G.R. No.

L-22962 September 28, 1972

PILAR N. BORROMEO, MARIA B. PUTONG, FEDERICO V. BORROMEO, JOSE BORROMEO, CONSUELO B.

MORALES and CANUTO V. BORROMEO, JR., petitioners,
vs.
COURT OF APPEALS and JOSE A. VILLAMOR, (Deceased) Substituted by FELISA VILLAMOR, ROSARIO V.
LIAO LAMCO, MANUEL VILLAMOR, AMPARO V. COTTON, MIGUEL VILLAMOR and CARMENCITA
VILLAMOR, respondents.

Filiberto Leonardo for petitioners.

Ramon Duterte for private respondents.

FERNANDO, J.:p

The point pressed on us by private respondents,1 in this petition for review of a decision of the Court of Appeals in
the interpretation of a stipulation which admittedly is not free from ambiguity, there being a mention of a waiver of
the defense of prescription, is not calculated to elicit undue judicial sympathy. For if accorded acceptance, a
creditor, now represented by his heirs, 2 who, following the warm and generous impulse of friendship, came to the
rescue of a debtor from a serious predicament of his own making would be barred from recovering the money
loaned. Thus the promptings of charity, unfortunately not often persuasive enough, would be discredited. It is
unfortunate then that respondent Court of Appeals did not see it that way. For its decision to be upheld would be to
subject the law to such a scathing indictment. A careful study of the relevant facts in the light of applicable doctrines
calls for the reversal of its decision.

The facts as found by the Court of Appeals follow: "Before the year 1933, defendant [Jose A. Villamor] was a
distributor of lumber belonging to Mr. Miller who was the agent of the Insular Lumber Company in Cebu City.
Defendant being a friend and former classmate of plaintiff [Canuto O. Borromeo] used to borrow from the latter
certain amounts from time to time. On one occasion with some pressing obligation to settle with Mr. Miller,
defendant borrowed from plaintiff a large sum of money for which he mortgaged his land and house in Cebu City.
Mr. Miller filed civil action against the defendant and attached his properties including those mortgaged to plaintiff,
inasmuch as the deed of mortgage in favor of plaintiff could not be registered because not properly drawn up.
Plaintiff then pressed the defendant for settlement of his obligation, but defendant instead offered to execute a
document promising to pay his indebtedness even after the lapse of ten years. Liquidation was made and defendant
was found to be indebted to plaintiff in the sum of P7,220.00, for which defendant signed a promissory note therefor
on November 29, 1933 with interest at the rate of 12% per annum, agreeing to pay 'as soon as I have money'. The
note further stipulates that defendant 'hereby relinquish, renounce, or otherwise waive my rights to the prescriptions
established by our Code of Civil Procedure for the collection or recovery of the above sum of P7,220.00. ... at any
time even after the lapse of ten years from the date of this instrument'. After the execution of the document, plaintiff
limited himself to verbally requesting defendant to settle his indebtedness from time to time. Plaintiff did not file any
complaint against the defendant within ten years from the execution of the document as there was no property
registered in defendant's name, who furthermore assured him that he could collect even after the lapse of ten years.
After the last war, plaintiff made various oral demands, but defendants failed to settle his account, — hence the
present complaint for collection." It was then noted in the decision under review that the Court of First Instance of
3

Cebu did sentence the original defendant, the deceased Jose A. Villamor, to pay Canuto O. Borromeo, now
represented by petitioners, the sum of P7,220.00 within ninety days from the date of the receipt of such decision
with interest at the rate of 12% per annum from the expiration of such ninety-day period. That was the judgment
reversed by the Court of Appeals in its decision of March 7, 1964, now the subject of this petition for review. The
legal basis was the lack of validity of the stipulation amounting to a waiver in line with the principle "that a person
cannot renounce future prescription." 4

The rather summary and curt disposition of the crucial legal question of respondent Court in its five-page decision,
regrettably rising not too-far-above the superficial level of analysis hardly commends itself for approval. In the first
place, there appeared to be undue reliance on certain words employed in the written instrument executed by the
parties to the total disregard of their intention. That was to pay undue homage to verbalism. That was to ignore the
warning of Frankfurter against succumbing to the vice of literalism in the interpretation of language whether found in
a constitution, a statute, or a contract. Then, too, in effect it would nullify what ought to have been evident by a
perusal that is not-too-cursory, namely, that the creditor moved by ties of friendship was more than willing to give the
debtor the utmost latitude as to when his admittedly scanty resources will allow him to pay. He was not renouncing
any right; he was just being considerate, perhaps excessively so. Under the view of respondent Court, however,
what had been agreed upon was in effect voided. That was to run counter to the well-settled maxim that between
two possible interpretations, that which saves rather than destroys is to be preferred. What vitiates most the
appealed decision, however, is that it would amount not to just negating an agreement duly entered into but would
put a premium on conduct that is hardly fair and could be characterized as duplicitous. Certainly, it would reflect on
a debtor apparently bent all the while on repudiating his obligation. Thus he would be permitted to repay an act of
kindness with base ingratitude. Since as will hereafter be shown, there is, on the contrary, the appropriate
construction of the wording that found its way in the document, one which has all the earmarks of validity and at the
same time is in consonance with the demands of justice and morality, the decision on appeal, as was noted at the
outset, must be reversed.

1. The facts rightly understood argue for the reversal of the decision arrived at by respondent Court of Appeals.
Even before the event that gave rise to the loan in question, the debtor, the late Jose A. Villamor, being a friend and
a former classmate, used to borrow from time to time various sums of money from the creditor, the late Canuto O.
Borromeo. Then faced with the need to settle a pressing obligation with a certain Miller, he did borrow from the latter
sometime in 1933 what respondent Court called "a large sum of money for which he mortgaged his land and house
in Cebu City." It was noted that this Miller did file a suit against him, attaching his properties including those he did
5

mortgage to the late Borromeo, there being no valid objection to such a step as the aforesaid mortgage, not being
properly drawn up, could not be registered. Mention was then made of the late Borromeo in his lifetime seeking the
satisfaction of the sum due with Villamor unable to pay, but executing a document promising "to pay his
indebtedness even after the lapse of ten years." It is with such a background that the words employed in the
6

instrument of November 29, 1933 should be viewed. There is nothing implausible in the view that such language
renouncing the debtor's right to the prescription established by the Code of Civil Procedure should be given the
meaning, as noted in the preceding sentence of the decision of respondent Court, that the debtor could be trusted to
pay even after the termination of the ten-year prescriptive period. For as was also made clear therein, there had
been since then verbal requests on the part of the creditor made to the debtor for the settlement of such a loan. Nor
was the Court of Appeals unaware that such indeed was within the contemplation of the parties as shown by this
sentence in its decision: "Plaintiff did not file any complaint against the defendant within ten years from the
execution of the document as there was no property registered in defendant's name who furthermore assured him
that he could collect even after the lapse of ten years." 7

2. There is much to be said then for the contention of petitioners that the reference to the prescriptive period is
susceptible to the construction that only after the lapse thereof could the demand be made for the payment of the
obligation. Whatever be the obscurity occasioned by the words is illumined when the light arising from the
relationship of close friendship between the parties as well as the unsuccessful effort to execute a mortgage, taken
in connection with the various oral demands made, is thrown on them. Obviously, it did not suffice for the
respondent Court of Appeals. It preferred to reach a conclusion which for it was necessitated by the strict letter of
the law untinged by any spirit of good morals and justice, which should not be alien to legal norms. Even from the
standpoint of what for some is strict legalism, the decision arrived at by the Court of Appeals calls for disapproval. It
is a fundamental principle in the interpretation of contracts that while ordinarily the literal sense of the words
employed is to be followed, such is not the case where they "appear to be contrary to the evident intention of the
contracting parties," which "intention shall prevail." Such a codal provision has been given full force and effect since
8

the leading case of Reyes v. Limjap, a 1910 decision. Justice Torres, who penned the above decision, had
9

occasion to reiterate such a principle when he spoke for the Court in De la Vega v. Ballilos thus: "The contract
10

entered into by the contracting parties which has produced between them rights and obligations is in fact one of
antichresis, for article 1281 of the Civil Code prescribes among other things that if the words should appear to
conflict with the evident intent of the contracting parties, the intent shall prevail." In Abella v. Gonzaga, this Court
11 12

through the then Justice Villamor, gave force to such a codal provision when he made clear that the inevitable
conclusion arrived at was "that although in the contract Exhibit A the usual words 'lease,' 'lessee,' and 'lessor' were
employed, that is no obstacle to holding, as we do hereby hold, that said contract was a sale on installments, for
such was the evident intention of the parties in entering into said contract. Only lately in Nielson and Company v.
13

Lepanto Consolidated Mining Company, this Court, with Justice Zaldivar, as ponente, after stressing the primordial
14

rule that in the construction and interpretation of a document, the intention of the parties must be sought, went on to
state: "This is the basic rule in the interpretation of contracts because all other rules are but ancillary to the
ascertainment of the meaning intended by the parties. And once this intention has been ascertained it becomes an
integral part of the contract as though it had been originally expressed therein in unequivocal terms ... ." While not
15

directly in point, what was said by Justice Labrador in Tumaneng v. Abad is relevant: "There is no question that the
16

terms of the contract are not clear on the period of redemption. But the intent of the parties thereto is the law
between them, and it must be ascertained and enforced." Nor is it to be forgotten, following what was first
17

announced in Velasquez v. Teodoro that "previous, simultaneous and subsequent acts of the parties are properly
18

cognizable indicia of their true intention." 19

There is another fundamental rule in the interpretation of contracts specifically referred to in Kasilag v.
Rodriguez, as "not less important" than other principles which "is to the effect that the terms, clauses and
20 21

conditions contrary to law, morals and public order should be separated from the valid and legal contract when such
separation can be made because they are independent of the valid contract which expresses the will of the
contracting parties. Manresa, commenting on article 1255 of the Civil Code and stating the rule of separation just
mentioned, gives his views as follows: 'On the supposition that the various pacts, clauses, or conditions are valid, no
difficulty is presented; but should they be void, the question is as to what extent they may produce the nullity of the
principal obligation. Under the view that such features of the obligation are added to it and do not go to its essence,
a criterion based upon the stability of juridical relations should tend to consider the nullity as confined to the clause
or pact suffering therefrom, except in cases where the latter, by an established connection or by manifest intention
of the parties, is inseparable from the principal obligation, and is a condition, juridically speaking, of that the nullity of
which it would also occasion.' ... The same view prevails in the Anglo-American law as condensed in the following
words: 'Where an agreement founded on a legal consideration contains several promises, or a promise to do
several things, and a part only of the things to be done are illegal, the promises which can be separated, or the
promise, so far as it can be separated, from the illegality, may be valid. The rule is that a lawful promise made for a
lawful consideration is not invalid merely because an unlawful promise was made at the same time and for the same
consideration, and this rule applies, although the invalidity is due to violation of a statutory provision, unless the
statute expressly or by necessary implication declares the entire contract void. ..." 22

Nor is it to be forgotten that as early as Compania Agricola Ultramar v. Reyes, 23 decided in 1904, the then Chief
Justice Arellano in a concurring opinion explicitly declared: "It is true that contracts are not what the parties may see
fit to call them, but what they really are as determined by the principles of law." Such a doctrine has been
24

subsequently adhered to since then. As was rephrased by Justice Recto in Aquino v.

Deala: "The validity of these agreements, however, is one thing, while the juridical qualification of the contract
25

resulting therefrom is very distinctively another." In a recent decision, Shell Company of the Phils., Ltd. vs.
26

Firemen's Insurance Co. of Newark, this court, through Justice Padilla, reaffirmed the doctrine thus: "To determine
27

the nature of a contract courts do not have or are not bound to rely upon the name or title given it by the contracting
parties, should there be a controversy as to what they really had intended to enter into, but the way the contracting
parties do or perform their respective obligations, stipulated or agreed upon may be shown and inquired into, and
should such performance conflict with the name or title given the contract by the parties, the former must prevail
over the latter." Is it not rather evident that since even the denomination of the entire contract itself is not
28

conclusively determined by what the parties call it but by the law, a stipulation found therein should likewise be
impressed with the characterization the law places upon it?

What emerges in the light of all the principles set forth above is that the first ten years after November 29, 1933
should not be counted in determining when the action of creditor, now represented by petitioners, could be filed.
From the joint record on appeal, it is undoubted that the complaint was filed on January 7, 1953. If the first ten-year
period was to be excluded, the creditor had until November 29, 1953 to start judicial proceedings. After deducting
the first ten-year period which expired on November 29, 1943, there was the additional period of still another ten
years. Nor could there be any legal objection to the complaint by the creditor Borromeo of January 7, 1953
29

embodying not merely the fixing of the period within which the debtor Villamor was to pay but likewise the collection
of the amount that until then was not paid. An action combining both features did receive the imprimatur of the
approval of this Court. As was clearly set forth in Tiglao v. The Manila Railroad Company: "There is something to
30

defendant's contention that in previous cases this Court has held that the duration of the term should be fixed in a
separate action for that express purpose. But we think the lower court has given good reasons for not adhering to
technicalities in its desire to do substantial justice." The justification became even more apparent in the latter
31

portion of the opinion of Justice Alex Reyes for this Court: "We may add that defendant does not claim that if a
separate action were instituted to fix the duration of the term of its obligation, it could present better proofs than
those already adduced in the present case. Such separate action would, therefore, be a mere formality and would
serve no purpose other than to delay." There is no legal obstacle then to the action for collection filed by the
32

creditor. Moreover, the judgment of the lower court, reversed by the respondent Court of Appeals, ordering the
payment of the amount due is in accordance with law.

3. There is something more to be said about the stress in the Tiglao decision on the sound reasons for not adhering
to technicalities in this Court's desire to do substantial justice. The then Justice, now Chief Justice, Concepcion
expressed a similar thought in emphasizing that in the determination of the rights of the contracting parties "the
interest of justice and equity be not ignored." This is a principle that dates back to the earliest years of this Court.
33

The then Chief Justice Bengzon in Arrieta v. Bellos, invoked equity. Mention has been made of "practical and
34

substantial justice," "[no] sacrifice of the substantial rights of a litigant in the altar of sophisticated technicalities with
35

impairment of the sacred principles of justice," "to afford substantial justice" and "what equity demands." There
36 37 38

has been disapproval when the result reached is "neither fair, nor equitable." What is to be avoided is an
39

interpretation that "may work injustice rather than promote justice." What appears to be most obvious is that the
40

decision of respondent Court of Appeals under review offended most grievously against the above fundamental
postulate that underlies all systems of law.

WHEREFORE, the decision of respondent Court of Appeals of March 7, 1964 is reversed, thus giving full force and
effect to the decision of the lower court of November 15, 1956. With costs against private respondents.
G.R. No. L-40258 September 11, 1980

LIM YHI LUYA, petitioner,

vs.
COURT OF APPEALS and HIND SUGAR COMPANY respondents.

GUERRERO, J.:

This is a Petition for Review by way of certiorari of the Decision of the Court of Appeals in CA-G.R. No. 51546-R
entitled Lim Yhi Luya, Plaintiff-Appellee, versus Hind Sugar Company, Defendant-Appellant, which reversed and
modified the decision of the Court of First Instance of Pangasinan in favor of the plaintiff-appellee, now the herein
petitioner.

The antecedent facts may be stated as follows:

Petitioner Lim Yhi Luya is a businessman, resident of Lingayen, Pangasinan where he operates a grocery store,
hardware store and gasoline station. Private respondent Hind Sugar Company is engaged in the manufacturing and
marketing of sugar, its principal office located in Manaoag, Pangasinan. Vice President and General Manager of
respondent company is Atty. Emiliano Abalos. His assistant is Generoso Bongato, while the cashier and accountant
of the company is Teodoro Garcia.

Petitioner and private respondent since 1958 have had business dealings with each other, the company selling
sugar to the petitioner and the latter has been supplying the company with diesoline, gasoline, muriatic acid, sulfuric
acid, other supplies and materials ordered on credit. On November 12, 1970, petitioner received a telegram from
Manager Abalos in the following tenor: "Please come tomorrow morning without fail." (Exh. "B"). The following day,
November 13, 1970, petitioner proceeded to the company and in the office of Manager Abalos, the latter offered to
sell sugar at P37.00 per picul. The parties agreed to the purchase of 4,085 piculs of sugar at P35.00 per picul. The
specific terms of the contract are shown in Exhibit "a" as follows:

CONTRACT OF SALE OF SUGAR

Seller : Hind Sugar Company

Manaoag, Pangasinan

Buyer : Lim Yhi Luya

Lingayen, Pangasinan

Quantity: Four Thousand Eighty-Five (4,085)

piculs of Hind-2 sugar, 1969-70 crop

Price : Thirty Five (?35.00) Pesos per

picul, f.o.b. Manaoag

Terms : Cash upon signing of this contract.

Manaoag, Pangasina, Nov. 13, 1970.

On the same day, November 13, 1970, in compliance with the contract, four delivery orders (Nos. 3054, 3055, 3056,
and 3057) were issued to petitioner by cashier Garcia upon instructions of Manager Abalos covering the total
quantity of sugar sold, 4,085 piculs. Between November 13, 1970 to January 27, 1971, petitioner withdrew from the
company warehouse in varying quantities a total amount of 3,735 piculs under substitute delivery orders, leaving a
balance of 350 piculs undelivered.

On January 22, 1971, the question of payment cropped out between the parties. Petitioner claimed that he had paid
P142,975.00 to the company officials, Cashier Garcia and Manager Abalos on November 13. 1970 and as proof of
his payment, he referred to the contract Exhibit "A", particularly to the stipulation stating "Terms: Cash upon sing of
this contract." Respondent company officials denied the claim of the petitioner, alleging that petitioner never paid for
the sugar on November 13, 1970 or at any time thereafter. An audit report or examination of the books of the
company made by External Auditor Victorino Daroya showed no payment by petitioner.

On May 17, 1971, petitioner, as plaintiff below, filed the complaint against the defendant Hind Sugar Company, now
the herein respondent, in Civil Case No. 14873 before the Court of First Instance of Pangasinan on six (6) causes of
action, alleging —

On his First Cause of Action: That defendant- appellant has unreasonably, unlawfully and
maliciously refused and failed to deliver to him 350 piculs of the sugar he bought from it under their
contract (Exh. "A") with a value of P12,250.00 altho the has already paid the full price thereof;

On his Second Cause of Action: That defendant-appellant has unreasonably, unlawfully and maliciously refused and
failed to deliver to him 1,000 piculs of export sugar altho he has deposited to the account of the defendant-appellant
the price thereof in the amount of P55,000.00 which the latter has already withdrawn, the agreed period of delivery
which was January 27, 1971 having expired.

On his Third Cause of Action: That defendant- appellant has refused, despite repeated demands, to release to him
160 piculs of Hind-3 sugar valued at P6,400.00, which he has already paid;

On his Fourth Cause of Action: That despite his demands that defendant-appellant liquidate and pay its
indebtedness to him in the amount of P60,602.30 for supplies of diesolene, gasoline, muriatic acid, sulfuric acid and
other materials needed by it, exclusive of interest and attorney's fees, which were payable within 30 days from date
of delivery, the defendant-appellant has refused to settle with him;

On his Fifth Cause of Action: That defendant- appellant's willful, unjust, unreasonable, malicious and fraudulent
refusal to pay its just obligations has caused him mental anguish, serious anxiety, wounded feelings, moral shock,
social humiliation and similar injuries, entitling him to P50,000 in moral compensatory and exemplary damages, and
on

The Sixth Cause of Action: That he be paid the sum of P50,000 for attoney's fees and expenses of litigation.

Answering the complaint, defendant-appellant alleges that —

On the First Cause of Action: The contract marked as Exhibit "A" was duly executed but it stopped delivery of the
last 350 piculs of sugar under said contract when plaintiff-appellee who has not paid any amount not even for the
sugar already withdrawn by him, refused, inspite of demands, to pay the consideration mentioned in the contract
claiming that he had already paid the full price stipulated therein. For this, parties had agreed to suspend further
delivery of sugar under the contract until plaintiff-appellee could prove payment;

On the Second Cause of Action: Altho plaintiff- appellee has deposited P55,000 on January 20, 1971 for export
sugar, in view of the occurrence of a controversy between the parties regarding the implementation of the Contract
Exhibit "A", both parties came to the understanding that no delivery would be made until the question of payment of
the 4,085 piculs of sugar mentioned in said contract shall have been satisfactorily settled between them.

On the Third Cause of Action: The 160 piculs of Hind- 3 sugar referred to here is the remaining portion of 1,313
piculs purchased by plaintiff-appellee on June 3, 1970, and the unclaimed sugar was always ready for delivery but
plaintiff-appellee preferred withdrawing from the 4,085 piculs covered by the contract Exhibit "A" instead.

On the Fourth Cause of Action: Plaintiff-appellee has in truth delivered supplies to defendant-appellant but the
invoices mentioned in the complaint are not the same as the original delivery receipts signed by defendant-
appellant's employee when supplies were received, and the figures contained therein are inaccurate. Moreover,
such supplies were never payable on a 30-day-from-delivery term, but the standing practice was to off-set their
value against the costs of sugar purchased by plaintiff-appellee, and

On the Fifth and Sixth Causes of Action: Defendant-appellant denies the averments therein and alleges that the
answers to such causes of action are fully covered by its answers to the first four causes of action.

By way of Counterclaim, defendant-appellant prays that from the unpaid cost of the 3,085 piculs of sugar contracted
and practically all taken by plaintiff-appellee amounting to P142,975.00, the value of the materials supplied
amounting to P59,500.00, the P55,000.00 deposited to its account on January 20, 1971, and the amount of
P6,080.00 representing the value of the 350 piculs of sugar unclaimed by plaintiff- appellee, after it was
reprocessed- or a total of P132,830.30 — be off-set, and the balance in the amount of P10,144.70 in its favor be
paid to it, and that plaintiff-appellee be required to pay, in addition thereto, another sum of P10,000.00 for and as
attorney's fees and costs of litigation."
1
Answering the Counterclaim, plaintiff-appellee denied for being false and untrue the material allegations of
paragraphs 1, 2, 3, 4, 5 and 6 of the Counterclaim and as special defenses, he alleges: (1) that defendant's
counterclaim states no cause of action; and (2) that the complaint was filed by plaintiff because defendant has acted
in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid, just and demandable claim. At the pre-trial
conference, the parties submitted a partial stipulation of facts reproduced as follows:

COMES NOW the parties in the above-entitled case, through counsel and respectfully submit the
following Partial Stipulation of Facts and statement of the issues:

1. Plaintiff is of legal age, with capacity to sue and be sued and is a resident of Lingayen, Pangasinan whereas
defendant is a corporation duly organized and existing in accordance with the laws of the Philippines likewise with
capacity to sue and to be sued;

2. Defendant admits having executed on November 13, 1970 a Contract of Sale for 4,085 piculs of Hind-2 sugar, a
xerox copy of which is attached to this Partial Stipulation of Facts and marked as Annex "1". The signature
appearing in Annex "1" hereof above the typewritten name Emiliano L. Abalos is that of the Vice President and
General Manager of defendant Hind Sugar Company, Mr. Emiliano L. Abalos and the signature appearing above
the typewritten name Lim Yhi Luya appearing in Annex "1" hereof is that of the plaintiff herein;

3. On November 13, 1970, upon execution of the Contract of Sale marked as Annex "I" hereof, defendant delivered
and issued to plaintiff four (4) delivery orders Nos. 3054, 3055, 3056 and 3057 marked respectively as Annexes "1",
"2", "3" and "4" of defendant's Answer and attached to this Partial Stipulation of Facts as Annexes "2", "13", "4" and
"5" hereof;

4. That on various occasions, the latest on January 23, 1971, the defendant delivered to the plaintiff on account of
the contract, Annex "1" hereof and by virtue of the delivery orders issued by the defendant at the request of the
plaintiff in substitution of the delivery orders marked as Annexes "2", "3", "4" and "5", the substitute delivery orders
hereto attached and marked as Annexes "6" to "110" inclusive (summarized herein under Annexes "111" to "114"
inclusive), showing a total of 3,735 piculs of sugar already delivered and leaving a balance still undelivered by the
defendant to the plaintiff of 350 piculs of Hind-2 sugar, covered by Delivery Orders Nos. 3252, 3254, 3255, 3256,
3257, 3258, 3259, 3260, 3230, 3232, and 3233, marked as Annexes "115" to "125", inclusive;

5. That the plaintiff deposited with the Consolidated Bank and Trust Corporation, Dagupan City Branch, in the name
of the Hind Sugar Company, the sum of FIFTY FIVE THOUSAND PESOS (P55,000.00) on January 20, 1971;

6. That defendant issued to plaintiff a provisional receipt dated January 27, 1971 for said amount of P55,000.00
(FIFTY FIVE THOUSAND PESOS), copy of which is hereto attached as Annex 126";

7. That on June 3, 1970, the defendant sold to the plaintiff 1,313 piculs of sugar at the rate of P40.00 per picul of H-
2 sugar and P38.00 per picul of H-3 sugar, which plaintiff has fully paid per cash debit hereto attached as Annex
"127", of which 160 piculs of H-3 sugar remain undelivered by the defendant to plaintiff;

8. That the plaintiff supplied the defendant with diesoline, gasoline, muriatic acid, sulphuric acid and other supplies
and materials ordered by defendant from plaintiff on credit;

9. The plaintiff delivered to defendant on credit for the month of January, 197 1, supplies and materials in the
amount of Pl 3,988.20 under invoices Nos. 6327, 6329, 6330, 6331, 6332, 6333 and 6334, marked as Annexes
"128" to "134" inclusive;

10. The plaintiff delivered to defendant on credit for the month of February, 1971, supplies and materials in the
amount of P23,455.10;

11. That in the month of March, 1971, plaintiff delivered to the defendant on credit supplies and materials worth
P18,051.00;

12. That in the month of April, 1971, the plaintiff, delivered to defendant on credit, supplies and materials worth
P5,098.00; 13. The parties submit that the issues to be threshed out between the parties at the trial of this case are
the following:

(a) As to the first cause of action, the remaining issue is whether or not plaintiffs has paid to
defendant the sum of P142,975.00 which is the purchase price of the 4,085 piculs of sugar subject to
the contract of sale marked as Annex "I" hereof;

(b) On the second cause of action, the issue is whether or not the plaintiff is entitled to the delivery
by the defendant of 1,000 piculs of export sugar by virtue of the deposit on January 20, 1971 of the
amount of P55,000.00;
 (c) On the third cause of action, issue is whether or not plaintiff is entitled to delivery by defendant of
160 piculs of Hind-3 sugar sold by defendant to plaintiff on June 3,1970;

(d) On the fourth cause of action, the issue are (1) what business practice or practices if any were
observed by the plaintiff and the defendant in their business dealings relative to the purchase of
supplies and materials by the defendant from the plaintiff on credit; (2) what is the total amount due,
if any, from the defendant to the plaintiff for supplies and materials delivered by plaintiff to defendant
on credit; (3) whether the supplies and materials delivered by plaintiff to defendant were payable
within thirty (30) days from date of delivery and overdue account to earn interests at the rate of 12%
per annum an additional amount equivalent to 25% of the amount or value of the good in litigation as
attorney's fees;

(e) On the sixth cause of action, whether or not plaintiff is entitled to attorney's fees and expenses of
litigation;

(g) Whether defendant is entitled or not to any set off;

(h) Whether defendant is entitled to attorney's fees.

14. The parties hereby reserve the right to present evidence on all other matters not herein stipulated.

The trial Court has correctly surmised that the principal issue in this case is whether or not the plaintiff-appellee has
paid the sum of P142,975.00 which is the purchase price of the 4,085 piculs of sugar covered by the contract of sale
(Exhibit "A") between the parties. This Contract reads as follows:

CONTRACT OF SALE OF SUGAR

(HIND-2) 1969-70

SELLER : HIND SUGAR COMPANY

Manaoag, Pangasinan.

BUYER : LIM YHI LUYA

Lingayen, Pangasinan

QUANTITY : Four Thousand Eighty Five

(4,085) (Piculs of HIND-2

Sugar, 1969-70 Crop).

PRICE : Thirty Five (P35.00) PESOS per

picul F.O.B., Manaoag

TERMS : Cash upon signing of this

Contract

Manaoag, Pangasinan, November 13,1970

HIND SUGAR COMPANY

By:

(SGD.) EMILIANO L. ABALOS (SGD.) LIM YHI LUYA

Vice President & Gen. Mgr. (Buyer)

(Seller)
Plaintiff-appellee claimed during the trial that he has paid the said amount and when pressed to show his receipt of
payment, he points to that portion of the contract which reads: "Terms: Cash upon signing of this Contract" as his
receipt and evidence of payment. On the other hand, defendant-appellant maintained that plaintiff-appellee has not
paid anything on the contract and the contract does not prove payment but merely created plaintiff-appellee's
obligation to pay.2

After trial, the Court of First Instance of Pangasinan rendered judgment, the dispositive portion of which reads:

WHEREFORE, this Court renders judgment as follows:

(1) On he first cause of action, ordering the defendant to immediately deliver to plaintiff the 350 piculs of H-2 sugar
or to pay plaintiff the sum of P12,250,00 plus legal rate of interest from November 13, 1970, until fully paid, giving
unto the plaintiff the option to choose whether to receive the sugar or to receive the payment corresponding to the
same;

(2) On the second cause of action, ordering the defendant to deliver immediately to the plaintiff the 1,000 piculs of
export sugar or to pay the plaintiff the sum of P55,000.00 with legal rate of interest from January 20, 1971, but
giving the option or choice to the plaintiff;

(3) With respect to the third cause of action, ordering the defendant to deliver to the plaintiff the 160 piculs of H-3
sugar or to pay to plaintiff the sum of P6,400.00 with legal rate of interest from June 3, 1970 but with the option
again belonging to the plaintiff;

(4) On the fourth cause of action, ordering the defendant to pay to the plaintiff the sum of P60,592.30 with interest at
12% per annum from the filing of the complaint and to pay attorney's fees of 25% of the principal obligation, that is,
the sum of P15,148.08;

(5) On the fifth and sixth causes of action, ordering the defendant to pay to the plaintiff the sum of P25,000.00 as
damages and to pay another sum of P15,000.00 as attorney's fees, the said fees referring to the first, second and
third causes of action; and

(6) Lastly, ordering the defendant to pay the costs of suit.

SO ORDERED.

Defendant Hind Sugar Company appealed to the Court of Appeals. The appellate court rendered the following
judgment, thus —

WHEREFORE, judgment is hereby rendered —

(1) ordering plaintiff-appellee to pay defendant- appellant the sum of P130,725.00 which is the price of 3,735 piculs
of sugar, at P35 a picul, which plaintiff has withdrawn and received as a result of the contract of sale Exhibit "A", and
cancelling the obligation of defendant-appellant to deliver the remaining 350 piculs called for in said contract for
failure of plaintiff-appellee to pay for the same;

(2) finding the defendant-appellant liable to return to plaintiff-appellee the latter's deposit of P55,000.00;

(3) finding the defendant-appellant liable to pay plaintiff-appellee the sum of P6,040.00 which was realized from
reprocessing the 160 piculs of sugar paid for but intentionally not claimed by plaintiff-appellee;

(4) finding the defendant-appellant liable to plaintiff-appellee for the sum of P60,592.30 for materials and supplies
which the latter supplied to it for the months of January, February, March, and April 1971.

Provided, however, that the plaintiff-appellee may deduct the said amounts of P55,000.00, P6,080.00 and
P60,592.30, totalling P121,672.30 in all, from his total obligation of P130,725.00 to the defendant-appellant, paying
the latter in cash only the remaining balance of P9,052.70; and

(5) ordering the plaintiff-appellee to pay defendant-appellant the further amount of P10,000.00 for and as attorney's
fees.

With costs against plaintiff-appellee.

SO ORDERED.
 Plaintiff-appellee, now the herein petitioner, having filed a Motion for Reconsideration but denied by
the respondent Court of Appeals, he now comes before Us with the instant Petition for Review of the
decision.

In reversing the judgment of the lower court on the first cause of action, the Court of Appeals said:

Plaintiff-appellee claimed during the trial that he has paid the said amount and when pressed to
show his receipt of payment, he points to that portion of the contract which reads: "Terms: Cash
upon signing of this Contract" as his receipt and evidence of payment. On the other hand,
defendant-appellant maintained that plaintiff- appellee has not paid anything on the contract and the
contract does not prove payment but merely created plaintiff-appellee's obligation to pay.

'We agree with defendant-appellant. The contract in its entirety proves no more than that there has been a meeting
of the minds of the parties. The signing perfected the contract but did not ex propio vigore consummate it. It gave
the parties the right to demand reciprocally the performance of the obligations assumed by each. The vendor
assumed to deliver the amount of sugar sold while the vendee which is the plaintiff-appellee was to pay the
contracted price upon the signing of the contract. The questioned portion of the contract does not say, and is not
therefore an evidence that plaintiff-appellee has paid or has performed his obligation to pay. Stated in another way,
the provision of the Contract in question means that the payment of P142,975.00 IS TO FOLLOW or IS TO BE
MADE (and NOT WAS MADE) upon the signing of said contract".

The appellate court further declared that it cannot believe as true facts the testimony of the petitioner that he paid
the sum of P142,975.000 around 1:30 o'clock in the afternoon of November 13, 1970 to Emiliano Abalos and
Teodoro Garcia, in cash because he was asked to pay in cash, and the evidence of his payment was the contract
(Exhibit "A") itself because the respondent company did not want to issue a separate receipt for his payment as the
sugar sold belonged not to it but to ARCA.

The court said that there is no reason for Emiliano Abalos to deny petitioner's claim of payment if that was really
made, pointing to the evidence of close relationship between the parties which show that Emiliano Abalos went all
the way to accommodate the petitioner by modifying the contract, changing the condition or mode of payment
provided in Exhibit "A" even without changing the written contract itself. It would have been an affront on their
friendship had Emiliano Abalos followed the suggestions of the trial court (that Abalos should have demanded that
the contract be corrected in such a way that it does not appear that the 4,085 piculs of sugar was not really paid for
or he should have put a note on the two copies of the contract that the 4,085 piculs of sugar were not then paid), the
appellate court reasoned out.

And according to the court, the explanation of Abalos in allowing or agreeing to release the delivery orders covering
the 4,085 piculs of sugar sold even without payment by the petitioner (which explanation is not even pointed out or
intimated in the decision) 'is a rational and very probable one.

After holding that the claim of petitioner that he paid the P142,975.00 wholly in cash is improbable; that it, is simply
not the way with businessmen because modern business moves on credit and checks; that it is unthinkable to a
businessman to keep so, much money in his possession when petitioner banks with several banking houses in
Lingayen and Dagupan City and has always paid mostly in checks in previous and subsequent transactions, the
court resolved, "We seriously doubt that as a successful businessman he will ever disregard sound business
practice of keeping his cash in the bank, especially that, according to him it was not his money but one he has
received in trust and for a certain A. Chang Trading in Makati."

Petitioner contends that the appellate court erred, first in holding that the contract of sale of sugar executed by and
between petitioner and respondent is not evidence that payment of the sugar had been made by the petitioner to
respondent upon the signing of said contract; the Court of Appeals likewise erred in holding that it was incumbent
upon the petitioner to produce a receipt' signed by respondent to prove that payment of the sugar covered by the
contract of sale had in fact been made by petitioner to respondent; it erred in not holding that petitioner had already
fully paid the respondent the sugar bought; and second, in reversing the decision of the trial court and in not
affirming the same.

The first error may be resolved by tile rules on the interpretation of contracts, and the second on the basis of
whether the general rule, that findings of the appellate tribunal are binding and must be respected by Us must
govern the case at bar or the well-established exceptions to said rule.

At this juncture, it is well to lay down cardinal rules in the interpretation of contracts as provided in the New Civil
Code, thus —

Art. 1370. If the terms of a contract are Clear and leave no doubt upon the intention of the
contracting parties. the literal meaning of its stipulation shall control.
 If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over
the former.

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

Art. 1375. Words which may have different significations shall be understood in that which is most in
keeping with the nature and object of the contract.

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.

According to the trial court, "(t)here is no question that the contract was signed on November 13, 1970, in the office
of the Hind Sugar Company at Manaoag, Pangasinan. The contract itself is so clear and explicit that it cast no doubt
as to its meaning. "Cash upon signing of this contract meaning to say, that once the contract was signed, the
payment of the 4.085 piculs of sugar which is P142,975.00 was made. After the said contract was signed and as
sustained by the plaintiff, he has already delivered the P142,975.00 in cash to the cashier of the defendan't, the said
plaintiff was given all the delivery orders covering the 4,085 piculs of sugar sold and by the giving of the delivery
orders to the plaintiff, the latter was entitled to withdraw all the 4,085 piculs sugar from the company's warehouse"
This is also the stand of the petition.

Contrari-wise, the appellate court castigates the "ex cathedra pronouncement of the trial court that the words
'Terms: Cash upon the signing of this contract' means that payment was made and the contract itself is the receipt
evidencing payment", as not based on proven facts, adding further that the trial court "has taken the dubious, weak,
unreliable and improbable statements of plaintiff-appellee for true, or for granted, and in so doing the trial court has
fallen wittingly or unwittingly into the error of begging the question (petitio principii)." in other words, respondent
company's interpretation of the contract was upheld.

Considering the admitted fact that the contract of sale (Exhibit "A") was prepared in the office of respondent
company by Generoso Bongato, Assistant to the Manager of the company, upon instruction of General Manager
Emiliano L. Abalos who is a lawyer, and We are now confronted with the varying or conflicting interpretations of the
parties thereto, the respondent company contending that the stipulation "Terms: Cash upon signing of this contract"
does not mean that the agreement was a cash transaction because no money was paid by the petitioner at the time
of the signing thereof, whereas the petitioner insists that it was a cash transaction inasmuch as he paid cash
amounting to P142,975.00 upon the signing of the contract, the payment having been made at around 1:30 in the
afternoon of November 13, 1970 to the cashier, Teodoro Garcia, and Manager Abalos although the sale was agreed
to in the morning of the same day, November 13, 1970, the conflicting interpretations have shrouded the stipulation
with ambiguity or vagueness. Then, the cardinal rule should and must apply, which is that the interpretation shall not
favor the party who caused the ambiguity (Art. 1377, New Civil Code). We rule that in the instant case, the
interpretation to be taken shall not favor the respondent company since it is the party who caused the ambiguity in
its preparation.

We do not agree with the meaning of the provision in the contract ascribed by the respondent court in its decision
that: "Stated in another way, the provision of the Contract in question means that the payment of the P142,975.00 IS
TO FOLLOW or IS TO BE MADE (and NOT WAS MADE) upon the signing of said contract." As already drafted or
drawn up, complete and finalized with all the signatures thereon of the contracting parties and presented in court as
Exhibit "A" without any change whatsoever in the mode of payment, such provision plainly and simply means that
the payment was in CASH, and not on CREDIT. The ambiguity raised by the use of the words or phrases in the
questioned provision must be resolved and interpreted against the respondent company.

In truth the stipulation in the contract which reads: "Terms: Cash upon signing of this contract" is very clear and
simple in its meaning, leaving no doubt in Our minds upon the intention of the contracting parties, hence, the first
rule of contract interpretation that the literal meaning of its stipulation shall control, is the governing rule at hand.
Resorting to Webster's Third New International Dictionary, p. 2515, for the definition of the word "upon" which
literally means, among others, "10a (1): immediately following on; very soon after; ... b: on the occasion of at the
time of; ... " the clear import of the stipulation is that payment was made on the occasion of or at the time of the
signing of the contract and not that payment will follow the signing. We must adopt the former meaning because it is
such an interpretation that would most adequately render the contract effectual, following Article 1373 of the New
Civil Code which provides:

Art. 1373. If 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 effectua.

The evidence for the petitioner establishes that after paying the cash consideration to Cashier Garcia and Manager
Abalos, the parties signed the contract and thereafter a signed copy of said contract was given to petitioner and also
the four (4) delivery orders covering the 4,085 piculs of sugar sold. The questioned stipulation recites exactly the act
of payment which is the paying of the money on the occasion of or at the time of the signing. Respondent would
have Us believe that the stipulation does not mean what it conveys because petitioner has not paid cash after the
signing of the contract nor at any time thereafter. We cannot agree with the respondent for otherwise the sanctity of
the written contract can easily be violated and impugned, for otherwise oral testimony would prevail over a written
document to vary, alter or modify the written terms, and most importantly, respondent's interpretation would render
the stipulation ineffectual as a mere agreement.

Petitioner claims that Exh. "A" is the receipt of his payment of the P142,975.00 cash upon the signing of the
contract. Respondent, on the other hand, insists that it is not a written acknowledgement or written admission of
having received the sum of P142,975.00 and may not be considered a receipt for any purpose (Brief for the
Respondent, p. 34), although he fully agrees with the proposition that any written acknowledgement or written
admission of anything received is a receipt (same page 34). This is exactly what the trial court ruled that "It would be
redundant to discuss what are the forms of receipts, but anything evidencing or admitting payment in compliance
with an obligation is a receipt and AS THE CONTRACT, EXH. A AS WELL AS THE SIGNED COPY, IS AN
EVIDENCE OF PAYMENT OF THE P142,975.00 IT MUST BE CONSIDERED A RECEIPT FOR ALL PURPOSES"
(Decision,. Record on Appeal, p. 60). We affirm the lower court's ruling.

One fact that weighs heavily in support of the lower court's ruling is that respondent cannot show nor produce any
document or record whatsoever that petitioner did not pay the consideration demanded in cash. While Manager
Abalos claims that the mode of payment was altered or changed, there is no showing or proof that the contract, Exh.
"A", was accordingly changed or altered. And neither was such alteration or change noted or recorded in the books
of the respondent company.

The trial court, justifying and supporting its judgment in favor of the petitioner, cites the following facts: (1) The
liquidation sheet dated December 30, 1970, Exh. "O", prepared by the cashier of defendant company, more than a
month after the transaction in question on November 13, 1970 does not charge the petitioner with any indebtedness
to the respondent company of whatever amount, much less the amount of P142,975.00; instead, it appears from
said Exhibit "O" that as of December 30, 1970, the company had two outstanding vales in favor of the petitioner: one
for P18,000.00 obtained on December 1, 1970 and another for P8,800.00 taken on December 15, 1970; (2) that
petitioner had always transacted with respondent company in cash and never on credit as admitted by Teodoro
Garcia, cashier of the company; (3) that petitioner had been withdrawing sugar from the company at its warehouse
after November 13, 1970 until January 23, 1971, totalling a quantity of 3,735 piculs of sugar by virtue of the contract
Exhibit "A" without the company demanding from the petitioner either verbally or in writing the payment, even only
partial of such a big amount (P142,975.00).

The above facts show contemporaneous and subsequent acts of the parties in relation to the transaction between
them as embodied in the Contract of Sale of Sugar (Exh. "A") from which the intention of the contracting parties may
be judged correctly. The trial court was correct in judging and deciding the intention of the parties from their
actuations contemporaneous with and subsequent to the agreement for the sale of the sugar in question, and We
sustain the trial court, applying Art. 1371, New Civil Code, supra.

The most telling, crucial and significant act contemporaneous with and subsequent to the signing of the agreement
embodied in Exhibit "A", which needs emphasis, is the delivery to the petitioner of four (4) delivery orders (Nos.
3054, 3055, 3056 and 3057) covering all the 4,035 piculs of sugar subject of the contract on November 13, 1970,
the very day that the contract was entered into and signed by the parties. The delivery orders is admitted by the
parties and included in the Partial Stipulation of Facts, paragraph 3 thereof. Viewed in the light of the established
fact that all sugar transactions between petitioner and respondent are always in cash, as admitted by Teodoro
Garcia who is the cashier of respondent company (Testimony of Teodoro Garcia, t.s.n., Estrada, Hearing, April 22,
1972, pp. 1819), the issuance of the four delivery orders is a clear confirmation of the fact that petitioner paid in
cash the cost of the sugar in the amount of P142,975.00 on the very day that the contract was signed, November
13, 1970, which is also the day that the delivery orders were given to him by the cashier upon direct instruction from
the manager.

Furthermore, the issuance of and delivery to the petitioner buyer of the said four delivery orders covering all the
4,085 piculs of sugar placed the control and possession of the thing sold to the vendee, the herein petitioner, and
pursuant to Article 1497 of the New Civil Code, the sugar sold is understood as delivered to the petitioner. The thing
sold shall be understood as delivered when it is placed in the control and possession of the vendee. Therefore,
when the thing subject of the sale is placed in the control and possession of the vendee, delivery is complete. (La
Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217)

In the case at bar, at the moment the delivery orders were issued and given to the petitioner-vendee, there was a
symbolic or feigned tradition of the sugar sold since the delivery orders are documents of title to goods which, under
Article 1636, New Civil Code, includes any bill of lading, dock, warrant, quedan, or warehouse receipt or order for
the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of
goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of
the document to transfer or receive, either by indorsement or by delivery, goods represented by such document.
And when the petitioner-buyer withdrew from the respondent's warehouse, hauled and took delivery on various
dates and varying quantities of sugar piculs to 3,735 piculs, there was actual delivery thereof which consummated
the sale. It is not correct, therefore, for the respondent court to hold that "the contract in its entirety proves no more
than that there has been a meeting of the minds of the parties." It is more than that because the parties did not end
the agreement by simply signing the contract, Exhibit "A". The minds of the parties did not only come to a meeting
but they continued to implement and consummate the same.

It may be true, as the decision under review opined, that "the signing perfected the contract but did not ex propio
vigore consummate it," if the parties stopped or desisted thereafter, but the issuance and delivery of the delivery
orders covering the total quantity of sugar sold was a consummation of the agreement, more so when petitioner-
buyer was allowed by respondent company's officials to substitute the four delivery orders Nos. 3054, 3055, 3056,
and 3057 marked Annexes "2", "3", "4", and "5" with substitute delivery orders marked Annexes "6" to "110" showing
a total of 3,735 piculs of sugar already delivered to the petitioner, leaving a small amount of 350 piculs still
unwithdrawn for which petitioner filed the original complaint in Civil Case No. 14873 against the company for
delivery. These facts which are not disputed showing that petitioner was allowed to receive the delivery orders on
November 13, 1970 immediately after the signing of the agreement on the same day and that he was further
allowed on various dates between November 13,1970 to January 23, 1971 to take delivery in varying amounts
totalling 3,735 piculs of sugar, have not been properly appreciated by respondent court, which failure or omission in
Our mind constitute grave and prejudicial abuse of discretion.

This brings Us to the consideration and resolution of the second assignment of error wherein petitioner contends
that the exception to the general rule, and not the general rule itself on the finality of the findings of fact by the Court
of Appeals, is applicable and must govern in the instant case.

It is, of course, well-established that the general rule that the appellate court's findings of facts are binding and must
be respected by Us, has recognized exceptions.

In Ramos vs. Pepsi-Cola Bottling Co., et al., L-22533, February 9, 1967, 19 SCRA 289, We enumerated the
following as exceptions to the general rule:

1. Where there is a grave abuse of discretion (Buyco vs. People, 95 Phil. 453);

2. When the finding is grounded entirely on speculation, surmises or conjectures (Joaquin vs. Navarro, 93 Phil 257);

3. When the inference made is manifestly mistaken, absurb or impossible (Luna vs. Linatoc, 74 Phil. 15);

4. When the judgment of the Court of Appeals was based on a misapprehension of facts (De la Cruz vs. Sosing, 94
Phil. 26);

5. When the factual findings are conflicting (Casica vs Villaseca, 101 Phil. 1205); or

6. When the Court of Appeals, in making its findings, went beyond the issues of the case and the same are contrary
to the admissions of both appellant and appellee (Evangelists vs. Alto Surety & Insurance Co., 1139, April 23,1958).

In Roque vs. Buan L-22459, October 31, 1967, 21 SCRA 642, We reversed the conclusion of the Court of Appeals,
having found it to be: (1) contrary to the established facts; (2) an inference based on mere assumption; (3) contrary
to the res ipsa loquitur rule, and (4) not in conformity with the physical law of nature. And in Fortus vs. Novero, L-
22370, June 29, 1968, 23 SCRA 1330, We ruled that in extreme cases calling for the exercise of Our supervisory
jurisdiction, this Tribunal may disturb or reverse any particular finding of fact of the Court of Appeals should We find
it to, be arbitrary or whimsical or entirely outside the issues raised by the parties in their respective pleadings. Again,
in Bunyi vs. Reyes, L-28845, June 10, 1971, 39 SCRA 504, We reversed the factual findings of the appellate court
based on an assumption unsuppoted, by the evidence on record.

In Sotto vs. Teves, 86 SCRA 154, and Alsua-Betts, et al., vs. Court of Appeals, et al., 92 SCRA 332, We reiterated
and listed the exceptions to the general rule.

And considering that in the case at bar the findings of the Court of Appeals are contrary to those of the trial court, a
minute scrutiny by the Supreme Court is in order, and resort to duly proven evidence becomes necessary. (Legaspi
vs. Court of Appeals, L-39877, Feb. 20, 1976, 69 SCRA 360, 364, citing Tolentino vs. De Jesus, et al., L-32797,
March 27, 1974, 56 SCRA 167).

There is merit to petitioner's contention that the appellate court misappreciated or misapprehended the import of the
liquidation sheet marked Exhibit "O" which is a financial statement prepared by the cashier of the respondent
company, Teodoro Garcia, barely two months after the contract under litigation was entered into, indicating the
mutual obligations between the parties. Petitioner points out in said statement that he had no liability whatsoever to
the company, much less the cost of the sugar he had bought on November 13, 1970. On the contrary, the statement
contains outstanding "vales" of P18,000.00 and P8,800.00 taken by the. company and due to petitioner. The Court
of Appeals said it is a fallacy to believe that Exhibit "O" is a liquidation of the periodic accounts of the parties when in
fact, it is no more than the itemization on how the amount of P97,960.51 representing cost of supplies and materials
from. the petitioner and two "vales' ".n the sum of P18,000.00 and P8,800.00 each, or a total of P124,760.51 had
been se off or deducted from two expected payments coming from the petitioner amounting to P140,259.41. In any
event, whether Exhibit "O" is a liquidation sheet or itemization of supplies and materials for set-off or deduction, it is
a customary and normal business practice to indicate and include all outstanding accounts, whether payable or
receivable, pertaining to a particular customer or client at the close of the business year. This is a custom or usage
which respondent court failed to consider and appreciate in the case at bar.

We agree with the petitioner that the decision under review has overlooked matters of substance in the evaluation of
the evidence. For one, it is an established fact that the transaction in question was no recorded-in the books of the
respondent company. This is the clear testimony of Victorino Daroya, External Auditor of the Hind Sugar Company
(t.s.n., Vinluan, p. 32, Hearing on May 13, 1972). And another significant fact, is that according to General Manager
Emiliano Abalos, there was no document to show that the transaction was not cash upon signing of the contract, in
his testimony at the hearing on May 22, 1972. (t.s.n., Estrada, pp. 35-36).

The logical implication of the ruling of the respondent court which upheld the position of the respondent company
that the purchase of sugar was not a cash transaction, is Chat the purchase was on credit. However, since it
appears that the transaction was not recorded in the company books and there was no document showing it was
not cash, the inference arises that the respondent company allowed, tolerated, and/or sanctioned a credit
transaction to be unrecorded in the company books which is simply irregular, unbusiness-like and anomalous. For a
corporation or company like the respondent engaged in the big business of sugar central, in the production and
marketing as well as export of sugar, and in the present case involving more than a hundred thousand pesos, to
keep no record of the transaction in question is blatantly, against ordinary business practice and procedure in
bookkeeping or accounting. Whether the explanation. of the respondent company's officials rests on close personal
friendship or cordial attachment with a particular customer or client, the conclusion is inevitable that the appealed
judgment is grounded on findings that are irrational, absurd and arbitrary because the court in effect sustained the
version of the company officers who wantonly and recklessly violated a customary business rule of protecting first
and above all the interest of the company they serve.

In the evaluation and appreciation of the evidence on record, We find that the respondent court gave credence to
the unsupported testimony of General Manager Emiliano Abalos that the term or mode of payment stipulated in the
written contract, Exh. "A", had been changed by him to "payment as withdrawals are made." This is clear as testified
to by Manager Abalos in the hearing on May 22, 1972, t.s.n., pp. 3839. The evidence, however, does not show nor
is there proof that the contract, Exh. "A", was accordingly changed or altered from "cash upon signing of the
contract" to "payment as withdrawals are made." In sustaining the oral testimony of Manager Abalos on the alleged
change of payment, as against the written terms of the contract that it was cash payment, the respondent court held
that "Emiliano Abalos went all the way to accommodate the plaintiff-appellee by modifying the contract, changing
the condition or mode of payment provided in Exhibit "A" even without changing the written contract itself."

This ruling of the court upholding the oral testimony and claim of Manager Abalos as against the written contract
itself is a grave and prejudicial error in the appreciation of the evidence because it is a clear and flagrant disregard
of the parol evidence rule (Section 7, Rule 130, Rev. Rules of Court) providing that: "When the terms of an
agreement have been reduced to writing, it is to be considered as containing all such terms, and, therefore, there
can be, between the parties and their successors in interest, no evidence of the terms of the agreement other than
the contents of the writing, except in the following cases: (a) Where a mistake or imperfection of the writing, or its
failure to express-the true intent and agreement of the parties, or the validity of the agreement is put in issue by the
pleadings; (b) When there is an intrinsic ambiguity in the writing.

Petitioner faults and impeaches the conclusions of the appellate court as founded entirely on speculations, surmises
or conjectures. Thus, he castigates the court's holding which ruled that "(t)he claim of plaintiff- appellee that he paid
the P142,975.00 wholly in cash is improbable. It is simply not the way with businessmen. Modern business moves
on credits and debts ..." and that "it is unthinkable to a businessman to keep cash all the time in his residence in
Lingayen, even if he did not know when or how soon he would disburse it." The appealed decision questions: "Why
would plaintiff-appellee be keeping so much cash in his possession and why should he pay P142,975.00 all in cash"
and then concludes: "We cannot imagine plaintiff-appellee taking the risk of loss of this money by keeping it in his
house."

The contention of the petitioner that the respondent court indulged in speculations and conjectures which are
baseless, is impressed with merit. Truly, the very specific term of the contract specified cash payment. The
instruction of General Manager Abalos to his assistant, Generoso Bongato, was particularized to the mode of
payment which was "cash upon signing of this contract" and the instruction was duly obeyed and complied with. It is
certainly whimsical and absurd for the Court of Appeals to speculate and surmise that petitioner ought not to have
brought and produced the cash money and should not even have such cash money in his possession. A review of
the appellate court's findings is, therefore, justified and warranted.

Respondents court is also taken to task for ignoring or suppressing the testimony of Manuel Chua Lim, son of
petitioner and a 24-year old graduate of Bachelor of Science in Commerce, major in Accounting, who accompanied
his father to the cashier's office of respondent company and witnessed the payment of the money in cash by his
father to the cashier, Teodoro Garcia, in the presence of Generoso Bongato and Manager Abalos, saw the signing
of the contract and that thereafter, the four (4) delivery orders were given to his father, including a signed copy of
the contract, Exhibit "A". Admittedly, this piece of evidence which is clear, positive and convincing was never
considered by the court which was its legal duty to evaluate and appreciate, considering that the presence of
Manuel Chua Lim and his testimony was not directly denied nor disputed by any of the officials so named and their
witnesses, Hence, We find petitioner's contention that the court's omission among other grave and serious
prejudicial errors pointed by petitioner justify the reversal of the appealed judgment. to be tenable.

We affirm the decision of the trial court in ruling that petitioner has paid in cash the sum of P142,975.00 to
respondent company for the purchase of 4,085 piculs of H-2 sugar and is entitled to the delivery of 350 piculs of H-2
sugar or to be paid the sum of P12,250.00 plus legal interest from November 13, 1970 until fully paid, at the option
of petitioner.

On the second cause of action, the judgment of the appellate court is correct insofar as it orders the respondent
company to return to the petitioner the latter's deposit of P55,000.00 but should be modified to include payment of
legal interest from January 20, 1971 until fully paid and giving the option to petitioner either to receive the money or
take delivery of 1,000 piculs of export sugar from respondent company.

On the third cause of action, the appealed judgment is also correct but the same is likewise modified to include
payment of legal interest on the sum of P6,400.00 from June 3, 1970 until fully paid, or to take delivery from
respondent the 160 piculs of H-3 sugar, at the option of the petitioner.

On the fourth cause of action, the judgment of the Court of Appeals finding respondent company liable to petitioner
for the sum of P60,592.30 for materials and supplies which the latter supplied to it for the months of January,
February, March and April, 1971 is also correct. The second portion under paragraph (4) of the judgment is set
aside, as well as paragraph (5) thereof which ordered petitioner to pay attorney's fees,

In other words, the decision of the trial court being in accordance with the evidence established and the law
applicable, the same is hereby reinstated in toto,

WHEREFORE, IN VIEW OF THE FOREGOING, We hereby reverse and set aside paragraph (1) and the second
portion of paragraph (4) of the appealed judgment, and modify the remaining portions of said judgment. Judgment is
hereby rendered

(1) On the first cause of action., ordering the respondent to immediately deliver to petitioner the 350 piculs of H-2
sugar or to pay petitioner the sum of P12,250.00 plus legal rate of interest from November 13, 1970, until fully paid.
giving unto the petitioner the option to choose whether to receive the sugar or to receive the payment corresponding
to the same:

(2) On the second cause of action, ordering the respondent to deliver immediately to the petitioner the 1,000 piculs
of export sugar or to pay the petitioner the sum of P55,000.00 with legal rate of interest from January 20, 1971, but
giving the option or choice to the petitioner;

(3) With respect to the third cause of action, ordering the respondent to deliver to the petitioner the 160 piculs of H-3
sugar or to pay to petitioner the sum of P6,400.00 with legal rate of interest from June 3. 1970, but the option again
belonging to the petitioner;

(4) On the fourth cause of action ordering the respondent to pay to the, petitioner the sum of P60,592.30 with
interest at 12% per annum from the filing of the complaint and to pay attorney's fees of 25% of the principal
obligation, that is, the sum of P15,143.08;

(5) On the fifth and sixth causes of action, ordering the respondent to pay to the petitioner the sum of P25,000.00 as
damages and to pay another sum of P15,000.00 as attorney's fees, the said fees referring to the first, second and
third causes of action.

Costs against respondent.

SO ORDERED.
G.R. No. 133107 March 25, 1999

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS and FELIPE LUSTRE, respondents.

KAPUNAN, J.:

A simple telephone call and an ounce of good faith on the part of petitioner could have prevented the present
controversy.

On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc. for
which he made a down payment of P164,620.00, the balance of the purchase price to be paid in 24 equal monthly
installments. Private respondent thus issued 24 postdated checks for the amount of P14,976.00 each. The first was
dated April 10, 1991; subsequent checks were dated every 10th day of each succeeding month.

To secure the balance, private respondent executed a promissory note and a contract of chattel mortgage over
1 2

the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in paragraph 11 thereof, provided for an
acceleration clause stating that should the mortgagor default in the payment of any installment, the whole amount
remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of the principal due as
liquidated damages.

On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel mortgage to petitioner Rizal
Commercial Banking Corporation (RCBC).

All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by RCBC from
private respondent's account, except for RCBC Check No. 279805 representing the payment for August 10, 1991,
which was unsigned. Previously, the amount represented by RCBC Check No. 279805 was debited from private
respondent's account but was later recalled and re-credited, to him. Because of the recall, the last two checks,
dated February 10, 1993 and March 10, 1993, were no longer presented for payment. This was purportedly in
conformity with petitioner bank's procedure that once a client's account was forwarded to its account representative,
all remaining checks outstanding as of the date the account was forwarded were no longer presented for patent.

On the theory that respondent defaulted in his payments, the check representing the payment for August 10, 1991
being unsigned, petitioner, in a letter dated January 21, 1993, demanded from private respondent the payment of
the balance of the debt, including liquidated damages. The latter refused, prompting petitioner to file an action for
replevin and damages before the Pasay City Regional Trial Court (RTC). Private respondent, in his Answer,
interposed a counterclaim for damages.

After trial, the. RTC rendered a decision disposing of the case as follows:
3

WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:

I. The complaint; for lack of cause of action, is hereby DISMISSED and plaintiff RCBC is hereby
ordered,

A. To accept the payment equivalent to the three checks amounting

to a total of P44,938.00, without interest.

B. To release/cancel the mortgage on the car . . . upon payment of

the amount of P44,938.00, without interest.
 C. To pay the cost of suit.

II. On The Counterclaim.

A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as

moral damages.

B. RCBC to pay P100,000.00 as exemplary damages.

C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty.

Lustre is not entitled to any fee for lawyering for himself.

All awards for damages are subject to payment of fees to be assessed by the Clerk
of Court, RTC, Pasay City.

SO ORDERED.

On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:

We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a contract of
adhesion — that is, one wherein a party, usually a corporation, prepares the stipulations in the
contract, while the other party merely affixes his signature or his "adhesion" thereto . . . — is to be
strictly construed against appellant bank which prepared the form Contract . . . Hence . . . paragraph
11 of the Chattel Mortgage contract [containing the acceleration clause] should be construed to
cover only deliberate and advertent failure on the part of the mortgagor to pay an amortization as it
became due in line with the consistent holding of the Supreme Court construing obscurities and
ambiguities in the restrictive sense against the drafter thereof . . . in the light of Article 1377 of the
Civil Code.

In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee rested solely on

the fact that the 5th check issued by appellee . . . was recalled for lack of signature. However, the
check was recalled only after the amount covered thereby had been deducted from defendant-
appellee's account, as shown by the testimony of plaintiff's own witness Francisco Bulatao who was
in charge of the preparation of the list and trial balances of bank customers . . . . The "default" was
therefore not a case of failure to pay, the check being sufficiently funded, and which amount was in
fact already debited [sic] from appellee's account by the appellant bank which subsequently re-
credited the amount to defendant-appelle's account for lack of signature. All these actions RCBC did
on its own without notifying defendant until sixteen (16) months later when it wrote its demand letter
dated January 21, 1993.

Clearly, appellant bank was remiss in the performance, of its functions for it could have easily called
the defendant's attention to the lack of signature on the check and sent the check to or summoned,
the latter to affix his signature. It is also to be noted that the demand letter contains no explanation
as to how defendant-appellee incurred arrearages in the amount of P66,255.70, which is why
defendant-appellee made a protest notation thereon.

Notably, all the other checks issued by the appellee dated subsequent to August 10, 1991 and dated
earlier than the demand letter, were duly encashed. This fact should have already prompted the
appellant bank to review its action relative to the unsigned check. . . .4

We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil Code, which
states:

The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.

It bears stressing that a contract of adhesion is just as binding as ordinary contracts. It is true that we have, on
5

occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant
bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to
bargain on equal footing. Nevertheless, contracts of adhesion are not invalid per se; they are not entirely
6 7

prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his
8

consent. 9

While ambiguities in a contract of adhesion are to be construed against the party that prepared the same, this rule
10

applies only if the stipulations in such contract are obscure or ambiguous. If the terms thereof are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. 11
In the latter
case, there would be no need for construction. 12

Here, the terms of paragraph 11 of the Chattel Mortgage Contract 13

are clear. Said paragraph states:

11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may be
due as provided in the said promissory note, the whole amount remaining unpaid therein shall
immediately become due and payable and the mortgage on the property (ies) herein-above
described may be foreclosed by the MORTGAGEE, or the MORTGAGEE may take any other legal
action to enforce collection of the obligation hereby secured, and in either case the MORTGAGOR
further agrees to pay the MORTGAGEE an additional sum of 25% of the principal due and unpaid,
as liquidated damages, which said sum shall become part thereof. The MORTGAGOR hereby
waives reimbursement of the amount heretofore paid by him/it to the MORTGAGEE.

The above terms leave no room for construction. All that is required is the application thereof.

Petitioner claims that private respondent's check representing the fifth installment was "not encashed," such that 14

the installment for August 1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it "was
justified in treating the entire balance of the obligation as due and
demandable." Despite demand by petitioner, however, private respondent refused to pay the balance of the debt.
15

Petitioner, in sum imputes delay on the part of private respondent.

We do not subscribe to petitioner's theory.

Art. 170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable
for damages. The delay in the performance of the obligation, however, must be either malicious or negligent. Thus, 16

assuming that private respondent was guilty of delay in the payment of the value of unsigned check, private
respondent cannot be held liable for damages. There is no imputation, much less evidence, that private respondent
acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court of Appeals finding that
such omission was mere "in advertence" on the part of private respondent. Toyota salesperson Jorge Geronimo
testified that he even verified whether private respondent had signed all the checks and in fact returned three or four
unsigned checks to him for signing:

Atty. Obispo:

After these receipts were issued, what else did you do about the transaction?

A: During our transaction with Atty. Lustre, I found out when he issued to me the 24 checks, I found out 3 to 4
checks are unsigned and I asked him to signed these checks.

Atty. Obispo:

What did you do?

A: I asked him to sign the checks. After signing the checks, I reviewed again all the documents, after I reviewed all
the documents and found out that all are completed and the down payments was completed, we realed to him the
car.17

Even when the checks were delivered to petitioner, it did not object to the unsigned check. In view of the lack of
malice or negligence on the part of private respondent, petitioner's blind and mechanical invocation of paragraph 11
of the contract of chattel mortgage was unwarranted. Petitioner's conduct, in the light of the circumstances of this
case, can only be described as mercenary. Petitioner had already debited the value of the unsigned check from
private respondent's account only to re-credit it much later to him. Thereafter, petitioner encashed checks
subsequently dated, then abruptly refused to encash the last two. More than a year after the date of the unsigned
check, petitioner, claiming delay and invoking paragraph 11, demanded from private respondent payment of the
value of said check and that of the last two checks, including liquidated damages. As pointed out by the trial court,
this whole controversy could have been avoided if only petitioner bothered to call up private respondent and ask him
to sign the check. Good faith not only in compliance with its contractual obligations, but also in observance of the
18

standard in human relations, for every person "to act with justice, give everyone his due, and observe honesty and
good faith." behooved the bank to do so. Failing thus, petitioner is liable for damages caused to private
19

respondent. These include moral damages for the mental anguish, serious anxiety, besmirched reputation,
20

wounded feelings and social humiliation suffered by the latter. The trial court found that private respondent was:
21

[a] client who has shared transactions for over twenty years with a bank . . ..The shabby treatment
given the defendant is unpardonable since he was put to shame and embarrassment after the case
was filed in Court. He is a lawyer in his own right, married to another member of the bar. He sired
 children who are all professionals in their chosen field. He is known to the community of golfers with
whom he gravitates. Surely the filing of the case made defendant feel so bad and bothered.

To deter others from emulating petitioner's callous example, we affirm the award of exemplary damages. 22
As
exemplary damages are warranted, so are attorney's fees. 23

We, however, find excessive the amount of damages awarded by the trial court in favor of private respondent with
respect to his counterclaims and, accordingly, reduce the same as follows:

(a) Moral damages — from P200,000.00 to P100,000.00

(b) Exemplary damages — from P100,000.00 to P75,000.00

(c) Attorney's fees — from P50,000.00 to P 30,000.00

WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFIRMED. SO ORDERED.

G.R. No. 158138. April 12, 2005

PHILIPPINE BANK OF, COMMUNICATIONS, Petitioners,

vs.
ELENA LIM, RAMON CALDERON, and TRI-ORO INTERNATIONAL TRADING & MANUFACTURING
CORPORATION, Respondents.

DECISION

PANGANIBAN, J.:

A restrictive stipulation on the venue of actions contained in a promissory note applies to the surety agreement
supporting it, because the nature of the two contracts and the factual circumstances surrounding their execution are
intertwined or interconnected. The surety agreement is merely an accessory to the principal loan agreement
embodied in the promissory note. Hence, the enforcement of the former depends upon the latter.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the April 29, 2003 Decision of the
1 2

Court of Appeals (CA) in CA-GR SP No. 69786. The challenged Decision disposed as follows:

"WHEREFORE, based on the foregoing, the instant petition is hereby GRANTED. The assailed Orders dated June
9, 2000 and January 9, 2002 are hereby ANNULED and SET ASIDE. Civil Case No. 99-94976 is hereby
ordered DISMISSED without prejudice to the filing thereof in the venue exclusively stipulated by the parties." 3

The Facts

The facts are related by the CA as follows:

"On September 3, 1999, the Philippine Bank of Communications (hereinafter ‘[petitioner’]) filed a complaint against
[Respondents Elena Lim, Ramon Calderon and Tri-Oro International Trading & Manufacturing Corporation (‘Tri-Oro’
for brevity)] with the Regional Trial Court of Manila for the collection of a deficiency amounting to ₱4,014,297.23
exclusive of interest. [Petitioner] alleged therein that [respondents] obtained a loan from it and executed a continuing
surety agreement dated November 16, 1995 in favor of [petitioner] for all loans, credits, etc., that were extended or
may be extended in the future to [respondents]. [Petitioner] granted a renewal of said loan upon [respondent’s]
request, the most recent being on January 21, 1998 as evidenced by Promissory Note Renewal BD-Variable No.
8298021001 in the amount of ₱3,000,000.00. It was expressly stipulated therein that the venue for any legal action
that may arise out of said promissory note shall be Makati City, ‘to the exclusion of all other courts’ x x x.
[Respondents allegedly] failed to pay said obligation upon maturity. Thus, [petitioner] foreclosed the real estate
mortgage executed by [respondents] valued at ₱1,081,600.00 leaving a deficiency balance of ₱4,014,297.23 as of
August 31, 1999.

"[Respondents] moved to dismiss the complaint on the ground of improper venue, invoking the stipulation contained
in the last paragraph of the promissory note with respect to the restrictive/exclusive venue. [The trial court] denied
said motion asseverating that [petitioner] ha[d] separate causes of action arising from the promissory note and the
continuing surety agreement. Thus, [under] Rule 4, Section 2, of the 1997 Rules of Civil Procedure, as amended, x x
x venue was properly laid in Manila. [The trial court] supported [its] order with cases where venue was held to be
merely permissive. A motion for reconsideration of said order was likewise denied." 4
Ruling of the Court of Appeals

On appeal, the CA ruled that respondents’ alleged debt was based on the Promissory Note, which had provided an
exclusionary stipulation on venue "to the exclusion of all other courts." The parties’ Surety Agreement, though silent
5

as to venue, was an accessory contract that should have been interpreted in consonance with the Promissory Note. 6

Hence, this Petition. 7

The Issue

Petitioner raises the following issue for our consideration:

"Whether or not the Honorable Court of Appeals had decided the issue of venue in a way not in accord with law and
applicable decisions of this Honorable Court and had thereby departed from the accepted and usual course of
judicial proceedings, as to call for this Honorable Supreme Court’s power of supervision and appellate review." 8

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Venue

At the outset, this Court observes that petitioner took liberties with the stipulated facts to suit its allegations in the
present Petition. In its Complaint, petitioner bank averred that respondents had entered into the Surety Agreement
(SA) to guarantee existing and future credit facilities, and that they had executed the Promissory Note (PN) to
document their loan. Now, the bank is claiming that Tri-Oro issued the PN on which the other respondents should
9

be made liable as sureties. 10

This strategy is obviously intended to disconnect the SA from the PN and to support the claim of petitioner that the
stipulation on venue does not apply to the SA. However, as will be discussed below, the cause of action to recover
on the basis of the SA is inseparable from that which is based on the PN.

Rule on Venue

Section 2 of Rule 4 of the Rules of Court provides that personal actions must be commenced and tried (1) in the
11

place where the plaintiff resides, or (2) where the defendant resides, or (3) in case of non-resident defendants,
where they may be found, at the choice of the plaintiff. This rule on venue does not apply when the law specifically
12

provides otherwise, or when -- before the filing of the action -- the contracting parties agree in writing on the
exclusive venue thereof. Venue is not jurisdictional and may be waived by the parties.
13 14

A stipulation as to venue does not preclude the filing of the action in other places, unless qualifying or restrictive
words are used in the agreement. 15

In the instant case, the stipulation on the exclusivity of the venue as stated in the PN is not at issue. What petitioner
claims is that there was no restriction on the venue, because none was stipulated in the SA on which petitioner had
allegedly based its suit. Accordingly, the action on the SA may be filed in Manila, petitioner’s place of residence.
16

Petitioner adds that its Complaint filed in the trial court had two causes of action: the first was founded on a breach
of the PN; and the second, on a violation of the SA. Consequently, it was allegedly correct to join the causes of
17

action and to file the case in Manila, per Section 5 of Rule 2 of the Rules of Court, which reads: 18

"Section 5. Joinder of Causes of Action. –A party may in one pleading assert, in the alternative or otherwise, as
many causes of action as he may have against an opposing party, subject to the following conditions:

xxxxxxxxx

(c) Where the causes of action are between the same parties but pertain to different venue or jurisdictions, the
joinder may be allowed in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of
the said court and venue lies therein." 19

Surety Agreement
Suretyship arises upon the solidary binding of a person -- deemed the surety -- with the principal debtor, for the
purpose of fulfilling an obligation. The prestation is not an original and direct obligation for the performance of the
20

surety’s own act, but merely accessory or collateral to the obligation contracted by the principal. Although the surety
21

contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking.
22

In enforcing a surety contract, the "complementary-contracts-construed-together" doctrine finds

application. According to this principle, an accessory contract must be read in its entirety and together with the
23

principal agreement. This principle is used in construing contractual stipulations in order to arrive at their true
24

meaning; certain stipulations cannot be segregated and then made to control. This no-segregation principle is
25

based on Article 1374 of the Civil Code, which we quote:

"Art. 1374. The 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 aforementioned doctrine is applicable to the present case. Incapable of standing by itself, the SA can be
enforced only in conjunction with the PN. The latter documents the debt that is sought to be collected in the action
against the sureties.

The factual milieu of the present case shows that the SA was entered into to facilitate existing and future loan
agreements. Petitioner approved the loan covered by the PN, partly because of the SA that assured the payment of
the principal obligation. The circumstances that related to the issuance of the PN and the SA are so intertwined that
neither one could be separated from the other. It makes no sense to argue that the parties to the SA were not bound
by the stipulations in the PN.

Notably, the PN was a contract of adhesion that petitioner required the principal debtor to execute as a condition of
the approval of the loan. It was made in the form and language prepared by the bank. By inserting the provision that
Makati City would be "the venue for any legal action [that] may arise out of [the] Promissory Note," petitioner also
26

restricted the venue of actions against the sureties. The legal action against the sureties arose not only from the SA,
but also from the PN.

Cause of Action

Petitioner correctly argues that there are two causes of action contained in its Complaint. A cause of action is a
party’s act or omission that violates the rights of the other. Only one suit may be commenced for a single cause of
27

action. If two or more suits are instituted on the basis of the same cause of action, only one case should remain and
28

the others must be dismissed. 29

As against Tri-Oro International Trading & Manufacturing Corporation, petitioner’s cause of action is the alleged
failure to pay the debt in violation of the PN; as against Elena Lim and Ramon Calderon, in violation of the SA.

Because of the variance between the causes of action, petitioner could have filed separate actions against
respondents to recover the debt, on condition that it could not recover twice from the same cause. It could have
proceeded against only one or all of them, as full payment by any one of them would have extinguished the
30

obligation. By the same token, respondents could have been joined as defendants in one suit, because petitioner’s
31

alleged right of relief arose from the same transaction or series of transactions that had common questions of
fact. To avoid a multiplicity of suits, joinder of parties is encouraged by the law.
32

The cause of action, however, does not affect the venue of the action. The vital issue in the present case is whether
the action against the sureties is covered by the restriction on venue stipulated in the PN. As earlier stated, the
answer is in the affirmative. Since the cases pertaining to both causes of action are restricted to Makati City as the
proper venue, petitioner cannot rely on Section 5 of Rule 2 of the Rules of Court.

Liberal Construction

Petitioner’s final plea for liberality in applying the rules on venue must be rejected. As earlier discussed, the PN was
a contract of adhesion. Ambiguities therein are to be construed against the party that prepared the contract. On the
33

same principle, petitioner can no longer disavow the stipulation on venue, considering that it drafted the Surety
Agreement. Besides, this alleged technicality caused no miscarriage of substantial justice, as petitioner may refile
the case. The inconveniences brought about by its failure to observe the rules on venue sprang from its own acts.
34

Hence, it cannot blame the courts or anyone else for the resulting delay in the adjudication of the merits of its cause.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.

Costs against petitioner.

SO ORDERED.
G.R. No. 172279 February 11, 2010

VALENTIN MOVIDO, substituted by MARGINITO MOVIDO, Petitioner,

vs.
LUIS REYES PASTOR, Respondent.

DECISION

CORONA, J.:

Respondent Luis Reyes Pastor filed a complaint for specific performance in the Regional Trial Court (RTC) of Imus,
Cavite, praying that petitioner Valentin Movido 1 be compelled to cause the survey of a parcel of land subject of their
contract to sell.

In his complaint, respondent alleged that he and petitioner executed a kasunduan sa bilihan ng lupa where the latter
agreed to sell a parcel of land located in Paliparan, Dasmariñas, Cavite with an area of some 21,000 sq. m. out of
the 22,731 sq. m. covered by Transfer Certificate of Title (TCT) No. 362995 at ₱400/sq. m. The agreement read:

xxx

1. Na si MOVIDO ang tunay at ganap na may-ari ng isang (1) parselang lupa sa Paliparan, Dasmariñas,
Cavite, na ang nasabing lupa sakop ng TRANSFER CERTIFICATE OF TITLE No. T-362995, na ito ay
lalong mailalarawan ng tulad ng sumusunod:

xxx

2. Na ipinagkakasundo ni MOVIDO na ipagbili kay PASTOR ang 21,000 metro cuadrado humigit-kumulang,
ng lupang nakalarawan sa dakong taas sa halagang APAT NA RAANG PISO (₱400.00) bawat metro
cuadrado o sa kabuuang halaga na WALONG MILYON AT APAT NA RAANG LIBONG PISO
(₱8,400,000.00), na ang nasabing halaga ay babayaran ni PASTOR kay MOVIDO ng gaya ng sumusunod:

₱500,000.00 – babayaran sa paglagda ng kasulatang ito;

₱500,000.00 – babayaran sa loob ng tatlong (3) buwan mula sa petsa ng unang bayad;
₱1,000, 000.00 – babayaran sa loob ng tatlong (3) buwan mula sa petsa ng ikalawang bayad;
₱1,000, 000.00 – babayaran sa loob ng tatlong (3) buwan mula sa petsa ng ikatlong bayad;
₱1,000, 000.00 – babayaran sa loob ng tatlong (3) buwan mula sa petsa ng ikaapat na bayad;
₱1,000, 000.00 – babayaran sa loob ng tatlong (3) buwan mula sa petsa ng ikalimang bayad;
₱1,000, 000.00 – babayaran sa loob ng tatlong (3) buwan mula sa petsa ng ikaanim na bayad;
₱2,400, 000.00 – babayaran sa loob ng tatlong (3) buwan mula sa petsa ng ikapitong bayad;

₱8,400, 000.00 – Kabuuan.

 3. Na ang 1,731 metro cuadrado, humigit-kumulang, na hindi kasama sa bilihang ito ay nasasakop ni
Leonardo Cuevas, na ito ay ipapasukat at ipapahiwalay ni MOVIDO sa kabuuan ng nasabing lupa bago
matapos ang huling bayad ng bilihang ito;

4. Na si MOVIDO ang magbabayad ng lahat ng gastos tungkol sa bilihang ito tulad ng capital gains
tax, selyo dokumentaryo, transfer tax, registration fees, bayad sa nagsasaka ng nasabing lupa, sampu ng
komisyon ng mga ahente. Ang babayaran ni MOVIDO na capital gains tax ay hanggang sa ISANG DAANG
PISO (₱100.00) lamang;

5. Na kung si PASTOR ay hindi makabayad sa balance sa takdang panahon, ang kalahati ng lahat ng
kanyang naibayad ay mapopornada sa kapakanan ni MOVIDO at ang kasulatang ito ay mawawalan ng bisa;

6. Na kasabay ng pagbabayad ng huling bayad, si MOVIDO ay lalagda sa kaukulang kasulatan ng ganap

na bilihan (Deed of Absolute Sale) ng lupang dito ay tinutukoy.2

Respondent further alleged that another kasunduan was later executed supplementing the kasunduan sa bilihan ng
lupa. It provided that, if a Napocor power line traversed the subject lot, the purchase price would be lowered to
₱200/sq. m. beyond the distance of 15 meters on both sides from the center of the power line while the portion
within a distance of 15 meters on both sides from the center of the power line would not be paid. In particular,
the kasunduan provided:

xxx

1. Na ipinagkasundoni MOVIDO na ipagbili kay PASTOR ang kanyang lupa lupa sa Paliparan, Dasmariñas,
Cavite na may sukat na 22731 metro kwadrado at sakop ng Transfer Certificate of Title No. T-362995.

2. Na kanilang napagkasunduan na kung sakali na ang lupang tinutukoy ay pumailalim sa linya ng kuryente
ng NAPOCOR, ang bahagi ng lupa na hindi hihigit sa layo ng LABING LIMANG (15) METRO mula sa
kailaliman ng linya ng kuryente ay hindi pababayaran ni MOVIDO kay PASTOR, at ang bahagi ng lupa na
pumakabila sa linya ng kuryente mula sa Paliparan Road at hihigit ng LABING LIMANG (15) METRO mula
sa kailaliman ng linya ng kuryente ay pababayaran ni MOVIDO kay PASTOR sa halagang DALAWANG
DAANG PISO bawat metro kwadrado.3 (italics supplied)

Respondent likewise claimed that petitioner undertook to cause the survey of the property in order to determine the
portion affected by the Napocor power line.

Lastly, respondent alleged that he already paid petitioner ₱5 million out of the original purchase price of ₱8.4 million
stated in the kasunduan sa bilihan ng lupa. He was willing and ready to pay the balance of the purchase price but
due to petitioner’s refusal to have the property surveyed despite incessant demands, his unpaid balance could not
be determined with certainty.

In his answer, petitioner alleged that the original negotiation for the sale of his property involved the entire area of
22,731 sq. m. However, as respondent was not sure whether a Napocor power line traversed the property, they
then executed the kasunduan. After respondent personally inspected the property, a final agreement—
the kasunduan sa bilihan ng lupa—was executed where the area to be sold was 21,000 sq. m. for ₱400/sq. m. for a
total sum of ₱8.4 million. The final agreement also listed a schedule of payments of the purchase price and included
a penalty clause in case of default.

Petitioner also charged respondent with delay in paying several installments due and did not pay the 7th installment
in the amount of ₱1 million. This was allegedly a material breach because they agreed that the survey of the
property would only be done after respondent would have paid the 7th installment. Due to respondent’s failure to
fulfill his obligations, petitioner claimed that he had no choice except to rescind the kasunduan sa bilihan ng lupa.
He, however, was willing to reimburse 50% of whatever respondent had paid him so far.

After hearing, the RTC4 ruled in favor of petitioner and held that the kasunduan preceded the kasunduan sa bilihan
ng lupa. Thus, the RTC dismissed the complaint of respondent for lack of merit and/or cause of action. It also
ordered the rescission of the kasunduan sa bilihan ng lupa as well as the forfeiture of 50% of the amount already
paid by respondent (but ordered petitioner to return to respondent 50% of the amount already paid). The RTC also
directed respondent to pay petitioner ₱50,000 attorney’s fees and costs of suit.

On appeal, the Court of Appeals (CA) 5 reversed the RTC and held that the kasunduan sa bilihan ng lupa was the
first document executed by the parties, not the kasunduan. Thus, the CA ordered respondent to pay the heirs of
petitioner the balance of the purchase price in the amount of ₱2,796,400. The CA also ordered that, upon complete
payment by respondent, Marginito Movido (the substitute of petitioner) should execute the necessary deed of
absolute sale in favor of respondent and comply with petitioner’s other obligations under the kasunduan sa bilihan
ng lupa.
Marginito Movido’s motion for reconsideration did not have its desired result. 6 Hence, this petition for review on
certiorari,7 where he insists that it was the kasunduan, not the kasunduan sa bilihan ng lupa, which was first
executed by the parties. He likewise claims that the failure of respondent to pay the 7th and 8th installments of the
purchase price gave petitioner the right to rescind the contract.

Misguided Search For Priority In Time

The issue of which of the two contracts was first executed by the parties is immaterial to the resolution of this case.
In the first place, both contracts were executed and notarized on the same day, December 6, 1993. More
importantly, both contracts, even independent of the time of their execution but, taken together, clearly spell out in
full the respective rights and obligations of the parties.

Indeed, a reading of the kasunduan sa bilihan ng lupa and the kasunduan would readily reveal that payment of the
purchase price does not depend on the survey of the property. In other words, the purchase price should be paid
whether or not the property is surveyed. The survey of the property is important only insofar as the right of
respondent to the reduction of the purchase price is concerned.

On the other hand, the survey of the property to determine the metes and bounds of the 1,731 sq. m. portion that is
excluded from the contract as well as the portions covered by the kasunduan which will be subject to reduction of
the purchase price, is also not conditioned on the payment of any installment. Petitioner simply has to do it. In fact,
under the kasunduan sa bilihan ng lupa, the survey should be done before the date of the last installment. Hence,
the survey could have been done anytime after the execution of the agreement.

If respondent pays a higher amount without the property being surveyed first (compared to what he is liable to pay
after the survey of the property) it will not be a problem because the excess of the amount paid can easily be
refunded to him. Such would be the plain application of the provisions of the kasunduan. On the other hand,
petitioner cannot successfully reject respondent’s demand for petitioner to perform his obligation to have the
property surveyed. Under the kasunduan sa bilihan ng lupa, petitioner is obligated to conduct the survey on or
before the due date of the last installment.

Corollary to this, the CA erred when it proceeded to determine the remaining balance of respondent by applying a
reduced rate on certain portions of the property. In effect, the CA disregarded the agreement of the parties that
petitioner should first cause the survey of the subject property in order to determine the area excluded from the sale
and the portion traversed by the Napocor power line. Petitioner himself admitted that he had this obligation. Thus,
the CA’s application of a reduced price in the absence of a survey was without factual or legal basis. It unduly
infringed on the parties’ liberty to contract.

There are two options to resolve this impasse. First, respondent may be ordered to pay his remaining balance in
the kasunduan sa bilihan ng lupa representing the 7th and 8th installments or the amount of ₱3.4 million in which
case Marginito will be ordered to immediately conduct the survey of the property and thereafter to refund to
respondent the excess of the amount paid. Second, Marginito may be ordered to have the property surveyed first
within a reasonable period and thereafter respondent will have to pay his corresponding balance (which, naturally,
will be less than ₱3.4 million).

Prudence dictates that the second option is better as it will prevent further conflict between the parties. Thus, we
adopt the second option.

Impropriety Of Rescission

Rescission is only allowed when the breach is so substantial and fundamental as to defeat the object of the parties
in entering into the contract.8 We find no such substantial or material breach. It is true that respondent failed to pay
the 7th and 8th installments of the purchase price. However, considering the circumstances of the instant case,
particularly the provisions of the kasunduan, respondent cannot be deemed to have committed a serious breach. In
the first place, respondent was not in default as petitioner never made a demand for payment. Moreover, 1avvphi1

the kasunduan sa bilihan ng lupa and the kasunduan should both be given effect rather than be declared conflicting,
if there is a way of reconciling them. Petitioner and respondent would not have entered into either of the agreements
if they did not intend to be bound or governed by them. Indeed, taken together, the two agreements actually
constitute a single contract pertaining to the sale of a land to respondent by petitioner. Their stipulations must
therefore be interpreted together, attributing to the doubtful ones that sense that may result from all of them taken
jointly.9 Their proper construction must be one that gives effect to all.10

In this connection, the kasunduan sa bilihan ng lupa contains the general terms and conditions of the agreement of
the parties. On the other hand, the kasunduan refers to a particular or specific matter, i.e., that portion of the land
that is traversed by a Napocor power line. As the kasunduan pertains to a special area of the agreement, it
constitutes an exception to the general provisions of the kasunduan sa bilihan ng lupa, particularly on the purchase
price for that portion. Specialibus derogat generalibus.
Under both the kasunduan sa bilihan ng lupa and the kasunduan, petitioner undertook to cause the survey of the
property in order to determine the portion excluded from the sale, as well as the portion traversed by the Napocor
power line. Despite repeated demands by respondent, however, petitioner failed to perform his obligation. Thus,
considering that there was a breach on the part of petitioner (and no material breach on the part of respondent), he
cannot properly invoke his right to rescind the contract.

WHEREFORE, the petition is hereby DENIED. The July 18, 2005 decision of the Court of Appeals in CA-G.R. CV
No. 67207 is AFFIRMED with the MODIFICATION that Marginito Movido is ordered to cause the survey of the
subject lot within a period of three months in order to determine the excluded portion of the sale and the portion
traversed by the Napocor power line. If he fails to do so, Luis Reyes Pastor is hereby authorized to have it done with
the cost of the survey charged to Marginito Movido.

Luis Reyes Pastor should thereafter pay the balance of the purchase price, after which, Marginito should execute
the kasulatan ng ganap na bilihan ng lupa (deed of absolute sale) in favor of Luis Reyes Pastor, reflecting as
purchase price the amount actually paid by the latter.

Costs against petitioner. SO ORDERED.

G.R. No. 204689 January 21, 2015

STRONGHOLD INSURANCE COMPANY, INC., Petitioner,

vs.
SPOUSES RUNE and LEA STROEM, Respondents.

DECISION

LEONEN, J.:

For resolution is a Petition for Review under Rule 45 of the Rules of Court assailing the Decision dated November
1 2

20, 2012 of the Court of Appeals in CA-G.R. CV No. 96017. The Court of Appeals ;iffirmed the Decision of the 3

Regional Trial Court of Makati, Branch 133 in Civil Case No. 02-1108 for collection of a sum of money.

This case involves the proper invocation of the Construction Industry Arbitration Committee's (CIAC) jurisdiction
through an arbitration clause in a construction contract. The main issue here is whether the dispute — liability of a
surety under a performance bond — is connected to a construction contract and, therefore, falls under the exclusive
jurisdiction of the CIAC.

Spouses Rune and Lea Stroem (Spouses Stroem) entered into an Owners-Contractor Agreement with Asis-Leif &
4

Company, Inc. (Asis-Leif) for the construction of a two-storey house on the lot owned by Spouses Stroem. The lot
was located at Lot 4A, Block 24, Don Celso Tuason Street, Valley Golf Subdivision, Barangay Mayamot, Antipolo,
Rizal.
5

On November 15, 1999, pursuant to the agreement, Asis-Leif secured Performance Bond No. LP/G(13)83056 in the
amount of ₱4,500,000.00 from Stronghold Insurance Company, Inc. (Stronghold). Stronghold and Asis-Leif, through
6

Ms. Ma. Cynthia Asis-Leif, bound themselves jointly and severally to pay the Spouses Stroem the agreed amount in
the event that the construction project is not completed.
7

Asis-Leif failed to finish the projecton time despite repeated demands of the Spouses Stroem. 8

Spouses Stroem subsequently rescinded the agreement. They then hired an independent appraiser to evaluate the
9

progress of the construction project.

10

Appraiser Asian Appraisal Company, Inc.’s evaluation resulted in the following percentage of completion: 47.53% of
the residential building, 65.62% of the garage, and 13.32% of the swimming pool, fence, gate, and land
development. 11

On April 5, 2001, Stronghold sent a letter to Asis-Leif requesting that the company settle its obligations withthe
Spouses Stroem. No response was received from Asis-Leif. 12

On September 12, 2002, the Spouses Stroem filed a Complaint (with Prayer for Preliminary Attachment) for breach
13

of contract and for sum of money with a claim for damages against Asis-Leif, Ms. Cynthia Asis-Leif, and
Stronghold. Only Stronghold was served summons. Ms. Cynthia Asis-Leif allegedly absconded and moved out of
14

the country.15
On July 13, 2010, the Regional Trial Court rendered a judgment in favor of the Spouses Stroem. The trial court
ordered Stronghold to pay the Spouses Stroem ₱4,500,000.00 with 6% legal interest from the time of first
demand. The dispositive portion of the trial court Decision reads:
16

WHEREFORE, finding plaintiffs’ cause of action to be sufficiently established being supported by evidence on
records, judgement is hereby rendered in favor of the plaintiff spouses Rune and Lea Stroem and against the
defendant Stronghold Insurance Company Incorporated ordering the latter topay the plaintiff the sums of:

1) Php4,500,000.00 with six (6%) percent legal interest from the time of first demand and interest due shall
earn legal interest from the time of judicial demand until fully paid.

2) Php35,000.00 by way of attorney’s fees and other litigation expenses.

Defendant is further ordered topay the costs of this suit.

SO ORDERED. 17

Both Stronghold and the Spouses Stroem appealed to the Court of Appeals. 18

The Court of Appeals affirmed with modification the trial court’s Decision. It increased the amount of attorney’s fees
to ₱50,000.00. 19

The dispositive portion of the Court of Appeals Decision reads:

WHEREFORE,the appeal of Stronghold Company, Inc[.] is DISMISSED, while the appeal of spouses Rune and Lea
Stroem is PARTLY GRANTED. The November 27, 2009 Decision of the Regional Trial Court of Makati City is
AFFIRMED with MODIFICATION that the award of attorney’s fees is increased to ₱50,000.00

SO ORDERED. 20

On March 20, 2013, this court required the Spouses Stroem to submit their Comment on the Petition. We noted the
21

Spouses Stroem’s Comment on July 31, 2013. We also required Stronghold to file its Reply to the
22

Comment, which was noted on December 9, 2013.

23 24

Stronghold argues that the trial court did not acquire jurisdiction over the case and, therefore, the Court of Appeals
committed reversible error when it upheld the Decision of the Regional Trial Court. The lower courts should have
25

dismissed the case in viewof the arbitration clause in the agreement and considering that "[Republic Act No. 876]
explicitly confines the court’s authority only to pass upon the issue of whether there is [an] agreement . . . providing
for arbitration. In the affirmative, the statute ordains that the court shall issue an order ‘summarily directing the
parties to proceed with the arbitration in accordance with the terms thereof.’" Moreover, "the stipulations in said
26

Agreement are part and parcel of the conditions in the bond. Were it not for such stipulations in said agreement,
[Stronghold] would not have agreed to issue a bond in favor of the Spouses Stroem. The parties tothe bond are
ALB/Ms. Asis-[L]eif, Spouses Stroem and [Stronghold] suchthat ALB/Ms. Asis-[L]eif never ceased to be a party to
the surety agreement." 27

In any case, Stronghold’s liability under the performance bond is limited only to additional costs for the completion of
the project. In addition, the Court of Appeals erred inholding that Stronghold changed its theory with regard to the
28

notice requirement and in modifying the trial court’s award of attorney’s fees.
29 30

On the other hand, the Spouses Stroem argue that Stronghold committed forum shopping warranting dismissal of
the case. According to the Spouses Stroem, Stronghold deliberately committed forum shopping when it filed the
31

present petition despite the pendency of the Spouses Stroem’s Motion for Partial Reconsideration of the Court of
Appeals Decision dated November 20, 2012. 32

More importantly, the Owners-Contractor Agreement is "separate and distinct from the Bond. The parties to the
Agreement are ALB/Ms. Asis-Leif and Spouses Stroem, while the parties to the Bond are Spouses Stroem and
Stronghold. The considerations for the two contracts are likewise distinct. Thus, the arbitration clause in the
Agreement is binding only on the parties thereto, specifically ALB/Ms. Asis-Leif and Spouses Stroem[.]" 33

Contrary to Stronghold’s argument, Spouses Stroem argues that stronghold is liable for the full amountof the
performance bond. The terms of the bond clearly show that Stronghold is liable as surety. Verily, notice to
34

Stronghold is not required for its liability to attach.

35

The issues for consideration are:

(1) Whether the dispute involves a construction contract;

 (2) Whether the CIAC has exclusive jurisdiction over the controversy between the parties;

(3) Whether the Regional Trial Court should have dismissed the petition outright as required by law and
jurisprudence and referred the matter to the CIAC; and

(4) Whether petitioner Stronghold Insurance Company, Inc. is liable under Performance Bond No.
LP/G(13)83056.

(a) Whether petitioner Stronghold Insurance Company, Inc. is only liable as to the extent of any additional
cost for the completion of the project due toany increase in prices for labor and materials.

(b) Whether the case involves ordinary suretyship or corporate suretyship.

After considering the parties’ arguments and the records of this case, this court resolves to deny the Petition.

On forum-shopping

Respondents argue that petitioner committed forum shopping; hence, the case should have been dismissed
outright.

Records show that petitioner received a copy of the Decision of the Court of Appeals on December 5,
2012. Petitioner did not file a Motion for Reconsideration of the assailed Decision. It filed before this court a Motion
36

for Extension of Time To File Petition for Review requesting an additional period of 30 days from December 20,
2012 or until January 19, 2013 to file the Petition.37

Respondents filed their Motion for Partial Reconsideration of the Court of Appeals Decision on December 11,
2012. They sought the modification of the Decision as to the amounts of moral damages, exemplary damages,
38

attorney’s fees, and costs of the suit.39

Respondents alleged in their Comment that as early as January 9, 2013, petitioner received a copy of the Court of
Appeals’ Resolution requiring Comment on the Motion for Partial Reconsideration. Still, petitioner did not disclose
40

in its Verification and Certification Against Forum Shopping the pendency of respondents’ Motion for Partial
Reconsideration. 41

For its part, petitioner claims that it did not commit forum shopping. It fully disclosed in its Petition that what it sought
to be reviewed was the Decision dated November 20, 2012 of the Court of Appeals. "Petitioner merely exercised its
available remedy with respect to the Decision of the Court of Appeals by filing [the] Petition." What the rules
42

mandate to be stated in the Certification Against Forum Shopping is the status of "any other action." This other
action involves the same issues and parties but is an entirely different case.

Indeed, petitioner is guilty of forum shopping.

There is forum shopping when:

as a result of an adverse opinion in one forum, a party seeks a favorable opinion (other than by appeal or certiorari)
in another. The principle applies not only with respect to suits filed in the courts but also in connection with litigations
commenced in the courts while an administrative proceeding is pending[.] (Citation omitted)
43

This court has enumerated the elements of forum-shopping: "(a) identity of parties, or at least such parties as
represent the same interests in both actions; (b) identity of rights asserted and reliefs prayed for, the reliefs being
founded on the same facts; and (c) the identity with respect to the two preceding particulars in the two cases issuch
that any judgment rendered in the pending cases, regardless of which party is successful, amount to res judicatain
the other case." Rule 42, Section 2 in relation to Rule 45, Section 4 of the Rules of Court mandates petitioner to
44 45

submit a Certification Against Forum Shopping and promptly inform this court about the pendency of any similar
action or proceeding before other courts or tribunals. The rule’s purpose is to deter the unethical practice of
pursuing simultaneous remedies in different forums, which "wreaks havoc upon orderly judicial procedure." Failure 46

to comply with the rule is a sufficient ground for the dismissal of the petition. 47

Records show that petitioner’s duly authorized officer certified the following on January 21, 2013: 4. I further certify
that: (a) I have not commenced any other action or proceeding involving the same issues in the Supreme Court,
Court of Appeals, or any other tribunal or agency; (b) to the best of my knowledge, no such action or proceeding is
pending in the Supreme Court, the Court of Appeals or different Divisions thereof, or any tribunal or agency; (c) if I
should thereafter learn that a similar action or proceeding has been filed or is pending before the Supreme Court,
the Court of Appeals, or different Divisions thereof, or any other tribunal or agency, I undertake to promptly inform
the aforesaid courts and such tribunal or agency of the fact within five (5) days therefrom. 48
Petitioner failed to carry out its duty of promptly informing this court of any pending action or proceeding before this
court,the Court of Appeals, or any other tribunal or agency. This court cannot countenance petitioner’s disregard of
the rules.

This court has held before that:

[u]ltimately, what is truly important to consider in determining whether forum-shopping exists or not is the vexation
caused the courts and parties-litigant by a party who asks different courts and/or administrative agencies to rule on
the same or related causes and/or to grant the same or substantially the same reliefs, in the process creating the
possibility of conflicting decisions being rendered by the different fora upon the same issue. (Emphasis supplied)
49

On this basis, this case should be dismissed.

On arbitration and the CIAC’s jurisdiction

Petitioner changed the theory of its case since its participation in the trial court proceedings. It raised the issue of
lack of jurisdiction in view of an arbitration agreement for the first time. Generally, parties may not raise issues for
the first time on appeal. Such practice is violative of the rules and due process and is frowned upon by the courts.
50

However, it is also well-settled that jurisdiction can never be waived or acquired by estoppel. Jurisdiction is
51

conferred by the Constitution or by law. "Lack of jurisdiction of the court over an action or the subject matter of an
52

action cannot be cured by the silence, by acquiescence, or even by express consent of the parties." 53

Section 4 of Executive Order No. 1008 is clear in defining the exclusive jurisdiction of the CIAC:
54

SECTION 4. Jurisdiction – The CIAC shall have original and exclusive jurisdiction over disputes arising from, or
connected with, contracts entered into by parties involved in construction in the Philippines, whether the dispute
arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes
may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must
agree to submit the same to voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and
workmanship; violation of the terms of agreement; interpretation and/or application of contractual timeand delays;
maintenance and defects; payment, default of employer or contractor and changes in contract cost.

Excluded from the coverage of thislaw are disputes arising from employer-employee relationships which shall
continue to be covered by the Labor Code of the Philippines. (Emphasis supplied)

Similarly, Section 35 of RepublicAct No. 9285 or the Alternative Dispute Resolution Act of 2004 states:

SEC. 35. Coverage of the Law. - Construction disputes which fall within the original and exclusive jurisdiction of the
Construction Industry Arbitration Commission (the "Commission") shall include those between or among parties to,
or who are otherwise bound by, an arbitration agreement, directly or by reference whether such parties are project
owner, contractor, subcontractor, quantity surveyor, bondsman or issuer of an insurance policy in a construction
project.

The Commission shall continue to exercise original and exclusive jurisdiction over construction disputes although
the arbitration is "commercial" pursuant to Section 21 of this Act. (Emphasis supplied)

In Heunghwa Industry Co., Ltd., v. DJ Builders Corporation, this court held that "there are two acts which may vest
55

the CIAC with jurisdiction over a construction dispute. One is the presence of an arbitration clause in a construction
contract, and the other is the agreement by the parties to submit the dispute to the CIAC." 56

This court has ruled that when a dispute arises from a construction contract, the CIAC has exclusive and original
jurisdiction. Construction has been defined as referring to "all on-site works on buildings or altering structures, from
57

land clearance through completion including excavation, erection and assembly and installation of components and
equipment." 58

In this case, there is no dispute asto whether the Owners-Contractor Agreement between Asis-Leif and respondents
is a construction contract. Petitioner and respondents recognize that CIAC has jurisdiction over disputes arising from
the agreement.

What is at issue in this case is the parties’ agreement, or lack thereof, to submit the case to arbitration. Respondents
argue that petitioner is not a party to the arbitration agreement. Petitioner did not consent to arbitration. It is only
respondent and Asis-Leif thatmay invoke the arbitration clause in the contract.
This court has previously held that a performance bond, which is meant "to guarantee the supply of labor,materials,
tools, equipment, and necessary supervision to complete the project[,]" is significantly and substantially connected
59

to the construction contract and, therefore, falls under the jurisdiction of the CIAC. 60

Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc. involved circumstances similar to the present case.
61

In Prudential, property owner Anscor Land, Inc. (ALI) entered into a contract for the construction of an eight-unit
townhouse located inCapitol Hills, Quezon City with contractor Kraft Realty and Development Corporation
(KRDC). KRDC secured the completion of the construction project through a surety and performance bond issued
62

by Prudential Guarantee and Assurance Inc. (PGAI). 63

The delay in the construction project resulted in ALI’s termination of the contract and claim against the performance
bond. "ALI [subsequently] commenced arbitration proceedings against KRDC and PGAI in the CIAC." PGAI,
64 65

however, argued that it was not a party to the construction contract. 66

The CIAC ruled that PGAI was not liable under the performance bond. Upon review, the Court of Appeals held that
67

PGAI was jointly and severally liable with KRDC under the performance bond. 68

PGAI appealed the Court of Appeals Decision and claimed that CIAC did not have jurisdiction over the performance
bond. This court ruled:
69

A guarantee or a surety contract under Article 2047 of the Civil Code of the Philippines is an accessory contract
because it is dependent for its existence upon the principal obligation guaranteed by it.

In fact, the primary and only reason behind the acquisition of the performance bond by KRDC was to guarantee to
ALI that the construction project would proceed in accordance with the contract terms and conditions. In effect, the
performance bond becomes liable for the completion of the construction project in the event KRDC fails in its
contractual undertaking. Because of the performance bond, the construction contract between ALI and KRDC is
guaranteed to be performed even if KRDC fails in its obligation. In practice, a performance bond is usually a
condition or a necessary component of construction contracts. In the case at bar, the performance bond was so
connected with the construction contract that the former was agreed by the parties to be a condition for the latter to
push through and at the same time, the former is reliant on the latter for its existence as an accessory contract.

Although not the construction contract itself, the performance bond is deemed as an associate of the main
construction contract that it cannot be separated or severed from its principal. The Performance Bond is significantly
and substantially connected to the construction contract that there can be no doubt it is the CIAC, under Section 4 of
EO No. 1008, which has jurisdiction over any dispute arising from or connected with it. (Emphasis supplied,
70

citations omitted)

At first look, the Owners-Contractor Agreement and the performance bond reference each other; the performance
bond was issued pursuant to the construction agreement.

A performance bond is a kind of suretyship agreement. A suretyship agreement is an agreement "whereby a party,
called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or
undertaking in favor of another party, called the obligee." In the same vein, a performance bond is "designed to
71

afford the project owner security that the . . . contractor, will faithfully comply with the requirements of the
contract . . . and make good [on the] damages sustained by the project owner in case of the contractor’s failure to so
perform." 72

It is settled that the surety’s solidary obligation for the performance of the principal debtor’s obligation is indirect and
merely secondary. Nevertheless, the surety’s liability tothe "creditor or promisee of the principal is said to be direct,
73

primary and absolute; in other words, he is directly and equally bound with the principal." 74

Verily, "[i]n enforcing a surety contract, the ‘complementary contracts-construed-together’ doctrine finds application.
According to this principle, an accessory contract must beread in its entirety and together with the principal
agreement." Article 1374 of the Civil Code provides:
75

ART. 1374. The 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.

Applying the "complementary-contracts-construed-together" doctrine, this court in Prudential held that the surety
willingly acceded to the terms of the construction contract despite the silence of the performance bond as to
arbitration:

In the case at bar, the performance bond was silent with regard to arbitration. On the other hand, the construction
contract was clear as to arbitration in the event of disputes. Applying the said doctrine, we rule that the silence of the
accessory contract in this case could only be construed as acquiescence to the main contract. The construction
contract breathes life into the performance bond. We are not ready to assume that the performance bond contains
reservations with regard to some of the terms and conditions in the construction contract where in fact it is silent. On
the other hand, it is more reasonable to assume that the party who issued the performance bond carefully and
meticulously studied the construction contract that it guaranteed, and if it had reservations, it would have and should
have mentioned them in the surety contract. (Emphasis supplied)
76

This court, however, cannot apply the ruling in Prudential to the present case. Several factors militate against
petitioner’s claim.

The contractual stipulations in this case and in Prudential are different. The relevant provisions of the Owners-
Contractor Agreement in this case state:

ARTICLE 5. THE CONTRACT DOCUMENTS

The following documents prepared by the CONTRACTOR shall constitute an integral part of this contract as fully as
if hereto attached or herein stated, except asotherwise modified by mutual agreement of parties, and attached to
this agreement.

Attachment 5.1 Working Drawings

Attachment 5.2 Outline Specifications

Attachment 5.3 Bill of Quantities

Attachment 5.4 CONTRACTOR Business License

....

ARTICLE 7. PERFORMANCE (SURETY) BOND

7.1 Within 30 days of the signing of this agreement, CONTRACTOR shall provide to OWNERS a
performance bond, issued by a duly licensed authority acceptable to the OWNERS, and equal to the amount
of PHP 4,500,000.00 (Four Million and Five Hundred Thousand Philippine Pesos),with the OWNERS as
beneficiary.

7.2 The performance bond will guarantee the satisfactory and faithful performance by the CONTRACTOR of
all provisions stated within this contract.

ARTICLE 8. ARBITRATION

8.1 Any dispute between the parties hereto which cannot be amicably settled shall be finally settled by arbitration in
accordance with the provision of Republic Act 876, of The Philippines, as amended by the Executive Order 1008
dated February 4, 1985. (Emphasis in the original)
77

In contrast, the provisions of the construction contract in Prudential provide:

Article 1

CONTRACT DOCUMENTS

1.1 The following shall form part of this Contractand together with this Contract, are known as the "Contract
Documents":

a. Bid Proposal

d. Notice to proceed

j. Appendices A & B (respectively, Surety Bond for Performance and, Supply of Materials by the
Developer) (Emphasis supplied)
78

This court in Prudential held that the construction contract expressly incorporated the performance bond into the
contract. In the present case, Article 7 of the Owners-Contractor Agreement merely stated that a performance bond
79

shall be issued in favor of respondents, in which case petitioner and Asis-Leif Builders and/or Ms. Ma. Cynthia Asis-
Leif shall pay ₱4,500,000.00 in the event that Asis-Leif fails to perform its duty under the Owners-Contractor
Agreement. Consequently, the performance bond merely referenced the contract entered into by respondents and
80
Asis-Leif, which pertained to Asis-Leif’s duty toconstruct a two-storey residence building with attic, pool, and
landscaping over respondents’ property. 81

To be clear, it is in the Owners-Contractor Agreement that the arbitration clause is found. The construction
1âwphi1

agreement was signed only by respondents and the contractor, Asis-Leif, as represented by Ms. Ma. Cynthia Asis-
Leif. It is basic that "[c]ontracts take effect only between the parties, their assigns and heirs[.]" Not being a party to
82

the construction agreement, petitioner cannot invoke the arbitration clause. Petitioner, thus, cannot invoke the
jurisdiction of the CIAC.

Moreover, petitioner’s invocation of the arbitration clause defeats the purpose of arbitration in relation to the
construction business. The state has continuously encouraged the use of dispute resolution mechanisms to promote
party autonomy. In LICOMCEN, Incorporated v. Foundation Specialists, Inc., this court upheld the CIAC's
83 84

jurisdiction in line with the state's policy to promote arbitration:

The CIAC was created through Executive Order No. 1008 (E. 0. 1008), in recognition of the need to establish an
arbitral machinery that would expeditiously settle construction industry disputes. The prompt resolution of problems
arising from or connected with the construction industry was considered of necessary and vital for the fulfillment of
national development goals, as the construction industry provides employment to a large segment of the national
labor force and is a leading contributor to the gross national product. (Citation omitted)
85

However, where a surety in a. construction contract actively participates in a collection suit, it is estopped from
raising jurisdiction later. Assuming that petitioner is privy to the construction agreement, we cannot allow petitioner
to invoke arbitration at this late stage of the proceedings since to do so would go against the law's goal of prompt
resolution of cases in the construction industry.

WHEREFORE, the petition is DENIED. The case is DISMISSED. Petitioner's counsel is STERNLY WARNED that a
repetition or similar violation of the rule on Certification Against Forum Shopping will be dealt with more severely.

SO ORDERED.

G.R. No. 154630 May 6, 2005

BERMAN MEMORIAL PARK, INC.1 and LUISA CHONG, petitioners,

vs.
FRANCISCO CHENG, respondent.

DECISION

CALLEJO, SR., J.:

Berman Memorial Park, Inc. (BMPI) is the owner and operator of the Iloilo Memorial Park (IMP) located in Jaro, Iloilo
City. One of the sales counselors of the corporation was Luisa Chong.

Francisco Cheng had been a businessman for 50 years, engaged in the purchase and sale of salt, monggo, soya
and other commodities under the business name "Timberland Native Products and Supplies." 2 Among his
employees was an accountant.

On January 18, 1994, Conchita Cheng, Francisco Cheng’s wife, died. On January 20, 1994, Cheng purchased from
BMPI a memorial lot, identified as 12-Lot Family Estate, Jr., in the IMP for the interment of his wife. He and BMPI
executed, on the said date, At-Need Purchase Agreement No. 2280 in which he bound and obliged himself to pay
its purchase price of P150,000.00, thus: P50,000.00 as downpayment; P50,000.00 on or before March 7, 1994;
and P50,000.00 on or before April 22, 1994.3 The remains of Conchita were interred in the said lot.

Cheng made a downpayment of P50,000.00 and executed a promissory note, obliging himself to pay the balance
of P100,000.00 on or before the said due date.4 Cheng was able to pay the P100,000.00 via postdated
check,5 less P1,000.00 representing Chong’s cash offer for the deceased which she and BMPI had agreed would be
deducted from her future commissions.6 However, Cheng remitted to BMPI, on April 22, 1994, the amount
of P49,750.00 as additional payment of the said lot although he had already paid the price in full. 7

Sometime in May 1994, Cheng purchased from the BMPI a bigger lot in the IMP where the remains of his wife
would be transferred. He was shown a price list of the lots in the said park, including 24-Lot Family Estate, Sr., with
an at-need price of P350,000.00, inclusive of the cost of perpetual care. BMPI offered to sell the said lot to Cheng at
a pre-need price of P250,000.00, less P110,000.00 of his payment of P150,000.00 for Lot 12, or in the net price
of P140,000.00. He was given a computation of the price for his consideration and approval. Cheng agreed to
purchase 24-Lot Family Estate, Sr. for the price of P250,000.00, inclusive of P8,100.00 for perpetual care,
less P110,000.00 of the P150,000.00 paid by him for 12-Lot, or the net price of P140,000.00, inclusive of the cost of
perpetual care for the lot. Cheng and BMPI executed, on May 11, 1994, Pre-Need Purchase Agreement No. 2318
covering the transaction.8 Cheng bound and obliged himself to pay on the following terms: P50,000.00 as
downpayment, the balance payable in 24 monthly installments of P4,625.00, commencing on May 31, 1994, with
21% interest on the unpaid balance. Cheng remitted the downpayment of P50,000.00, and was able to pay 17 of the
24 monthly installments due from June 30, 1994 to November 17, 1995, or in the total amount of P78,625.00.9

Subsequently, Cheng received a statement of account from BMPI showing that he still had a balance
of P32,375.00.10 In a Letter dated January 3, 1996, Cheng, through counsel, informed BMPI that he had, in fact,
made an overpayment of P77,375.00 for the two lots, demanded that the excess payment be refunded to him, and
that the Certificate of Ownership for 24-Lot be issued to him. 11 In a statement of account Cheng prepared, he
declared that he had a net balance due from BMPI in the amount of P57,414.82, inclusive of interest
of P12,414.82.12 He stated therein that the cost of the two lots was P250,000.00, and that he had made a total
payment of P327,375.00.

BMPI came out with its statement of account dated March 22, 1996, showing that the purchase price of 24-Lot
was P140,000.0013 and that Cheng had an outstanding account of P33,875.62 for the said lot. In his Reply-Letter
dated April 2, 1996, Cheng insisted that even if the two lots cost P311,000.00, he still had a balance, in his favor,
amounting to P26,375.00.14 In an effort to reconcile their differences, a conference among Cheng, Chong and the
accountant of BMPI was held, to no avail.

On July 24, 1996, Cheng filed a Complaint against the IMP, not against BMPI, and Luisa Chong in the Regional
Trial Court (RTC) of Iloilo City, for specific performance with damages. He alleged that the IMP was a corporation
duly organized and existing in the Philippines and that he had purchased 24-Lot from the IMP for P250,000.00, less
the amount of P150,000.00 he had paid for 12-Lot, or a net price of P100,000.00. He asserted that he had made an
overpayment of P77,375.00 for the said lot. He prayed that, after due proceedings, judgment be rendered in his
favor:

WHEREFORE, it is most respectfully prayed of this Honorable Court that, after due notice and hearing,
judgment be rendered, to wit:

1. Declaring that the 24-Lot Family Estate, Sr. (an interest space) as having been fully paid and
ordering defendant to convey to plaintiff the Certificate of Ownership over it;

2. Ordering defendant to return to plaintiff the total sum of P77,375.00 representing overpayment
made by plaintiff on his purchase of the aforedescribed interment space plus interest at the legal
rate;

3. Ordering defendant to pay plaintiff the sum of P5,000.00 as actual expenses, P30,000.00 as
attorney’s fees, and P20,000.00 as exemplary damages;

4. Ordering defendant to pay plaintiff the sum of P100,000.00 as moral damages;

5. To pay the costs of suit;

6. For such other reliefs and remedies that are just deemed and equitable in the premises. 15

In her answer with counterclaim, Chong admitted the allegation in the complaint that the IMP was a corporation duly
registered and organized in the Philippines (although it was not). She further alleged that the price of 24-Lot was
actually P350,000.00, but that the IMP had agreed to sell the lot to Cheng for P250,000.00, less P110,000.00 of
the P150,000.00 price of 12-Lot; as was the standard operating procedure, out of the amount of P150,000.00 which
was the total price of 12-Lot, only P110,000.00 was to be credited to Cheng because the said amount was the pre-
need price. Chong alleged that the difference of P40,000.00 (P150,000.00 less P110,000.00) belonged to the
IMP.16 Appended to their answer was a copy of the Pre-Need Purchase Agreement of the parties as Annex "1"
thereof.

During the pre-trial, the parties agreed to reset the same to give time to Atty. Florecita B. Gelvezon, a certified public
accountant, to determine whether or not Cheng had overpaid, or whether he still had a balance due for the purchase
of the two lots.17 On January 22, 1997, the trial court granted the motion and gave Atty. Gelvezon two weeks to
submit her report.18 She submitted her report on February 6, 1997, showing that Cheng still had a balance
of P32,375.00 due in favor of BMPI for 24-Lot, based on the purchase price of P140,000.00 for the said
lots.19 Cheng filed his comments/observations/objections to the report. He appended thereto the handwritten
computation of BMPI on the cost of the two lots and the computations thereof. 20 For their part, Chong and BMPI
agreed to the report of Atty. Gelvezon.21

During the trial, Cheng testified that he purchased 24-Lot for P250,000.00 and that he discovered his overpayment
during the first week of November 1994.22 He signed a blank document in printed form which turned out to be the
Pre-Need Purchase Agreement because he was sick with hernia and had to be operated on in five days. 23 He was
not given a copy of the Pre-Need Purchase Agreement. 24 He knew that the purchase price of a lot under a Pre-Need
Purchase Agreement was P250,000.00.25

Carmen S. Majarocon, the bookkeeper and accountant of BMPI, testified that on January 19, 1994, Cheng and his
brother Santiago Cheng arrived in the office to buy a lot at the IMP. 26 She showed them the price list of the
lots.27 She explained to them that the at-need price of 12-Lot was P150,000.00, while the at-need price of 24-Lot,
which was bigger than Lot 12, was P350,000.00. Cheng opted to buy 12-Lot, and signed the At-Need Purchase
Agreement28 and Promissory Note.29 Cheng then returned to BMPI on May 11, 1994 and agreed to purchase 24-Lot
at the pre-need price of P250,000.00, less P110,000.00 of the P150,000.00 he had paid for 12-Lot, or the net price
of P140,000.00.30 She averred that the difference of P40,000.00 between the price of P150,000.00 for 12-Lot and
the price of P110,000.00 credited to Cheng belonged to BMPI. She also testified that Cheng signed the Pre-Need
Purchase Agreement on May 11, 1994,31 and was given a copy of the contract, and her computations of the
purchase price of 24-Lot.32 As of September 1996, Cheng had a balance on his account in the amount
of P38,634.75.33 Chong corroborated Majarocon’s testimony.

On January 8, 1998, the trial court rendered judgment in favor of Cheng. The fallo of the decision reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff and against the
defendants.

1. Ordering defendants to return or reimburse plaintiff the amount of P28,625.00 representing the
overpayment that the latter made in purchasing the 24-Lot Family Estate, Sr. to earn legal interest from the
filing of the complaint until fully paid or returned.

2. Ordering defendants to pay plaintiff, jointly and severally:

a) P20,000.00 as and for attorney’s fees;

b) P30,000.00 as moral damages;

c) Dismissing the counterclaim.

Costs against the defendants.

SO ORDERED.34

The trial court ruled that since Cheng purchased 24-Lot to upgrade 12-Lot where the remains of his wife were
interred, the total amount of P150,000.00 which he paid for 12-Lot should be deducted from P250,000.00 (the
purchase price of 24-Lot), instead of only P110,000.00 as claimed by Chong and BMPI.

The decision was appealed by Chong and BMPI to the Court of Appeals (CA), which rendered judgment on January
18, 2001 affirming the decision of the RTC.35 Their motion for reconsideration was also denied by the appellate
court.36

Chong and BMPI, now the petitioners, filed their petition for review on certiorari of the decision and resolution of the
CA. The petitioners aver that:

I.

RESPONDENT KNEW AND UNDERSTOOD THE TWO (2) TRANSACTIONS HE ENTERED INTO AND
WAS BENEFITED BY THE PROCESS CALLED UPGRADING.

II.

THERE IS BASIS FOR THE PETITIONERS TO CREDIT ONLY P110,000.00 OUT OF THE P150,000.00
PAYMENTS MADE BY RESPONDENT AT THE TIME HE DECIDED TO PURCHASE THE BIGGER LOT.

III.

THERE IS NO BASIS FOR DECLARING THAT RESPONDENT HAS ALREADY MADE AN

OVERPAYMENT OF P28,625.00. ON THE CONTRARY, HE IS STILL LIABLE TO PAY PETITIONERS THE
SUM OF P38,634.75 REPRESENTING THE BALANCE OF HIS PRINCIPAL ACCOUNT PLUS
SURCHARGES AS OF SEPTEMBER 11, 1996.37
The petitioners assert that the at-need price of 12-Lot was P150,000.00, while that of 24-Lot was P350,000.00.
BMPI sold 24-Lot for the pre-need price of P250,000.00, less P110,000.00 of his payment for 12-Lot, or the net price
of P140,000.00 inclusive of costs for perpetual care, and to which the respondent agreed. The petitioners explained
why only P110,000.00 of the price of P150,000.00 for 12-Lot was credited to the respondent for the purchase price
of 24-Lot, thus:

Under this practice of upgrading which the petitioner corporation allows, when a client purchases an At-
Need 12-Lot Family Estate, Jr. and after paying the price he upgrades it to a 24-Lot Family Estate, Sr., the
former labels it not as an At-Need 24-Lot Family Estate, Sr. but a Pre-Need 24-Lot Family Estate, Sr. which
has a lower price of P250,000.00. However, since at the time of the purchase, he gets it at the at-need price,
his payment of P150,000.00 is not fully credited to his next purchase. He is charged the at-need cost
of P40,000.00 because the at-need price of a 12-Lot Family Estate, Jr. is P150,000.00 while its pre-need
price is P110,000.00. The P40,000.00 serves as a cost for the burden imposed on the corporation which is
in charge for all these arrangements and predicaments for the change of burial lot from a smaller At-Need
12-Lot Family Estate, Jr. to Pre-Need 24-Lot Family Estate, Sr., a different burial lot. It should be noted that
when a client made his first purchase, it was at an at-need price. When he made his second purchase in a
process called upgrading, the price is already a pre-need one.

It would have been different should a client made (sic) his first purchase of the lot at a pre-need price and
after payment of the pre-need price, he changes the lot to a bigger one at a pre-need price because, by
then, there would be no at-need cost. The whole pre-need price paid by him in the contract is credited to his
second upgraded contract. However, he pays a bigger price with a total of P350,000.00.

Respondent was benefited by this upgrading of the contract from At-Need 12-Lot Family Estate, Jr. to Pre-
Need 24-Lot Family Estate, Sr.38

The petitioners maintained that the CA failed to consider the evidence on record, including the acts of the parties,
simultaneously with and subsequent to their execution of the Pre-Need Purchase Agreement on May 11, 1994, and
the incredibility of the respondent’s lone testimony.

In his comment on the petition, the respondent alleged that the issues raised by the petitioners are factual; hence,
improper under Rule 45 of the Rules of Court. Moreover, the respondent pointed out, the issues presented by the
petitioners are unsubstantial matters.

The petition is meritorious.

Before resolving the merits of the petition, however, we have to address and resolve the issue as to whether or not
the IMP has the capacity to sue as petitioner and be sued as defendant in the RTC; and whether or not BMPI is an
indispensable party in the RTC, and in this case.

The rule is that only natural or juridical persons or entities authorized by law may be parties in a civil case. 39 A sole
proprietorship is not vested with juridical personality and cannot sue or file or defend an action. There is no law
authorizing sole proprietorship to file a suit. A sole proprietorship does not possess a judicial personality separate
and distinct from the personality of the owner of the enterprise. 40

In this case, the IMP is not a corporation and does not have a juridical personality that could enable it to be a party
defendant in the RTC. It is only a business name used by BMPI for the memorial park it owned and operated. In
fact, it is clearly indicated in the At-Need Purchase Agreement and Pre-Need Purchase Agreement dated January
20 and May 11, 1994, respectively, that the seller of the lots is BMPI, and that the IMP is owned and operated by it.
It is BMPI which has the juridical personality to be sued by the respondent as the plaintiff in the RTC. Indeed, the
real party-in-interest as party-defendant in the RTC is BMPI, the signatory to the said agreements which the
respondent sought to enforce therein. Since a contract may be enforced only by the parties thereto as against each
other, the real parties-in-interest, either as plaintiff or defendant in an action based on the said contract, must be the
parties to the said contract. If the real party-in-interest as defendant is not impleaded as such, then the complaint
must be dismissed on the ground that it states no cause of action, unless the complaint is later amended to implead
the said party-defendant in substitution. In this case, petitioner Chong did not pursue the issue in the RTC and in the
CA. In fact, she erroneously declared in her answer to the complaint that the IMP was a corporation. However, it is
not too late for the Court to order the impleading of the BMPI as party-defendant in the RTC, and party-petitioner in
this case, conformably with the following ruling:

The complaint then should have been amended to implead Yao Ka Sin as plaintiff in substitution of Yao Ka
Sin Trading. However, it is now too late in the history of this case to dismiss this petition and, in effect, nullify
all proceedings had before the trial court and the respondent Court on the sole ground of petitioner’s lack of
capacity to sue. Considering that private respondent did not pursue this issue before the respondent Court
and this Court; that, as We held in Juasing, the defect is merely formal and not substantial, and an
amendment to cure such defect is expressly authorized by Section 4, Rule 10 of the Rules of Court which
provides that "[a] defect in the designation of the parties may be summarily corrected at any stage of the
 action provided no prejudice is caused thereby to the adverse party;" and that "[a] sole proprietorship does
not, of course, possess any juridical personality separate and apart from the personality of the owner of the
enterprise and the personality of the persons acting in the name of such proprietorship," We hold and
declare that Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the petitioner in the
instant case. As this Court stated nearly eighty (80) years ago in Alonso v. Villamor:

No one has been misled by the error in the name of the party-plaintiff. If we should, by reason of this
error, send this case back for amendment and new trial, there would be on the retrial the same
complaint, the same answer, the same defense, the same interests, the same witnesses, and the
same evidence. The name of the plaintiff would constitute the only difference between the old trial
and the new. In our judgment, there is not enough in a name to justify such action. 41

Resultably, then, the complaint in the RTC and the petition at bench are amended to implead BMPI as party-
defendant/respondent in substitution of the IMP.

And now on the merits of the petition.

We agree with the respondent that the threshold issue in this case –whether the petitioners and the respondent had
agreed that the net price of 24-Lot was only P140,000.00 as it appears in the Pre-Need Purchase Agreement 42 is
factual. We, likewise, agree with his contention that under Rule 45 of the Rules of Court, only issues of law may be
raised in this Court. However, the said rule is without exception. In Josefa v. Zhandong Trading Corporation,43 the
Court held that, under Rule 45 of the Rules of Court, it may delve into and resolve factual issues on the following
reasons: (1) the conclusion is grounded on speculations, surmises or conjectures; (2) the inference is manifestly
mistaken, absurd or impossible; (3) there is grave abuse of discretion; (4) the judgment is based on a
misapprehension of facts; (5) the findings of fact are conflicting; (6) there is no citation of specific evidence on which
the factual findings are based; (7) the finding of absence of facts is contradicted by the presence of evidence on
record; (8) the findings of the CA are contrary to those of the trial court; (9) the CA manifestly overlooked certain
relevant and undisputed facts that, if properly considered, would justify a different conclusion; (10) the findings of the
CA are beyond the issues of the case; and (11) such findings are contrary to the admissions of both parties.

In this case, the May 11, 1994 Pre-Need Purchase Agreement 44 between the BMPI and the respondent plainly and
unequivocally states that the purchase price of 24-Lot is P140,000.00, payable as follows:

That the consideration of the above shall be as follows:

Price P131,900.00
Perpetual Care P 8,100.00
Total P140,000.00
Down Payment P 50,000.00
Balance Due P 90,000.00

PURCHASER agrees to pay to the SELLER therefore the sum of ONE HUNDRED FORTY THOUSAND
ONLY (P140,000.00) in Philippine Currency as follows: P50,000.00 upon the signing of this agreement by
PURCHASER receipt of which is hereby acknowledged, and the remainder in installments of P4,625.00 on
the 31st day of each and every month for 2 yrs/(24) months, commencing on May 31, 1994, until the entire
balance has been paid. Interest shall be charged at the rate of 21% per annum on the unpaid balance. All
payments for interment space shall be applied first to interest, next to the purchase price and the balance to
the Perpetual Care Fund.45

The respondent signed the agreement and was furnished with a copy. Indeed, the respondent confirmed in his
complaint that he signed the agreement.

The respondent cannot feign ignorance of the terms of the agreement by alleging that he affixed his signature on a
blank form, and on his barefaced and self-serving pretext that he was suffering from hernia and had to be operated
on in five days.

First. At the bottom of the agreement is the advice given to the respondent: "Please Read This Contract." 46

Second. The respondent had been a businessman for 50 years before he signed the agreement. The Court cannot
believe that he would sign a blank agreement without first reading and reviewing the terms and conditions contained
therein. The respondent is presumed to take ordinary care of his concerns; 47 that the private transaction was fair and
regular;48 that the ordinary course of business has been followed; 49 and that the respondent intended the ordinary
consequences of his voluntary act.50
Third. The respondent admitted in his Comment dated February 13, 1997 that he had agreed to the conversion of
12-Lot to 24-Lot, and that the petitioner furnished him a computation which he appended to his pleading. The
computation shows that the net price of 24-Lot is P140,000.00, thus:

Conversion of 12-Lot Jr. F.E. to 24-Lot Sr. F.E. P250,000.00

Cost of 24-Lot Sr. F.E.

Less : Cost of 12-Lot Jr. F.E. P110,000.00
Balance P140,000.00
Less : Downpayment 50,000.00
Balance P 90,000.00

Monthly Installment on Balance of P90,000.00

1 yr. P8,380.00/mo.
2 yrs. P4,625.00/mo.51

Fourth. The respondent complied with the terms and conditions of the Pre-Need Purchase Agreement and made the
requisite downpayment and the monthly installments for 17 months without any plaint. He never demanded for a
copy of the said agreement, or complained to the petitioners that the contents thereof did not reflect their
arrangement, or demanded that the said agreement be reformed to reflect their true agreement. It was only when
the respondent received the statement of his account from BMPI sometime in March 1996 that he alleged for the
first time that he had overpaid BMPI for 24-Lot.

Fifth. The respondent failed to adduce evidence that he was suffering from hernia and that he was to be operated
on in five days after signing the May 11, 1994 Pre-Need Purchase Agreement.

Article 1370 of the New Civil Code provides that if the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulation shall control. No amount of extrinsic aids are
required and no further extraneous sources are necessary in order to ascertain the parties’ intent, determinable as it
is, from the contract itself. The records are clear that the respondent understood the nature of the contract he
entered into.

If, indeed, the stipulations as embodied in the aforementioned Pre-Need Purchase Agreement were not the true
intention of the parties, the respondent should have filed the corresponding action for reformation of the contract.
But he did not.

The hornbook rule on interpretation of contracts gives primacy to the intention of the parties, which is the law among
them. Ultimately, their intention is to be deciphered not from the unilateral post facto assertions of one of the parties,
but from the language used in the contract. And when the terms of the agreement, as expressed in such language,
are clear, they are to be understood literally, just as they appear on the face of the contract. 52

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decisions of the Regional Trial Court and the
Court of Appeals are SET ASIDE. Another judgment is rendered, ORDERING the respondent to pay to Berman
Memorial Park, Inc. the amount of P32,375.00, representing his unpaid installments plus the corresponding
surcharge, with interest at 12% per annum to be computed from May 1996, when the total amount of the principal
obligation became due and demandable, until actual payment thereof. No costs.

SO ORDERED.
G.R. No. L-29155 May 13, 1970

UNIVERSAL FOOD CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO, respondents.

Wigberto E. Tañada for petitioner.

Teofilo Mendoza for respondents.

CASTRO, J.:

Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February 13,
1968 in CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal
Food Corporation, defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE the
appealed decision is hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and
defendant is hereby ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula
subject-matter of Exhibit A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the return to
him of said trademark and formula, plus attorney's fees in the amount of P500.00, with costs against defendant." 1

On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of
Manila, against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment."
The plaintiffs prayed the court to adjudge the defendant as without any right to the use of the Mafran trademark and
formula, and order the latter to restore to them the said right of user; to order the defendant to pay Magdalo V.
Francisco, Sr. his unpaid salary from December 1, 1960, as well as damages in the sum of P40,000, and to pay the
costs of suit.
1
On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the
allegations contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had
complied with all the terms and conditions of the Bill of Assignment and, consequently, the plaintiffs are not entitled
to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from the service as permanent
chief chemist of the corporation as he is still its chief chemist; and, by way of special defenses, that the aforesaid
plaintiff is estopped from questioning 1) the contents and due execution of the Bill of Assignment, 2) the corporate
acts of the petitioner, particularly the resolution adopted by its board of directors at the special meeting held on
October 14, 1960, to suspend operations to avoid further losses due to increase in the prices of raw materials, since
the same plaintiff was present when that resolution was adopted and even took part in the consideration thereof, 3)
the actuations of its president and general manager in enforcing and implementing the said resolution, 4) the fact
that the same plaintiff was negligent in the performance of his duties as chief chemist of the corporation, and 5) the
further fact that the said plaintiff was delinquent in the payment of his subscribed shares of stock with the
corporation. The defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's
fees and P5,000 in exemplary or corrective damages.

On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages
and attorney's fees, with costs against the former, who promptly appealed to the Court of Appeals. On February 13,
1969 the appellate court rendered the judgment now the subject of the present recourse.

The Court of Appeals arrived at the following "uncontroverted" findings of fact:

That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the
manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN
sauce; that the manufacture of this product was used in commercial scale in 1942, and in the same
year plaintiff registered his trademark in his name as owner and inventor with the Bureau of Patents;
that due to lack of sufficient capital to finance the expansion of the business, in 1960, said plaintiff
secured the financial assistance of Tirso T. Reyes who, after a series of negotiations, formed with
others defendant Universal Food Corporation eventually leading to the execution on May 11, 1960 of
the aforequoted "Bill of Assignment" (Exhibit A or 1).

Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was
appointed Chief Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco was
appointed auditor and superintendent with a salary of P250.00 a month. Since the start of the
operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret
materials inside the laboratory, never allowed anyone, not even his own son, or the President and
General Manager Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula
secret to himself. However, said plaintiff expressed a willingness to give the formula to defendant
provided that the same should be placed or kept inside a safe to be opened only when he is already
incapacitated to perform his duties as Chief Chemist, but defendant never acquired a safe for that
purpose. On July 26, 1960, President and General Manager Tirso T. Reyes wrote plaintiff requesting
him to permit one or two members of his family to observe the preparation of the 'Mafran Sauce'
(Exhibit C), but said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes did not
compel or force plaintiff to accede to said request. Thereafter, however, due to the alleged scarcity
and high prices of raw materials, on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman
of defendant issued a Memorandum (Exhibit B), duly approved by the President and General
Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should be retained in the factory
and that the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until
the corporation should resume its operation. Some five (5) days later, that is, on December 3, 1960,
President and General Manager Tirso T. Reyes, issued a memorandom to Victoriano Francisco
ordering him to report to the factory and produce "Mafran Sauce" at the rate of not less than 100
cases a day so as to cope with the orders of the corporation's various distributors and dealers, and
with instructions to take only the necessary daily employees without employing permanent
employees (Exhibit B). Again, on December 6, 1961, another memorandum was issued by the same
President and General Manager instructing the Assistant Chief Chemist Ricardo Francisco, to recall
all daily employees who are connected in the production of Mafran Sauce and also some additional
daily employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960, another
memorandum was issued by the President and General Manager instructing Ricardo Francisco, as
Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky
Pops in full swing starting January 2, 1961 with further instructions to hire daily laborers in order to
cope with the full blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary
as Chief Chemist in the amount of P300.00 a month only until his services were terminated on
November 30, 1960. On January 9 and 16, 1961, defendant, acting thru its President and General
Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a buyer of the corporation
including its trademarks, formula and assets at a price of not less than P300,000.00 (Exhibits D and
D-1). Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled
back to work, the latter filed the present action on February 14, 1961. About a month afterwards, in a
letter dated March 20, 1961, defendant, thru its President and General Manager, requested said
 plaintiff to report for duty (Exhibit 3), but the latter declined the request because the present action
was already filed in court (Exhibit J).

1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under article
1191 of the new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded only if
one is ready, willing and able to comply with his own obligation and the other is not; that under article 1169 of the
same Code, in reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him; that in this case the trial court found that the
respondents not only have failed to show that the petitioner has been guilty of default in performing its contractual
obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco who had been
remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran
sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the record is replete
with the various attempt made by the defendant (herein petitioner) to secure the said formula from Magdalo V.
Francisco to no avail; and that upon the foregoing findings, the respondent Court of Appeals unjustly concluded that
the private respondents are entitled to rescind the Bill of Assignment.

The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V.
Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. 2

The Bill of Assignment sets forth the following terms and conditions:

THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the
MAFRAN trade-mark and the formula for MAFRAN SAUCE;

THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit
which the PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of its
production of MAFRAN SAUCE and other food products and from other business which the Party of
the Second Part may engage in as defined in its Articles of Incorporation, and which its Board of
Directors shall determine and declare, said Party of the First Part hereby assign, transfer, and
convey all its property rights and interest over said Mafran trademark and formula for MAFRAN
SAUCE unto the Party of the Second Part;

THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the
Party of the Second Part obligates itself to pay unto the Party of the First Part as founder and as
owner of the MAFRAN trademark and formula for MAFRAN SAUCE, shall be paid at every end of
the Fiscal Year after the proper accounting and inventories has been undertaken by the Party of the
Second Part and after a competent auditor designated by the Board of Directors shall have duly
examined and audited its books of accounts and shall have certified as to the correctness of its
Financial Statement;

THAT it is hereby understood that the Party of the First Part, to improve the quality of the products of
the Party of the First Part and to increase its production, shall endeavor or undertake such research,
study, experiments and testing, to invent or cause to invent additional formula or formulas, the
property rights and interest thereon shall likewise be assigned, transferred, and conveyed unto the
Party of the Second Part in consideration of the foregoing premises, covenants and stipulations:

THAT in the operation and management of the Party of the First Part, the Party of the First Part shall
be entitled to the following Participation:

(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President and Chief
Chemist of the Party of the Second Part, which appointments are permanent in character and Mr.
VICTORIANO V. FRANCISCO shall be appointed Auditor thereof and in the event that the Treasurer
or any officer who may have the custody of the funds, assets and other properties of the Party of the
Second Part comes from the Party of the First Part, then the Auditor shall not be appointed from the
latter; furthermore should the Auditor be appointed from the Party representing the majority shares
of the Party of the Second Part, then the Treasurer shall be appointed from the Party of the First
Part;

(b) THAT in case of death or other disabilities they should become incapacitated to discharge the
duties of their respective position, then, their shares or assigns and who may have necessary
qualifications shall be preferred to succeed them;

(c) That the Party of the First Part shall always be entitled to at least two (2) membership in the
Board of Directors of the Party of the Second Part;

(d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the
Second Part, the Chief Chemist shall have and shall exercise absolute control and supervision over
 the laboratory assistants and personnel and in the purchase and safekeeping of the Chemicals and
other mixtures used in the preparation of said products;

THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the
PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said
MAFRAN trademark and mafran formula, except when a dissolution of the Party of the Second Part,
voluntary or otherwise, eventually arises, in which case then the property rights and interests over
said trademark and formula shall automatically revert the Party of the First Part.

Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent
patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran
sauce. Thus, the last part of the second paragraph recites that the respondent patentee "assign, transfer and
convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the
Party of the Second Part," and the last paragraph states that such "assignment, transfer and conveyance is
absolute and irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender
of its rights and interest over said MAFRAN trademark and mafran formula."

However, a perceptive analysis of the entire instrument and the language employed therein would lead one to the
3

conclusion that what was actually ceded and transferred was only the use of the Mafran sauce formula. This was
the precise intention of the parties, as we shall presently show.
4

Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of TWO (2%) PER
CENTUM of the net annual profit" which the petitioner corporation may realize by and/or out of its production of
Mafran sauce and other food products, etc. The word "royalty," when employed in connection with a license under a
patent, means the compensation paid for the use of a patented invention.

'Royalty,' when used in connection with a license under a patent, means the compensation paid by
the licensee to the licensor for the use of the licensor's patented invention." (Hazeltine Corporation
vs. Zenith Radio Corporation, 100 F. 2d 10, 16.) 5

Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is
provided in paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ...
permanent in character," and that in case of his "death or other disabilities," then his "heirs or assigns who may
have necessary qualifications shall be preferred to succeed" him as such chief chemist. It is further provided in
paragraph 5-(d) that the same respondent shall have and shall exercise absolute control and supervision over the
laboratory assistants and personnel and over the purchase and safekeeping of the chemicals and other mixtures
used in the preparation of the said product. All these provisions of the Bill of Assignment clearly show that the
intention of the respondent patentee at the time of its execution was to part, not with the formula for Mafran sauce,
but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6

Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take
place, "the property rights and interests over said trademark and formula shall automatically revert to the respondent
patentee. This must be so, because there could be no reversion of the trademark and formula in this case, if, as
contended by the petitioner, the respondent patentee assigned, ceded and transferred the trademark and formula —
and not merely the right to use it — for then such assignment passes the property in such patent right to the
petitioner corporation to which it is ceded, which, on the corporation becoming insolvent, will become part of the
property in the hands of the receiver thereof. 7

Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue of
the Bill of Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is admitted
without equivocation in paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot be
contradicted." The last part of paragraph 3 of the complaint and paragraph 3 of the answer are reproduced below
8

for ready reference:

3. — ... and due to these privileges, the plaintiff in return assigned to said corporation his interest
and rights over the said trademark and formula so that the defendant corporation could use the
formula in the preparation and manufacture of the mafran sauce, and the trade name for the
marketing of said project, as appearing in said contract ....

3. — Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint.

Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the
respondent patentee.

Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to
effect "the least transmission of right," and is there a better example of least transmission of rights than allowing or
9

permitting only the use, without transfer of ownership, of the formula for Mafran sauce.
The foregoing reasons support the conclusion of the Court of Appeals that what was actually ceded and
10

transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only the
use of the formula. Properly speaking, the Bill of Assignment vested in the petitioner corporation no title to the
formula. Without basis, therefore, is the observation of the lower court that the respondent patentee "had been
remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran
sauce."

2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was dismissed
from his position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of
the Bill of Assignment which in part provides that his appointment is "permanent in character."

The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the
petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being
dismissed from his position as chief chemist of the corporation. The fact, continues the petitioner, is that at a special
meeting of the board of directors of the corporation held on October 14, 1960, when the board decided to suspend
operations of the factory for two to four months and to retain only a skeletal force to avoid further losses, the two
private respondents were present, and the respondent patentee was even designated as the acting superintendent,
and assigned the mission of explaining to the personnel of the factory why the corporation was stopping operations
temporarily and laying off personnel. The petitioner further submits that exhibit B indicates that the salary of the
respondent patentee would not be paid only during the time that the petitioner corporation was idle, and that he
could draw his salary as soon as the corporation resumed operations. The clear import of this exhibit was allegedly
entirely disregarded by the respondent Court of Appeals, which concluded that since the petitioner resumed partial
production of Mafran sauce without notifying the said respondent formally, the latter had been dismissed as chief
chemist, without considering that the petitioner had to resume partial operations only to fill its pending orders, and
that the respondents were duly notified of that decision, that is, that exhibit B-1 was addressed to Ricardo Francisco,
and this was made known to the respondent Victoriano V. Francisco. Besides, the records will show that the
respondent patentee had knowledge of the resumption of production by the corporation, but in spite of such
knowledge he did not report for work.

The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the
product he claimed he so dearly loved, certainly he would not have waited for a formal notification but would have
immediately reported for work, considering that he was then and still is a member of the corporation's board of
directors, and insofar as the petitioner is concerned, he is still its chief chemist; and because Ricardo Francisco is a
son of the respondent patentee to whom had been entrusted the performance of the duties of chief chemist, while
the respondent Victoriano V. Francisco is his brother, the respondent patentee could not feign ignorance of the
resumption of operations.

The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December
29, 1960, the records will show that the petitioner was set to resume full capacity production only sometime in March
or April, 1961, and the respondent patentee cannot deny that in the very same month when the petitioner was set to
resume full production, he received a copy of the resolution of its board of directors, directing him to report
immediately for duty; that exhibit H, of a later vintage as it is dated February 1, 1961, clearly shows that Ricardo
Francisco was merely the acting chemist, and this was the situation on February 1, 1961, thirteen days before the
filing of the present action for rescission. The designation of Ricardo Francisco as the chief chemist carried no
weight because the president and general manager of the corporation had no power to make the designation
without the consent of the corporation's board of directors. The fact of the matter is that although the respondent
Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly indicates that
Ricardo Francisco was merely the acting chemist as he was the one assisting his father.

In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the
secretary-treasurer of the corporation issued a memorandum (exh. B), duly approved by its president and general
manager, directing that only Ricardo Francisco be retained in the factory and that the salary of respondent patentee,
as chief chemist, be stopped for the time being until the corporation resumed operations. This measure was taken
allegedly because of the scarcity and high prices of raw materials. Five days later, however, or on December 3, the
president and general manager issued a memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to
report to the factory and to produce Mafran sauce at the rate of no less than 100 cases a day to cope with the
orders of the various distributors and dealers of the corporation, and instructing him to take only the necessary daily
employees without employing permanent ones. Then on December 6, the same president and general manager
issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all
daily employees connected with the production of Mafran sauce and to hire additional daily employees for the
production of Porky Pops. Twenty-three days afterwards, or on December 29, the same president and general
manager issued still another memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio
Zarraga, as acting superintendent, to produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961,
with the further instruction to hire daily laborers in order to cope with the full blast production. And finally, at the
hearing held on October 24, 1961, the same president and general manager admitted that "I consider that the two
months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is the separation pay."
The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint
for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate
officers, 11 schemed and maneuvered to ease out, separate and dismiss the said respondent from the service as
permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a
month after the institution of the action for rescission, the petitioner corporation, thru its president and general
manager, requested the respondent patentee to report for duty (exh. 3), is of no consequence. As the Court of
Appeals correctly observed, such request was a "recall to placate said plaintiff."

3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready
reference the following articles of the new Civil Code governing rescission of contracts:

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

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

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

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

ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same.

ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused.

At the moment, we shall concern ourselves with the first two paragraphs of article 1191. The power to rescind
obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon
him. The injured party may choose between fulfillment and rescission of the obligation, with payment of damages in
either case.

In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature.
The petitioner corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the
services of the respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause.

Upon the factual milieu, is rescission of the Bill of Assignment proper?

The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such
substantial and fundamental breach as would defeat the very object of the parties in making the agreement. The 12

question of whether a breach of a contract is substantial depends upon the attendant circumstances. The 13

petitioner contends that rescission of the Bill of Assignment should be denied, because under article 1383,
rescission is a subsidiary remedy which cannot be instituted except when the party suffering damage has no other
legal means to obtain reparation for the same. However, in this case the dismissal of the respondent patentee
Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and substantial
breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the
legal principle that the option — to demand performance or ask for rescission of a contract — belongs to the injured
party, the fact remains that the respondents-appellees had no alternative but to file the present action for
14

rescission and damages. It is to be emphasized that the respondent patentee would not have agreed to the other
terms of the Bill of Assignment were it not for the basic commitment of the petitioner corporation to appoint him as
its Second Vice-President and Chief Chemist on a permanent basis; that in the manufacture of Mafran sauce and
other food products he would have "absolute control and supervision over the laboratory assistants and personnel
and in the purchase and safeguarding of said products;" and that only by all these measures could the respondent
patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and, in the
process afford and secure for himself a lifetime job and steady income. The salient provisions of the Bill of
Assignment, namely, the transfer to the corporation of only the use of the formula; the appointment of the
respondent patentee as Second Vice-President and chief chemist on a permanent status; the obligation of the said
respondent patentee to continue research on the patent to improve the quality of the products of the corporation; the
need of absolute control and supervision over the laboratory assistants and personnel and in the purchase and
safekeeping of the chemicals and other mixtures used in the preparation of said product — all these provisions of
the Bill of Assignment are so interdependent that violation of one would result in virtual nullification of the rest.

4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee is
entitled to payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran
trademark and formula, arguing that under articles 1191, the right to specific performance is not conjunctive with the
right to rescind a reciprocal contract; that a plaintiff cannot ask for both remedies; that the appellate court awarded
the respondents both remedies as it held that the respondents are entitled to rescind the Bill of Assignment and also
that the respondent patentee is entitled to his salary aforesaid; that this is a gross error of law, when it is considered
that such holding would make the petitioner liable to pay respondent patentee's salary from December 1, 1960 to
"kingdom come," as the said holding requires the petitioner to make payment until it returns the formula which, the
appellate court itself found, the corporation never had; that, moreover, the fact is that the said respondent patentee
refused to go back to work, notwithstanding the call for him to return — which negates his right to be paid his back
salaries for services which he had not rendered; and that if the said respondent is entitled to be paid any back
salary, the same should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961 the
petitioner had already formally called him back to work.

The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular
provisions in their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with the
petitioner, subject to defined limitations. One of the considerations for the transfer of the use thereof was the
undertaking on the part of the petitioner corporation to employ the respondent patentee as the Second Vice-
President and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or other disabilities
supervened. Under these circumstances, the petitioner corporation could not escape liability to pay the private
respondent patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for
Mafran sauce remained with the corporation.

5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the
respondents the trademark and formula for Mafran sauce, when both the decision of the appellate court and that of
the lower court state that the corporation is not aware nor is in possession of the formula for Mafran sauce, and the
respondent patentee admittedly never gave the same to the corporation. According to the petitioner these findings
would render it impossible to carry out the order to return the formula to the respondent patentee. The petitioner's
predicament is understandable. Article 1385 of the new Civil Code provides that rescission creates the obligation to
return the things which were the object of the contract. But that as it may, it is a logical inference from the appellate
court's decision that what was meant to be returned to the respondent patentee is not the formula itself, but only its
use and the right to such use. Thus, the respondents in their complaint for rescission specifically and particularly
pray, among others, that the petitioner corporation be adjudged as "without any right to use said trademark and
formula."

ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is
modified to read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is
hereby rescinded, and the defendant corporation is ordered to return and restore to the plaintiff Magdalo V.
Francisco, Sr. the right to the use of his Mafran sauce trademark and formula, subject-matter of the Bill of
Assignment, and to this end the defendant corporation and all its assigns and successors are hereby permanently
enjoined, effective immediately, from using in any manner the said Mafran sauce trademark and formula. The
defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1,
1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from the
date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500, with
costs against the defendant corporation." As thus modified, the said judgment is affirmed, with costs against the
petitioner corporation.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur.

Teehankee J., took no part.

Separate Opinions

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

I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the argument of
petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco, should be denied because
under Article 1383 of the Civil Code of the Philippines rescission can not be demanded except when the party
suffering damage has no other legal means to obtain reparation, is predicated on a failure to distinguish between a
rescission for breach of contract under Article 1191 of the Civil Code and a rescission by reason of lesion or
economic prejudice, under Article 1381, et seq. The rescission on account of breach of stipulations is not predicated
on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is in principal action retaliatory in character, it being unjust that a party
be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: "Non
servanti fidem, non est fides servanda." Hence, the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to
the existence of that prejudice, because it is the raison d'etre as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission
for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not, apply to cases under Article
1191.

It is probable that the petitioner's confusion arose from the defective technique of the new Code that terms both
instances as rescission without distinctions between them; unlike the previous Spanish Civil Code of 1889, that
differentiated "resolution" for breach of stipulations from "rescission" by reason of lesion or damage. But the 1

terminological vagueness does not justify confusing one case with the other, considering the patent difference in
causes and results of either action.

Separate Opinions

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

I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the argument of
petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco, should be denied because
under Article 1383 of the Civil Code of the Philippines rescission can not be demanded except when the party
suffering damage has no other legal means to obtain reparation, is predicated on a failure to distinguish between a
rescission for breach of contract under Article 1191 of the Civil Code and a rescission by reason of lesion or
economic prejudice, under Article 1381, et seq. The rescission on account of breach of stipulations is not predicated
on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is in principal action retaliatory in character, it being unjust that a party
be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: "Non
servanti fidem, non est fides servanda." Hence, the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to
the existence of that prejudice, because it is the raison d'etre as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission
for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not, apply to cases under Article
1191.

It is probable that the petitioner's confusion arose from the defective technique of the new Code that terms both
instances as rescission without distinctions between them; unlike the previous Spanish Civil Code of 1889, that
differentiated "resolution" for breach of stipulations from "rescission" by reason of lesion or damage. But the 1

terminological vagueness does not justify confusing one case with the other, considering the patent difference in
causes and results of either action.

G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners,
vs.
MAYFAIR THEATER, INC., respondent.

HERMOSISIMA, JR., J.:

Before us is a petition for review of the decision of

1
the Court of
Appeals involving questions in the resolution of which the respondent appellate court analyzed and
2

interpreted particular provisions of our laws on contracts and sales. In its assailed decision, the respondent
court reversed the trial court which, in dismissing the complaint for specific performance with damages and
3

annulment of contract, found the option clause in the lease contracts entered into by private respondent
4

Mayfair Theater, Inc. (hereafter, Mayfair) and petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to
be impossible of performance and unsupported by a consideration and the subsequent sale of the subject
property to petitioner Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been made without
any breach of or prejudice to, the said lease contracts. 5
We reproduce below the facts as narrated by the respondent court, which narration, we note, is almost
verbatim the basis of the statement of facts as rendered by the petitioners in their pleadings:

Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon located at
Claro M Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of
Deeds of Manila.

On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's lease of a
portion of Carmelo's property particularly described, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M.

Recto Avenue, Manila, with a floor area of 1,610 square meters.

THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M.
Recto Avenue, Manila, with a floor area of 150 square meters.

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

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

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M.

Recto Avenue, Manila, with a floor area of 1,064 square meters.

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

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

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

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

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

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

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

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

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

8. That if the LESSOR should desire to sell the leased premises the LESSEE shall
be given 30-days exclusive option to purchase the same. In the event, however, that
the leased premises is sold to someone other than the LESSEE, the LESSOR is
bound and obligated, as it is (sic) herebinds (sic) and obligates itself, to stipulate in
the Deed of Sale thereof that the purchaser shall recognize this lease and be bound
by all the terms and conditions hereof (sic).

Carmelo did not reply to this letter.

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

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

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

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

1. That there was a deed of sale of the contested premises by the defendant
Carmelo . . . in favor of defendant Equatorial . . .;

2. That in both contracts of lease there appear (sic) the stipulation granting the
plaintiff exclusive option to purchase the leased premises should the lessor desire to
sell the same (admitted subject to the contention that the stipulation is null and void);

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

4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of the
contracts of lease constitute the consideration for the plaintiff's occupancy of the
leased premises, subject of the same contracts of lease, Exhibits A and B;

xxx xxx xxx

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

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

8. That the leased premises constitute only the portions actually occupied by the
theaters; and

9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is
the land and the two buildings erected thereon.

xxx xxx xxx

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

WHEREFORE, judgment is hereby rendered:

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

(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by way of
attorney's fees on its counterclaim;

(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month as
reasonable compensation for the use of areas not covered by the contract (sic) of
lease from July 31, 1979 until plaintiff vacates said area (sic) plus legal interest from
July 31, 1978; P70,000 00 per month as reasonable compensation for the use of the
 premises covered by the contracts (sic) of lease dated (June 1, 1967 from June 1,
1987 until plaintiff vacates the premises plus legal interest from June 1, 1987;
P55,000.00 per month as reasonable compensation for the use of the premises
covered by the contract of lease dated March 31, 1969 from March 30, 1989 until
plaintiff vacates the premises plus legal interest from March 30, 1989; and
P40,000.00 as attorney's fees;

(4) Dismissing defendant Equatorial's crossclaim against defendant Carmelo &

Bauermann.

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

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

The court a quo ratiocinated:

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

Contracts without cause or with unlawful cause, produce no effect whatever. The
cause is unlawful if it is contrary to law, morals, good custom, public order or public
policy.

Contracts therefore without consideration produce no effect whatsoever. Article 1324 provides:

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

in relation with Article 1479 of the same Code:

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

An accepted unilateral promise to buy or to sell a determine thing for a price certain
is binding upon the promissor if the promise is supported by a consideration distinct
from the price.

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

Although the cause is not stated in the contract, it is presumed that it exists and is
lawful unless the debtor proves the contrary.

where consideration is legally presumed to exists. Article 1354 applies to contracts in general,
whereas when it comes to an option it is governed particularly and more specifically by Article 1479
whereby the promisee has the burden of proving the existence of consideration distinct from the
price. Thus, in the case of Sanchez vs. Rigor, 45 SCRA 368, 372-373, the Court said:

(1) Article 1354 applies to contracts in general, whereas the second paragraph of
Article 1479 refers to sales in particular, and, more specifically, to an accepted
unilateral promise to buy or to sell. In other words, Article 1479 is controlling in the
case at bar.

(2) In order that said unilateral promise may be binding upon the promissor, Article
1479 requires the concurrence of a condition, namely, that the promise be supported
by a consideration distinct from the price.
 Accordingly, the promisee cannot compel the promissor to comply with the promise,
unless the former establishes the existence of said distinct consideration. In other
words, the promisee has the burden of proving such consideration. Plaintiff herein
has not even alleged the existence thereof in his complaint. 7

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

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

1. Reversing and setting aside the appealed Decision;

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

3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development, Inc. to
execute the deeds and documents necessary for the issuance and transfer of ownership to Mayfair
of the lot registered under TCT Nos. 17350, 118612, 60936, and 52571; and

4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as adjudged,
declaring the Deed of Absolute Sale between the defendants-appellants Carmelo & Bauermann, Inc.
and Equatorial Realty Development, Inc. as valid and binding upon all the parties. 8

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

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

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

Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral promise
to buy or to sell a determinate thing for a price within (which) is binding upon the promisee if the
promise is supported by a consideration distinct from the price." That "unilateral promise to buy or to
sell a determinate thing for a price certain" is called an offer. An "offer", in laws, is a proposal to enter
into a contract (Rosenstock vs. Burke, 46 Phil. 217). To constitute a legal offer, the proposal must be
certain as to the object, the price and other essential terms of the contract (Art. 1319, Civil Code).

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

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

xxx xxx xxx

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

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

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

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

A I have an offer from another party to buy the property and having
the offer we decided to make an offer to Henry Yang on a first-refusal
basis. (TSN November 8, 1983, p. 12.).

and on cross-examination:

Q When you called Mr. Yang on August 1974 can you remember
exactly what you have told him in connection with that matter, Mr.
Pascal?

A More or less, I told him that I received an offer from another party to
buy the property and I was offering him first choice of the enter
property. (TSN, November 29, 1983, p. 18).

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

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

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

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

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

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

II

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

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

III

THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED IMPLEMENTATION OF

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

IV

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

We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case in
the Court of Appeals. Suffice it to say that in our Resolution, dated December 9, 1992, we already took note
12

of this matter and set out the proper applicable procedure to be the following:

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

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

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

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

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

In the event, however, that the leased premises is sold to someone other than the LESSEE, the
LESSOR is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of
Sale thereof that the purchaser shall recognize this lease and be bound by all the terms and
conditions thereof. 14

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

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

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

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

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

A contract by virtue of which A, in consideration of the payment of a certain sum to B,

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

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

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

But the two definitions above cited refer to the contract of option, or, what amounts to the same
thing, to the case where there was cause or consideration for the obligation, the subject of the
agreement made by the parties; while in the case at bar there was no such cause or
consideration. (Emphasis ours.)
16

The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract, in
order to be valid and enforceable, must, among other things, indicate the definite price at which the person
granting the option, is willing to sell.

Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per square
meter upon failure to make the purchase within the time specified; in one other case we freed the landowner from
17

her promise to sell her land if the prospective buyer could raise P4,500.00 in three weeks because such option was
not supported by a distinct consideration; in the same vein in yet one other case, we also invalidated an instrument
18

entitled, "Option to Purchase" a parcel of land for the sum of P1,510.00 because of lack of consideration; and as an
19

exception to the doctrine enumerated in the two preceding cases, in another case, we ruled that the option to buy
the leased premises for P12,000.00 as stipulated in the lease contract, is not without consideration for in reciprocal
contracts, like lease, the obligation or promise of each party is the consideration for that of the other. In all these
20

cases, the selling price of the object thereof is always predetermined and specified in the option clause in the
contract or in the separate deed of option. We elucidated, thus, in the very recent case of Ang Yu Asuncion
vs. Court of Appeals that:
21

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

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

A contract of sale may be absolute or conditional.

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

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

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

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a price certain
is binding upon the promisor if the promise is supported by a consideration distinct
from the price. (1451a).

Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not
the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach
of the option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally
bound to comply with their respective undertakings.

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise

(policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily
construed as mere invitations to make offers or only as proposals. These relations, until a contract is
perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the
contract, either negotiating party may stop the negotiation. The offer, at this stage, may be
withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and
not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a
period is given to the offeree within which to accept the offer, the following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and
has the right to withdraw the offer before its acceptance, or if an acceptance has been made, before
the offeror's coming to know of such fact, by communicating that withdrawal to the offeree (see Art.
1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is
applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South
Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of
Parañaque, Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to
withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a
damage claim under Article 19 of the Civil Code which ordains that "every person must, in the
exercise of his rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith."
 (2) If the period has a separate consideration, a contract of "option" deemed perfected, and it would
be a breach of that contract to withdraw the offer during the agreed period. The option, however, is
an independent contract by itself; and it is to be distinguished from the projected main agreement
(subject matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror
withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter
may not sue for specific performance on the proposed contract ("object" of the option) since it has
failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for
damages for breach of the opinion. . .

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

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

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

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

of the contracts of lease. The consideration is built into the reciprocal obligations of the parties.

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

other.

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

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

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

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

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

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question
rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial was
aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As such,
Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies.
 . . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil
Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to
third persons, like creditors. The status of creditors could be validly accorded the Bonnevies for they
had substantial interests that were prejudiced by the sale of the subject property to the petitioner
without recognizing their right of first priority under the Contract of Lease.

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

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

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

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

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

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

Petitioners assert the alleged impossibility of performance because the entire property is indivisible property.
It was petitioner Carmelo which fixed the limits of the property it was leasing out. Common sense and
fairness dictate that instead of nullifying the agreement on that basis, the stipulation should be given effect
by including the indivisible appurtenances in the sale of the dominant portion under the right of first refusal.
A valid and legal contract where the ascendant or the more important of the two parties is the landowner
should be given effect, if possible, instead of being nullified on a selfish pretext posited by the owner.
Following the arguments of petitioners and the participation of the owner in the attempt to strip Mayfair of its
rights, the right of first refusal should include not only the property specified in the contracts of lease but also
the appurtenant portions sold to Equatorial which are claimed by petitioners to be indivisible. Carmelo acted
in bad faith when it sold the entire property to Equatorial without informing Mayfair, a clear violation of
Mayfair's rights. While there was a series of exchanges of letters evidencing the offer and counter-offers
between the parties, Carmelo abandoned the negotiations without giving Mayfair full opportunity to negotiate
within the 30-day period.

Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be
authorized to exercise its right of first refusal under the contract to include the entirety of the indivisible
property. The boundaries of the property sold should be the boundaries of the offer under the right of first
refusal. As to the remedy to enforce Mayfair's right, the Court disagrees to a certain extent with the
concluding part of the dissenting opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion
vs. Court of Appeals should be modified, if not amplified under the peculiar facts of this case.

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

Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside or
rescinded. All of these matters are now before us and so there should be no piecemeal determination of this
case and leave festering sores to deteriorate into endless litigation. The facts of the case and considerations
of justice and equity require that we order rescission here and now. Rescission is a relief allowed for the
protection of one of the contracting parties and even third persons from all injury and damage the contract
may cause or to protect some incompatible and preferred right by the contract. The sale of the subject real
26

property by Carmelo to Equatorial should now be rescinded considering that Mayfair, which had substantial
interest over the subject property, was prejudiced by the sale of the subject property to Equatorial without
Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day stipulated period. 27

This Court has always been against multiplicity of suits where all remedies according to the facts and the
law can be included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which
Mayfair could have purchased the property is, therefore, fixed. It can neither be more nor less. There is no
dispute over it. The damages which Mayfair suffered are in terms of actual injury and lost opportunities. The
fairest solution would be to allow Mayfair to exercise its right of first refusal at the price which it was entitled
to accept or reject which is P11,300,000.00. This is clear from the records. To follow an alternative solution
that Carmelo and Mayfair may resume negotiations for the sale to the latter of the disputed property would
be unjust and unkind to Mayfair because it is once more compelled to litigate to enforce its right. It is not
proper to give it an empty or vacuous victory in this case. From the viewpoint of Carmelo, it is like asking a
fish if it would accept the choice of being thrown back into the river. Why should Carmelo be rewarded for
and allowed to profit from, its wrongdoing? Prices of real estate have skyrocketed. After having sold the
property for P11,300,000.00, why should it be given another chance to sell it at an increased price? Under
the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute
because a contract over the right of first refusal belongs to a class of preparatory juridical relations governed
not by the law on contracts but by the codal provisions on human relations. This may apply here if the
contract is limited to the buying and selling of the real property. However, the obligation of Carmelo to first
offer the property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal which
created the obligation. It should be enforced according to the law on contracts instead of the panoramic and
indefinite rule on human relations. The latter remedy encourages multiplicity of suits. There is something to
execute and that is for Carmelo to comply with its obligation to the property under the right of the first refusal
according to the terms at which they should have been offered then to Mayfair, at the price when that offer
should have been made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous nor is
it merely preparatory. Paragraphs 8 of the two leases can be executed according to their terms. On the
question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind that both
Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract entered into
with Mayfair. It sold the property to Equatorial with purpose and intend to withhold any notice or knowledge
of the sale coming to the attention of Mayfair. All the circumstances point to a calculated and contrived plan
of non-compliance with the agreement of first refusal.

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

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

WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-
G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty
Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo &
Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The latter is
directed to execute the deeds and documents necessary to return ownership to Carmelo and Bauermann of
the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots
for P11,300,000.00. SO ORDERED.
G.R. No. 86150 March 2, 1992

GUZMAN, BOCALING & CO., petitioner,

vs.
RAOUL S. V. BONNEVIE, respondent.

E. Voltaire Garcia for petitioner.

Guinto Law Office for private respondent.

CRUZ, J.:

The subject of the controversy is a parcel of land measuring six hundred (600) square meters, more or less, with two
buildings constructed thereon, belonging to the Intestate Estate of Jose L. Reynoso.

This property was leased to Raoul S. Bonnevie and Christopher Bonnevie by the administratrix, Africa Valdez de
Reynoso, for a period of one year beginning August 8, 1976, at a monthly rental of P4,000.00.

The Contract of lease contained the following stipulation:

20. — In case the LESSOR desire or decides to sell the lease property, the LESSEES shall be given
a first priority to purchase the same, all things and considerations being equal.

On November 3, 1976 according to Reynoso, she notified the private respondents by registered mail that she was
selling the leased premises for P600.000.00 less a mortgage loan of P100,000.00, and was giving them 30 days
from receipt of the letter within which to exercise their right of first priority to purchase the subject property. She said
that in the event that they did not exercise the said right, she would expect them to vacate the property not later then
March, 1977.

On January 20, 1977, Reynoso sent another letter to private respondents advising them that in view of their failure
to exercise their right of first priority, she had already sold the property.

Upon receipt of this letter, the private respondents wrote Reynoso informing her that neither of them had received
her letter dated November 3, 1976; that they had advised her agent to inform them officially should she decide to
sell the property so negotiations could be initiated; and that they were "constrained to refuse (her) request for the
termination of the lease.

On March 7, 1977, the leased premises were formally sold to petitioner Guzman, Bocaling & Co. The Contract of
Sale provided for immediate payment of P137,500.00 on the purchase price, the balance of P262,500.00 to be paid
only when the premises were vacated.

On April 12, 1977, Reynoso wrote a letter to the private respondents demanding that they vacate the premises
within 15 days for their failure to pay the rentals for four months. When they refuse, Reynoso filed a complaint for
ejectment against them which was docketed as Civil Case No. 043851-CV in the then City Court of Manila.

On September 25, 1979, the parties submitted a Compromise Agreement, which provided inter alia that "the
defendant Raoul S.V. Bonnevie shall vacate the premises subject of the Lease Contract, Voluntarily and Peacefully
not later than October 31, 1979."

This agreement was approved by the City Court and became the basis of its decision. However, as the private
respondents failed to comply with the above-qouted stipulation, Reynoso filed a motion for execution of the
judgment by compromise, which was granted on November 8, 1979.

On November 12, 1979, private respondent Raoul S. Bonnevie filed a motion to set aside the decision of the City
Court as well as the Compromise Agreement on the sole ground that Reynoso had not delivered to him the "records
of payments and receipts of all rentals by or for the account of defendant ..." The motion was denied and the case
was elevated to the then Court of First Instance. That Court remanded the case to the City Court of Manila for trial
on the merits after both parties had agreed to set aside the Compromise Agreement.

On April 29, 1980, while the ejectment case was pending in the City Court, the private respondents filed an action
for annulment of the sale between Reynoso and herein petitioner Guzman, Bocaling & Co. and cancellation of the
transfer certificate of title in the name of the latter. They also asked that Reynoso be required to sell the property to
them under the same terms ands conditions agreed upon in the Contract of Sale in favor of the petitioner This
complaint was docketed as Civil Case No. 131461 in the then Court of First Instance of Manila.
On May 5, 1980, the City Court decided the ejectment case, disposing as follows:

WHEREFORE, judgment is hereby rendered ordering defendants and all persons holding under
them to vacate the premises at No. 658 Gen. Malvar Street, Malate, Manila, subject of this action,
and deliver possession thereof to the plaintiff, and to pay to the latter; (1) The sum of P4,000.00 a
month from April 1, 1977 to August 8, 1977; (2) The sum of P7,000.00 a month, as reasonable
compensation for the continued unlawful use and occupation of said premises, from August 9, 1977
and every month thereafter until defendants actually vacate and deliver possession thereof to the
plaintiff; (3) The sum of P1,000.00 as and for attorney's fees; and (4) The costs of suit.

The decision was appealed to the then Court of First Instance of Manila, docketed as Civil Case No. 132634 and
consolidated with Civil Case No. 131461. In due time, Judge Tomas P. Maddela, Jr., decided the two cases as
follows:

WHEREFORE, premises considered, this Court in Civil Case No. 132634 hereby modifies the
decision of the lower court as follows:

1 Ordering defendants Raoul S.V. Bonnevie and Christopher Bonnevie and all persons holding
under them to vacate the premises at No. 658 Gen. Malvar St., Malate, Manila subject of this action
and deliver possessions thereof to the plaintiff; and

2 To pay the latter the sum of P4,000.00 a month from April 1, 1977 up to September 21, 1980
(when possession of the premises was turned over to the Sheriff) after deducting whatever
payments were made and accepted by Mrs. Africa Valdez Vda. de Reynoso during said period,
without pronouncement as to costs.

As to Civil Case No. 131461, the Court hereby renders judgment in favor of the plaintiff Raoul
Bonnevie as against the defendants Africa Valdez Vda. de Reynoso and Guzman and Bocaling &
Co. declaring the deed of sale with mortgage executed by defendant Africa Valdez Vda. de Reynoso
in favor of defendant Guzman and Bocaling null and void; cancelling the Certificate of Title No.
125914 issued by the Register of Deeds of Manila in the name of Guzman and Bocaling & Co.,; the
name of Guzman and Bocaling & Co.,; ordering the defendant Africa Valdez Vda. de Reynoso to
execute favor of the plaintiff Raoul Bonnevie a deed of sale with mortgage over the property leased
by him in the amount of P400,000.00 under the same terms and conditions should there be any
other occupants or tenants in the premises; ordering the defendants jointly and severally to pay the
plaintiff Raoul Bonnevie the amount of P50,000.00 as temperate damages; to pay the plaintiff jointly
and severally the of P2,000.00 per month from the time the property was sold to defendant Guzman
and Bocaling by defendant Africa Valdez Vda de Reynoso on March 7, 1977, up to the execution of
a deed of sale of the property by defendant Africa Valdez Vda. de Reynoso in favor of plaintiff
Bonnevie; to pay jointly and severally the plaintiff Bonnevie the amount of P20,000.00 as exemplary
damages, for attorney's fees in the amount of P10,000.00, and to pay the cost of suit.

Both Reynoso and the petitioner company filed with the Court of Appeals a petition for review of this decision. The
appeal was eventually resolved against them in a decision promulgated on March 16, 1988, where the respondent
court substantially affirmed the conclusions of the lower court but reduced the award of damages. 1

Its motion for reconsideration having been denied on December 14, 1986, the petitioner has come to this Court
asserting inter alia that the respondent court erred in ruling that the grant of first priority to purchase the subject
properties by the judicial administratrix needed no authority from the probate court; holding that the Contract of Sale
was not voidable but rescissible; considering the petitioner as a buyer in bad faith ordering Reynoso to execute the
deed of sale in favor of the Bonnevie; and not passing upon the counterclaim. Reynoso has not appealed.

The Court has examined the petitioner's contentions and finds them to be untenable.

Reynoso claimed to have sent the November 3, 1976 letter by registered mail, but the registry return card was not
offered in evidence. What she presented instead was a copy of the said letter with a photocopy of only the face of a
registry return card claimed to refer to the said letter. A copy of the other side of the card showing the signature of
the person who received the letter and the data of the receipt was not submitted. There is thus no satisfactory proof
that the letter was received by the Bonnevies.

Even if the letter had indeed been sent to and received by the private respondent and they did not exercise their
right of first priority, Reynoso would still be guilty of violating Paragraph 20 of the Contract of Lease which
specifically stated that the private respondents could exercise the right of first priority, "all things and conditions
being equal." The Court reads this mean that there should be identity of the terms and conditions to be offered to
the Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the right of first priority.
The selling price qouted to the Bonnevies was P600,000.00, to be fully paid in cash less only the mortgage lien of
P100,000.00. On the other hand, the selling price offered to and accepted by the petitioner was only P400,000.00
2

and only P137,500.00 was paid in cash while the balance of P272,500.00 was to be paid "when the property (was)
cleared of tenants or occupants. 3

The fact that the Bonnevies had financial problems at that time was no justification for denying them the first option
to buy the subject property. Even if the Bonnevies could not buy it at the price qouted, Reynoso could not sell it to
another for a lower price and under more favorable terms and conditions. Only if the Bonnevies failed to exercise
their right of first priority could Reynoso lawfully sell the subject property to others, and at that only under the same
terms and conditions offered to the Bonnevies.

The Court agrees with the respondent court that it was not necessary to secure the approval by the probate court of
the Contract of Lease because it did not involve an alienation of real property of the estate nor did the term of the
lease exceed one year so as top make it fall under Article 1878(8) of the Civil Code. Only if Paragraph 20 of the
Contract of Lease was activated and the said property was intended to be sold would it be required of the
administratrix to secure the approval of the probate court pursuant to Rule 89 of the Rules of Court.

As a strict legal proposition, no judgment of the probate court was reviewed and eventually annuled collaterally by
the respondent court as contended by the petitioner. The order authorizing the sale in its favor was duly issued by
the probate court, which thereafter approved the Contract of Sale resulting in the eventual issuance if title in favor of
the petitioner. That order was valid insofar as it recognized the existence of all the essential elements of a valid
contract of sale, but without regard to the special provision in the Contract of Lease giving another party the right of
first priority.

Even if the order of the probate court was valid, the private respondents still had a right to rescind the Contract of
Sale because of the failure of Reynoso to comply with her duty to give them the first opportunity to purchase the
subject property.

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

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

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to
secure reparation for damages caused to them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief allowed for
4

the protection of one of the contracting parties and even third persons from all injury and damage the contract may
cause, or to protect some incompatible and preferent right created by the contract. Recission implies a contract
5

which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for
reasons of equity. 6

It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action for
its rescission where it is shown that such third person is in lawful possession of the subject of the contract and that
he did not act in bad faith. However, this rule is not applicable in the case before us because the petitioner is not
7

considered a third party in relation to the Contract of Sale nor may its possession of the subject property be
regarded as acquired lawfully and in good faith.

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

A purchaser in good faith and for value is one who buys the property of another without notice that some other
person has a right to or interest in such property and pays a full and fair price for the same at the time of such
purchase or before he has notice of the claim or interest of some other person in the property. Good faith connotes
8

an honest intention to abstain from taking unconscientious advantage of another. Tested by these principles, the
9

petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease of the property by the
Bonnevies and such knowledge should have cautioned it to look deeper into the agreement to determine if it
involved stipulations that would prejudice its own interests.
The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease, Assuming
this to be true, we nevertherless agree with the observation of the respondent court that:

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

Finally, the petitioner also cannot invoke the Compromise Agreement which it says canceled the right of first priority
granted to the Bonnevies by the Contract of Lease. This agreement was set side by the parties thereto, resulting in
the restoration of the original rights of the private respondents under the Contract of Lease. The Joint Motion to
Remand filed by Reynoso and the private respondents clearly declared inter alia:

That without going into the merits of instant petition, the parties have agreed to SET ASIDE the
compromise agreement, dated September 24, 1979 and remand Civil Case No. 043851 of the City
Court of Manila to Branch IX thereof for trial on the merits.
10

We find, in sum, that the respondent court did not commit the errors imputed to it by the petitioner. On the contrary,
its decision is conformable to the established facts and the applicable law and jurisprudence and so must be
sustained.

WHEREFORE, the petition in DENIED, with costs against the petitioner. The challeged decision is AFFIRMED in
toto. It is so ordered.
G.R. No. 144934 January 15, 2004

ADELFA S. RIVERA, CYNTHIA S. RIVERA, and JOSE S. RIVERA, petitioners,

vs.
FIDELA DEL ROSARIO (deceased and substituted by her co-respondents), and her children, OSCAR,
ROSITA, VIOLETA, ENRIQUE JR., CARLOS, JUANITO and ELOISA, all surnamed DEL
ROSARIO, respondents.

DECISION

QUISUMBING, J.:

Before us is a petition for review on certiorari of the Court of Appeals’ decision1, dated November 29, 1999, in CA-
G.R. CV No. 60552, which affirmed the judgment2 of the Regional Trial Court (RTC) of Malolos, Bulacan, Branch 17,
in Civil Case No. 151-M-93. The RTC granted respondents’ complaint for nullity of contract of sale and annulment of
the transfer certificates of title issued in favor of petitioners.

The facts, as found by the Court of Appeals, are as follows:

Respondents Fidela (now deceased), Oscar, Rosita, Violeta, Enrique Jr., Carlos, Juanito and Eloisa, all
surnamed Del Rosario, were the registered owners of Lot No. 1083-C, a parcel of land situated at Lolomboy,
Bulacan. This lot spanned an area of 15,029 square meters and was covered by TCT No. T-50.668 (M)
registered in the Registry of Deeds of Bulacan.

On May 16, 1983, Oscar, Rosita, Violeta, Enrique Jr., Juanito, and Eloisa, executed a Special Power of Attorney 3 in
favor of their mother and co-respondent, Fidela, authorizing her to sell, lease, mortgage, transfer and convey their
rights over Lot No. 1083-C.4 Subsequently, Fidela borrowed P250,000 from Mariano Rivera in the early part of 1987.
To secure the loan, she and Mariano Rivera agreed to execute a deed of real estate mortgage and an agreement to
sell the land. Consequently, on March 9, 1987, Mariano went to his lawyer, Atty. Efren Barangan, to have three
documents drafted: the Deed of Real Estate Mortgage5, a Kasunduan (Agreement to Sell)6, and a Deed of Absolute
Sale.7

The Kasunduan provided that the children of Mariano Rivera, herein petitioners Adelfa, Cynthia and Jose, would
purchase Lot No. 1083-C for a consideration of P2,141,622.50. This purchase price was to be paid in three
installments: P250,000 upon the signing of the Kasunduan, P750,000 on August 31, 1987, and P1,141,622.50 on
December 31, 1987.8 It also provided that the Deed of Absolute Sale would be executed only after the second
installment is paid and a postdated check for the last installment is deposited with Fidela. 9 As previously stated,
however, Mariano had already caused the drafting of the Deed of Absolute Sale. But unlike the Kasunduan, the said
deed stipulated a purchase price of only P601,160, and covered a certain Lot No. 1083-A in addition to Lot No.
1083-C.10 This deed, as well as the Kasunduan and the Deed of Real Estate Mortgage11, was signed by Mariano’s
children, petitioners Adelfa, Cynthia and Jose, as buyers and mortgagees, on March 9, 1987. 12

The following day, Mariano Rivera returned to the office of Atty. Barangan, bringing with him the signed documents.
He also brought with him Fidela and her son Oscar del Rosario, so that the latter two may sign the mortgage and
the Kasunduan there.

Although Fidela intended to sign only the Kasunduan and the Real Estate Mortgage, she inadvertently affixed her
signature on all the three documents in the office of Atty. Barangan on the said day, March 10, 1987. Mariano then
gave Fidela the amount of P250,000. On October 30, 1987, he also gave Fidela a check for P200,000. In the
ensuing months, also, Mariano gave Oscar del Rosario several amounts totaling P67,800 upon the latter’s demand
for the payment of the balance despite Oscar’s lack of authority to receive payments under the Kasunduan. 13 While
Mariano was making payments to Oscar, Fidela entrusted the owner’s copy of TCT No. T-50.668 (M) to Mariano to
guarantee compliance with the Kasunduan.

When Mariano unreasonably refused to return the TCT,14 one of the respondents, Carlos del Rosario, caused the
annotation on TCT No. T-50.668 (M) of an Affidavit of Loss of the owner’s duplicate copy of the title on September
7, 1992. This annotation was offset, however, when Mariano registered the Deed of Absolute Sale on October 13,
1992, and afterwards caused the annotation of an Affidavit of Recovery of Title on October 14, 1992. Thus, TCT No.
T-50.668 (M) was cancelled, and in its place was issued TCT No. 158443 (M) in the name of petitioners Adelfa,
Cynthia and Jose Rivera.15
Meanwhile, the Riveras, representing themselves to be the new owners of Lot No. 1083-C, were also negotiating
with the tenant, Feliciano Nieto, to rid the land of the latter’s tenurial right. When Nieto refused to relinquish his
tenurial right over 9,000 sq. m. of the land, the Riveras offered to give 4,500 sq. m. in exchange for the surrender.
Nieto could not resist and he accepted. Subdivision Plan No. Psd-031404-052505 was then made on August 12,
1992. Later, it was inscribed on TCT No. 158443 (M), and Lot No. 1083-C was divided into Lots 1083 C-1 and 1083
C-2.16

To document their agreement with Feliciano Nieto, the Riveras executed a Kasulatan sa Pagtatakwil ng Karapatan
sa Pagmamay-ari ng Bahagi ng Isang Lagay na Lupa (Written Abdication of Rights over a Portion of a Parcel of
Land)17 on November 16, 1992. Four days later, they registered the document with the Registry of Deeds. Two titles
were then issued: TCT No. T-161784 (M) in the name of Nieto, for 4,500 sq. m. of land, and TCT No. T-161785 (M)
in the name of petitioners Adelfa, Cynthia and Jose Rivera, over the remaining 10,529 sq. m. of land. 18

On February 18, 1993, respondents filed a complaint19 in the Regional Trial Court of Malolos, asking that
the Kasunduan be rescinded for failure of the Riveras to comply with its conditions, with damages. They also sought
the annulment of the Deed of Absolute Sale on the ground of fraud, the cancellation of TCT No. T-161784 (M) and
TCT No. T-161785 (M), and the reconveyance to them of the entire property with TCT No. T-50.668 (M) restored. 20

Respondents claimed that Fidela never intended to enter into a deed of sale at the time of its execution and that she
signed the said deed on the mistaken belief that she was merely signing copies of the Kasunduan. According to
respondents, the position where Fidela’s name was typed and where she was supposed to sign her name in
the Kasunduan was roughly in the same location where it was typed in the Deed of Absolute Sale. They argued that
given Fidela’s advanced age (she was then around 72 at the time)21 and the fact that the documents were stacked
one on top of the other at the time of signing, Fidela could have easily and mistakenly presumed that she was
merely signing additional copies of the Kasunduan.22 They also alleged that petitioners acquired possession of the
TCT through fraud and machination.

In their defense, petitioners denied the allegations and averred that the Deed of Absolute Sale was validly entered
into by both parties. According to petitioners, Fidela del Rosario mortgaged Lot No. 1083-C to their predecessor in
interest, Mariano Rivera, on March 9, 1987. But on the following day Fidela decided to sell the lot to petitioners
for P2,161,622.50. When Mariano agreed (on the condition that Lot No. 1083-C will be delivered free from all liens
and encumbrances), the Kasunduan was consequently drawn up and signed. After that, however, Fidela informed
Mariano of the existence of Feliciano Nieto’s tenancy right over the lot to the extent of 9,000 sq. m. When Mariano
continued to want the land, albeit on a much lower price of only P601,160, as he had still to deal with Feliciano
Nieto, the parties drafted the Deed of Absolute Sale on March 10, 1987, to supersede the Kasunduan.

Petitioners likewise argued that respondents’ cause of action had been barred by laches or estoppel since more
than four years has lapsed from the time the parties executed the Deed of Absolute Sale on March 10, 1987, to the
time respondents instituted their complaint on February 18, 1993.

Petitioners also filed a counterclaim asking for moral and exemplary damages and the payment of attorney’s fees
and costs of suit.

After trial, the RTC ruled in favor of respondents:

WHEREFORE, in the light of all the foregoing, judgment is hereby rendered:

1. Declaring the Deed of Absolute Sale dated March 10, 1987 as null and void;

2. Annulling TCT No. T-158443 (M) and TCT No. T-161785 (M) both in the names of Adelfa, Cynthia
and Jose, all surnamed Rivera;

3. Declaring the plaintiffs to be the legitimate owners of the land covered by TCT No. T-161785 (M)
and ordering defendant Adelfa, Cynthia, and Jose, all surnamed Rivera, to reconvey the same to the
plaintiffs;

4. Ordering the Register of Deeds of Bulacan to cancel TCT No. T-161785 (M) and to issue in its
place a new certificate of title in the name of the plaintiffs as their names appear in TCT No. T-
50.668;

5. Declaring TCT No. T-161784 (M) in the name of Feliciano Nieto as valid;

6. Ordering the defendant Riveras to pay the plaintiffs solidarily the following amounts:

a) P191,246.98 as balance for the 4,500 square-meter portion given to defendant Feliciano
Nieto
 b) P200,000.00 as moral damages

c) P50,000.00 as exemplary damages

d) P50,000.00 as attorney’s fees

e) costs of the suit.

7. Dismissing the counterclaim of the defendant Riveras;

8. Dismissing the counterclaim and the crossclaim of defendant Feliciano Nieto.

SO ORDERED.23

The trial court ruled that Fidela’s signature in the Deed of Absolute Sale was genuine, but found that Fidela never
intended to sign the said deed. Noting the peculiar differences between the Kasunduan and the Deed of Absolute
Sale, the trial court concluded that the Riveras were guilty of fraud in securing the execution of the deed and its
registration in the Registry of Deeds.24 This notwithstanding, the trial court sustained the validity of TCT No. T-
161784 (M) in the name of Feliciano Nieto since there was no fraud proven on Nieto’s part. The trial court found him
to have relied in good faith on the representations of ownership of Mariano Rivera. Thus, Nieto’s rights, according to
the trial court, were akin to those of an innocent purchaser for value.25

On the foregoing, the trial court rescinded the Kasunduan but ruled that the P450,000 paid by petitioners be
retained by respondents as payment for the 4,500 sq. m. portion of Lot No. 1083-C that petitioners gave to
Nieto.26 The trial court likewise ordered petitioners to pay P191,246.98 as balance for the price of the land given to
Nieto, P200,000 as moral damages, P50,000 as exemplary damages, P50,000 as attorney’s fees, and the costs of
suit.27

On appeal to the Court of Appeals, the trial court’s judgment was modified as follows:

WHEREFORE, the judgment appealed from is hereby AFFIRMED with the MODIFICATION that the Deed of
Absolute Sale dated March 10, 1987 is declared null and void only insofar as Lot No. 1083-C is concerned,
but valid insofar as it conveyed Lot No. 1083-A, that TCT No. 158443 (M) is valid insofar as Lot No. 1083-A
is concerned and should not be annulled, and increasing the amount to be paid by the defendants-
appellants to the plaintiffs-appellees for the 4,500 square meters of land given to Feliciano Nieto
to P323,617.50.

Costs against the defendants-appellants.

SO ORDERED.28

Petitioners’ motion for reconsideration was denied. Hence, this petition.

While this petition was pending, respondent Fidela del Rosario died. She was substituted by her children, herein
respondents.

In this petition, petitioners rely on the following grounds:

THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS, GRAVE AND REVERSIBLE ERROR IN
AWARDING LOT 1083-A IN FAVOR OF THE PETITIONERS AND FELICIANO NIETO WHICH IS ADMITTEDLY A
PART AND PORTION OF THE EXISTING NORTH LUZON EXPRESSWAY AND AS SUCH ACTED WITHOUT OR
IN EXCESS OF ITS JURISDICTION, OR WITH GRAVE ABUSE OF JUDICIAL DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION.

II

RESPONDENTS FAILED TO PAY THE CORRECT DOCKET, FILING AND OTHER LAWFUL FEES WITH THE
OFFICE OF THE CLERK OF COURT OF THE COURT A QUO (RTC, MALOLOS, BULACAN) AT THE TIME OF
THE FILING OF THE ORIGINAL COMPLAINT IN 1993 PURSUANT TO THE SIOL 29 DOCTRINE.

III
[THE] TRIAL COURT AWARDED RELIEFS NOT SPECIFICALLY PRAYED FOR IN THE AMENDED COMPLAINT
WITHOUT REQUIRING THE PAYMENT OF THE CORRECT DOCKET, FILING AND OTHER LAWFUL FEES.

IV

THE COURT A QUO HAS NO JURISDICTION OVER THE RESPONDENTS’ CAUSE OF ACTION AND OVER
THE RES CONSIDERING THAT FELICIANO NIETO IS AN AGRICULTURAL TENANT OF THE RICELAND IN
QUESTION.

RESPONDENTS [’] MAIN CAUSE OF ACTION [IS] FOR RESCISSION OF CONTRACT WHICH IS SUBSIDIARY
IN NATURE [,] AND ANNULMENT OF SALE [,] BOTH OF WHICH HAVE ALREADY PRESCRIBED UNDER
ARTICLES 1389 AND 1391 OF THE CIVIL CODE.30

Petitioners’ assignment of errors may be reduced into three issues: (1) Did the trial court acquire jurisdiction over the
case, despite an alleged deficiency in the amount of filing fees paid by respondents and despite the fact that an
agricultural tenant is involved in the case? (2) Did the Court of Appeals correctly rule that the Deed of Absolute Sale
is valid insofar as Lot 1083-A is concerned? (3) Is the respondents’ cause of action barred by prescription?

On the first issue, petitioners contend that jurisdiction was not validly acquired because the filing fees respondents
paid was only P1,554.45 when the relief sought was reconveyance of land that was worth P2,141,622.50 under
the Kasunduan. They contend that respondents should have paid filing fees amounting to P12,183.70. In support of
their argument, petitioners invoke the doctrine in Sun Insurance Office, Ltd., (SIOL) v. Asuncion 31 and attach a
certification32 from the Clerk of Court of the RTC of Quezon City.

Respondents counter that it is beyond dispute that they paid the correct amount of docket fees when they filed the
complaint. If the assessment was inadequate, they could not be faulted because the clerk of court made no notice of
demand or reassessment, respondents argue. Respondents also add that since petitioners failed to contest the
alleged underpayment of docket fees in the lower court, they cannot raise the same on appeal. 33

We rule in favor of respondents. Jurisdiction was validly acquired over the complaint. In Sun Insurance Office, Ltd.,
(SIOL) v. Asuncion,34 this Court ruled that the filing of the complaint or appropriate initiatory pleading and the
payment of the prescribed docket fee vest a trial court with jurisdiction over the subject matter or nature of the
action. If the amount of docket fees paid is insufficient considering the amount of the claim, the clerk of court of the
lower court involved or his duly authorized deputy has the responsibility of making a deficiency assessment. The
party filing the case will be required to pay the deficiency, but jurisdiction is not automatically lost.

Here it is beyond dispute that respondents paid the full amount of docket fees as assessed by the Clerk of Court of
the Regional Trial Court of Malolos, Bulacan, Branch 17, where they filed the complaint. If petitioners believed that
the assessment was incorrect, they should have questioned it before the trial court. Instead, petitioners belatedly
question the alleged underpayment of docket fees through this petition, attempting to support their position with the
opinion and certification of the Clerk of Court of another judicial region. Needless to state, such certification has no
bearing on the instant case.

Petitioners also contend that the trial court does not have jurisdiction over the case because it involves an
agricultural tenant. They insist that by virtue of Presidential Decree Nos. 316 and 1038, 35 it is the Department of
Agrarian Reform Adjudication Board (DARAB) that has jurisdiction.36

Petitioners’ contention lacks merit. The DARAB has exclusive original jurisdiction over cases involving the rights and
obligations of persons engaged in the management, cultivation and use of all agricultural lands covered by the
Comprehensive Agrarian Reform Law.37 However, the cause of action in this case is primarily against the petitioners,
as indispensable parties, for rescission of the Kasunduan and nullification of the Deed of Sale and the TCTs issued
because of them. Feliciano Nieto was impleaded merely as a necessary party, stemming from whatever rights he
may have acquired by virtue of the agreement between him and the Riveras and the corresponding TCT issued.
Hence, it is the regular judicial courts that have jurisdiction over the case.

On the second issue, contrary to the ruling of the Court of Appeals that the Deed of Absolute Sale is void only
insofar as it covers Lot No. 1083-C, we find that the said deed is void in its entirety. Noteworthy is that during the
oral arguments before the Court of Appeals, both petitioners and respondents admitted that Lot No. 1083-A had
been expropriated by the government long before the Deed of Absolute Sale was entered into. 38 What’s more, this
case involves only Lot No. 1083-C. It never involved Lot 1083-A. Thus, the Court of Appeals had no jurisdiction to
adjudicate on Lot 1083-A, as it was never touched upon in the pleadings or made the subject of evidence at trial. 39

As to the third issue, petitioners cite Articles 1383, 40 138941 and 139142 of the New Civil Code. They submit that the
complaint for rescission of the Kasunduan should have been dismissed, for respondents’ failure to prove that there
was no other legal means available to obtain reparation other than to file a case for rescission, as required by Article
1383. Moreover, petitioners contend that even assuming respondents had satisfied this requirement, prescription
had already set in, the complaint having been filed in 1992 or five years after the execution of the Deed of Absolute
Sale in March 10, 1987.

Respondents counter that Article 1383 of the New Civil Code applies only to rescissible contracts enumerated under
Article 1381 of the same Code, while the cause of action in this case is for rescission of a reciprocal obligation, to
which Article 119143 of the Code applies. They assert that their cause of action had not prescribed because the four-
year prescriptive period is counted from the date of discovery of the fraud, which, in this case, was only in 1992.

Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished from
rescission of contracts under Article 1383 of the same Code. Both presuppose contracts validly entered into as well
as subsisting, and both require mutual restitution when proper, nevertheless they are not entirely identical. 44

In countless times there has been confusion between rescission under Articles 1381 and 1191 of the Civil Code.
Through this case we again emphasize that rescission of reciprocal obligations under Article 1191 is different from
rescissible contracts under Chapter 6 of the law on contracts under the Civil Code. 45 While Article 1191 uses the
term rescission, the original term used in Article 1124 of the old Civil Code, from which Article 1191 was based,
was resolution.46 Resolution is a principal action that is based on breach of a party, while rescission under Article
1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil Code, 47 which
expressly enumerates the following rescissible contracts:

ART. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;

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

(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.

Obviously, the Kasunduan does not fall under any of those situations mentioned in Article 1381. Consequently,
Article 1383 is inapplicable. Hence, we rule in favor of the respondents.

May the contract entered into between the parties, however, be rescinded based on Article 1191?

A careful reading of the Kasunduan reveals that it is in the nature of a contract to sell, as distinguished from a
contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing
sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee
until full payment of the purchase price.48 In a contract to sell, the payment of the purchase price is a positive
suspensive condition,49 the failure of which is not a breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an obligatory force. 50

Respondents in this case bound themselves to deliver a deed of absolute sale and clean title covering Lot No. 1083-
C after petitioners have made the second installment. This promise to sell was subject to the fulfillment of the
suspensive condition that petitioners pay P750,000 on August 31, 1987, and deposit a postdated check for the third
installment of P1,141,622.50.51 Petitioners, however, failed to complete payment of the second installment. The non-
fulfillment of the condition rendered the contract to sell ineffective and without force and effect. It must be stressed
that the breach contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply with an
obligation already extant, not a failure of a condition to render binding that obligation. 52 Failure to pay, in this
instance, is not even a breach but an event that prevents the vendor’s obligation to convey title from acquiring
binding force.53 Hence, the agreement of the parties in the instant case may be set aside, but not because of a
breach on the part of petitioners for failure to complete payment of the second installment. Rather, their failure to do
so prevented the obligation of respondents to convey title from acquiring an obligatory force. 54

Coming now to the matter of prescription. Contrary to petitioners’ assertion, we find that prescription has not yet set
in. Article 1391 states that the action for annulment of void contracts shall be brought within four years. This period
shall begin from the time the fraud or mistake is discovered. Here, the fraud was discovered in 1992 and the
complaint filed in 1993. Thus, the case is well within the prescriptive period.
On the matter of damages, the Court of Appeals awarded respondents P323,617.50 as actual damages for the loss
of the land that was given to Nieto, P200,000 as moral damages, P50,000 as exemplary damages, P50,000 as
attorney’s fees and the costs of suit. Modifications are in order, however.

Moral damages may be recovered in cases where one willfully causes injury to property, or in cases of breach of
contract where the other party acts fraudulently or in bad faith. 55 Exemplary damages are imposed by way of
example or correction for the public good,56 when the party to a contract acts in a wanton, fraudulent, oppressive or
malevolent manner.57 Attorney’s fees are allowed when exemplary damages are awarded and when the party to a
suit is compelled to incur expenses to protect his interest.58

While it has been sufficiently proven that the respondents are entitled to damages, the actual amounts awarded by
the lower court must be reduced because damages are not intended for a litigant’s enrichment, at the expense of
the petitioners.59 The purpose for the award of damages other than actual damages would be served, in this case,
by reducing the amounts awarded.

Respondents were amply compensated through the award of actual damages, which should be sustained. The
other damages awarded total P300,000, or almost equivalent to the amount of actual damages. Practically this will
double the amount of actual damages awarded to respondents. To avoid breaching the doctrine on enrichment,
award for damages other than actual should be reduced. Thus, the amount of moral damages should be set at
only P30,000, and the award of exemplary damages at only P20,000. The award of attorney’s fees should also be
reduced to P20,000, which under the circumstances of this case appears justified and reasonable.

WHEREFORE, the assailed decision of the Court of Appeals is MODIFIED. The Deed of Absolute Sale in question
is declared NULL and VOID in its entirety. Petitioners are ORDERED to pay respondents P323,617.50 as actual
damages, P30,000.00 as moral damages, P20,000.00 as exemplary damages and P20,000.00 as attorney’s fees.
No pronouncement as to costs.

SO ORDERED.
G.R. No. 152347 June 21, 2006

UNION BANK OF THE PHILIPPINES, Petitioner,

vs.
SPS. ALFREDO ONG AND SUSANA ONG and JACKSON LEE, Respondents.

DECISION

GARCIA, J.:

By this petition for review under Rule 45 of the Rules of Court, petitioner Union Bank of the Philippines (Union Bank)
seeks to set aside the decision 1 dated December 5, 2001 of the Court of Appeals (CA) in CA-G.R. No. 66030
reversing an earlier decision of the Regional Trial Court (RTC) of Pasig City in Civil Case No. 61601, a suit thereat
commenced by the petitioner against the herein respondents for annulment or rescission of sale in fraud of
creditors.

The facts:

Herein respondents, the spouses Alfredo Ong and Susana Ong, own the majority capital stock of Baliwag
Mahogany Corporation (BMC). On October 10, 1990, the spouses executed a Continuing Surety Agreement in favor
of Union Bank to secure a P40,000,000.00-credit line facility made available to BMC. The agreement expressly
stipulated a solidary liability undertaking.

On October 22, 1991, or about a year after the execution of the surety agreement, the spouses Ong,
for P12,500,000.00, sold their 974-square meter lot located in Greenhills, San Juan, Metro Manila, together with the
house and other improvements standing thereon, to their co-respondent, Jackson Lee (Lee, for short). The following
day, Lee registered the sale and was then issued Transfer Certificate of Title (TCT) No. 4746-R. At about this time,
BMC had already availed itself of the credit facilities, and had in fact executed a total of twenty-two (22) promissory
notes in favor of Union Bank.

On November 22, 1991, BMC filed a Petition for Rehabilitation and for Declaration of Suspension of Payments with
the Securities and Exchange Commission (SEC). To protect its interest, Union Bank lost no time in filing with the
RTC of Pasig City an action for rescission of the sale between the spouses Ong and Jackson Lee for purportedly
being in fraud of creditors.

In its complaint, docketed as Civil Case No. 61601 and eventually raffled to Branch 157 of the court, Union Bank
assailed the validity of the sale, alleging that the spouses Ong and Lee entered into the transaction in question for
the lone purpose of fraudulently removing the property from the reach of Union Bank and other creditors. The
fraudulent design, according to Union Bank, is evidenced by the following circumstances: (1) insufficiency of
consideration, the purchase price of P12,500,000.00 being below the fair market value of the subject property at that
time; (2) lack of financial capacity on the part of Lee to buy the property at that time since his gross income for the
year 1990, per the credit investigation conducted by the bank, amounted to only P346,571.73; and (3) Lee did not
assert absolute ownership over the property as he allowed the spouses Ong to retain possession thereof under a
purported Contract of Lease dated October 29, 1991.

Answering, herein respondents, as defendants a quo, maintained, in the main, that both contracts of sale and lease
over the Greenhills property were founded on good and valid consideration and executed in good faith. They also
scored Union Bank for forum shopping, alleging that the latter is one of the participating creditors in BMC’s petition
for rehabilitation.

Issues having been joined, trial followed. On September 27, 1999, the trial court, applying Article 1381 of the Civil
Code and noting that the evidence on record "present[s] a holistic combination of circumstances distinctly
characterized by badges of fraud," rendered judgment for Union Bank, the Deed of Sale executed on October 22,
1991 by the spouses Ong in favor of Lee being declared null and void.

Foremost of the circumstances adverted to relates to the execution of the sale against the backdrop of the spouses
Ong, as owners of 70% of BMC's stocks, knowing of the company’s insolvency. This knowledge was the reason
why, according to the court, the spouses Ong disposed of the subject property leaving the bank without recourse to
recover BMC's indebtedness. The trial court also made reference to the circumstances which Union Bank
mentioned in its complaint as indicia of conveyance in fraud of creditors.

Therefrom, herein respondents interposed an appeal to the CA which docketed their recourse as CA-G.R. No.
66030.

In its Decision dated December 5, 2001, the CA reversed and set aside the trial court's ruling, observing that the
contract of sale executed by the spouses Ong and Lee, being complete and regular on its face, is clothed with the
prima facie presumption of regularity and legality. Plodding on, the appellate court said:

In order that rescission of a contract made in fraud of creditors may be decreed, it is necessary that the complaining
creditors must prove that they cannot recover in any other manner what is due them. xxx.

There is no gainsaying that the basis of liability of the appellant spouses in their personal capacity to Union Bank is
the Continuing Surety Agreement they have signed … on October 10, 1990. However, the real debtor of Union Bank
is BMC, which has a separate juridical personality from appellants Ong. Granting that BMC was already insolvent at
the time of the sale, still, there was no showing that at the time BMC filed a petition for suspension of payment that
appellants Ong were themselves bankrupt. In the case at bench, no attempt was made by Union Bank, not even a
feeble or half-hearted one, to establish that appellants spouses have no other property from which Union Bank, as
creditor of BMC, could obtain payment. While appellants Ong may be independently liable directly to Union Bank
under the Continuing Surety Agreement, all that Union Bank tried to prove was that BMC was insolvent at the time
of the questioned sale. No competent evidence was adduced showing that appellants Ong had no leviable assets
other than the subject property that would justify challenge to the transaction. 2

Petitioner moved for a reconsideration of the above decision but its motion was denied by the appellate court in its
resolution of February 21, 2002.3

Hence, petitioner’s present recourse on its submission that the appellate court erred:

I. xxx WHEN IT CONSIDERED THAT THE SALE TRANSACTION BETWEEN [ RESPONDENTS SPOUSES ONG
AND LEE] ENJOYS THE PRESUMPTION OF REGULARITY AND LEGALITY AS THERE EXISTS ALSO A
PRESUMPTION THAT THE SAID SALE WAS ENTERED IN FRAUD OF CREDITORS. PETITIONER THEREFORE
NEED NOT PROVE THAT RESPONDENTS SPOUSES ONG DID NOT LEAVE SUFFICIENT ASSETS TO PAY
THEIR CREDITORS. BUT EVEN THEN, PETITIONER HAS PROVEN THAT THE SPOUSES HAVE NO OTHER
ASSETS.

II. IN CONCLUDING, ASSUMING EX-GRATIA ARGUMENTI THAT THE SALE BETWEEN DEFENDANT-
APPELLANTS ENJOY THE PRESUMPTION OF REGULARITY AND LEGALITY, THAT THE EVIDENCE
ADDUCED BY THE PETITIONER … WAS NOT SUFFICIENT TO OVERCOME THE PRESUMPTION.

III. xxx IN FINDING THAT IT WAS [RESPONDENT] LEE WHO HAS SUFFICIENTLY PROVEN THAT THERE WAS
A VALID AND SUFFICIENT CONSIDERATION FOR THE SALE.

IV. xxx IN NOT FINDING THAT JACKSON LEE WAS IN BAD FAITH WHEN HE PURCHASED THE PROPERTY. 4

Petitioner maintains, citing China Banking Corporation vs. Court of Appeals, 5 that the sale in question, having been
entered in fraud of creditor, is rescissible. In the same breath, however, petitioner would fault the CA for failing to
consider that the sale between the Ongs and Lee is presumed fraudulent under Section 70 of Act No. 1956, as
amended, or the Insolvency Law. Elaborating on this point, petitioner states that the subject sale occurred thirty (30)
days prior to the filing by BMC of a petition for suspension of payment before the SEC, thus rendering the sale not
merely rescissible but absolutely void.

We resolve to deny the petition.

In effect, the determinative issue tendered in this case resolves itself into the question of whether or not the Ong-
Lee contract of sale partakes of a conveyance to defraud Union Bank. Obviously, this necessitates an inquiry into
the facts and this Court eschews factual examination in a petition for review under Rule 45 of the Rules of Court,
save when, as in the instant case, a clash between the factual findings of the trial court and that of the appellate
court exists,6 among other exceptions.

As between the contrasting positions of the trial court and the CA, that of the latter commends itself for adoption,
being more in accord with the evidence on hand and the laws applicable thereto.

Essentially, petitioner anchors its case on Article 1381 of the Civil Code which lists as among the rescissible
contracts "[T]hose undertaken in fraud of creditors when the latter cannot in any other manner collect the claim due
them."
Contracts in fraud of creditors are those executed with the intention to prejudice the rights of creditors. They should
not be confused with those entered into without such mal-intent, even if, as a direct consequence thereof, the
creditor may suffer some damage. In determining whether or not a certain conveying contract is fraudulent, what
comes to mind first is the question of whether the conveyance was a bona fide transaction or a trick and contrivance
to defeat creditors.7 To creditors seeking contract rescission on the ground of fraudulent conveyance rest the onus
of proving by competent evidence the existence of such fraudulent intent on the part of the debtor, albeit they may
fall back on the disputable presumptions, if proper, established under Article 1387 of the Code. 8

In the present case, respondent spouses Ong, as the CA had determined, had sufficiently established the validity
and legitimacy of the sale in question. The conveying deed, a duly notarized document, carries with it the
presumption of validity and regularity. Too, the sale was duly recorded and annotated on the title of the property
owners, the spouses Ong. As the transferee of said property, respondent Lee caused the transfer of title to his
name.

There can be no quibbling about the transaction being supported by a valid and sufficient consideration.
Respondent Lee’s account, while on the witness box, about this angle of the sale was categorical and
straightforward. An excerpt of his testimony:

Atty. De Jesus :

Before you prepared the consideration of this formal offer, as standard operating procedure of buy and sell, what
documents were prepared?

xxx xxx xxx

Jackson Lee:

A. There is a downpayment.

Q. And how much was the downpayment?

A. P2,500,000.00.

Q. Was that downpayment covered by a receipt signed by the seller?

A. Yes, Sir, P500,000.00 and P2,000,000.00

xxx xxx xxx

Q. Are you referring to the receipt dated October 19, 1991, how about the other receipt dated October 21, 1991?

A. Yes, Sir, this is the same receipt.

xxx xxx xxx

Q. Considering that the consideration of this document is for P12,000,000.00 and you made mention only
of P2,500,000.00, covered by the receipts, do you have evidence to show that, finally, Susana Ong received the
balance of P10,000,000.00?

A. Yes, Sir.

Q. Showing to you a receipt denominated as Acknowledgement Receipt, dated October 25, 1991, are you referring
to this receipt to cover the balance of P10,000,000.00?

A. Yes, sir.9

The foregoing testimony readily proves that money indeed changed hands in connection with the sale of the subject
property. Respondent Lee, as purchaser, paid the stipulated contract price to the spouses Ong, as vendors.
Receipts presented in evidence covered and proved such payment. Accordingly, any suggestion negating payment
and receipt of valuable consideration for the subject conveyance, or worse, that the sale was fictitious must simply
be rejected.

In a bid to attach a badge of fraud on the transaction, petitioner raises the issue of inadequate consideration,
alleging in this regard that only P12,500,000.00 was paid for property having, during the period material, a fair
market value of P14,500,000.00.
We do not agree.

The existence of fraud or the intent to defraud creditors cannot plausibly be presumed from the fact that the price
paid for a piece of real estate is perceived to be slightly lower, if that really be the case, than its market value. To be
sure, it is logical, even expected, for contracting minds, each having an interest to protect, to negotiate on the price
and other conditions before closing a sale of a valuable piece of land. The negotiating areas could cover various
items. The purchase price, while undeniably an important consideration, is doubtless only one of them. Thus, a
scenario where the price actually stipulated may, as a matter of fact, be lower than the original asking price of the
vendor or the fair market value of the property, as what perhaps happened in the instant case, is not out of the
ordinary, let alone indicative of fraudulent intention. That the spouses Ong acquiesced to the price
of P12,500,000.00, which may be lower than the market value of the house and lot at the time of alienation, is
certainly not an unusual business phenomenon.

Lest it be overlooked, the disparity between the price appearing in the conveying deed and what the petitioner
regarded as the real value of the property is not as gross to support a conclusion of fraud. What is more, one Oliver
Morales, a licensed real estate appraiser and broker, virtually made short shrift of petitioner’s claim of gross
inadequacy of the purchase price. Mr. Morales declared that there exists no gross disparity between the market
value of the subject property and the price mentioned in the deed as consideration. He explained why:

ATTY. EUFEMIO:

Q. I am showing to you the said two (2) exhibits Mr. Morales and I would like you to go over the terms and
conditions stated therein and as an expert in real estate appraiser (sic) and also as a real estate broker, can you
give this Honorable Court your considered opinion whether the consideration stated therein P12,500,000.00 in the
light of all terms and conditions of the said Deed of Absolute Sale and Offer to Purchase could be deemed fair and
reasonable?

xxx xxx xxx

MR. MORALES:

A. My opinion generally a Deed of Absolute Sale indicated prescribed not only the amount of the consideration.
There are also other expenses involved in the sales. I do not see here other payment of who takes care of capital
gains stocks (sic) in this Deed of Sale neither who shouldered the documentary stamps or even transfer tax. That is
my comment regarding this.

Q. Precisely Mr. Witness we have also shown to you the Offer to Purchase which has been marked as Exhibit "9" as
to the terms which we are asking?

xxx xxx xxx

A. Well, it says here in item C of the conditions the Capital Gains Stocks (sic), documentary stamps, transfer tax
registration and broker’s fee for the buyer’s account. I do not know how much is this worth. If at all in condition (sic)
to the 12.5 million which is the selling price, may I, therefore aside (sic) how much is the total cost pertaining to this.
The capital gains tax on (sic), documentary stamps, transfer tax are all computed on the basis of the consideration
which is P12.5 M, the capital gain stocks (sic) is 5%, 5% of 12.5 M.

xxx xxx xxx

Yes sir if the 5% capital gains tax and documentary stamps respectively shall be added to the 12.5 Million before the
inclusion of the transfer tax, the amount will be already in the vicinity of P13,250.000.

Q. With such consideration Mr. Witness and in the light of the terms and conditions in the said Offer to Purchase
and Deed of Absolute Sale could you give your opinion as to whether the consideration is fair and reasonable.

xxx xxx xxx

A. With our proposal of P14.5 M as compared now to P13,250,000.00 may I give my opinion that generally there will
be two appraisers. In fairness to the situation, they should not vary by as much as 7% down so we are playing at a
variance actually of about 15%. In my experience in this profession for the last 27 years as I have said in fairness if
there is another appraisal done by another person, that kind of difference is very marginal should at least indicate
the fairness of the property and so therefore the only way to find out is to determine the difference between
the P14.5 M and the P13,250,000.00. My computation indicates that it is close to 10% something like that
difference. What is the question again?

Q. Whether it is fair and reasonable under the circumstances.

A. I have answered already the question and I said maximum of 15%.

Q. So based on your computation this is about 10% which is fair and reasonable.

A That is right sir.10

Withal, the consideration of the sale is fair and reasonable as would justify the conclusion that the sale is
undoubtedly a true and genuine conveyance to which the parties thereto are irrevocably and undeniably bound.

It may be stressed that, when the validity of sales contract is in issue, two veritable presumptions are relevant: first,
that there was sufficient consideration of the contract 11 ; and, second, that it was the result of a fair and regular
private transaction.12 If shown to hold, these presumptions infer prima facie the transaction's validity, except that it
must yield to the evidence adduced 13 which the party disputing such presumptive validity has the burden of
overcoming. Unfortunately for the petitioner, it failed to discharge this burden. Its bare allegation respecting the sale
having been executed in fraud of creditors and without adequate consideration cannot, without more, prevail over
the respondents' evidence which more than sufficiently supports a conclusion as to the legitimacy of the transaction
and the bona fides of the parties.

Parenthetically, the rescissory action to set aside contracts in fraud of creditors is accion pauliana, essentially a
subsidiary remedy accorded under Article 1383 of the Civil Code which the party suffering damage can avail of only
when he has no other legal means to obtain reparation for the same. 14 In net effect, the provision applies only when
the creditor cannot recover in any other manner what is due him.

It is true that respondent spouses, as surety for BMC, bound themselves to answer for the latter’s debt.
Nonetheless, for purposes of recovering what the eventually insolvent BMC owed the bank, it behooved the
petitioner to show that it had exhausted all the properties of the spouses Ong. It does not appear in this case that
the petitioner sought other properties of the spouses other than the subject Greenhills property. The CA
categorically said so. Absent proof, therefore, that the spouses Ong had no other property except their Greenhills
home, the sale thereof to respondent Lee cannot simplistically be considered as one in fraud of creditors.

Neither was evidence adduced to show that the sale in question peremptorily deprived the petitioner of means to
collect its claim against the Ongs. Where a creditor fails to show that he has no other legal recourse to obtain
satisfaction for his claim, then he is not entitled to the rescission asked. 15

For a contract to be rescinded for being in fraud of creditors, both contracting parties must be shown to have acted
maliciously so as to prejudice the creditors who were prevented from collecting their claims. 16 Again, in this case,
there is no evidence tending to prove that the spouses Ong and Lee were conniving cheats. In fact, the petitioner
did not even attempt to prove the existence of personal closeness or business and professional interdependence
between the spouses Ong and Lee as to cast doubt on their true intent in executing the contract of sale. With the
view we take of the evidence on record, their relationship vis-à-vis the subject Greenhills property was no more than
one between vendor and vendee dealing with each other for the first time. Any insinuation that the two colluded to
gyp petitioner bank is to read in a relationship something which, from all indications, appears to be purely business.

It cannot be overemphasized that rescission is generally unavailing should a third person, acting in good faith, is in
lawful possession of the property,17 that is to say, he is protected by law against a suit for rescission by the
registration of the transfer to him in the registry.

As recited earlier, Lee was - and may still be - in lawful possession of the subject property as the transfer to him was
by virtue of a presumptively valid onerous contract of sale. His possession is evidenced by no less than a certificate
of title issued him by the Registry of Deeds of San Juan, Metro Manila, after the usual registration of the
corresponding conveying deed of sale. On the other hand, the bona fides of his acquisition can be deduced from his
conduct and outward acts previous to the sale. As testified to by him and duly noted by the CA, respondent Lee
undertook what amounts to due diligence on the possible defects in the title of the Ongs before proceeding with the
sale. As it were, Lee decided to buy the property only after being satisfied of the absence of such defects. 18

Time and again, the Court has held that one dealing with a registered parcel of land need not go beyond the
certificate of title as he is charged with notice only of burdens which are noted on the face of the register or on the
certificate of title.19 The Continuing Surety Agreement, it ought to be particularly pointed out, was never recorded nor
annotated on the title of spouses Ong. There is no evidence extant in the records to show that Lee had knowledge,
prior to the subject sale, of the surety agreement adverted to. In fine, there is nothing to remotely suggest that the
purchase of the subject property was characterized by anything other than good faith.

Petitioner has made much of respondent Lee not taking immediate possession of the property after the sale, stating
that such failure is an indication of his participation in the fraudulent scheme to prejudice petitioner bank.

We are not persuaded.

Lee, it is true, allowed the respondent spouses to continue occupying the premises even after the sale. This
development, however, is not without basis or practical reason. The spouses' continuous possession of the property
was by virtue of a one-year lease20 they executed with respondent Lee six days after the sale. As explained by the
respondent spouses, they insisted on the lease arrangement as a condition for the sale in question. And pursuant to
the lease contract aforementioned, the respondent Ongs paid and Lee collected rentals at the rate of P25,000.00 a
month. Contrary thus to the petitioner’s asseveration, respondent Lee, after the sale, exercised acts of dominion
over the said property and asserted his rights as the new owner. So, when the respondent spouses continued to
occupy the property after its sale, they did so as mere tenants. While the failure of the vendee to take exclusive
possession of the property is generally recognized as a badge of fraud, the same cannot be said here in the light of
the existence of what appears to be a genuine lessor-lessee relationship between the spouses Ong and Lee. To
borrow from Reyes vs. Court of Appeals, 21 possession may be exercised in one’s own name or in the name of
another; an owner of a piece of land has possession, either when he himself physically occupies the same or when
another person who recognizes his right as owner is in such occupancy.

Petitioner’s assertion regarding respondent Lee’s lack of financial capacity to acquire the property in question since
his income in 1990 was only P346,571.73 is clearly untenable. Assuming for argument that petitioner got its figure
right, it is clearly incorrect to measure one’s purchasing capacity with one’s income at a given period. But the more
important consideration in this regard is the uncontroverted fact that respondent Lee paid the purchase price of said
property. Where he sourced the needed cash is, for the nonce, really of no moment.

The cited case of China Banking22 cannot plausibly provide petitioner with a winning card. In that case, the Court,
applying Article 1381 (3) of the Civil Code, rescinded an Assignment of Rights to Redeem owing to the failure of the
assignee to overthrow the presumption that the said conveyance/assignment is fraudulent. In turn, the presumption
was culled from Article 1387, par. 2, of the Code pertinently providing that "[A]lienation by onerous title are also
presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or
some writ of attachment has been issued."

Indeed, when the deed of assignment was executed in China Banking, the assignor therein already faced at that
time an adverse judgment. In the same case, moreover, the Court took stock of other signs of fraud which tainted
the transaction therein and which are, significantly, not obtaining in the instant case. We refer, firstly, to the element
of kinship, the assignor, Alfonso Roxas Chua, being the father of the assignee, Paulino. Secondly, Paulino admitted
knowing his father to be insolvent. Hence, the Court, rationalizing the rescission of the assignment of rights, made
the following remarks:

The mere fact that the conveyance was founded on valuable consideration does not necessarily negate the
presumption of fraud under Article 1387 of the Civil Code. There has to be valuable consideration and the
transaction must have been made bona fide.23

There lies the glaring difference with the instant case.

Here, the existence of fraud cannot be presumed, or, at the very least, what were perceived to be badges of fraud
have been proven to be otherwise. And, unlike Alfonso Roxas Chua in China Banking, a judgment has not been
rendered against respondent spouses Ong or that a writ of attachment has been issued against them at the time of
the disputed sale.

In a last-ditch attempt to resuscitate a feeble cause, petitioner cites Section 70 of the Insolvency Law which, unlike
the invoked Article 1381 of the Civil Code that deals with a valid but rescissible contract, treats of a contractual
infirmity resulting in nullity no less of the transaction in question. Insofar as pertinent, Section 70 of the Insolvency
Law provides:

Sec. 70. If any debtor, being insolvent, or in contemplation of insolvency, within thirty days before the filing of a
petition by or against him, with a view to giving a preference to any creditor or person having a claim against him xxx
makes any xxx sale or conveyance of any part of his property, xxx such xxx sale, assignment or conveyance is void,
and the assignee, or the receiver, may recover the property or the value thereof, as assets of such insolvent debtor.
xxx. Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of property of whatever character
made by the insolvent within one (1) month before the filing of a petition in insolvency by or against him, except for
a valuable pecuniary consideration made in good faith shall be void. xxx. (Emphasis added)

Petitioner avers that the Ong-Lee sales contract partakes of a fraudulent transfer and is null and void in
contemplation of the aforequoted provision, the sale having occurred on October 22, 1991 or within thirty (30) days
before BMC filed a petition for suspension of payments on November 22, 1991.

Petitioner's reliance on the afore-quoted provision is misplaced for the following reasons:

First, Section 70, supra, of the Insolvency Law specifically makes reference to conveyance of properties
made by a "debtor" or by an "insolvent" who filed a petition, or against whom a petition for insolvency has
been filed. Respondent spouses Ong have doubtlessly not filed a petition for a declaration of their own
 insolvency. Neither has one been filed against them. And as the CA aptly observed, it was never proven that
respondent spouses are likewise insolvent, petitioner having failed to show that they were down to their
Greenhills property as their only asset.

It may be that BMC had filed a petition for rehabilitation and suspension of payments with the SEC. The
nagging fact, however is that BMC is a different juridical person from the respondent spouses. Their seventy
percent (70%) ownership of BMC’s capital stock does not change the legal situation. Accordingly, the
alleged insolvency of BMC cannot, as petitioner postulates, extend to the respondent spouses such that
transaction of the latter comes within the purview of Section 70 of the Insolvency Law.

Second, the real debtor of petitioner bank in this case is BMC. The fact that the respondent spouses bound
themselves to answer for BMC’s indebtedness under the surety agreement referred to at the outset is not
reason enough to conclude that the spouses are themselves debtors of petitioner bank. We have already
passed upon the simple reason for this proposition. We refer to the basic precept in this jurisdiction that a
corporation, upon coming into existence, is invested by law with a personality separate and distinct from
those of the persons composing it.24 Mere ownership by a single or small group of stockholders of nearly all
of the capital stock of the corporation is not, without more, sufficient to disregard the fiction of separate
corporate personality.25

Third, Section 70 of the Insolvency Law considers transfers made within a month after the date of cleavage
void, except those made in good faith and for valuable pecuniary consideration. The twin elements of good
faith and valuable and sufficient consideration have been duly established. Given the validity and the basic
legitimacy of the sale in question, there is simply no occasion to apply Section 70 of the Insolvency Law to
nullify the transaction subject of the instant case.

All told, we are far from convinced by petitioner’s argumentation that the circumstances surrounding the sale of the
subject property may be considered badges of fraud. Consequently, its failure to show actual fraudulent intent on
the part of the spouses Ong defeats its own cause.

WHEREFORE, the instant petition is DENIED and the assailed decision of the Court of Appeals is AFFIRMED.

Costs against petitioner.

SO ORDERED.
G.R. No. 173349 February 9, 2011

SAMUEL U. LEE and PAULINE LEE and ASIATRUST DEVELOPMENT BANK, INC., Petitioners,
vs.
BANGKOK BANK PUBLIC COMPANY, LIMITED, Respondent.

DECISION

VELASCO, JR., J.:

The Case

In this Petition for Review on Certiorari under Rule 45, petitioners assail the March 15, 2006 Decision 1 of the Court
of Appeals (CA) in CA-G.R. CV No. 79362, which reversed and set aside the April 21, 2003 Decision 2 of the
Regional Trial Court (RTC), Branch 73 in Antipolo City, in Civil Case No. 99-5388, entitled Bangkok Bank Public
Company Limited v. Spouses Samuel U. Lee and Pauline Lee and Asiatrust Development Bank for the Rescission
of Real Estate Mortgage (REM), Annulment of Foreclosure Sale, Cancellation of Titles and Damages. They assail
also the June 29, 2006 CA Resolution denying their motion for reconsideration.

The Facts

Midas Diversified Export Corporation (MDEC) and Manila Home Textile, Inc. (MHI) entered into two separate Credit
Line Agreements (CLAs) with Respondent Bangkok Bank Public Company, Limited (Bangkok Bank) on November
29, 1995 and April 17, 1996, respectively.3 MDEC and MHI are owned and controlled by the Lee family: Thelma U.
Lee, Maybelle L. Lim, Daniel U. Lee and Samuel U. Lee (Samuel). 4 Both corporations have interlocking directors
and management led by the Lee family; and engaged in the manufacturing and export of garments, ladies’ bags and
apparel.

Bangkok Bank required guarantees from the Lee family for the two CLAs. Consequently, the Lee family executed
guarantees in favor of Bangkok Bank on December 1, 1995 for the CLA for MDEC and on April 17, 1996 for the CLA
of MHI. Under the guarantees, the Lee family irrevocably and unconditionally guaranteed, as principal debtors, the
payment of any and all indebtedness of MDEC and MHI with Bangkok Bank. 5 Prior to the granting of the CLAs,
Bangkok Bank conducted a property check on the Lee family and required Samuel to submit a list of his properties.
Bangkok Bank, however, did not require the setting aside, as collateral, of any particular property to answer for any
future unpaid obligation.6 Subsequently, MDEC and MHI made several availments from the CLAs. In time, the
advances, which MDEC and MHI had taken out from the CLAs, amounted to three million dollars (USD 3,000,000). 7

On July 25, 1996, MDEC was likewise granted a loan facility by Asiatrust Development Bank, Inc. (Asiatrust). 8 This
facility had an available credit line of forty million pesos (PhP 40,000,000) for letters of credit, advances on bills and
export packing; and a separate credit line of two million dollars (USD 2,000,000) for bills purchase. 9

In the meantime, in May 1997, Samuel bought several parcels of land in Cupang, Antipolo, and later entered into a
joint venture with Louisville Realty and Development Corporation to develop the properties into a residential
subdivision, called Louisville Subdivision.10 These properties in Cupang, Antipolo are the subject properties in the
instant case (Antipolo properties) and are covered by Transfer Certificate of Title (TCT) Nos. 329663 to 329511 of
the Registry of Deeds of Rizal in Marikina City (RD).11

Throughout 1997, MDEC availed itself of the omnibus credit line granted by Asiatrust on three occasions: ten million
pesos (PhP 10,000,000) to mature on July 15, 1997; eleven million pesos (PhP 11,000,000) to mature on February
6, 1998; and another ten million pesos (PhP 10,000,000) to mature on February 20, 1998. In the same year,
particularly in August 1997, when MDEC had defaulted in the payment of its loan that matured on July 15, 1997,
Asiatrust initiated negotiations with MDEC and required the Lee family to provide additional collateral that would
secure the loan. In December 1997, the negotiation was concluded when Asiatrust had agreed to Samuel’s
proposition that he would mortgage the subject Antipolo properties to secure the loan, and therefore execute a REM
over the properties.12 While the titles of the Antipolo properties had been delivered by Samuel to Asiatrust and the
REM had been executed in January 1998, spouses Samuel and Pauline Lee (spouses Lee) were requested to sign
a new deed of mortgage on February 23, 1998, and, thus, it was only on that date that the said mortgage was
actually notarized, registered, and annotated at the back of the titles. 13

Similarly, MDEC and MHI initially had made payments with their CLAs until they defaulted and incurred aggregate
obligations to Bangkok Bank in the amount of USD 1,998,554.60 for MDEC and USD 800,000 for MHI. 14 Similarly,
the Lee corporations defaulted in their obligations with other creditors. For example, Security Bank Corporation
(SBC) filed a case against the Lee family for a sum of money resulting from the nonpayment of obligations before
the RTC, Branch 132 in Makati City, entitled Security Bank Corporation v. Duty Free Superstore, Inc., Daniel U. Lee,
Samuel U. Lee and Jacqueline M. Lee, docketed as Civil Case No. 98-196. On January 30, 1998, the RTC in Civil
Case No. 98-196 issued a Writ of Preliminary Attachment in favor of SBC, granting attachment of the defendants’
real and personal properties.15 The writ, however, was neither registered nor annotated on the titles of the subject
Antipolo properties at the RD.

On February 16, 1998, MDEC, MHI, and three other corporations owned by the Lee family filed before the Securities
and Exchange Commission (SEC) a Consolidated Petition for the Declaration of a State of Suspension of Payments
and for Appointment of a Management Committee/Rehabilitation Receiver. 16 Said petition acknowledged, among
others, MDEC and MHI’s indebtedness with Bangkok Bank, and admitted that matured and maturing obligations
could not be met due to liquidity problems. The petition likewise had a list of creditors to whom the corporations
remain indebted, which included Asiatrust.17 The petition stated that the Lee family and their corporations had more
than sufficient properties to cover all liabilities to their creditors; and presented a list of all their properties including
the subject properties located in Antipolo, Rizal. Notably, the list of properties attached to the petition indicated that
the subject Antipolo properties of the spouses Lee had already been earmarked, or that they had already served as
security, for MDEC’s unpaid obligation with Asiatrust.18

On February 20, 1998, the SEC issued a Suspension Order enjoining the Lee corporations from disposing of their
property in any manner except in the ordinary course of business, and from making any payments outside the
legitimate expenses of their business during the pendency of the petition.19

On March 12, 1998, Bangkok Bank instituted an action before the RTC, Branch 141 in Makati City to recover the
loans extended to MDEC and MHI under the guarantees, docketed as Civil Case No. 98-628. 20 Bangkok Bank’s
application for the issuance of a writ of preliminary attachment was granted through the Orders dated March 17 and
18, 1998, covering the properties of the Lee family in Antipolo, Cavite, Quezon City, and Baguio, among others. 21

While enforcing the writs of preliminary attachment, Bangkok Bank discovered that the spouses Lee had executed a
REM over the subject Antipolo properties in favor of Asiatrust; and that the REM had previously been annotated on
the titles.22 Thus, the writs of preliminary attachment were also inscribed at the back of the TCTs covering the
subject Antipolo properties, next to the annotation of the REM.

With MDEC still unable to make payments on its defaulting loans with Asiatrust, the latter foreclosed the subject
mortgaged Antipolo properties. On April 15, 1998, Asiatrust won as the highest bidder at the auction sale,
purchasing the said properties for PhP 20,864,735. 23 Thereafter, Asiatrust still filed an action against MDEC and the
spouses Lee to collect the deficiency amounting to at least PhP 14,800,000. Up until the filing of the memoranda by
the parties before this Court, the said action remained pending before the CA. 24

Subsequently, the sale was registered on April 21, 1998. 25 Believing the REM and the foreclosure sale to be
fraudulent, Bangkok Bank did not redeem the subject properties. As there had been no effort to redeem the
properties, consequently, the TCTs covering the subject properties were consolidated in the name of Asiatrust on
April 30, 1999, and 120 new titles were issued in the name of Asiatrust without the annotation of the writs of
preliminary attachment, which were deemed canceled.26

Among the 120 titles foreclosed by Asiatrust in Louisville Subdivision in Antipolo, only 12 properties were sold for a
maximum price of PhP 250,000 for a house and lot, and 108 titles remained. Asiatrust was still unable to sell them
and convert them into cash. From then on, Asiatrust maintained security services and paid the real estate taxes of
the subject Antipolo properties, among others.

On July 20, 1999, Bangkok Bank filed the instant case before the RTC, Branch 73 in Antipolo City, docketed as Civil
Case No. 99-5388 for the rescission of the REM over the subject properties, annulment of the April 15, 1998
foreclosure sale, cancellation of the new TCTs issued in favor of Asiatrust, and damages amounting to PhP
600,000. In its action, Bangkok Bank alleged, among others, that the presumption of fraud under Article 1387 of the
Civil Code applies, considering that a writ of preliminary attachment was issued in January 1998 in favor of SBC
against Samuel. It also claimed that collusion and fraud transpired between the spouses Lee and Asiatrust in the
execution of the REM. On August 5, 1999, Bangkok Bank amended its complaint to implead the RD.

Meanwhile, on March 23, 2000, the RTC, Branch 141 in Makati City in Civil Case No. 98-628 rendered a Partial
Decision in favor of Bangkok Bank, ordering the Lee family, pursuant to the guarantees, to pay USD 1,998,554.60
for the CLA of MDEC and USD 800,000 for the CLA of MHI, with the corresponding 12% interest per annum from
the date of the filing of the complaint, i.e., on March 12, 1998, until fully paid.
But Bangkok Bank had only levied on the execution of the partial decision, some old equipment, office fixtures and
furniture, garments, textiles, and other small production equipment with an approximate aggregate value of PhP
600,000.27 Considering the total liabilities of the Lee family to Bangkok Bank, the levied properties were insufficient
to satisfy the partial judgment in Civil Case No. 98-628.

The Ruling of the RTC

After due hearing with the parties presenting their evidence, on April 21, 2003, the RTC rendered a Decision
dismissing the case, the fallo reading:

WHEREFORE, premises considered, the instant case is hereby dismissed for lack of merit.

No findings as to the counterclaim of the defendants for insufficiency of evidence to support the claim.

SO ORDERED.28

In dismissing the instant case, the trial court found no concrete proof of the alleged fraud committed by the Lee
family and Asiatrust, more so, that of a collusion or conspiracy between them. Consequently, it ruled that Art.
1381(3) of the Civil Code does not apply. Moreover, it noted that Bangkok Bank has not proved that it cannot in any
manner collect its claims from the Lee family. For one, it held that Bangkok Bank chose not to exercise its right of
redemption over the subject properties; for another, the subject properties were not the only properties of the Lee
family as admitted by Bangkok Bank’s sole witness, Susan Capalaran.

The RTC explained that a mortgage contract is an onerous undertaking to secure payment of an obligation and
cannot be considered as a gratuitous alienation; thus, Art. 1387 of the Civil Code does not apply. 29 Finally, it held
that neither fraud nor a violation of the SEC suspension order can result from the execution of the REM and the
foreclosure of the subject properties, because according to the testimony of Bangkok Bank’s sole witness, the
subject properties are not covered by the SEC Suspension Order for which reason Bangkok Bank filed an action to
attach them. As the subject properties are not covered by the SEC Suspension Order, the RTC held that there is
nothing that precludes the spouses Lee from mortgaging them to Asiatrust. 30

The Ruling of the CA

Aggrieved, Bangkok Bank appealed the trial court’s decision before the CA; and on March 15, 2006, the appellate
court rendered the assailed decision, which granted the appeal, and reversed and set aside the RTC decision. The
decretal portion reads:

WHEREFORE, premises considered, the instant appeal is hereby GRANTED. The assailed Decision dated April 21,
2003 of the trial court is REVERSED and SET ASIDE. A new judgment is rendered ordering the:

1. Rescission of the Real Estate Mortgage over Appellees-spouses Lee’s Antipolo properties in favor of
appellee Asiatrust;

2. Annulment of the Foreclosure Sale conducted on April 15, 1998;

3. Cancellation of the Transfer Certificate of Titles in the name of Asiatrust; and

4. Reversion of the titles in favor of appellees-spouses Lee.

No costs.

SO ORDERED.31

In reversing and setting aside the RTC decision, the CA held as crucial the Letter dated April 4, 1998 sent by the
counsel of the Midas Group of Companies to the Office of the Clerk of Court and Ex-Officio Sheriff of the trial court
relative to the extra-judicial foreclosure of the REM scheduled on April 15, 1998. The letter assailed said proceeding
as bereft of legal and factual bases in the light of the February 20, 1998 Suspension Order of the SEC. 32 It held that
the present counsel of petitioner-spouses Lee cannot take a 360-degree turn as regards their predecessor’s
position, for Bangkok Bank merely adopted petitioners’ earlier stance. Thus, the CA ruled that petitioner-spouses
Lee are in estoppel in pais, under Art. 1431 of the Civil Code and Section 2(a) of Rule 131 of the Revised Rules on
Evidence.

The CA found that the subject Antipolo properties, though personal assets of the spouses Lee, are covered by the
February 20, 1998 Suspension Order of the SEC, since they are included in the list submitted to SEC by the Lee
family; and that Samuel is a guarantor of the loans incurred by MDEC and MHI from Bangkok Bank. It ruled that
Samuel, being a guarantor, is jointly and severally liable to Bangkok Bank for the corporate debts of MDEC and
MHI, as he divested himself from the protection of the limited liability doctrine, which, the CA held, was shown (1)
through the inclusion of the said subject Antipolo properties in the list submitted to the SEC; and (2) by Samuel,
through the guarantees that he executed, thus voluntarily binding himself to the payment of the loans incurred from
Bangkok Bank.

The CA also rejected petitioners’ claim that the subject properties were allotted to Asiatrust. It reasoned that if the
subject properties were indeed allotted to Asiatrust, then these would not have been included in the list of properties
submitted to the SEC. It added that the absence of any encumbrance annotated on the TCTs or any document
appurtenant to it prior to the January 30, 1998 writ of preliminary attachment issued in Civil Case No. 98-196 and
the February 20, 1998 Suspension Order further belies petitioners’ claim. The CA held that fraud was perpetrated
through the REM executed and registered on February 23, 1998 pursuant to the presumption in the second
paragraph of Art. 1387 of the Civil Code, which provides that "alienations by onerous title are also presumed
fraudulent when made by persons against whom x x x some writ of attachment has been issued." Consequently, the
spouses Lee filed the instant petition.

The Issues

I.

Whether or not Bangkok Bank can maintain an action to rescind the REM on the subject Antipolo properties despite
its failure to exhaust all legal remedies to satisfy its claim.

II.

Whether or not properties owned by private individuals should be covered by a suspension order issued by the SEC
in an action for suspension of payments.

III.

Whether or not a surety or guarantor is guilty of defrauding creditors for executing a REM in favor of one creditor
prior to the filing of a Petition for Suspension of Payments. 33

The Court’s Ruling

The core issue is whether the February 23, 1998 REM executed over the subject Antipolo properties and the April
15, 1998 foreclosure sale were committed in fraud of petitioners’ other creditors, and, as a consequence of such
fraud, the questioned mortgage could, therefore, be rescinded. Petitioners allege that no fraud exists.

The petition is meritorious.

Prevailing and applicable SEC laws

At the outset, it must be noted that at the time the Consolidated Petition for the Declaration of a State of Suspension
of Payments and for Appointment of a Management Committee/Rehabilitation Receiver was filed before the SEC on
February 16, 1998 by MDEC, MHI, and three other corporations owned by the Lee family, Batas Pambansa Blg.
(BP) 178 or the then Revised Securities Act was the primary governing law along with Presidential Decree No. (PD)
902-A, as amended, and the Corporation Code of the Philippines. Pertinently, among others, the SEC was also
covered by the Investment House Law (PD 129), the Financing Company Act under Republic Act. No. (RA) 2626,
the Foreign Investments Act (RA 7042), and the Liberalized Foreign Investments Act (RA 8179). And subsequent to
the filing of the instant case, the Securitization Act of 2004 (RA 9267) and the Lending Company Regularization Act
of 2007 (RA 9474) were also enacted.

PD 902-A,34 however, was further amended by RA 8799 or the Securities Regulation Code, approved on July 19,
2000 by President Joseph Estrada.35 Under Sec. 5.2 of RA 8799,36 the SEC’s original and exclusive jurisdiction over
all cases enumerated under Sec. 5 of PD 902-A 37 was transferred to the appropriate RTC. RA 8799, Sec. 5.2,
however, expressly stated as an exception, that the "[t]he Commission shall retain jurisdiction over pending
suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed." Accordingly, the
Consolidated Petition for the Declaration of a State of Suspension of Payments and for Appointment of a
Management Committee/Rehabilitation Receiver filed on February 16, 1998 by MDEC, MHI and three other
corporations owned by the Lee family, remained under the jurisdiction of the SEC until finally disposed of pursuant
to the last sentence of Sec. 5.2 of RA 8799.

The subject properties are not under the purview of the SEC Suspension Order

Pivotal to the resolution of the instant case is whether the subject properties owned by the spouses Lee were
subject to the February 20, 1998 SEC Suspension Order. On the one hand, the CA held and found these to be
subject to the Suspension Order. The RTC, on the other hand, found contrariwise in that the assailed REM and
foreclosure sale did not violate the SEC Suspension Order.

A review of the applicable laws and existing jurisprudence would show that the subject properties owned by the
spouses Lee were not subject to the February 20, 1998 SEC Suspension Order.

PD 902-A vested the SEC with jurisdiction on petitions for suspension of payments only on corporations,
partnerships and associations; not on individual persons

The SEC’s jurisdiction is evident from the statutorily vested power of jurisdiction, supervision and control by the SEC
over all corporations, partnerships or associations, which are grantees of primary franchise, license or permit issued
by the government to operate in the Philippines, and its then original and exclusive jurisdiction over petitions for
suspension of payments of said entities. Secs. 3 and 5 of PD 902-A pertinently provides, thus:

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships
or associations, who are the grantees of primary franchise and/or a license or permit issued by the government to
operate in the Philippines; and in the exercise of its authority, it shall have the power to enlist the aid and support of
any and all enforcement agencies of the government, civil or military.

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under existing
laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

xxxx

(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in
cases where the corporation, partnership or association possesses sufficient property to cover all its debts but
foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its liabilities, but is under the management of a
Rehabilitation Receiver or Management Committee created pursuant to this Decree. (Emphasis Ours.)

It can be clearly gleaned from the above provisions that in cases of petitions for the suspension of payments, the
SEC has jurisdiction over corporations, partnerships and associations, which are grantees of primary franchise or
license or permit issued by the government to operate in the Philippines, and their properties. And it is indubitably
clear from the aforequoted Sec. 5(d) that only corporations, partnerships and associations—NOT private individuals
—can file with the SEC, petitions for declaration in a state of suspension of payments. Thus, it logically follows that
the SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other than
corporations, partnerships or associations. Indeed, settled is the rule that it is axiomatic that jurisdiction is the
authority to hear and determine a cause, which is conferred by law and not by the policy of any court or agency. 38

Private individuals and their privately owned properties cannot be placed under the jurisdiction of the SEC in a
petition for suspension of payments

In Chung Ka Bio v. Intermediate Appellate Court, 39 this Court resolved in the negative the issue of whether private
individuals can file with the SEC petitions for declaration in a state of suspension of payments. We held that Sec.
5(d) of PD 902-A clearly does not allow a mere individual to file the petition, which is limited to "corporations,
partnerships or associations." Besides, We pointed out that the SEC, being a mere administrative agency, is a
tribunal of limited jurisdiction and, as such, can only exercise those powers, which are specifically granted to them
by their enabling statutes. We, thus, concluded that where no authority is granted to hear petitions of individuals for
suspension of payments, such petitions are beyond the competence of the SEC. In short, the SEC has no
jurisdiction over private individuals relative to any petition for suspension of payments, whether the private individual
is a petitioner or a co-petitioner. We have said time and again that the SEC’s "jurisdiction is limited only to
corporations and corporate assets;" it has no jurisdiction over the properties of private individuals or natural persons,
even if they are the corporation’s officers or sureties.40 We have, thus, consistently applied this ruling to the
subsequent Ong v. Philippine Commercial International Bank, 41 Modern Paper Products, Inc. v. Court of
Appeals,42 and Union Bank of the Philippines v. Court of Appeals.43

Here, it is undisputed that the petition for suspension of payments was collectively filed by the five corporations
owned by the Lee family. It is likewise undisputed that together with the consolidated petition is a list of properties,
which included the subject Antipolo properties owned by Samuel and Pauline Lee. The fact, however, that the
subject properties were included in the list submitted to the SEC does not confer jurisdiction on the SEC over such
properties. It is apparent that even if the members of the Lee family are joined as co-petitioners with the five
corporations, still, this could not confer jurisdiction on the SEC over the Lee family members—as private individuals
—nor could this affect their privately owned properties.
Further, the fact that the debts of MDEC and MHI to Bangkok Bank are secured by the Lee family through the
guarantees will not likewise put the Lee family and their privately owned properties under the jurisdiction of the SEC
through the consolidated petition for suspension of payments.

Therefore, the February 20, 1998 Suspension Order issued by the SEC did not and could not have included the
subject properties. The RTC correctly grasped this point that the disposition of the subject properties did not violate
the suspension order.

Bangkok Bank cannot take both opposing stances

Certainly, Bangkok Bank cannot take opposite positions at the same time. On the one hand, it instituted Civil Case
No. 98-628 before the RTC, Branch 141 in Makati City on March 12, 1998—almost a month after the filing of the
consolidated petition before the SEC and the issuance of the February 20, 1998 Suspension Order in order to
recover the loans extended to MDEC and MHI under the guarantees. In it, Bangkok Bank contended that the
subject lots were not part of the properties under the jurisdiction of the SEC in the case for suspension of payments.
But, on the other hand, Bangkok Bank claims that the Antipolo properties are subject to the February 20, 1998 SEC
Suspension Order, and, therefore, cannot be mortgaged by the spouses Lee to Asiatrust. By saying that the subject
Antipolo properties are not under the jurisdiction of the SEC that is hearing the consolidated petition for suspension
of payments, it necessarily follows that the same properties could not be subject to the SEC Suspension Order. This
admission is also very clear in the statement made by Bangkok Bank’s sole witness, Susan Capalaran: 44

Q: In other words, by your filing of an action in Makati on March 12, 1998, you are in effect saying that the properties
owned by the individual stockholders are not covered by the Suspension Order of the Securities and Exchange
Commission?

Susan Capalaran: Yes.

The allegations of fraud in the instant petition

At the heart of the present controversy is the allegation of fraud by Bangkok Bank against the spouses Lee and
Asiatrust. It is in this regard that the issue of fraud shall be examined here in detail. Preliminary matters, such as the
applicable laws and their interpretation, shall first be explained. And subsequently, in order to fully appreciate the
allegations of fraud by Bangkok Bank, they shall be discussed in three parts: (1) the existence of fraud on the part of
the spouses Lee; (2) the existence of fraud on the part of Asiatrust; and separately, (3) the existence of collusion on
the part of the spouses Lee and Asiatrust. It is imperative to expound on these points separately in order to illustrate
that the mere existence of fraud on the part of one party, i.e., the spouses Lee (against whom some judgment or
some writ of attachment has been issued),45 does not necessarily result in the rescission of a supposed alienation, if
there is any.

The presumption of fraud under Art. 1387 of the Civil Code does not apply in the present case

Under Art. 1381(3) of the Civil Code, contracts, which were "undertaken in fraud of creditors when the latter cannot
in any other manner collect the claims due them," are rescissible. Art. 1387 of the Code states when an act is
presumed to be fraudulent, thus:

Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been
entered in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before
the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has
been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not
refer to the property alienated, and need not have been obtained by the party seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by
the law of evidence.

It is with regard to the foregoing provisions that the CA anchored its ruling of the existence of a presumption of fraud
in the instant case. This presumption, however, finds no application to this case.

The presumption of fraud established under Art. 1387 does not apply to registered lands IF "the judgment or
attachment made is not also registered."46 In Abaya v. Enriquez,47 Abaya was able to obtain a judgment against
Enriquez for a sum of money, and the judgment was partially unsatisfied after Enriquez made a partial payment. The
judgment and the writ of execution, however, was never annotated on the titles of the registered lands owned by
Enriquez.48 Subsequently, Enriquez sold the said lands. In an action for rescission instituted by Abaya, the Court
ruled that the presumption of fraud does not apply as the judgment and the attachment have not been registered
and annotated on the title.49 The Court held:
Where the judgment rendered against the defendant x x x has not been entered in the records of the register of
deeds, relative to an immovable belonging to the judgment debtor, the subsequent sale of said property by the
latter, shall not be rescinded upon the ground of fraud, unless the complicity of the buyer in the fraud imputed to
said vendor is established by other means than the presumption of fraud x x x. 50

In this case, prior to the annotation of the REM on February 23, 1998, SBC was able to successfully acquire a writ of
preliminary attachment in its favor against the spouses Lee on January 30, 1998 in a case for a sum of money for
nonpayment of its obligation. Bangkok Bank alleges that because of this, the presumption of fraud under Art. 1387
of the Civil Code applies. But while a judgment was made against the spouses Lee in favor of SBC on January 30,
1998, this, however, was not annotated on the titles of the subject properties. In fact, there is no showing that the
judgment has ever been annotated on the titles of the subject properties. As established in the facts, there were only
two annotations at the back of the titles of the Antipolo properties: first, the REM executed in favor of Asiatrust on
February 23, 1998; and second, the writ of preliminary attachment in favor of Bangkok Bank on March 18, 1998.
Considering that the earlier SBC judgment or attachment was not, and in fact never was, annotated on the titles of
the subject Antipolo properties, prior to the execution of the REM, the presumption of fraud under Art. 1387 of the
Code clearly cannot apply.

Even assuming that Art. 1387 of the Code applies, the execution of a mortgage is not contemplated within the
meaning of alienation by onerous title under the said provision

Under Art. 1387 of the Code, fraud is presumed only in alienations by onerous title of a person against whom a
judgment or attachment has been issued. The term, alienation, connotes the "transfer of the property and
possession of lands, tenements, or other things, from one person to another." 51 This term is "particularly applied to
absolute conveyances of real property" and must involve a "complete transfer from one person to another." 52 A
mortgage does not contemplate a transfer or an absolute conveyance of a real property. 53 It is "an interest in land
created by a written instrument providing security for the performance of a duty or the payment of a debt." 54 When a
debtor mortgages his property, he "merely subjects it to a lien but ownership thereof is not parted with." 55 It is merely
a lien that neither creates a title nor an estate. 56 It is, therefore, certainly not the alienation by onerous title that is
contemplated in Art. 1387 where fraud is to be presumed.

In this very action, Bangkok Bank claims that when the spouses Lee executed the REM in favor of Asiatrust, the
presumption of fraud under Art. 1387 became applicable. We hold in the negative. As We have plainly discussed, a
mortgage is not that which is contemplated in the term "alienation" that would make the presumption of fraud under
Art. 1387 apply. It requires a full and absolute conveyance or transfer of property from one person to another, such
as that in the form of a sale. As elucidated earlier, a mortgage merely creates a lien on the property that would
afford the mortgagee/creditor greater security in the obligation of the mortgagor/debtor. This being so, as the REM is
not the alienation contemplated in Art. 1387 of the Code, the presumption of fraud cannot apply.

In any case, the application of the presumption of fraud under Art. 1387, if applicable, could only be made to apply
to the spouses Lee as the person against whom a judgment or writ of attachment has been issued; not to Asiatrust

A careful reading of Art. 1387 of the Code vis-à-vis its Art. 1385 would plainly show that the presumption of fraud in
case of alienations by onerous title only applies to the person who made such alienation, and against whom some
judgment has been rendered in any instance or some writ of attachment has been issued. A third person is not and
should not be automatically presumed to be in fraud or in collusion with the judgment debtor. In allowing rescission
in case of an alienation by onerous title, the third person who received the property conveyed should likewise be a
party to the fraud.57 As clarified by Art. 1385(2) of the Code, so long as the person who is in legal possession of the
property did not act in bad faith, rescission cannot take place. Thus, in all instances, as to the third person in legal
possession of the questioned property, good faith is presumed. Accordingly, it is upon the person who alleges bad
faith or fraud that rests the burden of proof.58

Asiatrust, being a third person in good faith, should not be automatically presumed to have acted fraudulently by the
mere execution of the REM over the subject Antipolo properties, there being no evidence of fraud or bad faith.
Regrettably, in ratiocinating that fraud was committed by both the spouses Lee and Asiatrust, the CA merely
anchored its holding on the presumption espoused under Art. 1387 of the Code, 59 nothing more.

The alleged fraud on the part of the spouses Lee was not proved and substantiated

It appears that the argument of Bangkok Bank on the existence of fraud on the part of the spouses Lee 60 revolves
around the application of the presumption of fraud under Art. 1387 of the Code. 61 Bangkok Bank failed to
substantiate its allegations by presenting clear and convincing proof that the spouses Lee indeed committed fraud in
mortgaging the subject properties to Asiatrust, and instead anchored its existence of the presumption under Art.
1387. This cannot stand before this Court.

On the contrary, the spouses Lee proved the absence of fraud on their part. During trial, the spouses Lee and
Asiatrust were able to substantially establish that, indeed, a loan agreement has been existing between them since
1996 and that MDEC made use of it on several occasions in 1997. It has likewise been established that, as MDEC
defaulted in its payment of the loan that matured in 1997, the parties began negotiations as to how MDEC could
secure the loans. It was concluded in December 1997 upon Samuel’s proposal that his Antipolo properties be used
to secure MDEC’s loans by means of a mortgage. This settlement has been agreed upon even before any action
was filed against the Lee corporations in 1998. These facts have been established during trial without any
controversy.

No deception could have been used by the spouses Lee in including in the list of properties, which they submitted to
the SEC, the subject Antipolo properties. First, it is undisputed that the list of properties submitted by the Lee
corporations to the SEC clearly indicated that the subject Antipolo properties have already been earmarked, or have
already been serving as security, for its loan obligations with Asiatrust. Second, MDEC, through its counsel, truly
believed in good faith that the inclusion of the spouses Lee’s private properties in the list submitted to the SEC is
valid and regular. As can be seen in the letter sent by the counsel of the Midas Group of Companies to the Office of
the Clerk of Court and Ex-Officio Sheriff of the Antipolo RTC on April 4, 1998, at the time when the subject Antipolo
properties were being foreclosed by Asiatrust, its counsel vigorously countered the actions of Asiatrust and stated
that the subject Antipolo properties cannot be foreclosed pursuant to the SEC Suspension Order. 62 And as
discussed infra, the alleged collusion between the spouses Lee and Asiatrust appears to be a mere figment of
imagination.

In any case, the facts show no presence of fraud on the part of Asiatrust; therefore, the REM was not a sham

Even pushing further to say that the REM was executed by the spouses Lee to defraud creditors, the REM cannot
be rescinded and shall, therefore, stand, as Asiatrust—the third party, in favor of which the REM was executed, and
which subsequently foreclosed the subject properties—acted in good faith and without any badge of fraud. As a
general rule, whether the person, against whom a judgment was made or some writ of attachment was issued,
acted with or without fraud, so long as the third person who is in legal possession of the property in question did not
act with fraud and in bad faith, an action for rescission cannot prosper. Art. 1385 of the Civil Code explicitly states
this, thus:

Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission
can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the possession
of third persons who did not act in bad faith. (Emphasis Ours.)

As to who or which entity is in legal possession of a property, the registration in the Registry of Deeds of the subject
property under the name of a third person indicates the legal possession of that person. 63 In this case, Asiatrust is in
the legal possession of the subject Antipolo properties after the titles under the name of Spouses Lee have been
canceled, and new TCTs have been issued on April 20, 1999, under the name of Asiatrust. What is more, 12 title
out of the 120 titles in the Antipolo properties in question have already been sold to different persons, which make
them in legal possession of the properties. It is, thus, established that Asiatrust and the 12 other unnamed persons
are in legal possession of the subject Antipolo properties; and it is imperative to prove that they legally took
possession of them in good faith and without any badge of fraud.

Now, as to whether Asiatrust acted with fraud or bad faith, Bangkok Bank failed to present any clear and convincing
evidence that would ascertain its existence.

Contracts in fraud of creditors are those executed with the intention to prejudice the rights of creditors. They should
not be confused with those entered into without such mal-intent, even if, as a direct consequence, a creditor may
suffer some damage. More so it is, when the allegation involves not only fraud on the part of the debtor, but also
that of another creditor. In determining whether or not a certain conveying contract is fraudulent, what comes to
mind first is the question of whether the conveyance was a bona fide transaction or a trick and contrivance to defeat
creditors.64 Haste alone in the foreclosure of the mortgage does not constitute the existence of fraud. Considering
that the totality of circumstances clearly manifests the want of fraud and bad faith on the part of the parties to the
REM in question, consequently, the REM cannot be rescinded.

In this case, it is clearly established that there was a bona fide transaction between the spouses Lee and Asiatrust
that necessitated the negotiations resulting from the former’s default in the payment of its obligations; and which
brought about the execution of the REM to secure their pre-existing obligations. Particularly on the part of Asiatrust,
the testimonies of Shirley Benedicto, its Vice-President, who was part of the bank’s account management group
tasked to ensure the proper management of loans from its inception up to its collection, and of Atty. Neriza San
Juan, the bank’s former Vice-President, and Head of its Credit Support Services and Legal Services Groups, amply
proved the existence of good faith and dismissed the allegation of fraud. Asiatrust was able to establish (1) the
existence of a loan agreement through a loan facility/credit line between Asiatrust and MDEC since July 25, 1996,
which was guaranteed by the Lee family, including Samuel; (2) the advances made by MDEC throughout 1997,
which amounted to an aggregate sum of PhP 31,000,000; (3) the default in payment of MDEC on its maturing loans;
and (4) the negotiations, which took place between Asiatrust and Samuel on behalf of MDEC that led, in December
1997, to the agreement for Samuel to mortgage the subject Antipolo properties to secure the defaulting loan and the
loans, which were yet to mature.65 And as the last advances made by MDEC matured on February 20, 1998, it was
just timely and appropriate for Asiatrust to foreclose the subject properties on April 15, 1998 in order to ensure that it
is paid of the obligations, which MDEC owed to it. In this case, Asiatrust was left with only one clear and practicable
means by which it could be paid of MDEC’s obligations, i.e., by foreclosing the mortgaged properties. After all, "[t]he
only right of a mortgagee in case of non-payment of a debt secured by mortgage would be to foreclose the
mortgage and have the encumbered property sold to satisfy the outstanding indebtedness." 66

Conversely, Asiatrust did not sleep on its rights as a mortgage creditor of MDEC by foreclosing the mortgage on the
spouses Lee’s Antipolo properties. On the contrary, it is odd but worth noting that Bangkok Bank never acted on its
rights as creditor at the soonest possible time. It could have asserted it rights as creditor at the time when the Lee
family’s corporations started to default in their payments of the loans as early as October 1997. 67 When Bangkok
Bank finally instituted an action against the Lee family on March 12, 1998 to collect the outstanding obligations of
MDEC and MHI, a writ of preliminary attachment was issued by the Makati RTC in the same month covering the
properties of the Lee family, including the subject Antipolo properties. And while enforcing the said writ, Bangkok
Bank discovered the existing REM that had already been annotated on the titles of the subject Antipolo properties.
But Bangkok Bank did nothing upon its knowledge and discovery. Worse, even at the time of the foreclosure and
the redemption period, or until April 30, 1999, Bangkok Bank likewise did not act on the alleged fraudulent execution
of the REM; nor did it redeem the subject properties. Rather, it was only on July 20, 1999 that Bangkok Bank seems
to have belatedly realized that the subject Antipolo properties could properly be another means by which it could be
paid of the defaulting obligations of MDEC and MHI. Interestingly, even on the elevation of this case to Us, Bangkok
Bank’s counsel had to move for four extensions, totaling to 52 days within which to file a comment on the instant
petition, and has been warned for it. 68 Asiatrust cannot be faulted for acting with prudence, in good faith, and without
any badge of fraud in the creation of the REM and in the foreclosure of the mortgage to ensure the satisfaction of
the debts owed to it by MDEC. Bangkok Bank should have likewise done so at the earliest possible opportunity.

Furthermore, Asiatrust, in good faith, conducted the necessary diligence and meticulousness expected of it. During
cross-examination, Atty. San Juan established that when the spouses Lee offered the subject Antipolo properties as
collateral, Asiatrust had them appraised and required the spouses Lee to submit a photocopy of the titles, location
map, and the relevant tax declarations, which was forwarded to its Appraisal Team. She further explained that credit
investigation is a continuing annual process since the bank considers the market information in connection with the
account of the borrower.69 Indeed:

The mortgagee has a right to rely in good faith on what appears on the certificate of title of the mortgagor to the
property given as security and in the absence of anything to excite suspicion, he is under no obligation to look
beyond the certificate and investigate the title of the mortgagor appearing on the fact of the certificate. Accordingly,
the right or lien of an innocent mortgagee for value upon the mortgaged property must be respected and protected,
even if the mortgagor obtained his title through fraud. The remedy of the persons prejudiced is to bring an action for
damages against the person who caused the fraud x x x.70

There was no collusion between the spouses Lee and Asiatrust

Besides the fact that individually, fraud was not sufficiently and convincingly established on the part of the spouses
Lee and Asiatrust, Bangkok Bank’s allegation of collusion between them was likewise unsubstantiated and therefore
untenable.

First, even after the subject Antipolo properties were foreclosed by Asiatrust, Asiatrust sought the recovery of the
deficiency amounting to at least PhP 14,800,000. And until the filing of the memoranda by the parties before this
Court, the said action remains pending before the CA.71

Second, Asiatrust filed a criminal case against Samuel for violation of BP 22. 72 At the time of the filing of the petition
for review, the case was still pending before the Metropolitan Trial Court of Quezon City. 73 Later, at the time of the
filing of the spouses Lee’s Memorandum, it was indicated that it has already been dismissed.

Third, contrary to the CA’s appreciation of the facts, 74 the letter sent by Atty. Macam, counsel of the Midas Group of
Companies, actually strengthens the proof that no collusion existed between the parties. Acting on the interest of
MDEC, Atty. Macam sent a letter to the Clerk of Court and the Ex-Officio Sheriff of the Antipolo RTC, arguing that
the subject Antipolo properties cannot be foreclosed as they are the subject of an existing SEC Suspension
Order.75 In fact, counsel for MDEC alleged that the foreclosure sale was illegal. 76 On the other hand, when the Ex-
Officio Sheriff presented a copy of the letter to Asiatrust and asked the latter to comment, Asiatrust categorically
stated that the subject properties could not be made a subject of the SEC Suspension Order, they being properties
of the spouses Lee, natural persons outside the jurisdiction of the SEC. 77 In fact, it was Bangkok Bank’s sole
witness, Capalaran, who firmly agreed that, indeed, the subject properties are not covered by the Suspension Order
that is why Bangkok Bank, too, filed an action against the spouses Lee on March 12, 1998 and sought the
attachment of the said properties.78
With all the foregoing facts strongly established, We confirm the absence of fraud, bad faith, and collusion between
the spouses Lee and Asiatrust. 1avvphil

The requisite (1) good faith on the part of the third person and (2) fraud, necessary for an action to rescind under
Art. 1381 of the Civil Code, were not complied with

In Siguan v. Lim,79 this Court held that in an action to rescind under Art. 1381, the following requisites must exist:

The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the
following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation,
although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a
third person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent;
(5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the
fraud. (Emphasis Ours; citations omitted.)

Considering the discussions previously expounded, the extant records show that the fourth and fifth requisites
enumerated above are absent.

As between Asiatrust and Bangkok Bank, the former has a better right over the subject Antipolo properties, it being
the first to annotate its lien on the titles of the properties

It is evidently a well-settled and elementary principle that the rights of the first mortgage creditor or mortgagee over
the mortgaged properties are superior to those of a subsequent attaching creditor and other junior mortgagees. 80

In this case, it is a fact that the REM was annotated on the titles of the subject Antipolo properties ahead of the writs
of preliminary attachment issued in favor of Bangkok Bank. In fact, it was admitted by Bangkok Bank that it only
knew of the existing mortgage that has already been annotated at the back of the subject titles when it sought the
annotation of the writs of preliminary attachment. 81 Therefore, as between Asiatrust as mortgage creditor and
Bangkok Bank as attaching creditor, it is apparent that the former has a superior right over the latter.

Besides, "as between two persons who both stand to suffer loss, the possessor of the property should be preferred
in that possession, the ownership having been transferred by delivery." 82 In this case, Asiatrust, being the entity with
legal possession of the subject Antipolo properties, should be preferred in that possession. In addition, 12 of the
titles in question have already been sold to 12 different persons, whose identities have not been introduced in the
instant case and who have not been impleaded as parties. As these persons have been in legal possession of the
said properties and are in good faith, their ownership and possession, should not be disturbed.

The redemption period has already lapsed

Sec. 27, Rule 39 of the Rules of Court states the persons who may redeem a real property sold, thus:

Sec. 27. Who may redeem real property so sold.

Real property sold as provided in the last preceding section, or any part thereof sold separately, may be redeemed
in the manner hereinafter provided, by the following persons:

(a) The judgment obligor, or his successor in interest in the whole or any part of the property;

(b) A creditor having a lien by virtue of an attachment, judgment or mortgage on the property sold, or on
some part thereof, subsequent to the lien under which the property was sold. Such redeeming creditor is
termed a redemptioner. (Emphasis Ours.)

From the foregoing rule, it is clear that Bangkok Bank, as an attaching creditor, has the right to redeem the subject
Antipolo properties that were foreclosed by Asiatrust.83

In determining the period within which to redeem the foreclosed Antipolo properties in the present case, RA 337 or
the General Banking Act84 finds application. Pertinently, its Sec. 78 states:

Sec. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is
security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or
debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment
of an obligation to any bank, banking, or credit institution, within the purview of this Act, shall have the right, within
one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the
property by paying the amount fixed by the court in the order of execution, with interest thereon at the rate specified
in the mortgage, and all the costs and other judicial expenses incurred by the bank or institution concerned by
reason of the execution and sale and as a result of the custody of said property less the income received from the
property. However, the purchaser at the auction sale concerned shall have the right to enter upon and take
possession of such property immediately after the date of the confirmation of the auction sale and administer the
same in accordance with law. (Emphasis Ours.)

In this case, the auction sale took place on April 15, 1998 and was registered with the RD on April 21, 1998.
Subsequently, on April 30, 1999, a date already and certainly beyond the one-year redemption period provided by
law, new titles were issued in favor of Asiatrust. 85 Apparently, Bangkok Bank chose not to exercise its right of
redemption over the subject Antipolo properties.

Even as a general rule, "[t]he period of redemption is not tolled by the filing of a complaint or petition for annulment
of the mortgage and the foreclosure sale conducted pursuant to the said mortgage," 86 Bangkok Bank, however, filed
its action for rescission way beyond the expiration of the said redemption period on July 20, 1999. After the
expiration of the redemption period, Asiatrust as purchaser, therefore, became the absolute owner of the subject
properties, and whose rights necessarily include the right to be in the legal possession of the properties. 87

As a final note, in ruling for Bangkok Bank, the CA strangely did not even delve upon any fact that could have
ascertained the allegation of fraud from which Bangkok Bank based its arguments. Quite the opposite, the RTC
discussed in detail the facts and testimonies presented by the parties, upon which its finding of the absence of fraud
was based. Indeed, factual findings by the trial court are afforded great weight by this Court especially when
supported by substantial evidence on record.88

While prejudice to Bangkok Bank ultimately resulted in the series of inopportune events that led to the present case,
it cannot be denied that no clear, satisfactory and convincing evidence was presented to show fraud on the part of
both the spouses Lee and Asiatrust. Nor was bad faith on the part of Asiatrust and the 12 other subsequent
purchasers established. Accordingly, the REM annotated on the titles of the subject Antipolo properties and the
subsequent foreclosure of the same properties cannot and should not be rescinded.

Wherefore, premises considered, the petition is hereby GRANTED. Accordingly, the CA’s March 15, 2006 Decision
and June 29, 2006 Resolution in CA-G.R. CV No. 79362 are REVERSED and SET ASIDE. The RTC’s April 21,
2003 Decision in Civil Case No. 99-5388 is hereby REINSTATED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 182435 August 13, 2012

LILIA B. ADA, LUZ B. ADANZA, FLORA C. BA YLON, REMO BA YLON, JOSE BA YLON, ERIC BA YLON,
FLORENTINO BA YLON, and MA. RUBY BA YLON, Petitioners,
vs.
FLORANTE BA YLON, Respondent.

VILLARAMA, JR.,*

DECISION

REYES, J.:

Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to annul and set
aside the Decision dated October 26, 2007 rendered by the Court of Appeals (CA) in CA-G.R. CV No. 01746. The
1

assailed decision partially reversed and set aside the Decision dated October 20, 2005 issued ~y the Regional Trial
2

Court (RTC), Tan jay City, Negros Oriental, Branch 43 in Civil Case No. 11657.

The Antecedent Facts

This case involves the estate of spouses Florentino Baylon and Maximina Elnas Baylon (Spouses Baylon) who died
on November 7, 1961 and May 5, 1974, respectively. At the time of their death, Spouses Baylon were survived by
3

their legitimate children, namely, Rita Baylon (Rita), Victoria Baylon (Victoria), Dolores Baylon (Dolores), Panfila
Gomez (Panfila), Ramon Baylon (Ramon) and herein petitioner Lilia B. Ada (Lilia).

Dolores died intestate and without issue on August 4, 1976. Victoria died on November 11, 1981 and was survived
by her daughter, herein petitioner Luz B. Adanza. Ramon died intestate on July 8, 1989 and was survived by herein
respondent Florante Baylon (Florante), his child from his first marriage, as well as by petitioner Flora Baylon, his
second wife, and their legitimate children, namely, Ramon, Jr. and herein petitioners Remo, Jose, Eric, Florentino
and Ma. Ruby, all surnamed Baylon.

On July 3, 1996, the petitioners filed with the RTC a Complaint for partition, accounting and damages against
4

Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during their lifetime, owned 43 parcels of
land all situated in Negros Oriental. After the death of Spouses Baylon, they claimed that Rita took possession of
5

the said parcels of land and appropriated for herself the income from the same. Using the income produced by the
said parcels of land, Rita allegedly purchased two parcels of land, Lot No. 4709 and half of Lot No. 4706, situated in
6 7

Canda-uay, Dumaguete City. The petitioners averred that Rita refused to effect a partition of the said parcels of
land.

In their Answer, Florante, Rita and Panfila asserted that they and the petitioners co-owned 22 out of the 43 parcels
8 9

of land mentioned in the latter’s complaint, whereas Rita actually owned 10 parcels of land out of the 43 parcels
10

which the petitioners sought to partition, while the remaining 11 parcels of land are separately owned by Petra
Cafino Adanza, Florante, Meliton Adalia, Consorcia Adanza, Lilia and Santiago Mendez. Further, they claimed
11 12 13 14 15 16

that Lot No. 4709 and half of Lot No. 4706 were acquired by Rita using her own money. They denied that Rita
appropriated solely for herself the income of the estate of Spouses Baylon, and expressed no objection to the
partition of the estate of Spouses Baylon, but only with respect to the co-owned parcels of land.

During the pendency of the case, Rita, through a Deed of Donation dated July 6, 1997, conveyed Lot No. 4709 and
half of Lot No. 4706 to Florante. On July 16, 2000, Rita died intestate and without any issue. Thereafter, learning of
the said donation inter vivos in favor of Florante, the petitioners filed a Supplemental Pleading dated February 6,
17
2002, praying that the said donation in favor of the respondent be rescinded in accordance with Article 1381(4) of
the Civil Code. They further alleged that Rita was already sick and very weak when the said Deed of Donation was
supposedly executed and, thus, could not have validly given her consent thereto.

Florante and Panfila opposed the rescission of the said donation, asserting that Article 1381(4) of the Civil Code
applies only when there is already a prior judicial decree on who between the contending parties actually owned the
properties under litigation.
18

The RTC Decision

On October 20, 2005, the RTC rendered a Decision, the decretal portion of which reads:
19

Wherefore judgment is hereby rendered:

(1) declaring the existence of co-ownership over parcels nos. 1, 2, 3, 5, 7, 10, 13, 14, 16, 17, 18, 26, 29, 30,
33, 34, 35, 36, 40 and 41 described in the complaint;

(2) directing that the above mentioned parcels of land be partitioned among the heirs of Florentino Baylon
and Maximina Baylon;

(3) declaring a co-ownership on the properties of Rita Baylon namely parcels no[s]. 6, 11, 12, 20, 24, 27, 31,
32, 39 and 42 and directing that it shall be partitioned among her heirs who are the plaintiffs and defendant
in this case;

(4) declaring the donation inter vivos rescinded without prejudice to the share of Florante Baylon to the
estate of Rita Baylon and directing that parcels nos. 1 and 2 paragraph V of the complaint be included in the
division of the property as of Rita Baylon among her heirs, the parties in this case;

(5) excluding from the co-ownership parcels nos. 20, 21, 22, 9, 43, 4, 8, 19 and 37.

Considering that the parties failed to settle this case amicably and could not agree on the partition, the parties are
directed to nominate a representative to act as commissioner to make the partition. He shall immediately take [his]
oath of office upon [his] appointment. The commissioner shall make a report of all the proceedings as to the partition
within fifteen (15) days from the completion of this partition. The parties are given ten (10) days within which to
object to the report after which the Court shall act on the commissioner report.

SO ORDERED. (Emphasis ours)

20

The RTC held that the death of Rita during the pendency of the case, having died intestate and without any issue,
had rendered the issue of ownership insofar as parcels of land which she claims as her own moot since the parties
below are the heirs to her estate. Thus, the RTC regarded Rita as the owner of the said 10 parcels of land and,
accordingly, directed that the same be partitioned among her heirs. Nevertheless, the RTC rescinded the donation
inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. In rescinding the said donation inter vivos,
the RTC explained that:

However, with respect to lot nos. 4709 and 4706 which [Rita] had conveyed to Florante Baylon by way of donation
inter vivos, the plaintiffs in their supplemental pleadings (sic) assailed the same to be rescissible on the ground that
it was entered into by the defendant Rita Baylon without the knowledge and approval of the litigants [or] of
competent judicial authority. The subject parcels of lands are involved in the case for which plaintiffs have asked the
Court to partition the same among the heirs of Florentino Baylon and Maximina Elnas.

Clearly, the donation inter vivos in favor of Florante Baylon was executed to prejudice the plaintiffs’ right to succeed
to the estate of Rita Baylon in case of death considering that as testified by Florante Baylon, Rita Baylon was very
weak and he tried to give her vitamins x x x. The donation inter vivos executed by Rita Baylon in favor of Florante
Baylon is rescissible for the reason that it refers to the parcels of land in litigation x x x without the knowledge and
approval of the plaintiffs or of this Court. However, the rescission shall not affect the share of Florante Baylon to the
estate of Rita Baylon.21

Florante sought reconsideration of the Decision dated October 20, 2005 of the RTC insofar as it rescinded the
donation of Lot No. 4709 and half of Lot No. 4706 in his favor. He asserted that, at the time of Rita’s death on July
22

16, 2000, Lot No. 4709 and half of Lot No. 4706 were no longer part of her estate as the same had already been
conveyed to him through a donation inter vivos three years earlier. Thus, Florante maintained that Lot No. 4709 and
half of Lot No. 4706 should not be included in the properties that should be partitioned among the heirs of Rita.

On July 28, 2006, the RTC issued an Order which denied the motion for reconsideration filed by Florante.
23
 The CA Decision

On appeal, the CA rendered a Decision dated October 26, 2007, the dispositive portion of which reads:
24

WHEREFORE, the Decision dated October 20, 2005 and Order dated July 28, 2006 are REVERSED and SET
ASIDE insofar as they decreed the rescission of the Deed of Donation dated July 6, 1997 and the inclusion of lot no.
4709 and half of lot no. 4706 in the estate of Rita Baylon. The case is REMANDED to the trial court for the
determination of ownership of lot no. 4709 and half of lot no. 4706.

SO ORDERED. 25

The CA held that before the petitioners may file an action for rescission, they must first obtain a favorable judicial
ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the estate of Spouses Baylon and not to Rita.
Until then, the CA asserted, an action for rescission is premature. Further, the CA ruled that the petitioners’ action
for rescission cannot be joined with their action for partition, accounting and damages through a mere supplemental
pleading. Thus:

If Lot No. 4709 and half of Lot No. 4706 belonged to the Spouses’ estate, then Rita Baylon’s donation thereof in
favor of Florante Baylon, in excess of her undivided share therein as co-heir, is void. Surely, she could not have
validly disposed of something she did not own. In such a case, an action for rescission of the donation may,
therefore, prosper.

If the lots, however, are found to have belonged exclusively to Rita Baylon, during her lifetime, her donation thereof
in favor of Florante Baylon is valid. For then, she merely exercised her ownership right to dispose of what legally
belonged to her. Upon her death, the lots no longer form part of her estate as their ownership now pertains to
Florante Baylon. On this score, an action for rescission against such donation will not prosper. x x x.

Verily, before plaintiffs-appellees may file an action for rescission, they must first obtain a favorable judicial ruling
that lot no. 4709 and half of lot no. 4706 actually belonged to the estate of Spouses Florentino and Maximina
Baylon, and not to Rita Baylon during her lifetime. Until then, an action for rescission is premature. For this matter,
the applicability of Article 1381, paragraph 4, of the New Civil Code must likewise await the trial court’s resolution of
the issue of ownership.

Be that as it may, an action for rescission should be filed by the parties concerned independent of the proceedings
below. The first cannot simply be lumped up with the second through a mere supplemental pleading. (Citation 26

omitted)

The petitioners sought reconsideration of the Decision dated October 26, 2007 but it was denied by the CA in its
27

Resolution dated March 6, 2008.

28

Hence, this petition.

Issue

The lone issue to be resolved by this Court is whether the CA erred in ruling that the donation inter vivos of Lot No.
4709 and half of Lot No. 4706 in favor of Florante may only be rescinded if there is already a judicial determination
that the same actually belonged to the estate of Spouses Baylon.

The Court’s Ruling

The petition is partly meritorious.

Procedural Matters

Before resolving the lone substantive issue in the instant case, this Court deems it proper to address certain
procedural matters that need to be threshed out which, by laxity or otherwise, were not raised by the parties herein.

Misjoinder of Causes of Action

The complaint filed by the petitioners with the RTC involves two separate, distinct and independent actions –
partition and rescission. First, the petitioners raised the refusal of their co-heirs, Florante, Rita and Panfila, to
partition the properties which they inherited from Spouses Baylon. Second, in their supplemental pleading, the
petitioners assailed the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 made by Rita in favor of
Florante pendente lite.
The actions of partition and
rescission cannot be joined in a
single action.

By a joinder of actions, or more properly, a joinder of causes of action is meant the uniting of two or more demands
or rights of action in one action, the statement of more than one cause of action in a declaration. It is the union of
two or more civil causes of action, each of which could be made the basis of a separate suit, in the same complaint,
declaration or petition. A plaintiff may under certain circumstances join several distinct demands, controversies or
rights of action in one declaration, complaint or petition.
29

The objectives of the rule or provision are to avoid a multiplicity of suits where the same parties and subject matter
are to be dealt with by effecting in one action a complete determination of all matters in controversy and litigation
between the parties involving one subject matter, and to expedite the disposition of litigation at minimum cost. The
provision should be construed so as to avoid such multiplicity, where possible, without prejudice to the rights of the
litigants. 30

Nevertheless, while parties to an action may assert in one pleading, in the alternative or otherwise, as many causes
of action as they may have against an opposing party, such joinder of causes of action is subject to the condition,
inter alia, that the joinder shall not include special civil actions governed by special rules.
31

Here, there was a misjoinder of causes of action. The action for partition filed by the petitioners could not be joined
with the action for the rescission of the said donation inter vivos in favor of Florante. Lest it be overlooked, an action
for partition is a special civil action governed by Rule 69 of the Rules of Court while an action for rescission is an
ordinary civil action governed by the ordinary rules of civil procedure. The variance in the procedure in the special
civil action of partition and in the ordinary civil action of rescission precludes their joinder in one complaint or their
being tried in a single proceeding to avoid confusion in determining what rules shall govern the conduct of the
proceedings as well as in the determination of the presence of requisite elements of each particular cause of
action.32

A misjoined cause of action, if not

severed upon motion of a party or
by the court sua sponte, may be
adjudicated by the court together
with the other causes of action.

Nevertheless, misjoinder of causes of action is not a ground for dismissal. Indeed, the courts have the power, acting
upon the motion of a party to the case or sua sponte, to order the severance of the misjoined cause of action to be
proceeded with separately. However, if there is no objection to the improper joinder or the court did not motu
33

proprio direct a severance, then there exists no bar in the simultaneous adjudication of all the erroneously joined
causes of action. On this score, our disquisition in Republic of the Philippines v. Herbieto is instructive, viz:
34

This Court, however, disagrees with petitioner Republic in this regard. This procedural lapse committed by the
respondents should not affect the jurisdiction of the MTC to proceed with and hear their application for registration of
the Subject Lots.

xxxx

Considering every application for land registration filed in strict accordance with the Property Registration Decree as
a single cause of action, then the defect in the joint application for registration filed by the respondents with the MTC
constitutes a misjoinder of causes of action and parties. Instead of a single or joint application for registration,
respondents Jeremias and David, more appropriately, should have filed separate applications for registration of Lots
No. 8422 and 8423, respectively.

Misjoinder of causes of action and parties do not involve a question of jurisdiction of the court to hear and proceed
with the case. They are not even accepted grounds for dismissal thereof. Instead, under the Rules of Court, the
misjoinder of causes of action and parties involve an implied admission of the court’s jurisdiction. It acknowledges
the power of the court, acting upon the motion of a party to the case or on its own initiative, to order the severance
of the misjoined cause of action, to be proceeded with separately (in case of misjoinder of causes of action); and/or
the dropping of a party and the severance of any claim against said misjoined party, also to be proceeded with
separately (in case of misjoinder of parties). (Citations omitted)
35

It should be emphasized that the foregoing rule only applies if the court trying the case has jurisdiction over all of the
causes of action therein notwithstanding the misjoinder of the same. If the court trying the case has no jurisdiction
over a misjoined cause of action, then such misjoined cause of action has to be severed from the other causes of
action, and if not so severed, any adjudication rendered by the court with respect to the same would be a nullity.
Here, Florante posed no objection, and neither did the RTC direct the severance of the petitioners’ action for
rescission from their action for partition. While this may be a patent omission on the part of the RTC, this does not
constitute a ground to assail the validity and correctness of its decision. The RTC validly adjudicated the issues
raised in the actions for partition and rescission filed by the petitioners.

Asserting a New Cause of Action in a Supplemental Pleading

In its Decision dated October 26, 2007, the CA pointed out that the said action for rescission should have been filed
by the petitioners independently of the proceedings in the action for partition. It opined that the action for rescission
could not be lumped up with the action for partition through a mere supplemental pleading.

We do not agree.

A supplemental pleading may raise

a new cause of action as long as it
has some relation to the original
cause of action set forth in the
original complaint.

Section 6, Rule 10 of the Rules of Court reads:

Sec. 6. Supplemental Pleadings. – Upon motion of a party the court may, upon reasonable notice and upon such
terms as are just, permit him to serve a supplemental pleading setting forth transactions, occurrences or events
which have happened since the date of the pleading sought to be supplemented. The adverse party may plead
thereto within ten (10) days from notice of the order admitting the supplemental pleading.

In Young v. Spouses Sy, this Court had the opportunity to elucidate on the purpose of a supplemental pleading.
36

Thus:

As its very name denotes, a supplemental pleading only serves to bolster or add something to the primary pleading.
A supplement exists side by side with the original. It does not replace that which it supplements. Moreover, a
supplemental pleading assumes that the original pleading is to stand and that the issues joined with the original
pleading remained an issue to be tried in the action. It is but a continuation of the complaint. Its usual office is to set
up new facts which justify, enlarge or change the kind of relief with respect to the same subject matter as the
controversy referred to in the original complaint.

The purpose of the supplemental pleading is to bring into the records new facts which will enlarge or change the
kind of relief to which the plaintiff is entitled; hence, any supplemental facts which further develop the original right of
action, or extend to vary the relief, are available by way of supplemental complaint even though they themselves
constitute a right of action. (Citations omitted and emphasis ours)
37

Thus, a supplemental pleading may properly allege transactions, occurrences or events which had transpired after
the filing of the pleading sought to be supplemented, even if the said supplemental facts constitute another cause of
action.

Admittedly, in Leobrera v. Court of Appeals, we held that a supplemental pleading must be based on matters
38

arising subsequent to the original pleading related to the claim or defense presented therein, and founded on the
same cause of action. We further stressed therein that a supplemental pleading may not be used to try a new cause
of action.

However, in Planters Development Bank v. LZK Holdings and Development Corp., we clarified that, while a matter
39

stated in a supplemental complaint should have some relation to the cause of action set forth in the original
pleading, the fact that the supplemental pleading technically states a new cause of action should not be a bar to its
allowance but only a matter that may be considered by the court in the exercise of its discretion. In such cases, we
stressed that a broad definition of "cause of action" should be applied.

Here, the issue as to the validity of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 made by Rita in
favor of Florante is a new cause of action that occurred after the filing of the original complaint. However, the
petitioners’ prayer for the rescission of the said donation inter vivos in their supplemental pleading is germane to,
and is in fact, intertwined with the cause of action in the partition case. Lot No. 4709 and half of Lot No. 4706 are
included among the properties that were sought to be partitioned.

The petitioners’ supplemental pleading merely amplified the original cause of action, on account of the gratuitous
conveyance of Lot No. 4709 and half of Lot No. 4706 after the filing of the original complaint and prayed for
additional reliefs, i.e., rescission. Indeed, the petitioners claim that the said lots form part of the estate of Spouses
Baylon, but cannot be partitioned unless the gratuitous conveyance of the same is rescinded. Thus, the principal
issue raised by the petitioners in their original complaint remained the same.

Main Issue: Propriety of Rescission

After having threshed out the procedural matters, we now proceed to adjudicate the substantial issue presented by
the instant petition.

The petitioners assert that the CA erred in remanding the case to the RTC for the determination of ownership of Lot
No. 4709 and half of Lot No. 4706. They maintain that the RTC aptly rescinded the said donation inter vivos of Lot
No. 4709 and half of Lot No. 4706 pursuant to Article 1381(4) of the Civil Code.

In his Comment, Florante asserts that before the petitioners may file an action for rescission, they must first obtain
40

a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the estate of Spouses
Baylon. Until then, Florante avers that an action for rescission would be premature.

The petitioners’ contentions are well-taken.

The resolution of the instant dispute is fundamentally contingent upon a determination of whether the donation inter
vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may be rescinded pursuant to Article 1381(4) of
the Civil Code on the ground that the same was made during the pendency of the action for partition with the RTC.

Rescission is a remedy to address

the damage or injury caused to the
contracting parties or third
persons.

Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation
of damages caused to them by a contract, even if it should be valid, by means of the restoration of things to their
condition at the moment prior to the celebration of said contract. It is a remedy to make ineffective a contract, validly
41

entered into and therefore obligatory under normal conditions, by reason of external causes resulting in a pecuniary
prejudice to one of the contracting parties or their creditors.
42

Contracts which are rescissible are valid contracts having all the essential requisites of a contract, but by reason of
injury or damage caused to either of the parties therein or to third persons are considered defective and, thus, may
be rescinded.

The kinds of rescissible contracts, according to the reason for their susceptibility to rescission, are the following:
first, those which are rescissible because of lesion or prejudice; second, those which are rescissible on account of
43

fraud or bad faith; and third, those which, by special provisions of law, are susceptible to rescission.
44 45 46

Contracts which refer to things

subject of litigation is rescissible
pursuant to Article 1381(4) of the
Civil Code.

Contracts which are rescissible due to fraud or bad faith include those which involve things under litigation, if they
have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial
authority. Thus, Article 1381(4) of the Civil Code provides:

Art. 1381. The following contracts are rescissible:

xxxx

(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority.

The rescission of a contract under Article 1381(4) of the Civil Code only requires the concurrence of the following:
first, the defendant, during the pendency of the case, enters into a contract which refers to the thing subject of
litigation; and second, the said contract was entered into without the knowledge and approval of the litigants or of a
competent judicial authority. As long as the foregoing requisites concur, it becomes the duty of the court to order the
rescission of the said contract.

The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith among the parties to a case
and/or any fraudulent act which they may commit with respect to the thing subject of litigation.
When a thing is the subject of a judicial controversy, it should ultimately be bound by whatever disposition the court
shall render. The parties to the case are therefore expected, in deference to the court’s exercise of jurisdiction over
the case, to refrain from doing acts which would dissipate or debase the thing subject of the litigation or otherwise
render the impending decision therein ineffectual.

There is, then, a restriction on the disposition by the parties of the thing that is the subject of the litigation. Article
1381(4) of the Civil Code requires that any contract entered into by a defendant in a case which refers to things
under litigation should be with the knowledge and approval of the litigants or of a competent judicial authority.

Further, any disposition of the thing subject of litigation or any act which tends to render inutile the court’s impending
disposition in such case, sans the knowledge and approval of the litigants or of the court, is unmistakably and
irrefutably indicative of bad faith. Such acts undermine the authority of the court to lay down the respective rights of
the parties in a case relative to the thing subject of litigation and bind them to such determination.

It should be stressed, though, that the defendant in such a case is not absolutely proscribed from entering into a
contract which refer to things under litigation. If, for instance, a defendant enters into a contract which conveys the
thing under litigation during the pendency of the case, the conveyance would be valid, there being no definite
disposition yet coming from the court with respect to the thing subject of litigation. After all, notwithstanding that the
subject thereof is a thing under litigation, such conveyance is but merely an exercise of ownership.

This is true even if the defendant effected the conveyance without the knowledge and approval of the litigants or of
a competent judicial authority. The absence of such knowledge or approval would not precipitate the invalidity of an
otherwise valid contract. Nevertheless, such contract, though considered valid, may be rescinded at the instance of
the other litigants pursuant to Article 1381(4) of the Civil Code.

Here, contrary to the CA’s disposition, the RTC aptly ordered the rescission of the donation inter vivos of Lot No.
4709 and half of Lot No. 4706 in favor of Florante. The petitioners had sufficiently established the presence of the
requisites for the rescission of a contract pursuant to Article 1381(4) of the Civil Code. It is undisputed that, at the
time they were gratuitously conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are among the properties that
were the subject of the partition case then pending with the RTC. It is also undisputed that Rita, then one of the
defendants in the partition case with the RTC, did not inform nor sought the approval from the petitioners or of the
RTC with regard to the donation inter vivos of the said parcels of land to Florante.

Although the gratuitous conveyance of the said parcels of land in favor of Florante was valid, the donation inter
vivos of the same being merely an exercise of ownership, Rita’s failure to inform and seek the approval of the
petitioners or the RTC regarding the conveyance gave the petitioners the right to have the said donation rescinded
pursuant to Article 1381(4) of the Civil Code.

Rescission under Article 1381(4) of

the Civil Code is not preconditioned
upon the judicial determination as
to the ownership of the thing
subject of litigation.

In this regard, we also find the assertion that rescission may only be had after the RTC had finally determined that
the parcels of land belonged to the estate of Spouses Baylon intrinsically amiss. The petitioners’ right to institute the
action for rescission pursuant to Article 1381(4) of the Civil Code is not preconditioned upon the RTC’s
determination as to the ownership of the said parcels of land.

It bears stressing that the right to ask for the rescission of a contract under Article 1381(4) of the Civil Code is not
contingent upon the final determination of the ownership of the thing subject of litigation. The primordial purpose of
Article 1381(4) of the Civil Code is to secure the possible effectivity of the impending judgment by a court with
respect to the thing subject of litigation. It seeks to protect the binding effect of a court’s impending adjudication vis-
à-vis the thing subject of litigation regardless of which among the contending claims therein would subsequently be
upheld. Accordingly, a definitive judicial determination with respect to the thing subject of litigation is not a condition
sine qua non before the rescissory action contemplated under Article 1381(4) of the Civil Code may be instituted.

Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of the Civil Code is
preconditioned upon a judicial determination with regard to the thing subject litigation, this would only bring about
the very predicament that the said provision of law seeks to obviate. Assuming arguendo that a rescissory action
under Article 1381(4) of the Civil Code could only be instituted after the dispute with respect to the thing subject of
litigation is judicially determined, there is the possibility that the same may had already been conveyed to third
persons acting in good faith, rendering any judicial determination with regard to the thing subject of litigation illusory.
Surely, this paradoxical eventuality is not what the law had envisioned.

Even if the donation inter vivos is

validly rescinded, a determination
as to the ownership of the subject
parcels of land is still necessary.

Having established that the RTC had aptly ordered the rescission of the said donation inter vivos in favor of
Florante, the issue that has to be resolved by this Court is whether there is still a need to determine the ownership of
Lot No. 4709 and half of Lot No. 4706.

In opting not to make a determination as to the ownership of Lot No. 4709 and half of Lot No. 4706, the RTC
reasoned that the parties in the proceedings before it constitute not only the surviving heirs of Spouses Baylon but
the surviving heirs of Rita as well. As intimated earlier, Rita died intestate during the pendency of the proceedings
with the RTC without any issue, leaving the parties in the proceedings before the RTC as her surviving heirs. Thus,
the RTC insinuated, a definitive determination as to the ownership of the said parcels of land is unnecessary since,
in any case, the said parcels of land would ultimately be adjudicated to the parties in the proceedings before it.

We do not agree.

Admittedly, whoever may be adjudicated as the owner of Lot No. 4709 and half of Lot No. 4706, be it Rita or
Spouses Baylon, the same would ultimately be transmitted to the parties in the proceedings before the RTC as they
are the only surviving heirs of both Spouses Baylon and Rita. However, the RTC failed to realize that a definitive
adjudication as to the ownership of Lot No. 4709 and half of Lot No. 4706 is essential in this case as it affects the
authority of the RTC to direct the partition of the said parcels of land. Simply put, the RTC cannot properly direct the
partition of Lot No. 4709 and half of Lot No. 4706 until and unless it determines that the said parcels of land indeed
form part of the estate of Spouses Baylon.

It should be stressed that the partition proceedings before the RTC only covers the properties co-owned by the
parties therein in their respective capacity as the surviving heirs of Spouses Baylon. Hence, the authority of the RTC
to issue an order of partition in the proceedings before it only affects those properties which actually belonged to the
estate of Spouses Baylon.

In this regard, if Lot No. 4709 and half of Lot No. 4706, as unwaveringly claimed by Florante, are indeed exclusively
owned by Rita, then the said parcels of land may not be partitioned simultaneously with the other properties subject
of the partition case before the RTC. In such case, although the parties in the case before the RTC are still co-
owners of the said parcels of land, the RTC would not have the authority to direct the partition of the said parcels of
land as the proceedings before it is only concerned with the estate of Spouses Baylon.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is PARTIALLY GRANTED. The Decision
dated October 26, 2007 issued by the Court of Appeals in CA-G.R. CV No. 01746 is MODIFIED in that the Decision
dated October 20, 2005 issued by the Regional Trial Court, Tanjay City, Negros Oriental, Branch 43 in Civil Case
No. 11657, insofar as it decreed the rescission of the Deed of Donation dated July 6, 1997 is hereby REINSTATED.
The case is REMANDED to the trial court for the determination of the ownership of Lot No. 4709 and half of Lot No.
4706 in accordance with this Decision.

SO ORDERED.
G.R. No. 188288 January 16, 2012

SPOUSES FERNANDO and LOURDES VILORIA, Petitioners,

vs.
CONTINENTAL AIRLINES, INC.,

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the January 30, 2009 Decision of the Special
1

Thirteenth Division of the Court of Appeals (CA) in CA-G.R. CV No. 88586 entitled "Spouses Fernando and Lourdes
Viloria v. Continental Airlines, Inc.," the dispositive portion of which states:

WHEREFORE, the Decision of the Regional Trial Court, Branch 74, dated 03 April 2006, awarding US$800.00 or its
peso equivalent at the time of payment, plus legal rate of interest from 21 July 1997 until fully paid, [₱]100,000.00 as
moral damages, [₱]50,000.00 as exemplary damages, [₱]40,000.00 as attorney’s fees and costs of suit to plaintiffs-
appellees is hereby REVERSED and SET ASIDE.

Defendant-appellant’s counterclaim is DENIED.

Costs against plaintiffs-appellees.

SO ORDERED. 2

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a Decision, giving due course
to the complaint for sum of money and damages filed by petitioners Fernando Viloria (Fernando) and Lourdes
Viloria (Lourdes), collectively called Spouses Viloria, against respondent Continental Airlines, Inc. (CAI). As culled
from the records, below are the facts giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for himself and his wife, Lourdes,
two (2) round trip airline tickets from San Diego, California to Newark, New Jersey on board Continental Airlines.
Fernando purchased the tickets at US$400.00 each from a travel agency called "Holiday Travel" and was attended
to by a certain Margaret Mager (Mager). According to Spouses Viloria, Fernando agreed to buy the said tickets after
Mager informed them that there were no available seats at Amtrak, an intercity passenger train service provider in
the United States. Per the tickets, Spouses Viloria were scheduled to leave for Newark on August 13, 1997 and
return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier date or August 6, 1997.
Mager informed him that flights to Newark via Continental Airlines were already fully booked and offered the
alternative of a round trip flight via Frontier Air. Since flying with Frontier Air called for a higher fare of US$526.00
per passenger and would mean traveling by night, Fernando opted to request for a refund. Mager, however, denied
his request as the subject tickets are non-refundable and the only option that Continental Airlines can offer is the re-
issuance of new tickets within one (1) year from the date the subject tickets were issued. Fernando decided to
reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the Greyhound Station where he
saw an Amtrak station nearby. Fernando made inquiries and was told that there are seats available and he can
travel on Amtrak anytime and any day he pleased. Fernando then purchased two (2) tickets for Washington, D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak tickets, telling her that she
had misled them into buying the Continental Airlines tickets by misrepresenting that Amtrak was already fully
booked. Fernando reiterated his demand for a refund but Mager was firm in her position that the subject tickets are
non-refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998, demanding a refund and
alleging that Mager had deluded them into purchasing the subject tickets. 3

In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his complaint had been referred
to the Customer Refund Services of Continental Airlines at Houston, Texas. 4

In a letter dated March 24, 1998, Continental Micronesia denied Fernando’s request for a refund and advised him
that he may take the subject tickets to any Continental ticketing location for the re-issuance of new tickets within two
(2) years from the date they were issued. Continental Micronesia informed Fernando that the subject tickets may be
used as a form of payment for the purchase of another Continental ticket, albeit with a re-issuance fee. 5

On June 17, 1999, Fernando went to Continental’s ticketing office at Ayala Avenue, Makati City to have the subject
tickets replaced by a single round trip ticket to Los Angeles, California under his name. Therein, Fernando was
informed that Lourdes’ ticket was non-transferable, thus, cannot be used for the purchase of a ticket in his favor. He
was also informed that a round trip ticket to Los Angeles was US$1,867.40 so he would have to pay what will not be
covered by the value of his San Diego to Newark round trip ticket.

In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as he no longer wished to
have them replaced. In addition to the dubious circumstances under which the subject tickets were issued,
Fernando claimed that CAI’s act of charging him with US$1,867.40 for a round trip ticket to Los Angeles, which
other airlines priced at US$856.00, and refusal to allow him to use Lourdes’ ticket, breached its undertaking under
its March 24, 1998 letter. 6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI be ordered to refund the
money they used in the purchase of the subject tickets with legal interest from July 21, 1997 and to pay
₱1,000,000.00 as moral damages, ₱500,000.00 as exemplary damages and ₱250,000.00 as attorney’s fees. 7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a refund as the subject tickets
are non-refundable; (b) Fernando cannot insist on using the ticket in Lourdes’ name for the purchase of a round trip
ticket to Los Angeles since the same is non-transferable; (c) as Mager is not a CAI employee, CAI is not liable for
any of her acts; (d) CAI, its employees and agents did not act in bad faith as to entitle Spouses Viloria to moral and
exemplary damages and attorney’s fees. CAI also invoked the following clause printed on the subject tickets:

3. To the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject
to: (i) provisions contained in this ticket, (ii) applicable tariffs, (iii) carrier’s conditions of carriage and related
regulations which are made part hereof (and are available on application at the offices of carrier), except in
transportation between a place in the United States or Canada and any place outside thereof to which tariffs in force
in those countries apply.8

According to CAI, one of the conditions attached to their contract of carriage is the non-transferability and non-
refundability of the subject tickets.

The RTC’s Ruling

Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that Spouses Viloria are entitled to a
refund in view of Mager’s misrepresentation in obtaining their consent in the purchase of the subject tickets. The 9

relevant portion of the April 3, 2006 Decision states:

Continental Airlines agent Ms. Mager was in bad faith when she was less candid and diligent in presenting to
plaintiffs spouses their booking options. Plaintiff Fernando clearly wanted to travel via AMTRAK, but defendant’s
agent misled him into purchasing Continental Airlines tickets instead on the fraudulent misrepresentation that
Amtrak was fully booked. In fact, defendant Airline did not specifically denied (sic) this allegation.
Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked into buying Continental Airline tickets on Ms.
Mager’s misleading misrepresentations. Continental Airlines agent Ms. Mager further relied on and exploited plaintiff
Fernando’s need and told him that they must book a flight immediately or risk not being able to travel at all on the
couple’s preferred date. Unfortunately, plaintiffs spouses fell prey to the airline’s and its agent’s unethical tactics for
baiting trusting customers."10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAI’s agent, hence, bound by her bad
faith and misrepresentation. As far as the RTC is concerned, there is no issue as to whether Mager was CAI’s agent
in view of CAI’s implied recognition of her status as such in its March 24, 1998 letter.

The act of a travel agent or agency being involved here, the following are the pertinent New Civil Code provisions on
agency:

Art. 1868. By the contract of agency a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.

Art. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his
failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form.

As its very name implies, a travel agency binds itself to render some service or to do something in representation or
on behalf of another, with the consent or authority of the latter. This court takes judicial notice of the common
services rendered by travel agencies that represent themselves as such, specifically the reservation and booking of
local and foreign tours as well as the issuance of airline tickets for a commission or fee.

The services rendered by Ms. Mager of Holiday Travel agency to the plaintiff spouses on July 21, 1997 were no
different from those offered in any other travel agency. Defendant airline impliedly if not expressly acknowledged its
principal-agent relationship with Ms. Mager by its offer in the letter dated March 24, 1998 – an obvious attempt to
assuage plaintiffs spouses’ hurt feelings. 11

Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to replace the subject tickets
within two (2) years from their date of issue when it charged Fernando with the amount of US$1,867.40 for a round
trip ticket to Los Angeles and when it refused to allow Fernando to use Lourdes’ ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When defendant airline still charged
plaintiffs spouses US$1,867.40 or more than double the then going rate of US$856.00 for the unused tickets when
the same were presented within two (2) years from date of issue, defendant airline exhibited callous treatment of
passengers. 12

The Appellate Court’s Ruling

On appeal, the CA reversed the RTC’s April 3, 2006 Decision, holding that CAI cannot be held liable for Mager’s act
in the absence of any proof that a principal-agent relationship existed between CAI and Holiday Travel. According to
the CA, Spouses Viloria, who have the burden of proof to establish the fact of agency, failed to present evidence
demonstrating that Holiday Travel is CAI’s agent. Furthermore, contrary to Spouses Viloria’s claim, the contractual
relationship between Holiday Travel and CAI is not an agency but that of a sale.

Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel who was in turn a ticketing agent of Holiday
Travel who was in turn a ticketing agent of Continental Airlines. Proceeding from this premise, they contend that
Continental Airlines should be held liable for the acts of Mager. The trial court held the same view.

We do not agree. By the contract of agency, a person binds him/herself to render some service or to do something
in representation or on behalf of another, with the consent or authority of the latter. The elements of agency are: (1)
consent, express or implied, of the parties to establish the relationship; (2) the object is the execution of a juridical
act in relation to a third person; (3) the agent acts as a representative and not for him/herself; and (4) the agent acts
within the scope of his/her authority. As the basis of agency is representation, there must be, on the part of the
principal, an actual intention to appoint, an intention naturally inferable from the principal’s words or actions. In the
same manner, there must be an intention on the part of the agent to accept the appointment and act upon it. Absent
such mutual intent, there is generally no agency. It is likewise a settled rule that persons dealing with an assumed
agent are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also
the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it.
Agency is never presumed, neither is it created by the mere use of the word in a trade or business name. We have
perused the evidence and documents so far presented. We find nothing except bare allegations of plaintiffs-
appellees that Mager/Holiday Travel was acting in behalf of Continental Airlines. From all sides of legal prism, the
transaction in issue was simply a contract of sale, wherein Holiday Travel buys airline tickets from Continental
Airlines and then, through its employees, Mager included, sells it at a premium to clients. 13

The CA also ruled that refund is not available to Spouses Viloria as the word "non-refundable" was clearly printed on
the face of the subject tickets, which constitute their contract with CAI. Therefore, the grant of their prayer for a
refund would violate the proscription against impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria with the higher amount of
US$1,867.40 for a round trip ticket to Los Angeles. According to the CA, there is no compulsion for CAI to charge
the lower amount of US$856.00, which Spouses Viloria claim to be the fee charged by other airlines. The matter of
fixing the prices for its services is CAI’s prerogative, which Spouses Viloria cannot intervene. In particular:

It is within the respective rights of persons owning and/or operating business entities to peg the premium of the
services and items which they provide at a price which they deem fit, no matter how expensive or exhorbitant said
price may seem vis-à-vis those of the competing companies. The Spouses Viloria may not intervene with the
business judgment of Continental Airlines. 14

The Petitioners’ Case

In this Petition, this Court is being asked to review the findings and conclusions of the CA, as the latter’s reversal of
the RTC’s April 3, 2006 Decision allegedly lacks factual and legal bases. Spouses Viloria claim that CAI acted in
bad faith when it required them to pay a higher amount for a round trip ticket to Los Angeles considering CAI’s
undertaking to re-issue new tickets to them within the period stated in their March 24, 1998 letter. CAI likewise acted
in bad faith when it disallowed Fernando to use Lourdes’ ticket to purchase a round trip to Los Angeles given that
there is nothing in Lourdes’ ticket indicating that it is non-transferable. As a common carrier, it is CAI’s duty to inform
its passengers of the terms and conditions of their contract and passengers cannot be bound by such terms and
conditions which they are not made aware of. Also, the subject contract of carriage is a contract of adhesion;
therefore, any ambiguities should be construed against CAI. Notably, the petitioners are no longer questioning the
validity of the subject contracts and limited its claim for a refund on CAI’s alleged breach of its undertaking in its
March 24, 1998 letter.

The Respondent’s Case

In its Comment, CAI claimed that Spouses Viloria’s allegation of bad faith is negated by its willingness to issue new
tickets to them and to credit the value of the subject tickets against the value of the new ticket Fernando requested.
CAI argued that Spouses Viloria’s sole basis to claim that the price at which CAI was willing to issue the new tickets
is unconscionable is a piece of hearsay evidence – an advertisement appearing on a newspaper stating that airfares
from Manila to Los Angeles or San Francisco cost US$818.00. Also, the advertisement pertains to airfares in
15

September 2000 and not to airfares prevailing in June 1999, the time when Fernando asked CAI to apply the value
of the subject tickets for the purchase of a new one. CAI likewise argued that it did not undertake to protect
16

Spouses Viloria from any changes or fluctuations in the prices of airline tickets and its only obligation was to apply
the value of the subject tickets to the purchase of the newly issued tickets.

With respect to Spouses Viloria’s claim that they are not aware of CAI’s restrictions on the subject tickets and that
the terms and conditions that are printed on them are ambiguous, CAI denies any ambiguity and alleged that its
representative informed Fernando that the subject tickets are non-transferable when he applied for the issuance of a
new ticket. On the other hand, the word "non-refundable" clearly appears on the face of the subject tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no principal-agency relationship
exists between them. As an independent contractor, Holiday Travel was without capacity to bind CAI.

Issues

To determine the propriety of disturbing the CA’s January 30, 2009 Decision and whether Spouses Viloria have the
right to the reliefs they prayed for, this Court deems it necessary to resolve the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel?

b. Assuming that an agency relationship exists between CAI and Holiday Travel, is CAI bound by the acts of
Holiday Travel’s agents and employees such as Mager?

c. Assuming that CAI is bound by the acts of Holiday Travel’s agents and employees, can the representation
of Mager as to unavailability of seats at Amtrak be considered fraudulent as to vitiate the consent of Spouse
Viloria in the purchase of the subject tickets?

d. Is CAI justified in insisting that the subject tickets are non-transferable and non-refundable?
 e. Is CAI justified in pegging a different price for the round trip ticket to Los Angeles requested by Fernando?

f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses Viloria to apply the value of the
subject tickets in the purchase of new ones when it refused to allow Fernando to use Lourdes’ ticket and in
charging a higher price for a round trip ticket to Los Angeles?

This Court’s Ruling

I. A principal-agent relationship exists between CAI and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to review and re-examine the
evidence presented by the parties below, this Court takes exception to the general rule that the CA’s findings of fact
are conclusive upon Us and our jurisdiction is limited to the review of questions of law. It is well-settled to the point
of being axiomatic that this Court is authorized to resolve questions of fact if confronted with contrasting factual
findings of the trial court and appellate court and if the findings of the CA are contradicted by the evidence on
record.17

According to the CA, agency is never presumed and that he who alleges that it exists has the burden of proof.
Spouses Viloria, on whose shoulders such burden rests, presented evidence that fell short of indubitably
demonstrating the existence of such agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAI’s denial that Holiday Travel is one of its
agents. Furthermore, in erroneously characterizing the contractual relationship between CAI and Holiday Travel as a
contract of sale, the CA failed to apply the fundamental civil law principles governing agency and differentiating it
from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation, this Court explained the nature of an agency and spelled out
18

the essential elements thereof:

Out of the above given principles, sprung the creation and acceptance of the relationship of agency whereby one
party, called the principal (mandante), authorizes another, called the agent (mandatario), to act for and in his behalf
in transactions with third persons. The essential elements of agency are: (1) there is consent, express or implied of
the parties to establish the relationship; (2) the object is the execution of a juridical act in relation to a third person;
(3) the agent acts as a representative and not for himself, and (4) the agent acts within the scope of his authority. 1avvphi1

Agency is basically personal, representative, and derivative in nature. The authority of the agent to act emanates
from the powers granted to him by his principal; his act is the act of the principal if done within the scope of the
authority. Qui facit per alium facit se. "He who acts through another acts himself." 19

Contrary to the findings of the CA, all the elements of an agency exist in this case. The first and second elements
are present as CAI does not deny that it concluded an agreement with Holiday Travel, whereby Holiday Travel
would enter into contracts of carriage with third persons on CAI’s behalf. The third element is also present as it is
undisputed that Holiday Travel merely acted in a representative capacity and it is CAI and not Holiday Travel who is
bound by the contracts of carriage entered into by Holiday Travel on its behalf. The fourth element is also present
considering that CAI has not made any allegation that Holiday Travel exceeded the authority that was granted to it.
In fact, CAI consistently maintains the validity of the contracts of carriage that Holiday Travel executed with Spouses
Viloria and that Mager was not guilty of any fraudulent misrepresentation. That CAI admits the authority of Holiday
Travel to enter into contracts of carriage on its behalf is easily discernible from its February 24, 1998 and March 24,
1998 letters, where it impliedly recognized the validity of the contracts entered into by Holiday Travel with Spouses
Viloria. When Fernando informed CAI that it was Holiday Travel who issued to them the subject tickets, CAI did not
deny that Holiday Travel is its authorized agent.

Prior to Spouses Viloria’s filing of a complaint against it, CAI never refuted that it gave Holiday Travel the power and
authority to conclude contracts of carriage on its behalf. As clearly extant from the records, CAI recognized the
validity of the contracts of carriage that Holiday Travel entered into with Spouses Viloria and considered itself bound
with Spouses Viloria by the terms and conditions thereof; and this constitutes an unequivocal testament to Holiday
Travel’s authority to act as its agent. This Court cannot therefore allow CAI to take an altogether different position
and deny that Holiday Travel is its agent without condoning or giving imprimatur to whatever damage or prejudice
that may result from such denial or retraction to Spouses Viloria, who relied on good faith on CAI’s acts in
recognition of Holiday Travel’s authority. Estoppel is primarily based on the doctrine of good faith and the avoidance
of harm that will befall an innocent party due to its injurious reliance, the failure to apply it in this case would result in
gross travesty of justice. Estoppel bars CAI from making such denial.
20

As categorically provided under Article 1869 of the Civil Code, "[a]gency may be express, or implied from the acts of
the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is
acting on his behalf without authority."
Considering that the fundamental hallmarks of an agency are present, this Court finds it rather peculiar that the CA
had branded the contractual relationship between CAI and Holiday Travel as one of sale. The distinctions between a
sale and an agency are not difficult to discern and this Court, as early as 1970, had already formulated the
guidelines that would aid in differentiating the two (2) contracts. In Commissioner of Internal Revenue v.
Constantino, this Court extrapolated that the primordial differentiating consideration between the two (2) contracts is
21

the transfer of ownership or title over the property subject of the contract. In an agency, the principal retains
ownership and control over the property and the agent merely acts on the principal’s behalf and under his
instructions in furtherance of the objectives for which the agency was established. On the other hand, the contract is
clearly a sale if the parties intended that the delivery of the property will effect a relinquishment of title, control and
ownership in such a way that the recipient may do with the property as he pleases.

Since the company retained ownership of the goods, even as it delivered possession unto the dealer for resale to
customers, the price and terms of which were subject to the company's control, the relationship between the
company and the dealer is one of agency, tested under the following criterion:

"The difficulty in distinguishing between contracts of sale and the creation of an agency to sell has led to the
establishment of rules by the application of which this difficulty may be solved. The decisions say the transfer of title
or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the transferee in
the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not
merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of an
agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the
owner and has the right to control sales, fix the price, and terms, demand and receive the proceeds less the agent's
commission upon sales made. 1 Mechem on Sales, Sec. 43; 1 Mechem on Agency, Sec. 48; Williston on Sales, 1;
Tiedeman on Sales, 1." (Salisbury v. Brooks, 94 SE 117, 118-119) 22

As to how the CA have arrived at the conclusion that the contract between CAI and Holiday Travel is a sale is
certainly confounding, considering that CAI is the one bound by the contracts of carriage embodied by the tickets
being sold by Holiday Travel on its behalf. It is undisputed that CAI and not Holiday Travel who is the party to the
contracts of carriage executed by Holiday Travel with third persons who desire to travel via Continental Airlines, and
this conclusively indicates the existence of a principal-agent relationship. That the principal is bound by all the
obligations contracted by the agent within the scope of the authority granted to him is clearly provided under Article
1910 of the Civil Code and this constitutes the very notion of agency.

II. In actions based on quasi-delict, a principal can only be held liable for the tort committed by its agent’s
employees if it has been established by preponderance of evidence that the principal was also at fault or
negligent or that the principal exercise control and supervision over them.

Considering that Holiday Travel is CAI’s agent, does it necessarily follow that CAI is liable for the fault or negligence
of Holiday Travel’s employees? Citing China Air Lines, Ltd. v. Court of Appeals, et al., CAI argues that it cannot be
23

held liable for the actions of the employee of its ticketing agent in the absence of an employer-employee
relationship.

An examination of this Court’s pronouncements in China Air Lines will reveal that an airline company is not
completely exonerated from any liability for the tort committed by its agent’s employees. A prior determination of the
nature of the passenger’s cause of action is necessary. If the passenger’s cause of action against the airline
company is premised on culpa aquiliana or quasi-delict for a tort committed by the employee of the airline
company’s agent, there must be an independent showing that the airline company was at fault or negligent or has
contributed to the negligence or tortuous conduct committed by the employee of its agent. The mere fact that the
employee of the airline company’s agent has committed a tort is not sufficient to hold the airline company liable.
There is no vinculum juris between the airline company and its agent’s employees and the contractual relationship
between the airline company and its agent does not operate to create a juridical tie between the airline company
and its agent’s employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort
committed by its agent’s employees and the principal-agency relationship per se does not make the principal a party
to such tort; hence, the need to prove the principal’s own fault or negligence.

On the other hand, if the passenger’s cause of action for damages against the airline company is based on
contractual breach or culpa contractual, it is not necessary that there be evidence of the airline company’s fault or
negligence. As this Court previously stated in China Air Lines and reiterated in Air France vs. Gillego, "in an action
24

based on a breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was
at fault or was negligent. All that he has to prove is the existence of the contract and the fact of its non-performance
by the carrier."

Spouses Viloria’s cause of action on the basis of Mager’s alleged fraudulent misrepresentation is clearly one of tort
or quasi-delict, there being no pre-existing contractual relationship between them. Therefore, it was incumbent upon
Spouses Viloria to prove that CAI was equally at fault.
However, the records are devoid of any evidence by which CAI’s alleged liability can be substantiated. Apart from
their claim that CAI must be held liable for Mager’s supposed fraud because Holiday Travel is CAI’s agent, Spouses
Viloria did not present evidence that CAI was a party or had contributed to Mager’s complained act either by
instructing or authorizing Holiday Travel and Mager to issue the said misrepresentation.

It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the terms and conditions of the
subject contracts, which Mager entered into with them on CAI’s behalf, in order to deny Spouses Viloria’s request for
a refund or Fernando’s use of Lourdes’ ticket for the re-issuance of a new one, and simultaneously claim that they
are not bound by Mager’s supposed misrepresentation for purposes of avoiding Spouses Viloria’s claim for
damages and maintaining the validity of the subject contracts. It may likewise be argued that CAI cannot deny
liability as it benefited from Mager’s acts, which were performed in compliance with Holiday Travel’s obligations as
CAI’s agent.

However, a person’s vicarious liability is anchored on his possession of control, whether absolute or limited, on the
tortfeasor. Without such control, there is nothing which could justify extending the liability to a person other than the
one who committed the tort. As this Court explained in Cangco v. Manila Railroad Co.: 25

With respect to extra-contractual obligation arising from negligence, whether of act or omission , it is
competent for the legislature to elect — and our Legislature has so elected — to limit such liability to cases in which
the person upon whom such an obligation is imposed is morally culpable or, on the contrary, for reasons of public
policy, to extend that liability, without regard to the lack of moral culpability, so as to include responsibility
for the negligence of those persons whose acts or omissions are imputable, by a legal fiction, to others who
are in a position to exercise an absolute or limited control over them. The legislature which adopted our Civil
Code has elected to limit extra-contractual liability — with certain well-defined exceptions — to cases in which moral
culpability can be directly imputed to the persons to be charged. This moral responsibility may consist in having
failed to exercise due care in one's own acts, or in having failed to exercise due care in the selection and control of
one's agent or servants, or in the control of persons who, by reasons of their status, occupy a position of
dependency with respect to the person made liable for their conduct. (emphasis supplied)
26

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision over Mager by preponderant
evidence. The existence of control or supervision cannot be presumed and CAI is under no obligation to prove its
denial or nugatory assertion. Citing Belen v. Belen, this Court ruled in Jayme v. Apostol, that:
27 28

In Belen v. Belen, this Court ruled that it was enough for defendant to deny an alleged employment relationship. The
defendant is under no obligation to prove the negative averment. This Court said:

"It is an old and well-settled rule of the courts that the burden of proving the action is upon the plaintiff, and that if he
fails satisfactorily to show the facts upon which he bases his claim, the defendant is under no obligation to prove his
exceptions. This [rule] is in harmony with the provisions of Section 297 of the Code of Civil Procedure holding that
each party must prove his own affirmative allegations, etc." (citations omitted)
29

Therefore, without a modicum of evidence that CAI exercised control over Holiday Travel’s employees or that CAI
was equally at fault, no liability can be imposed on CAI for Mager’s supposed misrepresentation.

III. Even on the assumption that CAI may be held liable for the acts of Mager, still, Spouses Viloria are not
entitled to a refund. Mager’s statement cannot be considered a causal fraud that would justify the
annulment of the subject contracts that would oblige CAI to indemnify Spouses Viloria and return the
money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was
obtained through fraud, the contract is considered voidable and may be annulled within four (4) years from the time
of the discovery of the fraud. Once a contract is annulled, the parties are obliged under Article 1398 of the same
Code to restore to each other the things subject matter of the contract, including their fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that Fernando’s consent to the subject
contracts was supposedly secured by Mager through fraudulent means, it is plainly apparent that their demand for a
refund is tantamount to seeking for an annulment of the subject contracts on the ground of vitiated consent.

Whether the subject contracts are annullable, this Court is required to determine whether Mager’s alleged
misrepresentation constitutes causal fraud. Similar to the dispute on the existence of an agency, whether fraud
attended the execution of a contract is factual in nature and this Court, as discussed above, may scrutinize the
records if the findings of the CA are contrary to those of the RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. In
order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract. In Samson v. Court of Appeals, causal fraud was defined as "a
30 31
deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the
other."
32

Also, fraud must be serious and its existence must be established by clear and convincing evidence. As ruled by this
Court in Sierra v. Hon. Court of Appeals, et al., mere preponderance of evidence is not adequate:
33

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other
is induced to enter into a contract which without them, he would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

To quote Tolentino again, the "misrepresentation constituting the fraud must be established by full, clear, and
convincing evidence, and not merely by a preponderance thereof. The deceit must be serious. The fraud is serious
when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a
prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into
account the personal conditions of the victim." 34

After meticulously poring over the records, this Court finds that the fraud alleged by Spouses Viloria has not been
satisfactorily established as causal in nature to warrant the annulment of the subject contracts. In fact, Spouses
Viloria failed to prove by clear and convincing evidence that Mager’s statement was fraudulent. Specifically,
Spouses Viloria failed to prove that (a) there were indeed available seats at Amtrak for a trip to New Jersey on
August 13, 1997 at the time they spoke with Mager on July 21, 1997; (b) Mager knew about this; and (c) that she
purposely informed them otherwise.

This Court finds the only proof of Mager’s alleged fraud, which is Fernando’s testimony that an Amtrak had assured
him of the perennial availability of seats at Amtrak, to be wanting. As CAI correctly pointed out and as Fernando
admitted, it was possible that during the intervening period of three (3) weeks from the time Fernando purchased the
subject tickets to the time he talked to said Amtrak employee, other passengers may have cancelled their bookings
and reservations with Amtrak, making it possible for Amtrak to accommodate them. Indeed, the existence of fraud
cannot be proved by mere speculations and conjectures. Fraud is never lightly inferred; it is good faith that is. Under
the Rules of Court, it is presumed that "a person is innocent of crime or wrong" and that "private transactions have
been fair and regular." Spouses Viloria failed to overcome this presumption.
35

IV. Assuming the contrary, Spouses Viloria are nevertheless deemed to have ratified the subject contracts.

Even assuming that Mager’s representation is causal fraud, the subject contracts have been impliedly ratified when
Spouses Viloria decided to exercise their right to use the subject tickets for the purchase of new ones. Under Article
1392 of the Civil Code, "ratification extinguishes the action to annul a voidable contract."

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with
knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has
a right to invoke it should execute an act which necessarily implies an intention to waive his right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or
adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 36

Simultaneous with their demand for a refund on the ground of Fernando’s vitiated consent, Spouses Viloria likewise
asked for a refund based on CAI’s supposed bad faith in reneging on its undertaking to replace the subject tickets
with a round trip ticket from Manila to Los Angeles.

In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based on contractual
breach. Resolution, the action referred to in Article 1191, is based on the defendant’s breach of faith, a violation of
the reciprocity between the parties and in Solar Harvest, Inc. v. Davao Corrugated Carton Corporation, this Court
37 38

ruled that a claim for a reimbursement in view of the other party’s failure to comply with his obligations under the
contract is one for rescission or resolution.

However, annulment under Article 1390 of the Civil Code and rescission under Article 1191 are two (2) inconsistent
remedies. In resolution, all the elements to make the contract valid are present; in annulment, one of the essential
elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the consummation
stage of the contract when the parties are in the process of performing their respective obligations; in annulment,
the defect is already present at the time of the negotiation and perfection stages of the contract. Accordingly, by
pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly admitted the validity of the subject
contracts, forfeiting their right to demand their annulment. A party cannot rely on the contract and claim rights or
obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking
inconsistent positions.39

V. Contracts cannot be rescinded for a slight or casual breach.

CAI cannot insist on the non-transferability of the subject tickets.

Considering that the subject contracts are not annullable on the ground of vitiated consent, the next question is: "Do
Spouses Viloria have the right to rescind the contract on the ground of CAI’s supposed breach of its undertaking to
issue new tickets upon surrender of the subject tickets?"

Article 1191, as presently worded, states:

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

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

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

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

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts when it refused to apply the
value of Lourdes’ ticket for Fernando’s purchase of a round trip ticket to Los Angeles and in requiring him to pay an
amount higher than the price fixed by other airline companies.

In its March 24, 1998 letter, CAI stated that "non-refundable tickets may be used as a form of payment toward the
purchase of another Continental ticket for $75.00, per ticket, reissue fee ($50.00, per ticket, for tickets purchased
prior to October 30, 1997)."

Clearly, there is nothing in the above-quoted section of CAI’s letter from which the restriction on the non-
transferability of the subject tickets can be inferred. In fact, the words used by CAI in its letter supports the position
of Spouses Viloria, that each of them can use the ticket under their name for the purchase of new tickets whether for
themselves or for some other person.

Moreover, as CAI admitted, it was only when Fernando had expressed his interest to use the subject tickets for the
purchase of a round trip ticket between Manila and Los Angeles that he was informed that he cannot use the ticket
in Lourdes’ name as payment.

Contrary to CAI’s claim, that the subject tickets are non-transferable cannot be implied from a plain reading of the
provision printed on the subject tickets stating that "[t]o the extent not in conflict with the foregoing carriage and
other services performed by each carrier are subject to: (a) provisions contained in this ticket, x x x (iii) carrier’s
conditions of carriage and related regulations which are made part hereof (and are available on application at the
offices of carrier) x x x." As a common carrier whose business is imbued with public interest, the exercise of
extraordinary diligence requires CAI to inform Spouses Viloria, or all of its passengers for that matter, of all the
terms and conditions governing their contract of carriage. CAI is proscribed from taking advantage of any ambiguity
in the contract of carriage to impute knowledge on its passengers of and demand compliance with a certain
condition or undertaking that is not clearly stipulated. Since the prohibition on transferability is not written on the face
of the subject tickets and CAI failed to inform Spouses Viloria thereof, CAI cannot refuse to apply the value of
Lourdes’ ticket as payment for Fernando’s purchase of a new ticket.

CAI’s refusal to accept Lourdes’ ticket for the purchase of a new ticket for Fernando is only a casual breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not absolute. The general rule
is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and
fundamental violations as would defeat the very object of the parties in making the agreement. Whether a breach is
40

substantial is largely determined by the attendant circumstances. 41

While CAI’s refusal to allow Fernando to use the value of Lourdes’ ticket as payment for the purchase of a new
ticket is unjustified as the non-transferability of the subject tickets was not clearly stipulated, it cannot, however be
considered substantial. The endorsability of the subject tickets is not an essential part of the underlying contracts
and CAI’s failure to comply is not essential to its fulfillment of its undertaking to issue new tickets upon Spouses
Viloria’s surrender of the subject tickets. This Court takes note of CAI’s willingness to perform its principal obligation
and this is to apply the price of the ticket in Fernando’s name to the price of the round trip ticket between Manila and
Los Angeles. CAI was likewise willing to accept the ticket in Lourdes’ name as full or partial payment as the case
may be for the purchase of any ticket, albeit under her name and for her exclusive use. In other words, CAI’s
willingness to comply with its undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its
erroneous insistence that Lourdes’ ticket is non-transferable.

Moreover, Spouses Viloria’s demand for rescission cannot prosper as CAI cannot be solely faulted for the fact that
their agreement failed to consummate and no new ticket was issued to Fernando. Spouses Viloria have no right to
insist that a single round trip ticket between Manila and Los Angeles should be priced at around $856.00 and refuse
to pay the difference between the price of the subject tickets and the amount fixed by CAI. The petitioners failed to
allege, much less prove, that CAI had obliged itself to issue to them tickets for any flight anywhere in the world upon
their surrender of the subject tickets. In its March 24, 1998 letter, it was clearly stated that "[n]on-refundable tickets
may be used as a form of payment toward the purchase of another Continental ticket" and there is nothing in it
42

suggesting that CAI had obliged itself to protect Spouses Viloria from any fluctuation in the prices of tickets or that
the surrender of the subject tickets will be considered as full payment for any ticket that the petitioners intend to buy
regardless of actual price and destination. The CA was correct in holding that it is CAI’s right and exclusive
prerogative to fix the prices for its services and it may not be compelled to observe and maintain the prices of other
airline companies. 43

The conflict as to the endorsability of the subject tickets is an altogether different matter, which does not preclude
CAI from fixing the price of a round trip ticket between Manila and Los Angeles in an amount it deems proper and
which does not provide Spouses Viloria an excuse not to pay such price, albeit subject to a reduction coming from
the value of the subject tickets. It cannot be denied that Spouses Viloria had the concomitant obligation to pay
whatever is not covered by the value of the subject tickets whether or not the subject tickets are transferable or not. 1avvphi1

There is also no showing that Spouses Viloria were discriminated against in bad faith by being charged with a
higher rate. The only evidence the petitioners presented to prove that the price of a round trip ticket between Manila
and Los Angeles at that time was only $856.00 is a newspaper advertisement for another airline company, which is
inadmissible for being "hearsay evidence, twice removed." Newspaper clippings are hearsay if they were offered for
the purpose of proving the truth of the matter alleged. As ruled in Feria v. Court of Appeals,: 44

[N]ewspaper articles amount to "hearsay evidence, twice removed" and are therefore not only inadmissible but
without any probative value at all whether objected to or not, unless offered for a purpose other than proving the
truth of the matter asserted. In this case, the news article is admissible only as evidence that such publication does
exist with the tenor of the news therein stated. (citations omitted)
45

The records of this case demonstrate that both parties were equally in default; hence, none of them can seek
judicial redress for the cancellation or resolution of the subject contracts and they are therefore bound to their
respective obligations thereunder. As the 1st sentence of Article 1192 provides:

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor
shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the
contract, the same shall be deemed extinguished, and each shall bear his own damages. (emphasis supplied)

Therefore, CAI’s liability for damages for its refusal to accept Lourdes’ ticket for the purchase of Fernando’s round
trip ticket is offset by Spouses Viloria’s liability for their refusal to pay the amount, which is not covered by the
subject tickets. Moreover, the contract between them remains, hence, CAI is duty bound to issue new tickets for a
destination chosen by Spouses Viloria upon their surrender of the subject tickets and Spouses Viloria are obliged to
pay whatever amount is not covered by the value of the subject tickets.

This Court made a similar ruling in Central Bank of the Philippines v. Court of Appeals. Thus:
46

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island
Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply
with his obligation to pay his ₱17,000.00 debt within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal
obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of
Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for
damages, in the form of penalties and surcharges, for not paying his overdue ₱17,000.00 debt. x x x. 47

Another consideration that militates against the propriety of holding CAI liable for moral damages is the absence of
a showing that the latter acted fraudulently and in bad faith. Article 2220 of the Civil Code requires evidence of bad
faith and fraud and moral damages are generally not recoverable in culpa contractual except when bad faith had
been proven. The award of exemplary damages is likewise not warranted. Apart from the requirement that the
48
defendant acted in a wanton, oppressive and malevolent manner, the claimant must prove his entitlement to moral
damages. 49

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.

G.R. No. 191178 March 13, 2013

ANCHOR SAVINGS BANK (FORMERLY ANCHOR FINANCE AND INVESTMENT CORPORATION), Petitioner,
vs.
HENRY H. FURIGAY, GELINDA C. FURIGAY, HERRIETTE C. FURIGAY and HEGEM C.
FURIGAY, Respondents.

DECISION

MENDOZA, J.:

This concerns a petition for review_ on certiorari filed by petitioner Anchor Savings Bank (ASB) under Rule 45 of the
1997 Rules of Civil Procedure, assailing the May 28, 2009 Decision 1 and the January 22, 2010 Resolution2 of the
Court of Appeals (CA), in CA-G.R. CV No. 90123, dismissing the appeal. 3

The assailed resolution denied the separate motions for reconsideration of both parties.

The Facts

On April 21, 1999, ASB filed a verified complaint for sum of money and damages with application for replevin
against Ciudad Transport Services, Inc. (CTS), its president, respondent Henry H. Furigay; his wife, respondent
Gelinda C. Furigay; and a "John Doe." The case was docketed as Civil Case No. 99-865 and raffled to Branch 143
of the Regional Trial Court of Makati City (RTC).4

On November 7, 2003, the RTC rendered its Decision5 in favor of ASB, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff Anchor Savings Bank ordering defendants Ciudad
Transport Services, Inc., Henry H. Furigay and Genilda C. Furigay to pay the following:

1) The amount of Eight Million Six Hundred Ninety Five Thousand Two Hundred Two pesos and Fifty Nine
centavos (Php8,695,202.59) as PRINCIPAL OBLIGATION as of 12 April 1999;
 2) An INTEREST of Twelve per cent (12%) per annum until fully paid;

3) PENALTY CHARGE of Twelve per cent (12%) per annum until fully paid;

4) LIQUIDATED DAMAGES of Ten (10%) per cent of the total amount due;

5) One Hundred Thousand pesos as reasonable ATTORNEY’S FEES;

6) Costs of suit.

SO ORDERED.6

While Civil Case No. 99-865 was pending, respondent spouses donated their registered properties in Alaminos,
Pangasinan, to their minor children, respondents Hegem G. Furigay and Herriette C. Furigay. As a result, Transfer
Certificate of Title (TCT) Nos. 21743,7 21742,8 21741,9 and 2174010 were issued in the names of Hegem and
Herriette Furigay.

Claiming that the donation of these properties was made in fraud of creditors, ASB filed a Complaint for Rescission
of Deed of Donation, Title and Damages 11 against the respondent spouses and their children. The case was
docketed as Civil Case No. A-3040 and raffled to Branch 55 of the RTC of Alaminos, Pangasinan. In its Complaint,
ASB made the following allegations:

xxxx

4. That Ciudad Transport Services, Inc., Henry H. Furigay and Gelinda C. Furigay obtained a loan from Anchor
Savings Bank and subsequently the former defaulted from their loan obligation which prompted Anchor Savings
Bank to file the case entitled "Anchor Savings Bank vs. Ciudad Transport Services, Inc., Henry H. Furigay and
Gelinda C. Furigay" lodged before Makati City Regional Trial Court Branch 143 and docketed as Civil Case No. 99-
865. On 7 November 2003 the Honorable Court in the aforesaid case issued a Decision the dispositive portion of
which reads as follows:

xxxx

5. That defendants Sps. Henry H. Furigay and Gelinda C. Furigay are the registered owners of various real
properties located at the Province of Pangasinan covered by Transfer Certificate of Title Nos. 19721, 21678, 21679,
and 21682. x x x

6. That on 8 March 2001 defendants Sps. Henry H. Furigay and Gelinda C. Furigay executed a Deed of Donation in
favor of their children herein defendants Hegem C. Furigay and Herriette C. Furigay donating to them all of the
above-mentioned properties. Hence, the following titles were issued under their names to wit: Transfer Certificate of
Title Nos. 21743, 21742, 21741, and 21740. x x x

7. That the donation made by defendants Sps. Henry H. Furigay and Gelinda C. Furigay were done with the
intention to defraud its creditors particularly Anchor Savings Bank. Said transfer or conveyance is the one
contemplated by Article 1387 of the New Civil Code, which reads:

xxxx

8. x x x In the instant case, Sps. Furigay donated the properties at the time there was a pending case against them.
x x x. In the instant case, the Sps. Furigay donated the properties to their son and daughter. Moreover, the transfer
or donation was executed in 2001 when both donees Hegem C. Furigay and Herriette C. Furigay are minors.

9. Clearly, the Donation made by defendants Sps. Furigay was intended to deprive plaintiff Anchor Savings Bank
from going after the subject properties to answer for their due and demandable obligation with the Bank. The
donation being undertaken in fraud of creditors then the same may be rescinded pursuant to Article 1381 of the New
Civil Code. The said provision provides that: x x x x

Consequently, Transfer Certificate of Title Nos. 21743, 21742, 21741, and 21740 issued under the names of
defendants Herriette C. Furigay and Hegem C. Furigay should likewise be cancelled and reverted to the names of
co-defendants Henry and Gelinda Furigay.

10. That because of the fraud perpetrated by defendants, plaintiff suffered the following damages.

11. Plaintiff suffered actual and compensatory damages as a result of the filing of the case the bank has spent a lot
of man-hours of its employees and officers re-evaluating the account of defendant Sps. Furigay. Such man-hour
when converted into monetary consideration represents the salaries and per diems of its employees particularly the
CI/Appraiser, Head Office Lawyer and Bank Auditor;

12. Said claim likewise represents administrative expenses such as transportation expenses, reproduction of
documents, and courier expenses among others;

13. Defendants should be made to pay plaintiff Anchor Savings Bank the amount of PESOS: ONE MILLION
(₱1,000,000.00) as moral damages for the damage it caused to the latter’s business goodwill and reputation;

14. By way of example for the public and to deter others from the malicious filing of baseless (sic) suit, defendants
should be ordered to pay [plaintiff] the amount of PESOS: TWO HUNDRED THOUSAND (₱200,000.00) as
exemplary damages.

15. Attorneys fees equivalent to twenty-five percent (25%) of the total amount that can be collected from defendant;

16. Defendants should also be held liable to pay for the cost of suit. 12

Instead of filing an answer, respondents sought the dismissal of the complaint, principally arguing that the RTC
failed to acquire jurisdiction over their persons as well as over the subject matter in view of the failure of the ASB to
serve the summons properly and to pay the necessary legal fees.

RTC Resolutions

On September 29, 2006, the RTC issued an Order 13 denying the motion to dismiss. Respondents sought
reconsideration of the Order adding that the ASB’s action for rescission had already prescribed.

Upon filing of ASB’s opposition to the motion for reconsideration, on February 27, 2007, the RTC reconsidered its
earlier pronouncement and dismissed the complaint for failure of ASB to pay the correct docket fees and for
prescription.14

RTC explained that the service of summons by publication made by ASB was valid because respondents’
whereabouts could not have been ascertained with exactitude and because Section 14, Rule 14 of the Rules of
Court did not distinguish what kind of action it would apply.

On the issue of lack of jurisdiction over the subject matter of the case, the RTC ruled that the complaint was actually
a real action as it affected title to or possession of real property. Accordingly, the basis for determining the correct
docket fees was the fair market value of the real property under litigation as stated in its current tax declaration or its
current zonal valuation, whichever was higher. Considering that ASB did not state the current tax declaration or
current zonal valuation of the real properties involved, as well as the amount of actual damages and attorney’s fees
it prayed for, the trial court was of the view that ASB purposely evaded the payment of the correct filing fees.

On the issue of prescription, the RTC ruled that the action for rescission had already prescribed. It stated that an
action for rescission grounded on fraud should be filed within four (4) years from the discovery of fraud. ASB filed
the action for rescission only on October 14, 2005 or after four (4) years from the time the Deed of Donation was
registered in the Register of Deeds of Alaminos, Pangasinan, on April 4, 2001. The four-year prescriptive period
should be reckoned from the date of registration of the deed of donation and not from the date of the actual
discovery of the registration of the deeds of donation because registration is considered notice to the whole world.
Thus, the RTC disposed:

WHEREFORE, premises considered, the Order dated September 29, 2006 is hereby reconsidered and set aside, in
lieu thereof, the instant complaint is hereby ordered dismissed on the account of lack of jurisdiction over the subject
matter of the case for failure of the plaintiff to pay the correct docket fees upon its institution attended by bad faith
and on the ground of prescription.

SO ORDERED.15

ASB sought reconsideration, but to no avail.16

Ruling of the CA

On appeal, the CA agreed with ASB that its complaint should not have been dismissed on the ground that it failed to
pay the correct docket fees. It stated that the lack of specific amount of actual damages and attorney’s fees in ASB’s
complaint did not, by itself, amount to evident bad faith. The CA noted that ASB had previously manifested before
the trial court that it was willing to pay additional docket fees should the same be found insufficient.
On the issue of prescription, however, the CA saw things differently. Considering the subsidiary nature of an action
for rescission, the CA found that the action of ASB had not yet prescribed, but was premature. The CA noted that
ASB failed to allege in its complaint that it had resorted to all legal remedies to obtain satisfaction of its claim. The
CA wrote:

After a thorough examination of the foregoing precepts and the facts engirding this case, this court opines that
plaintiff-appellant’s action for rescission has not yet prescribed for it must be emphasized that it has not even
accrued in the first place. To stress, an action for rescission or accion pauliana accrues only if all five requisites are
present, to wit:

1) That the plaintiff asking for rescission, has a credit prior to the alienation, although demandable later;

2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person;

3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by rescission of the
conveyance to the third person;

4) That the act being impugned is fraudulent; and

5) That the third person who received the property conveyed, if by onerous title, has been an accomplice in
the fraud.

In the instant case, the plaintiff-appellant failed to satisfy the third requirement considering that it did not allege in its
complaint that it has resorted to all legal remedies to obtain satisfaction of his claim. It did not even point out in its
complaint if the decision in Civil Case No. 99-865 has already become final and executory and whether the
execution thereof yielded negative result in satisfying its claims. Even the skip tracing allegedly done by the plaintiff-
appellant to locate the properties of the defendant-appellees was not mentioned. And although the skip tracing
reports were subsequently presented by the plaintiff-appellant, such reports are not sufficient to satisfy the third
requirement. First, they are not prepared and executed by the sheriff, and second, they do not demonstrate that the
sheriff failed to enforce and satisfy the judgment of the court and that the plaintiff-appellant has exhausted the
property of the defendant-appellees. Perforce, the action for rescission filed by the plaintiff-appellant is dismissible. 17

As stated at the outset, both parties sought reconsideration but were rebuffed.

Issue

Hence, this recourse of ASB to the Court, presenting the lone issue of:

WHETHER OR NOT THE COURT OF APPEALS, IN CA G.R. CV NO 90123, HAS DECIDED A QUESTION OF
SUBSTANCE, NOT HERETOFORE DETERMINED BY THE SUPREME COURT, OR HAS DECIDED IT IN A WAY
PROBABLY NOT IN ACCORDANCE WITH LAW OR THE APPLICABLE DECISIONS OF THE SUPREME COURT,
WHEN IT RENDERED THE DECISION DATED 28 MAY 2009, AND RESOLUTION DATED 22 JANUARY 2010, IN
FINDING THAT PETITIONER FAILED TO PROVE THAT IT HAS RESORTED TO ALL LEGAL REMEDIES TO
OBTAIN SATISFACTION OF ITS CLAIM, WITHOUT GIVING PETITIONER THE OPPORTUNITY TO BE HEARD
OR THE CHANCE TO PRESENT EVIDENCE TO SUPPORT ITS ACTION, THEREBY DEPRIVING THE LATTER
OF THE RIGHT TO DUE PROCESS.18

ASB argues that, considering that its action was still in its preliminary stages, the CA erred in dismissing its action
on the ground that it failed to allege in its complaint the fact that it had resorted to all other legal remedies to satisfy
its claim, because it is a matter that need not be alleged in its complaint, but, rather, to be proved during trial. It
asserts that its action is not yet barred by prescription, insisting that the reckoning point of the four

(4)-year prescriptive period should be counted from September 2005, when it discovered the fraudulent donation
made by respondent spouses.

The basic issue in this case is whether the CA was correct in dismissing ASB’s complaint on the ground that the
action against respondents was premature.

Ruling of the Court

The Court finds the petition bereft of merit.

Section 1 of Rule 2 of the Revised Rules of Court requires that every ordinary civil action must be based on a cause
of action. Section 2 of the same rule defines a cause of action as an act or omission by which a party violates the
right of another. In order that one may claim to have a cause of action, the following elements must concur: (1) a
right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on
the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such
defendant in violation of the right of the plaintiff or constituting a breach of the obligation of the defendant to the
plaintiff for which the latter may maintain an action for recovery of damages or other appropriate relief. 19 In other
words, "a cause of action arises when that should have been done is not done, or that which should not have been
done is done."20

In Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., 21 it was held that "before an action can
properly be commenced, all the essential elements of the cause of action must be in existence, that is, the cause of
action must be complete. All valid conditions precedent to the institution of the particular action, whether prescribed
by statute, fixed by agreement of the parties or implied by law must be performed or complied with before
commencing the action, unless the conduct of the adverse party has been such as to prevent or waive performance
or excuse non-performance of the condition."

Moreover, it is not enough that a party has, in effect, a cause of action.

The rules of procedure require that the complaint must contain a concise statement of the ultimate or essential facts
constituting the plaintiff's cause of action. "The test of the sufficiency of the facts alleged in the complaint is whether
or not, admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the
prayer of plaintiff."22 The focus is on the sufficiency, not the veracity, of the material allegations. Failure to make a
sufficient allegation of a cause of action in the complaint warrants its dismissal. 23

In relation to an action for rescission, it should be noted that the remedy of rescission is subsidiary in nature; it
cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the
same.24 Article 1177 of the New Civil Code provides:

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

Consequently, following the subsidiary nature of the remedy of rescission, a creditor would have a cause of action to
bring an action for rescission, if it is alleged that the following successive measures have already been taken: (1)
exhaust the properties of the debtor through levying by attachment and execution upon all the property of the
debtor, except such as are exempt by law from execution; (2) exercise all the rights and actions of the debtor, save
those personal to him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud
of their rights (accion pauliana).25

With respect to an accion pauliana, it is required that the ultimate facts constituting the following requisites must all
be alleged in the complaint, viz.:

1) That the plaintiff asking for rescission, has credit prior to the alienation, although demandable later;

2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person;

3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by rescission of the
conveyance to the third person;

4) That act being impugned is fraudulent; and

5) That the third person who received the property conveyed, if by onerous title, has been an accomplice in
the fraud.26

A cursory reading of the allegations of ASB’s complaint would show that it failed to allege the ultimate facts
constituting its cause of action and the prerequisites that must be complied before the same may be instituted. ASB,
without availing of the first and second remedies, that is, exhausting the properties of CTS, Henry H. Furigay and
Genilda C. Furigay or their transmissible rights and actions, simply undertook the third measure and filed an action
for annulment of the donation. This cannot be done. The Court hereby quotes with approval the thorough discourse
of the CA on this score:27

To answer the issue of prescription, the case of Khe Hong Cheng vs. Court of Appeals (G.R. No. 144169, March 28,
2001) is pertinent. In said case, Philam filed an action for collection against Khe Hong Cheng. While the case was
still pending, or on December 20, 1989, Khe Hong Cheng, executed deeds of donations over parcels of land in favor
of his children, and on December 27, 1989, said deeds were registered. Thereafter, new titles were issued in the
names of Khe Hong Cheng’s children. Then, the decision became final and executory. But upon enforcement of writ
of execution, Philam found out that Khe Hong Cheng no longer had any property in his name. Thus, on February 25,
1997, Philam filed an action for rescission of the deeds of donation against Khe Hong Cheng alleging that such was
made in fraud of creditors. However, Khe Hong Cheng moved for the dismissal of the action averring that it has
already prescribed since the four-year prescriptive period for filing an action for rescission pursuant to Article 1389
of the Civil Code commenced to run from the time the deeds of donation were registered on December 27, 1989.
Khe Hong Cheng averred that registration amounts to constructive notice and since the complaint was filed only on
February 25, 1997, or more than four (4) years after said registration, the action was already barred by prescription.
The trial court ruled that the complaint had not yet prescribed since the prescriptive period began to run only from
December 29, 1993, the date of the decision of the trial court. Such decision was affirmed by this court but reckoned
the accrual of Philam's cause of action in January 1997, the time when it first learned that the judgment award could
not be satisfied because the judgment creditor, Khe Hong Cheng, had no more properties in his name. Hence, the
case reached the Supreme Court which ruled that the action for rescission has not yet prescribed, ratiocinating as
follows:

"Essentially, the issue for resolution posed by petitioners is this: When did the four (4) year prescriptive period as
provided for in Article 1389 of the Civil Code for respondent Philam to file its action for rescission of the subject
deeds of donation commence to run?

The petition is without merit.

Article 1389 of the Civil Code simply provides that, ‘The action to claim rescission must be commenced within four
years.’ Since this provision of law is silent as to when the prescriptive period would commence, the general rule, i.e,
from the moment the cause of action accrues, therefore, applies. Article 1150 of the Civil Code is particularly
instructive:

ARTICLE 1150. The time for prescription for all kinds of actions, when there is no special provision which ordains
otherwise, shall be counted from the day they may be brought.

Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action which determines the
starting point for the computation of the prescriptive period for the action. Article 1383 of the Civil Code provides as
follows:

ARTICLE 1383. An action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.

It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed of only after all other
legal remedies have been exhausted and have been proven futile. For an accion pauliana to accrue, the following
1âwphi1

requisites must concur:

1) That the plaintiff asking for rescission, has a credit prior to the alienation, although demandable later; 2) That the
debtor has made a subsequent contract conveying a patrimonial benefit to a third person; 3) That the creditor has
no other legal remedy to satisfy his claim, but would benefit by rescission of the conveyance to the third person; 4)
That the act being impugned is fraudulent; 5) That the third person who received the property conveyed, if by
onerous title, has been an accomplice in the fraud.

We quote with approval the following disquisition of the CA on the matter:

An accion pauliana accrues only when the creditor discovers that he has no other legal remedy for the satisfaction
of his claim against the debtor other than an accion pauliana. The accion pauliana is an action of a last resort. For
as long as the creditor still has a remedy at law for the enforcement of his claim against the debtor, the creditor will
not have any cause of action against the creditor for rescission of the contracts entered into by and between the
debtor and another person or persons. Indeed, an accion pauliana presupposes a judgment and the issuance by the
trial court of a writ of execution for the satisfaction of the judgment and the failure of the Sheriff to enforce and
satisfy the judgment of the court. It presupposes that the creditor has exhausted the property of the debtor. The date
of the decision of the trial court against the debtor is immaterial. What is important is that the credit of the plaintiff
antedates that of the fraudulent alienation by the debtor of his property. After all, the decision of the trial court
against the debtor will retroact to the time when the debtor became indebted to the creditor.

Petitioners, however, maintain that the cause of action of respondent Philam against them for the rescission of the
deeds of donation accrued as early as December 27, 1989, when petitioner Khe Hong Cheng registered the subject
conveyances with the Register of Deeds. Respondent Philam allegedly had constructive knowledge of the execution
of said deeds under Section 52 of Presidential Decree No. 1529, quoted infra, as follows:

SECTION 52. Constructive knowledge upon registration. — Every conveyance, mortgage, lease, lien, attachment,
order, judgment, instrument or entry affecting registered land shall, if registered, filed or entered in the Office of the
Register of Deeds for the province or city where the land to which it relates lies, be constructive notice to all persons
from the time of such registering, filing, or entering.
Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is misplaced, for in no
way does this imply that the specific provisions of the former may be all together ignored. To count the four year
prescriptive period to rescind an allegedly fraudulent contract from the date of registration of the conveyance with
the Register of Deeds, as alleged by the petitioners, would run counter to Article 1383 of the Civil Code as well as
settled jurisprudence. It would likewise violate the third requisite to file an action for rescission of an allegedly
fraudulent conveyance of property, i.e., the creditor has no other legal remedy to satisfy his claim.

An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial court of a writ of
execution for the satisfaction of the judgment, and 3) the failure of the sheriff to enforce and satisfy the judgment of
the court. It requires that the creditor has exhausted the property of the debtor. The date of the decision of the trial
court is immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by
the debtor of his property. After all, the decision of the trial court against the debtor will retroact to the time when the
debtor became indebted to the creditor.

xxxx

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng had executed the
deeds of donation in favor of his children, the complaint against Butuan Shipping Lines and/or petitioner Khe Hong
Cheng was still pending before the trial court. Respondent Philam had no inkling, at the time, that the trial court's
judgment would be in its favor and further, that such judgment would not be satisfied due to the deeds of donation
executed by petitioner Khe Hong Cheng during the pendency of the case. Had respondent Philam filed his
complaint on December 27, 1989, such complaint would have been dismissed for being premature. Not only were
all other legal remedies for the enforcement of respondent Philam's claims not yet exhausted at the time the deeds
of donation were executed and registered. Respondent Philam would also not have been able to prove then that
petitioner Khe Hong Cheng had no more property other than those covered by the subject deeds to satisfy a
favorable judgment by the trial court.

xxxx

As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by petitioner Khe
Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City to attach the properties of
petitioner Khe Hong Cheng. There they found that he no longer had any properties in his name. It was only then that
respondent

Philam's action for rescission of the deeds of donation accrued because then it could be said that respondent
Philam had exhausted all legal means to satisfy the trial court's judgment in its favor. Since respondent Philam filed
its complaint for accion pauliana against petitioners on February 25, 1997, barely a month from its discovery that
petitioner Khe Hong Cheng had no other property to satisfy the judgment award against him, its action for rescission
of the subject deeds clearly had not yet prescribed."

From the foregoing, it is clear that the four-year prescriptive period commences to run neither from the date of the
registration of the deed sought to be rescinded nor from the date the trial court rendered its decision but from the
day it has become clear that there are no other legal remedies by which the creditor can satisfy his claims.
[Emphases in the original]

In all, it is incorrect for ASB to argue that a complaint need not allege all the elements constituting its cause of action
since it would simply adduce proof of the same during trial. "Nothing is more settled than the rule that in a motion to
dismiss for failure to state a cause of action, the inquiry is "into the sufficiency, not the veracity, of the material
allegations."28 The inquiry is confined to the four comers of the complaint, and no other. 29 Unfortunately for ASB, the
Court finds the allegations of its complaint insufficient in establishing its cause of action and in apprising the
respondents of the same so that they could defend themselves intelligently and effectively pursuant to their right to
due process. It is a rule of universal application that courts of justice are constituted to adjudicate substantive rights.
While courts should consider public policy and necessity in putting an end to litigations speedily they must
nevertheless harmonize such necessity with the fundamental right of litigants to due process.

WHEREFORE, the petition is DENIED.

SO ORDERED.
G.R. No. 104234 June 30, 1995

AIR FRANCE, petitioner,

vs.
HONORABLE COURT OF APPEALS, IOLANI DIONISIO, MULTINATIONAL TRAVEL CORPORATION OF THE
PHIL., FIORELLO and VICKY PANOPIO, respondents.

ROMERO, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals which annulled and set aside the
1

orders of the Regional Trial Court of Manila, Branch 27.

The facts, as found by respondent Court of Appeals, are as follows:

Petitioner Air France filed a complaint for sum of money and damages against private respondents Multinational
Travel Corporation of the Philippines, Fiorello Panopio and Vicky Panopio before the Regional Trial Court of Manila,
Branch 27, then presided over by the Hon. Ricardo Diaz.

After trial, the court rendered judgment on August 31, 1987 in favor of petitioner, ordering private respondents to
pay petitioner, jointly and severally, the amount of P2,518,698.66, with legal rate of interest per annum from
September 22, 1986, until fully paid and P50,000.00 as and for attorney's fees.

On December 29, 1989, petitioner moved for the issuance of an alias writ of execution on the ground of unsatisfied
judgment. It likewise moved to declare the sale to Iolani Dionisio of a parcel of land with a house erected thereon in
the name of the Multinational Food Corporation and covered by Transfer Certificate of Title No. 353935 as one in
fraud of creditors.

Petitioner, in said motion, stated that private respondent spouses jointly owned 91% of Multinational Food and
Catering Corporation (Multinational Food), other stockholders being: Aldo Glen Panopio (brother of Fiorello) — 3%;
Jaime Dionisio (husband of private respondent Iolani Dionisio) — 3%; and Marie Rose Ricasa — 3%. Petitioner
stated that although Multinational Food was registered with the Securities and Exchange Corporation, it neither
engaged in operations nor held meetings because of adverse business conditions. The Corporation, through its
President Iolani Dionisio, filed a sworn statement to this effect with the SEC dated July 28, 1986. However,
petitioner alleged that despite its being non-operational, Multinational Food acquired from Ayala Investment and
Development Corporation (Ayala Corporation) the subject property on February 1, 1985.

Petitioner further alleged that private respondent spouses subsequently sold the property to Iolani Dionisio on April
11, 1985. However, the sale was not registered until one year and nine months later or at the time petitioner was
pursuing the issuance of a writ of attachment.

Petitioner's motion was set for hearing on January 4, 1990, on which date the respondent court ordered the
issuance of an alias writ of execution and on January 8, 1990, the same was issued.

Private respondent spouses filed their opposition thereto on the following grounds:

. . . (a) the respondent court has no jurisdiction because the alleged buyer in the person of Iolani
Dionisio is not a party in the case; (b) that Iolani Dionisio was not served with summons and
therefore to declare the sale to her in fraud of creditors without even jurisdiction would amount to
deprivation of property without due process of law; and (c) that the proper remedy is an independent
civil action where indispensable parties are to be impleaded to afford them to answer and/or refute
charges.

On January 19, 1990, the trial court issued an order requiring Iolani Dionisio and Multinational Food to answer the
allegations contained in petitioner's motion. However, both parties failed to file their respective answers thereto.

On November 19, 1990, the court issued an order finding the sale in favor of Iolani Dionisio of the subject property
covered by TCT No. 353935 registered with the Registry of Deeds of Quezon City in the name of Multinational Food
as having been made in fraud of creditors.

Private respondents filed a motion for reconsideration which was denied in the order of February 15, 1991;
whereupon, they then filed a petition for certiorari with the Court of Appeals, alleging that the lower court acted with
grave abuse of discretion amounting to lack of jurisdiction.

On February 24, 1992, the appellate court rendered a decision annulling and setting aside the questioned orders. It
further enjoined petitioner from proceeding against the property in question.

Hence, this petition.

The sole issue to be resolved in the instant case is whether or not the Court of Appeals erred in annulling and
setting aside the orders of the trial court.

Petitioner claims that a separate civil action, as proposed by private respondents, will only perpetrate fraud.

We find petitioner's contention to be devoid of merit.

First, the subject property is registered with the Register of Deeds of Quezon City in the name of the Multinational
Food and Catering Corporation and not in the name of either the Multinational Travel Corporation of the Philippines
or of the spouses Fiorello and Vicky Panopio who are the judgment debtors.

It is well-settled that the power of the court in the execution of judgments extends only over properties
unquestionably belonging to the judgment debtor. Here, the property in question was sold to private respondent
2

Iolani Dionisio, who was not a party to the case subject of execution.

In Bayer Philippines, Inc. v. Agana, the Court said:

3

. . . Once a court renders a final judgment, all the issues between or among the parties before it are
deemed resolved and its judicial function as regards any matter related to the controversy litigated
comes to an end. The execution of its judgment is purely a ministerial phase of adjudication. Indeed,
the nature of its duty to see to it that the claim of the prevailing party is fully satisfied from the
properties of the loser is generally ministerial. . ..
 xxx xxx xxx

In other words, construing Section 17 of Rule 39 of the Revised Rules of Court, the rights of third-
party claimants over certain properties levied upon by the sheriff to satisfy the judgment should not
be decided in the action where the third-party claims have been presented, but in the separate
action instituted by the claimants.

This is evident from the very nature of the proceedings. In Herald Publishing, supra, We intimated
that the levy by the sheriff of a property by virtue of a writ of attachment may be considered as made
under authority of the court only when the property levied upon unquestionably belongs to the
defendant. If he attach properties (sic) other than those of defendant, he acts beyond the limits of his
authority. Otherwise stated, the court issuing a writ of execution is supposed to enforce its authority
only over properties of the judgment debtor, and should a third party appear to claim the property
levied upon by the sheriff, the procedure laid down by the Rules is that such claim should be the
subject of a separate and independent action. (Emphasis supplied)

Multinational Food and Iolani Dionisio, not being parties to the case, the property covered by TCT No. 353935 may
not be levied upon to satisfy the obligations of private respondent spouses and the Multinational Travel Corporation.

Petitioner's contrary claim that the property belongs to private respondent spouses, if true, requires a rescissory
action which cannot be done in the same case, but through the filing of a separate action.

Rescission is a relief which the law grants on the premise that the contract is valid for the protection of one of the
contracting parties and third persons from all injury and damage the contract may cause, or to protect some
incompatible and preferential right created by the contract. 4

Under Art. 1381 of the Civil Code, the following contracts are rescissible:

xxx xxx xxx

(1) Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceeding number;

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

(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.

Rescissible contracts, not being void, they remain legally effective until set aside in a rescissory action and may
convey title. Nor can they be attacked collaterally upon the grounds for rescission in a land registration proceeding.5

An action for rescission may not be raised or set up in a summary proceeding through a motion, but in an
independent civil action and only after a full-blown trial. As Article 1383 of the Civil Code provides:

Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same.

Regarding contracts undertaken in fraud of creditors, the existence of the intention to prejudice the same should be
determined either by the presumption established by Article 1387 or by the proofs presented in the trial of the
6

case. In any case, the presumption of fraud established by this article is not conclusive, and may be rebutted by
7

satisfactory and convincing evidence. To repeat, an independent action is necessary to prove that the contract is
8

rescissible.

Under Article 1389 of the Civil Code, an "accion pauliana," the action to rescind contracts made in favor of
9

creditors, must be commenced within four years.

Clearly, the rights and defenses which the parties in a rescissible contract may raise or set up cannot be properly
ventilated in a motion but only in a full trial.
The appellate court did not err in holding that the trial court acted with grave abuse of discretion in resolving these
matters through mere motion of petitioner.

WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED in toto.

SO ORDERED.

G.R. No. 126000 October 7, 1998

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM (MWSS), petitioner,

vs.
COURT OF APPEALS, HON. PERCIVAL LOPEZ, AYALA CORPORATION and AYALA LAND,
INC., respondents.

G.R. No. 128520 october 7, 1998

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
HON. PERCIVAL MANDAP LOPEZ, CAPITOL HILLS GOLF AND COUNTRY CLUB INC., SILHOUETTE
TRADING CORPORATION, and PABLO ROMAN JR., respondents.

MARTINEZ, J.:

These are consolidated petitions for review emanating from Civil Case No. Q-93-15266 of the Regional Trial Court
of Quezon City, Branch 78, entitled "Metropolitan Waterworks and Sewerage System (hereafter MWSS) vs. Capitol
Hills Golf & Country Club Inc. (hereafter, CHGCCI), STC (hereafter, SILHOUETTE), Ayala Corporation, Ayala Land,
Inc. (hereafter AYALA) Pablo Roman, Jr., Josefina A. Roxas, Jesus Hipolito, Alfredo Juinito, National Treasurer of
the Philippines and the Register of Deeds of Quezon City."
From the voluminous pleadings and other documents submitted by the parties and their divergent styles in the
presentation of the facts, the basic antecedents attendant herein are as follows:

Sometime in 1965, petitioner MWSS (then known as NAWASA) leased around one hundred twenty eight (128)
hectares of its land (hereafter, subject property) to respondent CHGCCI (formerly the International Sports
Development Corporation) for twenty five (25) years and renewable for another fifteen (15) years or until the year
2005, with the stipulation allowing the latter to exercise a right of first refusal should the subject property be made
open for sale. The terms and conditions of respondent CHGCCI's purchase thereof shall nonetheless be subject to
presidential approval.

Pursuant to Letter of instruction (LOI) No. 440 issued on July 29,1976 by then President Ferdinand E. Marcos
directing petitioner MWSS to negotiate the cancellation of the MWSS-CHGCCI lease agreement for the disposition
of the subject property, Oscar Ilustre, then General Manager of petitioner MWSS, sometime in November of 1980
informed respondent CHGCCI, through its president herein respondent Pablo Roman, Jr., of its preferential right to
buy the subject property which was up for sale. Valuation thereof was to be made by an appraisal company of
petitioner MWSS' choice, the Asian Appraisal Co., Inc. which, on January 30, 1981, pegged a fair market value of
P40.00 per square meter or a total of P53,800,000.00 for the subject property.

Upon being informed that petitioner MWSS and respondent CHGCCI had already agreed in principle on the
purchase of the subject property, President Marcos expressed his approval of the sale as shown in his marginal
note on the letter sent by respondents Jose Roxas and Pablo Roman, Jr. dated December 20, 1982.

The Board of Trustees of petitioner MWSS thereafter passed Resolution 36-83, approving the sale of the subject
property in favor of respondent SILHOUETTE, as assignee of respondent CHGCCI, at the appraised value given by
Asian Appraisal Co., Inc. Said Board Resolution reads:

NOW, THEREFORE, BE IT RESOLVED, as it is hereby resolved, that in accordance with Section 3,

Par. (g) of the MWSS Charter and subject to the approval of the President of the Philippines, the
sale of a parcel of land located in Balara, Quezon City, covered by TCT No. 36069 of the Registry of
Deeds of Quezon City, containing an area of ONE HUNDRED TWENTY SEVEN (127.313) hectares
more or less, which is the remaining portion of the area under lease after segregating a BUFFER
ZONE already surveyed along the undeveloped area near the treatment plant and the developed
portion of the CHGCCI golf course, to SILHOUETTE TRADING CORPORATION as Assignee of
Capitol Hills Golf & Country Club, Inc., at FORTY (P40.00) PESOS per square meter, be and is
hereby approved.

BE IT RESOLVED FURTHER, that the General Manager be authorized, as he is hereby authorized

to sign for and in behalf of the MWSS the contract papers and other pertinent documents relative
thereto.

The MWSS-SILHOUETTE sales agreement eventually pushed through. Per the Agreement dated May 11, 1983
covering said purchase, the total price for the subject property is P50,925,200, P25 Million of which was to be paid
upon President Marcos' approval of the contract and the balance to be paid within one (1) year from the transfer of
the title to respondent SILHOUETTE as vendee with interest at 12% per annum. The balance was also secured by
an irrevocable letter of credit. A Supplemental Agreement was forged between petitioner MWSS and respondent
SILHOUETTE on August 11, 1983 to accurately identify the subject property.

Subsequently, respondent SILHOUETTE, under a deed of sale dated July 26, 1984, sold to respondent AYALA
about sixty-seven (67) hectares of the subject property at P110.00 per square meter. Of the total price of around
P74 Million, P25 Million was to be paid by respondent AYALA directly to petitioner MWSS for respondent
SILHOUETTE's account and P2 Million directly to respondent SILHOUETTE. P11,600,000 was to be paid upon the
issuance of title in favor of respondent AYALA, and the remaining balance to be payable within one (1) year with
12% per annum interest.

Respondent AYALA developed the land it purchased into a prime residential area now known as the Ayala Heights
Subdivision.

Almost a decade later, petitioner MWSS on March 26, 1993 filed an action against all herein named respondents
before the Regional Trial Court of Quezon City seeking for the declaration of nullity of the MWSS-SILHOUETTE
sales agreement and all subsequent conveyances involving the subject property, and for the recovery thereof with
damages.

Respondent AYALA filed its answer pleading the affirmative defenses of (1) prescription, (2) laches, (3)
waiver/estoppel/ratification, (4) no cause of action, (5) non-joinder of indispensable parties, and (6) non-jurisdiction
of the court for non-specification of amount of damages sought.
On June 10, 1993; the trial court issued an Order dismissing the complaint of petitioner MWSS on grounds of
prescription, laches, estoppel and non-joinder of indispensable parties.

Petitioner MWSS's motion for reconsideration of such Order was denied, forcing it to seek relief from the respondent
Court where its appeal was docketed as CA-G.R. CV No. 50654. It assigned as errors the following:

I. The court a quo committed manifest serious error and gravely abused its discretion
when it ruled that plaintiffs cause of action is for annulment of contract which has
already prescribed in the face of the clear and unequivocal recitation of six causes of
action in the complaint, none of which is for annulment.

II. The lower court erred and exceeded its jurisdiction when, contrary to the rules of
court and jurisprudence, it treated and considered the affirmative defenses of Ayalas
— defenses not categorized by the rules as grounds for a motion to dismiss — as
grounds of a motion to dismiss which justify the dismissal of the complaint.

III. The lower court abused its discretion and exceeded its jurisdiction when it
favorably acted on Ayala's motion for preliminary hearing of affirmative defenses
(motion to dismiss) by dismissing the complaint without conducting a hearing or
otherwise requiring the Ayalas to present evidence on the factual moorings of their
motion.

IV. The lower court acted without jurisdiction and committed manifest error when it
resolved factual issues and made findings and conclusions of facts all in favor of the
Ayalas in the absence of any evidence presented by the parties.

V. The court a quo erred when, contrary to the rules and jurisprudence, it
prematurely ruled that laches and estoppel bar the complaint as against Ayalas or
that otherwise the alleged failure to implead indispensable parties dictates the
dismissal of the complaint.

In the meantime, respondents CHGCCI and Roman filed their own motions to hear their affirmative defenses which
were identical to those adduced by respondent AYALA. For its part, respondent SILHOUETTE filed a similarly
grounded motion to dismiss.

Ruling upon these motions, the trial court issued an order dated December 13, 1993 denying all of them. The
motions for reconsideration of the respondents concerned met a similar fate in the May 9, 1994 Order of the trial
court. They thus filed special civil actions for certiorari before the respondent Court which were docketed as CA-
G.R. SP Nos. 34605, 34718 and 35065 and thereafter consolidated with CA-G.R. CV No. 50694 for disposition.

Respondent court, on August 19, 1996, rendered the assailed decision, the dispositive portion of which reads:

WHEREFORE, judgment is rendered:

1.) DENYING the petitions for writ of certiorari for lack of merit; and

2.) AFFIRMING the order of the lower court dismissing the complaint against the appellees Ayalas.

SO ORDERED.

Petitioner MWSS appealed to this Court that portion of the respondent Court's decision affirming the trial court's
dismissal of its complaint against respondent AYALA, docketed as G.R. No. 126000. The portion dismissing the
petition for certiorari (CA-GR Nos. 34605, 347718 and 35065) of respondents Roman, CHGCCI and SILHOUETTE,
however, became final and executory for their failure to appeal therefrom. Nonetheless, these respondents were
able to thereafter file before the trial court another motion to dismiss grounded, again, on prescription which the trial
court in an Order of October 1996 granted.

This prompted petitioner MWSS to file another petition for review of said trial court Order before this Court and
docketed as G.R. No. 128520. On motion of petitioner MWSS, this Court in a Resolution dated December 3, 1997
directed the consolidation of G.R. Nos. 126000 and 128520.

The errors assigned by petitioner MWSS in CA-GR No. 126000 are:

I.
 In holding, per the questioned Decision dated 19 August 1996, that plaintiffs cause of action is for
annulment of contract which has already prescribed in the face of the clear and unequivocal
recitation of six causes of action in the complaint, none of which is for annulment, and in effect
affirming the dismissal by the respondent judge of the complaint against respondent Ayalas. This
conclusion of respondent CH is, with due respect, manifestly mistaken and legally absurd.

II.

In failing to consider that the complaint recited six alternative causes of action, such that the
insufficiency of one cause — assuming there is such insufficiency — does not render insufficient the
other causes and the complaint itself. The contrary ruling in this regard by respondent CA is founded
entirely on speculation and conjecture and is constitutive of grave abuse of discretion.

In G.R. No. 128520, petitioner MWSS avers that:

I.

The court of origin erred in belatedly granting respondent's motions to dismiss which are but a
rehash, a disqualification, of their earlier motion for preliminary hearing of affirmative defense /
motion to dismiss. These previous motions were denied by the lower court, which denial the
respondents raised to the Court of Appeals by way of perfection for certiorari, which petitions in turn
were dismissed for lack of merit by the latter court. The correctness and validity of the lower court's
previous orders denying movant's motion for preliminary hearing of affirmative defense / motion to
dismiss has accordingly been settled already with finality and cannot be disturbed or challenged
anew at this instance of defendant's new but similarly anchored motions to dismiss, without
committing procedural heresy causative of miscarriage of justice.

II.

The lower court erred in not implementing correctly the decision of the Court of Appeal. After all,
respondents' own petitions for certiorari questioning the earlier denial of their motion for preliminary
hearing of affirmative defense / motion to dismiss were dismissed by the Court of Appeal, in the
process of affirming the validity and legality of such denial by the court a quo. The dismissal of the
respondents' petitions are embodied in the dispositive portion of the said decision of the Court of
Appeals dated 19 August 1996. The lower court cannot choose to disregard such decretal aspect of
the decision and instead implement an obiter dictum.

III.

That part of the decision of the decision of the Court of Appeals resolving the issue of prescription
attendant to the appeal of plaintiff against the Ayalas, has been appealed by plaintiff to the Supreme
Court by way of a petition for review on certiorari. Not yet being final and executory, the lower court
erred in making capital out of the same to dismiss the case against the other defendants, who are
the respondents herein.

IV.

The lower court erred in holding, per the questioned orders, that plaintiff's cause of action is for
annulment of contract which has already prescribed in the face of the clear and unequivocal
recitation of six causes of action in the complaint, none of which is for annulment. This conclusion of
public respondent is manifestly mistaken and legally absurd.

V.

The court a quo erred in failing to consider the complaint recites six alternative causes of action,
such that the insufficiency of one cause — assuming there is such insufficiency — does not render
insufficient the other cause and the complaint itself. The contrary ruling in this regard by public
respondent is founded entirely on speculation and conjecture and is constitutive of grave abuse of
discretion.

In disposing of the instant petition, this Court shall dwell on the more crucial grounds upon which the trial court and
respondent based their respective rulings unfavorable to petitioner MWSS; i.e., prescription, laches,
estoppel/ratification and non-joinder of indispensable parties.

RE: Prescription
Petitioner MWSS claims as erroneous both the lower courts' uniform finding that the action has prescribed, arguing
that its complaint is one to declare the MWSS-SILHOUETTE sale, and all subsequent conveyances of the subject
property, void which is imprescriptible.

We disagree.

The very allegations in petitioner MWSS' complaint show that the subject property was sold through contracts
which, at most, can be considered only as voidable, and not void. Paragraph 12 of the complaint reads in part:

12. . . . .

The plaintiff has been in continuous, peaceful and public possession and ownership of the afore-
described properties, the title (TCT No. [36069] 199170) thereto, including its derivative titles TCT
Nos. 213872 and 307655, having been duly issued in its name. However, as a result of fraudulent
and illegal acts of herein defendants, as described in the paragraphs hereinafter following, the
original of said title/s were cancelled and in lieu thereof new titles were issued to corporate
defendant/s covering subject 127.9271 hectares. . . . .

Paragraph 34 alleges:

34. Sometime thereafter, clearly influenced by the premature if not questionable approval by Mr.
Marcos of a non-existent agreement, and despite full knowledge that both the assessed and market
value of subject property were much higher, the MWSS Board of Trusties illegally passed an
undated resolution ("Resolution No. 36-83"), approving the "sale" of the property to CHGCCI at
P40/sq.m. and illegally authorizing General Manager Ilustre to sign the covering contract.

This "resolution" was signed by Messrs. Jesus Hipolito as Chairman; Oscar Ilustre, as Vice
Chairman; Aflredo Junio, as Member; and Silvestre Payoyo, as Member; . . . .

Paragraph 53 states:

53. Defendants Pablo Roman, Jr., Josefino Cenizal, and Jose Roxas as well as defendant
corporations (CHGCCI, STC and Ayala) who acted through the former and their other principal
officers, knowingly induced and caused then President Marcos and the former officers of plaintiff
MWSS to enter into the aforesaid undated "Agreement" which are manifestly and grossly
disadvantageous to the government and which gave the same defendants unwarranted
benefits, i.e., the ownership and dominion of the afore-described property of plaintiff.

Paragraph 54 avers:

54. Defendants Jesus Hipolito and Alfredo Junio, then public officers, together with the other public
officers who are now deceased (Ferdinand Marcos, Oscar Ilustre, and Sivestre Payoyo) knowingly
allowed themselves to be persuaded, induced and influenced to approve and/or enter into the
aforementioned "Agreements" which are grossly and manifestly disadvantageous to the
MWSS/government and which bestowed upon the other defendants the unwarranted
benefit/ownership of subject property.

The three elements of a contract — consent, the object, and the cause of obligation are all present. It cannot be
1

otherwise argued that the contract had for its object the sale of the property and the cause or consideration
thereof was the price to be paid (on the part of respondents CHGCCI/SILHOUETTE) and the land to be sold
(on the part of petitioner MWSS). Likewise, petitioner MWSS' consent to the May 11, 1983 and August 11,
1983 Agreements is patent on the face of these documents and on its own resolution No. 36-83.

As noted by both lower courts, petitioner MWSS admits that it consented to the sale of the property, with
the qualification that such consent was allegedly unduly influenced by the President Marcos. Taking such
allegation to be hypothetically true, such would have resulted in only voidable contracts because all three
elements of a contract, still obtained nonetheless. The alleged vitiation of MWSS' consent did not make the
sale null and void ab initio. Thus, "a contract where consent is given through mistake, violence,
intimidation, undue influence or fraud, is voidable" . Contracts "where consent is vitiated by mistake,
2

violence, intimidation, undue influence or fraud" are voidable or annullable . These are not void as —
3

Concepts of Voidable Contracts. — Voidable or anullable contracts are existent, valid, and
binding, although they can be annulled because of want of capacity or vitiated consent of the
one of the parties, but before annulment, they are effective and obligatory between parties.
Hence, it is valid until it is set aside and its validity may be assailed only in an action for that
purpose. They can be confirmed or ratified. 4
As the contracts were voidable at the most, the four year prescriptive period under Art. 1391 of the New
Civil Code will apply. This article provides that the prescriptive period shall begin in the cases of
intimidation, violence or undue influence, from the time the defect of the consent ceases", and "in case of
mistake or fraud, from the time of the discovery of the same time".

Hypothetically admitting that President Marcos unduly influenced the sale, the prescriptive period to annul
the same would have begun on February 26, 1986 which this Court takes judicial notice of as the date
President Marcos was deposed. Prescription would have set in by February 26, 1990 or more than three
years before petitioner MWSS' complaint was failed.

However, if petitioner MWSS' consent was vitiated by fraud, then the prescriptive period commenced upon
discovery. Discovery commenced from the date of the execution of the sale documents as petitioner was
party thereto. At the least, discovery is deemed to have taken place on the date of registration of the deeds
with the register of Deeds as registration is constructive notice to the world. Given these two principles on
5

discovery, the prescriptive period commenced in 1983 as petitioner MWSS actually knew of the sale, or, in
1984 when the agreements were registered and titles thereafter were issued to respondent SILHOUTTE. At
the latest, the action would have prescribed by 1988, or about five years before the complaint was
instituted. Thus, in Aznar vs. Bernard 6, this Court held that:

Lastly, even assuming that the petitioners had indeed failed to raise the affirmative defense
of prescription in a motion to dismiss or in an appropriate pleading (answer, or amended or
supplemental answer) and an amendment would no longer be feasible, still prescription, if
apparent on the face of the complaint, may be favorably considered. In the case at bar, the
private respondents admit in their complaint that the contract or real estate mortgage which
they alleged to be fraudulent and which had been foreclosed, giving rise to this controversy
with the petitioners, was executed on July 17, 1978, or more than eight long years before the
commencement of the suit in the court a quo, on September 15, 1986. And an action declare
a contract null and void on the ground of fraud must be instituted within four years.
Extinctive prescription is thus apparent on the face of the complaint itself as resolved by the
Court.

Petitioner MWSS further contends that prescription does not apply as its complaint prayed not for the
nullification of voidable contracts but for the declaration of nullity of void ab initio contracts which are
imprescriptible. This is incorrect, as the prayers in a complaint are not determinative of what legal
principles will operate based on the factual allegations of the complaint. And these factual allegations,
assuming their truth, show that MWSS consented to the sale, only that such consent was purportedly
vitiated by undue influence or fraud. Therefore, the rules on prescription will operate. Even if petitioner
MWSS asked for the declaration of nullity of these contracts, the prayers will not be controlling as only the
factual allegations in the complaint determine relief. "(I)t is the material allegations of fact in the complaint,
not the legal conclusion made therein or the prayer that determines the relief to which the plaintiff is
entitled" . Respondent court is thus correct in holding that:
7

xxx xxx xxx

The totality then of those allegations in the complaint makes up a case of a voidable contract
of sale — not a void one. The determinative allegations are those that point out that the
consent of MWSS in the Agreement of Sale was vitiated either by fraud or undue for the
declaration of nullity of the said contract because the Complaint says no. Basic is the rule
however that it is the body and not the caption nor the prayer of the Complaint that
determines the nature of the action. True, the caption and prayer of the Complaint state that
the action is for a judicial declaration of nullity of a contract, but alas, as already pointed out,
its body unmistakably alleges only a voidable contract. One cannot change the real nature of
an action adopting a different nomenclature any more than one can change gin into whisky
by just replacing the label on the bottle with that of the latter's and calling it whisky. No
matter what, the liquid inside remains gin.

xxx xxx xxx

Petitioner MWSS also theorizes that the May 11, 1983 MWSS-SILHOUTTE Agreement and the August 11,
1983 Supplemental Agreement were void ab initio because the "initial agreement" from which these
agreements emanated was executed "without the knowledge, much less the approval" of petitioner MWSS
through its Board of Trustees. The "initial agreement" referred to in petitioner MWSS' argument is the
December 20, 1982 letter of respondents Roxas and Roman, Jr. to President Marcos where the authors
mentioned that they had reached an agreement with petitioner's then general manager, Mr. Oscar Ilustre.
Petitioner MWSS maintains that Mr. Ilustre was not authorized to enter into such "initial agreement",
contrary to Art. 1874 of the New Civil Code which provides that "when a sale of a parcel of land or any
interest therein is through an agent, the authority of the latter shall be in writing otherwise the sale shall be
void." It then concludes that since its Res. No. 36-83 and the May 11, 1983 and August 11, 1983 Agreements
are "fruits" of the "initial agreement" (for which Mr. Ilustre was allegedly not authorized in writing), all of
these would have been also void under Art. 1422 of NCC, which provides that a contract which is the direct
result of a pronounced illegal contract, is also void and inexistent."

The argument does not impress. The "initial agreement" reflected in the December 20, 1982 letter of
respondent Roman to Pres. Marcos, is not a sale under Art. 1874. Since the nature of the "initial agreement"
is crucial, we
quotes the letter in full:
8

We respectfully approach Your Excellency in all humility and in the spirit of the Yuletide
Season. We have explained to Your Excellency when you allowed us the honor to see you,
that the negotiations with MWSS which the late Pablo R. Roman initiated way back in 1975,
with your kind approval, will finally be concluded.

We have agreed in principle with Mr. Oscar Ilustre on the terms of the sale as evidenced by
the following:

1. Our written agreement to hire Asian Appraisal Company to

appraise the entire leased area which then be the basis for the
negotiations of the purchase price of the property; and

2. Our exchange of communications wherein made a counter-

offer and our acceptance counter-offer.

However, we were informed by Mr. Ilustre that only written instruction from Your Excellency
will allow us to finally sign the Agreement.

In sum, our Agreement is for the purchase price of FIFTY-SEVEN MILLION TWO-HUNDRED-
FORTY THOUSAND PESOS (P57,240,000) for the entire leased area of 135 hectares; TWENTY-
SEVEN MILLION PESOS (P27,000,000) payable upon approval of the contract by Your
Excellency and the balance of THIRTY MILLION TWO HUNDRED FORTY THOUSAND PESOS
(P30,240,000) after one (1) year inclusive of a 12% interest.

We believe that this arrangement is fair and equitable to both parties considering that the
value of the land was appraised by a reputable company and independent appraisal company
jointly commissioned by both parties and considering further that Capitol Hills has still a 23-
year lien on the property by virtue of its existing lease contract with MWSS.

We humbly seek your instruction, Your Excellency and please accept our families' sincere
wish for a Merry Christmas and a Happy New Year to you and the First Family.

The foregoing does not document a sale, but at most, only the conditions proposed by respondent Roman
to enter into one. By the terms thereof, it refers only to an "agreement in principle". Reflecting a future
consummation, the letter mentions "negotiations with MWSS (which) with your (Marcos) kind approval, will
finally be concluded". It must likewise be noted that presidential approval had yet to be obtained. Thus, the
"initial agreement" was not a sale as it did not in any way transfer ownership over the property. The
proposed terms had yet to be approval by the President and the agreement in principle still had to be
formalized in a deed of sale. Written authority as is required under Art. 1834 of the New Civil Code, was not
needed at the point of the "initial agreement".

Verily, the principle on prescription of actions is designed to cover situations such as the case at bar,
where there have been a series of transfers to innocent purchasers for value. To set aside these
transactions only to accommodate a party who has slept on his rights is anathema to good order. 9

RE: Laches

Even assuming, for argument's sake, that the allegations in the complaint establish the absolute nullity of
the assailed contracts and hence imprescriptible, the complaint can still be dismissed on the ground of
laches which is different from prescription. This Court, as early as 1966, has distinguished these two
concepts in this wise:

. . . (T)he defense of laches applies independently of prescription. Laches is different from the
statute of limitations. Prescription is concerned with the fact of delay, whereas laches, is
concerned with the effect of delay. Prescription is a matter of time; laches is principally a
question of inequity of permitting a claim to be enforced, this inequity being founded on
 some change in the condition of the property or the relation of the parties. Prescription is
statutory; laches is not. Laches applies in inequity, whereas prescription applies at law.
Prescription is based on fixed-time; laches is not. 10

Thus, the prevailing doctrine is that the right to have a contract declared void ab initio may be
barred by laches although not barred by prescription. 11

It has, for all its elements are present, viz:

(1) conduct on the part of the defendant, or one under whom he

claims, giving rise to the situation that led to the complaint and
for which the complaint seeks a remedy;

(2) delay in asserting the complainant's rights, having had

knowledge or notice of the defendant's conduct and having
been afforded an opportunity to institute a suit;

(3) lack of knowledge or notice on the part of the defendant that

the complainant would assert the right on which he bases his
suit; and

(4) injury or prejudice to the defendant in the event relief is

accorded to the complainant, or the suit is not held barred.12

There is no question on the presence of the first element. the main thrust of petitioner MWSS's complaint is
to bring to the fore what it claims as fraudulent and/or illegal acts of the respondents in the acquisition of
the subject property.

The second element of delay is evident from the fact that petitioner tarried for almost ten (10) years from the
conclusion of the sale sometime in 1983 before formally laying claim to the subject property in 1993.

The third element is present as can be deduced from the allegations in the complaint that petitioner MWSS
(a) demanded for a downpayment for no less than three times; (b) accepted downpayment for P25 Million;
and (c) accepted a letter of credit for the balance. The pertinent paragraphs in the complaint thus read:

38. In a letter dated September 19, 1983, for failure of CHGCCI to pay on time, Mr. Ilustre
demanded payment of the downpayment of P25 Million which was due as of 18 April 1983. A
copy of this letter is hereto attached as Annex "X";

39. Again, in a letter dated February 7, 1984, then MWSS Acting General Manager Aber Canlas
demanded payment from CHGCCI of the purchase price long overdue. A copy of this letter is
hereto attached as Annex "Y";

40. Likewise, in a letter dated March 14, 1984, Mr. Canlas again demanded from CHGCCI
payment of the price. A copy of this demand letter is hereto attached as Annex "Z";

41. Thereafter, in a letter dated July 27, 1984, another entity, defendant Ayala Corporation,
through SVP Renato de la Fuente, paid with a check the long overdue downpayment of
P25,000,000.00 of STC/CHGCCI. Likewise a domestic stand-by letter of credit for the balance
was issued in favor of MWSS; Copies of the said letter, check and letter of credit are hereto
attached as Annexes "AA", "BB", and "CC", respectively.

Under these facts supplied by petitioner MWSS itself, respondents have every good reason to
believe that petitioner was honoring the validity of the conveyances of the subject property, and that
the sudden institution of the complaint in 1993 alleging the nullity of such conveyances was surely
an unexpected turn of events for respondents. Hence, petitioner MWSS cannot escape the effect of
laches.

RE: Ratification

Pertinent to this issue is the claim of petitioner MWSS that Mr. Ilustre was never given the authority by its
Board of Trustees to enter into the "initial agreement" of December 20, 1982 and therefore, the sale of the
subject property is invalid.

Petitioner MWSS misses the paint. The perceived infirmity in the "initial agreement" can be cured by
ratification. So settled is the precept that ratification can be made by the corporate board either expressly or
impliedly. Implied ratification may take various forms — like silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. Both 13

modes of ratification have been made in this case.

There was express ratification made by the Board of petitioner MWSS when it passed Resolution No. 36-83
approving the sale of the subject property to respondent SILHOUETTE and authorizing Mr. Ilustre, as
General Manager, "to sign for and in behalf of the MWSS the contract papers and other pertinent
documents relative thereto." Implied ratification by "silence or acquiescence" is revealed from the acts of
petitioner MWSS in (a) sending three (3) demand letters for the payment of the purchase price, (b) accepting
P25 Million as downpayment, and (c) accepting a letter of credit for the balance, as hereinbefore mentioned.
It may well be pointed out also that nowhere in petitioner MWSS' complaint is it alleged that it returned the
amounts, or any part thereof, covering the purchase price to any of the respondents-vendees at any point in
time. This is only indicative of petitioner MWSS' acceptance and retention of benefits flowing from the sales
transactions which is another form of implied ratification.

RE: Non-joinder of indispensable parties

There is no denying that petitioner MWSS' action against herein respondents for the recovery of the subject
property now converted into a prime residential subdivision would ultimately affect the proprietary rights of
the many lot owners to whom the land has already been parceled out. They should have been included in
the suit as parties-defendants, for "it is well established that owners of property over which reconveyance
is asserted are indispensable parties without whom no relief is available and without whom the court can
render no valid judgment." Being indispensable parties, the absence of these lot-owners in the suit
14

renders all subsequent actions of the trial court null and void for want of authority to act, not only as to the
absent parties but even as to those present. Thus, when indispensable parties are not before the court,
15

the action should be dismissed. 16

WHEREFORE, in view of the foregoing, the consolidated petitions are hereby DENIED.

SO ORDERED.

G.R. No. 125172 June 26, 1998

Spouses ANTONIO and LUZVIMINDA GUIANG, petitioners,

vs.
COURT OF APPEALS and GILDA COPUZ, respondents.

PANGANIBAN, J.:

The sale of a conjugal property requires the consent of both the husband and the wife. The absence of the consent
of one renders the sale null and void, while the vitiation thereof makes it merely voidable. Only in the latter case can
ratification cure the defect.

The Case
These were the principles that guided the Court in deciding this petition for review of the Decision dated January
1

30, 1996 and the Resolution dated May 28, 1996, promulgated by the Court of Appeals in CA-GR CV No.
2

41758, affirming the Decision of the lower court and denying reconsideration, respectively.

On May 28, 1990, Private Respondent Gilda Corpuz filed an Amended Complainant against her husband
3

Judie Corpuz and Petitioner-Spouses Antonio and Luzviminda Guiang. The said Complaint sought the
declaration of a certain deed of sale, which involved the conjugal property of private respondent and her
husband, null and void. The case was raffled to the Regional Trial Court of Koronadal, South Cotabato,
Branch 25. In due course, the trial court rendered a Decision dated September 9, 1992, disposing as
4

follow:5

ACCORDINGLY, judgment is rendered for the plaintiff and against the defendants,

1. Declaring both the Deed of Transfer of Rights dated March 1, 1990 (Exh. "A") and the
"amicable settlement" dated March 16, 1990 (Exh. "B") as null void and of no effect;

2. Recognizing as lawful and valid the ownership and possession of plaintiff Gilda Corpuz
over the remaining one-half portion of Lot 9, Block 8, (LRC) Psd-165409 which has been the
subject of the Deed of Transfer of Rights (Exh. "A");

3. Ordering plaintiff Gilda Corpuz to reimburse defendants Luzviminda Guiang the amount of
NINE THOUSAND (P9,000.00) PESOS corresponding to the payment made by defendants
Guiangs to Manuel Callejo for the unpaid balance of the account of plaintiff in favor of Manuel
Callejo, and another sum of P379.62 representing one-half of the amount of realty taxes paid
by defendants Guiangs on Lot 9, Block 8, (LRC) Psd-165409, both with legal interests thereon
computed from the finality of the decision.

No pronouncement as to costs in view of the factual circumstances of the case.

Dissatisfied, petitioners-spouses filed an appeal with the Court of Appeals. Respondent Court, in its
challenged Decision, ruled as follow: 6

WHEREFORE, the appealed of the lower court in Civil Case No. 204 is hereby AFFIRMED by
this Court. No costs considering plaintiff-appellee's failure to file her brief despite notice.

Reconsideration was similarly denied by the same court in its assailed Resolution: 7

Finding that the issues raised in defendants-appellants motion for reconsideration of Our
decision in this case of January 30, 1996, to be a mere rehash of the same issues which we
have already passed upon in the said decision, and there [being] no cogent reason to disturb
the same, this Court RESOLVED to DENY the instant motion for reconsideration for lack of
merit.

The Facts

The facts of this case are simple. Over the objection of private respondent and while she was in Manila
seeking employment, her husband sold to the petitioners-spouses one half of their conjugal peoperty,
consisting of their residence and the lot on which it stood. The circumstances of this sale are set forth in
the Decision of Respondent Court, which quoted from the Decision of the trial court as follows: 8

1. Plaintiff Gilda Corpuz and defendant Judie Corpuz are legally married spouses. They were
married on December 24, 1968 in Bacolod City, before a judge. This is admitted by
defendants-spouses Antonio and Luzviminda Guiang in their answer, and also admitted by
defendant Judie Corpuz when he testified in court (tsn. p. 3, June 9, 1992), although the latter
says that they were married in 1967. The couple have three children, namely: Junie — 18
years old, Harriet — 17 years of age, and Jodie or Joji, the youngest, who was 15 years of age
in August, 1990 when her mother testified in court.

Sometime on February 14, 1983, the couple Gilda and Judie Corpuz, with plaintiff-wife Gilda
Corpuz as vendee, bought a 421 sq. meter lot located in Barangay Gen. Paulino Santos (Bo.
1), Koronadal, South Cotabato, and particularly known as Lot 9, Block 8, (LRC) Psd-165409
from Manuel Callejo who signed as vendor through a conditional deed of sale for a total
consideration of P14,735.00. The consideration was payable in installment, with right of
cancellation in favor of vendor should vendee fail to pay three successive installments (Exh.
"2", tsn p. 6, February 14, 1990).
2. Sometime on April 22, 1988, the couple Gilda and Judie Corpuz sold one-half portion of
their Lot No. 9, Block 8, (LRC) Psd-165409 to the defendants-spouses Antonio and
Luzviminda Guiang. The latter have since then occupied the one-half portion [and] built their
house thereon (tsn. p. 4, May 22, 1992). They are thus adjoining neighbors of the Corpuzes.

3. Plaintiff Gilda Corpuz left for Manila sometime in June 1989. She was trying to look for
work abroad, in [the] Middle East. Unfortunately, she became a victim of an unscrupulous
illegal recruiter. She was not able to go abroad. She stayed for sometime in Manila however,
coming back to Koronadal, South Cotabato, . . . on March 11, 1990. Plaintiff's departure for
Manila to look for work in the Middle East was with the consent of her husband Judie Corpuz
(tsn. p. 16, Aug. 12, 1990; p. 10 Sept. 6, 1991).

After his wife's departure for Manila, defendant Judie Corpuz seldom went home to the
conjugal dwelling. He stayed most of the time at his place of work at Samahang Nayon
Building, a hotel, restaurant, and a cooperative. Daughter Herriet Corpuz went to school at
King's College, Bo. 1, Koronadal, South Cotabato, but she was at the same time working as
household help of, and staying at, the house of Mr. Panes. Her brother Junie was not
working. Her younger sister Jodie (Jojie) was going to school. Her mother sometimes sent
them money (tsn. p. 14, Sept. 6, 1991.)

Sometime in January 1990, Harriet Corpuz learned that her father intended to sell the
remaining one-half portion including their house, of their homelot to defendants Guiangs.
She wrote a letter to her mother informing her. She [Gilda Corpuz] replied that she was
objecting to the sale. Harriet, however, did not inform her father about this; but instead gave
the letter to Mrs. Luzviminda Guiang so that she [Guiang] would advise her father (tsn. pp.
16-17, Sept. 6, 1991).

4. However, in the absence of his wife Gilda Corpuz, defendant Judie Corpuz pushed through
the sale of the remaining one-half portion of Lot 9, Block 8, (LRC) Psd-165409. On March 1,
1990, he sold to defendant Luzviminda Guiang thru a document known as "Deed of Transfer
of Rights" (Exh. "A") the remaining one-half portion of their lot and the house standing
thereon for a total consideration of P30,000.00 of which P5,000.00 was to be paid in June,
1990. Transferor Judie Corpuz's children Junie and Harriet signed the document as witness.

Four (4) days after March 1, 1990 or on March 5, 1990, obviously to cure whatever defect in
defendant Judie Corpuz's title over the lot transferred, defendant Luzviminda Guiang as
vendee executed another agreement over Lot 9, Block 8, (LRC) Psd-165408 (Exh. "3"), this
time with Manuela Jimenez Callejo, a widow of the original registered owner from whom the
couple Judie and Gilda Corpuz originally bought the lot (Exh. "2"), who signed as vendor for
a consideration of P9,000.00. Defendant Judie Corpuz signed as a witness to the sale (Exh.
"3-A"). The new sale (Exh. "3") describes the lot sold as Lot 8, Block 9, (LRC) Psd-165408 but
it is obvious from the mass of evidence that the correct lot is Lot 8, Block 9, (LRC) Psd-
165409, the very lot earlier sold to the couple Gilda and Judie Corpuz.

5. Sometimes on March 11, 1990, plaintiff returned home. She found her children staying with
other households. Only Junie was staying in their house. Harriet and Joji were with Mr.
Panes. Gilda gathered her children together and stayed at their house. Her husband was
nowhere to be found. She was informed by her children that their father had a wife already.

6. For staying in their house sold by her husband, plaintiff was complained against by
defendant Luzviminda Guiang and her husband Antonio Guiang before the Barangay
authorities of Barangay General Paulino Santos (Bo. 1), Koronadal, South Cotabato, for
trespassing (tsn. p. 34, Aug. 17, 1990). The case was docketed by the barangay authorities as
Barangay Case No. 38 for "trespassing". On March 16, 1990, the parties thereat signed a
document known as "amicable settlement". In full, the settlement provides for, to wit:

That respondent, Mrs. Gilda Corpuz and her three children, namely: Junie,
Hariet and Judie to leave voluntarily the house of Mr. and Mrs. Antonio Guiang,
where they are presently boarding without any charge, on or before April 7,
1990.

FAIL NOT UNDER THE PENALTY OF THE LAW.

Believing that she had received the shorter end of the bargain, plaintiff to the Barangay
Captain of Barangay Paulino Santos to question her signature on the amicable settlement.
She was referred however to the Office-In-Charge at the time, a certain Mr. de la Cruz. The
latter in turn told her that he could not do anything on the matter (tsn. p. 31, Aug. 17, 1990).
 This particular point not rebutted. The Barangay Captain who testified did not deny that Mrs.
Gilda Corpuz approached him for the annulment of the settlement. He merely said he forgot
whether Mrs. Corpuz had approached him (tsn. p. 13, Sept. 26, 1990). We thus conclude that
Mrs. Corpuz really approached the Barangay Captain for the annulment of the settlement.
Annulment not having been made, plaintiff stayed put in her house and lot.

7. Defendant-spouses Guiang followed thru the amicable settlement with a motion for the
execution of the amicable settlement, filing the same with the Municipal Trial Court of
Koronadal, South Cotabato. The proceedings [are] still pending before the said court, with
the filing of the instant suit.

8. As a consequence of the sale, the spouses Guiang spent P600.00 for the preparation of the
Deed of Transfer of Rights, Exh. "A", P9,000.00 as the amount they paid to Mrs. Manuela
Callejo, having assumed the remaining obligation of the Corpuzes to Mrs. Callejo (Exh. "3");
P100.00 for the preparation of Exhibit "3"; a total of P759.62 basic tax and special education
fund on the lot; P127.50 as the total documentary stamp tax on the various documents;
P535.72 for the capital gains tax; P22.50 as transfer tax; a standard fee of P17.00; certification
fee of P5.00. These expenses particularly the taxes and other expenses towards the transfer
of the title to the spouses Guiangs were incurred for the whole Lot 9, Block 8, (LRC) Psd-
165409.

Ruling of Respondent Court

Respondent Court found no reversible error in the trial court's ruling that any alienation or encumbrance by
the husband of the conjugal propety without the consent of his wife is null and void as provided under
Article 124 of the Family Code. It also rejected petitioners' contention that the "amicable sttlement" ratified
said sale, citing Article 1409 of the Code which expressly bars ratification of the contracts specified therein,
particularly those "prohibited or declared void by law."

Hence, this petition. 9

The Issues

In their Memorandum, petitioners assign to public respondent the following errors: 10

Whether or not the assailed Deed of Transfer of Rights was validly executed.

II

Whether or not the Cour of Appeals erred in not declairing as voidable contract under Art.
1390 of the Civil Code the impugned Deed of Transfer of Rights which was validly ratified
thru the execution of the "amicable settlement" by the contending parties.

III

Whether or not the Court of Appeals erred in not setting aside the findings of the Court a
quo which recognized as lawful and valid the ownership and possession of private
respondent over the remaining one half (1/2) portion of the properly.

In a nutshell, petitioners-spouses contend that (1) the contract of sale (Deed of Transfer of Rights) was
merely voidable, and (2) such contract was ratified by private respondent when she entered into an
amicable sttlement with them.

This Court's Ruling

The petition is bereft of merit.

First Issue: Void or Voidable Contract?

Petitioners insist that the questioned Deed of Transfer of Rights was validly executed by the parties-
litigants in good faith and for valuable consideration. The absence of private respondent's consent merely
rendered the Deed voidable under Article 1390 of the Civil Code, which provides:
 Art. 1390. The following contracts are voidable or annullable, even though there may have
been no damage to the contracting parties:

xxx xxx xxx

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification.(n)

The error in petitioners' contention is evident. Article 1390, par. 2, refers to contracts visited by vices of
consent, i.e., contracts which were entered into by a person whose consent was obtained and vitiated
through mistake, violence, intimidation, undue influence or fraud. In this instance, private respondent's
consent to the contract of sale of their conjugal property was totally inexistent or absent. Gilda Corpuz, on
direct examination, testified thus:
11

Q Now, on March 1, 1990, could you still recall where you were?

A I was still in Manila during that time.

xxx xxx xxx

ATTY. FUENTES:

Q When did you come back to Koronadal, South Cotabato?

A That was on March 11, 1990, Ma'am.

Q Now, when you arrived at Koronadal, was there any problem which arose
concerning the ownership of your residential house at Callejo Subdivision?

A When I arrived here in Koronadal, there was a problem which arose

regarding my residential house and lot because it was sold by my husband
without my knowledge.

This being the case, said contract properly falls within the ambit of Article 124 of the Family Code, which
was correctly applied by the teo lower court:

Art. 124. The administration and enjoyment of the conjugal partnerhip properly shall belong
to both spouses jointly. In case of disgreement, the husband's decision shall prevail, subject
recourse to the court by the wife for proper remedy, which must be availed of within five
years from the date of the contract implementing such decision.

In the event that one spouse is incapacitated or otherwise unable to participate in the
administration of the conjugal properties, the other spouse may assume sole powers of
administration. These powers do not include the powers of disposition or encumbrance
which must have the authority of the court or the written consent of the other spouse. In the
absence of such authority or consent, the disposition or encumbrance shall be void.
However, the transaction shall be construed as a continuing offer on the part of the
consenting spouse and the third person, and may be perfected as a binding contract upon
the acceptance by the other spouse or authorization by the court before the offer is
withdrawn by either or both offerors. (165a) (Emphasis supplied)

Comparing said law with its equivalent provision in the Civil Code, the trial court adroitly explained the
amendatory effect of the above provision in this wise: 12

The legal provision is clear. The disposition or encumbrance is void. It becomes still clearer if
we compare the same with the equivalent provision of the Civil Code of the Philippines.
Under Article 166 of the Civil Code, the husband cannot generally alienate or encumber any
real property of the conjugal partnershit without the wife's consent. The alienation or
encumbrance if so made however is not null and void. It is merely voidable. The offended
wife may bring an action to annul the said alienation or encumbrance. Thus the provision of
Article 173 of the Civil Code of the Philippines, to wit:
 Art. 173. The wife may, during the marriage and within ten years from the
transaction questioned, ask the courts for the annulment of any contract of the
husband entered into without her consent, when such consent is required, or
any act or contract of the husband which tends to defraud her or impair her
interest in the conjugal partnership property. Should the wife fail to exercise
this right, she or her heirs after the dissolution of the marriage, may demand
the value of property fraudulently alienated by the husband.(n)

This particular provision giving the wife ten (10) years . . . during [the] marriage to annul the
alienation or encumbrance was not carried over to the Family Code. It is thus clear that any
alienation or encumbrance made after August 3, 1988 when the Family Code took effect by
the husband of the conjugal partnership property without the consent of the wife is null and
void.

Furthermore, it must be noted that the fraud and the intimidation referred to by petitioners were perpetrated
in the execution of the document embodying the amicable settlement. Gilda Corpuz alleged during trial that
barangay authorities made her sign said document through misrepresentation and
coercion. In any event, its execution does not alter the void character of the deed of sale between the
13

husband and the petitioners-spouses, as will be discussed later. The fact remains that such contract was
entered into without the wife's consent.

In sum, the nullity of the contract of sale is premised on the absence of private respondent's consent. To
constitute a valid contract, the Civil Code requires the concurrence of the following elements: (1) cause, (2)
object, and (3) consent, the last element being indubitably absent in the case at bar.
14

Second Issue: Amicable Settlement

Insisting that the contract of sale was merely voidable, petitioners aver that it was duly ratified by the
contending parties through the "amicable settlement" they executed on March 16, 1990 in Barangay Case
No. 38.

The position is not well taken. The trial and the appellate courts have resolved this issue in favor of the
private respondent. The trial court correctly held: 15

By the specific provision of the law [Art. 1390, Civil Code] therefore, the Deed to Transfer of
Rights (Exh. "A") cannot be ratified, even by an "amicable settlement". The participation by
some barangay authorities in the "amicable settlement" cannot otherwise validate an invalid
act. Moreover, it cannot be denied that the "amicable settlement (Exh. "B") entered into by
plaintiff Gilda Corpuz and defendent spouses Guiang is a contract. It is a direct offshoot of
the Deed of Transfer of Rights (Exh. "A"). By express provision of law, such a contract is also
void. Thus, the legal provision, to wit:

Art. 1422. Acontract which is the direct result of a previous illegal contract, is
also void and inexistent. (Civil Code of the Philippines).

In summation therefore, both the Deed of transfer of Rights (Exh. "A") and the "amicable
settlement" (Exh. "3") are null and void.

Doctrinally and clearly, a void contract cannot be ratified. 16

Neither can the "amicable settlement" be considered a continuing offer that was accepted and perfected by
the parties, following the last sentence of Article 124. The order of the pertinent events is clear: after the
sale, petitioners filed a complaint for trespassing against private respondent, after which the barangay
authorities secured an "amicable settlement" and petitioners filed before the MTC a motion for its
execution. The settlement, however, does not mention a continuing offer to sell the property or an
acceptance of such a continuing offer. Its tenor was to the effect that private respondent would vacate the
property. By no stretch of the imagination, can the Court interpret this document as the acceptance
mentioned in Article 124.

WHEREFORE, the Court hereby DENIES the petition and AFFIRMS the challenged Decision and Resolution.
Costs against petitioners.

SO ORDERED.
G.R. No. L-12471 April 13, 1959

ROSARIO L. DE BRAGANZA, ET AL., petitioners,

vs.
FERNANDO F. DE VILLA ABRILLE, respondent.

Oscar M. Herrera for petitioners.

R. P. Sarandi and F. Valdez Anama for respondents.

BENGZON, J.:
Rosario L. de Braganza and her sons Rodolfo and Guillermo petition for review of the Court of Appeal's decision
whereby they were required solidarily to pay Fernando F. de Villa Abrille the sum of P10,000 plus 2 % interest from
October 30, 1944.

The above petitioners, it appears, received from Villa Abrille, as a loan, on October 30, 1944 P70,000 in Japanese
war notes and in consideration thereof, promised in writing (Exhibit A) to pay him P10,000 "in legal currency of the
P. I. two years after the cessation of the present hostilities or as soon as International Exchange has been
established in the Philippines", plus 2 % per annum.

Because payment had not been made, Villa Abrille sued them in March 1949.

In their answer before the Manila court of first Instance, defendants claimed to have received P40,000 only —
instead of P70,000 as plaintiff asserted. They also averred that Guillermo and Rodolfo were minors when they
signed the promissory note Exhibit A. After hearing the parties and their evidence, said court rendered judgment,
which the appellate court affirmed, in the terms above described.

There can be no question about the responsibility of Mrs. Rosario L. Braganza because the minority of her
consigners note release her from liability; since it is a personal defense of the minors. However, such defense will
benefit her to the extent of the shares for which such minors may be responsible, (Art. 1148, Civil Code). It is not
denied that at the time of signing Exhibit A, Guillermo and Rodolfo Braganza were minors-16 and 18 respectively.
However, the Court of Appeals found them liable pursuant to the following reasoning:

. . . . These two appellants did not make it appears in the promissory note that they were not yet of legal
age. If they were really to their creditor, they should have appraised him on their incapacity, and if the
former, in spite of the information relative to their age, parted with his money, then he should be contended
with the consequence of his act. But, that was not the case. Perhaps defendants in their desire to acquire
much needed money, they readily and willingly signed the promissory note, without disclosing the legal
impediment with respect to Guillermo and Rodolfo. When minor, like in the instant case, pretended to be of
legal age, in fact they were not, they will not later on be permitted to excuse themselves from the fulfillment
of the obligation contracted by them or to have it annulled. (Mercado, et al. vs. Espiritu, 37 Phil., 215.)
[Emphasis Ours.]

We cannot agree to above conclusion. From the minors' failure to disclose their minority in the same promissory
note they signed, it does not follow as a legal proposition, that they will not be permitted thereafter to assert it. They
had no juridical duty to disclose their inability. In fact, according to Corpuz Juris Secundum, 43 p. 206;

. . . . Some authorities consider that a false representation as to age including a contract as part of the
contract and accordingly hold that it cannot be the basis of an action in tort. Other authorities hold that such
misrepresentation may be the basis of such an action, on the theory that such misrepresentation is not a
part of, and does not grow out of, the contract, or that the enforcement of liability for such misrepresentation
as tort does not constitute an indirect of enforcing liability on the contract. In order to hold infant liable,
however, the fraud must be actual and not constructure. It has been held that his mere silence when making
a contract as to age does not constitute a fraud which can be made the basis of an action of decit .
(Emphasis Ours.)

The fraud of which an infant may be held liable to one who contracts with him in the belief that he is of full
age must be actual not constructive, and mere failure of the infant to disclose his age is not sufficient. (27
American Jurisprudence, p. 819.)

The Mecado case1 cited in the decision under review is different because the document signed therein by the
minor specifically stated he was of age; here Exhibit A contained no such statement. In other words, in the Mercado
case, the minor was guilty of active misrepresentation; whereas in this case, if the minors were guilty at all, which
we doubt it is of passive (or constructive) misrepresentation. Indeed, there is a growing sentiment in favor of limiting
the scope of the application of the Mercado ruling, what with the consideration that the very minority which
incapacitated from contracting should likewise exempt them from the results of misrepresentation.

We hold, on this point, that being minors, Rodolfo and Guillermo Braganza could not be legally bound by their
signatures in Exhibit A.

It is argued, nevertheless, by respondent that inasmuch as this defense was interposed only in 1951, and inasmuch
as Rodolfo reached the age of majority in 1947, it was too late to invoke it because more than 4 years had elapsed
after he had become emancipated upon reaching the age of majority. The provisions of Article 1301 of the Civil
Code are quoted to the effect that "an action to annul a contract by reason of majority must be filed within 4 years"
after the minor has reached majority age. The parties do not specify the exact date of Rodolfo's birth. It is undenied,
however, that in October 1944, he was 18 years old. On the basis of such datum, it should be held that in October
1947, he was 21 years old, and in October 1951, he was 25 years old. So that when this defense was interposed in
June 1951, four years had not yet completely elapsed from October 1947.
Furthermore, there is reason to doubt the pertinency of the 4-years period fixed by Article 1301 of the Civil Code
where minority is set up only as a defense to an action, without the minors asking for any positive relief from the
contract. For one thing, they have not filed in this case an action for annulment.2 They merely interposed an excuse
from liability.

Upon the other hand, these minors may not be entirely absolved from monetary responsibility. In accordance with
the provisions of Civil Code, even if their written contact is unenforceable because of non-age, they shall make
restitution to the extent that they have profited by the money they received. (Art. 1340) There is testimony that the
funds delivered to them by Villa Abrille were used for their support during the Japanese occupation. Such being the
case, it is but fair to hold that they had profited to the extent of the value of such money, which value has been
authoritatively established in the so-called Ballantine Schedule: in October 1944, P40.00 Japanese notes were
equivalent to P1 of current Philippine money.

Wherefore, as the share of these minors was 2/3 of P70,000 of P46,666.66, they should now return
P1,166.67.3 Their promise to pay P10,000 in Philippine currency, (Exhibit A) can not be enforced, as already stated,
since they were minors incapable of binding themselves. Their liability, to repeat, is presently declared without
regard of said Exhibit A, but solely in pursuance of Article 1304 of the Civil Code.

Accordingly, the appealed decision should be modified in the sense that Rosario Braganza shall pay 1/3 of P10,000
i.e., P3,333.334 plus 2% interest from October 1944; and Rodolfo and Guillermo Braganza shall pay jointly 5 to the
same creditor the total amount of P1,166.67 plus 6% interest beginning March 7, 1949, when the complaint was
filed. No costs in this instance.

G.R. No. 139982 November 21, 2002

JULIAN FRANCISCO (Substituted by his Heirs, namely: CARLOS ALTEA FRANCISCO;

the heirs of late ARCADIO FRANCISCO, namely: CONCHITA SALANGSANG-FRANCISCO (surviving
spouse),
and his children namely: TEODULO S. FRANCISCO, EMILIANO S. FRANCISCO, MARIA THERESA S.
FRANCISCO,
PAULINA S. FRANCISCO, THOMAS S. FRANCISCO;
PEDRO ALTEA FRANCISCO; CARINA FRANCISCO-ALCANTARA; EFREN ALTEA FRANCISCO; DOMINGA
LEA FRANCISCO-REGONDON;
BENEDICTO ALTEA FRANCISCO and ANTONIO ALTEA FRANCISCO), petitioner,
vs.
PASTOR HERRERA, respondent.

DECISION

QUISUMBING, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals, dated August 30, 1999, in CA-G.R.
CV No. 47869, which affirmed in toto the judgment 2 of the Regional Trial Court (RTC) of Antipolo City, Branch 73, in
Civil Case No. 92-2267. The appellate court sustained the trial court’s ruling which: (a) declared null and void the
deeds of sale of the properties covered by Tax Declaration Nos. 01-00495 and 01-00497; and (b) directed petitioner
to return the subject properties to respondent who, in turn, must refund to petitioner the purchase price
of P1,750,000.

The facts, as found by the trial court and affirmed by the Court of Appeals, are as follows:

Eligio Herrera, Sr., the father of respondent, was the owner of two parcels of land, one consisting of 500 sq. m. and
another consisting of 451 sq. m., covered by Tax Declaration (TD) Nos. 01-00495 and 01-00497, respectively. Both
were located at Barangay San Andres, Cainta, Rizal.3

On January 3, 1991, petitioner bought from said landowner the first parcel, covered by TD No. 01-00495, for the
price of P1,000,000, paid in installments from November 30, 1990 to August 10, 1991.

On March 12, 1991, petitioner bought the second parcel covered by TD No. 01-00497, for P750,000.

Contending that the contract price for the two parcels of land was grossly inadequate, the children of Eligio, Sr.,
namely, Josefina Cavestany, Eligio Herrera, Jr., and respondent Pastor Herrera, tried to negotiate with petitioner to
increase the purchase price. When petitioner refused, herein respondent then filed a complaint for annulment of
sale, with the RTC of Antipolo City, docketed as Civil Case No. 92-2267. In his complaint, respondent claimed
ownership over the second parcel, which is the lot covered by TD No. 01-00497, allegedly by virtue of a sale in his
favor since 1973. He likewise claimed that the first parcel, the lot covered by TD No. 01-00495, was subject to the
co-ownership of the surviving heirs of Francisca A. Herrera, the wife of Eligio, Sr., considering that she died intestate
on April 2, 1990, before the alleged sale to petitioner. Finally, respondent also alleged that the sale of the two lots
was null and void on the ground that at the time of sale, Eligio, Sr. was already incapacitated to give consent to a
contract because he was already afflicted with senile dementia, characterized by deteriorating mental and physical
condition including loss of memory.

In his answer, petitioner as defendant below alleged that respondent was estopped from assailing the sale of the
lots. Petitioner contended that respondent had effectively ratified both contracts of sales, by receiving the
consideration offered in each transaction.

On November 14, 1994, the Regional Trial Court handed down its decision, the dispositive portion of which reads:

WHEREFORE, in view of all the foregoing, this court hereby orders that:

1. The deeds of sale of the properties covered by Tax Dec. Nos. 01-00495 and 01-00497 are declared null
and void;

2. The defendant is to return the lots in question including all improvements thereon to the plaintiff and the
plaintiff is ordered to simultaneously return to the defendant the purchase price of the lots sold totalling
to P750,000.00 for lot covered by TD 01-00497 and P1,000,000.00 covered by TD 01-00495;

3. The court also orders the defendant to pay the cost of the suit.

<>4. The counter-claim of the defendant is denied for lack of merit.

SO ORDERED.4

Petitioner then elevated the matter to the Court of Appeals in CA-G.R. CV No. 47869. On August 30, 1999,
however, the appellate court affirmed the decision of the Regional Trial Court, thus:

WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED in toto. Costs against
defendant-appellant.

SO ORDERED.5
Hence, this petition for review anchored on the following grounds:

I. THE COURT OF APPEALS COMPLETELY IGNORED THE BASIC DIFFERENCE BETWEEN A VOID
AND A MERELY VOIDABLE CONTRACT THUS MISSING THE ESSENTIAL SIGNIFICANCE OF THE
ESTABLISHED FACT OF RATIFICATION BY THE RESPONDENT WHICH EXTINGUISHED WHATEVER
BASIS RESPONDENT MAY HAVE HAD IN HAVING THE CONTRACT AT BENCH ANNULLED.

II. THE DECISION OF THE COURT OF APPEALS ON "SENILE DEMENTIA":

A. DISREGARDED THE FACTUAL BACKGROUND OF THE CASE;

B. WAS CONTRARY TO ESTABLISHED JURISPRUDENCE; AND

C. WAS PURELY CONJECTURAL, THE CONJECTURE BEING ERRONEOUS.

III. THE COURT OF APPEALS WAS IN GROSS ERROR AND IN FACT VIOLATED PETITIONERS’ RIGHT
TO DUE PROCESS WHEN IT RULED THAT THE CONSIDERATION FOR THE QUESTIONED
CONTRACTS WAS GROSSLY INADEQUATE.6

The resolution of this case hinges on one pivotal issue: Are the assailed contracts of sale void or merely voidable
and hence capable of being ratified?

Petitioner contends that the Court of Appeals erred when it ignored the basic distinction between void and voidable
contracts. He argues that the contracts of sale in the instant case, following Article 1390 7 of the Civil Code are
merely voidable and not void ab initio. Hence, said contracts can be ratified. Petitioner argues that while it is true
that a demented person cannot give consent to a contract pursuant to Article 1327, 8 nonetheless the dementia
affecting one of the parties will not make the contract void per se but merely voidable. Hence, when respondent
accepted the purchase price on behalf of his father who was allegedly suffering from senile dementia, respondent
effectively ratified the contracts. The ratified contracts then become valid and enforceable as between the parties.

Respondent counters that his act of receiving the purchase price does not imply ratification on his part. He only
received the installment payments on his senile father’s behalf, since the latter could no longer account for the
previous payments. His act was thus meant merely as a safety measure to prevent the money from going into the
wrong hands. Respondent also maintains that the sales of the two properties were null and void. First, with respect
to the lot covered by TD No. 01-00497, Eligio, Sr. could no longer sell the same because it had been previously sold
to respondent in 1973. As to lot covered by TD No. 01-00495, respondent contends that it is co-owned by Eligio, Sr.
and his children, as heirs of Eligio’s wife. As such, Eligio, Sr. could not sell said lot without the consent of his co-
owners.

We note that both the trial court and the Court of Appeals found that Eligio, Sr. was already suffering from senile
dementia at the time he sold the lots in question. In other words, he was already mentally incapacitated when he
entered into the contracts of sale. Settled is the rule that findings of fact of the trial court, when affirmed by the
appellate court, are binding and conclusive upon the Supreme Court.9

Coming now to the pivotal issue in this controversy. A void or inexistent contract is one which has no force and
effect from the very beginning. Hence, it is as if it has never been entered into and cannot be validated either by the
passage of time or by ratification. There are two types of void contracts: (1) those where one of the essential
requisites of a valid contract as provided for by Article 1318 10 of the Civil Code is totally wanting; and (2) those
declared to be so under Article 1409 11 of the Civil Code. By contrast, a voidable or annullable contract is one in
which the essential requisites for validity under Article 1318 are present, but vitiated by want of capacity, error,
violence, intimidation, undue influence, or deceit.

Article 1318 of the Civil Code states that no contract exists unless there is a concurrence of consent of the parties,
object certain as subject matter, and cause of the obligation established. Article 1327 provides that insane or
demented persons cannot give consent to a contract. But, if an insane or demented person does enter into a
contract, the legal effect is that the contract is voidable or annullable as specifically provided in Article 1390. 12

In the present case, it was established that the vendor Eligio, Sr. entered into an agreement with petitioner, but that
the former’s capacity to consent was vitiated by senile dementia. Hence, we must rule that the assailed contracts
are not void or inexistent per se; rather, these are contracts that are valid and binding unless annulled through a
proper action filed in court seasonably.

An annullable contract may be rendered perfectly valid by ratification, which can be express or implied. Implied
ratification may take the form of accepting and retaining the benefits of a contract. 13 This is what happened in this
case. Respondent’s contention that he merely received payments on behalf of his father merely to avoid their
misuse and that he did not intend to concur with the contracts is unconvincing. If he was not agreeable with the
contracts, he could have prevented petitioner from delivering the payments, or if this was impossible, he could have
immediately instituted the action for reconveyance and have the payments consigned with the court. None of these
happened. As found by the trial court and the Court of Appeals, upon learning of the sale, respondent negotiated for
the increase of the purchase price while receiving the installment payments. It was only when respondent failed to
convince petitioner to increase the price that the former instituted the complaint for reconveyance of the properties.
Clearly, respondent was agreeable to the contracts, only he wanted to get more. Further, there is no showing that
respondent returned the payments or made an offer to do so. This bolsters the view that indeed there was
ratification. One cannot negotiate for an increase in the price in one breath and in the same breath contend that the
contract of sale is void.

Nor can we find for respondent’s argument that the contracts were void as Eligio, Sr., could not sell the lots in
question as one of the properties had already been sold to him, while the other was the subject of a co-ownership
among the heirs of the deceased wife of Eligio, Sr. Note that it was found by both the trial court and the Court of
Appeals that Eligio, Sr., was the "declared owner" of said lots. This finding is conclusive on us. As declared owner of
said parcels of land, it follows that Eligio, Sr., had the right to transfer the ownership thereof under the principle of
jus disponendi.

In sum, the appellate court erred in sustaining the judgment of the trial court that the deeds of sale of the two lots in
question were null and void.

WHEREFORE, the instant petition is GRANTED. The decision dated August 30, 1999 of the Court of Appeals in
CA-G.R. CV No. 47869, affirming the decision of the Regional Trial Court in Civil Case No. 92-2267 is REVERSED.
The two contracts of sale covering lots under TD No. 01-00495 and No. 01-00497 are hereby declared VALID.
Costs against respondent.

SO ORDERED.

G.R. No. 183852 October 20, 2010

CARMELA BROBIO MANGAHAS, Petitioner,

vs.
EUFROCINA A. BROBIO, Respondent.
 RESOLUTION

NACHURA, J.:

This petition for review on certiorari seeks to set aside the Court of Appeals (CA) Decision 1 dated February 21,
2008, which dismissed petitioner’s action to enforce payment of a promissory note issued by respondent, and
Resolution2 dated July 9, 2008, which denied petitioner’s motion for reconsideration.

The case arose from the following facts:

On January 10, 2002, Pacifico S. Brobio (Pacifico) died intestate, leaving three parcels of land. He was survived by
his wife, respondent Eufrocina A. Brobio, and four legitimate and three illegitimate children; petitioner Carmela
Brobio Mangahas is one of the illegitimate children.

On May 12, 2002, the heirs of the deceased executed a Deed of Extrajudicial Settlement of Estate of the Late
Pacifico Brobio with Waiver. In the Deed, petitioner and Pacifico’s other children, in consideration of their love and
affection for respondent and the sum of ₱150,000.00, waived and ceded their respective shares over the three
parcels of land in favor of respondent. According to petitioner, respondent promised to give her an additional
amount for her share in her father’s estate. Thus, after the signing of the Deed, petitioner demanded from
respondent the promised additional amount, but respondent refused to pay, claiming that she had no more money. 3

A year later, while processing her tax obligations with the Bureau of Internal Revenue (BIR), respondent was
required to submit an original copy of the Deed. Left with no more original copy of the Deed, respondent summoned
petitioner to her office on May 31, 2003 and asked her to countersign a copy of the Deed. Petitioner refused to
countersign the document, demanding that respondent first give her the additional amount that she promised.
Considering the value of the three parcels of land (which she claimed to be worth ₱20M), petitioner asked for ₱1M,
but respondent begged her to lower the amount. Petitioner agreed to lower it to ₱600,000.00. Because respondent
did not have the money at that time and petitioner refused to countersign the Deed without any assurance that the
amount would be paid, respondent executed a promissory note. Petitioner agreed to sign the Deed when
respondent signed the promissory note which read —

31 May 2003

This is to promise that I will give a Financial Assistance to CARMELA B. MANGAHAS the amount of ₱600,000.00
Six Hundred Thousand only on June 15, 2003.

(SGD)

EUFROCINA A. BROBIO4

When the promissory note fell due, respondent failed and refused to pay despite demand. Petitioner made several
more demands upon respondent but the latter kept on insisting that she had no money.

On January 28, 2004, petitioner filed a Complaint for Specific Performance with Damages 5 against respondent,
alleging in part—

2. That plaintiff and defendant are legal heirs of the deceased, Pacifico S. Brobio[,] who died intestate and
leaving without a will, on January 10, 2002, but leaving several real and personal properties (bank deposits),
and some of which were the subject of the extra-judicial settlement among them, compulsory heirs of the
deceased, Pacifico Brobio. x x x.

3. That in consideration of the said waiver of the plaintiff over the listed properties in the extra-judicial
settlement, plaintiff received the sum of ₱150,000.00, and the defendant executed a "Promissory Note" on
June 15, 2003, further committing herself to give plaintiff a financial assistance in the amount of
₱600,000.00. x x x.

4. That on its due date, June 15, 2003, defendant failed to make good of her promise of delivering to the
plaintiff the sum of ₱600,000.00 pursuant to her "Promissory Note" dated May 31, 2003, and despite
repeated demands, defendant had maliciously and capriciously refused to deliver to the plaintiff the amount
[of] ₱600,000.00, and the last of which demands was on October 29, 2003. x x x. 6

In her Answer with Compulsory Counterclaim,7 respondent admitted that she signed the promissory note but
claimed that she was forced to do so. She also claimed that the undertaking was not supported by any
consideration. More specifically, she contended that —
 10. Defendant was practically held "hostage" by the demand of the plaintiff. At that time, defendant was so
much pressured and was in [a] hurry to submit the documents to the Bureau of Internal Revenue because of
the deadline set and for fear of possible penalty if not complied with. Defendant pleaded understanding but
plaintiff was adamant. Her hand could only move in exchange for 1 million pesos.

11. Defendant, out of pressure and confused disposition, was constrained to make a promissory note in a
reduced amount in favor of the plaintiff. The circumstances in the execution of the promissory note were
obviously attended by involuntariness and the same was issued without consideration at all or for illegal
consideration.8

On May 15, 2006, the Regional Trial Court (RTC) rendered a decision in favor of petitioner. The RTC found that the
alleged "pressure and confused disposition" experienced by respondent and the circumstances that led to the
execution of the promissory note do not constitute undue influence as would vitiate respondent’s consent thereto.
On the contrary, the RTC observed that —

It is clear from all the foregoing that it is the defendant who took improper advantage of the plaintiff’s trust and
confidence in her by resorting to a worthless written promise, which she was intent on reneging. On the other hand,
plaintiff did not perform an unlawful conduct when she insisted on a written commitment from the defendant, as
embodied in the promissory note in question, before affixing her signature that was asked of her by the defendant
because, as already mentioned, that was the only opportunity available to her or which suddenly and unexpectedly
presented itself to her in order to press her demand upon the defendant to satisfy the correct amount of
consideration due to her. In other words, as the defendant had repeatedly rebuffed her plea for additional
consideration by claiming lack of money, it is only natural for the plaintiff to seize the unexpected opportunity that
suddenly presented itself in order to compel the defendant to give to her [what is] due [her]. And by executing the
promissory note which the defendant had no intention of honoring, as testified to by her, the defendant clearly acted
in bad faith and took advantage of the trust and confidence that plaintiff had reposed in her. 9

The RTC also brushed aside respondent’s claim that the promissory note was not supported by valuable
consideration. The court maintained that the promissory note was an additional consideration for the waiver of
petitioner’s share in the three properties in favor of respondent. Its conclusion was bolstered by the fact that the
promissory note was executed after negotiation and haggling between the parties. The dispositive portion of the
RTC decision reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering the defendant to pay to plaintiff the sum of Six Hundred Thousand Pesos (₱600,000.00) which
she committed to pay to plaintiff under the promissory note in question, plus interest thereon at the rate of
12% per annum computed from the date of the filing of the complaint;

2. Ordering the defendant to pay to plaintiff the sum of ₱50,000.00 as attorney’s fees; and

3. Ordering the defendant to pay to plaintiff the costs of this suit.

SO ORDERED.10

On February 21, 2008, the CA reversed the RTC decision and dismissed the complaint. 11 The CA found that there
was a complete absence of consideration in the execution of the promissory note, which made it inexistent and
without any legal force and effect. The court noted that "financial assistance" was not the real reason why
respondent executed the promissory note, but only to secure petitioner’s signature. The CA held that the waiver of
petitioner’s share in the three properties, as expressed in the deed of extrajudicial settlement, may not be
considered as the consideration of the promissory note, considering that petitioner signed the Deed way back in
2002 and she had already received the consideration of ₱150,000.00 for signing the same. The CA went on to hold
that if petitioner disagreed with the amount she received, then she should have filed an action for partition.

Further, the CA found that intimidation attended the signing of the promissory note. Respondent needed the Deed
countersigned by petitioner in order to comply with a BIR requirement; and, with petitioner’s refusal to sign the said
document, respondent was forced to sign the promissory note to assure petitioner that the money promised to her
would be paid.

Petitioner moved for the reconsideration of the CA Decision. In a Resolution dated July 9, 2008, the CA denied
petitioner’s motion.12

In this petition for review, petitioner raises the following issues:

1. The Honorable Court of Appeals erred in the appreciation of the facts of this case when it found that
intimidation attended the execution of the promissory note subject of this case.
 2. The Honorable Court of Appeals erred when it found that the promissory note was without consideration.

3. The Honorable Court of Appeals erred when it stated that petitioner should have filed [an action] for
partition instead of a case for specific performance.13

The petition is meritorious.

Contracts are voidable where consent thereto is given through mistake, violence, intimidation, undue influence, or
fraud. In determining whether consent is vitiated by any of these circumstances, courts are given a wide latitude in
weighing the facts or circumstances in a given case and in deciding in favor of what they believe actually occurred,
considering the age, physical infirmity, intelligence, relationship, and conduct of the parties at the time of the
execution of the contract and subsequent thereto, irrespective of whether the contract is in a public or private
writing.14

Nowhere is it alleged that mistake, violence, fraud, or intimidation attended the execution of the promissory note.
Still, respondent insists that she was "forced" into signing the promissory note because petitioner would not sign the
document required by the BIR. In one case, the Court – in characterizing a similar argument by respondents therein
– held that such allegation is tantamount to saying that the other party exerted undue influence upon them.
However, the Court said that the fact that respondents were "forced" to sign the documents does not amount to
vitiated consent.15

There is undue influence when a person takes improper advantage of his power over the will of another, depriving
the latter of a reasonable freedom of choice.16 For undue influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting party as to destroy his free agency, making him express the
will of another rather than his own.17

Respondent may have desperately needed petitioner’s signature on the Deed, but there is no showing that she was
deprived of free agency when she signed the promissory note. Being forced into a situation does not amount to
vitiated consent where it is not shown that the party is deprived of free will and choice. Respondent still had a
choice: she could have refused to execute the promissory note and resorted to judicial means to obtain petitioner’s
signature. Instead, respondent chose to execute the promissory note to obtain petitioner’s signature, thereby
agreeing to pay the amount demanded by petitioner.

The fact that respondent may have felt compelled, under the circumstances, to execute the promissory note will not
negate the voluntariness of the act. As rightly observed by the trial court, the execution of the promissory note in the
amount of ₱600,000.00 was, in fact, the product of a negotiation between the parties. Respondent herself testified
that she bargained with petitioner to lower the amount:

ATTY. VILLEGAS:

Q And is it not that there was even a bargaining from ₱1-M to ₱600,000.00 before you prepare[d] and
[sign[ed] that promissory note marked as Exhibit "C"?

A Yes, sir.

Q And in fact, you were the one [who] personally wrote the amount of ₱600,000.00 only as indicated in the
said promissory note?

A Yes, sir.

COURT:

Q So, just to clarify. Carmela was asking an additional amount of ₱1-M for her to sign this document but you
negotiated with her and asked that it be lowered to ₱600,000.00 to which she agreed, is that correct?

A Yes, Your Honor. Napilitan na po ako.

Q But you negotiated and asked for its reduction from ₱1-M to ₱600,000.00?

A Yes, Your Honor.18

Contrary to the CA’s findings, the situation did not amount to intimidation that vitiated consent. There is intimidation
1awphil

when one of the contracting parties is compelled to give his consent by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants, or
ascendants.19 Certainly, the payment of penalties for delayed payment of taxes would not qualify as a "reasonable
and well-grounded fear of an imminent and grave evil."
We join the RTC in holding that courts will not set aside contracts merely because solicitation, importunity,
argument, persuasion, or appeal to affection was used to obtain the consent of the other party. Influence obtained
by persuasion or argument or by appeal to affection is not prohibited either in law or morals and is not obnoxious
even in courts of equity.20

On the issue that the promissory note is void for not being supported by a consideration, we likewise disagree with
the CA.

A contract is presumed to be supported by cause or consideration. 21 The presumption that a contract has sufficient
consideration cannot be overthrown by a mere assertion that it has no consideration. To overcome the presumption,
the alleged lack of consideration must be shown by preponderance of evidence. 22 The burden to prove lack of
consideration rests upon whoever alleges it, which, in the present case, is respondent.

Respondent failed to prove that the promissory note was not supported by any consideration. From her testimony
and her assertions in the pleadings, it is clear that the promissory note was issued for a cause or consideration,
which, at the very least, was petitioner’s signature on the document.
1avvphi1

It may very well be argued that if such was the consideration, it was inadequate. Nonetheless, even if the
consideration is inadequate, the contract would not be invalidated, unless there has been fraud, mistake, or undue
influence.23 As previously stated, none of these grounds had been proven present in this case.

The foregoing discussion renders the final issue insignificant. Be that as it may, we would like to state that the
remedy suggested by the CA is not the proper one under the circumstances. An action for partition implies that the
property is still owned in common.24 Considering that the heirs had already executed a deed of extrajudicial
settlement and waived their shares in favor of respondent, the properties are no longer under a state of co-
ownership; there is nothing more to be partitioned, as ownership had already been merged in one person.

WHEREFORE, premises considered, the CA Decision dated February 21, 2008 and its Resolution dated July 9,
2008 are REVERSED and SET ASIDE. The RTC decision dated May 15, 2006 is REINSTATED.

SO ORDERED.

G.R. No. 178902 April 21, 2010

MANUEL O. FUENTES and LETICIA L. FUENTES, Petitioners,

vs.
CONRADO G. ROCA, ANNABELLE R. JOSON, ROSE MARIE R. CRISTOBAL and PILAR
MALCAMPO, Respondents.

DECISION

ABAD, J.:

This case is about a husband’s sale of conjugal real property, employing a challenged affidavit of consent from an
estranged wife. The buyers claim valid consent, loss of right to declare nullity of sale, and prescription.

The Facts and the Case

Sabina Tarroza owned a titled 358-square meter lot in Canelar, Zamboanga City. On October 11, 1982 she sold it to
her son, Tarciano T. Roca (Tarciano) under a deed of absolute sale. 1 But Tarciano did not for the meantime have
the registered title transferred to his name.

Six years later in 1988, Tarciano offered to sell the lot to petitioners Manuel and Leticia Fuentes (the Fuentes
spouses). They arranged to meet at the office of Atty. Romulo D. Plagata whom they asked to prepare the
documents of sale. They later signed an agreement to sell that Atty. Plagata prepared 2 dated April 29, 1988, which
agreement expressly stated that it was to take effect in six months.

The agreement required the Fuentes spouses to pay Tarciano a down payment of ₱60,000.00 for the transfer of the
lot’s title to him. And, within six months, Tarciano was to clear the lot of structures and occupants and secure the
consent of his estranged wife, Rosario Gabriel Roca (Rosario), to the sale. Upon Tarciano’s compliance with these
conditions, the Fuentes spouses were to take possession of the lot and pay him an additional ₱140,000.00 or
₱160,000.00, depending on whether or not he succeeded in demolishing the house standing on it. If Tarciano was
unable to comply with these conditions, the Fuentes spouses would become owners of the lot without any further
formality and payment.

The parties left their signed agreement with Atty. Plagata who then worked on the other requirements of the sale.
According to the lawyer, he went to see Rosario in one of his trips to Manila and had her sign an affidavit of
consent.3 As soon as Tarciano met the other conditions, Atty. Plagata notarized Rosario’s affidavit in Zamboanga
City. On January 11, 1989 Tarciano executed a deed of absolute sale 4 in favor of the Fuentes spouses. They then
paid him the additional ₱140,000.00 mentioned in their agreement. A new title was issued in the name of the
spouses5 who immediately constructed a building on the lot. On January 28, 1990 Tarciano passed away, followed
by his wife Rosario who died nine months afterwards.

Eight years later in 1997, the children of Tarciano and Rosario, namely, respondents Conrado G. Roca, Annabelle
R. Joson, and Rose Marie R. Cristobal, together with Tarciano’s sister, Pilar R. Malcampo, represented by her son,
John Paul M. Trinidad (collectively, the Rocas), filed an action for annulment of sale and reconveyance of the land
against the Fuentes spouses before the Regional Trial Court (RTC) of Zamboanga City in Civil Case 4707. The
Rocas claimed that the sale to the spouses was void since Tarciano’s wife, Rosario, did not give her consent to it.
Her signature on the affidavit of consent had been forged. They thus prayed that the property be reconveyed to
them upon reimbursement of the price that the Fuentes spouses paid Tarciano. 6

The spouses denied the Rocas’ allegations. They presented Atty. Plagata who testified that he personally saw
Rosario sign the affidavit at her residence in Paco, Manila, on September 15, 1988. He admitted, however, that he
notarized the document in Zamboanga City four months later on January 11, 1989. 7 All the same, the Fuentes
spouses pointed out that the claim of forgery was personal to Rosario and she alone could invoke it. Besides, the
four-year prescriptive period for nullifying the sale on ground of fraud had already lapsed.

Both the Rocas and the Fuentes spouses presented handwriting experts at the trial. Comparing Rosario’s standard
signature on the affidavit with those on various documents she signed, the Rocas’ expert testified that the
signatures were not written by the same person. Making the same comparison, the spouses’ expert concluded that
they were.8

On February 1, 2005 the RTC rendered judgment, dismissing the case. It ruled that the action had already
prescribed since the ground cited by the Rocas for annulling the sale, forgery or fraud, already prescribed under
Article 1391 of the Civil Code four years after its discovery. In this case, the Rocas may be deemed to have notice of
the fraud from the date the deed of sale was registered with the Registry of Deeds and the new title was issued.
Here, the Rocas filed their action in 1997, almost nine years after the title was issued to the Fuentes spouses on
January 18, 1989.9

Moreover, the Rocas failed to present clear and convincing evidence of the fraud. Mere variance in the signatures of
Rosario was not conclusive proof of forgery.10 The RTC ruled that, although the Rocas presented a handwriting
expert, the trial court could not be bound by his opinion since the opposing expert witness contradicted the same.
Atty. Plagata’s testimony remained technically unrebutted.11

Finally, the RTC noted that Atty. Plagata’s defective notarization of the affidavit of consent did not invalidate the
sale. The law does not require spousal consent to be on the deed of sale to be valid. Neither does the irregularity
vitiate Rosario’s consent. She personally signed the affidavit in the presence of Atty. Plagata. 12

On appeal, the Court of Appeals (CA) reversed the RTC decision. The CA found sufficient evidence of forgery and
did not give credence to Atty. Plagata’s testimony that he saw Rosario sign the document in Quezon City. Its jurat
said differently. Also, upon comparing the questioned signature with the specimen signatures, the CA noted
significant variance between them. That Tarciano and Rosario had been living separately for 30 years since 1958
also reinforced the conclusion that her signature had been forged.

Since Tarciano and Rosario were married in 1950, the CA concluded that their property relations were governed by
the Civil Code under which an action for annulment of sale on the ground of lack of spousal consent may be brought
by the wife during the marriage within 10 years from the transaction. Consequently, the action that the Rocas, her
heirs, brought in 1997 fell within 10 years of the January 11, 1989 sale.

Considering, however, that the sale between the Fuentes spouses and Tarciano was merely voidable, the CA held
that its annulment entitled the spouses to reimbursement of what they paid him plus legal interest computed from
the filing of the complaint until actual payment. Since the Fuentes spouses were also builders in good faith, they
were entitled under Article 448 of the Civil Code to payment of the value of the improvements they introduced on the
lot. The CA did not award damages in favor of the Rocas and deleted the award of attorney’s fees to the Fuentes
spouses.13

Unsatisfied with the CA decision, the Fuentes spouses came to this court by petition for review. 14

The Issues Presented

The case presents the following issues:

1. Whether or not Rosario’s signature on the document of consent to her husband Tarciano’s sale of their
conjugal land to the Fuentes spouses was forged;

2. Whether or not the Rocas’ action for the declaration of nullity of that sale to the spouses already
prescribed; and

3. Whether or not only Rosario, the wife whose consent was not had, could bring the action to annul that
sale.

The Court’s Rulings

First. The key issue in this case is whether or not Rosario’s signature on the document of consent had been forged.
For, if the signature were genuine, the fact that she gave her consent to her husband’s sale of the conjugal land
would render the other issues merely academic.

The CA found that Rosario’s signature had been forged. The CA observed a marked difference between her
signature on the affidavit of consent 15 and her specimen signatures.16 The CA gave no weight to Atty. Plagata’s
testimony that he saw Rosario sign the document in Manila on September 15, 1988 since this clashed with his
declaration in the jurat that Rosario signed the affidavit in Zamboanga City on January 11, 1989.

The Court agrees with the CA’s observation that Rosario’s signature strokes on the affidavit appears heavy,
deliberate, and forced. Her specimen signatures, on the other hand, are consistently of a lighter stroke and more
fluid. The way the letters "R" and "s" were written is also remarkably different. The variance is obvious even to the
untrained eye.

Significantly, Rosario’s specimen signatures were made at about the time that she signed the supposed affidavit of
consent. They were, therefore, reliable standards for comparison. The Fuentes spouses presented no evidence that
Rosario suffered from any illness or disease that accounted for the variance in her signature when she signed the
affidavit of consent. Notably, Rosario had been living separately from Tarciano for 30 years since 1958. And she
resided so far away in Manila. It would have been quite tempting for Tarciano to just forge her signature and avoid
the risk that she would not give her consent to the sale or demand a stiff price for it.

What is more, Atty. Plagata admittedly falsified the jurat of the affidavit of consent. That jurat declared that Rosario
swore to the document and signed it in Zamboanga City on January 11, 1989 when, as Atty. Plagata testified, she
supposedly signed it about four months earlier at her residence in Paco, Manila on September 15, 1988. While a
defective notarization will merely strip the document of its public character and reduce it to a private instrument, that
falsified jurat, taken together with the marks of forgery in the signature, dooms such document as proof of Rosario’s
consent to the sale of the land. That the Fuentes spouses honestly relied on the notarized affidavit as proof of
Rosario’s consent does not matter. The sale is still void without an authentic consent.

Second. Contrary to the ruling of the Court of Appeals, the law that applies to this case is the Family Code, not the
Civil Code. Although Tarciano and Rosario got married in 1950, Tarciano sold the conjugal property to the Fuentes
spouses on January 11, 1989, a few months after the Family Code took effect on August 3, 1988.

When Tarciano married Rosario, the Civil Code put in place the system of conjugal partnership of gains on their
property relations. While its Article 165 made Tarciano the sole administrator of the conjugal partnership, Article
16617 prohibited him from selling commonly owned real property without his wife’s consent. Still, if he sold the same
without his wife’s consent, the sale is not void but merely voidable. Article 173 gave Rosario the right to have the
sale annulled during the marriage within ten years from the date of the sale. Failing in that, she or her heirs may
demand, after dissolution of the marriage, only the value of the property that Tarciano fraudulently sold. Thus:

Art. 173. The wife may, during the marriage, and within ten years from the transaction questioned, ask the courts for
the annulment of any contract of the husband entered into without her consent, when such consent is required, or
any act or contract of the husband which tends to defraud her or impair her interest in the conjugal partnership
property. Should the wife fail to exercise this right, she or her heirs, after the dissolution of the marriage, may
demand the value of property fraudulently alienated by the husband.

But, as already stated, the Family Code took effect on August 3, 1988. Its Chapter 4 on Conjugal Partnership of
Gains expressly superseded Title VI, Book I of the Civil Code on Property Relations Between Husband and
Wife.18 Further, the Family Code provisions were also made to apply to already existing conjugal partnerships
without prejudice to vested rights.19 Thus:

Art. 105. x x x The provisions of this Chapter shall also apply to conjugal partnerships of gains already established
between spouses before the effectivity of this Code, without prejudice to vested rights already acquired in
accordance with the Civil Code or other laws, as provided in Article 256. (n)

Consequently, when Tarciano sold the conjugal lot to the Fuentes spouses on January 11, 1989, the law that
governed the disposal of that lot was already the Family Code.

In contrast to Article 173 of the Civil Code, Article 124 of the Family Code does not provide a period within which the
wife who gave no consent may assail her husband’s sale of the real property. It simply provides that without the
other spouse’s written consent or a court order allowing the sale, the same would be void. Article 124 thus provides:

Art. 124. x x x In the event that one spouse is incapacitated or otherwise unable to participate in the administration
of the conjugal properties, the other spouse may assume sole powers of administration. These powers do not
include the powers of disposition or encumbrance which must have the authority of the court or the written consent
of the other spouse. In the absence of such authority or consent, the disposition or encumbrance shall be void. x x x

Under the provisions of the Civil Code governing contracts, a void or inexistent contract has no force and effect from
the very beginning. And this rule applies to contracts that are declared void by positive provision of law, 20 as in the
case of a sale of conjugal property without the other spouse’s written consent. A void contract is equivalent to
nothing and is absolutely wanting in civil effects. It cannot be validated either by ratification or prescription. 21

But, although a void contract has no legal effects even if no action is taken to set it aside, when any of its terms
have been performed, an action to declare its inexistence is necessary to allow restitution of what has been given
under it.22 This action, according to Article 1410 of the Civil Code does not prescribe. Thus:

Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

Here, the Rocas filed an action against the Fuentes spouses in 1997 for annulment of sale and reconveyance of the
real property that Tarciano sold without their mother’s (his wife’s) written consent. The passage of time did not erode
the right to bring such an action.

Besides, even assuming that it is the Civil Code that applies to the transaction as the CA held, Article 173 provides
that the wife may bring an action for annulment of sale on the ground of lack of spousal consent during the marriage
within 10 years from the transaction. Consequently, the action that the Rocas, her heirs, brought in 1997 fell within
10 years of the January 11, 1989 sale. It did not yet prescribe.

The Fuentes spouses of course argue that the RTC nullified the sale to them based on fraud and that, therefore, the
applicable prescriptive period should be that which applies to fraudulent transactions, namely, four years from its
discovery. Since notice of the sale may be deemed given to the Rocas when it was registered with the Registry of
Deeds in 1989, their right of action already prescribed in 1993.

But, if there had been a victim of fraud in this case, it would be the Fuentes spouses in that they appeared to have
agreed to buy the property upon an honest belief that Rosario’s written consent to the sale was genuine. They had
four years then from the time they learned that her signature had been forged within which to file an action to annul
the sale and get back their money plus damages. They never exercised the right.

If, on the other hand, Rosario had agreed to sign the document of consent upon a false representation that the
property would go to their children, not to strangers, and it turned out that this was not the case, then she would
have four years from the time she discovered the fraud within which to file an action to declare the sale void. But
that is not the case here. Rosario was not a victim of fraud or misrepresentation. Her consent was simply not
obtained at all. She lost nothing since the sale without her written consent was void. Ultimately, the Rocas ground
for annulment is not forgery but the lack of written consent of their mother to the sale. The forgery is merely
evidence of lack of consent.

Third. The Fuentes spouses point out that it was to Rosario, whose consent was not obtained, that the law gave the
right to bring an action to declare void her husband’s sale of conjugal land. But here, Rosario died in 1990, the year
after the sale. Does this mean that the right to have the sale declared void is forever lost?

The answer is no. As stated above, that sale was void from the beginning. Consequently, the land remained the
property of Tarciano and Rosario despite that sale. When the two died, they passed on the ownership of the
property to their heirs, namely, the Rocas.23 As lawful owners, the Rocas had the right, under Article 429 of the Civil
Code, to exclude any person from its enjoyment and disposal. 1avvphi1

In fairness to the Fuentes spouses, however, they should be entitled, among other things, to recover from
Tarciano’s heirs, the Rocas, the ₱200,000.00 that they paid him, with legal interest until fully paid, chargeable
against his estate.

Further, the Fuentes spouses appear to have acted in good faith in entering the land and building improvements on
it. Atty. Plagata, whom the parties mutually entrusted with closing and documenting the transaction, represented that
he got Rosario’s signature on the affidavit of consent. The Fuentes spouses had no reason to believe that the
lawyer had violated his commission and his oath. They had no way of knowing that Rosario did not come to
Zamboanga to give her consent. There is no evidence that they had a premonition that the requirement of consent
presented some difficulty. Indeed, they willingly made a 30 percent down payment on the selling price months
earlier on the assurance that it was forthcoming.

Further, the notarized document appears to have comforted the Fuentes spouses that everything was already in
order when Tarciano executed a deed of absolute sale in their favor on January 11, 1989. In fact, they paid the
balance due him. And, acting on the documents submitted to it, the Register of Deeds of Zamboanga City issued a
new title in the names of the Fuentes spouses. It was only after all these had passed that the spouses entered the
property and built on it. He is deemed a possessor in good faith, said Article 526 of the Civil Code, who is not aware
that there exists in his title or mode of acquisition any flaw which invalidates it.

As possessor in good faith, the Fuentes spouses were under no obligation to pay for their stay on the property prior
to its legal interruption by a final judgment against them. 24 What is more, they are entitled under Article 448 to
indemnity for the improvements they introduced into the property with a right of retention until the reimbursement is
made. Thus:

Art. 448. The owner of the land on which anything has been built, sown or planted in good faith, shall have the right
to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in Articles 546
and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper
rent. However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of
the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to
appropriate the building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in
case of disagreement, the court shall fix the terms thereof. (361a)

The Rocas shall of course have the option, pursuant to Article 546 of the Civil Code, 25 of indemnifying the Fuentes
spouses for the costs of the improvements or paying the increase in value which the property may have acquired by
reason of such improvements.

WHEREFORE, the Court DENIES the petition and AFFIRMS WITH MODIFICATION the decision of the Court of
Appeals in CA-G.R. CV 00531 dated February 27, 2007 as follows:

1. The deed of sale dated January 11, 1989 that Tarciano T. Roca executed in favor of Manuel O. Fuentes,
married to Leticia L. Fuentes, as well as the Transfer Certificate of Title T-90,981 that the Register of Deeds
 of Zamboanga City issued in the names of the latter spouses pursuant to that deed of sale are DECLARED
void;

2. The Register of Deeds of Zamboanga City is DIRECTED to reinstate Transfer Certificate of Title 3533 in
the name of Tarciano T. Roca, married to Rosario Gabriel;

3. Respondents Gonzalo G. Roca, Annabelle R. Joson, Rose Marie R. Cristobal, and Pilar Malcampo are
ORDERED to pay petitioner spouses Manuel and Leticia Fuentes the ₱200,000.00 that the latter paid
Tarciano T. Roca, with legal interest from January 11, 1989 until fully paid, chargeable against his estate;

4. Respondents Gonzalo G. Roca, Annabelle R. Joson, Rose Marie R. Cristobal, and Pilar Malcampo are
further ORDERED, at their option, to indemnify petitioner spouses Manuel and Leticia Fuentes with their
expenses for introducing useful improvements on the subject land or pay the increase in value which it may
have acquired by reason of those improvements, with the spouses entitled to the right of retention of the
land until the indemnity is made; and

5. The RTC of Zamboanga City from which this case originated is DIRECTED to receive evidence and
determine the amount of indemnity to which petitioner spouses Manuel and Leticia Fuentes are entitled.

SO ORDERED.
G.R. No. 158576 March 9, 2011

CORNELIA M. HERNANDEZ, Petitioner,

vs.
CECILIO F. HERNANDEZ, Respondent.

DECISION

PEREZ, J.:

Before Us is a Petition for Review1 of the Decision of the Court of Appeals in CA-G.R. CV No. 70184 2 dated 29 May
2003. The appellate court reversed the Decision of the Regional Trial Court of Makati, Branch 150 (RTC Branch
150), in Civil Case No. 00-11483 dated 12 February 2001, declaring that the quitclaim signed by the petitioner is
valid and incontrovertible.

The controversy between the parties began when the Republic of the Philippines, through the Department of Public
Works and Highways (DPWH), offered to purchase a portion of a parcel of land with an area of 80,133 square
meters, covered by TCT No. T-367514 of the Registry of Deeds for Tanauan, Batangas, located at San Rafael, Sto.
Tomas, Batangas, for use in the expansion of the South Luzon Expressway. The land is pro-indiviso owned by
Cornelia M. Hernandez (Cornelia), petitioner herein, Atty. Jose M. Hernandez, deceased father of respondent
Cecilio F. Hernandez (Cecilio),5 represented by Paciencia Hernandez (Paciencia) and Mena Hernandez (Mena),
also deceased and represented by her heirs.6

The initial purchase price that was offered by the government was allegedly at Thirty-Five pesos (₱35.00) per
square meter for 14,643 square meters of the aforementioned land.7 The Hernandez family rejected the offer. After a
series of negotiations with the DPWH, the last offer stood at Seventy Pesos (₱70.00) per square meter. 8 They still
did not accept the offer and the government was forced to file an expropriation case.

On 9 August 1993, an expropriation case was filed by the Republic of the Philippines, through the DPWH, before the
Regional Trial Court, Branch 83 (RTC Branch 83), Tanauan, Batangas. 9 The case was first docketed as Civil Case
No. T-859, then Civil Case No. C-023. Branch Clerk of Court Francisco Q. Balderama, Jr., issued a Certification
dated 10 January 2001 certifying that the docket numbers stated refers to one and the same case. 10

In Civil Case No. C-023, different parcels of land in Barangay Tripache, Tanauan Batangas, which belongs to thirty-
four (34) families including the Hernandezes are affected by the expansion project of the DPWH. A similar case,
Civil Case No. C-022, was consolidated with the former as it affects the same DPWH endeavor. Land in San Rafael,
Sto. Tomas, Batangas, which belong to twenty-three (23) families, was also the subject of expropriation.

On 11 November 1993, the owners of the Hernandez property executed a letter indicating: (1) Cecilio as the
representative of the owners of the land; and (2) the compensation he gets in doing such job. The letter reads:

November 11, 1993

Mr. Cecilio F. Hernandez

Tanauan, Batangas

Dear Cecilio:

This would confirm to give you twenty (20%) percent of any amount in excess of Seventy (P70.00) Pesos per
square meter of our respective shares as success fee for your effort in representing us in Civil Case No. T-859
entitled, "Republic of the Philippines, represented by the Public Works and Highways v. Sto. Tomas Agri-Farms, Inc.
and the Appellate Courts."

Whatever excess beyond Three Hundred (₱300.00) Pesos per square meter of the area shall likewise be given to
you as additional incentive.

We will give you One Thousand Five Hundred (₱8,500.00) (sic) Pesos each for the preparation of the pleading
before the Regional Trial Court and such other reasonable expenses of litigation pro-indiviso.

Very Truly Yours,

(Sgd.) PACENCIA F. HERNANDEZ

(Sgd.) CORNELIA M. HERNANDEZ

Conforme:

(Sgd.) PACITA M. HERNANDEZ

(Sgd.)CECILIO F. HERNANDEZ

HEIRS OF MENA M. HERNANDEZ

By: (Sgd.) MA. ANTONIA H. LLAMZON

AND

(Sgd.) PERSEVERANDO M. HERNANDEZ11

During the course of the expropriation proceedings, an Order dated 13 September 1996 was issued by the RTC
Branch 83, informing the parties of the appointment of commissioners to help determine the just compensation.
Cecilio was appointed as one of the commissioners to represent the defendants in Civil Case No. C-022. The Order
reads:

In order to determine the fair market value of the lands subject of expropriation, the following are appointed as
commissioners: Engr. Melchor Dimaano, as representative of the Department of Public Works and Highways
(DPWH), Messrs. Magno Aguilar and Cecilio Hernandez, as representatives of the landowners, and Mr. Eric
Faustino Esperanza as representative of the Court.12 (Emphasis ours)

On 18 October 1996, Cornelia, and her other co-owners who were also signatories of the 11 November 1993 letter,
executed an irrevocable Special Power of Attorney (SPA) appointing Cecilio Hernandez as their "true and lawful
attorney" with respect to the expropriation of the subject property. 13 The SPA stated that the authority shall be
irrevocable and continue to be binding all throughout the negotiation. It further stated that the authority shall bind all
successors and assigns in regard to any negotiation with the government until its consummation and binding
transfer of a portion to be sold to that entity with Cecilio as the sole signatory in regard to the rights and interests of
the signatories therein. There was no mention of the compensation scheme for Cecilio, the attorney-in-fact.

The just compensation for the condemned properties was fixed in the Decision 14 dated 7 January 1998, penned by
Judge Voltaire Y. Rosales (Judge Rosales) of RTC Branch 83, Tanauan, Batangas. The value of the land located at
Barangay Tripache, Tanauan, Batangas, was pegged at One Thousand Five Hundred Pesos (₱1,500.00) per
square meter. The total area that was condemned for the Hernandez family was Fourteen Thousand Six Hundred
Forty-Three (14,643) square meters. Thus, multiplying the values given, the Hernandez family will get a total of
Twenty One Million, Nine Hundred Sixty-Four Thousand Five Hundred Pesos (₱21,964,500.00) as just
compensation.15

Included in the decision is the directive of the court to pay the amount of ₱4,000.00 to Cecilio, as Commissioner’s
fees.16

On 6 October 1999, petitioner executed a Revocation of the SPA 17 withdrawing the authority earlier granted to
Cecilio in the SPA dated 18 October 1996. After the revocation, on 28 December 1999, without the termination of
counsel on record, Cornelia, with a new lawyer, moved for the withdrawal of her one-third (1/3) share of the just
compensation, which is equivalent to Seven Million Three Hundred Twenty-One Thousand Five Hundred Pesos
(₱7,321,500.00) – the amount a pro-indiviso owner is to receive.

In the Order18 dated 24 January 2000, Judge Rosales, even with the irregularity that the motion to withdraw was not
filed by the counsel of record, granted the motion of petitioner, with the condition that the money shall be released
only to the attorney-in-fact, Mr. Cecilio F. Hernandez. The trial court took cognizance of the irrevocable nature of the
SPA dated 18 October 1996.19 Cecilio, therefore, was able to get not just one-third (1/3) of, but the entire sum of
Twenty One Million, Nine Hundred Sixty-Four Thousand Five Hundred Pesos (₱21,964,500.00).

On 7 February 2000, Cornelia received from Cecilio a Bank of the Philippine Islands Check amounting to One
Million One Hundred Twenty-Three Thousand Pesos (₱1,123,000.00). 20 The check was however accompanied by a
Receipt and Quitclaim21 document in favor of Cecilio. In essence it states that: (1) the amount received will be the
share of Cornelia in the just compensation paid by the government in the expropriated property; (2) in consideration
of the payment, it will release and forever discharge Cecilio from any action, damages, claims or demands; and (3)
Cornelia will not institute any action and will not pursue her complaint or opposition to the release to Cecilio or his
heirs or assigns, of the entire amount deposited in the Land Bank of the Philippines, Tanauan, Batangas, or in any
other account with any bank, deposited or will be deposited therein, in connection with Civil Case No C-023,
representing the total just compensation of expropriated properties under the aforementioned case.
The check was received by Cornelia with a heavy heart. She averred in her ex-parte testimony that she was forced
to receive such amount because she needs the money immediately for medical expenses due to her frail condition. 22

Moreover, Cornelia averred that after a few days from her receipt of the check, she sought the help of her niece,
Daisy Castillo, to get the decision in Civil Case No. C-022. 23 It was only then, when her niece got hold of the decision
and explained its contents, that she learned that she was entitled to receive Seven Million Three Hundred Twenty-
One Thousand Five Hundred Pesos (₱7,321,500.00). 24 In a Letter25 dated 22 June 2000, Cornelia demanded the
accounting of the proceeds. The letter was left unanswered. She then decided to have the courts settle the issue. A
Complaint for the Annulment of Quitclaim and Recovery of Sum of Money and Damages 26 was filed before the RTC
Branch 150 of Makati on 18 September 2000. The case was docketed as Civil Case No. 00-1184.

Cecilio, despite the service of summons and copy of the complaint failed to file an answer. The trial court explained
further that Cecilio was present in the address supplied by the petitioner but refused to receive the copy. The trial
court even gave Cecilio ten (10) more days, from his refusal to accept the summons, to file his answer. Upon the
motion of the petitioner, respondent Cecilio was declared in default. The court allowed petitioner to adduce evidence
ex parte.27

Cecilio tried to file a Motion for Reconsideration to lift the order of default. However, the trial court found that the
leeway they have given Cecilio to file an answer was more than enough.

In the Decision dated 12 February 2001, the RTC Branch 150 of Makati, through Judge Zeus C. Abrogar denied the
motion and nullified the quitclaim in favor of Cecilio. The fallo of the case reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, declaring the receipt
and quitclaim signed by the plaintiff dated February 7, 2000 as null and void and ordering the defendant to pay the
plaintiff the amount of;

1. ₱6,198,417.60, including the accrued interest thereon with 12% per annum, computed from the date of
the filing hereof until the said amount is fully paid;

2. payment of ₱200,000.00 to the plaintiff by the defendant by way of moral damages;

3. attorney’s fees in the sum of ₱100,000.00 and;

4. cost of suit.28

Aggrieved, Cecilio appealed the Decision of the trial court. The Court of Appeals did not discuss whether the default
order was proper. However, the appellate court, in its Decision dated 29 May 2003 reversed and set aside the ruling
of the trial court. The dispositive portion reads:

WHEREFORE, premises considered, the Decision dated February 12, 2001, of the Regional Trial Court of Makati,
National Capital Judicial Region, Branch 150, in Civil Case No. 00-1148, is hereby REVERSED and SET ASIDE
and a new one is entered ordering the dismissal of the complaint filed on September 13, 2000 by the appellee
against the appellant. No pronouncement as to costs.29

Petitioner Cornelia now submits that the Court of Appeals erred in holding the validity of the receipt and quitclaim
document contrary to law and jurisprudence.30 She holds that the distribution of award that transpired is unjust and
prays that the decision of the RTC Branch 150 of Makati be reinstated.

We agree.

The trial court awarded the Hernandez family, among others, a total amount of ₱21,964,500.00 for the expropriation
of 14,643 square meters of land to be used as extension of the South Luzon Expressway. The three co-owners of
the said land, Cornelia, Mena and Paciencia were listed as item number twenty (20) in the decision dated 7 January
1998, as one of the recipients of the just compensation to be given by the government. 31 As pro-indiviso landowners
of the property taken, each one of them ought to receive an equal share or one third (1/3) of the total amount which
is equivalent to ₱7,321,500.00.

The equal division of proceeds, however, was contested by Cecilio. He avers that he is the agent of the owners of
the property.32 He bound himself to render service on behalf of her cousins, aunt and mother, by virtue of the request
of the latter.33 As an agent, Cecilio insists that he be given the compensation he deserves based on the agreement
made in the letter dated 11 November 1993, also called as the service contract, 34 which was signed by all the
parties. This is the contract to which Cecilio anchors his claim of validity of the receipt and quitclaim that was signed
in his favor.

I.
A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. 35 In
determining whether consent is vitiated by any of the circumstances mentioned, courts are given a wide latitude in
weighing the facts or circumstances in a given case and in deciding in their favor what they believe to have actually
occurred, considering the age, physical infirmity, intelligence, relationship, and the conduct of the parties at the time
of the making of the contract and subsequent thereto, irrespective of whether the contract is in public or private
writing.36 And, in order that mistake may invalidate consent, it should refer to the substance of the thing which is the
object of the contract, or those conditions which have principally moved one or both parties to enter the contract. 37

The compensation scheme of 20% of any amount over ₱70.00 per square meter and everything above ₱300.00 per
square meter was granted in favor of Cecilio by the Hernandezes on 11 November 1993. At that time, the
Hernandezes had just rejected the government’s offer of ₱35.00 per square meter, which offer last stood at ₱70.00
per square meter. It was the rejection likewise of the last offer that led to the filing of the expropriation case on 9
August 1993. It was in this case, and for Cecilio’s representation in it of the Hernandezes, that he was granted the
compensation scheme. Clear as day, the conditions that moved the parties to the contract were the base price at
₱70.00 per square meter, the increase of which would be compensated by 20% of whatever may be added to the
base price; and the ceiling price of ₱300.00 per square meter, which was considerably high reckoned from the base
at ₱70.00, which would therefore, allow Cecilio to get all that which would be in excess of the elevated ceiling. The
ceiling was, from the base, extraordinarily high, justifying the extraordinary grant to Cornelio of all that would exceed
the ceiling.

It was on these base and ceiling prices, conditions which principally moved both parties to enter into the agreement
on the scheme of compensation, that an obvious mistake was made. The trial court, deviating from the principle that
just compensation is determined by the value of the land at the time either of the taking or filing, 38 which was in
1993, determined the compensation as the 1998 value of ₱1,500.00 per square meter. The trial court ratiocinated
that the 1998 value was considered for the reason, among others that:

3. It is common knowledge that prices of real estate in Batangas, including and/or particularly in Sto.Tomas and
Tanauan have skyrocketed in the past two years;39 (Emphasis ours).

This 1998 "skyrocketed" price of ₱1,500.00 per square meter was pounced upon by Cecilio as the amount against
which the 1993 ceiling of ₱300.00 per square meter should be compared, thereby giving him the amount
computed40 as follows:

CECILIO’S FEES = (20% of anything over ₱70.00) + (everything in excess of ₱300)

*If the land value is at ₱1,500.00 per square meter, then,
= (20% of ₱230.00) + (₱1,500.00 – ₱300.00)
= ₱46.00 + ₱1,200.00
= ₱1,246.00 per square meter
= (land value at 1,500 less Cecilio’s fees)
CORNELIA’S SHARE
= ₱254.00 per square meter
*The total expropriated property is at 14,643 m2, thus, Cecilio will get a total of
= ₱1,246.00 * 14,643
= ₱18,245,178.00 total compensatinon
*One Third of the above value shows that Cecilio will get, from Cornelia
= ₱6,081,726.00

It must be noted that:

*The Hernandez’ family gets ₱21,964,500 for 14,643 m2, at ₱1,500.00 per m2

*One-third (1/3) of that is ₱7,321,500 representing the share of a co-owner like Cornelia

*What will be left of Cornelia’s share if she pays Cecilio will be:

₱1,239,774 less: 124,953.60 (Nominal Cost of Litigation as averred by Cecilio)

1,500.00 (Nominal payment for preparation of pleadings)

OVERALL TOTAL AMOUNT CORNELIA WILL RECEIVE:

₱ 1,113,320.4
 As opposed to:

OVERALL TOTAL AMOUNT CECILIO WILL RECEIVE: ₱6,081,726.00

Cecilio’s position would give him 83.07% of the just compensation due Cornelia as a co-owner of the land. No
evidence on record would show that Cornelia agreed, by way of the 11 November 1993 letter, to give Cecilio
83.07% of the proceeds of the sale of her land.

What is on record is that Cornelia asked for an accounting of the just compensation from Cecilio several times, but
the request remained unheeded. Right at that point, it can be already said that Cecilio violated the fiduciary
relationship of an agent and a principal. The relation of an agent to his principal is fiduciary and it is elementary that
in regard to property subject matter of the agency, an agent is estopped from acquiring or asserting a title adverse
to that of the principal. His position is analogous to that of a trustee and he cannot, consistently with the principles of
good faith, be allowed to create in himself an interest in opposition to that of his principal or cestui que trust.41

Instead of an accounting, what Cornelia received was a receipt and quitclaim document that was ready for signing.
As testified to by Cornelia, due to her frail condition and urgent need of money in order to buy medicines, she
nevertheless signed the quitclaim in Cornelio’s favor. Quitclaims are also contracts and can be voided if there was
fraud or intimidation that leads to lack of consent. The facts show that a simple accounting of the proceeds of the
just compensation will be enough to satisfy the curiosity of Cornelia. However, Cecilio did not disclose the truth and
instead of coming up with the request of his aunt, he made a contract intended to bar Cornelia from recovering any
further sum of money from the sale of her property.

The preparation by Cecilio of the receipt and quitclaim document which he asked Cornelia to sign, indicate that even
Cecilio doubted that he could validly claim 83.07% of the price of Cornelia’s land on the basis of the 11 November
1993 agreement. Based on the attending circumstances, the receipt and quitclaim document is an act of fraud
perpetuated by Cecilio. Very clearly, both the service contract of 11 November 1993 letter- agreement, and the later
receipt and quitclaim document, the first vitiated by mistake and the second being fraudulent, are void.

II.

Cecilio’s last source of authority to collect payment from the proceeds of the expropriation is the SPA executed on
18 October 1996 by the Hernandezes in favor of Cecilio as their "true and lawful" attorney with respect to the
expropriation of the Hernandez property. At the outset, it must be underscored that the SPA did not specify the
compensation of Cecilio as attorney-in-fact of the Hernandezes.

The SPA, however, must be appreciated in the light of the fact that Cecilio was appointed and acted as appraisal
commissioner in the expropriation case under the provisions of Section 5, Rule 67 of the Rules of Court, which
provides:

SEC. 5. Ascertainment of compensation. — Upon the rendition of the order of expropriation, the court shall appoint
not more than three (3) competent and disinterested persons as commissioners to ascertain and report to the court
the just compensation for the property sought to be taken. The order of appointment shall designate the time and
place of the first session of the hearing to be held by the commissioners and specify the time within which their
report shall be submitted to the court. (Emphasis ours).

The commissioner to be appointed is specifically required to be disinterested. As defined, such person must be free
from bias, prejudice or partiality.42 The record of performance by Cecilio of his duties as commissioner shows: (1)
Order dated 13 September 1996 appointing Cecilio and three others as court commissioners; (2) Agreement on the
course of action of the commissioners appointed 13 September 1996 whereby respondent Cecilio signed as a court
commissioner; (3) Appraisal Commission Report dated 10 January 1997 signed by respondent and his fellow court
commissioners; (4) Dissenting Opinion on the Lone Minority Report dated 14 February 1997 signed by respondent
and two other court commissioners; and (5) Decision dated 7 February 1997 which sets the fees of the court
commissioners.43

When Cecilio accepted the position as commissioner and proceeded to perform the duties of such commissioner
until the completion of his mandate as such, he created a barrier that prevented his performance of his duties under
the SPA. Due to the nature of his duties and functions as commissioner, Cecilio became an officer of the court. As
stated in Section 5, Rule 67 of the Rules of Court, the commissioner’s duty is to "ascertain and report to the court
the just compensation for the property to be taken." The undertaking of a commissioner is further stated under the
rules, to wit:

SEC. 6. Proceedings by commissioners.—Before entering upon the performance of their duties, the commissioners
shall take and subscribe an oath that they will faithfully perform their duties as commissioners, which oath shall be
filed in court with the other proceedings in the case. Evidence may be introduced by either party before the
commissioners who are authorized to administer oaths on hearings before them, and the commissioners shall,
unless the parties consent to the contrary, after due notice to the parties to attend, view and examine the property
sought to be expropriated and its surroundings, and may measure the same, after which either party may, by
himself or counsel, argue the case. The commissioners shall assess the consequential damages to the property not
taken and deduct from such consequential damages the consequential benefits to be derived by the owner from the
public use or purpose of the property taken, the operation of its franchise by the corporation or the carrying on of the
business of the corporation or person taking the property. But in no case shall the consequential benefits assessed
exceed the consequential damages assessed, or the owner be deprived of the actual value of his property so taken.

Cecilio acted for the expropriation court. He cannot be allowed to consider such action as an act for or in behalf of
the defendant in the same case. Cecilio could not have been a hearing officer and a defendant at the same time.
Indeed, Cecilio foisted fraud on both the Court and the Hernandezes when, after his appointment as commissioner,
he accepted the appointment by the Hernandezes to "represent" and "sue for" them.

It should be noted, finally, that, as completion of his appointment as commissioner, compensation for the work he
has done for the court was awarded, as stated in the decision rendered in the case, thus:

Finally, plaintiff is directed to pay the corresponding Commissioner’s fees of the following, to wit:

1. Eric Faustino J. Esperanza – Chairman ₱5,000.00

2. Cecilio F. Hernandez – Member 4,000.00

3. Magno Aguilar – Member 4,000.00

4. Melchor Dimaano – Member 4,000.0044

III.

Cecilio breached an obligation that is neither a loan nor forbearance of money. The decision of the lower court
ordering Cecilio to pay the amount of ₱6,189,417.60 to Cornelia at 12% per annum until fully paid should be
modified to 6% per annum from the time of the filing of the complaint up to the date of the decision, and at 12% per
annum from finality until fully paid, in order to conform to the doctrine enunciated by Eastern Shipping Lines, Inc. v.
Court of Appeals,45 to wit:

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date of the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount of finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

WHEREFORE, premises considered, the Decision of the Court of Appeals is hereby REVERSED and SET ASIDE.
The Decision of the RTC of Makati, Branch 150 is REINSTATED with the following MODIFICATIONS that the
interest on the monetary awards should be at 6% per annum from the time of the filing of the complaint up to the
date of the decision, and at 12% per annum from finality until fully paid.

SO ORDERED.
G.R. No. 188288 January 16, 2012

SPOUSES FERNANDO and LOURDES VILORIA, Petitioners,

vs.
CONTINENTAL AIRLINES, INC.,

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the January 30, 2009 Decision of the Special
1

Thirteenth Division of the Court of Appeals (CA) in CA-G.R. CV No. 88586 entitled "Spouses Fernando and Lourdes
Viloria v. Continental Airlines, Inc.," the dispositive portion of which states:

WHEREFORE, the Decision of the Regional Trial Court, Branch 74, dated 03 April 2006, awarding US$800.00 or its
peso equivalent at the time of payment, plus legal rate of interest from 21 July 1997 until fully paid, [₱]100,000.00 as
moral damages, [₱]50,000.00 as exemplary damages, [₱]40,000.00 as attorney’s fees and costs of suit to plaintiffs-
appellees is hereby REVERSED and SET ASIDE.

Defendant-appellant’s counterclaim is DENIED.

Costs against plaintiffs-appellees.

SO ORDERED. 2

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a Decision, giving due course
to the complaint for sum of money and damages filed by petitioners Fernando Viloria (Fernando) and Lourdes
Viloria (Lourdes), collectively called Spouses Viloria, against respondent Continental Airlines, Inc. (CAI). As culled
from the records, below are the facts giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for himself and his wife, Lourdes,
two (2) round trip airline tickets from San Diego, California to Newark, New Jersey on board Continental Airlines.
Fernando purchased the tickets at US$400.00 each from a travel agency called "Holiday Travel" and was attended
to by a certain Margaret Mager (Mager). According to Spouses Viloria, Fernando agreed to buy the said tickets after
Mager informed them that there were no available seats at Amtrak, an intercity passenger train service provider in
the United States. Per the tickets, Spouses Viloria were scheduled to leave for Newark on August 13, 1997 and
return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier date or August 6, 1997.
Mager informed him that flights to Newark via Continental Airlines were already fully booked and offered the
alternative of a round trip flight via Frontier Air. Since flying with Frontier Air called for a higher fare of US$526.00
per passenger and would mean traveling by night, Fernando opted to request for a refund. Mager, however, denied
his request as the subject tickets are non-refundable and the only option that Continental Airlines can offer is the re-
issuance of new tickets within one (1) year from the date the subject tickets were issued. Fernando decided to
reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the Greyhound Station where he
saw an Amtrak station nearby. Fernando made inquiries and was told that there are seats available and he can
travel on Amtrak anytime and any day he pleased. Fernando then purchased two (2) tickets for Washington, D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak tickets, telling her that she
had misled them into buying the Continental Airlines tickets by misrepresenting that Amtrak was already fully
booked. Fernando reiterated his demand for a refund but Mager was firm in her position that the subject tickets are
non-refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998, demanding a refund and
alleging that Mager had deluded them into purchasing the subject tickets. 3

In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his complaint had been referred
to the Customer Refund Services of Continental Airlines at Houston, Texas. 4
In a letter dated March 24, 1998, Continental Micronesia denied Fernando’s request for a refund and advised him
that he may take the subject tickets to any Continental ticketing location for the re-issuance of new tickets within two
(2) years from the date they were issued. Continental Micronesia informed Fernando that the subject tickets may be
used as a form of payment for the purchase of another Continental ticket, albeit with a re-issuance fee. 5

On June 17, 1999, Fernando went to Continental’s ticketing office at Ayala Avenue, Makati City to have the subject
tickets replaced by a single round trip ticket to Los Angeles, California under his name. Therein, Fernando was
informed that Lourdes’ ticket was non-transferable, thus, cannot be used for the purchase of a ticket in his favor. He
was also informed that a round trip ticket to Los Angeles was US$1,867.40 so he would have to pay what will not be
covered by the value of his San Diego to Newark round trip ticket.

In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as he no longer wished to
have them replaced. In addition to the dubious circumstances under which the subject tickets were issued,
Fernando claimed that CAI’s act of charging him with US$1,867.40 for a round trip ticket to Los Angeles, which
other airlines priced at US$856.00, and refusal to allow him to use Lourdes’ ticket, breached its undertaking under
its March 24, 1998 letter. 6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI be ordered to refund the
money they used in the purchase of the subject tickets with legal interest from July 21, 1997 and to pay
₱1,000,000.00 as moral damages, ₱500,000.00 as exemplary damages and ₱250,000.00 as attorney’s fees. 7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a refund as the subject tickets
are non-refundable; (b) Fernando cannot insist on using the ticket in Lourdes’ name for the purchase of a round trip
ticket to Los Angeles since the same is non-transferable; (c) as Mager is not a CAI employee, CAI is not liable for
any of her acts; (d) CAI, its employees and agents did not act in bad faith as to entitle Spouses Viloria to moral and
exemplary damages and attorney’s fees. CAI also invoked the following clause printed on the subject tickets:

3. To the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject
to: (i) provisions contained in this ticket, (ii) applicable tariffs, (iii) carrier’s conditions of carriage and related
regulations which are made part hereof (and are available on application at the offices of carrier), except in
transportation between a place in the United States or Canada and any place outside thereof to which tariffs in force
in those countries apply.8

According to CAI, one of the conditions attached to their contract of carriage is the non-transferability and non-
refundability of the subject tickets.

The RTC’s Ruling

Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that Spouses Viloria are entitled to a
refund in view of Mager’s misrepresentation in obtaining their consent in the purchase of the subject tickets. The 9

relevant portion of the April 3, 2006 Decision states:

Continental Airlines agent Ms. Mager was in bad faith when she was less candid and diligent in presenting to
plaintiffs spouses their booking options. Plaintiff Fernando clearly wanted to travel via AMTRAK, but defendant’s
agent misled him into purchasing Continental Airlines tickets instead on the fraudulent misrepresentation that
Amtrak was fully booked. In fact, defendant Airline did not specifically denied (sic) this allegation.

Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked into buying Continental Airline tickets on Ms.
Mager’s misleading misrepresentations. Continental Airlines agent Ms. Mager further relied on and exploited plaintiff
Fernando’s need and told him that they must book a flight immediately or risk not being able to travel at all on the
couple’s preferred date. Unfortunately, plaintiffs spouses fell prey to the airline’s and its agent’s unethical tactics for
baiting trusting customers." 10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAI’s agent, hence, bound by her bad
faith and misrepresentation. As far as the RTC is concerned, there is no issue as to whether Mager was CAI’s agent
in view of CAI’s implied recognition of her status as such in its March 24, 1998 letter.

The act of a travel agent or agency being involved here, the following are the pertinent New Civil Code provisions on
agency:

Art. 1868. By the contract of agency a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.

Art. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his
failure to repudiate the agency, knowing that another person is acting on his behalf without authority.
Agency may be oral, unless the law requires a specific form.

As its very name implies, a travel agency binds itself to render some service or to do something in representation or
on behalf of another, with the consent or authority of the latter. This court takes judicial notice of the common
services rendered by travel agencies that represent themselves as such, specifically the reservation and booking of
local and foreign tours as well as the issuance of airline tickets for a commission or fee.

The services rendered by Ms. Mager of Holiday Travel agency to the plaintiff spouses on July 21, 1997 were no
different from those offered in any other travel agency. Defendant airline impliedly if not expressly acknowledged its
principal-agent relationship with Ms. Mager by its offer in the letter dated March 24, 1998 – an obvious attempt to
assuage plaintiffs spouses’ hurt feelings.11

Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to replace the subject tickets
within two (2) years from their date of issue when it charged Fernando with the amount of US$1,867.40 for a round
trip ticket to Los Angeles and when it refused to allow Fernando to use Lourdes’ ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When defendant airline still charged
plaintiffs spouses US$1,867.40 or more than double the then going rate of US$856.00 for the unused tickets when
the same were presented within two (2) years from date of issue, defendant airline exhibited callous treatment of
passengers. 12

The Appellate Court’s Ruling

On appeal, the CA reversed the RTC’s April 3, 2006 Decision, holding that CAI cannot be held liable for Mager’s act
in the absence of any proof that a principal-agent relationship existed between CAI and Holiday Travel. According to
the CA, Spouses Viloria, who have the burden of proof to establish the fact of agency, failed to present evidence
demonstrating that Holiday Travel is CAI’s agent. Furthermore, contrary to Spouses Viloria’s claim, the contractual
relationship between Holiday Travel and CAI is not an agency but that of a sale.

Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel who was in turn a ticketing agent of Holiday
Travel who was in turn a ticketing agent of Continental Airlines. Proceeding from this premise, they contend that
Continental Airlines should be held liable for the acts of Mager. The trial court held the same view.

We do not agree. By the contract of agency, a person binds him/herself to render some service or to do something
in representation or on behalf of another, with the consent or authority of the latter. The elements of agency are: (1)
consent, express or implied, of the parties to establish the relationship; (2) the object is the execution of a juridical
act in relation to a third person; (3) the agent acts as a representative and not for him/herself; and (4) the agent acts
within the scope of his/her authority. As the basis of agency is representation, there must be, on the part of the
principal, an actual intention to appoint, an intention naturally inferable from the principal’s words or actions. In the
same manner, there must be an intention on the part of the agent to accept the appointment and act upon it. Absent
such mutual intent, there is generally no agency. It is likewise a settled rule that persons dealing with an assumed
agent are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also
the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it.
Agency is never presumed, neither is it created by the mere use of the word in a trade or business name. We have
perused the evidence and documents so far presented. We find nothing except bare allegations of plaintiffs-
appellees that Mager/Holiday Travel was acting in behalf of Continental Airlines. From all sides of legal prism, the
transaction in issue was simply a contract of sale, wherein Holiday Travel buys airline tickets from Continental
Airlines and then, through its employees, Mager included, sells it at a premium to clients. 13

The CA also ruled that refund is not available to Spouses Viloria as the word "non-refundable" was clearly printed on
the face of the subject tickets, which constitute their contract with CAI. Therefore, the grant of their prayer for a
refund would violate the proscription against impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria with the higher amount of
US$1,867.40 for a round trip ticket to Los Angeles. According to the CA, there is no compulsion for CAI to charge
the lower amount of US$856.00, which Spouses Viloria claim to be the fee charged by other airlines. The matter of
fixing the prices for its services is CAI’s prerogative, which Spouses Viloria cannot intervene. In particular:

It is within the respective rights of persons owning and/or operating business entities to peg the premium of the
services and items which they provide at a price which they deem fit, no matter how expensive or exhorbitant said
price may seem vis-à-vis those of the competing companies. The Spouses Viloria may not intervene with the
business judgment of Continental Airlines. 14

The Petitioners’ Case

In this Petition, this Court is being asked to review the findings and conclusions of the CA, as the latter’s reversal of
the RTC’s April 3, 2006 Decision allegedly lacks factual and legal bases. Spouses Viloria claim that CAI acted in
bad faith when it required them to pay a higher amount for a round trip ticket to Los Angeles considering CAI’s
undertaking to re-issue new tickets to them within the period stated in their March 24, 1998 letter. CAI likewise acted
in bad faith when it disallowed Fernando to use Lourdes’ ticket to purchase a round trip to Los Angeles given that
there is nothing in Lourdes’ ticket indicating that it is non-transferable. As a common carrier, it is CAI’s duty to inform
its passengers of the terms and conditions of their contract and passengers cannot be bound by such terms and
conditions which they are not made aware of. Also, the subject contract of carriage is a contract of adhesion;
therefore, any ambiguities should be construed against CAI. Notably, the petitioners are no longer questioning the
validity of the subject contracts and limited its claim for a refund on CAI’s alleged breach of its undertaking in its
March 24, 1998 letter.

The Respondent’s Case

In its Comment, CAI claimed that Spouses Viloria’s allegation of bad faith is negated by its willingness to issue new
tickets to them and to credit the value of the subject tickets against the value of the new ticket Fernando requested.
CAI argued that Spouses Viloria’s sole basis to claim that the price at which CAI was willing to issue the new tickets
is unconscionable is a piece of hearsay evidence – an advertisement appearing on a newspaper stating that airfares
from Manila to Los Angeles or San Francisco cost US$818.00. Also, the advertisement pertains to airfares in
15

September 2000 and not to airfares prevailing in June 1999, the time when Fernando asked CAI to apply the value
of the subject tickets for the purchase of a new one. CAI likewise argued that it did not undertake to protect
16

Spouses Viloria from any changes or fluctuations in the prices of airline tickets and its only obligation was to apply
the value of the subject tickets to the purchase of the newly issued tickets.

With respect to Spouses Viloria’s claim that they are not aware of CAI’s restrictions on the subject tickets and that
the terms and conditions that are printed on them are ambiguous, CAI denies any ambiguity and alleged that its
representative informed Fernando that the subject tickets are non-transferable when he applied for the issuance of a
new ticket. On the other hand, the word "non-refundable" clearly appears on the face of the subject tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no principal-agency relationship
exists between them. As an independent contractor, Holiday Travel was without capacity to bind CAI.

Issues

To determine the propriety of disturbing the CA’s January 30, 2009 Decision and whether Spouses Viloria have the
right to the reliefs they prayed for, this Court deems it necessary to resolve the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel?

b. Assuming that an agency relationship exists between CAI and Holiday Travel, is CAI bound by the acts of
Holiday Travel’s agents and employees such as Mager?

c. Assuming that CAI is bound by the acts of Holiday Travel’s agents and employees, can the representation
of Mager as to unavailability of seats at Amtrak be considered fraudulent as to vitiate the consent of Spouse
Viloria in the purchase of the subject tickets?

d. Is CAI justified in insisting that the subject tickets are non-transferable and non-refundable?

e. Is CAI justified in pegging a different price for the round trip ticket to Los Angeles requested by Fernando?

f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses Viloria to apply the value of the
subject tickets in the purchase of new ones when it refused to allow Fernando to use Lourdes’ ticket and in
charging a higher price for a round trip ticket to Los Angeles?

This Court’s Ruling

I. A principal-agent relationship exists between CAI and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to review and re-examine the
evidence presented by the parties below, this Court takes exception to the general rule that the CA’s findings of fact
are conclusive upon Us and our jurisdiction is limited to the review of questions of law. It is well-settled to the point
of being axiomatic that this Court is authorized to resolve questions of fact if confronted with contrasting factual
findings of the trial court and appellate court and if the findings of the CA are contradicted by the evidence on
record.17
According to the CA, agency is never presumed and that he who alleges that it exists has the burden of proof.
Spouses Viloria, on whose shoulders such burden rests, presented evidence that fell short of indubitably
demonstrating the existence of such agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAI’s denial that Holiday Travel is one of its
agents. Furthermore, in erroneously characterizing the contractual relationship between CAI and Holiday Travel as a
contract of sale, the CA failed to apply the fundamental civil law principles governing agency and differentiating it
from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation, this Court explained the nature of an agency and spelled out
18

the essential elements thereof:

Out of the above given principles, sprung the creation and acceptance of the relationship of agency whereby one
party, called the principal (mandante), authorizes another, called the agent (mandatario), to act for and in his behalf
in transactions with third persons. The essential elements of agency are: (1) there is consent, express or implied of
the parties to establish the relationship; (2) the object is the execution of a juridical act in relation to a third person;
(3) the agent acts as a representative and not for himself, and (4) the agent acts within the scope of his authority. 1avvphi1

Agency is basically personal, representative, and derivative in nature. The authority of the agent to act emanates
from the powers granted to him by his principal; his act is the act of the principal if done within the scope of the
authority. Qui facit per alium facit se. "He who acts through another acts himself." 19

Contrary to the findings of the CA, all the elements of an agency exist in this case. The first and second elements
are present as CAI does not deny that it concluded an agreement with Holiday Travel, whereby Holiday Travel
would enter into contracts of carriage with third persons on CAI’s behalf. The third element is also present as it is
undisputed that Holiday Travel merely acted in a representative capacity and it is CAI and not Holiday Travel who is
bound by the contracts of carriage entered into by Holiday Travel on its behalf. The fourth element is also present
considering that CAI has not made any allegation that Holiday Travel exceeded the authority that was granted to it.
In fact, CAI consistently maintains the validity of the contracts of carriage that Holiday Travel executed with Spouses
Viloria and that Mager was not guilty of any fraudulent misrepresentation. That CAI admits the authority of Holiday
Travel to enter into contracts of carriage on its behalf is easily discernible from its February 24, 1998 and March 24,
1998 letters, where it impliedly recognized the validity of the contracts entered into by Holiday Travel with Spouses
Viloria. When Fernando informed CAI that it was Holiday Travel who issued to them the subject tickets, CAI did not
deny that Holiday Travel is its authorized agent.

Prior to Spouses Viloria’s filing of a complaint against it, CAI never refuted that it gave Holiday Travel the power and
authority to conclude contracts of carriage on its behalf. As clearly extant from the records, CAI recognized the
validity of the contracts of carriage that Holiday Travel entered into with Spouses Viloria and considered itself bound
with Spouses Viloria by the terms and conditions thereof; and this constitutes an unequivocal testament to Holiday
Travel’s authority to act as its agent. This Court cannot therefore allow CAI to take an altogether different position
and deny that Holiday Travel is its agent without condoning or giving imprimatur to whatever damage or prejudice
that may result from such denial or retraction to Spouses Viloria, who relied on good faith on CAI’s acts in
recognition of Holiday Travel’s authority. Estoppel is primarily based on the doctrine of good faith and the avoidance
of harm that will befall an innocent party due to its injurious reliance, the failure to apply it in this case would result in
gross travesty of justice. Estoppel bars CAI from making such denial.
20

As categorically provided under Article 1869 of the Civil Code, "[a]gency may be express, or implied from the acts of
the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is
acting on his behalf without authority."

Considering that the fundamental hallmarks of an agency are present, this Court finds it rather peculiar that the CA
had branded the contractual relationship between CAI and Holiday Travel as one of sale. The distinctions between a
sale and an agency are not difficult to discern and this Court, as early as 1970, had already formulated the
guidelines that would aid in differentiating the two (2) contracts. In Commissioner of Internal Revenue v.
Constantino, this Court extrapolated that the primordial differentiating consideration between the two (2) contracts is
21

the transfer of ownership or title over the property subject of the contract. In an agency, the principal retains
ownership and control over the property and the agent merely acts on the principal’s behalf and under his
instructions in furtherance of the objectives for which the agency was established. On the other hand, the contract is
clearly a sale if the parties intended that the delivery of the property will effect a relinquishment of title, control and
ownership in such a way that the recipient may do with the property as he pleases.

Since the company retained ownership of the goods, even as it delivered possession unto the dealer for resale to
customers, the price and terms of which were subject to the company's control, the relationship between the
company and the dealer is one of agency, tested under the following criterion:

"The difficulty in distinguishing between contracts of sale and the creation of an agency to sell has led to the
establishment of rules by the application of which this difficulty may be solved. The decisions say the transfer of title
or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the transferee in
the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not
merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of an
agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the
owner and has the right to control sales, fix the price, and terms, demand and receive the proceeds less the agent's
commission upon sales made. 1 Mechem on Sales, Sec. 43; 1 Mechem on Agency, Sec. 48; Williston on Sales, 1;
Tiedeman on Sales, 1." (Salisbury v. Brooks, 94 SE 117, 118-119) 22

As to how the CA have arrived at the conclusion that the contract between CAI and Holiday Travel is a sale is
certainly confounding, considering that CAI is the one bound by the contracts of carriage embodied by the tickets
being sold by Holiday Travel on its behalf. It is undisputed that CAI and not Holiday Travel who is the party to the
contracts of carriage executed by Holiday Travel with third persons who desire to travel via Continental Airlines, and
this conclusively indicates the existence of a principal-agent relationship. That the principal is bound by all the
obligations contracted by the agent within the scope of the authority granted to him is clearly provided under Article
1910 of the Civil Code and this constitutes the very notion of agency.

II. In actions based on quasi-delict, a principal can only be held liable for the tort committed by its agent’s
employees if it has been established by preponderance of evidence that the principal was also at fault or
negligent or that the principal exercise control and supervision over them.

Considering that Holiday Travel is CAI’s agent, does it necessarily follow that CAI is liable for the fault or negligence
of Holiday Travel’s employees? Citing China Air Lines, Ltd. v. Court of Appeals, et al., CAI argues that it cannot be
23

held liable for the actions of the employee of its ticketing agent in the absence of an employer-employee
relationship.

An examination of this Court’s pronouncements in China Air Lines will reveal that an airline company is not
completely exonerated from any liability for the tort committed by its agent’s employees. A prior determination of the
nature of the passenger’s cause of action is necessary. If the passenger’s cause of action against the airline
company is premised on culpa aquiliana or quasi-delict for a tort committed by the employee of the airline
company’s agent, there must be an independent showing that the airline company was at fault or negligent or has
contributed to the negligence or tortuous conduct committed by the employee of its agent. The mere fact that the
employee of the airline company’s agent has committed a tort is not sufficient to hold the airline company liable.
There is no vinculum juris between the airline company and its agent’s employees and the contractual relationship
between the airline company and its agent does not operate to create a juridical tie between the airline company
and its agent’s employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort
committed by its agent’s employees and the principal-agency relationship per se does not make the principal a party
to such tort; hence, the need to prove the principal’s own fault or negligence.

On the other hand, if the passenger’s cause of action for damages against the airline company is based on
contractual breach or culpa contractual, it is not necessary that there be evidence of the airline company’s fault or
negligence. As this Court previously stated in China Air Lines and reiterated in Air France vs. Gillego, "in an action
24

based on a breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was
at fault or was negligent. All that he has to prove is the existence of the contract and the fact of its non-performance
by the carrier."

Spouses Viloria’s cause of action on the basis of Mager’s alleged fraudulent misrepresentation is clearly one of tort
or quasi-delict, there being no pre-existing contractual relationship between them. Therefore, it was incumbent upon
Spouses Viloria to prove that CAI was equally at fault.

However, the records are devoid of any evidence by which CAI’s alleged liability can be substantiated. Apart from
their claim that CAI must be held liable for Mager’s supposed fraud because Holiday Travel is CAI’s agent, Spouses
Viloria did not present evidence that CAI was a party or had contributed to Mager’s complained act either by
instructing or authorizing Holiday Travel and Mager to issue the said misrepresentation.

It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the terms and conditions of the
subject contracts, which Mager entered into with them on CAI’s behalf, in order to deny Spouses Viloria’s request for
a refund or Fernando’s use of Lourdes’ ticket for the re-issuance of a new one, and simultaneously claim that they
are not bound by Mager’s supposed misrepresentation for purposes of avoiding Spouses Viloria’s claim for
damages and maintaining the validity of the subject contracts. It may likewise be argued that CAI cannot deny
liability as it benefited from Mager’s acts, which were performed in compliance with Holiday Travel’s obligations as
CAI’s agent.

However, a person’s vicarious liability is anchored on his possession of control, whether absolute or limited, on the
tortfeasor. Without such control, there is nothing which could justify extending the liability to a person other than the
one who committed the tort. As this Court explained in Cangco v. Manila Railroad Co.: 25
With respect to extra-contractual obligation arising from negligence, whether of act or omission , it is
competent for the legislature to elect — and our Legislature has so elected — to limit such liability to cases in which
the person upon whom such an obligation is imposed is morally culpable or, on the contrary, for reasons of public
policy, to extend that liability, without regard to the lack of moral culpability, so as to include responsibility
for the negligence of those persons whose acts or omissions are imputable, by a legal fiction, to others who
are in a position to exercise an absolute or limited control over them. The legislature which adopted our Civil
Code has elected to limit extra-contractual liability — with certain well-defined exceptions — to cases in which moral
culpability can be directly imputed to the persons to be charged. This moral responsibility may consist in having
failed to exercise due care in one's own acts, or in having failed to exercise due care in the selection and control of
one's agent or servants, or in the control of persons who, by reasons of their status, occupy a position of
dependency with respect to the person made liable for their conduct. (emphasis supplied)
26

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision over Mager by preponderant
evidence. The existence of control or supervision cannot be presumed and CAI is under no obligation to prove its
denial or nugatory assertion. Citing Belen v. Belen, this Court ruled in Jayme v. Apostol, that:
27 28

In Belen v. Belen, this Court ruled that it was enough for defendant to deny an alleged employment relationship. The
defendant is under no obligation to prove the negative averment. This Court said:

"It is an old and well-settled rule of the courts that the burden of proving the action is upon the plaintiff, and that if he
fails satisfactorily to show the facts upon which he bases his claim, the defendant is under no obligation to prove his
exceptions. This [rule] is in harmony with the provisions of Section 297 of the Code of Civil Procedure holding that
each party must prove his own affirmative allegations, etc." (citations omitted)
29

Therefore, without a modicum of evidence that CAI exercised control over Holiday Travel’s employees or that CAI
was equally at fault, no liability can be imposed on CAI for Mager’s supposed misrepresentation.

III. Even on the assumption that CAI may be held liable for the acts of Mager, still, Spouses Viloria are not
entitled to a refund. Mager’s statement cannot be considered a causal fraud that would justify the
annulment of the subject contracts that would oblige CAI to indemnify Spouses Viloria and return the
money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was
obtained through fraud, the contract is considered voidable and may be annulled within four (4) years from the time
of the discovery of the fraud. Once a contract is annulled, the parties are obliged under Article 1398 of the same
Code to restore to each other the things subject matter of the contract, including their fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that Fernando’s consent to the subject
contracts was supposedly secured by Mager through fraudulent means, it is plainly apparent that their demand for a
refund is tantamount to seeking for an annulment of the subject contracts on the ground of vitiated consent.

Whether the subject contracts are annullable, this Court is required to determine whether Mager’s alleged
misrepresentation constitutes causal fraud. Similar to the dispute on the existence of an agency, whether fraud
attended the execution of a contract is factual in nature and this Court, as discussed above, may scrutinize the
records if the findings of the CA are contrary to those of the RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. In
order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract. In Samson v. Court of Appeals, causal fraud was defined as "a
30 31

deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the
other."32

Also, fraud must be serious and its existence must be established by clear and convincing evidence. As ruled by this
Court in Sierra v. Hon. Court of Appeals, et al., mere preponderance of evidence is not adequate:
33

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other
is induced to enter into a contract which without them, he would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

To quote Tolentino again, the "misrepresentation constituting the fraud must be established by full, clear, and
convincing evidence, and not merely by a preponderance thereof. The deceit must be serious. The fraud is serious
when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a
prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into
account the personal conditions of the victim." 34

After meticulously poring over the records, this Court finds that the fraud alleged by Spouses Viloria has not been
satisfactorily established as causal in nature to warrant the annulment of the subject contracts. In fact, Spouses
Viloria failed to prove by clear and convincing evidence that Mager’s statement was fraudulent. Specifically,
Spouses Viloria failed to prove that (a) there were indeed available seats at Amtrak for a trip to New Jersey on
August 13, 1997 at the time they spoke with Mager on July 21, 1997; (b) Mager knew about this; and (c) that she
purposely informed them otherwise.

This Court finds the only proof of Mager’s alleged fraud, which is Fernando’s testimony that an Amtrak had assured
him of the perennial availability of seats at Amtrak, to be wanting. As CAI correctly pointed out and as Fernando
admitted, it was possible that during the intervening period of three (3) weeks from the time Fernando purchased the
subject tickets to the time he talked to said Amtrak employee, other passengers may have cancelled their bookings
and reservations with Amtrak, making it possible for Amtrak to accommodate them. Indeed, the existence of fraud
cannot be proved by mere speculations and conjectures. Fraud is never lightly inferred; it is good faith that is. Under
the Rules of Court, it is presumed that "a person is innocent of crime or wrong" and that "private transactions have
been fair and regular." Spouses Viloria failed to overcome this presumption.
35

IV. Assuming the contrary, Spouses Viloria are nevertheless deemed to have ratified the subject contracts.

Even assuming that Mager’s representation is causal fraud, the subject contracts have been impliedly ratified when
Spouses Viloria decided to exercise their right to use the subject tickets for the purchase of new ones. Under Article
1392 of the Civil Code, "ratification extinguishes the action to annul a voidable contract."

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with
knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has
a right to invoke it should execute an act which necessarily implies an intention to waive his right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or
adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 36

Simultaneous with their demand for a refund on the ground of Fernando’s vitiated consent, Spouses Viloria likewise
asked for a refund based on CAI’s supposed bad faith in reneging on its undertaking to replace the subject tickets
with a round trip ticket from Manila to Los Angeles.

In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based on contractual
breach. Resolution, the action referred to in Article 1191, is based on the defendant’s breach of faith, a violation of
the reciprocity between the parties and in Solar Harvest, Inc. v. Davao Corrugated Carton Corporation, this Court
37 38

ruled that a claim for a reimbursement in view of the other party’s failure to comply with his obligations under the
contract is one for rescission or resolution.

However, annulment under Article 1390 of the Civil Code and rescission under Article 1191 are two (2) inconsistent
remedies. In resolution, all the elements to make the contract valid are present; in annulment, one of the essential
elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the consummation
stage of the contract when the parties are in the process of performing their respective obligations; in annulment,
the defect is already present at the time of the negotiation and perfection stages of the contract. Accordingly, by
pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly admitted the validity of the subject
contracts, forfeiting their right to demand their annulment. A party cannot rely on the contract and claim rights or
obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking
inconsistent positions.39

V. Contracts cannot be rescinded for a slight or casual breach.

CAI cannot insist on the non-transferability of the subject tickets.

Considering that the subject contracts are not annullable on the ground of vitiated consent, the next question is: "Do
Spouses Viloria have the right to rescind the contract on the ground of CAI’s supposed breach of its undertaking to
issue new tickets upon surrender of the subject tickets?"

Article 1191, as presently worded, states:

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

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

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

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

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts when it refused to apply the
value of Lourdes’ ticket for Fernando’s purchase of a round trip ticket to Los Angeles and in requiring him to pay an
amount higher than the price fixed by other airline companies.

In its March 24, 1998 letter, CAI stated that "non-refundable tickets may be used as a form of payment toward the
purchase of another Continental ticket for $75.00, per ticket, reissue fee ($50.00, per ticket, for tickets purchased
prior to October 30, 1997)."

Clearly, there is nothing in the above-quoted section of CAI’s letter from which the restriction on the non-
transferability of the subject tickets can be inferred. In fact, the words used by CAI in its letter supports the position
of Spouses Viloria, that each of them can use the ticket under their name for the purchase of new tickets whether for
themselves or for some other person.

Moreover, as CAI admitted, it was only when Fernando had expressed his interest to use the subject tickets for the
purchase of a round trip ticket between Manila and Los Angeles that he was informed that he cannot use the ticket
in Lourdes’ name as payment.

Contrary to CAI’s claim, that the subject tickets are non-transferable cannot be implied from a plain reading of the
provision printed on the subject tickets stating that "[t]o the extent not in conflict with the foregoing carriage and
other services performed by each carrier are subject to: (a) provisions contained in this ticket, x x x (iii) carrier’s
conditions of carriage and related regulations which are made part hereof (and are available on application at the
offices of carrier) x x x." As a common carrier whose business is imbued with public interest, the exercise of
extraordinary diligence requires CAI to inform Spouses Viloria, or all of its passengers for that matter, of all the
terms and conditions governing their contract of carriage. CAI is proscribed from taking advantage of any ambiguity
in the contract of carriage to impute knowledge on its passengers of and demand compliance with a certain
condition or undertaking that is not clearly stipulated. Since the prohibition on transferability is not written on the face
of the subject tickets and CAI failed to inform Spouses Viloria thereof, CAI cannot refuse to apply the value of
Lourdes’ ticket as payment for Fernando’s purchase of a new ticket.

CAI’s refusal to accept Lourdes’ ticket for the purchase of a new ticket for Fernando is only a casual breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not absolute. The general rule
is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and
fundamental violations as would defeat the very object of the parties in making the agreement. Whether a breach is
40

substantial is largely determined by the attendant circumstances. 41

While CAI’s refusal to allow Fernando to use the value of Lourdes’ ticket as payment for the purchase of a new
ticket is unjustified as the non-transferability of the subject tickets was not clearly stipulated, it cannot, however be
considered substantial. The endorsability of the subject tickets is not an essential part of the underlying contracts
and CAI’s failure to comply is not essential to its fulfillment of its undertaking to issue new tickets upon Spouses
Viloria’s surrender of the subject tickets. This Court takes note of CAI’s willingness to perform its principal obligation
and this is to apply the price of the ticket in Fernando’s name to the price of the round trip ticket between Manila and
Los Angeles. CAI was likewise willing to accept the ticket in Lourdes’ name as full or partial payment as the case
may be for the purchase of any ticket, albeit under her name and for her exclusive use. In other words, CAI’s
willingness to comply with its undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its
erroneous insistence that Lourdes’ ticket is non-transferable.

Moreover, Spouses Viloria’s demand for rescission cannot prosper as CAI cannot be solely faulted for the fact that
their agreement failed to consummate and no new ticket was issued to Fernando. Spouses Viloria have no right to
insist that a single round trip ticket between Manila and Los Angeles should be priced at around $856.00 and refuse
to pay the difference between the price of the subject tickets and the amount fixed by CAI. The petitioners failed to
allege, much less prove, that CAI had obliged itself to issue to them tickets for any flight anywhere in the world upon
their surrender of the subject tickets. In its March 24, 1998 letter, it was clearly stated that "[n]on-refundable tickets
may be used as a form of payment toward the purchase of another Continental ticket" and there is nothing in it
42

suggesting that CAI had obliged itself to protect Spouses Viloria from any fluctuation in the prices of tickets or that
the surrender of the subject tickets will be considered as full payment for any ticket that the petitioners intend to buy
regardless of actual price and destination. The CA was correct in holding that it is CAI’s right and exclusive
prerogative to fix the prices for its services and it may not be compelled to observe and maintain the prices of other
airline companies. 43

The conflict as to the endorsability of the subject tickets is an altogether different matter, which does not preclude
CAI from fixing the price of a round trip ticket between Manila and Los Angeles in an amount it deems proper and
which does not provide Spouses Viloria an excuse not to pay such price, albeit subject to a reduction coming from
the value of the subject tickets. It cannot be denied that Spouses Viloria had the concomitant obligation to pay
whatever is not covered by the value of the subject tickets whether or not the subject tickets are transferable or not. 1avvphi1

There is also no showing that Spouses Viloria were discriminated against in bad faith by being charged with a
higher rate. The only evidence the petitioners presented to prove that the price of a round trip ticket between Manila
and Los Angeles at that time was only $856.00 is a newspaper advertisement for another airline company, which is
inadmissible for being "hearsay evidence, twice removed." Newspaper clippings are hearsay if they were offered for
the purpose of proving the truth of the matter alleged. As ruled in Feria v. Court of Appeals,: 44

[N]ewspaper articles amount to "hearsay evidence, twice removed" and are therefore not only inadmissible but
without any probative value at all whether objected to or not, unless offered for a purpose other than proving the
truth of the matter asserted. In this case, the news article is admissible only as evidence that such publication does
exist with the tenor of the news therein stated. (citations omitted)
45

The records of this case demonstrate that both parties were equally in default; hence, none of them can seek
judicial redress for the cancellation or resolution of the subject contracts and they are therefore bound to their
respective obligations thereunder. As the 1st sentence of Article 1192 provides:

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor
shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the
contract, the same shall be deemed extinguished, and each shall bear his own damages. (emphasis supplied)

Therefore, CAI’s liability for damages for its refusal to accept Lourdes’ ticket for the purchase of Fernando’s round
trip ticket is offset by Spouses Viloria’s liability for their refusal to pay the amount, which is not covered by the
subject tickets. Moreover, the contract between them remains, hence, CAI is duty bound to issue new tickets for a
destination chosen by Spouses Viloria upon their surrender of the subject tickets and Spouses Viloria are obliged to
pay whatever amount is not covered by the value of the subject tickets.

This Court made a similar ruling in Central Bank of the Philippines v. Court of Appeals. Thus:
46

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island
Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply
with his obligation to pay his ₱17,000.00 debt within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal
obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of
Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for
damages, in the form of penalties and surcharges, for not paying his overdue ₱17,000.00 debt. x x x. 47

Another consideration that militates against the propriety of holding CAI liable for moral damages is the absence of
a showing that the latter acted fraudulently and in bad faith. Article 2220 of the Civil Code requires evidence of bad
faith and fraud and moral damages are generally not recoverable in culpa contractual except when bad faith had
been proven. The award of exemplary damages is likewise not warranted. Apart from the requirement that the
48

defendant acted in a wanton, oppressive and malevolent manner, the claimant must prove his entitlement to moral
damages. 49

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.
G.R. No. 174118 April 11, 2012

THE ROMAN CATHOLIC CHURCH, represented by the Archbishop of Caceres, Petitioner,

vs.
REGINO PANTE, Respondent.

DECISION

BRION, J.:

Through a petition for review on certiorari, the petitioner Roman Catholic Church (Church) seeks to set aside the
1

May 18, 2006 decision and the August 11, 2006 resolution of the Court of Appeals (CA) in CA-G.R.-CV No. 65069.
2 3

The CA reversed the July 30, 1999 decision of the Regional Trial Court (RTC) of Naga City, Branch 24, in Civil Case
4

No. 94-3286.

THE FACTUAL ANTECEDENTS

The Church, represented by the Archbishop of Caceres, owned a 32-square meter lot that measured 2x16 meters
located in Barangay Dinaga, Canaman, Camarines Sur. On September 25, 1992, the Church contracted with
5

respondent Regino Pante for the sale of the lot (thru a Contract to Sell and to Buy ) on the belief that the latter was
6

an actual occupant of the lot. The contract between them fixed the purchase price at ₱11,200.00, with the initial
₱1,120.00 payable as down payment, and the remaining balance payable in three years or until September 25,
1995.

On June 28, 1994, the Church sold in favor of the spouses Nestor and Fidela Rubi (spouses Rubi) a 215-square
meter lot that included the lot previously sold to Pante. The spouses Rubi asserted their ownership by erecting a
concrete fence over the lot sold to Pante, effectively blocking Pante and his family’s access from their family home
to the municipal road. As no settlement could be reached between the parties, Pante instituted with the RTC an
action to annul the sale between the Church and the spouses Rubi, insofar as it included the lot previously sold to
him.7

The Church filed its answer with a counterclaim, seeking the annulment of its contract with Pante. The Church
alleged that its consent to the contract was obtained by fraud when Pante, in bad faith, misrepresented that he had
been an actual occupant of the lot sold to him, when in truth, he was merely using the 32-square meter lot as a
passageway from his house to the town proper. It contended that it was its policy to sell its lots only to actual
occupants. Since the spouses Rubi and their predecessors-in-interest have long been occupying the 215-square
meter lot that included the 32-square meter lot sold to Pante, the Church claimed that the spouses Rubi were the
rightful buyers.

During pre-trial, the following admissions and stipulations of facts were made:

1. The lot claimed by Pante is a strip of land measuring only 2x16 meters;

2. The lot had been sold by the Church to Pante on September 25, 1992;

3. The lot was included in the sale to the spouses Rubi by the Church; and
 4. Pante expressly manifested and represented to the Church that he had been actually occupying the lot he
offered to buy.8

In a decision dated July 30, 1999, the RTC ruled in favor of the Church, finding that the Church’s consent to the sale
9

was secured through Pante’s misrepresentation that he was an occupant of the 32-square meter lot. Contrary to his
claim, Pante was only using the lot as a passageway; the Church’s policy, however, was to sell its lots only to those
who actually occupy and reside thereon. As the Church’s consent was secured through its mistaken belief that
Pante was a qualified "occupant," the RTC annulled the contract between the Church and Pante, pursuant to Article
1390 of the Civil Code. 10

The RTC further noted that full payment of the purchase price was made only on September 23, 1995, when Pante
consigned the balance of ₱10,905.00 with the RTC, after the Church refused to accept the tendered amount. It
considered the three-year delay in completing the payment fatal to Pante’s claim over the subject lot; it ruled that if
Pante had been prompt in paying the price, then the Church would have been estopped from selling the lot to the
spouses Rubi. In light of Pante’s delay and his admission that the subject lot had been actually occupied by the
spouses Rubi’s predecessors, the RTC upheld the sale in favor of the spouses Rubi.

Pante appealed the RTC’s decision with the CA. In a decision dated May 18, 2006, the CA granted Pante’s appeal
11

and reversed the RTC’s ruling. The CA characterized the contract between Pante and the Church as a contract of
sale, since the Church made no express reservation of ownership until full payment of the price is made. In fact, the
contract gave the Church the right to repurchase in case Pante fails to pay the installments within the grace period
provided; the CA ruled that the right to repurchase is unnecessary if ownership has not already been transferred to
the buyer.

Even assuming that the contract had been a contract to sell, the CA declared that Pante fulfilled the condition
precedent when he consigned the balance within the three-year period allowed under the parties’ agreement; upon
full payment, Pante fully complied with the terms of his contract with the Church.

After recognizing the validity of the sale to Pante and noting the subsequent sale to the spouses Rubi, the CA
proceeded to apply the rules on double sales in Article 1544 of the Civil Code:

Article 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should be movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first
recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the
possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith.
[Emphasis ours.]

Since neither of the two sales was registered, the CA upheld the full effectiveness of the sale in favor of Pante who
first possessed the lot by using it as a passageway since 1963.

The Church filed the present petition for review on certiorari under Rule 45 of the Rules of Court to contest the CA’s
ruling.

THE PETITION

The Church contends that the sale of the lot to Pante is voidable under Article 1390 of the Civil Code, which states:

Article 1390. The following contracts are voidable or annullable, even though there may have been no damage to
the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of
ratification. [Emphasis ours.]

It points out that, during trial, Pante already admitted knowing that the spouses Rubi have been residing on the lot.
Despite this knowledge, Pante misrepresented himself as an occupant because he knew of the Church’s policy to
sell lands only to occupants or residents thereof. It thus claims that Pante’s misrepresentation effectively vitiated its
consent to the sale; hence, the contract should be nullified.
For the Church, the presence of fraud and misrepresentation that would suffice to annul the sale is the primary issue
that the tribunals below should have resolved. Instead, the CA opted to characterize the contract between the
Church and Pante, considered it as a contract of sale, and, after such characterization, proceeded to resolve the
case in Pante’s favor. The Church objects to this approach, on the principal argument that there could not have
been a contract at all considering that its consent had been vitiated.

THE COURT’S RULING

The Court resolves to deny the petition.

No misrepresentation existed vitiating the

seller’s consent and invalidating the contract

Consent is an essential requisite of contracts as it pertains to the meeting of the offer and the acceptance upon the
12

thing and the cause which constitute the contract. To create a valid contract, the meeting of the minds must be free,
13

voluntary, willful and with a reasonable understanding of the various obligations the parties assumed for
themselves. Where consent, however, is given through mistake, violence, intimidation, undue influence, or fraud,
14

the contract is deemed voidable. However, not every mistake renders a contract voidable. The Civil Code clarifies
15

the nature of mistake that vitiates consent:

Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the
object of the contract, or to those conditions which have principally moved one or both parties to enter into the
contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction. [Emphasis ours.]

For mistake as to the qualification of one of the parties to vitiate consent, two requisites must concur:

1. the mistake must be either with regard to the identity or with regard to the qualification of one of the
contracting parties; and

2. the identity or qualification must have been the principal consideration for the celebration of the contract. 16

In the present case, the Church contends that its consent to sell the lot was given on the mistaken impression
arising from Pante’s fraudulent misrepresentation that he had been the actual occupant of the lot. Willful
misrepresentation existed because of its policy to sell its lands only to their actual occupants or residents. Thus, it
considers the buyer’s actual occupancy or residence over the subject lot a qualification necessary to induce it to sell
the lot.

Whether the facts, established during trial, support this contention shall determine if the contract between the
Church and Pante should be annulled. In the process of weighing the evidentiary value of these established facts,
the courts should consider both the parties’ objectives and the subjective aspects of the transaction, specifically, the
parties’ circumstances – their condition, relationship, and other attributes – and their conduct at the time of and
subsequent to the contract. These considerations will show what influence the alleged error exerted on the parties
and their intelligent, free, and voluntary consent to the contract.
17

Contrary to the Church’s contention, the actual occupancy or residency of a buyer over the land does not appear to
be a necessary qualification that the Church requires before it could sell its land. Had this been indeed its policy,
then neither Pante nor the spouses Rubi would qualify as buyers of the 32-square meter lot, as none of them
actually occupied or resided on the lot. We note in this regard that the lot was only a 2x16-meter strip of rural land
used as a passageway from Pante’s house to the municipal road.

We find well-taken Pante’s argument that, given the size of the lot, it could serve no other purpose than as a mere
passageway; it is unthinkable to consider that a 2x16-meter strip of land could be mistaken as anyone’s residence.
In fact, the spouses Rubi were in possession of the adjacent lot, but they never asserted possession over the 2x16-
meter lot when the 1994 sale was made in their favor; it was only then that they constructed the concrete fence
blocking the passageway.

We find it unlikely that Pante could successfully misrepresent himself as the actual occupant of the lot; this was a
fact that the Church (which has a parish chapel in the same barangay where the lot was located) could easily verify
had it conducted an ocular inspection of its own property. The surrounding circumstances actually indicate that the
Church was aware that Pante was using the lot merely as a passageway.
The above view is supported by the sketch plan, attached to the contract executed by the Church and Pante, which
18

clearly labeled the 2x16-meter lot as a "RIGHT OF WAY"; below these words was written the name of "Mr. Regino
Pante." Asked during cross-examination where the sketch plan came from, Pante answered that it was from the
Archbishop’s Palace; neither the Church nor the spouses Rubi contradicted this statement. 19

The records further reveal that the sales of the Church’s lots were made after a series of conferences with the
occupants of the lots. The then parish priest of Canaman, Fr. Marcaida, was apparently aware that Pante was not
20

an actual occupant, but nonetheless, he allowed the sale of the lot to Pante, subject to the approval of the
Archdiocese’s Oeconomous. Relying on Fr. Marcaida’s recommendation and finding nothing objectionable, Fr.
Ragay (the Archdiocese’s Oeconomous) approved the sale to Pante.

The above facts, in our view, establish that there could not have been a deliberate, willful, or fraudulent act
committed by Pante that misled the Church into giving its consent to the sale of the subject lot in his favor. That
Pante was not an actual occupant of the lot he purchased was a fact that the Church either ignored or waived as a
requirement. In any case, the Church was by no means led to believe or do so by Pante’s act; there had been no
vitiation of the Church’s consent to the sale of the lot to Pante.

From another perspective, any finding of bad faith, if one is to be made, should be imputed to the Church. Without
securing a court ruling on the validity of its contract with Pante, the Church sold the subject property to the spouses
Rubi. Article 1390 of the Civil Code declares that voidable contracts are binding, unless annulled by a proper court
action. From the time the sale to Pante was made and up until it sold the subject property to the spouses Rubi, the
Church made no move to reject the contract with Pante; it did not even return the down payment he paid. The
Church’s bad faith in selling the lot to Rubi without annulling its contract with Pante negates its claim for damages.

In the absence of any vitiation of consent, the contract between the Church and Pante stands valid and existing.
Any delay by Pante in paying the full price could not nullify the contract, since (as correctly observed by the CA) it
was a contract of sale. By its terms, the contract did not provide a stipulation that the Church retained ownership
until full payment of the price. The right to repurchase given to the Church in case Pante fails to pay within the
21

grace period provided would have been unnecessary had ownership not already passed to Pante.
22

The rule on double sales

The sale of the lot to Pante and later to the spouses Rubi resulted in a double sale that called for the application of
the rules in Article 1544 of the Civil Code:

Article 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should be movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first
recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the
possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith.
[Emphasis ours.]

As neither Pante nor the spouses Rubi registered the sale in their favor, the question now is who, between the two,
was first in possession of the property in good faith.1âwphi1

Jurisprudence has interpreted possession in Article 1544 of the Civil Code to mean both actual physical delivery and
constructive delivery. Under either mode of delivery, the facts show that Pante was the first to acquire possession
23

of the lot.

Actual delivery of a thing sold occurs when it is placed under the control and possession of the vendee. Pante 24

claimed that he had been using the lot as a passageway, with the Church’s permission, since 1963. After 1âwphi1

purchasing the lot in 1992, he continued using it as a passageway until he was prevented by the spouses Rubi’s
concrete fence over the lot in 1994. Pante’s use of the lot as a passageway after the 1992 sale in his favor was a
clear assertion of his right of ownership that preceded the spouses Rubi’s claim of ownership.

Pante also stated that he had placed electric connections and water pipes on the lot, even before he purchased it in
1992, and the existence of these connections and pipes was known to the spouses Rubi. Thus, any assertion of
25

possession over the lot by the spouses Rubi (e.g., the construction of a concrete fence) would be considered as
made in bad faith because works had already existed on the lot indicating possession by another. "[A] buyer of real
property in the possession of persons other than the seller must be wary and should investigate the rights of those
in possession. Without such inquiry, the buyer can hardly be regarded as a buyer in good faith and cannot have any
right over the property." 26
Delivery of a thing sold may also be made constructively. Article 1498 of the Civil Code states that:

Article 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the
delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot
clearly be inferred.

Under this provision, the sale in favor of Pante would have to be upheld since the contract executed between the
Church and Pante was duly notarized, converting the deed into a public instrument. In Navera v. Court of
27

Appeals, the Court ruled that:

28

[A]fter the sale of a realty by means of a public instrument, the vendor, who resells it to another, does not transmit
anything to the second vendee, and if the latter, by virtue of this second sale, takes material possession of the thing,
he does it as mere detainer, and it would be unjust to protect this detention against the rights of the thing lawfully
acquired by the first vendee.

Thus, under either mode of delivery, Pante acquired prior possession of the lot.

WHEREFORE, we DENY the petition for review on certiorari, and AFFIRM the decision of the Court of Appeals
dated May 18, 2006, and its resolution dated August 11, 2006, issued in CA-G.R.-CV No. 65069. Costs against the
Roman Catholic Church.

SO ORDERED.

G.R. No. 154390 March 17, 2014

METROPOLITAN FABRICS, INC. and ENRIQUE ANG, Petitioners,

vs.
PROSPERITY CREDIT RESOURCES INC., DOMINGO ANG and CALEB ANG, Respondents.

DECISION

BERSAMIN, J.:

The genuineness and due execution of a deed of real estate mortgage that has been acknowledged before a notary
public are presumed. Any allegation of fraud and forgery against the deed must be established by clear and
competent evidence.

The Case

In this appeal, the mortgagors, who were the plaintiffs in the trial court, seek to reverse and undo the judgment
promulgated on July 23, 2002, whereby the Court of Appeals (CA) reversed and set aside the decision rendered in
1

their favor on July 6, 1999 by the Regional Trial Court (RTC), Branch 107, in Quezon City (declaring the real estate
mortgage and the foreclosure by respondents null and void; and ordering the reconveyance of the foreclosed
properties to petitioners), and dismissed their complaint as well as the counterclaim of respondents.
2

Antecedents

The CAsummarized the antecedents as follows:

Metropolitan Fabrics, Incorporated, a family corporation, owned a 5.8 hectare industrial compound at No. 685
Tandang Sora Avenue, Novaliches, Quezon City which was covered by TCT No. 241597. Pursuant to a P2 million,
10-year 14% per annum loan agreement with Manphil Investment Corporation (Manphil) dated April 6, 1983, the
said lot was subdivided into 11 lots, with Manphil retaining four lots as mortgage security. The other seven lots, now
covered by TCT Nos. 317699 and 317702 to 317707, were released to MFI.

In July 1984, MFI sought from PCRI a loan in the amount of P3,443,330.52, the balance of the cost of its boiler
machine, to prevent its repossession by the seller. PCRI, also a family-owned corporation licensed since 1980 to
engage in money lending, was represented by Domingo Ang ("Domingo") its president, and his son Caleb, vice-
president. The parties knew each other because they belonged to the same family association, the Lioc Kui Tong
Fraternity.

The decision noted that on the basis only of his interview with Enrique, feedback from the stockholders and the
Chinese community, as well as information given by his own father Domingo, and without further checking on the
background of Enrique and his business and requiring him to submit a company profile and a feasibility study of
MFI, Caleb recommended the approval of the P3.44 million with an interest ranging from 24% to 26% per annum
and a term of between five and ten years (Decision, p. 5). According to the court, it sufficed for Caleb that Enrique
was a well-respected Chinese businessman, that he was the president of their Chinese family association, and that
he had other personal businesses aside from MFI, such as theAfrica Trading.

The court gave credence to the uncorroborated lone testimony of Enrique’s daughter Vicky that on August 3, 1984,
even before the signing of the mortgage and loan documents, PCRI released the P3.5 million loan to MFI. It found
that the blank loan forms, consisting of the real estate mortgage contract, promissory note, comprehensive surety
agreement and disclosure statement, which Domingo himself handed to Enrique, "had no entries specifying the rate
of interest and schedules of amortization." On the same day, to reciprocate the gesture of PCRI, Enrique, together
with his wife Natividad Africa, vice-president, and son Edmundo signed the blank forms "at their office at 685
Tandang Sora Avenue, Novaliches, Quezon City." The signing was allegedly witnessed by Vicky, Ellen and Alice, all
surnamed Ang, without any PCRI representative present. Immediately thereafter, Enrique and Vicky proceeded to
the PCRI office at 1020 Soler St., Binondo.

The court a quo also accepted Vicky’s account that it was in order to return the trust of Domingo and Caleb and their
gesture of the early release of the loan that Enrique and Vicky entrusted to them their seven

(7) titles, with an aggregate area of 3.3665 hectares, to wit: TCT Nos. 317699, 317702, 317703, 317704, 317705,
317706 and 1317707. She testified that they left it to defendants to choose from among the 7 titles those which
would be sufficient to secure the P3.5 million. She also admitted, however, that they had an appraisal report dated
June, 1984 of the said properties made by the Integrated Appraisal Corporation which put the value of four (4) of the
said properties at P6.8 million, now the subject of the action for reconveyance, while the aggregate value of all
seven lots was P11 million.

Vicky further stated that it was agreed that once PCRI had chosen the lots to be covered by the mortgage, the
defendants would return the remaining titles to the plaintiffs. Plaintiffs also secured an additional loan of about
P199,000.00 to pay for real estate taxes and other expenses. Significantly, Vicky testified that the plaintiffs delivered
to PCRI twenty- four (24) checks, bearing no dates and amounts, to cover the amortization payments, all signed in
blank by Enrique and Natividad.

In September 1984, the first amortization check bounced for insufficient fund due to MFI’s continuing business
losses. It was then that the appellees allegedly learned that PCRI had filled up the 24 blank checks with dates and
amounts that reflected a 35% interest rate per annum, instead of just 24%, and a two-year repayment period,
instead of 10 years. Vicky avers that her strong protest caused PCRI to desist from depositing the other 23 checks
(TSN, April 21, 1998, p. 15), and that it was about this time that PCRI finally furnished MFI with its copy of the
promissory note and the disclosure statement.

Vicky asserted that plaintiffs-appellees found the terms reflected in the loan documents to be prohibitive,
burdensome and unconscionable, and that had they known them when they took out the loan on August 3, 1984,
they could either have (1) negotiated/bargained or (2) rejected the terms of the loan and withdrawn the loan
application. Plaintiffs thereafter repeatedly asked the defendants to return the rest of the titles in excess of the
required collateral to which defendants allegedly routinely responded that their committee was still studying the
matter. Vicky even added that Caleb assured Vicky that PCRI would also lower the rate of interest to conform to
prevailing commercial rate. Meanwhile, due to losses plaintiffs’business operations stopped.

Vicky also testified that talks were held in earnest in 1985 between Domingo and Enrique as well as between Vicky
and Caleb concerning the possible offsetting of the loan by ceding some of their properties to PCRI. On February
28, 1986, Vicky wrote to defendants, referring to a meeting held on February 11, 1986 and reiterating her request
for the offsetting. The letter stated that since August, 1985, she had been asking for the offsetting of their properties
against the loan. Caleb had sought a report on the fair market value of the seven lots. Also, he sought the
assignment to PCRI of the rentals payable of plaintiffs’ tenant, Bethlehem Knitting Company up to 1987. Vicky
admitted that plaintiffs furnished Caleb on March 11, 1986 a copy of the 1984 Appraisal Report prepared by the
IntegratedAppraisal Corporation for the offsetting agreement.

PCRI’s account statement dated February 12, 1986 showed that MFI’s total loan obligation amounted to
P4,167,472.71 (Exh. "G"). The March 25, 1986 statement from PCRI, however, showed that all seven (7) titles were
placed as collateral for their P3.5 million loan. MFI maintained that per their appraisal report, four of the properties
were already worth P6.5 million while the three other lots were valued around P4.6 million.

Vicky also claimed that Domingo and Caleb tried to appease the plaintiffs by assuring them that they would return
the rest of the titles anytime they would need them, and that they could use them to secure another loan from them
or from another financing company. They would also reconsider the 35% interest rate, but when the discussion
shifted to the offsetting of the properties to pay the loan, the defendants’ standard answer was that they were still
awaiting the feedback of their committee.

On September 4, 1986, Enrique received a Notice of Sheriff’s Sale dated August 29, 1986, announcing the auction
of the seven lots on September 24, 1986 due to unpaid indebtedness of P10.5 million. After Vicky explained to her
father Enrique in Chinese that the defendants were auctioning all their seven lots, he became frantic, was unable to
take his lunch, and remained silent the whole afternoon. Later that night he fell ill and became delirious. His blood
pressure shot up to 200/100 and he was rushed to the Metropolitan Hospital where he fell into a coma and stayed in
the intensive care unit for four (4) days. Vicky claimed that during moments of consciousness, her father would
mutter the names of Domingo and Caleb and that they were unprofessional and dishonest people. He was
discharged after 6 days.

Vicky insisted that prior to the auction notice, they never received any statement or demand letter from the
defendants to pay P10.5 million, nor did the defendants inform them of the intended foreclosure. The last statement
they received was dated February 12, 1986, and showed amount due of only P4,167,472.71. Vicky recalled that
from June 1, 1986 to July 1986, they held several meetings to discuss the options available to them to repay their
loan, such as the offsetting of their rent collectibles and properties to cover the amortizations and the loan balance.

MFI protested the foreclosure, and the auction was reset to October 6, 1986, then to October 16, 1986, and finally
October 27, 1986 after they assured PCRI that they had found a serious buyer for three of the lots. In the meeting
held on October 15, 1986 at defendants’ office, the buyer, Winston Wang of Asia Cotton and his lawyer, Atty. Ismael
Andres were present. It was agreed to release the mortgage over TCT Nos. 317705, 317706, and 317707 upon
payment of P3.5 million. Winston Wang would pay to MFI P500,000.00 as down-payment, which MFI would in turn
pay to PCRI as partial settlement of the P3.5 million loan. Winston Wang was given 15 days from October 16, 1986
to pay the P500,000.00. Vicky claims that these agreements were made verbally, although she kept notes and
scribbles of them.

On January 19, 1987, Winston Wang confronted Vicky about their sale agreement and PCRI’s refusal to accept their
P3 million payment, because according to Caleb, the three lots had been foreclosed. Vicky was shocked, because
the agreed 60-day period to pay the P3 million was to lapse on January 13, 1987 yet. Caleb himself put the
particulars of the P500,000.00 payment in the cash voucher as partial settlement of the loan.

At the auction sale on October 27, 1986, PCRI was the sole bidder for P6.5 million. Vicky however also admitted
that discussions continued on the agreement to release three lots for P3.5 million. The reduction of interest rate and
charges and the condonation of the attorney’s fees of P300,000.00 for the foreclosure proceedings were also
sought. Present in these conferences were Enrique and Vicky, Domingo and Caleb, Winston Wang and his
lawyer,Atty. IsmaelAndres.

Upon defendants’ continued failure to honor their agreement, Atty. Ismael Andres threatened to sue PCRI in a letter
dated February 17, 1987 if they would not accept the P3 million payment of his client. Atty.Andres also sent them
similar letters dated May 15, August 5 and 7, 1987, and after several more discussions, the defendants finally
agreed to accept the P3 million from Winston Wang, but under these conditions: a) MFI must pay the P300,000.00
attorney’s fees paid for the foreclosure proceedings and the P190,000.00 for real estate taxes; b) PCRI shall issue
the certificate of redemption over the three lots; c) plaintiffs shall execute a Memorandum of Undertaking concerning
their right of way over the other properties, the lots being redeemed being situated along Tandang Sora Street.

Vicky also testified that although Wang would pay directly to Caleb, the plaintiffs pursued the transaction because of
PCRI’s promised to release the four (4) other remaining properties after the payment of P3.5 million loan principal as
well as the interest in arrears computed at P3 million, or a total of P6.5 (TSN, January 10, 1996, p. 11).

MFI paid to PCRI P490,000.00 as agreed, and likewise complied with the required documentation. Winston Wang
also paid the balance of P3 million for the three lots he was buying. The discussion then turned to how the plaintiffs’
P3 million interest arrearages would be settled, which they agreed to be payable over a period of one year, from
October 26, 1987 to October 26, 1988.

In October, 1988, however, plaintiffs were able to raise only P2 million. After a meeting at defendants’ office, the
period to pay was extended to October 26, 1989, but subject to 18% interest per annum, which Caleb however
allegedly refused to put in writing. Plaintiffs were later able to raise P3 million plus P540,000.00 representing the
18% interest per annum. On October 26, 1989, Vicky and Enrique tendered the same to Caleb at his office. Caleb
however became furious, and now insisted that the interest due since 1984 was already P7 million computed at
35% per annum.

On January 16, 1990 and again on March 5, 1990, PCRI sent the plaintiffs a letter demanding that they vacate the
four remaining lots. Caleb was also now asking for P10.5 million. On March 19, 1990, Caleb executed an affidavit of
non-redemption of TCT Nos. 317699, 317702, 317703 and 317704. On June 7, 1990, S.G. del Rosario, PCRI’s
vice- president, wrote Vicky reiterating their demand to vacate the premises and remove pieces of machinery,
equipment and persons therein, which MFI eventually heeded.

Vicky also testified that the news of plaintiffs’ predicament spread around the Chinese community and brought the
family great humiliation. Enrique’s health deteriorated rapidly and he was hospitalized. On October 9, 1991, they
filed the case below. Meanwhile, Enrique died on November 15, 1993 after one year and one month at the
Metropolitan Hospital. The family spent P300,000 - P400,000 for his funeral and burial expenses.
Plaintiffs now insist that P1 million in moral damages was not enough for the humiliation they suffered before the
Chinese community, considering that Enrique was then the president of the Lioc Kui Tong Fraternity while Domingo
and Caleb were members thereof. Plaintiffs were also deprived of the rental income of P10,000.00 per month and
the 10% rental increases from 1987 to present of their said properties.

In arguing that the 35% interest rate imposed by PCRI was exorbitant and without their consent, the plaintiffs cited
the promissory note and amortization schedule in their loan agreement with Manphil dated April 6, 1983 and with
IBAA on April 21, 1983 which both showed a rate of interest of only 14% and a ten-year term with two years grace
period.3

Ruling of the RTC

In the order of May 23, 1994, the trial judge listed the following issues for resolution, namely:

1.Whether or not the mortgage contract and its foreclosure should be declared null and void;

2.Whether or not either or both parties is/are entitled to damages from the other, and, if so, how much.

3.Whether or not plaintiffs’cause of action has prescribed;

4.Whether or not the estoppel had attached against the plaintiff. 4

As stated, the RTC rendered its decision in favor of petitioners, disposing:

5

WHEREFORE, IN VIEW OF THE FOREGOING, judgment is hereby rendered, to wit:

1. Declaring the real estate mortgage and the subsequent foreclosure made by the defendants on the
plaintiffs’ properties covered by Transfer Certificate of Title Nos. 317699, 317702, 317703, 317704 of the
Register of Deeds of Quezon City null and void and the titles issued in favor of the defendants canceled and
ordered reconveyed to the plaintiffs;

2. The defendants are hereby ordered solidarily liable to pay plaintiff, Metropolitan Fabrics, Inc. and the
family of Enrique Ang the following:

a.The amount of ONE MILLION PESOS (P1,000,000.00) for moral damages;

b.The amount of P10,000.00 per month with an interest of 10% per annum from January 1987 up to
the time that the plaintiffs take repossession of the said parcels of land as actual damages;

c.ONE HUNDRED THOUSAND PESOS (P100,000.00) for attorney's fees; and

d.Costs of suit.

3. The defendants’ counterclaim for deficiency judgment, in the amount of P107,876,171.82 as actual
damages; P1,000,000.00 for moral damages and P500,000.00 for attorney's fees is hereby DISMISSED.

Let a copy of this DECISION be furnished the Register of Deeds, Quezon City relative to the aforementioned
parcels of land. Anticipating an appeal in this case, to protect the rights of the plaintiffs, the Register of Deeds of
Quezon City is hereby ordered to annotate this DECISION in the aforementioned Certificates of Title.

SO ORDERED. 6

Judgment of the CA

Respondents appealed, assigning the following errors, to wit:

1.THE TRIAL COURT GRAVELY ERRED WHEN IT RULED THAT THE ACTION TO ANNUL THE
MORTGAGE CONTRACT DID NOT PRESCRIBE.

2.THE TRIAL COURT GRAVELY ERRED WHEN IT ANNULLED THE MORTGAGE CONTRACT, AND THE
FORECLOSURE SALE ON THE GROUND OF FRAUD, NOTWITHSTANDING THE TWELVE (12)
DOCUMEN-TARY EVIDENCE RATIFYING THE MORTGAGE AND FORECLOSURE SALE, AND THE
FAILURE OF THE SIGNATORIES TO IMPUGN THE VALIDITY OF THE SAME FROM THE TIME THEY
SIGNED UP TO THE PRESENT OR FORAPERIOD OF 14 YEARS.
 3.THE TRIAL COURT GRAVELY ERRED WHEN IT RULED THERE WAS FRAUD IN THE EXECUTION
OF THE MORTGAGE CONTRACT BASED ON THE LONE TESTIMONY OF VICKY ANG GAPIDO, WHO
WAS NOT A SIGNATORY TO THE MORTGAGE CONTRACT AND WHOSE TESTIMONY WAS NOT
EVEN CORROBORATED BYTHE SIGNATORIES TO THE SAME.

4.THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE PLAINTIFFS-APPELLEES DID NOT
AGREE TO THE LOAN AND/OR THE MORTGAGE DESPITE THE NUMEROUS ACTS OF THE
PLAINTIFFS-APPELLEES RECOGNIZING THE VALIDITY OF THE MORTGAGE AND ITS
FORECLOSURE AND ULTIMATELY VOLUNTARILY SURRENDERING THE FOUR (4) UNREDEEMED
LOTS TO THE DEFENDANTS-APPELLANTS, RESULTING IN ESTOPPEL.

5.THE TRIAL COURT GRAVELY ERRED IN FINDING THE DEFENDANTS-APPELLANTS GUILTY OF

PREDATORY LENDING PRACTICESAND INIQUITOUS CONDUCT.

6.THE TRIAL COURT GRAVELY ERRED WHEN ITAWARDED DAMAGES AND ATTORNEY’S FEES TO
PLAINTIFFS-APPELLEES NOTWITHSTANDING ITS ADMITTED FAILURE TO PAY ITS LOAN
OBLIGATIONS TO DEFENDANTS-APPELLANTS, AND FILING OF THIS BASELESSAND MALICIOUS
SUIT.

7.THE TRIAL COURT GRAVELY ERRED IN FAILING TO AWARD DAMAGES AND ATTORNEY’S FEES
TO DEFENDANTS- APPELLANTS. 7

On July 23, 2002, the CA promulgated its assailed judgment, reversing and setting aside the decision of the RTC,
8

and dismissing the complaint and the counterclaim upon the following ratiocination:

We find the appeal to be partially meritorious.

The action for annulment of title and reconveyance was based on the allegation of fraud which attended the
mortgage contract between the parties. Article 1391 of the Civil Code provides that actions to annul a contract
based on fraud should be brought within four years from discovery of the fraud (Asuncion vs. CA, 150 SCRA 353). If
the transaction involves registered land, the four-year period is computed from the registration of the
conveyance/transaction on account of constructive notice and not on actual knowledge. In the instant case, the
mortgage over the seven lots was annotated on the back of their respective titles on September 05, 1984, so that
the action to annul the mortgage should have been commenced before September 05, 1988. The case below was
filed only in 1991.

Even if the prescription period is counted from actual notice, the plaintiffs had until October 25, 1989, or four years
after the foreclosure sale, to file the action to annul. Indeed, pursuant to the cases of Armentia vs. Patriarca, 18
SCRA 1253 and Gatiaon vs. Gaffud, 27 SCRA706, if the annulment of the mortgage contract is merely a condition
precedent for the annulment or reconveyance of the title, the prescriptive period is only four years.

Moreover, assuming the defendants were guilty of continuing fraud, the plaintiffs’inaction for seven years is contrary
to human experience and thus estoppel may have already set in. Nor is it at all clear just how the continuing fraud
was committed by PCRI. Instead, what is more readily apparent from the findings of fact of the trial court is that
upon the incessant importuning of the plaintiffs, the defendants gave them every reasonable chance to pay their
loan and recover their properties. While it is settled that the findings of fact of the trial court which heard the case are
not to be disturbed on appeal, if, however, the conclusions are not borne out by the facts or if substantial facts
bearing upon the result of the case are overlooked, the same may be overturned. We find no clear and convincing
evidence, nor even preponderant evidence, to defeat the presumption of regularity of the mortgage contract and
promissory note. The plaintiffs relied mainly on the lone testimony of Vicky Ang Gapido, certainly a biased witness,
who was not even a signatory to the questioned documents. There was no proof that she was an officer of MFI back
in 1984. She appeared on the scene only in 1986.

The appealed decision appears to have brushed aside several documents which clearly tended to prove the
voluntary and free consent of the appellees to the mortgage. The promissory note and mortgage contract are public
documents that enjoy the presumption of regularity which can be overcome only by clear and convincing evidence.
Against these, the trial court accepted the sole testimony of VickyAng.

Absent proof that Vicky Ang was a responsible officer of MFI at the time of the execution of the mortgage
documents and was in fact present when the loan was negotiated and the documents were executed, Vicky Ang
cannot be considered a competent witness. Exh. "22", the list of officers of MFI, did not include Vicky. Her elaborate
testimony was not corroborated by another testimony or supported by any document. Vicky claimed that other family
members named Ellen and Alice were present at the signing, together with Enrique, Natividad, and Edmund, but it is
highly unusual and rather curious that none of them was presented. It was the duty of the appellees to establish the
fact of the alleged fraud, yet none of the signatories to the mortgage documents, who alone could have testified on
said claim, were presented. Neither the father, Enrique Ang, who was allegedly shocked and deeply hurt, nor the
mother Natividad Africa-Ang and brother EdmundAng testified.
Even Vicky’s letters to PCRI were clearly conciliatory and recognized their loan obligation. One could not divine a
tone of protest against the so-called continuing fraud committed against her family. Viewed from the common
experience of mankind, it was simply incredible that appellants and appellees would enter into a mortgage contract
for P3.5 million where the material terms were indefinite and left to the sole discretion of the lender, all protestations
of trust and the so-called Chinese way of doing business notwithstanding. It was incredible that the appellees, long-
time businessmen, would sign a promissory note and a real estate mortgage contract in blank. It was incredible that
MFI would issue 24 blank checks for the monthly amortizations, and this without even knowing that the interest rate
applied was 35% per annum. One needs only note that the signing of the loan documents and the release of the
loan were done on the same day, which then strongly connotes simultaneous consensual and reciprocal acts where
both parties were present. We note that the MOA for the accessory loan for P199,072.255 made on December 06,
1984 to pay the real estate taxes and registration fees clearly carried an interest rate of 35%, not 24% as claimed by
appellees. The delay in the execution of the mortgage contract was because the real estate taxes had yet to be
paid.

It was incredible too that MFI would have entrusted all seven titles to PCRI and yet also borrowed P199,072.255 for
registration fee of the deed of mortgage for all seven titles if they did not know that these seven titles were covered
by the mortgage. That this was part of the "Chinese way of doing business" was also not established as a custom in
the manner provided by Article 12 of the Civil Code. This claimed custom is easily negated by the execution of the
now-contested mortgage documents as well as the comprehensive surety agreement.

MFI should have known that the interest rate was 35% when its checks started bouncing. If indeed the agreed
interest rate was 24%, it was incredible that they waited so long before asking for a recomputation of the interest
rate. Also, MFI claimed it had an appraisal report in 1984 showing that the value of its lots was more than
P11million, yet it submitted the same only in 1986. What clearly appears from the testimony of Vicky Ang is that MFI
had difficulty finding buyers for their lots at their asking price, and that Caleb Ang repeatedly gave the appellees
time to pay their loan, met them to accommodate their proposals for possible settlement, agreed to postpone the
foreclosure sale several times to allow MFI to raise the money to pay, even agreed to a partial redemption and
further gave MFI more time to fully redeem the rest of the lots.

Vicky Ang’s lone and uncorroborated testimony contradicts the written documents, which should be deemed to
possess superior evidentiary weight unless overcome by more weighty and convincing evidence. Even her letters
tend to show that MFI was merely seeking to be allowed more time to settle its loan.

There is no dispute that the officers of plaintiff-appellee corporation signed the following documents: promissory
note (Exh. "1); Real Estate Mortgage (Exh. "2"); MFI’s P199,000 loan to pay real estate mortgage fees of seven
titles (Exh. "7"); twenty-four (24) post-dated checks (Exhs. "8" to "8-V"; MFI’s request not to deposit post-dated
checks (Exh. "10"); MFI’s letter informing PCRI of a buyer in order to stay foreclosure (Exh. "11); MFI’s letters
seeking to postpone foreclosure (Exh. "O", "P", "Q"); MFI Board resolution dated August 10, 1987 authorizing partial
redemption for P3.5million of three lots (Exh. "12"); Secretary’s Certificate (Exh. "13"); Certificate of Redemption
(Exh. "16"); Memorandum of Undertaking on the right of way dated September 18, 1987 (Exh. "18"); June 21, 1990
letter (Exh. "20").

The tenor of Vicky Ang’s letter dated February 28, 1986 (Exh. "10") is cordial and makes no mention or reference
whatsoever to the error in the interest rate imposed and the filling of the 24 blank checks with erroneous figures,
which would have been estafa. This silence negates Vicky’s testimony to the contrary. Instead, the letter contains a
litany of financial distress, blaming the country’s lingering economic slump for causing the shut-down of their
company and its failure to keep up with the loan amortizations. The letter sought the sympathy of PCRI. It asked that
the post-dated checks be not deposited. It pleaded for an offsetting of some of their lots against their loan obligation,
but obviously based on their 3-year old appraisal of the worth of the lots. Yet it had taken them considerable time to
find a buyer like Mr. Wang. She even mentions that Caleb suggested to her that they sell the properties so they
could pay their debt but that they have not been able to find buyers.

The appealed decision admits that the foreclosure sale was postponed several times upon the request of the
appellees. Moreover, instead of filing an action to annul the foreclosure mortgage, MFI even authorized the partial
redemption of three lots per Board Resolution dated August 10, 1987. The certificate of redemption (Exh. "16")
acknowledged that the agreed interest rate was 35% and the total loan payable to date was P6.5million. Then, when
they were asked to leave the premises whose titles had been eventually consolidated in PCRI, MFI after a
requested brief extension during which it expressly agreed to stay as lessee, peacefully vacated the same (Exh.
"20").

The claim of events undeniably prove that the appellees are estopped from denying the validity of the mortgage
contract. The trial court’s findings concerning the defects of the mortgage documents are not sufficient to overcome
the presumption of its validity.

That the "List of Mortgaged Properties" was visibly typewritten in small characters to fit into whatever available
space remained below the notarial acknowledgment, or that the first line of the "List of Mortgaged Properties"
occupied the same line as the last line of the notarial acknowledgment, cannot per se be taken as proof of
fraudulent incorporation of the seven titles therein. This conclusion is speculative, because this same situation can
result when one uses a form documents and the list happens to be long.

There is also no requirement that where the signatories from the plaintiffs have signed elsewhere in the mortgage
document, the said signatories should also conform to the "List of Mortgaged Properties" as fully indicative of the
parties’ consent to the inclusion of the property as mortgage security. To hold otherwise would render invalid the
practice of incorporating annexes into the main mortgage documents.

The trial court observed that the body of the real estate mortgage did not contain any indication as to what
properties were covered, and that the rubber stamp made by the Registry of Deeds of Quezon City on page 3
thereof is only for one property, TCT No. 317702. Is the court therefore saying that only the mortgage covering TCT
No. 317702 was valid? The rubber-stamping per se is not the operative act to establish the mortgage encumbrance,
but rather the fact that the mortgage was annotated on all seven titles.

The trial court also believed that since the Notarial Acknowledgment did not indicate the number of lots covered by
the mortgage, this violated the Notarial Act and thus destroyed any presumption of regularity in the execution of the
document. Let it suffice to say that this is the sole act of the notary public, not the signatories, for which he should be
taken to account personally.

The trial court also found that "evidence indubitably disclose that the real estate mortgage was not signed before the
Notary Public (TSN, July 5, 1994, pp. 28-29)," it being mandatory that the party acknowledging the instrument must
personally appear before the Notary Public. Yet how did the court come to its conclusion without any of the
signatories being presented to prove this fact? Even the Certificate of Redemption (Exh. "16") for the three lots sold
to Mr. Wang, signed by Vicky, admitted that the real estate mortgage was acknowledged before Notary Public
Noemi E. Ferrer, per her Notarial Register No. 139, Book No. VI, Page No. 29, Series of 1994.

The same certification even expressly mentioned that the agreed loan interest was 35% per cent, citing the terms of
Promissory Note No. 840804 datedAugust 03, 1984. That certain entries therein were left blank, such as the
position of the signatories and their tax account numbers, cannot lead to the conclusion that it was signed in blank
and thus operate to invalidate the note, at least as concerns MFI itself which signed it. If these facts can be
established separately, then the factual requirements are satisfied. That there were no witnesses to attest to the due
execution of the promissory note also will not operate to render it void, such being not a prerequisite to its validity.
Nor is there a requirement that the Schedule of Amortization which appears at the back thereof should also be
signed by MFI to show its conformity.

The trial court noted that "the Disclosure Statement (Exh. "B-1") mentioned only the amount of the loan. It did not
mention other details." It did not bother to say what these other details are. It also erred in saying that there was no
signature of Edmundo Ang on the comprehensive surety agreement (Exh. "28"). It further commented that "It is also
surprising why the Comprehensive Agreement which appears to have been allegedly required of the plaintiffs to
secure the payment of the loan was not even availed of by the defendants." That the defendants did not utilize it
was their sole option and privilege.

The above discussion notwithstanding, the trial court’s conclusion that the "defendants were patently guilty of
predatory lending practices and iniquitous conduct," may not be far off the truth at all, considering the excessive
penalties and charges imposed for missed amortizations. It is of common knowledge that the country was in the grip
of tumultuous political uncertainties when the mortgage contract was executed in August 1984, owing to the
unsolved assassination of Senator Benigno S. Aquino, Jr. But while interest rates shot up to unfamiliar heights, it is
also known that after the 1986 EDSA revolution, things settled down, and interest rates receded to levels obtaining
before August 21, 1983. Defendants would therefore be hard put to justify continuing to charge 35% interest after
February 1986.

On the question of the improper publication of the Notice of Sheriff’s Sale, Vicky testified that had the notice been
made in a newspaper of general circulation other than the "Listening Post," they could have obtained a very good
price for their lots. This is self-serving, as shown by their subsequent less than successful efforts to find buyers for
their lots. They even admitted to publishing notices in the papers for this purpose. As to the alleged lack of notice to
plaintiffs of the foreclosure sale, it suffices to say that ACT 3135 does not require such notice to the mortgagor.

The trial court stated that "Plaintiffs believe that Caleb showed deep interest in their properties. Although they
wanted to settle the loan as early as 1985, defendants gave them false hopes, encouraging plaintiffs to continue to
confer with them, which resulted in the inflated indebtedness until they foreclosed the mortgage. Plaintiffs believe
that they did it intentionally so they would not be able to get them back." Subsequent events belie this conclusion, as
shown in the sale of three lots to Winston Wang for P3.5 million.

As to the defendants-appellants’ claim for loan deficiency of P107,876,171.82, in addition to P1,000,000 in moral
damages and P500,000 in attorney’s fees, their Exhibits "30" and "31" show that in addition to the 35% simple
interest per annum, a compounded penalty of 1% per month as well as compounded liquidated damages of 3% per
month were also imposed, for a total of 95% percent in charges per annum. This is clearly exorbitant, iniquitous and
unconscionable. Furthermore, while the Central Bank’s interest rates for 1984, averaged 34% (Exh. "33"), there is
no showing that this situation continued to prevail for ten years thereafter and after the massive street
demonstrations had ceased. Thus, even the 35% annual simple interest rate could not be countenanced, at least
not beyond February 1986. Even defendants’ Exh. "31" showed that they realized that the 3% monthly liquidated
damages were unjustified and they were thus willing to waive the same.

We conclude that due to estoppel and prescription of the action to annul the mortgage contract, the complaint for
annulment of title and reconveyance should be dismissed. On the other hand, we find no basis to award to
defendants-appellants P1,000,000 in moral damages and P500,000 in attorney’s fees, even as we must dismiss
their counterclaim for deficiency judgment of P107,876,171.82 for being unconscionably excessive, unreasonable
and iniquitous.

WHEREFORE, premises considered, the appealed judgment is REVERSED and SET ASIDE and a new one is
entered DISMISSING the complaint below as well as the defendants-appellants’ counterclaim for deficiency
judgment of P107,876,171.82, moral damages of P1,000,000 and P500,000 in attorney’s fees. No costs.

SO ORDERED. 9

Issues

The petitioners now submit for consideration by the Court:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTEDAREVERSIBLE ERROR IN:

A.DISREGARDING THR FACTUAL FINDINGS OF THE TRIAL COURT;

B.NOT HOLDING THAT THE ABSENCE OF CONSENT MAKESA CONTRACT VOID, NOT
MERELYVOIDABLE;

C.NOT HOLDING THAT AN ACTION TO DECLARE A CONTRACT VOID DOES NOT PRESCRIBE; and

D.NOT HOLDING THAT PETITIONERS ARE NOT GUILTY OF ESTOPPELAND LACHES. 10

Ruling

The appeal has no merit.

1.

The CA did not disregard the factual findings of the RTC

It is settled that the appellate court will not disturb the factual findings of the lower court unless there is a showing
that the trial court overlooked, misunderstood or misapplied some fact or circumstance of weight and substance that
would have affected the result of the case. Indeed, the trial court’s findings are always presumed correct.
11

Nonetheless, the CA is not precluded from making its own determination and appreciation of facts if it considers the
conclusions arrived at by the trial court not borne out by the evidence, or if substantial facts bearing upon the result
of the case were overlooked, misunderstood or misapplied. As an appellate court, the CA is not necessarily bound
12

by the conclusions of the trial court, but holds the exclusive authority to review the assessment of the credibility of
witnesses and the weighing of conflicting evidence. 13

In view of the conflicting findings and appreciation of facts by the RTC and the CA, we have to revisit the evidence
of the parties.

Petitioners insist that respondents committed fraud when the officers of Metropolitan were made to sign the deed of
real estate mortgage in blank.

According to Article 1338 of the Civil Code, there is fraud when one of the contracting parties, through insidious
words or machinations, induces the other to enter into the contract that, without the inducement, he would not have
agreed to. Yet, fraud, to vitiate consent, must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the

making of the contract. In Samson v. Court of Appeals, causal fraud is defined as "a deception employed by one
14 15

party prior to or simultaneous to the contract in order to secure the consent of the other."
16
Fraud cannot be presumed but must be proved by clear and convincing evidence. Whoever alleges fraud affecting
17

a transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his
concerns, and private transactions are similarly presumed to have been fair and regular. To be remembered is that
18

mere allegation is definitely not evidence; hence, it must be proved by sufficient evidence. 19

Did petitioners clearly and convincingly establish their allegation of fraud in the execution of the deed of real estate
mortgage?

The contested deed of real estate mortgage was a public document by virtue of its being acknowledged before
notary public Atty. Noemi Ferrer. As a notarized document, the deed carried the evidentiary weight conferred upon
20

it with respect to its due execution, and had in its favor the presumption of regularity. Hence, it was admissible in
21 22

evidence without further proof of its authenticity, and was entitled to full faith and credit upon its face. To rebut its
23

authenticity and genuineness, the contrary evidence must be clear, convincing and more than merely preponderant;
otherwise, the deed should be upheld. 24

Petitioners undeniably failed to adduce clear and convincing evidence against the genuineness and authenticity of
the deed. Instead, their actuations even demonstrated that their transaction with respondents had been regular and
1âwphi1

at arms-length, thereby belying the intervention of fraud.

To start with, the evidence adduced by VickyAng, the lone witness for petitioners, tried to cast doubt on the contents
and due execution of the deed of real estate mortgage by pointing to certain irregularities. But she could not be
effective for the purpose because she had not been among the signatories of the deed. The signatories were her
late father Enrique Ang, her mother Natividad Africa, and her brother Edmundo Ang, none of whom came forward to
testify against the deed, or otherwise to assail the genuineness and due execution of the deed by any other means.
They would have been in the better position than Vicky Ang to substantiate the allegation of fraud if that was the
case. Their silence reflected the inanity of the allegation of fraud by Vicky Ang.It does seem that the three
signatories did not join Vicky Ang in impugning the authenticity and genuineness of the deed of real estate
mortgage. As Vicky Ang admitted during her cross-examination, she had no evidence to show that the signatories
ever assailed the deed, to wit:

Q The signatory to this document, one of the signatory to this document is Enrique Ang, will you be able to show us
a letter personally prepared and signed by Enrique Ang during his lifetime from 1984 assailing the validity of this
document?

A From 1984?

Q Up to the present.

A I cannot recall actually, but if you will permit me I will try to look at the files.

Q But now, you do not have in your possession a letter personally prepared and signed by Enrique Ang and duly
received by Prosperity, you will still look for it, is that correct, if it still exists?

A As I said I still have to go over the files because it has been eleven (11) years ago.

Q Can you state definitely that there is such a document as to this point in time?

A Because there were documents, there were letters, there were correspondences also signed by Enrique Ang,
prepared and signed by EnriqueAng, its just that I still have to look for it.

Q Another signatory here in this Promissory Note and Real Estate Mortgage is Edmundo Ang will you be able to
show us a letter signed by him and received by Prosperity in which he assailed the validity of this document?

A I cannot recall.

Q How about Natividad Africa, who is also a signatory to this document, will you be able to produce a letter signed
by her assailing the validity of this document duly received by Prosperity?

A I cannot recall. 25

Secondly, petitioners freely and voluntarily surrendered to respondents the seven transfer certificates of title (TCTs)
of their lots. Such surrender of the TCTs evinced their intention to offer the lots as collateral for the performance of
their obligations contracted with respondents. They thereby confirmed the genuineness and due execution of the
deed of real estate mortgage. Surely, they would not have surrendered the TCTs had their intention been otherwise.
Thirdly, another circumstance belying the commission of fraud by respondents was petitioners’ pleading with
respondents for the resetting of foreclosure sale of the properties after receiving the notice of the impending sale. As
a result, the sale was reset thrice. Had the mortgage and its foreclosure been unreasonable or fraudulent,
petitioners should have instead resolutely contested respondents’move to foreclose.

Fourthly, even after their properties were eventually sold as the consequence of the foreclosure, petitioners
negotiated with respondents on the partial redemption of three of the seven lots. They also took the trouble of
finding a buyer (Mr. Winston Wang of Asia Cotton) of some of the lots. Had the mortgage been fraudulent, they
could have instead instituted a complaint to nullify the real estate mortgage and the foreclosure sale.

And, lastly, Vicky Ang’s own letters to respondents had an apologetic tenor, and was seeking leniency from them.
Such tenor and tone of her communications were antithetical to her allegation of having been the victim of their
fraudulent acts.

These circumstances tended to indicate that fraud was not attendant during the transactions between the parties.
Verily, as between the duly executed real estate mortgage and the unsubstantiated allegations of fraud, the Court
affords greater weight to the former.

2.

Action to assail the mortgage already prescribed

The next issue to address is whether the action to assail the real estate mortgage already prescribed.

To resolve the issue of prescription, it is decisive to determine if the mortgage was void or merely voidable.

It appears that the original stance of petitioners was that the deed of real estate mortgage was voidable. In their
complaint, they averred that the deed, albeit in printed form, was incomplete in essential details, and that
Metropolitan, through Enrique Ang as its president, signed it in good faith and in absolute confidence. They 26

confirmed their original stance in their pre-trial brief, wherein they raised the following issues, to wit:
27

1.Whether or not the mortgage and foreclosure of the subject four (4) parcels of land should be declared null
and void; and

2.Whether or not defendants should be held liable to pay damages and attorney’s fees to plaintiffs, and for
how much? 28

Yet, petitioners now claim that the CA committed a reversible error in not holding that the absence of consent made
the deed of real estate mortgage void, not merely voidable. In effect, they are now advancing that their consent was
not merely vitiated by means of fraud, but that there was complete absence of consent. Although they should be
estopped from raising this issue for the first time on appeal, the Court nonetheless opts to consider it because its
resolution is necessary to arrive at a just and complete resolution of the case.

As the records show, petitioners really agreed to mortgage their properties as security for their loan, and signed the
deed of mortgage for the purpose. Thereafter, they delivered the TCTs of the properties subject of the mortgage to
respondents.

Consequently, petitioners' contention of absence of consent had no firm moorings. It remained unproved. To begin
1âwphi1

with, they neither alleged nor established that they had been forced or coerced to enter into the mortgage. Also,
they had freely and voluntarily applied for the loan, executed the mortgage contract and turned over the TCTs of
their properties. And, lastly, contrary to their modified defense of absence of consent, Vicky Ang's testimony tended
at best to prove the vitiation of their consent through insidious words, machinations or misrepresentations
amounting to fraud, which showed that the contract was voidable. Where the consent was given through fraud, the
contract was voidable, not void ab initio. This is because a voidable or annullable contract is existent, valid and
29

binding, although it can be annulled due to want of capacity or because of the vitiated consent of one of the parties. 30

With the contract being voidable, petitioners' action to annul the real estate mortgage already prescribed. Article
1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was obtained
through fraud, the contract is considered voidable and may be annulled within four years from the time of the
discovery of the fraud. The discovery of fraud is reckoned from the time the document was registered in the
31

Register of Deeds in view of the rule that registration was notice to the whole world. Thus, because the mortgage
32

involving the seven lots was registered on September 5, 1984, they had until September 5, 1988 within which to
assail the validity of the mortgage. But their complaint was instituted in the RTC only on October 10, 1991. Hence,
33

the action, being by then already prescribed, should be dismissed.

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision promulgated by the
Court of Appeals on July 23, 2002; and ORDERS petitioners to pay the costs of suit.

SO ORDERED.

G.R. No. L-55048 May 27, 1981

SUGA SOTTO YUVIENCO, BRITANIA SOTTO, and MARCELINO SOTTO, petitioners,

vs.
HON. AUXENCIO C. DACUYCUY, Judge of the CFI of Leyte, DELY RODRIGUEZ, FELIPE ANG CRUZ,
CONSTANCIA NOGAR, MANUEL GO, INOCENTES DIME, WILLY JULIO, JAIME YU, OSCAR DY, DY CHIU
SENG, BENITO YOUNG, FERNANDO YU, SEBASTIAN YU, CARLOS UY, HOC CHUAN and MANUEL
DY, respondents.

BARREDO, J.: 1äwphï1.ñët

Petition for certiorari and prohibition to declare void for being in grave abuse of discretion the orders of respondent
judge dated November 2, 1978 and August 29, 1980, in Civil Case No. 5759 of the Court of First Instance of Leyte,
which denied the motion filed by petitioners to dismiss the complaint of private respondents for specific performance
of an alleged agreement of sale of real property, the said motion being based on the grounds that the respondents'
complaint states no cause of action and/or that the claim alleged therein is unenforceable under the Statute of
Frauds.

Finding initially prima facie merit in the petition, We required respondents to answer and We issued a temporary
restraining order on October 7, 1980 enjoining the execution of the questioned orders.

In essence, the theory of petitioners is that while it is true that they did express willingness to sell to private
respondents the subject property for P6,500,000 provided the latter made known their own decision to buy it not
later than July 31, 1978, the respondents' reply that they were agreeable was not absolute, so much so that when
ultimately petitioners' representative went to Cebu City with a prepared and duly signed contract for the purpose of
perfecting and consummating the transaction, respondents and said representative found variance between the
terms of payment stipulated in the prepared document and what respondents had in mind, hence the bankdraft
which respondents were delivering to petit loners' representative was returned and the document remained
unsigned by respondents. Hence the action below for specific performance.

To be more specific, the parties do not dispute that on July 12, 1978, petitioners, thru a certain Pedro C. Gamboa,
sent to respondents the following letter:
Mr. Yao King Ong

Life Bakery

Tacloban City

Dear Mr. Yao: 1äwphï1.ñët

This refers to the Sotto property (land and building) situated at Tacloban City. My clients are willing
to sell them at a total price of P6,500,000.00.

While there are other parties who are interested to buy the property, I am giving you and the other
occupants the preference, but such priority has to be exercised within a given number of days as I
do not want to lose the opportunity if you are not interested. I am therefore gluing you and the rest of
the occupants until July 31, 1978 within it which to decide whether you want to buy the property. If I
do not hear from you by July 31, I will offer or close the deal with the other interested buyer.

Thank you so much for the hospitality extended to me during my last trip to Tacloban, and I hope to
hear from you very soon. 1äwphï1.ñët

Very truly yours,

Pedro C. Gamboa 1

(Page 9, Record.)

Reacting to the foregoing letter, the following telegram was sent by "Yao King Ong & tenants" to
Atty. Pedro Gamboa in Cebu City:

Atty. Pedro Gamboa

Room 314, Maria Cristina Bldg.

Osmeña Boulevard, Cebu City

Reurlet dated July 12 inform Dra. Yuvienco we agree to buy property proceed Tacloban to negotiate
details 1äwphï1.ñët

Yao King Ong & tenants

(Page 10, Record.)

Likewise uncontroverted is the fact that under date of July 27, 1978, Atty. Gamboa wired Yao King
Ong in Tacloban City as follows:

NLT

YAO KING ONG

LIFE BAKERY

TACLOBAN CITY

PROPOSAL ACCEPTED ARRIVING TUESDAY MORNING WITH CONTRACT PREPARE

PAYMENT BANK DRAFT 1äwphï1.ñët

ATTY. GAMBOA

(Page 10, Id.)

Now, Paragraph 10 of the complaint below of respondents alleges: 1äwphï1.ñët

 10. That on August 1, 1978, defendant Pedro Gamboa arrived Tacloban City bringing with him the
prepared contract to purchase and to sell referred to in his telegram dated July 27, 1978 (Annex 'D'
hereof) for the purpose of closing the transactions referred to in paragraphs 8 and 9 hereof,
however, to the complete surprise of plaintiffs, the defendant (except def. Tacloban City Ice Plant,
Inc.) without giving notice to plaintiffs, changed the mode of payment with respect to the balance of
P4,500,000.00 by imposing upon plaintiffs to pay same amount within thirty (30) days from execution
of the contract instead of the former term of ninety (90) days as stated in paragraph 8 hereof. (Pp.
10-11, Record.)

Additionally and to reenforce their position, respondents alleged further in their complaint: 1äwphï1.ñët

8. That on July 12, 1978, defendants (except defendant Tacloban City Ice Plant, Inc.) finally sent a
telegram letter to plaintiffs- tenants, through same Mr. Yao King Ong, notifying them that defendants
are willing to sell the properties (lands and building) at a total price of P6,500,000.00, which herein
plaintiffs-tenants have agreed to buy the said properties for said price; a copy of which letter is
hereto attached as integral part hereof and marked as Annex 'C', and plaintiffs accepted the offer
through a telegram dated July 25, 1978, sent to defendants (through defendant Pedro C. Gamboa),
a copy of which telegram is hereto attached as integral part hereof and marked as Annex C-1 and as
a consequence hereof. plaintiffs except plaintiff Tacloban - merchants' Realty Development
Corporation) and defendants (except defendant Tacloban City Ice Plant. Inc.) agreed to the following
terms and conditions respecting the payment of said purchase price, to wit: 1äwphï1.ñët

P2,000,000.00 to be paid in full on the date of the execution of the contract; and the
balance of P4,500,000.00 shall be fully paid within ninety (90) days thereafter;

9. That on July 27, 1978, defendants sent a telegram to plaintiff- tenants, through the latter's
representative Mr. Yao King Ong, reiterating their acceptance to the agreement referred to in the
next preceding paragraph hereof and notifying plaintiffs-tenants to prepare payment by bank drafts;
which the latter readily complied with; a copy of which telegram is hereto attached as integral part
hereof and marked as Annex "D"; (Pp 49-50, Record.)

It was on the basis of the foregoing facts and allegations that herein petitioners filed their motion to dismiss alleging
as main grounds: 1äwphï1.ñët

I. That plaintiff, TACLOBAN MERCHANTS' REALTY DEVELOPMENT CORPORATION, amended

complaint, does not state a cause of action and the claim on which the action is founded is likewise
unenforceable under the provisions of the Statute of Frauds.

II. That as to the rest of the plaintiffs, their amended complaint does not state a cause of action and
the claim on which the action is founded is likewise unenforceable under the provisions of the
Statute of Frauds. (Page 81, Record.)

With commendable knowledgeability and industry, respondent judge ruled negatively on the motion to dismiss,
discoursing at length on the personality as real party-in-interest of respondent corporation, while passing lightly,
however, on what to Us are the more substantial and decisive issues of whether or not the complaint sufficiently
states a cause of action and whether or not the claim alleged therein is unenforceable under the Statute of Frauds,
by holding thus: 1äwphï1.ñët

The second ground of the motion to dismiss is that plaintiffs' claim is unenforceable under the
Statute of Frauds. The defendants argued against this motion and asked the court to reject the
objection for the simple reason that the contract of sale sued upon in this case is supported by
letters and telegrams annexed to the complaint and other papers which will be presented during the
trial. This contention of the defendants is not well taken. The plaintiffs having alleged that the
contract is backed up by letters and telegrams, and the same being a sufficient memorandum, the
complaint states a cause of action and they should be given a day in court and allowed to
substantiate their allegations (Paredes vs. Espino, 22 SCRA 1000).

To take a contract for the sale of land out of the Statute of Frauds a mere note or memorandum in
writing subscribed by the vendor or his agent containing the name of the parties and a summary
statement of the terms of the sale either expressly or by reference to something else is all that is
required. The statute does not require a formal contract drawn up with technical exactness for the
language of Par. 2 of Art. 1403 of the Philippine Civil Code is' ... an agreement ... or some note or
memorandum thereof,' thus recognizing a difference between the contract itself and the written
evidence which the statute requires (Berg vs. Magdalena Estate, Inc., 92 Phil. 110; Ill Moran,
Comments on the Rules of Court, 1952 ed. p. 187). See also Bautista's Monograph on the Statute of
Frauds in 21 SCRA p. 250. (Pp. 110-111, Record)
Our first task then is to dwell on the issue of whether or not in the light of the foregoing circumstances, the complaint
in controversy states sufficiently a cause of action. This issue necessarily entails the determination of whether or not
the plaintiffs have alleged facts adequately showing the existence of a perfected contract of sale between herein
petitioners and the occupant represented by respondent Yao King Ong.

In this respect, the governing legal provision is, of course, Article 1319 of the Civil Code which provides: 1äwphï1.ñët

ART. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are constitute the contract. The offer must be certain the acceptance absolute.
A qualified acceptance constitute a counter-offer.

Acceptance made by letter or telegram does not bind offerer except from the time it came to his
knowledge. The contract, in a case, is presumed to have been entered into in the place where the
offer was made.

In the instant case, We can lay aside, for the moment, petitioners' contention that the letter of July 12, 1978 of Atty.
Pedro C. Gamboa to respondents Yao King Ong and his companions constitute an offer that is "certain", although
the petitioners claim that it was a mere expression of willingness to sell the subject property and not a direct offer of
sale to said respondents. What We consider as more important and truly decisive is what is the correct juridical
significance of the telegram of respondents instructing Atty. Gamboa to "proceed to Tacloban to negotiate details."
We underline the word "negotiate" advisedly because to Our mind it is the key word that negates and makes it
legally impossible for Us to hold that respondents' acceptance of petitioners' offer, assuming that it was a "certain"
offer indeed, was the "absolute" one that Article 1319 above-quoted requires.

Dictionally, the implication of "to negotiate" is practically the opposite of the Idea that an agreement has been
reached. Webster's Third International Dictionary, Vol. II (G. & C. Merriam Co., 1971 Philippine copyright) gives the
meaning of negotiate as "to communicate or confer with another so as to arrive at the settlement of some matter;
meet with another so as to arrive through discussion at some kind of agreement or compromise about something; —
to arrange for or bring about through conference or discussion; work at or arrive at or settle upon by meetings and
agreements or compromises — ". Importantly, it must be borne in mind that Yao King Ong's telegram simply says
"we agree to buy property". It does not necessarily connote acceptance of the price but instead suggests that the
details were to be subject of negotiation.

Respondents now maintain that what the telegram refers to as "details" to be "negotiated" are mere "accidental
elements", not the essential elements of the contract. They even invite attention to the fact that they have alleged in
their complaint (Par. 6) that it was as early as "in the month of October, 1977 (that) negotiations between plaintiffs
and defendants for the purchase and sale (in question) — were made, thus resulting to offers of same defendants
and counter-offer of plaintiffs". But to Our mind such alleged facts precisely indicate the failure of any meeting of the
minds of the parties, and it is only from the letter and telegrams above-quoted that one can determine whether or
not such meeting of the minds did materialize. As We see it, what such allegations bring out in bold relief is that it
was precisely because of their past failure to arrive at an agreement that petitioners had to put an end to the
uncertainty by writing the letter of July 12, 1978. On the other hand, that respondents were all the time agreeable to
buy the property may be conceded, but what impresses Us is that instead of "absolutely" accepting the "certain"
offer — if there was one — of the petitioners, they still insisted on further negotiation of details. For anyone to read
in the telegram of Yao that they accepted the price of P6,500,000.00 would be an inference not necessarily
warranted by the words "we agree to buy" and "proceed Tacloban to negotiate details". If indeed the details being
left by them for further negotiations were merely accidental or formal ones, what need was there to say in the
telegram that they had still "to negotiate (such) details", when, being unessential per their contention, they could
have been just easily clarified and agreed upon when Atty. Gamboa would reach Tacloban?

Anent the telegram of Atty. Gamboa of July 27, 1978, also quoted earlier above, We gather that it was in answer to
the telegram of Yao. Considering that Yao was in Tacloban then while Atty. Gamboa was in Cebu, it is difficult to
surmise that there was any communication of any kind between them during the intervening period, and none such
is alleged anyway by respondents. Accordingly, the claim of respondents in paragraph 8 of their complaint below
that there was an agreement of a down payment of P2 M, with the balance of P4.5M to be paid within 90 days
afterwards is rather improbable to imagine to have actually happened.

Respondents maintain that under existing jurisprudence relative to a motion to dismiss on the ground of failure of
the complaint to state a cause of action, the movant-defendant is deemed to admit the factual allegations of the
complaint, hence, petitioners cannot deny, for purposes of their motion, that such terms of payment had indeed
been agreed upon.

While such is the rule, those allegations do not detract from the fact that under Article 1319 of the Civil Code above-
quoted, and judged in the light of the telegram-reply of Yao to Atty. Gamboa's letter of July 12, 1978, there was not
an absolute acceptance, hence from that point of view, petitioners' contention that the complaint of respondents
state no cause of action is correct.
Nonetheless, the alleged subsequent agreement about the P2 M down and P4.5 M in 90 days may at best be
deemed as a distinct cause of action. And placed against the insistence of petitioners, as demonstrated in the two
deeds of sale taken by Atty. Gamboa to Tacloban, Annexes 9 and 10 of the answer of herein respondents, that
there was no agreement about 90 days, an issue of fact arose, which could warrant a trial in order for the trial court
to determine whether or not there was such an agreement about the balance being payable in 90 days instead of
the 30 days stipulated in Annexes 9 and 10 above-referred to. Our conclusion, therefore, is that although there was
no perfected contract of sale in the light of the letter of Atty. Gamboa of July 12, 1978 and the letter-reply thereto of
Yao; it being doubtful whether or not, under Article 1319 of the Civil Code, the said letter may be deemed as an offer
to sell that is "certain", and more, the Yao telegram is far from being an "absolute" acceptance under said article, still
there appears to be a cause of action alleged in Paragraphs 8 to 12 of the respondents' complaint, considering it is
alleged therein that subsequent to the telegram of Yao, it was agreed that the petitioners would sell the property to
respondents for P6.5 M, by paving P2 M down and the balance in 90 days and which agreement was allegedly
violated when in the deeds prepared by Atty. Gamboa and taken to Tacloban, only 30 days were given to
respondents.

But the foregoing conclusion is not enough to carry the day for respondents. It only brings Us to the question of
whether or not the claim for specific performance of respondents is enforceable under the Statute of Frauds. In this
respect, We man, view the situation at hand from two angles, namely, (1) that the allegations contained in
paragraphs 8 to 12 of respondents' complaint should be taken together with the documents already aforementioned
and (2) that the said allegations constitute a separate and distinct cause of action. We hold that either way We view
the situation, the conclusion is inescapable e that the claim of respondents that petitioners have unjustifiably refused
to proceed with the sale to them of the property v in question is unenforceable under the Statute of Frauds.

It is nowhere alleged in said paragraphs 8 to 12 of the complaint that there is any writing or memorandum, much
less a duly signed agreement to the effect that the price of P6,500,000 fixed by petitioners for the real property
herein involved was agreed to be paid not in cash but in installments as alleged by respondents. The only
documented indication of the non-wholly-cash payment extant in the record is that stipulated in Annexes 9 and 10
above-referred to, the deeds already signed by the petitioners and taken to Tacloban by Atty. Gamboa for the
signatures of the respondents. In other words, the 90-day term for the balance of P4.5 M insisted upon by
respondents choices not appear in any note, writing or memorandum signed by either the petitioners or any of them,
not even by Atty. Gamboa. Hence, looking at the pose of respondents that there was a perfected agreement of
purchase and sale between them and petitioners under which they would pay in installments of P2 M down and
P4.5 M within ninety 90) days afterwards it is evident that such oral contract involving the "sale of real property"
comes squarely under the Statute of Frauds (Article 1403, No. 2(e), Civil Code.)

On the other score of considering the supposed agreement of paying installments as partly supported by the letter
and t telegram earlier quoted herein, His Honor declared with well studied ratiocination, albeit legally inaccurate,
that:1äwphï1.ñët

The next issue relate to the State of Frauds. It is contended that plaintiffs' action for specific
performance to compel the defendants to execute a good and sufficient conveyance of the property
in question (Sotto land and building) is unenforceable because there is no other note memorandum
or writing except annexes "C", "C-l" and "D", which by themselves did not give birth to a contract to
sell. The argument is not well founded. The rules of pleading limit the statement of the cause of
action only to such operative facts as give rise to the right of action of the plaintiff to obtain relief
against the wrongdoer. The details of probative matter or particulars of evidence, statements of law,
inferences and arguments need not be stated. Thus, Sec. 1 of Rule 8 provides that 'every pleading
shall contain in a methodical and logical form, a plain concise and direct statement of the ultimate
facts on which the party pleading relies for his claim or defense, as the case may be, omitting the
statement of mere evidentiary facts.' Exhibits need not be attached. The contract of sale sued upon
in this case is supported by letters and telegrams annexed to the complaint and plaintiffs have
announced that they will present additional evidences during the trial to prove their cause of action.
The plaintiffs having alleged that the contract is backed up by letters and telegrams, and the same
being sufficient memorandum, the complaint states a cause of action and they should be given their
day in court and allowed to substantiate their allegations (Parades vs. Espino, 22 SCRA 1000). (Pp
165-166, Record.)

The foregoing disquisition of respondent judge misses at least two (2) juridical substantive aspects of the Statute of
Frauds insofar as sale of real property is concerned. First, His Honor assumed that the requirement of perfection of
such kind of contract under Article 1475 of the Civil Code which provides that "(t)he contract of sale is perfected at
the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price",
the Statute would no longer apply as long as the total price or consideration is mentioned in some note or
memorandum and there is no need of any indication of the manner in which such total price is to be paid.

We cannot agree. In the reality of the economic world and the exacting demands of business interests monetary in
character, payment on installments or staggered payment of the total price is entirely a different matter from cash
payment, considering the unpredictable trends in the sudden fluctuation of the rate of interest. In other words, it is
indisputable that the value of money - varies from day to day, hence the indispensability of providing in any sale of
the terms of payment when not expressly or impliedly intended to be in cash.

Thus, We hold that in any sale of real property on installments, the Statute of Frauds read together with the
perfection requirements of Article 1475 of the Civil Code must be understood and applied in the sense that the idea
of payment on installments must be in the requisite of a note or memorandum therein contemplated. Stated
otherwise, the inessential elements" mentioned in the case of Parades vs. Espino, 22 SCRA 1000, relied upon by
respondent judge must be deemed to include the requirement just discussed when it comes to installment sales.
There is nothing in the monograph re — the Statute of Frauds appearing in 21 SCRA 250 also cited by His Honor
indicative of any contrary view to this ruling of Ours, for the essence and thrust of the said monograph refers only to
the form of the note or memorandum which would comply with the Statute, and no doubt, while such note or
memorandum need not be in one single document or writing and it can be in just sufficiently implicit tenor,
imperatively the separate notes must, when put together', contain all the requisites of a perfected contract of sale.
To put it the other way, under the Statute of Frauds, the contents of the note or memorandum, whether in one
writing or in separate ones merely indicative for an adequate understanding of all the essential elements of the
entire agreement, may be said to be the contract itself, except as to the form.

Secondly, We are of the considered opinion that under the rules on proper pleading, the ruling of the trial court that,
even if the allegation of the existence of a sale of real property in a complaint is challenged as barred from
enforceability by the Statute of Frauds, the plaintiff may simply say there are documents, notes or memoranda
without either quoting them in or annexing them to the complaint, as if holding an ace in the sleeves is not correct.
To go directly to the point, for Us to sanction such a procedure is to tolerate and even encourage undue delay in
litigation, for the simple reason that to await the stage of trial for the showing or presentation of the requisite
documentary proof when it already exists and is asked to be produced by the adverse party would amount to
unnecessarily postponing, with the concomitant waste of time and the prolongation of the proceedings, something
that can immediately be evidenced and thereby determinable with decisiveness and precision by the court without
further delay.

In this connection, Moran observes that unlike when the ground of dismissal alleged is failure of the complaint to
state a cause of action, a motion to dismiss invoking the Statute of Frauds may be filed even if the absence of
compliance does not appear an the face of the complaint. Such absence may be the subject of proof in the motion
stage of the proceedings. (Moran, Comment on the Rules of Court, Vol. 1, p. 494, 1979 ed.) It follows then that
when such a motion is filed and all the documents available to movant are before the court, and they are insufficient
to comply with the Statute, it becomes incumbent upon the plaintiff, for the reasons of policy We have just' indicated
regarding speedy administration of justice, to bring out what note or memorandum still exists in his possession in
order to enable the court to expeditiously determine then and there the need for further proceedings. In other words,
it would be inimical to the public interests in speedy justice for plaintiff to play hide and seek at his own convenience,
particularly, when, as is quite apparent as in the instant case that chances are that there are no more writings, notes
or memoranda of the installment agreement alleged by respondents. We cannot divine any reason why any such
document would be withheld if they existed, except the unpermissible desire of the respondents to force the
petitioners to undergo the ordeals, time, effort and expenses of a futile trial.

In the foregoing premises, We find no alternative than to render judgment in favor of petitioners in this certiorari and
prohibition case. If at all, appeal could be available if the petitioners subjected themselves to the trial ruled to be
held by the trial court. We foresee even at this point, on the basis of what is both extant and implicit in the records,
that no different result can be probable. We consider it as sufficiently a grave abuse of discretion warranting the
special civil actions herein the failure of respondent judge to properly apply the laws on perfection of contracts in
relation to the Statute of Frauds and the pertinent rules of pleading and practice, as We have discussed above.

ACCORDINGLY, the impugned orders of respondent judge of November 2, 1978 and August 29, 1980 are hereby
set aside and private respondents' amended complaint, Annex A of the petition, is hereby ordered dismissed and
the restraining order heretofore issued by this Court on October 7, 1980 is declared permanent. Costs against
respondents.
G.R. No. 121069 February 7, 2003

BENJAMIN CORONEL AND EMILIA MEKING VDA. DE CORONEL, petitioners,

vs.
FLORENTINO CONSTANTINO, AUREA BUENSUCESO, AND THE HONORABLE COURT OF
APPEALS, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

This refers to the petition for review on certiorari of the decision of the Court of Appeals, dated March 27, 1995, in
CA-G.R. CV No. 44023 which affirmed the decision of the Regional Trial Court of Bulacan, Branch 8, dated April 12,
1

1993 in Civil Case No. 105-M-91 ; and the resolution of said appellate court, dated July 4, 1995, denying the motion
2

for reconsideration of its decision.

The factual background of the case is as follows:

The subject property consists of two parcels of land situated in Sta. Monica, Hagonoy, Bulacan, designated as
Cadastral Lots Nos. 5737 and 5738. The property is originally owned by Honoria Aguinaldo. One-half (1/2) of it was
inherited by Emilia Meking Vda. de Coronel together with her sons Benjamin, Catalino and Ceferino, all surnamed
Coronel. The other half was inherited by Florentino Constantino and Aurea Buensuceso.

On February 20, 1991, Constantino and Buensuceso filed a complaint for declaration of ownership, quieting of title
and damages with prayer for writ of mandatory and/or prohibitory injunction with the Regional Trial Court of Bulacan
(Branch 8) against Benjamin, Emilia and John Does, docketed as Civil Case No. 105-M-91. Plaintiffs allege that: on
April 23, 1981, Jess C. Santos and Priscilla Bernardo purchased the property belonging to Emilia and her sons by
virtue of a deed of sale signed by Emilia; on June 21, 1990, Santos and Bernardo in turn sold the same to
Constantino and Buensuceso by virtue of a compromise agreement in Civil Case No. 8289-M; they are the owners
of the subject property and defendants have illegally started to introduce construction on the premises in question;
and pray that "defendants respect, acknowledge and confirm the right of ownership of the plaintiffs to the share,
interest and participation of the one-third (1/3) portion of the above described property".
l^vvphi1.net

After defendants filed their Answer, pre-trial ensued wherein the parties stipulated that: (1) the property in question
was previously owned by Honoria Aguinaldo, one-half (1/2) of which was inherited by the defendants while the other
half was inherited by the plaintiffs from the same predecessor; (2) it was admitted by counsel for the defendants that
there was a sale between Jess Santos and the plaintiffs covering the subject property; and (3) that there was no
evidence presented in Civil Case No. 8289-M by either of the parties and that the decision therein was based on a
compromise agreement. 3

After trial on the merits, the trial court rendered a decision in favor of the plaintiffs, the decretal portion of which
reads as follows:

"WHEREFORE, judgment is hereby made in favor of plaintiffs, the Court hereby declares plaintiffs as the sole and
absolute owners of the properties covered by Tax Declarations Nos. 28960 and 28961 of Hagonoy, Bulacan, and
orders the defendants to respect, acknowledge and confirm the right of ownership of plaintiffs over the whole
property described above, to remove whatever improvements introduced by them thereon, and to pay the plaintiffs,
solidarily and severally ₱10,000.00 as attorney’s fees and costs of suit.

"SO ORDERED." 4

On appeal brought by defendants, the Court of Appeals affirmed the decision of the lower court and denied
defendants’ motion for reconsideration.

Hence, herein petition brought by defendants, raising the following issues:

"I.

WHETHER OR NOT THE CONTRACT [OF] SALE EXECUTED BY A PARENT-CO-OWNER, IN HER OWN
BEHALF, IS UNENFORCEABLE WITH RESPECT TO THE SHARES OF HER CO-HEIRS-CHILDREN;

"II.

WHETHER OR NOT THE MINOR CHILDREN CAN RATIFY UNAUTHORIZED ACTIONS OF THEIR PARENTS;

"III.

WHETHER OR NOT THE CO-HEIRS ARE INDISPENSABLE DEFENDANTS IN AN ACTION FOR DECLARATION
OF OWNERSHIP AND QUIETING OF TITLE;

"IV.

WHETHER OR NOT THE DEED OF SALE WHICH IS A PRIVATE DOCUMENT WAS SUFFICIENTLY
ESTABLISHED WHEN THE COUNSEL FOR THE DEFENDANTS-PETITIONERS ADMITTED ONLY ITS
EXISTENCE BUT NOT ITS CONTENTS." 5

The third issue was raised by the petitioners for the first time with the Court of Appeals. They claim that the
complaint should have been dismissed because private respondents failed to implead the heirs of Ceferino and
Catalino who died in 1983 and 1990, respectively, in their complaint as indispensable parties. We do not agree.
6

A careful reading of the "Kasulatan ng Bilihang Patuluyan" which is a private document, not having been duly
notarized, shows that only the share of Emilia in the subject property was sold because Benjamin did not sign the
document and the shares of Ceferino and Catalino were not subject of the sale. Pertinent portions of the document
read as follows:

"KASULATAN NG BILIHANG PATULUYAN

"PANIWALAAN NG LAHAT:

"Kaming mag-iinang Emilia Micking Vda. Coronel at Benjamin M. Coronel kapwa may sapat na gulang, Pilipino,
naninirahan sa nayon ng Sta. Monica, Hagonoy, Bulacan, sa kasulatang ito ay malaya naming:

"P I N A T U T U N A Y A N
"Na, kami ay tunay na nagmamay-ari ng isang lagay na lupang Bakuran na minana namin sa aming Lolong
yumaong Mauricio Coronel, na ang ayos, takal at kalagayan ay ang sumusunod:

"ORIGINAL CERTIFICATE OF TITLE NO. 5737

"Bakuran sa nayon ng Sta. Monica, Hagonoy, Bulacan na may sukat na 416 Square Meters ang kabuuan 208
Square Meters Lot A-1 ang kalahati nito na kanilang ipinagbibili.

"x x x x x x x x x

"Na, dahil at alang-alang sa halagang DALAWAMPU’T LIMANG LIBONG PISO (₱25,000) salaping Pilipino, na
aming tinanggap sa kasiyahang loob namin, buhat sa mag-asawang Jess C. Santos at Prescy Bernardo, kapwa
may sapat na gulang, Pilipino at naninirahan sa nayon ng Sta. Monica, Hagonoy, Bulacan, sa bisa ng kasulatang
ito, ay aming isinasalin, inililipat at ipinagbibili ng bilihang patuluyan ang lahat ng aming dapat na makaparte sa
lupang Bakuran Nakasaad sa dakong unahan nito, sa nabanggit na Jess C. Santos at Prescy Bernardo o sa
kanilang tagapagmana at kahalili.

"Na, ako namang Jess C. Santos, bilang nakabili, ay kusang loob ding nagsasaysay sa kasulatang ito na ako ay
kasangayon sa lahat ng dito’y nakatala, bagaman ang lupang naturan ay hindi pa nahahati sa dapat magmana sa
yumaong Honoria Aguinaldo.

"Na, sa aming kagipitan inari naming ipagbili ang aming karapatan o kaparte na minana sa yumaong Guillermo
Coronel ay napagkasunduan namin mag-iina na ipagbili ang bakurang ito na siyang makalulunas sa aming
pangangailangan x x x."

"Na, kaming nagbili ang magtatanggol ng katibayan sa pagmamayari sa lupang naturan, sakaling may
manghihimasok.

SA KATUNAYAN NITO, kami ay lumagda sa kasulatang ito sa bayan ng Malabon, Rizal ngayong ika-23 ng Abril,
1981.

(Signed) (Signed)
EMILIA MICKING Vda. CORONEL JESS C. SANTOS
Nagbili Nakabili
(Unsigned) (Signed)
BENJAMIN M. CORONEL PRISCILLA BERNARDO
Nagbili Nakabili" 7

Thus, it is clear, as already stated, that petitioner Benjamin did not sign the document and that the shares of
Catalino and Ceferino in the subject property were not sold by them.

Since the shares of Catalino and Ceferino were not sold, plaintiffs Constantino and Buensuceso have no cause of
action against them or against any of their heirs. Under Rule 3, Section 7 of the 1997 Rules of Civil Procedure,
indispensable parties are parties in interest without whom no final determination can be had of an action. In the
present case, the heirs of Catalino and Ceferino are not indispensable parties because a complete determination of
the rights of herein petitioners and respondents can be had even if the said heirs are not impleaded.

Besides, it is undisputed that petitioners never raised before the trial court the issue of the private respondents’
failure to implead said heirs in their complaint. Instead, petitioners actively participated in the proceedings in the
lower court and raised only the said issue on appeal with the Court of Appeals. It is a settled rule that jurisdictional
questions may be raised at any time unless an exception arises where estoppel has supervened. In the present 8

case, petitioners’ participation in all stages of the case during trial, without raising the issue of the trial court’s lack of
jurisdiction over indispensable parties, estops them from challenging the validity of the proceedings therein.

Further, the deed of sale is not a competent proof that petitioner Benjamin had sold his own share of the subject
property. It cannot be disputed that Benjamin did not sign the document and therefore, it is unenforceable against
him.l^vvphi1.net

Emilia executed the instrument in her own behalf and not in representation of her three children.

Article 493 of the Civil Code states:

"Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may
therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when
personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-owners, shall be
limited to the portion which may be allotted to him in the division upon the termination of the co-ownership."

Consequently, the sale of the subject property made by Emilia in favor of Santos and Bernardo is limited to the
portion which may be allotted to her upon the termination of her co-ownership over the subject property with her
children.

As to the first, second and fourth issues – it has been established that at the time of execution of the "Kasulatan ng
Bilihang Patuluyan" on April 23, 1981 , the subject property was co-owned, pro-indiviso, by petitioner Emilia
9

together with her petitioner son Benjamin, and her two other sons, Catalino and Ceferino. No proof was presented
to show that the co-ownership that existed among the heirs of Ceferino and Catalino and herein petitioners has ever
been terminated.

Applying Articles 1317 and 1403 of the Civil Code, the Court of Appeals ruled that through their inaction and silence,
the three sons of Emilia are considered to have ratified the aforesaid sale of the subject property by their mother.

Articles 1317 and 1403 (1) of the Civil Code provide:

"Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by
law a right to represent him.

"A contract entered into in the name of another by one who has no authority or legal representation or who has
acted "beyond his powers shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other contracting party.

"Art. 1403. The following contracts are unenforceable, unless they are ratified:

"(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers.

x x x x x x x x x"

We do not agree with the appellate court. The three sons of Emilia did not ratify the sale. In Maglucot-Aw vs.
Maglucot we held that:
10

"Ratification means that one under no disability voluntarily adopts and gives sanction to some unauthorized act or
defective proceeding, which without his sanction would not be binding on him. It is this voluntary choice, knowingly
made, which amounts to a ratification of what was theretofore unauthorized, and becomes the authorized act of the
party so making the ratification.

No evidence was presented to show that the three brothers were aware of the sale made by their mother. Unaware
of such sale, Catalino, Ceferino and Benjamin could not be considered as having voluntarily remained silent and
knowingly chose not to file an action for the annulment of the sale. Their alleged silence and inaction may not be
interpreted as an act of ratification on their part.

We also find no concrete evidence to show that Ceferino, Catalino and Benjamin benefited from the sale. It is true
that private respondent Constantino testified that Benjamin took money from Jess Santos but this is mere allegation
on the part of Constantino. No other evidence was presented to support such allegation. Bare allegations,
unsubstantiated by evidence, are not equivalent to proof under our Rules of Court. Neither do the records show that
11

Benjamin admitted having received money from Jess Santos. Even granting that Benjamin indeed received money
from Santos, Constantino’s testimony does not show that the amount received was part of the consideration for the
sale of the subject property.
1a\^/phi1.net

To repeat, the sale is valid insofar as the share of petitioner Emilia Meking Vda. de Coronel is concerned. The due
execution of the "Kasulatan ng Bilihang Patuluyan" was duly established when petitioners, through their counsel,
admitted during the pre-trial conference that the said document was signed by Emilia. While petitioners claim that
12

Emilia erroneously signed it under the impression that it was a contract of mortgage and not of sale, no competent
evidence was presented to prove such allegation.

Hence, Jess C. Santos and Priscilla Bernardo, who purchased the share of Emilia, became co-owners of the subject
property together with Benjamin and the heirs of Ceferino and Catalino. As such, Santos and Bernardo could validly
dispose of that portion of the subject property pertaining to Emilia in favor of herein private respondents Constantino
and Buensuceso.
However, the particular portions properly pertaining to each of the co-owners are not yet defined and determined as
no partition in the proper forum or extrajudicial settlement among the parties has been effected among the parties.
Consequently, the prayer of respondents for a mandatory or prohibitory injunction lacks merit.

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are AFFIRMED with the following
MODIFICATIONS:

1. Plaintiffs-private respondents Florentino Constantino and Aurea Buensuceso are declared owners of one-half
(1/2) undivided portion of the subject property plus the one-fourth (¼) undivided share of defendant-petitioner Emilia
Meking Vda. de Coronel; and, defendant-petitioner Benjamin Coronel together with the heirs of Catalino Coronel
and the heirs of Ceferino Coronel are declared owners of one-fourth (¼) share each of the other one-half (1/2)
portion of the subject property, without prejudice to the parties entering into partition of the subject property, judicial
or otherwise.

2. The order of removal of the improvements and the award of the amount of Ten Thousand Pesos (₱10,000.00) as
attorney’s fees and costs of suit are DELETED.

No costs.

SO ORDERED.

G.R. No. 139532 August 9, 2001

REGAL FILMS, INC., petitioner,

vs.
GABRIEL CONCEPCION, respondent.

VITUG, J.:

The case involves a compromise judgment issued by the Regional Trial Court of Quezon City, later affirmed by the
Court of Appeals, and now being assailed in the instant petition for review.

Culled from the records, the facts that led to the controversy would not appear to be in serious dispute.

In 1991, respondent Gabriel "Gabby" Conception, a television artist and movie actor, through his manager Lolita
Solis, entered into a contract with petitioner Regal Films, Inc., for services to be rendered by respondent in
petitioner's motion pictures. Petitioner, in turn, undertook to give two parcels of land to respondent, one located in
Marikina and the other in Cavite, on top of the "talent fees" it had agreed to pay.

In 1993, the parties renewed the contract, incorporating the same undertaking on the part of petitioner to give
respondent on the part of petitioner to give respondent the two parcels of land mentioned in the first agreement.
Despite the appearance of respondent in several films produced by petitioner, the latter failed to comply with its
promise to convey to respondent the two aforementioned lots. 1âwphi1.nêt

On 30 May 1994, respondent and his manager filed an action against petitioner before the Regional Trial Court of
Quezon City, docketed Civil Case No. Q-94-20714 and raffled to Branch 76, for rescission of contract with damages.
In his complaint, respondent contended that he was entitled to rescind the contract, plus damages, and to be
released from further commitment to work exclusively for petitioner owing to the latter's failure to honor the
agreement.

Instead of filing an answer to the complaint, petitioner moved for its dismissal on the allegation that the parties had
settled their differences amicably. Petitioner averred that both parties had executed an agreement, dated 17 June
1994, which was to so operate as an addendum to the 1991 and 1993 contracts between them. The agreement was
signed by a representative of petitioner and by Solis purportedly acting for and in behalf of respondent Concepcion.

The preliminary conference held by the trial court failed to produce a settlement between the parties; thereupon, the
trial court ordered Solis and respondent to comment on petitioner's motion to dismiss.

On 30 September 1994, Solis filed a motion to dismiss the complaint reiterating that she, acting for herself and for
respondent Concepcion, had already settled the case amicably with petitioner. On 17 October 1994, respondent
Concepcion himself opposed the motion to dismiss contending that the addendum, containing provisions grossly
disadvantageous to him, was executed without his knowledge and consent. Respondent stated that Solis had since
ceased to be his manager and had to authority to sign the addendum for him.

During the preliminary conference held on 23 June 1995, petitioner intimated to respondent and his counsel its
willingness to allow respondent to be released from his 1991 and 1993 contracts with petitioner rather than to further
pursue the addendum which respondent had challenged.

On 03 July 1995, respondent filed a manifestation with the trial court to the effect that he was now willing to honor
the addendum to the 1991 and 1993 contracts and to have it considered as compromise agreement as to warrant a
judgment in accordance therewith. The manifestation elicited a comment from both petitioner and Solis to the effect
that the relationship between the parties had by then become strained, following the notorious Manila Film Festival
scam involving respondent, but that it was still willing to release respondent from his contract.

On 24 October 1995, the trial court issued an order rendering judgment on compromise based on the
subject addendum which respondent had previously challenged but later agreed to honor pursuant to his
manifestation of 03 July 1995.

Petitioner moved for reconsideration; having been denied, it then elevated the case to the Court of Appeals arguing
that the trial court erred in treating the addendum of 17 June 1994 as being a compromise agreement and in
depriving it of its right to procedural due process.

On 30 July 1999, the appellate court rendered judgment affirming the order of the trial court of 24 October 1995; it
ruled:

"In the instant case, there was an Addendum to the contract signed by Lolita and Regal Films'
representative to which addendum Concepcion through his Manifestation expressed his conformity. There
was, therefore, consent of all the parties.

"The addendum/compromise agreement was perfected and is binding on the parties and may not later be
disowned simply because of a change of mind of Regal Films and/or Lolita by claiming, in their
Opposition/Reply to Conception's Manifestion, that after the 1995 Metro Manila Films Festival scam/fiasco in
which Concepcion was involved, the relationship between the parties had become bitter to render
compliance with the terms and conditions of the Addendum no longer possible and consequently release
Concepcion from the 1991 and 1993 contracts." 1

Dissatisfied, petitioner appealed to this Court claiming in its petition for review that –

"I.

THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURT'S ACTION IN RENDERING
JUDGMENT ON A COMPROMISE BASED ON THE ADDENDUM WHEN PETITIONER REGAL FILMS
SUBMITTED THIS DOCUMENT TO THE TRIAL COURT MERELY TO SERVE AS BASIS FOR ITS
MOTION TO DISMISS;

"II.
 THE COURT OF APPEALS ERRED IN RENDERING JUDGMENT ON A COMPROMISE WHEN THE
PARTIES DID NOT AGREE TO SUCH A COMPROMISE;

"III.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE MINDS OF THE PARTIES HAD MET TO
ELEVATE THE PREVIOUSLY REJECTED ADDENDUM TO THE LEVEL OF A JUDGMENT ON A
COMPROMISE." 2

The petition is meritorious.

Petitioner argues that the subject addendum could not be the basis of the compromise judgment. The Court agrees.

A compromise is an agreement between two or more persons who, for preventing or putting an end to a lawsuit,
adjust their respective positions by mutual consent in the way they feel they can live with. Reciprocal concessions
are the very heart and life of every compromise agreement, where each party approximates and concedes in the
3

hope of gaining balanced by the danger of losing. It is, in essence, a contract. Law and jurisprudence recite three
4

minimum elements for any valid contract – (a) consent; (b) object certain which is the subject matter of the contract;
and (c) cause of the obligation which is established. Consent is manifested by the meeting of the offer and cause
5

which are to constitute the agreement. The offer, however, must be certain and the acceptance seasonable and
absolute; if qualified, the acceptance would merely constitute a counter-offer.6

In this instance, the addendum was flatly rejected by respondent on the theses (a) that he did not give his consent
thereto nor authorized anyone to enter into the agreement, and (b) that it contained provisions grossly
disadvantageous to him. The outright rejection of the addendum made known to the other ended the offer. When
respondent later filed his Manifestation, stating that he was, after all, willing to honor the addendum, there was
nothing to still accept.

Verily, consent could be given not only by the part himself but by anyone duly authorized and acting for and in his
behalf. But by respondent's own admission, the addendum was entered into without his knowledge and consent. A
contract entered into in the name of another by one who ostensibly might have but who, in reality, had no real
authority or legal representation, or who, having such authority, acted beyond his powers, would be
unenforceable. The addendum, let us then assume, resulted in an unenforceable contract, might it not then be
7

susceptible to ratification by the person on whose behalf it was executed? The answer would obviously be in the
affirmative; however, that ratification should be made before its revocation by the other contracting party. The 8

adamant refusal of respondent to accept the terms of the addendum constrained petitioner, during the preliminary
conference held on 23 June 1995, to instead express its willingness to release respondent from his contracts prayed
for in his complaint and to thereby forego the rejected addendum. Respondent's subsequent attempt to ratify
the addendum came much too late for, by then, the addendum had already been deemed revoked by petitioner.

WHEREFORE, the petition is GRANTED, and the appealed judgment of the Court of the appealed judgment of the
Court of Appeals affirming that of the trial court is SET ASIDE, and the case is remanded to the trial court for further
proceedings. No costs.

SO ORDERED. 1âwphi1.nêt

[G.R. Nos. L-33819 and L-33897. October 23, 1982.]

NATIONAL POWER CORPORATION, Plaintiff-Appellant, v. NATIONAL MERCHANDISING

CORPORATION and DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES, Defendants-
Appellants.

The Solicitor General, for Plaintiff-Appellant.

Sycip, Salazar, Luna Manalo & Feliciano, for Defendants-Appellants.

SYNOPSIS

Plaintiff-appellant National Power Corporation (NPC) and defendant- appellant National Merchandising
Corporation (NAMERCO), the Philippine representative of New York-based International Commodities
Corporation, executed a contract of sale of sulfur with a stipulation for liquidated damages in case of
breach. Defendant-appellant Domestic Insurance Company executed a performance bond in favor of
NPC to guarantee the seller’s obligation. In entering into the contract, Namerco, however, did not
disclose to NPC that Namerco’s principal, in a cabled instruction, stated that the sale was subject to
availability of a steamer, and contrary to its principal’s instruction, Namerco agreed that non-
availability of a steamer was not a justification for non-payment of liquidated damages. The New
York supplier was not able to deliver the sulfur due to its inability to secure shipping space.
Consequently, the Government Corporate Counsel rescinded the contract of sale due to the supplier’s
non-performance of its obligations, and demanded payment of liquidated damages from both
Namerco and the surety. Thereafter, NPC sued for recovery of the stipulated liquidated damages.
After trial, the Court of First Instance rendered judgment ordering defendants-appellants to pay
solidarity to the NPC reduced liquidated damages with interest.

The Supreme Court held that Namerco is liable fur damages because under Article 1897 of the Civil
Code the agent who exceeds the limits of his authority without giving the party with whom he
contracts sufficient notice of his powers is personally liable to such party. The Court, however, further
reduced the solidary liability of defendants-appellants for liquidated damages.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; AGENCY; AN AGENT WHO EXCEEDS THE LIMITS OF
HIS AUTHORITY IS PERSONALLY LIABLE. — Under Article 1897 of the Civil Code the agent who
exceeds the limits of his authority without giving the party with whom he contracts sufficient notice
of his powers is personally liable to such party.

2. ID.; ID.; ID.; ID.; CASE AT BAR. — In the present case, Namerco, the agent of a New York-based
principal, entered into a contract of sale with the National Power Corporation without disclosing to the
NPC the limits of its powers and, contrary to its principal’s prior cabled instructions that the sale
should be subject to availability of a steamer, it agreed that non-availability of a steamer was not a
justification for nonpayment of the liquidated damages. Namerco. therefore, is liable for damages.

3. ID.; ID.; ID.; THE RULE THAT EVERY PERSON DEALING WITH AN AGENT IS PUT UPON AN
INQUIRY AND MUST DISCOVER UPON HIS PERIL THE AUTHORITY OF THE AGENT IS NOT
APPLICABLE WHERE THE AGENT, NOT THE PRINCIPAL, IS SOUGHT TO BE HELD LIABLE ON THE
CONTRACT. — The rule that every person dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent would apply only in cases where the principal is
sought to be held liable on the contract entered into by the agent. The said rule is not applicable in
the instant case since it is the agent, not the principal, that is sought to be held liable on the contract
of sale which was expressly repudiated by the principal because the agent took chances, it exceeded
its authority and, in effect. it acted in its own name.

4. ID.; ID.; ID.; THE CONTRACT ENTERED INTO BY AN AGENT WHO ACTED BEYOND HIS POWERS IS
UNENFORCEABLE ONLY AS AGAINST THE PRINCIPAL BUT NOT AGAINST THE AGENT AND ITS
SURETY. — Article 1403 of the Civil Code which provides that a contract entered into in the name of
another person by one who has acted beyond his powers is unenforceable, refers to the
unenforceability of the contract against the principal. In the instant case, the contract containing the
stipulation for liquidated damages is not being enforced against its principal but against the agent
and its surety. It being enforced against the agent because Article 1897 implies that the agent who
acts in excess of his authority is personally liable to the party with whom he contracted. And that rule
is complimented by Article 1898 of the Civil Code which provides that "if the agent contracts, in the
name of the principal, exceeding the scope of his authority, and the principal does not ratify the
contract, it shall be void if the party with whom the agent contracted is aware of the limits of the
powers granted by the principal." Namerco never disclosed to the NPC the cabled or written
instructions of its principal. For that reason and because Namerco exceeded the limits of its
authority, it virtually acted in its own name and not as agent and it is, therefore, bound by the
contract of sale which, however, it not enforceable against its principal. If, as contemplated in
Articles 1897 and 1898, Namerco is bound under the contract of sale, then it follows that it is bound
by the stipulation for liquidated damages in that contract.

5. ID.; ID.; ID.; THE LIABILITY OF AN AGENT WHO EXCEEDS THE LIMITS OF HIS AUTHORITY IS
BASED ON CONTRACT AND NOT ON TORT OR QUASI-DELICT; CASE AT BAR. — Defendant’s
contention that Namerco’s liability should be based on tort or quasi-delict, as held in some American
cases, like Mendelson v. Holton, 149 N.E. 38,42 ACR 1307, is not well-taken. As correctly argued by
the NPC, it would be unjust and inequitable for Namerco to escape liability of the contract after it had
deceived the NPC by not disclosing the limits of its powers and entering into the contract with
stipulations contrary to its principal’s instructions.
6. ID.; ID.; ID.; LIABILITY OF THE SURETY ON THE OBLIGATION CONTRACTED BY AN AGENT WHO
EXCEEDED HIS AUTHORITY IS NOT AFFECTED THEREBY. — The contention of the defendants that
the Domestic Insurance Company is not liable to the NPC because its bond was posted, not to
Namerco, the agent, but for the New York firm which is not liable on the contract of sale, cannot be
sustained because it was Namerco that actually solicited the bond from the Domestic Insurance
Company and, Namerco is being held liable under the contract of sale because it virtually acted in its
own name. In the last analysis, the Domestic Insurance Company acted as surety for Namerco. The
rule is that "want of authority of the person who executes an obligation as the agent or
representative of the principal will not, as a general rule, affect the surety thereon, especially in the
absence of fraud, even though the obligation is not binding on the principal." (72 C.J.S. 525).

7. CIVIL LAW; DAMAGES; IMPOSITION OF INTEREST THEREON NOT WARRANTED WHERE THE
DISPOSITION OF THE CASE HAS BEEN DELAYED DUE TO NO FAULT OF DEFENDANTS. — With
respect to the imposition of the legal rate of interest on the damages from the filing of the complaint
in 1957, or a quarter of a century ago, defendant’s contention that interest should not be collected
on the amount of damages is meritorious. It should be manifestly iniquitous to collect interest on the
damages especially considering that the disposition of this case has been considerably delayed due to
no fault of the defendants

8. ID.; ID.; LIQUIDATED DAMAGES; NO PROOF OF PECUNIARY LOSS IS REQUIRED FOR RECOVERY
THEREOF. — No proof of pecuniary lost is required for the recovery of liquited damages. The
stipulatian for liquidated damages is intended to obviate controversy on the amount of damages.
There can be no question that the NPC suffered damages because its production of fertilizer was
disrupted or diminished by reason of the non-delivery of the sulfur. The parties foresaw that it might
be difficult to ascertain the exact amount of damages for non-delivey of the sulfur. So, they fixed the
liquidated damages to be paid as indemnity to the NPC.

9. ID.; ID.; NOMINAL DAMAGES; NOT A CASE OF. — Nominal damages are damages in name only or
are in fact the same as no damages (25 C.J.S. 466). It would not be correct to hold in this case that
the NPC suffered damages in name only or that the breach of contract "as merely technical in
character since the NPC suffered damages because its production of fertilizer "as disrupted or
diminished by reason of the non-delivery of the sulfur.

DECISION

AQUINO, J.:

This case is about the recovery of liquidated damages from a seller’s agent that allegedly exceeded
its authority in negotiating the sale.

Plaintiff National Power Corporation appealed on questions of law from the decision of the Court of
First Instance of Manila dated October 10, 1966, ordering defendants National Merchandising
Corporation and Domestic Insurance Company of the Philippines to pay solidarily to the National
Power Corporation reduced liquidated damages in the sum of P72,114.66 plus legal, rate of interest
from the filing of the complaint and the costs (Civil Case No. 33114).

The two defendants appealed from the same decision allegedly because it is contrary to law and the
evidence. As the amount originally involved is P360,572.80 and defendants’ appeal is tied up with
plaintiff’s appeal on questions of law, defendants’ appeal can be entertained under Republic Act No.
2613 which amended section 17 of the Judiciary Law.

On October 17, 1956, the National Power Corporation and National Merchandising Corporation
(Namerco) of 3111 Nagtahan Street, Manila, as the representative of the International Commodities
Corporation of 11 Mercer Street, New York City (Exh. C), executed in Manila a contract for the
purchase by the NPC from the New York firm of four thousand long tons of crude sulfur for its Maria
Cristina Fertilizer Plant in Iligan City at a total price of (450,716 (Exh. E).

On that same date, a performance bond in the sum of P90,143.20 was executed by the Domestic
Insurance Company in favor of the NPC to guarantee the seller’s obligations (Exh. F).

It was stipulated in the contract of sale that the seller would deliver the sulfur at Iligan City within
sixty days from notice of the establishment in its favor of a letter of credit for $212,120 and that
failure to effect delivery would subject the seller and its surety to the payment of liquidated damages
at the rate of two-fifth of one percent of the full contract price for the first thirty days of default and
four-fifth of one percent for every day thereafter until complete delivery is made (Art. 8, p. 111,
Defendants’ Record on Appeal).

In a letter dated November 12, 1956, the NPC advised John Z. Sycip, the president of Namerco, of
the opening on November 8 of a letter of credit for $212,120 in favor of International Commodities
Corporation which would expire on January 31, 1957 (Exh. I). Notice of that letter of credit was,
received by cable by the New York firm on November 15, 1956 (Exh. 80-Wallick). Thus, the deadline
for the delivery of the sulfur was January 15, 1957.

The New York supplier was not able to deliver the sulfur due to its inability to secure shipping space.
During the period from January 20 to 26, 1957 there was a shutdown of the NPC’s fertilizer plant
because there was no sulfur. No fertilizer was produced (Exh. K).

In a letter dated February 27, 1957, the general manager of the NPC advised Namerco and the
Domestic Insurance Company that under Article 9 of the contract of sale "non-availability of bottom
or vessel" was not a fortuitous event that would excuse non-performance and that the NPC would
resort to legal remedies to enforce its rights (Exh. L and M).

The Government Corporate Counsel in his letter to Sycip dated May 8, 1957 rescinded the contract of
sale due to the New York supplier’s non-performance of its obligations (Exh. G). The same counsel in
his letter of June 8, 1957 demanded from Namerco the payment of P360,572.80 as liquidated
damages. He explained that time was of the essence of the contract. A similar demand was made
upon the surety (Exh. H and H-1).

The liquidated damages were computed on the basis of the 115-day period between January 15,
1957, the deadline for the delivery of the sulfur at Iligan City, and May 9, 1957 when Namerco was
notified of the rescission of the contract, or P54,085.92 for the first thirty days and P306,486.88 for
the remaining eighty-five days. Total: P360,572.80.

On November 5, 1957, the NPC sued the New York firm, Namerco and the Domestic Insurance
Company for the recovery of the stipulated liquidated damages (Civil Case No. 33114).

The trial court in its order of January 17, 1958 dismissed the case as to the New York firm for lack of
jurisdiction because it was not doing business in the Philippines (p. 60, Defendants Record on
Appeal).

On the other hand, Melvin Wallick, as the assignee of the New York corporation and after the latter
was dropped as a defendant in Civil Case No. 33114, sued Namerco for damages in connection with
the same sulfur transaction (Civil Case No. 37019). The two cases, both filed in the Court of First
Instance of Manila, were consolidated. A joint trial was held. The lower court rendered separate
decisions in the two cases on the same date.

In Civil Case No. 37019, the trial court dismissed Wallick’s action for damages against Namerco
because the assignment in favor of Wallick was champertous in character. Wallick appealed to this
Court. The appeal was dismissed because the record on appeal did not disclose that the appeal was
perfected on time (Res. of July 11, 1972 in L-33893).In this Civil Case No. 33114, although the
records on appeal were approved in 1967, inexplicably, they were elevated to this Court in 1971.
That anomaly initially contributed to the delay in the adjudication of this case.

Defendants’ appeal L-33819. — They contend that the delivery of the sulfur was conditioned on the
availability of a vessel to carry the shipment and that Namerco acted within the scope of its authority
as agent in signing the contract of sale.

The documentary evidence belies these contentions. The invitation to bid issued by the NPC provides
that non-availability of a steamer to transport the sulfur is not a ground for non-payment of the
liquidated damages in case of non-performance by the seller.

"4. Responsibility for availability of vessel. — The availability of vessel to transport the quantity of
sulfur within the time specified in item 14 of this specification shall be the responsibility of the bidder.
In case of award of contract, failure to ship on time allegedly due to non-availability of vessels shall
not exempt the Contractor from payment of liquidated damages provided in item 15 of this
specification."
cralaw virtua1aw library
"15. Liquidated damages. — . . .

"Availability of vessel being a responsibility of the Contractor as specified in item 4 of this

specification, the terms ‘unforeseeable causes beyond the control and without the fault or negligence
of the Contractor’ and ‘force majeure’ as used herein shall not be deemed to embrace or include lack
or nonavailability of bottom or vessel. It is agreed that prior to making his bid, a bidder shall have
made previous arrangements regarding shipments within the required time. It is clearly understood
that in no event shall the Contractor be exempt from the payment of liquidated damages herein
specified for reason of lack of bottom or vessel. Lack of bottom or nonavailability of vessel shall, in
no case, be considered as a ground for extension of time. . . . ." cralaw virtua1aw library

Namerco’s bid or offer is even more explicit. It provides that it was "responsible for the availability of
bottom or vessel" and that it "guarantees the availability of bottom or vessel to ship the quantity of
sulfur within the time specified in this bid" (Exh. B, p. 22, Defendants’ Record on Appeal).

In the contract of sale itself item 15 of the invitation to bid is reproduced in Article 9 which provides
that "it is clearly understood that in no event shall the seller be entitled to an extension of time or be
exempt from the payment of liquidated damages herein specified for reason of lack of bottom or
vessel" (Exh. E, p. 36, Record on Appeal).

It is true that the New York corporation in its cable to Namerco dated August 9, 1956 stated that the
sale was subject to availability of a steamer (Exh. N). However, Namerco did not disclose that cable
to the NPC and, contrary to its principal’s instruction, it agreed that nonavailability of a steamer was
not a justification for nonpayment of the liquidated damages.

The trial court rightly concluded that Namerco acted beyond the bounds of its authority because it
violated its principal’s cabled instructions (1) that the delivery of the sulfur should be "C & F Manila",
not "C & F Iligan City" ; (2) that the sale be subject to the availability of a steamer and (3) that the
seller should be allowed to withdraw right away the full amount of the letter of credit and not merely
eighty percent thereof (pp- 123-124, Record on Appeal).

The defendants argue that it was incumbent upon the NPC to inquire into the extent of the agent’s
authority and, for its failure to do so, it could not claim any liquidated damages which, according to
the defendants, were provided for merely to make the seller more diligent in looking for a steamer to
transport the sulfur.

The NPC counter-argues that Namerco should’ have advised the NPC of the limitations on its
authority to negotiate the sale.

We agree with the trial court that Namerco is liable for damages because under article 1897 of the
Civil Code the agent who exceeds the limits of his authority without giving the party with whom he
contracts sufficient notice of his powers is personally liable to such party.

The truth is that even before the contract of sale was signed Namerco was already aware that its
principal was having difficulties in booking shipping space. In a cable dated October 16, 1956, or one
day before the contract of sale was signed, the New York supplier advised Namerco that the latter
should not sign the contract unless it (Namerco) wished to assume sole responsibility for the
shipment (Exh. T).

Sycip, Namerco’s president, replied in his letter to the seller dated also October 16, 1956, that he
had no choice but to finalize the contract of sale because the NPC would forfeit Namerco’s bidder’s
bond in the sum of P45,100 posted by the Domestic Insurance Company if the contract was not
formalized (Exh. 14, 14-A and Exh. V).

Three days later, or on October 19, the New York firm cabled Namerco that the firm did not consider
itself bound by the contract of sale and that Namerco signed the contract on its own responsibility
(Exh. W).

In its letters dated November 8 and 19, 1956, the New York corporation informed Namerco that since
the latter acted contrary to the former’s cabled instructions, the former disclaimed responsibility for
the contract and that the responsibility for the sale rested on Namerco (Exh. Y and Y-1).

The letters of the New York firm dated November 26 and December 11, 1956 were even more
revealing. It bluntly told Namerco that the latter was never authorized to enter into the contract and
that it acted contrary to the repeated instructions of the former (Exh. U and Z). Said the vice-
president of the New York firm to Namerco: chanrobles virtual lawlibrary

"As we have pointed out to you before, you have acted strictly contrary to our repeated instructions
and, however regretfully, you have no one but yourselves to blame." cralaw virtua1aw library

The rule relied upon by the defendants-appellants that every person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the agent would apply in this case if
the principal is sought to be held liable on the contract entered into by the agent.

That is not so in this case. Here, it is the agent that it sought to be held liable on a contract of sale
which was expressly repudiated by the principal because the agent took chances, it exceeded its
authority, and, in effect, it acted in its own name.

As observed by Castan Tobeñas, an agent "que haya traspasado los limites dew mandato, lo que
equivale a obrar sin mandato" (4 Derecho Civil Español, 8th Ed., 1956, p. 520).

As opined by Olivieri, "si el mandante contesta o impugna el negocio juridico concluido por el
mandatario con el tercero, aduciendo el exceso de los limites impuestos, es justo que el mandatario,
que ha tratado con engaño al tercero, sea responsable personalmente respecto de el des las
consecuencias de tal falta de aceptacion por parte del mandate. Tal responsabilidad del mandatario
se informa en el principio de la falta de garantia de la existencia del mandato y de la cualidad de
mandatario, garantia impuesta coactivamente por la ley, que quire que aquel que contrata como
mandatario este obligado a garantizar al tercero la efectiva existencia de los poderes que afirma se
halla investido, siempre que el tercero mismo sea de buena fe. Efecto de tal garantia es el
resarcimiento de los daños causados al tercero como consecuencia de la negativa del mandante a
reconocer lo actuado por el mandatario." (26, part II, Scaveola, Codigo Civil, 1951, pp. 358-9).

Manresa says that the agent who exceeds the limits of his authority is personally liable "porque
realmente obra sin poderes" and the third person who contracts with the agent in such a case would
be defrauded if he would not be allowed to sue the agent (11 Codigo Civil, 6th Ed., 1972, p. 725).

The defendants also contend that the trial court erred in holding as enforceable the stipulation for
liquidated damages despite its finding that the contract was executed by the agent in excess of its
authority and is, therefore, allegedly unenforceable.

In support of that contention, the defendants cite article 1403 of the Civil Code which provides that a
contract entered into in the name of another person by one who has acted beyond his powers is
unenforceable.

We hold that defendants’ contention is untenable because article 1403 refers to the unenforceability
of the contract against the principal. In the instant case, the contract containing the stipulation for
liquidated damages is not being enforced against it principal but against the agent and its surety.

It is being enforced against the agent because article 1807 implies that the agent who acts in excess
of his authority is personally liable to the party with whom he contracted.

And that rule is complemented by article 1898 of the Civil Code which provides that "if the agent
contracts in the name of the principal, exceeding the scope of his authority, and the principal does
not ratify the contract, it shall be void if the party with whom the agent contracted is aware of the
limits of the powers granted by the principal."

It is being enforced against the agent because article 1897 implies that the agent who acts in excess
of his authority is personally liable to the party with whom he contracted.

And the rule is complemented by article 1898 of the Civil Code which provides that "if the agent
contracts in the name of the principal, exceeding the scope of his authority, and the principal does
not ratify the contract, it shall be void if the party with whom the agent contracted is aware of the
limits of the powers granted by the principal."

As priorly discussed, namerco, as agent, exceeded the limits of its authority in contracting with the
NPC in the name of its principal. The NPC was unaware of the limitations on the powers granted by
the New York firm to Namerco. chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

The New York corporation in its letter of April 26, 1956 said: jgc:chanrobles.com.ph
"We hereby certify that National Merchandising Corporation . . . are our exclusive representatives in
the Philippines for the sale of our products.

"Furthermore, we certify that they are empowered to present our offers in our behalf in accordance
with our cabled or written instructions." (Exh. C).

Namerco never disclosed to the NPC the cabled or written instructions of its principal. For that reason
and because Namerco exceeded the limits of its authority, it virtually acted in its own name and not
as agent and it is, therefore, bound by the contract of sale which, however, is not enforceable against
its principal.

If, as contemplated in articles 1897 and 1898, Namerco is bound under the contract of sale, then it
follows that it is bound by the stipulation for liquidated damages in that contract.

Defendants’ contention that Namerco’s liability should be based on tort or quasi-delict, as held in
some American cases, like Mendelsohn v. Holton, 149 N.E. 38, 42 ALR 1307, is not well-taken. As
correctly argued by the NPC, it would be unjust and inequitable for Namerco to escape liability after it
had deceived the NPC.

Another contention of the defendants is that the Domestic Insurance Company is not liable to the
NPC because its bond was posted, not for Namerco, the agent, but for the New York firm which is not
liable on the contract of sale.

That contention cannot be sustained because it was Namerco that actually solicited the bond from
the Domestic Insurance Company and, as explained already, Namerco is being held liable under the
contract of sale because it virtually acted in its own name. It became the principal in the performance
bond. In the last analysis, the Domestic Insurance Company acted as surety for Namerco.

The rule is that "want of authority of the person who executes an obligation as the agent or
representative of the principal will not, as a general rule, affect the surety’s liability thereon,
especially in the absence of fraud, even though the obligation is not binding on the principal" (72
C.J.S. 525).

Defendants’ other contentions are that they should be held liable only for nominal damages, that
interest should not be collected on the amount of damages and that the damages should be
computed on the basis of a forty-five day period and not for a period of one hundred fifteen days.

With respect to the imposition of the legal rate of interest on the damages from the filing of the
complaint in 1957, or a quarter of a century ago, defendants’ contention is meritorious. It would be
manifestly inequitable to collect interest on the damages especially considering that the disposition of
this case has been considerably delayed due to no fault of the defendants.

The contention that only nominal damages should be adjudged is contrary to the intention of the
parties (NPC, Namerco and its surety) because it is clearly provided that liquidated damages are
recoverable for delay in the delivery of the sulfur and, with more reason, for nondelivery.

No proof of pecuniary loss is required for the recovery of liquidated damages. the stipulation for
liquidated damages is intended to obviate controversy on the amount of damages. There can be no
question that the NPC suffered damages because its production of fertilizer was disrupted or
diminished by reason of the nondelivery of the sulfur. chanrobles.com.ph : virtual law library

The parties foresaw that it might be difficult to ascertain the exact amount of damages for
nondelivery of the sulfur. So, they fixed the liquidated damages to be paid as indemnity to the NPC.

On the other hand, nominal damages are damages in name only or are in fact the same as no
damages (25 C.J.S. 466). It would not be correct to hold in this case that the NPC suffered damages
in name only or that the breach of contract was merely technical in character.

As to the contention that the damages should be computed on the basis of forty-five days, the period
required by a vessel leaving Galveston, Texas to reach Iligan City, that point need not be resolved in
view of our conclusion that the liquidated damages should be equivalent to the amount of the
bidder’s bond posted by Namerco.

NPC’s appeal, L-33897. — The trial court reduced the liquidated damages to twenty percent of the
stipulated amount. the NPC contends the it is entitled to the full amount of liquidated damages in the
sum of P360,572.80.

In reducing the liquidated damages, the trial court relied on article 2227 of the Civil Code which
provides that "liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable."

Apparently, the trial court regarded as an equitable consideration the persistent efforts of Namerco
and its principal to charter a steamer and that the failure of the New York firm to secure shipping
space was not attributable to its fault or negligence.

The trial court also took into account the fact that the selling price of the sulfur was P450,716 and
that to award as liquidated damages more than eighty percent of the price would not be altogether
reasonable.

The NPC contends that Namerco was an obligor in bad faith and, therefore, it should be responsible
for all damages which could be reasonably attributed to its nonperformance of the obligation as
provided in article 2201 of the Civil Code.

On the other hand, the defendants argue that Namerco having acted as a mere agent, was not liable
for the liquidated damages stipulated in the alleged unenforceable contract of sale; that, as already
noted, Namerco’s liability should be based on tort or quasi-delict and not on the contract of sale; that
if Namerco is not liable, then the insurance company, its surety, is likewise not liable; that the NPC is
entitled only to nominal damages because it was able to secure the sulfur from another source (58-
59 tsn November 10, 1960) and that the reduced award of stipulated damages is highly iniquitous,
considering that Namerco acted in good faith and that the NPC did not suffer any actual damages. chanrobles law library : red

These contentions have already been resolved in the preceding discussion. We find no sanction or
justification for NPC’s claim that it is entitled to the full payment of the liquidated damages computed
by its official.

Ruling on the amount of damages. — A painstaking evaluation of the equities of the case in the light
of the arguments of the parties as expounded in their five briefs leads to the conclusion that the
damages due from the defendants should be further reduced to P45,100 which is equivalent to their
bidder’s bond or to about ten percent of the selling price of the sulfur.

WHEREFORE, the lower court’s judgment is modified and defendants National Merchandising
Corporation and Domestic Insurance Company of the Philippines are ordered to pay solidarily to the
National Power Corporation the sum of P45,100.00 as liquidated damages. No costs.

SO ORDERED.

G.R. No. 132474 November 19, 1999

RENATO CENIDO (deceased), represented by VICTORIA CENIDOSA, petitioner,

vs.
SPOUSES AMADEO APACIONADO and HERMINIA STA. ANA, respondents.

PUNO, J.:

In this petition for review, petitioner Renato Cenido seeks to reverse and set aside the decision of the Court of
Appeals in CA-G.R. CV No. 41011 which declared the private respondents as the owners of a house and lot in
1

Binangonan, Rizal. 2

The antecedent facts are as follows:

On May 22, 1989, respondent spouses Amadeo Apacionado and Herminia Sta. Ana filed with the Regional Trial
Court, Branch 70, Rizal a complaint against petitioner Renato Cenido for, "Declaration of Ownership, Nullity, with
Damages." The spouses alleged that: (1) they are the owners of a parcel of unregistered land, 123 square meters
3

in area and located at Rizal Street, Barrio Layunan, Binangonan, Rizal, more particularly described as follows:

. . . that certain parcel of land located at Rizal, St., Layunan, Binangonan, Rizal, with an area of 123
square meters, more or less, bounded on the North by Gavino Aparato; on the East by Rizal St., on
the South by Tranquilino Manuzon; and on the West by Simplicio Aparato, and the residential house
standing thereon. 4

(2) this house and lot were purchased by the spouses from its previous owner, Bonifacio Aparato, now
deceased, who lived under the spouses' care and protection for some twenty years prior to his death; (3)
while he was alive, Bonifacio Aparato mortgaged the said property twice, one to the Rural Bank of
Binangonan and the other to Linda C. Ynares, as security for loans obtained by him; (4) the loans were paid
off by the spouses thereby securing the release and cancellation of said mortgages; (5) the spouses also
paid and continue to pay the real estate taxes on the property; (6) from the time of sale, they have been in
open, public, continuous and uninterrupted possession of the property in the concept of owners; (7) that on
January 7, 1987, petitioner Renato Cenido, claiming to be the owner of the subject house and lot, filed a
complaint for ejectment against them with the Municipal Trial Court, Branch 2, Binangonan, Rizal; (8)
through fraudulent and unauthorized means, Cenido was able to cause the issuance in his name of Tax
Declaration No. 02-0368 over the subject property, which fact the spouses learned only upon the filing of the
ejectment case; (9) although the ejectment case was dismissed by the Municipal Trial Court (MTC), Branch
2, the tax declaration in Cenido's name was not cancelled and still subsisted; (10) the spouses have referred
the matter to the barangay for conciliation but Cenido unjustifiably refused to appear thereat. The spouses
thus prayed that:

WHEREFORE, it is respectfully prayed of the Honorable Court that judgment issue in the case:

1. Declaring them (plaintiffs) the true and absolute owners of the house and lot now covered by Tax
Declaration No. 02-0368;

2. Declaring Tax Declaration No. 02-0368 in the name of defendant Renato Cenido as null and void
and directing the Provincial Assessor of Rizal and the Municipal Assessor of Binangonan, Rizal to
register and to declare the house and lot covered by the same in their names (plaintiffs) for purposes
of taxation;

3. Ordering defendant to pay them in the least amount of P50,000.00 as and for moral damages
suffered;

4. Ordering defendant to pay them the amount of P10,000.00 as and for attorney's fees;

5. Ordering payment by defendant of exemplary damages in such amount which the Honorable
Court may deem just and equitable in the premises;

6. Ordering defendant to pay the costs of suit; and

Plaintiffs pray for such other and further relief which the Honorable Court may deem just and
equitable considering the foregoing premises. 5

Petitioner Cenido answered claiming that: (1) he is the illegitimate son of Bonifacio Aparato, the deceased owner of
the subject property; (2) as Aparato's sole surviving heir, he became the owner of the property as evidenced by the
cancellation of Tax Declaration No. 02-0274 in Bonifacio's name and the issuance of Tax Declaration No. 02-0368
in his name; (3) his ownership over the house and lot was also confirmed in 1985 by the Municipal Trial Court,
Branch 1, Binangonan in Case No. 2264 which "adjudicated various claims involving the same subject property
wherein plaintiffs were privy to the said case;" (4) that in said case, the Apacionado spouses participated in the
execution of the compromise agreement partitioning the deceased's estate among his heirs, which agreement was
adopted by the Municipal Trial Court as its judgment; (5) that the Apacionado spouses were allowed to stay in his
father's house temporarily; (6) the mortgages on the property were obtained by his father upon request of the
Apacionados who used the proceeds of the loans exclusively for themselves; (7) the real estate taxes or the
property were paid for by his father, the principal, and the spouses were merely his agents; (8) the instrument
attesting to the alleged sale of the house and lot by Bonifacio Aparato to the spouses is not a public document; (8)
petitioner Cenido was never summoned to appear before the barangay for conciliation proceedings. 6

Respondent spouses replied that: (1) Cenido is not the illegitimate son of Bonifacio, Cenido's claim of paternity
being spurious; (2) the ownership of the property was not the proper subject in Civil Case No. 2264 before the MTC,
Branch I, nor were the spouses parties in said case. 7
The parties went to trial. Respondent spouses presented four (4) witnesses, namely, respondent Herminia Sta. Ana
Apacionado; Rolando Nieves, the barangay captain; Norberto Aparato the son of Gavino Aparato, Bonifacio's
brother; and Carlos Inabayan, one of the two witnesses to the deed of sale between Bonifacio Aparato and the
spouses over the property. Petitioner Cenido presented only himself as witness.

On March 30, 1993, the trial court rendered judgment. The court upheld petitioner Cenido's ownership over the
property by virtue of the recognition made by Bonifacio's then surviving brother, Gavino, in the compromise
judgment of the MTC. Concomitantly, the court also did not sustain the deed of sale between Bonifacio and the
spouses because it was neither notarized nor signed by Bonifacio and was intrinsically defective. The court ordered
thus:

WHEREFORE, in the light of the foregoing considerations, the Court believes that preponderance of
evidence is on the side of defendant and so the complaint could not be given due course.
Accordingly, the case is, as it should be, dismissed. No attorney's fees or damages is being awarded
as no evidence to this effect had been given by defendant. With costs against plaintiffs.

SO ORDERED. 8

Respondent spouses appealed to the Court of Appeals. In a decision dated September 30, 1997, the appellate court
found the appeal meritorious and reversed the decision of the trial court. It held that the recognition of Cenido's
filiation by Gavino, Bonifacio's brother, did not comply with the requirements of the Civil Code and the Family Code;
that the deed between Bonifacio and respondent spouses was a valid contract of sale over the property; and
Cenido's failure to object to the presentation of the deed before the trial court was a waiver of the defense of the
Statute of Frauds. The Court of Appeals disposed of as follows:

WHEREFORE, the appealed Decision is hereby REVERSED and SET ASIDE. Plaintiffs-Appellants
Spouses Amadeo Apacionado and Herminia Sta. Ana are declared owners of the subject house and
lot now covered by Tax Declaration No. 02-6368. 9

Hence, this recourse. Petitioner Cenido alleges that:

1. The unsigned, unnotarized and highly doubtful private document designated as "Pagpapatunay"
which is solely relied upon by the respondents in support of their case is not sufficient to vest
ownership of and transfer the title, rights and interest over the subject property to the respondents.

xxx xxx xxx

2. The Court of Appeals departed from the accepted and usual course of judicial proceedings in that
it ruled against the petitioner in view of the alleged weakness of his defense rather than evaluate the
case based on the strength of the respondents' evidence, thereby necessitating this Honorable
Court's exercise of its power of supervision. 10

Victoria Cenidosa, in representation of petitioner Cenido, has manifested, through counsel, that petitioner died in
September 1993; that on December 18, 1985, eight years before his death, Cenido sold the subject house and lot to
Maria D. Ojeda for the sum of P70,000.00; that Maria D. Ojeda is now old and sickly, and is thus being represented
in the instant case by her daughter, Victoria O. Cenidosa. 11

In the same vein, respondent Herminia Sta. Ana Apacionado also manifested that her husband, Amadeo
Apacionado, died on August 11, 1989. Amadeo is now being represented by his compulsory heirs. 12

Before ruling on petitioner's arguments, it is necessary to establish certain facts essential for a proper adjudication
of the case.

The records reveal that the late Bonifacio Aparato had two siblings — a sister named Ursula and a brother named
Gavino. Ursula died on March 1, 1979, Bonifacio on January 3, 1982 and Gavino, sometime after Bonifacio's
13 14 15

death. Both Ursula and Bonifacio never married and died leaving no legitimate offspring. Gavino's son, Norberto,
however, testified that there was a fourth sibling, a sister, who married but also died; as to when she died or whether
she left any heirs, Norberto did not know. What is clear and undisputed is that Bonifacio was survived by Gavino
16

who also left legitimate heirs.

Both Bonifacio and Ursula lived in the subject property under the care and protection of the Apacionados. Herminia
Sta. Ana Apacionado started living with them in 1976. She took care of Bonifacio and Ursula, who died three years
later. Herminia married Amado Apacionado, whose paternal grandmother was a sister of Bonifacio. Amadeo 17

moved into Bonifacio's house and assisted Herminia in taking care of the old man until his demise.
Shortly after Bonifacio's death, Civil Case No. 2264 was instituted by petitioner Cenido against Gavino Aparato
before the Municipal Trial Court, Branch 1, Binangonan. The records do not reveal the nature of this
action. Nevertheless, three years after filing of the case, the parties entered into a compromise agreement. The
18

parties listed the properties of Bonifacio comprising two parcels of land: one parcel was the residential house and lot
in question and the other was registered agricultural land with an area of 38,641 square meters; Gavino Aparato
expressly recognized Renato Cenido as the sole illegitimate son of his brother, likewise, Cenido recognized Gavino
as the brother of Bonifacio; as Bonifacio's heirs, they partitioned his estate among themselves, with the subject
property and three portions of the agricultural land as Cenido's share, and the remaining 15,309 square meters of
the agricultural land as Gavino's; both parties agreed to share in the documentation, registration and other expenses
for the transfer of their shares. This compromise agreement was adopted as the decision of the MTC on January 31,
1985. 19

In the same year, petitioner Cenido obtained in his name Tax Declaration No. 02-6368 over the subject property.
Two years later, in January 1987, he filed an ejectment case against respondent spouses who continued occupying
the property in question. This case was dismissed.

Respondent spouses' claim of ownership over the subject property is anchored on a one-page typewritten document
entitled "Pagpapatunay," executed by Bonifacio Aparato. The "Pagpapatunay" reads as follows:

PAGPAPATUNAY

DAPAT MALAMAN NG LAHAT:

Akong si BONIFACIO APARATO, binata, Pilipino, husto sa gulang, at kasalukuyang naninirahan sa

Layunan, Binangonan, Rizal, ay nagpapatunay nitong mga sumusunod:

Una: — Na, ako ang siyang nagmamay-ari ng isang lagay na lupang SOLAR at Bahay Tirahan na
nakatirik sa nabanggit na solar na makikita sa lugar ng Rizal St., Layunan, Binangonan, Rizal;

Ikalawa: — Na, sapagkat ang nagalaga sa akin hanggang sa ako'y tuluyang kunin ng Dakilang
Maykapal ay walang iba kungdi ang mag-asawang AMADEO APACIONADO at HERMINIA STA.
ANA APACIONADO;

Ikatlo: — Na, pinatutunayan ko sa mga maykapangyarihan at kanginumang tao na ang nabanggit na

SOLAR at bahay tirahan ay ipinagbili ko sa nabanggit na mag-asawa sa halagang SAMPUNG
LIBONG (P10,000.00) PISO, bilang pakunsuwelo sa kanilang pagmamalasakit sa aking pagkatao at
kalalagayan;

Na, patunay na ito ay aking nilagdaan ng maliwanag ang aking isip at nalalaman ko ang lahat ng
nilalaman nito.

SA KATUNAYAN NG LAHAT, lumagda ako ng aking pangalan at apelyido ngayong ika-10 ng

Disyembre 1981, dito sa Layunan, Binangonan, Rizal.

(Thumbmarked)

BONIFACIO APARATO

Nagpatunay

NILAGDAAN SA HARAP NINA:

(SGD.) (SGD.)

Virgilio O. Cenido Carlos Inabayan

— Saksi — — Saksi — 20

On its face, the document "Pagpapatunay" attests to the fact that Bonifacio Aparato was the owner of the
house and lot in Layunan, Rizal; that because the Apacionado spouses took care of him until the time of his
death, Bonifacio sold said property to them for the sum of P10,000.00; that he was signing the same
document with a clear mind and with full knowledge of its contents; and as proof thereof, he was affixing his
signature on said document on the tenth day of December 1981 in Layunan, Binangonan, Rizal. Bonifacio
affixed his thumbmark on the space above his name; and this was witnessed by Virgilio O. Cenido and
Carlos Inabayan.
Petitioner Cenido disputes the authenticity and validity of the "Pagpapatunay." He claims that it is not a valid
contract of sale and its genuineness is highly doubtful because: (1) it was not notarized and is merely a private
instrument; (2) it was not signed by the vendor, Bonifacio; (3) it was improbable for Bonifacio to have executed the
document and dictated the words "lumagda ako ng aking pangalan at apelyido" because he was paralyzed and
could no longer sign his name at that time; and (4) the phrase "ang nag-alaga sa akin hanggang sa ako'y tuluyang
kunin ng Dakilang Maykapal" speaks of an already departed Bonifacio and could have been made only by persons
other than the dead man himself. 21

To determine whether the "Pagpapatunay" is a valid contract of sale, it must contain the essential requisites of
contracts, viz: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract;
and (3) cause of the obligation which is established.22

The object of the "Pagpapatunay" is the house and lot. The consideration is P10,000.00 for the services rendered to
Aparato by respondent spouses. According to respondent Herminia Apacionado, this P10,000.00 was not actually
paid to Bonifacio because the amount merely quantified the services they rendered to the old man. It was the care
the spouses voluntarily gave that was the cause of the sale. The cause therefore was the service remunerated.
23 24

Petition alleges that Bonifacio did not give his consent to the deed because he did not affix his signature, but merely
his thumbmark, on the document. Bonifacio was a literate person who could legibly sign his full name, and his
signature is evident in several documents such as his identification card as member of the Anderson Fil-American
Guerillas; the "Kasulatan ng Palasanglaan" dated July 25, 1974 where he and his two other siblings mortgaged the
25

subject property for P2,000.00 to one Linda Y. Cenido; "Padagdag sa Sanglaan" dated June 16, 1976; and
26 27

another "Pagdagdag sa Sanglaan" dated March 2, 1979. 28

Respondent Herminia Sta. Ana Apacionado testified that Bonifacio Aparato affixed his thumbmark because he could
no longer write at the time of execution of the document. The old man was already 61 years of age and could not
properly see with his eyes. He was stricken by illness a month before and was paralyzed from the waist down. He
could still speak albeit in a garbled manner, and be understood. The contents of the "Pagpapatunay" were actually
dictated by him to one Leticia Bandola who typed the same on a typewriter she brought to his house. 29

That Bonifacio was alive at the time of execution of the contract and voluntarily gave his consent to the instrument is
supported by the testimony of Carlos Inabayan, the lessee of Bonifacio's billiard hall at the ground floor of the
subject property. Inabayan testified that on December 10, 1981, he was summoned to go up to Bonifacio's house.
There, he saw Bonifacio, respondent Apacionados, and a woman and her husband. He was given a sheet of paper
to read. He read the paper and understood that it was a deed of sale of the house and lot executed by Bonifacio in
favor of the Apacionados. Thereafter, Bonifacio requested him to sign the document as witness. Reexamining the
"Pagpapatunay," Inabayan saw that Bonifacio affixed his thumbmark on the space above his name. Inabayan thus
signed the document and returned to the billiard hall.30

Inabayan's testimony has not been rebutted by petitioner. Petitioner, through counsel, waived his right to do so,
finding no need to cross-examine the witness. This waiver was granted by the court in the order of September 23,
31

1992. 32

One who alleges any defect or the lack of a valid consent to a contract must establish the same by full, clear and
convincing evidence, not merely by preponderance thereof. Petitioner has not alleged that the old man, by his
33

physical or mental state, was incapacitated to give his consent at the time of execution of the "Pagpapatunay."
Petitioner has not shown that Bonifacio was insane or demented or a deaf-mute who did not know how to
write. Neither has petitioner claimed, at the very least, that the consent of Bonifacio to the contract was vitiated by
34

mistake, violence, intimidation, undue influence or fraud. If by assailing the intrinsic defects in the wordage of the
35

"Pagpapatunay" petitioner Cenido seeks to specifically allege the exercise of extrinsic fraud and undue influence on
the old man, these defects are not substantial as to render the entire contract void. There must be clear and
convincing evidence of what specific acts of undue influence or fraud were employed by respondent spouses
36 37

that gave rise to said defects. Absent such proof, Bonifacio's presumed consent to the "Pagpapatunay" remains.

The "Pagpapatunay," therefore, contains all the essential requisites of a contract. Its authenticity and due execution
have not been disproved either. The finding of the trial court that the document was prepared by another person and
the thumbmark of the dead Bonifacio was merely affixed to it is pure conjecture. On the contrary, the testimonies of
respondent Herminia Sta. Ana and Carlos Inabayan prove that the document is authentic and was duly executed by
Bonifacio himself.

The "Pagpapatunay" is undisputably a private document. And this fact does not detract from its validity. The Civil
Code, in Article 1356 provides:

Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided
all the essential requisites for their validity are present. However, when the law requires that a
contract be in some form in order that it may be valid or enforceable, or that a contract be proved in
 a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised.

Generally, contracts are obligatory, in whatever form such contracts may have been entered into, provided
all the essential requisites for their validity are present. When, however, the law requires that a contract be in
some form for it to be valid or enforceable, that requirement must be complied with.

A certain form may be prescribed by law for any of the following purposes: for validity, enforceability, or greater
efficacy of the contract. When the form required is for validity, its non-observance renders the contract void and of
38

no effect. When the required form is for enforceability, non-compliance therewith will not permit, upon the objection
39

of a party, the contract, although otherwise valid, to be proved or enforced by action. Formalities intended for
40

greater efficacy or convenience or to bind third persons, if not done, would not adversely affect the validity or
enforceability of the contract between the contracting parties themselves. 41

Art. 1358 of the Civil Code requires that:

Art. 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest therein
are governed by Articles 1403, No. 2 and 1405;

(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;

(3) The power to administer property, or any other power which has for its object an act appearing or
which should appear in a public document, or should prejudice a third person;

(4) The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels or things in action are governed by Articles 1403,
No. 2 and 1405.

Acts and contracts which create, transmit, modify or extinguish real rights over immovable property should
be embodied in a public document. Sales of real property are governed by the Statute of Frauds which
reads:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) . . .

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be unenforceable by action, unless the same, or some
note or memorandum thereof, be in writing, and subscribed and by the party charged, or by his
agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary
evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the
making thereof;

xxx xxx xxx

(e) An agreement for the leasing for a longer period than one year, or for the sale of
real property or of an interest therein;

(3) . . . .

The sale of real property should be in writing and subscribed by the party charged for it to be enforceable.
The "Pagpapatunay" is in writing and subscribed by Bonifacio Aparato, the vendor; hence, it is enforceable
under the Statute of Frauds. Not having been subscribed and sworn to before a notary public, however, the
"Pagpapatunay" is not a public document, and therefore does not comply with Article 1358, paragraph 1 of
the Civil Code.

The requirement of a public document in Article 1358 is not for the validity of the instrument but for its
efficacy. Although a conveyance of land is not made in a public document, it does not affect the validity of such
42
conveyance. Article 1358 does not require the accomplishment of the acts or contracts in a public instrument in
43

order to validate the act or contract but only to insure its efficacy, so that after the existence of said contract has
44

been admitted, the party bound may be compelled to execute the proper document. This is clear from Article
45

1357, viz:

Art. 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article [Article 1358], the contracting parties may compel each other to
observe that form, once the contract has been perfected. This right may be exercised simultaneously
with the action upon the contract.

The private conveyance of the house and lot is therefore valid between Bonifacio Aparato and respondent spouses.
The question of whether the "Pagpapatunay" is sufficient to transfer and convey title to the land for purposes of
original registration or the issuance of a real estate tax declaration in respondent spouses' names, as prayed for
46

by respondent spouses, is another matter altogether. For greater efficacy of the contract, convenience of the
47 48

parties and to bind third persons, respondent spouses have the right to compel the vendor or his heirs to execute
the necessary document to properly convey the property. 49

Anent petitioner's second assigned error, the fact that the Court of Appeals sustained the validity of the
"Pagpapatunay" was not a conclusion that necessarily resulted from the weakness of petitioner's claim of filiation to
Bonifacio Aparato. Of and by itself, the "Pagpapatunay" is a valid contract of sale between the parties and the Court
of Appeals did not err in upholding its validity.

The issue of petitioner's paternity, however, is essential to determine whether Tax Declaration No. 02-6368 in the
name of petitioner Cenido should be nullified, as prayed for by respondent spouses in their complaint.

Tax Declaration No. 02-6368 in petitioner Cenido's name was issued pursuant to the compromise judgment of the
50

MTC where Gavino Aparato, Bonifacio's brother, expressly recognized petitioner Cenido as Bonifacio's sole
illegitimate son. The compromise judgment was rendered in 1985, three years after Bonifacio's demise.

Under the Civil Code, natural children and illegitimate children other than natural are entitled to support and
51

successional rights only when recognized or acknowledged by the putative parent. Unless recognized, they have
52

no rights whatsoever against their alleged parent or his estate. 53

The filiation of illegitimate children may be proved by any of the forms of recognition of natural children. This 54

recognition may be made in three ways: (1) voluntarily, which must be express such as that in a record of birth, a
55

will, a statement before a court of record, or in any authentic writing; (2) legally, i.e., when a natural child is
56

recognized, such recognition extends to his or her brothers and sisters of the full blood; and (3) judicially or
57

compulsorily, which may be demanded by the illegitimate child of his parents. The action for compulsory
58

recognition of the illegitimate child must be brought during the lifetime of the presumed parents. This is explicitly
provided in Article 285 of the Civil Code, viz:

Art. 285. The action for the recognition of natural children may be brought only during the lifetime of
the presumed parents, except in the following cases:

(1) If the father or mother died during the minority of the child, in which case the latter may file the
action before the expiration of four years from the attainment of his majority;

(2) If after the death of the father or of the mother a document should appear of which nothing had
been heard and in which either or both parents recognize the child.

In this case, the action must be commenced within four years from the finding of the document.

The illegitimate child can file an action for compulsory recognition only during the lifetime of the presumed parent.
After the parent's death, the child cannot bring such action, except, however, in only two instances: one is when the
supposed parent died during the minority of the child, and the other is when after the death of the parent, a
document should be discovered in which the parent recognized the child as his. The action must be brought within
four years from the attainment of majority in the first case, and from the discovery of the document in the second
case. The requirement that the action be filed during the parent's lifetime is to prevent illegitimate children, on
account of strong temptations to large estates left by dead persons, to claim part of this estate without giving the
alleged parent personal opportunity to be heard. It is vital that the parent be heard for only the parent is in a
59

position to reveal the true facts surrounding the claimant's conception. 60

In the case at bar, petitioner Cenido did not present any record of birth, will or any authentic writing to show he was
voluntarily recognized by Bonifacio as his illegitimate son. In fact, petitioner admitted on the witness stand that he
had no document to prove Bonifacio's recognition, much less his filiation. The voluntary recognition of petitioner's
61

filiation by Bonifacio's brother before the MTC does not qualify as a "statement in a court of record." Under the law,
this statement must be made personally by the parent himself or herself, not by any brother, sister or relative; after
all, the concept of recognition speaks of a voluntary declaration by the parent, or if the parent refuses, by judicial
authority, to establish the paternity or maternity of children born outside wedlock.
62

The compromise judgment of the MTC does not qualify as a compulsory recognition of petitioner. In the first place,
when he filed this case against Gavino Aparato, petitioner was no longer a minor. He was already pushing fifty years
old. Secondly, there is no allegation that after Bonifacio's death, a document was discovered where Bonifacio
63

recognized petitioner Cenido as his son. Thirdly, there is nothing in the compromise judgment that indicates that the
action before the MTC was a settlement of Bonifacio's estate with a gross value not exceeding
P20,000.00. Definitely, the action could not have been for compulsory recognition because the MTC had no
64

jurisdiction over the subject matter.

65

The Real Property Tax Code provides that real property tax be assessed in the name of the person "owning or
administering" the property on which the tax is levied. Since petitioner Cenido has not proven any successional or
66

administrative rights to Bonifacio's estate, Tax Declaration No. 02-6368 in Cenido's name must be declared null and
void.

IN VIEW WHEREOF, the petition is denied and the Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 41011 are affirmed. Tax Declaration No. 02-6368 in the name of petitioner Renato Cenido is declared null and
void.

No costs.

SO ORDERED.

G.R. No. 107624 January 28, 1997

GAMALIEL C. VILLANUEVA and IRENE C. VILLANUEVA, petitioners,

vs.
COURT OF APPEALS, SPOUSES JOSE and LEONILA DELA CRUZ, and SPOUSES GUIDO and FELICITAS
PILE, respondents.
PANGANIBAN, J.:

The main issue here is whether a contract of sale has been perfected under the attendant facts and circumstances.

The petition filed on December 18, 1992 assails the Decision of respondent Court of Appeals promulgated on
1

October 23, 1992 in CA-G.R. CV No. 30741 rendered by the Eleventh Division dismissing the appeal of petitioners
2

and affirming the decision in Civil Case No. Q-50844 dated December 28, 1990 of the Regional Trial Court, Branch
83 of Quezon City, presided by Judge Estrella T. Estrada. The dispositive portion of the affirmed decision of the
RTC reads: 3

WHEREFORE, judgment is hereby rendered dismissing plaintiff's instant action for specific
performance. However, defendant Jose de la Cruz is hereby ordered to refund or re imburse the
amount of Ten Thousand Pesos (P10,000.00) to plaintiff Irene Villanueva.

The parties' other claims for damages and attorney's fees are also hereby dismissed for being
necessary consequences of litigation.

No pronouncement as to costs.

The Facts

The factual antecedents of this case as found by the trial court were reproduced in the assailed Decision, as
4

follows:
5

. . .plaintiff (and now petitioner) Gamaliel Villanueva has been a tenant-occupant of a unit in the 3-
door apartment building erected on a parcel of land owned by defendants-spouses (now private
respondents) Jose Dela Cruz and Leonila dela Cruz, with an area of 403 square meters, more or
less, located at Short Horn, Project 8, Quezon City (Exhibit "L"), having succeeded in the occupancy
of said unit from the previous tenant Lolita Santos sometime in 1985. About February of 1986,
defendant Jose dela Cruz offered said parcel of land with the 3-door apartment building for sale and
plaintiffs, son and mother, showed interest in the property. As an initial step, defendant Jose dela
Cruz gave plaintiff Irene Villanueva a letter of authority dated February 12, 1986 (Exhibit "A") for her
to inspect the subject property. Because said property was in arrears in the payment of the realty
taxes, defendant Jose dela Cruz approached plaintiff Irene Villanueva and asked for a certain
amount to pay for the taxes so that the property would be cleared of any incumbrance ( sic). Plaintiff
Irene Villanueva gave P10,000.00 on two occasions — P5,000.00 on July 15, 1986 (Exhibit "F") and
another P5,000.00 on October 17, 1986 (Exhibit "D"). It was agreed by them that said P10,000.00
would form part of the sale price of P550,000.00. Sometime thereafter, defendant Jose dela Cruz
went to plaintiff Irene Villanueva bringing with him Mr. Ben Sabio, a tenant of one of the units in the
3-door apartment building located on the subject property, and requested her and her son to allow
said Ben Sabio to purchase one-half (1/2) of the property where the unit occupied by him pertained
to which the plaintiffs consented, so that they would just purchase the other half portion and would
be paying only P265,000.00, they having already given an amount of P10,000.00 used for paying
the realty taxes in arrears. Accordingly the property was subdivided and two (2) separate titles were
secured by defendants Dela Cruz. Mr. Ben Sabio immediately made payments by installments.

Sometime in March, 1987 or more specifically on March 6, 1987, defendants Dela Cruz executed in
favor of their co-defendants, the spouses Guide Pili (sic) and Felicitas Pili (sic), a Deed of
Assignment of the other one-half portion of the parcel of land wherein plaintiff Gamaliel Villanueva's
apartment unit is situated, designated as Lot 3-A of the Subdivision Plan (LRC) Psd-337290, Block
24, Pcs-4865, with an area of 201.50 square meters, more or less, and covered by Transfer
Certificate of Title 332445, purportedly as full payment and satisfaction of an indebtedness (sic)
obtained from defendants Pili (sic) (Exhibit "G"; Exhibit "3"). Consequently, Transfer Certificate of
Title No. 356040 was issued in the name of defendants Pili (sic) also on March 6, 1987. Immediately
thereafter, the plaintiffs came to know of such assignment and transfer and issuance of a new
certificate of title in favor of defendants Pili (sic) so that plaintiff Gamaliel Villanueva complained to
the barangay captain of Bahay Turo, Quezon City, on the ground that there was already an
agreement between defendants Dela Cruz and themselves that said portion of the parcel of land
owned by defendants Dela Cruz would be sold to him. As there was no settlement arrived at, the
plaintiffs elevated their complaint to this Court through the instant action.

The trial court rendered its decision in favor of private respondents. An appeal was duly brought to public
respondent which as earlier stated affirmed the said decision. Hence, this petition for review on certiorari under Rule
45 of the Rules of Court.

The Issues
The following errors are alleged to have been committed by public respondent: 6

The Court of Appeals erred in failing to find that there is a perfected contract of sale of subject
property between petitioners and respondents spouses Dela Cruz.

II

The Court of Appeals erred in applying the Statute of Frauds in this case when it is a contract of sale
that was partly executed

III

The Court of Appeals erred in not finding that this being a case of double sale of immovable
property, although respondents spouses Pili (sic) recorded the deed of assignment to them in the
Registry of Deeds they were not in good faith while (sic) petitioners as purchasers thereof were in
prior possession in good faith of the property

IV

The Court of Appeals erred in failing to reverse and set aside the appealed judgment of the trial
court and rendering a judgment for petitioners

In the opinion of this Court, these four issues may be summed up in a single question: Under the factual
circumstances of this case, was there a perfected contract of sale?

Petitioners contend that the adopted findings of facts of public respondent are contradicted by its ruling that there is
no agreement as to the price of the apartments. They argue that on the basis of the facts found by public
respondent, "the conclusion is ineluctable that there was a perfected contract of sale of the subject
property." According to petitioners, private respondents had to secure their consent to enable "Sabio to buy the
7

one-half portion of the property where the unit Sabio was renting pertains so that petitioners will pay only the
balance of P265,000.00 for the purchase of the other half after deducting the P10,000.00 petitioners
advanced." Public respondent's conclusion that the P10,000.00 paid to petitioners was not intended as part of the
8

purchase price allegedly "collides" with its quoted findings, as follows: 9

It was agreed by them that said P10,000.00 would form part of the sale price of P550,000.00. . . .
defendant Jose de la Cruz . . . requested her and her son to allow said Ben Sabio to purchase one-
half (1/2) of the property where the unit occupied by him pertained to which plaintiffs consented, so
they would purchase the other half portion and would be paying only P265.000.00 they having
already given an amount of P10,000.00 used for paying the realty taxes in arrears. . . . (Emphasis in
the petition).

The Court's Ruling

The arguments of petitioners do not persuade us. While it is true that respondent Court adopted the recitation of
facts of the trial court, it nonetheless later corrected the relevant portions thereof as it found that no perfected
contract of sale was agreed upon. Thus, public respondent explained: 10

Appellants' theory of earnest money cannot be sustained in view of the catena of circumstance
showing that the P10,000.00 given to appellees was not intended to form part of the purchase price.
As the great commentator Manresa observes that the delivery of part of the purchase price should
not be understood as constituting earnest money unless it be shown that such was the intention of
the parties (Manresa Commentaries on the Civil Code, 2d ed., Vol. 10, p. 85). Moreover, as can be
gleaned from the records there was no concrete agreement to the price and manner of payment:

Q Will you tell us why your transaction with plaintiffs (petitioners herein) did not
materialize?

A Because I have been returning to Mrs. Villanueva and in fact we have executed a
Deed of Sale which was in fact not signed.

Q Why did you not sign the Deed of Sale you mentioned?

A The Villanuevas told me to prepare the documents involved in this transaction

because according to her (sic) she (sic) was only waiting for the money to come but
 because I was then being pressed by Felicitas Pile for the payment of my loan. I was
constrained to assign the property to her.

Q What are your other reasons?

A Aside from that we were still huggling (sic) for the purchase price then and since I
was being pressed by my creditor, I was forced to make the assignment.

The most that public respondent can be faulted with is its failure to expressly state that although its conclusion of
law was correct, the trial court erred in its statement of the facts.

Was There a Perfected Contract of Sale?

Petitioners contend that private respondents' counsel admitted that "P10,000 is partial or advance payment of the
property (TSN, June 14 [should be 15], 4 (sic) 1990, pages 6 to 7)." Necessarily then, there must have been an
agreement as to price. They cite Article 1482 of the Civil Code which provides that "(w)henever earnest money is
given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract."
11

Private respondents contradict this claim with the argument that "(w)hat was clearly agreed (upon) between
petitioners and respondents Dela Cruz was that the P10,000.00 primarily intended as payment for realty tax was
going to form part of the consideration of the sale if and when the transaction would finally be
consummated." Private respondents insist that there "was no clear agreement as to the true amount of
12

consideration." 13

Generally, the findings of fact of the lower courts are entitled to great weight and not disturbed except for cogent
reasons. Indeed, they should not be changed on appeal in the absence of a clear showing that the trial court
14

overlooked, disregarded, or misinterpreted some facts of weight and significance, which if considered would have
altered the result of the case. In this case, and subject to the above clarification made by the appellate court,
15

petitioners have failed to convince us to alter such findings.

In fact, a review of the evidence merely strengthens the conclusions of public respondent. We scoured the
transcripts but we found that respondent dela Cruz never testified that he (or his spouse Leonila) had agreed to a
definite price for the subject property. In fact, his testimony during the cross-examination firmly negated any price
agreement with petitioners because he and his wife quoted the price of P575,000.00 and did not agree to reduce it
to P550,000.00 as claimed by petitioner: 16

Q And despite the fact that the property was mortgaged with Development Bank of
Rizal you still contrated (sic) Sandiego (sic) for the purpose of selling the property?

A Yes, sir.

Q And did Sandiego (sic) agree as agent in selling the property despite the fact that it
was mortgaged with the Development Bank of Rizal?

A Yes, sir.

Q Can you recall the condition you offered to Sandiego (sic) to act as your agent in
selling the same?

A He will get certain commission for the same.

Q Will you state the price and conditions set forth in selling the property?

A P575 thousand, sir.

Q That is the same offer that was given to you by plaintiff Mrs. Villanueva?

A I can not recall, I think so.

Q And you will agree with me that 1/2 of P575 thousand is how much (sic)?

ATTY. MANZO:

There (is) nothing to agree with you counsel.

 ATTY. GUPIT:

And the offer to you, the agreed price between you and Mrs. Villanueva is P275
thousand as stated in the agreement that was prepared?

ATTY. MANZO:

Counsel is again assuming that there was an agreement made already.

(ATTY. GUPIT:)

He answered there is a document between Villanueva and Dela Cruz.

ATTY. (MANZO):

Let the witness be confronted by the document.

We are not unmindful of petitioner Irene Villanueva's claim that the parties agreed on the sum of P550,000.00
follows:17

ATTY. GUPIT

What was the result of the negotiations?

WITNESS (Irene Villanueva):

We agreed that he would sell the land to us for the sum of, the amount of
P550,000.00

xxx xxx xxx

WITNESS

After the Deed of Sale relative to the purchase of the property was prepared, Mr.
dela Cruz (private respondent Jose) came to me and told me that he talked with one
of the tenants and he offered to buy the portion he was occupying if I will agree and I
will cause the partition of the property between us.

ATTY. GUPIT

Did you agree with the proposal of Mr. dela Cruz that the portion of the property will
be sold to one of the ten-ants?

WITNESS

Yes(,) sir. I agreed because we are (sic) both tenants.

ATTY. GUPIT

How about the price? How much are (sic) you supposed to pay in order to complete
your payments?

WITNESS

We are (sic) supposed to divide the amount of P550,000.00.

To settle the above conflicting claims of the parties, petitioners could have presented the contract of sale allegedly
prepared by private respondent Jose dela Cruz. Unfortunately, the contract was not presented in evidence.
However, petitioners aver that even if the unsigned deed of sale was not produced, private respondent Jose dela
Cruz "admitted preparing (said) deed in accordance with their agreement." This "judicial admission" is allegedly
18

the "best proof of its existence." Further it was "impossible" for petitioners to produce the same "since it was and
19

remained in the possession" of private respondent Jose dela Cruz. 20

We do not agree with petitioners. Assuming arguendo that such draft deed existed, it does not necessarily follow
that there was already a definite agreement as to the price. If there was, why then did private respondent Jose de la
Cruz not sign it? If indeed the draft deed of sale was that important to petitioners' cause, they should have shown
some effort to procure it. They could have secured it through a subpoena duces tecum or thru the use of one of the
modes of discovery. But petitioners made no such effort. And even if produced, it would not have commanded any
probative value as it was not signed.

As has been said in an old case, the price of the leased land not having been fixed, the essential elements which
give life to the contract were lacking. It follows that the lessee cannot compel the lessor to sell the leased land to
him. The price must be certain, it must be real, not fictitious. It is not necessary that the certainty of the price be
21 22

actual or determined at the time of executing the contract. The fact that the exact amount to be paid therefor is not
precisely fixed, is no bar to an action to recover such compensation, provided the contract, by its terms, furnishes a
basis or measure for ascertaining the amount agreed upon. The price could be made certain by the application of
23

known factors; where, in a sale of coal, a basic price was fixed, but subject to modification "in proportion to
variations in calories and ash content, and not otherwise," the price was held certain. A contract of sale is not void
24

for uncertainty when the price, though not directly stated in terms of pesos and centavos, can be made certain by
reference to existing invoices identified in the agreement. In this respect, the contract of sale is perfected. The
25

price must be certain, otherwise there is no true consent between the parties. There can be no sale without a
26

price. In the instant case, however, what is dramatically clear from the evidence is that there was no meeting of
27

mind as to the price, expressly or impliedly, directly or indirectly.

Sale is a consensual contract. He who alleges it must show its existence by competent proof. Here, the very
essential element of price has not been proven.

Lastly, petitioners' claim that they are ready to pay private respondents is immaterial and irrelevant as the latter
28

cannot be forced to accept such payment, there being no perfected contract of sale in the first place.

Applicability of Statute of Frauds and the Law on Double Sale

Petitioners contend that the statute of frauds does not apply because such statute applies only to executory
contracts whereas in this case the contract of sale had already been partly executed. Further, petitioners, citing
29

Article 1544 of the Civil Code asseverate that being in possession of the property in good faith therefore they should
be deemed the lawful owners thereof. On the other hand, private respondents counter that the contract in this case
30

is a "mere executory contract and not a completed or executed contract." 31

Both contentions are inaccurate. True, the statute of frauds applies only to executory contracts and not to partially or
completely executed ones. However, there is no perfected contract in this case, therefore there is no basis for the
32

application of the statute of frauds. The application of such statute presupposes the existence of a perfected
contract and requires only that a note or memorandum be executed in order to compel judicial enforcement thereof.
Also, the civil law rule on double sale finds no application because there was no sale at all to begin with.

At bottom, what took place was only a prolonged negotiation to buy and to sell, and at most, an offer and a counter-
offer but no definite agreement was reached by the parties. Hence, the rules on perfected contract of sale, statute of
frauds and double sale find no relevance nor application.

WHEREFORE, the Petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. 168289 March 22, 2010

THE MUNICIPALITY OF HAGONOY, BULACAN, represented by the HON. FELIX V. OPLE, Municipal Mayor,
and FELIX V. OPLE, in his personal capacity, Petitioners,
vs.
HON. SIMEON P. DUMDUM, JR., in his capacity as the Presiding Judge of the REGIONAL TRIAL COURT,
BRANCH 7, CEBU CITY; HON. CLERK OF COURT & EX-OFFICIO SHERIFF of the REGIONAL TRIAL COURT
of CEBU CITY; HON. CLERK OF COURT & EX-OFFICIO SHERIFF of the REGIONAL TRIAL COURT of
BULACAN and his DEPUTIES; and EMILY ROSE GO KO LIM CHAO, doing business under the name and
style KD SURPLUS, Respondents.

DECISION

PERALTA, J.:

This is a Joint Petition 1 under Rule 45 of the Rules of Court brought by the Municipality of Hagonoy, Bulacan and its
former chief executive, Mayor Felix V. Ople in his official and personal capacity, from the January 31, 2005
Decision2 and the May 23, 2005 Resolution3 of the Court of Appeals in CA-G.R. SP No. 81888. The assailed
decision affirmed the October 20, 2003 Order 4 issued by the Regional Trial Court of Cebu City, Branch 7 in Civil
Case No. CEB-28587 denying petitioners’ motion to dismiss and motion to discharge/dissolve the writ of preliminary
attachment previously issued in the case. The assailed resolution denied reconsideration.

The case stems from a Complaint5 filed by herein private respondent Emily Rose Go Ko Lim Chao against herein
petitioners, the Municipality of Hagonoy, Bulacan and its chief executive, Felix V. Ople (Ople) for collection of a sum
of money and damages. It was alleged that sometime in the middle of the year 2000, respondent, doing business as
KD Surplus and as such engaged in buying and selling surplus trucks, heavy equipment, machinery, spare parts
and related supplies, was contacted by petitioner Ople. Respondent had entered into an agreement with petitioner
municipality through Ople for the delivery of motor vehicles, which supposedly were needed to carry out certain
developmental undertakings in the municipality. Respondent claimed that because of Ople’s earnest representation
that funds had already been allocated for the project, she agreed to deliver from her principal place of business in
Cebu City twenty-one motor vehicles whose value totaled ₱5,820,000.00. To prove this, she attached to the
complaint copies of the bills of lading showing that the items were consigned, delivered to and received by petitioner
municipality on different dates.6 However, despite having made several deliveries, Ople allegedly did not heed
respondent’s claim for payment. As of the filing of the complaint, the total obligation of petitioner had already totaled
₱10,026,060.13 exclusive of penalties and damages. Thus, respondent prayed for full payment of the said amount,
with interest at not less than 2% per month, plus ₱500,000.00 as damages for business losses, ₱500,000.00 as
exemplary damages, attorney’s fees of ₱100,000.00 and the costs of the suit.

On February 13, 2003, the trial court issued an Order 7 granting respondent’s prayer for a writ of preliminary
attachment conditioned upon the posting of a bond equivalent to the amount of the claim. On March 20, 2003, the
trial court issued the Writ of Preliminary Attachment 8 directing the sheriff "to attach the estate, real and personal
properties" of petitioners.

Instead of addressing private respondent’s allegations, petitioners filed a Motion to Dismiss 9 on the ground that the
claim on which the action had been brought was unenforceable under the statute of frauds, pointing out that there
was no written contract or document that would evince the supposed agreement they entered into with respondent.
They averred that contracts of this nature, before being undertaken by the municipality, would ordinarily be subject
to several preconditions such as a public bidding and prior approval of the municipal council which, in this case, did
not obtain. From this, petitioners impress upon us the notion that no contract was ever entered into by the local
government with respondent.10 To address the claim that respondent had made the deliveries under the agreement,
they advanced that the bills of lading attached to the complaint were hardly probative, inasmuch as these
documents had been accomplished and handled exclusively by respondent herself as well as by her employees and
agents.11

Petitioners also filed a Motion to Dissolve and/or Discharge the Writ of Preliminary Attachment Already
Issued,12 invoking immunity of the state from suit, unenforceability of the contract, and failure to substantiate the
allegation of fraud.13

On October 20, 2003, the trial court issued an Order 14 denying the two motions. Petitioners moved for
reconsideration, but they were denied in an Order15 dated December 29, 2003.

Believing that the trial court had committed grave abuse of discretion in issuing the two orders, petitioners elevated
the matter to the Court of Appeals via a petition for certiorari under Rule 65. In it, they faulted the trial court for not
dismissing the complaint despite the fact that the alleged contract was unenforceable under the statute of frauds, as
well as for ordering the filing of an answer and in effect allowing private respondent to prove that she did make
several deliveries of the subject motor vehicles. Additionally, it was likewise asserted that the trial court committed
grave abuse of discretion in not discharging/dissolving the writ of preliminary attachment, as prayed for in the
motion, and in effect disregarding the rule that the local government is immune from suit.

On January 31, 2005, following assessment of the parties’ arguments, the Court of Appeals, finding no merit in the
petition, upheld private respondent’s claim and affirmed the trial court’s order. 16 Petitioners moved for
reconsideration, but the same was likewise denied for lack of merit and for being a mere scrap of paper for having
been filed by an unauthorized counsel.17 Hence, this petition.
In their present recourse, which raises no matter different from those passed upon by the Court of Appeals,
petitioners ascribe error to the Court of Appeals for dismissing their challenge against the trial court’s October 20
and December 29, 2003 Orders. Again, they reason that the complaint should have been dismissed at the first
instance based on unenforceability and that the motion to dissolve/discharge the preliminary attachment should
have been granted.18

Commenting on the petition, private respondent notes that with respect to the Court of Appeals’ denial of
the certiorari petition, the same was rightly done, as the fact of delivery may be properly and adequately addressed
at the trial of the case on the merits; and that the dissolution of the writ of preliminary attachment was not proper
under the premises inasmuch as the application for the writ sufficiently alleged fraud on the part of petitioners. In the
same breath, respondent laments that the denial of petitioners’ motion for reconsideration was rightly done by the
Court of Appeals, because it raised no new matter that had not yet been addressed. 19

After the filing of the parties’ respective memoranda, the case was deemed submitted for decision.

We now rule on the petition.

To begin with, the Statute of Frauds found in paragraph (2), Article 1403 of the Civil Code, 20 requires for
enforceability certain contracts enumerated therein to be evidenced by some note or memorandum. The term
"Statute of Frauds" is descriptive of statutes that require certain classes of contracts to be in writing; and that do not
deprive the parties of the right to contract with respect to the matters therein involved, but merely regulate the
formalities of the contract necessary to render it enforceable.21

In other words, the Statute of Frauds only lays down the method by which the enumerated contracts may be proved.
But it does not declare them invalid because they are not reduced to writing inasmuch as, by law, contracts are
obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity
are present.22 The object is to prevent fraud and perjury in the enforcement of obligations depending, for evidence
thereof, on the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be
evidenced by a writing signed by the party to be charged. 23 The effect of noncompliance with this requirement is
simply that no action can be enforced under the given contracts. 24 If an action is nevertheless filed in court, it shall
warrant a dismissal under Section 1(i),25 Rule 16 of the Rules of Court, unless there has been, among others, total or
partial performance of the obligation on the part of either party. 26

It has been private respondent’s consistent stand, since the inception of the instant case that she has entered into a
contract with petitioners. As far as she is concerned, she has already performed her part of the obligation under the
agreement by undertaking the delivery of the 21 motor vehicles contracted for by Ople in the name of petitioner
municipality. This claim is well substantiated — at least for the initial purpose of setting out a valid cause of action
against petitioners — by copies of the bills of lading attached to the complaint, naming petitioner municipality as
consignee of the shipment. Petitioners have not at any time expressly denied this allegation and, hence, the same is
binding on the trial court for the purpose of ruling on the motion to dismiss. In other words, since there exists an
indication by way of allegation that there has been performance of the obligation on the part of respondent, the case
is excluded from the coverage of the rule on dismissals based on unenforceability under the statute of frauds, and
either party may then enforce its claims against the other.

No other principle in remedial law is more settled than that when a motion to dismiss is filed, the material allegations
of the complaint are deemed to be hypothetically admitted. 27 This hypothetical admission, according to Viewmaster
Construction Corporation v. Roxas28 and Navoa v. Court of Appeals, 29 extends not only to the relevant and material
facts well pleaded in the complaint, but also to inferences that may be fairly deduced from them. Thus, where it
appears that the allegations in the complaint furnish sufficient basis on which the complaint can be maintained, the
same should not be dismissed regardless of the defenses that may be raised by the defendants. 30 Stated differently,
where the motion to dismiss is predicated on grounds that are not indubitable, the better policy is to deny the motion
without prejudice to taking such measures as may be proper to assure that the ends of justice may be served. 31

It is interesting to note at this point that in their bid to have the case dismissed, petitioners theorize that there could
not have been a contract by which the municipality agreed to be bound, because it was not shown that there had
been compliance with the required bidding or that the municipal council had approved the contract. The argument is
flawed. By invoking unenforceability under the Statute of Frauds, petitioners are in effect acknowledging the
existence of a contract between them and private respondent — only, the said contract cannot be enforced by
action for being non-compliant with the legal requisite that it be reduced into writing. Suffice it to say that while this
assertion might be a viable defense against respondent’s claim, it is principally a matter of evidence that may be
properly ventilated at the trial of the case on the merits.

Verily, no grave abuse of discretion has been committed by the trial court in denying petitioners’ motion to dismiss
this case. The Court of Appeals is thus correct in affirming the same.

We now address the question of whether there is a valid reason to deny petitioners’ motion to discharge the writ of
preliminary attachment.
Petitioners, advocating a negative stance on this issue, posit that as a municipal corporation, the Municipality of
Hagonoy is immune from suit, and that its properties are by law exempt from execution and garnishment. Hence,
they submit that not only was there an error committed by the trial court in denying their motion to dissolve the writ
of preliminary attachment; they also advance that it should not have been issued in the first place. Nevertheless,
they believe that respondent has not been able to substantiate her allegations of fraud necessary for the issuance of
the writ.32

Private respondent, for her part, counters that, contrary to petitioners’ claim, she has amply discussed the basis for
the issuance of the writ of preliminary attachment in her affidavit; and that petitioners’ claim of immunity from suit is
negated by Section 22 of the Local Government Code, which vests municipal corporations with the power to sue
and be sued. Further, she contends that the arguments offered by petitioners against the writ of preliminary
attachment clearly touch on matters that when ruled upon in the hearing for the motion to discharge, would amount
to a trial of the case on the merits.33

The general rule spelled out in Section 3, Article XVI of the Constitution is that the state and its political subdivisions
may not be sued without their consent. Otherwise put, they are open to suit but only when they consent to it.
Consent is implied when the government enters into a business contract, as it then descends to the level of the
other contracting party; or it may be embodied in a general or special law 34 such as that found in Book I, Title I,
Chapter 2, Section 22 of the Local Government Code of 1991, which vests local government units with certain
corporate powers —one of them is the power to sue and be sued.

Be that as it may, a difference lies between suability and liability. As held in City of Caloocan v. Allarde, 35 where the
suability of the state is conceded and by which liability is ascertained judicially, the state is at liberty to determine for
itself whether to satisfy the judgment or not. Execution may not issue upon such judgment, because statutes waiving
non-suability do not authorize the seizure of property to satisfy judgments recovered from the action. These statutes
only convey an implication that the legislature will recognize such judgment as final and make provisions for its full
satisfaction. Thus, where consent to be sued is given by general or special law, the implication thereof is limited only
to the resultant verdict on the action before execution of the judgment. 36

Traders Royal Bank v. Intermediate Appellate Court,37 citing Commissioner of Public Highways v. San Diego,38 is
instructive on this point. In that case which involved a suit on a contract entered into by an entity supervised by the
Office of the President, the Court held that while the said entity opened itself to suit by entering into the subject
contract with a private entity; still, the trial court was in error in ordering the garnishment of its funds, which were
public in nature and, hence, beyond the reach of garnishment and attachment proceedings. Accordingly, the Court
ordered that the writ of preliminary attachment issued in that case be lifted, and that the parties be allowed to prove
their respective claims at the trial on the merits. There, the Court highlighted the reason for the rule, to wit:

The universal rule that where the State gives its consent to be sued by private parties either by general or special
law, it may limit claimant’s action "only up to the completion of proceedings anterior to the stage of execution" and
that the power of the Courts ends when the judgment is rendered, since government funds and properties may not
be seized under writs of execution or garnishment to satisfy such judgments, is based on obvious considerations of
public policy. Disbursements of public funds must be covered by the corresponding appropriations as required by
law. The functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted by the
diversion of public funds from their legitimate and specific objects. x x x39

With this in mind, the Court holds that the writ of preliminary attachment must be dissolved and, indeed, it must not
have been issued in the very first place. While there is merit in private respondent’s position that she, by affidavit,
was able to substantiate the allegation of fraud in the same way that the fraud attributable to petitioners was
sufficiently alleged in the complaint and, hence, the issuance of the writ would have been justified. Still, the writ of
attachment in this case would only prove to be useless and unnecessary under the premises, since the property of
the municipality may not, in the event that respondent’s claim is validated, be subjected to writs of execution and
garnishment — unless, of course, there has been a corresponding appropriation provided by law. 40 1avvphi1

Anent the other issues raised by petitioners relative to the denial of their motion to dissolve the writ of attachment,
i.e., unenforceability of the contract and the veracity of private respondent’s allegation of fraud, suffice it to say that
these pertain to the merits of the main action. Hence, these issues are not to be taken up in resolving the motion to
discharge, lest we run the risk of deciding or prejudging the main case and force a trial on the merits at this stage of
the proceedings.41

There is one final concern raised by petitioners relative to the denial of their motion for reconsideration. They
complain that it was an error for the Court of Appeals to have denied the motion on the ground that the same was
filed by an unauthorized counsel and, hence, must be treated as a mere scrap of paper. 42

It can be derived from the records that petitioner Ople, in his personal capacity, filed his Rule 65 petition with the
Court of Appeals through the representation of the law firm Chan Robles & Associates. Later on, municipal legal
officer Joselito Reyes, counsel for petitioner Ople, in his official capacity and for petitioner municipality, filed with the
Court of Appeals a Manifestation with Entry of Appearance 43 to the effect that he, as counsel, was "adopting all the
pleadings filed for and in behalf of [Ople’s personal representation] relative to this case." 44

It appears, however, that after the issuance of the Court of Appeals’ decision, only Ople’s personal representation
signed the motion for reconsideration. There is no showing that the municipal legal officer made the same
manifestation, as he previously did upon the filing of the petition. 45 From this, the Court of Appeals concluded that it
was as if petitioner municipality and petitioner Ople, in his official capacity, had never moved for reconsideration of
the assailed decision, and adverts to the ruling in Ramos v. Court of Appeals 46 and Municipality of Pililla, Rizal v.
Court of Appeals47 that only under well-defined exceptions may a private counsel be engaged in lawsuits involving a
municipality, none of which exceptions obtains in this case.48

The Court of Appeals is mistaken. As can be seen from the manner in which the Manifestation with Entry of
Appearance is worded, it is clear that petitioner municipality’s legal officer was intent on adopting, for both the
municipality and Mayor Ople, not only the certiorari petition filed with the Court of Appeals, but also all other
pleadings that may be filed thereafter by Ople’s personal representation, including the motion for reconsideration
subject of this case. In any event, however, the said motion for reconsideration would warrant a denial, because
there seems to be no matter raised therein that has not yet been previously addressed in the assailed decision of
the Court of Appeals as well as in the proceedings below, and that would have otherwise warranted a different
treatment of the issues involved.

WHEREFORE, the Petition is GRANTED IN PART. The January 31, 2005 Decision of the Court of Appeals in CA-
G.R. SP No. 81888 is AFFIRMED insofar as it affirmed the October 20, 2003 Decision of the Regional Trial Court of
Cebu City, Branch 7 denying petitioners’ motion to dismiss in Civil Case No. CEB-28587. The assailed decision
is REVERSED insofar as it affirmed the said trial court’s denial of petitioners’ motion to discharge the writ of
preliminary attachment issued in that case. Accordingly, the August 4, 2003 Writ of Preliminary Attachment issued in
Civil Case No. CEB-28587 is ordered lifted.

SO ORDERED.

G.R. No. 168770 February 9, 2011

ANUNCIACION VDA. DE OUANO, MARIO P. OUANO, LETICIA OUANO ARNAIZ, and CIELO OUANO
MARTINEZ, Petitioners,
vs.
THE REPUBLIC OF THE PHILIPPINES, THE MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY, and
THE REGISTER OF DEEDS FOR THE CITY OF CEBU, Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 168812

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY (MCIAA), Petitioner,

vs.
RICARDO L. INOCIAN, in his personal capacity and as Attorney-in-Fact of OLYMPIA E. ESTEVES, EMILIA E.
BACALLA, RESTITUTA E. MONTANA, and RAUL L. INOCIAN; and ALETHA SUICO MAGAT, in her personal
capacity and as Attorney-in-Fact of PHILIP M. SUICO, DORIS S. DELA CRUZ, JAMES M. SUICO, EDWARD M.
SUICO, ROSELYN SUICO-LAWSIN, REX M. SUICO, KHARLA SUICO-GUTIERREZ, ALBERT CHIONGBIAN,
and JOHNNY CHAN, Respondents.

DECISION

VELASCO, JR., J.:

At the center of these two (2) Petitions for Review on Certiorari under Rule 45 is the issue of the right of the former
owners of lots acquired for the expansion of the Lahug Airport in Cebu City to repurchase or secure reconveyance
of their respective properties.

In the first petition, docketed as G.R. No. 168770, petitioners Anunciacion vda. de Ouano, Mario Ouano, Leticia
Ouano Arnaiz and Cielo Ouano Martinez (the Ouanos) seek to nullify the Decision 1 dated September 3, 2004 of the
Court of Appeals (CA) in CA-G.R. CV No. 78027, affirming the Order dated December 9, 2002 of the Regional Trial
Court (RTC), Branch 57 in Cebu City, in Civil Case No. CEB-20743, a suit to compel the Republic of the Philippines
and/or the Mactan-Cebu International Airport Authority (MCIAA) to reconvey to the Ouanos a parcel of land.

The second petition, docketed as G.R. No. 168812, has the MCIAA seeking principally to annul and set aside the
Decision2 and Resolution3 dated January 14, 2005 and June 29, 2005, respectively, of the CA in CA-G.R. CV No.
64356, sustaining the RTC, Branch 13 in Cebu City in its Decision of October 7, 1988 in Civil Case No. CEB-18370.

Per its October 19, 2005 Resolution, the Court ordered the consolidation of both cases.

Except for the names of the parties and the specific lot designation involved, the relevant factual antecedents which
gave rise to these consolidated petitions are, for the most part, as set forth in the Court’s Decision 4 of October 15,
2003, as reiterated in a Resolution 5 dated August 9, 2005, in G.R. No. 156273 entitled Heirs of Timoteo Moreno and
Maria Rotea v. Mactan-Cebu International Airport Authority (Heirs of Moreno), and in other earlier related cases.6

In 1949, the National Airport Corporation (NAC), MCIAA’s predecessor agency, pursued a program to expand the
Lahug Airport in Cebu City. Through its team of negotiators, NAC met and negotiated with the owners of the
properties situated around the airport, which included Lot Nos. 744-A, 745-A, 746, 747, 761-A, 762-A, 763-A, 942,
and 947 of the Banilad Estate. As the landowners would later claim, the government negotiating team, as a
sweetener, assured them that they could repurchase their respective lands should the Lahug Airport expansion
project do not push through or once the Lahug Airport closes or its operations transferred to Mactan-Cebu Airport.
Some of the landowners accepted the assurance and executed deeds of sale with a right of repurchase. Others,
however, including the owners of the aforementioned lots, refused to sell because the purchase price offered was
viewed as way below market, forcing the hand of the Republic, represented by the then Civil Aeronautics
Administration (CAA), as successor agency of the NAC, to file a complaint for the expropriation of Lot Nos. 744-A,
745-A, 746, 747, 761-A, 762-A, 763-A, 942, and 947, among others, docketed as Civil Case No. R-1881 entitled
Republic v. Damian Ouano, et al.

On December 29, 1961, the then Court of First Instance (CFI) of Cebu rendered judgment for the Republic,
disposing, in part, as follows:

IN VIEW OF THE FOREGOING, judgment is hereby rendered:

1. Declaring the expropriation of Lots Nos. 75, 76, 76, 89, 90, 91, 92, 105, 106, 107, 108, 104, 921-A, 88,
93, 913-B, 72, 77, 916, 777-A, 918, 919, 920, 764-A, 988, 744-A, 745-A, 746, 747, 762-A, 763-A, 951, 942,
720-A, x x x and 947, included in the Lahug Airport, Cebu City, justified in and in lawful exercise of the right
of eminent domain.

xxxx
 3. After the payment of the foregoing financial obligation to the landowners, directing the latter to deliver to
the plaintiff the corresponding Transfer Certificates of Title to their respective lots; and upon the presentation
of the said titles to the Register of Deeds, ordering the latter to cancel the same and to issue, in lieu thereof,
new Transfer Certificates of Title in the name of the plaintiff.7

In view of the adverted buy-back assurance made by the government, the owners of the lots no longer appealed the
decision of the trial court.8 Following the finality of the judgment of condemnation, certificates of title for the covered
parcels of land were issued in the name of the Republic which, pursuant to Republic Act No. 6958, 9 were
subsequently transferred to MCIAA.

At the end of 1991, or soon after the transfer of the aforesaid lots to MCIAA, Lahug Airport completely ceased
operations, Mactan Airport having opened to accommodate incoming and outgoing commercial flights. On the
ground, the expropriated lots were never utilized for the purpose they were taken as no expansion of Lahug Airport
was undertaken. This development prompted the former lot owners to formally demand from the government that
they be allowed to exercise their promised right to repurchase. The demands went unheeded. Civil suits followed.

G.R. No. 168812 (MCIAA Petition)

On February 8, 1996, Ricardo L. Inocian and four others (all children of Isabel Limbaga who originally owned six [6]
of the lots expropriated); and Aletha Suico Magat and seven others, successors-in-interest of Santiago Suico, the
original owner of two (2) of the condemned lots (collectively, the Inocians), filed before the RTC in Cebu City a
complaint for reconveyance of real properties and damages against MCIAA. The complaint, docketed as Civil Case
No. CEB-18370, was eventually raffled to Branch 13 of the court.

On September 29, 1997, one Albert Chiongbian (Chiongbian), alleging to be the owner of Lot Nos. 761-A and 762-A
but which the Inocians were now claiming, moved and was later allowed to intervene.

During the pre-trial, MCIAA admitted the following facts:

1. That the properties, which are the subject matter of Civil Case No. CEB-18370, are also the properties
involved in Civil Case R-1881;

2. That the purpose of the expropriation was for the expansion of the old Lahug Airport; that the Lahug
Airport was not expanded;

3. That the old Lahug Airport was closed sometime in June 1992;

4. That the price paid to the lot owners in the expropriation case is found in the decision of the court; and

5. That some properties were reconveyed by the MCIAA because the previous owners were able to secure
express waivers or riders wherein the government agreed to return the properties should the expansion of
the Lahug Airport not materialize.

During trial, the Inocians adduced evidence which included the testimony of Ricardo Inocian (Inocian) and Asterio
Uy (Uy). Uy, an employee of the CAA, testified that he was a member of the team which negotiated for the
acquisition of certain lots in Lahug for the proposed expansion of the Lahug Airport. He recalled that he acted as the
interpreter/spokesman of the team since he could speak the Cebuano dialect. He stated that the other members of
the team of negotiators were Atty. Pedro Ocampo, Atty. Lansang, and Atty. Saligumba. He recounted that, in the
course of the negotiation, their team assured the landowners that their landholdings would be reconveyed to them in
the event the Lahug Airport would be abandoned or if its operation were transferred to the Mactan Airport. Some
landowners opted to sell, while others were of a different bent owing to the inadequacy of the offered price.

Inocian testified that he and his mother, Isabel Lambaga, attended a meeting called by the NAC team of negotiators
sometime in 1947 or 1949 where he and the other landowners were given the assurance that they could repurchase
their lands at the same price in the event the Lahug Airport ceases to operate. He further testified that they rejected
the NAC’s offer. However, he said that they no longer appealed the decree of expropriation due to the repurchase
assurance adverted to.

The MCIAA presented Michael Bacarizas (Bacarizas), who started working for MCIAA as legal assistant in 1996. He
testified that, in the course of doing research work on the lots subject of Civil Case No. CEB-18370, he discovered
that the same lots were covered by the decision in Civil Case No. R-1881. He also found out that the said decision
did not expressly contain any condition on the matter of repurchase.

Ruling of the RTC

On October 7, 1998, the RTC rendered a Decision in Civil Case No. CEB-18370, the dispositive portion of which
reads as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered directing defendant Mactan Cebu International
Airport Authority (MCIAA) to reconvey (free from liens and encumbrances) to plaintiffs Ricardo Inocian, Olimpia E.
Esteves, Emilia E. Bacalla, Restituta E. Montana and Raul Inocian Lots No. 744-A, 745-A, 746, 762-A, 747, 761-A
and to plaintiffs Aletha Suico Magat, Philip M. Suico, Doris S. dela Cruz, James M. Suico, Edward M. Suico,
Roselyn S. Lawsin, Rex M. Suico and Kharla Suico-Gutierrez Lots No. 942 and 947, after plaintiffs shall have paid
MCIAA the sums indicated in the decision in Civil Case No. R-1881. Defendant MCIAA is likewise directed to pay
the aforementioned plaintiffs the sum or P50,000.00 as and for attorney’s fees and P10,000.00 for litigation
expenses.

Albert Chiongbian’s intervention should be, as it is hereby DENIED for utter lack of factual basis.

With costs against defendant MCIAA.10

Therefrom, MCIAA went to the CA on appeal, docketed as CA-G.R. CV No. 64356.

Ruling of the CA

On January 14, 2005, the CA rendered judgment for the Inocians, declaring them entitled to the reconveyance of
the questioned lots as the successors-in-interest of the late Isabel Limbaga and Santiago Suico, as the case may
be, who were the former registered owners of the said lots. The decretal portion of the CA’s Decision reads:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DISMISSING the appeal filed
in this case and AFFFIRMING the decision rendered by the court a quo on October 7, 1998 in Civil Case No. CEB-
18370.

SO ORDERED.

The CA, citing and reproducing excerpts from Heirs of Moreno, 11 virtually held that the decision in Civil Case No. R-
1881 was conditional, stating "that the expropriation of [plaintiff-appellees’] lots for the proposed expansion of the
Lahug Airport was ordered by the CFI of Cebu under the impression that Lahug Airport would continue in
operation."12 The condition, as may be deduced from the CFI’s decision, was that should MCIAA, or its precursor
agency, discontinue altogether with the operation of Lahug Airport, then the owners of the lots expropriated may, if
so minded, demand of MCIAA to make good its verbal assurance to allow the repurchase of the properties. To the
CA, this assurance, a demandable agreement of repurchase by itself, has been adequately established.

On September 21, 2005, the MCIAA filed with Us a petition for review of the CA’s Decision, docketed as G.R. No.
168812.

G.R. No. 168770 (Ouano Petition)

Soon after the MCIAA jettisoned the Lahug Airport expansion project, informal settlers entered and occupied Lot No.
763-A which, before its expropriation, belonged to the Ouanos. The Ouanos then formally asked to be allowed to
exercise their right to repurchase the aforementioned lot, but the MCIAA ignored the demand. On August 18, 1997,
the Ouanos instituted a complaint before the Cebu City RTC against the Republic and the MCIAA for reconveyance,
docketed as Civil Case No. CEB-20743.

Answering, the Republic and MCIAA averred that the Ouanos no longer have enforceable rights whatsoever over
the condemned Lot No. 763-A, the decision in Civil Case No. R-1881 not having found any reversionary condition.

Ruling of the RTC

By a Decision dated November 28, 2000, the RTC, Branch 57 in Cebu City ruled in favor of the Ouanos, disposing
as follows:

WHEREFORE, in the light of the foregoing, the Court hereby renders judgment in favor of the plaintiffs, Anunciacion
Vda. De Ouano, Mario P. Ouano, Leticia Ouano Arnaiz and Cielo Ouano Martinez and against the Republic of the
Philippines and Mactan Cebu International Airport Authority (MCIAA) to restore to plaintiffs, the possession and
ownership of their land, Lot No. 763-A upon payment of the expropriation price to defendants; and

2. Ordering the Register of Deeds to effect the transfer of the Certificate of Title from defendant Republic of the
Philippines on Lot 763-A, canceling TCT No. 52004 in the name of defendant Republic of the Philippines and to
issue a new title on the same lot in the names of Anunciacion Vda. De Ouano, Mario P. Ouano, Leticia Ouano
Arnaiz and Cielo Ouano Martinez.
No pronouncement as to costs.13

Acting on the motion of the Republic and MCIAA for reconsideration, however, the RTC, Branch 57 in Cebu City,
presided this time by Judge Enriqueta L. Belarmino, issued, on December 9, 2002, an Order 14 that reversed its
earlier decision of November 28, 2000 and dismissed the Ouanos’ complaint.

Ruling of the CA

In time, the Ouanos interposed an appeal to the CA, docketed as CA-G.R. CV No. 78027. Eventually, the appellate
court rendered a Decision15 dated September 3, 2004, denying the appeal, thus:

WHEREFORE, premises considered, the Order dated December 9, 2002, of the Regional Trial Court, 7th Judicial
Region, Branch 57, Cebu City, in Civil Case No. CEB-20743, is hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Explaining its case disposition, the CA stated that the decision in Civil Case No. R-1881 did not state any condition
that Lot No. 763-A of the Ouanos––and all covered lots for that matter––would be returned to them or that they
could repurchase the same property if it were to be used for purposes other than for the Lahug Airport. The
appellate court also went on to declare the inapplicability of the Court’s pronouncement in MCIAA v. Court of
Appeals, RTC, Branch 9, Cebu City, Melba Limbago, et al.,16 to support the Ouanos’ cause, since the affected
landowners in that case, unlike the Ouanos, parted with their property not through expropriation but via a sale and
purchase transaction.

The Ouanos filed a motion for reconsideration of the CA’s Decision, but was denied per the CA’s May 26, 2005
Resolution.17 Hence, they filed this petition in G.R. No. 168770.

The Issues

G.R. No. 168812

GROUNDS FOR ALLOWANCE OF THE PETITION

l. THE ASSAILED ISSUANCES ILLEGALLY STRIPPED THE REPUBLIC OF ITS ABSOLUTE AND
UNCONDITIONAL TITLE TO THE SUBJECT EXPROPRIATED PROPERTIES.

ll. THE IMPUNGED DISPOSITIONS INVALIDLY OVERTURNED THIS HONORABLE COURT’S FINAL
RULINGS IN FERY V. MUNICIPALITY OF CABANATUAN, MCIAA V. COURT OF APPEALS AND REYES
V. NATIONAL HOUSING AUTHORITY.

lll. THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THIS HONORABLE COURT’S RULING
IN MORENO, ALBEIT IT HAS NOT YET ATTAINED FINALITY. 18

G.R. No. 168770

Questions of law presented in this Petition

Whether or not the testimonial evidence of the petitioners proving the promises, assurances and representations by
the airport officials and lawyers are inadmissbale under the Statute of Frauds.

Whether or not under the ruling of this Honorable Court in the heirs of Moreno Case, and pursuant to the principles
enunciated therein, petitioners herein are entitiled to recover their litigated property.

Reasons for Allowances of this Petition

Respondents did not object during trial to the admissibility of petitioners’ testimonial evidence under the Statute of
Frauds and have thus waived such objection and are now barred from raising the same. In any event, the Statute of
Frauds is not applicable herein. Consequently, petitioners’ evidence is admissible and should be duly given weight
and credence, as initially held by the trial court in its original Decision.19

While their respective actions against MCIAA below ended differently, the Ouanos and the Inocians’ proffered
arguments presented before this Court run along parallel lines, both asserting entitlement to recover the litigated
property on the strength of the Court’s ruling in Heirs of Moreno. MCIAA has, however, formulated in its
Consolidated Memorandum the key interrelated issues in these consolidated cases, as follows:
 I

WHETHER ABANDONMENT OF THE PUBLIC USE FOR WHICH THE SUBJECT PROPERTIES WERE
EXPROPRIATED ENTITLES PETITIONERS OUANOS, ET AL. AND RESPONDENTS INOCIAN, ET AL. TO
REACQUIRE THEM.

II

WHETHER PETITIONERS OUANOS, ET AL. AND RESPONDENTS INOCIAN, ET AL. ARE ENTITLED TO
RECONVEYANCE OF THE SUBJECT PROPERTIES SIMPLY ON THE BASIS OF AN ALLEGED VERBAL
PROMISE OR ASSURANCE OF SOME NAC OFFICIALS THAT THE SUBJECT PROPERTIES WILL BE
RETUNRED IF THE AIRPORT PROJECT WOULD BE ABANDONED.

The Court’s Ruling

The Republic and MCIAA’s petition in G.R. No. 168812 is bereft of merit, while the Ouano petition in G.R. No.
168770 is meritorious.

At the outset, three (3) fairly established factual premises ought to be emphasized:

First, the MCIAA and/or its predecessor agency had not actually used the lots subject of the final decree of
expropriation in Civil Case No. R-1881 for the purpose they were originally taken by the government, i.e., for the
expansion and development of Lahug Airport.

Second, the Lahug Airport had been closed and abandoned. A significant portion of it had, in fact, been purchased
by a private corporation for development as a commercial complex.20

Third, it has been preponderantly established by evidence that the NAC, through its team of negotiators, had given
assurance to the affected landowners that they would be entitled to repurchase their respective lots in the event
they are no longer used for airport purposes.21 "No less than Asterio Uy," the Court noted in Heirs of Moreno, "one of
the members of the CAA Mactan Legal Team, which interceded for the acquisition of the lots for the Lahug Airport’s
expansion, affirmed that persistent assurances were given to the landowners to the effect that as soon as the Lahug
Airport is abandoned or transferred to Mactan, the lot owners would be able to reacquire their properties." 22 In Civil
Case No. CEB-20743, Exhibit "G," the transcript of the deposition 23 of Anunciacion vda. de Ouano covering the
assurance made had been formally offered in evidence and duly considered in the initial decision of the RTC Cebu
City. In Civil Case No. CEB-18370, the trial court, on the basis of testimonial evidence, and later the CA, recognized
the reversionary rights of the suing former lot owners or their successors in interest 24 and resolved the case
accordingly. In point with respect to the representation and promise of the government to return the lots taken
should the planned airport expansion do not materialize is what the Court said in Heirs of Moreno, thus:

This is a difficult case calling for a difficult but just solution. To begin with there exists an undeniable historical
narrative that the predecessors of respondent MCIAA had suggested to the landowners of the properties covered
by the Lahug Airport expansion scheme that they could repurchase their properties at the termination of the airport’s
venue. Some acted on this assurance and sold their properties; other landowners held out and waited for the
exercise of eminent domain to take its course until finally coming to terms with respondent’s predecessors that they
would not appeal nor block further judgment of condemnation if the right of repurchase was extended to them. A
handful failed to prove that they acted on such assurance when they parted with ownership of their
land.25 (Emphasis supplied; citations omitted.)

For perspective, Heirs of Moreno––later followed by MCIAA v. Tudtud (Tudtud)26 and the consolidated cases at
bar––is cast under the same factual setting and centered on the expropriation of privately-owned lots for the public
purpose of expanding the Lahug Airport and the alleged promise of reconveyance given by the negotiating NAC
officials to the private lot owners. All the lots being claimed by the former owners or successors-in-interest of the
former owners in the Heirs of Moreno, Tudtud, and the present cases were similarly adjudged condemned in favor
of the Republic in Civil Case No. R-1881. All the claimants sought was or is to have the condemned lots reconveyed
to them upon the payment of the condemnation price since the public purpose of the expropriation was never met.
Indeed, the expropriated lots were never used and were, in fact, abandoned by the expropriating government
agencies.

In all then, the issues and supporting arguments presented by both sets of petitioners in these consolidated cases
have already previously been passed upon, discussed at length, and practically peremptorily resolved in Heirs of
Moreno and the November 2008 Tudtud ruling. The Ouanos, as petitioners in G.R. No. 168770, and the Inocians, as
respondents in G.R. No. 168812, are similarly situated as the heirs of Moreno in Heirs of Moreno and Benjamin
Tudtud in Tudtud. Be that as it may, there is no reason why the ratio decidendi in Heirs of
Moreno and Tudtud should not be made to apply to petitioners Ouanos and respondents Inocians such that they
shall be entitled to recover their or their predecessors’ respective properties under the same manner and
arrangement as the heirs of Moreno and Tudtud. Stare decisis et non quieta movere (to adhere to precedents, and
not to unsettle things which are established).27

Just like in Tudtud and earlier in Heirs of Moreno, MCIAA would foist the theory that the judgment of condemnation
in Civil Case No. R-1881 was without qualification and was unconditional. It would, in fact, draw attention to
the fallo of the expropriation court’s decision to prove that there is nothing in the decision indicating that the
government gave assurance or undertook to reconvey the covered lots in case the Lahug airport expansion project
is aborted. Elaborating on this angle, MCIAA argues that the claim of the Ouanos and the Inocians regarding the
alleged verbal assurance of the NAC negotiating team that they can reacquire their landholdings is barred by the
Statute of Frauds.28

Under the rule on the Statute of Frauds, as expressed in Article 1403 of the Civil Code, a contract for the sale or
acquisition of real property shall be unenforceable unless the same or some note of the contract be in writing and
subscribed by the party charged. Subject to defined exceptions, evidence of the agreement cannot be received
without the writing, or secondary evidence of its contents.

MCIAA’s invocation of the Statute of Frauds is misplaced primarily because the statute applies only to executory
and not to completed, executed, or partially consummated contracts. 29 Carbonnel v. Poncio, et al., quoting Chief
Justice Moran, explains the rationale behind this rule, thusly:

x x x "The reason is simple. In executory contracts there is a wide field for fraud because unless they may be in
writing there is no palpable evidence of the intention of the contracting parties. The statute has been precisely been
enacted to prevent fraud." x x x However, if a contract has been totally or partially performed, the exclusion of parol
evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits already derived by
him from the transaction in litigation, and at the same time, evade the obligations, responsibilities or liabilities
assumed or contracted by him thereby.30 (Emphasis in the original.)

Analyzing the situation of the cases at bar, there can be no serious objection to the proposition that the agreement
package between the government and the private lot owners was already partially performed by the government
through the acquisition of the lots for the expansion of the Lahug airport. The parties, however, failed to accomplish
the more important condition in the CFI decision decreeing the expropriation of the lots litigated upon: the expansion
of the Lahug Airport. The project––the public purpose behind the forced property taking––was, in fact, never
pursued and, as a consequence, the lots expropriated were abandoned. Be that as it may, the two groups of
landowners can, in an action to compel MCIAA to make good its oral undertaking to allow repurchase, adduce parol
evidence to prove the transaction.

At any rate, the objection on the admissibility of evidence on the basis of the Statute of Frauds may be waived if not
timely raised. Records tend to support the conclusion that MCIAA did not, as the Ouanos and the Inocians posit,
object to the introduction of parol evidence to prove its commitment to allow the former landowners to repurchase
their respective properties upon the occurrence of certain events.

In a bid to deny the lot owners the right to repurchase, MCIAA, citing cases, 31 points to the dispositive part of the
decision in Civil Case R-1881 which, as couched, granted the Republic absolute title to the parcels of land declared
expropriated. The MCIAA is correct about the unconditional tone of the dispositive portion of the decision, but that
actuality would not carry the day for the agency. Addressing the matter of the otherwise absolute tenor of the CFI’s
disposition in Civil Case No. R-1881, the Court, in Heirs of Moreno, after taking stock of the ensuing portion of the
body of the CFI’s decision, said:

As for the public purpose of the expropriation proceeding, it cannot now be doubted. Although Mactan Airport is
being constructed, it does not take away the actual usefulness and importance of the Lahug Airport: it is handling
the air traffic of both civilian and military. From it aircrafts fly to Mindanao and Visayas and pass thru it on their flights
to the North and Manila. Then, no evidence was adduced to show how soon is the Mactan Airport to be placed in
operation and whether the Lahug Airport will be closed immediately thereafter. It is up to the other departments of
the Government to determine said matters. The Court cannot substitute its judgments for those of the said
departments or agencies. In the absence of such showing, the court will presume that the Lahug Airport will
continue to be in operation.32 (Emphasis supplied.)

We went on to state as follows:

While the trial court in Civil Case No. R-1881 could have simply acknowledged the presence of public purpose for
the exercise of eminent domain regardless of the survival of the Lahug Airport, the trial court in its Decision chose
not to do so but instead prefixed its finding of public purpose upon its understanding that ‘Lahug Airport will continue
to be in operation’. Verily, these meaningful statements in the body of the Decision warrant the conclusion that the
expropriated properties would remain to be so until it was confirmed that Lahug Airport was no longer ‘in operation’.
This inference further implies two (2) things: (a) after the Lahug Airport ceased its undertaking as such and the
expropriated lots were not being used for any airport expansion project, the rights vis-à-vis the expropriated lots x x
x as between the State and their former owners, petitioners herein, must be equitably adjusted; and (b) the
foregoing unmistakable declarations in the body of the Decision should merge with and become an intrinsic part of
the fallo thereof which under the premises is clearly inadequate since the dispositive portion is not in accord with the
findings as contained in the body thereof.33

Not to be overlooked of course is what the Court said in its Resolution disposing of MCIAA’s motion to reconsider
the original ruling in Heirs of Moreno. In that resolution, We stated that the fallo of the decision in Civil Case R-1881
should be viewed and understood in connection with the entire text, which contemplated a return of the property
taken if the airport expansion project were abandoned. For ease of reference, following is what the Court wrote:

Moreover, we do not subscribe to the [MCIAA’s] contention that since the possibility of the Lahug Airport’s closure
was actually considered by the trial court, a stipulation on reversion or repurchase was so material that it should not
have been discounted by the court a quo in its decision in Civil Case No. R-1881, if, in fact, there was one. We find it
proper to cite, once more, this Court’s ruling that the fallo of the decision in Civil Case No. R-1881 must be read in
reference to the other portions of the decision in which it forms a part. A reading of the Court’s judgment must not be
confined to the dispositive portion alone; rather it should be meaningfully construed in unanimity with the ratio
decidendi thereof to grasp the true intent and meaning of a decision.34

The Court has, to be sure, taken stock of Fery v. Municipality of Cabanatuan,35 a case MCIAA cites at every possible
turn, where the Court made these observations:

If, for example, land is expropriated for a particular purpose, with the condition that when that purpose is ended or
abandoned the property shall return to its former owner, then of course, when the purpose is terminated or
abandoned, the former owner reacquires the property so expropriated. x x x If, upon the contrary, however the
decree of expropriation gives to the entity a fee simple title, then, of course, the land becomes the absolute property
of the expropriator x x x and in that case the non-user does not have the effect of defeating the title acquired by the
expropriation proceedings x x x.

Fery notwithstanding, MCIAA cannot really rightfully say that it has absolute title to the lots decreed expropriated in
Civil Case No. R-1881. The correct lesson of Fery is captured by what the Court said in that case, thus: "the
government acquires only such rights in expropriated parcels of land as may be allowed by the character of its title
over the properties." In light of our disposition in Heirs of Moreno and Tudtud, the statement immediately adverted to
means that in the event the particular public use for which a parcel of land is expropriated is abandoned, the owner
shall not be entitled to recover or repurchase it as a matter of right, unless such recovery or repurchase is
expressed in or irresistibly deducible from the condemnation judgment. But as has been determined below, the
decision in Civil Case No. R-1881 enjoined MCIAA, as a condition of approving expropriation, to allow recovery or
repurchase upon abandonment of the Lahug airport project. To borrow from our underlying decision in Heirs of
Moreno, "[n]o doubt, the return or repurchase of the condemned properties of petitioners could readily be justified as
the manifest legal effect of consequence of the trial court’s underlying presumption that ‘Lahug Airport will continue
to be in operation’ when it granted the complaint for eminent domain and the airport discontinued its activities." 36

Providing added support to the Ouanos and the Inocians’ right to repurchase is what in Heirs of Moreno was
referred to as constructive trust, one that is akin to the implied trust expressed in Art. 1454 of the Civil Code, 37 the
purpose of which is to prevent unjust enrichment. 38 In the case at bench, the Ouanos and the Inocians parted with
their respective lots in favor of the MCIAA, the latter obliging itself to use the realties for the expansion of Lahug
Airport; failing to keep its end of the bargain, MCIAA can be compelled by the former landowners to reconvey the
parcels of land to them, otherwise, they would be denied the use of their properties upon a state of affairs that was
not conceived nor contemplated when the expropriation was authorized. In effect, the government merely held the
properties condemned in trust until the proposed public use or purpose for which the lots were condemned was
actually consummated by the government. Since the government failed to perform the obligation that is the basis of
the transfer of the property, then the lot owners Ouanos and Inocians can demand the reconveyance of their old
properties after the payment of the condemnation price.

Constructive trusts are fictions of equity that courts use as devices to remedy any situation in which the holder of the
legal title, MCIAA in this case, may not, in good conscience, retain the beneficial interest. We add, however, as
in Heirs of Moreno, that the party seeking the aid of equity––the landowners in this instance, in establishing the
trust––must himself do equity in a manner as the court may deem just and reasonable.

The Court, in the recent MCIAA v. Lozada, Sr., revisited and abandoned the Fery ruling that the former owner is not
entitled to reversion of the property even if the public purpose were not pursued and were abandoned, thus:

On this note, we take this opportunity to revisit our ruling in Fery, which involved an expropriation suit commenced
upon parcels of land to be used as a site for a public market. Instead of putting up a public market, respondent
Cabanatuan constructed residential houses for lease on the area. Claiming that the municipality lost its right to the
property taken since it did not pursue its public purpose, petitioner Juan Fery, the former owner of the lots
expropriated, sought to recover his properties. However, as he had admitted that, in 1915, respondent Cabanatuan
acquired a fee simple title to the lands in question, judgment was rendered in favor of the municipality, following
American jurisprudence, particularly City of Fort Wayne v. Lake Shore & M.S. RY. Co., McConihay v. Theodore
Wright, and Reichling v. Covington Lumber Co., all uniformly holding that the transfer to a third party of the
expropriated real property, which necessarily resulted in the abandonment of the particular public purpose for which
the property was taken, is not a ground for the recovery of the same by its previous owner, the title of the
expropriating agency being one of fee simple. 1avvphi1

Obviously, Fery was not decided pursuant to our now sacredly held constitutional right that private property shall not
be taken for public use without just compensation. It is well settled that the taking of private property by the
Governments power of eminent domain is subject to two mandatory requirements: (1) that it is for a particular public
purpose; and (2) that just compensation be paid to the property owner. These requirements partake of the nature of
implied conditions that should be complied with to enable the condemnor to keep the property expropriated.

More particularly, with respect to the element of public use, the expropriator should commit to use the property
pursuant to the purpose stated in the petition for expropriation filed, failing which, it should file another petition for
the new purpose. If not, it is then incumbent upon the expropriator to return the said property to its private owner, if
the latter desires to reacquire the same. Otherwise, the judgment of expropriation suffers an intrinsic flaw, as it
would lack one indispensable element for the proper exercise of the power of eminent domain, namely, the
particular public purpose for which the property will be devoted. Accordingly, the private property owner would be
denied due process of law, and the judgment would violate the property owners right to justice, fairness, and equity.

In light of these premises, we now expressly hold that the taking of private property, consequent to the Governments
exercise of its power of eminent domain, is always subject to the condition that the property be devoted to the
specific public purpose for which it was taken. Corollarily, if this particular purpose or intent is not initiated or not at
all pursued, and is peremptorily abandoned, then the former owners, if they so desire, may seek the reversion of the
property, subject to the return of the amount of just compensation received. In such a case, the exercise of the
power of eminent domain has become improper for lack of the required factual justification. 39 (Emphasis supplied.)

Clinging to Fery, specifically the fee simple concept underpinning it, is no longer compelling, considering the
ensuing inequity such application entails. Too, the Court resolved Fery not under the cover of any of the Philippine
Constitutions, each decreeing that private property shall not be taken for public use without just compensation. The
twin elements of just compensation and public purpose are, by themselves, direct limitations to the exercise of
eminent domain, arguing, in a way, against the notion of fee simple title. The fee does not vest until payment of just
1avvphi1

compensation.40

In esse, expropriation is forced private property taking, the landowner being really without a ghost of a chance to
defeat the case of the expropriating agency. In other words, in expropriation, the private owner is deprived of
property against his will. Withal, the mandatory requirement of due process ought to be strictly followed, such that
the state must show, at the minimum, a genuine need, an exacting public purpose to take private property, the
purpose to be specifically alleged or least reasonably deducible from the complaint.

Public use, as an eminent domain concept, has now acquired an expansive meaning to include any use that is of
"usefulness, utility, or advantage, or what is productive of general benefit [of the public]." 41 If the genuine public
necessity—the very reason or condition as it were—allowing, at the first instance, the expropriation of a private land
ceases or disappears, then there is no more cogent point for the government’s retention of the expropriated land.
The same legal situation should hold if the government devotes the property to another public use very much
different from the original or deviates from the declared purpose to benefit another private person. It has been said
that the direct use by the state of its power to oblige landowners to renounce their productive possession to another
citizen, who will use it predominantly for that citizen’s own private gain, is offensive to our laws. 42

A condemnor should commit to use the property pursuant to the purpose stated in the petition for expropriation,
failing which it should file another petition for the new purpose. If not, then it behooves the condemnor to return the
said property to its private owner, if the latter so desires. The government cannot plausibly keep the property it
expropriated in any manner it pleases and, in the process, dishonor the judgment of expropriation. This is not in
keeping with the idea of fair play,

The notion, therefore, that the government, via expropriation proceedings, acquires unrestricted ownership over or a
fee simple title to the covered land, is no longer tenable. We suggested as much in Heirs of Moreno and
in Tudtud and more recently in Lozada, Sr. Expropriated lands should be differentiated from a piece of land,
ownership of which was absolutely transferred by way of an unconditional purchase and sale contract freely entered
by two parties, one without obligation to buy and the other without the duty to sell. In that case, the fee simple
concept really comes into play. There is really no occasion to apply the "fee simple concept" if the transfer is
conditional. The taking of a private land in expropriation proceedings is always conditioned on its continued devotion
to its public purpose. As a necessary corollary, once the purpose is terminated or peremptorily abandoned, then the
former owner, if he so desires, may seek its reversion, subject of course to the return, at the very least, of the just
compensation received.

To be compelled to renounce dominion over a piece of land is, in itself, an already bitter pill to swallow for the
owner. But to be asked to sacrifice for the common good and yield ownership to the government which reneges on
its assurance that the private property shall be for a public purpose may be too much. But it would be worse if the
power of eminent domain were deliberately used as a subterfuge to benefit another with influence and power in the
political process, including development firms. The mischief thus depicted is not at all far-fetched with the continued
application of Fery. Even as the Court deliberates on these consolidated cases, there is an uncontroverted
allegation that the MCIAA is poised to sell, if it has not yet sold, the areas in question to Cebu Property Ventures,
Inc. This provides an added dimension to abandon Fery.

Given the foregoing disquisitions, equity and justice demand the reconveyance by MCIAA of the litigated lands in
question to the Ouanos and Inocians. In the same token, justice and fair play also dictate that the Ouanos and
Inocian return to MCIAA what they received as just compensation for the expropriation of their respective properties
plus legal interest to be computed from default, which in this case should run from the time MCIAA complies with the
reconveyance obligation.43 They must likewise pay MCIAA the necessary expenses it might have incurred in
sustaining their respective lots and the monetary value of its services in managing the lots in question to the extent
that they, as private owners, were benefited thereby.

In accordance with Art. 1187 of the Civil Code on mutual compensation, MCIAA may keep whatever income or fruits
it may have obtained from the parcels of land expropriated. In turn, the Ouanos and Inocians need not require the
accounting of interests earned by the amounts they received as just compensation. 44

Following Art. 1189 of the Civil Code providing that "[i]f the thing is improved by its nature, or by time, the
improvement shall inure to the benefit of the creditor x x x," the Ouanos and Inocians do not have to settle the
appreciation of the values of their respective lots as part of the reconveyance process, since the value increase is
merely the natural effect of nature and time.

Finally, We delete the award of PhP 50,000 and PhP 10,000, as attorney’s fees and litigation expenses,
respectively, made in favor of the Inocians by the Cebu City RTC in its judgment in Civil Case No. CEB-18370, as
later affirmed by the CA. As a matter of sound policy, no premium should be set on the right to litigate where there is
no doubt about the bona fides of the exercise of such right, 45 as here, albeit the decision of MCIAA to resist the
former landowners’ claim eventually turned out to be untenable.

WHEREFORE, the petition in G.R. No. 168770 is GRANTED. Accordingly, the CA Decision dated September 3,
2004 in CA-G.R. CV No. 78027 is REVERSED and SET ASIDE. Mactan-Cebu International Airport Authority is
ordered to reconvey subject Lot No. 763-A to petitioners Anunciacion vda. de Ouano, Mario P. Ouano, Leticia
Ouano Arnaiz, and Cielo Ouano Martinez. The Register of Deeds of Cebu City is ordered to effect the necessary
cancellation of title and transfer it in the name of the petitioners within fifteen (15) days from finality of judgment.

The petition of the Mactan-Cebu International Airport Authority in G.R. No. 168812 is DENIED, and the CA’s
Decision and Resolution dated January 14, 2005 and June 29, 2005, respectively, in CA-G.R. CV No. 64356
are AFFIRMED, except insofar as they awarded attorney’s fees and litigation expenses that are hereby DELETED.
Accordingly, Mactan-Cebu International Airport Authority is ordered to reconvey to respondents Ricardo L. Inocian,
Olympia E. Esteves, Emilia E. Bacalla, Restituta E. Montana, and Raul L. Inocian the litigated Lot Nos. 744-A, 745-
A, 746, 762-A, 747, and 761-A; and to respondents Aletha Suico Magat, Philip M. Suico, Dolores S. dela Cruz,
James M. Suico, Edward M. Suico, Roselyn S. Lawsin, Rex M. Suico, and Kharla Suico-Gutierrez the litigated Lot
Nos. 942 and 947. The Register of Deeds of Cebu City is ordered to effect the necessary cancellation of title and
transfer it in the name of respondents within a period of fifteen (15) days from finality of judgment.

The foregoing dispositions are subject to QUALIFICATIONS, to apply to these consolidated petitions, when
appropriate, as follows:

(1) Petitioners Ouano, et al. in G.R. No. 168770 and respondents Ricardo L Inocian, et al. in G.R. No.
168812 are ordered to return to the MCIAA the just compensation they or their predecessors-in-interest
received for the expropriation of their respective lots as stated in Civil Case No. R-1881, within a period of
sixty (60) days from finality of judgment;

(2) The MCIAA shall be entitled to RETAIN whatever fruits and income it may have obtained from the
subject expropriated lots without any obligation to refund the same to the lot owners; and

(3) Petitioners Ouano, et al. in G.R. No. 168770 and respondents Ricardo L. Inocian, et al. in G.R. No.
168812 shall RETAIN whatever interests the amounts they received as just compensation may have earned
in the meantime without any obligation to refund the same to MCIAA.

SO ORDERED.
G.R. No. L-23749 April 29, 1977

FAUSTINO CRUZ, plaintiff-appellant,

vs.
J. M. TUASON & COMPANY, INC., and GREGORIO ARANETA, INC., defendants-appellees.

BARREDO, J.:

Appeal from the order dated August 13, 1964 of the Court of First Instance of Quezon City in Civil Case No. Q-
7751, Faustino Cruz vs. J.M. Tuason & Co., Inc., and Gregorio Araneta, Inc., dismissing the complaint of appellant
Cruz for the recovery of improvements he has made on appellees' land and to compel appellees to convey to him
3,000 square meters of land on three grounds: (1) failure of the complaint to state a cause of action; (2) the cause of
action of plaintiff is unenforceable under the Statute of Frauds; and (3) the action of the plaintiff has already
prescribed.

Actually, a perusal of plaintiff-appellant's complaint below shows that he alleged two separate causes of action,
namely: (1) that upon request of the Deudors (the family of Telesforo Deudor who laid claim on the land in question
on the strength of an "informacion posesoria" ) plaintiff made permanent improvements valued at P30,400.00 on
said land having an area of more or less 20 quinones and for which he also incurred expenses in the amount of
P7,781.74, and since defendants-appellees are being benefited by said improvements, he is entitled to
reimbursement from them of said amounts and (2) that in 1952, defendants availed of plaintiff's services as an
intermediary with the Deudors to work for the amicable settlement of Civil Case No. Q-135, then pending also in the
Court of First Instance of Quezon City, and involving 50 quinones of land, of Which the 20 quinones aforementioned
form part, and notwithstanding his having performed his services, as in fact, a compromise agreement entered into
on March 16, 1963 between the Deudors and the defendants was approved by the court, the latter have refused to
convey to him the 3,000 square meters of land occupied by him, (a part of the 20 quinones above) which said
defendants had promised to do "within ten years from and after date of signing of the compromise agreement", as
consideration for his services.

Within the Period allowed by the rules, the defendants filed separate motions to dismiss alleging three Identical
grounds: (1) As regards that improvements made by plaintiff, that the complaint states no cause of action, the
agreement regarding the same having been made by plaintiff with the Deudors and not with the defendants, hence
the theory of plaintiff based on Article 2142 of the Code on unjust enrichment is untenable; and (2) anent the alleged
agreement about plaintiffs services as intermediary in consideration of which, defendants promised to convey to him
3,000 square meters of land, that the same is unenforceable under the Statute of Frauds, there being nothing in
writing about it, and, in any event, (3) that the action of plaintiff to compel such conveyance has already prescribed.

Plaintiff opposed the motion, insisting that Article 2142 of the applicable to his case; that the Statute of Frauds
cannot be invoked by defendants, not only because Article 1403 of the Civil Code refers only to "sale of real
property or of an interest therein" and not to promises to convey real property like the one supposedly promised by
defendants to him, but also because, he, the plaintiff has already performed his part of the agreement, hence the
agreement has already been partly executed and not merely executory within the contemplation of the Statute; and
that his action has not prescribed for the reason that defendants had ten years to comply and only after the said ten
years did his cause of action accrue, that is, ten years after March 16, 1963, the date of the approval of the
compromise agreement, and his complaint was filed on January 24, 1964.

Ruling on the motion to dismiss, the trial court issued the herein impugned order of August 13, 1964:

In the motion, dated January 31, 1964, defendant Gregorio Araneta, Inc. prayed that the complaint
against it be dismissed on the ground that (1) the claim on which the action is founded is
unenforceable under the provision of the Statute of Frauds; and (2) the plaintiff's action, if any has
already prescribed. In the other motion of February 11, 1964, defendant J. M. Tuason & Co., Inc.
sought the dismissal of the plaintiffs complaint on the ground that it states no cause of action and on
the Identical grounds stated in the motion to dismiss of defendant Gregorio Araneta, Inc. The said
motions are duly opposed by the plaintiff.
 From the allegations of the complaint, it appears that, by virtue of an agreement arrived at in 1948 by
the plaintiff and the Deudors, the former assisted the latter in clearing, improving, subdividing and
selling the large tract of land consisting of 50 quinones covered by the informacion posesoria in the
name of the late Telesforo Deudor and incurred expenses, which are valued approximately at
P38,400.00 and P7,781.74, respectively; and, for the reasons that said improvements are being
used and enjoyed by the defendants, the plaintiff is seeking the reimbursement for the services and
expenses stated above from the defendants.

Defendant J. M. Tuason & Co., Inc. claimed that, insofar as the plaintiffs claim for the reimbursement
of the amounts of P38,400.00 and P7,781.74 is concerned, it is not a privy to the plaintiff's
agreement to assist the Deudors n improving the 50 quinones. On the other hand, the plaintiff
countered that, by holding and utilizing the improvements introduced by him, the defendants are
unjustly enriching and benefiting at the expense of the plaintiff; and that said improvements
constitute a lien or charge of the property itself

On the issue that the complaint insofar as it claims the reimbursement for the services rendered and
expenses incurred by the plaintiff, states no cause of action, the Court is of the opinion that the same
is well-founded. It is found that the defendants are not parties to the supposed express contract
entered into by and between the plaintiff and the Deudors for the clearing and improvement of the 50
quinones. Furthermore in order that the alleged improvement may be considered a lien or charge on
the property, the same should have been made in good faith and under the mistake as to the title.
The Court can take judicial notice of the fact that the tract of land supposedly improved by the
plaintiff had been registered way back in 1914 in the name of the predecessors-in-interest of
defendant J. M. Tuason & Co., Inc. This fact is confirmed in the decision rendered by the Supreme
Court on July 31, 1956 in Case G. R. No. L-5079 entitled J.M. Tuason & Co. Inc. vs. Geronimo
Santiago, et al., Such being the case, the plaintiff cannot claim good faith and mistake as to the title
of the land.

On the issue of statute of fraud, the Court believes that same is applicable to the instant case. The
allegation in par. 12 of the complaint states that the defendants promised and agreed to cede,
transfer and convey unto the plaintiff the 3,000 square meters of land in consideration of certain
services to be rendered then. it is clear that the alleged agreement involves an interest in real
property. Under the provisions of See. 2(e) of Article 1403 of the Civil Code, such agreement is not
enforceable as it is not in writing and subscribed by the party charged.

On the issue of statute of limitations, the Court holds that the plaintiff's action has prescribed. It is
alleged in par. 11 of the complaint that, sometime in 1952, the defendants approached the plaintiff to
prevail upon the Deudors to enter to a compromise agreement in Civil Case No. Q-135 and allied
cases. Furthermore, par. 13 and 14 of the complaint alleged that the plaintiff acted as emissary of
both parties in conveying their respective proposals and couter-proposals until the final settlement
was effected on March 16, 1953 and approved by Court on April 11, 1953. In the present action,
which was instituted on January 24, 1964, the plaintiff is seeking to enforce the supposed agreement
entered into between him and the defendants in 1952, which was already prescribed.

WHEREFORE, the plaintiffs complaint is hereby ordered DISMISSED without pronouncement as to

costs.

SO ORDERED. (Pp. 65-69, Rec. on Appeal,)

On August 22, 1964, plaintiff's counsel filed a motion for reconsideration dated August 20, 1964 as follows:

Plaintiff through undersigned counsel and to this Honorable Court, respectfully moves to reconsider
its Order bearing date of 13 August 1964, on the following grounds:

1. THAT THE COMPLAINT STATES A SUFFICIENT CAUSE OF ACTION AGAINST DEFENDANTS

IN SO FAR AS PLAINTIFF'S CLAIM PAYMENT OF SERVICES AND REIMBURSEMENT OF HIS
EXPENSES, IS CONCERNED;

II. THAT REGARDING PLAINTIFF'S CLAIM OVER THE 3,000 SQ. MS., THE SAME HAS NOT
PRESCRIBED AND THE STATUTE OF FRAUDS IS NOT APPLICABLE THERETO;

ARGUMENT

Plaintiff's complaint contains two (2) causes of action — the first being an action for sum of money in
the amount of P7,781.74 representing actual expenses and P38,400.00 as reasonable
compensation for services in improving the 50 quinones now in the possession of defendants. The
second cause of action deals with the 3,000 sq. ms. which defendants have agreed to transfer into
Plaintiff for services rendered in effecting the compromise between the Deudors and defendants;

Under its order of August 3, 1964, this Honorable Court dismissed the claim for sum of money on the
ground that the complaint does not state a cause of action against defendants. We respectfully
submit:

1. THAT THE COMPLAINT STATES A SUFFICIENT CAUSE OF ACTION AGAINST DEFENDANTS

IN SO FAR AS PLAINTIFF'S CLAIM FOR PAYMENT OF SERVICES AND REIMBURSEMENT OF
HIS EXPENSES IS CONCERNED.

Said this Honorable Court (at p. 2, Order):

ORDER

xxx xxx xxx

On the issue that the complaint, in so far as it claims the reimbursement for the services rendered
and expenses incurred by the plaintiff, states no cause of action, the Court is of the opinion that the
same is well-founded. It is found that the defendants are not parties to the supposed express
contract entered into by and between the plaintiff and the Deudors for the clearing and improvement
of the 50 quinones. Furthermore, in order that the alleged improvement may he considered a lien or
charge on the property, the same should have been made in good faith and under the mistake as to
title. The Court can take judicial notice of the fact that the tract of land supposedly improved by the
plaintiff had been registered way back in 1914 in the name of the predecessors-in-interest of
defendant J. M. Tuason & Co., Inc. This fact is confirmed in the decision rendered by the Supreme
Court on July 31, 1956 in case G. R. No. L-5079 entitled 'J M. Tuason & Co., Inc. vs, Geronimo
Santiago, et al.' Such being the case, the plaintiff cannot claim good faith and mistake as to the title
of the land.

The position of this Honorable Court (supra) is that the complaint does not state a cause of action in
so far as the claim for services and expenses is concerned because the contract for the
improvement of the properties was solely between the Deudors and plaintiff, and defendants are not
privies to it. Now, plaintiff's theory is that defendants are nonetheless liable since they are utilizing
and enjoying the benefit's of said improvements. Thus under paragraph 16 of "he complaint, it is
alleged:

(16) That the services and personal expenses of plaintiff mentioned in paragraph 7
hereof were rendered and in fact paid by him to improve, as they in fact resulted in
considerable improvement of the 50 quinones, and defendants being now in
possession of and utilizing said improvements should reimburse and pay plaintiff for
such services and expenses.

Plaintiff's cause of action is premised inter alia, on the theory of unjust enrichment under Article 2142
of the civil Code:

ART. 2142. Certain lawful voluntary and unilateral acts give rise to the juridical
relation of quasi-contract to the end that no one shill be unjustly enriched or benefited
at the expense of another.

In like vein, Article 19 of the same Code enjoins that:

ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give every-one his due and observe honesty and good faith.

We respectfully draw the attention of this Honorable Court to the fact that ARTICLE 2142 (SUPRA)
DEALS WITH QUASI-CONTRACTS or situations WHERE THERE IS NO CONTRACT BETWEEN
THE PARTIES TO THE ACTION. Further, as we can readily see from the title thereof (Title XVII),
that the Same bears the designation 'EXTRA CONTRACTUAL OBLIGATIONS' or obligations which
do not arise from contracts. While it is true that there was no agreement between plaintiff and
defendants herein for the improvement of the 50 quinones since the latter are presently enjoying and
utilizing the benefits brought about through plaintiff's labor and expenses, defendants should pay
and reimburse him therefor under the principle that 'no one may enrich himself at the expense of
another.' In this posture, the complaint states a cause of action against the defendants.
II. THAT REGARDING PLAINTIFF'S CLAIM OVER THE 3,000 SQ. MS. THE SAME HAS NOT
PRESCRIBED AND THE STATUTE OF FRAUDS IS NOT APPLICABLE THERETO.

The Statute of Frauds is CLEARLY inapplicable to this case:

At page 2 of this Honorable Court's order dated 13 August 1964, the Court ruled as follows:

ORDER

xxx xxx xxx

On the issue of statute of fraud, the Court believes that same is applicable to the
instant Case, The allegation in par. 12 of the complaint states that the defendants
promised and agree to cede, transfer and convey unto the plaintiff, 3,000 square
meters of land in consideration of certain services to be rendered then. It is clear that
the alleged agreement involves an interest in real property. Under the provisions of
Sec. 2(e) of Article 1403 of the Civil Code, such agreement is not enforceable as it is
not in writing and subscribed by the party charged.

To bring this issue in sharper focus, shall reproduce not only paragraph 12 of the complaint but also
the other pertinent paragraphs therein contained. Paragraph 12 states thus:

COMPLAINT

xxx xxx xxx

12). That plaintiff conferred with the aforesaid representatives of defendants several times and on
these occasions, the latter promised and agreed to cede, transfer and convey unto plaintiff the 3,000
sq. ms. (now known as Lots 16-B, 17 and 18) which plaintiff was then occupying and continues to
occupy as of this writing, for and in consideration of the following conditions:

(a) That plaintiff succeed in convincing the DEUDORS to enter into a compromise
agreement and that such agreement be actually entered into by and between the
DEUDORS and defendant companies;

(b) That as of date of signing the compromise agreement, plaintiff shall be the owner
of the 3,000 sq. ms. but the documents evidencing his title over this property shall be
executed and delivered by defendants to plaintiff within ten (10) years from and after
date of signing of the compromise agreement;

(c) That plaintiff shall, without any monetary expense of his part, assist in clearing the
20 quinones of its occupants;

13). That in order to effect a compromise between the parties. plaintiff not only as well acted as
emissary of both parties in conveying their respective proposals and counter- proposals until
succeeded in convinzing the DEUDORS to settle with defendants amicably. Thus, on March 16,
1953, a Compromise Agreement was entered into by and between the DEUDORS and the
defendant companies; and on April 11, 1953, this agreement was approved by this Honorable Court;

14). That in order to comply with his other obligations under his agreement with defendant
companies, plaintiff had to confer with the occupants of the property, exposing himself to physical
harm, convincing said occupants to leave the premises and to refrain from resorting to physical
violence in resisting defendants' demands to vacate;

That plaintiff further assisted defendants' employees in the actual demolition and
transfer of all the houses within the perimeter of the 20 quinones until the end of
1955, when said area was totally cleared and the houses transferred to another area
designated by the defendants as 'Capt. Cruz Block' in Masambong, Quezon City.
(Pars. 12, 13 and 14, Complaint; Emphasis supplied)

From the foregoing, it is clear then the agreement between the parties mentioned in paragraph 12
(supra) of the complaint has already been fully EXECUTED ON ONE PART, namely by the plaintiff.
Regarding the applicability of the statute of frauds (Art. 1403, Civil Code), it has been uniformly held
that the statute of frauds IS APPLICABLE ONLY TO EXECUTORY CONTRACTS BUT NOT
WHERE THE CONTRACT HAS BEEN PARTLY EXECUTED:
 SAME ACTION TO ENFORCE. — The statute of frauds has been uniformly
interpreted to be applicable to executory and not to completed or contracts.
Performance of the contracts takes it out of the operation of the statute. ...

The statute of the frauds is not applicable to contracts which are either totally or
partially performed, on the theory that there is a wide field for the commission of
frauds in executory contracts which can only be prevented by requiring them to be in
writing, a facts which is reduced to a minimum in executed contracts because the
intention of the parties becomes apparent buy their execution and execution, in mots
cases, concluded the right the parties. ... The partial performance may be proved by
either documentary or oral evidence. (At pp. 564-565, Tolentino's Civil Code of the
Philippines, Vol. IV, 1962 Ed.; Emphasis supplied).

Authorities in support of the foregoing rule are legion. Thus Mr. Justice Moran in his 'Comments on
the Rules of Court', Vol. III, 1974 Ed., at p. 167, states:

2 THE STATUTE OF FRAUDS IS APPLICABLE ONLY TO EXECUTORY

CONTRACTS: CONTRACTS WHICH ARE EITHER TOTALLY OR PARTIALLY
PERFORMED ARE WITHOUT THE STATUE. The statute of frauds is
applicable only to executory contracts. It is neither applicable to executed
contracts nor to contracts partially performed. The reason is simple. In executory
contracts there is a wide field for fraud because unless they be in writing there is no
palpable evidence of the intention of the contracting parties. The statute has been
enacted to prevent fraud. On the other hand the commission of fraud in executed
contracts is reduced to minimum in executed contracts because (1) the intention of
the parties is made apparent by the execution and (2) execution concludes, in most
cases, the rights of the parties. (Emphasis supplied)

Under paragraphs 13 and 14 of the complaint (supra) one can readily see that the plaintiff has
fulfilled ALL his obligation under the agreement between him defendants concerning the 3,000 sq.
ms. over which the latter had agreed to execute the proper documents of transfer. This fact is further
projected in paragraph 15 of the complaint where plaintiff states;

15). That in or about the middle of 1963, after all the conditions stated in paragraph
12 hereof had been fulfilled and fully complied with, plaintiff demanded of said
defendants that they execute the Deed of Conveyance in his favor and deliver the
title certificate in his name, over the 3,000 sq. ms. but defendants failed and refused
and continue to fail and refuse to heed his demands. (par. 15, complaint; Emphasis
supplied).

In view of the foregoing, we respectfully submit that this Honorable court erred in holding that the
statute of frauds is applicable to plaintiff's claim over the 3,000 sq. ms. There having been full
performance of the contract on plaintiff's part, the same takes this case out of the context of said
statute.

Plaintiff's Cause of Action had NOT Prescribed:

With all due respect to this Honorable court, we also submit that the Court committed error in holding
that this action has prescribed:

ORDER

xxx xxx xxx

On the issue of the statute of limitations, the Court holds that the plaintiff's action has
prescribed. It is alleged in par. III of the complaint that, sometime in 1952, the
defendants approached the plaintiff to prevail upon the Deudors to enter into a
compromise agreement in Civil Case No. Q-135 and allied cases. Furthermore, pars.
13 and 14 of the complaint alleged that plaintiff acted as emissary of both parties in
conveying their respective proposals and counter-proposals until the final settlement
was affected on March 16, 1953 and approved by the Court on April 11, 1953. In the
present actin, which was instituted on January 24, 1964, the plaintiff is seeking to
enforce the supposed agreement entered into between him and the defendants in
1952, which has already proscribed. (at p. 3, Order).

The present action has not prescribed, especially when we consider carefully the terms of the
agreement between plaintiff and the defendants. First, we must draw the attention of this Honorable
 Court to the fact that this is an action to compel defendants to execute a Deed of Conveyance over
the 3,000 sq. ms. subject of their agreement. In paragraph 12 of the complaint, the terms and
conditions of the contract between the parties are spelled out. Paragraph 12 (b) of the complaint
states:

(b) That as of date of signing the compromise agreement, plaintiff shall be the owner
of the 3,000 sq. ms. but the documents evidencing his title over this property shall be
executed and delivered by defendants to plaintiff within ten (10) years from and after
date of signing of the compromise agreement. (Emphasis supplied).

The compromise agreement between defendants and the Deudors which was conclude through the
efforts of plaintiff, was signed on 16 March 1953. Therefore, the defendants had ten (10) years
signed on 16 March 1953. Therefore, the defendants had ten (10) years from said date within which
to execute the deed of conveyance in favor of plaintiff over the 3,000 sq. ms. As long as the 10
years period has not expired, plaintiff had no right to compel defendants to execute the document
and the latter were under no obligation to do so. Now, this 10-year period elapsed on March 16,
1963. THEN and ONLY THEN does plaintiff's cause of action plaintiff on March 17, 1963. Thus,
under paragraph 15, of the complaint (supra) plaintiff made demands upon defendants for the
execution of the deed 'in or about the middle of 1963.

Since the contract now sought to be enforced was not reduced to writing, plaintiff's cause of action
expires on March 16, 1969 or six years from March 16, 1963 WHEN THE CAUSE OF ACTION
ACCRUED (Art. 1145, Civil Code).

In this posture, we gain respectfully submit that this Honorable Court erred in holding that plaintiff's
action has prescribed.

PRAYER

WHEREFORE, it is respectfully prayed that " Honorable Court reconsider its Order dated August 13,
1964; and issue another order denying the motions to dismiss of defendants G. Araneta, Inc. and J.
M. Tuason Co. Inc. for lack of merit. (Pp. 70-85, Record on Appeal.)

Defendants filed an opposition on the main ground that "the arguments adduced by the plaintiff are merely
reiterations of his arguments contained in his Rejoinder to Reply and Opposition, which have not only been refuted
in herein defendant's Motion to Dismiss and Reply but already passed upon by this Honorable Court."

On September 7, 1964, the trial court denied the motion for reconsiderations thus:

After considering the plaintiff's Motion for Reconsideration of August 20, 1964 and it appearing that
the grounds relied upon in said motion are mere repetition of those already resolved and discussed
by this Court in the order of August 13, 1964, the instant motion is hereby denied and the findings
and conclusions arrived at by the Court in its order of August 13, 1964 are hereby reiterated and
affirmed.

SO ORDERED. (Page 90, Rec. on Appeal.)

Under date of September 24, 1964, plaintiff filed his record on appeal.

In his brief, appellant poses and discusses the following assignments of error:

I. THAT THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT ON THE GROUND
THAT APPELLANT'S CLAIM OVER THE 3,000 SQ. MS. IS ALLEGEDLY UNENFORCEABLE
UNDER THE STATUTE OF FRAUDS;

II. THAT THE COURT A QUO FURTHER COMMITTED ERROR IN DISMISSING APPELLANT'S
COMPLAINT ON THE GROUND THAT HIS CLAIM OVER THE 3,000 SQ. MS. IS ALLEGEDLY
BARRED BY THE STATUTE OF LIMITATIONS; and

III. THAT THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT FOR FAILURE TO
STATE A CAUSE OF ACTION IN SO FAR AS APPELLANT'S CLAIM FOR REIMBURSEMENT OF
EXPENSES AND FOR SERVICES RENDERED IN THE IMPROVEMENT OF THE FIFTY (50)
QUINONES IS CONCERNED.
We agree with appellant that the Statute of Frauds was erroneously applied by the trial court. It is elementary that
the Statute refers to specific kinds of transactions and that it cannot apply to any that is not enumerated therein. And
the only agreements or contracts covered thereby are the following:

(1) Those entered into in the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers;

(2) Those do not comply with the Statute of Frauds as set forth in this number, In the following cases
an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:

(a) An agreement that by its terms is not to be performed within a year from the
making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to

marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less
than five hundred pesos, unless the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them of such things in action, or pay at the
time some part of the purchase money; but when a sale is made by auction and entry
is made by the auctioneer in his sales book, at the time of the sale, of the amount
and kind of property sold, terms of sale, price, names of the purchasers and person
on whose account the sale is made, it is a sufficient memorandum:

(e) An agreement for the leasing for a longer period than one year, or for the sale of
real property or of an interest therein:

(f) a representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract. (Art. 1403, civil Code.)

In the instant case, what appellant is trying to enforce is the delivery to him of 3,000 square meters of land which he
claims defendants promised to do in consideration of his services as mediator or intermediary in effecting a
compromise of the civil action, Civil Case No. 135, between the defendants and the Deudors. In no sense may such
alleged contract be considered as being a "sale of real property or of any interest therein." Indeed, not all dealings
involving interest in real property come under the Statute.

Moreover, appellant's complaint clearly alleges that he has already fulfilled his part of the bargains to induce the
Deudors to amicably settle their differences with defendants as, in fact, on March 16, 1963, through his efforts, a
compromise agreement between these parties was approved by the court. In other words, the agreement in
question has already been partially consummated, and is no longer merely executory. And it is likewise a
fundamental principle governing the application of the Statute that the contract in dispute should be purely executory
on the part of both parties thereto.

We cannot, however, escape taking judicial notice, in relation to the compromise agreement relied upon by
appellant, that in several cases We have decided, We have declared the same rescinded and of no effect. In J. M.
Tuason & Co., Inc. vs. Bienvenido Sanvictores, 4 SCRA 123, the Court held:

It is also worthy of note that the compromise between Deudors and Tuason, upon which Sanvictores
predicates his right to buy the lot he occupies, has been validly rescinded and set aside, as
recognized by this Court in its decision in G.R. No. L-13768, Deudor vs. Tuason, promulgated on
May 30, 1961.

We repeated this observation in J.M. Tuason & Co., Inc. vs. Teodosio Macalindong, 6 SCRA 938. Thus, viewed
from what would be the ultimate conclusion of appellant's case, We entertain grave doubts as to whether or not he
can successfully maintain his alleged cause of action against defendants, considering that the compromise
agreement that he invokes did not actually materialize and defendants have not benefited therefrom, not to mention
the undisputed fact that, as pointed out by appellees, appellant's other attempt to secure the same 3,000 square
meters via the judicial enforcement of the compromise agreement in which they were supposed to be reserved for
him has already been repudiated by the courts. (pp. 5-7. Brief of Appellee Gregorio Araneta, Inc.)
As regards appellant's third assignment of error, We hold that the allegations in his complaint do not sufficiently
Appellants' reliance. on Article 2142 of Civil Code is misplaced. Said article provides:

Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the
end that no one shall be unjustly enriched or benefited at the expense of another.

From the very language of this provision, it is obvious that a presumed qauasi-contract cannot emerge as against
one party when the subject mater thereof is already covered by an existing contract with another party. Predicated
on the principle that no one should be allowed to unjustly enrich himself at the expense of another, Article 2124
creates the legal fiction of a quasi-contract precisely because of the absence of any actual agreement between the
parties concerned. Corollarily, if the one who claims having enriched somebody has done so pursuant to a contract
with a third party, his cause of action should be against the latter, who in turn may, if there is any ground therefor,
seek relief against the party benefited. It is essential that the act by which the defendant is benefited must have
been voluntary and unilateral on the part of the plaintiff. As one distinguished civilian puts it, "The act is voluntary.
because the actor in quasi-contracts is not bound by any pre-existing obligation to act. It is unilateral, because it
arises from the sole will of the actor who is not previously bound by any reciprocal or bilateral agreement. The
reason why the law creates a juridical relations and imposes certain obligation is to prevent a situation where a
person is able to benefit or take advantage of such lawful, voluntary and unilateral acts at the expense of said
actor." (Ambrosio Padilla, Civil Law, Vol. VI, p. 748, 1969 ed.) In the case at bar, since appellant has a clearer and
more direct recourse against the Deudors with whom he had entered into an agreement regarding the
improvements and expenditures made by him on the land of appellees. it Cannot be said, in the sense
contemplated in Article 2142, that appellees have been enriched at the expense of appellant.

In the ultimate. therefore, Our holding above that appellant's first two assignments of error are well taken cannot
save the day for him. Aside from his having no cause of action against appellees, there is one plain error of
omission. We have found in the order of the trial court which is as good a ground as any other for Us to terminate
this case favorably to appellees. In said order Which We have quoted in full earlier in this opinion, the trial court
ruled that "the grounds relied upon in said motion are mere repetitions of those already resolved and discussed by
this Court in the order of August 13, 1964", an observation which We fully share. Virtually, therefore. appellant's
motion for reconsideration was ruled to be pro-forma. Indeed, a cursory reading of the record on appeal reveals that
appellant's motion for reconsideration above-quoted contained exactly the same arguments and manner of
discussion as his February 6, 1964 "Opposition to Motion to Dismiss" of defendant Gregorio Araneta, Inc. ((pp. 17-
25, Rec. on Appeal) as well as his February 17, 1964 "Opposition to Motion to Dismiss of Defendant J. M. Tuason &
Co." (pp. 33-45, Rec. on Appeal and his February 29, 1964 "Rejoinder to Reply Oil Defendant J. M. Tuason & Co."
(pp. 52-64, Rec. on Appeal) We cannot see anything in said motion for reconsideration that is substantially different
from the above oppositions and rejoinder he had previously submitted and which the trial court had already
considered when it rendered its main order of dismissal. Consequently, appellant's motion for reconsideration did
not suspend his period for appeal. (Estrada vs. Sto. Domingo, 28 SCRA 890, 905-6.) And as this point was covered
by appellees' "Opposition to Motion for Reconsideration" (pp. 8689), hence, within the frame of the issues below, it
is within the ambit of Our authority as the Supreme Court to consider the same here even if it is not discussed in the
briefs of the parties. (Insular Life Assurance Co., Ltd. Employees Association-NATU vs. Insular Life Assurance Co.,
Ltd. [Resolution en banc of March 10, 1977 in G. R. No. L-25291).

Now, the impugned main order was issued on August 13, 1964, while the appeal was made on September 24, 1964
or 42 days later. Clearly, this is beyond the 30-day reglementary period for appeal. Hence, the subject order of
dismissal was already final and executory when appellant filed his appeal.

WHEREFORE, the appeal of Faustino Cruz in this case is dismissed. No costs.

G.R. No. 176841 June 29, 2010

ANTHONY ORDUÑA, DENNIS ORDUÑA, and ANTONITA ORDUÑA, Petitioners,

vs.
EDUARDO J. FUENTEBELLA, MARCOS S. CID, BENJAMIN F. CID, BERNARD G. BANTA, and ARMANDO
GABRIEL, JR., Respondents.

DECISION

VELASCO, JR., J.:

In this Petition for Review1 under Rule 45 of the Rules of Court, Anthony Orduña, Dennis Orduña and Antonita
Orduña assail and seek to set aside the Decision 2 of the Court of Appeals (CA) dated December 4, 2006 in CA-G.R.
CV No. 79680, as reiterated in its Resolution of March 6, 2007, which affirmed the May 26, 2003 Decision 3 of the
Regional Trial Court (RTC), Branch 3 in Baguio City, in Civil Case No. 4984-R, a suit for annulment of title and
reconveyance commenced by herein petitioners against herein respondents.

Central to the case is a residential lot with an area of 74 square meters located at Fairview Subdivision, Baguio City,
originally registered in the name of Armando Gabriel, Sr. (Gabriel Sr.) under Transfer Certificate of Title (TCT) No.
67181 of the Registry of Deeds of Baguio City.4

As gathered from the petition, with its enclosures, and the comments thereon of four of the five respondents, 5 the
Court gathers the following relevant facts:

Sometime in 1996 or thereabouts, Gabriel Sr. sold the subject lot to petitioner Antonita Orduña (Antonita), but no
formal deed was executed to document the sale. The contract price was apparently payable in installments as
Antonita remitted from time to time and Gabriel Sr. accepted partial payments. One of the Orduñas would later
testify that Gabriel Sr. agreed to execute a final deed of sale upon full payment of the purchase price. 6

As early as 1979, however, Antonita and her sons, Dennis and Anthony Orduña, were already occupying the
subject lot on the basis of some arrangement undisclosed in the records and even constructed their house thereon.
They also paid real property taxes for the house and declared it for tax purposes, as evidenced by Tax Declaration
No. (TD) 96-04012-1110877 in which they place the assessed value of the structure at PhP 20,090.

After the death of Gabriel Sr., his son and namesake, respondent Gabriel Jr., secured TCT No. T-71499 8 over the
subject lot and continued accepting payments from the petitioners. On December 12, 1996, Gabriel Jr. wrote
Antonita authorizing her to fence off the said lot and to construct a road in the adjacent lot. 9 On December 13, 1996,
Gabriel Jr. acknowledged receipt of a PhP 40,000 payment from petitioners. 10 Through a letter11 dated May 1, 1997,
Gabriel Jr. acknowledged that petitioner had so far made an aggregate payment of PhP 65,000, leaving an
outstanding balance of PhP 60,000. A receipt Gabriel Jr. issued dated November 24, 1997 reflected a PhP 10,000
payment.
Despite all those payments made for the subject lot, Gabriel Jr. would later sell it to Bernard Banta (Bernard)
obviously without the knowledge of petitioners, as later developments would show.

As narrated by the RTC, the lot conveyance from Gabriel Jr. to Bernard was effected against the following backdrop:
Badly in need of money, Gabriel Jr. borrowed from Bernard the amount of PhP 50,000, payable in two weeks at a
fixed interest rate, with the further condition that the subject lot would answer for the loan in case of default. Gabriel
Jr. failed to pay the loan and this led to the execution of a Deed of Sale 12 dated June 30, 1999 and the issuance later
of TCT No. T-7278213 for subject lot in the name of Bernard upon cancellation of TCT No. 71499 in the name of
Gabriel, Jr. As the RTC decision indicated, the reluctant Bernard agreed to acquire the lot, since he had by then
ready buyers in respondents Marcos Cid and Benjamin F. Cid (Marcos and Benjamin or the Cids).

Subsequently, Bernard sold to the Cids the subject lot for PhP 80,000. Armed with a Deed of Absolute Sale of a
Registered Land14 dated January 19, 2000, the Cids were able to cancel TCT No. T-72782 and secure TCT No.
7278315 covering the subject lot. Just like in the immediately preceding transaction, the deed of sale between
Bernard and the Cids had respondent Eduardo J. Fuentebella (Eduardo) as one of the instrumental witnesses.

Marcos and Benjamin, in turn, ceded the subject lot to Eduardo through a Deed of Absolute Sale 16 dated May 11,
2000. Thus, the consequent cancellation of TCT No. T-72782 and issuance on May 16, 2000 of TCT No. T-
327617 over subject lot in the name of Eduardo.

As successive buyers of the subject lot, Bernard, then Marcos and Benjamin, and finally Eduardo, checked, so each
claimed, the title of their respective predecessors-in-interest with the Baguio Registry and discovered said title to be
free and unencumbered at the time each purchased the property. Furthermore, respondent Eduardo, before buying
the property, was said to have inspected the same and found it unoccupied by the Orduñas. 18

Sometime in May 2000, or shortly after his purchase of the subject lot, Eduardo, through his lawyer, sent a letter
addressed to the residence of Gabriel Jr. demanding that all persons residing on or physically occupying the subject
lot vacate the premises or face the prospect of being ejected.19

Learning of Eduardo’s threat, petitioners went to the residence of Gabriel Jr. at No. 34 Dominican Hill, Baguio City.
There, they met Gabriel Jr.’s estranged wife, Teresita, who informed them about her having filed an affidavit-
complaint against her husband and the Cids for falsification of public documents on March 30, 2000. According to
Teresita, her signature on the June 30, 1999 Gabriel Jr.–Bernard deed of sale was a forgery. Teresita further
informed the petitioners of her intent to honor the aforementioned 1996 verbal agreement between Gabriel Sr. and
Antonita and the partial payments they gave her father-in-law and her husband for the subject lot.

On July 3, 2001, petitioners, joined by Teresita, filed a Complaint 20 for Annulment of Title, Reconveyance with
Damages against the respondents before the RTC, docketed as Civil Case No. 4984-R, specifically praying that
TCT No. T-3276 dated May 16, 2000 in the name of Eduardo be annulled. Corollary to this prayer, petitioners
pleaded that Gabriel Jr.’s title to the lot be reinstated and that petitioners be declared as entitled to acquire
ownership of the same upon payment of the remaining balance of the purchase price therefor agreed upon by
Gabriel Sr. and Antonita.

While impleaded and served with summons, Gabriel Jr. opted not to submit an answer.

Ruling of the RTC

By Decision dated May 26, 2003, the RTC ruled for the respondents, as defendants a quo, and against the
petitioners, as plaintiffs therein, the dispositive portion of which reads:

WHEREFORE, the instant complaint is hereby DISMISSED for lack of merit. The four (4) plaintiffs are hereby
ordered by this Court to pay each defendant (except Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J.
Fuentebella who did not testify on these damages), Moral Damages of Twenty Thousand (P20,000.00) Pesos, so
that each defendant shall receive Moral Damages of Eighty Thousand (P80,000.00) Pesos each. Plaintiffs shall also
pay all defendants (except Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who did not testify on
these damages), Exemplary Damages of Ten Thousand (P10,000.00) Pesos each so that each defendant shall
receive Forty Thousand (P40,000.00) Pesos as Exemplary Damages. Also, plaintiffs are ordered to
pay each defendant (except Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who did not testify
on these damages), Fifty Thousand (P50,000.00) Pesos as Attorney’s Fees, jointly and solidarily.

Cost of suit against the plaintiffs.21

On the main, the RTC predicated its dismissal action on the basis of the following grounds and/or premises:
 1. Eduardo was a purchaser in good faith and, hence, may avail himself of the provision of Article 1544 22 of
the Civil Code, which provides that in case of double sale, the party in good faith who is able to register the
property has better right over the property;

2. Under Arts. 135623 and 135824 of the Code, conveyance of real property must be in the proper form, else it
is unenforceable;

3. The verbal sale had no adequate consideration; and

4. Petitioners’ right of action to assail Eduardo’s title prescribes in one year from date of the issuance of
such title and the one-year period has already lapsed.

From the above decision, only petitioners appealed to the CA, their appeal docketed as CA-G.R. CV No. 79680.

The CA Ruling

On December 4, 2006, the appellate court rendered the assailed Decision affirming the RTC decision.
The fallo reads:

WHEREFORE, premises considered, the instant appeal is hereby DISMISSED and the 26 May 2003 Decision of the
Regional Trial Court, Branch 3 of Baguio City in Civil Case No. 4989-R is hereby AFFIRMED.

SO ORDERED.25

Hence, the instant petition on the submission that the appellate court committed reversible error of law:

1. xxx WHEN IT HELD THAT THE SALE OF THE SUBJECT LOT BY ARMANDO GABRIEL, SR. AND
RESPONDENT ARMANDO GABRIEL, JR. TO THE PETITIONERS IS UNENFORCEABLE.

2. xxx IN NOT FINDING THAT THE SALE OF THE SUBJECT LOT BY RESPONDENT ARMANDO
GABRIEL, JR. TO RESPONDENT BERNARD BANTA AND ITS SUBSEQUENT SALE BY THE LATTER TO
HIS CO-RESPONDENTS ARE NULL AND VOID.

3. xxx IN NOT FINDING THAT THE RESPONDENTS ARE BUYERS IN BAD FAITH

4. xxx IN FINDING THAT THE SALE OF THE SUBJECT LOT BETWEEN GABRIEL, SR. AND
RESPONDENT GABRIEL, JR. AND THE PETITIONERS HAS NO ADEQUATE CONSIDERATION.

5. xxx IN RULING THAT THE INSTANT ACTION HAD ALREADY PRESCRIBED.

6. xxx IN FINDING THAT THE PLAINTIFFS-APPELLANTS ARE LIABLE FOR MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY’S FEES.26

The Court’s Ruling

The core issues tendered in this appeal may be reduced to four and formulated as follows, to wit: first, whether or
not the sale of the subject lot by Gabriel Sr. to Antonita is unenforceable under the Statute of Frauds; second,
whether or not such sale has adequate consideration; third, whether the instant action has already prescribed;
and, fourth, whether or not respondents are purchasers in good faith.

The petition is meritorious.

Statute of Frauds Inapplicable to Partially Executed Contracts

It is undisputed that Gabriel Sr., during his lifetime, sold the subject property to Antonita, the purchase price payable
on installment basis. Gabriel Sr. appeared to have been a recipient of some partial payments. After his death, his
son duly recognized the sale by accepting payments and issuing what may be considered as receipts therefor.
Gabriel Jr., in a gesture virtually acknowledging the petitioners’ dominion of the property, authorized them to
construct a fence around it. And no less than his wife, Teresita, testified as to the fact of sale and of payments
received.

Pursuant to such sale, Antonita and her two sons established their residence on the lot, occupying the house they
earlier constructed thereon. They later declared the property for tax purposes, as evidenced by the issuance of TD
96-04012-111087 in their or Antonita’s name, and paid the real estates due thereon, obviously as sign that they are
occupying the lot in the concept of owners.
Given the foregoing perspective, Eduardo’s assertion in his Answer that "persons appeared in the property" 27 only
after "he initiated ejectment proceedings" 28 is clearly baseless. If indeed petitioners entered and took possession of
the property after he (Eduardo) instituted the ejectment suit, how could they explain the fact that he sent a demand
letter to vacate sometime in May 2000?

With the foregoing factual antecedents, the question to be resolved is whether or not the Statute of Frauds bars the
enforcement of the verbal sale contract between Gabriel Sr. and Antonita.

The CA, just as the RTC, ruled that the contract is unenforceable for non-compliance with the Statute of Frauds.

We disagree for several reasons. Foremost of these is that the Statute of Frauds expressed in Article 1403, par.
(2),29 of the Civil Code applies only to executory contracts, i.e., those where no performance has yet been made.
Stated a bit differently, the legal consequence of non-compliance with the Statute does not come into play where the
contract in question is completed, executed, or partially consummated.30

The Statute of Frauds, in context, provides that a contract for the sale of real property or of an interest therein shall
be unenforceable unless the sale or some note or memorandum thereof is in writing and subscribed by the party or
his agent. However, where the verbal contract of sale has been partially executed through the partial
payments made by one party duly received by the vendor, as in the present case, the contract is taken out of the
scope of the Statute.

The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations depending for their
evidence on the unassisted memory of witnesses, by requiring certain enumerated contracts and transactions to be
evidenced by a writing signed by the party to be charged. 31 The Statute requires certain contracts to be evidenced
by some note or memorandum in order to be enforceable. The term "Statute of Frauds" is descriptive of statutes
that require certain classes of contracts to be in writing. The Statute does not deprive the parties of the right to
contract with respect to the matters therein involved, but merely regulates the formalities of the contract
necessary to render it enforceable.32

Since contracts are generally obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present, 33 the Statute simply provides the method by which the contracts
enumerated in Art. 1403 (2) may be proved but does not declare them invalid because they are not reduced to
writing. In fine, the form required under the Statute is for convenience or evidentiary purposes only.

There can be no serious argument about the partial execution of the sale in question. The records show that
petitioners had, on separate occasions, given Gabriel Sr. and Gabriel Jr. sums of money as partial payments of the
purchase price. These payments were duly receipted by Gabriel Jr. To recall, in his letter of May 1, 1997, Gabriel,
Jr. acknowledged having received the aggregate payment of PhP 65,000 from petitioners with the balance of PhP
60,000 still remaining unpaid. But on top of the partial payments thus made, possession of the subject of the sale
had been transferred to Antonita as buyer. Owing thus to its partial execution, the subject sale is no longer within
the purview of the Statute of Frauds.

Lest it be overlooked, a contract that infringes the Statute of Frauds is ratified by the acceptance of benefits under
the contract.34 Evidently, Gabriel, Jr., as his father earlier, had benefited from the partial payments made by the
petitioners. Thus, neither Gabriel Jr. nor the other respondents—successive purchasers of subject lots—could
plausibly set up the Statute of Frauds to thwart petitioners’ efforts towards establishing their lawful right over the
subject lot and removing any cloud in their title. As it were, petitioners need only to pay the outstanding balance of
the purchase price and that would complete the execution of the oral sale.

There was Adequate Consideration

Without directly saying so, the trial court held that the petitioners cannot sue upon the oral sale since in its own
words: "x x x for more than a decade, [petitioners] have not paid in full Armando Gabriel, Sr. or his estate, so that
the sale transaction between Armando Gabriel Sr. and [petitioners] [has] no adequate consideration."

The trial court’s posture, with which the CA effectively concurred, is patently flawed. For starters, they equated
incomplete payment of the purchase price with inadequacy of price or what passes as lesion, when both are
different civil law concepts with differing legal consequences, the first being a ground to rescind an otherwise valid
and enforceable contract. Perceived inadequacy of price, on the other hand, is not a sufficient ground for setting
aside a sale freely entered into, save perhaps when the inadequacy is shocking to the conscience. 35

The Court to be sure takes stock of the fact that the contracting parties to the 1995 or 1996 sale agreed to a
purchase price of PhP 125,000 payable on installments. But the original lot owner, Gabriel Sr., died before full
payment can be effected. Nevertheless, petitioners continued remitting payments to Gabriel, Jr., who sold the
subject lot to Bernard on June 30, 1999. Gabriel, Jr., as may be noted, parted with the property only for PhP 50,000.
On the other hand, Bernard sold it for PhP 80,000 to Marcos and Benjamin. From the foregoing price figures, what
is abundantly clear is that what Antonita agreed to pay Gabriel, Sr., albeit in installment, was very much more than
what his son, for the same lot, received from his buyer and the latter’s buyer later. The Court, therefore, cannot see
its way clear as to how the RTC arrived at its simplistic conclusion about the transaction between Gabriel Sr. and
Antonita being without "adequate consideration."

The Issues of Prescription and the Bona

Fides of the Respondents as Purchasers

Considering the interrelation of these two issues, we will discuss them jointly.

There can be no quibbling about the fraudulent nature of the conveyance of the subject lot effected by Gabriel Jr. in
favor of Bernard. It is understandable that after his father’s death, Gabriel Jr. inherited subject lot and for which he
was issued TCT No. No. T-71499. Since the Gabriel Sr. – Antonita sales transaction called for payment of the
contract price in installments, it is also understandable why the title to the property remained with the Gabriels. And
after the demise of his father, Gabriel Jr. received payments from the Orduñas and even authorized them to enclose
the subject lot with a fence. In sum, Gabriel Jr. knew fully well about the sale and is bound by the contract as
predecessor-in-interest of Gabriel Sr. over the property thus sold.

Yet, the other respondents (purchasers of subject lot) still maintain that they are innocent purchasers for value
whose rights are protected by law and besides which prescription has set in against petitioners’ action for annulment
of title and reconveyance.

The RTC and necessarily the CA found the purchaser-respondents’ thesis on prescription correct stating in this
regard that Eduardo’s TCT No. T-3276 was issued on May 16, 2000 while petitioners filed their complaint for
annulment only on July 3, 2001. To the courts below, the one-year prescriptive period to assail the issuance of a
certificate of title had already elapsed.

We are not persuaded.

The basic complaint, as couched, ultimately seeks the reconveyance of a fraudulently registered piece of residential
land. Having possession of the subject lot, petitioners’ right to the reconveyance thereof, and the annulment of the
covering title, has not prescribed or is not time-barred. This is so for an action for annulment of title or reconveyance
based on fraud is imprescriptible where the suitor is in possession of the property subject of the acts, 36 the action
partaking as it does of a suit for quieting of title which is imprescriptible. 37 Such is the case in this instance.
Petitioners have possession of subject lots as owners having purchased the same from Gabriel, Sr. subject only to
the full payment of the agreed price.

The prescriptive period for the reconveyance of fraudulently registered real property is 10 years, reckoned from the
date of the issuance of the certificate of title, if the plaintiff is not in possession, but imprescriptible if he is in
possession of the property.38 Thus, one who is in actual possession of a piece of land claiming to be the owner
thereof may wait until his possession is disturbed or his title is attacked before taking steps to vindicate his right. 39 As
it is, petitioners’ action for reconveyance is imprescriptible.

This brings us to the question of whether or not the respondent-purchasers, i.e., Bernard, Marcos and Benjamin,
and Eduardo, have the status of innocent purchasers for value, as was the thrust of the trial court’s disquisition and
disposition.

We are unable to agree with the RTC.

It is the common defense of the respondent-purchasers that they each checked the title of the subject lot when it
was his turn to acquire the same and found it clean, meaning without annotation of any encumbrance or adverse
third party interest. And it is upon this postulate that each claims to be an innocent purchaser for value, or one who
buys the property of another without notice that some other person has a right to or interest in it, and who pays
therefor a full and fair price at the time of the purchase or before receiving such notice. 40

The general rule is that one dealing with a parcel of land registered under the Torrens System may safely rely on
the correctness of the certificate of title issued therefor and is not obliged to go beyond the certificate. 41 Where, in
other words, the certificate of title is in the name of the seller, the innocent purchaser for value has the right to rely
on what appears on the certificate, as he is charged with notice only of burdens or claims on the res as noted in the
certificate. Another formulation of the rule is that (a) in the absence of anything to arouse suspicion or (b) except
where the party has actual knowledge of facts and circumstances that would impel a reasonably cautious man to
make such inquiry or (c) when the purchaser has knowledge of a defect of title in his vendor or of sufficient facts to
induce a reasonably prudent man to inquire into the status of the title of the property, 42 said purchaser is without
obligation to look beyond the certificate and investigate the title of the seller.

Eduardo and, for that matter, Bernard and Marcos and Benjamin, can hardly claim to be innocent purchasers for
value or purchasers in good faith. For each knew or was at least expected to know that somebody else other than
Gabriel, Jr. has a right or interest over the lot. This is borne by the fact that the initial seller, Gabriel Jr., was not in
possession of subject property. With respect to Marcos and Benjamin, they knew as buyers that Bernard, the seller,
was not also in possession of the same property. The same goes with Eduardo, as buyer, with respect to Marcos
and Benjamin. ten.lihpwa1

Basic is the rule that a buyer of a piece of land which is in the actual possession of persons other than the seller
must be wary and should investigate the rights of those in possession. Otherwise, without such inquiry, the buyer
can hardly be regarded as a buyer in good faith. When a man proposes to buy or deal with realty, his duty is to read
the public manuscript, i.e., to look and see who is there upon it and what his rights are. A want of caution and
diligence which an honest man of ordinary prudence is accustomed to exercise in making purchases is, in
contemplation of law, a want of good faith. The buyer who has failed to know or discover that the land sold to him is
in adverse possession of another is a buyer in bad faith.43

Where the land sold is in the possession of a person other than the vendor, the purchaser must go beyond the
certificates of title and make inquiries concerning the rights of the actual possessor. 44 And where, as in the instant
case, Gabriel Jr. and the subsequent vendors were not in possession of the property, the prospective vendees are
obliged to investigate the rights of the one in possession. Evidently, Bernard, Marcos and Benjamin, and Eduardo
did not investigate the rights over the subject lot of the petitioners who, during the period material to this case, were
in actual possession thereof. Bernard, et al. are, thus, not purchasers in good faith and, as such, cannot be
accorded the protection extended by the law to such purchasers. 45 Moreover, not being purchasers in good faith,
their having registered the sale, will not, as against the petitioners, carry the day for any of them under Art. 1544 of
the Civil Code prescribing rules on preference in case of double sales of immovable
property. Occeña v. Esponilla46 laid down the following rules in the application of Art. 1544: (1) knowledge by the
first buyer of the second sale cannot defeat the first buyer’s rights except when the second buyer first register in
good faith the second sale; and (2) knowledge gained by the second buyer of the first sale defeats his rights even if
he is first to register, since such knowledge taints his registration with bad faith.

Upon the facts obtaining in this case, the act of registration by any of the three respondent-purchasers was not
coupled with good faith. At the minimum, each was aware or is at least presumed to be aware of facts which should
put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his
vendor.

The award by the lower courts of damages and attorney’s fees to some of the herein respondents was predicated
on the filing by the original plaintiffs of what the RTC characterized as an unwarranted suit. The basis of the award,
needless to stress, no longer obtains and, hence, the same is set aside.

WHEREFORE, the petition is hereby GRANTED. The appealed December 4, 2006 Decision and the March 6, 2007
Resolution of the Court of Appeals in CA-G.R. CV No. 79680 affirming the May 26, 2003 Decision of the Regional
Trial Court, Branch 3 in Baguio City are hereby REVERSED and SET ASIDE. Accordingly, petitioner Antonita
Orduña is hereby recognized to have the right of ownership over subject lot covered by TCT No. T-3276 of the
Baguio Registry registered in the name of Eduardo J. Fuentebella. The Register of Deeds of Baguio City is hereby
ORDERED to cancel said TCT No. T-3276 and to issue a new one in the name of Armando Gabriel, Jr. with the
proper annotation of the conditional sale of the lot covered by said title in favor of Antonita Orduña subject to the
payment of the PhP 50,000 outstanding balance. Upon full payment of the purchase price by Antonita Orduña,
Armando Gabriel, Jr. is ORDERED to execute a Deed of Absolute Sale for the transfer of title of subject lot to the
name of Antonita Orduña, within three (3) days from receipt of said payment.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 179597 February 3, 2014

IGLESIA FILIPINA INDEPENDIENTE, Petitioner,

vs.
HEIRS of BERNARDINO TAEZA, Respondents.

DECISION

PERALTA, J.:

This deals with the Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that the Decision of 1

the Court of Appeals (CA), promulgated on June 30, 2006, and the Resolution dated August 23, 2007, denying
2

petitioner's motion for reconsideration thereof, be reversed and set aside.

The CA's narration of facts is accurate, to wit:

The plaintiff-appellee Iglesia Filipina Independiente (IFI, for brevity), a duly registered religious corporation, was the
owner of a parcel of land described as Lot 3653, containing an area of 31,038 square meters, situated at Ruyu (now
Leonarda), Tuguegarao, Cagayan, and covered by Original Certificate of Title No. P-8698. The said lot is subdivided
as follows: Lot Nos. 3653-A, 3653-B, 3653-C, and 3653-D.

Between 1973 and 1974, the plaintiff-appellee, through its then Supreme Bishop Rev. Macario Ga, sold Lot 3653-D,
with an area of 15,000 square meters, to one Bienvenido de Guzman.

On February 5, 1976, Lot Nos. 3653-A and 3653-B, with a total area of 10,000 square meters, were likewise sold by
Rev. Macario Ga, in his capacity as the Supreme Bishop of the plaintiff-appellee, to the defendant Bernardino
Taeza, for the amount of ₱100,000.00, through installment, with mortgage to secure the payment of the balance.
Subsequently, the defendant allegedly completed the payments.

In 1977, a complaint for the annulment of the February 5, 1976 Deed of Sale with Mortgage was filed by the Parish
Council of Tuguegarao, Cagayan, represented by Froilan Calagui and Dante Santos, the President and the
Secretary, respectively, of the Laymen's Committee, with the then Court of First Instance of Tuguegarao, Cagayan,
against their Supreme Bishop Macario Ga and the defendant Bernardino Taeza.
The said complaint was, however, subsequently dismissed on the ground that the plaintiffs therein lacked the
personality to file the case.

After the expiration of Rev. Macario Ga's term of office as Supreme Bishop of the IFI on May 8, 1981, Bishop Abdias
dela Cruz was elected as the Supreme Bishop. Thereafter, an action for the declaration of nullity of the elections
was filed by Rev. Ga, with the Securities and Exchange Commission (SEC).

In 1987, while the case with the SEC is (sic) still pending, the plaintiff-appellee IFI, represented by Supreme Bishop
Rev. Soliman F. Ganno, filed a complaint for annulment of the sale of the subject parcels of land against Rev. Ga
and the defendant Bernardino Taeza, which was docketed as Civil Case No. 3747. The case was filed with the
Regional Trial Court of Tuguegarao, Cagayan, Branch III, which in its order dated December 10, 1987, dismissed
the said case without prejudice, for the reason that the issue as to whom of the Supreme Bishops could sue for the
church had not yet been resolved by the SEC.

On February 11, 1988, the Securities and Exchange Commission issued an order resolving the leadership issue of
the IFI against Rev. Macario Ga.

Meanwhile, the defendant Bernardino Taeza registered the subject parcels of land. Consequently, Transfer
Certificate of Title Nos. T-77995 and T-77994 were issued in his name.

The defendant then occupied a portion of the land. The plaintiff-appellee allegedly demanded the defendant to
vacate the said land which he failed to do.

In January 1990, a complaint for annulment of sale was again filed by the plaintiff-appellee IFI, this time through
Supreme Bishop Most Rev. Tito Pasco, against the defendant-appellant, with the Regional Trial Court of
Tuguegarao City, Branch 3.

On November 6, 2001, the court a quo rendered judgment in favor of the plaintiff-appellee. It held that the deed of
1âwphi1

sale executed by and between Rev. Ga and the defendant-appellant is null and void. 3

The dispositive portion of the Decision of Regional Trial Court of Tuguegarao City (RTC) reads as follows:

WHEREFORE, judgment is hereby rendered:

1) declaring plaintiff to be entitled to the claim in the Complaint;

2) declaring the Deed of Sale with Mortgage dated February 5, 1976 null and void;

3) declaring Transfer Certificates of Title Numbers T-77995 and T-77994 to be null and void ab initio;

4) declaring the possession of defendant on that portion of land under question and ownership thereof as
unlawful;

5) ordering the defendant and his heirs and successors-in-interest to vacate the premises in question and
surrender the same to plaintiff; [and]

6) condemning defendant and his heirs pay (sic) plaintiff the amount of ₱100,000.00 as actual/consequential
damages and ₱20,000.00 as lawful attorney's fees and costs of the amount (sic). 4

Petitioner appealed the foregoing Decision to the CA. On June 30, 2006, the CA rendered its Decision reversing
and setting aside the RTC Decision, thereby dismissing the complaint. The CA ruled that petitioner, being a
5

corporation sole, validly transferred ownership over the land in question through its Supreme Bishop, who was at
the time the administrator of all properties and the official representative of the church. It further held that "[t]he
authority of the then Supreme Bishop Rev. Ga to enter into a contract and represent the plaintiff-appellee cannot be
assailed, as there are no provisions in its constitution and canons giving the said authority to any other person or
entity."
6

Petitioner then elevated the matter to this Court via a petition for review on certiorari, wherein the following issues
are presented for resolution:

A.) WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING THE FEBRUARY 5, 1976
DEED OF SALE WITH MORTGAGE AS NULL AND VOID;

B.) ASSUMING FOR THE SAKE OF ARGUMENT THAT IT IS NOT VOID, WHETHER OR NOT THE
COURT OF APPEALS ERRED IN NOT FINDING THE FEBRUARY 5, 1976 DEED OF SALE WITH
MORTGAGE AS UNENFORCEABLE, [and]
 C.) WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING RESPONDENT TAEZA
HEREIN AS BUYER IN BAD FAITH. 7

The first two issues boil down to the question of whether then Supreme Bishop Rev. Ga is authorized to enter into a
contract of sale in behalf of petitioner.

Petitioner maintains that there was no consent to the contract of sale as Supreme Bishop Rev. Ga had no authority
to give such consent. It emphasized that Article IV (a) of their Canons provides that "All real properties of the Church
located or situated in such parish can be disposed of only with the approval and conformity of the laymen's
committee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and finally with the
approval of the Supreme Bishop, as administrator of all the temporalities of the Church." It is alleged that the sale of
the property in question was done without the required approval and conformity of the entities mentioned in the
Canons; hence, petitioner argues that the sale was null and void.

In the alternative, petitioner contends that if the contract is not declared null and void, it should nevertheless be
found unenforceable, as the approval and conformity of the other entities in their church was not obtained, as
required by their Canons.

Section 113 of the Corporation Code of the Philippines provides that:

Sec. 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real estate and
personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts
for such purposes. Such corporation may mortgage or sell real property held by it upon obtaining an order for that
purpose from the Court of First Instance of the province where the property is situated; x x x Provided, That in cases
where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging
real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the
courts shall not be necessary. 8

Pursuant to the foregoing, petitioner provided in Article IV (a) of its Constitution and Canons of the Philippine
Independent Church, that "[a]ll real properties of the Church located or situated in such parish can be disposed of
9

only with the approval and conformity of the laymen's

committee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and finally with the
approval of the Supreme Bishop, as administrator of all the temporalities of the Church."

Evidently, under petitioner's Canons, any sale of real property requires not just the consent of the Supreme Bishop
but also the concurrence of the laymen's committee, the parish priest, and the Diocesan Bishop, as sanctioned by
the Supreme Council. However, petitioner's Canons do not specify in what form the conformity of the other church
entities should be made known. Thus, as petitioner's witness stated, in practice, such consent or approval may be
assumed as a matter of fact, unless some opposition is expressed. 10

Here, the trial court found that the laymen's committee indeed made its objection to the sale known to the Supreme
Bishop. The CA, on the other hand, glossed over the fact of such opposition from the laymen's committee, opining
11

that the consent of the Supreme Bishop to the sale was sufficient, especially since the parish priest and the
Diocesan Bishop voiced no objection to the sale. 12

The Court finds it erroneous for the CA to ignore the fact that the laymen's committee objected to the sale of the lot
in question. The Canons require that ALL the church entities listed in Article IV (a) thereof should give its approval to
the transaction. Thus, when the Supreme Bishop executed the contract of sale of petitioner's lot despite the
opposition made by the laymen's committee, he acted beyond his powers.

This case clearly falls under the category of unenforceable contracts mentioned in Article 1403, paragraph (1) of the
Civil Code, which provides, thus:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;

In Mercado v. Allied Banking Corporation, the Court explained that:

13

x x x Unenforceable contracts are those which cannot be enforced by a proper action in court, unless they are
ratified, because either they are entered into without or in excess of authority or they do not comply with the statute
of frauds or both of the contracting parties do not possess the required legal capacity. x x x.14
Closely analogous cases of unenforceable contracts are those where a person signs a deed of extrajudicial partition
in behalf of co-heirs without the latter's authority; where a mother as judicial guardian of her minor children,
15

executes a deed of extrajudicial partition wherein she favors one child by giving him more than his share of the
estate to the prejudice of her other children; and where a person, holding a special power of attorney, sells a
16

property of his principal that is not included in said special power of attorney.
17

In the present case, however, respondents' predecessor-in-interest, Bernardino Taeza, had already obtained a
transfer certificate of title in his name over the property in question. Since the person supposedly transferring
ownership was not authorized to do so, the property had evidently been acquired by mistake. In Vda. de Esconde v.
Court of Appeals, the Court affirmed the trial court's ruling that the applicable provision of law in such cases is
18

Article 1456 of the Civil Code which states that "[i]f property is acquired through mistake or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the
property comes." Thus, in Aznar Brothers Realty Company v. Aying, citing Vda. de Esconde, the Court clarified
19 20

the concept of trust involved in said provision, to wit:

Construing this provision of the Civil Code, in Philippine National Bank v. Court of Appeals, the Court stated:

A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in a typical trust, confidence
is reposed in one person who is named a trustee for the benefit of another who is called the cestui que trust,
respecting property which is held by the trustee for the benefit of the cestui que trust. A constructive trust, unlike an
express trust, does not emanate from, or generate a fiduciary relation. While in an express trust, a beneficiary and a
trustee are linked by confidential or fiduciary relations, in a constructive trust, there is neither a promise nor any
fiduciary relation to speak of and the so-called trustee neither accepts any trust nor intends holding the property for
the beneficiary.

The concept of constructive trusts was further elucidated in the same case, as follows:

. . . implied trusts are those which, without being expressed, are deducible from the nature of the transaction as
matters of intent or which are superinduced on the transaction by operation of law as matters of equity,
independently of the particular intention of the parties. In turn, implied trusts are either resulting or constructive
trusts. These two are differentiated from each other as follows:

Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines the
equitable title or interest and are presumed always to have been contemplated by the parties. They arise from the
nature of circumstances of the consideration involved in a transaction whereby one person thereby becomes
invested with legal title but is obligated in equity to hold his legal title for the benefit of another. On the other hand,
constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent
unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence,
obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold. (Italics
supplied)

A constructive trust having been constituted by law between respondents as trustees and petitioner as beneficiary of
the subject property, may respondents acquire ownership over the said property? The Court held in the same case
of Aznar, that unlike in express trusts and resulting implied trusts where a trustee cannot acquire by prescription
21

any property entrusted to him unless he repudiates the trust, in constructive implied trusts, the trustee may acquire
the property through prescription even if he does not repudiate the relationship. It is then incumbent upon the
beneficiary to bring an action for reconveyance before prescription bars the same.

In Aznar, the Court explained the basis for the prescriptive period, to wit:
22

x x x under the present Civil Code, we find that just as an implied or constructive trust is an offspring of the law (Art.
1456, Civil Code), so is the corresponding obligation to reconvey the property and the title thereto in favor of the true
owner. In this context, and vis-á-vis prescription, Article 1144 of the Civil Code is applicable.

Article 1144. The following actions must be brought within ten years from the time the right of action accrues:

(1) Upon a written contract;

(2) Upon an obligation created by law;

(3) Upon a judgment.

xxx xxx xxx

An action for reconveyance based on an implied or constructive trust must perforce prescribe in ten years and not
otherwise. A long line of decisions of this Court, and of very recent vintage at that, illustrates this rule. Undoubtedly,
it is now well-settled that an action for reconveyance based on an implied or constructive trust prescribes in ten
years from the issuance of the Torrens title over the property.

It has also been ruled that the ten-year prescriptive period begins to run from the date of registration of the deed or
the date of the issuance of the certificate of title over the property, x x x.
23

Here, the present action was filed on January 19, 1990, while the transfer certificates of title over the subject lots
24

were issued to respondents' predecessor-in-interest, Bernardino Taeza, only on February 7, 1990. 25

Clearly, therefore, petitioner's complaint was filed well within the prescriptive period stated above, and it is only just
that the subject property be returned to its rightful owner.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals, dated June 30, 2006, and its
Resolution dated August 23, 2007, are REVERSED and SET ASIDE. A new judgment is hereby entered:

(1) DECLARING petitioner Iglesia Filipina Independiente as the RIGHTFUL OWNER of the lots covered by
Transfer Certificates of Title Nos. T-77994 and T-77995;

(2) ORDERING respondents to execute a deed reconveying the aforementioned lots to petitioner;

(3) ORDERING respondents and successors-in-interest to vacate the subject premises and surrender the
same to petitioner; and

(4) Respondents to PAY costs of suit.

SO ORDERED.

G.R. No. 141877 August 13, 2004

GREGORIO F. AVERIA and SYLVANNA A. VERGARA, representing the absentee heir TERESA
AVERIA, petitioners,
vs.
DOMINGO AVERIA, ANGEL AVERIA, FELIPE AVERIA, and the Heirs of FELIMON F. AVERIA, respondents.

DECISION

CARPIO-MORALES, J.:

Macaria Francisco (Macaria) and Marcos Averia contracted marriage which bore six issues, namely: Gregorio,
Teresa, Domingo, Angel, Felipe and Felimon.

Macaria was widowed and she contracted a second marriage with Roberto Romero (Romero) which bore no issue.

Romero died on February 28, 1968, leaving three adjoining residential lots located at Sampaloc, Manila.
1

In a Deed of Extrajudicial Partition and Summary Settlement of the Estate of Romero, the house and lot containing
150 square meters at 725 Extremadura Street, Sampaloc was apportioned to Macaria.

Transfer Certificate of Title (TCT) No. 93310 covering the Extremadura property was accordingly issued in the name
of Macaria.2

Alleging that fraud was employed by her co-heirs in the partition of the estate of Romero, Macaria filed on June 1,
1970 an action for annulment of title and damages before the Court of First Instance of Manila against her co-heirs
Domingo Viray, et al., docketed as Civil Case No. 79955. Macaria was represented in the case by Atty. Mario C. R.
Domingo. The case was pending litigation for about ten years until the decision of the Court of Appeals which
adjudged Macaria as entitled to an additional 30 square meters of the estate of Romero became final and
executory.

Macaria’s son Gregorio and his family and daughter Teresa’s family lived with her at Extremadura until her death on
March 28, 1983. 3

Close to six years after Macaria’s demise or on January 19, 1989, her children Domingo, Angel and Felipe, along
with Susan Pelayo vda. de Averia (widow of Macaria’s deceased son Felimon), filed before the Regional Trial Court
(RTC) of Manila a complaint against their brother Gregorio and niece Sylvanna Vergara "representing her absentee
mother" Teresa Averia, for judicial partition of the Extremadura property inclusive of the 30 square meters judicially
awarded. The case which was docketed as Civil Case No. 89-47554 is now the subject of the present decision.
4

The defendants Gregorio and Sylvanna Vergara, in their February 8, 1989 Answer to the Complaint, countered that
Gregorio and his late wife Agripina spent for the litigation expenses in Civil Case No. 79955, upon the request of
Macaria, and the couple spent not less P20,000.00 for the purpose "which amount due to the inflation of the
Philippine peso is now equivalent to more or less P200,000.00;" that from 1974 to 1983, Macaria was bedridden and
it was Gregorio’s wife Agripina who nursed and took care of her; that before Macaria died, she in consideration of
the court and other expenses which were defrayed by Gregorio and his wife in prosecuting Civil Case No. 79955
and of "the kindness of the said couple in caring for her," verbally sold to the spouses Gregorio and Agripina one-
half (½) of her Extremadura property.

Gregorio and Sylvanna further countered that the plaintiff Domingo sold and assigned to the spouses Gregorio and
Agripina his one sixth (1/6) share in the remaining ½ portion of the Extremadura property.

Gregorio and Sylvanna concluded in their Answer that the plaintiffs are not co-owners of the Extremadura property
as ½ thereof is solely owned by Gregorio and 1/6 of the other half representing Domingo’s share thereof had already
been sold and assigned by him (Domingo) to Gregorio and his wife who died on May 20, 1987. 5

During the pendency of the case or on June 7, 1989, Macaria’s son Felipe executed a Waiver-Affidavit waiving his
6

"share" in the property subject of litigation in favor of his co-heirs.

After trial, the trial court, Branch 31 RTC of Manila, rendered a decision of July 19, 1991 crediting the version of the
7

defendants in this wise, quoted verbatim:

The defendant Gregorio Averia, Sr. had established that he had paid plaintiff Domingo Averia P10,000.00
although denied by the latter but Domingo Averia did not deny receiving the amount of P5,000.00 on July
10, 1983 given by Gregorio Averia’s wife Agrifina. According to the testimony of defendant’s witness, plaintiff
Domingo Averia sold on July 10, 1983 his inheritance share in the property [consisting of a] house and lot
located at 725 Extremadura because he was in . . . need of money and that he was paid P5,000.00 on July
10, 1983 by Agrifina Averia and another P5,000.00 by Major Gregorio Averia inside his room at the Makati
Police Department three (3) days later. The reason why Domingo Averia became insistent in claiming his
inheritance is the fact that Gregorio Averia refused the request of Domingo Averia and his children to occupy
the portion of subject house which was sold to him by their mother and it was for this reason that they
sought the assistance of the Citizens Legal Assistance Office (CLAO), Atty. Benjamin Roxas in writing
defendant Gregorio Averia to allow him (Domingo Averia) to occupy a portion of subject house but plaintiff
Domingo Averia did not tell his brothers and sisters that he had already sold his 1/6 share of the inheritance
although verbally in favor of Gregorio Averia and his wife.

In the light of the foregoing, the Court, after a circumspect assessment of the evidence presented by both parties,
hereby declares, that defendant Gregorio Averia then a major of police precinct in Makati was the person
responsible for the expenses in litigation in Civil Case No. 79955, involving the property and their mother had indeed
awarded him with ½ portion of the property and that Domingo Averia sold 1/6 of [his] share of the remaining ½
portion of the property to defendant Gregorio. (Underscoring supplied)

Accordingly, the trial court disposed as follows, quoted verbatim:

WHEREFORE, the remaining 5/6 of ½ of the property may still be subject of partition among the remaining
heirs but the summary settlement of the remaining estate of the 5/6 remaining portion of the estate . . . may
be sold and the proceeds thereof be distributed among the heirs in accordance with the aliquot portions of
each and every heir of the deceased Macaria Francisco.

Both parties are hereby ordered to shoulder their respective expenses for attorney’s fees and litigation costs.
(Underscoring supplied)

On appeal to the Court of Appeals (CA) wherein the plaintiffs Domingo et al. assigned two errors, to wit:
 A. THE TRIAL COURT ERRED IN ITS FINDING THAT THERE WAS A SALE OF ONE-HALF OF THE
DECEASED MACARIA F. AVERIA’S INTEREST AND OWNERSHIP OVER THE SUBJECT PROPERTY
IN FAVOR OF DEFENDANT-APPELLEE GREGORIO AVERIA.

B. THE TRIAL COURT ERRED IN ALLOWING THE RECEPTION OF PAROL EVIDENCE TO THE
EFFECT THAT PLAINTIFF-APPELLANT DOMINGO AVERIA HAD ALREADY DISPOSED OF HIS ONE
SIXTH (1/6) SHARE OF THE SUBJECT PROPERTY IN FAVOR OF DEFENDANT-APPELLEE
GREGORIO AVERIA (Emphasis supplied),
8

the appellate court reversed the decision of the trial court.

In reversing the trial court, the appellate court, noting that the alleged transfers made by Macaria and Domingo in
favor of Gregorio were bereft of any written memoranda, held that it was error for the trial court to rely solely on the
evidence adduced by the defendants consisting of the testimonies of Gregorio, Veronica Bautista, Sylvanna Vergara
Clutario, Atty. Mario C.R. Domingo, Felimon Dagondon and Gregorio Averia, Jr. The CA explained its ruling in this
wise:

[T]he alleged conveyances purportedly made by Macaria Francisco and plaintiff-appellant Domingo Averia
are unenforceable as the requirements under the Statute of Frauds have not been complied with. Article
1403, 2(e) of the New Civil Code is explicit:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) x x x

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following
cases an agreement thereafter made shall be unenforceable by action, unless the same, or some
note or memorandum thereof, be in writing and subscribed by the party charged, or by this agent;
evidence, therefore, of the agreement cannot be received without the writing, or a secondary
evidence of its contents:

(a) x x x;

(b) x x x;

(e) an agreement for the leasing for a longer period than one year, or for the sale of real property or
of an interest therein;

(f) x x x"

The two (2) transactions in question being agreements for the sale of real property or of an interest therein
are in clear contravention of the prescription that it must be in writing and subscribed by the party charged or
by an agent thereof. Hence, the strong insistence by defendants-appellees on the verbal conveyances
cannot be made the basis for the alleged ownership over the undivided interests claimed by Gregorio
Averia.

The parol evidence upon which the trial court anchored its award in favor of defendant-appellee Gregorio
Averia is irregular as such kind of evidence is foreclosed by Article 1403 of the Civil Code that no evidence
of the alleged agreements can be received without the writing of secondary evidence which embodies the
sale of the real property. The introduction of the testimonies of Gregorio Averia’s witnesses were timely
objected to by plaintiffs-appellants. Since the testimonies of defendants-appellees’ witnesses are
inadmissible, then such exclusion has pulled the rug under the assailed decision of the trial court and it has
no more leg to stand on.

In the vain attempt to salvage the situation, defendants-appellees however argue that the Article 1403 or the
Statute of Frauds does not apply because the same only refers to purely executory contracts and not to
partially or completely executed contracts.

This contention is untenable. It was not amply demonstrated how such alleged transfers were executed
since plaintiffs-appellants have vigorously objected and opposed the claims of ownership by defendants-
appellees. He who asserts a fact or the affirmative of an issue has the burden of proving it. Defendants-
appellees miserably failed in this respect.

While this Court cannot discount the fact that either defendant-appellee Gregorio Averia or plaintiff-appellant
Domingo Averia may have valid claims against the estate of Macaria Francsico, such matter can best be
threshed out in the proceedings for partition before the court a quo bearing in mind that such partition is
 subject to the payment of the debts of the deceased under Article 1078 of the Civil Code. (Citations omitted;
9

Emphasis and underscoring supplied)

The appellate court thus remanded the case to the trial court.

WHEREFORE, the decision dated July 19, 1991 is reversed and set aside. The case is remanded to the
court a quo which is directed to effect the partition of the subject property or if not, possible, sell the entire lot
and distribute the proceeds of the sale based on equal shares among the children of the late Macaria
Francisco after debts of the said deceased are paid or settled pursuant to Article 1078 of the Civil
Code. (Underscoring supplied)
10

Gregorio and Sylvanna’s motion for reconsideration having been denied by the appellate court, they lodged the
Petition for Review on Certiorari at bar upon the following assignment of errors:

I. THE COURT OF APPEALS (SECOND DIVISION) ERRED IN ITS FINDING THAT THERE WAS NO
SALE OF ONE-HALF (1/2) OF THE DECEASED MACARIA F. AVERIA’S INTEREST AND OWNERSHIP
OVER THE SUBJECT PROPERTY IN FAVOR OF PETITIONER GREGORIO F. AVERIA.

II. THE COURT OF APPEALS (SECOND DIVISION) ERRED IN ITS FINDING THAT THE RECEPTION OF
PAROL EVIDENCE TO THE EFFECT THAT RESPONDENT DOMINGO AVERIA HAD ALREADY SOLD
HIS ONE SIXTH (1/6) SHARE IN THE SUBJECT PROPERTY IN FAVOR OF PETITIONER GREGORIO
AVERIA IS NOT IN ACCORDANCE WITH LAW. 11

Petitioners contend that contrary to the findings of the Court of Appeals, they were able to amply establish, by the
testimonies of credible witnesses, the conveyances to Gregorio of ½ of the Sampaloc property and 1/6 of the
remaining half representing the share of Domingo. 12

With respect to the application by the appellate court of the Statute of Frauds, petitioners contend that the same
refers only to purely executory contracts and not to partially or completely executed contracts as in the instant case.
The finding of the CA that the testimonies of petitioners’ witnesses were timely objected to by respondents is not,
petitioners insist, borne out in the records of the case except with respect to the testimony of Gregorio. 13

Petitioners thus conclude that respondents waived any objection to the admission of parol evidence, hence, it is
admissible and enforceable following Article 1405 of the Civil Code.
14 15 16

The Court finds for petitioner.

Indeed, except for the testimony of petitioner Gregorio bearing on the verbal sale to him by Macaria of the
property, the testimonies of petitioners’ witnesses Sylvanna Vergara Clutario and Flora Lazaro Rivera bearing on
the same matter were not objected to by respondents. Just as the testimonies of Gregorio, Jr. and Veronica
Bautista bearing on the receipt by respondent Domingo on July 23, 1983 from Gregorio’s wife of P5,000.00
representing partial payment of the P10,000.00 valuation of his (Domingo’s) 1/6 share in the property, and of
the testimony of Felimon Dagondon bearing on the receipt by Domingo of P5,000.00 from Gregorio were not
objected to. Following Article 1405 of the Civil Code, the contracts which infringed the Statute of Frauds were
17

ratified by the failure to object to the presentation of parol evidence, hence, enforceable.

ARTICLE 1403. The following contracts are unenforceable, unless they are ratified:

xxx

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases
an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:

xxx

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property
or of an interest therein;

x x x (Emphasis and underscoring supplied),

Contrary then to the finding of the CA, the admission of parol evidence upon which the trial court anchored its
decision in favor of respondents is not irregular and is not foreclosed by Article 1405.
In any event, the Statute of Frauds applies only to executory contracts and not to contracts which are either partially
or totally performed. In the case at bar, petitioners claimed that there was total performance of the contracts, full
18

payment of the objects thereof having already been made and the vendee Gregorio having, even after Macaria’s
death in 1983, continued to occupy the property until and after the filing on January 19, 1989 of the complaint
subject of the case at bar as in fact he is still occupying it.

In proving the fact of partial or total performance, oral evidence may be received as what the trial court in the case at
bar did. Noted civilist Arturo M. Tolentino elucidates on the matter:

The statute of frauds is not applicable to contracts which are either totally or partially performed, on the
theory that there is a wide field for the commission of frauds in executory contracts which can only be
prevented by requiring them to be in writing, a fact which is reduced to a minimum in executed contracts
because the intention of the parties becomes apparent by their execution, and execution concludes, in most
cases, the rights of the parties. However it is not enough for a party to allege partial performance in
order to render the Statute of Frauds inapplicable; such partial performance must be duly
proved. But neither is such party required to establish such partial performance by documentary
proof before he could have the opportunity to introduce oral testimony on the transaction. The
partial performance may be proved by either documentary or oral evidence. (Emphasis, underscoring
19

and italics supplied)

The testimonies of petitioners’ witnesses being credible and straightforward, the trial court did not err in giving them
credence.

The testimony of Sylvana Vergara Clutario, daughter of Teresa, in fact was more than sufficient to prove the
conveyance of half of the subject property by Macaria to Gregorio.

ATTY. DOMINGO:

Q: Are you the same Sylvana Vergara representing the defendant Teresa Averia in this case?

WITNESS:

A: Yes, sir.

Q: Now on February 28, 1972, about 5:30 in the afternoon, where were you?

A: As far as I can remember, I was inside my residence at 725 Extremadura at that date, and time.

Q: On that date and time, where were you residing?

A: At said address, 725 Extremadura Street, that time and date at 5:30 in the afternoon.

Q: Who were your companions if you have any?

A: I was there with my brothers and sisters and Uncle Gregorio and Auntie Agripina and the children and my
grand mother and also the lady who is leading in the prayers because on that date it is the anniversary of
the death of my grandfather.

Q: What is the name of your grandmother?

A: Macaria Averia, sir.

Q: Now, this Gregorio Averia whom you identified to be your Uncle, is he the same Gregorio Averia who is
also the defendant in this case?

WITNESS:

A: The same, sir.

Q: What is the name of your grandfather whom you said whose death anniversary you are then celebrating
on that date?

A: Roberto Romero, sir.

Q: What actually you were doing that time 5:30?

A: We had a gathering and merienda in recollection of the celebration (sic) of the death of my grandfather,
sir.

Q: When you said you were eating then, where were you eating then?

A: It was beside my grandmother.

Q: Where?

A: At the dining room, sir.

Q: So you were sitting at the dining table all of you?

A: Yes, sir the others were a little bit near the table.

Q: Who were seated in the dining table?

A: The Spouses Gregorio and Agripina, my sister Beth and my cousins and my Lola Macaria.

Q: When you were then seated in taking that ginatan as you stated what transpired?

A: Somebody called up and the one who called up was the Secretary of a lawyer and they were asking for
[payment of] expenses in connection with . . . [Criminal Case No. 79955].

Q: You said that it was Agripina who was the one who answered that telephone call. After answering it, what
did she say to anyone seated in that table?

A: Agripina said if Gregorio has some money, he will pay them but Gregorio said he will be responsible for
the expenses.

Q: Did you come to know how much was amount being asked?

A: P500.00, sir.

Q: What else happened after Gregorio said that he would answer for the expenses to be sent to the lawyer?

A: My Lola said that she was embarrassed and ashame[d] because at that time she d[id] not have any
money and it was the couple who was taking the expenses of the case.

Q: When you said "Lola," you are referring to Macaria Averia?

A: Yes, sir.

Q: What else transpired?

A: Because of her embarrassment, she told [them that] one half (1/2) of the House and Lot will be given to
the couple to cover the expenses of the case.

ATTY. DOMINGO:

Q: To whom did your grandmother say this?

A: Well, she said that to Gregorio and Agripina and Gregorio told her, if that is what you wish, I will agree to
your proposal.

Q: What was the reply of your grand mother?

A: My Lola told Gregorio that since you agree, you better prepare all the documents and we will make ready
the documents for the division or partition.

Q: Do you know what House and Lot one half (1/2) of which your grand mother was given (sic) to your Uncle
and Auntie . . .?

A: She is referring to the House and Lot where I used to live before.
 Q: You are referring to the House and Lot located at 725 Extremadura Street, Sampaloc, Manila.

A: Yes, sir.

x x x (Emphasis and underscoring supplied)

20

Not only on account of Sylvana’s manner of testifying that her testimony should be given weight. Her testimony was
against the interest of her mother Teresa whom she represented, her mother being also an heir of Macaria . If the
transfer by Macaria to Gregorio of ½ of the property is upheld as valid and enforceable, then the share of the other
heirs including Sylvanna’s mother would considerably be reduced.

That Atty. Mario C. R. Domingo who was admittedly Macaria’s counsel in Civil Case No. 79955 (which, as priorly
reflected, entailed a period of ten years in court), affirmed on the witness stand that Gregorio and his wife were the
ones who paid for his attorney’s fees amounting to P16,000.00 should no doubt strongly lend credence to
21

Gregorio’s claim to that effect.

As to the sale of Domingo’s 1/6 share to Gregorio, petitioners were able to establish said transaction by parol
evidence, consisting of the testimonies of Gregorio Averia, Jr., Veronica Averia and Felimon Dagondon the
22 23 24

presentation of which was, it bears repeating, not objected to.

Albeit Domingo never denied having received the total amount of P10,000.00 from Gregorio and his wife, he denied
having sold to Gregorio his interest over the property. Such disclaimer cannot, however, prevail over the categorical,
positive statements of petitioners’ above-named witnesses.

In sum, not only did petitioners’ witnesses prove, by their testimonies, the forging of the contracts of sale or
assignment. They proved the full performance or execution of the contracts as well.

WHEREFORE, the petition is hereby GRANTED. The January 31, 2000 Decision of the Court of Appeals in CA-
G.R. No. 44704 is hereby SET ASIDE.

The case is hereby remanded to the trial court, Branch 31 of the RTC of Manila, for appropriate action, following
Section 2 of Rule 69 of the Rules of Civil Procedure.

SO ORDERED.

G.R. No. L-17587 September 12, 1967

PHILIPPINE BANKING CORPORATION, representing the estate of JUSTINA SANTOS Y CANON FAUSTINO,
deceased, plaintiff-appellant,
vs.
LUI SHE in her own behalf and as administratrix of the intestate estate of Wong Heng, deceased, defendant-
appellant.

Nicanor S. Sison for plaintiff-appellant.

Ozaeta, Gibbs & Ozaeta for defendant-appellant.

CASTRO, J.:

Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of land in Manila.
This parcel, with an area of 2,582.30 square meters, is located on Rizal Avenue and opens into Florentino Torres
street at the back and Katubusan street on one side. In it are two residential houses with entrance on Florentino
Torres street and the Hen Wah Restaurant with entrance on Rizal Avenue. The sisters lived in one of the houses,
while Wong Heng, a Chinese, lived with his family in the restaurant. Wong had been a long-time lessee of a portion
of the property, paying a monthly rental of P2,620.

On September 22, 1957 Justina Santos became the owner of the entire property as her sister died with no other
heir. Then already well advanced in years, being at the time 90 years old, blind, crippled and an invalid, she was left
with no other relative to live with. Her only companions in the house were her 17 dogs and 8 maids. Her otherwise
dreary existence was brightened now and then by the visits of Wong's four children who had become the joy of her
life. Wong himself was the trusted man to whom she delivered various amounts for safekeeping, including rentals
from her property at the corner of Ongpin and Salazar streets and the rentals which Wong himself paid as lessee of
a part of the Rizal Avenue property. Wong also took care of the payment; in her behalf, of taxes, lawyers' fees,
funeral expenses, masses, salaries of maids and security guard, and her household expenses.

"In grateful acknowledgment of the personal services of the lessee to her," Justina Santos executed on November
15, 1957 a contract of lease (Plff Exh. 3) in favor of Wong, covering the portion then already leased to him and
another portion fronting Florentino Torres street. The lease was for 50 years, although the lessee was given the
right to withdraw at any time from the agreement; the monthly rental was P3,120. The contract covered an area of
1,124 square meters. Ten days later (November 25), the contract was amended (Plff Exh. 4) so as to make it cover
the entire property, including the portion on which the house of Justina Santos stood, at an additional monthly rental
of P360. For his part Wong undertook to pay, out of the rental due from him, an amount not exceeding P1,000 a
month for the food of her dogs and the salaries of her maids.

On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to buy the leased premises for
P120,000, payable within ten years at a monthly installment of P1,000. The option, written in Tagalog, imposed on
him the obligation to pay for the food of the dogs and the salaries of the maids in her household, the charge not to
exceed P1,800 a month. The option was conditioned on his obtaining Philippine citizenship, a petition for which was
then pending in the Court of First Instance of Rizal. It appears, however, that this application for naturalization was
withdrawn when it was discovered that he was not a resident of Rizal. On October 28, 1958 she filed a petition to
adopt him and his children on the erroneous belief that adoption would confer on them Philippine citizenship. The
error was discovered and the proceedings were abandoned.

On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the term of the lease to 99
years, and another (Plff Exh. 6) fixing the term of the option of 50 years. Both contracts are written in Tagalog.

In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & 279), she bade her legatees to respect the
contracts she had entered into with Wong, but in a codicil (Plff Exh. 17) of a later date (November 4, 1959) she
appears to have a change of heart. Claiming that the various contracts were made by her because of machinations
and inducements practiced by him, she now directed her executor to secure the annulment of the contracts.

On November 18 the present action was filed in the Court of First Instance of Manila. The complaint alleged that the
contracts were obtained by Wong "through fraud, misrepresentation, inequitable conduct, undue influence and
abuse of confidence and trust of and (by) taking advantage of the helplessness of the plaintiff and were made to
circumvent the constitutional provision prohibiting aliens from acquiring lands in the Philippines and also of the
Philippine Naturalization Laws." The court was asked to direct the Register of Deeds of Manila to cancel the
registration of the contracts and to order Wong to pay Justina Santos the additional rent of P3,120 a month from
November 15, 1957 on the allegation that the reasonable rental of the leased premises was P6,240 a month.

In his answer, Wong admitted that he enjoyed her trust and confidence as proof of which he volunteered the
information that, in addition to the sum of P3,000 which he said she had delivered to him for safekeeping, another
sum of P22,000 had been deposited in a joint account which he had with one of her maids. But he denied having
taken advantage of her trust in order to secure the execution of the contracts in question. As counterclaim he sought
the recovery of P9,210.49 which he said she owed him for advances.

Wong's admission of the receipt of P22,000 and P3,000 was the cue for the filing of an amended complaint. Thus on
June 9, 1960, aside from the nullity of the contracts, the collection of various amounts allegedly delivered on
different occasions was sought. These amounts and the dates of their delivery are P33,724.27 (Nov. 4, 1957);
P7,344.42 (Dec. 1, 1957); P10,000 (Dec. 6, 1957); P22,000 and P3,000 (as admitted in his answer). An accounting
of the rentals from the Ongpin and Rizal Avenue properties was also demanded.

In the meantime as a result of a petition for guardianship filed in the Juvenile and Domestic Relations Court, the
Security Bank & Trust Co. was appointed guardian of the properties of Justina Santos, while Ephraim G. Gochangco
was appointed guardian of her person.

In his answer, Wong insisted that the various contracts were freely and voluntarily entered into by the parties. He
likewise disclaimed knowledge of the sum of P33,724.27, admitted receipt of P7,344.42 and P10,000, but
contended that these amounts had been spent in accordance with the instructions of Justina Santos; he expressed
readiness to comply with any order that the court might make with respect to the sums of P22,000 in the bank and
P3,000 in his possession.

The case was heard, after which the lower court rendered judgment as follows:

[A]ll the documents mentioned in the first cause of action, with the exception of the first which is the lease
contract of 15 November 1957, are declared null and void; Wong Heng is condemned to pay unto plaintiff
thru guardian of her property the sum of P55,554.25 with legal interest from the date of the filing of the
amended complaint; he is also ordered to pay the sum of P3,120.00 for every month of his occupation as
 lessee under the document of lease herein sustained, from 15 November 1959, and the moneys he has
consigned since then shall be imputed to that; costs against Wong Heng.

From this judgment both parties appealed directly to this Court. After the case was submitted for decision, both
parties died, Wong Heng on October 21, 1962 and Justina Santos on December 28, 1964. Wong was substituted by
his wife, Lui She, the other defendant in this case, while Justina Santos was substituted by the Philippine Banking
Corporation.

Justina Santos maintained — now reiterated by the Philippine Banking Corporation — that the lease contract (Plff
Exh. 3) should have been annulled along with the four other contracts (Plff Exhs. 4-7) because it lacks mutuality;
because it included a portion which, at the time, was in custodia legis; because the contract was obtained in
violation of the fiduciary relations of the parties; because her consent was obtained through undue influence, fraud
and misrepresentation; and because the lease contract, like the rest of the contracts, is absolutely simulated.

Paragraph 5 of the lease contract states that "The lessee may at any time withdraw from this agreement." It is
claimed that this stipulation offends article 1308 of the Civil Code which provides that "the contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them."

We have had occasion to delineate the scope and application of article 1308 in the early case of Taylor v. Uy Tieng
Piao.1 We said in that case:

Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to the insertion in a
contract for personal service of a resolutory condition permitting the cancellation of the contract by one of
the parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment of
the contract dependent upon the will of the party to whom is conceded the privilege of cancellation; for
where the contracting parties have agreed that such option shall exist, the exercise of the option is as much
in the fulfillment of the contract as any other act which may have been the subject of agreement. Indeed, the
cancellation of a contract in accordance with conditions agreed upon beforehand is fulfillment. 2

And so it was held in Melencio v. Dy Tiao Lay 3 that a "provision in a lease contract that the lessee, at any time
before he erected any building on the land, might rescind the lease, can hardly be regarded as a violation of article
1256 [now art. 1308] of the Civil Code."

The case of Singson Encarnacion v. Baldomar 4 cannot be cited in support of the claim of want of mutuality,
because of a difference in factual setting. In that case, the lessees argued that they could occupy the premises as
long as they paid the rent. This is of course untenable, for as this Court said, "If this defense were to be allowed, so
long as defendants elected to continue the lease by continuing the payment of the rentals, the owner would never
be able to discontinue it; conversely, although the owner should desire the lease to continue the lessees could
effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping
payment of the rentals." Here, in contrast, the right of the lessee to continue the lease or to terminate it is so
circumscribed by the term of the contract that it cannot be said that the continuance of the lease depends upon his
will. At any rate, even if no term had been fixed in the agreement, this case would at most justify the fixing of a
period5 but not the annulment of the contract.

Nor is there merit in the claim that as the portion of the property formerly owned by the sister of Justina Santos was
still in the process of settlement in the probate court at the time it was leased, the lease is invalid as to such portion.
Justina Santos became the owner of the entire property upon the death of her sister Lorenzo on September 22,
1957 by force of article 777 of the Civil Code. Hence, when she leased the property on November 15, she did so
already as owner thereof. As this Court explained in upholding the sale made by an heir of a property under judicial
administration:

That the land could not ordinarily be levied upon while in custodia legis does not mean that one of the heirs
may not sell the right, interest or participation which he has or might have in the lands under administration.
The ordinary execution of property in custodia legis is prohibited in order to avoid interference with the
possession by the court. But the sale made by an heir of his share in an inheritance, subject to the result of
the pending administration, in no wise stands in the way of such administration. 6

It is next contended that the lease contract was obtained by Wong in violation of his fiduciary relationship with
Justina Santos, contrary to article 1646, in relation to article 1941 of the Civil Code, which disqualifies "agents (from
leasing) the property whose administration or sale may have been entrusted to them." But Wong was never an
agent of Justina Santos. The relationship of the parties, although admittedly close and confidential, did not amount
to an agency so as to bring the case within the prohibition of the law.

Just the same, it is argued that Wong so completely dominated her life and affairs that the contracts express not her
will but only his. Counsel for Justina Santos cites the testimony of Atty. Tomas S. Yumol who said that he prepared
the lease contract on the basis of data given to him by Wong and that she told him that "whatever Mr. Wong wants
must be followed."7
The testimony of Atty. Yumol cannot be read out of context in order to warrant a finding that Wong practically
dictated the terms of the contract. What this witness said was:

Q Did you explain carefully to your client, Doña Justina, the contents of this document before she signed it?

A I explained to her each and every one of these conditions and I also told her these conditions were quite
onerous for her, I don't really know if I have expressed my opinion, but I told her that we would rather not
execute any contract anymore, but to hold it as it was before, on a verbal month to month contract of lease.

Q But, she did not follow your advice, and she went with the contract just the same?

A She agreed first . . .

Q Agreed what?

A Agreed with my objectives that it is really onerous and that I was really right, but after that, I was called
again by her and she told me to follow the wishes of Mr. Wong Heng.

xxx xxx xxx

Q So, as far as consent is concerned, you were satisfied that this document was perfectly proper?

xxx xxx xxx

A Your Honor, if I have to express my personal opinion, I would say she is not, because, as I said before,
she told me — "Whatever Mr. Wong wants must be followed."8

Wong might indeed have supplied the data which Atty. Yumol embodied in the lease contract, but to say this is not
to detract from the binding force of the contract. For the contract was fully explained to Justina Santos by her own
lawyer. One incident, related by the same witness, makes clear that she voluntarily consented to the lease contract.
This witness said that the original term fixed for the lease was 99 years but that as he doubted the validity of a lease
to an alien for that length of time, he tried to persuade her to enter instead into a lease on a month-to-month basis.
She was, however, firm and unyielding. Instead of heeding the advice of the lawyer, she ordered him, "Just follow
Mr. Wong Heng."9 Recounting the incident, Atty. Yumol declared on cross examination:

Considering her age, ninety (90) years old at the time and her condition, she is a wealthy woman, it is just
natural when she said "This is what I want and this will be done." In particular reference to this contract of
lease, when I said "This is not proper," she said — "You just go ahead, you prepare that, I am the owner,
and if there is any illegality, I am the only one that can question the illegality."10

Atty. Yumol further testified that she signed the lease contract in the presence of her close friend, Hermenegilda
Lao, and her maid, Natividad Luna, who was constantly by her side. 11 Any of them could have testified on the undue
influence that Wong supposedly wielded over Justina Santos, but neither of them was presented as a witness. The
truth is that even after giving his client time to think the matter over, the lawyer could not make her change her mind.
This persuaded the lower court to uphold the validity of the lease contract against the claim that it was procured
through undue influence.

Indeed, the charge of undue influence in this case rests on a mere inference 12 drawn from the fact that Justina
Santos could not read (as she was blind) and did not understand the English language in which the contract is
written, but that inference has been overcome by her own evidence.

Nor is there merit in the claim that her consent to the lease contract, as well as to the rest of the contracts in
question, was given out of a mistaken sense of gratitude to Wong who, she was made to believe, had saved her
and her sister from a fire that destroyed their house during the liberation of Manila. For while a witness claimed that
the sisters were saved by other persons (the brothers Edilberto and Mariano Sta. Ana) 13 it was Justina Santos
herself who, according to her own witness, Benjamin C. Alonzo, said "very emphatically" that she and her sister
would have perished in the fire had it not been for Wong. 14 Hence the recital in the deed of conditional option (Plff
Exh. 7) that "[I]tong si Wong Heng ang siyang nagligtas sa aming dalawang magkapatid sa halos ay tiyak na
kamatayan", and the equally emphatic avowal of gratitude in the lease contract (Plff Exh. 3).

As it was with the lease contract (Plff Exh. 3), so it was with the rest of the contracts (Plff Exhs. 4-7) — the consent
of Justina Santos was given freely and voluntarily. As Atty. Alonzo, testifying for her, said:

[I]n nearly all documents, it was either Mr. Wong Heng or Judge Torres and/or both. When we had
conferences, they used to tell me what the documents should contain. But, as I said, I would always ask the
old woman about them and invariably the old woman used to tell me: "That's okay. It's all right." 15
But the lower court set aside all the contracts, with the exception of the lease contract of November 15, 1957, on the
ground that they are contrary to the expressed wish of Justina Santos and that their considerations are fictitious.
Wong stated in his deposition that he did not pay P360 a month for the additional premises leased to him, because
she did not want him to, but the trial court did not believe him. Neither did it believe his statement that he paid
P1,000 as consideration for each of the contracts (namely, the option to buy the leased premises, the extension of
the lease to 99 years, and the fixing of the term of the option at 50 years), but that the amount was returned to him
by her for safekeeping. Instead, the court relied on the testimony of Atty. Alonzo in reaching the conclusion that the
contracts are void for want of consideration.

Atty. Alonzo declared that he saw no money paid at the time of the execution of the documents, but his negative
testimony does not rule out the possibility that the considerations were paid at some other time as the contracts in
fact recite. What is more, the consideration need not pass from one party to the other at the time a contract is
executed because the promise of one is the consideration for the other. 16

With respect to the lower court's finding that in all probability Justina Santos could not have intended to part with her
property while she was alive nor even to lease it in its entirety as her house was built on it, suffice it to quote the
testimony of her own witness and lawyer who prepared the contracts (Plff Exhs. 4-7) in question, Atty. Alonzo:

The ambition of the old woman, before her death, according to her revelation to me, was to see to it that
these properties be enjoyed, even to own them, by Wong Heng because Doña Justina told me that she did
not have any relatives, near or far, and she considered Wong Heng as a son and his children her
grandchildren; especially her consolation in life was when she would hear the children reciting prayers in
Tagalog.17

She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped her much, and
she told me to see to it that no one could disturb Wong Heng from those properties. That is why we thought
of the ninety-nine (99) years lease; we thought of adoption, believing that thru adoption Wong Heng might
acquire Filipino citizenship; being the adopted child of a Filipino citizen.18

This is not to say, however, that the contracts (Plff Exhs. 3-7) are valid. For the testimony just quoted, while
dispelling doubt as to the intention of Justina Santos, at the same time gives the clue to what we view as a scheme
to circumvent the Constitutional prohibition against the transfer of lands to aliens. "The illicit purpose then becomes
the illegal causa"19 rendering the contracts void.

Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they reveal an
insidious pattern to subvert by indirection what the Constitution directly prohibits. To be sure, a lease to an alien for
a reasonable period is valid. So is an option giving an alien the right to buy real property on condition that he is
granted Philippine citizenship. As this Court said in Krivenko v. Register of Deeds:20

[A]liens are not completely excluded by the Constitution from the use of lands for residential purposes. Since
their residence in the Philippines is temporary, they may be granted temporary rights such as a lease
contract which is not forbidden by the Constitution. Should they desire to remain here forever and share our
fortunes and misfortunes, Filipino citizenship is not impossible to acquire.

But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino
owner cannot sell or otherwise dispose of his property, 21 this to last for 50 years, then it becomes clear that the
arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to
enjoy the land ( jus possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to dispose of it ( jus
disponendi) — rights the sum total of which make up ownership. It is just as if today the possession is transferred,
tomorrow, the use, the next day, the disposition, and so on, until ultimately all the rights of which ownership is made
up are consolidated in an alien. And yet this is just exactly what the parties in this case did within the space of one
year, with the result that Justina Santos' ownership of her property was reduced to a hollow concept. If this can be
done, then the Constitutional ban against alien landholding in the Philippines, as announced in Krivenko v. Register
of Deeds,22 is indeed in grave peril.

It does not follow from what has been said, however, that because the parties are in pari delicto they will be left
where they are, without relief. For one thing, the original parties who were guilty of a violation of the fundamental
charter have died and have since been substituted by their administrators to whom it would be unjust to impute their
guilt.23 For another thing, and this is not only cogent but also important, article 1416 of the Civil Code provides, as an
exception to the rule on pari delicto, that "When the agreement is not illegal per se but is merely prohibited, and the
prohibition by law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover
what he has paid or delivered." The Constitutional provision that "Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except to individuals, corporations, or associations qualified to
acquire or hold lands of the public domain in the Philippines" 24 is an expression of public policy to conserve lands for
the Filipinos. As this Court said in Krivenko:
 It is well to note at this juncture that in the present case we have no choice. We are construing the
Constitution as it is and not as we may desire it to be. Perhaps the effect of our construction is to preclude
aliens admitted freely into the Philippines from owning sites where they may build their homes. But if this is
the solemn mandate of the Constitution, we will not attempt to compromise it even in the name of amity or
equity . . . .

For all the foregoing, we hold that under the Constitution aliens may not acquire private or public agricultural
lands, including residential lands, and, accordingly, judgment is affirmed, without costs. 25

That policy would be defeated and its continued violation sanctioned if, instead of setting the contracts aside and
ordering the restoration of the land to the estate of the deceased Justina Santos, this Court should apply the general
rule of pari delicto. To the extent that our ruling in this case conflicts with that laid down in Rellosa v. Gaw Chee
Hun 26 and subsequent similar cases, the latter must be considered as pro tanto qualified.

The claim for increased rentals and attorney's fees, made in behalf of Justina Santos, must be denied for lack of
merit.

And what of the various amounts which Wong received in trust from her? It appears that he kept two classes of
accounts, one pertaining to amount which she entrusted to him from time to time, and another pertaining to rentals
from the Ongpin property and from the Rizal Avenue property, which he himself was leasing.

With respect to the first account, the evidence shows that he received P33,724.27 on November 8, 1957 (Plff Exh.
16); P7,354.42 on December 1, 1957 (Plff Exh. 13); P10,000 on December 6, 1957 (Plff Exh. 14) ; and P18,928.50
on August 26, 1959 (Def. Exh. 246), or a total of P70,007.19. He claims, however, that he settled his accounts and
that the last amount of P18,928.50 was in fact payment to him of what in the liquidation was found to be due to him.

He made disbursements from this account to discharge Justina Santos' obligations for taxes, attorneys' fees, funeral
services and security guard services, but the checks (Def Exhs. 247-278) drawn by him for this purpose amount to
only P38,442.84.27 Besides, if he had really settled his accounts with her on August 26, 1959, we cannot understand
why he still had P22,000 in the bank and P3,000 in his possession, or a total of P25,000. In his answer, he offered
to pay this amount if the court so directed him. On these two grounds, therefore, his claim of liquidation and
settlement of accounts must be rejected.

After subtracting P38,442.84 (expenditures) from P70,007.19 (receipts), there is a difference of P31,564 which,
added to the amount of P25,000, leaves a balance of P56,564.3528 in favor of Justina Santos.

As to the second account, the evidence shows that the monthly income from the Ongpin property until its sale in
Rizal Avenue July, 1959 was P1,000, and that from the Rizal Avenue property, of which Wong was the lessee, was
P3,120. Against this account the household expenses and disbursements for the care of the 17 dogs and the
salaries of the 8 maids of Justina Santos were charged. This account is contained in a notebook (Def. Exh. 6) which
shows a balance of P9,210.49 in favor of Wong. But it is claimed that the rental from both the Ongpin and Rizal
Avenue properties was more than enough to pay for her monthly expenses and that, as a matter of fact, there
should be a balance in her favor. The lower court did not allow either party to recover against the other. Said the
court:

[T]he documents bear the earmarks of genuineness; the trouble is that they were made only by Francisco
Wong and Antonia Matias, nick-named Toning, — which was the way she signed the loose sheets, and
there is no clear proof that Doña Justina had authorized these two to act for her in such liquidation; on the
contrary if the result of that was a deficit as alleged and sought to be there shown, of P9,210.49, that was
not what Doña Justina apparently understood for as the Court understands her statement to the Honorable
Judge of the Juvenile Court . . . the reason why she preferred to stay in her home was because there she
did not incur in any debts . . . this being the case, . . . the Court will not adjudicate in favor of Wong Heng on
his counterclaim; on the other hand, while it is claimed that the expenses were much less than the rentals
and there in fact should be a superavit, . . . this Court must concede that daily expenses are not easy to
compute, for this reason, the Court faced with the choice of the two alternatives will choose the middle
course which after all is permitted by the rules of proof, Sec. 69, Rule 123 for in the ordinary course of
things, a person will live within his income so that the conclusion of the Court will be that there is neither
deficit nor superavit and will let the matter rest here.

Both parties on appeal reiterate their respective claims but we agree with the lower court that both claims should be
denied. Aside from the reasons given by the court, we think that the claim of Justina Santos totalling P37,235, as
rentals due to her after deducting various expenses, should be rejected as the evidence is none too clear about the
amounts spent by Wong for food 29 masses30 and salaries of her maids.31 His claim for P9,210.49 must likewise be
rejected as his averment of liquidation is belied by his own admission that even as late as 1960 he still had P22,000
in the bank and P3,000 in his possession.
ACCORDINGLY, the contracts in question (Plff Exhs. 3-7) are annulled and set aside; the land subject-matter of the
contracts is ordered returned to the estate of Justina Santos as represented by the Philippine Banking Corporation;
Wong Heng (as substituted by the defendant-appellant Lui She) is ordered to pay the Philippine Banking
Corporation the sum of P56,564.35, with legal interest from the date of the filing of the amended complaint; and the
amounts consigned in court by Wong Heng shall be applied to the payment of rental from November 15, 1959 until
the premises shall have been vacated by his heirs. Costs against the defendant-appellant.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Angeles, JJ., concur.

Separate Opinions

FERNANDO, J., concurring:

With the able and well-written opinion of Justice Castro, I am in full agreement. The exposition of the facts leaves
nothing to be desired and the statement of the law is notable for its comprehensiveness and clarity. This concurring
opinion has been written solely to express what I consider to be the unfortunate and deplorable consequences of
applying the pari delicto concept, as was, to my mind, indiscriminately done, to alien landholding declared illegal
under the Krivenko doctrine in some past decisions.

It is to be remembered that in Krivenko v. The Register of Deeds of Manila,1 this Court over strong dissents held
that residential and commercial lots may be considered agricultural within the meaning of the constitutional provision
prohibiting the transfer of any private agricultural land to individuals, corporations or associations not qualified to
acquire or hold lands of the public domain in the Philippines save in cases of hereditary succession.

That provision of the Constitution took effect on November 15, 1935 when the Commonwealth Government was
established. The interpretation as set forth in the Krivenko decision was only handed down on November 15, 1947.
Prior to that date there were many who were of the opinion that the phrase agricultural land should be construed
strictly and not be made to cover residential and commercial lots. Acting on that belief, several transactions were
entered into transferring such lots to alien vendees by Filipino-vendors.

After the Krivenko decision, some Filipino vendors sought recovery of the lots in question on the ground that the
sales were null and void. No definite ruling was made by this Court until September of 1953, when on the 29th of
said month, Rellosa v. Gaw Chee Hun,2 Bautista v. Uy Isabelo,3 Talento v. Makiki,4 Caoile v. Chiao Peng5 were
decided.

Of the four decisions in September, 1953, the most extensive discussion of the question is found in Rellosa v. Gaw
Chee Hun, the opinion being penned by retired Justice Bautista Angelo with the concurrence only of one Justice,
Justice Labrador, also retired. Former Chief Justice Paras as well as the former Justices Tuason and Montemayor
concurred in the result. The necessary sixth vote for a decision was given by the then Justice Bengzon, who had a
two-paragraph concurring opinion disagreeing with the main opinion as to the force to be accorded to the two
cases,6 therein cited. There were two dissenting opinions by former Justices Pablo and Alex Reyes. The doctrine as
announced in the Rellosa case is that while the sale by a Filipino-vendor to an alien-vendee of a residential or a
commercial lot is null and void as held in the Krivenko case, still the Filipino-vendor has no right to recover under a
civil law doctrine, the parties being in pari delicto. The only remedy to prevent this continuing violation of the
Constitution which the decision impliedly sanctions by allowing the alien vendees to retain the lots in question is
either escheat or reversion. Thus: "By following either of these remedies, or by approving an implementary law as
above suggested, we can enforce the fundamental policy of our Constitution regarding our natural resources without
doing violence to the principle of pari delicto."7

Were the parties really in pari delicto? Had the sale by and between Filipino-vendor and alien-vendee occurred after
the decision in the Krivenko case, then the above view would be correct that both Filipino-vendor and alien-vendee
could not be considered as innocent parties within the contemplation of the law. Both of them should be held equally
guilty of evasion of the Constitution.

Since, however, the sales in question took place prior to the Krivenko decision, at a time when the assumption could
be honestly entertained that there was no constitutional prohibition against the sale of commercial or residential lots
by Filipino-vendor to alien-vendee, in the absence of a definite decision by the Supreme Court, it would not be doing
violence to reason to free them from the imputation of evading the Constitution. For evidently evasion implies at the
very least knowledge of what is being evaded. The new Civil Code expressly provides: "Mistakes upon a doubtful or
difficult question of law may be the basis of good faith."8
According to the Rellosa opinion, both parties are equally guilty of evasion of the Constitution, based on the broader
principle that "both parties are presumed to know the law." This statement that the sales entered into prior to
the Krivenko decision were at that time already vitiated by a guilty knowledge of the parties may be too extreme a
view. It appears to ignore a postulate of a constitutional system, wherein the words of the Constitution acquire
meaning through Supreme Court adjudication. 1awphîl.nèt

Reference may be made by way of analogy to a decision adjudging a statute void. Under the orthodox theory of
constitutional law, the act having been found unconstitutional was not a law, conferred no rights, imposed no duty,
afforded no protection.9 As pointed out by former Chief Justice Hughes though in Chicot County Drainage District v.
Baxter State Bank:10 "It is quite clear, however, that such broad statements as to the effect of a determination of
unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to such a determination,
is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased
by a new judicial declaration. The effect of subsequent ruling as to invalidity may have to be considered in various
aspects, — with respect to particular relations, individual and corporate, and particular conduct, private and official.
Questions of rights claimed to have become vested, of status, of prior determinations deemed to have finality and
acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous application,
demand examination."

After the Krivenko decision, there is no doubt that continued possession by alien-vendee of property acquired before
its promulgation is violative of the Constitution. It is as if an act granting aliens the right to acquire residential and
commercial lots were annulled by the Supreme Court as contrary to the provision of the Constitution prohibiting
aliens from acquiring private agricultural land.

The question then as now, therefore, was and is how to divest the alien of such property rights on terms equitable to
both parties. That question should be justly resolved in accordance with the mandates of the Constitution not by a
wholesale condemnation of both parties for entering into a contract at a time when there was no ban as yet arising
from the Krivenko decision, which could not have been anticipated. Unfortunately, under the Rellosa case, it was
assumed that the parties, being in pari delicto, would be left in the situation in which they were, neither being in a
position to seek judicial redress.

Would it not have been more in consonance with the Constitution, if instead the decision compelled the restitution of
the property by the alien-vendee to the Filipino-vendor? Krivenko decision held in clear, explicit and unambigous
language that: "We are deciding the instant case under section 5 of Article XIII of the Constitution which is more
comprehensive and more absolute in the sense that it prohibits the transfer to aliens of any private agricultural land
including residential land whatever its origin might have been . . . . This prohibition [Rep. Act No. 133] makes no
distinction between private lands that are strictly agricultural and private lands that are residential or commercial.
The prohibition embraces the sale of private lands of any kind in favor of aliens, which is again a clear
implementation and a legislative interpretation of the constitutional prohibition. . . . It is well to note at this juncture
that in the present case we have no choice. We are construing the Constitution as it is and not as we may desire it
to be. Perhaps the effect of our construction is to preclude aliens, admitted freely into the Philippines, from owning
sites where they may build their homes. But if this is the solemn mandate of the Constitution, we will not attempt to
compromise it even in the name of amity or equity."11

Alien-vendee is therefore incapacitated or disqualified to acquire and hold real estate. That incapacity and that
disqualification should date from the adoption of the Constitution on November 15, 1935. That incapacity and that
disqualification, however, was made known to Filipino-vendor and to alien-vendee only upon the promulgation of
the Krivenko decision on November 15, 1947. Alien-vendee, therefore, cannot be allowed to continue owning and
exercising acts of ownership over said property, when it is clearly included within the Constitutional prohibition.
Alien-vendee should thus be made to restore the property with its fruits and rents to Filipino-vendor, its previous
owner, if it could be shown that in the utmost good faith, he transferred his title over the same to alien-vendee, upon
restitution of the purchase price of course.

The Constitution bars alien-vendees from owning the property in question. By dismissing those suits, the lots
remained in alien hands. Notwithstanding the solution of escheat or reversion offered, they are still at the moment of
writing, for the most part in alien hands. There have been after almost twenty years no proceedings for escheat or
reversion.

Yet it is clear that an alien-vendee cannot consistently with the constitutional provision, as interpreted in
the Krivenko decision, continue owning and exercising acts of ownership over the real estate in question. It ought to
follow then, if such a continuing violation of the fundamental law is to be put an end to, that the Filipino-vendor, who
in good faith entered into, a contract with an incapacitated person, transferring ownership of a piece of land after the
Constitution went into full force and effect, should, in the light of the ruling in the Krivenko case, be restored to the
possession and ownership thereof, where he has filed the appropriate case or proceeding. Any other construction
would defeat the ends and purposes not only of this particular provision in question but the rest of the Constitution
itself.
The Constitution frowns upon the title remaining in the alien-vendees. Restoration of the property upon payment of
price received by Filipino vendor or its reasonable equivalent as fixed by the court is the answer. To give the
constitutional provision full force and effect, in consonance with the dictates of equity and justice, the restoration to
Filipino-vendor upon the payment of a price fixed by the court is the better remedy. He thought he could transfer the
property to an alien and did so. After the Krivenko case had made clear that he had no right to sell nor an alien-
vendee to purchase the property in question, the obvious solution would be for him to reacquire the same. That way
the Constitution would be given, as it ought to be given, respect and deference.

It may be said that it is too late at this stage to hope for such a solution, the Rellosa opinion, although originally
concurred in by only one justice, being too firmly imbedded. The writer however sees a welcome sign in the
adoption by the Court in this case of the concurring opinion of the then Justice, later Chief Justice, Bengzon. Had it
been followed then, the problem would not be still with us now. Fortunately, it is never too late — not even in
constitutional adjudication.

G.R. No. 139982 November 21, 2002

JULIAN FRANCISCO (Substituted by his Heirs, namely: CARLOS ALTEA FRANCISCO;

the heirs of late ARCADIO FRANCISCO, namely: CONCHITA SALANGSANG-FRANCISCO (surviving
spouse),
and his children namely: TEODULO S. FRANCISCO, EMILIANO S. FRANCISCO, MARIA THERESA S.
FRANCISCO,
PAULINA S. FRANCISCO, THOMAS S. FRANCISCO;
PEDRO ALTEA FRANCISCO; CARINA FRANCISCO-ALCANTARA; EFREN ALTEA FRANCISCO; DOMINGA
LEA FRANCISCO-REGONDON;
BENEDICTO ALTEA FRANCISCO and ANTONIO ALTEA FRANCISCO), petitioner,
vs.
PASTOR HERRERA, respondent.

DECISION

QUISUMBING, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals, dated August 30, 1999, in CA-G.R.
CV No. 47869, which affirmed in toto the judgment 2 of the Regional Trial Court (RTC) of Antipolo City, Branch 73, in
Civil Case No. 92-2267. The appellate court sustained the trial court’s ruling which: (a) declared null and void the
deeds of sale of the properties covered by Tax Declaration Nos. 01-00495 and 01-00497; and (b) directed petitioner
to return the subject properties to respondent who, in turn, must refund to petitioner the purchase price
of P1,750,000.

The facts, as found by the trial court and affirmed by the Court of Appeals, are as follows:

Eligio Herrera, Sr., the father of respondent, was the owner of two parcels of land, one consisting of 500 sq. m. and
another consisting of 451 sq. m., covered by Tax Declaration (TD) Nos. 01-00495 and 01-00497, respectively. Both
were located at Barangay San Andres, Cainta, Rizal.3

On January 3, 1991, petitioner bought from said landowner the first parcel, covered by TD No. 01-00495, for the
price of P1,000,000, paid in installments from November 30, 1990 to August 10, 1991.

On March 12, 1991, petitioner bought the second parcel covered by TD No. 01-00497, for P750,000.

Contending that the contract price for the two parcels of land was grossly inadequate, the children of Eligio, Sr.,
namely, Josefina Cavestany, Eligio Herrera, Jr., and respondent Pastor Herrera, tried to negotiate with petitioner to
increase the purchase price. When petitioner refused, herein respondent then filed a complaint for annulment of
sale, with the RTC of Antipolo City, docketed as Civil Case No. 92-2267. In his complaint, respondent claimed
ownership over the second parcel, which is the lot covered by TD No. 01-00497, allegedly by virtue of a sale in his
favor since 1973. He likewise claimed that the first parcel, the lot covered by TD No. 01-00495, was subject to the
co-ownership of the surviving heirs of Francisca A. Herrera, the wife of Eligio, Sr., considering that she died intestate
on April 2, 1990, before the alleged sale to petitioner. Finally, respondent also alleged that the sale of the two lots
was null and void on the ground that at the time of sale, Eligio, Sr. was already incapacitated to give consent to a
contract because he was already afflicted with senile dementia, characterized by deteriorating mental and physical
condition including loss of memory.

In his answer, petitioner as defendant below alleged that respondent was estopped from assailing the sale of the
lots. Petitioner contended that respondent had effectively ratified both contracts of sales, by receiving the
consideration offered in each transaction.

On November 14, 1994, the Regional Trial Court handed down its decision, the dispositive portion of which reads:

WHEREFORE, in view of all the foregoing, this court hereby orders that:

1. The deeds of sale of the properties covered by Tax Dec. Nos. 01-00495 and 01-00497 are declared null
and void;

2. The defendant is to return the lots in question including all improvements thereon to the plaintiff and the
plaintiff is ordered to simultaneously return to the defendant the purchase price of the lots sold totalling
to P750,000.00 for lot covered by TD 01-00497 and P1,000,000.00 covered by TD 01-00495;

3. The court also orders the defendant to pay the cost of the suit.

<>4. The counter-claim of the defendant is denied for lack of merit.

SO ORDERED.4

Petitioner then elevated the matter to the Court of Appeals in CA-G.R. CV No. 47869. On August 30, 1999,
however, the appellate court affirmed the decision of the Regional Trial Court, thus:

WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED in toto. Costs against
defendant-appellant.

SO ORDERED.5

Hence, this petition for review anchored on the following grounds:

I. THE COURT OF APPEALS COMPLETELY IGNORED THE BASIC DIFFERENCE BETWEEN A VOID
AND A MERELY VOIDABLE CONTRACT THUS MISSING THE ESSENTIAL SIGNIFICANCE OF THE
ESTABLISHED FACT OF RATIFICATION BY THE RESPONDENT WHICH EXTINGUISHED WHATEVER
BASIS RESPONDENT MAY HAVE HAD IN HAVING THE CONTRACT AT BENCH ANNULLED.

II. THE DECISION OF THE COURT OF APPEALS ON "SENILE DEMENTIA":

 A. DISREGARDED THE FACTUAL BACKGROUND OF THE CASE;

B. WAS CONTRARY TO ESTABLISHED JURISPRUDENCE; AND

C. WAS PURELY CONJECTURAL, THE CONJECTURE BEING ERRONEOUS.

III. THE COURT OF APPEALS WAS IN GROSS ERROR AND IN FACT VIOLATED PETITIONERS’ RIGHT
TO DUE PROCESS WHEN IT RULED THAT THE CONSIDERATION FOR THE QUESTIONED
CONTRACTS WAS GROSSLY INADEQUATE.6

The resolution of this case hinges on one pivotal issue: Are the assailed contracts of sale void or merely voidable
and hence capable of being ratified?

Petitioner contends that the Court of Appeals erred when it ignored the basic distinction between void and voidable
contracts. He argues that the contracts of sale in the instant case, following Article 1390 7 of the Civil Code are
merely voidable and not void ab initio. Hence, said contracts can be ratified. Petitioner argues that while it is true
that a demented person cannot give consent to a contract pursuant to Article 1327, 8 nonetheless the dementia
affecting one of the parties will not make the contract void per se but merely voidable. Hence, when respondent
accepted the purchase price on behalf of his father who was allegedly suffering from senile dementia, respondent
effectively ratified the contracts. The ratified contracts then become valid and enforceable as between the parties.

Respondent counters that his act of receiving the purchase price does not imply ratification on his part. He only
received the installment payments on his senile father’s behalf, since the latter could no longer account for the
previous payments. His act was thus meant merely as a safety measure to prevent the money from going into the
wrong hands. Respondent also maintains that the sales of the two properties were null and void. First, with respect
to the lot covered by TD No. 01-00497, Eligio, Sr. could no longer sell the same because it had been previously sold
to respondent in 1973. As to lot covered by TD No. 01-00495, respondent contends that it is co-owned by Eligio, Sr.
and his children, as heirs of Eligio’s wife. As such, Eligio, Sr. could not sell said lot without the consent of his co-
owners.

We note that both the trial court and the Court of Appeals found that Eligio, Sr. was already suffering from senile
dementia at the time he sold the lots in question. In other words, he was already mentally incapacitated when he
entered into the contracts of sale. Settled is the rule that findings of fact of the trial court, when affirmed by the
appellate court, are binding and conclusive upon the Supreme Court.9

Coming now to the pivotal issue in this controversy. A void or inexistent contract is one which has no force and
effect from the very beginning. Hence, it is as if it has never been entered into and cannot be validated either by the
passage of time or by ratification. There are two types of void contracts: (1) those where one of the essential
requisites of a valid contract as provided for by Article 1318 10 of the Civil Code is totally wanting; and (2) those
declared to be so under Article 1409 11 of the Civil Code. By contrast, a voidable or annullable contract is one in
which the essential requisites for validity under Article 1318 are present, but vitiated by want of capacity, error,
violence, intimidation, undue influence, or deceit.

Article 1318 of the Civil Code states that no contract exists unless there is a concurrence of consent of the parties,
object certain as subject matter, and cause of the obligation established. Article 1327 provides that insane or
demented persons cannot give consent to a contract. But, if an insane or demented person does enter into a
contract, the legal effect is that the contract is voidable or annullable as specifically provided in Article 1390. 12

In the present case, it was established that the vendor Eligio, Sr. entered into an agreement with petitioner, but that
the former’s capacity to consent was vitiated by senile dementia. Hence, we must rule that the assailed contracts
are not void or inexistent per se; rather, these are contracts that are valid and binding unless annulled through a
proper action filed in court seasonably.

An annullable contract may be rendered perfectly valid by ratification, which can be express or implied. Implied
ratification may take the form of accepting and retaining the benefits of a contract. 13 This is what happened in this
case. Respondent’s contention that he merely received payments on behalf of his father merely to avoid their
misuse and that he did not intend to concur with the contracts is unconvincing. If he was not agreeable with the
contracts, he could have prevented petitioner from delivering the payments, or if this was impossible, he could have
immediately instituted the action for reconveyance and have the payments consigned with the court. None of these
happened. As found by the trial court and the Court of Appeals, upon learning of the sale, respondent negotiated for
the increase of the purchase price while receiving the installment payments. It was only when respondent failed to
convince petitioner to increase the price that the former instituted the complaint for reconveyance of the properties.
Clearly, respondent was agreeable to the contracts, only he wanted to get more. Further, there is no showing that
respondent returned the payments or made an offer to do so. This bolsters the view that indeed there was
ratification. One cannot negotiate for an increase in the price in one breath and in the same breath contend that the
contract of sale is void.
Nor can we find for respondent’s argument that the contracts were void as Eligio, Sr., could not sell the lots in
question as one of the properties had already been sold to him, while the other was the subject of a co-ownership
among the heirs of the deceased wife of Eligio, Sr. Note that it was found by both the trial court and the Court of
Appeals that Eligio, Sr., was the "declared owner" of said lots. This finding is conclusive on us. As declared owner of
said parcels of land, it follows that Eligio, Sr., had the right to transfer the ownership thereof under the principle of
jus disponendi.

In sum, the appellate court erred in sustaining the judgment of the trial court that the deeds of sale of the two lots in
question were null and void.

WHEREFORE, the instant petition is GRANTED. The decision dated August 30, 1999 of the Court of Appeals in
CA-G.R. CV No. 47869, affirming the decision of the Regional Trial Court in Civil Case No. 92-2267 is REVERSED.
The two contracts of sale covering lots under TD No. 01-00495 and No. 01-00497 are hereby declared VALID.
Costs against respondent.

SO ORDERED.

G.R. No. 155001 May 5, 2003

DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B.
BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO,
LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION -
NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION
(PALEA), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA,
in his capacity as Head of the Department of Transportation and Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION,
MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION,
MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION,
and MIASCOR LOGISTICS CORPORATION, petitioners-in-intervention,

x---------------------------------------------------------x
G.R. No. 155547 May 5, 2003

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G. JARAULA, petitioners,

vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS AND
HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of
Transportation and Communications, and SECRETARY SIMEON A. DATUMANONG, in his capacity as Head
of the Department of Public Works and Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON VILLARAMA,
PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST ABAYON, and BENASING O.
MACARANBON, respondents-intervenors,

x---------------------------------------------------------x

G.R. No. 155661 May 5, 2003

CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V. GAERLAN, LEONARDO
DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD SCHLOBOM, ANGELITO SANTOS, MA. LUISA
M. PALCON and SAMAHANG MANGGAGAWA SA PALIPARAN NG PILIPINAS (SMPP), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, SECRETARY LEANDRO M. MENDOZA, in
his capacity as Head of the Department of Transportation and Communications, respondents.

PUNO, J.:

Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65 of the Revised
Rules of Court seeking to prohibit the Manila International Airport Authority (MIAA) and the Department of
Transportation and Communications (DOTC) and its Secretary from implementing the following agreements
executed by the Philippine Government through the DOTC and the MIAA and the Philippine International Air
Terminals Co., Inc. (PIATCO): (1) the Concession Agreement signed on July 12, 1997, (2) the Amended and
Restated Concession Agreement dated November 26, 1999, (3) the First Supplement to the Amended and Restated
Concession Agreement dated August 27, 1999, (4) the Second Supplement to the Amended and Restated
Concession Agreement dated September 4, 2000, and (5) the Third Supplement to the Amended and Restated
Concession Agreement dated June 22, 2001 (collectively, the PIATCO Contracts).

The facts are as follows:

In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a comprehensive
study of the Ninoy Aquino International Airport (NAIA) and determine whether the present airport can cope
with the traffic development up to the year 2010. The study consisted of two parts: first, traffic forecasts,
capacity of existing facilities, NAIA future requirements, proposed master plans and development plans; and
second, presentation of the preliminary design of the passenger terminal building. The ADP submitted a
Draft Final Report to the DOTC in December 1989.

Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun, Henry Sy, Sr.,
Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V. Ramos to explore the
possibility of investing in the construction and operation of a new international airport terminal. To signify
their commitment to pursue the project, they formed the Asia's Emerging Dragon Corp. (AEDC) which was
registered with the Securities and Exchange Commission (SEC) on September 15, 1993.

On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the DOTC/MIAA
for the development of NAIA International Passenger Terminal III (NAIA IPT III) under a build-operate-and-
transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law). 1

On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the Prequalification Bids and Awards
Committee (PBAC) for the implementation of the NAIA IPT III project.

On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the National Economic
and Development Authority (NEDA). A revised proposal, however, was forwarded by the DOTC to NEDA on
December 13, 1995. On January 5, 1996, the NEDA Investment Coordinating Council (NEDA ICC) – Technical
Board favorably endorsed the project to the ICC – Cabinet Committee which approved the same, subject to certain
conditions, on January 19, 1996. On February 13, 1996, the NEDA passed Board Resolution No. 2 which approved
the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an invitation for
competitive or comparative proposals on AEDC's unsolicited proposal, in accordance with Sec. 4-A of RA 6957, as
amended. The alternative bidders were required to submit three (3) sealed envelopes on or before 5:00 p.m. of
September 20, 1996. The first envelope should contain the Prequalification Documents, the second envelope the
Technical Proposal, and the third envelope the Financial Proposal of the proponent.

On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid Documents and the
submission of the comparative bid proposals. Interested firms were permitted to obtain the Request for Proposal
Documents beginning June 28, 1996, upon submission of a written application and payment of a non-refundable fee
of P50,000.00 (US$2,000).

The Bid Documents issued by the PBAC provided among others that the proponent must have adequate capability
to sustain the financing requirement for the detailed engineering, design, construction, operation, and maintenance
phases of the project. The proponent would be evaluated based on its ability to provide a minimum amount of equity
to the project, and its capacity to secure external financing for the project.

On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid conference on July 29,
1996.

On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The following
amendments were made on the Bid Documents:

a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial proposal an
additional percentage of gross revenue share of the Government, as follows:

i. First 5 years 5.0%

ii. Next 10 years 7.5%
iii. Next 10 years 10.0%

b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price challenge. Proponent
may offer an Annual Guaranteed Payment which need not be of equal amount, but payment of which shall
start upon site possession.

c. The project proponent must have adequate capability to sustain the financing requirement for the detailed
engineering, design, construction, and/or operation and maintenance phases of the project as the case may
be. For purposes of pre-qualification, this capability shall be measured in terms of:

i. Proof of the availability of the project proponent and/or the consortium to provide the minimum
amount of equity for the project; and

ii. a letter testimonial from reputable banks attesting that the project proponent and/or the members
of the consortium are banking with them, that the project proponent and/or the members are of good
financial standing, and have adequate resources.

d. The basis for the prequalification shall be the proponent's compliance with the minimum technical and
financial requirements provided in the Bid Documents and the IRR of the BOT Law. The minimum amount of
equity shall be 30% of the Project Cost.

e. Amendments to the draft Concession Agreement shall be issued from time to time. Said amendments
shall only cover items that would not materially affect the preparation of the proponent's proposal.

On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were made. Upon the
request of prospective bidder People's Air Cargo & Warehousing Co., Inc (Paircargo), the PBAC warranted that
based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations of the BOT Law, only the proposed Annual
Guaranteed Payment submitted by the challengers would be revealed to AEDC, and that the challengers' technical
and financial proposals would remain confidential. The PBAC also clarified that the list of revenue sources contained
in Annex 4.2a of the Bid Documents was merely indicative and that other revenue sources may be included by the
proponent, subject to approval by DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges
denominated as Public Utility Fees would be subject to regulation, and those charges which would be actually
deemed Public Utility Fees could still be revised, depending on the outcome of PBAC's query on the matter with the
Department of Justice.

In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers to the Queries of PAIRCARGO as Per
Letter Dated September 3 and 10, 1996." Paircargo's queries and the PBAC's responses were as follows:
 1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement as prescribed
in Section 8.3.4 of the Bid Documents considering that the capitalization of each member company is so
structured to meet the requirements and needs of their current respective business undertaking/activities. In
order to comply with this equity requirement, Paircargo is requesting PBAC to just allow each member of
(sic) corporation of the Joint Venture to just execute an agreement that embodies a commitment to infuse
the required capital in case the project is awarded to the Joint Venture instead of increasing each
corporation's current authorized capital stock just for prequalification purposes.

In prequalification, the agency is interested in one's financial capability at the time of prequalification, not
future or potential capability.

A commitment to put up equity once awarded the project is not enough to establish that "present" financial
capability. However, total financial capability of all member companies of the Consortium, to be established
by submitting the respective companies' audited financial statements, shall be acceptable.

2. At present, Paircargo is negotiating with banks and other institutions for the extension of a Performance
Security to the joint venture in the event that the Concessions Agreement (sic) is awarded to them.
However, Paircargo is being required to submit a copy of the draft concession as one of the documentary
requirements. Therefore, Paircargo is requesting that they'd (sic) be furnished copy of the approved
negotiated agreement between the PBAC and the AEDC at the soonest possible time.

A copy of the draft Concession Agreement is included in the Bid Documents. Any material changes would
be made known to prospective challengers through bid bulletins. However, a final version will be issued
before the award of contract.

The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents (Acceptance of
Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the required Bid Security.

On September 20, 1996, the consortium composed of People's Air Cargo and Warehousing Co., Inc. (Paircargo),
Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo
Consortium) submitted their competitive proposal to the PBAC. On September 23, 1996, the PBAC opened the first
envelope containing the prequalification documents of the Paircargo Consortium. On the following day, September
24, 1996, the PBAC prequalified the Paircargo Consortium.

On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the Paircargo
Consortium, which include:

a. The lack of corporate approvals and financial capability of PAIRCARGO;

b. The lack of corporate approvals and financial capability of PAGS;

c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount that Security
Bank could legally invest in the project;

d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for prequalification purposes;
and

e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement in the
operation of a public utility.

The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues raised by the latter,
and that based on the documents submitted by Paircargo and the established prequalification criteria, the PBAC
had found that the challenger, Paircargo, had prequalified to undertake the project. The Secretary of the DOTC
approved the finding of the PBAC.

The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium which contained
its Technical Proposal.

On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargo's financial capability, in
view of the restrictions imposed by Section 21-B of the General Banking Act and Sections 1380 and 1381 of the
Manual Regulations for Banks and Other Financial Intermediaries. On October 7, 1996, AEDC again manifested its
objections and requested that it be furnished with excerpts of the PBAC meeting and the accompanying technical
evaluation report where each of the issues they raised were addressed.

On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the Paircargo Consortium
containing their respective financial proposals. Both proponents offered to build the NAIA Passenger Terminal III for
at least $350 million at no cost to the government and to pay the government: 5% share in gross revenues for the
first five years of operation, 7.5% share in gross revenues for the next ten years of operation, and 10% share in
gross revenues for the last ten years of operation, in accordance with the Bid Documents. However, in addition to
the foregoing, AEDC offered to pay the government a total of P135 million as guaranteed payment for 27 years
while Paircargo Consortium offered to pay the government a total of P17.75 billion for the same period.

Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by the Paircargo
Consortium, and gave AEDC 30 working days or until November 28, 1996 within which to match the said bid,
otherwise, the project would be awarded to Paircargo.

As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado Lagdameo, on
December 11, 1996, issued a notice to Paircargo Consortium regarding AEDC's failure to match the proposal.

On February 27, 1997, Paircargo Consortium incorporated into Philippine International Airport Terminals Co., Inc.
(PIATCO).

AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its objections as
regards the prequalification of PIATCO.

On April 11, 1997, the DOTC submitted the concession agreement for the second-pass approval of the NEDA-ICC.

On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of Nullity of the
Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the Chairman of the PBAC, the voting
members of the PBAC and Pantaleon D. Alvarez, in his capacity as Chairman of the PBAC Technical Committee.

On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a no-objection basis, of
the BOT agreement between the DOTC and PIATCO. As the ad referendum gathered only four (4) of the required
six (6) signatures, the NEDA merely noted the agreement.

On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.

On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO, through its
President, Henry T. Go, signed the "Concession Agreement for the Build-Operate-and-Transfer Arrangement of the
Ninoy Aquino International Airport Passenger Terminal III" (1997 Concession Agreement). The Government granted
PIATCO the franchise to operate and maintain the said terminal during the concession period and to collect the
fees, rentals and other charges in accordance with the rates or schedules stipulated in the 1997 Concession
Agreement. The Agreement provided that the concession period shall be for twenty-five (25) years commencing
from the in-service date, and may be renewed at the option of the Government for a period not exceeding twenty-
five (25) years. At the end of the concession period, PIATCO shall transfer the development facility to MIAA.

On November 26, 1998, the Government and PIATCO signed an Amended and Restated Concession Agreement
(ARCA). Among the provisions of the 1997 Concession Agreement that were amended by the ARCA were: Sec.
1.11 pertaining to the definition of "certificate of completion"; Sec. 2.05 pertaining to the Special Obligations of GRP;
Sec. 3.02 (a) dealing with the exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning the
assignment by Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing with the proceeds of
Concessionaire's insurance; Sec. 5.10 with respect to the temporary take-over of operations by GRP; Sec. 5.16
pertaining to the taxes, duties and other imposts that may be levied on the Concessionaire; Sec. 6.03 as regards the
periodic adjustment of public utility fees and charges; the entire Article VIII concerning the provisions on the
termination of the contract; and Sec. 10.02 providing for the venue of the arbitration proceedings in case a dispute
or controversy arises between the parties to the agreement.

Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First Supplement was
signed on August 27, 1999; the Second Supplement on September 4, 2000; and the Third Supplement on June 22,
2001 (collectively, Supplements).

The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining "Revenues" or "Gross Revenues";
Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient funds for the upkeep,
maintenance, repair and/or replacement of all airport facilities and equipment which are owned or operated by
MIAA; and further providing additional special obligations on the part of GRP aside from those already enumerated
in Sec. 2.05 of the ARCA. The First Supplement also provided a stipulation as regards the construction of a surface
road to connect NAIA Terminal II and Terminal III in lieu of the proposed access tunnel crossing Runway 13/31; the
swapping of obligations between GRP and PIATCO regarding the improvement of Sales Road; and the changes in
the timetable. It also amended Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02
of the ARCA by inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of
Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing, removal, demolition or disposal
of subterranean structures uncovered or discovered at the site of the construction of the terminal by the
Concessionaire. It defined the scope of works; it provided for the procedure for the demolition of the said structures
and the consideration for the same which the GRP shall pay PIATCO; it provided for time extensions, incremental
and consequential costs and losses consequent to the existence of such structures; and it provided for some
additional obligations on the part of PIATCO as regards the said structures.

Finally, the Third Supplement provided for the obligations of the Concessionaire as regards the construction of the
surface road connecting Terminals II and III.

Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA Terminals I and II, had
existing concession contracts with various service providers to offer international airline airport services, such as in-
flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling
and warehousing, and other services, to several international airlines at the NAIA. Some of these service providers
are the Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia Group. Miascor, DNATA and
MacroAsia, together with Philippine Airlines (PAL), are the dominant players in the industry with an aggregate
market share of 70%.

On September 17, 2002, the workers of the international airline service providers, claiming that they stand to lose
their employment upon the implementation of the questioned agreements, filed before this Court a petition for
prohibition to enjoin the enforcement of said agreements.2

On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed a motion for
intervention and a petition-in-intervention.

On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed a similar
petition with this Court.3

On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the legality of the various
agreements.4

On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P. Nantes, Eduardo C.
Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O.
Macaranbon, moved to intervene in the case as Respondents-Intervenors. They filed their Comment-In-Intervention
defending the validity of the assailed agreements and praying for the dismissal of the petitions.

During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on November 29, 2002, in
her speech at the 2002 Golden Shell Export Awards at Malacañang Palace, stated that she will not "honor
(PIATCO) contracts which the Executive Branch's legal offices have concluded (as) null and void." 5

Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002. The Office of the
Solicitor General and the Office of the Government Corporate Counsel filed their respective Comments in behalf of
the public respondents.

On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the Court then
resolved in open court to require the parties to file simultaneously their respective Memoranda in amplification of the
issues heard in the oral arguments within 30 days and to explore the possibility of arbitration or mediation as
provided in the challenged contracts.

In their consolidated Memorandum, the Office of the Solicitor General and the Office of the Government Corporate
Counsel prayed that the present petitions be given due course and that judgment be rendered declaring the 1997
Concession Agreement, the ARCA and the Supplements thereto void for being contrary to the Constitution, the BOT
Law and its Implementing Rules and Regulations.

On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO commenced arbitration
proceedings before the International Chamber of Commerce, International Court of Arbitration (ICC) by filing a
Request for Arbitration with the Secretariat of the ICC against the Government of the Republic of the Philippines
acting through the DOTC and MIAA.

In the present cases, the Court is again faced with the task of resolving complicated issues made difficult by their
intersecting legal and economic implications. The Court is aware of the far reaching fall out effects of the ruling
which it makes today. For more than a century and whenever the exigencies of the times demand it, this Court has
never shirked from its solemn duty to dispense justice and resolve "actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction."6 To be sure, this Court will not begin to do otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they allege will bar the
resolution of the instant controversy.

Petitioners' Legal Standing to File

the present Petitions

a. G.R. Nos. 155001 and 155661

In G.R. No. 155001 individual petitioners are employees of various service providers 7 having separate concession
contracts with MIAA and continuing service agreements with various international airlines to provide in-flight
catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and
warehousing and other services. Also included as petitioners are labor unions MIASCOR Workers Union-National
Labor Union and Philippine Airlines Employees Association. These petitioners filed the instant action for prohibition
as taxpayers and as parties whose rights and interests stand to be violated by the implementation of the PIATCO
Contracts.

Petitioners-Intervenors in the same case are all corporations organized and existing under Philippine laws engaged
in the business of providing in-flight catering, passenger handling, ramp and ground support, aircraft maintenance
and provisions, cargo handling and warehousing and other services to several international airlines at the Ninoy
Aquino International Airport. Petitioners-Intervenors allege that as tax-paying international airline and airport-related
service operators, each one of them stands to be irreparably injured by the implementation of the PIATCO
Contracts. Each of the petitioners-intervenors have separate and subsisting concession agreements with MIAA and
with various international airlines which they allege are being interfered with and violated by respondent PIATCO.

In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa Paliparan ng
Pilipinas - a legitimate labor union and accredited as the sole and exclusive bargaining agent of all the employees in
MIAA. Petitioners anchor their petition for prohibition on the nullity of the contracts entered into by the Government
and PIATCO regarding the build-operate-and-transfer of the NAIA IPT III. They filed the petition as taxpayers and
persons who have a legitimate interest to protect in the implementation of the PIATCO Contracts.

Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations which directly
contravene numerous provisions of the Constitution, specific provisions of the BOT Law and its Implementing Rules
and Regulations, and public policy. Petitioners contend that the DOTC and the MIAA, by entering into said
contracts, have committed grave abuse of discretion amounting to lack or excess of jurisdiction which can be
remedied only by a writ of prohibition, there being no plain, speedy or adequate remedy in the ordinary course of
law.

In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA which grant
PIATCO the exclusive right to operate a commercial international passenger terminal within the Island of Luzon,
except those international airports already existing at the time of the execution of the agreement. The contracts
further provide that upon the commencement of operations at the NAIA IPT III, the Government shall cause the
closure of Ninoy Aquino International Airport Passenger Terminals I and II as international passenger terminals.
With respect to existing concession agreements between MIAA and international airport service providers regarding
certain services or operations, the 1997 Concession Agreement and the ARCA uniformly provide that such services
or operations will not be carried over to the NAIA IPT III and PIATCO is under no obligation to permit such carry
over except through a separate agreement duly entered into with PIATCO. 8

With respect to the petitioning service providers and their employees, upon the commencement of operations of the
NAIA IPT III, they allege that they will be effectively barred from providing international airline airport services at the
NAIA Terminals I and II as all international airlines and passengers will be diverted to the NAIA IPT III. The
petitioning service providers will thus be compelled to contract with PIATCO alone for such services, with no
assurance that subsisting contracts with MIAA and other international airlines will be respected. Petitioning service
providers stress that despite the very competitive market, the substantial capital investments required and the high
rate of fees, they entered into their respective contracts with the MIAA with the understanding that the said contracts
will be in force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning service
providers to recoup their investments and obtain a reasonable return thereon.

Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on the other hand
allege that with the closure of the NAIA Terminals I and II as international passenger terminals under the PIATCO
Contracts, they stand to lose employment.

The question on legal standing is whether such parties have "alleged such a personal stake in the outcome of the
controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court
so largely depends for illumination of difficult constitutional questions." 9 Accordingly, it has been held that the
interest of a person assailing the constitutionality of a statute must be direct and personal. He must be able to show,
not only that the law or any government act is invalid, but also that he sustained or is in imminent danger of
sustaining some direct injury as a result of its enforcement, and not merely that he suffers thereby in some indefinite
way. It must appear that the person complaining has been or is about to be denied some right or privilege to which
he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the statute or act
complained of.10

We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners have a direct and
substantial interest to protect by reason of the implementation of the PIATCO Contracts. They stand to lose their
source of livelihood, a property right which is zealously protected by the Constitution. Moreover, subsisting
concession agreements between MIAA and petitioners-intervenors and service contracts between international
airlines and petitioners-intervenors stand to be nullified or terminated by the operation of the NAIA IPT III under the
PIATCO Contracts. The financial prejudice brought about by the PIATCO Contracts on petitioners and petitioners-
intervenors in these cases are legitimate interests sufficient to confer on them the requisite standing to file the
instant petitions.

b. G.R. No. 155547

In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of Representatives,
citizens and taxpayers. They allege that as members of the House of Representatives, they are especially interested
in the PIATCO Contracts, because the contracts compel the Government and/or the House of Representatives to
appropriate funds necessary to comply with the provisions therein. 11 They cite provisions of the PIATCO Contracts
which require disbursement of unappropriated amounts in compliance with the contractual obligations of the
Government. They allege that the Government obligations in the PIATCO Contracts which compel government
expenditure without appropriation is a curtailment of their prerogatives as legislators, contrary to the mandate of the
Constitution that "[n]o money shall be paid out of the treasury except in pursuance of an appropriation made by
law."12

Standing is a peculiar concept in constitutional law because in some cases, suits are not brought by parties who
have been personally injured by the operation of a law or any other government act but by concerned citizens,
taxpayers or voters who actually sue in the public interest. Although we are not unmindful of the cases of Imus
Electric Co. v. Municipality of Imus 13 and Gonzales v. Raquiza14 wherein this Court held that appropriation must
be made only on amounts immediately demandable, public interest demands that we take a more liberal view in
determining whether the petitioners suing as legislators, taxpayers and citizens have locus standi to file the
instant petition. In Kilosbayan, Inc. v. Guingona,15 this Court held "[i]n line with the liberal policy of this Court
on locus standi, ordinary taxpayers, members of Congress, and even association of planters, and non-profit civic
organizations were allowed to initiate and prosecute actions before this Court to question the constitutionality or
validity of laws, acts, decisions, rulings, or orders of various government agencies or instrumentalities." 16 Further,
"insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of discretion as to whether or not it should
be entertained."17 As such ". . . even if, strictly speaking, they [the petitioners] are not covered by the definition, it is
still within the wide discretion of the Court to waive the requirement and so remove the impediment to its addressing
and resolving the serious constitutional questions raised." 18 In view of the serious legal questions involved and their
impact on public interest, we resolve to grant standing to the petitioners.

Other Procedural Matters

Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant cases as factual
issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO alleges that submission of this
controversy to this Court at the first instance is a violation of the rule on hierarchy of courts. They contend that trial
courts have concurrent jurisdiction with this Court with respect to a special civil action for prohibition and hence,
following the rule on hierarchy of courts, resort must first be had before the trial courts.

After a thorough study and careful evaluation of the issues involved, this Court is of the view that the crux of the
instant controversy involves significant legal questions. The facts necessary to resolve these legal questions are
well established and, hence, need not be determined by a trial court.

The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over the cases at bar. The
said rule may be relaxed when the redress desired cannot be obtained in the appropriate courts or where
exceptional and compelling circumstances justify availment of a remedy within and calling for the exercise of this
Court's primary jurisdiction.19

It is easy to discern that exceptional circumstances exist in the cases at bar that call for the relaxation of the rule.
Both petitioners and respondents agree that these cases are of transcendental importance as they involve the
construction and operation of the country's premier international airport. Moreover, the crucial issues submitted for
resolution are of first impression and they entail the proper legal interpretation of key provisions of the Constitution,
the BOT Law and its Implementing Rules and Regulations. Thus, considering the nature of the controversy before
the Court, procedural bars may be lowered to give way for the speedy disposition of the instant cases.

Legal Effect of the Commencement

of Arbitration Proceedings by

PIATCO

There is one more procedural obstacle which must be overcome. The Court is aware that arbitration proceedings
pursuant to Section 10.02 of the ARCA have been filed at the instance of respondent PIATCO. Again, we hold that
the arbitration step taken by PIATCO will not oust this Court of its jurisdiction over the cases at bar.

In Del Monte Corporation-USA v. Court of Appeals,20 even after finding that the arbitration clause in the
Distributorship Agreement in question is valid and the dispute between the parties is arbitrable, this Court affirmed
the trial court's decision denying petitioner's Motion to Suspend Proceedings pursuant to the arbitration clause under
the contract. In so ruling, this Court held that as contracts produce legal effect between the parties, their assigns and
heirs, only the parties to the Distributorship Agreement are bound by its terms, including the arbitration clause
stipulated therein. This Court ruled that arbitration proceedings could be called for but only with respect to the
parties to the contract in question. Considering that there are parties to the case who are neither parties to the
Distributorship Agreement nor heirs or assigns of the parties thereto, this Court, citing its previous ruling in Salas, Jr.
v. Laperal Realty Corporation,21 held that to tolerate the splitting of proceedings by allowing arbitration as to some of
the parties on the one hand and trial for the others on the other hand would, in effect, result in multiplicity of suits,
duplicitous procedure and unnecessary delay.22 Thus, we ruled that the interest of justice would best be served if
the trial court hears and adjudicates the case in a single and complete proceeding.

It is established that petitioners in the present cases who have presented legitimate interests in the resolution of
the controversy are not parties to the PIATCO Contracts. Accordingly, they cannot be bound by the arbitration
clause provided for in the ARCA and hence, cannot be compelled to submit to arbitration proceedings. A speedy
and decisive resolution of all the critical issues in the present controversy, including those raised by
petitioners, cannot be made before an arbitral tribunal. The object of arbitration is precisely to allow an
expeditious determination of a dispute. This objective would not be met if this Court were to allow the parties to
settle the cases by arbitration as there are certain issues involving non-parties to the PIATCO Contracts which the
arbitral tribunal will not be equipped to resolve.

Now, to the merits of the instant controversy.

Is PIATCO a qualified bidder?

Public respondents argue that the Paircargo Consortium, PIATCO's predecessor, was not a duly pre-qualified
bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to meet the financial
capability required under the BOT Law and the Bid Documents. They allege that in computing the ability of the
Paircargo Consortium to meet the minimum equity requirements for the project, the entire net worth of Security
Bank, a member of the consortium, should not be considered.

PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996 issued by the DOTC
Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a combined net worth of
P3,900,000,000.00, sufficient to meet the equity requirements of the project. The said Memorandum was in
response to a letter from Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial
capability of the Paircargo Consortium on the ground that it does not have the financial resources to put up the
required minimum equity of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337, as
amended or the General Banking Act that a commercial bank cannot invest in any single enterprise in an amount
more than 15% of its net worth. In the said Memorandum, Undersecretary Cal opined:

The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial capability will be
evaluated based on total financial capability of all the member companies of the [Paircargo] Consortium. In
this connection, the Challenger was found to have a combined net worth of P3,926,421,242.00 that could
support a project costing approximately P13 Billion.

It is not a requirement that the net worth must be "unrestricted." To impose that as a requirement now will be
nothing less than unfair.

The financial statement or the net worth is not the sole basis in establishing financial capability. As stated in
Bid Bulletin No. 3, financial capability may also be established by testimonial letters issued by reputable
banks. The Challenger has complied with this requirement.

To recap, net worth reflected in the Financial Statement should not be taken as the amount of the money to
be used to answer the required thirty percent (30%) equity of the challenger but rather to be used in
establishing if there is enough basis to believe that the challenger can comply with the required 30% equity.
 In fact, proof of sufficient equity is required as one of the conditions for award of contract (Section 12.1 IRR
of the BOT Law) but not for pre-qualification (Section 5.4 of the same document). 23

Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall be awarded to
the bidder "who, having satisfied the minimum financial, technical, organizational and legal standards"
required by the law, has submitted the lowest bid and most favorable terms of the project. 24 Further, the
1994 Implementing Rules and Regulations of the BOT Law provide:

Section 5.4 Pre-qualification Requirements.

xxx xxx xxx

c. Financial Capability: The project proponent must have adequate capability to sustain the financing
requirements for the detailed engineering design, construction and/or operation and maintenance phases of
the project, as the case may be. For purposes of pre-qualification, this capability shall be measured in terms
of (i) proof of the ability of the project proponent and/or the consortium to provide a minimum
amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the
project proponent and/or members of the consortium are banking with them, that they are in good
financial standing, and that they have adequate resources. The government agency/LGU concerned
shall determine on a project-to-project basis and before pre-qualification, the minimum amount of equity
needed. (emphasis supplied)

Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996 amending the financial
capability requirements for pre-qualification of the project proponent as follows:

6. Basis of Pre-qualification

The basis for the pre-qualification shall be on the compliance of the proponent to the minimum technical and
financial requirements provided in the Bid Documents and in the IRR of the BOT Law, R.A. No. 6957, as
amended by R.A. 7718.

The minimum amount of equity to which the proponent's financial capability will be based shall be thirty
percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of the
Bid Documents. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a of the
draft concession agreement. The debt portion of the project financing should not exceed 70% of the actual
project cost.

Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to the unsolicited
proposal of AEDC has to show that it possesses the requisite financial capability to undertake the project in the
minimum amount of 30% of the project cost through (i) proof of the ability to provide a minimum amount of equity
to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent or members of
the consortium are banking with them, that they are in good financial standing, and that they have adequate
resources.

As the minimum project cost was estimated to be US$350,000,000.00 or roughly P9,183,650,000.00, 25 the Paircargo
Consortium had to show to the satisfaction of the PBAC that it had the ability to provide the minimum equity for the
project in the amount of at least P2,755,095,000.00.

Paircargo's Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth of P2,783,592.00
and P3,123,515.00 respectively.26 PAGS' Audited Financial Statements as of 1995 indicate that it has approximately
P26,735,700.00 to invest as its equity for the project. 27 Security Bank's Audited Financial Statements as of 1995
show that it has a net worth equivalent to its capital funds in the amount of P3,523,504,377.00. 28

We agree with public respondents that with respect to Security Bank, the entire amount of its net worth could not
be invested in a single undertaking or enterprise, whether allied or non-allied in accordance with the provisions of
R.A. No. 337, as amended or the General Banking Act:

Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary Board,
whenever it shall deem appropriate and necessary to further national development objectives or support
national priority projects, may authorize a commercial bank, a bank authorized to provide commercial
banking services, as well as a government-owned and controlled bank, to operate under an
expanded commercial banking authority and by virtue thereof exercise, in addition to powers
authorized for commercial banks, the powers of an Investment House as provided in Presidential
Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or all of the equity in
a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking
services: Provided, That (a) the total investment in equities shall not exceed fifty percent (50%) of the net
 worth of the bank; (b) the equity investment in any one enterprise whether allied or non-allied shall
not exceed fifteen percent (15%) of the net worth of the bank; (c) the equity investment of the bank, or
of its wholly or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirty-five
percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five percent (35%) of the voting
stock in that enterprise; and (d) the equity investment in other banks shall be deducted from the investing
bank's net worth for purposes of computing the prescribed ratio of net worth to risk assets.

xxx xxx xxx

Further, the 1993 Manual of Regulations for Banks provides:

SECTION X383. Other Limitations and Restrictions. — The following limitations and restrictions shall also
apply regarding equity investments of banks.

a. In any single enterprise. — The equity investments of banks in any single enterprise shall not exceed at
any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and Subsec.
X121.5.

Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is only
P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the Paircargo
Consortium, after considering the maximum amounts that may be validly invested by each of its members
is P558,384,871.55 or only 6.08% of the project cost, 29 an amount substantially less than the prescribed minimum
equity investment required for the project in the amount of P2,755,095,000.00 or 30% of the project cost.

The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity, the ability of the
bidder to undertake the project. Thus, with respect to the bidder's financial capacity at the pre-qualification stage,
the law requires the government agency to examine and determine the ability of the bidder to fund the entire cost of
the project by considering the maximum amounts that each bidder may invest in the project at the time of
pre-qualification.

The PBAC has determined that any prospective bidder for the construction, operation and maintenance of the NAIA
IPT III project should prove that it has the ability to provide equity in the minimum amount of 30% of the project cost,
in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid Documents. Thus, in the case of Paircargo
Consortium, the PBAC should determine the maximum amounts that each member of the consortium may commit
for the construction, operation and maintenance of the NAIA IPT III project at the time of pre-qualification. With
respect to Security Bank, the maximum amount which may be invested by it would only be 15% of its net worth in
view of the restrictions imposed by the General Banking Act. Disregarding the investment ceilings provided by
applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the
project as for all intents and purposes, such ceiling or legal restriction determines the true maximum amount which
a bidder may invest in the project.

Further, the determination of whether or not a bidder is pre-qualified to undertake the project requires an evaluation
of the financial capacity of the said bidder at the time the bid is submitted based on the required documents
presented by the bidder. The PBAC should not be allowed to speculate on the future financial ability of the bidder
to undertake the project on the basis of documents submitted. This would open doors to abuse and defeat the very
purpose of a public bidding. This is especially true in the case at bar which involves the investment of billions of
pesos by the project proponent. The relevant government authority is duty-bound to ensure that the awardee of the
contract possesses the minimum required financial capability to complete the project. To allow the PBAC to estimate
the bidder's future financial capability would not secure the viability and integrity of the project. A restrictive and
conservative application of the rules and procedures of public bidding is necessary not only to protect the
impartiality and regularity of the proceedings but also to ensure the financial and technical reliability of the project. It
has been held that:

The basic rule in public bidding is that bids should be evaluated based on the required documents submitted
before and not after the opening of bids. Otherwise, the foundation of a fair and competitive public bidding
would be defeated. Strict observance of the rules, regulations, and guidelines of the bidding process
is the only safeguard to a fair, honest and competitive public bidding. 30

Thus, if the maximum amount of equity that a bidder may invest in the project at the time the bids are
submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly
disqualified. Considering that at the pre-qualification stage, the maximum amounts which the Paircargo Consortium
may invest in the project fell short of the minimum amounts prescribed by the PBAC, we hold that Paircargo
Consortium was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a
disqualified bidder, is null and void.

While it would be proper at this juncture to end the resolution of the instant controversy, as the legal effects of the
disqualification of respondent PIATCO's predecessor would come into play and necessarily result in the nullity of all
the subsequent contracts entered by it in pursuance of the project, the Court feels that it is necessary to discuss in
full the pressing issues of the present controversy for a complete resolution thereof.

II

Is the 1997 Concession Agreement valid?

Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it contains provisions
that substantially depart from the draft Concession Agreement included in the Bid Documents. They maintain that a
substantial departure from the draft Concession Agreement is a violation of public policy and renders the 1997
Concession Agreement null and void.

PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is intended to be
a draft, i.e., subject to change, alteration or modification, and that this intention was clear to all participants,
including AEDC, and DOTC/MIAA. It argued further that said intention is expressed in Part C (6) of Bid Bulletin No.
3 issued by the PBAC which states:

6. Amendments to the Draft Concessions Agreement

Amendments to the Draft Concessions Agreement shall be issued from time to time. Said amendments shall
only cover items that would not materially affect the preparation of the proponent's proposal.

By its very nature, public bidding aims to protect the public interest by giving the public the best possible advantages
through open competition. Thus:

Competition must be legitimate, fair and honest. In the field of government contract law, competition
requires, not only `bidding upon a common standard, a common basis, upon the same thing, the same
subject matter, the same undertaking,' but also that it be legitimate, fair and honest; and not designed
to injure or defraud the government.31

An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not simply in terms of
application of the procedural rules and regulations imposed by the relevant government agency, but more
importantly, on the contract bidded upon. Each bidder must be able to bid on the same thing. The rationale is
obvious. If the winning bidder is allowed to later include or modify certain provisions in the contract awarded such
that the contract is altered in any material respect, then the essence of fair competition in the public bidding is
destroyed. A public bidding would indeed be a farce if after the contract is awarded, the winning bidder may modify
the contract and include provisions which are favorable to it that were not previously made available to the other
bidders. Thus:

It is inherent in public biddings that there shall be a fair competition among the bidders. The specifications in
such biddings provide the common ground or basis for the bidders. The specifications should, accordingly,
operate equally or indiscriminately upon all bidders.32

The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:

The law is well settled that where, as in this case, municipal authorities can only let a contract for public work
to the lowest responsible bidder, the proposals and specifications therefore must be so framed as to permit
free and full competition. Nor can they enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the terms and specifications upon
which the bids were invited.33

In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft concession agreement
is subject to amendment, the pertinent portion of which was quoted above, the PBAC also clarified that "[s]aid
amendments shall only cover items that would not materially affect the preparation of the proponent's
proposal."

While we concede that a winning bidder is not precluded from modifying or amending certain provisions of the
contract bidded upon, such changes must not constitute substantial or material amendments that would alter
the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to
bid on the same terms. Hence, the determination of whether or not a modification or amendment of a contract
bidded out constitutes a substantial amendment rests on whether the contract, when taken as a whole, would
contain substantially different terms and conditions that would have the effect of altering the technical and/or
financial proposals previously submitted by other bidders. The alterations and modifications in the contract executed
between the government and the winning bidder must be such as to render such executed contract to be an
entirely different contract from the one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,34 this Court quoted with approval the ruling of
the trial court that an amendment to a contract awarded through public bidding, when such subsequent amendment
was made without a new public bidding, is null and void:

The Court agrees with the contention of counsel for the plaintiffs that the due execution of a contract after
public bidding is a limitation upon the right of the contracting parties to alter or amend it without another
public bidding, for otherwise what would a public bidding be good for if after the execution of a
contract after public bidding, the contracting parties may alter or amend the contract, or even cancel
it, at their will? Public biddings are held for the protection of the public, and to give the public the best
possible advantages by means of open competition between the bidders. He who bids or offers the best
terms is awarded the contract subject of the bid, and it is obvious that such protection and best possible
advantages to the public will disappear if the parties to a contract executed after public bidding may alter or
amend it without another previous public bidding.35

Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same agreement that was
offered for public bidding, i.e., the draft Concession Agreement attached to the Bid Documents? A close comparison
of the draft Concession Agreement attached to the Bid Documents and the 1997 Concession Agreement reveals
that the documents differ in at least two material respects:

a. Modification on the Public

Utility Revenues and Non-Public

Utility Revenues that may be

collected by PIATCO

The fees that may be imposed and collected by PIATCO under the draft Concession Agreement and the 1997
Concession Agreement may be classified into three distinct categories: (1) fees which are subject to periodic
adjustment of once every two years in accordance with a prescribed parametric formula and adjustments are made
effective only upon written approval by MIAA; (2) fees other than those included in the first category which maybe
adjusted by PIATCO whenever it deems necessary without need for consent of DOTC/MIAA; and (3) new fees and
charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino
International Airport Passenger Terminal I, pursuant to Administrative Order No. 1, Series of 1993, as amended.
The glaring distinctions between the draft Concession Agreement and the 1997 Concession Agreement lie in the
types of fees included in each category and the extent of the supervision and regulation which MIAA is allowed to
exercise in relation thereto.

For fees under the first category, i.e., those which are subject to periodic adjustment in accordance with a
prescribed parametric formula and effective only upon written approval by MIAA, the draft Concession
Agreement includes the following:36

(1) aircraft parking fees;

(2) aircraft tacking fees;

(3) groundhandling fees;

(4) rentals and airline offices;

(5) check-in counter rentals; and

(6) porterage fees.

Under the 1997 Concession Agreement, fees which are subject to adjustment and effective upon MIAA approval
are classified as "Public Utility Revenues" and include:37

(1) aircraft parking fees;

(2) aircraft tacking fees;

(3) check-in counter fees; and

(4) Terminal Fees.

The implication of the reduced number of fees that are subject to MIAA approval is best appreciated in relation to
fees included in the second category identified above. Under the 1997 Concession Agreement, fees which
PIATCO may adjust whenever it deems necessary without need for consent of DOTC/MIAA are "Non-Public Utility
Revenues" and is defined as "all other income not classified as Public Utility Revenues derived from operations of
the Terminal and the Terminal Complex."38 Thus, under the 1997 Concession Agreement, ground handling fees,
rentals from airline offices and porterage fees are no longer subject to MIAA regulation.

Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to regulate (1) lobby and
vehicular parking fees and (2) other new fees and charges that may be imposed by PIATCO. Such regulation may
be made by periodic adjustment and is effective only upon written approval of MIAA. The full text of said provision is
quoted below:

Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking fees, aircraft
tacking fees, groundhandling fees, rentals and airline offices, check-in-counter rentals and porterage fees
shall be allowed only once every two years and in accordance with the Parametric Formula attached hereto
as Annex F. Provided that adjustments shall be made effective only after the written express approval of the
MIAA. Provided, further, that such approval of the MIAA, shall be contingent only on the conformity of the
adjustments with the above said parametric formula. The first adjustment shall be made prior to the In-
Service Date of the Terminal.

The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and
vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of Section
6.01 if in its judgment the users of the airport shall be deprived of a free option for the services they
cover.39

On the other hand, the equivalent provision under the 1997 Concession Agreement reads:

Section 6.03 Periodic Adjustment in Fees and Charges.

xxx xxx xxx

(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility
Revenues in order to ensure that End Users are not unreasonably deprived of services. While the
vehicular parking fee, porterage fee and greeter/well wisher fee constitute Non-Public Utility
Revenues of Concessionaire, GRP may intervene and require Concessionaire to explain and justify
the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have become
exorbitant resulting in the unreasonable deprivation of End Users of such services. 40

Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2) porterage fee and (3)
greeter/well wisher fee, all that MIAA can do is to require PIATCO to explain and justify the fees set by PIATCO. In
the draft Concession Agreement, vehicular parking fee is subject to MIAA regulation and approval under the
second paragraph of Section 6.03 thereof while porterage fee is covered by the first paragraph of the same
provision. There is an obvious relaxation of the extent of control and regulation by MIAA with respect to the
particular fees that may be charged by PIATCO.

Moreover, with respect to the third category of fees that may be imposed and collected by PIATCO, i.e., new fees
and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy
Aquino International Airport Passenger Terminal I, under Section 6.03 of the draft Concession Agreement MIAA
has reserved the right to regulate the same under the same conditions that MIAA may regulate fees under the first
category, i.e., periodic adjustment of once every two years in accordance with a prescribed parametric formula and
effective only upon written approval by MIAA. However, under the 1997 Concession Agreement, adjustment of
fees under the third category is not subject to MIAA regulation.

With respect to terminal fees that may be charged by PIATCO, 41 as shown earlier, this was included within the
category of "Public Utility Revenues" under the 1997 Concession Agreement. This classification is significant
because under the 1997 Concession Agreement, "Public Utility Revenues" are subject to an "Interim Adjustment"
of fees upon the occurrence of certain extraordinary events specified in the agreement. 42 However, under the draft
Concession Agreement, terminal fees are not included in the types of fees that may be subject to "Interim
Adjustment."43

Finally, under the 1997 Concession Agreement, "Public Utility Revenues," except terminal fees, are denominated
in US Dollars44 while payments to the Government are in Philippine Pesos. In the draft Concession Agreement, no
such stipulation was included. By stipulating that "Public Utility Revenues" will be paid to PIATCO in US Dollars
while payments by PIATCO to the Government are in Philippine currency under the 1997 Concession Agreement,
PIATCO is able to enjoy the benefits of depreciations of the Philippine Peso, while being effectively insulated from
the detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement with respect to reduction in the types
of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to other fees are
significant amendments that substantially distinguish the draft Concession Agreement from the 1997 Concession
Agreement. The 1997 Concession Agreement, in this respect, clearly gives PIATCO more favorable terms
than what was available to other bidders at the time the contract was bidded out. It is not very difficult to see
that the changes in the 1997 Concession Agreement translate to direct and concrete financial advantages for
PIATCO which were not available at the time the contract was offered for bidding. It cannot be denied that under the
1997 Concession Agreement only "Public Utility Revenues" are subject to MIAA regulation. Adjustments of all other
fees imposed and collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under
the 1997 Concession Agreement, the same is further subject to "Interim Adjustments" not previously stipulated in
the draft Concession Agreement. Finally, the change in the currency stipulated for "Public Utility Revenues" under
the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit which was not available at
the time of bidding.

b. Assumption by the

Government of the liabilities of

PIATCO in the event of the latter's

default thereof

Under the draft Concession Agreement, default by PIATCO of any of its obligations to creditors who have
provided, loaned or advanced funds for the NAIA IPT III project does not result in the assumption by the
Government of these liabilities. In fact, nowhere in the said contract does default of PIATCO's loans figure in the
agreement. Such default does not directly result in any concomitant right or obligation in favor of the Government.

However, the 1997 Concession Agreement provides:

Section 4.04 Assignment.

xxx xxx xxx

(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default has
resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of
maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default.
GRP shall, within one hundred eighty (180) Days from receipt of the joint written notice of the Unpaid
Creditors and Concessionaire, either (i) take over the Development Facility and assume the Attendant
Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be substituted as concessionaire and operator of
the Development Facility in accordance with the terms and conditions hereof, or designate a qualified
operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of
this Agreement; Provided that if at the end of the 180-day period GRP shall not have served the Unpaid
Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take over
the Development Facility with the concomitant assumption of Attendant Liabilities.

(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the
latter shall form and organize a concession company qualified to take over the operation of the Development
Facility. If the concession company should elect to designate an operator for the Development Facility, the
concession company shall in good faith identify and designate a qualified operator acceptable to GRP within
one hundred eighty (180) days from receipt of GRP's written notice. If the concession company, acting in
good faith and with due diligence, is unable to designate a qualified operator within the aforesaid period,
then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant
Liabilities.

The term "Attendant Liabilities" under the 1997 Concession Agreement is defined as:

Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the
Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually
used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed by Concessionaire to its
suppliers, contractors and sub-contractors.

Under the above quoted portions of Section 4.04 in relation to the definition of "Attendant Liabilities," default by
PIATCO of its loans used to finance the NAIA IPT III project triggers the occurrence of certain events that
leads to the assumption by the Government of the liability for the loans. Only in one instance may the
Government escape the assumption of PIATCO's liabilities, i.e., when the Government so elects and allows a
qualified operator to take over as Concessionaire. However, this circumstance is dependent on the existence
and availability of a qualified operator who is willing to take over the rights and obligations of PIATCO
under the contract, a circumstance that is not entirely within the control of the Government.

Without going into the validity of this provision at this juncture, suffice it to state that Section 4.04 of the 1997
Concession Agreement may be considered a form of security for the loans PIATCO has obtained to finance the
project, an option that was not made available in the draft Concession Agreement. Section 4.04 is an important
amendment to the 1997 Concession Agreement because it grants PIATCO a financial advantage or benefit
which was not previously made available during the bidding process. This financial advantage is a significant
modification that translates to better terms and conditions for PIATCO.

PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft Concession
Agreement is subject to amendment because the Bid Documents permit financing or borrowing. They claim that it
was the lenders who proposed the amendments to the draft Concession Agreement which resulted in the 1997
Concession Agreement.

We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the project proponent or
the winning bidder to obtain financing for the project, especially in this case which involves the construction,
operation and maintenance of the NAIA IPT III. Expectedly, compliance by the project proponent of its undertakings
therein would involve a substantial amount of investment. It is therefore inevitable for the awardee of the contract to
seek alternate sources of funds to support the project. Be that as it may, this Court maintains that amendments to
the contract bidded upon should always conform to the general policy on public bidding if such procedure is to be
faithful to its real nature and purpose. By its very nature and characteristic, competitive public bidding aims to
protect the public interest by giving the public the best possible advantages through open competition. 45 It has been
held that the three principles in public bidding are (1) the offer to the public; (2) opportunity for competition; and (3) a
basis for the exact comparison of bids. A regulation of the matter which excludes any of these factors destroys the
distinctive character of the system and thwarts the purpose of its adoption. 46 These are the basic parameters which
every awardee of a contract bidded out must conform to, requirements of financing and borrowing notwithstanding.
Thus, upon a concrete showing that, as in this case, the contract signed by the government and the contract-
awardee is an entirely different contract from the contract bidded, courts should not hesitate to strike down said
contract in its entirety for violation of public policy on public bidding. A strict adherence on the principles, rules and
regulations on public bidding must be sustained if only to preserve the integrity and the faith of the general public on
the procedure.

Public bidding is a standard practice for procuring government contracts for public service and for furnishing
supplies and other materials. It aims to secure for the government the lowest possible price under the most
favorable terms and conditions, to curtail favoritism in the award of government contracts and avoid suspicion of
anomalies and it places all bidders in equal footing. 47 Any government action which permits any substantial
variance between the conditions under which the bids are invited and the contract executed after the award
thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which warrants proper
judicial action.

In view of the above discussion, the fact that the foregoing substantial amendments were made on the 1997
Concession Agreement renders the same null and void for being contrary to public policy. These amendments
convert the 1997 Concession Agreement to an entirely different agreement from the contract bidded out or the
draft Concession Agreement. It is not difficult to see that the amendments on (1) the types of fees or charges that
are subject to MIAA regulation or control and the extent thereof and (2) the assumption by the Government, under
certain conditions, of the liabilities of PIATCO directly translates concrete financial advantages to PIATCO that
were previously not available during the bidding process. These amendments cannot be taken as merely
supplements to or implementing provisions of those already existing in the draft Concession Agreement. The
amendments discussed above present new terms and conditions which provide financial benefit to PIATCO which
may have altered the technical and financial parameters of other bidders had they known that such terms were
available.

III

Direct Government Guarantee

Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement provides:

Section 4.04 Assignment

xxx xxx xxx

(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default
resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of
maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default.
 GRP shall within one hundred eighty (180) days from receipt of the joint written notice of the Unpaid
Creditors and Concessionaire, either (i) take over the Development Facility and assume the Attendant
Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be substituted as concessionaire and operator of
the Development facility in accordance with the terms and conditions hereof, or designate a qualified
operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of
this Agreement; Provided, that if at the end of the 180-day period GRP shall not have served the Unpaid
Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take
over the Development Facility with the concomitant assumption of Attendant Liabilities.

(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter shall
form and organize a concession company qualified to takeover the operation of the Development Facility. If
the concession company should elect to designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified operator acceptable to GRP within one
hundred eighty (180) days from receipt of GRP's written notice. If the concession company, acting in good
faith and with due diligence, is unable to designate a qualified operator within the aforesaid period, then
GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant
Liabilities.

….

Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of
the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually
used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed by Concessionaire to its
suppliers, contractors and sub-contractors.48

It is clear from the above-quoted provisions that Government, in the event that PIATCO defaults in its loan
obligations, is obligated to pay "all amounts recorded and from time to time outstanding from the books" of
PIATCO which the latter owes to its creditors. 49 These amounts include "all interests, penalties, associated fees,
charges, surcharges, indemnities, reimbursements and other related expenses." 50 This obligation of the Government
to pay PIATCO's creditors upon PIATCO's default would arise if the Government opts to take over NAIA IPT III. It
should be noted, however, that even if the Government chooses the second option, which is to allow PIATCO's
unpaid creditors operate NAIA IPT III, the Government is still at a risk of being liable to PIATCO's creditors should
the latter be unable to designate a qualified operator within the prescribed period. 51 In effect, whatever option the
Government chooses to take in the event of PIATCO's failure to fulfill its loan obligations, the Government
is still at a risk of assuming PIATCO's outstanding loans. This is due to the fact that the Government would only
be free from assuming PIATCO's debts if the unpaid creditors would be able to designate a qualified operator within
the period provided for in the contract. Thus, the Government's assumption of liability is virtually out of its
control. The Government under the circumstances provided for in the 1997 Concession Agreement is at the mercy
of the existence, availability and willingness of a qualified operator. The above contractual provisions constitute a
direct government guarantee which is prohibited by law.

One of the main impetus for the enactment of the BOT Law is the lack of government funds to construct the
infrastructure and development projects necessary for economic growth and development. This is why private sector
resources are being tapped in order to finance these projects. The BOT law allows the private sector to participate,
and is in fact encouraged to do so by way of incentives, such as minimizing the unstable flow of returns, 52 provided
that the government would not have to unnecessarily expend scarcely available funds for the project itself. As such,
direct guarantee, subsidy and equity by the government in these projects are strictly prohibited. 53 This is but logical
for if the government would in the end still be at a risk of paying the debts incurred by the private entity in
the BOT projects, then the purpose of the law is subverted.

Section 2(n) of the BOT Law defines direct guarantee as follows:

(n) Direct government guarantee — An agreement whereby the government or any of its agencies or local
government units assume responsibility for the repayment of debt directly incurred by the project
proponent in implementing the project in case of a loan default.

Clearly by providing that the Government "assumes" the attendant liabilities, which consists of PIATCO's unpaid
debts, the 1997 Concession Agreement provided for a direct government guarantee for the debts incurred by
PIATCO in the implementation of the NAIA IPT III project. It is of no moment that the relevant sections are
subsumed under the title of "assignment". The provisions providing for direct government guarantee which is
prohibited by law is clear from the terms thereof.

The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal defect. Article IV,
Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides:
 Section 4.04 Security

xxx xxx xxx

(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into direct
agreement with the Senior Lenders, or with an agent of such Senior Lenders (which agreement shall be
subject to the approval of the Bangko Sentral ng Pilipinas), in such form as may be reasonably acceptable to
both GRP and Senior Lenders, with regard, inter alia, to the following parameters:

xxx xxx xxx

(iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior
Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior
Loans, the Senior Lenders shall have the right to notify GRP of the same, and without prejudice to
any other rights of the Senior Lenders or any Senior Lenders' agent may have (including without
limitation under security interests granted in favor of the Senior Lenders), to either in good faith
identify and designate a nominee which is qualified under sub-clause (viii)(y) below to operate the
Development Facility [NAIA Terminal 3] or transfer the Concessionaire's [PIATCO] rights and
obligations under this Agreement to a transferee which is qualified under sub-clause (viii) below;

xxx xxx xxx

(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to designate
a nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one
hundred eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above,
then GRP and the Senior Lenders shall endeavor in good faith to enter into any other arrangement
relating to the Development Facility [NAIA Terminal 3] (other than a turnover of the Development
Facility [NAIA Terminal 3] to GRP) within the following one hundred eighty (180) days. If no
agreement relating to the Development Facility [NAIA Terminal 3] is arrived at by GRP and the
Senior Lenders within the said 180-day period, then at the end thereof the Development Facility
[NAIA Terminal 3] shall be transferred by the Concessionaire [PIATCO] to GRP or its
designee and GRP shall make a termination payment to Concessionaire [PIATCO] equal to
the Appraised Value (as hereinafter defined) of the Development Facility [NAIA Terminal 3] or
the sum of the Attendant Liabilities, if greater. Notwithstanding Section 8.01(c) hereof, this
Agreement shall be deemed terminated upon the transfer of the Development Facility [NAIA
Terminal 3] to GRP pursuant hereto;

xxx xxx xxx

Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to
time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders or any other
persons or entities who have provided, loaned, or advanced funds or provided financial facilities to
Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all principal,
interest, associated fees, charges, reimbursements, and other related expenses (including the fees,
charges and expenses of any agents or trustees of such persons or entities), whether payable at maturity,
by acceleration or otherwise, and further including amounts owed by Concessionaire [PIATCO] to its
professional consultants and advisers, suppliers, contractors and sub-contractors.54

It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its loan obligations to
its Senior Lenders, the Government is obligated to directly negotiate and enter into an agreement relating to NAIA
IPT III with the Senior Lenders, should the latter fail to appoint a qualified nominee or transferee who will take the
place of PIATCO. If the Senior Lenders and the Government are unable to enter into an agreement after the
prescribed period, the Government must then pay PIATCO, upon transfer of NAIA IPT III to the Government,
termination payment equal to the appraised value of the project or the value of the attendant liabilities whichever
is greater. Attendant liabilities as defined in the ARCA includes all amounts owed or thereafter may be owed by
PIATCO not only to the Senior Lenders with whom PIATCO has defaulted in its loan obligations but to all other
persons who may have loaned, advanced funds or provided any other type of financial facilities to PIATCO for NAIA
IPT III. The amount of PIATCO's debt that the Government would have to pay as a result of PIATCO's default in its
loan obligations -- in case no qualified nominee or transferee is appointed by the Senior Lenders and no other
agreement relating to NAIA IPT III has been reached between the Government and the Senior Lenders -- includes,
but is not limited to, "all principal, interest, associated fees, charges, reimbursements, and other related expenses . .
. whether payable at maturity, by acceleration or otherwise."55

It is clear from the foregoing that the ARCA provides for a direct guarantee by the government to pay
PIATCO's loans not only to its Senior Lenders but all other entities who provided PIATCO funds or services
upon PIATCO's default in its loan obligation with its Senior Lenders. The fact that the Government's obligation
to pay PIATCO's lenders for the latter's obligation would only arise after the Senior Lenders fail to appoint a qualified
nominee or transferee does not detract from the fact that, should the conditions as stated in the contract occur, the
ARCA still obligates the Government to pay any and all amounts owed by PIATCO to its lenders in connection with
NAIA IPT III. Worse, the conditions that would make the Government liable for PIATCO's debts is triggered by
PIATCO's own default of its loan obligations to its Senior Lenders to which loan contracts the Government was
never a party to. The Government was not even given an option as to what course of action it should take in case
PIATCO defaulted in the payment of its senior loans. The Government, upon PIATCO's default, would be merely
notified by the Senior Lenders of the same and it is the Senior Lenders who are authorized to appoint a qualified
nominee or transferee. Should the Senior Lenders fail to make such an appointment, the Government is then
automatically obligated to "directly deal and negotiate" with the Senior Lenders regarding NAIA IPT III. The only way
the Government would not be liable for PIATCO's debt is for a qualified nominee or transferee to be appointed in
place of PIATCO to continue the construction, operation and maintenance of NAIA IPT III. This "pre-condition",
however, will not take the contract out of the ambit of a direct guarantee by the government as the existence,
availability and willingness of a qualified nominee or transferee is totally out of the government's control. As
such the Government is virtually at the mercy of PIATCO (that it would not default on its loan obligations to its
Senior Lenders), the Senior Lenders (that they would appoint a qualified nominee or transferee or agree to some
other arrangement with the Government) and the existence of a qualified nominee or transferee who is able and
willing to take the place of PIATCO in NAIA IPT III.

The proscription against government guarantee in any form is one of the policy considerations behind the
BOT Law. Clearly, in the present case, the ARCA obligates the Government to pay for all loans, advances and
obligations arising out of financial facilities extended to PIATCO for the implementation of the NAIA IPT III project
should PIATCO default in its loan obligations to its Senior Lenders and the latter fails to appoint a qualified nominee
or transferee. This in effect would make the Government liable for PIATCO's loans should the conditions as set forth
in the ARCA arise. This is a form of direct government guarantee.

The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a BOT project may be
accepted, the following conditions must first be met: (1) the project involves a new concept in technology and/or is
not part of the list of priority projects, (2) no direct government guarantee, subsidy or equity is required, and (3)
the government agency or local government unit has invited by publication other interested parties to a public
bidding and conducted the same.56 The failure to meet any of the above conditions will result in the denial of the
proposal. It is further provided that the presence of direct government guarantee, subsidy or equity will "necessarily
disqualify a proposal from being treated and accepted as an unsolicited proposal." 57 The BOT Law clearly and
strictly prohibits direct government guarantee, subsidy and equity in unsolicited proposals that the mere inclusion of
a provision to that effect is fatal and is sufficient to deny the proposal. It stands to reason therefore that if a proposal
can be denied by reason of the existence of direct government guarantee, then its inclusion in the contract executed
after the said proposal has been accepted is likewise sufficient to invalidate the contract itself. A prohibited
provision, the inclusion of which would result in the denial of a proposal cannot, and should not, be allowed to later
on be inserted in the contract resulting from the said proposal. The basic rules of justice and fair play alone militate
against such an occurrence and must not, therefore, be countenanced particularly in this instance where the
government is exposed to the risk of shouldering hundreds of million of dollars in debt.

This Court has long and consistently adhered to the legal maxim that those that cannot be done directly cannot be
done indirectly.58 To declare the PIATCO contracts valid despite the clear statutory prohibition against a
direct government guarantee would not only make a mockery of what the BOT Law seeks to prevent --
which is to expose the government to the risk of incurring a monetary obligation resulting from a contract
of loan between the project proponent and its lenders and to which the Government is not a party to -- but
would also render the BOT Law useless for what it seeks to achieve –- to make use of the resources of the
private sector in the "financing, operation and maintenance of infrastructure and development
projects"59 which are necessary for national growth and development but which the government,
unfortunately, could ill-afford to finance at this point in time.

IV

Temporary takeover of business affected with public interest

Article XII, Section 17 of the 1987 Constitution provides:

Section 17. In times of national emergency, when the public interest so requires, the State may, during the
emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any
privately owned public utility or business affected with public interest.

The above provision pertains to the right of the State in times of national emergency, and in the exercise of its police
power, to temporarily take over the operation of any business affected with public interest. In the 1986 Constitutional
Commission, the term "national emergency" was defined to include threat from external aggression, calamities or
national disasters, but not strikes "unless it is of such proportion that would paralyze government service." 60 The
duration of the emergency itself is the determining factor as to how long the temporary takeover by the government
would last.61 The temporary takeover by the government extends only to the operation of the business and not to the
ownership thereof. As such the government is not required to compensate the private entity-owner of the said
business as there is no transfer of ownership, whether permanent or temporary. The private entity-owner
affected by the temporary takeover cannot, likewise, claim just compensation for the use of the said business and its
properties as the temporary takeover by the government is in exercise of its police power and not of its power of
eminent domain.

Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:

Section 5.10 Temporary Take-over of operations by GRP.

….

(c) In the event the development Facility or any part thereof and/or the operations of Concessionaire or any
part thereof, become the subject matter of or be included in any notice, notification, or declaration
concerning or relating to acquisition, seizure or appropriation by GRP in times of war or national emergency,
GRP shall, by written notice to Concessionaire, immediately take over the operations of the Terminal and/or
the Terminal Complex. During such take over by GRP, the Concession Period shall be suspended;
provided, that upon termination of war, hostilities or national emergency, the operations shall be returned to
Concessionaire, at which time, the Concession period shall commence to run again. Concessionaire shall
be entitled to reasonable compensation for the duration of the temporary take over by GRP, which
compensation shall take into account the reasonable cost for the use of the Terminal and/or
Terminal Complex, (which is in the amount at least equal to the debt service requirements of
Concessionaire, if the temporary take over should occur at the time when Concessionaire is still servicing
debts owed to project lenders), any loss or damage to the Development Facility, and other consequential
damages. If the parties cannot agree on the reasonable compensation of Concessionaire, or on the liability
of GRP as aforesaid, the matter shall be resolved in accordance with Section 10.01 [Arbitration]. Any
amount determined to be payable by GRP to Concessionaire shall be offset from the amount next payable
by Concessionaire to GRP.62

PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on temporary
government takeover and obligate the government to pay "reasonable cost for the use of the Terminal
and/or Terminal Complex."63 Article XII, section 17 of the 1987 Constitution envisions a situation wherein the
exigencies of the times necessitate the government to "temporarily take over or direct the operation of any privately
owned public utility or business affected with public interest." It is the welfare and interest of the public which is the
paramount consideration in determining whether or not to temporarily take over a particular business. Clearly, the
State in effecting the temporary takeover is exercising its police power. Police power is the "most essential,
insistent, and illimitable of powers."64 Its exercise therefore must not be unreasonably hampered nor its exercise be
a source of obligation by the government in the absence of damage due to arbitrariness of its exercise. 65 Thus,
requiring the government to pay reasonable compensation for the reasonable use of the property pursuant to the
operation of the business contravenes the Constitution.

Regulation of Monopolies

A monopoly is "a privilege or peculiar advantage vested in one or more persons or companies, consisting in the
exclusive right (or power) to carry on a particular business or trade, manufacture a particular article, or control the
sale of a particular commodity."66 The 1987 Constitution strictly regulates monopolies, whether private or public,
and even provides for their prohibition if public interest so requires. Article XII, Section 19 of the 1987 Constitution
states:

Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall be allowed.

Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist to aid the
government in carrying on an enterprise or to aid in the performance of various services and functions in the
interest of the public.67 Nonetheless, a determination must first be made as to whether public interest requires a
monopoly. As monopolies are subject to abuses that can inflict severe prejudice to the public, they are subject to a
higher level of State regulation than an ordinary business undertaking.

In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted the "exclusive
right to operate a commercial international passenger terminal within the Island of Luzon" at the NAIA IPT III. 68 This
is with the exception of already existing international airports in Luzon such as those located in the Subic Bay
Freeport Special Economic Zone ("SBFSEZ"), Clark Special Economic Zone ("CSEZ") and in Laoag City. 69 As such,
upon commencement of PIATCO's operation of NAIA IPT III, Terminals 1 and 2 of NAIA would cease to function as
international passenger terminals. This, however, does not prevent MIAA to use Terminals 1 and 2 as domestic
passenger terminals or in any other manner as it may deem appropriate except those activities that would compete
with NAIA IPT III in the latter's operation as an international passenger terminal. 70 The right granted to PIATCO
to exclusively operate NAIA IPT III would be for a period of twenty-five (25) years from the In-Service Date 71 and
renewable for another twenty-five (25) years at the option of the government. 72 Both the 1997 Concession
Agreement and the ARCA further provide that, in view of the exclusive right granted to PIATCO, the
concession contracts of the service providers currently servicing Terminals 1 and 2 would no longer be
renewed and those concession contracts whose expiration are subsequent to the In-Service Date would
cease to be effective on the said date.73

The operation of an international passenger airport terminal is no doubt an undertaking imbued with public interest.
In entering into a Build–Operate-and-Transfer contract for the construction, operation and maintenance of NAIA IPT
III, the government has determined that public interest would be served better if private sector resources were used
in its construction and an exclusive right to operate be granted to the private entity undertaking the said project, in
this case PIATCO. Nonetheless, the privilege given to PIATCO is subject to reasonable regulation and supervision
by the Government through the MIAA, which is the government agency authorized to operate the NAIA complex, as
well as DOTC, the department to which MIAA is attached.74

This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be regulated. 75 While
it is the declared policy of the BOT Law to encourage private sector participation by "providing a climate of minimum
government regulations,"76 the same does not mean that Government must completely surrender its sovereign
power to protect public interest in the operation of a public utility as a monopoly. The operation of said public utility
can not be done in an arbitrary manner to the detriment of the public which it seeks to serve. The right granted to
the public utility may be exclusive but the exercise of the right cannot run riot. Thus, while PIATCO may be
authorized to exclusively operate NAIA IPT III as an international passenger terminal, the Government, through the
MIAA, has the right and the duty to ensure that it is done in accord with public interest. PIATCO's right to operate
NAIA IPT III cannot also violate the rights of third parties.

Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:

3.01 Concession Period

xxx xxx xxx

(e) GRP confirms that certain concession agreements relative to certain services and operations
currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a validity
period extending beyond the In-Service Date. GRP through DOTC/MIAA, confirms that these services
and operations shall not be carried over to the Terminal and the Concessionaire is under no legal
obligation to permit such carry-over except through a separate agreement duly entered into with
Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any such
concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on full
indemnity basis from and against any loss and/or any liability resulting from any such litigation, including the
cost of litigation and the reasonable fees paid or payable to Concessionaire's counsel of choice, all such
amounts shall be fully deductible by way of an offset from any amount which the Concessionaire is bound to
pay GRP under this Agreement.

During the oral arguments on December 10, 2002, the counsel for the petitioners-in-intervention for G.R. No.
155001 stated that there are two service providers whose contracts are still existing and whose validity
extends beyond the In-Service Date. One contract remains valid until 2008 and the other until 2010. 77

We hold that while the service providers presently operating at NAIA Terminal 1 do not have an absolute right for
the renewal or the extension of their respective contracts, those contracts whose duration extends beyond NAIA IPT
III's In-Service-Date should not be unduly prejudiced. These contracts must be respected not just by the parties
thereto but also by third parties. PIATCO cannot, by law and certainly not by contract, render a valid and binding
contract nugatory. PIATCO, by the mere expedient of claiming an exclusive right to operate, cannot require the
Government to break its contractual obligations to the service providers. In contrast to the arrastre and stevedoring
service providers in the case of Anglo-Fil Trading Corporation v. Lazaro 78 whose contracts consist of temporary
hold-over permits, the affected service providers in the cases at bar, have a valid and binding contract with the
Government, through MIAA, whose period of effectivity, as well as the other terms and conditions thereof, cannot be
violated.

In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of the 1997 Concession
Agreement and the ARCA did not strip government, thru the MIAA, of its right to supervise the operation of the
whole NAIA complex, including NAIA IPT III. As the primary government agency tasked with the job, 79 it is MIAA's
responsibility to ensure that whoever by contract is given the right to operate NAIA IPT III will do so within the
bounds of the law and with due regard to the rights of third parties and above all, the interest of the public.
 VI

CONCLUSION

In sum, this Court rules that in view of the absence of the requisite financial capacity of the Paircargo Consortium,
predecessor of respondent PIATCO, the award by the PBAC of the contract for the construction, operation and
maintenance of the NAIA IPT III is null and void. Further, considering that the 1997 Concession Agreement contains
material and substantial amendments, which amendments had the effect of converting the 1997 Concession
Agreement into an entirely different agreement from the contract bidded upon, the 1997 Concession Agreement is
similarly null and void for being contrary to public policy. The provisions under Sections 4.04(b) and (c) in relation to
Section 1.06 of the 1997 Concession Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which
constitute a direct government guarantee expressly prohibited by, among others, the BOT Law and its Implementing
Rules and Regulations are also null and void. The Supplements, being accessory contracts to the ARCA, are
likewise null and void.

WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession Agreement and the
Supplements thereto are set aside for being null and void.

SO ORDERED.

Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona, and Carpio-Morales,
JJ., concur.
Vitug, J., see separate (dissenting) opinion.
Panganiban, J., please see separate opinion.
Quisumbing, J., no jurisdiction, please see separate opinion of J. Vitug in which he concurs.
Carpio, J., no part.
Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.
Azcuna, J., joins the separate opinion of J. Vitug.

SEPARATE OPINIONS

VITUG, J.:

This Court is bereft of jurisdiction to hear the petitions at bar. The Constitution provides that the Supreme Court shall
exercise original jurisdiction over, among other actual controversies, petitions for certiorari, prohibition, mandamus,
quo warranto, and habeas corpus.1 The cases in question, although denominated to be petitions for prohibition,
actually pray for the nullification of the PIATCO contracts and to restrain respondents from implementing said
agreements for being illegal and unconstitutional.

Section 2, Rule 65 of the Rules of Court states:

"When the proceedings of any tribunal, corporation, board, officer or person, whether exercising judicial,
quasi-judicial or ministerial functions, are without or in excess of its or his jurisdiction, or with grave abuse of
discretion amounting to lack or excess of jurisdiction, and there is no appeal or any other plain, speedy and
adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the
proper court, alleging the facts with certainty and praying that judgment be rendered commanding the
respondent to desist from further proceedings in the action or matter specified therein, or otherwise granting
such incidental reliefs as law and justice may require."

The rule is explicit. A petition for prohibition may be filed against a tribunal, corporation, board, officer or person,
exercising judicial, quasi-judicial or ministerial functions. What the petitions seek from respondents do not involve
judicial, quasi-judicial or ministerial functions. In prohibition, only legal issues affecting the jurisdiction of the tribunal,
board or officer involved may be resolved on the basis of undisputed facts.2 The parties allege, respectively,
contentious evidentiary facts. It would be difficult, if not anomalous, to decide the jurisdictional issue on the basis of
the contradictory factual submissions made by the parties. 3 As the Court has so often exhorted, it is not a trier of
facts.

The petitions, in effect, are in the nature of actions for declaratory relief under Rule 63 of the Rules of Court. The
Rules provide that any person interested under a contract may, before breach or violation thereof, bring an action in
the appropriate Regional Trial Court to determine any question of construction or validity arising, and for a
declaration of his rights or duties thereunder. 4 The Supreme Court assumes no jurisdiction over petitions for
declaratory relief which are cognizable by regional trial courts.5
As I have so expressed in Tolentino vs. Secretary of Finance, 6 reiterated in Santiago vs. Guingona, Jr.7 , the
Supreme Court should not be thought of as having been tasked with the awesome responsibility of overseeing the
entire bureaucracy. Pervasive and limitless, such as it may seem to be under the 1987 Constitution, judicial power
still succumbs to the paramount doctrine of separation of powers. The Court may not at good liberty intrude, in the
guise of sovereign imprimatur, into every affair of government. What significance can still then remain of the time-
honored and widely acclaimed principle of separation of powers if, at every turn, the Court allows itself to pass upon
at will the disposition of a co-equal, independent and coordinate branch in our system of government. I dread to
think of the so varied uncertainties that such an undue interference can lead to.

Accordingly, I vote for the dismissal of the petition.

Quisumbing, and Azcuna, JJ., concur.

PANGANIBAN, J.:

The five contracts for the construction and the operation of Ninoy Aquino International Airport (NAIA) Terminal III,
the subject of the consolidated Petitions before the Court, are replete with outright violations of law, public policy
and the Constitution. The only proper thing to do is declare them all null and void ab initio and let the chips fall
where they may. Fiat iustitia ruat coelum.

The facts leading to this controversy are already well presented in the ponencia. I shall not burden the readers with
a retelling thereof. Instead, I will cut to the chase and directly address the two sets of gut issues:

1. The first issue is procedural: Does the Supreme Court have original jurisdiction to hear and decide the Petitions?
Corollarily, do petitioners have locus standi and should this Court decide the cases without any mandatory referral to
arbitration?

2. The second one is substantive in character: Did the subject contracts violate the Constitution, the laws, and public
policy to such an extent as to render all of them void and inexistent?

My answer to all the above questions is a firm "Yes."

The Procedural Issue:

Jurisdiction, Standing and Arbitration

Definitely and surely, the issues involved in these Petitions are clearly of transcendental importance and of national
interest. The subject contracts pertain to the construction and the operation of the country's premiere international
airport terminal - an ultramodern world-class public utility that will play a major role in the country's economic
development and serve to project a positive image of our country abroad. The five build-operate-&-transfer (BOT)
contracts, while entailing the investment of billions of pesos in capital and the availment of several hundred millions
of dollars in loans, contain provisions that tend to establish a monopoly, require the disbursements of public funds
sans appropriations, and provide government guarantees in violation of statutory prohibitions, as well as other
provisions equally offensive to law, public policy and the Constitution. Public interest will inevitably be affected
thereby.

Thus, objections to these Petitions, grounded upon (a) the hierarchy of courts, (b) the need for arbitration prior to
court action, and (c) the alleged lack of sufficient personality, standing or interest, being in the main procedural
matters, must now be set aside, as they have been in past cases. This Court must be permitted to perform its
constitutional duty of determining whether the other agencies of government have acted within the limits of the
Constitution and the laws, or if they have gravely abused the discretion entrusted to them. 1

Hierarchy of Courts

The Court has, in the past, held that questions relating to gargantuan government contracts ought to be settled
without delay.2 This holding applies with greater force to the instant cases. Respondent Piatco is partly correct in
averring that petitioners can obtain relief from the regional trial courts via an action to annul the contracts.

Nevertheless, the unavoidable consequence of having to await the rendition and the finality of any such judgment
would be a prolonged state of uncertainty that would be prejudicial to the nation, the parties and the general public.
And, in light of the feared loss of jobs of the petitioning workers, consequent to the inevitable pretermination of
contracts of the petitioning service providers that will follow upon the heels of the impending opening of NAIA
Terminal III, the need for relief is patently urgent, and therefore, direct resort to this Court through the special civil
action of prohibition is thus justified.3
Contrary to Piatco's argument that the resolution of the issues raised in the Petitions will require delving into factual
questions,4 I submit that their disposition ultimately turns on questions of law. 5 Further, many of the significant and
relevant factual questions can be easily addressed by an examination of the documents submitted by the parties. In
any event, the Petitions raise some novel questions involving the application of the amended BOT Law, which this
Court has seen fit to tackle.

Arbitration

Should the dispute be referred to arbitration prior to judicial recourse? Respondent Piatco claims that Section 10.02
of the Amended and Restated Concession Agreement (ARCA) provides for arbitration under the auspices of the
International Chamber of Commerce to settle any dispute or controversy or claim arising in connection with the
Concession Agreement, its amendments and supplements. The government disagrees, however, insisting that there
can be no arbitration based on Section 10.02 of the ARCA, since all the Piatco contracts are void ab initio.
Therefore, all contractual provisions, including Section 10.02 of the ARCA, are likewise void, inexistent and
inoperative. To support its stand, the government cites Chavez v. Presidential Commission on Good
Government:6 "The void agreement will not be rendered operative by the parties' alleged performance (partial or full)
of their respective prestations. A contract that violates the Constitution and the law is null and void ab initio and
vests no rights and creates no obligations. It produces no legal effect at all."

As will be discussed at length later, the Piatco contracts are indeed void in their entirety; thus, a resort to the
aforesaid provision on arbitration is unavailing. Besides, petitioners and petitioners-in-intervention have pointed out
that, even granting arguendo that the arbitration clause remained a valid provision, it still cannot bind them
inasmuch as they are not parties to the Piatco contracts. And in the final analysis, it is unarguable that the arbitration
process provided for under Section 10.02 of the ARCA, to be undertaken by a panel of three (3) arbitrators
appointed in accordance with the Rules of Arbitration of the International Chamber of Commerce, will not be able to
address, determine and definitively resolve the constitutional and legal questions that have been raised in the
Petitions before us.

Locus Standi

Given this Court's previous decisions in cases of similar import, no one will seriously doubt that, being taxpayers
and members of the House of Representatives, Petitioners Baterina et al. have locus standi to bring the Petition in
GR No. 155547. In Albano v. Reyes,7 this Court held that the petitioner therein, suing as a citizen, taxpayer and
member of the House of Representatives, was sufficiently clothed with standing to bring the suit questioning the
validity of the assailed contract. The Court cited the fact that public interest was involved, in view of the important
role of the Manila International Container Terminal (MICT) in the country's economic development and the
magnitude of the financial consideration. This, notwithstanding the fact that expenditure of public funds was not
required under the assailed contract.

In the cases presently under consideration, petitioners' personal and substantial interest in the controversy is shown
by the fact that certain provisions in the Piatco contracts create obligations on the part of government (through the
DOTC and the MIAA) to disburse public funds without prior congressional appropriations.

Petitioners thus correctly assert that the injury to them has a twofold aspect: (1) they are adversely affected as
taxpayers on account of the illegal disbursement of public funds; and (2) they are prejudiced qua legislators, since
the contractual provisions requiring the government to incur expenditures without appropriations also operate as
limitations upon the exclusive power and prerogative of Congress over the public purse. As members of the House
of Representatives, they are actually deprived of discretion insofar as the inclusion of those items of expenditure in
the budget is concerned. To prevent such encroachment upon the legislative privilege and obviate injury to the
institution of which they are members, petitioners-legislators have locus standi to bring suit.

Messrs. Agan et al. and Lopez et al., are likewise taxpayers and thus possessed of standing to challenge the illegal
disbursement of public funds. Messrs. Agan et al., in particular, are employees (or representatives of employees) of
various service providers that have (1) existing concession agreements with the MIAA to provide airport services
necessary to the operation of the NAIA and (2) service agreements to furnish essential support services to the
international airlines operating at the NAIA.

On the other hand, Messrs. Lopez et al. are employees of the MIAA. These petitioners (Messrs. Agan et al. and
Messrs. Lopez et al.) are confronted with the prospect of being laid off from their jobs and losing their means of
livelihood when their employer-companies are forced to shut down or otherwise retrench and cut back on
manpower. Such development would result from the imminent implementation of certain provisions in the contracts
that tend toward the creation of a monopoly in favor of Piatco, its subsidiaries and related companies.

Petitioners-in-intervention are service providers in the business of furnishing airport-related services to international
airlines and passengers in the NAIA and are therefore competitors of Piatco as far as that line of business is
concerned. On account of provisions in the Piatco contracts, petitioners-in-intervention have to enter into a written
contract with Piatco so as not to be shut out of NAIA Terminal III and barred from doing business there. Since there
is no provision to ensure or safeguard free and fair competition, they are literally at its mercy. They claim injury on
account of their deprivation of property (business) and of the liberty to contract, without due process of law.

And even if petitioners and petitioners-in-intervention were not sufficiently clothed with legal standing, I have at the
outset already established that, given its impact on the public and on national interest, this controversy is laden with
transcendental importance and constitutional significance. Hence, I do not hesitate to adopt the same position as
was enunciated in Kilosbayan v. Guingona Jr.8 that "in cases of transcendental importance, the Court may relax the
standing requirements and allow a suit to prosper even when there is no direct injury to the party claiming the right
of judicial review."9

The Substantive Issue:

Violations of the Constitution and the Laws

From the Outset, the Bidding Process Was Flawed and Tainted

After studying the documents submitted and arguments advanced by the parties, I have no doubt that, right at the
outset, Piatco was not qualified to participate in the bidding process for the Terminal III project, but was nevertheless
permitted to do so. It even won the bidding and was helped along by what appears to be a series of collusive and
corrosive acts.

The build-operate-and-transfer (BOT) project for the NAIA Passenger Terminal III comes under the category of an
"unsolicited proposal," which is the subject of Section 4-A of the BOT Law. 10 The unsolicited proposal was originally
submitted by the Asia's Emerging Dragon Corporation (AEDC) to the Department of Transportation and
Communications (DOTC) and the Manila International Airport Authority (MIAA), which reviewed and approved the
proposal.

The draft of the concession agreement as negotiated between AEDC and DOTC/MIAA was endorsed to the
National Economic Development Authority (NEDA-ICC), which in turn reviewed it on the basis of its scope,
economic viability, financial indicators and risks; and thereafter approved it for bidding.

The DOTC/MIAA then prepared the Bid Documents, incorporating therein the negotiated Draft Concession
Agreement, and published invitations for public bidding, i.e., for the submission of comparative or competitive
proposals. Piatco's predecessor-in-interest, the Paircargo Consortium, was the only company that submitted a
competitive bid or price challenge.

At this point, I must emphasize that the law requires the award of a BOT project to the bidder that has satisfied the
minimum requirements; and met the technical, financial, organizational and legal standards provided in the BOT
Law. Section 5 of this statute states:

"Sec. 5. Public bidding of projects. - . . .

"In the case of a build-operate-and-transfer arrangement, the contract shall be awarded to the bidder
who, having satisfied the minimum financial, technical, organizational and legal standards required
by this Act, has submitted the lowest bid and most favorable terms for the project, based on the present
value of its proposed tolls, fees, rentals and charges over a fixed term for the facility to be constructed,
rehabilitated, operated and maintained according to the prescribed minimum design and performance
standards, plans and specifications. . . ." (Emphasis supplied.)

The same provision requires that the price challenge via public bidding "must be conducted under a
two-envelope/two-stage system: the first envelope to contain the technical proposal and the second envelope to
contain the financial proposal." Moreover, the 1994 Implementing Rules and Regulations (IRR) provide that only
those bidders that have passed the prequalification stage are permitted to have their two envelopes reviewed.

In other words, prospective bidders must prequalify by submitting their prequalification documents for evaluation;
and only the pre-qualified bidders would be entitled to have their bids opened, evaluated and appreciated. On the
other hand, disqualified bidders are to be informed of the reason for their disqualification. This procedure was
confirmed and reiterated in the Bid Documents, which I quote thus: "Prequalified proponents will be considered
eligible to move to second stage technical proposal evaluation. The second and third envelopes of pre-disqualified
proponents will be returned."11

Aside from complying with the legal and technical requirements (track record or experience of the firm and its key
personnel), a project proponent desiring to prequalify must also demonstrate its financial capacity to undertake the
project. To establish such capability, a proponent must prove that it is able to raise the minimum amount of equity
required for the project and to procure the loans or financing needed for it. Section 5.4(c) of the 1994 IRR provides:
 "Sec. 5.4. Prequalification Requirements. - To pre-qualify, a project proponent must comply with the
following requirements:

xxx xxx xxx

"c. Financial Capability. The project proponent must have adequate capability to sustain the financing
requirements for the detailed engineering design, construction, and/or operation and maintenance phases of
the project, as the case may be. For purposes of prequalification, this capability shall be measured in terms
of: (i) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of
equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent
and/or members of the consortium are banking with them, that they are in good financial standing, and that
they have adequate resources. The government Agency/LGU concerned shall determine on a project-to-
project basis, and before prequalification, the minimum amount of equity needed. . . . ." (Italics supplied)

Since the minimum amount of equity for the project was set at 30 percent 12 of the minimum project cost of US$350
million, the minimum amount of equity required of any proponent stood at US$105 million. Converted to pesos at the
exchange rate then of P26.239 to US$1.00 (as quoted by the Bangko Sentral ng Pilipinas), the peso equivalent of
the minimum equity was P2,755,095,000.

However, the combined equity or net worth of the Paircargo consortium stood at only P558,384,871.55. 13 This
amount was only slightly over 6 percent of the minimum project cost and very much short of the required minimum
equity, which was equivalent to 30 percent of the project cost. Such deficiency should have immediately caused the
disqualification of the Paircargo consortium. This matter was brought to the attention of the Prequalification and
Bidding Committee (PBAC).

Notwithstanding the glaring deficiency, DOTC Undersecretary Primitivo C. Cal, concurrent chair of the PBAC,
declared in a Memorandum dated 14 October 1996 that "the Challenger (Paircargo consortium) was found to have
a combined net worth of P3,926,421,242.00 that could support a project costing approximately P13 billion ." To
justify his conclusion, he asserted: "It is not a requirement that the networth must be `unrestricted'. To impose this
as a requirement now will be nothing less than unfair."

He further opined, "(T)he networth reflected in the Financial Statement should not be taken as the amount of money
to be used to answer the required thirty (30%) percent equity of the challenger but rather to be used in establishing
if there is enough basis to believe that the challenger can comply with the required 30% equity. In fact, proof of
sufficient equity is required as one of the conditions for award of contract (Sec. 12.1 of IRR of the BOT Law) but not
for prequalification (Sec. 5.4 of same document)."

On the basis of the foregoing dubious declaration, the Paircargo consortium was deemed prequalified and thus
permitted to proceed to the other stages of the bidding process.

By virtue of the prequalified status conferred upon the Paircargo, Undersecretary Cal's findings in effect relieved the
consortium of the need to comply with the financial capability requirement imposed by the BOT Law and IRR. This
position is unmistakably and squarely at odds with the Supreme Court's consistent doctrine emphasizing the strict
application of pertinent rules, regulations and guidelines for the public bidding process, in order to place each bidder
- actual or potential - on the same footing. Thus, it is unarguably irregular and contrary to the very concept of public
bidding to permit a variance between the conditions under which bids are invited and those under which proposals
are submitted and approved.

Republic v. Capulong,14 teaches that if one bidder is relieved from having to conform to the conditions that impose
some duty upon it, that bidder is not contracting in fair competition with those bidders that propose to be bound by
all conditions. The essence of public bidding is, after all, an opportunity for fair competition and a basis for the
precise comparison of bids.15 Thus, each bidder must bid under the same conditions; and be subject to the same
guidelines, requirements and limitations. The desired result is to be able to determine the best offer or lowest bid, all
things being equal.

Inasmuch as the Paircargo consortium did not possess the minimum equity equivalent to 30 percent of the minimum
project cost, it should not have been prequalified or allowed to participate further in the bidding. The Prequalification
and Bidding Committee (PBAC) should therefore not have opened the two envelopes of the consortium containing
its technical and financial proposals; required AEDC to match the consortium's bid; 16 or awarded the Concession
Agreement to the consortium's successor-in-interest, Piatco.

As there was effectively no public bidding to speak of, the entire bidding process having been flawed and tainted
from the very outset, therefore, the award of the concession to Paircargo's successor Piatco was void, and the
Concession Agreement executed with the latter was likewise void ab initio. For this reason, Piatco cannot and
should not be allowed to benefit from that Agreement.17

AEDC Was Deprived of the Right to Match PIATCO's Price Challenge

In DOTC PBAC Bid Bulletin No. 4 (par. 3), Undersecretary Cal declared that, for purposes of matching the price
challenge of Piatco, AEDC as originator of the unsolicited proposal would be permitted access only to the schedule
of proposed Annual Guaranteed Payments submitted by Piatco, and not to the latter's financial and technical
proposals that constituted the basis for the price challenge in the first place. This was supposedly in keeping with
Section 11.6 of the 1994 IRR, which provides that proprietary information is to be respected, protected and treated
with utmost confidentiality, and is therefore not to form part of the bidding/tender and related documents.

This pronouncement, I believe, was a grievous misapplication of the mentioned provision. The "proprietary
information" referred to in Section 11.6 of the IRR pertains only to the proprietary information of the originator of an
unsolicited proposal, and not to those belonging to a challenger. The reason for the protection accorded proprietary
information at all is the fact that, according to Section 4-A of the BOT Law as amended, a proposal qualifies as an
"unsolicited proposal" when it pertains to a project that involves "a new concept or technology", and/or a project that
is not on the government's list of priority projects.

To be considered as utilizing a new concept or technology, a project must involve the possession of exclusive rights
(worldwide or regional) over a process; or possession of intellectual property rights over a design, methodology or
engineering concept.18 Patently, the intent of the BOT Law is to encourage individuals and groups to come up with
creative innovations, fresh ideas and new technology. Hence, the significance and necessity of protecting
proprietary information in connection with unsolicited proposals. And to make the encouragement real, the law also
extends to such individuals and groups what amounts to a "right of first refusal" to undertake the project they
conceptualized, involving the use of new technology or concepts, through the mechanism of matching a price
challenge.

A competing bid is never just any figure conjured from out of the blue; it is arrived at after studying economic,
financial, technical and other, factors; it is likewise based on certain assumptions as to the nature of the business,
the market potentials, the probable demand for the product or service, the future behavior of cost items, political and
other risks, and so on. It is thus self-evident that in order to be able to intelligently match a bid or price challenge, a
bidder must be given access to the assumptions and the calculations that went into crafting the competing bid.

In this instance, the financial and technical proposals of Piatco would have provided AEDC with the necessary
information to enable it to make a reasonably informed matching bid. To put it more simply, a bidder unable to
access the competitor's assumptions will never figure out how the competing bid came about; requiring him to
"counter-propose" is like having him shoot at a target in the dark while blindfolded.

By withholding from AEDC the challenger's financial and technical proposals containing the critical information it
needed, Undersecretary Cal actually and effectively deprived AEDC of the ability to match the price challenge. One
could say that AEDC did not have the benefit of a "level playing field." It seems to me, though, that AEDC
was actually shut out of the game altogether.

At the end of the day, the bottom line is that the validity and the propriety of the award to Piatco had been
irreparably impaired.

Delayed Issuance of the Notice of Award Violated the BOT Law and the IRR

Section 9.5 of the IRR requires that the Notice of Award must indicate the time frame within which the winner of the
bidding (and therefore the prospective awardee) shall submit the prescribed performance security, proof of
commitment of equity contributions, and indications of sources of financing (loans); and, in the case of joint
ventures, an agreement showing that the members are jointly and severally responsible for the obligations of the
project proponent under the contract.

The purpose of having a definite and firm timetable for the submission of the aforementioned requirements is not
only to prevent delays in the project implementation, but also to expose and weed out unqualified proponents, who
might have unceremoniously slipped through the earlier prequalification process, by compelling them to put their
money where their mouths are, so to speak.

Nevertheless, this provision can be easily circumvented by merely postponing the actual issuance of the Notice of
Award, in order to give the favored proponent sufficient time to comply with the requirements. Hence, to avert or
minimize the manipulation of the post-bidding process, the IRR not only set out the precise sequence of events
occurring between the completion of the evaluation of the technical bids and the issuance of the Notice of Award,
but also specified the timetables for each such event. Definite allowable extensions of time were provided for, as
were the consequences of a failure to meet a particular deadline.

In particular, Section 9.1 of the 1994 IRR prescribed that within 30 calendar days from the time the second-stage
evaluation shall have been completed, the Committee must come to a decision whether or not to award the contract
and, within 7 days therefrom, the Notice of Award must be approved by the head of agency or local government unit
(LGU) concerned, and its issuance must follow within another 7 days thereafter.
Section 9.2 of the IRR set the procedure applicable to projects involving substantial government undertakings as
follows: Within 7 days after the decision to award is made, the draft contract shall be submitted to the ICC for
clearance on a no-objection basis. If the draft contract includes government undertakings already previously
approved, then the submission shall be for information only.

However, should there be additional or new provisions different from the original government undertakings, the draft
shall have to be reviewed and approved. The ICC has 15 working days to act thereon, and unless otherwise
specified, its failure to act on the contract within the specified time frame signifies that the agency or LGU may
proceed with the award. The head of agency or LGU shall approve the Notice of Award within seven days of the
clearance by the ICC on a no-objection basis, and the Notice itself has to be issued within seven days thereafter.

The highly regulated time-frames within which the agents of government were to act evinced the intent to impose
upon them the duty to act expeditiously throughout the process, to the end that the project be prosecuted and
implemented without delay. This regulated scenario was likewise intended to discourage collusion and substantially
reduce the opportunity for agents of government to abuse their discretion in the course of the award process.

Despite the clear timetables set out in the IRR, several lengthy and still-unexplained delays occurred in the award
process, as can be observed from the presentation made by the counsel for public respondents, 19 quoted
hereinbelow:

"11 Dec. 1996 - The Paircargo Joint Venture was informed by the PBAC that AEDC failed to match and that
negotiations preparatory to Notice of Award should be commenced. This was the decision to award that
should have commenced the running of the 7-day period to approve the Notice of Award, as per Section 9.1
of the IRR, or to submit the draft contract to the ICC for approval conformably with Section 9.2.

"01 April 1997 - The PBAC resolved that a copy of the final draft of the Concession Agreement be submitted
to the NEDA for clearance on a no-objection basis. This resolution came more than 3 months too late as it
should have been made on the 20th of December 1996 at the latest.

"16 April 1997 - The PBAC resolved that the period of signing the Concession Agreement be extended by
15 days.

"18 April 1997 - NEDA approved the Concession Agreement. Again this is more than 3 months too late as
the NEDA's decision should have been released on the 16th of January 1997 or fifteen days after it should
have been submitted to it for review.

"09 July 1997 - The Notice of Award was issued to PIATCO. Following the provisions of the IRR, the Notice
of Award should have been issued fourteen days after NEDA's approval, or the 28th of January 1997. In any
case, even if it were to be assumed that the release of NEDA's approval on the 18th of April was timely, the
Notice of Award should have been issued on the 9th of May 1997. In both cases, therefore, the release of
the Notice of Award occurred in a decidedly less than timely fashion."

This chronology of events bespeaks an unmistakable disregard, if not disdain, by the persons in charge of the
award process for the time limitations prescribed by the IRR. Their attitude flies in the face of this Court's solemn
pronouncement in Republic v. Capulong,20 that "strict observance of the rules, regulations and guidelines of the
bidding process is the only safeguard to a fair, honest and competitive public bidding."

From the foregoing, the only conclusion that can possibly be drawn is that the BOT law and its IRR were repeatedly
violated with unmitigated impunity - and by agents of government, no less! On account of such violation, the award
of the contract to Piatco, which undoubtedly gained time and benefited from the delays, must be deemed null and
void from the beginning.

Further Amendments Resulted in a Substantially Different Contract, Awarded Without Public Bidding

But the violations and desecrations did not stop there. After the PBAC made its decision on December 11, 1996 to
award the contract to Piatco, the latter negotiated changes to the Contract bidded out and ended up with what
amounts to a substantially new contract without any public bidding. This Contract was subsequently further
amended four more times through negotiation and without any bidding. Thus, the contract actually executed
between Piatco and DOTC/MIAA on July 12, 1997 (the Concession Agreement or "CA") differed from the contract
bidded out (the draft concession agreement or "DCA") in the following very significant respects:

1. The CA inserted stipulations creating a monopoly in favor of Piatco in the business of providing airport-
related services for international airlines and passengers.21

2. The CA provided that government is to answer for Piatco's unpaid loans and debts (lumped under the
term Attendant Liabilities) in the event Piatco fails to pay its senior lenders.22
 3. The CA provided that in case of termination of the contract due to the fault of government, government
shall pay all expenses that Piatco incurred for the project plus the appraised value of the Terminal. 23

4. The CA imposed new and special obligations on government, including delivery of clean possession of
the site for the terminal; acquisition of additional land at the government's expense for construction of road
networks required by Piatco's approved plans and specifications; and assistance to Piatco in securing site
utilities, as well as all necessary permits, licenses and authorizations.24

5. Where Section 3.02 of the DCA requires government to refrain from competing with the contractor with
respect to the operation of NAIA Terminal III, Section 3.02(b) of the CA excludes and prohibits everyone,
including government, from directly or indirectly competing with Piatco, with respect to the operation of, as
well as operations in, NAIA Terminal III. Operations in is sufficiently broad to encompass all retail and other
commercial business enterprises operating within Terminal III, inclusive of the businesses of providing
various airport-related services to international airlines, within the scope of the prohibition.

6. Under Section 6.01 of the DCA, the following fees are subject to the written approval of MIAA: lease/rental
charges, concession privilege fees for passenger services, food services, transportation utility concessions,
groundhandling, catering and miscellaneous concession fees, porterage fees, greeter/well-wisher fees,
carpark fees, advertising fees, VIP facilities fees and others. Moreover, adjustments to the groundhandling
fees, rentals and porterage fees are permitted only once every two years and in accordance with a
parametric formula, per DCA Section 6.03. However, the CA as executed with Piatco provides in Section
6.06 that all the aforesaid fees, rentals and charges may be adjusted without MIAA's approval or
intervention. Neither are the adjustments to these fees and charges subject to or limited by any parametric
formula.25

7. Section 1.29 of the DCA provides that the terminal fees, aircraft tacking fees, aircraft parking fees, check-
in counter fees and other fees are to be quoted and paid in Philippine pesos. But per Section 1.33 of the CA,
all the aforesaid fees save the terminal fee are denominated in US Dollars.

8. Under Section 8.07 of the DCA, the term attendant liabilities refers to liabilities pertinent to NAIA Terminal
III, such as payment of lease rentals and performance of other obligations under the Land Lease
Agreement; the obligations under the Tenant Agreements; and payment of all taxes, fees, charges and
assessments of whatever kind that may be imposed on NAIA Terminal III or parts thereof. But in Section
1.06 of the CA, Attendant Liabilities refers to unpaid debts of Piatco: "All amounts recorded and from time to
time outstanding in the books of (Piatco) as owing to Unpaid Creditors who have provided, loaned or
advanced funds actually used for the Project, including all interests, penalties, associated fees, charges,
surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed
by [Piatco] to its suppliers, contractors and subcontractors."

9. Per Sections 8.04 and 8.06 of the DCA, government may, on account of the contractors breach, rescind
the contract and select one of four options: (a) take over the terminal and assume all its attendant liabilities;
(b) allow the contractor's creditors to assign the Project to another entity acceptable to DOTC/MIAA; (c) pay
the contractor rent for the facilities and equipment the DOTC may utilize; or (d) purchase the terminal at a
price established by independent appraisers. Depending on the option selected, government may take
immediate possession and control of the terminal and its operations. Government will be obligated to
compensate the contractor for the "equivalent or proportionate contract costs actually disbursed," but only
where government is the one in breach of the contract. But under Section 8.06(a) of the CA, whether on
account of Piatco's breach of contract or its inability to pay its creditors, government is obliged to either (a)
take over Terminal III and assume all of Piatco's debts or (b) permit the qualified unpaid creditors to be
substituted in place of Piatco or to designate a new operator. And in the event of government's breach of
contract, Piatco may compel it to purchase the terminal at fair market value, per Section 8.06(b) of the CA.

10. Under the DCA, any delay by Piatco in the payment of the amounts due the government constitutes
breach of contract. However, under the CA, such delay does not necessarily constitute breach of contract,
since Piatco is permitted to suspend payments to the government in order to first satisfy the claims of its
secured creditors, per Section 8.04(d) of the CA.

It goes without saying that the amendment of the Contract bidded out (the DCA or draft concession agreement) - in
such substantial manner, without any public bidding, and after the bidding process had been concluded on
December 11, 1996 - is violative of public policy on public biddings, as well as the spirit and intent of the BOT Law.
The whole point of going through the public bidding exercise was completely lost. Its very rationale was totally
subverted by permitting Piatco to amend the contract for which public bidding had already been concluded.
Competitive bidding aims to obtain the best deal possible by fostering transparency and preventing favoritism,
collusion and fraud in the awarding of contracts. That is the reason why procedural rules pertaining to public bidding
demand strict observance.26
In a relatively early case, Caltex v. Delgado Brothers,27 this Court made it clear that substantive amendments to a
contract for which a public bidding has already been finished should only be awarded after another public bidding:

"The due execution of a contract after public bidding is a limitation upon the right of the contracting parties to
alter or amend it without another public bidding, for otherwise what would a public bidding be good for if after
the execution of a contract after public bidding, the contracting parties may alter or amend the contract, or
even cancel it, at their will? Public biddings are held for the protection of the public, and to give the public the
best possible advantages by means of open competition between the bidders. He who bids or offers the
best terms is awarded the contract subject of the bid, and it is obvious that such protection and best possible
advantages to the public will disappear if the parties to a contract executed after public bidding may alter or
amend it without another previous public bidding."28

The aforementioned case dealt with the unauthorized amendment of a contract executed after public bidding; in the
situation before us, the amendments were made also after the bidding, but prior to execution. Be that as it may, the
same rationale underlying Caltex applies to the present situation with equal force. Allowing the winning bidder to
renegotiate the contract for which the bidding process has ended is tantamount to permitting it to put in anything it
wants. Here, the winning bidder (Piatco) did not even bother to wait until after actual execution of the contract before
rushing to amend it. Perhaps it believed that if the changes were made to a contract already won through bidding
(DCA) instead of waiting until it is executed, the amendments would not be noticed or discovered by the public.

In a later case, Mata v. San Diego,29 this Court reiterated its ruling as follows:

"It is true that modification of government contracts, after the same had been awarded after a public bidding,
is not allowed because such modification serves to nullify the effects of the bidding and whatever
advantages the Government had secured thereby and may also result in manifest injustice to the other
bidders. This prohibition, however, refers to a change in vital and essential particulars of the agreement
which results in a substantially new contract."

Piatco's counter-argument may be summed up thus: There was nothing in the 1994 IRR that prohibited further
negotiations and eventual amendments to the DCA even after the bidding had been concluded. In fact, PBAC Bid
Bulletin No. 3 states: "[A]mendments to the Draft Concession Agreement shall be issued from time to time. Said
amendments will only cover items that would not materially affect the preparation of the proponent's proposal."

I submit that accepting such warped argument will result in perverting the policy underlying public bidding. The BOT
Law cannot be said to allow the negotiation of contractual stipulations resulting in a substantially new contract after
the bidding process and price challenge had been concluded. In fact, the BOT Law, in recognition of the time,
money and effort invested in an unsolicited proposal, accords its originator the privilege of matching the challenger's
bid.

Section 4-A of the BOT Law specifically refers to a "lower price proposal" by a competing bidder; and to the right of
the original proponent "to match the price" of the challenger. Thus, only the price proposals are in play. The terms,
conditions and stipulations in the contract for which public bidding has been concluded are understood to remain
intact and not be subject to further negotiation. Otherwise, the very essence of public bidding will be destroyed -
there will be no basis for an exact comparison between bids.

Moreover, Piatco misinterpreted the meaning behind PBAC Bid Bulletin No. 3. The phrase amendments . . . from
time to time refers only to those amendments to the draft concession agreement issued by the PBAC prior to the
submission of the price challenge; it certainly does not include or permit amendments negotiated for and introduced
after the bidding process, has been terminated.

Piatco's Concession Agreement Was Further Amended, (ARCA) Again Without Public Bidding

Not satisfied with the Concession Agreement, Piatco - once more without bothering with public bidding - negotiated
with government for still more substantial changes. The result was the Amended and Restated Concession
Agreement (ARCA) executed on November 26, 1998. The following changes were introduced:

1. The definition of Attendant Liabilities was further amended with the result that the unpaid loans of Piatco,
for which government may be required to answer, are no longer limited to only those loans recorded in
Piatco's books or loans whose proceeds were actually used in the Terminal III project. 30

2. Although the contract may be terminated due to breach by Piatco, it will not be liable to pay the
government any Liquidated Damages if a new operator is designated to take over the operation of the
terminal.31

3. The Liquidated Damages which government becomes liable for in case of its breach of contract were
substantially increased.32
 4. Government's right to appoint a comptroller for Piatco in case the latter encounters liquidity problems was
deleted.33

5. Government is made liable for Incremental and Consequential Costs and Losses in case it fails to comply
or cause any third party under its direct or indirect control to comply with the special obligations imposed on
government.34

6. The insurance policies obtained by Piatco covering the terminal are now required to be assigned to the
Senior Lenders as security for the loans; previously, their proceeds were to be used to repair and
rehabilitate the facility in case of damage.35

7. Government bound itself to set the initial rate of the terminal fee, to be charged when Terminal III begins
operations, at an amount higher than US$20.36

8. Government waived its defense of the illegality of the contract and even agreed to be liable to pay
damages to Piatco in the event the contract was declared illegal.37

9. Even though government may be entitled to terminate the ARCA on account of breach by Piatco,
government is still liable to pay Piatco the appraised value of Terminal III or the Attendant Liabilities, if the
termination occurs before the In-Service Date.38 This condition contravenes the BOT Law provision on
termination compensation.

10. Government is obligated to take the administrative action required for Piatco's imposition, collection and
application of all Public Utility Revenues.39 No such obligation existed previously.

11. Government is now also obligated to perform and cause other persons and entities under its direct or
indirect control to perform all acts necessary to perfect the security interests to be created in favor of
Piatco's Senior Lenders.40 No such obligation existed previously.

12. DOTC/MIAA's right of intervention in instances where Piatco's Non-Public Utility Revenues become
exorbitant or excessive has been removed.41

13. The illegality and unenforceability of the ARCA or any of its material provisions was made an event of
default on the part of government only, thus constituting a ground for Piatco to terminate the ARCA. 42

14. Amounts due from and payable by government under the contract were made payable on demand - net
of taxes, levies, imposts, duties, charges or fees of any kind except as required by law. 43

15. The Parametric Formula in the contract, which is utilized to compute for adjustments/increases to the
public utility revenues (i.e., aircraft parking and tacking fees, check-in counter fee and terminal fee), was
revised to permit Piatco to input its more costly short-term borrowing rates instead of the longer-terms rates
in the computations for adjustments, with the end result that the changes will redound to its greater financial
benefit.

16. The Certificate of Completion simply deleted the successful performance-testing of the terminal facility in
accordance with defined performance standards as a pre-condition for government's acceptance of the
terminal facility.44

In sum, the foregoing revisions and amendments as embodied in the ARCA constitute very material alterations of
the terms and conditions of the CA, and give further manifestly undue advantage to Piatco at the expense of
government. Piatco claims that the changes to the CA were necessitated by the demands of its foreign lenders.
However, no proof whatsoever has been adduced to buttress this claim.

In any event, it is quite patent that the sum total of the aforementioned changes resulted in drastically weakening the
position of government to a degree that seems quite excessive, even from the standpoint of a businessperson who
regularly transacts with banks and foreign lenders, is familiar with their mind-set, and understands what motivates
them. On the other hand, whatever it was that impelled government officials concerned to accede to those grossly
disadvantageous changes, I can only hazard a guess.

There is no question in my mind that the ARCA was unauthorized and illegal for lack of public bidding and for being
patently disadvantageous to government.

The Three Supplements Imposed New Obligations on Government, Also Without Prior Public Bidding

After Piatco had managed to breach the protective rampart of public bidding, it recklessly went on a rampage of
further assaults on the ARCA.
The First Supplement Is as Void as the ARCA

In the First Supplement ("FS") executed on August 27, 1999, the following changes were made to the ARCA:

1. The amounts payable by Piatco to government were reduced by allowing additional exceptions to the
Gross Revenues in which government is supposed to participate.45

2. Made part of the properties which government is obliged to construct and/or maintain and keep in good
repair are (a) the access road connecting Terminals II and III - the construction of this access road is the
obligation of Piatco, in lieu of its obligation to construct an Access Tunnel connecting Terminals II and III;
and (b) the taxilane and taxiway - these are likewise part of Piatco's obligations, since they are part and
parcel of the project as described in Clause 1.3 of the Bid Documents . 46

3. The MIAA is obligated to provide funding for the maintenance and repair of the airports and facilities
owned or operated by it and by third persons under its control. It will also be liable to Piatco for the latter's
losses, expenses and damages as well as liability to third persons, in case MIAA fails to perform such
obligations. In addition, MIAA will also be liable for the incremental and consequential costs of the remedial
work done by Piatco on account of the former's default.47

4. The FS also imposed on government ten (10) "Additional Special Obligations," including the following:

(a) Working for the removal of the general aviation traffic from the NAIA airport complex 48

(b) Providing through MIAA the land required by Piatco for the taxilane and one taxiway at no cost to
Piatco49

(c) Implementing the government's existing storm drainage master plan50

(d) Coordinating with DPWH the financing, the implementation and the completion of the following
works before the In-Service Date: three left-turning overpasses (EDSA to Tramo St., Tramo to
Andrews Ave., and Manlunas Road to Sales Ave.); 51 and a road upgrade and improvement program
involving widening, repair and resurfacing of Sales Road, Andrews Avenue and Manlunas Road;
improvement of Nichols Interchange; and removal of squatters along Andrews Avenue. 52

(e) Dealing directly with BCDA and the Phil. Air Force in acquiring additional land or right of way for
the road upgrade and improvement program.53

5. Government is required to work for the immediate reversion to MIAA of the Nayong Pilipino National
Park.54

6. Government's share in the terminal fees collected was revised from a flat rate of P180 to 36 percent
thereof; together with government's percentage share in the gross revenues of Piatco, the amount will be
remitted to government in pesos instead of US dollars. 55 This amendment enables Piatco to benefit from the
further erosion of the peso-dollar exchange rate, while preventing government from building up its foreign
exchange reserves.

7. All payments from Piatco to government are now to be invoiced to MIAA, and payments are to accrue to
the latter's exclusive benefit.56 This move appears to be in support of the funds MIAA advanced to DPWH.

I must emphasize that the First Supplement is void in two respects. First, it is merely an amendment to the ARCA,
upon which it is wholly dependent; therefore, since the ARCA is void, inexistent and not capable of being ratified or
amended, it follows that the FS too is void, inexistent and inoperative. Second, even assuming arguendo that the
ARCA is somehow remotely valid, nonetheless the FS, in imposing significant new obligations upon government,
altered the fundamental terms and stipulations of the ARCA, thus necessitating a public bidding all over again. That
the FS was entered into sans public bidding renders it utterly void and inoperative.

The Second Supplement Is Similarly Void and Inexistent

The Second Supplement ("SS") was executed between the government and Piatco on September 4, 2000. It calls
for Piatco, acting not as concessionaire of NAIA Terminal III but as a public works contractor, to undertake - in the
government's stead - the clearing, removal, demolition and disposal of improvements, subterranean obstructions
and waste materials at the project site.57

The scope of the works, the procedures involved, and the obligations of the contractor are provided for in Parts II
and III of the SS. Section 4.1 sets out the compensation to be paid, listing specific rates per cubic meter of materials
for each phase of the work - excavation, leveling, removal and disposal, backfilling and dewatering. The amounts
collectible by Piatco are to be offset against the Annual Guaranteed Payments it must pay government.

Though denominated as Second Supplement, it was nothing less than an entirely new public works contract. Yet it,
too, did not undergo any public bidding, for which reason it is also void and inoperative.

Not surprisingly, Piatco had to subcontract the works to a certain Wintrack Builders, a firm reputedly owned by a
former high-ranking DOTC official. But that is another story altogether.

The Third Supplement Is Likewise Void and Inexistent

The Third Supplement ("TS"), executed between the government and Piatco on June 22, 2001, passed on to the
government certain obligations of Piatco as Terminal III concessionaire, with respect to the surface road connecting
Terminals II and III.

By way of background, at the inception of and forming part of the NAIA Terminal III project was the proposed
construction of an access tunnel crossing Runway 13/31, which. would connect Terminal III to Terminal II. The Bid
Documents in Section 4.1.2.3[B][i] declared that the said access tunnel was subject to further negotiation; but for
purposes of the bidding, the proponent should submit a bid for it as well. Therefore, the tunnel was supposed to be
part and parcel of the Terminal III project.

However, in Section 5 of the First Supplement, the parties declared that the access tunnel was not economically
viable at that time. In lieu thereof, the parties agreed that a surface access road (now called the T2-T3 Road) was to
be constructed by Piatco to connect the two terminals. Since it was plainly in substitution of the tunnel, the surface
road construction should likewise be considered part and parcel of the same project, and therefore part of Piatco's
obligation as well. While the access tunnel was estimated to cost about P800 million, the surface road would have a
price tag in the vicinity of about P100 million, thus producing significant savings for Piatco.

Yet, the Third Supplement, while confirming that Piatco would construct the T2-T3 Road, nevertheless shifted to
government some of the obligations pertaining to the former, as follows:

1. Government is now obliged to remove at its own expense all tenants, squatters, improvements and/or
waste materials on the site where the T2-T3 road is to be constructed. 58 There was no similar obligation on
the part of government insofar as the access tunnel was concerned.

2. Should government fail to carry out its obligation as above described, Piatco may undertake it on
government's behalf, subject to the terms and conditions (including compensation payments) contained in
the Second Supplement.59

3. MIAA will answer for the operation, maintenance and repair of the T2-T3 Road. 60

The TS depends upon and is intended to supplement the ARCA as well as the First Supplement, both of which are
void and inexistent and not capable of being ratified or amended. It follows that the TS is likewise void, inexistent
and inoperative. And even if, hypothetically speaking, both ARCA and FS are valid, still, the Third Supplement -
imposing as it does significant new obligations upon government - would in effect alter the terms and stipulations of
the ARCA in material respects, thus necessitating another public bidding. Since the TS was not subjected to public
bidding, it is consequently utterly void as well. At any rate, the TS created new monetary obligations on the part of
government, for which there were no prior appropriations. Hence it follows that the same is void ab initio.

In patiently tracing the progress of the Piatco contracts from their inception up to the present, I noted that the whole
process was riddled with significant lapses, if not outright irregularity and wholesale violations of law and public
policy. The rationale of beginning at the beginning, so to speak, will become evident when the question of what to
do with the five Piatco contracts is discussed later on.

In the meantime, I shall take up specific, provisions or changes in the contracts and highlight the more prominent
objectionable features.

Government Directly Guarantees Piatco Debts

Certainly the most discussed provision in the parties' arguments is the one creating an unauthorized, direct
government guarantee of Piatco's obligations in favor of the lenders.

Section 4-A of the BOT Law as amended states that unsolicited proposals, such as the NAIA Terminal III Project,
may be accepted by government provided inter alia that no direct government guarantee, subsidy or equity is
required. In short, such guarantee is prohibited in unsolicited proposals. Section 2(n) of the same legislation defines
direct government guarantee as "an agreement whereby the government or any of its agencies or local government
units (will) assume responsibility for the repayment of debt directly incurred by the project proponent in implementing
the project in case of a loan default."

Both the CA and the ARCA have provisions that undeniably create such prohibited government guarantee. Section
4.04 (c)(iv) to (vi) of the ARCA, which is similar to Section 4.04 of the CA, provides thus:

"(iv) that if Concessionaire is in default under a payment obligation owed to the Senior Lenders, and as a
result thereof the Senior Lenders have become entitled to accelerate the Senior Loans, the Senior Lenders
shall have the right to notify GRP of the same . . .;

(v) . . . the Senior Lenders may after written notification to GRP, transfer the Concessionaire's rights and
obligations to a transferee . . .;

(vi) if the Senior Lenders . . . are unable to . . . effect a transfer . . ., then GRP and the Senior Lenders shall
endeavor . . . to enter into any other arrangement relating to the Development Facility . . . If no agreement
relating to the Development Facility is arrived at by GRP and the Senior Lenders within the said 180-day
period, then at the end thereof the Development Facility shall be transferred by the Concessionaire to GRP
or its designee and GRP shall make a termination payment to Concessionaire equal to the Appraised Value
(as hereinafter defined) of the Development Facility or the sum of the Attendant Liabilities, if greater. . . ."

In turn, the term Attendant Liabilities is defined in Section 1.06 of the ARCA as follows:

"Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to time
owed or which may become, owing by Concessionaire to Senior Lenders or any other persons or entities
who have provided, loaned or advanced funds or provided financial facilities to Concessionaire for the
Project, including, without limitation, all principal, interest, associated fees, charges, reimbursements, and
other related expenses (including the fees, charges and expenses of any agents or trustees of such persons
or entities), whether payable at maturity, by acceleration or otherwise, and further including amounts owed
by Concessionaire to its professional consultants and advisers, suppliers, contractors and sub-contractors."

Government's agreement to pay becomes effective in the event of a default by Piatco on any of its loan
obligations to the Senior Lenders, and the amount to be paid by government is the greater of either the Appraised
Value of Terminal III or the aggregate amount of the moneys owed by Piatco - whether to the Senior Lenders or
to other entities, including its suppliers, contractors and subcontractors. In effect, therefore, this agreement already
constitutes the prohibited assumption by government of responsibility for repayment of Piatco's debts in case of a
loan default. In fine, a direct government guarantee.

It matters not that there is a roundabout procedure prescribed by Section 4.04(c)(iv), (v) and (vi) that would
require, first, an attempt (albeit unsuccessful) by the Senior Lenders to transfer Piatco's rights to a transferee of their
choice; and, second, an effort (equally unsuccessful) to "enter into any other arrangement" with the government
regarding the Terminal III facility, before government is required to make good on its guarantee. What is abundantly
clear is the fact that, in the devious labyrinthine process detailed in the aforesaid section, it is entirely within the
Senior Lenders' power, prerogative and control - exercisable via a mere refusal or inability to agree upon "a
transferee" or "any other arrangement" regarding the terminal facility - to push the process forward to the ultimate
contractual cul-de-sac, wherein government will be compelled to abjectly surrender and make good on its guarantee
of payment.

Piatco also argues that there is no proviso requiring government to pay the Senior Lenders in the event of Piatco's
default. This is literally true, in the sense that Section 4.04(c)(vi) of ARCA speaks of government making the
termination payment to Piatco, not to the lenders. However, it is almost a certainty that the Senior Lenders will
already have made Piatco sign over to them, ahead of time, its right to receive such payments from government;
and/or they may already have had themselves appointed its attorneys-in-fact for the purpose of collecting and
receiving such payments.

Nevertheless, as petitioners-in-intervention pointed out in their Memorandum, 61 the termination payment is to be

made to Piatco, not to the lenders; and there is no provision anywhere in the contract documents to prevent it from
diverting the proceeds to its own benefit and/or to ensure that it will necessarily use the same to pay off the Senior
Lenders and other creditors, in order to avert the foreclosure of the mortgage and other liens on the terminal facility.
Such deficiency puts the interests of government at great risk. Indeed, if the unthinkable were to happen,
government would be paying several hundreds of millions of dollars, but the mortgage liens on the facility may still
be foreclosed by the Senior Lenders just the same.

Consequently, the Piatco contracts are also objectionable for grievously failing to adequately protect government's
interests. More accurately, the contracts would consistently weaken and do away with protection of government
interests. As such, they are therefore grossly lopsided in favor of Piatco and/or its Senior Lenders.
While on this subject, it is well to recall the earlier discussion regarding a particularly noticeable alteration of the
concept of "Attendant Liabilities." In Section 1.06 of the CA defining the term, the Piatco debts to be assumed/paid
by government were qualified by the phrases recorded and from time to time outstanding in the books of the
Concessionaire and actually used for the project. These phrases were eliminated from the ARCA's definition of
Attendant Liabilities.

Since no explanation has been forthcoming from Piatco as to the possible justification for such a drastic change, the
only conclusion, possible is that it intends to have all of its debts covered by the guarantee, regardless of whether or
not they are disclosed in its books. This has particular reference to those borrowings which were obtained in
violation of the loan covenants requiring Piatco to maintain a minimum 70:30 debt-to-equity ratio, and even if the
loan proceeds were not actually used for the project itself.

This point brings us back to the guarantee itself. In Section 4.04(c)(vi) of ARCA, the amount which government has
guaranteed to pay as termination payment is the greater of either (i) the Appraised Value of the terminal facility or
(ii) the aggregate of the Attendant Liabilities. Given that the Attendant Liabilities may include practically any Piatco
debt under the sun, it is highly conceivable that their sum may greatly exceed the appraised value of the facility, and
government may end up paying very much more than the real worth of Terminal III. (So why did government have to
bother with public bidding anyway?)

In the final analysis, Section 4.04(c)(iv) to (vi) of the ARCA is diametrically at odds with the spirit and the intent of the
BOT Law. The law meant to mobilize private resources (the private sector) to take on the burden and the risks of
financing the construction, operation and maintenance of relevant infrastructure and development projects for the
simple reason that government is not in a position to do so. By the same token, government guarantee was
prohibited, since it would merely defeat the purpose and raison d'être of a build-operate-and-transfer project to be
undertaken by the private sector.

To the extent that the project proponent is able to obtain loans to fund the project, those risks are shared between
the project proponent on the one hand, and its banks and other lenders on the other. But where the proponent or its
lenders manage to cajol or coerce the government into extending a guarantee of payment of the loan obligations,
the risks assumed by the lenders are passed right back to government. I cannot understand why, in the instant
case, government cheerfully assented to re-assuming the risks of the project when it gave the prohibited guarantee
and thus simply negated the very purpose of the BOT Law and the protection it gives the government.

Contract Termination Provisions in the Piatco Contracts Are Void

The BOT Law as amended provides for contract termination as follows:

"Sec. 7. Contract Termination. - In the event that a project is revoked, cancelled or terminated by the
government through no fault of the project proponent or by mutual agreement, the Government shall
compensate the said project proponent for its actual expenses incurred in the project plus a reasonable rate
of return thereon not exceeding that stated in the contract as of the date of such revocation, cancellation or
termination: Provided, That the interest of the Government in this instances [sic] shall be duly insured with
the Government Service Insurance System or any other insurance entity duly accredited by the Office of the
Insurance Commissioner: Provided, finally, That the cost of the insurance coverage shall be included in the
terms and conditions of the bidding referred to above.

"In the event that the government defaults on certain major obligations in the contract and such failure is not
remediable or if remediable shall remain unremedied for an unreasonable length of time, the project
proponent/contractor may, by prior notice to the concerned national government agency or local government
unit specifying the turn-over date, terminate the contract. The project proponent/contractor shall be
reasonably compensated by the Government for equivalent or proportionate contract cost as defined in the
contract."

The foregoing statutory provision in effect provides for the following limited instances when termination
compensation may be allowed:

1. Termination by the government through no fault of the project proponent

2. Termination upon the parties' mutual agreement

3. Termination by the proponent due to government's default on certain major contractual obligations

To emphasize, the law does not permit compensation for the project proponent when contract termination is due to
the proponent's own fault or breach of contract.
This principle was clearly violated in the Piatco Contracts. The ARCA stipulates that government is to pay
termination compensation to Piatco even when termination is initiated by government for the following causes:

"(i) Failure of Concessionaire to finish the Works in all material respects in accordance with the Tender
Design and the Timetable;

(ii) Commission by Concessionaire of a material breach of this Agreement . . .;

(iii) . . . a change in control of Concessionaire arising from the sale, assignment, transfer or other disposition
of capital stock which results in an ownership structure violative of statutory or constitutional limitations;

(iv) A pattern of continuing or repeated non-compliance, willful violation, or non-performance of other terms
and conditions hereof which is hereby deemed a material breach of this Agreement . . ." 62

As if that were not bad enough, the ARCA also inserted into Section 8.01 the phrase "Subject to Section 4.04." The
effect of this insertion is that in those instances where government may terminate the contract on account of Piatco's
breach, and it is nevertheless required under the ARCA to make termination compensation to Piatco even though
unauthorized by law, such compensation is to be equivalent to the payment amount guaranteed by government -
either a) the Appraised Value of the terminal facility or (b) the aggregate of the Attendant Liabilities, whichever
amount is greater!

Clearly, this condition is not in line with Section 7 of the BOT Law. That provision permits a project proponent to
recover the actual expenses it incurred in the prosecution of the project plus a reasonable rate of return not in
excess of that provided in the contract; or to be compensated for the equivalent or proportionate contract cost as
defined in the contract, in case the government is in default on certain major contractual obligations.

Furthermore, in those instances where such termination compensation is authorized by the BOT Law, it is
indispensable that the interest of government be duly insured. Section 5.08 the ARCA mandates insurance
coverage for the terminal facility; but all insurance policies are to be assigned, and all proceeds are payable, to the
Senior Lenders. In brief, the interest being secured by such coverage is that of the Senior Lenders, not that of
government. This can hardly be considered compliance with law.

In essence, the ARCA provisions on termination compensation result in another unauthorized government
guarantee, this time in favor of Piatco.

A Prohibited Direct Government Subsidy, Which at the Same Time Is an Assault on the National Honor

Still another contractual provision offensive to law and public policy is Section 8.01(d) of the ARCA, which is a
"bolder and badder" version of Section 8.04(d) of the CA.

It will be recalled that Section 4-A of the BOT Law as amended prohibits not only direct government guarantees, but
likewise a direct government subsidy for unsolicited proposals. Section 13.2. b. iii. of the 1999 IRR defines a direct
government subsidy as encompassing "an agreement whereby the Government . . . will . . . postpone any payments
due from the proponent."

Despite the statutory ban, Section 8.01 (d) of the ARCA provides thus:

"(d) The provisions of Section 8.01(a) notwithstanding, and for the purpose of preventing a disruption of the
operations in the Terminal and/or Terminal Complex, in the event that at any time Concessionaire is of the
reasonable opinion that it shall be unable to meet a payment obligation owed to the Senior Lenders,
Concessionaire shall give prompt notice to GRP, through DOTC/MIAA and to the Senior Lenders. In such
circumstances, the Senior Lenders (or the Senior Lenders' Representative) may ensure that after making
provision for administrative expenses and depreciation, the cash resources of Concessionaire shall first be
used and applied to meet all payment obligations owed to the Senior Lenders. Any excess cash, after
meeting such payment obligations, shall be earmarked for the payment of all sums payable by
Concessionaire to GRP under this Agreement. If by reason of the foregoing GRP should be unable to collect
in full all payments due to GRP under this Agreement, then the unpaid balance shall be payable within a 90-
day grace period counted from the relevant due date, with interest per annum at the rate equal to the
average 91-day Treasury Bill Rate as of the auction date immediately preceding the relevant due date. If
payment is not effected by Concessionaire within the grace period, then a spread of five (5%) percent over
the applicable 91-day Treasury Bill Rate shall be added on the unpaid amount commencing on the expiry of
the grace period up to the day of full payment. When the temporary illiquidity of Concessionaire shall have
been corrected and the cash position of Concessionaire should indicate its ability to meet its maturing
obligations, then the provisions set forth under this Section 8.01(d) shall cease to apply. The foregoing
remedial measures shall be applicable only while there remains unpaid and outstanding amounts owed to
the Senior Lenders." (Emphasis supplied)
By any manner of interpretation or application, Section 8.01(d) of the ARCA clearly mandates
the indefinite postponement of payment of all of Piatco's obligations to the government, in order to ensure that
Piatco's obligations to the Senior Lenders are paid in full first. That is nothing more or less than the direct
government subsidy prohibited by the BOT Law and the IRR. The fact that Piatco will pay interest on the unpaid
amounts owed to government does not change the situation or render the prohibited subsidy any less unacceptable.

But beyond the clear violations of law, there are larger issues involved in the ARCA. Earlier, I mentioned that
Section 8.01(d) of the ARCA completely eliminated the proviso in Section 8.04(d) of the CA which gave government
the right to appoint a financial controller to manage the cash position of Piatco during situations of financial distress.
Not only has government been deprived of any means of monitoring and managing the situation; worse, as can be
seen from Section 8.01(d) above-quoted, the Senior Lenders have effectively locked in on the right to exercise
financial controllership over Piatco and to allocate its cash resources to the payment of all amounts owed to the
Senior Lenders before allowing any payment to be made to government.

In brief, this particular provision of the ARCA has placed in the hands of foreign lenders the power and the authority
to determine how much (if at all) and when the Philippine government (as grantor of the franchise) may be allowed
to receive from Piatco. In that situation, government will be at the mercy of the foreign lenders. This is a situation
completely contrary to the rationale of the BOT Law and to public policy.

The aforesaid provision rouses mixed emotions - shame and disgust at the parties' (especially the
government officials') docile submission and abject servitude and surrender to the imperious and
excessive demands of the foreign lenders, on the one hand; and vehement outrage at the affront to the
sovereignty of the Republic and to the national honor, on the other. It is indeed time to put an end to such
an unbearable, dishonorable situation.

The Piatco Contracts Unarguably Violate Constitutional Injunctions

I will now discuss the manner in which the Piatco Contracts offended the Constitution.

The Exclusive Right Granted to Piatco to Operate a Public Utility Is Prohibited by the Constitution

While Section 2.02 of the ARCA spoke of granting to Piatco "a franchise to operate and maintain the Terminal
Complex," Section 3.02(a) of the same ARCA granted to Piatco, for the entire term of the concession agreement,
"the exclusive right to operate a commercial international passenger terminal within the Island of Luzon" with the
exception of those three terminals already existing63 at the time of execution of the ARCA.

Section 11 of Article XII of the Constitution prohibits the grant of a "franchise, certificate, or any other form of
authorization for the operation of a public utility" that is "exclusive in character."

In its Opinion No. 078, Series of 1995, the Department of justice held that "the NAIA Terminal III which . . . is a
'terminal for public use' is a public utility." Consequently, the constitutional prohibition against the exclusivity of a
franchise applies to the franchise for the operation of NAIA Terminal III as well.

What was granted to Piatco was not merely a franchise, but an "exclusive right" to operate an international
passenger terminal within the "Island of Luzon." What this grant effectively means is that the government is now
estopped from exercising its inherent power to award any other person another franchise or a right to operate such
a public utility, in the event public interest in Luzon requires it. This restriction is highly detrimental to government
and to the public interest. Former Secretary of Justice Hernando B. Perez expressed this point well in his
Memorandum for the President dated 21 May 2002:

"Section 3.02 on 'Exclusivity'

"This provision gives to PIATCO (the Concessionaire) the exclusive right to operate a commercial
international airport within the Island of Luzon with the exception of those already existing at the time of the
execution of the Agreement, such as the airports at Subic, Clark and Laoag City. In the case of the Clark
International Airport, however, the provision restricts its operation beyond its design capacity of 850,000
passengers per annum and the operation of new terminal facilities therein until after the new NAIA Terminal
III shall have consistently reached or exceeded its design capacity of ten (10) million passenger capacity per
year for three (3) consecutive years during the concession period.

"This is an onerous and disadvantageous provision. It effectively grants PIATCO a monopoly in Luzon and
ties the hands of government in the matter of developing new airports which may be found expedient and
necessary in carrying out any future plan for an inter-modal transportation system in Luzon.
 "Additionally, it imposes an unreasonable restriction on the operation of the Clark International Airport which
could adversely affect the operation and development of the Clark Special Economic Zone to the economic
prejudice of the local constituencies that are being benefited by its operation." (Emphasis supplied)

While it cannot be gainsaid that an enterprise that is a public utility may happen to constitute a monopoly on account
of the very nature of its business and the absence of competition, such a situation does not however constitute
justification to violate the constitutional prohibition and grant an exclusive franchise or exclusive right to operate a
public utility.

Piatco's contention that the Constitution does not actually prohibit monopolies is beside the point. As correctly
argued,64 the existence of a monopoly by a public utility is a situation created by circumstances that do not
encourage competition. This situation is different from the grant of a franchise to operate a public utility, a privilege
granted by government. Of course, the grant of a franchise may result in a monopoly. But making such
franchise exclusive is what is expressly proscribed by the Constitution.

Actually, the aforementioned Section 3.02 of the ARCA more than just guaranteed exclusivity; it also guaranteed
that the government will not improve or expand the facilities at Clark - and in fact is required to put a cap on the
latter's operations - until after Terminal III shall have been operated at or beyond its peak capacity for
three consecutive years.65 As counsel for public respondents pointed out, in the real world where the rate of influx of
international passengers can fluctuate substantially from year to year, it may take many years before Terminal III
sees three consecutive years' operations at peak capacity. The Diosdado Macapagal International Airport may thus
end up stagnating for a long time. Indeed, in order to ensure greater profits for Piatco, the economic progress of a
region has had to be sacrificed.

The Piatco Contracts Violate the Time Limitation on Franchises

Section 11 of Article XII of the Constitution also provides that "no franchise, certificate or any other form of
authorization for the operation of a public utility shall be . . . for a longer period than fifty years." After all, a franchise
held for an unreasonably long time would likely give rise to the same evils as a monopoly.

The Piatco Contracts have come up with an innovative way to circumvent the prohibition and obtain an extension.
This fact can be gleaned from Section 8.03(b) of the ARCA, which I quote thus:

"Sec. 8.03. Termination Procedure and Consequences of Termination. -

a) x x x xxx xxx

b) In the event the Agreement is terminated pursuant to Section 8.01 (b) hereof, Concessionaire
shall be entitled to collect the Liquidated Damages specified in Annex 'G'. The full payment by GRP
to Concessionaire of the Liquidated Damages shall be a condition precedent to the transfer by
Concessionaire to GRP of the Development Facility. Prior to the full payment of the Liquidated
Damages, Concessionaire shall to the extent practicable continue to operate the Terminal and the
Terminal Complex and shall be entitled to retain and withhold all payments to GRP for the purpose
of offsetting the same against the Liquidated Damages. Upon full payment of the Liquidated
Damages, Concessionaire shall immediately transfer the Development Facility to GRP on 'as-is-
where-is' basis."

The aforesaid easy payment scheme is less beneficial than it first appears. Although it enables government to avoid
having to make outright payment of an obligation that will likely run into billions of pesos, this easy payment plan will
nevertheless cost government considerable loss of income, which it would earn if it were to operate Terminal III by
itself. Inasmuch as payments to the concessionaire (Piatco) will be on "installment basis," interest charges on the
remaining unpaid balance would undoubtedly cause the total outstanding balance to swell. Piatco would thus be
entitled to remain in the driver's seat and keep operating the terminal for an indefinite length of time.

The Contracts Create Two Monopolies for Piatco

By way of background, two monopolies were actually created by the Piatco contracts. The first and more obvious
one refers to the business of operating an international passenger terminal in Luzon, the business end of which
involves providing international airlines with parking space for their aircraft, and airline passengers with the use of
departure and arrival areas, check-in counters, information systems, conveyor systems, security equipment and
paraphernalia, immigrations and customs processing areas; and amenities such as comfort rooms, restaurants and
shops.

In furtherance of the first monopoly, the Piatco Contracts stipulate that the NAIA Terminal III will be the only facility
to be operated as an international passenger terminal;66 that NAIA Terminals I and II will no longer be operated as
such;67 and that no one (including the government) will be allowed to compete with Piatco in the operation of an
international passenger terminal in the NAIA Complex. 68 Given that, at this time, the government and Piatco are the
only ones engaged in the business of operating an international passenger terminal, I am not acutely concerned
with this particular monopolistic situation.

There was however another monopoly within the NAIA created by the subject contracts for Piatco - in the business
of providing international airlines with the following: groundhandling, in-flight catering, cargo handling, and aircraft
repair and maintenance services. These are lines of business activity in which are engaged many service providers
(including the petitioners-in-intervention), who will be adversely affected upon full implementation of the Piatco
Contracts, particularly Sections 3.01(d)69 and (e)70 of both the ARCA and the CA.

On the one hand, Section 3.02(a) of the ARCA makes Terminal III the only international passenger terminal at the
NAIA, and therefore the only place within the NAIA Complex where the business of providing airport-related services
to international airlines may be conducted. On the other hand, Section 3.01(d) of the ARCA requires government,
through the MIAA, not to allow service providers with expired MIAA contracts to renew or extend their contracts to
render airport-related services to airlines. Meanwhile, Section 3.01(e) of the ARCA requires government, through
the DOTC and MIAA, not to allow service providers - those with subsisting concession agreements for services and
operations being conducted at Terminal I - to carry over their concession agreements, services and operations to
Terminal III, unless they first enter into a separate agreement with Piatco.

The aforementioned provisions vest in Piatco effective and exclusive control over which service provider may and
may not operate at Terminal III and render the airport-related services needed by international airlines. It thereby
possesses the power to exclude competition. By necessary implication, it also has effective control over the fees
and charges that will be imposed and collected by these service providers.

This intention is exceedingly clear in the declaration by Piatco that it is "completely within its rights to exclude any
party that it has not contracted with from NAIA Terminal III." 71

Worse, there is nothing whatsoever in the Piatco Contracts that can serve to restrict, control or regulate the
concessionaire's discretion and power to reject any service provider and/or impose any term or condition it may see
fit in any contract it enters into with a service provider. In brief, there is no safeguard whatsoever to ensure free and
fair competition in the service-provider sector.

In the meantime, and not surprisingly, Piatco is first in line, ready to exploit the unique business opportunity. It
announced72 that it has accredited three groundhandlers for Terminal III. Aside from the Philippine Airlines, the other
accredited entities are the Philippine Airport and Ground Services Globeground, Inc. ("PAGSGlobeground") and the
Orbit Air Systems, Inc. ("Orbit"). PAGSGlobeground is a wholly-owned subsidiary of the Philippine Airport and
Ground Services, Inc. or PAGS,73 while Orbit is a wholly-owned subsidiary of Friendship Holdings, Inc., 74 which is in
turn owned 80 percent by PAGS. 75 PAGS is a service provider owned 60 percent by the Cheng Family; 76 it is a
stockholder of 35 percent of Piatco77 and is the latter's designated contractor-operator for NAIA Terminal III. 78

Such entry into and domination of the airport-related services sector appear to be very much in line with the
following provisions contained in the First Addendum to the Piatco Shareholders Agreement, 79 executed on July 6,
1999, which appear to constitute a sort of master plan to create a monopoly and combinations in restraint of trade:

"11. The Shareholders shall ensure:

a. x x x xxx x x x.;

b. That (Phil. Airport and Ground Services, Inc.) PAGS and/or its designated Affiliates shall, at all times
during the Concession Period, be exclusively authorized by (PIATCO) to engage in the provision of ground-
handling, catering and fueling services within the Terminal Complex.

c. That PAIRCARGO and/or its designated Affiliate shall, during the Concession Period, be the only entities
authorized to construct and operate a warehouse for all cargo handling and related services within the Site."

Precisely, proscribed by our Constitution are the monopoly and the restraint of trade being fostered by the Piatco
Contracts through the erection of barriers to the entry of other service providers into Terminal III. In Tatad v.
Secretary of the Department of Energy,80 the Court ruled:

". . . [S]ection 19 of Article XII of the Constitution . . . mandates: 'The State shall regulate or prohibit
monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition
shall be allowed.'

"A monopoly is a privilege or peculiar advantage vested in one or more persons or companies, consisting in
the exclusive right or power to carry on a particular business or trade, manufacture a particular article, or
control the sale or the whole supply of a particular commodity. It is a form of market structure in which one or
 only a few firms dominate the total sales of a product or service. On the other hand, a combination in
restraint of trade is an agreement or understanding between two or more persons, in the form of a contract,
trust, pool, holding company, or other form of association, for the purpose of unduly restricting competition,
monopolizing trade and commerce in a certain commodity, controlling its production, distribution and price,
or otherwise interfering with freedom of trade without statutory authority. Combination in restraint of trade
refers to the means while monopoly refers to the end.

"x x x xxx xxx

"Section 19, Article XII of our Constitution is anti-trust in history and in spirit. It espouses competition. The
desirability of competition is the reason for the prohibition against restraint of trade, the reason for the
interdiction of unfair competition, and the reason for regulation of unmitigated monopolies. Competition is
thus the underlying principle of [S]ection 19, Article XII of our Constitution, . . ." 81

Gokongwei Jr. v. Securities and Exchange Commission 82 elucidates the criteria to be employed: "A 'monopoly'
embraces any combination the tendency of which is to prevent competition in the broad and general sense, or to
control prices to the detriment of the public. In short, it is the concentration of business in the hands of a few. The
material consideration in determining its existence is not that prices are raised and competition actually excluded,
but that power exists to raise prices or exclude competition when desired."83 (Emphasis supplied)

The Contracts Encourage Monopolistic Pricing, Too

Aside from creating a monopoly, the Piatco contracts also give the concessionaire virtually limitless power over the
charging of fees, rentals and so forth. What little "oversight function" the government might be able and minded to
exercise is less than sufficient to protect the public interest, as can be gleaned from the following provisions:

"Sec. 6.06. Adjustment of Non-Public Utility Fees and Charges

"For fees, rentals and charges constituting Non-Public Utility Revenues, Concessionaire may make any
adjustments it deems appropriate without need for the consent of GRP or any government agency subject to
Sec. 6.03(c)."

Section 6.03(c) in turn provides:

"(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility
Revenues in order to ensure that End Users are not unreasonably deprived of services. While the vehicular
parking fee, porterage fee and greeter/wellwisher fee constitute Non-Public Utility Revenues of
Concessionaire, GRP may require Concessionaire to explain and justify the fee it may set from time to time,
if in the reasonable opinion of GRP the said fees have become exorbitant resulting in the unreasonable
deprivation of End Users of such services."

It will be noted that the above-quoted provision has no teeth, so the concessionaire can defy the government
without fear of any sanction. Moreover, Section 6.06 - taken together with Section 6.03(c) of the ARCA - falls short
of the standard set by the BOT Law as amended, which expressly requires in Section 2(b) that the project proponent
is "allowed to charge facility users appropriate tolls, fees, rentals and charges not exceeding those proposed in
its bid or as negotiated and incorporated in the contract x x x."

The Piatco Contracts Violate Constitutional Prohibitions Against

Impairment of Contracts and Deprivation of Property Without Due Process

Earlier, I discussed how Section 3.01(e) 84 of both the CA and the ARCA requires government, through DOTC/MIAA,
not to permit the carry-over to Terminal III of the services and operations of certain service providers currently
operating at Terminal I with subsisting contracts.

By the In-Service Date, Terminal III shall be the only facility to be operated as an international passenger terminal at
the NAIA;85 thus, Terminals I and II shall no longer operate as such, 86 and no one shall be allowed to compete with
Piatco in the operation of an international passenger terminal in the NAIA. 87 The bottom line is that, as of the In-
Service Date, Terminal III will be the only terminal where the business of providing airport-related services to
international airlines and passengers may be conducted at all.

Consequently, government through the DOTC/MIAA will be compelled to cease honoring existing contracts with
service providers after the In-Service Date, as they cannot be allowed to operate in Terminal III.

In short, the CA and the ARCA obligate and constrain government to break its existing contracts with these service
providers.
Notably, government is not in a position to require Piatco to accommodate the displaced service providers, and it
would be unrealistic to think that these service providers can perform their service contracts in some other
international airport outside Luzon. Obviously, then, these displaced service providers are - to borrow a quaint
expression - up the river without a paddle. In plainer terms, they will have lost their businesses entirely, in the blink
of an eye.

What we have here is a set of contractual provisions that impair the obligation of contracts and contravene the
constitutional prohibition against deprivation of property without due process of law. 88

Moreover, since the displaced service providers, being unable to operate, will be forced to close shop, their
respective employees - among them Messrs. Agan and Lopez et al. - have very grave cause for concern, as they
will find themselves out of employment and bereft of their means of livelihood. This situation comprises still another
violation of the constitution prohibition against deprivation of property without due process.

True, doing business at the NAIA may be viewed more as a privilege than as a right. Nonetheless, where that
privilege has been availed of by the petitioners-in-intervention service providers for years on end, a situation arises,
similar to that in American Inter-fashion v. GTEB.89 We held therein that a privilege enjoyed for seven years "evolved
into some form of property right which should not be removed x x x arbitrarily and without due process ." Said
pronouncement is particularly relevant and applicable to the situation at bar because the livelihood of the employees
of petitioners-intervenors are at stake.

The Piatco Contracts Violate Constitutional Prohibition

Against Deprivation of Liberty Without Due Process

The Piatco Contracts by locking out existing service providers from entry into Terminal III and restricting entry of
future service providers, thereby infringed upon the freedom - guaranteed to and heretofore enjoyed by international
airlines - to contract with local service providers of their choice, and vice versa.

Both the service providers and their client airlines will be deprived of the right to liberty, which includes the right to
enter into all contracts,90 and/or the right to make a contract in relation to one's business. 91

By Creating New Financial Obligations for Government,

Supplements to the ARCA Violate the Constitutional
Ban on Disbursement of Public Funds Without Valid Appropriation

Clearly prohibited by the Constitution is the disbursement of public funds out of the treasury, except in pursuance of
an appropriation made by law.92 The immediate effect of this constitutional ban is that all the various agencies of
government are constrained to limit their expenditures to the amounts appropriated by law for each fiscal year; and
to carefully count their cash before taking on contractual commitments. Giving flesh and form to the injunction of the
fundamental law, Sections 46 and 47 of Executive Order 292, otherwise known as the Administrative Code of 1987,
provide as follows:

"Sec. 46. Appropriation Before Entering into Contract. - (1) No contract involving the expenditure of public
funds shall be entered into unless there is an appropriation therefor, the unexpended balance of which, free
of other obligations, is sufficient to cover the proposed expenditure; and . .

"Sec. 47. Certificate Showing Appropriation to Meet Contract. - Except in the case of a contract for personal
service, for supplies for current consumption or to be carried in stock not exceeding the estimated
consumption for three (3) months, or banking transactions of government-owned or controlled banks, no
contract involving the expenditure of public funds by any government agency shall be entered into or
authorized unless the proper accounting official of the agency concerned shall have certified to the officer
entering into the obligation that funds have been duly appropriated for the purpose and that the amount
necessary to cover the proposed contract for the current calendar year is available for expenditure on
account thereof, subject to verification by the auditor concerned. The certificate signed by the proper
accounting official and the auditor who verified it, shall be attached to and become an integral part of the
proposed contract, and the sum so certified shall not thereafter be available for expenditure for any other
purpose until the obligation of the government agency concerned under the contract is fully extinguished."

Referring to the aforequoted provisions, this Court has held that "(I)t is quite evident from the tenor of the language
of the law that the existence of appropriations and the availability of funds are indispensable pre-requisites to or
conditions sine qua non for the execution of government contracts. The obvious intent is to impose such conditions
as a priori requisites to the validity of the proposed contract."93

Notwithstanding the constitutional ban, statutory mandates and Jurisprudential precedents, the three Supplements
to the ARCA, which were not approved by NEDA, imposed on government the additional burden of spending public
moneys without prior appropriation.
In the First Supplement ("FS") dated August 27, 1999, the following requirements were imposed on the government:

• To construct, maintain and keep in good repair and operating condition all airport support services,
facilities, equipment and infrastructure owned and/or operated by MIAA, which are not part of the Project or
which are located outside the Site, even though constructed by Concessionaire - including the access road
connecting Terminals II and III and the taxilane, taxiways and runways

• To obligate the MIAA to provide funding for the upkeep, maintenance and repair of the airports and
facilities owned or operated by it and by third persons under its control in order to ensure compliance with
international standards; and holding MIAA liable to Piatco for the latter's losses, expenses and damages as
well as for the latter's liability to third persons, in case MIAA fails to perform such obligations; in addition,
MIAA will also be liable for the incremental and consequential costs of the remedial work done by Piatco on
account of the former's default.

• Section 4 of the FS imposed on government ten (10) "Additional Special Obligations," including the
following:

o Providing thru MIAA the land required by Piatco for the taxilane and one taxiway, at no cost to Piatco
o Implementing the government's existing storm drainage master plan
o Coordinating with DPWH the financing, implementation and completion of the following works before
the In-Service Date: three left-turning overpasses (Edsa to Tramo St., Tramo to Andrews Ave., and
Manlunas Road to Sales Ave.) and a road upgrade and improvement program involving widening,
repair and resurfacing of Sales Road, Andrews Avenue and Manlunas Road; improvement of
Nichols Interchange; and removal of squatters along Andrews Avenue
o Dealing directly with BCDA and the Philippine Air Force in acquiring additional land or right of way
for the road upgrade and improvement program
o Requiring government to work for the immediate reversion to MIAA of the Nayong Pilipino National
Park, in order to permit the building of the second west parallel taxiway

• Section 5 of the FS also provides that in lieu of the access tunnel, a surface access road (T2-T3) will be
constructed. This provision requires government to expend funds to purchase additional land from Nayong
Pilipino and to clear the same in order to be able to deliver clean possession of the site to Piatco, as
required in Section 5(c) of the FS.

On the other hand, the Third Supplement ("TS") obligates the government to deliver, within 120 days from date
thereof, clean possession of the land on which the T2-T3 Road is to be constructed.

The foregoing contractual stipulations undeniably impose on government the expenditures of public funds not
included in any congressional appropriation or authorized by any other statute. Piatco however attempts to take
these stipulations out of the ambit of Sections 46 and 47 of the Administrative Code by characterizing them as
stipulations for compliance on a "best-efforts basis" only.

To determine whether the additional obligations under the Supplements may really be undertaken on a best-efforts
basis only, the nature of each of these obligations must be examined in the context of its relevance and significance
to the Terminal III Project, as well as of any adverse impact that may result if such obligation is not performed or
undertaken on time. In short, the criteria for determining whether the best-efforts basis will apply is whether the
obligations are critical to the success of the Project and, accordingly, whether failure to perform them (or to perform
them on time) could result in a material breach of the contract.

Viewed in this light, the "Additional Special Obligations" set out in Section 4 of the FS take on a different aspect. In
particular, each of the following may all be deemed to play a major role in the successful and timely prosecution of
the Terminal III Project: the obtention of land required by PIATCO for the taxilane and taxiway; the implementation
of government's existing storm drainage master plan; and coordination with DPWH for the completion of the three
left-turning overpasses before the In-Service Date, as well as acquisition and delivery of additional land for the
construction of the T2-T3 access road.

Conversely, failure to deliver on any of these obligations may conceivably result in substantial prejudice to the
concessionaire, to such an extent as to constitute a material breach of the Piatco Contracts. Whereupon, the
concessionaire may outrightly terminate the Contracts pursuant to Section 8.01(b)(i) and (ii) of the ARCA and seek
payment of Liquidated Damages in accordance with Section 8.02(a) of the ARCA; or the concessionaire may
instead require government to pay the Incremental and Consequential Losses under Section 1.23 of the
ARCA.94 The logical conclusion then is that the obligations in the Supplements are not to be performed on a best-
efforts basis only, but are unarguably mandatory in character.

Regarding MIAA's obligation to coordinate with the DPWH for the complete implementation of the road upgrading
and improvement program for Sales, Andrews and Manlunas Roads (which provide access to the Terminal III site)
prior to the In-Service Date, it is essential to take note of the fact that there was a pressing need to complete the
program before the opening of Terminal III. 95 For that reason, the MIAA was compelled to enter into a memorandum
of agreement with the DPWH in order to ensure the timely completion of the road widening and improvement
program. MIAA agreed to advance the total amount of P410.11 million to DPWH for the works, while the latter was
committed to do the following:

"2.2.8. Reimburse all advance payments to MIAA including but not limited to interest, fees, plus other costs
of money within the periods CY2004 and CY2006 with payment of no less than One Hundred Million Pesos
(PhP100M) every year.

"2.2.9. Perform all acts necessary to include in its CY2004 to CY2006 budget allocation the repayments for
the advances made by MIAA, to ensure that the advances are fully repaid by CY2006. For this purpose,
DPWH shall include the amounts to be appropriated for reimbursement to MIAA in the "Not Needing
Clearance" column of their Agency Budget Matrix (ABM) submitted to the Department of Budget and
Management."

It can be easily inferred, then, that DPWH did not set aside enough funds to be able to complete the upgrading
program for the crucially situated access roads prior to the targeted opening date of Terminal III; and that, had MIAA
not agreed to lend the P410 Million, DPWH would not have been able to complete the program on time. As a
consequence, government would have been in breach of a material obligation. Hence, this particular undertaking of
government may likewise not be construed as being for best-efforts compliance only.

They also Infringe on the Legislative Prerogative and Power Over the Public Purse

But the particularly sad thing about this transaction between MIAA and DPWH is the fact that both agencies were
maneuvered into (or allowed themselves to be maneuvered into) an agreement that would ensure delivery of
upgraded roads for Piatco's benefit, using funds not allocated for that purpose. The agreement would then be
presented to Congress as a done deal. Congress would thus be obliged to uphold the agreement and support it with
the necessary allocations and appropriations for three years, in order to enable DPWH to deliver on its committed
repayments to MIAA. The net result is an infringement on the legislative power over the public purse and a
diminution of Congress' control over expenditures of public funds - a development that would not have come about,
were it not for the Supplements. Very clever but very illegal!

EPILOGUE
What Do We Do Now?

In the final analysis, there remains but one ultimate question, which I raised during the Oral Argument on December
10, 2002: What do we do with the Piatco Contracts and Terminal III?96 (Feeding directly into the resolution of
the decisive question is the other nagging issue: Why should we bother with determining the legality and validity of
these contracts, when the Terminal itself has already been built and is practically complete?)

Prescinding from all the foregoing disquisition, I find that all the Piatco contracts, without exception, are void ab
initio, and therefore inoperative. Even the very process by which the contracts came into being - the bidding and the
award - has been riddled with irregularities galore and blatant violations of law and public policy, far too many to
ignore. There is thus no conceivable way, as proposed by some, of saving one (the original Concession Agreement)
while junking all the rest.

Neither is it possible to argue for the retention of the Draft Concession Agreement (referred to in the various
pleadings as the Contract Bidded Out) as the contract that should be kept in force and effect to govern the situation,
inasmuch as it was never executed by the parties. What Piatco and the government executed was the Concession
Agreement which is entirely different from the Draft Concession Agreement.

Ultimately, though, it would be tantamount to an outrageous, grievous and unforgivable mutilation of public policy
and an insult to ourselves if we opt to keep in place a contract - any contract - for to do so would assume that we
agree to having Piatco continue as the concessionaire for Terminal III.

Despite all the insidious contraventions of the Constitution, law and public policy Piatco perpetrated, keeping Piatco
on as concessionaire and even rewarding it by allowing it to operate and profit from Terminal III - instead of
imposing upon it the stiffest sanctions permissible under the laws - is unconscionable.

It is no exaggeration to say that Piatco may not really mind which contract we decide to keep in place. For all it may
care, we can do just as well without one, if we only let it continue and operate the facility. After all, the real money
will come not from building the Terminal, but from actually operating it for fifty or more years and charging whatever
it feels like, without any competition at all. This scenario must not be allowed to happen.
If the Piatco contracts are junked altogether as I think they should be, should not AEDC automatically be considered
the winning bidder and therefore allowed to operate the facility? My answer is a stone-cold 'No'. AEDC never won
the bidding, never signed any contract, and never built any facility. Why should it be allowed to automatically step in
and benefit from the greed of another?

Should government pay at all for reasonable expenses incurred in the construction of the Terminal? Indeed it
should, otherwise it will be unjustly enriching itself at the expense of Piatco and, in particular, its funders, contractors
and investors - both local and foreign. After all, there is no question that the State needs and will make use of
Terminal III, it being part and parcel of the critical infrastructure and transportation-related programs of government.

In Melchor v. Commission on Audit,97 this Court held that even if the contract therein was void, the principle of
payment by quantum meruit was found applicable, and the contractor was allowed to recover the reasonable value
of the thing or services rendered (regardless of any agreement as to the supposed value), in order to avoid unjust
enrichment on the part of government. The principle of quantum meruit was likewise applied in Eslao v. Commission
on Audit,98 because to deny payment for a building almost completed and already occupied would be to permit
government to unjustly enrich itself at the expense of the contractor. The same principle was applied in Republic v.
Court of Appeals.99

One possible practical solution would be for government - in view of the nullity of the Piatco contracts and of the fact
that Terminal III has already been built and is almost finished - to bid out the operation of the facility under the same
or analogous principles as build-operate-and-transfer projects. To be imposed, however, is the condition that the
winning bidder must pay the builder of the facility a price fixed by government based on quantum meruit; on the real,
reasonable - not inflated - value of the built facility.

How the payment or series of payments to the builder, funders, investors and contractors will be staggered and
scheduled, will have to be built into the bids, along with the annual guaranteed payments to government. In this
manner, this whole sordid mess could result in something truly beneficial for all, especially for the Filipino people.
WHEREFORE, I vote to grant the Petitions and to declare the subject contracts NULL and VOID.

G.R. No. 153201 January 26, 2005

JOSE MENCHAVEZ, JUAN MENCHAVEZ JR., SIMEON MENCHAVEZ, RODOLFO MENCHAVEZ, CESAR
MENCHAVEZ, REYNALDO, MENCHAVEZ, ALMA MENCHAVEZ, ELMA MENCHAVEZ, CHARITO M. MAGA, FE
M. POTOT, THELMA M. REROMA, MYRNA M. YBAÑEZ, and SARAH M. VILLABER, petitioners,
vs.
FLORENTINO TEVES JR., respondent.

DECISION

PANGANIBAN, J.:

Avoid contract is deemed legally nonexistent. It produces no legal effect. As a general rule, courts leave parties to
such a contract as they are, because they are in pari delicto or equally at fault. Neither party is entitled to legal
protection.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2001
Decision2 and the April 16, 2002 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 51144. The challenged
Decision disposed as follows:

"WHEREFORE, the assailed decision is hereby MODIFIED, as follows:

"1. Ordering [petitioners] to jointly and severally pay the [respondent] the amount of ₱128,074.40 as actual
damages, and ₱50,000.00 as liquidated damages;

"2. Dismissing the third party complaint against the third party defendants;

"3. Upholding the counterclaims of the third party defendants against the [petitioners. Petitioners] are hereby
required to pay [the] third party defendants the sum of ₱30,000.00 as moral damages for the clearly
unfounded suit;

"4. Requiring the [petitioners] to reimburse the third party defendants the sum of ₱10,000.00 in the concept
of attorney’s fees and appearance fees of ₱300.00 per appearance;
 "5. Requiring the [petitioners] to reimburse the third party defendants the sum of ₱10,000.00 as exemplary
damages pro bono publico and litigation expenses including costs, in the sum of ₱5,000.00." 4

The assailed Resolution denied petitioners’ Motion for Reconsideration.

The Facts

On February 28, 1986, a "Contract of Lease" was executed by Jose S. Menchavez, Juan S. Menchavez Sr., Juan S.
Menchavez Jr., Rodolfo Menchavez, Simeon Menchavez, Reynaldo Menchavez, Cesar Menchavez, Charito M.
Maga, Fe M. Potot, Thelma R. Reroma, Myrna Ybañez, Sonia S. Menchavez, Sarah Villaver, Alma S. Menchavez,
and Elma S. Menchavez, as lessors; and Florentino Teves Jr. as lessee. The pertinent portions of the Contract are
l^vvphi1.net

herein reproduced as follows:

"WHEREAS, the LESSORS are the absolute and lawful co-owners of that area covered by FISHPOND
APPLICATION No. VI-1076 of Juan Menchavez, Sr., filed on September 20, 1972, at Fisheries Regional Office No.
VII, Cebu City covering an area of 10.0 hectares more or less located at Tabuelan, Cebu;

xxxxxxxxx

"NOW, THEREFORE, for and in consideration of the mutual covenant and stipulations hereinafter set forth, the
LESSORS and the LESSEE have agreed and hereby agree as follows:

"1. The TERM of this LEASE is FIVE (5) YEARS, from and after the execution of this Contract of Lease,
renewable at the OPTION of the LESSORS;

"2. The LESSEE agrees to pay the LESSORS at the residence of JUAN MENCHAVEZ SR., one of the
LESSORS herein, the sum of FORTY THOUSAND PESOS (₱40,000.00) Philippine Currency, annually x x
x;

"3. The LESSORS hereby warrant that the above-described parcel of land is fit and good for the intended
use as FISHPOND;

"4. The LESSORS hereby warrant and assure to maintain the LESSEE in the peaceful and adequate
enjoyment of the lease for the entire duration of the contract;

"5. The LESSORS hereby further warrant that the LESSEE can and shall enjoy the intended use of the
leased premises as FISHPOND FOR THE ENTIRE DURATION OF THE CONTRACT;

"6. The LESSORS hereby warrant that the above-premises is free from all liens and encumbrances, and
shall protect the LESSEE of his right of lease over the said premises from any and all claims whatsoever;

"7. Any violation of the terms and conditions herein provided, more particularly the warranties above-
mentioned, the parties of this Contract responsible thereof shall pay liquidated damages in the amount of not
less than ₱50,000.00 to the offended party of this Contract; in case the LESSORS violated therefor, they
bound themselves jointly and severally liable to the LESSEE;"

x x x x x x x x x.5

On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo Cabigon demolished the fishpond dikes
constructed by respondent and delivered possession of the subject property to other parties. 6 As a result, he filed a
Complaint for damages with application for preliminary attachment against petitioners. In his Complaint, he alleged
that the lessors had violated their Contract of Lease, specifically the peaceful and adequate enjoyment of the
property for the entire duration of the Contract. He claimed ₱157,184.40 as consequential damages for the
demolition of the fishpond dikes, ₱395,390.00 as unearned income, and an amount not less than ₱100,000.00 for
rentals paid.7

Respondent further asserted that the lessors had withheld from him the findings of the trial court in Civil Case No.
510-T, entitled "Eufracia Colongan and Paulino Pamplona v. Juan Menchavez Sr. and Sevillana S. Menchavez." In
that case involving the same property, subject of the lease, the Menchavez spouses were ordered to remove the
dikes illegally constructed and to pay damages and attorney’s fees.8

Petitioners filed a Third Party Complaint against Benny and Elizabeth Allego, Albino Laput, Adrinico Che and
Charlemagne Arendain Jr., as agents of Eufracia Colongan and Paulino Pamplona. The third-party defendants
maintained that the Complaint filed against them was unfounded. As agents of their elderly parents, they could not
be sued in their personal capacity. Thus, they asserted their own counterclaims. 9
After trial on the merits, the RTC ruled thus:

"[The court must resolve the issues one by one.] As to the question of whether the contract of lease between Teves
and the [petitioners] is valid, we must look into the present law on the matter of fishponds. And this is Pres. Decree
No. 704 which provides in Sec. 24:

‘Lease of fishponds-Public lands available for fishpond development including those earmarked for family-size
fishponds and not yet leased prior to November 9, 1972 shall be leased only to qualified persons, associations,
cooperatives or corporations, subject to the following conditions.

‘1. The lease shall be for a period of twenty five years (25), renewable for another twenty five years;

‘2. Fifty percent of the area leased shall be developed and be producing in commercial scale within three
years and the remaining portion shall be developed and be producing in commercial scale within five years;
both periods begin from the execution of the lease contract;

‘3. All areas not fully developed within five years from the date of the execution of the lease contract shall
automatically revert to the public domain for disposition of the bureau; provided that a lessee who failed to
develop the area or any portion thereof shall not be permitted to reapply for said area or any portion thereof
or any public land under this decree; and/or any portion thereof or any public land under this decree;

‘4. No portion of the leased area shall be subleased.’

The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution) states:

‘Sec. 2 - All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of
potential energy, fisheries, forests, or timber, wild life, flora and fauna and other natural resources are owned by the
state.

‘Sec. 3 - Lands of the public domain are classified into agricultural, forest or timber, mineral lands and national
parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they
may be devoted. Alienable lands of the public domain shall be limited to agricultural lands x x x.’

"As a consequence of these provisions, and the declared public policy of the State under the Regalian Doctrine, the
lease contract between Florentino Teves, Jr. and Juan Menchavez Sr. and his family is a patent nullity. Being a
patent nullity, [petitioners] could not give any rights to Florentino Teves, Jr. under the principle: ‘NEMO DAT QUOD
NON HABET’ - meaning ONE CANNOT GIVE WHAT HE DOES NOT HAVE, considering that this property in
litigation belongs to the State and not to [petitioners]. Therefore, the first issue is resolved in the negative, as the
court declares the contract of lease as invalid and void ab-initio.

"On the issue of whether [respondent] and [petitioners] are guilty of mutual fraud, the court rules that the
[respondent] and [petitioners] are in pari-delicto. As a consequence of this, the court must leave them where they
are found. x x x.

xxxxxxxxx

"x x x. Why? Because the defendants ought to have known that they cannot lease what does not belong to them for
as a matter of fact, they themselves are still applying for a lease of the same property under litigation from the
government.

"On the other hand, Florentino Teves, being fully aware that [petitioners were] not yet the owner[s], had assumed
the risks and under the principle of VOLENTI NON FIT INJURIA NEQUES DOLUS - He who voluntarily assumes a
risk, does not suffer damage[s] thereby. As a consequence, when Teves leased the fishpond area from [petitioners]-
who were mere holders or possessors thereof, he took the risk that it may turn out later that his application for lease
may not be approved.

"Unfortunately however, even granting that the lease of [petitioners] and [their] application in 1972 were to be
approved, still [they] could not sublease the same. In view therefore of these, the parties must be left in the same
situation in which the court finds them, under the principle IN PARI DELICTO NON ORITOR ACTIO, meaning[:]
Where both are at fault, no one can found a claim.

"On the third issue of whether the third party defendants are liable for demolishing the dikes pursuant to a writ of
execution issued by the lower court[, t]his must be resolved in the negative, that the third party defendants are not
liable. First, because the third party defendants are mere agents of Eufracia Colongan and Eufenio Pamplona, who
l^vvphi1.net

are the ones who should be made liable if at all, and considering that the demolition was pursuant to an order of the
court to restore the prevailing party in that Civil Case 510-T, entitled: Eufracia Colongan v. Menchavez.
"After the court has ruled that the contract of lease is null and void ab-initio, there is no right of the [respondent] to
protect and therefore[,] there is no basis for questioning the Sheriff’s authority to demolish the dikes in order to
restore the prevailing party, under the principle VIDETUR NEMO QUISQUAM ID CAPERE QUOD EI NECESSE
EST ALII RESTITUERE - He will not be considered as using force who exercise his rights and proceeds by the force
of law.

"WHEREFORE, in view of all foregoing [evidence] and considerations, this court hereby renders judgment as
follows:

"1. Dismissing the x x x complaint by the [respondent] against the [petitioners];

"2. Dismissing the third party complaint against the third party defendants;

"3. Upholding the counterclaims of the third party defendants against the [petitioners. The petitioners] are
hereby required to pay third party defendants the sum of ₱30,000.00 as moral damages for this clearly
unfounded suit;

"4. Requiring the [petitioners] to reimburse the third party defendants the sum of ₱10,000.00 in the concept
of attorney’s fees and appearance fees of ₱300.00 per appearance;

"5. Requiring the [petitioners] to pay to the third party defendants the sum of ₱10,000.00 as exemplary
damages probono publico and litigation expenses including costs, in the sum of ₱5,000.00." 10 (Underscoring
in the original)

Respondent elevated the case to the Court of Appeals, where it was docketed as CA-GR CV No. 51144.

Ruling of the Court of Appeals

The CA disagreed with the RTC’s finding that petitioners and respondent were in pari delicto. It contended that while
there was negligence on the part of respondent for failing to verify the ownership of the subject property, there was
no evidence that he had knowledge of petitioners’ lack of ownership.11 It held as follows:

"x x x. Contrary to the findings of the lower court, it was not duly proven and established that Teves had actual
knowledge of the fact that [petitioners] merely usurped the property they leased to him. What Teves admitted was
that he did not ask for any additional document other than those shown to him, one of which was the fishpond
application. In fact, [Teves] consistently claimed that he did not bother to ask the latter for their title to the property
because he relied on their representation that they are the lawful owners of the fishpond they are holding for lease.
(TSN, July 11, 1991, pp. 8-11)"12 1awphi1.nét

The CA ruled that respondent could recover actual damages in the amount of ₱128,074.40. Citing Article 1356 13 of
the Civil Code, it further awarded liquidated damages in the amount of ₱50,000, notwithstanding the nullity of the
Contract.14

Hence, this Petition.15

The Issues

Petitioners raise the following issues for our consideration:

"1. The Court of Appeals disregarded the evidence, the law and jurisprudence when it modified the trial
court’s decision when it ruled in effect that the trial court erred in holding that the respondent and petitioners
are in pari delicto, and the courts must leave them where they are found;

"2. The Court of Appeals disregarded the evidence, the law and jurisprudence in modifying the decision of
the trial court and ruled in effect that the Regional Trial Court erred in dismissing the respondent’s
Complaint."16

The Court’s Ruling

The Petition has merit.

Main Issue:

Were the Parties in Pari Delicto?

The Court shall discuss the two issues simultaneously.

In Pari Delicto Rule on Void Contracts

The parties do not dispute the finding of the trial and the appellate courts that the Contract of Lease was
void.17 Indeed, the RTC correctly held that it was the State, not petitioners, that owned the fishpond. The 1987
Constitution specifically declares that all lands of the public domain, waters, fisheries and other natural resources
belong to the State.18 Included here are fishponds, which may not be alienated but only leased. 19 Possession thereof,
no matter how long, cannot ripen into ownership.20

Being merely applicants for the lease of the fishponds, petitioners had no transferable right over them. And even if
the State were to grant their application, the law expressly disallowed sublease of the fishponds to
respondent.21 Void are all contracts in which the cause, object or purpose is contrary to law, public order or public
policy.22

A void contract is equivalent to nothing; it produces no civil effect. 23 It does not create, modify or extinguish a juridical
relation.24 Parties to a void agreement cannot expect the aid of the law; the courts leave them as they are, because
they are deemed in pari delicto or "in equal fault."25 To this rule, however, there are exceptions that permit the return
of that which may have been given under a void contract. 26 One of the exceptions is found in Article 1412 of the Civil
Code, which states:

"Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the
following rules shall be observed:

"(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue
of the contract, or demand the performance of the other’s undertaking;

"(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of
the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may
demand the return of what he has given without any obligation to comply with his promise."

On this premise, respondent contends that he can recover from petitioners, because he is an innocent party to the
Contract of Lease.27 Petitioners allegedly induced him to enter into it through serious misrepresentation. 28

Finding of In Pari Delicto:

A Question of Fact

The issue of whether respondent was at fault or whether the parties were in pari delicto is a question of fact not
normally taken up in a petition for review on certiorari under Rule 45 of the Rules of Court. 29 The present case,
however, falls under two recognized exceptions to this rule. 30 This Court is compelled to review the facts, since the
CA’s factual findings are (1) contrary to those of the trial court; 31 and (2) premised on an absence of evidence, a
presumption that is contradicted by the evidence on record.32

Unquestionably, petitioners leased out a property that did not belong to them, one that they had no authority to
sublease. The trial court correctly observed that petitioners still had a pending lease application with the State at the
time they entered into the Contract with respondent.33

Respondent, on the other hand, claims that petitioners misled him into executing the Contract. 34 He insists that he
relied on their assertions regarding their ownership of the property. His own evidence, however, rebuts his
contention that he did not know that they lacked ownership. At the very least, he had notice of their doubtful
ownership of the fishpond.

Respondent himself admitted that he was aware that the petitioners’ lease application for the fishpond had not yet
been approved.35 Thus, he knowingly entered into the Contract with the risk that the application might be
disapproved. Noteworthy is the fact that the existence of a fishpond lease application necessarily contradicts a claim
of ownership. That respondent did not know of petitioners’ lack of ownership is therefore incredible.

The evidence of respondent himself shows that he negotiated the lease of the fishpond with both Juan Menchavez
Sr. and Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge Esparagoza. 36 His counsel’s presence during the
negotiations, prior to the parties’ meeting of minds, further debunks his claim of lack of knowledge. Lawyers are
expected to know that fishponds belong to the State and are inalienable. It was reasonably expected of the counsel
herein to advise his client regarding the matter of ownership.

Indeed, the evidence presented by respondent demonstrates the contradictory claims of petitioners regarding their
alleged ownership of the fishpond. On the one hand, they claimed ownership and, on the other, they assured him
that their fishpond lease application would be approved.37 This circumstance should have been sufficient to place
him on notice. It should have compelled him to determine their right over the fishpond, including their right to lease
it.

The Contract itself stated that the area was still covered by a fishpond application. 38 Nonetheless, although
petitioners declared in the Contract that they co-owned the property, their erroneous declaration should not be used
against them. A cursory examination of the Contract suggests that it was drafted to favor the lessee. It can readily
be presumed that it was he or his counsel who prepared it -- a matter supported by petitioners’ evidence. 39 The
ambiguity should therefore be resolved against him, being the one who primarily caused it. 40

The CA erred in finding that petitioners had failed to prove actual knowledge of respondent of the ownership status
of the property that had been leased to him. On the contrary, as the party alleging the fact, it was he who had the
burden of proving – through a preponderance of evidence 41 -- that they misled him regarding the ownership of the
fishpond. His evidence fails to support this contention. Instead, it reveals his fault in entering into a void Contract. As
both parties are equally at fault, neither may recover against the other. 42

Liquidated Damages Not Proper

The CA erred in awarding liquidated damages, notwithstanding its finding that the Contract of Lease was void. Even
if it was assumed that respondent was entitled to reimbursement as provided under paragraph 1 of Article 1412 of
the Civil Code, the award of liquidated damages was contrary to established legal principles. 1a\^/phi1.net

Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of a breach
thereof.43 Liquidated damages are identical to penalty insofar as legal results are concerned. 44 Intended to ensure
the performance of the principal obligation, such damages are accessory and subsidiary obligations. 45 In the present
case, it was stipulated that the party responsible for the violation of the terms, conditions and warranties of the
Contract would pay not less than ₱50,000 as liquidated damages. Since the principal obligation was void, there was
no contract that could have been breached by petitioners; thus, the stipulation on liquidated damages was
inexistent. The nullity of the principal obligation carried with it the nullity of the accessory obligation of liquidated
damages.46

As explained earlier, the applicable law in the present factual milieu is Article 1412 of the Civil Code. This law merely
allows innocent parties to recover what they have given without any obligation to comply with their prestation. No
damages may be recovered on the basis of a void contract; being nonexistent, the agreement produces no juridical
tie between the parties involved. Since there is no contract, the injured party may only recover through other
sources of obligations such as a law or a quasi-contract. 47 A party recovering through these other sources of
obligations may not claim liquidated damages, which is an obligation arising from a contract.

WHEREFORE, the Petition is GRANTED and the assailed Decision and Resolution SET ASIDE. The Decision of
the trial court is hereby REINSTATED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 116635 July 24, 1997

CONCHITA NOOL and GAUDENCIO ALMOJERA, petitioner,

vs.
COURT OF APPEALS, ANACLETO NOOL and EMILIA NEBRE, respondents.

PANGANIBAN, J.:

A contract of repurchase arising out of a contract of sale where the seller did not have any title to the property "sold"
is not valid. Since nothing was sold, then there is also nothing to repurchase.

Statement of the Case

This postulate is explained by this Court as it resolves this petition for review on certiorari assailing the January 20,
1993 Decision of Respondent Court of Appeals in CA-G.R. CV No. 36473, affirming the decision of the trial
1 2 3

court which disposed as follows:

4 5

WHEREFORE, judgment is hereby rendered dismissing the complaint for no cause of action, and
hereby:

1. Declaring the private writing, Exhibit "C", to be an option to sell, not binding and
considered validly withdrawn by the defendants for want of consideration;

2. Ordering the plaintiffs to return to the defendants the sum of P30,000.00 plus
interest thereon at the legal rate, from the time of filing of defendants' counterclaim
until the same is fully paid;
 3. Ordering the plaintiffs to deliver peaceful possession of the two hectares
mentioned in paragraph 7 of the complaint and in paragraph 31 of defendants'
answer (counterclaim);

4. Ordering the plaintiffs to pay reasonable rents on said two hectares at

P5,000.00 per annum or at P2,500.00 per cropping from the time of judicial demand
mentioned in paragraph 2 of the dispositive portion of this decision, until the said two
hectares shall have been delivered to the defendants; and

5. To pay the costs.

SO ORDERED.

The Antecedent Facts

The facts, which appear undisputed by the parties, are narrated by the Court of Appeals as follows:

Two (2) parcels of land are in dispute and litigated upon here. The first has an area of 1 hectare. It
was formerly owned by Victorino Nool and covered by Transfer Certificate of Title No. T-74950. With
an area of 3.0880 hectares, the other parcel was previously owned by Francisco Nool under
Transfer Certificate of Title No. T-100945. Both parcel's are situated in San Manuel, Isabela. The
plaintiff spouses, Conchita Nool and Gaudencio Almojera, now the appellants, seek recovery of the
aforementioned parcels of land from the defendants, Anacleto Nool, a younger brother of Conchita,
and Emilia Nebre, now the appellees.

In their complaint, plaintiff-appellants alleged inter alia that they are the owners of subject parcels of
land, and they bought the same from Conchita's other brothers, Victorino Nool and Francisco Nool;
that as plaintiffs were in dire need of money, they obtained a loan from the Ilagan Branch of the
Development Bank of the Philippines, in Ilagan, Isabela, secured by a real estate mortgage on said
parcels of land, which were still registered in the names of Victorino Nool and Francisco Nool, at the
time, and for the failure of plaintiffs to pay the said loan, including interest and surcharges, totaling
P56,000.00, the mortgage was foreclosed; that within the period of redemption, plaintiffs contacted
defendant Anacleto Nool for the latter to redeem the foreclosed properties from DBP, which the latter
did; and as a result, the titles of the two (2) parcels of land in question were transferred to Anacleto
Nool; that as part of their arrangement or understanding, Anacleto Nool agreed to buy from plaintiff
Conchita Nool the two (2) parcels of land under controversy, for a total price of P100,000.00,
P30,000.00 of which price was paid to Conchita, and upon payment of the balance of P14,000.00,
plaintiffs were to regain possession of the two (2) hectares of land, which amounts defendants failed
to pay, and the same day the said arrangement was made; another covenant was entered into by
6 7

the parties, whereby defendants agreed to return to plaintiffs the lands in question, at anytime the
latter have the necessary amount; that plaintiffs asked the defendants to return the same but despite
the intervention of the Barangay Captain of their place, defendants refused to return the said parcels
of land to plaintiffs; thereby impelling them (plaintiffs) to come to court for relief.

In their Answer, defendants-appellees theorized that they acquired the lands in question from the
Development Bank of the Philippines, through negotiated sale, and were misled by plaintiffs when
defendant Anacleto Nool signed the private writing, agreeing to return subject lands when plaintiffs
have the money to redeem the same; defendant Anacleto having been made to believe, then, that
his sister, Conchita, still had the right to redeem the said properties.

The pivot of inquiry here, as aptly observed below, is the nature and significance of the private
document, marked Exhibit "D" for plaintiffs, which document has not been denied by the defendants,
as defendants even averred in their Answer that they gave an advance payment of P30,000.00
therefor, and acknowledged that they had a balance of P14,000.00 to complete their payment. On
this crucial issue, the lower court adjudged the said private writing (Exhibit "D") as an option to sell
not binding upon and considered the same validly withdrawn by defendants for want of
consideration; and decided the case in the manner above-mentioned.

There is no quibble over the fact that the two (2) parcels of land in dispute were mortgaged to the
Development Bank of the Philippines, to secure a loan obtained by plaintiffs from DBP (Ilagan
Branch), Ilagan, Isabela. For the non-payment of said loan, the mortgage was foreclosed and in the
process, ownership of the mortgaged lands was consolidated in DBP (Exhibits 3 and 4 for
defendants). After DBP became the absolute owner of the two parcels of land, defendants
negotiated with DBP and succeeded in buying the same. By virtue of such sale by DBP in favor of
defendants, the titles of DBP were cancelled and the corresponding Transfer Certificates of Title
(Annexes "C" and "D" to the Complaint) issued to the defendants. 8
It should be stressed that Manuel S. Mallorca, authorized officer of DBP, certified that the one-year redemption
period was from March 16, 1982 up to March 15, 1983 and that the mortgagors' right of redemption was not
exercised within this period. Hence, DBP became the absolute owner of said parcels of land for which it was issued
9

new certificates of title, both entered on May 23, 1983 by the Registry of Deeds for the Province of Isabela. About10

two years thereafter, on April 1, 1985, DBP entered into a Deed of Conditional Sale involving the same parcels of
11

land with Private Respondent Anacleto Nool as vendee. Subsequently, the latter was issued new certificates of title
on February 8, 1988. 12

The Court of Appeals ruled: 13

WHEREFORE, finding no reversible error infirming it, the appealed Judgment is hereby
AFFIRMED in toto. No pronouncement as to costs.

The Issues

Petitioners impute to Respondent Court the following alleged "errors":

1. The Honorable Court of Appeals, Second Division has misapplied the legal import or meaning of
Exhibit "C" in a way contrary to law and existing jurisprudence in stating that it has no binding effect
between the parties and considered validly withdrawn by defendants-appellees for want of
consideration.

2. The Honorable Court of Appeals, Second Division has miserably failed to give legal significance to
the actual possession and cultivation and appropriating exclusively the palay harvest of the two (2)
hectares land pending the payment of the remaining balance of fourteen thousand pesos
(P14,000.00) by defendants-appellees as indicated in Exhibit "C".

3. The Honorable Court of Appeals has seriously erred in affirming the decision of the lower court by
awarding the payment of rents per annum and the return of P30,000.00 and not allowing the
plaintiffs-appellants to re-acquire the four (4) hectares, more or less upon payment of one hundred
thousand pesos (P100,000.00) as shown in Exhibit "D". 14

The Court's Ruling

The petition is bereft of merit.

First Issue: Are Exhibits "C" and "D" Valid and Enforceable?

The petitioner-spouses plead for the enforcement of their agreement with private respondents as contained in
Exhibits "C" and "D," and seek damages for the latter's alleged breach thereof. In Exhibit C, which was a private
handwritten document labeled by the parties as Resibo ti Katulagan or Receipt of Agreement, the petitioners appear
to have "sold" to private respondents the parcels of land in controversy covered by TCT No. T-74950 and TCT No.
T-100945. On the other hand, Exhibit D, which was also a private handwritten document in Ilocano and labeled
as Kasuratan, private respondents agreed that Conchita Nool "can acquire back or repurchase later on said land
when she has the money." 15

In seeking to enforce her alleged right to repurchase the parcels of land, Conchita (joined by her co-petitioner-
husband) invokes Article 1370 of the Civil Code which mandates that "(i)f the terms of a contract are clear and leave
no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control." Hence,
petitioners contend that the Court of Appeals erred in affirming the trial court's finding and conclusion that said
Exhibits C and D were "not merely voidable but utterly void and inexistent."

We cannot sustain petitioners' view. Article 1370 of the Civil Code is applicable only to valid and enforceable
contracts. The Regional Trial Court and the Court of Appeals ruled that the principal contract of sale contained in
Exhibit C and the auxiliary contract of repurchase in Exhibit D are both void. This conclusion of the two lower courts
appears to find support in Dignos vs. Court of Appeals, where the Court held:
16

Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were
no longer owners of the same and the sale is null and void.

In the present case, it is clear that the sellers no longer had any title to the parcels of land at the time of sale. Since
Exhibit D, the alleged contract of repurchase, was dependent on the validity of Exhibit C, it is itself void. A void
contract cannot give rise to a valid one. Verily, Article 1422 of the Civil Code provides that "(a) contract which is
17

the direct result of a previous illegal contract, is also void and inexistent."
We should however add that Dignos did not cite its basis for ruling that a "sale is null and void" where the sellers
"were no longer the owners" of the property. Such a situation (where the sellers were no longer owners) does not
appear to be one of the void contracts enumerated in Article 1409 of the Civil Code. Moreover, the Civil
18

Code itself recognizes a sale where the goods are to be "acquired . . . by the seller after the perfection of the
19

contract of sale," clearly implying that a sale is possible even if the seller was not the owner at the time of sale,
provided he acquires title to the property later on.

In the present case however, it is likewise clear that the sellers can no longer deliver the object of the sale to the
buyers, as the buyers themselves have already acquired title and delivery thereof from the rightful owner, the DBP.
Thus, such contract may be deemed to be inoperative and may thus fall, by analogy, under item no. 5 of Article
20

1409 of the Civil Code: "Those which contemplate an impossible service." Article 1459 of the Civil Code provides
that "the vendor must have a right to transfer the ownership thereof [object of the sale] at the time it is delivered."
Here, delivery of ownership is no longer possible. It has become impossible.

Furthermore, Article 1505 of the Civil Code provides that "where goods are sold by a person who is not the owner
thereof, and who does not sell them under authority or with consent of the owner, the buyer acquires no better title
to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's
authority to sell." Here, there is no allegation at all that petitioners were authorized by DBP to sell the property to the
private respondents. Jurisprudence, on the other hand, teaches us that "a person can sell only what he owns or is
authorized to sell; the buyer can as a consequence acquire no more than what the seller can legally transfer." No 21

one can give what he does not have — nono dat quod non habet. On the other hand, Exhibit D presupposes that
petitioners could repurchase the property that they "sold" to private respondents. As petitioners "sold" nothing, it
follows that they can also "repurchase" nothing. Nothing sold, nothing to repurchase. In this light, the contract of
repurchase is also inoperative — and by the same analogy, void.

Contract of Repurchase
Dependent on Validity of Sale

As borne out by the evidence on record, the private respondents bought the two parcels of land directly from DBP
on April 1, 1985 after discovering that petitioners did not own said property, the subject of Exhibits C and D
executed on November 30, 1984. Petitioners, however, claim that they can exercise their alleged right to
"repurchase" the property, after private respondents had acquired the same from DBP. We cannot accede to this,
22

for it clearly contravenes the intention of the parties and the nature of their agreement. Exhibit D reads:

W R I T I N G v. 30, 1984

That I, Anacleto Nool have bought from my sister Conchita Nool a land an area of four hectares (4
has.) in the value of One Hundred Thousand (100,000.00) Pesos. It is our agreement as brother and
sister that she can acquire back or repurchase later on said land when she has the money.
[Emphasis supplied].

As proof of this agreement we sign as brother and sister this written document this day of Nov. 30,
1984, at District 4, San Manuel, Isabela. gd ANACLETO NOOL

Sgd Emilio Paron

Witness

Sgd Conchita Nool

Anac
o l

Conc
a Noo

One "repurchases" only what one has previously sold. In other words, the right to repurchase presupposes a valid
contract of sale between the same parties. Undisputedly, private respondents acquired title to the property from
DBP, and not from petitioners.

Assuming arguendo that Exhibit D is separate and distinct from Exhibit C and is not affected by the nullity of the
latter, still petitioners do not thereby acquire a right to repurchase the property. In that scenario, Exhibit D ceases to
be a "right to repurchase" ancillary and incidental to the contract of sale; rather, it becomes an accepted unilateral
promise to sell. Article 1479 of the Civil Code, however, provides that "an accepted unilateral promise to buy or sell
a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration
distinct from the price." In the present case, the alleged written contract of repurchase contained in Exhibit D is
bereft of any consideration distinct from the price. Accordingly, as an independent contract, it cannot bind private
respondents. The ruling in Diamante vs. CA supports this. In that case, the Court through Mr. Justice Hilario G.
24

Davide, Jr. explained:

Article 1601 of the Civil Code provides:

Conventional redemption shall take place when the vendor reserves the right to repurchase the thing
sold, with the obligation to comply with the provisions of article 1616 and other stipulations which
may have been agreed upon.

In Villarica, et al. Vs. Court of Appeals, et al., decided on 29 November 1968, or barely seven (7)
days before the respondent Court promulgated its decisions in this case, this Court, interpreting the
above Article, held:

The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument,
but is a right reserved by the vendor in the same instrument of sale as one of the stipulations of the
contract. Once the instrument of absolute sale is executed, the vendor can not longer reserve the
right to repurchase, and any right thereafter granted the vendor by the vendee in a separate
instrument cannot be a right of repurchase but some other right like the option to buy in the instant
case. . . .

In the earlier case of Ramos, et al. vs. Icasiano, et al., decided in 1927, this Court had already ruled
that "an agreement to repurchase becomes a promise to sell when made after the sale, because
when the sale is made without such an agreement, the purchaser acquires the thing sold absolutely,
and if he afterwards grants the vendor the right to purchase, it is a new contract entered into by the
purchaser, as absolute owner already of the object. In that case the vendor has nor reserved to
himself the right to repurchase.

In Vda. De Cruzo, et al. vs. Carriaga, et al. this Court found another occasion to apply the foregoing
principle.

Hence, the Option to Repurchase executed by private respondent in the present case, was merely a
promise to sell, which must be governed by Article 1479 of the Civil Code which reads as follows:

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.

Right to Repurchase Based on

Homestead or Trust Non-Existent

Petitioners also base their alleged right to repurchase on (1) Sec. 119 of the Public Land Act 25
and (2) an implied
trust relation as "brother and sister."
26

The Court notes that Victorino Nool and Francisco Nool mortgaged the land to DBP. The brothers, together with
Conchita Nool and Anacleto Nool, were all siblings and heirs qualified to repurchase the two parcels of land under
Sec. 119 of the Public Land Act which provides that "(e)very conveyance of land acquired under the free patent or
homestead provisions, when proper, shall be subject to repurchase by the applicant, his widow or legal heirs, within
a period of five years from the date of conveyance." Assuming the applicability of this statutory provision to the case
at bar, it is indisputable that Private Respondent Anacleto Nool already repurchased from DBP the contested
properties. Hence, there was no more right of repurchase that his sister Conchita or brothers Victorino and
Francisco could exercise. The properties were already owned by an heir of the homestead grantee and the rationale
of the provision to keep homestead lands within the family of the grantee was thus fulfilled.27

The claim of a trust relation is likewise without merit. The records show that private respondents did not purchase
the contested properties from DBP in trust for petitioners. The former, as previously mentioned, in fact bought the
land from DBP upon realization that the latter could not validly sell the same. Obviously, petitioners bought it for
themselves. There is no evidence at all in the records that they bought the land in trust for private respondents. The
fact that Anacleto Nool was the younger brother of Conchita Nool and that they signed a contract of repurchase,
which as discussed earlier was void, does not prove the existence of an implied trust in favor of petitioners.
 Second Issue: No Estoppel in Impugning the
Validity of Void Contracts

Petitioners argue that "when Anacleto Nool took the possession of the two hectares, more or less, and let the other
two hectares to be occupied and cultivated by plaintiffs-appellant, Anacleto Nool cannot later on disclaim the terms
or contions (sic) agreed upon and his actuation is within the ambit of estoppel . . . We disagree. The private
28

respondents cannot be estopped from raising the defense of nullity of contract, specially in this case where they
acted in good faith, believing that indeed petitioners could sell the two parcels of land in question. Article 1410 of the
Civil Code mandates that "(t)he action or defense for the declaration of the inexistence of a contract does not
prescribe." It is a well-settled doctrine that "as between parties to a contract, validity cannot be given to it by
estoppel if it is prohibited by law or it is against public policy (19 Am. Jur. 802). It is not within the competence of any
citizen to barter away what public policy by law seeks to preserve." Thus, it is immaterial that private respondents
29

initially acted to implement the contract of sale, believing in good faith that the same was valid. We stress that a
contract void at inception cannot be validated by ratification or prescription and certainly cannot be binding on or
enforceable against private respondents. 30

Third Issue: Return of P30,000.00 with Interest

and Payment of Rent

Petitioners further argue that it would be a "miscarriage of justice" to order them (1) to return the sum of P30,000.00
to private respondents when allegedly it was Private Respondent Anacleto Nool who owed the former a balance of
P14,000.00 and (2) to order petitioners to pay rent when they "were allowed to cultivate the said two hectares." 31

We are not persuaded. Based on the previous discussion, the balance of P14,000.00 under the void contract of sale
may not be enforced. Petitioners are the ones who have an obligation to return what they unduly and improperly
received by reason of the invalid contract of sale. Since they cannot legally give title to what they "sold," they cannot
keep the money paid for the object of the sale. It is basic that "(e)very person who through an act of performance by
another, or any other means, acquires or comes into possession of something at the expense of the latter without
just or legal ground, shall return the same." Thus, if a void contract has already "been performed, the restoration of
32

what has been given is in order." Corollarily and as aptly ordered by respondent appellate court, interest thereon
33

will run only from the time of private respondents' demand for the return of this amount in their counterclaim. In the
34

same vein, petitioners' possession and cultivation of the two hectares are anchored on private respondents'
tolerance. Clearly, the latter's tolerance ceased upon their counterclaim and demand on the former to vacate.
Hence, their right to possess and cultivate the land ipso facto ceased.

WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals affirming that of the trial
court is hereby AFFIRMED.

SO ORDERED.
G.R. No. 180388 January 18, 2011

GREGORIO R. VIGILAR, SECRETARY OF THE DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS (DPWH),
DPWH UNDERSECRETARIES TEODORO E. ENCARNACION AND EDMUNDO E. ENCARNACION AND
EDMUNDO V. MIR, DPWH ASSISTANT SECRETARY JOEL L. ALTEA, DPWH REGIONAL DIRECTOR
VICENTE B. LOPEZ, DPWH DISTRICT ENGINEER ANGELITO M. TWAÑO, FELIX A. DESIERTO OF THE
TECHNICAL WORKING GROUP VALIDATION AND AUDITING TEAM, AND LEONARDO ALVARO, ROMEO N.
SUPAN, VICTORINO C. SANTOS OF THE DPWH PAMPANGA 2ND ENGINEERING DISTRICT, Petitioners,
vs.
ARNULFO D. AQUINO, Respondent.

DECISION

SERENO, J.:

Before the Court is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court, assailing the
Decision2 of the Court of Appeals in C.A.-G.R. CV No. 82268, dated 25 September 2006.

The antecedent facts are as follows:

On 19 June 1992, petitioner Angelito M. Twaño, then Officer-in-Charge (OIC)-District Engineer of the Department of
Public Works and Highways (DPWH) 2nd Engineering District of Pampanga sent an Invitation to Bid to respondent
Arnulfo D. Aquino, the owner of A.D. Aquino Construction and Supplies. The bidding was for the construction of a
dike by bulldozing a part of the Porac River at Barangay Ascomo-Pulungmasle, Guagua, Pampanga.

Subsequently, on 7 July 1992, the project was awarded to respondent, and a "Contract of Agreement" was
thereafter executed between him and concerned petitioners for the amount of PhP1,873,790.69, to cover the project
cost.

By 9 July 1992, the project was duly completed by respondent, who was then issued a Certificate of Project
Completion dated 16 July 1992. The certificate was signed by Romeo M. Yumul, the Project Engineer; as well as
petitioner Romeo N. Supan, Chief of the Construction Section, and by petitioner Twaño.

Respondent Aquino, however, claimed that PhP1,262,696.20 was still due him, but petitioners refused to pay the
amount. He thus filed a Complaint3 for the collection of sum of money with damages before the Regional Trial Court
of Guagua, Pampanga. The complaint was docketed as Civil Case No. 3137.

Petitioners, for their part, set up the defense4 that the Complaint was a suit against the state; that respondent failed
to exhaust administrative remedies; and that the "Contract of Agreement" covering the project was void for violating
Presidential Decree No. 1445, absent the proper appropriation and the Certificate of Availability of Funds. 5

On 28 November 2003, the lower court ruled in favor of respondent, to wit:

WHEREFORE, premises considered, defendant Department of Public Works and Highways is hereby ordered to
pay the plaintiff Arnulfo D. Aquino the following:

1. PhP1,873,790.69, Philippine Currency, representing actual amount for the completion of the project done
by the plaintiff;

2. PhP50,000.00 as attorney’s fee and

3. Cost of this suit.

SO ORDERED. 6

It is to be noted that respondent was only asking for PhP1,262,696.20; the award in paragraph 1 above, however,
conforms to the entire contract amount.

On appeal, the Court of Appeals reversed and set aside the Decision of the lower court and disposed as follows:

WHEREFORE, premises considered, the appeal is GRANTED. The "CONTRACT AGREEMENT" entered into
between the plaintiff-appellee’s construction company, which he represented, and the government, through the
Department of Public Works and Highway (DPWH) – Pampanga 2nd Engineering District, is declared null and void
ab initio.

The assailed decision of the court a quo is hereby REVERSED AND SET ASIDE.

In line with the pronouncement in Department of Health vs. C.V. Canchela & Associates, Architects, 7 the
Commission on Audit (COA) is hereby ordered to determine and ascertain with dispatch, on a quantum meruit basis,
the total obligation due to the plaintiff-appellee for his undertaking in implementing the subject contract of public
works, and to allow payment thereof, subject to COA Rules and Regulations, upon the completion of the said
determination.

No pronouncement as to costs.

SO ORDERED.8

Dissatisfied with the Decision of the Court of Appeals, petitioners are now before this Court, seeking a reversal of
the appellate court’s Decision and a dismissal of the Complaint in Civil Case No. G-3137. The Petition raises the
following issues:

1. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT THE DOCTRINE OF NON-
SUABILITY OF THE STATE HAS NO APPLICATION IN THIS CASE.

2. WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT DISMISSING THE COMPLAINT FOR
FAILURE OF RESPONDENT TO EXHAUST ALL ADMINISTRATIVE REMEDIES.

3. WHETHER OR NOT THE COURT OF APPEALS ERRED IN ORDERING THE COA TO ALLOW PAYMENT TO
RESPONDENT ON A QUANTUM MERUIT BASIS DESPITE THE LATTER’S FAILURE TO COMPLY WITH THE
REQUIREMENTS OF PRESIDENTIAL DECREE NO. 1445.

After a judicious review of the case, the Court finds the Petition to be without merit.

Firstly, petitioners claim that the Complaint filed by respondent before the Regional Trial Court was done without
exhausting administrative remedies. Petitioners aver that respondent should have first filed a claim before the
Commission on Audit (COA) before going to the courts. However, it has been established that the doctrine of
exhaustion of administrative remedies and the doctrine of primary jurisdiction are not ironclad rules. In Republic of
the Philippines v. Lacap,9 this Court enumerated the numerous exceptions to these rules, namely: (a) where there is
estoppel on the part of the party invoking the doctrine; (b) where the challenged administrative act is patently illegal,
amounting to lack of jurisdiction; (c) where there is unreasonable delay or official inaction that will irretrievably
prejudice the complainant; (d) where the amount involved is relatively so small as to make the rule impractical and
oppressive; (e) where the question involved is purely legal and will ultimately have to be decided by the courts of
justice; (f) where judicial intervention is urgent; (g) where the application of the doctrine may cause great and
irreparable damage; (h) where the controverted acts violate due process; (i) where the issue of non-exhaustion of
administrative remedies has been rendered moot; (j) where there is no other plain, speedy and adequate remedy;
(k) where strong public interest is involved; and (l) in quo warranto proceedings. In the present case, conditions (c)
and (e) are present.
The government project contracted out to respondent was completed almost two decades ago. To delay the
proceedings by remanding the case to the relevant government office or agency will definitely prejudice respondent.
More importantly, the issues in the present case involve the validity and the enforceability of the "Contract of
Agreement" entered into by the parties. These are questions purely of law and clearly beyond the expertise of the
Commission on Audit or the DPWH. In Lacap, this Court said:

... It does not involve an examination of the probative value of the evidence presented by the parties. There is a
question of law when the doubt or difference arises as to what the law is on a certain state of facts, and not as to the
truth or the falsehood of alleged facts. Said question at best could be resolved only tentatively by the administrative
authorities. The final decision on the matter rests not with them but with the courts of justice. Exhaustion of
administrative remedies does not apply, because nothing of an administrative nature is to be or can be done. The
issue does not require technical knowledge and experience but one that would involve the interpretation and
application of law. (Emphasis supplied.)

Secondly, in ordering the payment of the obligation due respondent on a quantum meruit basis, the Court of
Appeals correctly relied on Royal Trust Corporation v. COA, 10 Eslao v. COA,11 Melchor v. COA,12 EPG Construction
Company v. Vigilar,13 and Department of Health v. C.V. Canchela & Associates, Architects. 14 All these cases
involved government projects undertaken in violation of the relevant laws, rules and regulations covering public
bidding, budget appropriations, and release of funds for the projects. Consistently in these cases, this Court has
held that the contracts were void for failing to meet the requirements mandated by law; public interest and equity,
however, dictate that the contractor should be compensated for services rendered and work done.

Specifically, C.V. Canchela & Associates is similar to the case at bar, in that the contracts involved in both cases
failed to comply with the relevant provisions of Presidential Decree No. 1445 and the Revised Administrative Code
of 1987. Nevertheless, "(t)he illegality of the subject Agreements proceeds, it bears emphasis, from an express
declaration or prohibition by law, not from any intrinsic illegality. As such, the Agreements are not illegal per se, and
the party claiming thereunder may recover what had been paid or delivered." 15

The government project involved in this case, the construction of a dike, was completed way back on 9 July 1992.
For almost two decades, the public and the government benefitted from the work done by respondent. Thus, the
Court of Appeals was correct in applying Eslao to the present case. In Eslao, this Court stated:

...the Court finds that the contractor should be duly compensated for services rendered, which were for the benefit of
the general public. To deny the payment to the contractor of the two buildings which are almost fully completed and
presently occupied by the university would be to allow the government to unjustly enrich itself at the expense of
another. Justice and equity demand compensation on the basis of quantum meruit. (Emphasis supplied.)

Neither can petitioners escape the obligation to compensate respondent for services rendered and work done by
invoking the state’s immunity from suit. This Court has long established in Ministerio v. CFI of Cebu, 16 and recently
reiterated in Heirs of Pidacan v. ATO, 17 that the doctrine of governmental immunity from suit cannot serve as an
instrument for perpetrating an injustice to a citizen. As this Court enunciated in EPG Construction: 181avvphi1

To our mind, it would be the apex of injustice and highly inequitable to defeat respondent’s right to be duly
compensated for actual work performed and services rendered, where both the government and the public
have for years received and accepted benefits from the project and reaped the fruits of respondent’s honest
toil and labor.

xxx xxx xxx

Under these circumstances, respondent may not validly invoke the Royal Prerogative of Dishonesty and
conveniently hide under the State's cloak of invincibility against suit, considering that this principle yields to certain
settled exceptions. True enough, the rule, in any case, is not absolute for it does not say that the state may
not be sued under any circumstance.

xxx xxx xxx

Although the Amigable and Ministerio cases generously tackled the issue of the State's immunity from suit vis a vis
the payment of just compensation for expropriated property, this Court nonetheless finds the doctrine enunciated in
the aforementioned cases applicable to the instant controversy, considering that the ends of justice would be
subverted if we were to uphold, in this particular instance, the State's immunity from suit.

To be sure, this Court — as the staunch guardian of the citizens' rights and welfare — cannot sanction an
injustice so patent on its face, and allow itself to be an instrument in the perpetration thereof. Justice and
equity sternly demand that the State's cloak of invincibility against suit be shred in this particular instance,
and that petitioners-contractors be duly compensated — on the basis of quantum meruit — for construction
done on the public works housing project. (Emphasis supplied.)
WHEREFORE, in view of the foregoing, the Petition is DENIED for lack of merit. The assailed Decision of the Court
of Appeals in CA-G.R. No. 82268 dated 25 September 2006 is AFFIRMED.

SO ORDERED.

.R. No. 191667 April 17, 2013

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
EDUARDO M. CACAYURAN, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this Petition for Review on Certiorari1 is the March 26, 2010 Decision2 of the Court of Appeals (CA) in
CA-G.R. CV. No. 89732 which affirmed with modification the April 10, 2007 Decision 3 of the Regional Trial Court
(RTC) of Agoo, La Union, Branch 31, declaring inter alia the nullity of the loan agreements entered into by petitioner
Land Bank of the Philippines (Land Bank) and the Municipality of Agoo, La Union (Municipality).

The Facts

From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain resolutions to implement a multi-
phased plan (Redevelopment Plan) to redevelop the Agoo Public Plaza (Agoo Plaza) where the Imelda Garden and
Jose Rizal Monument were situated.

To finance phase 1 of the said plan, the SB initially passed Resolution No. 68-2005 4 on April 19, 2005, authorizing
then Mayor Eufranio Eriguel (Mayor Eriguel) to obtain a loan from Land Bank and incidental thereto, mortgage a
2,323.75 square meter lot situated at the southeastern portion of the Agoo Plaza (Plaza Lot) as collateral. To serve
as additional security, it further authorized the assignment of a portion of its internal revenue allotment (IRA) and the
monthly income from the proposed project in favor of Land Bank. 5 The foregoing terms were confirmed, approved
and ratified on October 4, 2005 through Resolution No. 139-2005. 6 Consequently, on November 21, 2005, Land
Bank extended a ₱4,000,000.00 loan in favor of the Municipality (First Loan), 7 the proceeds of which were used to
construct ten (10) kiosks at the northern and southern portions of the Imelda Garden. After completion, these kiosks
were rented out.8

On March 7, 2006, the SB passed Resolution No. 58-2006, 9 approving the construction of a commercial center on
the Plaza Lot as part of phase II of the Redevelopment Plan. To finance the project, Mayor Eriguel was again
authorized to obtain a loan from Land Bank, posting as well the same securities as that of the First Loan. All
previous representations and warranties of Mayor Eriguel related to the negotiation and obtention of the new
loan10 were ratified on September 5, 2006 through Resolution No. 128-2006. 11 In consequence, Land Bank granted a
second loan in favor of the Municipality on October 20, 2006 in the principal amount of ₱28,000,000.00 (Second
Loan).12
Unlike phase 1 of the Redevelopment Plan, the construction of the commercial center at the Agoo Plaza was
vehemently objected to by some residents of the Municipality. Led by respondent Eduardo Cacayuran (Cacayuran),
these residents claimed that the conversion of the Agoo Plaza into a commercial center, as funded by the proceeds
from the First and Second Loans (Subject Loans), were "highly irregular, violative of the law, and detrimental to
public interests, and will result to wanton desecration of the said historical and public park." 13 The foregoing was
embodied in a Manifesto,14 launched through a signature campaign conducted by the residents and Cacayuran.

In addition, Cacayuran wrote a letter15 dated December 8, 2006 addressed to Mayor Eriguel, Vice Mayor Antonio
Eslao (Vice Mayor Eslao), and the members of the SB namely, Violeta Laroya-Balbin, Jaime Boado, Jr., Rogelio De
Vera, James Dy, Crisogono Colubong, Ricardo Fronda, Josephus Komiya, Erwina Eriguel, Felizardo Villanueva,
and Gerard Mamuyac (Implicated Officers), expressing the growing public clamor against the conversion of the
Agoo Plaza into a commercial center. He then requested the foregoing officers to furnish him certified copies of
various documents related to the aforementioned conversion including, among others, the resolutions approving the
Redevelopment Plan as well as the loan agreements for the sake of public information and transparency.

Unable to get any response, Cacayuran, invoking his right as a taxpayer, filed a Complaint 16 against the Implicated
Officers and Land Bank, assailing, among others, the validity of the Subject Loans on the ground that the Plaza Lot
used as collateral thereof is property of public dominion and therefore, beyond the commerce of man. 17

Upon denial of the Motion to Dismiss dated December 27, 2006, 18 the Implicated Officers and Land Bank filed their
respective Answers.

For its part, Land Bank claimed that it is not privy to the Implicated Officers’ acts of destroying the Agoo Plaza. It
further asserted that Cacayuran did not have a cause of action against it since he was not privy to any of the Subject
Loans.19

During the pendency of the proceedings, the construction of the commercial center was completed and the said
structure later became known as the Agoo’s People Center (APC).

On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007, 20 declaring the area where the APC stood as
patrimonial property of the Municipality.

The Ruling of the RTC

In its Decision dated April 10, 2007,21 the RTC ruled in favor of Cacayuran, declaring the nullity of the Subject
Loans.22 It found that the resolutions approving the said loans were passed in a highly irregular manner and thus,
ultra vires; as such, the Municipality is not bound by the same. 23 Moreover, it found that the Plaza Lot is proscribed
from collateralization given its nature as property for public use.24

Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007. 25 On the other hand, the Implicated Officers’
appeal was deemed abandoned and dismissed for their failure to file an appellants’ brief despite due notice. 26 In this
regard, only Land Bank’s appeal was given due course by the CA.

Ruling of the CA

In its Decision dated March 26, 2010, 27 the CA affirmed with modification the RTC’s ruling, excluding Vice Mayor
Eslao from any personal liability arising from the Subject Loans.28

It held, among others, that: (1) Cacayuran had locus standi to file his complaint, considering that (a) he was born,
raised and a bona fide resident of the Municipality; and (b) the issue at hand involved public interest of
transcendental importance;29 (2) Resolution Nos. 68-2005, 139-2005, 58-2006, 128-2006 and all other related
resolutions (Subject Resolutions) were invalidly passed due to the SB’s non-compliance with certain sections of
Republic Act No. 7160, otherwise known as the "Local Government Code of 1991" (LGC); (3) the Plaza Lot, which
served as collateral for the Subject Loans, is property of public dominion and thus, cannot be appropriated either by
the State or by private persons; 30 and (4) the Subject Loans are ultra vires because they were transacted without
proper authority and their collateralization constituted improper disbursement of public funds.

Dissatisfied, Land Bank filed the instant petition.

Issues Before the Court

The following issues have been raised for the Court’s resolution: (1) whether Cacayuran has standing to sue; (2)
whether the Subject Resolutions were validly passed; and (3) whether the Subject Loans are ultra vires.

The Court’s Ruling

The petition lacks merit.

A. Cacayuran’s standing to sue

Land Bank claims that Cacayuran did not have any standing to contest the construction of the APC as it was funded
through the proceeds coming from the Subject Loans and not from public funds. Besides, Cacayuran was not even
a party to any of the Subject Loans and is thus, precluded from questioning the same.

The argument is untenable.

It is hornbook principle that a taxpayer is allowed to sue where there is a claim that public funds are illegally
disbursed, or that public money is being deflected to any improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional law. A person suing as a taxpayer, however, must show
that the act complained of directly involves the illegal disbursement of public funds derived from taxation. In other
words, for a taxpayer’s suit to prosper, two requisites must be met namely, (1) public funds derived from taxation are
disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is
committed; and (2) the petitioner is directly affected by the alleged act. 31

Records reveal that the foregoing requisites are present in the instant case.

First, although the construction of the APC would be primarily sourced from the proceeds of the Subject Loans,
which Land Bank insists are not taxpayer’s money, there is no denying that public funds derived from taxation are
bound to be expended as the Municipality assigned a portion of its IRA as a security for the foregoing loans.
Needless to state, the Municipality’s IRA, which serves as the local government unit’s just share in the national
taxes,32 is in the nature of public funds derived from taxation. The Court believes, however, that although these
funds may be posted as a security, its collateralization should only be deemed effective during the incumbency of
the public officers who approved the same, else those who succeed them be effectively deprived of its use.

In any event, it is observed that the proceeds from the Subject Loans had already been converted into public funds
by the Municipality’s receipt thereof. Funds coming from private sources become impressed with the characteristics
of public funds when they are under official custody.33

Accordingly, the first requisite has been clearly met.

Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by the conversion of the Agoo
Plaza which was funded by the proceeds of the Subject Loans. It is well-settled that public plazas are properties for
public use34 and therefore, belongs to the public dominion.35 As such, it can be used by anybody and no one can
exercise over it the rights of a private owner. 36 In this light, Cacayuran had a direct interest in ensuring that the Agoo
Plaza would not be exploited for commercial purposes through the APC’s construction. Moreover, Cacayuran need
not be privy to the Subject Loans in order to proffer his objections thereto. In Mamba v. Lara, it has been held that a
taxpayer need not be a party to the contract to challenge its validity; as long as taxes are involved, people have a
right to question contracts entered into by the government.37

Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing to file the instant suit.

B. Validity of the Subject Resolutions

Land Bank avers that the Subject Resolutions provided ample authority for Mayor Eriguel to contract the Subject
Loans. It posits that Section 444(b)(1)(vi) of the LGC merely requires that the municipal mayor be authorized by the
SB concerned and that such authorization need not be embodied in an ordinance. 38

A careful perusal of Section 444(b)(1)(vi) of the LGC shows that while the authorization of the municipal mayor need
not be in the form of an ordinance, the obligation which the said local executive is authorized to enter into must be
made pursuant to a law or ordinance, viz:

Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation. -

xxxx

(b) For efficient, effective and economical governance the purpose of which is the general welfare of the municipality
and its inhabitants pursuant to Section 16 of this Code, the municipal mayor shall:

xxxx
(vi) Upon authorization by the sangguniang bayan, represent the municipality in all its business transactions and
sign on its behalf all bonds, contracts, and obligations, and such other documents made pursuant to law or
ordinance; (Emphasis and underscoring supplied)

In the present case, while Mayor Eriguel’s authorization to contract the Subject Loans was not contained – as it
need not be contained – in the form of an ordinance, the said loans and even the Redevelopment Plan itself were
not approved pursuant to any law or ordinance but through mere resolutions. The distinction between ordinances
and resolutions is well-perceived. While ordinances are laws and possess a general and permanent character,
resolutions are merely declarations of the sentiment or opinion of a lawmaking body on a specific matter and are
temporary in nature.39 As opposed to ordinances, "no rights can be conferred by and be inferred from a
resolution."40 In this accord, it cannot be denied that the SB violated Section 444(b)(1)(vi) of the LGC altogether.

Noticeably, the passage of the Subject Resolutions was also tainted with other irregularities, such as (1) the SB’s
failure to submit the Subject Resolutions to the Sangguniang Panlalawigan of La Union for its review contrary to
Section 56 of the LGC;41 and (2) the lack of publication and posting in contravention of Section 59 of the LGC. 42

In fine, Land Bank cannot rely on the Subject Resolutions as basis to validate the Subject Loans.

C. Ultra vires nature of the Subject

Loans

Neither can Land Bank claim that the Subject Loans do not constitute ultra vires acts of the officers who approved
the same.

Generally, an ultra vires act is one committed outside the object for which a corporation is created as defined by the
law of its organization and therefore beyond the powers conferred upon it by law. 43 There are two (2) types of ultra
vires acts. As held in Middletown Policemen's Benevolent Association v. Township of Middletown: 44

There is a distinction between an act utterly beyond the jurisdiction of a municipal corporation and the irregular
exercise of a basic power under the legislative grant in matters not in themselves jurisdictional. The former are ultra
vires in the primary sense and void; the latter, ultra vires only in a secondary sense which does not preclude
ratification or the application of the doctrine of estoppel in the interest of equity and essential justice. (Emphasis and
underscoring supplied)

In other words, an act which is outside of the municipality’s jurisdiction is considered as a void ultra vires act, while
an act attended only by an irregularity but remains within the municipality’s power is considered as an ultra vires act
subject to ratification and/or validation. To the former belongs municipal contracts which (a) are entered into beyond
the express, implied or inherent powers of the local government unit; and (b) do not comply with the substantive
requirements of law e.g., when expenditure of public funds is to be made, there must be an actual appropriation and
certificate of availability of funds; while to the latter belongs those which (a) are entered into by the improper
department, board, officer of agent; and (b)do not comply with the formal requirements of a written contract e.g., the
Statute of Frauds.45

Applying these principles to the case at bar, it is clear that the Subject Loans belong to the first class of ultra vires
acts deemed as void.

Records disclose that the said loans were executed by the Municipality for the purpose of funding the conversion of
the Agoo Plaza into a commercial center pursuant to the Redevelopment Plan. However, the conversion of the said
plaza is beyond the Municipality’s jurisdiction considering the property’s nature as one for public use and thereby,
forming part of the public dominion. Accordingly, it cannot be the object of appropriation either by the State or by
private persons.46 Nor can it be the subject of lease or any other contractual undertaking. 47 In Villanueva v.
Castañeda, Jr.,48 citing Espiritu v. Municipal Council of Pozorrubio,49 the Court pronounced that:

x x x Town plazas are properties of public dominion, to be devoted to public use and to be made available to the
public in general. They are outside the commerce of man and cannot be disposed of or even leased by the
municipality to private parties.
1âwphi1

In this relation, Article 1409(1) of the Civil Code provides that a contract whose purpose is contrary to law, morals,
good customs, public order or public policy is considered void 50 and as such, creates no rights or obligations or any
juridical relations.51 Consequently, given the unlawful purpose behind the Subject Loans which is to fund the
commercialization of the Agoo Plaza pursuant to the Redevelopment Plan, they are considered as ultra vires in the
primary sense thus, rendering them void and in effect, non-binding on the Municipality.

At this juncture, it is equally observed that the land on which the Agoo Plaza is situated cannot be converted into
patrimonial property – as the SB tried to when it passed Municipal Ordinance No. 02-2007 52 – absent any express
grant by the national government.53 As public land used for public use, the foregoing lot rightfully belongs to and is
subject to the administration and control of the Republic of the Philippines. 54 Hence, without the said grant, the
Municipality has no right to claim it as patrimonial property.

Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra vires, the officers who authorized
the passage of the Subject Resolutions are personally liable. Case law states that public officials can be held
personally accountable for acts claimed to have been performed in connection with official duties where they have
acted ultra vires,55 as in this case.

WHEREFORE, the petition is DENIED. Accordingly, the March 26, 2010 Decision of the Court of Appeals in CA-
G.R. CV. No. 89732 is hereby AFFIRMED.

SO ORDERED.

G.R. No. 195670 December 3, 2012

WILLEM BEUMER, Petitioner,

vs.
AVELINA AMORES, Respondent.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of CoLlli assailing the October 8,
1

2009 Decision and January 24, 2011 Resolution of the court of Appeals (CA) in CA-G.R. CV No. 01940, which
2 3

affirmed the February 28, 2007 Decision of the Regional Trial Court (RTC) of Negros Oriental, Branch 34 in Civil
4

Case No. I 2884. The foregoing rulings dissolved the conjugal partnership of gains of Willem Beumer (petitioner)
and Avelina Amores (respondent) and distributed the properties forming part of the said property regime.

The Factual Antecedents

Petitioner, a Dutch National, and respondent, a Filipina, married in March 29, 1980. After several years, the RTC of
Negros Oriental, Branch 32, declared the nullity of their marriage in the Decision dated November 10, 2000 on the
5

basis of the former’s psychological incapacity as contemplated in Article 36 of the Family Code.

Consequently, petitioner filed a Petition for Dissolution of Conjugal Partnership dated December 14, 2000 praying
6

for the distribution of the following described properties claimed to have been acquired during the subsistence of
their marriage, to wit:

By Purchase:

a. Lot 1, Block 3 of the consolidated survey of Lots 2144 & 2147 of the Dumaguete Cadastre, covered by
Transfer Certificate of Title (TCT) No. 22846, containing an area of 252 square meters (sq.m.), including a
residential house constructed thereon.

b. Lot 2142 of the Dumaguete Cadastre, covered by TCT No. 21974, containing an area of 806 sq.m.,
including a residential house constructed thereon.
 c. Lot 5845 of the Dumaguete Cadastre, covered by TCT No. 21306, containing an area of 756 sq.m.

d. Lot 4, Block 4 of the consolidated survey of Lots 2144 & 2147 of the Dumaguete Cadastre, covered by
TCT No. 21307, containing an area of 45 sq.m.

By way of inheritance:

e. 1/7 of Lot 2055-A of the Dumaguete Cadastre, covered by TCT No. 23567, containing an area of 2,635
sq.m. (the area that appertains to the conjugal partnership is 376.45 sq.m.).

f. 1/15 of Lot 2055-I of the Dumaguete Cadastre, covered by TCT No. 23575, containing an area of 360
sq.m. (the area that appertains to the conjugal partnership is 24 sq.m.).
7

In defense, respondent averred that, with the exception of their two (2) residential houses on Lots 1 and 2142, she
8

and petitioner did not acquire any conjugal properties during their marriage, the truth being that she used her own
personal money to purchase Lots 1, 2142, 5845 and 4 out of her personal funds and Lots 2055-A and 2055-I by way
of inheritance. She submitted a joint affidavit executed by her and petitioner attesting to the fact that she purchased
9

Lot 2142 and the improvements thereon using her own money. Accordingly, respondent sought the dismissal of the
10

petition for dissolution as well as payment for attorney’s fees and litigation expenses.
11

During trial, petitioner testified that while Lots 1, 2142, 5845 and 4 were registered in the name of respondent, these
properties were acquired with the money he received from the Dutch government as his disability benefit since 12

respondent did not have sufficient income to pay for their acquisition. He also claimed that the joint affidavit they
submitted before the Register of Deeds of Dumaguete City was contrary to Article 89 of the Family Code, hence,
invalid.
13

For her part, respondent maintained that the money used for the purchase of the lots came exclusively from her
personal funds, in particular, her earnings from selling jewelry as well as products from Avon, Triumph and
Tupperware. She further asserted that after she filed for annulment of their marriage in 1996, petitioner transferred
14

to their second house and brought along with him certain personal properties, consisting of drills, a welding
machine, grinders, clamps, etc. She alleged that these tools and equipment have a total cost of P500,000.00. 15

The RTC Ruling

On February 28, 2007, the RTC of Negros Oriental, Branch 34 rendered its Decision, dissolving the parties’ conjugal
partnership, awarding all the parcels of land to respondent as her paraphernal properties; the tools and equipment
in favor of petitioner as his exclusive properties; the two (2) houses standing on Lots 1 and 2142 as co-owned by
the parties, the dispositive of which reads:

WHEREFORE, judgment is hereby rendered granting the dissolution of the conjugal partnership of gains between
petitioner Willem Beumer and respondent Avelina Amores considering the fact that their marriage was previously
annulled by Branch 32 of this Court. The parcels of land covered by Transfer Certificate of Titles Nos. 22846, 21974,
21306, 21307, 23567 and 23575 are hereby declared paraphernal properties of respondent Avelina Amores due to
the fact that while these real properties were acquired by onerous title during their marital union, Willem Beumer,
being a foreigner, is not allowed by law to acquire any private land in the Philippines, except through inheritance.

The personal properties, i.e., tools and equipment mentioned in the complaint which were brought out by Willem
from the conjugal dwelling are hereby declared to be exclusively owned by the petitioner.

The two houses standing on the lots covered by Transfer Certificate of Title Nos. 21974 and 22846 are hereby
declared to be co-owned by the petitioner and the respondent since these were acquired during their marital union
and since there is no prohibition on foreigners from owning buildings and residential units. Petitioner and respondent
are, thereby, directed to subject this court for approval their project of partition on the two houses aforementioned.

The Court finds no sufficient justification to award the counterclaim of respondent for attorney’s fees considering the
well settled doctrine that there should be no premium on the right to litigate. The prayer for moral damages are
likewise denied for lack of merit.

No pronouncement as to costs.

SO ORDERED. 16

It ruled that, regardless of the source of funds for the acquisition of Lots 1, 2142, 5845 and 4, petitioner could not
have acquired any right whatsoever over these properties as petitioner still attempted to acquire them
notwithstanding his knowledge of the constitutional prohibition against foreign ownership of private lands. This was
17

made evident by the sworn statements petitioner executed purporting to show that the subject parcels of land were
purchased from the exclusive funds of his wife, the herein respondent. Petitioner’s plea for reimbursement for the
18

amount he had paid to purchase the foregoing properties on the basis of equity was likewise denied for not having
come to court with clean hands.

The CA Ruling

Petitioner elevated the matter to the CA, contesting only the RTC’s award of Lots 1, 2142, 5845 and 4 in favor of
respondent. He insisted that the money used to purchase the foregoing properties came from his own capital funds
and that they were registered in the name of his former wife only because of the constitutional prohibition against
foreign ownership. Thus, he prayed for reimbursement of one-half (1/2) of the value of what he had paid in the
purchase of the said properties, waiving the other half in favor of his estranged ex-wife.
19

On October 8, 2009, the CA promulgated a Decision affirming in toto the judgment rendered by the RTC of Negros
20

Oriental, Branch 34. The CA stressed the fact that petitioner was "well-aware of the constitutional prohibition for
aliens to acquire lands in the Philippines." Hence, he cannot invoke equity to support his claim for reimbursement.
21

Consequently, petitioner filed the instant Petition for Review on Certiorari assailing the CA Decision due to the
following error:

UNDER THE FACTS ESTABLISHED, THE COURT ERRED IN NOT SUSTAINING THE PETITIONER’S ATTEMPT
AT SUBSEQUENTLY ASSERTING OR CLAIMING A RIGHT OF HALF OR WHOLE OF THE PURCHASE PRICE
USED IN THE PURCHASE OF THE REAL PROPERTIES SUBJECT OF THIS CASE. (Emphasis supplied) 22

The Ruling of the Court

The petition lacks merit.

The issue to be resolved is not of first impression. In In Re: Petition For Separation of Property-Elena Buenaventura
Muller v. Helmut Muller the Court had already denied a claim for reimbursement of the value of purchased parcels
23

of Philippine land instituted by a foreigner Helmut Muller, against his former Filipina spouse, Elena Buenaventura
Muller. It held that Helmut Muller cannot seek reimbursement on the ground of equity where it is clear that he
willingly and knowingly bought the property despite the prohibition against foreign ownership of Philippine
land enshrined under Section 7, Article XII of the 1987 Philippine Constitution which reads:
24

Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire or hold lands of the public domain.

Undeniably, petitioner openly admitted that he "is well aware of the above-cited constitutional prohibition" and even
25

asseverated that, because of such prohibition, he and respondent registered the subject properties in the latter’s
name. Clearly, petitioner’s actuations showed his palpable intent to skirt the constitutional prohibition. On the basis
26

of such admission, the Court finds no reason why it should not apply the Muller ruling and accordingly, deny
petitioner’s claim for reimbursement.

As also explained in Muller, the time-honored principle is that he who seeks equity must do equity, and he who
comes into equity must come with clean hands. Conversely stated, he who has done inequity shall not be accorded
equity. Thus, a litigant may be denied relief by a court of equity on the ground that his conduct has been inequitable,
unfair and dishonest, or fraudulent, or deceitful.27

In this case, petitioner’s statements regarding the real source of the funds used to purchase the subject parcels of
land dilute the veracity of his claims: While admitting to have previously executed a joint affidavit that respondent’s
personal funds were used to purchase Lot 1, he likewise claimed that his personal disability funds were used to
28

acquire the same. Evidently, these inconsistencies show his untruthfulness. Thus, as petitioner has come before the
Court with unclean hands, he is now precluded from seeking any equitable refuge.

In any event, the Court cannot, even on the grounds of equity, grant reimbursement to petitioner given that he
acquired no right whatsoever over the subject properties by virtue of its unconstitutional purchase. It is well-
established that equity as a rule will follow the law and will not permit that to be done indirectly which, because of
public policy, cannot be done directly. Surely, a contract that violates the Constitution and the law is null and void,
29

vests no rights, creates no obligations and produces no legal effect at all. Corollary thereto, under Article 1412 of
30

the Civil Code, petitioner cannot have the subject properties deeded to him or allow him to recover the money he
31

had spent for the purchase thereof. The law will not aid either party to an illegal contract or agreement; it leaves the
parties where it finds them. Indeed, one cannot salvage any rights from an unconstitutional transaction knowingly
32

entered into.

Neither can the Court grant petitioner’s claim for reimbursement on the basis of unjust enrichment. As held in
33

Frenzel v. Catito, a case also involving a foreigner seeking monetary reimbursement for money spent on purchase
of Philippine land, the provision on unjust enrichment does not apply if the action is proscribed by the Constitution,
to wit:

Futile, too, is petitioner's reliance on Article 22 of the New Civil Code which reads:

Art. 22. Every person who through an act of performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just or legal ground, shall return the same to him. 1âwphi1

The provision is expressed in the maxim: "MEMO CUM ALTERIUS DETER DETREMENTO PROTEST" (No person
should unjustly enrich himself at the expense of another). An action for recovery of what has been paid without just
cause has been designated as an accion in rem verso. This provision does not apply if, as in this case, the action is
proscribed by the Constitution or by the application of the pari delicto doctrine. It may be unfair and unjust to bar the
petitioner from filing an accion in rem verso over the subject properties, or from recovering the money he paid for the
said properties, but, as Lord Mansfield stated in the early case of Holman v. Johnson: "The objection that a contract
is immoral or illegal as between the plaintiff and the defendant, sounds at all times very ill in the mouth of the
defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of
policy, which the defendant has the advantage of, contrary to the real justice, as between him and the
plaintiff." (Citations omitted)
34

Nor would the denial of his claim amount to an injustice based on his foreign citizenship. Precisely, it is the
35

Constitution itself which demarcates the rights of citizens and non-citizens in owning Philippine land. To be sure, the
constitutional ban against foreigners applies only to ownership of Philippine land and not to the improvements built
thereon, such as the two (2) houses standing on Lots 1 and 2142 which were properly declared to be co-owned by
the parties subject to partition. Needless to state, the purpose of the prohibition is to conserve the national
patrimony and it is this policy which the Court is duty-bound to protect.
36

WHEREFORE, the petition is DENIED. Accordingly, the assailed October 8, 2009 Decision and January 24, 2011
Resolution of the Court of Appeals in CA-G.R. CV No. 01940 are AFFIRMED.

SO ORDERED.

G.R. No. 193747 June 5, 2013

JOSELITO C. BORROMEO, Petitioner,

vs.
JUAN T. MINA, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the April 30, 2010 Decision2 and September 13, 2010
Resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 101185, dismissing petitioner Joselito C. Borromeo’s
petitions which identically prayed for the exemption of his landholding from the coverage of the government’s
Operation Land Transfer (OLT) program as well as the cancellation of respondent Juan T. Mina’s title over the
property subject of the said landholding.

The Facts

Subject of this case is a 1.1057 hectare parcel of agriculture land, situated in Barangay Magsaysay, Naguilian,
Isabela, denominated as Lot No. 5378 and covered by Transfer Certificate of Title (TCT) No. EP-43526, 4 registered
in the name of respondent (subject property). It appears from the foregoing TCT that respondent’s title over the said
property is based on Emancipation Patent No. 393178 issued by the Department of Agrarian Reform (DAR) on May
2, 1990.5

Petitioner filed a Petition dated June 9, 2003 6 before the Provincial Agrarian Reform Office (PARO) of Isabela,
seeking that: (a) his landholding over the subject property (subject landholding) be exempted from the coverage of
the government’s OLT program under Presidential Decree No. 27 dated October 21, 1972 7 (PD 27); and (b)
respondent’s emancipation patent over the subject property be consequently revoked and cancelled. 8 To this end,
petitioner alleged that he purchased the aforesaid property from its previous owner, one Serafin M. Garcia (Garcia),
as evidenced by a deed of sale notarized on February 19, 1982 (1982 deed of sale). For various reasons, however,
he was not able to effect the transfer of title in his name. Subsequently, to his surprise, he learned that an
emancipation patent was issued in respondent’s favor without any notice to him. He equally maintained that his total
agricultural landholdings was only 3.3635 hectares and thus, within the landowner's retention limits under both PD
27 and Republic Act No. 6647, otherwise known as the "Comprehensive Agrarian Reform Law of 1988." In this
regard, he claimed that the subject landholding should have been excluded from the coverage of the government’s
OLT program.9

Petitioner filed a subsequent Petition dated September 1, 2003 10 also with the PARO which contained identical
allegations as those stated in his June 9, 2003 Petition (PARO petitions) and similarly prayed for the cancellation of
respondent’s emancipation patent.

After due investigation, the Municipal Agrarian Reform Officer (MARO) Joey Rolando M. Unblas issued a Report
dated September 29, 2003,11 finding that the subject property was erroneously identified by the same office as the
property of petitioner’s father, the late Cipriano Borromeo. In all actuality, however, the subject property was never
owned by Cipriano Borromeo as its true owner was Garcia – notably, a perennial PD 27 landowner 12– who later sold
the same to petitioner.

Based on these findings, the MARO recommended that: (a) the subject landholding be exempted from the coverage
of the OLT; and (b) petitioner be allowed to withdraw any amortizations deposited by respondent with the Land Bank
of the Philippines (LBP) to serve as rental payments for the latter’s use of the subject property. 13

The Ruling of the PARO

In an undated Resolution, the PARO adopted the recommendation of the MARO and accordingly (a) cancelled
respondent's emancipation patent; (b) directed petitioner to allow respondent to continue in the peaceful possession
and cultivation of the subject property and to execute a leasehold contract over the same pursuant to the provisions
of Republic Act No. 3844 (RA 3844), otherwise known as the "Agricultural Land Reform Code"; and (c) authorized
petitioner to withdraw from the LBP all amortizations deposited by respondent as rental payments for the latter's use
of the said property.14

Aggrieved, respondent filed an administrative appeal to the DAR Regional Director.

The Ruling of the DAR Regional Director

On November 30, 2004, DAR Regional Director Renato R. Navata issued an Order, 15 finding that petitioner, being
the true owner of the subject property, had the right to impugn its coverage from the government’s OLT program.
Further, considering that the subject property was erroneously identified as owned by Cipriano Borromeo, coupled
with the fact that petitioner's total agricultural landholdings was way below the retention limits prescribed under
existing agrarian laws, he declared the subject landholding to be exempt from OLT coverage.

While affirming the PARO's Decision, the DAR Regional Director did not, however, order the cancellation of
respondent’s emancipation patent. He merely directed petitioner to institute the proper proceedings for such
purpose before the DAR Adjudication Board (DARAB).

Consequently, respondent moved for reconsideration,16 challenging petitioner's ownership of the subject property for
lack of sufficient basis to show that his averred predecessor-in-interest, Garcia, was its actual owner. In addition,
respondent pointed out that petitioner never filed a protest against the issuance of an emancipation patent in his
favor. Hence, petitioner should be deemed to have slept on his rights on account of his inaction for 21 years.

The aforesaid motion was, however, denied in the Resolution dated February 10, 2006, 17 prompting respondent to
elevate the matter to the DAR Secretary.

The Ruling of the DAR Secretary

On September 12, 2007, then DAR Secretary Nasser C. Pagandaman issued DARCO Order No. EXC-0709-333,
series of 2007,18 affirming in toto the DAR Regional Director’s ruling. It upheld the latter’s findings that the subject
landholding was improperly placed under the coverage of the government’s OLT program on account of the
erroneous identification of the landowner,19 considering as well the fact that petitioner’s total agricultural
landholdings, i.e., 3.3635 hectares, was way below the retention limits under existing agrarian laws. 20

Undaunted, respondent filed a petition for review with the CA.

The Ruling of the CA

In a Decision dated April 30, 2010,21 the CA reversed and set aside the DAR Secretary's ruling. It doubted
petitioner’s claim of ownership based on the 1982 deed of sale due to the inconsistent allegations regarding the
dates of its notarization divergently stated in the two (2) PARO Petitions, this alongside the fact that a copy of the
same was not even attached to the records of the case for its examination. In any case, the CA found the said sale
to be null and void for being a prohibited transaction under PD 27 which forbids the transfers or alienation of
covered agricultural lands after October 21, 1972 except to the tenant-beneficiaries thereof, of which petitioner was
not.22 It also held23 that petitioner cannot mount any collateral attack against respondent’s title to the subject property
as the same is prohibited under Section 48 of the Presidential Decree No. 1529 (PD 1529), otherwise known as the
"Property Registration Decree."

Petitioner moved for reconsideration which was, however, denied in a Resolution dated September 13, 2010. 24

Hence, this petition.

The Petition

Petitioner contends that the CA erred in declaring the sale between him and Garcia as null and void. In this
connection, he avers that there was actually an oral sale entered into by him and Garcia (through his son Lorenzo
Garcia) in 1976. The said oral sale was consummated on the same year as petitioner had already occupied and
tilled the subject property and started paying real estate taxes thereon. He further alleges that he allowed
respondent to cultivate and possess the subject property in 1976 only out of mercy and compassion since the latter
begged him for work. The existing sale agreement had been merely formalized by virtue of the 1982 deed of sale
which in fact, expressly provided that the subject property was not tenanted and that the provisions of law on pre-
emption had been complied with.25 In this regard, petitioner claims that respondent cannot be considered as a tenant
and as such, the issuance of an emancipation patent in his favor was erroneous. Likewise, petitioner claims that his
right to due process was violated by the issuance of the aforesaid emancipation patent without any notice on his
part.

In his Comment,26 respondent counters that petitioner cannot change his theory regarding the date of sale between
him and Garcia nor even raise the same factual issue on appeal before the Court. 27 Moreover, he asserts that the
1982 deed of sale was not registered and therefore, does not bind him. In any event, he posits that the sale
between petitioner and Garcia was null and void.28 Finally, he argues that petitioner’s PARO petitions constitute
collateral attacks to his title to the subject property which are disallowed under PD 1529. 29

The Court's Ruling

The petition lacks merit.

A. Petitioner’s change of theory on appeal

The Court first resolves the procedural matter.

Settled is the rule that a party who adopts a certain theory upon which the case is tried and decided by the lower
courts or tribunals will not be permitted to change his theory on appeal, 30 not because of the strict application of
procedural rules, but as a matter of fairness. 31 Basic considerations of due process dictate that theories, issues and
arguments not brought to the attention of the trial court would not ordinarily be considered by a reviewing
court,32 except when their factual bases would not require presentation of any further evidence by the adverse party
in order to enable him to properly meet the issue raised, 33 such as when the factual bases of such novel theory,
issue or argument is (a) subject of judicial notice; or (b) had already been judicially admitted, 34 which do not obtain in
this case.

Records show that petitioner changed his theory on appeal with respect to two (2) matters:

First, the actual basis of his ownership rights over the subject property, wherein he now claims that his ownership
was actually based on a certain oral sale in 1976 which was merely formalized by the 1982 deed of sale; 35 and

Second, the status of respondent as tenant of the subject property, which he never questioned during the earlier
stages of the proceedings before the DAR but presently disputes before the Court.

Clearly, the factual bases of the foregoing theories require the presentation of proof as neither of them had been
judicially admitted by respondent nor subject of judicial notice. Therefore, the Court cannot entertain petitioner’s
novel arguments raised in the instant petition. Accordingly, he must rely on his previous positions that (a) his basis
of ownership over the subject property rests on the 1982 deed of sale; and (b) that respondent’s status as the tenant
of the subject property remains undisputed.

Having settled the foregoing procedural issue, the Court now proceeds to resolve the substantive issue in this case.

B. Validity of the sale of the

subject property to petitioner

PD 27 prohibits the transfer of ownership over tenanted rice and/or corn lands after October 21, 1972 except only in
favor of the actual tenanttillers thereon. As held in the case of Sta. Monica Industrial and Development Corporation
v. DAR Regional Director for Region III,36 citing Heirs of Batongbacal v. CA:37

x x x P.D. No. 27, as amended, forbids the transfer or alienation of covered agricultural lands after October 21, 1972
except to the tenant-beneficiary. x x x.

In Heirs of Batongbacal v. Court of Appeals, involving the similar issue of sale of a covered agricultural land under
P.D. No. 27, this Court held:

Clearly, therefore, Philbanking committed breach of obligation as an agricultural lessor. As the records show,
1âwphi1

private respondent was not informed about the sale between Philbanking and petitioner, and neither was he privy to
the transfer of ownership from Juana Luciano to Philbanking. As an agricultural lessee, the law gives him the right to
be informed about matters affecting the land he tills, without need for him to inquire about it.

xxxx

In other words, transfer of ownership over tenanted rice and/or corn lands after October 21, 1972 is allowed only in
favor of the actual tenant-tillers thereon. Hence, the sale executed by Philbanking on January 11, 1985 in favor of
petitioner was in violation of the aforequoted provision of P.D. 27 and its implementing guidelines, and must thus be
declared null and void. (Emphasis and underscoring supplied)

Records reveal that the subject landholding fell under the coverage of PD 27 on October 21, 1972 38 and as such,
could have been subsequently sold only to the tenant thereof, i.e., the respondent. Notably, the status of respondent
as tenant is now beyond dispute considering petitioner’s admission of such fact. 39 Likewise, as earlier discussed,
petitioner is tied down to his initial theory that his claim of ownership over the subject property was based on the
1982 deed of sale. Therefore, as Garcia sold the property in 1982 to the petitioner who is evidently not the tenant-
beneficiary of the same, the said transaction is null and void for being contrary to law. 40

In consequence, petitioner cannot assert any right over the subject landholding, such as his present claim for
landholding exemption, because his title springs from a null and void source. A void contract is equivalent to
nothing; it produces no civil effect; and it does not create, modify or extinguish a juridical relation. 41 Hence,
notwithstanding the erroneous identification of the subject landholding by the MARO as owned by Cipriano
Borromeo, the fact remains that petitioner had no right to file a petition for landholding exemption since the sale of
the said property to him by Garcia in 1982 is null and void. Proceeding from this, the finding that petitioner’s total
agricultural landholdings is way below the retention limits set forth by law thus, becomes irrelevant to his claim for
landholding exemption precisely because he has no right over the aforementioned landholding.

In view of the foregoing disquisition, the Court sees no reason to delve on the issue regarding the cancellation of
respondent’s emancipation patent, without prejudice to petitioner’s right to raise his other claims and objections
thereto through the appropriate action filed before the proper forum. 42

WHEREFORE, the petition is DENIED. The assailed April 30, 2010 Decision and September 13, 2010 Resolution of
the Court of Appeals in CA-G.R. SP No. 101185 are hereby AFFIRMED.

SO ORDERED.
G.R. Nos. 162335 & 162605 December 12, 2005

SEVERINO M. MANOTOK IV, FROILAN M. MANOTOK, FERNANDO M. MANOTOK, FAUSTO MANOTOK III,
MA. MAMERTA M. MANOTOK, PATRICIA L. TIONGSON, PACITA L. GO, ROBERTO LAPERAL III, MICHAEL
MARSHALL V. MANOTOK, MARY ANN MANOTOK, FELISA MYLENE V. MANOTOK, IGNACIO MANOTOK,
JR., MILAGROS V. MANOTOK, SEVERINO MANOTOK III, ROSA R. MANOTOK, MIGUEL A.B. SISON,
GEORGE M. BOCANEGRA, MA. CRISTINA E. SISON, PHILIPP L. MANOTOK, JOSE CLEMENTE L.
MANOTOK, RAMON SEVERINO L. MANOTOK, THELMA R. MANOTOK, JOSE MARIA MANOTOK, JESUS
JUDE MANOTOK, JR. and MA. THERESA L. MANOTOK, represented by their Attorney-in-fact, Rosa R.
Manotok, Petitioners,
vs.
HEIRS OF HOMER L. BARQUE, represented by TERESITA BARQUE HERNANDEZ, Respondents.

DECISION

YNARES-SANTIAGO, J.:

These consolidated petitions for review assail, in G.R. No. 162335, the February 24, 2004 Amended Decision of the
1

Third Division of the Court of Appeals in CA-G.R. SP No. 66642, ordering the Register of Deeds of Quezon City to
cancel petitioners’ TCT No. RT-22481 and directing the Land Registration Authority (LRA) to reconstitute
respondents’ TCT No. 210177; and in G.R. No. 162605, the November 7, 2003 Amended Decision of the Special
2

Division of Five of the Former Second Division in CA-G.R. SP No. 66700 directing the Register of Deeds of Quezon
City to cancel petitioners’ TCT No. RT-22481, and the LRA to reconstitute respondents’ TCT No. T-210177 and the
March 12, 2004 Resolution denying the motion for reconsideration.
3

The facts as found by the Court of Appeals are as follows:

4

Petitioners, (respondents herein) as the surviving heirs of the late Homer Barque, filed a petition with the LRA for
administrative reconstitution of the original copy of TCT No. 210177 issued in the name of Homer L. Barque, which
was destroyed in the fire that gutted the Quezon City Hall, including the Office of the Register of Deeds of Quezon
City, sometime in 1988. In support of the petition, petitioners submitted the owner’s duplicate copy of TCT No.
210177, real estate tax receipts, tax declarations and the Plan FLS 3168 D covering the property.

Upon being notified of the petition for administrative reconstitution, private respondents (petitioners herein) filed their
opposition thereto claiming that the lot covered by the title under reconstitution forms part of the land covered by
their reconstituted title TCT No. RT-22481, and alleging that TCT No. 210177 in the name of petitioners’
predecessors-in-interest is spurious.

On June 30, 1997, Atty. Benjamin M. Bustos, as reconstituting officer, denied the reconstitution of TCT No.
210177 on grounds that:
5

1. Lots 823-A and 823-B, Fls-3168-D, containing areas of 171,473 Sq. Mtrs. and 171,472 Sq. Mtrs., respectively,
covered by TCT No. 210177, appear to duplicate Lot 823 Piedad Estate, containing an area of 342,945 Sq. Mtrs.,
covered by TCT No. 372302 registered in the name of Severino M. Manotok, et. al., reconstituted under Adm.
Reconstitution No. Q-213 dated February 01, 1991;

2. The submitted plan Fls-3168-D is a spurious document as categorically stated by Engr. Privadi J.G. Dalire, Chief,
Geodetic Surveys Division, Land Management Bureau, in his letter dated February 19, 1997. 6

Respondents’ motion for reconsideration was denied in an order dated February 10, 1998 hence they appealed to
7

the LRA.

The LRA ruled that the reconstituting officer should not have required the submission of documents other than the
owner’s duplicate certificate of title as bases in denying the petition and should have confined himself with the
owner’s duplicate certificate of title. The LRA further declared:
8

Based on the documents presented, petitioners have established by clear and convincing evidence that TCT NO.
210177 was, at the time of the destruction thereof, valid, genuine, authentic and effective. Petitioners duly presented
the original of the owner’s duplicate copy of TCT No. 210177 .... The logbook of the Register of Deeds of Quezon
City lists TCT No. 210177 as among the titles lost .... The Register of Deeds of Quezon City himself acknowledged
the existence and authenticity of TCT No. 210177 when he issued a certification to the effect that TCT No. 210177
was one of the titles destroyed and not salvaged from the fire that gutted the Quezon City Hall on 11 June 1988 ....

It is likewise noteworthy that the technical description and boundaries of the lot reflected in TCT No. 210177
absolutely conform to the technical description and boundaries of Lot 823 Piedad Estate ... as indicated in the B. L.
Form No. 28-37-R dated 11-8-94 and B. L. Form No. 31-10 duly issued by the Bureau of Lands ....

It therefore becomes evident that the existence, validity, authenticity and effectivity of TCT No. 210177 was
established indubitably and irrefutably by the petitioners. Under such circumstances, the reconstitution thereof
should be given due course and the same is mandatory. 9

….

It would be necessary to underscore that the certified copy of Plan FLS 3168 D was duly issued by the office of
Engr. Ernesto Erive, Chief, Surveys Division LMS-DENR-NCR whose office is the lawful repository of survey plans
for lots situated within the National Capital Region including the property in question. Said plan was duly signed by
the custodian thereof, Carmelito Soriano, Chief Technical Records and Statistics Section, DENR-NCR. Said plan is
likewise duly supported by Republic of the Philippines Official Receipt No. 2513818 Q dated 9-23-96 .... Engr. Erive
in his letter dated 28 November 1996 addressed to Atty. Bustos … confirmed that a microfilm copy of Plan FLS
3168D is on file in the Technical Records and Statistics Section of his office. Engr. Dalire, in his letter dated 2
January 1997 addressed to Atty. Bustos even confirmed the existence and authenticity of said plan. …

.…

The claim of Engr. Dalire in his letter dated 19 February 1997 that his office has no records or information about
Plan FLS 3168-D is belied by the certified copy of the computer print-out duly issued by the Bureau of Lands
indicating therein that FLS 3168D is duly entered into the microfilm records of the Bureau of Lands and has been
assigned Accession Number 410436 appearing on Page 79, Preliminary Report No. 1, List of Locator Cards and
Box Number 0400 and said computer print-out is duly supported by an Offical Receipt ….

The said Plan FLS 3168D is indeed authentic and valid coming as it does from the legal repository and duly signed
by the custodian thereof. The documentary evidence presented is much too overwhelming to be simply brushed
aside and be defeated by the fabricated statements and concoctions made by Engr. Dalire in his 19 February 1997
letter. … 10
Nevertheless, notwithstanding its conclusion that petitioners’ title was fraudulently reconstituted, the LRA noted that
it is only the Regional Trial Court (RTC) which can declare that the same was indeed fraudulently reconstituted. It
thus opined that respondents’ title may only be reconstituted after a judicial declaration that petitioners’ title was void
and should therefore be cancelled. 11

The dispositive portion of the LRA’s decision reads:

WHEREFORE, in view of the foregoing, it is hereby ordered that reconstitution of TCT No. 210177 in the name of
Homer L. Barque, Sr. shall be given due course after cancellation of TCT No. RT-22481 (372302) in the name of
Manotoks upon order of a court of competent jurisdiction.

SO ORDERED. 12

Petitioners’ filed a motion for reconsideration which was opposed by respondents with a prayer that reconstitution
be ordered immediately.

On June 14, 2001, petitioners’ motion for reconsideration and respondents’ prayer for immediate reconstitution were
denied.13

From the foregoing, respondents filed a petition for review with the Court of Appeals docketed as CA-G.R. SP No.
14

66700 and praying that the LRA be directed to immediately reconstitute TCT No. 210177 without being subjected to
the condition that petitioners’ TCT No. RT-22481 [372302] should first be cancelled by a court of competent
jurisdiction. Petitioners likewise filed a petition for review with the Court of Appeals docketed as CA-G.R. SP No.
15

66642.

In CA-G.R. SP No. 66700, the Second Division of the Court of Appeals rendered a Decision on September 13,
16

2002, the dispositive portion of which reads:

WHEREFORE, the foregoing premises considered the assailed Resolution of the LRA dated June 24, 1998 is
AFFIRMED in toto and the petition for review is ordered DISMISSED. No pronouncement as to costs.

SO ORDERED. 17

Respondents moved for reconsideration. On November 7, 2003, the Special Division of Five of the Former Second
18

Division rendered an Amended Decision in CA-G.R. SP No. 66700, the dispositive portion of which reads:

WHEREFORE, our decision dated 13 September 2002 is hereby reconsidered. Accordingly, the Register of Deeds
of Quezon City is hereby directed to cancel TCT No. RT-22481 of private respondents and the LRA is hereby
directed to reconstitute forthwith petitioners’ valid, genuine and existing Certificate of Title No. T-210177.

No pronouncement as to costs.

SO ORDERED. 19

Petitioners’ motion for reconsideration of the amended decision in CA-G.R. SP No. 66700 was denied, hence, this
20

petition docketed as G.R. No. 162605.

Meanwhile, in CA-G.R. SP No. 66642, the Third Division of the Court of Appeals rendered a Decision on October21

29, 2003, the dispositive portion of which reads:

WHEREFORE, the petition is hereby DENIED. The Resolution of the LRA dated 24 June 1998 is hereby
AFFIRMED.

SO ORDERED. 22

In so ruling, the Third Division of the Court of Appeals declared that the LRA correctly deferred in giving due course
to the petition for reconstitution since there is yet no final judgment upholding or annulling respondents’ title. 23

Respondents’ motion for reconsideration was granted by the Third Division of the Court of Appeals on February 24,
2004, thus:

WHEREFORE, the Motion for Reconsideration is hereby GRANTED. The Decision of this Court dated 29 October
2003 is RECONSIDERED and a new one is entered ordering the Register of Deeds of Quezon City to cancel
petitioners’ TCT No. RT-22481 and directing the LRA to reconstitute forthwith respondents’ TCT No. T-210177.
SO ORDERED. 24

From the foregoing decisions of the Court of Appeals in CA-G.R. SP No. 66700 and CA-G.R. SP No. 66642,
petitioners filed separate petitions for review before this Court docketed as G.R. No. 162605 and G.R. No. 162335,
respectively.

In G.R. No. 162605, petitioners argue that:

THE MAJORITY JUSTICES ACTED WITHOUT JURISDICTION IN ORDERING THE CANCELLATION OF

PETITIONERS’ EXISTING TITLE, CONSIDERING THAT:

a. THEY ORDERED THE CANCELLATION OF TITLE DESPITE THE FACT THAT THE SAME IS NOT PART OF
THE RELIEF SOUGHT IN A RECONSTITUTION PROCEEDINGS.

b. THEY ALLOWED A COLLATERAL ATTACK ON A TORRENS CERTIFICATE OF TITLE; and

c. THE COURT OF APPEALS, IN RESOLVING AN APPEAL OF THE DECISION OF THE LAND REGISTRATION
AUTHORITY, DOES NOT HAVE JURISDICTION TO ORDER THE CANCELLATION OF TITLE, SINCE ONLY A
PROPER REGIONAL TRIAL COURT CAN ORDER THE ANNULMENT/CANCELLATION OF A TORRENS TITLE.
BY ALLOWING A "SHORT CUT", THE MAJORITY JUSTICES DEPRIVED THE PETITIONERS OF THEIR
PROPERTY AND THEIR CONSTITUTIONALLY PROTECTED RIGHT TO DUE PROCESS OF LAW.

II

THE MAJORITY JUSTICES GRAVELY MISAPPLIED THE RULING OF THIS HONORABLE COURT IN ORTIGAS
V. VELASCO, CONSIDERING THAT:

a. IN THE ORTIGAS CASE, THERE WERE TWO TITLES EXISTING OVER THE SAME PARCEL OF LAND, AS A
RESULT OF THE RECONSTITUTED TITLE ISSUED IN THE NAME OF MOLINA. IN THE INSTANT CASE, ONLY
PETITIONERS HOLD TITLE TO THE PROPERTY IN QUESTION, AS RESPONDENTS ARE MERELY TRYING
TO HAVE TITLE RECONSTITUTED IN THEIR NAMES.

b. IN ORTIGAS, THERE WERE SEVERAL DECISIONS OF THE SUPREME COURT WHICH PREVIOUSLY
RESOLVED THE ISSUE OF OWNERSHIP OF ORTIGAS’ PROPERTY. HENCE, THERE WAS SUFFICIENT
GROUND TO ANNUL MOLINA’S TITLE OUTRIGHT. IN THE INSTANT CASE, THERE ARE NO SUCH
DECISIONS IN FAVOR OF RESPONDENTS WHICH WOULD JUSTIFY THE CANCELLATION OF THE TITLE OF
PETITIONERS WITHOUT ANY HEARING. 25

In G.R. No. 162335, petitioners raise the following issues:

I. THE HONORABLE COURT OF APPEALS (THIRD DIVISION) COMMITTED GRAVE ABUSE OF DISCRETION
AND GROSS IGNORANCE OF THE LAW IN ORDERING THE LAND REGISTRATION AUTHORITY TO CANCEL
TCT NO. RT-22481 OF PETITIONERS MANOTOK NOTWITHSTANDING THE FACT THAT SAID COURT WAS
FULLY COGNIZANT THAT IT HAS NO JURISDICTION TO EXERCISE SUCH AUTHORITY AND POWER AND
THE LAND REGISTRATION AUTHORITY IS EQUALLY DEVOID OF JURISDICTION ON THE MATTER
BECAUSE UNDER THE JUDICIARY REORGANIZATION ACT OF 1980 SPECIFICALLY SECTION 19 (2)
THEREOF, ONLY THE REGIONAL TRIAL COURTS HAVE EXCLUSIVE ORIGINAL JURISDICTION OVER CIVIL
ACTIONS WHICH INVOLVES TITLE TO, OR POSSESSION OF, REAL PROPERTY, OR ANY INTEREST
THEREIN.

II. THE HONORABLE COURT OF APPEALS (THIRD DIVISION) COMMITTED GRAVE ABUSE OF DISCRETION
AND GROSS IGNORANCE OF THE LAW IN INVOKING EQUITABLE CONSIDERATION TO JUSTIFY ITS
CHALLENGED AMENDED DECISION DATED FEBRUARY 24, 2004 DIRECTING LRA TO CANCEL
PETITIONERS MANOTOK’S TITLE NOTWITHSTANDING THE FACT, AS STATED, THE LAW EXPLICITLY
VESTS EXCLUSIVE ORIGINAL JURISDICTION TO THE REGIONAL TRIAL COURTS OVER CIVIL ACTIONS
WHICH INVOLVES TITLE TO, OR POSSESSION OF, REAL PROPERTY, OR ANY INTEREST THEREIN.

III. THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR IN EXCESS OF JURISDICTION IN FAILING TO ORDER THE SETTING ASIDE OF THE CHALLENGED
RESOLUTION DATED JUNE 24, 1998 OF RESPONDENT LAND REGISTRATION AUTHORITY IN LRC ADMIN.
CASE NO. Q-547 [97] VIEWED FROM THE FACT THAT SAID RESOLUTION OF LRA IS PATENTLY AT WAR
WITH LAW AND CONTROLLING JURISPRUDENCE THAT PROHIBITS RECONSTITUTION OF TITLE BY THIRD
PARTY ALLEGED TO HAVE BEEN LOST OR DESTROYED IF ANOTHER VALID TITLE IS EXISTING COVERING
THE LAND SUBJECT THEREOF.
IV. THE LRA COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR IN EXCESS OF
JURISDICTION IN ORDERING THE RECONSTITUTION OF THE TITLE OF HOMER BARQUE, SR. SUBJECT
ONLY TO THE CONDITION THAT THE TITLE OF PETITIONERS MANOTOK SHOULD FIRST BE ORDERED
CANCELLED BY COURT OF COMPETENT JURISDICTION IN THE FACE OF THE GLARING FACTS THAT SAID
TITLE IS HIGHLY SUSPECT AND BEARS BADGES OF FABRICATION AND FALSIFICATION AND THEREFORE
NO OTHER LOGICAL AND CREDIBLE CONCLUSION CAN BE DRAWN EXCEPT THAT IT IS A FAKE AND
SPURIOUS TITLE.

V. THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO

LACK OF IN EXCESS OF JURISDICTION IN ALLOWING RESPONDENTS’ MOTION FOR RECONSIDERATION
WHICH WAS CLEARLY FILED OUT OF TIME. 26

On August 2, 2004, the petition in G.R. No. 162605 was consolidated with the petition in G.R. No. 162335. 27

In sum, petitioners contend that (a) the LRA has no authority to annul their title; (b) the reconstitution of
respondents’ Torrens title would be a collateral attack on petitioners’ existing title; (c) they were not given the
opportunity to be heard, specifically the chance to defend the validity of their Torrens title; (d) the Court of Appeals,
in resolving the appeal from the LRA, has no jurisdiction to order the cancellation of petitioners’ title; and (e) the
ruling in Ortigas was misapplied.

The petitions must be denied.

The LRA properly ruled that the reconstituting officer should have confined himself to the owner’s duplicate
certificate of title prior to the reconstitution. Section 3 of Republic Act (RA) No. 26 clearly provides:
28

Section 3. Transfer certificates of title shall be reconstituted from such of the sources hereunder enumerated as may
be available, in the following order:

(a) The owner’s duplicate of the certificate of title;

....

When respondents filed the petition for reconstitution, they submitted in support thereof the owner’s duplicate
certificate of title, real estate tax receipts and tax declaration. Plainly, the same should have more than sufficed as
sources for the reconstitution pursuant to Section 3 of RA No. 26 which explicitly mandates that the reconstitution
shall be made following the hierarchy of sources as enumerated by law. In addition, Section 12 of the same law
requires that the petition shall be accompanied with a plan and technical description of the property only if the
source of the reconstitution is Section 3(f) of RA No. 26. Thus:

Section 12. … Provided, That in case the reconstitution is to be made exclusively from sources enumerated in
section 2(f) or 3(f) of this Act, the petition shall further be accompanied with a plan and technical description of the
property duly approved by the Chief of the General Land Registration Office, or with a certified copy of the
description taken from a prior certificate of title covering the same property.29

Since respondents’ source of reconstitution is the owner’s duplicate certificate of title, there is no need for the
reconstituting officer to require the submission of the plan, much less deny the petition on the ground that the
submitted plan appears to be spurious. By enumerating the hierarchy of sources to be used for the reconstitution, it
is the intent of the law to give more weight and preference to the owner’s duplicate certificate of title over the other
enumerated sources.

The factual finding of the LRA that respondents’ title is authentic, genuine, valid, and existing, while petitioners’ title
is sham and spurious, as affirmed by the two divisions of the Court of Appeals, is conclusive before this Court. It
should remain undisturbed since only questions of law may be raised in a petition for review under Rule 45 of the
Rules of Court.

Findings of fact of administrative bodies are accorded respect, even finality by this Court and, when affirmed by the
Court of Appeals, are no longer reviewable except only for very compelling reasons. Basic is the rule that factual
findings of agencies exercising quasi-judicial functions … are accorded not only respect but even finality, aside from
the consideration that this Court is essentially not a trier of facts.
30

Such questions as whether certain items of evidence should be accorded probative value or weight, or rejected as
feeble or spurious, or whether or not the proofs on one side or the other are clear and convincing and adequate to
establish a proposition in issue, are without doubt questions of fact. Whether or not the body of proofs presented by
a party, weighed and analyzed in relation to contrary evidence submitted by adverse party, may be said to be
strong, clear and convincing; whether or not certain documents presented by one side should be accorded full faith
and credit in the face of protests as to their spurious character by the other side; whether or not inconsistencies in
the body of proofs of a party are of such gravity as to justify refusing to give said proofs weight – all these are issues
of fact. Questions like these are not reviewable by this court which, as a rule, confines its review of cases decided
by the Court of Appeals only to questions of law raised in the petition and therein distinctly set forth. A petition for
31

review should only cover questions of law. Questions of fact are not reviewable. 32

In Dolfo v. Register of Deeds for the Province of Cavite, this Court categorically declared:
33

Second. Both the trial court and the Court of Appeals made a factual finding that petitioner’s title to the land is of
doubtful authenticity.

Having jurisdiction only to resolve questions of law, this Court is bound by the factual findings of the trial court and
the Court of Appeals....

In view of the foregoing, it is no longer necessary to remand the case to the RTC for the determination of which title,
petitioners' or respondents', is valid or spurious. This has been ruled upon by the LRA and duly affirmed by the two
divisions of the Court of Appeals.

The LRA has the jurisdiction to act on petitions for administrative reconstitution. It has the authority to review, revise,
reverse, modify or affirm on appeal the decision of the reconstituting officer. The function is adjudicatory in nature –
it can properly deliberate on the validity of the titles submitted for reconstitution. Logically, it can declare a title as
sham or spurious, or valid on its face. Otherwise, if it cannot make such declaration, then there would be no basis
for its decision to grant or deny the reconstitution. The findings of fact of the LRA, when supported by substantial
evidence, as in this case, shall be binding on the Court of Appeals. 34

In the reconstitution proceedings, the LRA is bound to determine from the evidence submitted which between or
among the titles is genuine and existing to enable it to decide whether to deny or approve the petition. Without such
authority, the LRA would be a mere robotic agency clothed only with mechanical powers.

The Court of Appeals also properly exercised its appellate jurisdiction over the judgment of the LRA. Under Sections
1 and 3, Rule 43 of the Rules of Court, the appellate court has jurisdiction on appeals from judgments or final orders
of the LRA, whether the appeal involves questions of fact, of law, or mixed questions of fact and law.

Indeed, it would be needlessly circuitous to remand the case to the RTC to determine anew which of the two titles is
sham or spurious and thereafter appeal the trial court’s ruling to the Court of Appeals. After all, the LRA and the two
divisions of the appellate court have already declared that petitioners’ title is forged. In Mendoza v. Court of
Appeals, we ruled that:
35

Now, technically, the revocation and cancellation of the deed of sale and the title issued in virtue thereof in de los
Santos’ favor should be had in appropriate proceedings to be initiated at the instance of the Government. However,
since all the facts are now before this Court, and it is not within de los Santos’ power in any case to alter
those facts at any other proceeding, or the verdict made inevitable by said facts, for this Court to direct at
this time that cancellation proceedings be yet filed to nullify the sale to de los Santos and his title, would be
needlessly circuitous and would unnecessarily delay the termination of the controversy at bar, .... This
Court will therefore make the adjudication entailed by the facts here and now, without further proceedings,
as it has done in other cases in similar premises.

No useful purpose will be served if a case or the determination of an issue in a case is remanded to the trial court
only to have its decision raised again to the Court of Appeals and then to the Supreme Court. The remand of the
case or of an issue to the lower court for further reception of evidence is not necessary where the Court is in position
to resolve the dispute based on the records before it and particularly where the ends of justice would not be
subserved by the remand thereof. 36

The Register of Deeds, the LRA and the Court of Appeals have jurisdiction to act on the petition for administrative
reconstitution. The doctrine laid down in Alabang Dev. Corp., et al. v. Hon. Valenzuela, etc., et al. does not apply in
37

the instant case. In Alabang, the Court stressed that:

… [L]ands already covered by duly issued existing Torrens Titles … cannot be the subject of petitions
for reconstitution of allegedly lost or destroyed titles filed by third parties without first securing by final judgment
the cancellation of such existing titles. … The courts simply have no jurisdiction over petitions by such third
parties for reconstitution of allegedly lost or destroyed titles over lands that are already covered by duly issued
subsisting titles in the names of their duly registered owners. The very concept of stability and indefeasibility of titles
covered under the Torrens System of registration rules out as anathema the issuance of two certificates of title over
the same land to two different holders thereof. … 38

The Alabang ruling was premised on the fact that the existing Torrens title was duly issued and that there is only
one title subsisting at the time the petition for reconstitution was filed. In the instant case, it cannot be said that
petitioners’ title was duly issued much less could it be presumed valid considering the findings of the LRA and the
Court of Appeals that the same is sham and spurious.

The Court of Appeals properly applied the doctrine laid down in Ortigas in refusing to remand the case to the trial
court. As expressly declared in Ortigas & Company Limited Partnership v. Velasco: 39

Ordinarily, the relief indicated by the material facts would be the remand of the reconstitution case (LRC No. Q-
5405) to the Court of origin with instructions that Ortigas’ and the Solicitor General’s appeals from the judgment
rendered therein, which were wrongly disallowed, be given due course and the records forthwith transmitted to the
appellate tribunal. This, in fact, is a relief alternatively prayed for by petitioner Ortigas. Considering however the fatal
infirmities afflicting Molina’s theory or cause of action, evident from the records before this Court, such a remand
and subsequent appeal proceedings would be pointless and unduly circuitous. Upon the facts, it is not possible for
Molina’s cause to prosper. To defer adjudication thereon would be unwarranted and unjust.

The same rationale should apply in the instant case. As already discussed, the validity of respondents’ and
petitioners’ title have been squarely passed upon by the LRA and reviewed and affirmed by the Court of Appeals,
which factual findings are no longer reviewable by this Court.

A careful examination of the case of Spouses Cayetano, et al. v. CA, et al., where this Court, as claimed by
40

petitioners, have affirmed their title over the disputed property, would reveal that the sole issue resolved therein is
whether or not a tenancy relationship exists between the parties. There was no adjudication on ownership. In fact, it
41

cannot even be discerned if the property subject of the Spouses Cayetano case refers to the property subject of the
instant controversy.

There is no basis in the allegation that petitioners were deprived of "their property" without due process of law when
the Court of Appeals ordered the cancellation of their Torrens title, even without a direct proceeding in the RTC. As
already discussed, there is no need to remand the case to the RTC for a re-determination on the validity of the titles
of respondents and petitioners as the same has been squarely passed upon by the LRA and affirmed by the
appellate court. By opposing the petition for reconstitution and submitting their administratively reconstituted title,
petitioners acquiesced to the authority and jurisdiction of the reconstituting officer, the LRA and the Court of
Appeals, and recognized their authority to pass judgment on their title. All the evidence presented was duly
considered by these tribunals. There is thus no basis to petitioners’ claim that they were deprived of their right to be
heard and present evidence, which is the essence of due process.

As held in Yusingco v. Ong Hing Lian: 42

Therefore, it appearing from the records that in the previous petition for reconstitution of certificates of title, the
parties acquiesced in submitting the issue of ownership for determination in the said petition, and they were given
the full opportunity to present their respective sides of the issues and evidence in support thereof, and that the
evidence presented was sufficient and adequate for rendering a proper decision upon the issue, the adjudication of
the issue of ownership was valid and binding.

The reconstitution would not constitute a collateral attack on petitioners’ title which was irregularly and illegally
issued in the first place. As pertinently held in Dolfo v. Register of Deeds for the Province of Cavite:
43 44

The rule that a title issued under the Torrens System is presumed valid and, hence, is the best proof of ownership of
a piece of land does not apply where the certificate itself is faulty as to its purported origin.

In this case, petitioner anchors her arguments on the premise that her title to the subject property is indefeasible
because of the presumption that her certificate of title is authentic. However, this presumption is overcome by the
evidence presented, consisting of the LRA report … that TCT No. T-320601 was issued without legal basis …

….

Thus, petitioner cannot invoke the indefeasibility of her certificate of title. It bears emphasis that the Torrens system
does not create or vest title but only confirms and records one already existing and vested. Thus, while it may be
true, as petitioner argues, that a land registration court has no jurisdiction over parcels of land already covered by a
certificate of title, it is equally true that this rule applies only where there exists no serious controversy as to the
authenticity of the certificate.

Under similar circumstances, this Court has ruled that wrongly reconstituted certificates of title secured through
fraud and misrepresentation cannot be the source of legitimate rights and benefits. 45

WHEREFORE, the petitions are DENIED. In G.R. No. 162335, the February 24, 2004 Amended Decision of the
Third Division of the Court of Appeals in CA-G.R. SP No. 66642, ordering the Register of Deeds of Quezon City to
cancel petitioners’ TCT No. RT-22481 and directing the Land Registration Authority to reconstitute respondents’
TCT No. 210177; and in G.R. No. 162605, the November 7, 2003 Amended Decision of the Special Division of Five
of the Former Second Division in CA-G.R. SP No. 66700 directing the Register of Deeds of Quezon City to cancel
petitioners’ TCT No. RT-22481, and the Land Registration Authority to reconstitute respondents’ TCT No. T-210177
and the March 12, 2004 Resolution denying the motion for reconsideration, are AFFIRMED.

SO ORDERED.

G.R. No. 183444 February 8, 2012

DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, Petitioner,

vs.
RONALDO E. QUIWA, doing business under the name "R.E.Q. Construction," EFREN N. RIGOR, doing
business under the name "Chiara Construction," ROMEO R. DIMATULAC, doing business under the name
"Ardy Construction," and FELICITAS C. SUMERA, doing business under the name "F.C.S. Construction,"
represented by her attorney-in-fact ROMEO M. DE LEON, Respondents.

RESOLUTION

SERENO, J.:

Assailed in this Motion for Partial Reconsideration dated 8 November 2011 filed by petitioner Department of Public
Works and Highways (DPWH) is the 12 October 2011 Decision of the Court, primarily affirming the trial and the
appellate courts’ judgments in favor of respondents’ entitlement to compensation.

To recall, after the Mt. Pinatubo tragedy in 1991, DPWH engaged a number of contractors, including the
respondents, for the urgent rehabilitation of the affected river systems. Save for Chiara Construction and Ardy
Construction, respectively owned by Efren N. Rigor and Romeo R. Dimatulac, the contractors signed written
agreements with Engineer Philip Meñez, Project Manager II of the DPWH.

It is undisputed that the contractors have completed their assigned rehabilitation works. But DPWH refused to pay
1

the contractors for the reason that the contracts were invalid due to non-compliance with legal requirements. As
2

such, respondents filed an action for a sum of money against DPWH. The Regional Trial Court (RTC) of Manila, in
3

Civil Case No. 96-77180, held that the contracts were valid and thus directed payment of compensation to the
contractors. DPWH appealed to the Court of Appeals (CA), which like the RTC, ruled that the respondents are
4

entitled to their claim of compensation.

5
Petitioner appealed by certiorari before this Court. In the questioned 12 October 2011 Decision, the Court primarily
affirmed the trial and the appellate courts’ judgments in favor of respondents’ entitlement to compensation against
petitioner DPWH.

On 10 November 2011, petitioner filed a Motion for Partial Reconsideration assailing the aforementioned Decision.
6

Petitioner’s main contention is that respondents did not come to court with clean hands to assert their money claims
against petitioner in view of their failure to comply with the legal requirements concerning government contracts and
in ascertaining the extent of authority of the public official with whom they contracted. These omissions made the
7

contracts void ab initio and, as a consequence, petitioner should not be made to suffer by paying respondents huge
sums of money arising from void contracts. 8

We deny the motion.

Petitioner unsuccessfully established the applicability of the clean hands doctrine. Citing Muller v. Muller, petitioner
points out that "a litigant may be denied relief by a court of equity on the ground that his conduct has been
inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy in issue." 9

However, respondents’ purported omissions, standing alone, cannot be construed as fraudulent or deceitful.
Petitioner did not present evidence of actual fraud and merely inferred that because of the omissions, the
respondent contractors were in bad faith. "Fraud is never presumed but must be established by clear and
convincing evidence. The strongest suspicion cannot sway judgment or overcome the presumption of regularity." 10

Parties who do not come to court with clean hands cannot be allowed to profit from their own wrongdoing. The 11

action (or inaction) of the party seeking equity must be "free from fault, and he must have done nothing to lull his
adversary into repose, thereby obstructing and preventing vigilance on the part of the latter." Neither the trial court
12

nor the appellate court found any design to defraud on the part of the respondent contractors.

While petitioner is correct in saying that one who seeks equity must do equity, and one who comes into equity must
come with clean hands, it is equally true that an allegation of fraud and dishonesty to come within the doctrine’s
13

purview must be substantiated:

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious accusations
that can be so conveniently and casually invoked, and that is why they are never presumed. They amount to mere
slogans or mudslinging unless convincingly substantiated by whoever is alleging them. 14

This court recognizes that certain omissions will qualify as "acting with unclean hands." The omission, though, must
be such as to give rise to a confusion that leads to an undesirable state of things.
15

Here, even with the respondents’ supposed failure to ascertain the validity of the contract and the authority of the
public official involved in the construction agreements, there is no such confusion as to the matter of the contract’s
validity and the equivalent compensation. As found by the court a quo, petitioner had assured the contractors that
they would be paid for the work that they would do, as even DPWH Undersecretary Teodoro T. Encarnacion had
told them to "fast-track" the project. Hence, respondents cannot by any stretch of logic, be deprived of
16

compensation for their services when - despite their ostensible omissions - they only heeded the assurance of
DPWH and proceeded to work on the urgent project.

Lest it be forgotten, our courts are courts of both law and equity. The petitioner merely claims that the omissions of
17

respondents amount to fraud, while the records show that the public benefitted from the services of respondents.
Given these, this Court will remain true to the rule of substantial justice and direct the payment of compensation to
the contractors, who have completed their services for the government’s Mt. Pinatubo Rehabilitation Project.
Otherwise, urgent actions for emergency work in the future would be discouraged.

After the unfounded clean hands doctrine resorted to by petitioner DPWH is cleared up, all that remains is its
repeated arguments. Petitioner reiterates that the contracts are void, without legal effect, and cannot be cured by
ratification. In the same Motion, it claims that the contracts were unenforceable, as they were entered into beyond
18

the authority of Engineer Meñez. Petitioner also stresses that since the construction contracts with Rigor and
19

Dimatulac are unwritten, DPWH cannot be held liable. It raises the point that the writing of government contracts is
20

a requirement for existence, validity and enforceability. Citing the treatise of Bartolome C. Fernandez, petitioner
21

DPWH further asserts that the government, being an artificial person, cannot verbally consent to the contract. 22

These arguments have already been ruled upon, and we find no reason to disturb the rulings. To reiterate, it has
been settled in several cases that payment for services done on account of the government, but based on a void
contract, cannot be avoided. The government is unjustified in denying what it owes to contractors and in leaving
23

them uncompensated after it has benefitted from the already completed work. Jurisprudence recognizes the
24
principle of quantum meruit. Accordingly, in the interest of substantial justice, the contractor’s entitlement to
compensation has been and is hereby directed. 25

IN VIEW THEREOF, the 8 November 2011 Motion for Partial Reconsideration of the 12 October 2011 Decision of
this Court’s Second Division is denied for lack of merit.

SO ORDERED.

G.R. No. 188417 September 24, 2012

MILAGROS DE BELEN VDA. DE CABALU, MELITON CABALU, SPS. ANGELA CABALU and RODOLFO
TALAVERA, and PATRICIO ABUS, Petitioners,
vs.
SPS. RENATO DOLORES TABU and LAXAMANA, Municipal Trial Court in Cities, Tarlac City, Branch
II, Respondents.

DECISION

MENDOZA, J.:

This is a "Petition for Review on Certiorari (under Rule 45)" of the Rules of Court assailing the June 16, 2009
Decision of the Court of Appeals (CA) in CA-GR. CV No. 81469 entitled "Milagros De Belen Vda de Cabalu v.
1

Renato Tabu."

The Facts

The property subject of the controversy is a 9,000 square meter lot situated in Mariwalo, Tarlac, which was a portion
of a property registered in the name of the late Faustina Maslum (Faustina) under Transfer Certificate of Title (TCT)
No. 16776 with a total area of 140,211 square meters. 2

On December 8, 1941, Faustina died without any children. She left a holographic will, dated July 27, 1939,
assigning and distributing her property to her nephews and nieces. The said holographic will, however, was not
probated. One of the heirs was the father of Domingo Laxamana (Domingo), Benjamin Laxamana, who died in
1960. On March 5, 1975, Domingo allegedly executed a Deed of Sale of Undivided Parcel of Land disposing of his
9,000 square meter share of the land to Laureano Cabalu. 3
On August 1, 1994, to give effect to the holographic will, the forced and legitimate heirs of Faustina executed a
Deed of Extra-Judicial Succession with Partition. The said deed imparted 9,000 square meters of the land covered
by TCT No. 16776 to Domingo. Thereafter, on December 14, 1995, Domingo sold 4,500 square meters of the 9,000
square meters to his nephew, Eleazar Tabamo. The document was captioned Deed of Sale of a Portion of Land. On
May 7, 1996, the remaining 4,500 square meters of Domingo’s share in the partition was registered under his name
under TCT No. 281353. 4

On August 4, 1996, Domingo passed away.

On October 8, 1996, two months after his death, Domingo purportedly executed a Deed of Absolute Sale of TCT
No. 281353 in favor of respondent Renato Tabu (Tabu). The resultant transfer of title was registered as TCT No.
286484. Subsequently, Tabu and his wife, Dolores Laxamana (respondent spouses), subdivided the said lot into
two which resulted into TCT Nos. 291338 and 291339. 5

On January 15, 1999, respondent Dolores Laxamana-Tabu, together with Julieta Tubilan-Laxamana, Teresita
Laxamana, Erlita Laxamana, and Gretel Laxamana, the heirs of Domingo, filed an unlawful detainer action,
docketed as Civil Case No. 7106, against Meliton Cabalu, Patricio Abus, Roger Talavera, Jesus Villar, Marcos
Perez, Arthur Dizon, and all persons claiming rights under them. The heirs claimed that the defendants were merely
allowed to occupy the subject lot by their late father, Domingo, but, when asked to vacate the property, they refused
to do so. The case was ruled in favor of Domingo’s heirs and a writ of execution was subsequently issued. 6

On February 4, 2002, petitioners Milagros de Belen Vda. De Cabalu, Meliton Cabalu, Spouses Angela Cabalu and
Rodolfo Talavera, and Patricio Abus (petitioners), filed a case for Declaration of Nullity of Deed of Absolute Sale,
Joint Affidavit of Nullity of Transfer Certificate of Title Nos. 291338 and 291339, Quieting of Title, Reconveyance,
Application for Restraining Order, Injunction and Damages (Civil Case No. 9290) against respondent spouses
before the Regional Trial Court, Branch 63, Tarlac City (RTC). 7

In their complaint, petitioners claimed that they were the lawful owners of the subject property because it was sold to
their father, Laureano Cabalu, by Domingo, through a Deed of Absolute Sale, dated March 5, 1975. Hence, being
the rightful owners by way of succession, they could not be ejected from the subject property. 8

In their Answer, respondent spouses countered that the deed of sale from which the petitioners anchored their right
over the 9,000 square meter property was null and void because in 1975, Domingo was not yet the owner of the
property, as the same was still registered in the name of Faustina. Domingo became the owner of the property only
on August 1, 1994, by virtue of the Deed of Extra-Judicial Succession with Partition executed by the forced heirs of
Faustina. In addition, they averred that Domingo was of unsound mind having been confined in a mental institution
for a time.
9

On September 30, 2003, the RTC dismissed the complaint as it found the Deed of Absolute Sale, dated March 5,
1975, null and void for lack of capacity to sell on the part of Domingo. Likewise, the Deed of Absolute Sale, dated
October 8, 1996, covering the remaining 4,500 square meters of the subject property was declared ineffective
having been executed by Domingo two months after his death on August 4, 1996. The fallo of the Decision reads: 10

WHEREFORE, in view of the foregoing, the complaint is hereby DISMISSED, and the decision is hereby rendered
by way of:

1. declaring null and void the Deed of Absolute Sale dated March 5, 1975, executed by Domingo Laxamana
in favor of Laureano Cabalu;

2. declaring null and void the Deed of Absolute Sale dated October 8, 1996, executed by Domingo
Laxamana in favor of Renato Tabu, and that TCT Nos. 293338 and 291339, both registered in the name of
Renato Tabu, married to Dolores Laxamana be cancelled;

3. restoring to its former validity, TCT No. 16770 in the name of Faustina Maslum subject to partition by her
lawful heirs.

Costs de oficio.

SO ORDERED. 11

Not in conformity, both parties appealed to the CA. Petitioners contended that the RTC erred in declaring void the
Deed of Absolute Sale, dated March 5, 1975. They claimed that Domingo owned the property, when it was sold to
Laureano Cabalu, because he inherited it from his father, Benjamin, who was one of the heirs of Faustina. Being a
co-owner of the property left by Benjamin, Domingo could dispose of the portion he owned, notwithstanding the will
of Faustina not being probated.
Respondent spouses, on the other hand, asserted that the Deed of Sale, dated March 5, 1975, was spurious and
simulated as the signature, PTR and the document number of the Notary Public were different from the latter’s
notarized documents. They added that the deed was without consent, Domingo being of unsound mind at the time
of its execution. Further, they claimed that the RTC erred in canceling TCT No. 266583 and insisted that the same
should be restored to its validity because Benjamin and Domingo were declared heirs of Faustina.

On June 16, 2009, the CA rendered its decision and disposed as follows:

WHEREFORE, in the light of the foregoing, the instant appeal is partially GRANTED in that the decision of the trial
court is AFFIRMED WITH MODIFICATION that sub-paragraphs 2 & 3 of the disposition, which reads:

"2. declaring null and void the Deed of Absolute Sale dated October 8, 1996, executed by Domingo Laxamana in
favor of Renato Tabu, and that TCT Nos. 291338 and 291339, both registered in the name of Renato Tabu, married
to Dolores Laxamana be cancelled;

3. restoring to its former validity, TCT No. 16776 in the name of Faustina Maslum subject to partition by her lawful
heirs," are DELETED.

IT IS SO ORDERED. 12

In finding Domingo as one of the heirs of Faustina, the CA explained as follows:

It appears from the records that Domingo was a son of Benjamin as apparent in his Marriage Contract and Benjamin
was a nephew of Faustina as stated in the holographic will and deed of succession with partition. By representation,
when Benjamin died in 1960, Domingo took the place of his father in succession. In the same vein, the holographic
will of Faustina mentioned Benjamin as one of her heirs to whom Faustina imparted 9,000 square meters of her
property. Likewise, the signatories to the Deed of Extra-judicial Succession with Partition, heirs of Faustina,
particularly declared Domingo as their co-heir in the succession and partition thereto. Furthermore, the parties in this
case admitted that the relationship was not an issue. 13

Although the CA found Domingo to be of sound mind at the time of the sale on March 5, 1975, it sustained the
RTC’s declaration of nullity of the sale on the ground that the deed of sale was simulated.

The CA further held that the RTC erred in canceling TCT No. 266583 in the name of Domingo and in ordering the
restoration of TCT No. 16770, registered in the name of Faustina, to its former validity, Domingo being an
undisputed heir of Faustina.

Hence, petitioners interpose the present petition before this Court anchored on the following:

GROUNDS

(A)

THE DEED OF SALE OF UNDIVIDED PARCEL OF LAND EXECUTED ON MARCH 5, 1975 BY DOMINGO
LAXAMANA IN FAVOR OF LAUREANO CABALU IS VALID BECAUSE IT SHOULD BE ACCORDED THE
PRESUMPTION OF REGULARITY AND DECLARED VALID FOR ALL PURPOSES AND INTENTS.

(B)

THE SUBPARAGRAPH NO. 2 OF THE DECISION OF THE REGIONAL TRIAL COURT SHOULD STAY
BECAUSE THE HONORABLE COURT OF APPEALS DID NOT DISCUSS THE ISSUE AND DID NOT
STATE THE LEGAL BASIS WHY SAID PARAGRAPH SHOULD BE DELETED FROM THE SEPTEMBER
30, 2003 DECISION OF THE REGIONAL TRIAL COURT. 14

The core issues to be resolved are 1) whether the Deed of Sale of Undivided Parcel of Land covering the 9,000
square meter property executed by Domingo in favor of Laureano Cabalu on March 5, 1975, is valid; and 2) whether
the Deed of Sale, dated October 8, 1996, covering the 4,500 square meter portion of the 9,000 square meter
property, executed by Domingo in favor of Renato Tabu, is null and void.

Petitioners contend that the Deed of Absolute Sale executed by Domingo in favor of Laureano Cabalu on March 5,
1975 should have been declared valid because it enjoyed the presumption of regularity. According to them, the
subject deed, being a public document, had in its favor the presumption of regularity, and to contradict the same,
there must be clear, convincing and more than preponderant evidence, otherwise, the document should be upheld.
They insist that the sale transferred rights of ownership in favor of the heirs of Laureano Cabalu.
They further argue that the CA, in modifying the decision of the RTC, should not have deleted the portion declaring
null and void the Deed of Absolute Sale, dated October 8, 1996, executed by Domingo in favor of Renato Tabu,
because at the time of execution of the said deed of sale, the seller, Domingo was already dead. Being a void
document, the titles originating from the said instrument were also void and should be cancelled.

Respondent spouses, in their Comment and Memorandum, counter that the issues raised are not questions of law
15 16

and call for another calibration of the whole evidence already passed upon by the RTC and the CA. Yet, they argue
that petitioners’ reliance on the validity of the March 5, 1975 Deed of Sale of Undivided Parcel of Land, based on
presumption of regularity, was misplaced because both the RTC and the CA, in the appreciation of evidence on
record, had found said deed as simulated.

It is well to note that both the RTC and the CA found that the evidence established that the March 5, 1975 Deed of
Sale of Undivided Parcel of Land executed by Domingo in favor of Laureano Cabalu was a fictitious and simulated
document. As expounded by the CA, viz:

Nevertheless, since there are discrepancies in the signature of the notary public, his PTR and the document number
on the lower-most portion of the document, as well as the said deed of sale being found only after the plaintiffs-
appellants were ejected by the defendants-appellants; that they were allegedly not aware that the said property was
bought by their father, and that they never questioned the other half of the property not occupied by them, it is
apparent that the sale dated March 5, 1975 had the earmarks of a simulated deed written all over it. The lower court
did not err in pronouncing that it be declared null and void. 17

Petitioners, in support of their claim of validity of the said document of deed, again invoke the legal presumption of
regularity. To reiterate, the RTC and later the CA had ruled that the sale, dated March 5, 1975, had the earmarks of
a simulated deed, hence, the presumption was already rebutted. Verily and as aptly noted by the respondent
spouses, such presumption of regularity cannot prevail over the facts proven and already established in the records
of this case.

Even on the assumption that the March 5, 1975 deed was not simulated, still the sale cannot be deemed valid
because, at that time, Domingo was not yet the owner of the property. There is no dispute that the original and
registered owner of the subject property covered by TCT No. 16776, from which the subject 9,000 square meter lot
came from, was Faustina, who during her lifetime had executed a will, dated July 27, 1939. In the said will, the name
of Benjamin, father of Domingo, appeared as one of the heirs. Thus, and as correctly found by the RTC, even if
Benjamin died sometime in 1960, Domingo in 1975 could not yet validly dispose of the whole or even a portion
thereof for the reason that he was not the sole heir of Benjamin, as his mother only died sometime in 1980.

Besides, under Article 1347 of the Civil Code, "No contract may be entered into upon future inheritance except in
cases expressly authorized by law." Paragraph 2 of Article 1347, characterizes a contract entered into upon future
inheritance as void. The law applies when the following requisites concur: (1) the succession has not yet been
opened; (2) the object of the contract forms part of the inheritance; and (3) the promissor has, with respect to the
object, an expectancy of a right which is purely hereditary in nature. 18

In this case, at the time the deed was executed, Faustina’s will was not yet probated; the object of the contract, the
9,000 square meter property, still formed part of the inheritance of his father from the estate of Faustina; and
Domingo had a mere inchoate hereditary right therein. 1âwphi1

Domingo became the owner of the said property only on August 1, 1994, the time of execution of the Deed of
Extrajudicial Succession with Partition by the heirs of Faustina, when the 9,000 square meter lot was adjudicated to
him.

The CA, therefore, did not err in declaring the March 5, 1975 Deed of Sale null and void.

Domingo’s status as an heir of Faustina by right of representation being undisputed, the RTC should have
maintained the validity of TCT No. 266583 covering the 9,000 square meter subject property. As correctly concluded
by the CA, this served as the inheritance of Domingo from Faustina.

Regarding the deed of sale covering the remaining 4,500 square meters of the subject property executed in favor of
Renato Tabu, it is evidently null and void. The document itself, the Deed of Absolute Sale, dated October 8, 1996,
readily shows that it was executed on August 4, 1996 more than two months after the death of Domingo.
Contracting parties must be juristic entities at the time of the consummation of the contract. Stated otherwise, to
form a valid and legal agreement it is necessary that there be a party capable of contracting and a party capable of
being contracted with. Hence, if any one party to a supposed contract was already dead at the time of its execution,
such contract is undoubtedly simulated and false and, therefore, null and void by reason of its having been made
after the death of the party who appears as one of the contracting parties therein. The death of a person terminates
contractual capacity.
19
The contract being null and void, the sale to Renato Tabu produced no legal effects and transmitted no rights
whatsoever. Consequently, TCT No. 286484 issued to Tabu by virtue of the October 8, 1996 Deed of Sale, as well
as its derivative titles, TCT Nos. 291338 and 291339, both registered in the name of Rena to Tabu, married to
Dolores Laxamana, are likewise void.

The CA erred in deleting that portion in the RTC decision declaring the Deed of Absolute Sale, dated October 8,
1996, null and void and canceling TCT Nos. 291338 and 291339.

WHEREFORE, the petition is partially GRANTED. The decretal portion of the June 16, 2009 Decision of the Court of
Appeals is hereby MODIFIED to read as follows:

1. The Deed of Absolute Sale, dated March 5, 1975, executed by Domingo Laxamana in favor of Laureano
Cabalu, is hereby declared as null and void.

2. The Deed of Absolute Sale, dated October 8, 1996, executed by Domingo Laxamana in favor of Renato
Tabu, and TCT No. 286484 as well as the derivative titles TCT Nos. 291338 and 291339, both registered in
the name of Renato Tabu, married to Dolores Laxamana, are hereby declared null and void and cancelled.

3. TCT No. 281353 in the name of Domingo Laxamana is hereby ordered restored subject to the partition by
his lawful heirs.

SO ORDERED.

G.R. No. 156364 September 3, 2007

JACOBUS BERNHARD HULST, petitioner,

vs.
PR BUILDERS, INC., respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court assailing the
Decision1 dated October 30, 2002 of the Court of Appeals (CA) in CA-G.R. SP No. 60981.

The facts:

Jacobus Bernhard Hulst (petitioner) and his spouse Ida Johanna Hulst-Van Ijzeren (Ida), Dutch nationals, entered
into a Contract to Sell with PR Builders, Inc. (respondent), for the purchase of a 210-sq m residential unit in
respondent's townhouse project in Barangay Niyugan, Laurel, Batangas.

When respondent failed to comply with its verbal promise to complete the project by June 1995, the spouses Hulst
filed before the Housing and Land Use Regulatory Board (HLURB) a complaint for rescission of contract with
interest, damages and attorney's fees, docketed as HLRB Case No. IV6-071196-0618.
On April 22, 1997, HLURB Arbiter Ma. Perpetua Y. Aquino (HLURB Arbiter) rendered a Decision 2 in favor of
spouses Hulst, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the complainant, rescinding
the Contract to Sell and ordering respondent to:

1) Reimburse complainant the sum of P3,187,500.00, representing the purchase price paid by the
complainants to P.R. Builders, plus interest thereon at the rate of twelve percent (12%) per annum from the
time complaint was filed;

2) Pay complainant the sum of P297,000.00 as actual damages;

3) Pay complainant the sum of P100,000.00 by way of moral damages;

4) Pay complainant the sum of P150,000.00 as exemplary damages;

5) P50,000.00 as attorney's fees and for other litigation expenses; and

6) Cost of suit.

SO ORDERED.3

Meanwhile, spouses Hulst divorced. Ida assigned her rights over the purchased property to petitioner. 4 From then
on, petitioner alone pursued the case.

On August 21, 1997, the HLURB Arbiter issued a Writ of Execution addressed to the Ex-Officio Sheriff of the
Regional Trial Court of Tanauan, Batangas directing the latter to execute its judgment. 5

On April 13, 1998, the Ex-Officio Sheriff proceeded to implement the Writ of Execution. However, upon complaint of
respondent with the CA on a Petition for Certiorari and Prohibition, the levy made by the Sheriff was set aside,
requiring the Sheriff to levy first on respondent's personal properties. 6 Sheriff Jaime B. Ozaeta (Sheriff) tried to
implement the writ as directed but the writ was returned unsatisfied.7

On January 26, 1999, upon petitioner's motion, the HLURB Arbiter issued an Alias Writ of Execution. 8

On March 23, 1999, the Sheriff levied on respondent's 15 parcels of land covered by 13 Transfer Certificates of Title
(TCT)9 in Barangay Niyugan, Laurel, Batangas.10

In a Notice of Sale dated March 27, 2000, the Sheriff set the public auction of the levied properties on April 28, 2000
at 10:00 a.m..11

Two days before the scheduled public auction or on April 26, 2000, respondent filed an Urgent Motion to Quash Writ
of Levy with the HLURB on the ground that the Sheriff made an overlevy since the aggregate appraised value of the
levied properties at P6,500.00 per sq m is P83,616,000.00, based on the Appraisal Report 12 of Henry Hunter Bayne
Co., Inc. dated December 11, 1996, which is over and above the judgment award. 13

At 10:15 a.m. of the scheduled auction date of April 28, 2000, respondent's counsel objected to the conduct of the
public auction on the ground that respondent's Urgent Motion to Quash Writ of Levy was pending resolution. Absent
any restraining order from the HLURB, the Sheriff proceeded to sell the 15 parcels of land. Holly Properties Realty
Corporation was the winning bidder for all 15 parcels of land for the total amount of P5,450,653.33. The sum
of P5,313,040.00 was turned over to the petitioner in satisfaction of the judgment award after deducting the legal
fees.14

At 4:15 p.m. of the same day, while the Sheriff was at the HLURB office to remit the legal fees relative to the auction
sale and to submit the Certificates of Sale15 for the signature of HLURB Director Belen G. Ceniza (HLURB Director),
he received the Order dated April 28, 2000 issued by the HLURB Arbiter to suspend the proceedings on the
matter.16

Four months later, or on August 28, 2000, the HLURB Arbiter and HLURB Director issued an Order setting aside the
sheriff's levy on respondent's real properties,17 reasoning as follows:

While we are not making a ruling that the fair market value of the levied properties is PhP6,500.00 per
square meter (or an aggregate value of PhP83,616,000.00) as indicated in the Hunter Baynes Appraisal
Report, we definitely cannot agree with the position of the Complainants and the Sheriff that the aggregate
value of the 12,864.00-square meter levied properties is only around PhP6,000,000.00. The disparity
between the two valuations are [sic] so egregious that the Sheriff should have looked into the matter first
 before proceeding with the execution sale of the said properties, especially when the auction sale
proceedings was seasonably objected by Respondent's counsel, Atty. Noel Mingoa. However, instead of
resolving first the objection timely posed by Atty. Mingoa, Sheriff Ozaete totally disregarded the objection
raised and, posthaste, issued the corresponding Certificate of Sale even prior to the payment of the legal
fees (pars. 7 & 8, Sheriff's Return).

While we agree with the Complainants that what is material in an execution sale proceeding is the amount
for which the properties were bidded and sold during the public auction and that, mere inadequacy of the
price is not a sufficient ground to annul the sale, the court is justified to intervene where the inadequacy of
the price shocks the conscience (Barrozo vs. Macaraeg, 83 Phil. 378). The difference between
PhP83,616,000.00 and Php6,000,000.00 is PhP77,616,000.00 and it definitely invites our attention to look
into the proceedings had especially so when there was only one bidder, the HOLLY PROPERTIES REALTY
CORPORATION represented by Ma, Chandra Cacho (par. 7, Sheriff's Return) and the auction sale
proceedings was timely objected by Respondent's counsel (par. 6, Sheriff's Return) due to the pendency of
the Urgent Motion to Quash the Writ of Levy which was filed prior to the execution sale.

Besides, what is at issue is not the value of the subject properties as determined during the auction
sale, but the determination of the value of the properties levied upon by the Sheriff taking into
consideration Section 9(b) of the 1997 Rules of Civil Procedure x x x.

xxxx

It is very clear from the foregoing that, even during levy, the Sheriff has to consider the fair market value of
the properties levied upon to determine whether they are sufficient to satisfy the judgment, and any levy in
excess of the judgment award is void (Buan v. Court of Appeals, 235 SCRA 424).

x x x x18 (Emphasis supplied).

The dispositive portion of the Order reads:

WHEREFORE, the levy on the subject properties made by the Ex-Officio Sheriff of the RTC of Tanauan,
Batangas, is hereby SET ASIDE and the said Sheriff is hereby directed to levy instead Respondent's real
properties that are reasonably sufficient to enforce its final and executory judgment, this time, taking into
consideration not only the value of the properties as indicated in their respective tax declarations, but also all
the other determinants at arriving at a fair market value, namely: the cost of acquisition, the current value of
like properties, its actual or potential uses, and in the particular case of lands, their size, shape or location,
and the tax declarations thereon.

SO ORDERED.19

A motion for reconsideration being a prohibited pleading under Section 1(h), Rule IV of the 1996 HLURB Rules and
Procedure, petitioner filed a Petition for Certiorari and Prohibition with the CA on September 27, 2000.

On October 30, 2002, the CA rendered herein assailed Decision 20 dismissing the petition. The CA held that
petitioner's insistence that Barrozo v. Macaraeg21 does not apply since said case stated that "when there is a right to
redeem inadequacy of price should not be material" holds no water as what is obtaining in this case is not "mere
inadequacy," but an inadequacy that shocks the senses; that Buan v. Court of Appeals22 properly applies since the
questioned levy covered 15 parcels of land posited to have an aggregate value of P83,616,000.00 which shockingly
exceeded the judgment debt of only around P6,000,000.00.

Without filing a motion for reconsideration,23 petitioner took the present recourse on the sole ground that:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE ARBITER'S ORDER
SETTING ASIDE THE LEVY MADE BY THE SHERIFF ON THE SUBJECT PROPERTIES. 24

Before resolving the question whether the CA erred in affirming the Order of the HLURB setting aside the levy made
by the sheriff, it behooves this Court to address a matter of public and national importance which completely
escaped the attention of the HLURB Arbiter and the CA: petitioner and his wife are foreign nationals who are
disqualified under the Constitution from owning real property in their names.

Section 7 of Article XII of the 1987 Constitution provides:

Sec. 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed
except to individuals, corporations, or associations qualified to acquire or hold lands of the public
domain. (Emphasis supplied).
The capacity to acquire private land is made dependent upon the capacity to acquire or hold lands of the public
domain. Private land may be transferred or conveyed only to individuals or entities "qualified to acquire lands of the
public domain." The 1987 Constitution reserved the right to participate in the disposition, exploitation, development
and utilization of lands of the public domain for Filipino citizens 25 or corporations at least 60 percent of the capital of
which is owned by Filipinos. 26 Aliens, whether individuals or corporations, have been disqualified from acquiring
public lands; hence, they have also been disqualified from acquiring private lands. 27

Since petitioner and his wife, being Dutch nationals, are proscribed under the Constitution from acquiring and
owning real property, it is unequivocal that the Contract to Sell entered into by petitioner together with his wife and
respondent is void. Under Article 1409 (1) and (7) of the Civil Code, all contracts whose cause, object or purpose is
contrary to law or public policy and those expressly prohibited or declared void by law are inexistent and void from
the beginning. Article 1410 of the same Code provides that the action or defense for the declaration of the
inexistence of a contract does not prescribe. A void contract is equivalent to nothing; it produces no civil effect. 28 It
does not create, modify or extinguish a juridical relation.29

Generally, parties to a void agreement cannot expect the aid of the law; the courts leave them as they are, because
they are deemed in pari delicto or "in equal fault."30 In pari delicto is "a universal doctrine which holds that no action
arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to
recover the property agreed to be sold or delivered, or the money agreed to be paid, or damages for its violation;
and where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other." 31

This rule, however, is subject to exceptions 32 that permit the return of that which may have been given under a void
contract to: (a) the innocent party (Arts. 1411-1412, Civil Code); 33 (b) the debtor who pays usurious interest (Art.
1413, Civil Code);34 (c) the party repudiating the void contract before the illegal purpose is accomplished or
before damage is caused to a third person and if public interest is subserved by allowing recovery (Art.
1414, Civil Code);35 (d) the incapacitated party if the interest of justice so demands (Art. 1415, Civil Code); 36 (e) the
party for whose protection the prohibition by law is intended if the agreement is not illegal per se but merely
prohibited and if public policy would be enhanced by permitting recovery (Art. 1416, Civil Code); 37 and (f) the party
for whose benefit the law has been intended such as in price ceiling laws (Art. 1417, Civil Code) 38 and labor laws
(Arts. 1418-1419, Civil Code).39

It is significant to note that the agreement executed by the parties in this case is a Contract to Sell and not a contract
of sale. A distinction between the two is material in the determination of when ownership is deemed to have been
transferred to the buyer or vendee and, ultimately, the resolution of the question on whether the constitutional
proscription has been breached.

In a contract of sale, the title passes to the buyer upon the delivery of the thing sold. The vendor has lost and cannot
recover the ownership of the property until and unless the contract of sale is itself resolved and set aside. 40 On the
other hand, a contract to sell is akin to a conditional sale where the efficacy or obligatory force of the vendor's
obligation to transfer title is subordinated to the happening of a future and uncertain event, so that if the suspensive
condition does not take place, the parties would stand as if the conditional obligation had never existed. 41 In other
words, in a contract to sell, the prospective seller agrees to transfer ownership of the property to the buyer upon the
happening of an event, which normally is the full payment of the purchase price. But even upon the fulfillment of the
suspensive condition, ownership does not automatically transfer to the buyer. The prospective seller still has to
convey title to the prospective buyer by executing a contract of absolute sale. 42

Since the contract involved here is a Contract to Sell, ownership has not yet transferred to the petitioner when he
filed the suit for rescission. While the intent to circumvent the constitutional proscription on aliens owning real
property was evident by virtue of the execution of the Contract to Sell, such violation of the law did not materialize
because petitioner caused the rescission of the contract before the execution of the final deed transferring
ownership.

Thus, exception (c) finds application in this case. Under Article 1414, one who repudiates the agreement and
demands his money before the illegal act has taken place is entitled to recover. Petitioner is therefore entitled to
recover what he has paid, although the basis of his claim for rescission, which was granted by the HLURB, was not
the fact that he is not allowed to acquire private land under the Philippine Constitution. But petitioner is entitled to
the recovery only of the amount of P3,187,500.00, representing the purchase price paid to respondent. No damages
may be recovered on the basis of a void contract; being nonexistent, the agreement produces no juridical tie
between the parties involved.43 Further, petitioner is not entitled to actual as well as interests thereon, 44 moral and
exemplary damages and attorney's fees.

The Court takes into consideration the fact that the HLURB Decision dated April 22, 1997 has long been final and
executory. Nothing is more settled in the law than that a decision that has acquired finality becomes immutable and
unalterable and may no longer be modified in any respect even if the modification is meant to correct erroneous
conclusions of fact or law and whether it was made by the court that rendered it or by the highest court of the
land.45 The only recognized exceptions to the general rule are the correction of clerical errors, the so-called nunc
pro tunc entries which cause no prejudice to any party, void judgments, and whenever circumstances transpire after
the finality of the decision rendering its execution unjust and inequitable. 46 None of the exceptions is present in this
case. The HLURB decision cannot be considered a void judgment, as it was rendered by a tribunal with jurisdiction
over the subject matter of the complaint.47

Ineluctably, the HLURB Decision resulted in the unjust enrichment of petitioner at the expense of respondent.
Petitioner received more than what he is entitled to recover under the circumstances.

Article 22 of the Civil Code which embodies the maxim, nemo ex alterius incommode debet lecupletari (no man
ought to be made rich out of another's injury), states:

Art. 22. Every person who through an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just or legal ground, shall return the
same to him.

The above-quoted article is part of the chapter of the Civil Code on Human Relations, the provisions of which were
formulated as basic principles to be observed for the rightful relationship between human beings and for the stability
of the social order; designed to indicate certain norms that spring from the fountain of good conscience; guides for
human conduct that should run as golden threads through society to the end that law may approach its supreme
ideal which is the sway and dominance of justice. 48 There is unjust enrichment when a person unjustly retains a
benefit at the loss of another, or when a person retains money or property of another against the fundamental
principles of justice, equity and good conscience.49

A sense of justice and fairness demands that petitioner should not be allowed to benefit from his act of entering into
a contract to sell that violates the constitutional proscription.

This is not a case of equity overruling or supplanting a positive provision of law or judicial rule. Rather, equity is
exercised in this case "as the complement of legal jurisdiction [that] seeks to reach and to complete justice where
courts of law, through the inflexibility of their rules and want of power to adapt their judgments to the special
circumstances of cases, are incompetent to do so."50

The purpose of the exercise of equity jurisdiction in this case is to prevent unjust enrichment and to ensure
restitution. Equity jurisdiction aims to do complete justice in cases where a court of law is unable to adapt its
judgments to the special circumstances of a case because of the inflexibility of its statutory or legal jurisdiction. 51

The sheriff delivered to petitioner the amount of P5,313,040.00 representing the net proceeds (bidded amount
is P5,450,653.33) of the auction sale after deducting the legal fees in the amount of P137,613.33.52 Petitioner is only
entitled to P3,187,500.00, the amount of the purchase price of the real property paid by petitioner to respondent
under the Contract to Sell. Thus, the Court in the exercise of its equity jurisdiction may validly order petitioner to
return the excess amount of P2,125,540.00.

The Court shall now proceed to resolve the single issue raised in the present petition: whether the CA seriously
erred in affirming the HLURB Order setting aside the levy made by the Sheriff on the subject properties.

Petitioner avers that the HLURB Arbiter and Director had no factual basis for pegging the fair market value of the
levied properties at P6,500.00 per sq m or P83,616,000.00; that reliance on the appraisal report was misplaced
since the appraisal was based on the value of land in neighboring developed subdivisions and on the assumption
that the residential unit appraised had already been built; that the Sheriff need not determine the fair market value of
the subject properties before levying on the same since what is material is the amount for which the properties were
bidded and sold during the public auction; that the pendency of any motion is not a valid ground for the Sheriff to
suspend the execution proceedings and, by itself, does not have the effect of restraining the Sheriff from proceeding
with the execution.

Respondent, on the other hand, contends that while it is true that the HLURB Arbiter and Director did not
categorically state the exact value of the levied properties, said properties cannot just amount to P6,000,000.00; that
the HLURB Arbiter and Director correctly held that the value indicated in the tax declaration is not the sole
determinant of the value of the property.

The petition is impressed with merit.

If the judgment is for money, the sheriff or other authorized officer must execute the same pursuant to the provisions
of Section 9, Rule 39 of the Revised Rules of Court, viz:

Sec. 9. Execution of judgments for money, how enforced. –

 (a) Immediate payment on demand. - The officer shall enforce an execution of a judgment for money by
demanding from the judgment obligor the immediate payment of the full amount stated in the writ of
execution and all lawful fees. x x x

(b) Satisfaction by levy. - If the judgment obligor cannot pay all or part of the obligation in cash, certified
bank check or other mode of payment acceptable to the judgment obligee, the officer shall levy upon the
properties of the judgment obligor of every kind and nature whatsoever which may be disposed of
for value and not otherwise exempt from execution, giving the latter the option to immediately choose
which property or part thereof may be levied upon, sufficient to satisfy the judgment. If the judgment obligor
does not exercise the option, the officer shall first levy on the personal properties, if any, and then on the
real properties if the personal properties are insufficient to answer for the judgment.

The sheriff shall sell only a sufficient portion of the personal or real property of the judgment obligor
which has been levied upon.

When there is more property of the judgment obligor than is sufficient to satisfy the judgment and
lawful fees, he must sell only so much of the personal or real property as is sufficient to satisfy the
judgment and lawful fees.

Real property, stocks, shares, debts, credits, and other personal property, or any interest in either real or
personal property, may be levied upon in like manner and with like effect as under a writ of
attachment (Emphasis supplied).53

Thus, under Rule 39, in executing a money judgment against the property of the judgment debtor, the sheriff shall
levy on all property belonging to the judgment debtor as is amply sufficient to satisfy the judgment and costs, and
sell the same paying to the judgment creditor so much of the proceeds as will satisfy the amount of the judgment
debt and costs. Any excess in the proceeds shall be delivered to the judgment debtor unless otherwise directed by
the judgment or order of the court.54

Clearly, there are two stages in the execution of money judgments. First, the levy and then the execution sale.

Levy has been defined as the act or acts by which an officer sets apart or appropriates a part or the whole of a
judgment debtor's property for the purpose of satisfying the command of the writ of execution. 55 The object of a levy
is to take property into the custody of the law, and thereby render it liable to the lien of the execution, and put it out
of the power of the judgment debtor to divert it to any other use or purpose. 56

On the other hand, an execution sale is a sale by a sheriff or other ministerial officer under the authority of a writ of
execution of the levied property of the debtor.57

In the present case, the HLURB Arbiter and Director gravely abused their discretion in setting aside the levy
conducted by the Sheriff for the reason that the auction sale conducted by the sheriff rendered moot and academic
the motion to quash the levy. The HLURB Arbiter lost jurisdiction to act on the motion to quash the levy by virtue of
the consummation of the auction sale. Absent any order from the HLURB suspending the auction sale, the sheriff
rightfully proceeded with the auction sale. The winning bidder had already paid the winning bid. The legal fees had
already been remitted to the HLURB. The judgment award had already been turned over to the judgment creditor.
What was left to be done was only the issuance of the corresponding certificates of sale to the winning bidder. In
fact, only the signature of the HLURB Director for that purpose was needed 58 – a purely ministerial act.

A purely ministerial act or duty is one which an officer or tribunal performs in a given state of facts, in a prescribed
manner, in obedience to the mandate of a legal authority, without regard for or the exercise of his own judgment
upon the propriety or impropriety of the act done. If the law imposes a duty upon a public officer and gives him the
right to decide how or when the duty shall be performed, such duty is discretionary and not ministerial. The duty is
ministerial only when the discharge of the same requires neither the exercise of official discretion nor judgment. 59 In
the present case, all the requirements of auction sale under the Rules have been fully complied with to warrant the
issuance of the corresponding certificates of sale.

And even if the Court should go into the merits of the assailed Order, the petition is meritorious on the following
grounds:

Firstly, the reliance of the HLURB Arbiter and Director, as well as the CA, on Barrozo v. Macaraeg60 and Buan v.
Court of Appeals61 is misplaced.

The HLURB and the CA misconstrued the Court's pronouncements in Barrozo. Barrozo involved a judgment debtor
who wanted to repurchase properties sold at execution beyond the one-year redemption period. The statement of
the Court in Barrozo, that "only where such inadequacy shocks the conscience the courts will intervene," is at best a
mere obiter dictum. This declaration should be taken in the context of the other declarations of the Court
in Barrozo, to wit:

Another point raised by appellant is that the price paid at the auction sale was so inadequate as to shock the
conscience of the court. Supposing that this issue is open even after the one-year period has expired and
after the properties have passed into the hands of third persons who may have paid a price higher than the
auction sale money, the first thing to consider is that the stipulation contains no statement of the reasonable
value of the properties; and although defendant' answer avers that the assessed value was P3,960 it also
avers that their real market value was P2,000 only. Anyway, mere inadequacy of price – which was the
complaint' allegation – is not sufficient ground to annul the sale. It is only where such inadequacy
shocks the conscience that the courts will intervene. x x x Another consideration is that the assessed
value being P3,960 and the purchase price being in effect P1,864 (P464 sale price plus P1,400 mortgage
lien which had to be discharged) the conscience is not shocked upon examining the prices paid in the sales
in National Bank v. Gonzales, 45 Phil., 693 and Guerrero v. Guerrero, 57 Phil., 445, sales which were left
undisturbed by this Court.

Furthermore, where there is the right to redeem – as in this case – inadequacy of price should not be
material because the judgment debtor may re-acquire the property or else sell his right to redeem
and thus recover any loss he claims to have suffered by reason of the price obtained at the
execution sale.

x x x x (Emphasis supplied).62

In other words, gross inadequacy of price does not nullify an execution sale. In an ordinary sale, for reason of
equity, a transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks
one's conscience as to justify the courts to interfere; such does not follow when the law gives the owner the right to
redeem as when a sale is made at public auction, 63 upon the theory that the lesser the price, the easier it is for the
owner to effect redemption.64 When there is a right to redeem, inadequacy of price should not be material because
the judgment debtor may re-acquire the property or else sell his right to redeem and thus recover any loss he claims
to have suffered by reason of the price obtained at the execution sale. 65 Thus, respondent stood to gain rather than
be harmed by the low sale value of the auctioned properties because it possesses the right of redemption. More
importantly, the subject matter in Barrozo is the auction sale, not the levy made by the Sheriff.

The Court does not sanction the piecemeal interpretation of a decision. To get the true intent and meaning of a
decision, no specific portion thereof should be isolated and resorted to, but the decision must be considered in its
entirety.66

As regards Buan, it is cast under an entirely different factual milieu. It involved the levy on two parcels of land owned
by the judgment debtor; and the sale at public auction of one was sufficient to fully satisfy the judgment, such that
the levy and attempted execution of the second parcel of land was declared void for being in excess of and beyond
the original judgment award granted in favor of the judgment creditor.

In the present case, the Sheriff complied with the mandate of Section 9, Rule 39 of the Revised Rules of Court, to
"sell only a sufficient portion" of the levied properties "as is sufficient to satisfy the judgment and the lawful fees."
Each of the 15 levied properties was successively bidded upon and sold, one after the other until the judgment debt
and the lawful fees were fully satisfied. Holly Properties Realty Corporation successively bidded upon and bought
each of the levied properties for the total amount of P5,450,653.33 in full satisfaction of the judgment award and
legal fees.67

Secondly, the Rules of Court do not require that the value of the property levied be exactly the same as the
judgment debt; it can be less or more than the amount of debt. This is the contingency addressed by Section 9, Rule
39 of the Rules of Court. In the levy of property, the Sheriff does not determine the exact valuation of the levied
property. Under Section 9, Rule 39, in conjunction with Section 7, Rule 57 of the Rules of Court, the sheriff is
required to do only two specific things to effect a levy upon a realty: (a) file with the register of deeds a copy of the
order of execution, together with the description of the levied property and notice of execution; and (b) leave with the
occupant of the property copy of the same order, description and notice. 68 Records do not show that respondent
alleged non-compliance by the Sheriff of said requisites.

Thirdly, in determining what amount of property is sufficient out of which to secure satisfaction of the execution, the
Sheriff is left to his own judgment. He may exercise a reasonable discretion, and must exercise the care which a
reasonably prudent person would exercise under like conditions and circumstances, endeavoring on the one hand
to obtain sufficient property to satisfy the purposes of the writ, and on the other hand not to make an unreasonable
and unnecessary levy.69 Because it is impossible to know the precise quantity of land or other property necessary to
satisfy an execution, the Sheriff should be allowed a reasonable margin between the value of the property levied
upon and the amount of the execution; the fact that the Sheriff levies upon a little more than is necessary to satisfy
the execution does not render his actions improper. 70 Section 9, Rule 39, provides adequate safeguards against
excessive levying. The Sheriff is mandated to sell so much only of such real property as is sufficient to satisfy the
judgment and lawful fees.

In the absence of a restraining order, no error, much less abuse of discretion, can be imputed to the Sheriff in
proceeding with the auction sale despite the pending motion to quash the levy filed by the respondents with the
HLURB. It is elementary that sheriffs, as officers charged with the delicate task of the enforcement and/or
implementation of judgments, must, in the absence of a restraining order, act with considerable dispatch so as not to
unduly delay the administration of justice; otherwise, the decisions, orders, or other processes of the courts of
justice and the like would be futile.71 It is not within the jurisdiction of the Sheriff to consider, much less resolve,
respondent's objection to the continuation of the conduct of the auction sale. The Sheriff has no authority, on his
own, to suspend the auction sale. His duty being ministerial, he has no discretion to postpone the conduct of the
auction sale.

Finally, one who attacks a levy on the ground of excessiveness carries the burden of sustaining that contention. 72 In
the determination of whether a levy of execution is excessive, it is proper to take into consideration encumbrances
upon the property, as well as the fact that a forced sale usually results in a sacrifice; that is, the price demanded for
the property upon a private sale is not the standard for determining the excessiveness of the levy. 73

Here, the HLURB Arbiter and Director had no sufficient factual basis to determine the value of the levied property.
Respondent only submitted an Appraisal Report, based merely on surmises. The Report was based on the
projected value of the townhouse project after it shall have been fully developed, that is, on the assumption that the
residential units appraised had already been built. The Appraiser in fact made this qualification in its Appraisal
Report: "[t]he property subject of this appraisal has not been constructed. The basis of the appraiser is on the
existing model units."74 Since it is undisputed that the townhouse project did not push through, the projected value
did not become a reality. Thus, the appraisal value cannot be equated with the fair market value. The Appraisal
Report is not the best proof to accurately show the value of the levied properties as it is clearly self-serving.

Therefore, the Order dated August 28, 2000 of HLURB Arbiter Aquino and Director Ceniza in HLRB Case No. IV6-
071196-0618 which set aside the sheriff's levy on respondent's real properties, was clearly issued with grave abuse
of discretion. The CA erred in affirming said Order.

WHEREFORE, the instant petition is GRANTED. The Decision dated October 30, 2002 of the Court of Appeals in
CA-G.R. SP No. 60981 is REVERSED and SET ASIDE. The Order dated August 28, 2000 of HLURB Arbiter Ma.
Perpetua Y. Aquino and Director Belen G. Ceniza in HLRB Case No. IV6-071196-0618 is
declared NULL and VOID. HLURB Arbiter Aquino and Director Ceniza are directed to issue the corresponding
certificates of sale in favor of the winning bidder, Holly Properties Realty Corporation. Petitioner is ordered to return
to respondent the amount of P2,125,540.00, without interest, in excess of the proceeds of the auction sale delivered
to petitioner. After the finality of herein judgment, the amount of P2,125,540.00 shall earn 6% interest until fully paid.

SO ORDERED.

G.R. No. 215014 February 29, 2016

REBECCA FULLIDO, Petitioner,

vs.
GINO GRILLI, Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari seeking to reverse and set aside the May 31, 2013 Decision and the 1

September 24, 2014 Resolution of the Court of Appeals (CA) in CA-G.R. CEB-SP No. 06946, which affirmed the
2

April 26, 2012 Decision of the Regional Trial Court, Branch 47, Tagbilaran City (RTC) in Civil Case No. 7895,
3

reversing the March 31, 2011 Decision of the Municipal Circuit Trial Court, Dauis, Bohol (MCTC) in Civil Case No.
4

244, a case for unlawful detainer filed by Gino Grilli (Grilli) against Rebecca Fullido (Fullido).
 The Facts

Sometime in 1994, Grilli, an Italian national, met Fullido in Bohol and courted her. In 1995, Grilli decided to build a
residential house where he and Fullido would to stay whenever he would be vacationing in the country. Grilli
financially assisted Fullido in procuring a lot located in Biking I, Dauis, Bohol, from her parents which was registered
in her name under Transfer Certificate of Title (TCT) No. 30626. On the said property, they constructed a house,
5

which was funded by Grilli. Upon completion, they maintained a common-law relationship and lived there whenever
Grilli was on vacation in the Philippines twice a year.

In 1998, Grilli and Fullido executed a contract of lease, a memorandum of agreement (MOA) and a special power
6 7

of attorney (SPA), to define their respective rights over the house and lot.
8

The lease contract stipulated, among others, that Grilli as the lessee, would rent the lot, registered in the name of
Fullido, for a period of fifty (50) years, to be automatically renewed for another fifty (50) years upon its expiration in
the amount of P10,000.00 for the whole term of the lease contract; and that Fullido as the lessor, was prohibited
from selling, donating, or encumbering the said lot without the written consent of Grilli. The pertinent provisions of
the lease contract over the house and lot are as follows:

That for and in consideration of the total amount of rental in the amount of TEN THOUSAND (P10,000.00) PESOS,
Philippine Currency, paid by the LESSEE to the LESSOR, receipt of which is hereby acknowledged, the latter
hereby leases to the LESSEE a house and lot, and all the furnishings found therein, land situated at Biking I, Dauis,
Bohol, Philippines, absolutely owned and belonging to the LESSOR and particularly described as follows, to wit:

xxxx

That the LESSOR and the LESSEE hereby agree as they have agreed to be bound by the following terms and
conditions, to wit:

1. That the term of the lease shall be FIFTY (50) YEARS from August 16, 1998 to August 15, 2048, automatically
renewed for the same term upon the expiration thereof;

xxx

7. That the LESSOR is strictly prohibited to sell, donate, encumber, or in any manner convey the property subject of
this lease to any third person, without the written consent of the LESSEE. 9

The said lease contract was duly registered in the Register of Deeds of Bohol.

The MOA, on the other hand, stated, among others, that Grilli paid for the purchase price of the house and lot; that
ownership of the house and lot was to reside with him; and that should the common-law relationship be terminated,
Fullido could only sell the house and lot to whomever Grilli so desired. Specifically, the pertinent terms of the MOA
read:

NOW WHEREFORE, FOR AND IN CONSIDERATION of the foregoing premises, the parties hereto agree as they
hereby covenant to agree that the FIRST PARTY (Grilli) shall permanently reside on the property as above-
mentioned, subject to the following terms and conditions:

1. That ownership over the above-mentioned properties shall reside absolutely with herein FIRST PARTY,
and the SECOND PARTY (Fullido) hereby acknowledges the same;

2. That the SECOND PARTY is expressly prohibited to sell the above-stated property, except if said sale is
with the conformity of the FIRST PARTY;

3. That the SECOND PARTY hereby grants the FIRST PARTY, the absolute and irrevocable right, to reside
in the residential building so constructed during his lifetime, or any time said FIRST PARTY may so desire;

4. That in the event the common-law relationship terminates, or when the SECOND PARTY marries
another, or enters into another common-law relationship with another, said SECOND PARTY shall be
obliged to execute a DEED OF ABSOLUTE SALE over the above-stated parcel of land and residential
building, in favor of whomsoever the FIRST PARTY may so desire, and be further obliged to turn over the
entire consideration of the said sale to the FIRST PARTY , or if the law shall allow, the FIRST PARTY shall
retain ownership of the said land, as provided for in paragraph 7 below;

xxx
 7. That if the cases referred to in paragraph 4 shall occur and in the event that a future law shall be passed
allowing foreigners to own real properties in the Philippines, the ownership of the above-described real
properties shall pertain to the FIRST PARTY, and the herein undersigned SECOND PARTY undertakes to
execute all the necessary deeds, documents, and contracts to effect the transfer of title in favor of the FIRST
PARTY;

xxx. 10

Lastly, the SPA allowed Grilli to administer, manage, and transfer the house and lot on behalf of Fullido. Initially,
their relationship was harmonious, but it turned sour after 16 years of living together. Both charged each other with
infidelity. They could not agree who should leave the common property, and Grilli sent formal letters to Fullido
demanding that she vacate the property, but these were unheeded. On September 8, 2010, Grilli filed a complaint
for unlawful detainer with prayer for issuance of preliminary injunction against Fullido before the MCTC, docketed as
Civil Case No. 244.

Grilli’s Position

The complaint stated that the common-law relationship between Grilli and Fullido began smoothly, until Grilli
discovered that Fullido was pregnant when he arrived in the Philippines in 2002. At first, she told him that the child
she was carrying was his. After the delivery of the child, however, it became apparent that the child was not his
because of the discrepancy between the child’s date of birth and his physical presence in the Philippines and the
difference between the baby’s physical features and those of Grilli. Later on, she admitted that the child was indeed
sired by another man.

Grilli further claimed that he was so devastated that he decided to end their common-law relationship. Nevertheless,
he allowed Fullido to live in his house out of liberality and generosity, but this time, using another room. He did not
demand any rent from Fullido over the use of his property.

After a year, Fullido became more hostile and difficult to handle. Grilli had to make repairs with his house every time
he arrived in the Philippines because she was not maintaining it in good condition. Fullido also let her two children,
siblings and parents stay in his house, which caused damage to the property. He even lost his personal belongings
inside his house on several occasions. Grilli verbally asked Fullido to move out of his house because they were not
getting along anymore, but she refused. He could no longer tolerate the hostile attitude shown to him by Fullido and
her family, thus, he filed the instant complaint.

Fullido’s Position

Fullido countered that she met Grilli sometime in 1993 when she was still 17 years old working as a cashier in
Alturas Supermarket. Grilli was then a tourist in Bohol who persistently courted her.

At first, Fullido was hesitant to the advances of Grilli because she could not yet enter into a valid marriage. When he
assured her and her parents that they would eventually be married in three years, she eventually agreed to have a
relationship with him and to live as common-law spouses. Sometime in 1995, Grilli offered to build a house for her
on a parcel of land she exclusively owned which would become their conjugal abode. Fullido claimed that their
relationship as common-law spouses lasted for more than 18 years until she discovered that Grilli had found a new
and younger woman in his life. Grilli began to threaten and physically hurt her by knocking her head and choking
her.

When Fullido refused to leave their house even after the unlawful detainer case was filed, Grilli again harassed,
intimidated and threatened to hurt her and her children. Thus, she filed a petition for Temporary Protection Order
(TPO) and Permanent Protection Order (PPO) against Grilli under Republic Act (R.A.) No. 9262 before the Regional
Trial Court, Branch 3, Bohol (RTC-Branch 3). In an Order, dated February 23, 2011, the RTC-Branch 3 granted the
11

TPO in favor of Fullido and directed that Grilli must be excluded from their home.

Fullido finally asserted that, although it was Grilli who funded the construction of the house, she exclusively owned
the lot and she contributed to the value of the house by supervising its construction and maintaining their household.

The MCTC Ruling

In its decision, dated March 31, 2011, the MCTC dismissed the case after finding that Fullido could not be ejected
from their house and lot. The MCTC opined that she was a co-owner of the house as she contributed to it by
supervising its construction. Moreover, the MCTC respected the TPO issued by RTC-Branch 3 which directed that
Grilli be removed from Fullido’s residence. The dispositive portion of the MCTC decision reads:

WHEREFORE, judgment is hereby rendered:

 1. Dismissing the instant case;

2. Ordering the Plaintiff to pay to Defendant the amount of Fifty Thousand Pesos (P50,000.00) as
moral damages, and Twenty Thousand Pesos (P20,000.00) as exemplary damages, and Twenty
Thousand Pesos (P20,000.00) as Attorney’s Fees; and

3. Denying the prayer for the issuance of Preliminary Mandatory Injunction.

SO ORDERED. 12

Not in conformity, Grilli elevated the matter before the RTC.

The RTC Ruling

In its decision, dated April 26, 2012, the RTC reversed and set aside the MCTC decision. The RTC was of the view
that Grilli had the exclusive right to use and possess the house and lot by virtue of the contract of lease executed by
the parties. Since the period of lease had not yet expired, Fullido, as lessor, had the obligation to respect the
peaceful and adequate enjoyment of the leased premises by Grilli as lessee. The RTC opined that absent a judicial
declaration of nullity of the contract of lease, its terms and conditions were valid and binding. As to the TPO, the
RTC held that the same had no bearing in the present case which merely involved the possession of the leased
property.

Aggrieved, Fullido instituted an appeal before the CA alleging that her land was unlawfully transferred by Grilli to a
certain Jacqueline Guibone (Guibone), his new girlfriend, by virtue of the SPA earlier executed by Fullido.

The CA Ruling

In its assailed decision, dated May 31, 2013, the CA upheld the decision of the RTC emphasizing that in an
ejectment case, the only issue to be resolved would be the physical possession of the property. The CA was also of
the view that as Fullido executed both the MOA and the contract of lease, which gave Grilli the possession and use
of the house and lot, the same constituted as a judicial admission that it was Grilli who had the better right of
physical possession. The CA stressed that, if Fullido would insist that the said documents were voidable as her
consent was vitiated, then she must institute a separate action for annulment of contracts. Lastly, the CA stated that
the TPO issued by the RTC-Branch 3 under Section 21 of R.A. No. 9262 was without prejudice to any other action
that might be filed by the parties.

Fullido filed a motion for reconsideration, but she failed to attach the proofs of service of her motion. For said
13

reason, it was denied by the CA in its assailed resolution, dated September 24, 2014.

Hence, this present petition raising the following:

ISSUES

THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND DEPARTED FROM ESTABLISHED LAW
AND JURISPRUDENCE IN DENYING THE PETITION FOR REVIEW AND IN AFFIRMING THE DECISION OF
RTC BOHOL BRANCH 47 EJECTING PETITIONER FROM THE SUBJECT PROPERTIES, WHICH EJECTMENT
ORDER IS ANCHORED ON PATENTLY NULL AND VOID CONTRACTS.

II

THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND DEPARTED FROM ESTABLISHED LAW IN
AFFIRMING THE DECISION OF THE RTC BOHOL BRANCH 47 EJECTING PETITIONER FROM THEIR
CONJUGAL ABODE WHERE RESPONDENT HAS BEEN EARLIER ORDERED TO VACATE BY VIRTUE OF A
PERMANENT PROTECTION ORDER THUS EFFECTIVELY SETTING ASIDE, NEGATING AND/OR VIOLATING
AN ORDER ISSUED BY A COURT OF CO-EQUAL JURISDICTION.

III

THE HONORABLE COURT OF APPEALS LIKEWISE ERRED AND DEPARTED FROM ESTABLISHED LAW
AND JURISPRUDENCE IN DENYING THE PETITIONER’S MOTION FOR RECONSIDERATION, AMONG
OTHERS, FOR NONCOMPLIANCE WITH SECTION 1 RULE 52 VIS-À-VIS SECTION 13, RULE 13 OF THE 1997
RULES OF CIVIL PROCEDURE. 14
Fullido argues that she could not be ejected from her own lot based on the contract of lease and the MOA because
those documents were null and void for being contrary to the Constitution, the law, public policy, morals and
customs; that the MOA prevented her from disposing or selling her own land, while the contract of lease favoring
Grilli, a foreigner, was contrary to the Constitution as it was a for a period of fifty (50) years, and, upon termination,
was automatically renewable for another fifty (50) years; that the TPO, which became a PPO by virtue of the July 5,
2011 Decision of RTC-Branch 3, should not be defeated by the ejectment suit; and that the CA should have
15

liberally applied its procedural rules and allowed her motion for reconsideration.

In his Comment, Grilli countered that he was the rightful owner of the house because a foreigner was not prohibited
16

from owning residential buildings; that the lot was no longer registered in the name of Fullido as it was transferred to
Guibone, covered by TCT No. 101-2011000335; that if Fullido wanted to assail the lease contract, she should have
first filed a separate action for annulment of the said contract, which she did in Civil Case No. 8094, pending before
the Regional Trial Court of Bohol; and that by signing the contracts, Fullido fully agreed with their terms and must
abide by the same.

In her Reply, Fullido insisted that the contract of lease and the MOA were null and void, thus, these could not be
17

the source of Grilli’s de facto possession.

The Court’s Ruling

The Court finds the petition meritorious.

Unlawful detainer is an action to recover possession of real property from one who unlawfully withholds possession
thereof after the expiration or termination of his right to hold possession under any contract, express or implied. The
possession of the defendant in unlawful detainer is originally legal but became illegal due to the expiration or
termination of the right to possess. The only issue to be resolved in an unlawful detainer case is the physical or
material possession of the property involved, independent of any claim of ownership by any of the parties. 18

In this case, Fullido chiefly asserts that Grilli had no right to institute the action for unlawful detainer because the
lease contract and the MOA, which allegedly gave him the right of possession over the lot, were null and void for
violating the Constitution. Contrary to the findings of the CA, Fullido was not only asserting that the said
contracts were merely voidable, but she was consistently invoking that the same were completely
void. Grilli, on the other hand, contends that Fullido could not question the validity of the said contracts in the
19

present ejectment suit unless she instituted a separate action for annulment of contracts. Thus, the Court is
confronted with the issue of whether a contract could be declared void in a summary action of unlawful detainer.

Under the circumstances of the case, the Court answers in the affirmative.

A void contract cannot be the

source of any right; it cannot
be utilized in an ejectment suit

A void or inexistent contract may be defined as one which lacks, absolutely either in fact or in law, one or some of
the elements which are essential for its validity. It is one which has no force and effect from the very beginning, as
20

if it had never been entered into; it produces no effect whatsoever either against or in favor of anyone. Quod 21

nullum est nullum producit effectum. Article 1409 of the New Civil Code explicitly states that void contracts also
cannot be ratified; neither can the right to set up the defense of illegality be waived. Accordingly, there is no need
22

for an action to set aside a void or inexistent contract.

23

A review of the relevant jurisprudence reveals that the Court did not hesitate to set aside a void contract even in an
action for unlawful detainer. In Spouses Alcantara v. Nido, which involves an action for unlawful detainer, the
24

petitioners therein raised a defense that the subject land was already sold to them by the agent of the owner. The
Court rejected their defense and held that the contract of sale was void because the agent did not have the written
authority of the owner to sell the subject land.

Similarly, in Roberts v. Papio, a case of unlawful detainer, the Court declared that the defense of ownership by the
25

respondent therein was untenable. The contract of sale invoked by the latter was void because the agent did not
have the written authority of the owner. A void contract produces no effect either against or in favor of anyone.

In Ballesteros v. Abion, which also involves an action for unlawful detainer, the Court disallowed the defense of
26

ownership of the respondent therein because the seller in their contract of sale was not the owner of the subject
property. For lacking an object, the said contract of sale was void ab initio.

Clearly, contracts may be declared void even in a summary action for unlawful detainer because, precisely, void
contracts do not produce legal effect and cannot be the source of any rights. To emphasize, void contracts may not
be invoked as a valid action or defense in any court proceeding, including an ejectment suit. The next issue that
must be resolved by the Court is whether the assailed lease contract and MOA are null and void.

<>The lease contract and the

MOA circumvent the
constitutional restraint against
foreign ownership of lands.

Under Section 1 of Article XIII of the 1935 Constitution, natural resources shall not be alienated, except with respect
to public agricultural lands and in such cases, the alienation is limited to Filipino citizens. Concomitantly, Section
5 thereof states that, save in cases of hereditary succession, no private agricultural land shall be transferred or
assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain
in the Philippines. The prohibition on the transfer of lands to aliens was adopted in the present 1987 Constitution,
under Sections 2, 3 and 7 of Article XII thereof. Agricultural lands, whether public or private, include residential,
commercial and industrial lands. The purpose of prohibiting the transfer of lands to foreigners is to uphold the
conservation of our national patrimony and ensure that agricultural resources remain in the hands of Filipino
citizens. 27

The prohibition, however, is not limited to the sale of lands to foreigners. It also covers leases of lands amounting to
the transfer of all or substantially all the rights of dominion. In the landmark case of Philippine Banking Corporation
v. Lui She, the Court struck down a lease contract of a parcel of land in favor of a foreigner for a period of ninety-
28

nine (99) years with an option to buy the land for fifty (50) years. Where a scheme to circumvent the Constitutional
prohibition against the transfer of lands to aliens is readily revealed as the purpose for the contracts, then the illicit
purpose becomes the illegal cause rendering the contracts void. Thus, if an alien is given not only a lease of, but
also an option to buy, a piece of land by virtue of which the Filipino owner cannot sell or otherwise dispose
of his property, this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of
ownership whereby the owner divests himself in stages not only of the right to enjoy the land but also of the right to
dispose of it — rights which constitute ownership. If this can be done, then the Constitutional ban against alien
landholding in the Philippines, is indeed in grave peril.
29

In Llantino v. Co Liong Chong, however, the Court clarified that a lease contract in favor of aliens for a reasonable
30

period was valid as long as it did not have any scheme to circumvent the constitutional prohibition, such as depriving
the lessors of their right to dispose of the land. The Court explained that "[a]liens are not completely excluded by the
Constitution from use of lands for residential purposes. Since their residence in the Philippines is temporary, they
may be granted temporary rights such as a lease contract which is not forbidden by the Constitution. Should they
desire to remain here forever and share our fortune and misfortune, Filipino citizenship is not impossible to
acquire." The lessee-foreigner therein eventually acquired Filipino citizenship.
31

Consequently, Presidential Decree (P.D.) No. 471 was enacted to regulate the lease of lands to aliens. It provides
1avvphi1

that the maximum period allowable for the duration of leases of private lands to aliens or alien-owned corporations,
associations, or entities not qualified to acquire private lands in the Philippines shall be twenty-five (25) years,
renewable for another period of twenty-five (25) years upon mutual agreement of both lessor and lessee. It also 32

provides that any contract or agreement made or executed in violation thereof shall be null and void ab
initio.
33

Based on the above-cited constitutional, legal and jurisprudential limitations, the Court finds that the lease contract
and the MOA in the present case are null and void for virtually transferring the reigns of the land to a foreigner.

As can be gleaned from the contract, the lease in favor of Grilli was for a period of fifty (50) years, automatically
extended for another fifty (50) years upon the expiration of the original period. Moreover, it strictly prohibited Fullido
from selling, donating, or encumbering her land to anyone without the written consent of Grilli. For a measly
consideration of P10,000.00, Grilli would be able to absolutely occupy the land of Fullido for 100 years, and she is
powerless to dispose the same. The terms of lease practically deprived Fullido of her property rights and effectively
transferred the same to Grilli.

Worse, the dominion of Grilli over the land had been firmly cemented by the terms of the MOA as it reinforced Grilli’s
property rights over the land because, first, it brazenly dictated that ownership of the land and the residential
building resided with him. Second, Fullido was expressly prohibited from transferring the same without Grilli’s
conformity. Third, Grilli would permanently reside in the residential building. Fourth, Grilli may capriciously dispose
Fullido’s property once their common-law relationship is terminated. This right was recently exercised when the land
was transferred to Guibone. Lastly, Fullido shall be compelled to transfer the land to Grilli if a law would be passed
allowing foreigners to own real properties in the Philippines.

Evidently, the lease contract and the MOA operated hand-in-hand to strip Fullido of any dignified right over her own
property. The term of lease for 100 years was obviously in excess of the allowable periods under P.D. No. 471.
Even Grilli admitted that "this is a case of an otherwise valid contract of lease that went beyond the period of what is
legally permissible."34 Grilli had been empowered to deprive Fullido of her land’s possession, control, disposition
and even its ownership. The jus possidendi, jus utendi, jus fruendi, jus abutendi and, more importantly, the jus
disponendi – the sum of rights which composes ownership – of the property were effectively transferred to Grilli who
would safely enjoy the same for over a century. The title of Fullido over the land became an empty and useless
vessel, visible only in paper, and was only meant as a dummy to fulfill a foreigner’s desire to own land within our
soils. It is disturbing how these documents were methodically formulated to circumvent the constitutional prohibition
against land ownership by foreigners. The said contracts attempted to guise themselves as a lease, but a closer
scrutiny of the same revealed that they were intended to transfer the dominion of a land to a foreigner in violation of
Section 7, Article XII of the 1987 Constitution. Even if Fullido voluntary executed the same, no amount of consent
from the parties could legalize an unconstitutional agreement. The lease contract and the MOA do not deserve an
iota of validity and must be rightfully struck down as null and void for being repugnant to the fundamental law. These
void documents cannot be the source of rights and must be treated as mere scraps of paper.

Grilli does not have a

cause of action for
unlawful detainer

Ultimately, the complaint filed by Grilli was an action for unlawful detainer. Section 1 of Rule 70 of the Rules of Court
lays down the requirements for filing a complaint for unlawful detainer, to wit:

Who may institute proceedings, and when. – Subject to the provision of the next succeeding section, a person
deprived of the possession of any land or building by force, intimidation, threat, strategy, or stealth, or a lessor,
vendor, vendee, or other person against whom the possession of any land or building is unlawfully
withheld after the expiration or termination of the right to hold possession, by virtue of any contract, express or
implied, or the legal representatives or assigns of any such lessor, vendor, vendee, or other person, may, at any
time within one (1) year after such unlawful deprivation or withholding of possession, bring an action in the proper
Municipal Trial Court against the person or persons unlawfully withholding or depriving of possession, or any person
or persons claiming under them, for the restitution of such possession, together with damages and costs.

[Emphasis Supplied]

A complaint sufficiently alleges a cause of action for unlawful detainer if it recites the following: (1) initially,
possession of property by the defendant was by contract with or by tolerance of the plaintiff; (2) eventually, such
possession became illegal upon notice by plaintiff to defendant of the termination of the latter’s right of possession;
(3) thereafter, the defendant remained in possession of the property and deprived the plaintiff of the enjoyment
thereof; and (4) within one year from the last demand on defendant to vacate the property, the plaintiff instituted the
complaint for ejectment. 35

The Court rules that Grilli has no cause of action for unlawful detainer against Fullido. As can be gleaned from the
discussion above, the complainant must either be a lessor, vendor, vendee, or other person against whom the
possession of any land or building is unlawfully withheld. In other words, the complainant in an unlawful detainer
case must have some right of possession over the property.

In the case at bench, the lease contract and the MOA, from which Grilli purportedly drew his right of possession,
were found to be null and void for being unconstitutional. A contract that violates the Constitution and the law is null
and void ab initio and vests no rights and creates no obligations. It produces no legal effect at all. Hence, as void
36

contracts could not be the source of rights, Grilli had no possessory right over the subject land. A person who does
not have any right over a property from the beginning cannot eject another person possessing the same.
Consequently, Grilli’s complaint for unlawful detainer must be dismissed for failure to prove his cause of action.

In Pari Delicto Doctrine

is not applicable

On a final note, the Court deems it proper to discuss the doctrine of in pari delicto. Latin for "in equal fault," in pari
delicto connotes that two or more people are at fault or are guilty of a crime. Neither courts of law nor equity will
interpose to grant relief to the parties, when an illegal agreement has been made, and both parties stand in pari
delicto.
37

The application of the doctrine of in pari delicto is not always rigid. An accepted exception arises when its
application contravenes well-established public policy. In this jurisdiction, public policy has been defined as that
principle of the law which holds that no subject or citizen can lawfully do that which has a tendency to be injurious to
the public or against the public good. Thus, whenever public policy is advanced by either party, they may be
38

allowed to sue for relief against the transaction.

39

In the present case, both Grilli and Fullido were undoubtedly parties to a void contract. Fullido, however, was not
barred from filing the present petition before the Court because the matters at hand involved an issue of public
policy, specifically the Constitutional prohibition against land ownership by aliens. As pronounced in Philippine
Banking Corporation v. Lui She, the said constitutional provision would be defeated and its continued violation
sanctioned if the lands continue to remain in the hands of a foreigner. Thus, the doctrine of in pari delicto shall not
40

be applicable in this case.

WHEREFORE, the petition is GRANTED. The May 31, 2013 Decision of the Court of Appeals and its September
24, 2014 Resolution in CA-G.R. CEB-SP No. 06946 are hereby REVERSED and SET ASIDE. The complaint filed
by Gino Grilli before the Municipal Circuit Trial Court, Dauis-Panglao, Dauis, Bohol, docketed as Civil Case No. 244,
is DISMISSED for lack of cause of action.

SO ORDERED.

G.R. No. L-65510 March 9, 1987

TEJA MARKETING AND/OR ANGEL JAUCIAN, petitioner,

vs.
HONORABLE INTERMEDIATE APPELLATE COURT * AND PEDRO N. NALE, respondents.

Cirilo A. Diaz, Jr. for petitioner.

Henry V. Briguera for private respondent.

PARAS, J.:

"'Ex pacto illicito' non oritur actio" (No action arises out of illicit bargain) is the time-honored maxim that must be
applied to the parties in the case at bar. Having entered into an illegal contract, neither can seek relief from the
courts, and each must bear the consequences of his acts." (Lita Enterprises vs. IAC, 129 SCRA 81.)

The factual background of this case is undisputed. The same is narrated by the respondent court in its now assailed
decision, as follows:

On May 9, 1975, the defendant bought from the plaintiff a motorcycle with complete accessories and
a sidecar in the total consideration of P8,000.00 as shown by Invoice No. 144 (Exh. "A"). Out of the
total purchase price the defendant gave a downpayment of P1,700.00 with a promise that he would
pay plaintiff the balance within sixty days. The defendant, however, failed to comply with his promise
and so upon his own request, the period of paying the balance was extended to one year in monthly
installments until January 1976 when he stopped paying anymore. The plaintiff made demands but
just the same the defendant failed to comply with the same thus forcing the plaintiff to consult a
lawyer and file this action for his damage in the amount of P546.21 for attorney's fees and P100.00
for expenses of litigation. The plaintiff also claims that as of February 20, 1978, the total account of
the defendant was already P2,731.06 as shown in a statement of account (Exhibit. "B"). This amount
includes not only the balance of P1,700.00 but an additional 12% interest per annum on the said
balance from January 26, 1976 to February 27, 1978; a 2% service charge; and P 546.21
representing attorney's fees.

In this particular transaction a chattel mortgage (Exhibit 1) was constituted as a security for the
payment of the balance of the purchase price. It has been the practice of financing firms that
whenever there is a balance of the purchase price the registration papers of the motor vehicle
subject of the sale are not given to the buyer. The records of the LTC show that the motorcycle sold
to the defendant was first mortgaged to the Teja Marketing by Angel Jaucian though the Teja
Marketing and Angel Jaucian are one and the same, because it was made to appear that way only
as the defendant had no franchise of his own and he attached the unit to the plaintiff's MCH Line.
The agreement also of the parties here was for the plaintiff to undertake the yearly registration of the
motorcycle with the Land Transportation Commission. Pursuant to this agreement the defendant on
February 22, 1976 gave the plaintiff P90.00, the P8.00 would be for the mortgage fee and the
P82.00 for the registration fee of the motorcycle. The plaintiff, however failed to register the
motorcycle on that year on the ground that the defendant failed to comply with some requirements
such as the payment of the insurance premiums and the bringing of the motorcycle to the LTC for
stenciling, the plaintiff saying that the defendant was hiding the motorcycle from him. Lastly, the
plaintiff explained also that though the ownership of the motorcycle was already transferred to the
defendant the vehicle was still mortgaged with the consent of the defendant to the Rural Bank of
Camaligan for the reason that all motorcycle purchased from the plaintiff on credit was rediscounted
with the bank.

On his part the defendant did not dispute the sale and the outstanding balance of P1,700. 00 still
payable to the plaintiff. The defendant was persuaded to buy from the plaintiff the motorcycle with
the side car because of the condition that the plaintiff would be the one to register every year the
motorcycle with the Land Transportation Commission. In 1976, however, the plaintfff failed to
register both the chattel mortgage and the motorcycle with the LTC notwithstanding the fact that the
defendant gave him P90.00 for mortgage fee and registration fee and had the motorcycle insured
with La Perla Compana de Seguros (Exhibit "6") as shown also by the Certificate of cover (Exhibit
"3"). Because of this failure of the plaintiff to comply with his obligation to register the motorcycle the
defendant suffered damages when he failed to claim any insurance indemnity which would amount
to no less than P15,000.00 for the more than two times that the motorcycle figured in accidents
aside from the loss of the daily income of P15.00 as boundary fee beginning October 1976 when the
motorcycle was impounded by the LTC for not being registered.

The defendant disputed the claim of the plaintiff that he was hiding from the plaintiff the motorcycle
resulting in its not being registered. The truth being that the motorcycle was being used for
transporting passengers and it kept on travelling from one place to another. The motor vehicle sold
to him was mortgaged by the plaintiff with the Rural Bank of Camaligan without his consent and
knowledge and the defendant was not even given a copy of the mortgage deed. The defendant
claims that it is not true that the motorcycle was mortgaged because of re-discounting for
rediscounting is only true with Rural Banks and the Central Bank. The defendant puts the blame on
the plaintiff for not registering the motorcycle with the LTC and for not giving him the registration
papers inspite of demands made. Finally, the evidence of the defendant shows that because of the
 filing of this case he was forced to retain the services of a lawyer for a fee on not less than
P1,000.00.

xxx xxx xxx

... it also appears and the Court so finds that defendant purchased the motorcycle in question,
particularly for the purpose of engaging and using the same in the transportation business and for
this purpose said trimobile unit was attached to the plaintiffs transportation line who had the
franchise, so much so that in the registration certificate, the plaintiff appears to be the owner of the
unit. Furthermore, it appears to have been agreed, further between the plaintiff and the defendant,
that plaintiff would undertake the yearly registration of the unit in question with the LTC. Thus, for the
registration of the unit for the year 1976, per agreement, the defendant gave to the plaintiff the
amount of P82.00 for its registration, as well as the insurance coverage of the unit.

Eventually, petitioner Teja Marketing and/or Angel Jaucian filed an action for "Sum of Money with Damages" against
private respondent Pedro N. Nale in the City Court of Naga City. The City Court rendered judgment in favor of
petitioner, the dispositive portion of which reads:

WHEREFORE, decision is hereby rendered dismissing the counterclaim and ordering the defendant
to pay plaintiff the sum of P1,700.00 representing the unpaid balance of the purchase price with
legal rate of interest from the date of the filing of the complaint until the same is fully paid; to pay
plaintiff the sum of P546.21 as attorney's fees; to pay plaintiff the sum of P200.00 as expenses of
litigation; and to pay the costs.

SO ORDERED.

On appeal to the Court of First Instance of Camarines Sur, the decision was affirmed in toto. Private respondent
filed a petition for review with the Intermediate Appellate Court and on July 18, 1983 the said Court promulgated its
decision, the pertinent portion of which reads —

However, as the purchase of the motorcycle for operation as a trimobile under the franchise of the
private respondent Jaucian, pursuant to what is commonly known as the "kabit system", without the
prior approval of the Board of Transportation (formerly the Public Service Commission) was an
illegal transaction involving the fictitious registration of the motor vehicle in the name of the private
respondent so that he may traffic with the privileges of his franchise, or certificate of public
convenience, to operate a tricycle service, the parties being in pari delicto, neither of them may bring
an action against the other to enforce their illegal contract [Art. 1412 (a), Civil Code].

xxx xxx xxx

WHEREFORE, the decision under review is hereby set aside. The complaint of respondent Teja
Marketing and/or Angel Jaucian, as well as the counterclaim of petitioner Pedro Nale in Civil Case
No. 1153 of the Court of First Instance of Camarines Sur (formerly Civil Case No. 5856 of the City
Court of Naga City) are dismissed. No pronouncement as to costs.

SO ORDERED.

The decision is now before Us on a petition for review, petitioner Teja Marketing and/or Angel Jaucian presenting a
lone assignment of error — whether or not respondent court erred in applying the doctrine of "pari delicto."

We find the petition devoid of merit.

Unquestionably, the parties herein operated under an arrangement, commonly known as the "kabit system"
whereby a person who has been granted a certificate of public convenience allows another person who owns motor
vehicles to operate under such franchise for a fee. A certificate of public convenience is a special privilege conferred
by the government. Abuse of this privilege by the grantees thereof cannot be countenanced. The "kabit system" has
been Identified as one of the root causes of the prevalence of graft and corruption in the government transportation
offices.

Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being contrary
to public policy and, therefore, void and in existent under Article 1409 of the Civil Code. It is a fundamental principle
that the court will not aid either party to enforce an illegal contract, but will leave both where it finds then. Upon this
premise it would be error to accord the parties relief from their predicament. Article 1412 of the Civil Code denies
them such aid. It provides:
 Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:

1. When the fault is on the part of both contracting parties, neither may recover that he has given by
virtue of the contract, or demand, the performance of the other's undertaking.

The defect of in existence of a contract is permanent and cannot be cured by ratification or by prescription. The
mere lapse of time cannot give efficacy to contracts that are null and void.

WHEREFORE, the petition is hereby dismissed for lack of merit. The assailed decision of the Intermediate Appellate
Court (now the Court of Appeals) is AFFIRMED. No costs.

SO ORDERED.

G.R. No. 186550 July 5, 2010

ASIAN CATHAY FINANCE AND LEASING CORPORATION, Petitioner,

vs.
SPOUSES CESARIO GRAVADOR and NORMA DE VERA and SPOUSES EMMA CONCEPCION G. DUMIGPI
and FEDERICO L. DUMIGPI, Respondents.
 DECISION

NACHURA, J.:

On appeal is the June 10, 2008 Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 83197, setting aside the
April 5, 2004 decision2 of the Regional Trial Court (RTC), Branch 9, Bulacan, as well as its subsequent
Resolution3 dated February 11, 2009, denying petitioner’s motion for reconsideration.

On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of Eight
Hundred Thousand Pesos (₱800,000.00)4 to respondent Cesario Gravador, with respondents Norma de Vera and
Emma Concepcion Dumigpi as co-makers. The loan was payable in sixty (60) monthly installments of ₱24,400.00
each. To secure the loan, respondent Cesario executed a real estate mortgage 5 over his property in Sta. Maria,
Bulacan, covered by Transfer Certificate of Title No. T-29234. 6

Respondents paid the initial installment due in November 1999. However, they were unable to pay the subsequent
ones. Consequently, on February 1, 2000, respondents received a letter demanding payment of ₱1,871,480.00
within five (5) days from receipt thereof. Respondents requested for an additional period to settle their account, but
ACFLC denied the request. Petitioner filed a petition for extrajudicial foreclosure of mortgage with the Office of the
Deputy Sheriff of Malolos, Bulacan.

On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and promissory note with damages
and prayer for issuance of a temporary restraining order (TRO) and writ of preliminary injunction. Respondents
claimed that the real estate mortgage is null and void. They pointed out that the mortgage does not make reference
to the promissory note dated October 22, 1999. The promissory note does not specify the maturity date of the loan,
the interest rate, and the mode of payment; and it illegally imposed liquidated damages. The real estate mortgage,
on the other hand, contains a provision on the waiver of the mortgagor’s right of redemption, a provision that is
contrary to law and public policy. Respondents added that ACFLC violated Republic Act No. 3765, or the Truth in
Lending Act, in the disclosure statement that should be issued to the borrower. Respondents, thus, claimed that
ACFLC’s petition for foreclosure lacked factual and legal basis, and prayed that the promissory note, real estate
mortgage, and any certificate of sale that might be issued in connection with ACFLC’s petition for extrajudicial
foreclosure be declared null and void. In the alternative, respondents prayed that the court fix their obligation at
₱800,000.00 if the mortgage could not be annulled, and declare as null and void the provisions on the waiver of
mortgagor’s right of redemption and imposition of the liquidated damages. Respondents further prayed for moral
and exemplary damages, as well as attorney’s fees, and for the issuance of a TRO to enjoin ACFLC from
foreclosing their property.

On April 12, 2000, the RTC issued an Order, 7 denying respondents’ application for TRO, as the acts sought to be
enjoined were already fait accompli.

On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the complaint and averring failure to
state a cause of action and lack of cause of action, as defenses. ACFLC claimed that it was merely exercising its
right as mortgagor; hence, it prayed for the dismissal of the complaint.

After trial, the RTC rendered a decision, dismissing the complaint for lack of cause of action. Sustaining the validity
of the promissory note and the real estate mortgage, the RTC held that respondents are well-educated individuals
who could not feign naiveté in the execution of the loan documents. It, therefore, rejected respondents’ claim that
ACFLC deceived them into signing the promissory note, disclosure statement, and deed of real estate mortgage.
The RTC further held that the alleged defects in the promissory note and in the deed of real estate mortgage are too
insubstantial to warrant the nullification of the mortgage. It added that a promissory note is not one of the essential
elements of a mortgage; thus, reference to a promissory note is neither indispensable nor imperative for the validity
of the mortgage. The RTC also upheld the interest rate and the penalty charge imposed by ACFLC, and the waiver
of respondents’ right of redemption provided in the deed of real estate mortgage.

The RTC disposed thus:

WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence applicable thereto, judgment is
hereby rendered DISMISSING the complaint in the above-entitled case for want of cause of action as well as the
counterclaim of [petitioner] Asian Cathay Finance & Leasing Corporation for moral and exemplary damages and
attorney’s fees for abject lack of proof to justify the same.

SO ORDERED.8

Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the assailed Decision, reversing
the RTC. It held that the amount of ₱1,871,480.00 demanded by ACFLC from respondents is unconscionable and
excessive. Thus, it declared respondents’ principal loan to be ₱800,000.00, and fixed the interest rate at 12% per
annum and reduced the penalty charge to 1% per month. It explained that ACFLC could not insist on the interest
rate provided on the note because it failed to provide respondents with the disclosure statement prior to the
consummation of the loan transaction. Finally, the CA invalidated the waiver of respondents’ right of redemption for
reasons of public policy. Thus, the CA ordered:

WHEREFORE, premises considered, the appealed decision is REVERSED AND SET ASIDE. Judgment is hereby
rendered as follows:

1) Affirming the amount of the principal loan under the REM and Disclosure Statement both dated October
22, 1999 to be ₱800,000.00, subject to:

a. 1% interest per month (12% per annum) on the principal from November 23, 1999 until the date of
the foreclosure sale, less ₱24,000.00 paid by [respondents] as first month amortization[;]

b. 1% penalty charge per month on the principal from December 23, 1999 until the date of the
foreclosure sale.

2) Declaring par. 14 of the REM as null and void by reason of public policy, and granting mortgagors a
period of one year from the finality of this Decision within which to redeem the subject property by paying the
redemption price as computed under paragraph 1 hereof, plus one percent (1%) interest thereon from the
time of foreclosure up to the time of the actual redemption pursuant to Section 28, Rule 39 of the 1997 Rules
on Civil Procedure.

The claim of the [respondents] for moral and exemplary damages and attorney’s fees is dismissed for lack of merit.

SO ORDERED.9

ACFLC filed a motion for reconsideration, but the CA denied it on February 11, 2009.

ACFLC is now before us, faulting the CA for reversing the dismissal of respondents’ complaint. It points out that
respondents are well-educated persons who are familiar with the execution of loan documents. Thus, they cannot
be deceived into signing a document containing provisions that they are not amenable to. ACFLC ascribes error on
the part of the CA for invalidating the interest rates imposed on respondents’ loan, and the waiver of the right of
redemption.

The appeal lacks merit.

It is true that parties to a loan agreement have a wide latitude to stipulate on any interest rate in view of Central
Bank Circular No. 905, series of 1982, which suspended the Usury Law ceiling on interest rate effective January 1,
1983. However, interest rates, whenever unconscionable, may be equitably reduced or even invalidated. In several
cases,10 this Court had declared as null and void stipulations on interest and charges that were found excessive,
iniquitous and unconscionable.

Records show that the amount of loan obtained by respondents on October 22, 1999 was ₱800,000.00.
Respondents paid the installment for November 1999, but failed to pay the subsequent ones. On February 1, 2000,
ACFLC demanded payment of ₱1,871,480.00. In a span of three months, respondents’ obligation ballooned by
more than ₱1,000,000.00. ACFLC failed to show any computation on how much interest was imposed and on the
penalties charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is unconscionable.

In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion T. Clemente and Alexander C.
Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps. Marie Rose T. Soliman and Arvin Soliman and Julius
Amiel Tan,11 this Court held:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is
immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to
the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there
any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.

Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against
the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They
cannot be ratified nor the right to set up their illegality as a defense be waived. The nullity of the stipulation on the
usurious interest does not, however, affect the lender’s right to recover the principal of the loan. Nor would it affect
the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right
can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the
stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive
interest formerly imposed.12 The nullification by the CA of the interest rate and the penalty charge and the
consequent imposition of an interest rate of 12% and penalty charge of 1% per month cannot, therefore, be
considered a reversible error.

ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage which provides for the waiver of
the mortgagor’s right of redemption. It argues that the right of redemption is a privilege; hence, respondents are at
liberty to waive their right of redemption, as they did in this case.

Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be couched in clear and
unequivocal terms which will leave no doubt as to the intention of a party to give up a right or benefit which legally
pertains to him. Additionally, the intention to waive a right or an advantage must be shown clearly and
convincingly.13 Unfortunately, ACFLC failed to convince us that respondents waived their right of redemption
voluntarily.

As the CA had taken pains to demonstrate:

The supposed waiver by the mortgagors was contained in a statement made in fine print in the REM. It was made in
the form and language prepared by [petitioner]ACFLC while the [respondents] merely affixed their signatures or
adhesion thereto. It thus partakes of the nature of a contract of adhesion. It is settled that doubts in the interpretation
of stipulations in contracts of adhesion should be resolved against the party that prepared them. This principle
especially holds true with regard to waivers, which are not presumed, but which must be clearly and convincingly
shown. [Petitioner] ACFLC presented no evidence hence it failed to show the efficacy of this waiver.

Moreover, to say that the mortgagor’s right of redemption may be waived through a fine print in a mortgage contract
is, in the last analysis, tantamount to placing at the mortgagee’s absolute disposal the property foreclosed. It would
render practically nugatory this right that is provided by law for the mortgagor for reasons of public policy. A contract
of adhesion may be struck down as void and unenforceable for being subversive to public policy, when the weaker
party is completely deprived of the opportunity to bargain on equal footing. 14

In fine, when the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid rather
than to defeat his right.15 Thus, we affirm the CA in nullifying the waiver of the right of redemption provided in the real
estate mortgage.

Finally, ACFLC claims that respondents’ complaint for annulment of mortgage is a collateral attack on its certificate
of title. The argument is specious.

The instant complaint for annulment of mortgage was filed on April 7, 2000, long before the consolidation of
ACFLC’s title over the property. In fact, when respondents filed this suit at the first instance, the title to the property
was still in the name of respondent Cesario. The instant case was pending with the RTC when ACFLC filed a
petition for foreclosure of mortgage and even when a writ of possession was issued. Clearly, ACFLC’s title is subject
to the final outcome of the present case. 1avvphi1

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R.
CV No. 83197 are AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. 166859 April 12, 2011

REPUBLIC OF THE PHILIPPINES, Petitioner,
vs.
SANDIGANBAYAN (FIRST DIVISION), EDUARDO M. COJUANGCO, JR., AGRICULTURAL CONSULTANCY
SERVICES, INC., ARCHIPELAGO REALTY CORP., BALETE RANCH, INC., BLACK STALLION RANCH, INC.,
CHRISTENSEN PLANTATION COMPANY, DISCOVERY REALTY CORP., DREAM PASTURES, INC., ECHO
RANCH, INC., FAR EAST RANCH, INC., FILSOV SHIPPING COMPANY, INC., FIRST UNITED TRANSPORT,
INC., HABAGAT REALTY DEVELOPMENT, INC., KALAWAKAN RESORTS, INC., KAUNLARAN
AGRICULTURAL CORP., LABAYUG AIR TERMINALS, INC., LANDAIR INTERNATIONAL MARKETING CORP.,
LHL CATTLE CORP., LUCENA OIL FACTORY, INC., MEADOW LARK PLANTATIONS, INC., METROPLEX
COMMODITIES, INC., MISTY MOUNTAIN AGRICULTURAL CORP., NORTHEAST CONTRACT TRADERS, INC.,
NORTHERN CARRIERS CORP., OCEANSIDE MARITIME ENTERPRISES, INC., ORO VERDE SERVICES, INC.,
PASTORAL FARMS, INC., PCY OIL MANUFACTURING CORP., PHILIPPINE TECHNOLOGIES, INC.,
PRIMAVERA FARMS, INC., PUNONG-BAYAN HOUSING DEVELOPMENT CORP., PURA ELECTRIC
COMPANY, INC., RADIO AUDIENCE DEVELOPERS INTEGRATED ORGANIZATION, INC., RADYO PILIPINO
CORP., RANCHO GRANDE, INC., REDDEE DEVELOPERS, INC., SAN ESTEBAN DEVELOPMENT CORP.,
SILVER LEAF PLANTATIONS, INC., SOUTHERN SERVICE TRADERS, INC., SOUTHERN STAR CATTLE
CORP., SPADE ONE RESORTS CORP., UNEXPLORED LAND DEVELOPERS, INC., VERDANT
PLANTATIONS, INC., VESTA AGRICULTURAL CORP. AND WINGS RESORTS CORP., Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 169203

REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
SANDIGANBAYAN (FIRST DIVISION), EDUARDO M. COJUANGCO, JR., MEADOW LARK PLANTATIONS,
INC., SILVER LEAF PLANTATIONS, INC., PRIMAVERA FARMS, INC., PASTORAL FARMS, INC., BLACK
STALLION RANCH, INC., MISTY MOUNTAINS AGRICULTURAL CORP., ARCHIPELAGO REALTY CORP.,
AGRICULTURAL CONSULTANCY SERVICES, INC., SOUTHERN STAR CATTLE CORP., LHL CATTLE CORP.,
RANCHO GRANDE, INC., DREAM PASTURES, INC., FAR EAST RANCH, INC., ECHO RANCH, INC., LAND AIR
INTERNATIONAL MARKETING CORP., REDDEE DEVELOPERS, INC., PCY OIL MANUFACTURING CORP.,
LUCENA OIL FACTORY, INC., METROPLEX COMMODITIES, INC., VESTA AGRICULTURAL CORP.,
VERDANT PLANTATIONS, INC., KAUNLARAN AGRICULTURAL CORP., ECJ & SONS AGRICULTURAL
ENTERPRISES, INC., RADYO PILIPINO CORP., DISCOVERY REALTY CORP., FIRST UNITED TRANSPORT,
INC., RADIO AUDIENCE DEVELOPERS INTEGRATED ORGANIZATION, INC., ARCHIPELAGO FINANCE AND
LEASING CORP., SAN ESTEBAN DEVELOPMENT CORP., CHRISTENSEN PLANTATION COMPANY,
NORTHERN CARRIERS CORP., VENTURE SECURITIES, INC., BALETE RANCH, INC., ORO VERDE
SERVICES, INC., and KALAWAKAN RESORTS, INC., Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 180702

REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
EDUARDO M. COJUANGCO, JR., FERDINAND E. MARCOS, IMELDA R. MARCOS, EDGARDO J. ANGARA,*
JOSE C. CONCEPCION, AVELINO V. CRUZ, EDUARDO U. ESCUETA, PARAJA G. HAYUDINI, JUAN PONCE
ENRILE, TEODORO D. REGALA, DANILO URSUA, ROGELIO A. VINLUAN, AGRICULTURAL CONSULTANCY
SERVICES, INC., ANGLO VENTURES, INC., ARCHIPELAGO REALTY CORP., AP HOLDINGS, INC., ARC
INVESTMENT, INC., ASC INVESTMENT, INC., AUTONOMOUS DEVELOPMENT CORP., BALETE RANCH,
INC., BLACK STALLION RANCH, INC., CAGAYAN DE ORO OIL COMPANY, INC., CHRISTENSEN
PLANTATION COMPANY, COCOA INVESTORS, INC., DAVAO AGRICULTURAL AVIATION, INC., DISCOVERY
REALTY CORP., DREAM PASTURES, INC., ECHO RANCH, INC., ECJ & SONS AGRI. ENT., INC., FAR EAST
RANCH, INC., FILSOV SHIPPING COMPANY, INC., FIRST MERIDIAN DEVELOPMENT, INC., FIRST UNITED
TRANSPORT, INC., GRANEXPORT MANUFACTURING CORP., HABAGAT REALTY DEVELOPMENT, INC.,
HYCO AGRICULTURAL, INC., ILIGAN COCONUT INDUSTRIES, INC., KALAWAKAN RESORTS, INC.,
KAUNLARAN AGRICULTURAL CORP., LABAYOG AIR TERMINALS, INC., LANDAIR INTERNATIONAL
MARKETING CORP., LEGASPI OIL COMPANY, LHL CATTLE CORP., LUCENA OIL FACTORY, INC.,
MEADOW LARK PLANTATIONS, INC., METROPLEX COMMODITIES, INC., MISTY MOUNTAIN
AGRICULTURAL CORP., NORTHEAST CONTRACT TRADERS, INC., NORTHERN CARRIERS CORP.,
OCEANSIDE MARITIME ENTERPRISES, INC., ORO VERDE SERVICES, INC., PASTORAL FARMS, INC., PCY
OIL MANUFACTURING CORP., PHILIPPINE RADIO CORP., INC., PHILIPPINE TECHNOLOGIES, INC.,
PRIMAVERA FARMS, INC., PUNONG-BAYAN HOUSING DEVELOPMENT CORP., PURA ELECTRIC
COMPANY, INC., RADIO AUDIENCE DEVELOPERS INTEGRATED ORGANIZATION, INC., RADYO PILIPINO
CORP., RANCHO GRANDE, INC., RANDY ALLIED VENTURES, INC., REDDEE DEVELOPERS, INC.,
ROCKSTEEL RESOURCES, INC., ROXAS SHARES, INC., SAN ESTEBAN DEVELOPMENT CORP., SAN
MIGUEL CORPORATION OFFICERS, INC., SAN PABLO MANUFACTURING CORP., SOUTHERN LUZON OIL
MILLS, INC., SILVER LEAF PLANTATIONS, INC., SORIANO SHARES, INC., SOUTHERN SERVICE TRADERS,
INC., SOUTHERN STAR CATTLE CORP., SPADE 1 RESORTS CORP., TAGUM AGRICULTURAL
DEVELOPMENT CORP., TEDEUM RESOURCES, INC., THILAGRO EDIBLE OIL MILLS, INC., TODA
HOLDINGS, INC., UNEXPLORED LAND DEVELOPERS, INC., VALHALLA PROPERTIES, INC., VENTURES
SECURITIES, INC., VERDANT PLANTATIONS, INC., VESTA AGRICULTURAL CORP. and WINGS RESORTS
CORP., Respondents.
JOVITO R. SALONGA, WIGBERTO E. TAÑADA, OSCAR F. SANTOS, VIRGILIO M. DAVID, ROMEO C.
ROYANDAYAN for himself and for SURIGAO DEL SUR FEDERATION OF AGRICULTURAL COOPERATIVES
(SUFAC), MORO FARMERS ASSOCIATION OF ZAMBOANGA DEL SUR (MOFAZS) and COCONUT FARMERS
OF SOUTHERN LEYTE COOPERATIVE (COFA-SL); PHILIPPINE RURAL RECONSTRUCTION MOVEMENT
(PRRM), represented by CONRADO S. NAVARRO; COCONUT INDUSTRY REFORM MOVEMENT, INC. (COIR)
represented by JOSE MARIE T. FAUSTINO; VICENTE FABE for himself and for PAMBANSANG KILUSAN NG
MGA SAMAHAN NG MAGSASAKA (PAKISAMA); NONITO CLEMENTE for himself and for the
NAGKAKAISANG UGNAYAN NG MGA MALILIIT NA MAGSASAKA AT MANGGAGAWA SA NIYUGAN
(NIUGAN); DIONELO M. SUANTE, SR. for himself and for KALIPUNAN NG MALILIIT NA MAGNINIYOG NG
PILIPINAS (KAMMPIL), INC., Petitioners-Intervenors.

DECISION

BERSAMIN, J.:

For over two decades, the issue of whether the sequestered sizable block of shares representing 20% of the
outstanding capital stock of San Miguel Corporation (SMC) at the time of acquisition belonged to their registered
owners or to the coconut farmers has remained unresolved. Through this decision, the Court aims to finally resolve
the issue and terminate the uncertainty that has plagued that sizable block of shares since then.

These consolidated cases were initiated on various dates by the Republic of the Philippines (Republic) via petitions
for certiorari in G.R. Nos. 166859 1 and 169023,2 and via petition for review on certiorari in 180702, 3 the first two
petitions being brought to assail the following resolutions issued in Civil Case No. 0033-F by the Sandiganbayan,
and the third being brought to appeal the adverse decision promulgated on November 28, 2007 in Civil Case No.
0033-F by the Sandiganbayan.

Specifically, the petitions and their particular reliefs are as follows:

(a) G.R. No. 166859 (petition for certiorari), to assail the resolution promulgated on December 10,
20044 denying the Republic’s Motion For Partial Summary Judgment;

(b) G.R. No. 169023 (petition for certiorari), to nullify and set aside, firstly, the resolution promulgated on
October 8, 2003,5 and, secondly, the resolution promulgated on June 24, 2005 6 modifying the resolution of
October 8, 2003; and

(c) G.R. No. 180702 (petition for review on certiorari), to appeal the decision promulgated on November 28,
2007.7

ANTECEDENTS

On July 31, 1987, the Republic commenced Civil Case No. 0033 in the Sandiganbayan by complaint, impleading as
defendants respondent Eduardo M. Cojuangco, Jr. (Cojuangco) and 59 individual defendants. On October 2, 1987,
the Republic amended the complaint in Civil Case No. 0033 to include two additional individual defendants. On
December 8, 1987, the Republic further amended the complaint through its Amended Complaint [Expanded per
Court-Approved Plaintiff’s ‘Manifestation/Motion Dated Dec. 8, 1987] albeit dated October 2, 1987.

More than three years later, on August 23, 1991, the Republic once more amended the complaint apparently to
avert the nullification of the writs of sequestration issued against properties of Cojuangco. The amended complaint
dated August 19, 1991, designated as Third Amended Complaint [Expanded Per Court-Approved Plaintiff’s
Manifestation/Motion Dated Dec. 8, 1987], 8 impleaded in addition to Cojuangco, President Marcos, and First Lady
Imelda R. Marcos nine other individuals, namely: Edgardo J. Angara, Jose C. Concepcion, Avelino V. Cruz,
Eduardo U. Escueta, Paraja G. Hayudini, Juan Ponce Enrile, Teodoro D. Regala, and Rogelio Vinluan, collectively,
the ACCRA lawyers, and Danilo Ursua, and 71 corporations.

On March 24, 1999, the Sandiganbayan allowed the subdivision of the complaint in Civil Case No. 0033 into eight
complaints, each pertaining to distinct transactions and properties and impleading as defendants only the parties
alleged to have participated in the relevant transactions or to have owned the specific properties involved. The
subdivision resulted into the following subdivided complaints, to wit:

Subdivided
Subject Matter
Complaint
 1 Civil Case No. Anomalous Purchase and Use of First United Bank (now
. 0033-A United Coconut Planters Bank)
2 Civil Case No. Creation of Companies Out of Coco Levy Funds
. 0033-B
3 Civil Case No. Creation and Operation of Bugsuk Project and Award of
. 0033-C P998 Million Damages to Agricultural Investors, Inc.
4 Civil Case No. Disadvantageous Purchases and Settlement of the
. 0033-D Accounts of Oil Mills Out of Coco Levy Funds
5 Civil Case No. Unlawful Disbursement and Dissipation of Coco Levy
. 0033-E Funds
6 Civil Case No. Acquisition of SMC shares of stock
. 0033-F
7 Civil Case No. Acquisition of Pepsi-Cola
. 0033-G
8 Civil Case No. Behest Loans and Contracts
. 0033-H

In Civil Case No. 0033-F, the individual defendants were Cojuangco, President Marcos and First Lady Imelda R.
Marcos, the ACCRA lawyers, and Ursua. Impleaded as corporate defendants were Southern Luzon Oil Mills,
Cagayan de Oro Oil Company, Incorporated, Iligan Coconut Industries, Incorporated, San Pablo Manufacturing
Corporation, Granexport Manufacturing Corporation, Legaspi Oil Company, Incorporated, collectively referred to
herein as the CIIF Oil Mills, and their 14 holding companies, namely: Soriano Shares, Incorporated, Roxas Shares,
Incorporated, Arc Investments, Incorporated, Toda Holdings, Incorporated, ASC Investments, Incorporated, Randy
Allied Ventures, Incorporated, AP Holdings, Incorporated, San Miguel Corporation Officers, Incorporated, Te Deum
Resources, Incorporated, Anglo Ventures, Incorporated, Rock Steel Resources, Incorporated, Valhalla Properties,
Incorporated, and First Meridian Development, Incorporated.

Allegedly, Cojuangco purchased a block of 33,000,000 shares of SMC stock through the 14 holding companies
owned by the CIIF Oil Mills. For this reason, the block of 33,133,266 shares of SMC stock shall be referred to as the
CIIF block of shares.

Also impleaded as defendants in Civil Case No. 0033-F were several corporations 9 alleged to have been under
Cojuangco’s control and used by him to acquire the block of shares of SMC stock totaling 16,276,879 at the time of
acquisition (representing approximately 20% percent of the capital stock of SMC). These corporations are referred
to as Cojuangco corporations or companies, to distinguish them from the CIIF Oil Mills. Reference hereafter to
Cojuangco and the Cojuangco corporations or companies shall be as Cojuangco, et al., unless the context requires
individualization.

The material averments of the Republic’s Third Amended Complaint (Subdivided) 10 in Civil Case No. 0033-F
included the following:

12. Defendant Eduardo Cojuangco, Jr., served as a public officer during the Marcos administration. During
the period of his incumbency as a public officer, he acquired assets, funds, and other property grossly and
manifestly disproportionate to his salaries, lawful income and income from legitimately acquired property.

13. Having fully established himself as the undisputed "coconut king" with unlimited powers to deal with the
coconut levy funds, the stage was now set for Defendant Eduardo M. Cojuangco, Jr. to launch his predatory
forays into almost all aspects of Philippine economic activity namely: softdrinks, agribusiness, oil mills,
shipping, cement manufacturing, textile, as more fully described below.

14. Defendant Eduardo Cojuangco, Jr. taking undue advantage of his association, influence and connection,
acting in unlawful concert with Defendants Ferdinand E. Marcos and Imelda R. Marcos, and the individual
defendants, embarked upon devices, schemes and stratagems, including the use of defendant corporations
as fronts, to unjustly enrich themselves at the expense of Plaintiff and the Filipino people, such as when he –
misused coconut levy funds to buy out majority of the outstanding shares of stock of San Miguel Corporation
in order to control the largest agri-business, foods and beverage company in the Philippines, more
particularly described as follows:

(b) He entered SMC in early 1983 when he bought most of the 20 million shares Enrique Zobel
owned in the Company. The shares, worth $49 million, represented 20% of SMC;
(c) Later that year, Cojuangco also acquired the Soriano stocks through a series of complicated and
secret agreements, a key feature of which was a "voting trust agreement" that stipulated that
Andres, Jr. or his heir would proxy over the vote of the shares owned by Soriano and Cojuangco.
This agreement, which accounted for 30% of the outstanding shares of SMC and which lasted for
five (5) years, enabled the Sorianos to retain management control of SMC for the same period;

(d) Furthermore, in exchange for an SMC investment of $45 million in non-voting preferred shares in
UCPB, Soriano served as the vice-chairman of the supposed bank of the coconut farmers, UCPB,
and in return, Cojuangco, for investing funds from the coconut levy, was named vice-chairman of
SMC;

(e) Consequently, Cojuangco enjoyed the privilege of appointing his nominees to the SMC Board, to
which he appointed key members of the ACCRA Law Firm (herein Defendants) instead of coconut
farmers whose money really funded the sale;

(f) The scheme of Cojuangco to use the lawyers of the said Firm was revealed in a document which
he signed on 19 February 1983 entitled "Principles and Framework of Mutual Cooperation and
Assistance" which governed the rules for the conduct of management of SMC and the disposition of
the shares which he bought.

(g) All together, Cojuangco purchased 33 million shares of the SMC through the following 14 holding
companies:

a) Soriano Shares, Inc. 1,249,163

b) ASC Investors, Inc. 1,562,449
c) Roxas Shares, Inc. 2,190,860
d) ARC Investors, Inc. 4,431,798
e) Toda Holdings, Inc. 3,424,618
f) AP Holdings, Inc. 1,580,997
g) Fernandez Holdings, Inc. 838,837
h) SMC Officers Corps., Inc. 2,385,987
i) Te Deum Resources, Inc. 2,674,899
j) Anglo Ventures Corp. 1,000.000
k) Randy Allied Ventures, Inc. 1,000,000
l) Rock Steel Resources, Inc. 2,432,625
m) Valhalla Properties Ltd., Inc. 1,361,033
n) First Meridian Development, Inc. 1,000,000

33,133,266

3.1. The same fourteen companies were in turn owned by the following six (6) so-called CIIF
Companies which were:

a) San Pablo Manufacturing Corp. 19%

b) Southern Luzon Coconut Oil Mills, Inc. 11%
c) Granexport Manufacturing Corporation 19%
d) Legaspi Oil Company, Inc. 18%
e) Cagayan de Oro Oil Company, Inc. 18%
f) Iligan Coconut Industries, Inc. 15%

100%
(h) Defendant Corporations are but "shell" corporations owned by interlocking shareholders who
have previously admitted that they are just "nominee stockholders" who do not have any proprietary
interest over the shares in their names. The respective affidavits of the following, namely: Jose C.
Concepcion, Florentino M. Herrera III, Teresita J. Herbosa, Teodoro D. Regala, Victoria C. de los
Reyes, Manuel R. Roxas, Rogelio A. Vinluan, Eduardo U. Escuete and Franklin M. Drilon, who were
all, at the time they became such stockholders, lawyers of the Angara Abello Concepcion Regala &
Cruz (ACCRA) Law Offices, the previous counsel who incorporated said corporations, prove that
they were merely nominee stockholders thereof.

(i) Mr. Eduardo M. Cojuangco, Jr., acquired a total of 16,276,879 shares of San Miguel Corporation
from the Ayala group: of said shares, a total of 8,138,440 (broken into 7,128,227 Class A and
1,010,213 Class B shares) were placed in the names of Meadowlark Plantations, Inc. (2,034,610)
and Primavera Farms, Inc. (4,069,220). The Articles of Incorporation of these three companies show
that Atty. Jose C. Concepcion of ACCRA owns 99.6% of the entire outstanding stock. The same
shareholder executed three (3) separate "Declaration of Trust and Assignment of Subscription:" in
favor of a BLANK assignee pertaining to his shareholdings in Primavera Farms, Inc., Silver Leaf
Plantations, Inc. and Meadowlark Plantations, Inc.

(k) The other respondent Corporations are owned by interlocking shareholders who are likewise
lawyers in the ACCRA Law Offices and had admitted their status as "nominee stockholders" only.

(k-1) The corporations: Agricultural Consultancy Services, Inc., Archipelago Realty

Corporation, Balete Ranch, Inc., Black Stallion Ranch, Inc., Discovery Realty Corporation,
First United Transport, Inc., Kaunlaran Agricultural Corporation, LandAir International
Marketing Corporation, Misty Mountains Agricultural Corporation, Pastoral Farms, Inc., Oro
Verde Services, Inc. Radyo Filipino Corporation, Reddee Developers, Inc., Verdant
Plantations, Inc. and Vesta Agricultural Corporation, were incorporated by lawyers of ACCRA
Law Offices.

(k-2) With respect to PCY Oil Manufacturing Corporation and Metroplex Commodities, Inc.,
they are controlled respectively by HYCO, Inc. and Ventures Securities, Inc., both of which
were incorporated likewise by lawyers of ACCRA Law Offices.

(k-3) The stockholders who appear as incorporators in most of the other Respondents
corporations are also lawyers of the ACCRA Law Offices, who as early as 1987 had admitted
under oath that they were acting only as "nominee stockholders."

(l) These companies, which ACCRA Law Offices organized for Defendant Cojuangco to be able to
control more than 60% of SMC shares, were funded by institutions which depended upon the
coconut levy such as the UCPB, UNICOM, United Coconut Planters Assurance Corp. (COCOLIFE),
among others. Cojuangco and his ACCRA lawyers used the funds from 6 large coconut oil mills and
10 copra trading companies to borrow money from the UCPB and purchase these holding
companies and the SMC stocks. Cojuangco used $150 million from the coconut levy, broken down
as follows:

Amount Source Purpose

(in million)
$22.26 Oil Mills equity in holding companies
$65.6 Oil Mills loan to holding companies
$61.2 UCPB loan to holding companies [164]

The entire amount, therefore, came from the coconut levy, some passing through the Unicom Oil
mills, others directly from the UCPB.

(m) With his entry into the said Company, it began to get favors from the Marcos government,
significantly the lowering of the excise taxes (sales and specific taxes) on beer, one of the main
products of SMC.

(n) Defendant Cojuangco controlled SMC from 1983 until his co-defendant Marcos was deposed in
1986.

(o) Along with Cojuangco, Defendant Enrile and ACCRA also had interests in SMC, broken down as
follows:
 % of SMC
Owner
Cojuangco
31.3% coconut levy money
18% companies linked to Cojuangco
5.2% government
5.2% SMC employee retirement fund
Enrile & ACCRA
1.8% Enrile
1.8% Jaka Investment Corporation
1.8% ACCRA Investment Corporation

15. Defendants Eduardo Cojuangco, Jr., Edgardo J. Angara, Jose C. Concepcion, Teodoro Regala, Avelino
Cruz, Rogelio Vinluan, Eduardo U. Escueta and Paraja G. Hayudini of the Angara Concepcion Cruz Regala
and Abello law offices (ACCRA) plotted, devised, schemed, conspired and confederated with each other in
setting up, through the use of coconut levy funds, the financial and corporate framework and structures that
led to the establishment of UCPB, UNICOM, COCOLIFE, COCOMARK. CIC, and more than twenty other
coconut levy-funded corporations, including the acquisition of San Miguel Corporation shares and its
institutionalization through presidential directives of the coconut monopoly. Through insidious means and
machinations, ACCRA, being the wholly-owned investment arm, ACCRA Investments Corporation, became
the holder of approximately fifteen million shares representing roughly 3.3% of the total outstanding capital
stock of UCPB as of 31 March 1987. This ranks ACCRA Investments Corporation number 44 among the top
100 biggest stockholders of UCPB which has approximately 1,400,000 shareholders. On the other hand, the
corporate books show the name Edgardo J. Angara as holding approximately 3,744 shares as of February,
1984.

16. The acts of Defendants, singly or collectively, and/or in unlawful concert with one another, constitute
gross abuse of official position and authority, flagrant breach of public trust and fiduciary obligations, brazen
abuse of right and power, unjust enrichment, violation of the constitution and laws of the Republic of the
Philippines, to the grave and irreparable damage of Plaintiff and the Filipino people. 11

On June 17, 1999, Ursua and Enrile each filed his separate Answer with Compulsory Counterclaims.

Before filing their answer, the ACCRA lawyers sought their exclusion as defendants in Civil Case No. 0033, averring
that even as they admitted having assisted in the organization and acquisition of the companies included in Civil
Case No. 0033, they had acted as mere nominees-stockholders of corporations involved in the sequestration
proceedings pursuant to office practice. After the Sandiganbayan denied their motion, they elevated their cause to
this Court, which ultimately ruled in their favor in the related cases of Regala, et al. v. Sandiganbayan, et
al.12 and Hayudini v. Sandiganbayan, et al.,13 as follows:

WHEREFORE, IN VIEW OF THE FOREGOING, the Resolutions of respondent Sandiganbayan (First Division)
promulgated on March 18, 1992 and May 21, 1992 are hereby ANNULLED and SET ASIDE. Respondent
Sandiganbayan is further ordered to exclude petitioners Teodoro D. Regala, Edgardo J. Angara, Avelino V. Cruz,
Jose C. Concepcion, Victor P. Lazatin, Eduardo U. Escueta and Paraja G. Hayudini as parties-defendants in SB
Civil Case No. 0033 entitled "Republic of the Philippines v. Eduardo Cojuangco, Jr., et al."

SO ORDERED.

Conformably with the ruling, the Sandiganbayan excluded the ACCRA lawyers from the case on May 24, 2000. 14

On June 23, 1999, Cojuangco filed his Answer to the Third Amended Complaint, 15 averring the following affirmative
defenses, to wit:

7.00. The Presidential Commission on Good Government (PCGG) is without authority to act in the name
and in behalf of the "Republic of the Philippines".

7.01. As constituted in E.O. No. 1, the PCGG was composed of "Minister Jovito R. Salonga, as Chairman,
Mr. Ramon Diaz, Mr. Pedro L. Yap, Mr. Raul Daza and Ms. Mary Concepcion Bautista, as Commissioners".
When the complaint in the instant case was filed, Minister Salonga, Mr. Pedro L. Yap and Mr. Raul Daza
had already left the PCGG. By then the PCGG had become functus officio.

7.02. The Sandiganbayan has no jurisdiction over the complaint or over the transaction alleged in the
complaint.

7.03. The complaint does not allege any cause of action.

 7.04. The complaint is not brought in the name of the real parties in interest, assuming any cause of action
exists.

7.05. Indispensable and necessary parties have not been impleaded.

7.06. There is improper joinder of causes of action (Sec. 6, Rule 2, Rules of Civil Procedure). The causes of
action alleged, if any, do not arise out of the same contract, transaction or relation between the parties, nor
are they simply for money, or are of the same nature and character.

7.07. There is improper joinder of parties defendants (Sec. 11, Rule 3, Rules of Civil Procedure).The causes
of action alleged as to defendants, if any, do not involve a single transaction or a related series of
transactions. Defendant is thus compelled to litigate in a suit regarding matters as to which he has no
involvement. The questions of fact and law involved are not common to all defendants.

7.08. In so far as the complaint seeks the forfeiture of assets allegedly acquired by defendant "manifestly out
of proportion to their salaries, to their other lawful income and income from legitimately acquired property,"
under R.A. 1379, the "previous inquiry similar to preliminary investigation in criminal cases" required to be
conducted under Sec. 2 of that law before any suit for forfeiture may be instituted, was not conducted; as a
consequence, the Court may not acquire and exercise jurisdiction over such a suit.

7.09. The complaint in the instant suit was filed July 31, 1987, or within one year before the local election
held on January 18, 1988. If this suit involves an action under R.A. 1379, its institution was also in direct
violation of Sec. 2, R.A. No. 1379.

7.10. E.O. No. 1, E.O. No. 2, E.O. No. 14 and 14-A, are unconstitutional. They violate due process, equal
protection, ex post facto and bill of attainder provisions of the Constitution.

7.11. Acts imputed to defendant which he had committed were done pursuant to law and in good faith.

The Cojuangco corporations’ Answer16 had the same tenor as the Answer of Cojuangco.

In his own Answer with Compulsory Counterclaims,17 Ursua averred affirmative and special defenses.

In his own Answer with Compulsory Counterclaims, 18 Enrile specifically denied the material averments of the Third
Amended Complaint and asserted affirmative defenses.

The CIIF Oil Mills’ Answer19 also contained affirmative defenses.

On December 20, 1999, the Sandiganbayan scheduled the pre-trial in Civil Case No. 0033-F on March 8, 2000,
giving the parties sufficient time to file their Pre-Trial Briefs prior to that date. Subsequently, the parties filed their
respective Pre-Trial Briefs, as follows: Cojuangco and the Cojuangco corporations, jointly on February 14, 2000;
Enrile, on March 1, 2000; the CIIF Oil Mills, on March 3, 2000; and Ursua, on March 6, 2000. However, the Republic
sought several extensions to file its own Pre-Trial Brief, and eventually did so on May 9, 2000.

In the meanwhile, some non-parties sought to intervene. On November 22, 1999, GABAY Foundation, Inc. (GABAY)
filed its complaint-in-intervention. On February 24, 2000, the Philippine Coconut Producers Federation, Inc., Maria
Clara L. Lobregat, Jose R. Eleazar, Jr., Domingo Espina, Jose Gomez, Celestino Sabate, Manuel del Rosario, Jose
Martinez, Jr., and Eladio Chato (collectively referred to as COCOFED, considering that the co-intervenors were its
officers) also sought to intervene, citing the October 2, 1989 ruling in G.R. No. 75713 entitled COCOFED v. PCGG
whereby the Court recognized COCOFED as the "private national association of coconut producers certified in 1971
by the PHILCOA as having the largest membership among such producers" and as such "entrusted it with the task
of maintaining continuing liaison with the different sectors of the industry, the government and its mass base."
Pending resolution of its motion for intervention, COCOFED filed a Pre-Trial Brief on March 2, 2000.

On May 24, 2000, the Sandiganbayan denied GABAY’s intervention without prejudice because it found "that the
allowance of GABAY to enter under the special character in which it presents itself would be to open the doors to
other groups of coconut farmers whether of the same kind or of any other kind which could be considered a sub-
class or a sub-classification of the coconut planters or the coconut industry of this country." 20

COCOFED’s intervention as defendant was allowed on May 24, 2000, however, because "the position taken by the
COCOFED is relevant to the proceedings herein, if only to state that there is a special function which the COCOFED
and the coconut planters have in the matter of the coconut levy funds and the utilization of those funds, part of
which is in dispute in the instant matter."21
The pre-trial was actually held on May 24, 2000,22 during which the Sandiganbayan sought clarification from the
parties, particularly the Republic, on their respective positions, but at the end it found the clarifications
"inadequately" enlightening. Nonetheless, the Sandiganbayan, not disposed to reset, terminated the pre-trial:

xxx primarily because the Court is given a very clear impression that the plaintiff does not know what documents will
be or whether they are even available to prove the causes of action in the complaint. The Court has pursued and
has exerted every form of inquiry to see if there is a way by which the plaintiff could explain in any significant
particularity the acts and the evidence which will support its claim of wrong-doing by the defendants. The plaintiff
has failed to do so.23

The following material portions of the pre-trial order 24 are quoted to provide a proper perspective of what transpired
during the pre-trial, to wit:

Upon oral inquiry from the Court, the issues which were being raised by plaintiff appear to have been made on a
very generic character. Considering that any claim for violation or breach of trust or deception cannot be made on
generic statements but rather by specific acts which would demonstrate fraud or breach of trust or deception,
together with the evidence in support thereof, the same was not acceptable to the Court.

The plaintiff through its designated counsel for this morning, Atty. Dennis Taningco, has represented to this Court
that the annexes to its pre-trial brief, more particularly the findings of the COA in its various examinations, copies of
which COA reports are attached to the pre-trial brief, would demonstrate the wrong, the act or omission attributed to
the defendants or to several of them and the basis, therefore, for the relief that plaintiff seeks in its complaint. It
would appear, however, that the plaintiff through its counsel at this time is not prepared to go into the specifics of the
identification of these wrongs or omissions attributed to plaintiff.

The Court has reminded the plaintiff that a COA report proves itself only in proceedings where the issue arises from
a review of the accountability of particular officers and, therefore, to show the existence of shortages or deficiencies
in an examination conducted for that purpose, provided that such a report is accompanied by its own working
papers and other supporting documents.

In civil cases such as this, a COA report would not have the same independent probative value since it is not a
review of the accountability of public officers for public property in their custody as accountable officers. It has been
the stated view of this Court that a COA report, to be of significant evidence, may itself stand only on the basis of the
supporting documents that upon which it is based and upon an analysis made by those who are competent to do so.
The Court, therefore, sought a more specific statement from plaintiff as to what these documents were and which of
them would prove a particular act or omission or a series of acts or omissions purportedly committed by any, by
several or by all of the defendants in any particular stage of the chain of alleged wrong-doing in this case.

The plaintiff was not in a position to do so.

The Court has remonstrated with the plaintiff, insofar as its inadequacy is concerned, primarily because this case
was set for pre-trial as far back as December and has been reset from its original setting, with the undertaking by
the plaintiff to prepare itself for these proceedings. It appears to this Court at this time that the failure of the plaintiff
to have available responses and specific data and documents at this stage is not because the matter has been the
product of oversight or notes and papers left elsewhere; rather, the agitation of this Court arises from the fact that at
this very stage, the plaintiff through its counsel does not know what these documents are, where these documents
will be and is still anticipating a submission or a delivery thereof by COA at an undetermined time. The justification
made by counsel for this stance is that this is only pre-trial and this information and the documents are not needed
yet.

The Court is not prepared to postpone the pre-trial anew primarily because the Court is given a very clear
impression that the plaintiff does not know what documents will be or whether they are even available to prove the
causes of action in the complaint. The Court has pursued and has exerted every form of inquiry to see if there is a
way by which the plaintiff could explain in any significant particularity the acts and the evidence which will support its
claim of wrong-doing by the defendants. The plaintiff has failed to do so.

Defendants Cojuangco have come back and reiterated their previous inquiry as to the statement of the cause of
action and the description thereof. While the Court acknowledges that logically, that statement along that line would
be primary, the Court also recognizes that sometimes the phrasing of the issue may be determined or may arise
after a statement of the evidence is determined by this Court because the Court can put itself in a position of more
clearly and perhaps more accurately stating what the issues are. The Pre-Trial Order, after all, is not so much a
reflection of merely separate submissions by all of the parties involved, witnesses by the Court, as to what the
subject matter of litigation will be, including the determination of what matters of fact remain unresolved. At this time,
the plaintiff has not taken the position on any factual statement or any piece of evidence which can be subject of
admission or denial, nor any specifics of any act which could be disputed by the defendants; what plaintiff through
counsel has stated are general conclusions, general statements of abuse and misuse and opportunism.
After an extended break requested by some of the parties, the sessions were resumed and nothing anew arose
from the plaintiff. The plaintiff sought fifteen (15) days to file a reply to the comments and observations made by
defendant Cojuangco to the pre-trial brief of the plaintiff. This Court denied this Request since the submissions in
preparation for pre-trial are not litigious or contentious matters. They are mere assertions or positions which may or
may not be meritorious depending upon the view of the Court of the entire case and if useful at the pre-trial. At this
stage, the plaintiff then reiterated its earlier request to consider the pre-trial terminated. The Court sought the
positions of the other parties, whether or not they too were prepared to submit their respective positions on the basis
of what was before the Court at pre-trial. All of the parties, in the end, have come to an agreement that they were
submitting their own respective positions for purpose of pre-trial on the basis of the submissions made of record.

With all of the above, the pre-trial is now deemed terminated.

This Order has been overly extended simply because there has been a need to put on record all of the events that
have taken place leading to the conclusions which were drawn herein.

The parties have indicated a desire to make their submissions outside of trial as a consequence of this terminated
pre-trial, with the plea that the transcript of the proceedings this morning be made available to them, so that they
may have the basis for whatever assertions they will have to make either before this Court or elsewhere. The Court
deems the same reasonable and the Court now gives the parties fifteen (15) days after notice to them that the
transcript of stenographic notes of the proceedings herein are complete and ready for them to be retrieved. Settings
for trial or for any other proceeding hereafter will be fixed by this Court either upon request of the parties or when
the Court itself shall have determined that nothing else has to be done.

The Court has sought confirmation from the parties present as to the accuracy of the recapitulation herein of the
proceedings this morning and the Court has gotten assent from all of the parties.

xxx

SO ORDERED.25

In the meanwhile, the Sandiganbayan, in order to conform with the ruling in Presidential Commission on Good
Government v. Cojuangco, et al., 26 resolved COCOFED’s Omnibus Motion (with prayer for preliminary injunction)
relative to who should vote the UCPB shares under sequestration, holding as follows: 27

In the light of all of the above, the Court submits itself to jurisprudence and with the statements of the Supreme
Court in G.R. No. 115352 entitled Enrique Cojuangco, Jr., et al. vs. Jaime Calpo, et al. dated January 27, 1997, as
well as the resolution of the Supreme Court promulgated on January 27, 1999 in the case of PCGG vs. Eduardo
Cojuangco, Jr., et al., G.R. No. 13319 which included the Sandiganbayan as one of the respondents. In these two
cases, the Supreme Court ruled that the voting of sequestered shares of stock is governed by two considerations,
namely:

1. whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong to the
State; and

2. whether there is an imminent danger of dissipation thus necessitating their continued sequestration and
voting by the PCGG while the main issue pends with the Sandiganbayan.

xxx xxx xxx

In view hereof, the movants COCOFED, et al and Ballares, et al. as well as Eduardo Cojuangco, et al. who were
acknowledged to be registered stockholders of the UCPB are authorized, as are all other registered stockholders of
the United Coconut Planters Bank, until further orders from this Court, to exercise their rights to vote their shares of
stock and themselves to be voted upon in the United Coconut Planters Bank (UCPB) at the scheduled Stockholders’
Meeting on March 6, 2001 or on any subsequent continuation or resetting thereof, and to perform such acts as will
normally follow in the exercise of these rights as registered stockholders.

xxx xxx xxx

Consequently, on March 1, 2001, the Sandiganbayan issued a writ of preliminary injunction to enjoin the PCGG
from voting the sequestered shares of stock of the UCPB.

On July 25, 2002, before Civil Case No. 0033-F could be set for trial, the Republic filed a Motion for Judgment on
the Pleadings and/or for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and
COCOFED, et al.).28

Cojuangco, Enrile, and COCOFED separately opposed the motion. Ursua adopted COCOFED’s opposition.
Thereafter, the Republic likewise filed a Motion for Partial Summary Judgment [Re: Shares in San Miguel
Corporation Registered in the Respective Names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant
Cojuangco Companies].29

Cojuangco, et al. opposed the motion,30 after which the Republic submitted its reply.31

On February 23, 2004, the Sandiganbayan issued an order, 32 in which it enumerated the admitted facts or facts that
appeared to be without substantial controversy in relation to the Republic’s Motion for Judgment on the Pleadings
and/or for Partial Summary Judgment [Re: Defendants CIIF Companies, 14 Holding Companies and COCOFED, et
al.].

Commenting on the order of February 23, 2004, Cojuangco, et al. specified the items they considered as inaccurate,
but particularly interposed no objection to item no. 17 (to the extent that item no. 17 stated that Cojuangco had
disclaimed any interest in the CIIF block SMC shares of stock registered in the names of the 14 corporations listed
in item no. 1 of the order).33

The Republic also filed its Comment,34 but COCOFED denied the admitted facts summarized in the order of
February 23, 2004.35

Earlier, on October 8, 2003,36 the Sandiganbayan resolved the various pending motions and pleadings relative to the
writs of sequestration issued against the defendants, disposing:

IN VIEW OF THE FOREGOING, the Writs of Sequestration Nos. (a) 86-0042 issued on April 8, 1986, (b) 86-0062
issued on April 21, 1986, (c) 86-0069 issued on April 22, 1986, (d) 86-0085 issued on May 9, 1986, (e) 86-0095
issued on May 16, 1986, (f) 86-0096 dated May 16, 1986, (g) 86-0097 issued on May 16, 1986, (h) 86-0098 issued
on May 16, 1986 and (i) 87-0218 issued on May 27, 1987 are hereby declared automatically lifted for being null and
void.

Despite the lifting of the writs of sequestration, since the Republic continues to hold a claim on the shares which is
yet to be resolved, it is hereby ordered that the following shall be annotated in the relevant corporate books of San
Miguel Corporation:

(1) any sale, pledge, mortgage or other disposition of any of the shares of the Defendants Eduardo
Cojuangco, et al. shall be subject to the outcome of this case;

(2) the Republic through the PCGG shall be given twenty (20) days written notice by Defendants Eduardo
Cojuangco, et al. prior to any sale, pledge, mortgage or other disposition of the shares;

(3) in the event of sale, mortgage or other disposition of the shares, by the Defendants Cojuangco, et al., the
consideration therefore, whether in cash or in kind, shall be placed in escrow with Land Bank of the
Philippines, subject to disposition only upon further orders of this Court; and

(4) any cash dividends that are declared on the shares shall be placed in escrow with the Land Bank of the
Philippines, subject to disposition only upon further orders of this Court. If in case stock dividends are
declared, the conditions on the sale, pledge, mortgage and other disposition of any of the shares as above-
mentioned in conditions 1, 2 and 3, shall likewise apply.

In so far as the matters raised by Defendants Eduardo Cojuangco, et al. in their "Omnibus Motion" dated September
23, 1996 and "Reply to PCGG’s Comment/Opposition with Motion to Order PCGG to Complete Inventory, to Nullify
Writs of Sequestration and to Enjoin PCGG from Voting Sequestered Shares of Stock" dated January 3, 1997,
considering the above conclusion, this Court rules that it is no longer necessary to delve into the matters raised in
the said Motions.

SO ORDERED.37

Cojuangco, et al. moved for the modification of the resolution, 38 praying for the deletion of the conditions for allegedly
restricting their rights. The Republic also sought reconsideration of the resolution. 39

Eventually, on June 24, 2005, the Sandiganbayan denied both motions, but reduced the restrictions thuswise:

WHEREFORE, the "Motion for Reconsideration (Re: Resolution dated September 17, 2003 Promulgated on
October 8, 2003)" dated October 24, 2003 of Plaintiff Republic is hereby DENIED for lack of merit. As to the "Motion
for Modification (Re: Resolution Promulgated on October 8, 2003)" dated October 22, 2003, the same is hereby
DENIED for lack of merit. However, the restrictions imposed by this Court in its Resolution dated September 17,
2003 and promulgated on October 8, 2003 shall now read as follows:
"Despite the lifting of the writs of sequestration, since the Republic continues to hold a claim on the shares which is
yet to be resolved, it is hereby ordered that the following shall be annotated in the relevant corporate books of San
Miguel Corporation:

"a) any sale, pledge, mortgage or other disposition of any of the shares of the Defendants Eduardo Cojuangco, et al.
shall be subject to the outcome of this case.

"b) the Republic through the PCGG shall be given twenty (20) days written notice by Defendants Eduardo
Cojuangco, et al. prior to any sale, pledge, mortgage or other disposition of the shares.

"SO ORDERED."40

Pending resolution of the motions relative to the lifting of the writs of sequestration, SMC filed a Motion for
Intervention with attached Complaint-in-Intervention, 41 alleging, among other things, that it had an interest in the
matter in dispute between the Republic and defendants CIIF Companies for being the owner by purchase of a
portion (i.e., 25,450,000 SMC shares covered by Stock Certificate Nos. A0004129 and B0015556 of the so-called
"CIIF block of SMC shares of stock" sought to be recovered as alleged ill-gotten wealth).

Although Cojuangco, et al. interposed no objection to SMC’s intervention, the Republic opposed, 42 averring that the
intervention would be improper and was a mere attempt to litigate anew issues already raised and passed upon by
the Supreme Court. COCOFED similarly opposed SMC’s intervention,43 and Ursua adopted its opposition.

On May 6, 2004, the Sandiganbayan denied SMC’s motion to intervene. 44 SMC sought reconsideration,45 and its
motion to that effect was opposed by COCOFED and the Republic.

On May 7, 2004, the Sandiganbyan granted the Republic’s Motion for Judgment on the Pleadings and/or Partial
Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and COCOFED, et al.) and rendered
a Partial Summary Judgment,46 the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed,
et al.) filed by Plaintiff is hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp. (GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors, Inc.;

5. Toda Holdings, Inc.;

6. AP. Holdings, Inc.;

7. Fernandez Holdings, Inc.;

8. SMC Officers Corps. Inc.;

9. Te Deum Resources, Inc.;

 10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALING 33,133,266
SHARES AS OF 1983 TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED THEREON AS WELL
AS ANY INCREMENTS THERETO ARISING FROM, BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE
RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT IN-TRUST FOR ALL THE COCONUT FARMERS
AND ORDERED RECONVEYED TO THE GOVERNMENT.

Let the trial of this Civil Case proceed with respect to the issues which have not been disposed of in this partial
Summary Judgment, including the determination of whether the CIIF Block of SMC Shares adjudged to be owned
by the Government represents 27% of the issued and outstanding capital stock of SMC according to plaintiff or
31.3% of said capital stock according to COCOFED, et al. and Ballares, et al.

SO ORDERED.47

In the same resolution of May 7, 2004, the Sandiganbayan considered the Motions to Dismiss filed by Cojuangco, et
al. on August 2, 2000 and by Enrile on September 4, 2000 as overtaken by the Republic’s Motion for Judgment on
the Pleadings and/or Partial Summary Judgment.48

On May 25, 2004, Cojuangco, et al. filed their Motion for Reconsideration. 49

COCOFED filed its so-called Class Action Omnibus Motion: (a) Motion to Dismiss for Lack of Subject Matter
Jurisdiction and Alternatively, (b) Motion for Reconsideration dated May 26, 2004. 50

The Republic submitted its Consolidated Comment.51

Relative to the resolution of May 7, 2004, the Sandiganbayan issued its resolution of December 10, 2004, 52 denying
the Republic’s Motion for Partial Summary Judgment (Re: Shares in San Miguel Corporation Registered in the
Respective Names of Defendants Eduardo M. Cojuangco, Jr. and the defendant Cojuangco Companies) upon the
following reasons:

In the instant case, a circumspect review of the records show that while there are facts which appear to be
undisputed, there are also genuine factual issues raised by the defendants which need to be threshed out in a full-
blown trial. Foremost among these issues are the following:

1) What are the "various sources" of funds, which the defendant Cojuangco and his companies claim they
utilized to acquire the disputed SMC shares?

2) Whether or not such funds acquired from alleged "various sources" can be considered coconut levy
funds;

3) Whether or not defendant Cojuangco had indeed served in the governing bodies of PC, UCPB and/or
CIIF Oil Mills at the time the funds used to purchase the SMC shares were obtained such that he owed a
fiduciary duty to render an account to these entities as well as to the coconut farmers;

4) Whether or not defendant Cojuangco took advantage of his position and/or close ties with then President
Marcos to obtain favorable concessions or exemptions from the usual financial requirements from the
lending banks and/or coco-levy funded companies, in order to raise the funds to acquire the disputed SMC
shares; and if so, what are these favorable concessions or exemptions?

Answers to these issues are not evident from the submissions of the plaintiff and must therefore be proven through
the presentation of relevant and competent evidence during trial. A perusal of the subject Motion shows that the
plaintiff hastily derived conclusions from the defendants’ statements in their previous pleadings although such
conclusions were not supported by categorical facts but only mere inferences. In the Reply dated October 2, 2003,
the plaintiff construed the supposed meaning of the phrase "various sources" (referring to the source of defendant
Cojuangco’s funds which were used to acquire the subject SMC shares), which plaintiff said was quite obvious from
the defendants’ admission in his Pre-Trial Brief, which we quote:
"According to Cojuangco’s own Pre-Trial Brief, these so-called ‘various sources’, i.e., the sources from which he
obtained the funds he claimed to have used in buying the 20% SMC shares are not in fact ‘various’ as he claims
them to be. He says he obtained ‘loans’ from UCPB and ‘advances’ from the CIIF Oil Mills. He even goes as far as
to admit that his only evidence in this case would have been ‘records of UCPB’ and a ‘representative of the CIIF Oil
Mills’ obviously the ‘records of UCPB’ relate to the ‘loans’ that Cojuangco claims to have obtained from UCPB – of
which he was President and CEO – while the ‘representative of the CIIF Oil Mills’ will obviously testify on the
‘advances’ Cojuangco obtained from CIIF Oil Mills – of which he was also the President and CEO."

From the foregoing premises, plaintiff went on to conclude that:

"These admissions of defendant Cojuangco are outright admissions that he (1) took money from the bank entrusted
by law with the administration of coconut levy funds and (2) took more money from the very corporations/oil mills in
which part of those coconut levy funds (the CIIF) was placed – treating the funds of UCPB and the CIIF as his own
personal capital to buy ‘his’ SMC shares."

We cannot agree with the plaintiff’s contention that the defendant’s statements in his Pre-Trial Brief regarding the
presentation of a possible CIIF witness as well as UCPB records, can already be considered as admissions of the
defendant’s exclusive use and misuse of coconut levy funds to acquire the subject SMC shares and defendant
Cojuangco’s alleged taking advantage of his positions to acquire the subject SMC shares. Moreover, in ruling on a
motion for summary judgment, the court "should take that view of the evidence most favorable to the party against
whom it is directed, giving such party the benefit of all inferences." Inasmuch as this issue cannot be resolved
merely from an interpretation of the defendant’s statements in his brief, the UCPB records must be produced and
the CIIF witness must be heard to ensure that the conclusions that will be derived have factual basis and are thus,
valid.

WHEREFORE, in view of the forgoing, the Motion for Partial Summary Judgment dated July 11, 2003 is hereby
DENIED for lack of merit.

SO ORDERED.

Thereafter, on December 28, 2004, the Sandiganbayan resolved the other pending motions, 53 viz:

WHEREFORE, in view of the foregoing, the Motion for Reconsideration dated May 25, 2004 filed by defendant
Eduardo M. Cojuangco, Jr., et al. and the Class Action Omnibus Motion: (a) Motion to Dismiss for Lack of Subject
Matter Jurisdiction and Alternatively, (b) Motion for Reconsideration dated May 26, 2004 filed by COCOFED, et al.
and Ballares, et al. are hereby DENIED for lack of merit.

SO ORDERED.54

COCOFED moved to set the case for trial, 55 but the Republic opposed the motion.56 On their part, Cojuangco, et al.
also moved to set the trial,57 with the Republic similarly opposing the motion.58

On March 23, 2006, the Sandiganbayan granted the motions to set for trial and set the trial on August 8, 10, and 11,
2006.59

In the meanwhile, on August 9, 2005, the Republic filed a Motion for Execution of Partial Summary Judgment (re:
CIIF block of SMC Shares of Stock), 60 contending that an execution pending appeal was justified because any
appeal by the defendants of the Partial Summary Judgment would be merely dilatory.

Cojuangco, et al. opposed the motion.61

The Sandiganbayan denied the Republic’s Motion for Execution of Partial Summary Judgment (re: CIIF block of
SMC Shares of Stock),62 to wit:

WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL SUMMARY JUDGMENT (RE: CIIF BLOCK OF SMC
SHARES OF STOCK) dated August 8, 2005 of the plaintiff is hereby denied for lack of merit. However, this Court
orders the severance of this particular claim of Plaintiff. The Partial Summary Judgment dated May 7, 2004 is now
considered a separate final and appealable judgment with respect to the said CIIF Block of SMC shares of stock.

The Partial Summary Judgment rendered on May 7, 2004 is modified by deleting the last paragraph of the
dispositive portion which will now read, as follows:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed,
et al.) filed by Plaintiff is hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:
 1. Southern Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp.

(GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors, Inc.;

5. Toda Holdings, Inc.;

6. AP Holdings, Inc.;

7. Fernandez Holdings, Inc.;

8. SMC Officers Corps, Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALING 33,133,266
SHARES AS OF 1983 TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED THEREON AS WELL
AS ANY INCREMENTS THERETO ARISING FROM, BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE
RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT IN TRUST FOR ALL THE COCONUT FARMERS
AND ORDERED RECONVEYED TO THE GOVERNMENT.

The aforementioned Partial Summary Judgment is now deemed a separate appealable judgment which finally
disposes of the ownership of the CIIF Block of SMC Shares, without prejudice to the continuation of proceedings
with respect to the remaining claims particularly those pertaining to the Cojuangco, et al. block of SMC shares.

SO ORDERED.63

During the pendency of the Republic’s motion for execution, Cojuangco, et al. filed a Motion for Authority to Sell San
Miguel Corporation (SMC) shares, praying for leave to allow the sale of SMC shares to proceed, exempted from the
conditions set forth in the resolutions promulgated on October 3, 2003 and June 24, 2005. 64 The Republic opposed,
contending that the requested leave to sell would be tantamount to removing jurisdiction over the res or the subject
of litigation.65

However, the Sandiganbayan eventually granted the Motion for Authority to Sell San Miguel Corporation (SMC)
shares.66
Thereafter, Cojuangco, et al. manifested to the Sandiganbayan that the shares would be sold to the San Miguel
Corporation Retirement Plan.67 Ruling on the manifestations of Cojuangco, et al., the Sandiganbayan issued its
resolution of July 30, 2007 allowing the sale of the shares, to wit:

This notwithstanding however, while the Court exempts the sale from the express condition that it shall be subject to
the outcome of the case, defendants Cojuangco, et al. may well be reminded that despite the deletion of the said
condition, they cannot transfer to any buyer any interest higher than what they have. No one can transfer a right to
another greater than what he himself has. Hence, in the event that the Republic prevails in the instant case,
defendants Cojuangco, et al. hold themselves liable to their transferees-buyers, especially if they are buyers in good
faith and for value. In such eventuality, defendants Cojuangco, et al. cannot be shielded by the cloak of principle of
caveat emptor because case law has it that this rule only requires the purchaser to exercise such care and attention
as is usually exercised by ordinarily prudent men in like business affairs, and only applies to defects which are open
and patent to the service of one exercising such care.

Moreover, said defendants Eduardo M. Cojuangco, et al. are hereby ordered to render their report on the sale within
ten (10) days from completion of the payment by the San Miguel Corporation Retirement Plan.

SO ORDERED.68

Cojuangco, et al. later rendered a complete accounting of the proceeds from the sale of the Cojuangco block of
shares of SMC stock, informing that a total amount of ₱ 4,786,107,428.34 had been paid to the UCPB as loan
repayment.69

It appears that the trial concerning the disputed block of shares was not scheduled because the consideration and
resolution of the aforecited motions for summary judgment occupied much of the ensuing proceedings.

At the hearing of August 8, 2006, the Republic manifested 70 that it did not intend to present any testimonial evidence
and asked for the marking of certain exhibits that it would have the Sandiganbayan take judicial notice of. The
Republic was then allowed to mark certain documents as its Exhibits A to I, inclusive, following which it sought and
was granted time within which to formally offer the exhibits.

On August 31, 2006, the Republic filed its Manifestation of Purposes (Re: Matters Requested or Judicial Notice on
the 20% Shares in San Miguel Corporation Registered in the Respective Names of defendant Eduardo M.
Cojuangco, Jr. and the defendant Cojuangco Companies).71

On September 18, 2006, the Sandiganbayan issued the following resolution, 72 to wit:

Acting on the Manifestation of Purposes (Re: Matters Requested or Judicial Notice on the 20% Shares in San
Miguel Corporation Registered in the Respective names of Defendant Eduardo M. Cojuangco, Jr. and the
Defendant Cojuangco Companies) dated 28 August 2006 filed by the plaintiff, which has been considered its formal
offer of evidence, and the Comment of Defendants Eduardo M. Cojuangco, Jr., et al. on Plaintiff’s "Manifestation of
Purposes …" Dated August 30, 2006 dated September 15, 2006, the court resolves to ADMIT all the exhibits
offered, i.e.:

• Exhibit "A" – the Answer of defendant Eduardo M. Cojuangco, Jr. to the Third Amended Complaint
(Subdivided) dated June 23, 1999, as well as the sub-markings (Exhibit "A-1" to "A-4";

• Exhibit "B" – the "Pre-Trial Brief dated January 11, 2000 of defendant CIIF Oil Mills and fourteen (14) CIIF
Holding Companies, as well as the sub-markings Exhibits "B-1" and "B-2"

• Exhibit "C" – the Pre-Trial Brief dated January 11, 2000 of defendant Eduardo M. Cojuangco, Jr. as well as
the sub-markings Exhibits "C-1", "C-1-a" and "C-1-b";

• Exhibit "D" – the Plaintiff’s Motion for Summary Judgment [Re: Shares in San Miguel Corporation
Registered in the Respective Names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant Cojuangco
Companies] dated July 11, 2003, as well as the sub-markings Exhibits "D-1" to "D-4"

the said exhibits being part of the record of the case, as well as

• Exhibit "E" – Presidential Decree No. 961 dated July 11, 1976;

• Exhibit "F" – Presidential Decree No. 755 dated July 29, 1975;

• Exhibit "G" – Presidential Decree No. 1468 dated June 11, 1978;
 • Exhibit "H" – Decision of the Supreme Court in Republic vs. COCOFED, et al., G.R. Nos. 147062-64,
December 14, 2001, 372 SCRA 462

the aforementioned exhibits being matters of public record.

The admission of these exhibits is being made over the objection of the defendants Cojuangco, et al. as to the
relevance thereof and as to the purposes for which they were offered in evidence, which matters shall be taken into
consideration by the Court in deciding the case on the merits.

The trial hereon shall proceed on November 21, 2006, at 8:30 in the morning as previously scheduled. 73

During the hearing on November 24, 2006, Cojuangco, et al. filed their Submission and Offer of Evidence of
Defendants,74 formally offering in evidence certain documents to substantiate their counterclaims, and informing that
they found no need to present countervailing evidence because the Republic’s evidence did not prove the
allegations of the Complaint. On December 5, 2006, after the Republic submitted its Comment, 75 the Sandiganbayan
admitted the exhibits offered by Cojuangco, et al., and granted the parties a non-extendible period within which to
file their respective memoranda and reply-memoranda.

Thereafter, on February 23, 2007, the Sandiganbayan considered the case submitted for decision. 76

ISSUES

The various issues submitted for consideration by the Court are summarized hereunder.

G.R. No. 166859

The Republic came to the Court via petition for certiorari 77 to assail the denial of its Motion for Partial Summary
Judgment through the resolution promulgated on December 10, 2004, insisting that the Sandiganbayan thereby
committed grave abuse of discretion: (a) in holding that the various sources of funds used in acquiring the SMC
shares of stock remained disputed; (b) in holding that it was disputed whether or not Cojuangco had served in the
governing bodies of PCA, UCPB, and/or the CIIF Oil Mills; and (c) in not finding that Cojuangco had taken
advantage of his position and had violated his fiduciary obligations in acquiring the SMC shares of stock in issue.

The Court will consider and resolve the issues thereby raised alongside the issues presented in G.R. No. 180702.

G.R. No. 169203

In the resolution promulgated on October 8, 2003, the Sandiganbayan declared as "automatically lifted for being null
and void" nine writs of sequestration (WOS) issued against properties of Cojuangco and Cojuangco companies,
considering that: (a) eight of them (i.e., WOS No. 86-0062 dated April 21, 1986; WOS No. 86-0069 dated April 22,
1986; WOS No. 86-0085 dated May 9, 1986; WOS No. 86-0095 dated May 16, 1986; WOS No. 86-0096 dated May
16, 1986; WOS No. 86-0097 dated May 16, 1986; WOS No. 86-0098 dated May 16, 1986; and WOS No. 87-0218
dated May 27, 1987) had been issued by only one PCGG Commissioner, contrary to the requirement of Section 3 of
the Rules of the PCGG for at least two Commissioners to issue the WOS; and (b) the ninth (i.e., WOS No. 86-0042
dated April 8, 1986), although issued prior to the promulgation of the Rules of the PCGG requiring at least two
Commissioners to issue the WOS, was void for being issued without prior determination by the PCGG of a prima
facie basis for sequestration.
1avvphi1

Nonetheless, despite its lifting of the nine WOS, the Sandiganbayan prescribed four conditions to be still "annotated
in the relevant corporate books of San Miguel Corporation" considering that the Republic "continues to hold a claim
on the shares which is yet to be resolved."78

In its resolution promulgated on June 24, 2005, the Sandiganbayan denied the Republic’s Motion for
Reconsideration filed vis-a-vis the resolution promulgated on October 8, 2003, but reduced the conditions earlier
imposed to only two.79

On September 1, 2005, the Republic filed a petition for certiorari 80 to annul the resolutions promulgated on October
8, 2003 and on June 24, 2005 on the ground that the Sandiganbayan had thereby committed grave abuse of
discretion:

I.

XXX IN LIFTING WRIT OF SEQUESTRATION NOS. 86-0042 AND 87-0218 DESPITE EXISTENCE OF THE
BASIC REQUISITES FOR THE VALIDITY OF SEQUESTRATION.

II.
XXX WHEN IT DENIED PETITIONER’S ALTERNATIVE PRAYER IN ITS MOTION FOR RECONSIDERATION FOR
THE ISSUANCE OF AN ORDER OF SEQUESTRATION AGAINST ALL THE SUBJECT SHARES OF STOCK IN
ACCORDNCE WITH THE RULING IN REPUBLIC VS. SANDIGANBAYAN, 258 SCRA 685 (1996).

III.

XXX IN SUBSEQUENTLY DELETING THE LAST TWO (2) CONDITIONS WHICH IT EARLIER IMPOSED ON THE
SUBJECT SHARES OF STOCK.81

G.R. No. 180702

On November 28, 2007, the Sandiganbayan promulgated its decision,82 decreeing as follows:

WHEREFORE, in view of all the foregoing, the Court is constrained to DISMISS, as it hereby DISMISSES, the Third
Amended Complaint in subdivided Civil Case No. 0033-F for failure of plaintiff to prove by preponderance of
evidence its causes of action against defendants with respect to the twenty percent (20%) outstanding shares of
stock of San Miguel Corporation registered in defendants’ names, denominated herein as the "Cojuangco, et al.
block" of SMC shares. For lack of satisfactory warrant, the counterclaims in defendants’ Answers are likewise
ordered dismissed.

SO ORDERED.

Hence, the Republic appeals, positing:

I.

COCONUT LEVY FUNDS ARE PUBLIC FUNDS. THE SMC SHARES, WHICH WERE ACQUIRED BY
RESPONDENTS COJUANGCO, JR. AND THE COJUANGCO COMPANIES WITH THE USE OF
COCONUT LEVY FUNDS – IN VIOLATION OF RESPONDENT COJUANGCO, JR.’S FIDUCIARY
OBLIGATION – ARE, NECESSARILY, PUBLIC IN CHARACTER AND SHOULD BE RECONVEYED TO
THE GOVERNMENT.

II.

PETITIONER HAS CLEARLY DEMONSTRATED ITS ENTITLEMENT, AS A MATTER OF LAW, TO THE

RELIEFS PRAYED FOR.83

and urging the following issues to be resolved, to wit:

I.

WHETHER THE HONORABLE SANDIGANBAYAN COMMITTED A REVERSIBLE ERROR WHEN IT

DISMISSED CIVIL CASE NO. 0033-F; AND

II.

WHETHER OR NOT THE SUBJECT SHARES IN SMC, WHICH WERE ACQUIRED BY, AND ARE IN THE
RESPECTIVE NAMES OF RESPONDENTS COJUANGCO, JR. AND THE COJUANGCO COMPANIES,
SHOULD BE RECONVEYED TO THE REPUBLIC OF THE PHILIPPINES FOR HAVING BEEN ACQUIRED
USING COCONUT LEVY FUNDS.84

On their part, the petitioners-in-intervention85 submit the following issues, to wit:

WHETHER OR NOT THE COURT A QUO GRAVELY ERRED AND DECIDED THE CASE A QUO IN
VIOLATION OF LAW AND APPLICABLE RULINGS OF THE HONORABLE COURT IN RULING THAT,
WHILE ADMITTEDLY THE SUBJECT SMC SHARES WERE PURCHASED FROM LOAN PROCEEDS
FROM UCPB AND ADVANCES FROM THE CIIF OIL MILLS, SAID SUBJECT SMC SHARES ARE NOT
PUBLIC PROPERTY

II

WHETHER OR NOT THE COURT A QUO GRAVELY ERRED AND DECIDED THE CASE A QUO IN
VIOLATION OF LAW AND APPLICABLE RULINGS OF THE HONORABLE COURT IN FAILING TO RULE
 THAT, EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT LOAN PROCEEDS FROM UCPB ARE
NOT PUBLIC FINDS, STILL, SINCE RESPONDENT COJUANGCO, IN THE PURCHASE OF THE
SUBJECT SMC SHARES FROM SUCH LOAN PROCEEDS, VIOLATED HIS FIDUCIARY DUTIES AND
TOOK A COMMERCIAL OPPORTUNITY THAT RIGHTFULLY BELONGED TO UCPB (A PUBLIC
CORPORATION), THE SUBJECT SMC SHARES SHOULD REVERT BACK TO THE GOVERNMENT.

RULING

We deny all the petitions of the Republic.

Lifting of nine WOS for violation of PCGG Rules

did not constitute grave abuse of discretion

Through its resolution promulgated on June 24, 2005, assailed on certiorari in G.R. No. 169203, the Sandiganbayan
lifted the nine WOS for the following reasons, to wit:

Having studied the antecedent facts, this Court shall now resolve the pending incidents especially defendants’
"Motion to Affirm that the Writs or Orders of Sequestration Issued on Defendants’ Properties Were Unauthorized,
Invalid and Never Became Effective" dated March 5, 1999.

Section 3 of the PCGG Rules and Regulations promulgated on April 11, 1986, provides:

"Sec. 3. Who may issue. – A writ of sequestration or a freeze or hold order may be issued by the Commission upon
the authority of at least two Commissioners, based on the affirmation or complaint of an interested party or motu
propio (sic) the issuance thereof is warranted."

In this present case, of all the questioned writs of sequestration issued after the effectivity of the PCGG Rules and
Regulations or after April 11, 1986, only writ no. 87-0218 issued on May 27, 1987 complied with the requirement
that it be issued by at least two Commissioners, the same having been issued by Commissioners Ramon E. Rodrigo
and Quintin S. Doromal. However, even if Writ of Sequestration No. 87-0218 complied with the requirement that the
same be issued by at least two Commissioners, the records fail to show that it was issued with factual basis or with
factual foundation as can be seen from the Certification of the Commission Secretary of the PCGG of the excerpt of
the minutes of the meeting of the PCGG held on May 26, 1987, stating therein that:

"The Commission approved the recommendation of Dir. Cruz to sequester all the shares of stock, assets, records,
and documents of Balete Ranch, Inc. and the appointment of the Fiscal Committee with ECI Challenge, Inc./Pepsi-
Cola for Balete Ranch, Inc. and the Aquacor Marketing Corp. vice Atty. S. Occena. The objective is to consolidate
the Fiscal Committee activities covering three associated entities of Mr. Eduardo Cojuangco.Upon recommendation
of Comm. Rodrigo, the reconstitution of the Board of Directors of the three companies was deferred for further
study."

Nothing in the above-quoted certificate shows that there was a prior determination of a factual basis or factual
foundation. It is the absence of a prima facie basis for the issuance of a writ of sequestration and not the lack of
authority of two (2) Commissioners which renders the said writ void ab initio. Thus, being the case, Writ of
Sequestration No. 87-0218 must be automatically lifted.

As declared by the Honorable Supreme Court in two cases it has decided,

"The absence of a prior determination by the PCGG of a prima facie basis for the sequestration order is,
unavoidably, a fatal defect which rendered the sequestration of respondent corporation and its properties void ab
initio." And

"The corporation or entity against which such writ is directed will not be able to visually determine its validity, unless
the required signatures of at least two commissioners authorizing its issuance appear on the very document itself.
The issuance of sequestration orders requires the existence of a prima facie case. The two –commissioner rule is
obviously intended to assure a collegial determination of such fact. In this light, a writ bearing only one signature is
an obvious transgression of the PCGG Rules."

Consequently, the writs of sequestration nos. 86-0062, 86-0069, 86-0085, 86-0095, 86-0096, 86-0097 and 86-0098
must be lifted for not having complied with the pertinent provisions of the PCGG Rules and Regulations, all of which
were issued by only one Commissioner and after April 11, 1986 when the PCGG Rules and Regulations took effect,
an utter disregard of the PCGG’s Rules and Regulations. The Honorable Supreme Court has stated that:
"Obviously, Section 3 of the PCGG Rules was intended to protect the public from improvident, reckless and
needless sequestrations of private property. And since these Rules were issued by Respondent Commission, it
should be the first entity to observe them."

Anent the writ of sequestration no. 86-0042 which was issued on April 8, 1986 or prior to the promulgation of the
PCGG Rules and Regulations on April 11, 1986, the same cannot be declared void on the ground that it was signed
by only one Commissioner because at the time it was issued, the Rules and Regulations of the PCGG were not yet
in effect. However, it again appears that there was no prior determination of the existence of a prima facie basis or
factual foundation for the issuance of the said writ. The PCGG, despite sufficient time afforded by this Court to show
that a prima facie basis existed prior to the issuance of Writ No. 86-0042, failed to do so. Nothing in the records
submitted by the PCGG in compliance of the Resolutions and Order of this Court would reveal that a meeting was
held by the Commission for the purpose of determining the existence of a prima facie evidence prior to its issuance.
In a case decided by the Honorable Supreme Court, wherein it involved a writ of sequestration issued by the PCGG
on March 19, 1986 against all assets, movable and immovable, of Provident International Resources Corporation
and Philippine Casino Operators Corporation, the Honorable Supreme Court enunciated:

"The questioned sequestration order was, however issued on March 19, 1986, prior to the promulgation of the
PCGG Rules and Regulations. As a consequence, we cannot reasonably expect the commission to abide by said
rules, which were nonexistent at the time the subject writ was issued by then Commissioner Mary Concepcion
Bautista. Basic is the rule that no statute, decree, ordinance, rule or regulation (and even policies) shall be given
retrospective effect unless explicitly stated so. We find no provision in said Rules which expressly gives them
retroactive effect, or implies the abrogation of previous writs issued not in accordance with the same Rules. Rather,
what said Rules provide is that they "shall be effective immediately," which in legal parlance, is understood as "upon
promulgation". Only penal laws are given retroactive effect insofar as they favor the accused.

We distinguish this case from Republic vs. Sandiganbayan, Romualdez and Dio Island Resort, G.R. No. 88126, July
12, 1996 where the sequestration order against Dio Island Resort, dated April 14, 1986, was prepared, issued and
signed not by two commissioners of the PCGG, but by the head of its task force in Region VIII. In holding that said
order was not valid since it was not issued in accordance with PCGG Rules and Regulations, we explained:

"(Sec. 3 of the PCGG Rules and Regulations), couched in clear and simple language, leaves no room for
interpretation. On the basis thereof, it is indubitable that under no circumstances can a sequestration or freeze order
be validly issued by one not a commissioner of the PCGG.

xxx xxx xxx

Even assuming arguendo that Atty. Ramirez had been given prior authority by the PCGG to place Dio Island Resort
under sequestration, nevertheless, the sequestration order he issued is still void since PCGG may not delegate its
authority to sequester to its representatives and subordinates, and any such delegation is valid and ineffective."

We further said:

"In the instant case, there was clearly no prior determination made by the PCGG of a prima facie basis for the
sequestration of Dio Island Resort, Inc. x x x

xxx xxx xxx

The absence of a prior determination by the PCGG of a prima facie basis for the sequestration order is,
unavoidably, a fatal defect which rendered the sequestration of respondent corporation and its properties void ab
initio. Being void ab initio, it is deemed nonexistent, as though it had never been issued, and therefore is not subject
to ratification by the PCGG.

What were obviously lacking in the above case were the basic requisites for the validity of a sequestration order
which we laid down in BASECO vs. PCGG, 150 SCRA 181, 216, May 27, 1987, thus:

"Section (3) of the Commission’s Rules and regulations provides that sequestration or freeze (and takeover) orders
issue upon the authority of at least two commissioners, based on the affirmation or complaint of an interested party,
or motu propio (sic) when the Commission has reasonable grounds to believe that the issuance thereof is
warranted."

In the case at bar, there is no question as to the presence of prima facie evidence justifying the issuance of the
sequestration order against respondent corporations. But the said order cannot be nullified for lack of the other
requisite (authority of at least two commissioners) since, as explained earlier, such requisite was nonexistent at the
time the order was issued."
As to the argument of the Plaintiff Republic that Defendants Cojuangco, et al. have not shown any contrary prima
facie proof that the properties subject matter of the writs of sequestration were legitimate acquisitions, the same is
misplaced. It is a basic legal doctrine, as well as many times enunciated by the Honorable Supreme Court that when
a prima facie proof is required in the issuance of a writ, the party seeking such extraordinary writ must establish that
it is entitled to it by complying strictly with the requirements for its issuance and not the party against whom the writ
is being sought for to establish that the writ should not be issued against it.

According to the Republic, the Sandiganbayan thereby gravely abused its discretion in: (a) in lifting WOS No. 86-
0042 and No. 87-0218 despite the basic requisites for the validity of sequestration being existent; (b) in denying the
Republic’s alternative prayer for the issuance of an order of sequestration against all the subject shares of stock in
accordance with the ruling in Republic v. Sandiganbayan, 258 SCRA 685, as stated in its Motion For
Reconsideration; and (c) in deleting the last two conditions the Sandiganbayan had earlier imposed on the subject
shares of stock.

We sustain the lifting of the nine WOS for the reasons made extant in the assailed resolution of October 8, 2003,
supra.

Section 3 of the Rules of the PCGG, promulgated on April 11, 1986, provides:

Section 3. Who may issue. – A writ of sequestration or a freeze or hold order may be issued by the Commission
upon the authority of at least two Commissioners, based on the affirmation or complaint of an interested party or
motu proprio when the Commission has reasonable grounds to believe that the issuance thereof is warranted.

Conformably with Section 3, supra, WOS No. 86-0062 dated April 21, 1986; WOS No. 86-0069 dated April 22, 1986;
WOS No. 86-0085 dated May 9, 1986; WOS No. 86-0095 dated May 16, 1986; WOS No. 86-0096 dated May 16,
1986; WOS No. 86-0097 dated May 16, 1986; and WOS No. 86-0098 dated May 16, 1986 were lawfully and
correctly nullified considering that only one PCGG Commissioner had issued them.

Similarly, WOS No. 86-0042 dated April 8, 1986 and WOS No. 87-0218 dated May 27, 1987 were lawfully and
correctly nullified ̶ notwithstanding that WOS No. 86-0042, albeit signed by only one Commissioner (i.e.,
Commissioner Mary Concepcion Bautista), was not at the time of its issuance subject to the two-Commissioners
rule, and WOS No. 87-0218, albeit already issued under the signatures of two Commissioners ̶ considering that both
had been issued without a prior determination by the PCGG of a prima facie basis for the sequestration.

Plainly enough, the irregularities infirming the issuance of the several WOS could not be ignored in favor of the
Republic and resolved against the persons whose properties were subject of the WOS. Where the Rules of the
PCGG instituted safeguards under Section 3, supra, by requiring the concurrent signatures of two Commissioners to
every WOS issued and the existence of a prima facie case of ill gotten wealth to support the issuance, the non-
compliance with either of the safeguards nullified the WOS thus issued. It is already settled that sequestration, due
to its tendency to impede or limit the exercise of proprietary rights by private citizens, is construed strictly against the
State, conformably with the legal maxim that statutes in derogation of common rights are generally strictly construed
and rigidly confined to the cases clearly within their scope and purpose.86

Consequently, the nullification of the nine WOS, being in implementation of the safeguards the PCGG itself had
instituted, did not constitute any abuse of its discretion, least of all grave, on the part of the Sandiganbayan.

Nor did the Sandiganbayan gravely abuse its discretion in reducing from four to only two the conditions imposed for
the lifting of the WOS. The Sandiganbayan thereby acted with the best of intentions, being all too aware that the
claim of the Republic to the sequestered assets and properties might be prejudiced or harmed pendente lite unless
the protective conditions were annotated in the corporate books of SMC. Moreover, the issue became academic
following the Sandiganbayan’s promulgation of its decision dismissing the Republic’s Amended Complaint, which
thereby removed the stated reason – "the Republic continues to hold a claim on the shares which is yet to be
resolved" – underlying the need for the annotation of the conditions (whether four or two).

II

The Concept and Genesis of

Ill-Gotten Wealth in the Philippine Setting

A brief review of the Philippine law and jurisprudence pertinent to ill-gotten wealth should furnish an illuminating
backdrop for further discussion.

In the immediate aftermath of the peaceful 1986 EDSA Revolution, the administration of President Corazon C.
Aquino saw to it, among others, that rules defining the authority of the government and its instrumentalities were
promptly put in place. It is significant to point out, however, that the administration likewise defined the limitations of
the authority.
The first official issuance of President Aquino, which was made on February 28, 1986, or just two days after the
EDSA Revolution, was Executive Order (E.O.) No. 1, which created the Presidential Commission on Good
Government (PCGG). Ostensibly, E.O. No. 1 was the first issuance in light of the EDSA Revolution having come
about mainly to address the pillage of the nation’s wealth by President Marcos, his family, and cronies.

E.O. No. 1 contained only two WHEREAS Clauses, to wit:

WHEREAS, vast resources of the government have been amassed by former President Ferdinand E. Marcos, his
immediate family, relatives, and close associates both here and abroad;

WHEREAS, there is an urgent need to recover all ill-gotten wealth; 87

Paragraph (4) of E.O. No. 288 further required that the wealth, to be ill-gotten, must be "acquired by them through or
as a result of improper or illegal use of or the conversion of funds belonging to the Government of the Philippines or
any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of
their official position, authority, relationship, connection or influence to unjustly enrich themselves at the expense
and to the grave damage and prejudice of the Filipino people and the Republic of the Philippines."

Although E.O. No. 1 and the other issuances dealing with ill-gotten wealth (i.e., E.O. No. 2, E.O. No. 14, and E.O.
No. 14-A) only identified the subject matter of ill-gotten wealth and the persons who could amass ill-gotten wealth
and did not include an explicit definition of ill-gotten wealth, we can still discern the meaning and concept of ill-gotten
wealth from the WHEREAS Clauses themselves of E.O. No. 1, in that ill-gotten wealth consisted of the "vast
resources of the government" amassed by "former President Ferdinand E. Marcos, his immediate family, relatives
and close associates both here and abroad." It is clear, therefore, that ill-gotten wealth would not include all the
properties of President Marcos, his immediate family, relatives, and close associates but only the part that originated
from the "vast resources of the government."

In time and unavoidably, the Supreme Court elaborated on the meaning and concept of ill-gotten wealth. In Bataan
Shipyard & Engineering Co., Inc. v. Presidential Commission on Good Government, 89 or BASECO, for the sake of
brevity, the Court held that:

xxx until it can be determined, through appropriate judicial proceedings, whether the property was in truth "ill-
gotten," i.e., acquired through or as a result of improper or illegal use of or the conversion of funds belonging to the
Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue
advantage of official position, authority, relationship, connection or influence, resulting in unjust enrichment of the
ostensible owner and grave damage and prejudice to the State. And this, too, is the sense in which the term is
commonly understood in other jurisdictions.90

The BASECO definition of ill-gotten wealth was reiterated in Presidential Commission on Good Government v. Lucio
C. Tan,91 where the Court said:

On this point, we find it relevant to define "ill-gotten wealth." In Bataan Shipyard and Engineering Co., Inc., this
Court described "ill-gotten wealth" as follows:

"Ill-gotten wealth is that acquired through or as a result of improper or illegal use of or the conversion of funds
belonging to the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or
by taking undue advantage of official position, authority, relationship, connection or influence, resulting in unjust
enrichment of the ostensible owner and grave damage and prejudice to the State. And this, too, is the sense in
which the term is commonly understood in other jurisdiction."

Concerning respondents’ shares of stock here, there is no evidence presented by petitioner that they belong to the
Government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions.
Nor is there evidence that respondents, taking undue advantage of their connections or relationship with former
President Marcos or his family, relatives and close associates, were able to acquire those shares of stock.

Incidentally, in its 1998 ruling in Chavez v. Presidential Commission on Good Government, 92 the Court rendered an
identical definition of ill-gotten wealth, viz:

xxx. We may also add that ‘ill-gotten wealth’, by its very nature, assumes a public character. Based on the
aforementioned Executive Orders, ‘ill-gotten wealth’ refers to assets and properties purportedly acquired, directly or
indirectly, by former President Marcos, his immediate family, relatives and close associates through or as a result
of their improper or illegal use of government funds or properties; or their having taken undue advantage of
their public office; or their use of powers, influence or relationships, "resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the Republic of the Philippines." Clearly, the assets
and properties referred to supposedly originated from the government itself. To all intents and purposes,
therefore, they belong to the people. As such, upon reconveyance they will be returned to the public
treasury, subject only to the satisfaction of positive claims of certain persons as may be adjudged by competent
courts. Another declared overriding consideration for the expeditious recovery of ill-gotten wealth is that it may be
used for national economic recovery.

All these judicial pronouncements demand two concurring elements to be present before assets or properties were
considered as ill-gotten wealth, namely: (a) they must have "originated from the government itself," and (b) they
must have been taken by former President Marcos, his immediate family, relatives, and close associates by illegal
means.

But settling the sources and the kinds of assets and property covered by E.O. No. 1 and related issuances did not
complete the definition of ill-gotten wealth. The further requirement was that the assets and property should have
been amassed by former President Marcos, his immediate family, relatives, and close associates both here and
abroad. In this regard, identifying former President Marcos, his immediate family, and relatives was not difficult, but
identifying other persons who might be the close associates of former President Marcos presented an inherent
difficulty, because it was not fair and just to include within the term close associates everyone who had had any
association with President Marcos, his immediate family, and relatives.

Again, through several rulings, the Court became the arbiter to determine who were the close associates within the
coverage of E.O. No. 1.

In Republic v. Migriño,93 the Court held that respondents Migriño, et al. were not necessarily among the persons
covered by the term close subordinate or close associate of former President Marcos by reason alone of their
having served as government officials or employees during the Marcos administration, viz:

It does not suffice, as in this case, that the respondent is or was a government official or employee during
the administration of former Pres. Marcos. There must be a prima facie showing that the respondent
unlawfully accumulated wealth by virtue of his close association or relation with former Pres. Marcos and/or
his wife. This is so because otherwise the respondent’s case will fall under existing general laws and procedures on
the matter. xxx

In Cruz, Jr. v. Sandiganbayan,94 the Court declared that the petitioner was not a close associate as the term was
used in E.O. No. 1 just because he had served as the President and General Manager of the GSIS during the
Marcos administration.

In Republic v. Sandiganbayan,95 the Court stated that respondent Maj. Gen. Josephus Q. Ramas’ having been a
Commanding General of the Philippine Army during the Marcos administration "d[id] not automatically make him a
subordinate of former President Ferdinand Marcos as this term is used in Executive Order Nos. 1, 2, 14 and 14-A
absent a showing that he enjoyed close association with former President Marcos."

It is well to point out, consequently, that the distinction laid down by E.O. No. 1 and its related issuances, and
expounded by relevant judicial pronouncements unavoidably required competent evidentiary substantiation made in
appropriate judicial proceedings to determine: (a) whether the assets or properties involved had come from the vast
resources of government, and (b) whether the individuals owning or holding such assets or properties were close
associates of President Marcos. The requirement of competent evidentiary substantiation made in appropriate
judicial proceedings was imposed because the factual premises for the reconveyance of the assets or properties in
favor of the government due to their being ill-gotten wealth could not be simply assumed. Indeed, in BASECO, 96 the
Court made this clear enough by emphatically observing:

6. Government’s Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government’s plan "to recover all ill-gotten
wealth."

Neither can there be any debate about the proposition that assuming the above described factual premises of the
Executive Orders and Proclamation No. 3 to be true, to be demonstrable by competent evidence, the recovery from
Marcos, his family and his minions of the assets and properties involved, is not only a right but a duty on the part of
Government.

But however plain and valid that right and duty may be, still a balance must be sought with the equally compelling
necessity that a proper respect be accorded and adequate protection assured, the fundamental rights of private
property and free enterprise which are deemed pillars of a free society such as ours, and to which all members of
that society may without exception lay claim.

xxx Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components freedom of
conscience, freedom of expression, and freedom in the pursuit of happiness. Along with these freedoms are
included economic freedom and freedom of enterprise within reasonable bounds and under proper control. xxx
Evincing much concern for the protection of property, the Constitution distinctly recognizes the preferred position
which real estate has occupied in law for ages. Property is bound up with every aspect of social life in a democracy
as democracy is conceived in the Constitution. The Constitution realizes the indispensable role which property,
owned in reasonable quantities and used legitimately, plays in the stimulation to economic effort and the formation
and growth of a solid social middle class that is said to be the bulwark of democracy and the backbone of every
progressive and happy country.

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be duly
established by adequate proof in each case, in a proper judicial proceeding, so that the recovery of the ill-gotten
wealth may be validly and properly adjudged and consummated; although there are some who maintain that the fact
— that an immense fortune, and "vast resources of the government have been amassed by former President
Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad," and they have
resorted to all sorts of clever schemes and manipulations to disguise and hide their illicit acquisitions — is within the
realm of judicial notice, being of so extensive notoriety as to dispense with proof thereof. Be this as it may, the
requirement of evidentiary substantiation has been expressly acknowledged, and the procedure to be followed
explicitly laid down, in Executive Order No. 14. 97

Accordingly, the Republic should furnish to the Sandiganbayan in proper judicial proceedings the competent
evidence proving who were the close associates of President Marcos who had amassed assets and properties that
would be rightly considered as ill-gotten wealth.

III.

Summary Judgment was not warranted;

The Republic should have adduced evidence

to substantiate its allegations against the Respondents

We affirm the decision of November 28, 2007, because the Republic did not discharge its burden as the plaintiff to
establish by preponderance of evidence that the respondents’ SMC shares were illegally acquired with coconut-levy
funds.

The decision of November 28, 2007 fully explained why the Sandiganbayan dismissed the Republic’s case against
Cojuangco, et al., viz:

Going over the evidence, especially the laws, i.e., P.D. No. 961, P.D. No. 755, and P.D. No. 1468, over which
plaintiff prayed that Court to take judicial notice of, it is worth noting that these same laws were cited by plaintiff
when it filed its motion for judgment on the pleadings and/or summary judgment regarding the CIIF block of SMC
shares of stock. Thus, the Court has already passed upon the same laws when it arrived at judgment determining
ownership of the CIIF block of SMC shares of stock. Pertinently, in the Partial Summary Judgment promulgated on
May 7, 2004, the Court gave the following rulings finding certain provisions of the above-cited laws to be
constitutionally infirmed, thus:

In this case, Section 2(d) and Section 9 and 10, Article III, of P.D. Nos. 961 and 1468 mandated the UCPB to utilize
the CIIF, an accumulation of a portion of the CCSF and the CIDF, for investment in the form of shares of stock in
corporations organized for the purpose of engaging in the establishment and the operation of industries and
commercial activities and other allied business undertakings relating to coconut and other palm oils industry in all
aspects. The investments made by UCPB in CIIF companies are required by the said Decrees to be equitably
distributed for free by the said bank to the coconut farmers (Sec. 10, P.D. No. 961 and Sec. 10, P.D. No. 1468). The
public purpose sought to be served by the free distribution of the shares of stock acquired with the use of public
funds is not evident in the laws mentioned. More specifically, it is not clear how private ownership of the shares of
stock acquired with public funds can serve a public purpose. The mode of distribution of the shares of stock also left
much room for the diversion of assets acquired through public funds into private uses or to serve directly private
interests, contrary to the Constitution. In the said distribution, defendants COCOFED, et al. and Ballares, et al.
admitted that UCPB followed the administrative issuances of PCA which we found to be constitutionally
objectionable in our Partial Summary Judgment in Civil Case No. 0033-A, the pertinent portions of which are quoted
hereunder:

xxx xxx xxx

The distribution for free of the shares of stock of the CIIF Companies is tainted with the above-mentioned
constitutional infirmities of the PCA administrative issuances. In view of the foregoing, we cannot consider the
provision of P.D. No. 961 and P.D. No. 1468 and the implementing regulations issued by the PCA as valid legal
basis to hold that assets acquired with public funds have legitimately become private properties.
The CIIF Companies having been acquired with public funds, the 14 CIIF-owned Holding Companies and all their
assets, including the CIIF Block of SMC Shares, being public in character, belong to the government. Even granting
that the 14 Holding Companies acquired the SMC Shares through CIIF advances and UCPB loans, said advances
and loans are still the obligations of the said companies. The incorporating equity or capital of the 14 Holding
Companies, which were allegedly used also for the acquisition of the subject SMC shares, being wholly owned by
the CIIF Companies, likewise form part of the coconut levy funds, and thus belong to the government in trust for the
ultimate beneficiaries thereof, which are all the coconut farmers.

xxx xxx xxx

And, with the above-findings of the Court, the CIIF block of SMC shares were subsequently declared to be of public
character and should be reconveyed to the government in trust for coconut farmers. The foregoing findings
notwithstanding, a question now arises on whether the same laws can likewise serve as ultimate basis for a finding
that the Cojuangco, et al. block of SMC shares are also imbued with public character and should rightfully be
reconveyed to the government.

On this point, the Court disagrees with plaintiff that reliance on said laws would suffice to prove that defendants
Cojuangco, et al.’s acquisition of SMC shares of stock was illegal as public funds were used. For one, plaintiff’s
reliance thereon has always had reference only to the CIIF block of shares, and the Court has already settled the
same by going over the laws and quoting related findings in the Partial Summary judgment rendered in Civil Case
No. 0033-A. For another, the allegations of plaintiff pertaining to the Cojuangco block representing twenty percent
(20%) of the outstanding capital stock of SMC stress defendant Cojuangco’s acquisition by virtue of his positions as
Chief Executive Officer of UCPB, a member-director of the Philippine Coconut Authority (PCA) Governing Board,
and a director of the CIIF Oil Mills. Thus, reference to the said laws would not settle whether there was abuse on the
part of defendants Cojuangco, et al. of their positions to acquire the SMC shares. 98

Besides, in the Resolution of the Court on plaintiff’s Motion for Parial Summary Judgment (Re: Shares in San Miguel
Corporation Registered in the Respective Names of Defendants Eduardo M. Cojuangco, Jr. and the defendant
Cojuangco Companies), the Court already rejected plaintiff’s reference to said laws. In fact, the Court declined to
grant plaintiff’s motion for partial summary judgment because it simply contended that defendant Cojuangco’s
statements in his pleadings, which plaintiff again offered in evidence herein, regarding the presentation of a possible
CIIF witness as well as UCPB records can already be considered admissions of defendants’ exclusive use and
misuse of coconut levy funds. In the said resolution, the Court already reminded plaintiff that the issues cannot be
resolved by plaintiff’s interpretation of defendant Cojuangco’s statements in his brief. Thus, the substantial portion of
the Resolution of the Court denying plaintiff’s motion for partial summary judgment is again quoted for emphasis: 99

We cannot agree with the plaintiff’s contention that the defendant’s statements in his Pre-Trial Brief regarding the
presentation of a possible CIIF witness as well as UCPB records, can already be considered as admissions of the
defendant’s exclusive use and misuse of coconut levy funds to acquire the subject SMC shares and defendant
Cojuangco’s alleged taking advantage of his positions to acquire the subject SMC shares. Moreover, in ruling on a
motion for summary judgment, the court "should take that view of the evidence most favorable to the party against
whom it is directed, giving such party the benefit of all favorable inferences." Inasmuch as this issue cannot be
resolved merely from an interpretation of the defendant’s statements in his brief, the UCPB records must be
produced and the CIIF witness must be heard to ensure that the conclusions that will be derived have factual basis
and are thus, valid. 100

WHEREFORE, in view of the foregoing, the Motion for Partial Summary Judgment dated July 11, 2003 is hereby
DENIED for lack of merit.

SO ORDERED.

(Emphasis supplied)

Even assuming that, as plaintiff prayed for, the Court takes judicial notice of the evidence it offered with respect to
the Cojuangco block of SMC shares of stock, as contained in plaintiff’s manifestation of purposes, still its evidence
do not suffice to prove the material allegations in the complaint that Cojuangco took advantage of his positions in
UCPB and PCA in order to acquire the said shares. As above-quoted, the Court, itself, has already ruled, and
hereby stress that "UCPB records must be produced and the CIIF witness must be heard to ensure that the
conclusions that will be derived have factual basis and are thus, valid." Besides, the Court found that there are
genuine factual issues raised by defendants that need to be threshed out in a full-blown trial, and which plaintiff had
the burden to substantially prove. Thus, the Court outlined these genuine factual issues as follows:

1) What are the "various sources" of funds, which defendant Cojuangco and his companies claim they
utilized to acquire the disputed SMC shares?

2) Whether or not such funds acquired from alleged "various sources" can be considered coconut levy
funds;
 3) Whether or not defendant Cojuangco had indeed served in the governing bodies of PCA, UCPB and/or
CIIF Oil Mills at the time the funds used to purchase the SMC shares were obtained such that he owed a
fiduciary duty to render an account to these entities as well as to the coconut farmers;

4) Whether or not defendant Cojuangco took advantage of his position and/or close ties with then President
Marcos to obtain favorable concessions or exemptions from the usual financial requirements from the
lending banks and/or coco-levy funded companies, in order to raise the funds to acquire the disputed SMC
shares; and if so, what are these favorable concessions or exemptions?101

Answers to these issues are not evident from the submissions of plaintiff and must therefore be proven through the
presentation of relevant and competent evidence during trial. A perusal of the subject Motion shows that the plaintiff
hastily derived conclusions from the defendants’ statements in their previous pleadings although such conclusions
were not supported by categorical facts but only mere inferences. xxx xxx xxx." (Emphasis supplied) 102

Despite the foregoing pronouncement of the Court, plaintiff did not present any other evidence during the trial of this
case but instead made its manifestation of purposes, that later served as its offer of evidence in the instant case,
that merely used the same evidence it had already relied upon when it moved for partial summary judgment over
the Cojuangco block of SMC shares. Altogether, the Court finds the same insufficient to prove plaintiff’s allegations
in the complaint because more than judicial notices, the factual issues require the presentation of admissible,
competent and relevant evidence in accordance with Sections 3 and 4, Rule 128 of the Rules on Evidence.

Moreover, the propriety of taking judicial notice of plaintiff’s exhibits is aptly questioned by defendants Cojuangco, et
al. Certainly, the Court can take judicial notice of laws pertaining to the coconut levy funds as well as decisions of
the Supreme Court relative thereto, but taking judicial notice does not mean that the Court would accord full
probative value to these exhibits. Judicial notice is based upon convenience and expediency for it would certainly be
superfluous, inconvenient, and expensive both to parties and the court to require proof, in the ordinary way, of facts
which are already known to courts. However, a court cannot take judicial notice of a factual matter in controversy.
Certainly, there are genuine factual matters in the instant case, as above-cited, which plaintiff ought to have proven
with relevant and competent evidence other than the exhibits it offered.

Referring to plaintiff’s causes of action against defendants Cojuangco, et al., the Court finds its evidence insufficient
to prove that the source of funds used to purchase SMC shares indeed came from coconut levy funds. In fact, there
is no direct link that the loans obtained by defendant Cojuangco, Jr. were the same money used to pay for the SMC
shares. The scheme alleged to have been taken by defendant Cojuangco, Jr. was not even established by any
paper trail or testimonial evidence that would have identified the same. On account of his positions in the UCPB,
PCA and the CIIF Oil Mills, the Court cannot conclude that he violated the fiduciary obligations of the positions he
held in the absence of proof that he was so actuated and that he abused his positions. 103

It was plain, indeed, that Cojuangco, et al. had tendered genuine issues through their responsive pleadings and did
not admit that the acquisition of the Cojuangco block of SMC shares had been illegal, or had been made with public
funds. As a result, the Republic needed to establish its allegations with preponderant competent evidence, because,
as earlier stated, the fact that property was ill gotten could not be presumed but must be substantiated with
competent proof adduced in proper judicial proceedings. That the Republic opted not to adduce competent evidence
thereon despite stern reminders and warnings from the Sandiganbayan to do so revealed that the Republic did not
have the competent evidence to prove its allegations against Cojuangco, et al.

Still, the Republic, relying on the 2001 holding in Republic v. COCOFED, 104 pleads in its petition for review (G.R. No.
180702) that:

With all due respect, the Honorable Sandiganbayan failed to consider legal precepts and procedural principles vis-à-
vis the records of the case showing that the funds or "various loans" or "advances" used in the acquisition of the
disputed SMC Shares ultimately came from the coconut levy funds.

As discussed hereunder, respondents’ own admissions in their Answers and Pre-Trial Briefs confirm that the
"various sources" of funds utilized in the acquisition of the disputed SMC shares came from "borrowings" and
"advances" from the UCPB and the CIIF Oil Mills.105

Thereby, the Republic would have the Sandiganbayan pronounce the block of SMC shares of stock acquired by
Cojuangco, et al. as ill-gotten wealth even without the Republic first presenting preponderant evidence establishing
that such block had been acquired illegally and with the use of coconut levy funds.

The Court cannot heed the Republic’s pleas for the following reasons:

To begin with, it is notable that the decision of November 28, 2007 did not rule on whether coconut levy funds were
public funds or not. The silence of the Sandiganbayan on the matter was probably due to its not seeing the need for
such ruling following its conclusion that the Republic had not preponderantly established the source of the funds
used to pay the purchase price of the concerned SMC shares, and whether the shares had been acquired with the
use of coconut levy funds.

Secondly, the ruling in Republic v. COCOFED106 determined only whether certain stockholders of the UCPB could
vote in the stockholders’ meeting that had been called. The issue now before the Court could not be controlled by
the ruling in Republic v. COCOFED, however, for even as that ruling determined the issue of voting, the Court was
forthright enough about not thereby preempting the Sandiganbayan’s decisions on the merits on ill-gotten wealth in
the several cases then pending, including this one, viz:

In making this ruling, we are in no way preempting the proceedings the Sandiganbayan may conduct or the final
judgment it may promulgate in Civil Case No. 0033-A, 0033-B and 0033-F. Our determination here is merely prima
facie, and should not bar the anti-graft court from making a final ruling, after proper trial and hearing, on the issues
and prayers in the said civil cases, particularly in reference to the ownership of the subject shares.

We also lay down the caveat that, in declaring the coco levy funds to be prima facie public in character, we are not
ruling in any final manner on their classification — whether they are general or trust or special funds — since such
classification is not at issue here. Suffice it to say that the public nature of the coco levy funds is decreed by the
Court only for the purpose of determining the right to vote the shares, pending the final outcome of the said civil
cases.

Neither are we resolving in the present case the question of whether the shares held by Respondent Cojuangco are,
as he claims, the result of private enterprise. This factual matter should also be taken up in the final decision in the
cited cases that are pending in the court a quo. Again, suffice it to say that the only issue settled here is the right of
PCGG to vote the sequestered shares, pending the final outcome of said cases.

Thirdly, the Republic’s assertion that coconut levy funds had been used to source the payment for the Cojuangco
block of SMC shares was premised on its allegation that the UCPB and the CIIF Oil Mills were public corporations.
But the premise was grossly erroneous and overly presumptuous, because:

(a) The fact of the UCPB and the CIIF Oil Mills being public corporations or government-owned or
government-controlled corporations precisely remained controverted by Cojuangco, et al. in light of the lack
of any competent to that effect being in the records;

(b) Cojuangco explicitly averred in paragraph 2.01.(b) of his Answer that the UCPB was a "private
corporation;" and

(c) The Republic did not competently identify or establish which ones of the Cojuangco corporations had
supposedly received advances from the CIIF Oil Mills.

Fourthly, the Republic asserts that the contested block of shares had been paid for with "borrowings" from the
UCPB and "advances" from the CIIF Oil Mills, and that such borrowings and advances had been illegal because the
shares had not been purchased for the "benefit of the Coconut Farmers." To buttress its assertion, the Republic
relied on the admissions supposedly made in paragraph 2.01 of Cojuangco’s Answer in relation to paragraph 4 of
the Republic’s Amended Complaint.

The best way to know what paragraph 2.01 of Cojuangco’s Answer admitted is to refer to both paragraph 4 of the
Amended Complaint and paragraph 2.01 of his Answer, which are hereunder quoted:

Paragraph 4 of the Amended Complaint

4. Defendant EDUARDO M. COJUANGCO, JR., was Governor of Tarlac, Congressman of then First District of
Tarlac and Ambassador-at-Large in the Marcos Administration. He was commissioned Lieutenant Colonel in the
Philippine Air Force, Reserve. Defendant Eduardo M. Cojuangco, Jr., otherwise known as the "Coconut King" was
head of the coconut monopoly which was instituted by Defendant Ferdinand E. Marcos, by virtue of the Presidential
Decrees. Defendant Eduardo E. Cojuangco, Jr., who was also one of the closest associates of the Defendant
Ferdinand E. Marcos, held the positions of Director of the Philippine Coconut Authority, the United Coconut Mills,
Inc., President and Board Director of the United Coconut Planters Bank, United Coconut Planters Life Assurance
Corporation, and United Coconut Chemicals, Inc. He was also the Chairman of the Board and Chief Executive
Officer and the controlling stockholder of the San Miguel Corporation. He may be served summons at 45 Balete
Drive, Quezon City or at 136 East 9th Street, Quezon City.

Paragraph 2.01 of Respondent Cojuangco’s Answer

2.01. Herein defendant admits paragraph 4 only insofar as it alleges the following:
 (a) That herein defendant has held the following positions in government: Governor of Tarlac, Congressman
of the then First District of Tarlac, Ambassador-at-Large, Lieutenant Colonel in the Philippine Air Force and
Director of the Philippines Coconut Authority;

(b) That he held the following positions in private corporations: Member of the Board of Directors of the
United Coconut Oil Mills, Inc.; President and member of the Board of Directors of the United Coconut
Planters Bank, United Coconut Planters Life Assurance Corporation, and United Coconut Chemicals, Inc.;
Chairman of the Board and Chief Executive of San Miguel Corporation; and

(c) That he may be served with summons at 136 East 9th Street, Quezon City.

Herein defendant specifically denies the rest of the allegations of paragraph 4, including any insinuation that
whatever association he may have had with the late Ferdinand Marcos or Imelda Marcos has been in connection
with any of the acts or transactions alleged in the complaint or for any unlawful purpose.

It is basic in remedial law that a defendant in a civil case must apprise the trial court and the adverse party of the
facts alleged by the complaint that he admits and of the facts alleged by the complaint that he wishes to place into
contention. The defendant does the former either by stating in his answer that they are true or by failing to properly
deny them. There are two ways of denying alleged facts: one is by general denial, and the other, by specific
denial.107

In this jurisdiction, only a specific denial shall be sufficient to place into contention an alleged fact. 108 Under Section
10,109 Rule 8 of the Rules of Court, a specific denial of an allegation of the complaint may be made in any of three
ways, namely: (a) a defendant specifies each material allegation of fact the truth of which he does not admit and,
whenever practicable, sets forth the substance of the matters upon which he relies to support his denial; (b) a
defendant who desires to deny only a part of an averment specifies so much of it as is true and material and denies
only the remainder; and (c) a defendant who is without knowledge or information sufficient to form a belief as to the
truth of a material averment made in the complaint states so, which has the effect of a denial.

The express qualifications contained in paragraph 2.01 of Cojuangco’s Answer constituted efficient specific denials
of the averments of paragraph 2 of the Republic’s Amended Complaint under the first method mentioned in Section
10 of Rule 8, supra. Indeed, the aforequoted paragraphs of the Amended Complaint and of Cojuangco’s Answer
indicate that Cojuangco thereby expressly qualified his admission of having been the President and a Director of the
UCPB with the averment that the UCPB was a "private corporation;" that his Answer’s allegation of his being a
member of the Board of Directors of the United Coconut Oil Mills, Inc. did not admit that he was a member of the
Board of Directors of the CIIF Oil Mills, because the United Coconut Oil Mills, Inc. was not one of the CIIF Oil Mills;
and that his Answer nowhere contained any admission or statement that he had held the various positions in the
government or in the private corporations at the same time and in 1983, the time when the contested acquisition of
the SMC shares of stock took place.

What the Court stated in Bitong v. Court of Appeals (Fifth Division) 110 as to admissions is illuminating:

When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to the Amended
Petition alone, clearly raises an issue as to the legal personality of petitioner to file the complaint. Every alleged
admission is taken as an entirety of the fact which makes for the one side with the qualifications which limit, modify
or destroy its effect on the other side. The reason for this is, where part of a statement of a party is used against him
as an admission, the court should weigh any other portion connected with the statement, which tends to neutralize
or explain the portion which is against interest.

In other words, while the admission is admissible in evidence, its probative value is to be determined from the whole
statement and others intimately related or connected therewith as an integrated unit. Although acts or facts admitted
do not require proof and cannot be contradicted, however, evidence aliunde can be presented to show that the
admission was made through palpable mistake. The rule is always in favor of liberality in construction of pleadings
so that the real matter in dispute may be submitted to the judgment of the court.

And, lastly, the Republic cites the following portions of the joint Pre-Trial Brief of Cojuangco, et al., 111 to wit:

IV.

PROPOSED EVIDENCE

xxx

4.01. xxx Assuming, however, that plaintiff presents evidence to support its principal contentions, defendant’s
evidence in rebuttal would include testimonial and documentary evidence showing: a) the ownership of the shares
of stock prior to their acquisition by respondents (listed in Annexes ‘A" and ‘B"); b) the consideration for the
acquisition of the shares of stock by the persons or companies in whose names the shares of stock are now
registered; and c) the source of the funds used to pay the purchase price.

4.02. Herein respondents intend to present the following evidence:

xxx

b. Proposed Exhibits ____, ____, ____

Records of the United Coconut Planters Bank which would show borrowings of the companies listed in Annexes "A"
and "B", or companies affiliated or associated with them, which were used to source payment of the shares of stock
of the San Miguel Corporation subject of this case.

4.03. Witnesses.

xxx

(b) A representative of the United Coconut Planters Bank who will testify in regard the loans which were
used to source the payment of the price of SMC shares of stock.

(c) A representative from the CIIF Oil Mills who will testify in regard the loans or credit advances which were
used to source the payment of the purchase price of the SMC shares of stock.

The Republic insists that the aforequoted portions of the joint Pre-Trial Brief were Cojuangco, et al.’s admission that:

(a) Cojuangco had received money from the UCPB, a bank entrusted by law with the administration of the
coconut levy funds; and

(b) Cojuangco had received more money from the CIIF Oil Mills in which part of the CIIF funds had been
placed, and thereby used the funds of the UCPB and the CIIF as capital to buy his SMC shares. 112

We disagree with the Republic’s posture.

The statements found in the joint Pre-Trial Brief of Cojuangco, et al. were noticeably written beneath the heading of
Proposed Evidence. Such location indicated that the statements were only being proposed, that is, they were not
yet intended or offered as admission of any fact stated therein. In other words, the matters stated or set forth therein
might or might not be presented at all. Also, the text and tenor of the statements expressly conditioned the proposal
on the Republic ultimately presenting its evidence in the action. After the Republic opted not to present its evidence,
the condition did not transpire; hence, the proposed admissions, assuming that they were that, did not materialize.

Obviously, too, the statements found under the heading of Proposed Evidence in the joint Pre-Trial Brief were
incomplete and inadequate on the important details of the supposed transactions (i.e., alleged borrowings and
advances). As such, they could not constitute admissions that the funds had come from borrowings by Cojuangco,
et al. from the UCPB or had been credit advances from the CIIF Oil Companies. Moreover, the purpose for
presenting the records of the UCPB and the representatives of the UCPB and of the still unidentified or unnamed
CIIF Oil Mills as declared in the joint Pre-Trial Brief did not at all show whether the UCPB and/or the unidentified or
unnamed CIIF Oil Mills were the only sources of funding, or that such institutions, assuming them to be the sources
of the funding, had been the only sources of funding. Such ambiguousness disqualified the statements from being
relied upon as admissions. It is fundamental that any statement, to be considered as an admission for purposes of
judicial proceedings, should be definite, certain and unequivocal;113 otherwise, the disputed fact will not get settled.

Another reason for rejecting the Republic’s posture is that the Sandiganbayan, as the trial court, was in no position
to second-guess what the non-presented records of the UCPB would show as the borrowings made by the
corporations listed in Annexes A and B, or by the companies affiliated or associated with them, that "were used to
source payment of the shares of stock of the San Miguel Corporation subject of this case," or what the
representative of the UCPB or the representative of the CIIF Oil Mills would testify about loans or credit advances
used to source the payment of the price of SMC shares of stock.

Lastly, the Rules of Court has no rule that treats the statements found under the heading Proposed Evidence as
admissions binding Cojuangco, et al. On the contrary, the Rules of Court has even distinguished between admitted
facts and facts proposed to be admitted during the stage of pre-trial. Section 6 (b), 114 Rule 18 of the Rules of Court,
requires a Pre-Trial Brief to include a summary of admitted facts and a proposed stipulation of facts. Complying with
the requirement, the joint Pre-Trial Brief of Cojuangco, et al. included the summary of admitted facts in its paragraph
3.00 of its Item III, separately and distinctly from the Proposed Evidence, to wit:

III.
SUMMARY OF UNDISPUTED FACTS

3.00. Based on the complaint and the answer, the acquisition of the San Miguel shares by, and their registration in
the names of, the companies listed in Annexes "A" and "B" may be deemed undisputed.

3.01. All other allegations in the complaint are disputed.115

The burden of proof, according to Section 1, Rule 131 of the Rules of Court, is "the duty of a party to present
evidence on the facts in issue necessary to establish his claim or defense by the amount of evidence required by
law." Here, the Republic, being the plaintiff, was the party that carried the burden of proof. That burden required it to
demonstrate through competent evidence that the respondents, as defendants, had purchased the SMC shares of
stock with the use of public funds; and that the affected shares of stock constituted ill-gotten wealth. The Republic
was well apprised of its burden of proof, first through the joinder of issues made by the responsive pleadings of the
defendants, including Cojuangco, et al. The Republic was further reminded through the pre-trial order and the
Resolution denying its Motion for Summary Judgment, supra, of the duty to prove the factual allegations on ill-gotten
wealth against Cojuangco, et al., specifically the following disputed matters:

(a) When the loans or advances were incurred;

(b) The amount of the loans from the UCPB and of the credit advances from the CIIF Oil Mills, including the
specific CIIF Oil Mills involved;

(c) The identities of the borrowers, that is, all of the respondent corporations together, or separately; and the
amounts of the borrowings;

(d) The conditions attendant to the loans or advances, if any;

(e) The manner, form, and time of the payments made to Zobel or to the Ayala Group, whether by check,
letter of credit, or some other form; and

(f) Whether the loans were paid, and whether the advances were liquidated.

With the Republic nonetheless choosing not to adduce evidence proving the factual allegations, particularly the
aforementioned matters, and instead opting to pursue its claims by Motion for Summary Judgment, the
Sandiganbayan became completely deprived of the means to know the necessary but crucial details of the
transactions on the acquisition of the contested block of shares. The Republic’s failure to adduce evidence shifted
no burden to the respondents to establish anything, for it was basic that the party who asserts, not the party who
denies, must prove.116 Indeed, in a civil action, the plaintiff has the burden of pleading every essential fact and
element of the cause of action and proving them by preponderance of evidence. This means that if the defendant
merely denies each of the plaintiff’s allegations and neither side produces evidence on any such element, the
plaintiff must necessarily fail in the action.117 Thus, the Sandiganbayan correctly dismissed Civil Case No. 0033-F for
failure of the Republic to prove its case by preponderant evidence.

A summary judgment under Rule 35 of the Rules of Court is a procedural technique that is proper only when there is
no genuine issue as to the existence of a material fact and the moving party is entitled to a judgment as a matter of
law.118 It is a method intended to expedite or promptly dispose of cases where the facts appear undisputed and
certain from the pleadings, depositions, admissions, and affidavits on record. 119 Upon a motion for summary
judgment the court’s sole function is to determine whether there is an issue of fact to be tried, and all doubts as to
the existence of an issue of fact must be resolved against the moving party. In other words, a party who moves for
summary judgment has the burden of demonstrating clearly the absence of any genuine issue of fact, and any
doubt as to the existence of such an issue is resolved against the movant. Thus, in ruling on a motion for summary
judgment, the court should take that view of the evidence most favorable to the party against whom it is directed,
giving that party the benefit of all favorable inferences.120

The term genuine issue has been defined as an issue of fact that calls for the presentation of evidence as
distinguished from an issue that is sham, fictitious, contrived, set up in bad faith, and patently unsubstantial so as
not to constitute a genuine issue for trial. The court can determine this on the basis of the pleadings, admissions,
documents, affidavits, and counter-affidavits submitted by the parties to the court. Where the facts pleaded by the
parties are disputed or contested, proceedings for a summary judgment cannot take the place of a trial. 121 Well-
settled is the rule that a party who moves for summary judgment has the burden of demonstrating clearly the
absence of any genuine issue of fact.122 Upon that party’s shoulders rests the burden to prove the cause of action,
and to show that the defense is interposed solely for the purpose of delay. After the burden has been discharged,
the defendant has the burden to show facts sufficient to entitle him to defend. 123 Any doubt as to the propriety of a
summary judgment shall be resolved against the moving party.
We need not stress that the trial courts have limited authority to render summary judgments and may do so only in
cases where no genuine issue as to any material fact clearly exists between the parties. The rule on summary
judgment does not invest the trial courts with jurisdiction to try summarily the factual issues upon affidavits, but
authorizes summary judgment only when it appears clear that there is no genuine issue as to any material fact. 124

IV.

Republic’s burden to establish by preponderance of evidence that respondents’ SMC shares had been illegally
acquired with coconut-levy funds was not discharged

Madame Justice Carpio Morales argues in her dissent that although the contested SMC shares could be
inescapably treated as fruits of funds that are prima facie public in character, Cojuangco, et al. abstained from
presenting countervailing evidence; and that with the Republic having shown that the SMC shares came into fruition
from coco levy funds that are prima facie public funds, Cojuangco, et al. had to go forward with contradicting
evidence, but did not.

The Court disagrees. We cannot reverse the decision of November 28, 2007 on the basis alone of judicial
pronouncements to the effect that the coconut levy funds were prima facie public funds, 125 but without any competent
evidence linking the acquisition of the block of SMC shares by Cojuangco, et al. to the coconut levy funds.

V.

No violation of the DOSRI and

Single Borrower’s Limit restrictions

The Republic’s lack of proof on the source of the funds by which Cojuangco, et al. had acquired their block of SMC
shares has made it shift its position, that it now suggests that Cojuangco had been enabled to obtain the loans by
the issuance of LOI 926 exempting the UCPB from the DOSRI and the Single Borrower’s Limit restrictions.

We reject the Republic’s suggestion.

Firstly, as earlier pointed out, the Republic adduced no evidence on the significant particulars of the supposed loan,
like the amount, the actual borrower, the approving official, etc. It did not also establish whether or not the loans
were DOSRI126 or issued in violation of the Single Borrower’s Limit. Secondly, the Republic could not outrightly
assume that President Marcos had issued LOI 926 for the purpose of allowing the loans by the UCPB in favor of
Cojuangco. There must be competent evidence to that effect. And, finally, the loans, assuming that they were of a
DOSRI nature or without the benefit of the required approvals or in excess of the Single Borrower’s Limit, would not
be void for that reason. Instead, the bank or the officers responsible for the approval and grant of the DOSRI loan
would be subject only to sanctions under the law.127

VI.

Cojuangco violated no fiduciary duties

The Republic invokes the following pertinent statutory provisions of the Civil Code, to wit:

Article 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the
purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by
operation of law in favor of the person to whom the funds belong.

Article 1456. If property is acquired through mistake or fraud, the person obtaining it s by force of law, considered a
trustee of an implied trust for the benefit of the person from whom the property comes.

and the Corporation Code, as follows:

Section 31. Liability of directors, trustees or officers.—Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.
Did Cojuangco breach his "fiduciary duties" as an officer and member of the Board of Directors of the UCPB? Did
his acquisition and holding of the contested SMC shares come under a constructive trust in favor of the Republic?

The answers to these queries are in the negative.

The conditions for the application of Articles 1455 and 1456 of the Civil Code (like the trustee using trust funds to
purchase, or a person acquiring property through mistake or fraud), and Section 31 of the Corporation Code (like a
director or trustee willfully and knowingly voting for or assenting to patently unlawful acts of the corporation, among
others) require factual foundations to be first laid out in appropriate judicial proceedings. Hence, concluding that
Cojuangco breached fiduciary duties as an officer and member of the Board of Directors of the UCPB without
competent evidence thereon would be unwarranted and unreasonable.

Thus, the Sandiganbayan could not fairly find that Cojuangco had committed breach of any fiduciary duties as an
officer and member of the Board of Directors of the UCPB. For one, the Amended Complaint contained no clear
factual allegation on which to predicate the application of Articles 1455 and 1456 of the Civil Code, and Section 31
of the Corporation Code. Although the trust relationship supposedly arose from Cojuangco’s being an officer and
member of the Board of Directors of the UCPB, the link between this alleged fact and the borrowings or advances
was not established. Nor was there evidence on the loans or borrowings, their amounts, the approving authority,
etc. As trial court, the Sandiganbayan could not presume his breach of fiduciary duties without evidence showing so,
for fraud or breach of trust is never presumed, but must be alleged and proved. 128

The thrust of the Republic that the funds were borrowed or lent might even preclude any consequent trust
implication. In a contract of loan, one of the parties (creditor) delivers money or other consumable thing to another
(debtor) on the condition that the same amount of the same kind and quality shall be paid. 129 Owing to the
consumable nature of the thing loaned, the resulting duty of the borrower in a contract of loan is to pay, not to
return, to the creditor or lender the very thing loaned. This explains why the ownership of the thing loaned is
transferred to the debtor upon perfection of the contract. 130 Ownership of the thing loaned having transferred, the
debtor enjoys all the rights conferred to an owner of property, including the right to use and enjoy (jus utendi), to
consume the thing by its use (jus abutendi), and to dispose (jus disponendi), subject to such limitations as may be
provided by law.131 Evidently, the resulting relationship between a creditor and debtor in a contract of loan cannot be
characterized as fiduciary.132

To say that a relationship is fiduciary when existing laws do not provide for such requires evidence that confidence
is reposed by one party in another who exercises dominion and influence. Absent any special facts and
circumstances proving a higher degree of responsibility, any dealings between a lender and borrower are not
fiduciary in nature.133 This explains why, for example, a trust receipt transaction is not classified as a simple loan and
is characterized as fiduciary, because the Trust Receipts Law (P.D. No. 115) punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the
owner.134

Based on the foregoing, a debtor can appropriate the thing loaned without any responsibility or duty to his creditor to
return the very thing that was loaned or to report how the proceeds were used. Nor can he be compelled to return
the proceeds and fruits of the loan, for there is nothing under our laws that compel a debtor in a contract of loan to
do so. As owner, the debtor can dispose of the thing borrowed and his act will not be considered misappropriation of
the thing.135 The only liability on his part is to pay the loan together with the interest that is either stipulated or
provided under existing laws.

WHEREFORE, the Court dismisses the petitions for certiorari in G.R. Nos. 166859 and 169023; denies the petition
for review on certiorari in G.R. No. 180702; and, accordingly, affirms the decision promulgated by the
Sandiganbayan on November 28, 2007 in Civil Case No. 0033-F.

The Court declares that the block of shares in San Miguel Corporation in the names of respondents Cojuangco, et
al. subject of Civil Case No. 0033-F is the exclusive property of Cojuangco, et al. as registered owners.

Accordingly, the lifting and setting aside of the Writs of Sequestration affecting said block of shares (namely: Writ of
Sequestration No. 86-0062 dated April 21, 1986; Writ of Sequestration No. 86-0069 dated April 22, 1986; Writ of
Sequestration No. 86-0085 dated May 9, 1986; Writ of Sequestration No. 86-0095 dated May 16, 1986; Writ of
Sequestration No. 86-0096 dated May 16, 1986; Writ of Sequestration No. 86-0097 dated May 16, 1986; Writ of
Sequestration No. 86-0098 dated May 16, 1986; Writ of Sequestration No. 86-0042 dated April 8, 1986; and Writ of
Sequestration No. 87-0218 dated May 27, 1987) are affirmed; and the annotation of the conditions prescribed in the
Resolutions promulgated on October 8, 2003 and June 24, 2005 is cancelled.

SO ORDERED.
G.R. No. 160711 August 14, 2004

HEIRS OF MAXIMO LABANON, represented by ALICIA LABANON CAÑEDO and the PROVINCIAL
ASSESSOR OF COTABATO, Petitioners,
vs.
HEIRS OF CONSTANCIO LABANON, represented by ALBERTO MAKILANG, Respondents.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the recall and nullification of the May 8, 2003 Decision 1 of
the Court of Appeals (CA) in CA-G.R. CV No. 65617 entitled Heirs of Constancio Labanon represented by Alberto
Makilang v. Heirs of Maximo Labanon represented by Alicia Labanon Cañedo and the Provincial Assessor of
Cotabato, which reversed the August 18, 1999 Decision2 of the Kidapawan City, Cotabato Regional Trial Court
(RTC), Branch 17, in Civil Case No. 865. Likewise assailed is the October 13, 2003 Resolution 3 which disregarded
petitioners’ Motion for Reconsideration.

The Facts

The CA culled the facts this way:

During the lifetime of Constancio Labanon, prior to the outbreak of WWII, he settled upon a piece of alienable and
disposable public agricultural land situated at Brgy. Lanao, Kidapawan, Cotabato x x x. Constancio cultivated the
said lot and introduced permanent improvements that still exist up to the present. Being of very limited educational
attainment, he found it difficult to file his public land application over said lot. Constancio then asked his brother,
Maximo Labanon who was better educated to file the corresponding public land application under the express
agreement that they will divide the said lot as soon as it would be feasible for them to do so. The offer was accepted
by Maximo. During the time of the application it was Constancio who continued to cultivate the said lot in order to
comply with the cultivation requirement set forth under Commonwealth Act 141, as amended, on Homestead
applications. After which, on June 6, 1941, due to industry of Constancio, Homestead Application No. 244742 (E-
128802) of his brother Maximo was approved with Homestead Patent No. 67512. Eventually, Original Certificate of
Title No. P-14320 was issued by the Register of Deeds of Cotabato over said lot in favor of Maximo Labanon.

On February 11, 1955, Maximo Labanon executed a document denominated as "Assignment of Rights and
Ownership" and docketed as Doc. No. 20; Page No. 49; Book No. V; Series of 1955 of the Notarial Register of Atty.
Florentino Kintanar. The document was executed to safeguard the ownership and interest of his brother Constancio
Labanon. Pertinent portion of which is reproduced as follows:

"That I, MAXIMO LABANON, of legal age, married to Anastacia Sagarino, and a resident of Kidapawan, Cotabato,
for and in consideration of the expenses incurred by my elder brother CONSTANCIO LABANON also of legal age,
Filipino, widower and a resident of Kidapawan, Cotabato, for the clearing, cultivation and improvements on the
eastern portion xxx Lot No. 1, Blk. 22, Pls-59 xxx which expenses have been incurred by my said brother xxx before
the outbreak of the last world war xxx I do hereby assign transfer and convey my rights to, interests in and
ownership on the said eastern portion of said Lot No. 1, Block 22, Pls-59 ONE HUNDRED (100 M) ALONG THE
NATIONAL HIGHWAY, (DAVAO-COTABATO ROAD) by TWO HUNDRED FIFTY METERS (250 M) going inside
the land to cover an area of TWO AND ONE HALF HECTARES (25,000 SQ. M.), more or less, adjoining the school
site of barrio Lanao, Kidapawan, Cotabato, to the said CONSTANCIO LABANON, his heirs and assigns, can freely
occupy for his own use and benefit xxx.

IN WITNESS WHEREFOF, I have hereunto set my hand this 11th day of February 1995 at Kidapawan, Cotabato.

(SGD) MAXIMO LABANON

With my marital consent.

(SGD) ANASTACIA SAGARINO

(Wife)" (p.16, rollo)

On April 25, 1962, Maximo Labanon executed a sworn statement reiterating his desire that his elder brother
Constancio, his heirs and assigns shall own the eastern portion of the Lot, pertinent portion of which reads:

"That I am the same and identical person who is a homestead applicant (HA-224742, E-128802) of a tract of land
which is covered by Homestead Patent No. 67512 dated June 6, 1941, known as Lot No. 1, Block 22, Pls-59,
situated in [B]arrio Lanao, Municipality of Kidapawan, Province of Cotabato, Philippines, and containing an area of
5.0000 hectares, more or less;

That I am the same and identical person who executed a deed of ASSIGNMENT OF RIGHTS AND OWNERSHIP in
favor of my brother Constancio Labanon, now deceased, now for his heirs, for the eastern half portion of the land
above described, and which deed was duly notarized by notary public Florentino P. Kintanar on February 11, 1955
at Kidapawan, Cotabato and entered in his Notarial Register as Doc. No. 20, Page No. 49, Book No. V, Series of
1955; and

That in order that I and the Heirs of Constancio Labanon will exercise our respective rights and ownership over the
aforementioned lot, and to give force and effect to said deed of assignment, I hereby, by these presents, request the
Honorable Director of Lands and the Land Title Commission to issue a separate title in my favor covering the
western half portion of the aforementioned lot and to the Heirs of Constancio Labanon a title for the eastern half
portion thereof.

IN WITNESS THEREOF, I have hereunto set my hand this 25th day of April, 1962, at Pikit, Cotabato, Philippines."
(p. 9, records)

After the death of Constancio Labanon, his heirs executed an [e]xtra-judicial settlement of estate with simultaneous
sale over the aforesaid eastern portion of the lot in favor of Alberto Makilang, the husband of Visitacion Labanon,
one of the children of Constancio. Subsequently, the parcel of land was declared for taxation purposes in the name
of Alberto under TD No. 11593. However, in March 1991, the defendants heirs of Maximo Labanon namely, Alicia L.
Caniedo, Leopoldo Labanon, Roberto Nieto and Pancho Labanon, caused to be cancelled from the records of the
defendant Provincial Assessor of Cotabato the aforesaid TD No. 11593 and the latter, without first verifying the
legality of the basis for said cancellation, did cancel the same. x x x Further, after discovering that the defendant-
heirs of Maximo Labanon were taking steps to deprive the heirs of Constancio Labanon of their ownership over the
eastern portion of said lot, the latter, thru Alberto Makilang, demanded the owner’s copy of the certificate of title
covering the aforesaid Lot to be surrendered to the Register of Deeds of Cotabato so that the ownership of the heirs
of Constancio may be fully effected but the defendants refused and still continue to refuse to honor the trust
agreement entered into by the deceased brothers. x x x4

Thus, on November 12, 1991, petitioners filed a complaint 5 for Specific Performance, Recovery of Ownership,
Attorney’s Fees and Damages with Writ of Preliminary Injunction and Prayer for Temporary Restraining Order
against respondents docketed as Civil Case No. 865 before the Kidapawan City RTC. After hearing, the trial court
rendered its August 18, 1999 Decision, the decretal portion of which reads:

Wherefore, prescinding from the foregoing facts and considerations the Court finds and so holds that the
[defendant-heirs] of Maximo Labanon represented by Alicia Labanon Caniedo have proved by preponderance of
evidence that they are entitled to the reliefs set forth in their answer and consequently judgment is hereby rendered
as follows:

1. Ordering the dismissal of the complaint against the Heirs of Maximo Labanon represented by Alicia
Labanon Caniedo for lack of merit;
 2. Ordering the dismissal of the case against the Provincial Assessor. The claim of the plaintiff is untenable,
because the duties of the Provincial Assessor are ministerial. Moreover, the presumption of regularity in the
performance of his duty is in his favor;

3. Ordering the plaintiff to pay the defendants the amount of P20,000.00 as exemplary damages,
P10,000.00 for Attorney’s Fees, P500.00 per appearance in Court; and

4. To pay the costs of this suit.

IT IS SO ORDERED.6

Aggrieved, respondents elevated the adverse judgment to the CA which issued the assailed May 8, 2003 Decision
in CA-G.R. CV No. 65617, the fallo of which states:

WHEREFORE, the appeal is hereby GRANTED for being meritorious. The assailed decision of the Regional Trial
Court is hereby REVERSED and SET ASIDE and a new one is hereby entered as follows:

1) Recognizing the lawful possession of the plaintiffs-appellants over the eastern portion of the property in
dispute;

2) Declaring the plaintiffs-appellants as owners of the eastern portion of the property by reason of lawful
possession;

3) Ordering the Provincial Assessor to reinstate TD No. 11593 and declaring TD No. 243-A null and void;

4) Ordering the defendants-appellees to pay the plaintiffs-appellants the amount of P20,000 as moral
damages, P10,000 for attorney’s fees, P500.00 per appearance in Court and

5) To pay the costs of the suit.

SO ORDERED.

The Issues

Surprised by the turn of events, petitioners brought this petition before us raising the following issues, to wit:

1. Whether or not Original Certificate of Title No. 41320 issued on April 10, 1975 in the name of MAXIMO
LABANON be now considered indefeasible and conclusive; and

2. Whether or not the Trust Agreement allegedly made by Constancio Labanon and Maximo Labanon
prescribed.7

The Court’s Ruling

The petition must fail.

First Issue

Respondents are not precluded from challenging the validity of Original Certificate of Title No. P-41320

Petitioners argue that respondents can no longer question Maximo Labanon’s ownership of the land after its
registration under the principle of indefeasibility of a Transfer Certificate of Title (TCT).

Such argument is inaccurate.

The principle of indefeasibility of a TCT is embodied in Section 32 of Presidential Decree No. (PD) 1529, amending
the Land Registration Act, which provides:

Section 32. Review of decree of registration; Innocent purchaser for value. The decree of registration shall not be
reopened or revised by reason of absence, minority, or other disability of any person adversely affected thereby, nor
by any proceeding in any court for reversing judgments, subject, however, to the right of any person, including the
government and the branches thereof, deprived of land or of any estate or interest therein by such adjudication or
confirmation of title obtained by actual fraud, to file in the proper Court of First Instance a petition for reopening and
review of the decree of registration not later than one year from and after the date of the entry of such decree of
registration, but in no case shall such petition be entertained by the court where an innocent purchaser for value has
acquired the land or an interest therein, whose rights may be prejudiced. Whenever the phrase "innocent purchaser
for value" or an equivalent phrase occurs in this Decree, it shall be deemed to include an innocent lessee,
mortgagee, or other encumbrancer for value.

Upon the expiration of said period of one year, the decree of registration and the certificate of title issued shall
become incontrovertible. Any person aggrieved by such decree of registration in any case may pursue his remedy
by action for damages against the applicant or any other persons responsible for the fraud.

Contrary to petitioners’ interpretation, the aforequoted legal provision does not totally deprive a party of any remedy
to recover the property fraudulently registered in the name of another. Section 32 of PD 1529 merely precludes the
reopening of the registration proceedings for titles covered by the Torrens System, but does not foreclose other
remedies for the reconveyance of the property to its rightful owner. As elaborated in Heirs of Clemente Ermac v.
Heirs of Vicente Ermac:

While it is true that Section 32 of PD 1529 provides that the decree of registration becomes incontrovertible after a
year, it does not altogether deprive an aggrieved party of a remedy in law. The acceptability of the Torrens System
would be impaired, if it is utilized to perpetuate fraud against the real owners. 8

A more succinct explanation is found in Vda. De Recinto v. Inciong, thus:

The mere possession of a certificate of title under the Torrens system does not necessarily make the possessor a
true owner of all the property described therein for he does not by virtue of said certificate alone become the owner
of the land illegally included. It is evident from the records that the petitioner owns the portion in question and
therefore the area should be conveyed to her. The remedy of the land owner whose property has been wrongfully or
erroneously registered in another's name is, after one year from the date of the decree, not to set aside the decree,
but, respecting the decree as incontrovertible and no longer open to review, to bring an ordinary action in the
ordinary court of justice for reconveyance or, if the property has passed into the hands of an innocent purchaser for
value, for damages.9 (Emphasis supplied.)

Undeniably, respondents are not precluded from recovering the eastern portion of Original Certificate of Title (OCT)
No. P-14320, with an area subject of the "Assignment of Rights and Ownership" previously owned by their father,
Constancio Labanon. The action for Recovery of Ownership before the RTC is indeed the appropriate remedy.

Second Issue

The trust agreement between Maximo Labanon and Constancio Labanon may still be enforced

Former Vice-President and Senator Arturo Tolentino, a noted civilist, explained the nature and import of a trust:

Trust is the legal relationship between one person having an equitable ownership in property and another person
owning the legal title to such property, the equitable ownership of the former entitling him to the performance of
certain duties and the exercise of certain powers by the latter.10

This legal relationship can be distinguished from other relationships of a fiduciary character, such as deposit,
guardianship, and agency, in that the trustee has legal title to the property. 11 In the case at bench, this is exactly the
relationship established between the parties.

Trusts are classified under the Civil Code as either express or implied. Such classification determines the
prescriptive period for enforcing such trust.

Article 1444 of the New Civil Code on express trust provides that "[n]o particular words are required for the creation
of an express trust, it being sufficient that a trust is clearly intended."

Civil law expert Tolentino further elucidated on the express trust, thus:

No particular form of words or conduct is necessary for the manifestation of intention to create a trust. It is possible
to create a trust without using the word "trust" or "trustee". Conversely, the mere fact that these words are used
does not necessarily indicate an intention to create a trust. The question in each case is whether the trustor
manifested an intention to create the kind of relationship which to lawyers is known as trust. It is immaterial whether
or not he knows that the relationship which he intends to create is called a trust, and whether or not he knows the
precise characteristics of the relationship which is called a trust.12

Correlatively, we ruled in Estate of Edward Miller Grimm v. Estate of Charles Parsons and Patrick C. Parsons, that:
An express trust is created by the direct and positive acts of the parties, by some writing or deed or by words
evidencing an intention to create a trust; the use of the word trust is not required or essential to its constitution, it
being sufficient that a trust is clearly intended.13
1avvphi1

In the instant case, such intention to institute an express trust between Maximo Labanon as trustee and Constancio
Labanon as trustor was contained in not just one but two written documents, the Assignment of Rights and
Ownership as well as Maximo Labanon’s April 25, 1962 Sworn Statement. In both documents, Maximo Labanon
recognized Constancio Labanon’s ownership and possession over the eastern portion of the property covered by
OCT No. P-14320, even as he recognized himself as the applicant for the Homestead Patent over the land. Thus,
Maximo Labanon maintained the title over the property while acknowledging the true ownership of Constancio
Labanon over the eastern portion of the land. The existence of an express trust cannot be doubted nor disputed.

On the issue of prescription, we had the opportunity to rule in Bueno v. Reyes that unrepudiated written express
trusts are imprescriptible:

While there are some decisions which hold that an action upon a trust is imprescriptible, without distinguishing
between express and implied trusts, the better rule, as laid down by this Court in other decisions, is that prescription
does supervene where the trust is merely an implied one. The reason has been expressed by Justice J.B.L. Reyes
in J.M. Tuason and Co., Inc. vs. Magdangal, 4 SCRA 84, 88, as follows:

Under Section 40 of the old Code of Civil Procedure, all actions for recovery of real property prescribed in 10 years,
excepting only actions based on continuing or subsisting trusts that were considered by section 38 as
imprescriptible. As held in the case of Diaz v. Gorricho, L-11229, March 29, 1958, however, the continuing or
subsisting trusts contemplated in section 38 of the Code of Civil Procedure referred only to express unrepudiated
trusts, and did not include constructive trusts (that are imposed by law) where no fiduciary relation exists and the
trustee does not recognize the trust at all.14

This principle was amplified in Escay v. Court of Appeals this way: "Express trusts prescribe 10 years from the
repudiation of the trust (Manuel Diaz, et al. vs. Carmen Gorricho et al., 54 0.G. p. 8429, Sec. 40, Code of Civil
Procedure)."15

In the more recent case of Secuya v. De Selma, we again ruled that the prescriptive period for the enforcement of
an express trust of ten (10) years starts upon the repudiation of the trust by the trustee. 16

In the case at bar, Maximo Labanon never repudiated the express trust instituted between him and Constancio
Labanon. And after Maximo Labanon’s death, the trust could no longer be renounced; thus, respondents’ right to
enforce the trust agreement can no longer be restricted nor prejudiced by prescription.

It must be noted that the Assignment of Rights and Ownership and Maximo Labanon’s Sworn Statement were
executed after the Homestead Patent was applied for and eventually granted with the issuance of Homestead
Patent No. 67512 on June 6, 1942. Evidently, it was the intent of Maximo Labanon to hold the title over the land in
his name while recognizing Constancio Labanon’s equitable ownership and actual possession of the eastern portion
of the land covered by OCT No. P-14320.

In addition, petitioners can no longer question the validity of the positive declaration of Maximo Labanon in the
Assignment of Rights and Ownership in favor of the late Constancio Labanon, as the agreement was not impugned
during the former’s lifetime and the recognition of his brother’s rights over the eastern portion of the lot was further
affirmed and confirmed in the subsequent April 25, 1962 Sworn Statement.

Section 31, Rule 130 of the Rules of Court is the repository of the settled precept that "[w]here one derives title to
property from another, the act, declaration, or omission of the latter, while holding the title, in relation to the property,
is evidence against the former." Thus, petitioners have accepted the declaration made by their predecessor-in-
interest, Maximo Labanon, that the eastern portion of the land covered by OCT No. P-14320 is owned and
possessed by and rightfully belongs to Constancio Labanon and the latter’s heirs. Petitioners cannot now feign
ignorance of such acknowledgment by their father, Maximo.

Lastly, the heirs of Maximo Labanon are bound to the stipulations embodied in the Assignment of Rights and
Ownership pursuant to Article 1371 of the Civil Code that contracts take effect between the parties, assigns, and
heirs.

Petitioners as heirs of Maximo cannot disarrow the commitment made by their father with respect to the subject
property since they were merely subrogated to the rights and obligations of their predecessor-in-interest. They
simply stepped into the shoes of their predecessor and must therefore recognize the rights of the heirs of
Constancio over the eastern portion of the lot. As the old adage goes, the spring cannot rise higher than its source.
WHEREFORE, the petition is DENIED. The May 8, 2003 CA Decision and October 13, 2003 Resolution in CA-G.R.
CV No. 65617 are AFFIRMED with the modifications that the Kidapawan City, Cotabato RTC, Branch 17 is directed
to have OCT No. P-14320 segregated and subdivided by the Land Management Bureau into two (2) lots based on
the terms of the February 11, 1955 Assignment of Rights and Ownership executed by Maximo Labanon and
Constancio Labanon; and after approval of the subdivision plan, to order the Register of Deeds of Kidapawan City,
Cotabato to cancel OCT No. P-14320 and issue one title each to petitioners and respondents based on the said
subdivision plan.

Costs against petitioners.

SO ORDERED.

G.R. No. 108525 September 13, 1994

SPOUSES RICARDO AND MILAGROS HUANG, petitioners,

vs.
COURT OF APPELAS, JUDGE, PEDRO N. LAGGUI, Presiding Judge, RTC, Makati, Br. 60, and SPOUSES
DOLORES AND ANICETO SANDOVAL, respondents.

Ponce Enrile, Cayetano, Reyes & Manalastas for petitioners.

Quasha, Asperilla, Ancheta, Peña & Nolasco for private respondents.

BELLOSILLO, J.:

Sometime in 1965 respondent Dolores Sandoval wanted to buy two (2) lots in Dasmariñas Village, Makati, but was
advised by petitioner Milagros Huang, wife of her brother, petitioner Ricardo Huang, that the policy of the
subdivision owner forbade the acquisition of two (2) lots by a single individual. Consequently, Dolores purchased Lot
21 and registered it in her name. She also purchased the adjacent lot, Lot 20, but heading the advice of Milagros,
the deed of sale was placed in the name of Ricardo and Registered in his name under TCT No. 204783. Thereafter,
Dolores constructed a residential house on
Lot 21. Ricardo also requested her permission to construct a small residential house on Lot 20 to which she agreed
inasmuch as she was then the one paying for apartment rentals of the Huang spouses. She also allowed Ricardo to
mortgage Lot 20 to the Social Security System to secure the payment of his loan of P19,200.00 to be spent in
putting up the house. However, she actualy financed the construction of the house, the swimming pool and the
fence thereon on the understanding that the Huang spouses would merely hold title in trust for her beneficial
interest.

On 19 March 1968, to protect her rights and interests as the lawful owner of Lot 20 and its improvements, Dolores
requested the Huangs to execute in her favor a deed of absolute sale with assumption of mortgage over the
property. The letter obliged.

On 15 March 1980, the Huang spouses leased the house to Deltron-Sprague Electronics Corporation for its various
executives as official quarters without first securing the permission of Dolores. Dolores tolerated the lease of the
property as she did not need it at that time. But, after sometime, the lessees started prohibiting the Sandoval family
from using the swimming pool and the Huangs then began challenging the Sandovals' ownership of the property.
On 26 August 1980, Dolores lodged a complaint before the office of the Barangay Captain praying that the spouses
Ricardo and Milagros Huang be made to execute the necessary request to the SSS for the approval of the deed of
sale with assumption of mortgage, as well as for the release in her favor of the owner's duplicate certificate of title in
its possession so that the deed could be duly annotated on the title and/or a new certificate of title issued in her
name. But no amicable settlement was reached, so that on 16 December 1980 the Lupong Tagapayapa issued a
certification that the controversy was ripe for judicial action.

On 22 December 1980, Ricardo and Milagros Huang filed a complaint against the spouses Dolores and Aniceto
Sandoval in the then Court of First Instance of Rizal, docketed as Civil Case No. 39702, seeking the nullity of the
deed of sale with assumption of mortgage and/or quieting of title to Lot 20. They alleged that the Sandovals made
them sign blank papers which turned out to be a deed of sale with assumption of mortgage over Lot 20.

Meanwhile, on 19 February 1981, Dolores paid the balance of Ricardo's loan to the SSS and requested the release
to her of TCT No. 204783 and the real estate mortgage thereon, but SSS refused. On the same date, she filed a
complaint against the Huang spouses and the SSS before the same trial court, docketed as Civil Case No. 40288,
praying among other things that: (a) the SSS be restrained from releasing the owner's copy of TCT No. 204783 to
the Huangs; (b) the SSS be ordered instead to release to her said title as well as the mortgaged thereon; and (c) the
Registered of Deeds of Rizal be ordered to register the deed of sale, cancel TCT No. 204783 and issue another one
in her name.

Both cases were consolidated and jointly tried. On the basis of the evidence presented, the trial court found that it
was indeed Dolores who brought Lot 20 but had it registered in the name of Ricardo; and, it was she who built the
house and swimming pool thereon and the fence enclosing Lots 20 and 21. As regards the deed of sale with
assumption of mortgage, the trial court found that it was signed voluntarily by the Huang spouses so much so that
their claim that they were misled into signing it was unbelievable. Thus, on 23 November 1988, judgment was
rendered in favor of the Sandoval spouses thus:

In Civil Case No. 39702 — (1) The complaint of the Huang spouses was dismissed; (2) The Sandovals were
declared owners of Lot 20 and all the improvements thereon; (3) The deed of sale with assumption of mortgage was
declared valid; (4) The Huang spouses and all persons acting in their behalf were ordered to vacate the property
and turn over the possession to the Sandovals; (5) The Huang spouses were ordered jointly and severally to
(a) deliver to the Sandoval spouses all the rentals and other income from Lot 20 which they received, and (b) pay to
the Sandovals P5,000.00 as exemplary damages, P10,000.00 as attorney's fees, and the costs of suit; and, (6) The
Register of Deeds of Rizal was ordered to (a) register the deed of sale with assumption of mortgage; (b) cancel TCT
No. 204783, and (c) issue, in lieu thereof, a transfer certificate of title in the name of "Dolores Sandoval married to
Aniceto Sandoval" upon compliance with all the legal requirements.

In Civil Case No. 40288 — (1) Ricardo, Milagros or the SSS who has custody of the owner's copy of TCT No.
204783 was ordered to surrender it to the Registry of Deeds of Rizal within ten (10) days from the finality of the
decision, otherwise, for failure to do so, the title shall be deemed annulled and the Register of Deeds shall issue
another owner's copy thereof in favor of the Sandovals, and (2) SSS was ordered to execute a discharge of the
mortgage annotated on TCT No. 204783 and deliver it to Dolores within ten (10) days from the finality of the
decision. 1

The Huang spouses filed a motion for reconsideration and new

trial and/or rehearing but it was denied by the trial court in its order of 26 July 1989.
2

On appeal to the Court of Appeals, the decision of the trial court was affirmed. The motion to reconsider the
3

decision was denied. Hence the instant recourse.

4

Petitioners assert that the finding of the Court of Appeals of a resulting or implied trust between them and Dolores is
not supported by evidence. On the contrary, the deed of sale with assumption of mortgage has all the elements of
an equitable mortgage. Granting arguendo that a resulting or implied trust exists between the parties, its
enforcement is already barred by prescription. Petitioners argue that when the suit in the trial court was filed by
Dolores on
19 February 1981 more than ten (10) years had already lapsed since TCT
No. 204783 was issued on 11 October 1967. They also contend that jurisprudence has established the rule that the
prescriptive period for an action for reconveyance based on fraud is ten (10) years, and that a resulting or implied
trust is totally incompatible with the deed of sale with assumption of mortgage, hence, the existence of said deed
cannot be vaguelly dismissed as a mere security. It is the position of petitioners that the terms of the contract are
rendered conclusive upon the parties and evidence aliunde is not admissible to vary, contradict or dispute a
complete and enforceable agreement embodied in a document.

The exhaustive decision of the trial court based as it is on a painstaking review of the entire records deserves our
affirmance. Indeed, we find no reason to disturb the factual conclusions therein.
Ricardo claimed that he bought Lot 20 with his own money on installment: the first installment of P19,341.00 was
paid on 5 November 1965, and the second installment of P39,279.75 was paid on 4 April 1966. He said that the
money came from his salary as employee of the Universal Textile Mills, his commission as rice sales agent, his
involvement in politics and other undeclared income.

But Ricardo's pretense was easily unmasked by the following circumstances: (1) His annual income as employee of
Textile Mills was only P6,795.05 in 1964, P6,295.05 in 1965 and P7,154.15 in 1966; as of 10 June 1967, he was
5 6 7

only receiving a monthly salary of P600.00; (2) His commission as rice sales agent of Dolores was earned in
8

connection with a 1973 transaction, and so he could not have used this commission in 1965 and 1966 for the
purchase of Lot 20; (3) He never bothered to explain how he made money out of politics and how much he realized
from it; and, (4) There is no evidence on the source, nature and amount of his undeclared income. The only logical
conclusion then is that the money which was used to buy Lot 20 did not belong to him.

On the part of Dolores, she was able to prove by overwhelming evidence that she purchased Lot 20 with her own
funds. She testified that Milagros informed her that she could not buy two (2) lots in the village in her name; instead,
she suggested that one of the lots be bought in the name of Ricardo. This testimony we never refuted by Ricardo.
Moreover, the Agreements to Purchase and Sell Lots 20 and 21 were both executed on 5 November 1965 and
9 10

the first installments for both lots were paid on the same date, while the second installments were paid on 4 April
1966. These facts suggest that the lots were bought in a single transaction by only one person.

Dolores also testified that she gave the amount corresponding to the first installments for both lots to Milagros.
Dolores was able to establish that she withdrew P19,500.00 from her deposit at the National City Bank of New
York and issued a Prudential Bank check for P19,341.00. In payment of the second installments for the two lots,
11 12

she withdrew P24,000.00 from the First National City Bank and issued a check for P54,927.90. Viewed together
13 14

with the foregoing circumstances is the admission of Ricardo himself that Dolores constructed the swimming pool on
Lot 20 and enclosed Lots 20 and 21 with a fence at her own expense.

Aside from Lot 20, Ricardo also asserted ownership of the house thereon which he claimed to have started
constructing on 13 December 1967 and that it was "semi-accomplished" by 8 March 1968.

Weighed against the testimony of Dolores that for the cost of labor alone in the construction of the house she spent
P45,000.00 while the other expenses are listed in Exhs. "20," and "21" and "21-A" to "J," Ricardo could not have
spent therefor because, as previously shown, his income was not sufficient enough. Neither could the P19,200.00
loan which he obtained from the SSS suffice. Dolores even had to shell out P5,062.68 on 7 May 1968 to pay for
arrears in the rental of the apartment being occupied by the Huangs from November 1966 to February 1968; electric
bills from March 1965 to December 1967; and, water bills up to February 1966, to prevent the Huangs from being
15

ejected from their apartment. Dolores' ownership of the house is confirmed further by the presence of her personal
properties therein, e.g., chandelier, furniture, (c) Tai-ping rugs and Sacred Heart statue.
16 17 18 19

As a whole, spouses Huang's evidence failed to help them in their bid to establish ownership over Lot 20 and its
improvements. They should know the Chinese proverb that "one simply cannot attain his purpose of chewing food
well if he were to do it by means of loose teeth."

Regarding the deed of sale with assumption of mortgage, Ricardo alleged that Dolores and his cousin, Rene Javier,
pressured and misled him into signing it because of his P30,000.00 indebtedness to Dolores; the deed was "blank"
in the sense that it did not have a title when he signed it; he did not read it contents; and, he did not acknowledge it
before a notary public.

Ricardo's version of the circumstances under which he signed the deed of question is incredible. Human experience
argues against the claim that a highly educated and mature man like Ricardo would sign a deed of sale without
reading or knowing its contents. Ricardo graduated with the degree of Bachelor of Science in Architecture in 1955,
and when he signed the deed he was about 39 years old. There is no evidence on record that Dolores "pressured"
Ricardo to sign the deed. In fact, Milagros signed the document at the instance of Ricardo himself. The deed, which
was duly notarized, enjoys the presumption of regularity in its execution. The claim of Ricardo that he was indebted
to Dolores in the amount of P30,000.00, which he used in his pretense that he was coerced by her, was never
established.

On the contrary, the testimony of Dolores is more in accord with reason and clearly disproves Ricardo's gratuitous
allegations. She testified that she asked Ricardo and Milagros to sign the deed of sale for her and her children's
protection because time would come when they would want the property for themselves. Besides, according to her,
the Huang spouses read the contents of the deed and signed it before the notary public without any compulsion
from her. We are therefore drawn to the inevitable conclusion that the Huang spouses voluntarily signed the deed
before the notary public with full knowledge of its contents and in recognition of Dolores' ownership over Lot 20 and
its improvements.

We shall discuss the merit, nay, the demerit of the Huang petition. First, there is need to define the basic concepts in
a trust relationship. Trust is a fiduciary relationship with respect to property which involves the existence of equitable
duties imposed upon the holder of the title to the property to deal with it for the benefit of another. A person who
20

establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of
another person is known as the trustee; and the person for whose benefit the trust has been created is referred to
as the beneficiary or cestui que trust. Trust is either express or implied. Express trust is created by the intention of
21

the trustor or of the parties. Implied trust comes into being by operation of law. The latter kind or neither
22

constructive or resulting trust. A constructive trust is imposed where a person holding title to property is subject to an
equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain
it. The duty to convey the property arises because it was acquired through fraud, duress, undue influence or
mistake, or through breach of a fiduciary duty, or through the wrongful disposition of another's property. On the other
hand, a resulting trust arises where a person makes or causes to be made a disposition of property under
circumstances which raise an inference that he does not intend that the person taking or holding the property should
have the beneficial interest in the property. It is founded on the presumed intention of the parties, and as a general
23

rule, it arises where, and only where such may be reasonably presumed to be the intention of the parties, as
determined from the facts and circumstances existing at the time of the transaction out of which it is sought to be
established. 24

In the present case, Dolores provided the money for the purchase of
Lot 20 but the corresponding deed of sale and transfer certificate of title were placed in the name of Ricardo Huang
because she was advised that the subdivision owner prohibited the acquisition of two (2) lots by a single individual.
Guided by the foregoing definitions, we are in conformity with the common finding of the trial court and respondent
court that a resulting trust was created. Ricardo became the trustee of Lot 20 and its improvements for the benefit of
Dolores as owner. The pertinent law is Art. 1448 of the New Civil Code which provides that there is an implied trust
when property is sold and the legal estate is granted to one party but the price is paid by another for the purpose of
having the beneficial interest for the property. A resulting trust arises because of the presumption that he who pays
for a thing intends a beneficial interest therein for himself.
25

Petitioners' assertion that the deed of sale with assumption of mortgage has all the elements of an equitable
mortgage must outrightly be rejected as it was apparently never brought to the attention of the trial court nor averred
before respondent court. Well settled is the rule that, ordinarily, issues not raised in the trial court, let alone in the
Court of Appeals, cannot be raised for the first time before this Court as it would be offensive to the basic rule of
26

fair play, justice and due process.27

Petitioners raise the issue of prescription. But the action to compel the trustee to convey the property registered in
his name for the benefits of the cestui que trust does not prescribe. If at all, it is only when the trustee repudiates
28

the trust that the period of prescription commences to run. 29

The prescriptive period is ten (10) years from the repudiation of the trust. It is ten (10) years because just as a
resulting trust is an offspring of the law, so is the corresponding obligation to convey the property and the title
thereto to the true owner. In this context, and vis-a-vis prescription, Art. 1144 of the New Civil Code, which is the law
applicable, provides: "The following actions must be brought within ten years from the time the right of action
accrues: (a) Upon a written contract; (b) Upon an obligation created by law; (c) Upon a
judgment." 30

Thus, the reckoning point is repudiation of the trust by the trustee because from that moment his possession
becomes adverse, which in the present case gave rise to a cause of action by Dolores against the Huang
spouses. However, before the period of prescription may start, it must be shown that:
31

(a) the trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust; (b)
such positive acts of repudiation have been made known to the cestui que trust; and, (c) the evidence thereon is
clear and conclusive. In Laguna v. Levantino and Valdez v. Olorga, we held that acts which may be adverse to
32 33

strangers may not be sufficiently adverse to the cestui que trust. A mere silent possession of the trustee
unaccompanied by acts amounting to an ouster of the cestui que trust cannot be construed as an adverse
possession. Mere perception of rents and profits by the trustee, and erecting fences and buildings adapted for the
cultivation of the land held in trust, are not equivalent to unequivocal acts of ouster of the cestui que trust.

We agree with the trial court that the action filed by Dolores has not prescribed. Firstly, Ricardo has not performed
any unequivocal act of repudiation amounting to an ouster of Dolores. The only acts which may be considered as
indicative of his intention not to respect the trust anymore were his leasing the house without the prior knowledge of
Dolores; his refusal to carry out the demand of Dolores that he must ask the lessees to vacate the house; and, his
refusal to give the necessary papers to Dolores to enable her to get the title from the SSS. Secondly, the foregoing
acts are not positive acts of repudiation; and, thirdly, the evidence on such acts is unclear and inconclusive. But
even if the foregoing acts were manifest acts of repudiation made known to Dolores, the fact remains that they were
done at the earliest only on 15 March 1980 when Ricardo leased Lot 20 and its improvements to Deltron. Dolores'
complaint before the trial court was filed on 19 February 1981, or within the 10-year prescriptive period.

Petitioners are of the mistaken notion that the 10-year prescriptive period is counted from the date of issuance of the
Torrens certificate of title. This rule applies only to the remedy of reconveyance which has its basis on Sec. 53,
par. 3, P.D. No. 1529, otherwise known as the Property Registration Decree, and Art. 1456 of the Civil
34
Code. Reconveyance is available in case of registration of property procured by fraud thereby creating
35

a constructive trust between the parties, a situation which does not obtain in this case.

Without expressly stating so, petitioners' line of argument invokes

Rule 130, Sec. 7, of the Rules of Court then prevailing which states: "When the terms of an agreement have been
reduced to writing, it is to be considered as containing all such terms and, therefore, there can be, between the
parties and their successors-in-interest, no evidence of the terms of the agreement other than the contents of the
writing."

The Huangs were less than candid to the Court when they merely invoked the general rule and completely ignoring
the exceptions that are also explicitly provided therein: (a) where a mistake or imperfection of the writing or its failure
to express the true intent and agreement of the parties, or the validity of the agreement is put in issue by the
pleadings; and, (b) when there is an intrinsic ambiguity in the writing. In the present case, parol evidence is
admissible because the deed of sale with assumption of mortgage failed to express the true intent and agreement of
the parties. We concur with the finding of the appellate court that the deed was executed by the parties as security
for the protection of the rights and interest of Dolores as the true and lawful owner of Lot 20 and its improvements.

Petitioners state prefatorily in their petition that this case involves sibling oppression. It does not. Rather, it is a battle
between greed and thirst for justice, between a fortunate sister and a less fortunate brother, with the latter taking
advantage of the former's bounty.

WHEREFORE, the petition is DENIED. The decision of respondent Court of Appeals dated 28 September 1992 and
its resolution dated 8 January 1993, both sustaining the decision of the Regional Trial Court, are AFFIRMED, with
costs against petitioners.

SO ORDERED.

G.R. No. L-26699 March 16, 1976

BENITA SALAO, assisted by her husband, GREGORIO MARCELO; ALMARIO ALCURIZA, ARTURO
ALCURIZA, OSCAR ALCURIZA and ANITA ALCURIZA, the latter two being minors are represented by
guardian ad litem, ARTURO ALCURIZA, plaintiffs-appellants,
vs.
JUAN S. SALAO, later substituted by PABLO P. SALAO, Administrator of the Intestate of JUAN S. SALAO;
now MERCEDES P. VDA. DE SALAO, ROBERTO P. SALAO, MARIA SALAO VDA. DE SANTOS, LUCIANA P.
SALAO, ISABEL SALAO DE SANTOS, and PABLO P. SALAO, as successors-in-interest of the late JUAN S.
SALAO, together with PABLO P. SALAO, Administrator, defendants-appellants.

Eusebio V. Navarro for plaintiffs-appellants.

Nicolas Belmonte & Benjamin T. de Peralta for defendants-appellants.

AQUINO, J.:

This litigation regarding a forty-seven-hectare fishpond located at Sitio Calunuran, Hermosa, Bataan involves the
law of trusts and prescription. The facts are as follows:

The spouses Manuel Salao and Valentina Ignacio of Barrio Dampalit, Malabon, Rizal begot four children named
Patricio, Alejandra, Juan (Banli) and Ambrosia. Manuel Salao died in 1885. His eldest son, Patricio, died in 1886
survived by his only child. Valentin Salao.

There is no documentary evidence as to what, properties formed part of Manuel Salao's estate, if any. His widow
died on May 28, 1914. After her death, her estate was administered by her daughter Ambrosia.
It was partitioned extrajudicially in a deed dated December 29, 1918 but notarized on May 22, 1919 (Exh. 21). The
deed was signed by her four legal heirs, namely, her three children, Alejandra, Juan and Ambrosia, and her
grandson, Valentin Salao, in representation of his deceased father, Patricio.

The lands left by Valentina Ignacio, all located at Barrio Dampalit were as follows:

Nature of Land

Area

squa
mete

(1) One-half interest in a fishpond which she had inherited from her parents, Feliciano Ignacio and Damiana
Mendoza, and the other half of which was owned by her co-owner, Josefa Sta. Ana . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 21,700

(2) Fishpond inherited from her parents . . . . . . . . . . . . 7,418

(3) Fishpond inherited from her parents . . . . . . . . . . . . . 6,989

(4) Fishpond with a bodega for salt . . . . . . . . . . . . . . . . 50,469

(5) Fishpond with an area of one hectare, 12 ares and 5 centares purchased from Bernabe and Honorata Ignacio by
Valentina Ignacio on November 9, 1895 with a bodega for salt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 11,205

(6) Fishpond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000

(7) One-half interest in a fishpond with a total area of 10,424 square meters, the other half was owned by A.
Aguinaldo . . . . . . . . . . . . . . . . . . . . . . . 5,217

(8) Riceland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,454

(9) Riceland purchased by Valentina Ignacio from Eduardo Salao on January 27, 1890 with a house and two
camarins thereon . . . . . . . . . . . . . . . . . . 8,065

(10) Riceland in the name of Ambrosia Salao, with an area of 11,678 square meters, of which 2,173 square meters
were sold to Justa Yongco . . . . . . . . . .9,505

TOTAL . . . . . . . . . . . . .. 179,022 square

mete

To each of the legal heirs of Valentina Ignacio was adjudicated a distributive share valued at P8,135.25. In
satisfaction of his distributive share, Valentin Salao (who was then already forty-eight years old) was given the
biggest fishpond with an area of 50,469 square meters, a smaller fishpond with an area of 6,989 square meters and
the riceland with a net area of 9,905 square meters. Those parcels of land had an aggregate appraised value of
P13,501 which exceeded Valentin's distributive share. So in the deed of partition he was directed to pay to his co-
heirs the sum of P5,365.75. That arrangement, which was obviously intended to avoid the fragmentation of the
lands, was beneficial to Valentin.

In that deed of partition (Exh. 21) it was noted that "desde la muerte de Valentina Ignacio y Mendoza, ha venido
administrando sus bienes la referida Ambrosia Salao" "cuya administracion lo ha sido a satisfaccion de todos los
herederos y por designacion los mismos". It was expressly stipulated that Ambrosia Salao was not obligated to
render any accounting of her administration "en consideracion al resultado satisfactorio de sus gestiones,
mejoradas los bienes y pagodas por ella las contribusiones (pages 2 and 11, Exh. 21).

By virtue of the partition the heirs became "dueños absolutos de sus respectivas propiedadas, y podran
inmediatamente tomar posesion de sus bienes, en la forma como se han distribuido y llevado a cabo las
adjudicaciones" (page 20, Exh. 21).

The documentary evidence proves that in 1911 or prior to the death of Valentina Ignacio her two children, Juan Y.
Salao, Sr. and Ambrosia Salao, secured a Torrens title, OCT No. 185 of the Registry of Deeds of Pampanga, in their
names for a forty-seven-hectare fishpond located at Sitio Calunuran, Lubao, Pampanga (Exh. 14). It is also known
as Lot No. 540 of the Hermosa cadastre because that part of Lubao later became a part of Bataan.

The Calunuran fishpond is the bone of contention in this case.

Plaintiffs' theory is that Juan Y. Salao, Sr. and his sister Ambrosia had engaged in the fishpond business. Where
they obtained the capital is not shown in any documentary evidence. Plaintiffs' version is that Valentin Salao and
Alejandra Salao were included in that joint venture, that the funds used were the earnings of the properties
supposedly inherited from Manuel Salao, and that those earnings were used in the acquisition of the Calunuran
fishpond. There is no documentary evidence to support that theory.

On the other hand, the defendants contend that the Calunuran fishpond consisted of lands purchased by Juan Y.
Salao, Sr. and Ambrosia Salao in 1905, 1906, 1907 and 1908 as, shown in their Exhibits 8, 9, 10 and 13. But this
point is disputed by the plaintiffs.

However, there can be no controversy as to the fact that after Juan Y. Salao, Sr. and Ambrosia Salao secured a
Torrens title for the Calunuran fishpond in 1911 they exercised dominical rights over it to the exclusion of their
nephew, Valentin Salao.

Thus, on December 1, 1911 Ambrosia Salao sold under pacto de retro for P800 the Calunuran fishpond to Vicente
Villongco. The period of redemption was one year. In the deed of sale (Exh19) Ambrosia confirmed that she and her
brother Juan were the dueños proindivisos of the said pesqueria. On December 7, 1911 Villongco, the vendee a
retro, conveyed the same fishpond to Ambrosia by way of lease for an anual canon of P128 (Exh. 19-a).

After the fishpond was redeemed from Villongco or on June 8, 1914 Ambrosia and Juan sold it under pacto de
retro to Eligio Naval for the sum of P3,360. The period of redemption was also one year (Exh. 20). The fishpond was
later redeemed and Naval reconveyed it to the vendors a retro in a document dated October 5, 1916 (Exh. 20-a).

The 1930 survey shown in the computation sheets of the Bureau of Lands reveals that the Calunuran fishpond has
an area of 479,205 square meters and that it was claimed by Juan Salao and Ambrosia Salao, while the
Pinanganacan fishpond (subsequently acquired by Juan and Ambrosia) has an area of 975,952 square meters
(Exh. 22).

Likewise, there is no controversy as to the fact that on May 27, 1911 Ambrosia Salao bought for four thousand
pesos from the heirs of Engracio Santiago a parcel of swampland planted to bacawan and nipa with an area of 96
hectares, 57 ares and 73 centares located at Sitio Lewa, Barrio Pinanganacan, Lubao, Pampanga (Exh. 17-d).

The record of Civil Case No. 136, General Land Registration Office Record No. 12144, Court of First Instance of
Pampanga shows that Ambrosia Salao and Juan Salao filed an application for the registration of that land in their
names on January 15, 1916. They alleged in their petition that "han adquirido dicho terreno por partes iguales y por
la compra a los herederos del finado, Don Engracio Santiago" (Exh. 17-a).

At the hearing on October 26, 1916 before Judge Percy M. Moir, Ambrosia testified for the applicants. On that same
day Judge Moir rendered a decision, stating, inter alia, that the heirs of Engracio Santiago had sold the land to
Ambrosia Salao and Juan Salao. Judge Moir "ordena la adjudicacion y registro del terreno solicitado a nombre de
Juan Salao, mayor de edad y de estado casado y de su esposa Diega Santiago y Ambrosia Salao, de estado
soltera y mayor de edad, en participaciones iguales" (Exh. 17-e).

On November 28, 1916 Judge Moir ordered the issuance of a decree for the said land. The decree was issued on
February 21, 1917. On March 12, 1917 Original Certificate of Title No. 472 of the Registry of Deeds of Pampanga
was issued in the names of Juan Salao and Ambrosia Salao.

That Pinanganacan or Lewa fishpond later became Cadastral Lot No. 544 of the Hermosa cadastre (Exh. 23). It
adjoins the Calunuran fishpond (See sketch, Exh. 1).

Juan Y. Salao, Sr. died on November 3, 1931 at the age of eighty years (Exh. C). His nephew, Valentin Salao, died
on February 9, 1933 at the age of sixty years according to the death certificate (Exh. A. However, if according to
Exhibit 21, he was forty-eight years old in 1918, he would be sixty-three years old in 1933).

The intestate estate of Valentin Salao was partitioned extrajudicially on December 28, 1934 between his two
daughters, Benita Salao-Marcelo and Victorina Salao-Alcuriza (Exh. 32). His estate consisted of the two fishponds
which he had inherited in 1918 from his grandmother, Valentina Ignacio.

If it were true that he had a one-third interest in the Calunuran and Lewa fishponds with a total area of 145 hectares
registered in 1911 and 1917 in the names of his aunt and uncle, Ambrosia Salao and Juan Y. Salao, Sr.,
respectively, it is strange that no mention of such interest was made in the extrajudicial partition of his estate in
1934.

It is relevant to mention that on April 8, 1940 Ambrosia Salao donated to her grandniece, plaintiff Benita Salao, three
lots located at Barrio Dampalit with a total area of 5,832 square meters (Exit. L). As donee Benita Salao signed the
deed of donation.

On that occasion she could have asked Ambrosia Salao to deliver to her and to the children of her sister, Victorina,
the Calunuran fishpond if it were true that it was held in trust by Ambrosia as the share of Benita's father in the
alleged joint venture.

But she did not make any such demand. It was only after Ambrosia Salao's death that she thought of filing an action
for the reconveyance of the Calunuran fishpond which was allegedly held in trust and which had become the sole
property of Juan Salao y Santiago (Juani).

On September 30, 1944 or during the Japanese occupation and about a year before Ambrosia Salao's death on
September 14, 1945 due to senility (she was allegedly eighty-five years old when she died), she donated her one-
half proindiviso share in the two fishponds in question to her nephew, Juan S. Salao, Jr. (Juani) At that time she
was living with Juani's family. He was already the owner of the the other half of the said fishponds, having inherited
it from his father, Juan Y. Salao, Sr. (Banli) The deed of denotion included other pieces of real property owned by
Ambrosia. She reserved for herself the usufruct over the said properties during her lifetime (Exh. 2 or M).

The said deed of donation was registered only on April 5, 1950 (page 39, Defendants' Record on Appeal).

The lawyer of Benita Salao and the Children of Victorina Salao in a letter dated January 26, 1951 informed Juan S.
Salao, Jr. that his clients had a one-third share in the two fishponds and that when Juani took possession thereof in
1945, he refused to give Benita and Victorina's children their one-third share of the net fruits which allegedly
amounted to P200,000 (Exh. K).

Juan S. Salao, Jr. in his answer dated February 6, 1951 categorically stated that Valentin Salao did not have any
interest in the two fishponds and that the sole owners thereof his father Banli and his aunt Ambrosia, as shown in
the Torrens titles issued in 1911 and 1917, and that he Juani was the donee of Ambrosia's one-half share (Exh. K-
1).

Benita Salao and her nephews and niece filed their original complaint against Juan S. Salao, Jr. on January 9, 1952
in the Court of First Instance of Bataan (Exh. 36). They amended their complaint on January 28, 1955. They asked
for the annulment of the donation to Juan S. Salao, Jr. and for the reconveyance to them of the Calunuran fishpond
as Valentin Salao's supposed one-third share in the 145 hectares of fishpond registered in the names of Juan Y.
Salao, Sr. and Ambrosia Salao.

Juan S. Salao, Jr. in his answer pleaded as a defense the indefeasibility of the Torrens title secured by his father
and aunt. He also invoked the Statute of Frauds, prescription and laches. As counter-claims, he asked for moral
damages amounting to P200,000, attorney's fees and litigation expenses of not less than P22,000 and
reimbursement of the premiums which he has been paying on his bond for the lifting of the receivership Juan S.
Salao, Jr. died in 1958 at the age of seventy-one. He was substituted by his widow, Mercedes Pascual and his six
children and by the administrator of his estate.

In the intestate proceedings for the settlement of his estate the two fishponds in question were adjudicated to his
seven legal heirs in equal shares with the condition that the properties would remain under administration during the
pendency of this case (page 181, Defendants' Record on Appeal).

After trial the trial court in its decision consisting of one hundred ten printed pages dismissed the amended
complaint and the counter-claim. In sixty-seven printed pages it made a laborious recital of the testimonies of
plaintiffs' fourteen witnesses, Gregorio Marcelo, Norberto Crisostomo, Leonardo Mangali Fidel de la Cruz, Dionisio
Manalili, Ambrosio Manalili, Policarpio Sapno, Elias Manies Basilio Atienza, Benita Salao, Emilio Cagui Damaso de
la Peña, Arturo Alcuriza and Francisco Buensuceso, and the testimonies of defendants' six witnesses, Marcos
Galicia, Juan Galicia, Tiburcio Lingad, Doctor Wenceslao Pascual, Ciriaco Ramirez and Pablo P. Salao. (Plaintiffs
presented Regino Nicodemus as a fifteenth witness, a rebuttal witness).

The trial court found that there was no community of property among Juan Y. Salao, Sr., Ambrosia Salao and
Valentin Salao when the Calunuran and Pinanganacan (Lewa) lands were acquired; that a co-ownership over the
real properties of Valentina Ignacio existed among her heirr after her death in 1914; that the co-ownership was
administered by Ambrosia Salao and that it subsisted up to 1918 when her estate was partitioned among her three
children and her grandson, Valentin Salao.
The trial court surmised that the co-ownership which existed from 1914 to 1918 misled the plaintiffs and their
witnesses and caused them to believe erroneously that there was a co-ownership in 1905 or thereabouts. The trial
court speculated that if valentin had a hand in the conversion into fishponds of the Calunuran and Lewa lands, he
must have done so on a salary or profit- sharing basis. It conjectured that Valentin's children and grandchildren were
given by Ambrosia Salao a portion of the earnings of the fishponds as a reward for his services or because of
Ambrosia's affection for her grandnieces.

The trial court rationalized that Valentin's omission during his lifetime to assail the Torrens titles of Juan and
Ambrosia signified that "he was not a co-owner" of the fishponds. It did not give credence to the testimonies of
plaintiffs' witnesses because their memories could not be trusted and because no strong documentary evidence
supported the declarations. Moreover, the parties involved in the alleged trust were already dead.

It also held that the donation was validly executed and that even if it were void Juan S. Salao, Jr., the donee, would
nevertheless be the sole legal heir of the donor, Ambrosia Salao, and would inherit the properties donated to him.

Both parties appealed. The plaintiffs appealed because their action for reconveyance was dismissed. The
defendants appealed because their counterclaim for damages was dismissed.

The appeals, which deal with factual and legal issues, were made to the Court of Appeals. However, as the amounts
involved exceed two hundred thousand pesos, the Court of Appeals elevated the case to this Court in its resolution
of Octoter 3, 1966 (CA-G.R. No. 30014-R).

Plaintiffs' appeal. — An appellant's brief should contain "a subject index index of the matter in the brief with a digest
of the argument and page references" to the contents of the brief (Sec. 16 [a], Rule 46, 1964 Rules of Court; Sec.
17, Rule 48, 1940 Rules of Court).

The plaintiffs in their appellants' brief consisting of 302 pages did not comply with that requirement. Their statements
of the case and the facts do not contain "page references to the record" as required in section 16[c] and [d] of Rule
46, formerly section 17, Rule 48 of the 1940 Rules of Court.

Lawyers for appellants, when they prepare their briefs, would do well to read and re-read section 16 of Rule 46. If
they comply strictly with the formal requirements prescribed in section 16, they might make a competent and
luminous presentation of their clients' case and lighten the burden of the Court.

What Justice Fisher said in 1918 is still true now: "The pressure of work upon this Court is so great that we cannot,
in justice to other litigants, undertake to make an examination of the voluminous transcript of the testimony (1,553
pages in this case, twenty-one witnesses having testified), unless the attorneys who desire us to make such
examination have themselves taken the trouble to read the record and brief it in accordance with our rules" (Palara
vs. Baguisi 38 Phil. 177, 181). As noted in an old case, this Court decides hundreds of cases every year and in
addition resolves in minute orders an exceptionally considerable number of petitions, motions and interlocutory
matters (Alzua and Arnalot vs. Johnson, 21 Phil. 308, 395; See In re Almacen, L-27654, February 18, 1970, 31
SCRA 562, 573).

Plaintiffs' first assignment of error raised a procedural issue. In paragraphs 1 to 14 of their first cause of action they
made certain averments to establish their theory that Valentin Salao had a one-third interest in the two fishponds
which were registrered in the names of Juan Y. Salao, Sr. (Banli) and Ambrosia Salao.

Juan S. Salao, Jr. (Juani) in his answer "specifically" denied each and all the allegations" in paragraphs I to 10 and
12 of the first cause of action with the qualification that Original certificates of Title Nos. 185 and 472 were issued
"more than 37 years ago" in the names of Juan (Banli) and Ambrosia under the circumstances set forth in Juan S.
Salao, Jr.'s "positive defenses" and "not under the circumstances stated in the in the amended complaint".

The plaintiffs contend that the answer of Juan S. Salao, Jr. was in effect tin admission of the allegations in their first
cause of action that there was a co-ownership among Ambrosia, Juan, AIejandra and Valentin, all surnamed Salao,
regarding the Dampalit property as early as 1904 or 1905; that the common funds were invested the acquisition of
the two fishponds; that the 47-hectare Calunuran fishpond was verbally adjudicated to Valentin Salao in the l919
partition and that there was a verbal stipulation to to register "said lands in the name only of Juan Y. Salao".

That contention is unfounded. Under section 6, Rule 9 of the 1940 of Rules of Court the answer should "contain
either a specific dinial a statement of matters in accordance of the cause or causes of action asserted in the
complaint". Section 7 of the same rule requires the defendant to "deal specificaly with each material allegation of
fact the truth of wihich he does not admit and, whenever practicable shall set forth the substance of the matters
which he will rely upon to support his denial". "Material averments in the complaint, other than those as to the
amount damage, shall be deemed admitted when specifically denied" (Sec. 8). "The defendant may set forth set
forth by answer as many affirmative defenses as he may have. All grounds of defenses as would raise issues of fact
not arising upon the preceding pleading must be specifically pleaded" (Sec. 9).
What defendant Juan S. Salao, Jr. did in his answer was to set forth in his "positive defenses" the matters in
avoidance of plaintiffs' first cause of action which which supported his denials of paragraphs 4 to 10 and 12 of the
first cause of action. Obviously, he did so because he found it impracticable to state pierceneal his own version as to
the acquisition of the two fishponds or to make a tedious and repetitious recital of the ultimate facts contradicting
allegations of the first cause of action.

We hold that in doing so he substantially complied with Rule 9 of the 1940 Rules of Court. It may be noted that
under the present Rules of Court a "negative defense is the specific denial of t the material fact or facts alleged in
the complaint essential to plaintiff's cause of causes of action". On the other hand, "an affirmative defense is an
allegation of new matter which, while admitting the material allegations of the complaint, expressly or impliedly,
would nevertheless prevent or bar recovery by the plaintiff." Affirmative defenses include all matters set up "by of
confession and avoidance". (Sec. 5, Rule 6, Rules of Court).

The case of El Hogar Filipino vs. Santos Investments, 74 Phil. 79 and similar cases are distinguishable from the
instant case. In the El Hogar case the defendant filed a laconic answer containing the statement that it denied
"generally ans specifically each and every allegation contained in each and every paragraph of the complaint". It did
not set forth in its answer any matters by way of confession and avoidance. It did not interpose any matters by way
of confession and avoidance. It did not interpose any affirmative defenses.

Under those circumstances, it was held that defendant's specific denial was really a general denial which was
tantamount to an admission of the allegations of the complaint and which justified judgment on the pleadings. That
is not the situation in this case.

The other nine assignments of error of the plaintiffs may be reduced to the decisive issue of whether the Calunuran
fishpond was held in trust for Valentin Salao by Juan Y. Salao, Sr. and Ambrosia Salao. That issue is tied up with
the question of whether plaintiffs' action for reconveyance had already prescribed.

The plaintiffs contend that their action is "to enforce a trust which defendant" Juan S. Salao, Jr. allegedly violated.
The existence of a trust was not definitely alleged in plaintiffs' complaint. They mentioned trust for the first time on
page 2 of their appelants' brief.

To determine if the plaintiffs have a cause of action for the enforcement of a trust, it is necessary to maek some
exegesis on the nature of trusts (fideicomosis). Trusts in Anglo-American jurisprudence were derived from
the fideicommissa of the Roman law (Government of the Philippine Islands vs. Abadilla, 46 Phil. 642, 646).

"In its technical legal sense, a trust is defined as the right, enforceable solely in equity, to the beneficial enjoyment of
property, the legal title to which is vested in another, but the word 'trust' is frequently employed to indicate duties,
relations, and responsibilities which are not strictly technical trusts" (89 C.J.S. 712).

A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the
benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is
referred to as the beneficiary" (Art. 1440, Civil Code). There is a fiduciary relation between the trustee and
the cestui que trust as regards certain property, real, personal, money or choses in action (Pacheco vs. Arro, 85
Phil. 505).

"Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties.
Implied trusts come into being by operation of law" (Art. 1441, Civil Code). "No express trusts concerning an
immovable or any interest therein may be proven by parol evidence. An implied trust may be proven by oral
evidence" (Ibid, Arts. 1443 and 1457).

"No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly
intended" (Ibid, Art. 1444; Tuason de Perez vs. Caluag, 96 Phil. 981; Julio vs. Dalandan, L-19012, October 30,
1967, 21 SCRA 543, 546). "Express trusts are those which are created by the direct and positive acts of the parties,
by some writing or deed, or will, or by words either expressly or impliedly evincing an intention to create a trust" (89
C.J.S. 72).

"Implied trusts are those which, without being expressed, are deducible from the nature of the transaction
as matters of intent, or which are superinduced on the transaction by operation of law as matter of
equity, independently of the particular intention of the parties" (89 C.J.S. 724). They are ordinarily subdivided into
resulting and constructive trusts (89 C.J.S. 722).

"A resulting trust. is broadly defined as a trust which is raised or created by the act or construction of law, but in its
more restricted sense it is a trust raised by implication of law and presumed to have been contemplated by the
parties, the intention as to which is to be found in the nature of their transaction, but not expressed in the deed or
instrument of conveyance (89 C.J.S. 725). Examples of resulting trusts are found in articles 1448 to 1455 of the Civil
Code. (See Padilla vs. Court of Appeals, L-31569, September 28, 1973, 53 SCRA 168, 179; Martinez vs. Graño 42
Phil. 35).
On the other hand, a constructive trust is -a trust "raised by construction of law, or arising by operation of law". In a
more restricted sense and as contra-distinguished from a resulting trust, a constructive trust is "a trust not created
by any words, either expressly or impliedly evincing a direct intension to create a trust, but by the construction of
equity in order to satisfy the demands of justice." It does not arise "by agreement or intention, but by operation of
law." (89 C.J.S. 726-727).

Thus, "if property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a
trustee of an implied trust for the benefit of the person from whom the property comes" (Art. 1456, Civil Code).

Or "if a person obtains legal title to property by fraud or concealment, courts of equity will impress upon the title a
so-called constructive trust in favor of the defrauded party". Such a constructive trust is not a trust in the technical
sense. (Gayondato vs. Treasurer of the P. I., 49 Phil. 244).

Not a scintilla of documentary evidence was presented by the plaintiffs to prove that there was an express trust over
the Calunuran fishpond in favor of Valentin Salao. Purely parol evidence was offered by them to prove the alleged
trust. Their claim that in the oral partition in 1919 of the two fishponds the Calunuran fishpond was assigned to
Valentin Salao is legally untenable.

It is legally indefensible because the terms of article 1443 of the Civil Code (already in force when the action herein
was instituted) are peremptory and unmistakable: parol evidence cannot be used to prove an express trust
concerning realty.

Is plaintiffs' massive oral evidence sufficient to prove an implied trust, resulting or constructive, regarding the two
fishponds?

Plaintiffs' pleadings and evidence cannot be relied upon to prove an implied trust. The trial court's firm conclusion
that there was no community of property during the lifetime of Valentina; Ignacio or before 1914 is substantiated by
defendants' documentary evidence. The existence of the alleged co-ownership over the lands supposedly inherited
from Manuel Salao in 1885 is the basis of plaintiffs' contention that the Calunuran fishpond was held in trust for
Valentin Salao.

But that co-ownership was not proven by any competent evidence. It is quite improbable because the alleged estate
of Manuel Salao was likewise not satisfactorily proven. The plaintiffs alleged in their original complaint that there
was a co-ownership over two hectares of land left by Manuel Salao. In their amended complaint, they alleged that
the co-ownership was over seven hectares of fishponds located in Barrio Dampalit, Malabon, Rizal. In their brief
they alleged that the fishponds, ricelands and saltbeds owned in common in Barrio Dampalit had an area of twenty-
eight hectares, of which sixteen hectares pertained to Valentina Ignacio and eleven hectares represented Manuel
Salao's estate.

They theorized that the eleven hectares "were, and necessarily, the nucleus, nay the very root, of the property now
in litigation (page 6, plaintiffs-appellants' brief). But the eleven hectares were not proven by any trustworthy
evidence. Benita Salao's testimony that in 1918 or 1919 Juan, Ambrosia, Alejandra and Valentin partitioned twenty-
eight hectares of lands located in Barrio Dampalit is not credible. As noted by the defendants, Manuel Salao was
not even mentioned in plaintiffs' complaints.

The 1919 partition of Valentina Ignacio's estate covered about seventeen hectares of fishponds and ricelands (Exh.
21). If at the time that partition was made there were eleven hectares of land in Barrio Dampalit belonging to Manuel
Salao, who died in 1885, those eleven hectares would have been partitioned in writing as in the case of the
seventeen hectares belonging to Valentina Ignacio's estate.

It is incredible that the forty-seven-hectare Calunuran fishpond would be adjudicated to Valentin Salao mere by by
word of mouth. Incredible because for the partition of the seventeen hectares of land left by Valentina Ignacio an
elaborate "Escritura de Particion" consisting of twenty-two pages had to be executed by the four Salao heirs. Surely,
for the partition of one hundred forty-five hectares of fishponds among three of the same Salao heirs an oral
adjudication would not have sufficed.

The improbability of the alleged oral partition becomes more evident when it is borne in mind that the two fishponds
were registered land and "the act of registration" is "the operative act" that conveys and affects the land (Sec. 50,
Act No. 496). That means that any transaction affecting the registered land should be evidenced by a registerable
deed. The fact that Valentin Salao and his successors-in-interest, the plaintiffs, never bothered for a period of nearly
forty years to procure any documentary evidence to establish his supposed interest ox participation in the two
fishponds is very suggestive of the absence of such interest.

The matter may be viewed from another angle. As already stated, the deed of partition for Valentina Ignacio's estate
wag notarized in 1919 (Exh. 21). The plaintiffs assert that the two fishponds were verbally partitioned also in 1919
and that the Calunuran fishpond was assigned to Valentin Salao as his share.
Now in the partition of Valentina Ignacio's estate, Valentin was obligated to pay P3,355.25 to Ambrosia Salao. If,
according to the plaintiffs, Ambrosia administered the two fishponds and was the custodian of its earnings, then it
could have been easily stipulated in the deed partitioning Valentina Ignacio's estate that the amount due from
Valentin would just be deducted by Ambrosia from his share of the earnings of the two fishponds. There was no
such stipulation. Not a shred of documentary evidence shows Valentin's participation in the two fishponds.

The plaintiffs utterly failed to measure up to the yardstick that a trust must be proven by clear, satisfactory and
convincing evidence. It cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite
declarations (De Leon vs. Molo-Peckson, 116 Phil. 1267, 1273).

Trust and trustee; establishment of trust by parol evidence; certainty of proof. — Where a trust is to
be established by oral proof, the testimony supporting it must be sufficiently strong to prove the right
of the alleged beneficiary with as much certainty as if a document proving the trust were shown. A
trust cannot be established, contrary to the recitals of a Torrens title, upon vague and inconclusive
proof. (Syllabus, Suarez vs. Tirambulo, 59 Phil. 303).

Trusts; evidence needed to establish trust on parol testimony. — In order to establish a trust in real
property by parol evidence, the proof should be as fully convincing as if the act giving rise to the trust
obligation were proven by an authentic document. Such a trust cannot be established upon
testimony consisting in large part of insecure surmises based on ancient hearsay. (Syllabus, Santa
Juana vs. Del Rosario 50 Phil. 110).

The foregoing rulings are good under article 1457 of the Civil Code which, as already noted, allows an implied trust
to be proven by oral evidence. Trustworthy oral evidence is required to prove an implied trust because, oral
evidence can be easily fabricated.

On the other hand, a Torrens title is generally a conclusive of the ownership of the land referred to therein (Sec. 47,
Act 496). A strong presumption exists. that Torrens titles were regularly issued and that they are valid. In order to
maintain an action for reconveyance, proof as to the fiduciary relation of the parties must be clear and convincing
(Yumul vs. Rivera and Dizon, 64 Phil. 13, 17-18).

The real purpose of the Torrens system is, to quiet title to land. "Once a title is registered, the owner may rest
secure, without the necessity of waiting in the portals of the court, or sitting in the mirador de su casa, to avoid the
possibility of losing his land" (Legarda and Prieto vs. Saleeby, 31 Phil. 590, 593).

There was no resulting trust in this case because there never was any intention on the part of Juan Y. Salao, Sr.,
Ambrosia Salao and Valentin Salao to create any trust. There was no constructive trust because the registration of
the two fishponds in the names of Juan and Ambrosia was not vitiated by fraud or mistake. This is not a case where
to satisfy the demands of justice it is necessary to consider the Calunuran fishpond " being held in trust by the heirs
of Juan Y. Salao, Sr. for the heirs of Valentin Salao.

And even assuming that there was an implied trust, plaintiffs' action is clearly barred by prescription or laches
(Ramos vs. Ramos, L-19872, December 3, 1974, 61 SCRA 284; Quiniano vs. Court of Appeals, L-23024, May 31,
1971, 39 SCRA 221; Varsity Hills, Inc. vs. Navarro, 9, February 29, 1972, 43 SCRA 503; Alzona vs. Capunitan and
Reyes, 114 Phil. 377).

Under Act No. 190, whose statute of limitation would apply if there were an implied trust in this case, the longest
period of extinctive prescription was only ten year (Sec. 40; Diaz vs. Gorricho and Aguado, 103 Phil. 261, 266).

The Calunuran fishpond was registered in 1911. The written extrajudicial demand for its reconveyance was made by
the plaintiffs in 1951. Their action was filed in 1952 or after the lapse of more than forty years from the date of
registration. The plaintiffs and their predecessor-in-interest, Valentin Salao, slept on their rights if they had any rights
at all. Vigilanti prospiciunt jura or the law protects him who is watchful of his rights (92 C.J.S. 1011, citing Esguerra
vs. Tecson, 21 Phil. 518, 521).

"Undue delay in the enforcement of a right is strongly persuasive of a lack of merit in the claim, since it is human
nature for a person to assert his rights most strongly when they are threatened or invaded". "Laches or
unreasonable delay on the part of a plaintiff in seeking to enforce a right is not only persuasive of a want of merit but
may, according to the circumstances, be destructive of the right itself." (Buenaventura vs. David, 37 Phil. 435, 440-
441).

Having reached the conclusion that the plaintiffs are not entitled to the reconveyance of the Calunuran fishpond, it is
no longer n to Pass upon the validity of the donation made by Ambrosia Salao to Juan S. Salao, Jr. of her one-half
share in the two fishponds The plaintiffs have no right and personality to assil that donation.
Even if the donation were declared void, the plaintiffs would not have any successional rights to Ambrosia's share.
The sole legal heir of Ambrosia was her nephew, Juan, Jr., her nearest relative within the third degree. Valentin
Salao, if living in 1945 when Ambrosia died, would have been also her legal heir, together with his first cousin, Juan,
Jr. (Juani). Benita Salao, the daughter of Valentin, could not represent him in the succession to the estate of
Ambrosia since in the collateral line, representation takes place only in favor of the children of brothers or sisters
whether they be of the full or half blood is (Art 972, Civil Code). The nephew excludes a grandniece like Benita
Salao or great-gandnephews like the plaintiffs Alcuriza (Pavia vs. Iturralde 5 Phil. 176).

The trial court did not err in dismissing plaintiffs' complaint.

Defendants' appeal. — The defendants dispute the lower court's finding that the plaintiffs filed their action in good
faith. The defendants contend that they are entitled to damages because the plaintiffs acted maliciously or in bad
faith in suing them. They ask for P25,000 attorneys fees and litigation expenses and, in addition, moral damages.

We hold that defemdamts' appeal is not meritorious. The record shows that the plaintiffs presented fifteen witnesses
during the protracted trial of this case which lasted from 1954 to 1959. They fought tenaciously. They obviously
incurred considerable expenses in prosecuting their case. Although their causes of action turned out to be
unfounded, yet the pertinacity and vigor with which they pressed their claim indicate their sincerity and good faith.

There is the further consideration that the parties were descendants of common ancestors, the spouses Manuel
Salao and Valentina Ignacio, and that plaintiffs' action was based on their honest supposition that the funds used in
the acquisition of the lands in litigation were earnings of the properties allegedly inherited from Manuel Salao.

Considering those circumstances, it cannot be concluded with certitude that plaintiffs' action was manifestly frivolous
or was primarily intended to harass the defendants. An award for damages to the defendants does not appear to be
just and proper.

The worries and anxiety of a defendant in a litigation that was not maliciously instituted are not the moral damages
contemplated in the law (Solis & Yarisantos vs. Salvador, L-17022, August 14, 1965, 14 SCRA 887; Ramos vs.
Ramos, supra). The instant case is not among the cases mentioned in articles 2219 and 2220 of the Civil Code
wherein moral damages may be recovered. Nor can it be regarded as analogous to any of the cases mentioned in
those articles.

The adverse result of an action does not per se make the act wrongful and subject the actor to the
payment of moral damages. The law could not have meant to impose a penalty on the right to
litigate; such right is so precious that moral damages may not be charged on those who may
exercise it erroneously. (Barreto vs. Arevalo, 99 Phil. 771. 779).

The defendants invoke article 2208 (4) (11) of the Civil Code which provides that attorney's fees may be recovered
"in case of a clearly unfounded civil action or proceeding against the plaintiff" (defendant is a plaintiff in his
counterclaim) or "in any other case where the court deems it just and equitable" that attorney's fees should he
awarded.

But once it is conceded that the plaintiffs acted in good faith in filing their action there would be no basis for
adjudging them liable to the defendants for attorney's fees and litigation expenses (See Rizal Surety & Insurance
Co., Inc. vs. Court of Appeals, L-23729, May 16, 1967, 20 SCRA 61).

It is not sound public policy to set a premium on the right to litigate. An adverse decision does not ipso facto justify
the award of attorney's fees to the winning party (Herrera vs. Luy Kim Guan, 110 Phil. 1020, 1028; Heirs of Justiva
vs. Gustilo, 61 O. G. 6959).

The trial court's judgment is affirmed. No pronouncement as to costs.

SO ORDERED.
G.R. No. 148788 November 23, 2007

SOLEDAD CAÑEZO, substituted by WILLIAM CAÑEZO and VICTORIANO CAÑEZO Petitioners,

vs.
CONCEPCION ROJAS, Respondent.

DECISION

NACHURA, J.:

This is a petition for review on certiorari from the Decision1 of the Court of Appeals, dated September 7, 2000, in CA-
G.R. SP No. 53236, and Resolution dated May 9, 2001.

On January 29, 1997, petitioner Soledad Cañezo filed a Complaint2 for the recovery of real property plus damages
with the Municipal Trial Court (MTC) of Naval, Biliran, against her father’s second wife, respondent Concepcion
Rojas. The subject property is an unregistered land with an area of 4,169 square meters, situated at Higatangan,
Naval, Biliran. Cañezo attached to the complaint a Joint Affidavit3 executed on May 10, 1979 by Isidro Catandijan
and Maximina Cañezo attesting to her acquisition of the property.

In her complaint, the petitioner alleged that she bought the parcel of land in 1939 from Crisogono Limpiado,
although the transaction was not reduced into writing. Thereafter, she immediately took possession of the property.
When she and her husband left for Mindanao in 1948, she entrusted the said land to her father, Crispulo 4 Rojas,
who took possession of, and cultivated, the property. In 1980, she found out that the respondent, her stepmother,
was in possession of the property and was cultivating the same. She also discovered that the tax declaration over
the property was already in the name of Crispulo Rojas.5

In her Answer, the respondent asserted that, contrary to the petitioner’s claim, it was her husband, Crispulo Rojas,
who bought the property from Crisogono Limpiado in 1948, which accounts for the tax declaration being in
Crispulo’s name. From then on, until his death in 1978, Crispulo possessed and cultivated the property. Upon his
death, the property was included in his estate, which was administered by a special administrator, Bienvenido
Ricafort. The petitioner, as heir, even received her share in the produce of the estate. The respondent further
contended that the petitioner ought to have impleaded all of the heirs as defendants. She also argued that the fact
that petitioner filed the complaint only in 1997 means that she had already abandoned her right over the property. 6

On July 3, 1998, after hearing, the MTC rendered a Decision in favor of the petitioner, thus:
WHEREFORE, premises considered, the Court finds a preponderance of evidence in favor of plaintiff Soledad
Cañezo and against defendant Concepcion Rojas by declaring plaintiff the true and lawful owner of the land more
particularly described under paragraph 5 of the complaint and hereby orders defendant Concepcion Rojas:

a) To vacate and surrender possession of the land to plaintiff;

b) To pay plaintiff the sum of ₱34,000.00 actual damages, ₱10,000.00 for attorney’s fees and litigation
expenses; and

c) To pay the costs.

SO ORDERED.7

Despite the respondent’s objection that the verbal sale cannot be proven without infringing the Statute of Frauds,
the MTC gave credence to the testimony of the petitioners’ two witnesses attesting to the fact that Crisogono
Limpiado sold the property to the petitioner in 1939. The MTC also found no evidence to show that Crispulo Rojas
bought the property from Crisogono Limpiado in 1948. It held that the 1948 tax declaration in Crispulo’s name had
little significance on respondent’s claim, considering that in 1948, the "country was then rehabilitating itself from the
ravages of the Second World War" and "the government was more interested in the increase in tax collection than
the observance of the niceties of law."8

The respondent appealed the case to the Regional Trial Court (RTC) of Naval, Biliran. On October 12, 1998, the
RTC reversed the MTC decision on the ground that the action had already prescribed and acquisitive prescription
had set in. The dispositive portion of the Decision reads:

WHEREFORE, premises considered, the decision of the Municipal Trial Court of Naval, Biliran awarding ownership
of the disputed land to the plaintiff and further allowing recovery of damages is hereby REVERSED in toto. There is
no award of damages.

The said property remains as the legitime of the defendant Concepcion Rojas and her children.

SO ORDERED.9

However, acting on petitioner’s motion for reconsideration, the RTC amended its original decision on December 14,
1998.10 This time, it held that the action had not yet prescribed considering that the petitioner merely entrusted the
property to her father. The ten-year prescriptive period for the recovery of a property held in trust would commence
to run only from the time the trustee repudiates the trust. The RTC found no evidence on record showing that
Crispulo Rojas ever ousted the petitioner from the property. The dispositive portion of the amended decision reads
as follows:

WHEREFORE, in view of the foregoing considerations, the decision of this Court dated October 12, 1998 is hereby
set aside and another is hereby entered modifying the decision of the Court a quo and declaring Soledad Rojas
Vda. De Cañezo as the true and lawful owner of a parcel of land, more particularly described and bounded as
follows:

A parcel of land situated at Higatangan, Naval, Biliran, bounded on the North by Policarpio Limpiado; on the South
by Fidel Limpiado; on the East by Seashore; and on the West by Crispolo (sic) Limpiado with an approximate area
of 4,169 square meters per Tax Declaration No. 2258, later under Tax Declaration No. 4073 in the name of Crispolo
Rojas and later in the name of the Heirs of Crispolo Rojas.

Further, ordering defendant-appellant Concepcion Rojas and all persons claiming rights or interest under her to
vacate and surrender possession of the land aforecited to the plaintiff or any of her authorized representatives,
Ordering the Provincial and/or Municipal Assessor’s Office to cancel the present existing Tax Declaration in the
name of Heirs of Crispolo Rojas referring to the above-described property in favor of the name of Soledad Rojas
Vda. De Cañezo, Ordering the defendant-appellant Concepcion Rojas to pay the plaintiff-appellee the sum of
₱34,000.00 in actual damages, and to pay for the loss of her share in money value of the products of the coconuts
of said land from 1979 to 1997 and to pay further until the case is terminated at the rate of ₱200.00 per quarter
based on the regular remittances of the late Crispolo Rojas to the plaintiff-appellee, and to pay the costs.

SO ORDERED.11

The respondent filed a motion to reconsider the Amended Decision but the RTC denied the same in an Order dated
April 25, 1999.

She then filed a petition for review with the Court of Appeals (CA), which reversed the Amended Decision of the
RTC on September 7, 2000, thus:
WHEREFORE, the amended decision dated December 14, 1998 rendered in Civil Case No. B-1041 is hereby
REVERSED and SET ASIDE. The complaint filed by Soledad Cañezo before the Municipal Trial Court of Naval,
Biliran is hereby DISMISSED on grounds of laches and prescription and for lack of merit.

SO ORDERED.12

The CA held that the petitioner’s inaction for several years casts a serious doubt on her claim of ownership over the
parcel of land. It noted that 17 years lapsed since she discovered that respondent was in adverse possession of the
property before she instituted an action to recover the same. And during the probate proceedings, the petitioner did
not even contest the inclusion of the property in the estate of Crispulo Rojas. 13

The CA was convinced that Crispulo Rojas owned the property, having bought the same from Crisogono Limpiado
in 1948. Supporting this conclusion, the appellate court cited the following circumstances: (1) the property was
declared for taxation purposes in Crispulo’s name and he had been paying the taxes thereon from 1948 until his
death in 1978; (2) Crispulo adversely possessed the same property from 1948 until his death in 1978; and (3) upon
his death in 1978, the property was included in his estate, the proceeds of which were distributed among his heirs. 14

The CA further held that, assuming that there was an implied trust between the petitioner and her father over the
property, her right of action to recover the same would still be barred by prescription since 49 years had already
lapsed since Crispulo adversely possessed the contested property in 1948.15

On May 9, 2001, the CA denied the petitioner’s motion for reconsideration for lack of merit. 16

In this petition for review, the petitioner, substituted by her heirs, assigns the following errors:

That the Court of Appeals committed grave abuse of discretion in setting aside petitioner’s contention that the
Petition for Review filed by respondent CONCEPCION ROJAS before the Court of Appeals was FILED OUT OF
TIME;

That the Court of Appeals erred and committed grave abuse of discretion amounting to lack or excess of jurisdiction
when it decided that the filing of the case by SOLEDAD CAÑEZO for Recovery of Real Property was already barred
by PRESCRIPTION AND LACHES.17

The petitioner insists that the respondent’s petition for review before the CA was filed out of time. The petitioner
posits that the CA may not grant an additional extension of time to file the petition except for the most compelling
reason. She contends that the fact that respondent’s counsel needed additional time to secure the certified copy of
his annexes cannot be considered as a compelling reason that would justify an additional period of

extension. She admits, though, that this issue was raised for the first time in their motion for reconsideration, but
insists that it can be raised at any time since it concerns the jurisdiction of the CA over the petition.

The petitioner further posits that prescription and laches are unavailing because there was an express trust
relationship between the petitioner and Crispulo Rojas and his heirs, and express trusts do not prescribe. Even
assuming that it was not an express trust, there was a resulting trust which generally does not prescribe unless
there is repudiation by the trustee.

For her part, the respondent argues that the petitioners are now estopped from questioning the CA Resolution
granting her second motion for extension to file the petition for review. She notes that the petitioner did not raise this
issue in the comment that she filed in the CA. In any case, the grant of the second extension of time was warranted
considering that the certified true copy of the assailed RTC orders did not arrive at the office of respondent’s counsel
in Cebu City in time for the filing of the petition.

On the merits, the respondent asserts that the complaint is barred by prescription, laches and estoppel. From 1948
until his death in 1978, Crispulo cultivated the property and was in adverse, peaceful and continuous possession
thereof in the concept of owner. It took the petitioner 49 years from 1948 before she filed the complaint for recovery
of the property in 1997. Granting that it was only in 1980 that she found out that the respondent adversely
possessed the property, still petitioner allowed 17 years to elapse before she asserted her alleged right over the
property.

Finally, the respondent maintains that the other co-owners are indispensable parties to the case; and because they
were not impleaded, the case should be dismissed.

The petition has no merit.

On the procedural issue raised by the petitioner, we find no reversible error in the grant by the CA of the second
motion for extension of time to file the respondent’s petition. The grant or denial of a motion for extension of time is
addressed to the sound discretion of the court.18 The CA obviously considered the difficulty in securing a certified
true copy of the assailed decision because of the distance between the office of respondent’s counsel and the trial
court as a compelling reason for the request. In the absence of any showing that the CA granted the motion for
extension capriciously, such exercise of discretion will not be disturbed by this Court.

On the second issue, the petitioner insists that her right of action to recover the property cannot be barred by
prescription or laches even with the respondent’s uninterrupted possession of the property for 49 years because
there existed between her and her father an express trust or a resulting trust. Indeed, if no trust relations existed,
the possession of the property by the respondent, through her predecessor, which dates back to 1948, would
already have given rise to acquisitive prescription in accordance with Act No. 190 (Code of Civil Procedure). 19 Under
Section 40 of Act No. 190, an action for recovery of real property, or of an interest therein, can be brought only
within ten years after the cause of action accrues. This period coincides with the ten-year period for acquisitive
prescription provided under Section 4120 of the same Act.

Thus, the resolution of the second issue hinges on our determination of the existence of a trust over the property ---
express or implied --- between the petitioner and her father.

A trust is the legal relationship between one person having an equitable ownership of property and another person
owning the legal title to such property, the equitable ownership of the former entitling him to the performance of
certain duties and the exercise of certain powers by the latter.21 Trusts are either express or implied.22 Express trusts
are those which are created by the direct and positive acts of the parties, by some writing or deed, or will, or by
words evincing an intention to create a trust.23 Implied trusts are those which, without being expressed, are
deducible from the nature of the transaction as matters of intent or, independently, of the particular intention of the
parties, as being superinduced on the transaction by operation of law basically by reason of equity. 24 An implied trust
may either be a resulting trust or a constructive trust.

It is true that in express trusts and resulting trusts, a trustee cannot acquire by prescription a property entrusted to
him unless he repudiates the trust.25 The following discussion is instructive:

There is a rule that a trustee cannot acquire by prescription the ownership of property entrusted to him, or that an
action to compel a trustee to convey property registered in his name in trust for the benefit of the cestui que trust
does not prescribe, or that the defense of prescription cannot be set up in an action to recover property held by a
person in trust for the benefit of another, or that property held in trust can be recovered by the beneficiary regardless
of the lapse of time.

That rule applies squarely to express trusts. The basis of the rule is that the possession of a trustee is not adverse.
Not being adverse, he does not acquire by prescription the property held in trust. Thus, Section 38 of Act 190
provides that the law of prescription does not apply "in the case of a continuing and subsisting trust."

The rule of imprescriptibility of the action to recover property held in trust may possibly apply to resulting trusts as
long as the trustee has not repudiated the trust.

xxxx

Acquisitive prescription may bar the action of the beneficiary against the trustee in an express trust for the recovery
of the property held in trust where (a) the trustee has performed unequivocal acts of repudiation amounting to an
ouster of the cestui que trust; (b) such positive acts of repudiation have been made known to the cestui que trust,
and (c) the evidence thereon is clear and conclusive.26

As a rule, however, the burden of proving the existence of a trust is on the party asserting its existence, and such
proof must be clear and satisfactorily show the existence of the trust and its elements. 27 The presence of the
following elements must be proved: (1) a trustor or settlor who executes the instrument creating the trust; (2) a
trustee, who is the person expressly designated to carry out the trust; (3) the trust res, consisting of duly identified
and definite real properties; and (4) the cestui que trust, or beneficiaries whose identity must be clear.28 Accordingly,
it was incumbent upon petitioner to prove the existence of the trust relationship. And petitioner sadly failed to
discharge that burden.

The existence of express trusts concerning real property may not be established by parol evidence. 29 It must be
proven by some writing or deed. In this case, the only evidence to support the claim that an express trust existed
between the petitioner and her father was the self-serving testimony of the petitioner. Bare allegations do not
constitute evidence adequate to support a conclusion. They are not equivalent to proof under the Rules of Court. 30

In one case, the Court allowed oral testimony to prove the existence of a trust, which had been partially performed.
It was stressed therein that what is important is that there should be an intention to create a trust, thus:
What is crucial is the intention to create a trust. While oftentimes the intention is manifested by the trustor in express
or explicit language, such intention may be manifested by inference from what the trustor has said or done, from the
nature of the transaction, or from the circumstances surrounding the creation of the purported trust.

However, an inference of the intention to create a trust, made from language, conduct or circumstances, must be
made with reasonable certainty. It cannot rest on vague, uncertain or indefinite declarations. An inference of
intention to create a trust, predicated only on circumstances, can be made only where they admit of no other
interpretation.31

Although no particular words are required for the creation of an express trust, a clear intention to create a trust must
be shown; and the proof of fiduciary relationship must be clear and convincing. The creation of an express trust
must be manifested with reasonable certainty and cannot be inferred from loose and vague declarations or from
ambiguous circumstances susceptible of other interpretations.32

In the case at bench, an intention to create a trust cannot be inferred from the petitioner’s testimony and the
attendant facts and circumstances. The petitioner testified only to the effect that her agreement with her father was
that she will be given a share in the produce of the property, thus:

Q: What was your agreement with your father Crispulo Rojas when you left this property to him?

A: Every time that they will make copra, they will give a share.

Q: In what particular part in Mindanao [did] you stay with your husband?

A: Bansalan, Davao del Sur.

Q: And while you were in Bansalan, Davao del Sur, did Crispolo Rojas comply with his obligation of giving
your share the proceeds of the land?

A: When he was still alive, he gave us every three months sometimes ₱200.00 and sometimes ₱300.00. 33

This allegation, standing alone as it does, is inadequate to establish the existence of a trust because profit-sharing
per se, does not necessarily translate to a trust relation. It could also be present in other relations, such as in
deposit.

What distinguishes a trust from other relations is the separation of the legal title and equitable ownership of the
property. In a trust relation, legal title is vested in the fiduciary while equitable ownership is vested in a cestui que
trust. Such is not true in this case. The petitioner alleged in her complaint that the tax declaration of the land was
transferred to the name of Crispulo without her consent. Had it been her intention to create a trust and make
Crispulo her trustee, she would not have made an issue out of this because in a trust agreement, legal title is vested
in the trustee. The trustee would necessarily have the right to transfer the tax declaration in his name and to pay the
taxes on the property. These acts would be treated as beneficial to the cestui que trust and would not amount to an
adverse possession.34

Neither can it be deduced from the circumstances of the case that a resulting trust was created. A resulting trust is
1âwphi1

a species of implied trust that is presumed always to have been contemplated by the parties, the intention as to
which can be found in the nature of their transaction although not expressed in a deed or instrument of conveyance.
A resulting trust is based on the equitable doctrine that it is the more valuable consideration than the legal title that
determines the equitable interest in property.35

While implied trusts may be proved by oral evidence, the evidence must be trustworthy and received by the courts
with extreme caution, and should not be made to rest on loose, equivocal or indefinite declarations. Trustworthy
evidence is required because oral evidence can easily be fabricated.36 In order to establish an implied trust in real
property by parol evidence, the proof should be as fully convincing as if the acts giving rise to the trust obligation are
proven by an authentic document. An implied trust, in fine, cannot be established upon vague and inconclusive
proof.37 In the present case, there was no evidence of any transaction between the petitioner and her father from
which it can be inferred that a resulting trust was intended.

In light of the disquisitions, we hold that there was no express trust or resulting trust established between the
petitioner and her father. Thus, in the absence of a trust relation, we can only conclude that Crispulo’s uninterrupted
possession of the subject property for 49 years, coupled with the performance of acts of ownership, such as
payment of real estate taxes, ripened into ownership. The statutory period of prescription commences when a
person who has neither title nor good faith, secures a tax declaration in his name and may, therefore, be said to
have adversely claimed ownership of the lot.38 While tax declarations and receipts are not conclusive evidence of
ownership and do not prove title to the land, nevertheless, when coupled with actual possession, they constitute
evidence of great weight and can be the basis of a claim of ownership through prescription. 39 Moreover, Section 41
of Act No. 190 allows adverse possession in any character to ripen into ownership after the lapse of ten years.
There could be prescription under the said section even in the absence of good faith and just title. 40

All the foregoing notwithstanding, even if we sustain petitioner’s claim that she was the owner of the property and
that she constituted a trust over the property with her father as the trustee, such a finding still would not advance her
case.

Assuming that such a relation existed, it terminated upon Crispulo’s death in 1978. A trust terminates upon the
death of the trustee where the trust is personal to the trustee in the sense that the trustor intended no other person
to administer it.41 If Crispulo was indeed appointed as trustee of the property, it cannot be said that such
appointment was intended to be conveyed to the respondent or any of Crispulo’s other heirs. Hence, after Crispulo’s
death, the respondent had no right to retain possession of the property. At such point, a constructive trust would be
created over the property by operation of law. Where one mistakenly retains property which rightfully belongs to
another, a constructive trust is the proper remedial device to correct the situation. 42

A constructive trust is one created not by any word or phrase, either expressly or impliedly, evincing a direct
intention to create a trust, but one which arises in order to satisfy the demands of justice. It does not come about by
agreement or intention but in the main by operation of law, construed against one who, by fraud, duress or abuse of
confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold. 43

As previously stated, the rule that a trustee cannot, by prescription, acquire ownership over property entrusted to
him until and unless he repudiates the trust, applies to express trusts and resulting implied trusts. However, in
constructive implied trusts, prescription may supervene even if the trustee does not repudiate the relationship.
Necessarily, repudiation of the said trust is not a condition precedent to the running of the prescriptive period. 44 A
constructive trust, unlike an express trust, does not emanate from, or generate a fiduciary relation. While in an
express trust, a beneficiary and a trustee are linked by confidential or fiduciary relations, in a constructive trust, there
is neither a promise nor any fiduciary relation to speak of and the so-called trustee neither accepts any trust nor
intends holding the property for the beneficiary.45 The relation of trustee and cestui que trust does not in fact exist,
and the holding of a constructive trust is for the trustee himself, and therefore, at all times adverse.

In addition, a number of other factors militate against the petitioner’s case. First, the petitioner is estopped from
asserting ownership over the subject property by her failure to protest its inclusion in the estate of Crispulo. The CA,
thus, correctly observed that:

Even in the probate proceedings instituted by the heirs of Crispulo Rojas, which included her as a daughter of the
first marriage, Cañezo never contested the inclusion of the contested property in the estate of her father. She even
participated in the project of partition of her father’s estate which was approved by the probate court in 1984. After
personally receiving her share in the proceeds of the estate for 12 years, she suddenly claims ownership of part of
her father’s estate in 1997.

The principle of estoppel in pais applies when -- by one’s acts, representations, admissions, or silence when there is
a need to speak out -- one, intentionally or through culpable negligence, induces another to believe certain facts to
exist; and the latter rightfully relies and acts on such belief, so as to be prejudiced if the former is permitted to deny
the existence of those facts.46 Such a situation obtains in the instant case.

Second, the action is barred by laches. The petitioner allegedly discovered that the property was being possessed
by the respondent in 1980.47 However, it was only in 1997 that she filed the action to recover the property. Laches is
negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to
it has either abandoned or declined to assert it.48

Finally, the respondent asserts that the court a quo ought to have dismissed the complaint for failure to implead the
other heirs who are indispensable parties. We agree. We note that the complaint filed by the petitioner sought to
recover ownership, not just possession of the property; thus, the suit is in the nature of an action for reconveyance.
It is axiomatic that owners of property over which reconveyance is asserted are indispensable parties. Without them
being impleaded, no relief is available, for the court cannot render valid judgment. Being indispensable parties, their
absence in the suit renders all subsequent actions of the trial court null and void for want of authority to act, not only
as to the absent parties but even as to those present. Thus, when indispensable parties are not before the court, the
action should be dismissed.49 At any rate, a resolution of this issue is now purely academic in light of our finding that
the complaint is already barred by prescription, estoppel and laches.

WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals, dated
September 7, 2000, and Resolution dated May 9, 2001, are AFFIRMED.

SO ORDERED.
G.R. No. 171805 May 30, 2011

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
MERELO B. AZNAR; MATIAS B. AZNAR III; JOSE L. AZNAR (deceased), represented by his heirs; RAMON
A. BARCENILLA; ROSARIO T. BARCENILLA; JOSE B. ENAD (deceased), represented by his heirs; and
RICARDO GABUYA (deceased), represented by his heirs, Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 172021

MERELO B. AZNAR and MATIAS B. AZNAR III, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court are two petitions for review on certiorari under Rule 45 of the Rules of Court both seeking to annul
and set aside the Decision1 dated September 29, 2005 as well as the Resolution 2 dated March 6, 2006 of the Court
of Appeals in CA-G.R. CV No. 75744, entitled "Merelo B. Aznar, Matias B. Aznar III, Jose L. Aznar (deceased)
represented by his heirs, Ramon A. Barcenilla (deceased) represented by his heirs, Rosario T. Barcenilla, Jose B.
Enad (deceased) represented by his heirs, and Ricardo Gabuya (deceased) represented by his heirs v. Philippine
National Bank, Jose Garrido and Register of Deeds of Cebu City." The September 29, 2005 Decision of the Court of
Appeals set aside the Decision3 dated November 18, 1998 of the Regional Trial Court (RTC) of Cebu City, Branch
17, in Civil Case No. CEB-21511. Furthermore, it ordered the Philippine National Bank (PNB) to pay Merelo B.
Aznar; Matias B. Aznar III; Jose L. Aznar (deceased), represented by his heirs; Ramon A. Barcenilla (deceased),
represented by his heirs; Rosario T. Barcenilla; Jose B. Enad (deceased), represented by his heirs; and Ricardo
Gabuya (deceased), represented by his heirs (Aznar, et al.), the amount of their lien based on the Minutes of the
Special Meeting of the Board of Directors4 (Minutes) of the defunct Rural Insurance and Surety Company, Inc.
(RISCO) duly annotated on the titles of three parcels of land, plus legal interests from the time of PNB’s acquisition
of the subject properties until the finality of the judgment but dismissing all other claims of Aznar, et al. On the other
hand, the March 6, 2006 Resolution of the Court of Appeals denied the Motion for Reconsideration subsequently
filed by each party.
The facts of this case, as stated in the Decision dated September 29, 2005 of the Court of Appeals, are as follows:

In 1958, RISCO ceased operation due to business reverses. In plaintiffs’ desire to rehabilitate RISCO, they
contributed a total amount of ₱212,720.00 which was used in the purchase of the three (3) parcels of land described
as follows:

"A parcel of land (Lot No. 3597 of the Talisay-Minglanilla Estate, G.L.R.O. Record No. 3732) situated in the
Municipality of Talisay, Province of Cebu, Island of Cebu. xxx containing an area of SEVENTY[-]EIGHT
THOUSAND ONE HUNDRED EIGHTY[-]FIVE SQUARE METERS (78,185) more or less. x x x" covered by Transfer
Certificate of Title No. 8921 in the name of Rural Insurance & Surety Co., Inc.";

"A parcel of land (Lot 7380 of the Talisay Minglanilla Estate, G.L.R.O. Record No. 3732), situated in the Municipality
of Talisay, Province of Cebu, Island of Cebu. xxx containing an area of THREE HUNDRED TWENTY[-]NINE
THOUSAND FIVE HUNDRED FORTY[-]SEVEN SQUARE METERS (329,547), more or less. xxx" covered by
Transfer Certificate of Title No. 8922 in the name of Rural Insurance & Surety Co., Inc." and

"A parcel of land (Lot 1323 of the subdivision plan Psd-No. 5988), situated in the District of Lahug, City of Cebu,
Island of Cebu. xxx containing an area of FIFTY[-]FIVE THOUSAND SIX HUNDRED FIFTY[-]THREE (55,653)
SQUARE METERS, more or less." covered by Transfer Certificate of Title No. 24576 in the name of Rural
Insurance & Surety Co., Inc."

After the purchase of the above lots, titles were issued in the name of RISCO. The amount contributed by plaintiffs
constituted as liens and encumbrances on the aforementioned properties as annotated in the titles of said lots. Such
annotation was made pursuant to the Minutes of the Special Meeting of the Board of Directors of RISCO
(hereinafter referred to as the "Minutes") on March 14, 1961, pertinent portion of which states:

xxxx

3. The President then explained that in a special meeting of the stockholders previously called for the purpose of
putting up certain amount of ₱212,720.00 for the rehabilitation of the Company, the following stockholders
contributed the amounts indicated opposite their names:

CONTRIBUTED SURPLUS

MERELO B. AZNAR ₱50,000.00

MATIAS B. AZNAR 50,000.00
JOSE L. AZNAR 27,720.00
RAMON A. BARCENILLA 25,000.00
ROSARIO T. BARCENILLA 25,000.00
JOSE B. ENAD 17,500.00
RICARDO GABUYA 17,500.00

212,720.00

xxxx

And that the respective contributions above-mentioned shall constitute as their lien or interest on the property
described above, if and when said property are titled in the name of RURAL INSURANCE & SURETY CO., INC.,
subject to registration as their adverse claim in pursuance of the Provisions of Land Registration Act, (Act No. 496,
as amended) until such time their respective contributions are refunded to them completely.

x x x x"

Thereafter, various subsequent annotations were made on the same titles, including the Notice of Attachment and
Writ of Execution both dated August 3, 1962 in favor of herein defendant PNB, to wit:

On TCT No. 8921 for Lot 3597:

Entry No. 7416-V-4-D.B. – Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case No. 47725, Court of
First Instance of Manila, entitled "Philippine National Bank, Plaintiff, versus Iluminada Gonzales, et al., Defendants",
attaching all rights, interest and participation of the defendant Iluminada Gonzales and Rural Insurance & Surety
Co., Inc. of the two parcels of land covered by T.C.T. Nos. 8921, Attachment No. 330 and 185.

Date of Instrument – August 3, 1962.

Date of Inscription – August 3, 1962, 3:00 P.M.

Entry No. 7417-V-4-D.B. – Writ of Execution – By the Court of First Instance of Manila, commanding the Provincial
Sheriff of Cebu, of the lands and buildings of the defendants, to make the sum of Seventy[-]One Thousand Three
Hundred Pesos (₱71,300.00) plus interest etc., in connection with Civil Case No. 47725, File No. T-8021.

Date of Instrument – July 21, 1962.

Date of Inscription – August 3, 1962, 3:00 P.M.

Entry No. 7512-V-4-D.B. – Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case Nos. IV-74065,
73929, 74129, 72818, in the Municipal Court of the City of Manila, entitled "Jose Garrido, Plaintiff, versus Rural
Insurance & Surety Co., Inc., et als., Defendants", attaching all rights, interests and participation of the defendants,
to the parcels of land covered by T.C.T. Nos. 8921 & 8922 Attachment No. 186, File No. T-8921.

Date of the Instrument – August 16, 1962.

Date of Inscription – August 16, 1962, 2:50 P.M.

Entry No. 7513-V-4-D.B. – Writ of Execution – By the Municipal Court of the City of Manila, commanding the
Provincial Sheriff of Cebu, of the lands and buildings of the defendants, to make the sum of Three Thousand Pesos
(₱3,000.00), with interest at 12% per annum from July 20, 1959, in connection with Civil Case Nos. IV-74065,
73929, 74613 annotated above.

File No. T-8921

Date of the Instrument – August 11, 1962.

Date of the Inscription – August 16, 1962, 2:50 P.M.

On TCT No. 8922 for Lot 7380:

(Same as the annotations on TCT 8921)

On TCT No. 24576 for Lot 1328 (Corrected to Lot 1323-c per court order):

Entry No. 1660-V-7-D.B. – Notice of Attachment – by the Provincial Sheriff of Cebu, Civil Case No. 47725, Court of
First Instance of Manila, entitled "Philippine National Bank, Plaintiff, versus, Iluminada Gonzales, et al., Defendants",
attaching all rights, interest, and participation of the defendants Iluminada Gonzales and Rural Insurance & Surety
Co., Inc. of the parcel of land herein described.

Attachment No. 330 & 185.

Date of Instrument – August 3, 1962.

Date of Inscription – August 3, 1962, 3:00 P.M.

Entry No. 1661-V-7-D.B. – Writ of Execution by the Court of First Instance of Manila commanding the Provincial
Sheriff of Cebu, of the lands and buildings of the defendants to make the sum of Seventy[-]One Thousand Three
Hundred Pesos (₱71,300.00), plus interest, etc., in connection with Civil Case No. 47725.

File No. T-8921.

Date of the Instrument – July 21, 1962.

Date of the Inscription – August 3, 1962 3:00 P.M.

Entry No. 1861-V-7-D.B. - Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case Nos. IV-74065,
73929, 74129, 72613 & 72871, in the Municipal Court of the City of Manila, entitled "Jose Garrido, Plaintiff, versus
Rural Insurance & Surety Co., Inc., et als., Defendants", attaching all rights, interest and participation of the
defendants, to the parcel of land herein described.

Attachment No. 186.

File No. T-8921.

Date of the Instrument – August 16, 1962.

Date of the Instription – August 16, 1962 2:50 P.M.

Entry No. 1862-V-7-D.B. – Writ of Execution – by the Municipal Court of Manila, commanding the Provincial Sheriff
of Cebu, of the lands and buildings of the Defendants, to make the sum of Three Thousand Pesos (P3,000.00), with
interest at 12% per annum from July 20, 1959, in connection with Civil Case Nos. IV-74065, 73929, 74129, 72613 &
72871 annotated above.

File No. T-8921.

Date of the Instrument – August 11, 1962.

Date of the Inscription – August 16, 1962 at 2:50 P.M.

As a result, a Certificate of Sale was issued in favor of Philippine National Bank, being the lone and highest bidder
of the three (3) parcels of land known as Lot Nos. 3597 and 7380, covered by T.C.T. Nos. 8921 and 8922,
respectively, both situated at Talisay, Cebu, and Lot No. 1328-C covered by T.C.T. No. 24576 situated at Cebu City,
for the amount of Thirty-One Thousand Four Hundred Thirty Pesos (P31,430.00). Thereafter, a Final Deed of Sale
dated May 27, 1991 in favor of the Philippine National Bank was also issued and Transfer Certificate of Title No.
24576 for Lot 1328-C (corrected to 1323-C) was cancelled and a new certificate of title, TCT 119848 was issued in
the name of PNB on August 26, 1991.

This prompted plaintiffs-appellees to file the instant complaint seeking the quieting of their supposed title to the
subject properties, declaratory relief, cancellation of TCT and reconveyance with temporary restraining order and
preliminary injunction. Plaintiffs alleged that the subsequent annotations on the titles are subject to the prior
annotation of their liens and encumbrances. Plaintiffs further contended that the subsequent writs and processes
annotated on the titles are all null and void for want of valid service upon RISCO and on them, as stockholders.
They argued that the Final Deed of Sale and TCT No. 119848 are null and void as these were issued only after 28
years and that any right which PNB may have over the properties had long become stale.

Defendant PNB on the other hand countered that plaintiffs have no right of action for quieting of title since the order
of the court directing the issuance of titles to PNB had already become final and executory and their validity cannot
be attacked except in a direct proceeding for their annulment. Defendant further asserted that plaintiffs, as mere
stockholders of RISCO do not have any legal or equitable right over the properties of the corporation. PNB posited
that even if plaintiff’s monetary lien had not expired, their only recourse was to require the reimbursement or refund
of their contribution.5
1awphi1

Aznar, et al., filed a Manifestation and Motion for Judgment on the Pleadings 6 on October 5, 1998. Thus, the trial
court rendered the November 18, 1998 Decision, which ruled against PNB on the basis that there was an express
trust created over the subject properties whereby RISCO was the trustee and the stockholders, Aznar, et al., were
the beneficiaries or the cestui que trust. The dispositive portion of the said ruling reads:

WHEREFORE, judgment is hereby rendered as follows:

a) Declaring the Minutes of the Special Meeting of the Board of Directors of RISCO approved on March 14,
1961 (Annex "E," Complaint) annotated on the titles to subject properties on May 15, 1962 as an express
trust whereby RISCO was a mere trustee and the above-mentioned stockholders as beneficiaries being the
true and lawful owners of Lots 3597, 7380 and 1323;

b) Declaring all the subsequent annotations of court writs and processes, to wit: Entry No. 7416-V-4-D.B.,
7417-V-4-D.B., 7512-V-4-D.B., and 7513-V-4-D.B. in TCT No. 8921 for Lot 3597 and TCT No. 8922 for Lot
7380; Entry No. 1660-V-7-D.B., Entry No. 1661-V-7-D.B., Entry No. 1861-V-7-D.B., Entry No. 1862-V-7-
D.B., Entry No. 4329-V-7-D.B., Entry No. 3761-V-7-D.B. and Entry No. 26522 v. 34, D.B. on TCT No. 24576
for Lot 1323-C, and all other subsequent annotations thereon in favor of third persons, as null and void;

c) Directing the Register of Deeds of the Province of Cebu and/or the Register of Deeds of Cebu City, as the
case may be, to cancel all these annotations mentioned in paragraph b) above the titles;
 d) Directing the Register of Deeds of the Province of Cebu to cancel and/or annul TCTs Nos. 8921 and 8922
in the name of RISCO, and to issue another titles in the names of the plaintiffs; and

e) Directing Philippine National Bank to reconvey TCT No. 119848 in favor of the plaintiffs. 7

PNB appealed the adverse ruling to the Court of Appeals which, in its September 29, 2005 Decision, set aside the
judgment of the trial court. Although the Court of Appeals agreed with the trial court that a judgment on the
pleadings was proper, the appellate court opined that the monetary contributions made by Aznar, et al., to RISCO
can only be characterized as a loan secured by a lien on the subject lots, rather than an express trust. Thus, it
directed PNB to pay Aznar, et al., the amount of their contributions plus legal interest from the time of acquisition of
the property until finality of judgment. The dispositive portion of the decision reads:
lawphil

WHEREFORE, premises considered, the assailed Judgment is hereby SET ASIDE.

A new judgment is rendered ordering Philippine National Bank to pay plaintiffs-appellees the amount of their lien
based on the Minutes of the Special Meeting of the Board of Directors duly annotated on the titles, plus legal
interests from the time of appellants’ acquisition of the subject properties until the finality of this judgment.

All other claims of the plaintiffs-appellees are hereby DISMISSED.8

Both parties moved for reconsideration but these were denied by the Court of Appeals. Hence, each party filed with
this Court their respective petitions for review on certiorari under Rule 45 of the Rules of Court, which were
consolidated in a Resolution9 dated October 2, 2006.

In PNB’s petition, docketed as G.R. No. 171805, the following assignment of errors were raised:

THE COURT OF APPEALS ERRED IN AFFIRMING THE FINDINGS OF THE TRIAL COURT THAT A
JUDGMENT ON THE PLEADINGS WAS WARRANTED DESPITE THE EXISTENCE OF GENUINE
ISSUES OF FACTS ALLEGED IN PETITIONER PNB’S ANSWER.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF RESPONDENTS
TO REFUND OR REPAYMENT OF THEIR CONTRIBUTIONS HAD NOT PRESCRIBED AND/OR THAT
THE MINUTES OF THE SPECIAL MEETING OF THE BOARD OF DIRECTORS OF RISCO
CONSTITUTED AS AN EFFECTIVE ADVERSE CLAIM.

III

THE COURT OF APPEALS ERRED IN NOT CONSIDERING THE DISMISSAL OF THE COMPLAINT ON
GROUNDS OF RES JUDICATA AND LACK OF CAUSE OF ACTION ALLEGED BY PETITIONER IN ITS
ANSWER.10

On the other hand, Aznar, et al.’s petition, docketed as G.R. No. 172021, raised the following issue:

THE COURT OF APPEALS ERRED IN CONCLUDING THAT THE CONTRIBUTIONS MADE BY THE
STOCKHOLDERS OF RISCO WERE MERELY A LOAN SECURED BY THEIR LIEN OVER THE PROPERTIES,
SUBJECT TO REIMBURSEMENT OR REFUND, RATHER THAN AN EXPRESS TRUST. 11

Anent the first issue raised in G.R. No. 171805, PNB argues that a judgment on the pleadings was not proper
because its Answer,12 which it filed during the trial court proceedings of this case, tendered genuine issues of fact
since it did not only deny material allegations in Aznar, et al.’s Complaint 13 but also set up special and affirmative
defenses. Furthermore, PNB maintains that, by virtue of the trial court’s judgment on the pleadings, it was denied its
right to present evidence and, therefore, it was denied due process.

The contention is meritorious.

The legal basis for rendering a judgment on the pleadings can be found in Section 1, Rule 34 of the Rules of Court
which states that "[w]here an answer fails to tender an issue, or otherwise admits the material allegations of the
adverse party’s pleading, the court may, on motion of that party, direct judgment on such pleading. x x x."

Judgment on the pleadings is, therefore, based exclusively upon the allegations appearing in the pleadings of the
parties and the annexes, if any, without consideration of any evidence aliunde. 14 However, when it appears that not
all the material allegations of the complaint were admitted in the answer for some of them were either denied or
disputed, and the defendant has set up certain special defenses which, if proven, would have the effect of nullifying
plaintiff’s main cause of action, judgment on the pleadings cannot be rendered. 15

In the case at bar, the Court of Appeals justified the trial court’s resort to a judgment on the pleadings in the
following manner:

Perusal of the complaint, particularly, Paragraph 7 thereof reveals:

"7. That in their desire to rehabilitate RISCO, the above-named stockholders contributed a total amount of
Ph₱212,720.00 which was used in the purchase of the above-described parcels of land, which amount constituted
liens and encumbrances on subject properties in favor of the above-named stockholders as annotated in the titles
adverted to above, pursuant to the Minutes of the Special Meeting of the Board of Directors of RISCO approved on
March 14, 1961, a copy of which is hereto attached as Annex "E".

On the other hand, defendant in its Answer, admitted the aforequoted allegation with the qualification that the
amount put up by the stockholders was "used as part payment" for the properties. Defendant further averred that
plaintiff’s liens and encumbrances annotated on the titles issued to RISCO constituted as "loan from the
stockholders to pay part of the purchase price of the properties" and "was a personal obligation of RISCO and was
thus not a claim adverse to the ownership rights of the corporation." With these averments, We do not find error on
the part of the trial court in rendering a judgment on the pleadings. For one, the qualification made by defendant in
its answer is not sufficient to controvert the allegations raised in the complaint. As to defendants’ contention that the
money contributed by plaintiffs was in fact a "loan" from the stockholders, reference can be made to the Minutes of
the Special Meeting of the Board of Directors, from which plaintiffs-appellees anchored their complaint, in order to
ascertain the true nature of their claim over the properties. Thus, the issues raised by the parties can be resolved on
the basis of their respective pleadings and the annexes attached thereto and do not require further presentation of
evidence aliunde.16

However, a careful reading of Aznar, et al.’s Complaint and of PNB’s Answer would reveal that both parties raised
several claims and defenses, respectively, other than what was cited by the Court of Appeals, which requires the
presentation of evidence for resolution, to wit:

Complaint (Aznar, et al.) Answer (PNB)

11. That these subsequent annotations on the titles
of the properties in question are subject to the prior
annotation of liens and encumbrances of the above-
named stockholders per Entry No. 458-V-7-D.B.
inscribed on TCT No. 24576 on May 15, 1962 and
per Entry No. 6966-V-4-D.B. on TCT No. 8921 and
TCT No. 8922 on May 15, 1962;
12. That these writs and processes annotated on the 11) Par. 12 is denied as in fact notice
titles are all null and void for total want of valid to RISCO had been sent to its last
service upon RISCO and the above-named known address at Plaza Goite, Manila;
stockholders considering that as early as sometime
in 1958, RISCO ceased operations as earlier stated,
and as early as May 15, 1962, the liens and
encumbrances of the above-named stockholders
were annotated in the titles of subject properties;
13. That more particularly, the Final Deed of Sale
(Annex "G") and TCT No. 119848 are null and void
as these were issued only after 28 years and 5
months (in the case of the Final Deed of Sale) and
28 years, 6 months and 29 days (in the case of TCT
119848) from the invalid auction sale on December
27, 1962, hence, any right, if any, which PNB had
over subject properties had long become stale;
14. That plaintiffs continue to have possession of
subject properties and of their corresponding titles,
but they never received any process concerning the
petition filed by PNB to have TCT 24576 over Lot
1323-C surrendered and/or cancelled;
15. That there is a cloud created on the
aforementioned titles of RISCO by reason of the
annotate writs, processes and proceedings caused
by Jose Garrido and PNB which were apparently
10) Par. 11 is denied as the loan from
the stockholders to pay part of the
purchase price of the properties was a
personal obligation of RISCO and was
thus not a claim adverse to the
ownership rights of the corporation;
12) Par. 13 is denied for no law
requires the final deed of sale to be
executed immediately after the end of
the redemption period. Moreover,
another court of competent jurisdiction
has already ruled that PNB was
entitled to a final deed of sale;
13) Par. 14 is denied as plaintiffs are
not in actual possession of the land
and if they were, their possession was
as trustee for the creditors of RISCO
like PNB;
14) Par. 15 is denied as the court
orders directing the issuance of titles
to PNB in lieu of TCT 24576 and TCT
8922 are valid judgments which
 valid or effective, but which are in truth and in fact cannot be set aside in a collateral
invalid and ineffective, and prejudicial to said titles proceeding like the instant case.18
and to the rights of the plaintiffs, which should be
removed and the titles quieted.17

Furthermore, apart from refuting the aforecited material allegations made by Aznar, et al., PNB also indicated in its
Answer the special and affirmative defenses of (a) prescription; (b) res judicata; (c) Aznar, et al., having no right of
action for quieting of title; (d) Aznar, et al.’s lien being ineffective and not binding to PNB; and (e) Aznar, et al.’s
having no personality to file the suit.19

From the foregoing, it is indubitably clear that it was error for the trial court to render a judgment on the pleadings
and, in effect, resulted in a denial of due process on the part of PNB because it was denied its right to present
evidence. A remand of this case would ordinarily be the appropriate course of action. However, in the interest of
justice and in order to expedite the resolution of this case which was filed with the trial court way back in 1998, the
Court finds it proper to already resolve the present controversy in light of the existence of legal grounds that would
dispose of the case at bar without necessity of presentation of further evidence on the other disputed factual claims
and defenses of the parties.

A thorough and comprehensive scrutiny of the records would reveal that this case should be dismissed because
Aznar, et al., have no title to quiet over the subject properties and their true cause of action is already barred by
prescription.

At the outset, the Court agrees with the Court of Appeals that the agreement contained in the Minutes of the Special
Meeting of the RISCO Board of Directors held on March 14, 1961 was a loan by the therein named stockholders to
RISCO. We quote with approval the following discussion from the Court of Appeals Decision dated September 29,
2005:

Careful perusal of the Minutes relied upon by plaintiffs-appellees in their claim, showed that their contributions shall
constitute as "lien or interest on the property" if and when said properties are titled in the name of RISCO, subject to
registration of their adverse claim under the Land Registration Act, until such time their respective contributions are
refunded to them completely.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulation shall control. When the language of the
contract is explicit leaving no doubt as to the intention of the drafters thereof, the courts may not read into it any
other intention that would contradict its plain import.

The term lien as used in the Minutes is defined as "a discharge on property usually for the payment of some debt or
obligation. A lien is a qualified right or a proprietary interest which may be exercised over the property of another. It
is a right which the law gives to have a debt satisfied out of a particular thing. It signifies a legal claim or charge on
property; whether real or personal, as a collateral or security for the payment of some debt or obligation." Hence,
from the use of the word "lien" in the Minutes, We find that the money contributed by plaintiffs-appellees was in the
nature of a loan, secured by their liens and interests duly annotated on the titles. The annotation of their lien serves
only as collateral and does not in any way vest ownership of property to plaintiffs. 20 (Emphases supplied.)

We are not persuaded by the contention of Aznar, et al., that the language of the subject Minutes created an
express trust.

Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in another. It is a fiduciary
relationship that obliges the trustee to deal with the property for the benefit of the beneficiary. Trust relations
between parties may either be express or implied. An express trust is created by the intention of the trustor or of the
parties. An implied trust comes into being by operation of law.21

Express trusts, sometimes referred to as direct trusts, are intentionally created by the direct and positive acts of the
settlor or the trustor - by some writing, deed, or will or oral declaration. It is created not necessarily by some written
words, but by the direct and positive acts of the parties. 22 This is in consonance with Article 1444 of the Civil Code,
which states that "[n]o particular words are required for the creation of an express trust, it being sufficient that a trust
is clearly intended."

In other words, the creation of an express trust must be manifested with reasonable certainty and cannot be inferred
from loose and vague declarations or from ambiguous circumstances susceptible of other interpretations. 23

No such reasonable certitude in the creation of an express trust obtains in the case at bar. In fact, a careful scrutiny
of the plain and ordinary meaning of the terms used in the Minutes does not offer any indication that the parties
thereto intended that Aznar, et al., become beneficiaries under an express trust and that RISCO serve as trustor.
Indeed, we find that Aznar, et al., have no right to ask for the quieting of title of the properties at issue because they
have no legal and/or equitable rights over the properties that are derived from the previous registered owner which
is RISCO, the pertinent provision of the law is Section 2 of the Corporation Code (Batas Pambansa Blg. 68), which
states that "[a] corporation is an artificial being created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence."

As a consequence thereof, a corporation has a personality separate and distinct from those of its stockholders and
other corporations to which it may be connected. 24 Thus, we had previously ruled in Magsaysay-Labrador v. Court of
Appeals25 that the interest of the stockholders over the properties of the corporation is merely inchoate and therefore
does not entitle them to intervene in litigation involving corporate property, to wit:

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential
and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management
of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after
payment of the corporate debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not
vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being
equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is
owned by the corporation as a distinct legal person.26

In the case at bar, there is no allegation, much less any proof, that the corporate existence of RISCO has ceased
and the corporate property has been liquidated and distributed to the stockholders. The records only indicate that,
as per Securities and Exchange Commission (SEC) Certification 27 dated June 18, 1997, the SEC merely suspended
RISCO’s Certificate of Registration beginning on September 5, 1988 due to its non-submission of SEC required
reports and its failure to operate for a continuous period of at least five years.

Verily, Aznar, et al., who are stockholders of RISCO, cannot claim ownership over the properties at issue in this
case on the strength of the Minutes which, at most, is merely evidence of a loan agreement between them and the
company. There is no indication or even a suggestion that the ownership of said properties were transferred to them
which would require no less that the said properties be registered under their names. For this reason, the complaint
should be dismissed since Aznar, et al., have no cause to seek a quieting of title over the subject properties.

At most, what Aznar, et al., had was merely a right to be repaid the amount loaned to RISCO. Unfortunately, the
right to seek repayment or reimbursement of their contributions used to purchase the subject properties is already
barred by prescription.

Section 1, Rule 9 of the Rules of Court provides that when it appears from the pleadings or the evidence on record
that the action is already barred by the statute of limitations, the court shall dismiss the claim, to wit:

Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. However,
when it appears from the pleadings or the evidence on record that the court has no jurisdiction over the subject
matter, that there is another action pending between the same parties for the same cause, or that the action is
barred by a prior judgment or by statute of limitations, the court shall dismiss the claim. (Emphasis supplied.)

In Feliciano v. Canoza,28 we held:

We have ruled that trial courts have authority and discretion to dismiss an action on the ground of prescription when
the parties’ pleadings or other facts on record show it to be indeed time-barred x x x; and it may do so on the basis
of a motion to dismiss, or an answer which sets up such ground as an affirmative defense; or even if the ground is
alleged after judgment on the merits, as in a motion for reconsideration; or even if the defense has not been
asserted at all, as where no statement thereof is found in the pleadings, or where a defendant has been declared in
default. What is essential only, to repeat, is that the facts demonstrating the lapse of the prescriptive period,
be otherwise sufficiently and satisfactorily apparent on the record; either in the averments of the plaintiffs
complaint, or otherwise established by the evidence.29 (Emphasis supplied.)

The pertinent Civil Code provision on prescription which is applicable to the issue at hand is Article 1144(1), to wit:

The following actions must be brought within ten years from the time the right of action accrues:

1. Upon a written contract;

2. Upon an obligation created by law;

3. Upon a judgment. (Emphasis supplied.)

Moreover, in Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 30 we held that the term "written contract"
includes the minutes of the meeting of the board of directors of a corporation, which minutes were adopted by the
parties although not signed by them, to wit:

Coming now to the question of prescription raised by defendant Lepanto, it is contended by the latter that the period
to be considered for the prescription of the claim regarding participation in the profits is only four years, because the
modification of the sharing embodied in the management contract is merely verbal, no written document to that
effect having been presented. This contention is untenable. The modification appears in the minutes of the special
meeting of the Board of Directors of Lepanto held on August 21, 1940, it having been made upon the authority of its
President, and in said minutes the terms of modification had been specified. This is sufficient to have the agreement
considered, for the purpose of applying the statute of limitations, as a written contract even if the minutes were not
signed by the parties (3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract if
adopted by two persons may constitute a contract in writing even if the same is not signed by either of the parties (3
A.L.R., 2d, pp. 812-813). Another authority says that an unsigned agreement the terms of which are embodied in a
document unconditionally accepted by both parties is a written contract (Corbin on Contracts, Vol. I, p. 85). 31

Applied to the case at bar, the Minutes which was approved on March 14, 1961 is considered as a written contract
between Aznar, et al., and RISCO for the reimbursement of the contributions of the former. As such, the former had
a period of ten (10) years from 1961 within which to enforce the said written contract. However, it does not appear
that Aznar, et al., filed any action for reimbursement or refund of their contributions against RISCO or even against
PNB. Instead the suit that Aznar, et al., brought before the trial court only on January 28, 1998 was one to quiet title
over the properties purchased by RISCO with their contributions. It is unmistakable that their right of action to claim
for refund or payment of their contributions had long prescribed. Thus, it was reversible error for the Court of
Appeals to order PNB to pay Aznar, et al., the amount of their liens based on the Minutes with legal interests from
the time of PNB’s acquisition of the subject properties.

In view of the foregoing, it is unnecessary for the Court to pass upon the other issues raised by the parties.

WHEREFORE, the petition of Aznar, et al., in G.R. No. 172021 is DENIED for lack of merit. The petition of PNB in
G.R. No. 171805 is GRANTED. The Complaint, docketed as Civil Case No. CEB-21511, filed by Aznar, et al., is
hereby DISMISSED. No costs.

SO ORDERED.

G.R. No. 147863 August 13, 2004

PROSPERO RINGOR, SATURNINO RINGOR, ANDRES RINGOR, substituted by SHAKUNTALA DEBIE,

CLARO ALEJO, GERONIMA and SANDIE LOUR, all surnamed RINGOR, RAYMUNDA RINGOR, LUISA R.
RIMANDO, EMILIANA R. TIU and HEIRS OF JOSE M. RINGOR, INC., petitioners,
vs.
CONCORDIA, FELIPA, EMETERIA, all surnamed RINGOR, MARCELINA RINGOR, in behalf of her deceased
father, AGAPITO RINGOR, AVELINA, CRESENCIA, and FELIMON, all surnamed ALMASEN, in behalf of their
deceased mother, ESPIRITA RINGOR, and TEOFILO M. ABALOS, in behalf of his deceased mother,
GENOVEVA RINGOR, respondents.

DECISION

QISUMBING, J.:

Petitioners seek the review of the Decision dated November 27, 2000 of the Court of Appeals in CA-G.R. CV No.
1

48581 and its Resolution, dated April 24, 2001, denying the subsequent motion for reconsideration. The Court of
2

Appeals affirmed the decision of the Regional Trial Court (formerly the Court of First Instance) of Dagupan City,
Branch 43, in favor of herein respondents, for partition and reconveyance of land with damages.

The controversy involves lands in San Fabian, Pangasinan, owned by the late Jacobo Ringor. By his first wife,
Gavina Laranang, he had two children, Juan and Catalina. He did not have offsprings by his second and third wives.
Catalina predeceased her father Jacobo who died sometime in 1935, leaving Juan his lone heir.

Juan married Gavina Marcella. They had seven (7) children, namely: Jose (the father and predecessor-in-interest of
herein petitioners), Genoveva, Felipa, Concordia, Agapito, Emeteria and Espirita. Genoveva and Agapito are
represented in this case by Teofilo Abalos and Marcelina Ringor, their respective children. Espirita is represented by
her children, Avelina, Cresencia and Felimon Almasen.

Jacobo applied for the registration of his lands under the Torrens system. He filed three land registration cases
alone, with his son Juan, or his grandson Jose, applying jointly with him.
The first application, docketed as Expediente 241, G.L.R.O. Record No. 13152 was applied for alone by Jacobo.
While Jacobo was the only applicant in Expediente 241, on November 22, 1921, in Decree No. 119561, Parcels 1
and 2 of the lands in Expediente 241 were adjudicated to Jacobo and his son, Juan, in equal shares as pro-
indiviso co-owners. On March 6, 1922, OCT No. 23689 was issued in the names of Jacobo and Juan. With Jacobo's
3 4

thumbmark, in a Compraventa dated November 6, 1928, the one-half (½) undivided interest of Jacobo in the said
Parcels 1 and 2 was sold and transferred to Jose. The OCT was eventually cancelled and replaced by TCT No.
15918, dated November 6, 1928. The sale to Jose was registered only on February 15, 1940. 5

Decree No. 119562awarded full ownership ofParcel 3 to Jacobo. Thus, OCT No. 23690 pertaining to Parcel 3, was
6

issued in Jacobo's name. By another Compraventa also dated November 6, 1928, and with the same
7

circumstances as the Compraventa in Parcels 1 and 2, the entire interest of Jacobo in Parcel 3 was likewise sold
and transferred to Jose. Thereafter, TCT No. 5090 was issued in the name of Jose. All the lands declared to Jacobo
8

in Expediente 241 were allegedly sold to Jose for P6,000. 9

In the second application, Expediente 244, G.L.R.O. Record No. 13168, Jacobo named Jose as the applicant. In
Decree No. 65500,the five (5) parcels of land in Expediente 244 were adjudicated to Jose as a "donacion de su
abuelo" (donation of his grandfather). On April 18, 1918, OCT No. 18797 was issued exclusively to Jose.
10 11

The third application docketed as Expediente 4449, G.L.R.O. Record No. 23643, was filed in the names of Jacobo
and his only son Juan. It covered three parcels of land. Juan died on July 16, 1922, a year before the decision of
12

the land registration court was issued. On October 10, 1923, in Decree No. 147191, half of Parcel 1 was adjudicated
to Jacobo and the other half to Jose and later, three-fourths (¾) of parcels 2 and 3 to Jacobo and one-fourth (¼) to
Jose. Although Juan was one of the named applicants, it later appeared that Jose's name was substituted for
13

Juan's name because of an erroneous information that Jose was the only successor-in-interest of Juan. Thus, on 14

February 29, 1924, OCT Nos. 25885 and 25886 were issued in the names of Jacobo and Jose respectively. 15

Subsequently, in a Compraventa dated November 3, 1928, Jacobo allegedly sold and transferred to Jose his one-
half (½) undivided interest in Parcel 1 covered by OCT No. 25885. Jacobo's thumbmark appeared on
the Compraventa. These lands are now covered by TCT No. 15916, in the name of petitioner corporation, Heirs of
16

Jose M. Ringor, Inc., organized after the initiation of the instant case. By another Compraventa also dated
17

November 3, 1928, the three-fourths (¾) undivided interests of Jacobo in Parcels 2 and 3 covered by OCT No.
25886 were likewise sold and transferred to Jose. The Compraventas were duly registered sometime in 1940. The
OCTs were cancelled and new TCTs were issued in the name of Jose. Jacobo allegedly sold to Jose for P800 all
the lands declared to him in Expediente 4449. 18

During trial, witnesses attested that even after the decisions in the three land registration cases and
the Compraventas, Jacobo remained in possession of the lands and continued administering them as he did prior to
their registration. He unfailingly gave a share of the produce to all the 7 children of his son Juan. According to
witness Julio Monsis, Jacobo did not partition the lands since the latter said that he still needed them. When
19 20

Jacobo died on June 7, 1935, the lands under the three land registration applications, including those which
petitioners sought to partition in their counterclaim before the trial court, remained undivided. Jose, as the eldest
grandchild, assumed and continued the administration of the lands. He also conscientiously gave his 5 younger
21

sisters and only brother Agapito, their share in the produce and income from the lands. Herein respondents claim
22

they repeatedly asked Jose for partitioning of the land; however, every time they did, Jose always answered that it
was not going to be easy because there would be "big and small shares." Respondents explained that they did not
23

zealously press for the immediate partition of the lands because Jose constantly assured them that he would never
cheat them and because they respected him highly. 24

Jose died on April 30, 1971. Respondents demanded from Jose's children, herein petitioners, the partition and
delivery of their share in the estate left by Jacobo and under Jose's administration. The petitioners refused and
attempts at amicable settlement failed. On March 27, 1973, respondents filed a Complaint for partition and
25

reconveyance with damages, docketed as Civil Case No. D-3037. An Amended Complaint was admitted by the
lower court in its Order of August 6, 1973.26

In their Complaint, herein respondents claimed that (1) they are all grandchildren and/or great grandchildren of
Jacobo, who left intestate the disputed lands with a total area of 322,775 sq. m., all located in San Fabian,
Pangasinan, and declared for tax purposes in the name of Jose Ringor; (2) that the late Jose Ringor had always
been the administrator and trustee of Jacobo; (3) that after Jacobo's death, they asked for their shares of the
27

intestate properties but was refused; and (4) that Jose as trustee and overseer of all these properties was
answerable to the respondents for their just shares in the intestate properties of Jacobo. They asked for (a) the
28

partition of their corresponding shares, the cancellation of OCT No. 18797 issued in the name of Jose Ringor
under Expediente 244 and that these be subdivided among the seven children of Jose Ringor, and the six children
and grandchildren of Juan Ringor; (b) the payment to plaintiffs of whatever maybe found as chargeable to the late
Jose Ringor as trustee, as well as liability for administering these properties from the time of Jose's death up to the
time the case is terminated; and (c) the payment of attorney's fees, surveyor's expenses and cost of the suit. 29
In their Answer, herein petitioners insisted that they rightfully own and possess the disputed lands. They alleged
that their father acquired legitimate title to and remained in continuous, uninterrupted and exclusive possession and
enjoyment of the said parcels of land in the concept of an owner at varying times since 1917, 1923, and 1928, as
evidenced by the certificates of title issued more than thirty (30) years ago and in some cases more than fifty (50)
years ago, before the present suit was instituted by respondents. They claimed that Jacobo sold the parcels of land
under Expediente Nos. 4449 and 241 to Jose for valuable consideration on November 3 and 6, 1928, respectively,
evidenced by notarial deeds of sale duly registered in the Registry of Deeds of Pangasinan. The other disputed
lands sought to be divided, petitioners assured, were held by Jose as exclusive owner.

In their Amended Answer, petitioners averred that the parcels of land in the exclusive name of Jose are his
exclusive properties acquired by him either by inheritance, homestead patent, or purchase. They claimed that Jose
had long acquired indefeasible and incontrovertible title to the said properties in accordance with the provisions of
the Land Registration Act. These are evidenced by OCT No. 18797 issued March 6, 1919 for Lots Nos. 1, 2, 3, 4, 5,
Plan Psu-6099; OCT No. 23797 on May 6, 1922 for Plan Psu-15467; TCT No. 5090 issued December 12, 1929 for
Lot No. 3, Plan Psu-6095; TCT No. 15918 issued February 15, 1940 for Lots Nos. 1 & 2, Plan Psu-6095 Amd; TCT
No. 15917 on February 15, 1940 for Lots Nos. 1 & 2, Plan Psu-35491; and TCT No. 15916 issued February 15,
1940 for Plan Psu-31271, now TCT No. 93019 issued November 22, 1971. Further, according to petitioners,
whatever cause or right of action, if any, the respondents had with respect to the properties owned and possessed
by them and their late father, including those based on constructive trust, it had long been barred by prescription
and laches and/or prior judgments since it is an incontrovertible fact that Jose had been, for more than thirty (30)
years and in some cases for more than fifty (50) years, the exclusive registered owner of the registered
properties. Lastly, petitioners asserted that respondents' claim of express trust concerning the properties in
30

question could not be proved by parol evidence.

While trial of the case was in progress, Julio Monsis, alleging he was the only child of Macaria Discipulo and
Jacobo, filed a Complaint in Intervention. So did Leocadia Ringor, alleging she was the only child of Jacobo with
Marcelina Gimeno. When Julio died on February 3, 1977, he was survived by his wife Felipa and their legitimate
children Maria, Federico, Eusebio, Paciencia, Panfilo and Fermin, all surnamed Monsis. On July 8, 1982, herein
respondents filed an Amendment to their Amended Complaint impleading as additional party-defendants, the
Heirs of Jose M. Ringor, Inc.
31

On February 10, 1995, the RTC decided in favor of respondents. The dispositive portion of the Decision set forth its
judgment:

(a) Declaring the 7 children of Juan L. Ringor who are the grandchildren of Jacobo Ringor, namely: Jose,
Genoveva, Felipa, Concordia, Agapito, Emeteria and Espirita, all surnamed Ringor, as pro-indiviso co-
owners of all the lands covered by Expediente Nos. 241, 244 and 4449 described in pages 2, 3, 4 and 5 of
this decision brought under the Land Registration Act and now covered by TCT No. 15918 (Lots 1 and 2)
and TCT 5090 (Lot No. 3) in the name of Jose Ringor (Expediente 241); TCT No. 15916 in the name of
defendant Heirs of Jose M. Ringor, Inc. (Lot 1, Expediente 2449); TCT No. 15917 (Lots 2 and 3, Expediente
4449); and TCT No. 18797 (Lots 1, 2, 3, 4 and 5, Expediente 244), in the name of Jose Ringor;

(b) Ordering the partition of the said parcels of land covered by TCT Nos. 15918, 5090, 15916, 15917 and
18797, all of the Register of Deeds of Pangasinan, among Jose, Genoveva, Felipa, Concordia, Agapito,
Emeteria and Espirita, all surnamed Ringor into 7 equal parts;

(c) Ordering defendants to render an accounting to the plaintiffs of all the income, produce and rents on
these parcels of land from 1973 until the respective shares of the plaintiffs are physically and peacefully
delivered to each of them;

(d) Ordering defendants jointly and severally to pay the plaintiffs the sum of P50,000.00 for attorney's fees;

(e) Dismissing the Complaints-in-Intervention of Julio Mon[sis] and Leocadia Ringor;

(f) On the Counterclaim, ordering the partition in seven (7) equal shares the parcels of land described in
paragraph 34 (a and b), pages 14 and 15 of this decision, among Jose, Genoveva, Felipa, Concordia,
Agapito, Emeteria and Espirita, all surnamed Ringor.

(g) Ordering the defendants to pay the costs of suit.

SO ORDERED. 32

The trial court concluded that Jacobo created an express trust over his entire property in favor of his grandchildren.
It found that Jose held the subject lands as co-owner and trustee of the express trust. The trial court held that the
notarial deeds of sale executed between Jacobo and Jose in Expediente 241 were false and simulated. It noted that
Jose registered the deed of sale twelve years after their execution and five years after Jacobo's death. More
important, the trial court declared that Jacobo continued to occupy and exercise acts of ownership over the same
parcels of land until his death despite the supposed sale to Jose.

On Expediente 244, the trial court observed that the document evidencing that Jacobo donated the lands therein to
Jose was never presented to the registration court, nor was any explanation given for the failure to register the
alleged donation. Hence, the donation was declared invalid.

On Expediente 4449, the trial court observed that although the applicants were Jacobo and Juan, the land was
erroneously adjudicated to Jacobo and Jose because it was made to appear that Jose was the only child who
succeeded Juan, who died a year before the application was adjudicated, when in fact Juan had seven children.
Jacobo knew of this error, yet he did nothing to correct it.

The trial court concluded that all these incidents and circumstances served as indicia that Jacobo cared little if the
lands were in his name or someone else's. As far as he was concerned, all these lands belonged to him such that
notwithstanding the subsequent compraventas, he continued to possess and administer the lands and all the profits
from them were at his disposal. Thus, the trial court continued, from the acts of Jacobo and his full exercise of
dominion over the lands until his death, it could be deduced that the compraventas were without consideration and
this was why the compraventas were not registered during Jacobo's lifetime. The trial court noted that even after the
registration of the compraventas, until his own death, Jose continued Jacobo's practice of sharing the produce of the
land with his siblings, a recognition that even Jose considered that his siblings were beneficial co-owners of the
lands under his care.33

The trial court reasoned that despite the absence of a document proving the express trust, the same was proven by
parol evidence. The trial court explained that the prohibition in Article 1443 of the New Civil Code – that no express
34

trust concerning an immovable or any interest therein may be proved by parol evidence – is a prohibition for
purposes of presenting proof on the matter, but it could be waived by a party. It went on to say that the failure to
35

object to parol evidence during trial and the cross-examination of the witnesses is a waiver of the prohibition.
Furthermore, it said that Jose, as trustee, did not repudiate the trust, such that the trust remained, and since the
trust continued to exist, an action to compel the trustee to convey the properties has not prescribed nor is it barred
by laches.36

Before the Court of Appeals, petitioners contended that the lower court erred when (1) it ruled that Jacobo Ringor
constituted an express trust over the disputed properties abovecited in favor of respondents as the beneficiaries and
with Jose Ringor as trustee; and (2) it gave weight to the oral evidence of herein respondents to prove the existence
of an express trust in their favor.

The Court of Appeals affirmed the lower court's decision. The Motion for Reconsideration of petitioners was also
denied.

Now before us the petitioners, in their Memorandum, raise the following issues:

1. WHETHER OR NOT THERE IS A DOCUMENT, INSTRUMENT, DEED OR ANY WRITING CREATING

AN EXPRESS TRUST AND FORMING PART OF THE EVIDENCE ON RECORD WHICH SUPPORTS THE
FINDINGS OF THE TRIAL COURT, AS THE SAME WAS AFFIRMED BY THE COURT A QUO, THAT AN
EXPRESS TRUST WAS ESTABLISHED BY THE LATE JACOBO RINGOR OVER THE PARCELS OF
LAND IN QUESTION IN FAVOR OF THE RESPONDENTS AS THE BENEFICIARIES, WITH JOSE
RINGOR AS THE TRUSTEE THEREOF (AND CO-BENEFICIARY AT THE SAME TIME).

2. WHETHER OR NOT THE TRIAL COURT'S RULINGS AS THE SAME WERE AFFIRMED ON APPEAL
BY THE COURT A QUO, WERE ANCHORED ONLY ON PAROL EVIDENCE.

3. WHETHER OR NOT THE ADMISSION OF PAROL EVIDENCE TO PROVE EXPRESS TRUST AS

PROSCRIBED BY ART. 1443 OF THE NEW CIVIL CODE CAN BE WAIVED.

4. WHETHER OR NOT THE COURT A QUO ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION
IN RULING THAT PETITIONERS VALIDLY WAIVED THEIR OBJECTION TO THE ADMISSION BY THE
TRIAL COURT OF PAROL EVIDENCE AS PROOF OF THE ESTABLISHMENT OF AN EXPRESS TRUST.

5. WHETHER OR NOT THE COURT A QUO ERRED IN AFFIRMING THE TRIAL COURT'S RULING
ADMITTING AND GIVING WEIGHT AND CONSIDERATION TO THE PAROL EVIDENCE ON RECORD TO
PROVE THE EXISTENCE OF AN EXPRESS TRUST.

6. WHETHER OR NOT THE FACTUAL FINDINGS OF THE TRIAL COURT WHICH WERE AFFIRMED IN
TOTO BY THE COURT A QUO ARE SUPPORTED BY, OR CONTRARY TO, THE EVIDENCE ON
RECORD.
 7. WHETHER OR NOT THE COURT A QUO COMMITTED SERIOUS ERRORS AND GRAVE ABUSE OF
DISCRETION IN VIRTUALLY ORDERING THE NULLIFICATION AND/OR DECLARING THE NULLITY OF
--- ALL THE TITLES (TCT NO. 5090, TCT NO. 15918, OCT NO. 18797, TCT NO. 1597, AND TCT NO.
93019) OF JOSE RINGOR AND HIS SUCCESSORS-IN-INTEREST (THE PETITIONERS HEREIN) AND
DIVESTING THEM OF THEIR EXCLUSIVE OWNERSHIP OVER THE PARCELS OF LAND IN QUESTION;
THE DECISIONS OF THE LAND REGISTRATION COURTS IN EXPEDIENTE 244 AND 4449; THE
DONATION REFERRED TO IN THE DECISION IN EXPEDIENTE 244; AND THE FOUR (4) DULY
NOTARIZED COMPRAVENTAS EXECUTED BY JACOBO RINGOR IN FAVOR OF JOSE RINGOR
COVERING THE PARCELS OF LAND DESCRIBED THEREIN, AND --- WHETHER OR NOT THE COURT
A QUO ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECLARING THE SUBJECT
PARCELS OF LAND AS BELONGING TO THE INTESTATE ESTATE OF JACOBO RINGOR AND UNDER
THE CO-OWNERSHIP OF JOSE RINGOR AND THE RESPONDENTS, AND IN ORDERING THEIR
PARTITION AMONG THE SEVEN CHILDREN OF JUAN RINGOR, IN VIOLATION OF THE APPLICABLE
PROVISIONS OF THE CIVIL CODE, AND THE PRINCIPLES OF RES JUDICATA AND THE
INDEFEASIBILITY OF A TORRENS TITLE.

8. WHETHER OR NOT RESPONDENTS' ACTION WAS ALREADY BARRED BY PRESCRIPTION, BOTH

ACQUISITIVE AND EXTINCTIVE, AND LACHES. 37

Briefly stated, the issues to be resolved in this petition are: (1) Were the factual findings of the lower and appellate
courts supported by evidence on record? (2) Was there a valid express trust established by Jacobo Ringor? (3) May
parol evidence be used as proof of the establishment of the express trust? (4) Did the court in effect nullify the
Torrens titles over the disputed parcels of land? (5) Were respondents' action barred by prescription and laches?

We shall now address these issues together.

At the outset, petitioners urge this Court to review the factual findings of the case. It is a well-established principle,
however, that in an appeal via certiorari only questions of law may be raised. The findings of fact of the Court of
38

Appeals – especially when not at variance with those of the trial court – may not, generally be reviewed by this
Court. The findings of fact of the lower court are conclusive on us, absent any palpable error or patent arbitrariness.
In this case, we find no tenable route but to leave the findings of fact of the lower courts untouched, and move on to
the resolution of the other issues.

Petitioners' main contention is that the trial and appellate courts had no basis to conclude that Jacobo constituted an
express trust because respondents did not present any deed, instrument or document expressly declaring that a
trust was constituted. Petitioners anchor their assertion on the Civil Code, particularly their interpretation of Articles
1440, 1441, 1443, 1444, 1445, and 1446, as they point out that in these provisions, for an express trust over an
39 40 41 42 43 44

immovable to exist, four elements must be present, namely: (1) a trustor or settlor who executes the instrument
creating the trust; (2) a trustee, who is the person expressly designated to carry out the trust; (3) the trust res,
consisting of duly identified and definite real properties; and (4) the cestui que trust, or beneficiaries whose identity
must be clear. Petitioners aver that these elements are indispensable for an express trust to exist. Petitioners then
lament that respondents did not present during trial or even attach to the records of the case, any deed, instrument
or document that Jacobo intended to create a trust. Petitioners, in their petition, insist that the intent to create a trust
must be in writing; and they claimed that they objected, from the beginning, to the introduction of any oral testimony
to prove the establishment of an express trust.

Respondents, for their part, argue that Jacobo created an express trust. Respondents cite the three applications for
registration of the lands referred to the Expedientes 241, 244 and 4449 and the three Compraventas as
documentary proofs that an express trust was created by Jacobo. According to them, this conclusion can be
gleaned clearly when Jacobo exercised acts of ownership over all the disputed lands even after the alleged
donation and deeds of sale in favor of Jose, and when Jacobo religiously gave shares of the income and produce of
the disputed lands to the respondents, a practice Jose continued until three years before his death.

Express trusts, sometimes referred to as direct trusts, are intentionally created by the direct and positive acts of the
settlor or the trustor – by some writing, deed, or will, or oral declaration. It is created not necessarily by some
45

written words, but by the direct and positive acts of the parties. No particular words are required, it being sufficient
that a trust was clearly intended. Unless required by a statutory provision, such as the Statute of Frauds, a writing is
46

not a requisite for the creation of a trust. Such a statute providing that no instruments concerning lands shall be
47

"created" or declared unless by written instruments signed by the party creating the trust, or by his attorney, is not to
be construed as precluding a creation of a trust by oral agreement, but merely as rendering such a trust
unenforceable. Contrary to the claim of petitioners, oral testimony is allowed to prove that a trust exists. It is not
48

error for the court to rely on parol evidence, - - i.e., the oral testimonies of witnesses Emeteria Ringor, Julio Monsis
and Teofilo Abalos - - which the appellate court also relied on to arrive at the conclusion that an express trust exists.
What is crucial is the intention to create a trust. While oftentimes the intention is manifested by the trustor in express
or explicit language, such intention may be manifested by inference from what the trustor has said or done, from the
nature of the transaction, or from the circumstances surrounding the creation of the purported trust. 49
However, an inference of the intention to create a trust, made from language, conduct or circumstances, must be
made with reasonable certainty. It cannot rest on vague, uncertain or indefinite declarations. An inference of
50

intention to create a trust, predicated only on circumstances, can be made only where they admit of no other
interpretation. In the present case, credible witnesses testified that (1) the lands subject of Expedientes
51

241 and 4449 were made and transferred in the name of Jose merely for convenience since Juan predeceased
Jacobo; (2) despite the Compraventas, transferring all the lands in Jose's name, Jacobo continued to perform all the
acts of ownership including possession, use and administration of the lands; (3) Jacobo did not want to partition the
lands because he was still using them; (4) when Jacobo died, Jose took over the administration of the lands and
conscientiously and unfailingly gave his siblings their share in the produce of the lands, in recognition of their share
as co-owners; and (5) Jose did not repudiate the claim of his siblings and only explained upon their expression of
the desire for partitioning, that it was not going to be an easy task.

From all these premises and the fact that Jose did not repudiate the claim of his co-heirs, it can be concluded that
as far as the lands covered by Expediente Nos. 241 and 4449 are concerned, when Jacobo transferred these lands
to Jose, in what the lower court said were simulated or falsified sales, Jacobo's intention impressed upon the titles of
Jose a trust in favor of the true party-beneficiaries, including herein respondents.

Under the doctrine of partial performance recognized in this jurisdiction, the objection to the oral character of a trust
may be overcome or removed where there has been partial performance of the terms of the trust as to raise an
equity in the promisee. A trustee may perform the provisions of the trust, and if he does, the beneficiary is protected
52

in benefits that he has received from such performance. Thus, when a verbal contract has been completed,
53

executed or partially consummated, its enforceability will not be barred by the Statute of Frauds, which applies only
to an executory agreement. Noteworthy, despite the compraventas transferring the lands in his name, Jose
54

unfailingly gave his siblings their share of the produce of the lands. Furthermore, not only did he fail to repudiate the
trust, he also assured his co-heirs that it was the inconvenience of partitioning that kept him from transferring the
shares of his siblings to them. Accordingly, with respect to the lands covered by Expediente Nos. 241 and 4449, an
express trust exists with Jose Ringor as trustee in favor of all the heirs of Jacobo Ringor. As far as prescription or
laches are concerned, they pose no hindrance or limitation to the enforcement of an express trust. 55

Finally, on the lands covered in Expediente 244, we note that as a "donacion de su abuelo," the donation impaired
the hereditary rights of succession of Jose's co-heirs. Nevertheless, these were transferred to Jose by final
judgment of the land registration court. Despite the registration in Jose's name, Jose did not take possession over
them from the date of registration to the time of Jacobo's death. Instead, while alive, Jacobo retained possession,
and continued the administration of the lands. Considering then these circumstances, Article 1449 of the New Civil
Code on implied trusts is the pertinent law. It provides that, "[t]here is also an implied trust when a donation is made
to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to
have no beneficial interest or only a part thereof." Article 1449 creates a resulting trust where the donee becomes
the trustee of the real beneficiary. Generally, resulting trusts do not prescribe except when the trustee repudiates
56

the trust. Further, the action to reconvey does not prescribe so long as the property stands in the name of the
57

trustee. To allow prescription would be tantamount to allowing a trustee to acquire title against his principal and true
58

owner. Here, Jose did not repudiate the trust, and the titles of the disputed lands are still registered in Jose's name
59

or in the name of the Heirs of Jose M. Ringor, Inc.

Petitioners contend, however, that the court a quo virtually nullified all the land titles in Jose's name when it declared
that the disputed lands belong to the intestate estate of Jacobo and Jose and his siblings were co-owners thereof.
This, petitioners aver, violates the principle of res judicata and the indefeasibility of the Torrens title.

Nothing is farther from the truth than this contention. A trustee who obtains a Torrens title over a property held in
trust for him by another cannot repudiate the trust by relying on the registration. A Torrens Certificate of Title in
60

Jose's name did not vest ownership of the land upon him. The Torrens system does not create or vest title. It only
confirms and records title already existing and vested. It does not protect a usurper from the true owner. The 61

Torrens system was not intended to foment betrayal in the performance of a trust. It does not permit one to enrich
62

himself at the expense of another. Where one does not have a rightful claim to the property, the Torrens system of
registration can confirm or record nothing. Petitioners cannot rely on the registration of the lands in Jose's name nor
63

in the name of the Heirs of Jose M. Ringor, Inc., for the wrong result they seek. For Jose could not repudiate a trust
by relying on a Torrens title he held in trust for his co-heirs. The beneficiaries are entitled to enforce the trust,
64

notwithstanding the irrevocability of the Torrens title. The intended trust must be sustained.

To recapitulate, we find no reversible error in the assailed decision of the appellate court. We are in agreement in
sustaining the findings and conclusions of the court a quo. The trial court found in favor of herein respondents' claim
that the deeds of sale that caused the registration of the TCTs in Expedientes 241 and 4449 in Jose's name were
invalid. The deeds were false, simulated and clearly without consideration. The trial court also found that Jose
owned only about three hectares of land which he farmed, and he had no other means for his alleged purchases.
He was never in business, nor gainfully employed in the government or in the private sector. Neither were the
children of Jose propertied nor employed. In fine, we sustain its findings on the invalidity of the deeds of sale for
65

being simulated and false.

As for the donations of the lands in Expediente 244, the basis of which was an alleged "donacion de su abuelo" the
trial court concluded they were invalid donations because no deed of donation was ever shown. The trial court noted
that the documents evidencing the donations were never presented for registration simply because there was never
a donation to Jose and because at the time the application was filed, Jacobo's only son, Juan, was still alive. The
donation was allegedly made merely to facilitate the registration of the lands in Jose's name. As found by the trial
66

court and sustained by the appellate court, it was merely for convenience that Jacobo registered the lands in the
name of Jose. He did not intend to relinquish his rights to the lands. His intention was clearly to keep the lands for
himself until his death, and it was to be understood that Jose was merely a trustee. We are not inclined to disturb
these findings and conclusions of the trial court, sustained by the Court of Appeals, which persuasively convince us
that the transfers of the lands in Expedientes 241 and 4449 were simulated sales, and in Expediente 244 the
transfers were invalid donations.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated November 27, 2000 of the Court of
Appeals, affirming the Decision of the Regional Trial Court, formerly the Court of First Instance of Dagupan City,
Branch 43, is hereby AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. L-26107 November 27, 1981

THE HEIRS OF PEDRO MEDINA, represented by MARGARITA MEDINA, petitioners

vs.
THE HON. COURT OF APPEALS, * RESTITUTA ZURBITO VDA. DE MEDINA and ANDRES NAVARRO,
JR., respondents.

TEEHANKEE, Acting C.J.:

The Court upholds the decision of the Court of Appeals which dismissed petitioners' complaint to recover from
private respondents a parcel of land situated in Oac, Milagros, Masbate, together with the Spanish title (Titulo Real
No. 349581) covering it. The Court of Appeals correctly found that petitioners failed to prove their claim that
respondents were holding the property on the basis of an express trust, the existence of which, according to law and
to established jurisprudence, cannot be proven by mere parol evidence and cannot rest on vague and uncertain
evidence or on loose, equivocal or indefinite declarations. Thus, assuming that there existed a constructive trust in
petitioners' favor, petitioners' action to recover the property had been lost by both extinctive and acquisitive
prescription by virtue of respondents' continuous, uninterrupted and unchallenged possession and occupancy of the
premises adversely and in the concept of owner-buyer for thirty-three years, counted from the execution in 1924 of
the deed of sale in respondents' favor to the filing of the action in 1957.
The late Francisco Medina had eight children, namely, Gregorio, Sotero, Narciso, Victorina, Simona,
Carmen, Pedro and Hospicia, all of whom are deceased. Petitioner Margarita Medina, who filed the complaint on
behalf of the heirs of Pedro Medina in the Court of First Instance of Masbate, is the daughter of Pedro Medina who 1

predeceased his father Francisco Medina. Restituta Zurbito Vda. de Medina, herein private respondent, and
defendant in the trial court, is the widow of Sotero Medina (brother of Pedro Medina); and Andres Navarro, Jr., her
herein co-respondent and co-defendant in the trial court, is her grandson.

On March 6, 1957, herein petitioners filed the complaint in the trial court seeking to recover from herein respondents
a parcel of land situated in the sitio of Oac, municipality of Milagros, province of Masbate, containing an area of
321.1156 hectares and praying that respondents be ordered to deliver to them possession and ownership thereof
with accounting, damages and costs and litigation expenses.

Among others, the complaint alleged that petitioner Margarita Medina as plaintiff inherited with her sister Ana
Medina the said parcel of land from their father Pedro Medina; that upon their father's death, she and her sister Ana
Medina being then minors were placed under the care and custody of the spouses Sotero Medina and Restituta
Zurbito, as guardians of their persons and property; that the land in dispute was placed under the management of
Sotero Medina as administrator thereof, and upon Sotero's death under the management of his widow, Restituta
Zurbito; that she later discovered that the land in question was surreptitiously declared for taxation purposes in the
name of Andres Navarro, Jr., grandson of Restituta Zurbito; that said respondents as defendants had without color
of title denied petitioners' ownership and instead had claimed ownership thereof since the year 1948 and exercised
acts of possession and ownership thereon to the exclusion of petitioners; that petitioners had demanded that
respondents vacate the premises and deliver possession and ownership thereof, but the latter failed and refused to
do so; that respondent Andres Navarro, Jr. had excavated soil from the land in question and sold the same to the
Provincial Government of Masbate without the knowledge and consent of petitioners and appropriated the proceeds
thereof to his personal benefit to the damage and prejudice of the plaintiff; and that respondent Restituta Zurbito
Vda. de Medina never rendered an accounting of the income of the property in question in spite of their repeated
demands and instead appropriated all the income therefrom to her personal use and benefit.

Respondents as defendants alleged on the other hand that petitioner Margarita and her deceased sister Ana were
but illegitimate children of Pedro Medina and for that reason did not enjoy the status of recognized natural children,
such that when Pedro died intestate, Francisco Medina, Pedro's father who was still living, succeeded to his
properties; that upon the death of Francisco, his children succeeded to his properties and the land in dispute was
adjudicated to Gregorio, Sotero, and Narciso Medina; that in a deed of extrajudicial partition the land was later
adjudicated solely to Narciso Medina; that Narciso Medina having become sole and exclusive owner of the land in
question by virtue of said partition sold the same to Restituta and her husband Sotero Medina on June 29, 1924, as
evidenced by a deed of sale; that from that day, respondents had actually possessed the land in question in the
concept of owners, publicly, openly and continuously and adversely against the whole world so that whatever right,
interest, title or participation petitioners had or might have had in the property had been lost by extinctive
prescription and by virtue of the 33 years of exclusive actual possession in the concept of owner of the spouses
Sotero and Restituta Medina who had thereby acquired title thereto by acquisitive prescription, even
granting arguendo that petitioners had some title, right or interest over the land.

After trial, judgment was rendered declaring petitioner Margarita Medina with her co-heirs as the lawful owners of
the land in question; ordering respondents to deliver unto them the "titulo real No. 349581 " and to restore to them
the actual possession thereof; and ordering respondents to pay them certain amounts representing the produce of
the land and attorneys' fees and costs of litigation.

Upon appeal, respondent Court of Appeals reversed the trial court's decision and sustaining respondents' defenses
of prescription of action and acquisitive prescription, ordered the dismissal of the complaint.

Petitioners twice moved in vain to reconsider the appellate court's adverse decision. Hence, this petition for review,
which we find to be without merit.

At the outset, it should be mentioned that the avowed status of petitioner Margarita Medina and her deceased sister
Ana Medina as "legitimate daughters" of Pedro Medina, which assertion had been vigorously objected both in the
trial and appellate courts by respondents (who challenged the trial court's admission of petitioners' amended reply
asserting their status as "legitimate children," changing and amending the statement in their original reply that they
were "acknowledged natural daughters" of their father Pedro Medina and recognized by their "deceased natural
grandparents" ), was determined positively in favor of petitioners by the Court of Appeals which ruled that there
2

was sufficient 'evidence upholding the trial court's finding on their legitimate filiation based on the testimonies of
witnesses who testified on the fact of the marriage of their parents Pedro Medina and Rosario Ramirez. Said
findings of fact may no longer be disturbed in these proceedings, and at any rate do not affect the disposition of the
case.

The decisive issue at bar, bearing in mind the legitimate filiation of petitioners, and thus the would be validity of their
claim to the land, is simply whether or not petitioners' action for recovery thereof has been barred by prescription.
The validity of respondents' defense of prescription in turn rests upon whether or not an express trust over the
property in litigation has been constituted by petitioners' father Pedro Medina (who predeceased his father
Francisco Medina) upon his brother Sotero and Sotero's wife Restituta Zurbito for the benefit of his children,
petitioner Margarita Medina and her deceased sister Ana Medina and the latter's heirs.

As provided by our Civil Code, "Trusts are either express or implied. Express trusts are created by the intention of
the trusts are of the parties. Implied trusts come into being by operation of law." (Art. 1441) "No express trusts
concerning an immovable or any interest therein may be proven by parol evidence." (Art. 1443) "An implied trust
may be proven by oral evidence." (Art. 1457) 3

Applied to the case at bar, if an express trust had been constituted upon the occupancy of the property by
respondents in favor of the petitioners, prescription of action would not lie, the basis of the rule being that the
possession of the trustee is not adverse to the beneficiary. But if there were merely a constructive or implied trust,
the action to recover may be barred by prescription of action or by acquisitive prescription by virtue of respondents'
continuous and adverse possession of the property in the concept of owner-buyer for thirty-three years.

The appellate court correctly held that the facts and evidence of record do not support petitioners' claim of the
creation of an express trust and imprescriptibility of their claim, ruling squarely that "the facts do not warrant the
conclusion that an express trust was created over the land in dispute. Although no particular words are required for
the creation of an express trust, a clear intention to create a trust must be shown (Article 1444, Civil Code of the
Philippines); and the proof of fiduciary relationship must be clear and convincing g (Quiogue vs. Arambulo, 45 O. G.
305; Espinosa vs. Tumulak, CA-G. R. No. 30075-R, June 26, 1964). Express trusts are those intentionally created
by the direct and positive act of the trustor, by some writing, deed or win, or oral declaration (54 Am. Jur. 33-34).
The creation of an express trust must be manifested with reasonable certainty and cannot be inferred from loose
and vague declarations or from ambiguous circumstances susceptible of other interpretations (54 Am. Jur. 48-49).
Nowhere in the record is there any evidence, and the plaintiffs do not even raise the pretention, that the original
owner of the property Pedro Medina, father of plaintiff Margarita Medina, appointed, designated or constituted
Sotero Medina (the husband of defendant Restituta Zurbito Medina) as the trustee of the land in dispute. Plaintiffs'
contention that there was an express trust must, therefore, fail."4

Concretely, petitioners anchor their claim of an express trust on the following circumstances: (1) respondents'
possession of the titulo real covering the land; (2) the deed of partition of the estate of the common predecessor
Francisco Medina dated February 3, 1924, adjudicating the land solely to his son Narciso Medina; (3) the deed of
sale of the land dated June 29, 1924, executed by Narciso Medina in favor of his brother Sotero Medina; and (4) the
testimony of respondent Restituta Zurbito Vda. de Medina (Sotero's wife) to the effect that her husband used to
"administer" and then later on, she herself "administered" the land.

These circumstances do not make out the creation of an express trust. Respondents' possession of the Spanish title
issued in the late Pedro Medina's name may just be the consequence of the sale of the land by Narciso (to whom it
had been adjudicated in the partition) to the spouses Sotero Medina and Restituta Zurbito on June 29, 1924 and is
by no means an evidence of an express trust created for the benefit of petitioners. Spanish titles are defeasible, and
"although evidences of ownership . ... may be lost through prescription." Neither is the deed of partition (which
5

apparently excluded Pedro Medina) entered into earlier any indication of an express creation of a trust. In fact, these
documents are adverse to petitioners' cause, and are evidences of transfer of ownership of the land from one
owner/owners to another or others and they in fact negate the creation or existence of an express trust.

Neither does the testimony of Sotero's widow, Restituta Zurbito, to the effect that her husband and then later she
herself "administered" the land support petitioners' claim of an express trust. There is no showing that the term
"administration" as used by said respondent in her testimony is by reason of an appointment as such on behalf of
another owner or beneficiary, such as to support the existence of an express trust. On the contrary, it appears clear
from the context of her testimony that her use of the term "administer" was in the concept of an owner-buyer
"administering" and managing his/her property,

Thus, petitioner cite her following testimony:

Q. In what manner did you possess this property from the time you bought it from
Narciso Medina? — A. First my husband was the one who administered the property
and then later on, I administered there. (T.s.n., Dec. 4, 1963, p. 119.)

But continuing her testimony, she clearly declared, as follows:

Q. How did you hold the property? In what manner?

A. Because I bought it, I was the one possessing it.

Q. From the date of this document which is June 1924, (Exhibit 2) has there been
anybody who disturbed you in your possession of your property?
 A. No sir, we were not disturbed there. 6

The appellate court thus likewise correctly held, absent the existence of an express trust, that "The legal
construction most favorable to (petitioners) that can be impressed upon the facts of the case is that a constructive or
implied trust was created by operation of law upon the property in question," but petitioners' cause of action had
7

prescribed upon the lapse of the ten-year period of acquisitive prescription provided by the then applicable statute
(section 41 of Act 190) for unregistered lands such as the land herein involved.
8

As found by the Court of Appeals, the land was sold to Sotero Medina on June 29, 1924 from which date Sotero and
his wife took open, public, continuous and adverse possession of the land in the concept of owner. In 1957 when
the present action was filed, thirty-three (33) years, much more than the 10-year statutory period for acquisitive
prescription, had already elapsed.

In addition, the appellate court further held that petitioners' action to recover was likewise time-barred, pointing out
that "the ten-year period under the statute of limitation within which plaintiffs could file an action for recovery of real
property commenced to run, in 1933 when plaintiff Margarita Medina was informed that the land in dispute belonged
to her father Pedro Medina, for in that year she could have brought an action for reconveyance. The period of
prescription commences to run from the day the action may be brought (Article 1150, Civil Code of the Philippines),
and in an action based on fraud, as is the basis of the present action, the period of prescription begins from the
discovery of the fraud (IV Tolentino's Civil Code of the Philippines 40, citing Anuran vs. Aquino, 38 Phil. 29 and
Solatorio vs. Solatorio, 52 Phil. 444); the reasons a party might have had for not immediately taking judicial action is
immaterial and does not stop the running of the period (Lamko vs. Dioso No. L-6923, October 31,
1955)." Respondent court had referred to such non-action as "perhaps in deference to the defendants who had
9

raised and clothed her." 10

The similar case of Cuaycong vs. Cuaycong, where the Court, after finding the non-existence of an express trust
11

applying Article 1443 of the Civil Code which bars parol evidence in proving the alleged creation of an express trust
over immovables, held that "even assuming the alleged trust to be an implied one, the right alleged by plaintiffs
would have already prescribed since starting in 1936 when the trustor died, plaintiffs had already been allegedly
refused by the aforesaid defendants in their demands over the land, and the compliance filed only in 1961 – more
than the 1 year period of prescription for the enforcement of such rights under the trust. It is settled that the right to
enforce an implied trust in one's favor prescribes in. ten (10) years. And even under the Code of Civil Procedure,
action to recover real property such as lands prescribes in ten years (Sec. 40, Act 190)," fully supports the
correctness of the decision under review.

ACCORDINGLY, the appealed decision is hereby affirmed.

Fernandez, De Castro,** Melencio-Herrera and Plana, JJ., concur.

Makasiar and Guerero, JJ., are on leave.

G.R. No. 136021 February 22, 2000

BENIGNA SECUYA, MIGUEL SECUYA, MARCELINO SECUYA, CORAZON SECUYA, RUFINA SECUYA,
BERNARDINO SECUYA, NATIVIDAD SECUYA, GLICERIA SECUYA and PURITA SECUYA, petitioners,
vs.
GERARDA M. VDA. DE SELMA, respondent.

PANGANIBAN, J.:

In action for quieting of title, the plaintiff must show not only that there is a cloud or contrary interest over the subject
real property, but that the have a valid title to it. In the present case, the action must fail, because petitioners failed
to show the requisite title.

The Case

Before us is a Petition for Review seeking to set aside the July 30, 1998 Decision of the Court of Appeals (CA) in
CA-G.R. CV No. 38580,1 which affirmed the judgment2 of the Regional Trial Court (RTC) of Cebu City. The CA ruled:

WHEREFORE, [there being] no error in the appealed decision, the same is hereby AFFIRMED in toto.3

The decretal portion of the trial court Decision reads as follows:

 WHEREFORE, in view of all the foregoing [evidence] and considerations, this court hereby finds the
preponderance of evidence to be in favor of the defendant Gerarda Selma as judgment is rendered:

1. Dismissing this Complaint for Quieting of title, Cancellation of Certificate of Title of Gerarda vda. de Selma
and damages,

2. Ordering the plaintiffs to vacate the premises in question and turn over the possession of the same to the
defendant Gerarda Selma;

3. Requiring the plaintiffs to pay defendant the sum of P20,000 as moral damages, according to Art. 2217,
attorney's fees of P15,000.00, litigation expenses of P5,000.00 pursuant to Art. 2208 No. 11 and to pay the
costs of this suit.
1âwphi1.nêt

SO ORDERED.4

Likewise challenged is the October 14, 1998 CA Resolution which denied petitioners' Motion for Reconsideration. 5

The Facts

The present Petition is rooted in an action for quieting of title filed before the RTC by Benigna, Miguel, Marcelino,
Corazon, Rufina, Bernardino, Natividad, Gliceria and Purita — all surnamed Secuya — against Gerarda M. vda. de
Selma. Petitioners asserted ownership over the disputed parcel of land, alleging the following facts:

xxx xxx xxx

8. The parcel of land subject of this case is a PORTION of Lot 5679 of the Talisay-Minglanilla Friar Lands
Estate, referred to and covered [o]n Page 279, Friar Lands Sale Certificate Register of the Bureau of Lands
(Exh. "K"). The property was originally sold, and the covering patent issued, to Maxima Caballero Vda. de
Cariño (Exhs. "K-1"; "K-2). Lot 5679 has an area of 12,750 square meters, more or less;

9. During the lifetime of Maxima Caballero, vendee and patentee of Lot 5679, she entered into that
AGREEMENT OF PARTITION dated January 5, 1938 with Paciencia Sabellona, whereby the former bound
herself and parted [with] one-third (1/3) portion of Lot 5679 in favor of the latter (Exh. "D"). Among others it
was stipulated in said agreement of partition that the said portion of one-third so ceded will be located
adjoining the municipal road (par. 5. Exh "D");

10. Paciencia Sabellona took possession and occupation of that one-third portion of Lot 5679 adjudicated to
her. Later, she sold the three thousand square meter portion thereof to Dalmacio Secuya on October 20,
1953, for a consideration of ONE THOUSAND EIGHT HUNDRED FIFTY PESOS (P1,850.00), by means of
a private document which was lost (p. 8, tsn., 8/8/89-Calzada). Such sale was admitted and confirmed by
Ramon Sabellona, only heir of Paciencia Sabellona, per that instrument denominated CONFIRMATION OF
SALE OF UNDIVIDED SHARES, dated September 28, 1976(Exh. "B");

11. Ramon Sabellona was the only [or] sole voluntary heir of Paciencia Sabellona, per that KATAPUSAN
NGA KABUT-ON UG PANUGON NI PACIENCIA SABELLONA (Last Will and Testament of Paciencia
Sabellona), dated July 9, 1954, executed and acknowledged before Notary Public Teodoro P. Villarmina
(Exh. "C"). Pursuant to such will, Ramon Sabellona inherited all the properties left by Paciencia Sabellona;

12. After the purchase [by] Dalmacio Secuya, predecessor-in interest of plaintiffs of the property in litigation
on October 20, 1953, Dalmacio, together with his brothers and sisters — he being single — took physical
possession of the land and cultivated the same. In 1967, Edilberto Superales married Rufina Secuya, niece
of Dalmacio Secuya. With the permission and tolerance of the Secuyas, Edilberto Superales constructed his
house on the lot in question in January 1974 and lived thereon continuously up to the present (p. 8., tsn
7/25/88 — Daclan). Said house is inside Lot 5679-C-12-B, along lines 18-19-20 of said lot, per Certification
dated August 10, 1985, by Geodetic Engineer Celestino R. Orozco (Exh. "F");

13. Dalmacio Secuya died on November 20, 1961. Thus his heirs — brothers, sisters, nephews and nieces
— are the plaintiffs in Civil Case No. CEB-4247 and now the petitioners;

14. In 1972, defendant-respondent Gerarda Selma bought a 1,000 square-meter portion of Lot 5679,
evidenced by Exhibit "P". Then on February 19, 1975, she bought the bigger bulk of Lot 5679, consisting of
9,302 square meters, evidenced by that deed of absolute sale, marked as Exhibit "5". The land in question,
a 3,000-square meter portion of Lot 5679, is embraced and included within the boundary of the later
acquisition by respondent Selma;
 15. Defendant-respondent Gerarda Selma lodged a complaint, and had the plaintiffs-petitioners summoned,
before the Barangay Captain of the place, and in the confrontation and conciliation proceedings at the
Lupong Tagapayapa, defendant-respondent Selma was asserting ownership over the land inherited by
plaintiffs-petitioners from Dalmacio Secuya of which they had long been in possession . . . in concept of
owner. Such claim of defendant-respondent Selma is a cloud on the title of plaintiffs-petitioners, hence, their
complaint (Annex "C").6

Respondent Selma's version of the facts, on the other hand, was summarized by the appellate court as follows:

She is the registered owner of Lot 5679-C-120 consisting of 9,302 square meters as evidenced by TCT No.
T-35678 (Exhibit "6", Record, p. 324), having bought the same sometime in February 1975 from Cesaria
Caballero as evidenced by a notarized Deed of Sale (Exhibit "5", Record, p. 323) and ha[ve] been in
possession of the same since then. Cesaria Caballero was the widow of Silvestre Aro, registered owner of
the mother lot, Lot. No. 5679 with an area of 12,750 square meters of the Talisay-Minglanilla Friar Lands
Estate, as shown by Transfer Certificate of Title No. 4752 (Exhibit "10", Record, p. 340). Upon Silvestre
Aro's demise, his heirs executed an "Extrajudicial Partition and Deed of Absolute Sale" (Exhibit "11",
Record, p. 341) wherein one-half plus one-fifth of Lot No. 5679 was adjudicated to the widow, Cesaria
Caballero, from whom defendant-appellee derives her title.7

The CA Ruling

In affirming the trial court's ruling, the appellate court debunked petitioners' claim of ownership of the land and
upheld Respondent Selma's title thereto. It held that respondent's title can be traced to a valid TCT. On the other
hand, it ruled that petitioners anchor their claim on an "Agreement of Partition" which is void for being violative of the
Public Land Act. The CA noted that the said law prohibited the alienation or encumbrance of land acquired under a
free patent or homestead patent, for a period of five years from the issuance of the said patent.

Hence, this Petition.8

The Issues

In their Memorandum, petitioners urge the Court to resolve the following questions:

1. Whether or not there was a valid transfer or conveyance of one-third (1/3) portion of Lot 5679 by Maxima
Caballero in favor of Paciencia Sabellona, by virtue of [the] Agreement of Partition dated January 5, 1938[;]
and

2. Whether or not the trial court, as well as the court, committed grave abuse of discretion amounting to lack
of jurisdiction in not making a finding that respondent Gerarda M. vda. de Selma [was] a buyer in bad faith
with respect to the land, which is a portion of Lot 5679.9

For a clearer understanding of the above matters, we will divide the issues into three: first, the implications of the
Agreement of Partition; second, the validity of the Deed of Confirmation of Sale executed in favor of the petitioners;
and third, the validity of private respondent's title.

The Court's Ruling

The Petition fails to show any reversible error in the assailed Decision.

Preliminary Matter:
The Action for Quieting of Title

In an action to quiet title, the plaintiffs or complainants must demonstrate a legal or an equitable title to, or an
interest in, the subject real property. 10 Likewise, they must show that the deed, claim, encumbrance or proceeding
that purportedly casts a cloud on their title is in fact invalid or inoperative despite its prima facie appearance of
validity or legal efficacy.11 This point is clear from Article 476 of the Civil Code, which reads:

Whenever there is cloud on title to real property or any interest therein, by reason of any instrument, record,
claim, encumbrance or proceeding which is apparently valid or effective but is in truth and in fact invalid,
ineffective, voidable or unenforceable, and may be prejudicial to said title, an action may be brought to
remove such cloud or to quiet title.

An action may also be brought to prevent a cloud from being cast upon title to real property or any interest
therein.
In the case at bar, petitioners allege that TCT No. 5679-C-120, issued in the name of Private Respondent Selma, is
a cloud on their title as owners and possessors of the subject property, which is a 3,000 —square-meter portion of
Lot No. 5679-C-120 covered by the TCT. But the underlying question is, do petitioners have the requisite title that
would enable them to avail themselves of the remedy of quieting of title?

Petitioners anchor their claim of ownership on two documents: the Agreement of Partition executed by Maxima
Caballero and Paciencia Sabellona and the Deed of Confirmation of Sale executed by Ramon Sabellona. We will
now examine these two documents.

First Issue:
The Real Nature of the "Agreement of Partition"

The duly notarized Agreement of Partition dated January 5, 1938; is worded as follows:

AGREEMENT OF PARTITION

I, MAXIMA CABALLERO, Filipina, of legal age, married to Rafael Cariño, now residing and with postal
address in the Municipality of Dumaguete, Oriental Negros, depose the following and say:

1. That I am the applicant of vacant lot No. 5679 of the Talisay-Minglanilla Estate and the said application
has already been indorsed by the District Land Officer, Talisay, Cebu, for private sale in my favor;

2. That the said Lot 5679 was formerly registered in the name of Felix Abad y Caballero and the sale
certificate of which has already been cancelled by the Hon. Secretary of Agriculture and Commerce;

3. That for and in representation of my brother, Luis Caballero, who is now the actual occupant of said lot I
deem it wise to have the said lot paid by me, as Luis Caballero has no means o[r] any way to pay the
government;

4. That as soon as the application is approved by the Director of Lands, Manila, in my favor, I hereby bind
myself to transfer the one-third (l/3) portion of the above mentioned lot in favor of my aunt, Paciencia
Sabellana y Caballero, of legal age, single, residing and with postal address in Tungkop, Minglanilla, Cebu.
Said portion of one-third (1/3) will be subdivided after the approval of said application and the same will be
paid by her to the government [for] the corresponding portion.

5. That the said portion of one-third (1/3) will be located adjoining the municipal road;

6. I, Paciencia Sabellana y Caballero, hereby accept and take the portion herein adjudicated to me by Mrs.
Maxima Caballero of Lot No. 5679 Talisay-Minglanilla Estate and will pay the corresponding portion to the
government after the subdivision of the same;

IN WITNESS WHEREOF, we have hereunto set our hands this 5th day of January, 1988, at Talisay,
Cebu."12

The Agreement: An Express Trust, Not a Partition

Notwithstanding its purported nomenclature, this Agreement is not one of partition, because there was no property
to partition and the parties were not co-owners. Rather, it is in the nature of a trust agreement.

Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in another. It is a fiduciary
relationship that obliges the trustee to deal with the property for the benefit of the beneficiary. 13 Trust relations
between parties may either be express or implied. An express trust is created by the intention of the trustor or of the
parties. An implied trust comes into being by operation of law.14

The present Agreement of Partition involves an express trust. Under Article 1444 of the Civil Code, "[n]o particular
words are required for the creation of an express trust, it being sufficient that a trust is clearly intended." That
Maxima Caballero bound herself to give one third of Lot No. 5629 to Paciencia Sabellona upon the approval of the
former's application is clear from the terms of the Agreement. Likewise, it is evident that Paciencia acquiesced to the
covenant and is thus bound to fulfill her obligation therein.

As a result of the Agreement, Maxima Caballero held the portion specified therein as belonging to Paciencia
Sabellona when the application was eventually approved and a sale certificate was issued in her name. 15 Thus, she
should have transferred the same to the latter, but she never did so during her lifetime. Instead, her heirs sold the
entire Lot No. 5679 to Silvestre Aro in 1955.
From 1954 when the sale certificate was issued until 1985 when petitioners filed their Complaint, Paciencia and her
successors-in-interest did not do anything to enforce their proprietary rights over the disputed property or to
consolidate their ownership over the same. In fact, they did not even register the said Agreement with the Registry
of Property or pay the requisite land taxes. While petitioners had been doing nothing, the disputed property, as part
of Lot No. 5679, had been the subject of several sales transactions 16 and covered by several transfer certificates of
title.

The Repudiation of the Express Trust

While no time limit is imposed for the enforcement of rights under express trusts, 17 prescription may, however, bar a
beneficiary's action for recovery, if a repudiation of the trust is proven by clear and convincing evidence and made
known to the beneficiary.18

There was a repudiation of the express trust when the heirs of Maxima Caballero failed to deliver or transfer the
property to Paciencia Sabellona, and instead sold the same to a third person not privy to the Agreement. In the
memorandum of incumbrances of TCT No. 3087 19 issued in the name of Maxima, there was no notation of the
Agreement between her and Paciencia. Equally important, the Agreement was not registered; thus, it could not bind
third persons. Neither was there any allegation that Silvestre Aro, who purchased the property from Maxima's heirs,
knew of it. Consequently, the subsequent sales transactions involving the land in dispute and the titles covering it
must be upheld, in the absence of proof that the said transactions were fraudulent and irregular.

Second Issue:
The Purported Sale to Dalmacio Secuya

Even granting that the express trust subsists, petitioners have not proven that they are the rightful successors-in-
interest of Paciencia Sabellona.

The Absence of the Purported Deed of Sale

Petitioners insist that Paciencia sold the disputed property to Dalmacio Secuya on October 20, 1953, and that the
sale was embodied in a private document. However, such document, which would have been the best evidence of
the transaction, was never presented in court, allegedly because it had been lost. While a sale of a piece of land
appearing in a private deed is binding between the parties, it cannot be considered binding on third persons, if it is
not embodied in a public instrument and recorded in the Registry of Property. 20

Moreover, while petitioners could not present the purported deed evidencing the transaction between Paciencia
Sabellona and Dalmacio Secuya, petitioners' immediate predecessor-in-interest, private respondent in contrast has
the necessary documents to support her claim to the disputed property.

The Questionable Value of the Deed

Executed by Ramon Sabellona

To prove the alleged sale of the disputed property to Dalmacio, petitioners instead presented the testimony of
Miguel Secuya, one of the petitioners; and a Deed 21 confirming the sale executed by Ramon Sabellona, Paciencia's
alleged heir. The testimony of Miguel was a bare assertion that the sale had indeed taken place and that the
document evidencing it had been destroyed. While the Deed executed by Ramon ratified the transaction, its
probative value is doubtful. His status as heir of Paciencia was not affirmatively established. Moreover, he was not
presented in court and was thus not quizzed on his knowledge — or lack thereof — of the 1953 transaction.

Petitioners' Failure to Exercise Owners'

Rights to the Property

Petitioners insist that they had been occupying the disputed property for forty-seven years before they filed their
Complaint for quieting of title. However, there is no proof that they had exercised their rights and duties as owners of
the same. They argue that they had been gathering the fruits of such property; yet, it would seem that they had
been remiss in their duty to pay the land taxes. If petitioners really believed that they owned the property, they have
should have been more vigilant in protecting their rights thereto. As noted earlier, they did nothing to enforce
whatever proprietary rights they had over the disputed parcel of land.

Third Issue:
The Validity of Private Respondent's Title
Petitioners debunk Private Respondent Selma's title to the disputed property, alleging that she was aware of their
possession of the disputed properties. Thus, they insist that she could not be regarded as a purchaser in good faith
who is entitled to the protection of the Torrens system.

Indeed, a party who has actual knowledge of facts and circumstances that would move a reasonably cautious man
to make an inquiry will not be protected by the Torrens system. In Sandoval v. Court of Appeals,22 we held:

It is settled doctrine that one who deals with property registered under the Torrens system need not go
beyond the same, but only has to rely on the title. He is charged with notice only of such burdens and claims
as are annotated on the title.

The aforesaid principle admits of an unchallenged exception: that a person dealing with registered land has
a right to rely on the Torrens certificate of title and to dispense without the need of inquiring further except
when the party has actual knowledge of facts and circumstances that would impel a reasonably cautious
man to make such inquiry, or when the purchaser has knowledge of a defect or the lack of title in his vendor
or of sufficient facts to induce a reasonably prudent man to inquire into the status of title of the property in
litigation. The presence of anything which excites or arouses suspicion should then prompt the vendee to
look beyond the certificate and investigate the title of the vendor appearing on the face of the certificate. One
who falls within the exception can neither be denominated an innocent purchaser for value purchaser in
good faith; and hence does not merit the protection of the law.

Granting arguendo that private respondent knew that petitioners, through Superales and his family, were actually
occupying the disputed lot, we must stress that the vendor, Cesaria Caballero, assured her that petitioners were just
tenants on the said lot. Private respondent cannot be faulted for believing this representation, considering that
petitioners' claim was not noted in the certificate of the title covering Lot No. 5679.

Moreover, the lot, including the disputed portion, had been the subject of several sales transactions. The title thereto
had been transferred several times, without any protestation or complaint from the petitioners. In any case, private
respondent's title is amply supported by clear evidence, while petitioners' claim is barren of proof.

Clearly, petitioners do not have the requisite title to pursue an action for quieting of title. 1âwphi1.nêt

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. 144148. March 18, 2005

SPS. FELIZA DUYAN GOMEZ and EUGENIO GOMEZ, Petitioners,

vs.
PURISIMA DUYAN, ROLANDO DUYAN, EMERITA DUYAN, DIGNA DUYAN, EDUARDO DUYAN, LUCRECIA
DUYAN, ROBERTO DUYAN, CRESENCIA DUYAN, RODRIGO DUYAN, REULGINA DUYAN, DOMINICIA
DUYAN, AVECENCIO DUYAN, MARIA SALOME DUYAN and DIVINA DUYAN, Respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

Before this Court is a petition for review on certiorari assailing the Decision1 of the Court of Appeals in CA-G.R. CV
No. 49163 ordering the reconveyance by the petitioners to the respondents of the property covered by Transfer
Certificate of Title (TCT) No. 281115 and declaring said title cancelled, thereby reversing the Decision2 of the
Regional Trial Court (RTC) of Quezon City, Branch 80 which dismissed the complaint. The dispositive portion of the
challenged Decision reads as follows:
WHEREFORE, premises considered, the assailed decision of the Regional Trial Court of Quezon City, Branch 80 in
Civil Case No. Q-91-8821 is hereby REVERSED and SET ASIDE. ACCORDINGLY, defendants-appellees are
hereby ordered to RECONVEY in favor of plaintiffs-appellants the property covered by TCT No. 281115, which title
is hereby declared CANCELLED. With costs.3

The facts as culled from the records are as follows:

The parties in this case are relatives residing at 96 General Avenue, Project 8, Quezon City which consists of four
houses situated in an eight hundred-square meter (800 sq.m.) lot, covered by TCT No. 41717 issued by the
Register of Deeds of Quezon City in the name of Eulogio Duyan (now deceased) married to Purisima Duyan, one of
the respondents in this case. The property in dispute which constitutes one-half of the property previously covered
by TCT No. 41717 is now covered by TCT No. 281115 issued in the name of petitioner spouses. 4

Eulogio Duyan and Feliza Duyan are siblings. In his desire to help his sister, Eulogio allowed her to construct a
house on the disputed lot sometime in 1968. 5 Petitioners acknowledged the fact that the disputed property was
owned by Eulogio and that they were staying in the disputed property solely due to his benevolence. Accordingly, an
instrument entitled Pagpapahayag was executed by the siblings on 5 May 1974. The instrument provides that in the
event that the property will be registered in Feliza’s name, she will continue to acknowledge Eulogio as the owner
and will never assert ownership over the same, except in accordance with her brother’s wishes. 6 The pertinent
portions of the instrument read:

Na napagkasunduan naming magcapatid na bouin ang documentong ito bilang katibayan ang lahat;

....

4. Na kaming magkapatid ay magtutulongan at magdadamayan maging sa hirap at ginhawa alang-alang sa

ikabubuti ng aming mga mahal sa buhay;

5. Na ito ay mailagay sa pangalan man ng aming Ama o pangalan ko ay ito’y hindi ko pag-aari kundi ari ito ng aking
kuya, Eulogio V. Duyan, at-

6. Na ito ay aming igagalang maging saan man makarating ngayon at kailan man. 7

On 11 May 1974, a deed of sale covering a residential house situated on the disputed lot was executed by Eulogio
and Regina Velasquez, a common-law wife of the former, in favor of petitioners for the sum of One Thousand Pesos
(₱1,000.00). Thereafter, petitioners allegedly asserted ownership not only over the said house but over the whole lot
covered by TCT No. 41717.8 This prompted Eulogio’s legal wife, Purisima, to file a complaint for recovery of
possession and damages against petitioners with the then Court of First Instance of Rizal, Branch IV-B, Quezon
City.9

Deciding the case in favor of Purisima, the trial court ordered petitioners to surrender possession of the property to
her. On appeal, the Court of Appeals dismissed the case after the parties entered into an amicable settlement. 10

On 25 January 1978, Eulogio and Purisima this time, as vendors, executed a Deed of Absolute Sale in favor of
petitioners with respect to the disputed lot for the sum of Twenty Thousand Pesos (₱20,000.00). 11

Purisima claims that the deed of sale was executed merely to give color of legality to petitioners’ stay in the disputed
property so that she and her children will not drive them away after they (Purisima and her children) manifested their
opposition to Eulogio’s decision to let them stay therein. 12 Petitioners claim otherwise, contending that the sale was
freely agreed upon by the parties thereto; hence, it was authentic and validly executed. 13

Subsequent to the execution of the deed of sale or on 10 February 1978, 14 another Pagpapahayag was executed
between Eulogio and Feliza, where the latter acknowledged that the lot subject of the deed of sale 15 will eventually
be transferred to respondents herein who are her nephews and nieces and the children of Eulogio. 16 The pertinent
portions of the second Pagpapahayag read:

Na pagkatapos ng lahat ng hidwaan sa Husgado ay aming isasagawa agad and conwaring pagbibili muli ng
nasabing xxx aming binili sa aking capatid na si Gg. Eulogio V. Duyan. At pag mangyari ang nasabing hatian ng
lote, ay aming ilalagay agad sa pangalan ng aming mga pamangkin na sina Salome V. Duyan, Divina V. Duyan,
Cresencia V. Duyan, Reulgina V. Duyan, Domincia, Rodrigo at Avencio C. Duyan. 17

Notwithstanding the second Pagpapahayag, petitioners caused the registration of the deed of sale dated 25 January
1978 with the Register of Deeds of Quezon City. As a consequence, TCT No. 281115 covering the disputed lot was
issued on 22 September 1981 in the name of petitioners.18
On 20 May 1991, respondents filed a suit for reconveyance of real property and cancellation of TCT No. 281115
with damages against petitioners before Branch 80 of the Quezon City RTC.

On 5 September 1994, the trial court rendered a decision, dismissing the complaint and ordering respondents to pay
jointly and severally defendants therein, now petitioners, the amount of Ten Thousand Pesos (₱10,000,00) as
reasonable attorney’s fees and to pay the costs of the suit.19

In dismissing the case, the trial court held that:

…[the] TCT No. 281115 (Exh. 4) was validly issued pursuant to the Absolute Deed of Sale dated January 25, 1978
(Exh. 3) duly registered at the Office of the Registry of Deeds of Quezon City. The same became indefeasible and
conclusive upon the expiration of one year period from its entry as it was not attacked directly by anyone due to
fraud.20

On appeal, the Court of Appeals reversed the decision and held that an implied trust arose in favor of respondents
over the disputed property by virtue of the Pagpapahayag dated 10 February 1978. It held that the action for
reconveyance of property was properly filed by respondents against petitioners.21

Petitioners’ motion for reconsideration22 having been denied by the appellate court in a Resolution23 promulgated on
28 June 2000, the case was elevated to this Court by way of a petition for review.

Petitioners in their petition for review 24 contend that the Court of Appeals "acted with grave abuse of
discretion"25 when it reversed the RTC decision and that the error, if not corrected, will cause them great
injustice.26 They claim that the Court of Appeals erred when it ordered the reconveyance by petitioners to
respondents of the property covered by TCT No. 281115 and declared the cancellation of said title 27.

The contention is without merit. The Court of Appeals did not err in ordering the reconveyance of the property in
dispute.

As found by the appellate court, the trial court failed to consider the law on trusts despite the existence of
uncontroverted evidence establishing the creation of a trust as it anchored its decision solely on the indefeasibility of
title aspect. Although it recognized the instruments creating the trust, the trial court nevertheless held that:

In the document entitled "Pagpapahayag" (Exh. B), although the defendant Felisa Gomez stipulated therein that she
will not claim ownership over the lot covered by TCT No. 41717, even in the event that the same will be transferred
in her name, the same does not bar her totally from becoming as owner because of the exception provided therein
that she can still own the lot or part thereof in accordance with the wishes of the deceased which was clearly
manifested when the Absolute Deed of Sale of the half of the lot covered by TCT No. 41717 was executed between
the deceased and his spouse Purisima Duyan (plaintiff) and the defendants. 28

While citing the provisions of the Pagpapahayag dated 5 May 1974 and concluding therefrom that Feliza was not
actually prohibited from claiming ownership over the property, the trial court completely disregarded and missed the
import of the other Pagpapahayag dated 10 February 1978.

In express terms, Feliza undertook in the subsequent Pagpapahayag to convey the property subject of the fictitious
deed of sale to her own nephews and nieces who are the children of her brother Eulogio. To reiterate, Feliza
stated "…At pag mangyari ang nasabing hatian ng lote, ay aming ilalagay agad sa pangalan ng aming mga
pamangkin na sina Salome V. Duyan, Divina V. Duyan, Cresencia V. Duyan, Reulgina V. Duyan, Domincia, Rodrigo
at Avencio C. Duyan".29 It must be noted that this Pagpapahayag was entered into by Eulogio and Feliza after the
supposed sale of the property on 25 January 1978. Based on the clear provisions of this document, the intent of the
siblings to create a trust was manifest with Eulogio as the trustor, Feliza as the trustee and Eulogio’s children as the
beneficiaries or the cestui qui trust30 of the res31 which was the disputed property. This is based on the provision of
the law on trusts which states that:

Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards
property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has
been created is referred to as the beneficiary.32

However, the trust created was not merely implied as held by the Court of Appeals but belongs to the express kind.
Based on the provisions of the Civil Code and jurisprudence, "Express trusts are those which the direct and positive
acts of the parties create, by some writing, deed or will, or words evincing an intention to create a trust." 33

In this case, the provisions of the Pagpapahayag dated 10 February 1978 left no room for doubt. It was clearly
intended therein by Eulogio and Feliza that the property subject of the sale will subsequently be placed by the latter
in the name of respondents, thus creating a trust relationship over the property in dispute.
Even if the word "trust" was not expressly used by the signatories to the 10 February 1978 Pagpapahayag and the
document did not expressly state that a trust was being established by reason thereof, the establishment of an
express trust cannot be discounted. Under the Civil Code, "No particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly intended." 34 In a decision penned by Justice Paras, this Court
held that "…under the law on Trusts, it is not necessary that the document expressly state and provide for the
express trust, for it may even be created orally, no particular words are required for its creation (Art. 1444, Civil
Code)."35 The Pagpapahayag dated 10 February 1978 having been freely entered into by Eulogio and Feliza, it had
the force of law between them. It was therefore incumbent upon Feliza as trustee to comply with the provisions of
the instrument and have the subject property registered in the names of her nephews and nieces.

Petitioners’ subsequent act of registering the disputed property in their own names and resisting the action for
reconveyance later filed by respondents was clearly a betrayal of the provisions of the express trust created by the
10 February 1978 Pagpapahayag. By these actions, petitioners not only failed to comply with the provisions of
the Pagpapahayag, but actually circumvented them.

It is worthy of note that petitioners never denied the existence, authenticity and due execution of the 10 February
1978 Pagpapahayag as they merely objected to the purpose of its presentation. 36 As held by the appellate court:

Neither refutation nor denial of the existence of such document exist in the records of the case at bar. Particularly,
Feliza did not even raise any objection as to the due execution and authenticity of the "Pagpapahayag" dated 10
February 1978. In relation thereto, it is worthy to note that an objection as to the purpose of its presentation is not
tantamount to an objection as to the authenticity and due execution of the document. In view of the absence of such
objection, the GOMEZES as signatories thereto, are deemed bound by the stipulations therein. 37

"A trust … is sacred and inviolable. The courts have therefore shielded fiduciary relations against every manner of
chicanery or detestable design cloaked by legal technicalities." 38 Considering this pronouncement of the Supreme
Court and the betrayal by petitioners of the provisions of the Pagpapahayag creating the trust in this case, the Court
of Appeals rightly ordered the reconveyance of the disputed property to respondents and the cancellation of TCT
No. 21885.

Moreover, petitioners admitted in the Pagpapahayag itself that the 25 January 1978 sale was fictitious. This is
evident by the use of the phrase "conwaring pagbibili"39 which means "simulated or fictitious sale." Thus, petitioners
are estopped from claiming or asserting ownership over the subject property based on the 25 January 1978 deed of
sale. Feliza’s admission in the said Pagpapahayag of the falsity of the sale is deemed conclusive upon her and her
co-petitioner Eugenio Gomez. Under the Civil Code, "Through estoppel an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as against the person relying
thereon."40 That admission cannot now be denied by Feliza as against Eulogio and his successors-in-interest, the
latter having relied upon her representation.

Petitioners argue that the action for reconveyance filed by respondents against them is not proper, the latter not
being the owners of the property in question. 41 Invoking the 25 January 1978 deed of sale despite Feliza’s admission
adverted to above that such sale was fictitious, petitioners assert that they are the owners of the subject property.
They claim that the best proof of ownership of a piece of land is the certificate of title, and the TCT being in their
name, they are the rightful owners thereof. 42 They further argue that based on the case of Dela Peña vs. Court of
Appeals43 among others, reconveyance is a remedy granted only to the owner of the property alleged to be
wrongfully titled in another’s name.44

The argument begs the question. Reconveyance is precisely the proper action for respondents to take against
petitioners since the former are claiming that they are the rightful owners of the property in question, not petitioners.
By filing an action for reconveyance, a party seeks to show that the person who secured the registration of the
questioned property is not the real owner thereof.45

Petitioners cannot rely on the registration of the disputed property and the corresponding issuance of a certificate of
title in their name as vesting ownership on them simply because an express trust over the property was created in
favor of respondents. It has been held that a trustee who obtains a Torrens title over the property held in trust by
him for another cannot repudiate the trust by relying on the registration. 46

The law safeguards the rightful party’s interest in titled land from fraud and improper technicalities by allowing such
party to bring an action for reconveyance of whatever he has been deprived of as long as the property has not been
transferred or conveyed to an innocent purchaser for value. 47 The action while respecting the registration decree as
incontrovertible, seeks to transfer or reconvey the land from the registered owner to the rightful owner. 48 As this
Court held in the case of Escobar vs. Locsin, "The Torrens system was never calculated to foment betrayal in the
performance of a trust."49

In a further effort to bolster the claim that they own the property in dispute, petitioners attempt to introduce new
evidence annexed to their petition in the form of a purported declaration made by Eulogio dated 19 February
1979.50 The declaration purports to state that the previous instruments entered into by him and the petitioners are
void because he had already sold the lot to them. 51 This declaration, although annexed to the Petition for Review
appears nowhere in the records of the trial court and the appellate court. This is a piece of factual evidence which
should have been presented before the trial court to be considered and to allow respondents the opportunity to
rebut it or to present evidence to the contrary. The Rules of Court specifically provides that "The court shall consider
no evidence which has not been formally offered…" 52 The alleged declaration not having been formally offered in
evidence is deemed to be a mere scrap of paper which has no evidentiary value.

Lastly, petitioners contend that the conflict between the decision of the appellate court and that of the trial court
provides this Court with a ground to review the decisions of both courts. 53 That may be true but the circumstance
does not suffice to warrant the reversal of the Court of Appeals’ Decision. Quite the contrary, the undisputed facts
and the applicable law ineluctably support the conclusion that the appellate court did not commit any reversible
error.

WHEREFORE, the petition is DENIED due course and the Decision of the Court of Appeals is AFFIRMED. Costs
against petitioners.

SO ORDERED.

G.R. No. L-25563 July 28, 1972

MARIANO TAMAYO, petitioner,

vs.
AURELIO CALLEJO and the HON. COURT OF APPEALS, respondents.

Marcelino T. Macaraeg for petitioner.

Hermogenes S. Decano for private respondent.

CONCEPCION, C.J.:p
This action, initiated in the Court of First Instance of Pangasinan, was brought by Aurelio Callejo, originally against
Mariano Tamayo only, and, later, against his brother Marcos Tamayo, also, for the reconveyance of the northern
portion of a parcel of land formerly covered by Original Certificate of Title No. 2612, in the names of said brothers. In
due course, said court dismissed the complaint, with costs against the plaintiff. The latter appealed to the Court of
Appeals which, in turn, rendered a decision the dispositive part of which reads:

IN VIEW WHEREOF, judgment must have to be as it is hereby, reversed, and the land in question
claimed in par. 2 of the original and amended complaint and graphically shown in Exh. Q in the
name of appellant, is declared reconveyed unto him, but the expenses of registration of this decision
once it should have become final, shall be at his, appellant's cost; no other pronouncement as to
costs whether here, whether in Lower Court; all other claims between appellant and appellee within
their respective pleadings are hereby dismissed.

It appears that the spouses Vicente Tamayo and Cirila Velasco-Tamayo owned a parcel of land in the barrio of
Oalsic or Gualsic, between the municipalities of Alcala and Malasiqui, Pangasinan. Prior to February 1, 1912, said
spouses sold part of the northern portion of said land, with an area of 22,125-1/3 square meters, to Fernando
Domantay, who took possession thereof. Sometime after this sale, but before said date, Vicente Tamayo died. His
widow having waived her rights to the remaining portion of their original property in favor of her children Mariano
Tamayo and Marcos Tamayo, these brothers were, on February 1, 1912, declared, in Civil Case No. 136 of the
Court of First Instance of Pangasinan, sole heirs of the deceased. On September 29, 1913, Mariano Tamayo and
Marcos Tamayo applied, in Cadastral Case No. 61, G.L.R.O. Record No. 10548 of the same court, for the
registration in their names, of a tract of land of about 383,509 square meters, alleging that they had thus inherited
the same from their deceased father.

After appropriate proceedings, judgment was rendered, directing the registration, in the name of Mariano Tamayo;
and Marcos Tamayo, of 205,421 square meters only of the land applied for, said applicants having acknowledged
that the remaining portion thereof belonged to the estate of Gregorio Flor Mata, deceased. Upon the issuance of the
corresponding decree thereafter, said OCT No. 2612 was, on November 15, 1915, issued in favor of the brothers
Mariano Tamayo and Marcos Tamayo. Not long after, or on August 22, 1918, Fernando Domantay sold his above
mentioned land of 22,125-1/3 square meters to Aurelio Callejo, who took possession thereof since then.
Subsequently, or on May 23, 1930, Marcos Tamayo sold his undivided share in the property covered by OCT No.
2612 to his brother Mariano Tamayo, who, accordingly, obtained, on May 26, 1930, Transfer Certificate of Title No.
5486 in his name, in lieu of OCT No. 2612. Then, on February 24, 1940, Mariano Tamayo sold 70,000 square
meters, more or less, on the western portion of said property, to Proceso Estacio, upon whose request surveyor
Fidel Diaz went, sometime in June 1952, to the land covered by said TCT No. 5486, for the purpose of preparing a
subdivision plan and segregating the seven (7) hectares thus conveyed by Mariano Tamayo, but Diaz did not
accomplish his purpose, for he was not allowed by Callejo to enter the portion held by the latter. What is more,
Callejo asked Mariano Tamayo to cause to be excluded from TCT No. 5486 the land held by the former, but the
latter refused to do so. Hence, on June 16, 1952, Callejo registered his adverse claim over said land, which claim
was annotated in TCT No. 5486.

Then, on June 25, 1952, Callejo filed, with the Court of First Instance of Pangasinan, his present complaint, for
reconveyance and damages, against Mariano Tamayo. The complaint was later amended to include Marcos
Tamayo as one of the defendants, he having, meanwhile, reacquired his share in the land covered before by OCT
No. 2612, and then TCT No. 5486. Having failed to answer the amended complaint, defendant Marcos Tamayo was
declared in default, whereas defendant Mariano Tamayo filed his answer with counterclaim. His main defense was
that the land claimed by Callejo is outside the perimeter of the area covered by the aforementioned certificates of
title. In his amended answer, Mariano Tamayo pleaded, also, the statute of limitations. After due trial, said court
rendered a decision dismissing the complaint, upon the ground that the land purchased by Fernando Domantay
from the parent of Mariano and Marcos Tamayo is not included in said titles. On appeal taken by plaintiff Callejo,
this decision was reversed by the Court of Appeals, which found, as a fact, that the land claimed by him is part of
the land covered by the aforementioned certificates of title, and overruled the plea of prescription set up by Mariano
Tamayo, upon the theory that the title to said portion of land now claimed by Callejo, and, before, by Fernando
Domantay, is held in trust by the Tamayos and that the action to enforce said trust does not prescribe. The case is
now before Us on petition for review filed by Mariano Tamayo. The petition was, at first denied by minute resolution,
which was later reconsidered and the petition given due course.

In his brief before this Court, Tamayo maintains that the Court of Appeals has erred: (1) "in not holding that the
respondent Aurelio Callejo's cause of action, if any, had already prescribed"; (2) "in holding that the petitioner's
failure to appeal from the decision that did not grant him affirmative relief on the matter of possession,
constituted res adjudicata thereon"; (3) "in disregarding the judicial admission made by the respondent Callejo and
his counsel"; (4) "in making conclusions not supported by the facts on record"; and (5) "in not affirming the decision
rendered by the trial court."

Under his first assignment of error, Tamayo argues that if the erroneous inclusion in his certificate of title of the
parcel of land formerly sold by his parents to Fernando Domantay created, by operation of law, an implied trust, the
corresponding action for reconveyance of said parcel prescribed ten (10) years from the accrual of the cause of
action, on November 15, 1915, when OCT No. 2612 was issued, or long before the institution of this case on June
25, 1952.

It should be noted, however, that although the trust created by the application for registration filed by Mariano and
Marcos Tamayo, on or about September 29, 1913, and the inclusion in OCT No. 2612, issued in their names, on
November 15, 1915, of the tract of land previously sold by their parents to Fernando Domantay — and later
conveyed by him to Aurelio Callejo may have had a constructive or implied nature, its status was
substantially affected on June 28, 1918, by the following facts, namely: On the date last mentioned, Fernando
Domantay and petitioner Mariano Tamayo — the latter acting in his own behalf and on that of his brother Marcos
Tamayo — executed the public instrument Exhibit I whereby Mariano Tamayo explicitly acknowledged that his
deceased parents, Vicente Tamayo and Cirila Velasco, had sold to Fernando Domantay, for the sum of P200, the
parcel of land of about 22,125-1/3 square meters, then held by the latter, and stipulating, inter alia, that Fernando
Domantay is the absolute owner of said land, free from any lien or encumbrance thereon, and that, in view of the
sale thus made by his parents, he (Mariano Tamayo) "quedo responsible al susodicho Don Fernando Domantay,
sus herederos y causa habientes por la propiedad, cuyo titulo me comprometo a defender contra las reclamaciones
... de quienes las presentare." 1

This express recognition by Mariano Tamayo — on his behalf and that of his brother Marcos Tamayo — of the
previous sale, made by their parents, to Fernando Domantay had the effect of imparting to the aforementioned trust
the — nature of an express trust — it having been created by the will of the parties, "no particular words" being
"required for the creation of an express trust, it being sufficient that a trust is clearly intended" — which express
2

trust is a "continuing and subsisting" trust, not subject to the statute of limitations, at least, until repudiated, in which
event the period of prescription begins to run only from the time of the repudiation. The latter did not take place, in
3

the case at bar, until early in June, 1952, when Mariano Tamayo rejected Aurelio Callejo's demand that the now
disputed portion be excluded from TCT No. 5486 in the former's name. But, then, the case at bar was filed weeks
later, or on June 25, 1952, when the period of prescription had barely begun to run.

It is thus apparent that the Court of Appeals did not err in overruling the plea of prescription.

Under his second assignment of error, petitioner Tamayo maintains that "the Court of Appeals erred in holding that
the petitioner's failure to appeal from the decision that did not grant him affirmative relief on the matter of
possession, constituted res adjudicata thereon." This pretense is manifestly devoid of merit, for the Court of Appeals
had explicitly acknowledged Callejo's title over the disputed land and declared the same reconveyed to him. This
necessarily implied that Callejo is entitled to remain in possession of said land.

The third assignment of error impugns the following observations made in the decision of the Court of Appeals:

... it is true that appellees sought to show that it was outside of their titled land, and north of this, and
is now identified as Lot 12340 of the Malasiqui cadastre, and peculiarly enough, there is an answer
in cross by appellant himself that might indicate that he indeed admitted that this land in question is
Lot 12340 of the Malasiqui cadastre, tsn. 21, Abalos, but his counsel must have apparently
discovered that this was an error, so much so that even in Lower Court, in the memorandum that he
filed, he contended that the questioned land could not be Lot 12340, R.A., p.48, so that even were
this testimony to be given the category of a judicial admission, Rule 129, sec. 2 of the Revised Rules
of Court, the same must have to give way to the truth if the latter were shown to be otherwise from
the evidence, because then it would have been shown to have been due to palpable mistake, and let
it be remembered that technical numerations of their lots very probably are not known with
exactness by lay witnesses; ... .

Petitioner maintains that "it has not been shown by clear evidence" that respondent Callejo had made the admission
in question "through palpable mistake"; and that Callejo's counsel and said appellate court had, in turn, admitted the
inexistence of evidence of such "palpable mistake."

The Court of Appeals did not make the admission imputed thereto. Neither did it "disregard" the admission of
Callejo. The latter is to the effect that in cadastral case No. 92, Cadastral Record No. 1860, he had asserted his
claim to the "land in question" by filing an answer — dated June 25, 1952 — which refers to Lot No. 12340 of the
cadastral survey. Callejo's counsel had, also, made a similar admission, in the trial court. Callejo did not admit,
however, that Lot No. 12340, is the property conveyed to Fernando Domantay — his predecessor in interest — by
the parents of Mariano and Marcos Tamayo. Needless to say, in the answer (Exhibits P and 1) filed by him in said
Case No. 92, on June 25, 1952, to which petitioner referred in connection with said admission Callejo could not
have legally claimed any portion of Lot No. 12341 — covered by TCT No. 5486, in the name of Mariano Tamayo —
for the very reason that the latter's right to the registration of this Lot 12341 had already been settled in the decision
and decree upon which OCT No. 2612 — from which said TCT No 5486 has been derived — was based and such
decision is no longer subject to review, although without prejudice to the corresponding action for reconveyance, if
proper. Hence, coetaneously with the filing of said answer (Exhibits P and 1), Callejo had commenced the present
action for reconveyance and damages.
Thus Callejo claimed both Lot No. 12340 and the northern portion of Lot No. 12341. Indeed, said answer describes
the southern boundary of said Lot No. 12340 as Lot No. "12341, Mariano Tamayo — portion claimed by Aurelio
Callejo." Thus, Callejo alleged in said pleading that, aside from Lot No. 12340, he claimed, also, a portion of the
land included in Lot No. 12341. What is more, he alleged, in paragraph 5 of the aforementioned answer, that he had
acquired the said Lot No. 12340 by "purchase from Maximo Rico" not from Fernando Domantay, his predecessor in
interest with respect to his title to the northern portion of Lot No. 12341. And this is borne out by the very testimony
of petitioner herein, who admitted that the property inherited by him from his parents is bounded on the north by the
land formerly belonging to said Maximo Rico, and, more significantly, by the deed Exhibit I, in which petitioner
acknowledged that the property sold by his parents to Fernando Domantay is bounded "al norte, con el terreno de la
propiedad de Maximo Rico." These admissions by petitioner herein leave no room for doubt that Lot No. 12340 is
not the property so conveyed to Domantay and then assigned by the latter to Callejo.

The full text of the finding of the Court of Appeals — of which the contested observations are but a part — reads:

CONSIDERING: Therefore, that question of whether or not appellees' titled land had included
appellant's portion bought from Fernando Domantay, and since an examination of evidence would
show that the said land that bad been bought by appellant was bounded on the North by Maximo
Rico and Moises Rosal, on the East by Felomena Macaraeg, on the South by Mariano Tamayo and
on the West by Maria Olea, see Exhs. F and I, while the land that had been titled in the name of
defendants was bounded on the North by Felipe Novida on the NE by properties of Felomena
Macaraeg and Santiago Tamayo, on the South by property of the estate of Gregorio Flor Mata, on
the West, by Macaro Creek and on the Northwest by the property of Felipe Novida, see Exh. B, and
since appellant's purchase referred only to a portion of the Tamayo land, the fact that it was bounded
on the south by Mariano Tamayo according to Exhs. E and I would support his claim that said
portion was really part, the northern part, of the original Tamayo land; the fact that the boundary on
the north of the land he purchased was Maximo Rico and Moises Rosal as shown in Exhs. F and I,
in the light of the proven fact that Maximo Rico was the successor in interest to that land toward the
north, formerly of Felipe Novida — and this is admitted by appellee himself:

Q. That land north of the land described in your title TCT 5486 was later owned by
Maximo Rico, is it not?

A. Not only Maximo Rico, also Fernando Dumatay, tsn. 39. Rollazo.

which confirms the testimony of witness, Fernando Rico, son of Maximo:

Q. That land bought by your father from Matias Lomibao used to be the property of
one Felipe Novida is that right?

A. Matias Lomibao bought that land from Felipe Novida and Matias Lomibao sold
that land to Maximo Rico. tsn. 36, Rollazo;

therefore, the portion bought by appellant in 1918 is persuasively shown by these details to be really
that northern portion within the former Tamayo land; it is true that appelles sought to show that it was
outside of their titled land, and north of this, and is now identified as Lot 12340 of the Malasiqui
cadastre, and peculiarly enough, there is an answer in cross by appellant himself that might indicate
that he indeed admitted that this land in question is Lot 12340 of the Malsiqui cadastre, t.s.n. 21,
Abalos but his counsel must have apparently discovered that this was an error, so much so that
even in Lower Court, in the memorandum that he filed, he contended that the questioned land could
not be Lot 12340, R.A., p. 48, so that even were this testimony to be given the category of a judicial
admission, Rule 129, see. 2 of the Revised Rules of Court the same must have to give way to the
truth if the latter were shown to be otherwise from the evidence, because then it would have been
shown to have been due to a palpable mistake, and let it be remembered that technical numerations
of their lots very probably are not known with exactness by law witnesses; at any rate, and indeed, a
further examination of the proof would demonstrate that this Lot 12340 is not really the land that had
been bought by appellant from Fernando Dumatay, but is a land north of that; because:

1st — This Lot 12340 is shown by the very Exh. 2 of defendants-appellees, to have been acquired
by appellant, not from Fernando Dumatay but from Maximo Rico, — see par. 5 thereof;

2nd. — The fact that appellant had bought a portion of said Maximo Rico's land north of the titled
property that is to say, north of Lot 12341, is admitted by appellee himself in cross.

Q. That land north of the land described in your title, TCT 5486 was later owned by
Maximo Rico, is it not?

A. Not only Maximo Rico, also Fernando Dumatay.

 Q. Who is the owner now of that land north of the land covered by TCT 5486?

A. It was sold to Aurelio Callejo, now the heirs of Aurelio Callejo and Fernando
Dumatay. tsn. 39, Rollazo, witness, Mariano Tamayo;

3rd — This can only mean that Lot 12340, which is the Lot 12341, — which is appellee's land — had
been acquired by appellant Aurelio, not from Fernando Dumatay, — but from Maximo Rico, —
successor in interest of Felipe Novida the former boundary owner north of the titled land, as shown
indeed in appellant's answer in the cadastral case, Exh. 2, exhibited by appellees themselves;

4th — Appellee's own exhibit 2, which is a verified copy of the plan in the Bureau of Lands of Lots
12340 and 12341, would indicate that Lot 12340 is as so testified by surveyor Diaz, outside of land
surveyed in Plan 11-7384 which is the plan of the titled property; but on the other hand, surveyor
Diaz it must be remembered. also prepared and identified his own plan, Exh. Q which is sketch plan
of 11-7384 — Amd', and her it is graphically seen that Lot A thereof, therein denominated as part of
the land described in the plan 11-7384 Amd. — is for and in the name of, "Aurelio Callejo", so much
so that it even indicates the position and location of Aurelio's house.

None of the premises on which the foregoing finding is based has been assailed by petitioner herein. Hence, the
third assignment of error is clearly untenable.

Under petitioner's fourth assignment of error, it is urged that the conclusion of the Court of Appeals to the effect that
Lot No. 12340 was acquired by respondent Callejo from Maximo Rico "is not supported by any direct
testimonial evidence." This argument is in the nature of a negative pregnant. It does not deny the existence
of indirect testimonial evidence, such as the circumstances pointed out in the above-quoted finding of the Court of
Appeals. Neither does it assail the existence of direct documentary evidence, such as petitioner's aforementioned
admission in Exhibit I. In short, it does not deny the existence of substantial evidence in support of the contested,
conclusion of fact of the Court of Appeals.

Apart from the foregoing, this assignment of error, like the third, tends to impugn the finding of the Court of Appeals
to the effect that the land sold by petitioner's parents to Domantay is within the perimeter of the property covered by
TCT No. 5486. This, however, is essentially a question of fact, and, consequently, the finding to this effect is final
and not subject to review in the present appeal on certiorari. Indeed, its determination would require an examination
5

of all the evidence introduced before the trial court, a consideration of the credibility of witnesses, and of the
circumstances surrounding the case, and their relevancy or relation to one another and to the whole, as well as an
appraisal of the probabilities of the entire situation. It would thus abolish the distinction between an ordinary appeal
on the one hand, and a review on certiorari, on the other, and thus defeat the purpose for which the latter procedure
has been established. In short, the issue raised in petitioner's third and fourth assignments of error is basically one
of fact, not reviewable by Us on certiorari.

Under the last assignment of error, petitioner questions the right of Callejo to demand a reconveyance, insofar as it
may affect the portion of 70,000 square meters sold by him to Proceso Estacio, upon the ground that the latter is a
purchaser in good faith for value. This is, however, a defense not available to petitioner herein, aside from the fact
that he has not even pleaded it in the trial court or otherwise raised it either in that court or in the Court of Appeals.

We note that the dispositive part of the decision of the Court of Appeals declares that the land in question is
"declared reconveyed" to said respondent. Such reconveyance cannot, however, be deemed made without a survey
defining with precision the metes and bounds of the area to be segregated for herein respondent, Aurelio Callejo.
Accordingly, the case should be remanded to the court of origin for the preparation of a subdivision plan of the
portion thus to be segregated and the judicial approval of such plan, and only after such approval has become final
and executory may the reconveyance be either made or deemed effected.

SO MODIFIED, the appealed decision of the Court of Appeals is hereby affirmed in all other respects, with the costs
of this instance against petitioner Mariano Tamayo. It is so ordered.

G.R. No. L-49087 April 5, 1982

MINDANAO DEVELOPMENT AUTHORITY, now the SOUTHERN PHILIPPINES DEVELOPMENT

ADMINISTRATION, petitioner,
vs.
THE COURT OF APPEALS and FRANCISCO ANG BANSING, respondents.

CONCEPCION JR., J.:

Petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. No. 48488-R, entitled: "Mindanao
Development Authority, etc., plaintiff-appellee, versus Francisco Ang Bansing defendant-appellant", which reversed
the decision of the Court of First Instance of Davao and dismissed the complaint filed in Civil Case No. 6480 of the
said court.

It is not disputed that the respondent Francisco Ang Bansing was the owner of a big tract of land with an area of
about 300,000 sq.m., situated in Barrio Panacan Davao City. On February 25, 1939, Ang Bansing sold a portion
thereof, with an area of about 5 hectares to Juan Cruz Yap Chuy The contract provided, among others, the
following:

That I hereby agree to work for the titling of the entire area of my land under my own expenses and
the expenses for the titling of the portion sold to me shall be under the expenses of the said Juan
Cruz Yap Chuy. 1

After the sale, the land of Ang Banging was surveyed and designated as Lot 664-B, Psd-1638. Lot 664-B was
further subdivided into five (5) lots and the portion sold to Juan Cruz Yap Chuy shortened to Juan Cruz, was
designated as Lot 664B-3, with an area of 61.107 square meters, more or less. 2 On June 15-17 and December 15,
1939, a cadastral survey was made and Lot 664-B-3 was designated as Lot 1846-C of the Davao Cadastre. On
December 23, 1939, Juan Cruz sold Lot 1846-C to the Commonwealth of the Philippines for the amount of
P6,347.50. 3 On that same day, Juan Cruz, as vendor, and C.B. Cam and Miguel N. Lansona as sureties, executed a
surety bond in favor of the vendee to guarantee the vendor's absolute title over the land sold. 4

The cadastral survey plan was approved by the Director of Lands on July 10, 1940, 5 and on March 7, 1941, Original
Certificate of Title No. 26 was issued in the means of Victoriana Ang Bansing, Orfelina Ang Bansing and Francisco Ang
Bansing as claimants of the land, pursuant to Decree No. 745358 issued on July 29, 1940. On March 31, 1941, OCT No.
26 was cancelled pursuant to a Deed of Adjudication and Transfer Certificate of Title No. 1783 was issued in the name of
Francisco Ang Bansing. 6

On that day, March 31, 1941, Ang Banging sold Lot 1846-A to Juan Cruz and TCT No. 1783 was cancelled. TCT
No. 1784 was issued in the name of Juan Cruz, for Lot 1846-A and TCT No. 1785 was issued in the name of Ang
Bansing for the remaining Lots 1846-B, 1846-C, 1846-D, and 1846-E. Later, Ang Bansing sold two subdivision lots
of Lot 1846-B, namely: Lot 1846-B-2-C and Lot 1846-B-1 to Vedasto Corcuera for which TCT No. 2551 and TCT
No. 2552, respectively, were issued in the name of the said Vedasto Corcuera on August 10, 1946. Thereafter, Lot
1848-A, with an area of 9.6508 hectares, and Lots 1846-B-A and 1848- B-2-D all subdivided portions of Lot 1846-B,
were similarly conveyed to Juan Cruz for which TCT No. 2599 and TCT No. 2600, respectively, were issued in the
name of Juan Cruz on September 26, 1946. TCT No. 2601 was issued in the name of Ang Bansing for the
remainder of the property, including the lot in question. Then, another portion of 1846-B, designated in the
subdivision plan as Lot 1848-B-2-B was sold to Juan Cruz for which TCT No. 184 was issued in the latter's name.
On November 28, 1946, after these conveyances, there remained in the possession of Ang Bansing under TCT No.
2601, Lot 1846-C, the lot in question; Lot 1846-D; and Lot 1846-E. However, TCT No. 2601 was again partially
cancelled when Ang Bansing sold Lot 1846-D to Vedasto Corcuera. 7

On February 25, 1965, the President of the Philippines issued Proclamation No. 459, transferring ownership of
certain parcels of land situated in Sasa Davao City, to the Mindanao Development Authority, now the Southern
Philippines Development Administration, subject to private rights, if any. Lot 1846-C, the disputed parcel of land,
was among the parcels of land transferred to the Mindanao Development Authority in said proclamation. 8

On March 31, 1969, Atty. Hector L. Bisnar counsel for the Mindanao Development Authority, wrote Ang Bansing
requesting the latter to surrender the Owner's duplicate copy of TCT No. 2601 so that Lot 1846-C could be formally
transferred to his client but Ang Bansing refused. 9 Consequently, on April 11, 1969, the Mindanao Development
Authority filed a complaint against Francisco Ang Bansing before the Court of First Instance of Davao City, docketed
therein as Civil Case No. 6480, for the reconveyance of the title over Lot 1846-C, alleging, among others, the following:

xxx xxx xxx

9. That the deed of sale, marked as Annex 'A', it was stipulated by the parties that the defendant
would work to secure title of his entire tract of land of about 30 hectares defraying the expenses for
the same and the expenses for the title of the portion sold by the defendant to Juan Cruz Yap Chuy
shall be borned by the latter;

10. That the defendant as vendor and the one who worked to secure the title of his entire tract of
land which included the portion sold by him. to Juan Cruz Yap Chuy acted in the capacity of and/or
served as trustee for any and all parties who become successor-in-interest to Juan Cruz Yap Chuy
and the defendant was bound and obligated to give, deliver and reconvey to Juan Cruz Yap Chuy
and/or his successor-in-interest the title pertaining to the portion of land sold and conveyed by him to
Juan Cruz Yap Chuy by virtue of the deed of sale marked as Annex 'A' and his affidavit marked as
Annex 'C'. 10

In answer, Ang Bansing replied:

 xxx xxx xxx

9. That defendant admits that in Annex'A'of the complaint, it was agreed and stipulated in paragraph
6 thereof that:

That I hereby agree to work for the titling of the entire area of my land under my own
expense and the expenses for the titling of the portion sold to me shall be under the
expenses of the said Juan Cruz Yap Chuy.

and defendant in fact secured at his expense his OCT No. 26 for his entire land; that in the process
of defendant's securing his title neither Juan Cruz Yap Chuy nor the Commonwealth of the
Philippines asserted any right to ownership of the subject property and that was almost 30 years ago
until plaintiff filed its complaint, thus plaintiff is forever barred from claiming any right over the subject
property. There was no real sale made but only the intention to sell a portion of the land as stated by
defendant in Annex 'C' of the complaint.

10. That defendant denies allegations contained in paragraph 10 of the complaint that he acted as
the trustee of Juan Cruz Yap Chuy Defendant was never such; matter of fact Juan Cruz Yap Chuy
for the last 26 years, that is until he. died in October, 1965, never made any demand to have the title
of the subject property transferred in his name because he knew all the time that the alleged sale in
his favor was per se null and void he also knew that no sale was ever consummated. 11

After trial, the Court of First Instance of Davao City found that an express trust had been established and ordered
the reconveyance of the title to Lot 1846-C of the Davao Cadastre to the plaintiff Mindanao Development
Authority. 12

Ang Banging appealed to the Court of Appeals and the said appellate court ruled that no express trust has been
created and, accordingly, reversed the judgment and dismissed the complaint. 13

Hence, the present recourse.

The petition is without merit. As found by the respondent Court of Appeals, no express trust had been created
between Ang Banging and Juan Cruz over Lot 1846-C of the Davao Cadastre. "Trusts are either express or implied.
Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by
operation of law." 14 It is fundamental in the law of trusts that certain requirements must exist before an express trust will
be recognized. Basically, these elements include a competent trustor and trustee, an ascertainable trust res, and
sufficiently certain beneficiaries. Stilted formalities are unnecessary, but nevertheless each of the above elements is
required to be established, and, if any one of them is missing, it is fatal to the trusts. Furthermore, there must be a present
and complete disposition of the trust property, notwithstanding that the enjoyment in the beneficiary will take place in the
future. It is essential, too, that the purpose be an active one to prevent trust from being executed into a legal estate or
interest, and one that is not in contravention of some prohibition of statute or rule of public policy. There must also be
some power of administration other than a mere duty to perform a contract although the contract is for a third-party
beneficiary. A declaration of terms is essential, and these must be stated with reasonable certainty in order that the
trustee may administer, and that the court, if called upon so to do, may enforce, the trust." 15

In this case, the herein petitioner relies mainly upon the following stipulation in the deed of sale executed by Ang
Bansing in favor of Juan Cruz to prove that an express trust had been established with Ang Bansing as the settlor
and trustee and Juan Cruz as the cestui que trust or beneficiary:

That I hereby agree to work for the titling of the entire area of my land under my own expenses and
the expenses for the titling of the portion sold to me shall be under the expenses of said Juan Cruz
Yap Chuy.

The above-quoted stipulation, however, is nothing but a condition that Ang Bansing shall pay the expenses for the
registration of his land and for Juan Cruz to shoulder the expenses for the registration of the land sold to him. The
stipulation does not categorically create an obligation on the part of Ang Bansing to hold the property in trust for
Juan Cruz. Hence, there is no express trust. It is essential to the creation of an express trust that the settlor
presently and unequivocally make a disposition of property and make himself the trustee of the property for the
benefit of another. 16

In case of a declaration of trust, the declaration must be clear and unequivocal that the owner holds
property in trust for the purposes named. 17

While Ang Bansing had agreed in the deed of sale that he will work for the titling of "the entire area of my land under
my own expenses," it is not clear therefrom whether said statement refers to the 30-hectare parcel of land or to that
portion left to him after the sale. A failure on the part of the settlor definitely to describe the subject-matter of the
supposed trust or the beneficiaries or object thereof is strong evidence that he intended no trust. 18
The intent to create a trust must be definite and particular. It must show a desire to pass benefits through the
medium of a trust, and not through some related or similar device. 19

Clear and unequivocal language is necessary to create a trust and mere precatory language and statements of
ambiguous nature, are not sufficient to establish a trust. As the Court stated in the case of De Leon vs. Packson, 20 a
trust must be proven by clear, satisfactory and convincing evidence; it cannot rest on vague and uncertain evidence or on
loose, equivocal or indefinite declarations. Considering that the trust intent has not been expressed with such clarity and
definiteness, no express trust can be deduced from the stipulation aforequoted.

Nor will the affidavit executed by Ang Banging on April 23, 1941, 21 be construed as having established an express
trust. As counsel for the herein petitioner has stated, "the only purpose of the Affidavit was to clarify that the area of the
land sold by Ang Bansing to Juan Cruz Yap Chuy is not only 5 hectares but 61,107 square meters or a little over six (6)
hectares." 22

That no express trust had been agreed upon by Ang Bansing and Juan Cruz is evident from the fact that Juan Cruz,
the supposed beneficiary of the trust, never made any attempt to enforce the alleged trust and require the trustee to
transfer the title over Lot 1846-C in his name. Thus, the records show that the deed of sale, covering Lot 1846-C,
was executed by Ang Bansing in favor of Juan Cruz on February 25, 1939. Two years later, or on March 31, 1941,
Ang Bansing sold Lot 1846-A to the said Juan Cruz for which TCT No. 1784 was issued in the name of Juan Cruz.
Subsequently thereafter, Lot 1848-A, with an area of 9.6508 hectares, and Lots 1846-A and 1848-B-2-D, all
subdivided portions of Lot 1846-B, were similarly conveyed to the said Juan Cruz for which TCT No. 2599 and TCT
No. 2600, respectively, were issued in the name of Juan Cruz on September 26, 1946. Then, another portion of 'Lot
1¬846-B, designated in the subdivision plan as Lot 1848-B-2-13, was sold to Juan Cruz for which TCT No. 184 was
issued in his name on November 28, 1948. Despite these numerous transfers of portions of the original 30-hectare
parcel of land of Ang Bansing to Juan Cruz and the issuance of certificates of title in the name of Juan Cruz, the
latter never sought the transfer of the title to Lot 1846-C in his name. For sure, if the parties had agreed that Ang
Bansing shall hold the property in trust for Juan Cruz until after the former shall have obtained a certificate of title to
the land, the latter would have asked for the reconveyance of the title to him in view of the surety bond executed by
him in favor of the Commonwealth Government wherein he warrants his title over the property. The conduct of Juan
Cruz is inconsistent with a trust and may well have probative effect against a trust.

But, even granting, arguendo, that an express trust had been established, as claimed by the herein petitioner, it
would appear that the trustee had repudiated the trust and the petitioner herein, the alleged beneficiary to the trust,
did not take any action therein until after the lapse of 23 years. Thus, in its Reply to the Defendant's Answer, filed on
June 29, 1969, the herein petitioner admitted that "after the last war the City Engineer's Office of Davao City made
repeated demands on the defendants for the delivery and conveyance to the Commonwealth Government, now the
Republic of the Philippines, of the title of land in question, Lot 1846-C, but the defendant ignored and evaded the
same." 23 Considering that the demand was made in behalf of the Commonwealth Government, it is obvious that the said
demand was made before July 4, 1946, when the Commonwealth Government was dismantled and the Republic of the
Philippines came into being. From 1946 to 1969, when the action for reconveyance was filed with the Court, 23 years had
passed. For sure, the period for enforcing the rights of the alleged beneficiary over the land in question after the
repudiation of the trust by the trustee, had already prescribed.

Needless to say, only an implied trust may have been impressed upon the title of Ang Banging over Lot 1846-C of
the Davao Cadastre since the land in question was registered in his name although the land belonged to another. In
implied trusts, there is neither promise nor fiduciary relations, the so-called trustee does not recognize any trust and
has no intent to hold the property for the beneficiary." 24 It does not arise by agreement or intention, but by operation of
law. Thus, if property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee
of an implied trust for the benefit of the person from whom the property comes. 25

If a person obtains legal title to property by fraud or concealment, courts of equity will impress upon the title a so-
called constructive trust in favor of the defrauded party. 26

There is also a constructive trust if a person sells a parcel of land and thereafter obtains title to it through fraudulent
misrepresentation. 27

Such a constructive trust is not a trust in the technical sense and is prescriptible; it prescribes in 10 years. 28

Here, the 10-year prescriptive period began on March 31, 1941, upon the issuance of Original Certificate of Title No.
26 in the names of Victoriana Ang Bansing Orfelina Ang Bansing and Francisco Ang Banging. From that date up to
April 11, 1969, when the complaint for reconveyance was filed, more than 28 years had passed. Clearly, the action
for reconveyance had prescribed.

Besides, the enforcement of the constructive trust that may have been impressed upon the title of Ang Bansing over
Lot 1846-C of the Davao Cadastre is barred by laches. 29 It appears that the deed of sale in favor of the Commonwealth
Government was executed by Juan Cruz on December 23, 1939, during the cadastral proceedings, and even before the
cadastral survey plan was approved by the Director of Lands on July 10, 1940. But, the vendee therein did not file an
answer, much less an opposition to the answer of Ang Bansing in the said Cadastral proceedings. The judgment rendered
in the said cadastral proceeding, awarding the lot in question to Ang Bansing is already final. After an inexcusable delay of
more than 28 years and acquiescence to existing conditions, it is now too late for the petitioner to complain.

WHEREFORE, the petition should be, as it is hereby, DENIED. No costs.

SO ORDERED.

G.R. No. 175073 August 15, 2011

ESTATE OF MARGARITA D. CABACUNGAN, represented by LUZ LAIGO-ALI, Petitioner,

vs.
MARILOU LAIGO, PEDRO ROY LAIGO, STELLA BALAGOT and SPOUSES MARIO B. CAMPOS AND JULIA S.
CAMPOS, Respondents.
CARPIO,* J.,

BRION,**

SERENO,***JJ.

DECISION

PERALTA, J.:

This Petition for Review under Rule 45 of the Rules of Court assails the October 13, 2006 Decision 1 of the Court of
Appeals in CA-G.R. CV No. 72371. The assailed decision affirmed the July 2, 2001 judgment 2 rendered by the
Regional Trial Court of La Union, Branch 33 in Civil Case No. 1031-BG – a complaint for annulment of sale of real
property, recovery of ownership and possession, cancellation of tax declarations and damages filed by Margarita
Cabacungan,3 represented by her daughter, Luz Laigo-Ali against Marilou Laigo and Pedro Roy Laigo, respondents
herein, and against Estella Balagot,4 and the spouses Mario and Julia Campos.

The facts follow.

Margarita Cabacungan (Margarita) owned three parcels of unregistered land in Paringao and in Baccuit, Bauang, La
Union, each measuring 4,512 square meters, 1,986 square meters and 3,454 square meters. The properties were
individually covered by tax declaration all in her name. 5 Sometime in 1968, Margarita’s son, Roberto Laigo, Jr.
(Roberto), applied for a non-immigrant visa to the United States, and to support his application, he allegedly asked
Margarita to transfer the tax declarations of the properties in his name. 6 For said purpose, Margarita, unknown to her
other children, executed an Affidavit of Transfer of Real Property whereby the subject properties were transferred by
donation to Roberto.7 Not long after, Roberto’s visa was issued and he was able to travel to the U.S. as a tourist and
returned in due time. In 1979, he adopted respondents Pedro Laigo (Pedro) and Marilou Laigo (Marilou), 8 and then
he married respondent Estella Balagot.

In July 1990, Roberto sold the 4,512 sq m property in Baccuit to the spouses Mario and Julia Campos for
₱23,000.00.9 Then in August 1992, he sold the 1,986 sq m and 3,454 sq m lots in Paringao, respectively, to Marilou
for ₱100,000.00 and to Pedro for ₱40,000.00. 10 Allegedly, these sales were not known to Margarita and her other
children.11

It was only in August 1995, at Roberto’s wake, that Margarita came to know of the sales as told by Pedro
himself.12 In February 1996, Margarita, represented by her daughter, Luz, instituted the instant complaint for the
annulment of said sales and for the recovery of ownership and possession of the subject properties as well as for
the cancellation of Ricardo’s tax declarations. Margarita admitted having accommodated Roberto’s request for the
transfer of the properties to his name, but pointed out that the arrangement was only for the specific purpose of
supporting his U.S. visa application. She emphasized that she never intended to divest herself of ownership over
the subject lands and, hence, Roberto had no right to sell them to respondents and the Spouses Campos. She
likewise alleged that the sales, which were fictitious and simulated considering the gross inadequacy of the
stipulated price, were fraudulently entered into by Roberto. She imputed bad faith to Pedro, Marilou and the
Spouses Campos as buyers of the lots, as they supposedly knew all along that Roberto was not the rightful owner of
the properties.13 Hence, she principally prayed that the sales be annulled; that Roberto’s tax declarations be
cancelled; and that the subject properties be reconveyed to her.14

The Spouses Campos advanced that they were innocent purchasers for value and in good faith, and had merely
relied on Roberto’s representation that he had the right to sell the property; and that, hence, they were not bound by
whatever agreement entered by Margarita with her son. They posited that the alleged gross inadequacy of the price
would not invalidate the sale absent a vitiation of consent or proof of any other agreement. Further, they noted that
Margarita’s claim was already barred by prescription and laches owing to her long inaction in recovering the subject
properties. Finally, they believed that inasmuch as Roberto had already passed away, Margarita must have, instead,
directed her claim against his estate.15

In much the same way, Marilou and Pedro, 16 who likewise professed themselves to be buyers in good faith and for
value, believed that Margarita’s cause of action had already been barred by laches, and that even assuming the
contrary, the cause of action was nevertheless barred by prescription as the same had accrued way back in 1968
upon the execution of the affidavit of transfer by virtue of which an implied trust had been created. In this regard,
they emphasized that the law allowed only a period of ten (10) years within which an action to recover ownership of
real property or to enforce an implied trust thereon may be brought, but Margarita merely let it pass. 17

On February 3, 1999, prior to pre-trial, Margarita and the Spouses Campos amicably entered into a settlement
whereby they waived their respective claims against each other. 18 Margarita died two days later and was forthwith
substituted by her estate.19 On February 8, 1999, the trial court rendered a Partial Decision 20 approving the
compromise agreement and dismissing the complaint against the Spouses Campos. Forthwith, trial on the merits
ensued with respect to Pedro and Marilou.
On July 2, 2001, the trial court rendered judgment dismissing the complaint as follows:

WHEREFORE, in view of the foregoing considerations, the complaint is DISMISSED. 21

The trial court ruled that the 1968 Affidavit of Transfer operated as a simple transfer of the subject properties from
Margarita to Roberto. It found no express trust created between Roberto and Margarita by virtue merely of the said
document as there was no evidence of another document showing Roberto’s undertaking to return the subject
properties. Interestingly, it concluded that, instead, an "implied or constructive trust" was created between the
parties, as if affirming that there was indeed an agreement – albeit unwritten – to have the properties returned to
Margarita in due time. 22

Moreover, the trial court surmised how Margarita could have failed to recover the subject properties from Roberto at
any time between 1968, following the execution of the Affidavit of Transfer, and Roberto’s return from the United
States shortly thereafter. Finding Margarita guilty of laches by such inaction, the trial court barred recovery from
respondents who were found to have acquired the properties supposedly in good faith and for value. 23 It also pointed
out that recovery could no longer be pursued in this case because Margarita had likewise exhausted the ten-year
prescriptive period for reconveyance based on an implied trust which had commenced to run in 1968 upon the
execution of the Affidavit of Transfer.24 Finally, it emphasized that mere inadequacy of the price as alleged would not
be a sufficient ground to annul the sales in favor of Pedro and Marilou absent any defect in consent. 25

Aggrieved, petitioner appealed to the Court of Appeals which, on October 13, 2006, affirmed the trial court’s
disposition. The appellate court dismissed petitioner’s claim that Roberto was merely a trustee of the subject
properties as there was no evidence on record supportive of the allegation that Roberto merely borrowed the
properties from Margarita upon his promise to return the same on his arrival from the United States. Further, it
hypothesized that granting the existence of an implied trust, still Margarita’s action thereunder had already been
circumscribed by laches. 26

Curiously, while the appellate court had found no implied trust relation in the transaction between Margarita and
Roberto, nevertheless, it held that the ten-year prescriptive period under Article 1144 of the Civil Code, in relation to
an implied trust created under Article 1456, had already been exhausted by Margarita because her cause of action
had accrued way back in 1968; and that while laches and prescription as defenses could have availed against
Roberto, the same would be unavailing against Pedro and Marilou because the latter were supposedly buyers in
good faith and for value.27 It disposed of the appeal, thus:

WHEREFORE, the Appeal is hereby DENIED. The assailed Decision dated 2 July 2001 of the Regional Trial Court
of Bauang, La Union, Branch 33 is AFFIRMED.

SO ORDERED.28

Hence, the instant recourse imputing error to the Court of Appeals in holding: (a) that the complaint is barred by
laches and prescription; (b) that the rule on innocent purchaser for value applies in this case of sale of unregistered
land; and (c) that there is no evidence to support the finding that there is an implied trust created between Margarita
and her son Roberto.29

Petitioner posits that the Court of Appeals should not have haphazardly applied the doctrine of laches and failed to
see that the parties in this case are bound by familial ties. They assert that laches must not be applied when an
injustice would result from it. Petitioner believes that the existence of such confidential relationship precludes a
finding of unreasonable delay on Margarita’s part in enforcing her claim, especially in the face of Luz’s testimony
that she and Margarita had placed trust and confidence in Roberto. Petitioner also refutes the Court of Appeals’
finding that there was a donation of the properties to Roberto when the truth is that the subject properties were all
that Margarita possessed and that she could not have failed to provide for her other children nor for means by which
to support herself. It reiterates that the transfer to Roberto was only an accommodation so that he could submit
proof to support his U.S. visa application.

On the issue of prescription, petitioner advances that it runs from the time Roberto, as trustee, has repudiated the
trust by selling the properties to respondents in August 15, 1992; that hence, the filing of the instant complaint in
1996 was well within the prescriptive period. Finally, petitioner states that whether a buyer is in good or bad faith is a
matter that attains relevance in sales of registered land, as corollary to the rule that a purchaser of unregistered land
uninformed of the seller’s defective title acquires no better right than such seller.

Respondents stand by the ruling of the Court of Appeals. In their Comment, they theorize that if indeed Margarita
and Roberto had agreed to have the subject properties returned following the execution of the Affidavit of Transfer,
then there should have been a written agreement evincing such intention of the parties. They note that petitioner’s
reliance on the Affidavit of Transfer as well as on the alleged unwritten agreement for the return of the properties
must fail, simply because they are not even parties to it. Be that as it may, the said document had effectively
transferred the properties to Roberto who, in turn, had acquired the full capacity to sell them, especially since these
properties could well be considered as Roberto’s inheritance from Margarita who, on the contrary, did have other
existing properties in her name. Moreover, they believe that the liberal application of the rule on laches between
family members does not apply in the instant case because there is no fiduciary relationship and privity between
them and Margarita.

There is merit in the petition.

To begin with, the rule is that the latitude of judicial review under Rule 45 generally excludes factual and evidentiary
reevaluation, and the Court ordinarily abides by the uniform conclusions of the trial court and the appellate court.
Yet, in the case at bar, while the courts below have both arrived at the dismissal of petitioner’s complaint, there still
remains unsettled the ostensible incongruence in their respective factual findings. It thus behooves us to be
thorough both in reviewing the records and in appraising the evidence, especially since an opposite conclusion is
warranted and, as will be shown, justified.

A trust is the legal relationship between one person having an equitable ownership of property and another person
owning the legal title to such property, the equitable ownership of the former entitling him to the performance of
certain duties and the exercise of certain powers by the latter. 30 Trusts are either express or implied. 31 Express or
direct trusts are created by the direct and positive acts of the parties, by some writing or deed, or will, or by oral
declaration in words evincing an intention to create a trust. 32 Implied trusts – also called "trusts by operation of law,"
"indirect trusts" and "involuntary trusts" – arise by legal implication based on the presumed intention of the parties or
on equitable principles independent of the particular intention of the parties. 33 They are those which, without being
expressed, are deducible from the nature of the transaction as matters of intent or, independently of the particular
intention of the parties, as being inferred from the transaction by operation of law basically by reason of equity. 34

Implied trusts are further classified into constructive trusts and resulting trusts. Constructive trusts, on the one hand,
come about in the main by operation of law and not by agreement or intention. They arise not by any word or
phrase, either expressly or impliedly, evincing a direct intention to create a trust, but one which arises in order to
satisfy the demands of justice.35 Also known as trusts ex maleficio, trusts ex delicto and trusts de son tort, they are
construed against one who by actual or constructive fraud, duress, abuse of confidence, commission of a wrong or
any form of unconscionable conduct, artifice, concealment of questionable means, or who in any way against equity
and good conscience has obtained or holds the legal right to property which he ought not, in equity and good
conscience, hold and enjoy.36 They are aptly characterized as "fraud-rectifying trust," 37 imposed by equity to satisfy
the demands of justice38 and to defeat or prevent the wrongful act of one of the parties. 39 Constructive trusts are
illustrated in Articles 1450, 1454, 1455 and 1456.40

On the other hand, resulting trusts arise from the nature or circumstances of the consideration involved in a
transaction whereby one person becomes invested with legal title but is obligated in equity to hold his title for the
benefit of another. This is based on the equitable doctrine that valuable consideration and not legal title is
determinative of equitable title or interest and is always presumed to have been contemplated by the parties. 41 Such
intent is presumed as it is not expressed in the instrument or deed of conveyance and is to be found in the nature of
their transaction.42 Implied trusts of this nature are hence describable as "intention-enforcing trusts." 43 Specific
examples of resulting trusts may be found in the Civil Code, particularly Articles 1448, 1449, 1451, 1452 and 1453. 44

Articles 1448 to 1456 of the Civil Code enumerate cases of implied trust, but the list according to Article 1447 is not
exclusive of others which may be established by the general law on trusts so long as the limitations laid down in
Article 1442 are observed,45 that is, that they be not in conflict with the New Civil Code, the Code of Commerce, the
Rules of Court and special laws.46

While resulting trusts generally arise on failure of an express trust or of the purpose thereof, or on a conveyance to
one person upon a consideration from another (sometimes referred to as a "purchase-money resulting trust"), they
may also be imposed in other circumstances such that the court, shaping judgment in its most efficient form and
preventing a failure of justice, must decree the existence of such a trust. 47 A resulting trust, for instance, arises
where, there being no fraud or violation of the trust, the circumstances indicate intent of the parties that legal title in
one be held for the benefit of another. 48 It also arises in some instances where the underlying transaction is without
consideration, such as that contemplated in Article 1449 49 of the Civil Code. Where property, for example, is
gratuitously conveyed for a particular purpose and that purpose is either fulfilled or frustrated, the court may affirm
the resulting trust in favor of the grantor or transferor, 50 where the beneficial interest in property was not intended to
vest in the grantee.51

Intention – although only presumed, implied or supposed by law from the nature of the transaction or from the facts
and circumstances accompanying the transaction, particularly the source of the consideration – is always an
element of a resulting trust52 and may be inferred from the acts or conduct of the parties rather than from direct
expression of conduct.53 Certainly, intent as an indispensable element, is a matter that necessarily lies in the
evidence, that is, by evidence, even circumstantial, of statements made by the parties at or before the time title
passes.54 Because an implied trust is neither dependent upon an express agreement nor required to be evidenced
by writing,55 Article 145756 of our Civil Code authorizes the admission of parole evidence to prove their existence.
Parole evidence that is required to establish the existence of an implied trust necessarily has to be trustworthy and it
cannot rest on loose, equivocal or indefinite declarations.57
Thus, contrary to the Court of Appeals’ finding that there was no evidence on record showing that an implied trust
relation arose between Margarita and Roberto, we find that petitioner before the trial court, had actually adduced
evidence to prove the intention of Margarita to transfer to Roberto only the legal title to the properties in question,
with attendant expectation that Roberto would return the same to her on accomplishment of that specific purpose for
which the transaction was entered into. The evidence of course is not documentary, but rather testimonial.

We recall that the complaint before the trial court alleged that the 1968 Affidavit of Transfer was executed merely to
accommodate Roberto’s request to have the properties in his name and thereby produce proof of ownership of
certain real properties in the Philippines to support his U.S. visa application. The agreement, the complaint further
stated, was for Margarita to transfer the tax declarations of the subject properties to Roberto for the said purpose
and without the intention to divest her of the rights of ownership and dominion. 58 Margarita, however, died before trial
on the merits ensued;59 yet the allegation was substantiated by the open-court statements of her daughter, Luz, and
of her niece, Hilaria Costales (Hilaria), a disinterested witness.

In her testimony, Luz, who affirmed under oath her own presence at the execution of the Affidavit of Transfer,
described the circumstances under which Margarita and Roberto entered into the agreement. She narrated that
Roberto had wanted to travel to the U.S and to show the embassy proof of his financial capacity, he asked to
"borrow" from Margarita the properties involved but upon the condition that he would give them back to her upon his
arrival from the United States. She admitted that Roberto’s commitment to return the properties was not put in
writing because they placed trust and confidence in him, and that while she had spent most of her time in Mindanao
since she married in 1956, she would sometimes come to La Union to see her mother but she never really knew
whether at one point or another her mother had demanded the return of the properties from Roberto. 60 She further
asserted that even after Roberto’s arrival from the United States, it was Margarita who paid off the taxes on the
subject properties and that it was only when her health started to deteriorate that Roberto had taken up those
obligations.61 Hilaria’s testimony ran along the same line. Like Luz, she was admittedly present at the execution of
the Affidavit of Transfer which took place at the house she shared with Jacinto Costales, the notarizing officer who
was her own brother. She told that Roberto at the time had wanted to travel to the U.S. but did not have properties
in the Philippines which he could use to back up his visa application; as accommodation, Margarita "lent" him the tax
declarations covering the properties but with the understanding that upon his return he would give them back to
Margarita. She professed familiarity with the properties involved because one of them was actually sitting close to
her own property.62

While indeed at one point at the stand both of Luz‘s and Hilaria’s presence at the execution of the affidavit had been
put to test in subtle interjections by respondents’ counsel to the effect that their names and signatures did not
appear in the Affidavit of Transfer as witnesses, this, to our mind, is of no moment inasmuch as they had not been
called to testify on the fact of, or on the contents of, the Affidavit of Transfer or its due execution. Rather, their
testimony was offered to prove the circumstances surrounding its execution – the circumstances from which could
be derived the unwritten understanding between Roberto and Margarita that by their act, no absolute transfer of
ownership would be effected. Besides, it would be highly unlikely for Margarita to institute the instant complaint if it
were indeed her intention to vest in Roberto, by virtue of the Affidavit of Transfer, absolute ownership over the
covered properties.

It is deducible from the foregoing that the inscription of Roberto’s name in the Affidavit of Transfer as Margarita’s
transferee is not for the purpose of transferring ownership to him but only to enable him to hold the property in trust
for Margarita. Indeed, in the face of the credible and straightforward testimony of the two witnesses, Luz and Hilaria,
the probative value of the ownership record forms in the names of respondents, together with the testimony of their
witness from the municipal assessor’s office who authenticated said forms, are utterly minimal to show Roberto’s
ownership. It suffices to say that respondents did not bother to offer evidence that would directly refute the
statements made by Luz and Hilaria in open court on the circumstances underlying the 1968 Affidavit of Transfer.

As a trustee of a resulting trust, therefore, Roberto, like the trustee of an express passive trust, is merely a
depositary of legal title having no duties as to the management, control or disposition of the property except to make
a conveyance when called upon by the cestui que trust. 63 Hence, the sales he entered into with respondents are a
wrongful conversion of the trust property and a breach of the trust. The question is: May respondents now be
compelled to reconvey the subject properties to petitioner? We rule in the affirmative.

Respondents posit that petitioner’s claim may never be enforced against them as they had purchased the properties
from Roberto for value and in good faith. They also claim that, at any rate, petitioner’s cause of action has accrued
way back in 1968 upon the execution of the Affidavit of Transfer and, hence, with the 28 long years that since
passed, petitioner’s claim had long become stale not only on account of laches, but also under the rules on
extinctive prescription governing a resulting trust. We do not agree.

First, fundamental is the rule in land registration law that the issue of whether the buyer of realty is in good or bad
faith is relevant only where the subject of the sale is registered land and the purchase was made from the registered
owner whose title to the land is clean, in which case the purchaser who relies on the clean title of the registered
owner is protected if he is a purchaser in good faith and for value. 64 Since the properties in question are unregistered
lands, respondents purchased the same at their own peril. Their claim of having bought the properties in good faith,
i.e., without notice that there is some other person with a right to or interest therein, would not protect them should it
turn out, as it in fact did in this case, that their seller, Roberto, had no right to sell them.

Second, the invocation of the rules on limitation of actions relative to a resulting trust is not on point because the
resulting trust relation between Margarita and Roberto had been extinguished by the latter’s death. A trust, it is said,
terminates upon the death of the trustee, particularly where the trust is personal to him. 65 Besides, prescription and
laches, in respect of this resulting trust relation, hardly can impair petitioner’s cause of action. On the one hand, in
accordance with Article 114466 of the Civil Code, an action for reconveyance to enforce an implied trust in one’s
favor prescribes in ten (10) years from the time the right of action accrues, as it is based upon an obligation created
by law.67 It sets in from the time the trustee performs unequivocal acts of repudiation amounting to an ouster of the
cestui que trust which are made known to the latter. 68 In this case, it was the 1992 sale of the properties to
respondents that comprised the act of repudiation which, however, was made known to Margarita only in 1995 but
nevertheless impelled her to institute the action in 1996 – still well within the prescriptive period. Hardly can be
considered as act of repudiation Roberto’s open court declaration which he made in the 1979 adoption proceedings
involving respondents to the effect that he owned the subject properties, 69 nor even the fact that he in 1977 had
entered into a lease contract on one of the disputed properties which contract had been subject of a 1996 decision
of the Court of Appeals.70 These do not suffice to constitute unequivocal acts in repudiation of the trust.

On the other hand, laches, being rooted in equity, is not always to be applied strictly in a way that would obliterate
an otherwise valid claim especially between blood relatives. The existence of a confidential relationship based upon
consanguinity is an important circumstance for consideration; hence, the doctrine is not to be applied mechanically
as between near relatives.71 Adaza v. Court of Appeals72 held that the relationship between the parties therein, who
were siblings, was sufficient to explain and excuse what would otherwise have been a long delay in enforcing the
claim and the delay in such situation should not be as strictly construed as where the parties are complete
strangers vis-a-vis each other; thus, reliance by one party upon his blood relationship with the other and the trust
and confidence normally connoted in our culture by that relationship should not be taken against him. Too, Sotto v.
Teves73 ruled that the doctrine of laches is not strictly applied between near relatives, and the fact that the parties
are connected by ties of blood or marriage tends to excuse an otherwise unreasonable delay.

Third, there is a fundamental principle in agency that where certain property entrusted to an agent and impressed by
law with a trust in favor of the principal is wrongfully diverted, such trust follows the property in the hands of a third
person and the principal is ordinarily entitled to pursue and recover it so long as the property can be traced and
identified, and no superior equities have intervened. This principle is actually one of trusts, since the wrongful
conversion gives rise to a constructive trust which pursues the property, its product or proceeds, and permits the
beneficiary to recover the property or obtain damages for the wrongful conversion of the property. Aptly called the
"trust pursuit rule," it applies when a constructive or resulting trust has once affixed itself to property in a certain
state or form.74

Hence, a trust will follow the property – through all changes in its state and form as long as such property, its
products or its proceeds, are capable of identification, even into the hands of a transferee other than a bona
fide purchaser for value, or restitution will be enforced at the election of the beneficiary through recourse against the
trustee or the transferee personally. This is grounded on the principle in property law that ownership continues and
can be asserted by the true owner against any withholding of the object to which the ownership pertains, whether
such object of the ownership is found in the hands of an original owner or a transferee, or in a different form, as long
as it can be identified.75 Accordingly, the person to whom is made a transfer of trust property constituting a wrongful
conversion of the trust property and a breach of the trust, when not protected as a bona fide purchaser for value, is
himself liable and accountable as a constructive trustee. The liability attaches at the moment of the transfer of trust
property and continues until there is full restoration to the beneficiary. Thus, the transferee is charged with, and can
be held to the performance of the trust, equally with the original trustee, and he can be compelled to execute a
reconveyance.76

This scenario is characteristic of a constructive trust imposed by Article 1456 77 of the Civil Code, which impresses
upon a person obtaining property through mistake or fraud the status of an implied trustee for the benefit of the
person from whom the property comes. Petitioner, in laying claim against respondents who are concededly
transferees who professed having validly derived their ownership from Roberto, is in effect enforcing against
respondents a constructive trust relation that arose by virtue of the wrongful and fraudulent transfer to them of the
subject properties by Roberto.

Aznar Brother Realty Co. v. Aying,78 citing Buan Vda. de Esconde v. Court of Appeals,79 explained this form of
implied trust as follows:

A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in a typical trust, confidence
is reposed in one person who is named a trustee for the benefit of another who is called the cestui que trust,
respecting property which is held by the trustee for the benefit of the cestui que trust. A constructive trust, unlike an
express trust, does not emanate from, or generate a fiduciary relation. While in an express trust, a beneficiary and a
trustee are linked by confidential or fiduciary relations, in a constructive trust, there is neither a promise nor any
fiduciary relation to speak of and the so-called trustee neither accepts any trust nor intends holding the property for
the beneficiary.

xxxx

x x x [C]onstructive trusts are created by the construction of equity in order to satisfy the demands of justice and
prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold. 80

It is settled that an action for reconveyance based on a constructive implied trust prescribes in 10 years likewise in
accordance with Article 1144 of the Civil Code. Yet not like in the case of a resulting implied trust and an express
trust, prescription supervenes in a constructive implied trust even if the trustee does not repudiate the relationship.
In other words, repudiation of said trust is not a condition precedent to the running of the prescriptive period. 81

As to when the prescriptive period commences to run, Crisostomo v. Garcia 82 elucidated as follows:

When property is registered in another's name, an implied or constructive trust is created by law in favor of the true
owner. The action for reconveyance of the title to the rightful owner prescribes in 10 years from the issuance of the
title. An action for reconveyance based on implied or constructive trust prescribes in ten years from the alleged
fraudulent registration or date of issuance of the certificate of title over the property.
1avvphi1

It is now well settled that the prescriptive period to recover property obtained by fraud or mistake, giving rise to an
implied trust under Art. 1456 of the Civil Code, is 10 years pursuant to Art. 1144. This ten-year prescriptive period
begins to run from the date the adverse party repudiates the implied trust, which repudiation takes place when the
adverse party registers the land.83

From the foregoing, it is clear that an action for reconveyance under a constructive implied trust in accordance with
Article 1456 does not prescribe unless and until the land is registered or the instrument affecting the same is
inscribed in accordance with law, inasmuch as it is what binds the land and operates constructive notice to the
world.84 In the present case, however, the lands involved are concededly unregistered lands; hence, there is no way
by which Margarita, during her lifetime, could be notified of the furtive and fraudulent sales made in 1992 by Roberto
in favor of respondents, except by actual notice from Pedro himself in August 1995. Hence, it is from that date that
prescription began to toll. The filing of the complaint in February 1996 is well within the prescriptive period. Finally,
such delay of only six (6) months in instituting the present action hardly suffices to justify a finding of inexcusable
delay or to create an inference that Margarita has allowed her claim to stale by laches.

WHEREFORE, the Petition is GRANTED. The October 13, 2006 Decision of the Court of Appeals in CA-G.R. CV
No. 72371, affirming the July 2, 2001 judgment of the Regional Trial Court of La Union, Branch 33 in Civil Case No.
1031-BG, is REVERSED and SET ASIDE, and a new one is entered (a) directing the cancellation of the tax
declarations covering the subject properties in the name of Roberto D. Laigo and his transferees; (b) nullifying the
deeds of sale executed by Roberto D. Laigo in favor of respondents Pedro Roy Laigo and Marilou Laigo; and (c)
directing said respondents to execute reconveyance in favor of petitioner.

SO ORDERED.

G.R. No. 137533 November 22, 2002

TALA REALTY SERVICES CORPORATION, petitioner,
vs.
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, respondent.

DECISION

PUNO, J.:

A four-page contract executed by the parties more than two decades ago spurred the present controversy. The
records of the case total thousands of pages, but no amount and fashion of words can forever bury or hide the truth.
Justice will be dispensed to both parties and each would pay the price for its deception.

This is a petition for review on certiorari to annul and set aside the Court of Appeals’ December 18, 1998 decision
and February 17, 1999 resolution affirming the decision of the Regional Trial Court of Malolos, Bulacan, Branch 78,
which dismissed petitioner’s action for ejectment.

Petitioner Tala Realty Services Corporation ("Tala") alleges that it is the absolute owner of nine parcels of land and
their improvements located in Manila, Malabon, Marikina City, La Union, Lucena City, Iloilo City, Davao City,
Pangasinan, and Bulacan by virtue of separate Deeds of Absolute Sale executed between Tala and the respondent
Banco Filipino Savings and Mortgage Bank (the "Bank") on August 25, 1981. The Bulacan property is the subject
matter of this case.1

On that same day, August 25, 1981, Tala and the Bank entered into separate lease contracts over the
aforementioned nine properties. The contracts had the same form and terms, except for the description of the
property and the amount of the monthly rentals. The contracts provided for twenty-year lease periods renewable for
another twenty years at the option of the Bank. The monthly rental for the Bulacan property was P9,800.00. 2

Later that same day, the parties revised these nine lease contracts. The terms of the lease were shortened to
eleven years renewable for a period of nine years "at the option of the lessee under terms and conditions mutually
agreeable to both parties." The monthly rental for the Bulacan property remained P9,800.00. 3

Almost eleven years after the execution of the nine lease contracts, or on August 19, 1992, Tala’s director, Elizabeth
H. Palma, wrote to the Bank reminding the latter that the contracts were about to expire on August 31, 1992, and
that the Bank had earlier signified its interest to renew the lease contracts. The letter also indicated that Tala was
open to discuss the terms and conditions of the renewal of the lease "subject to the condition that the lease rate
which may be mutually agreed upon shall retroact to September 1, 1992." Meantime, Tala would lease the
properties to the Bank on a month-to-month basis until the agreement was finalized. 4

On January 20, 1993, the Bank requested Tala to send its representative to the Bank’s office to negotiate the
renewal of the lease.5 Tala’s director, Elizabeth Palma, negotiated the renewal and submitted a proposal for
increased rental. In its February 10, 1993 letter to the Bank, Tala reiterated the increased rental which was agreed
upon in the previous negotiation. It also stated that Tala was charging the Bank goodwill money for the renewal of
the lease to cover the substantial losses it incurred during the period of the lease and upon its expiration when Tala
was holding the lease sites for the Bank and turning down more profitable offers. The new monthly rental rate for the
Bulacan property was P31,800.00.

On March 4, 1993, the Bank requested Tala to furnish it some documents regarding the lease of Tala’s properties.
For several months from the time of negotiation, the Bank failed to take action on Tala’s proposed terms for the
renewal of the lease contract, prompting Tala to write to the Bank on June 22, 1993; it billed the Bank the difference
between the old monthly rental rate of P9,800.00 it had been paying for the past ten months and the increased rate
of P31,800.006 which, according to Tala, was agreed upon by the parties during the negotiation. 7 Tala also informed
the Bank in its June 22, 1993 letter that since it had been ten months since the expiration of the lease contracts in
August 1992 and the Bank had not taken any definite action to renew the contracts despite being furnished copies
of the same in December 1992, Tala declared itself free to "lease, dispose, sell and/or in any way alienate the bank
branch sites subject of the lease agreement."8

The Bank responded on June 29, 1993, clarifying that it was the Bank which had the option to renew the lease and
that it had communicated to Tala it was exercising its option to do so. However, Tala failed to furnish some
documents relevant to the lease the Bank had earlier requested. The Bank needed the requested documents to
help clear up (1) its sale of the leased properties to Tala and (2) the basis of its lease negotiations with the latter, but
could not find the pertinent deeds of sale and lease contracts over some of the lease sites. On January 15, 1985,
the Central Bank closed the Bank, placed it under receivership, and took possession of its records; but this Court in
1991 declared the closure null and void, and the records were returned. However, the Bank could not find in the
returned records some deeds of sale, lease contracts, and transfer certificates of title regarding the properties Tala
leased to it.9
From the time the lease contract over the Bulacan property expired in August 1992 until March 1994, the Bank
continued to occupy the subject Bulacan property. It paid Tala monthly rentals at the old rate of P9,800.00 from
September 1, 1992 until March 1994, but refused to pay the P22,000.00 difference between the old monthly rate
and the new rate of P31,800.00. Beginning April 1994 until the filing of the instant case, however, the Bank did not
pay any rent at all. Nor did it pay the goodwill money and deposit Tala required for the renewal of the lease. 10

On April 14, 1994, Tala wrote to the Bank demanding payment of the latter’s outstanding obligations of
P1,102,440.00 over the Bulacan property, consisting of unpaid rental adjustment of P440,260.00, deposit of
P127,200.00, and goodwill money of P500,000.00. Tala also informed the Bank that at the end of the month, the
month-to-month lease would no longer be renewed, thus, it should vacate the premises by that time, otherwise,
petitioner would resort to legal action. 11 Still, the Bank refused to pay its outstanding obligations, prompting Tala’s
lawyer to write to it on May 2, 1994 demanding the latter to vacate the premises and to pay its outstanding
obligation within five days from receipt of the letter, otherwise a legal action would be filed against it. 12 The petitioner
wrote similar letters for the nine other properties it leased to the Bank. 13

As the Bank did not comply with Tala’s demands, the latter filed complaints for ejectment and/or unlawful detainer in
the courts where the nine properties are located. The complaint in the case at bar was filed in the Municipal Trial
Court of Malolos on November 11, 1994. 14 Tala prayed therein that the Bank vacate the premises, and pay it
P653,638.00 accrued rentals as of September 30, 1994 and rental of P42,325.00 a month with an annual 10%
escalation from October 1994 until it vacates the premises, and to pay the costs. 15

Parenthetically, on August 5, 1985, while the Bank was closed, placed under receivership and being liquidated by
order of the Monetary Board, counsel for the Bank’s liquidator wrote Tala regarding the lease contracts that have
expired and others that would expire in 2001. It appeared from some lease contracts that the Bank had paid Tala
advance rentals/deposits amounting to P13,937,300.00 which were to cover rentals accruing from the eleventh to
the twentieth year of the lease, i.e., from 1992 to 2001. Since the Bank was under liquidation at that time and had no
more need for the leased premises for that ten-year period, the liquidator’s counsel asked Tala to apply the advance
deposit to the rentals of the properties totaling P423,550.00 a month for the period during which the Bank was
closed and under receivership.16

In a letter dated October 7, 1987, Tala’s lawyer replied to the counsel of the Bank’s liquidator that the amended 11-
year lease contracts of August 25, 1981 provided for the payment of security deposits and not advance rentals so
that said payment could not be used to cover unpaid rentals during the period that the Bank was closed and under
receivership and liquidation. According to Tala’s lawyer, the only time that said security deposits may be applied to
unpaid rents is when the rentals for the last year of the lease contracts were not paid, but the lease contracts were
still due to expire in 1992. 17 The Bank, therefore, could not apply the security deposits to the payment of rentals and
thus had to pay its accrued rentals. However, on February 21, 1990, the Bank’s liquidator wrote Tala informing the
latter that it had approved payment of accrued rents on Tala’s properties leased by the Bank, less the security
deposit of P13,937,300.00 that the Bank had earlier paid for all the properties it leased from Tala. The letter
indicated that the total rent due on all the leased properties as of November 1989 was P19,169,625.00. Applying the
security deposit of P13,937,300.00 to this amount, the net amount due Tala for unpaid rent as of November 1989
was P5,232,325.00. The representative of Tala, Elizabeth H. Palma, agreed to this net amount due for unpaid rent
as of November 1989 and signed in the liquidator’s letter to show conformity to said net amount. 18 Of the unpaid rent
due as of November 1989, P509,600.00 was due with respect to the Bulacan property for the period covering
August 1985 to November 1989.19 Petitioner notes that since the Bank paid only P487,500.00 advance
rental/security deposits on the Bulacan property, there was still a balance of P22,100.00 to be paid by the Bank. 20

The Bank had a different story to tell.

In 1979, the Bank undertook an expansion program, part of which was to purchase the present site of its head office
at corner Paseo de Roxas and Dela Rosa Streets in Makati City. At that time, however, it had already reached the
limit for real estate investment set by Sections 25(a) and 34 of Rep. Act No. 337 or the General Banking Act, as
amended, viz:

"Sec. 25. Any commercial bank may purchase, hold and convey real estate for the following purposes:

(a) such as shall be necessary for its immediate accommodation in the transaction of its business:
Provided, however, that the total investment in such real estate and improvements thereof, including
bank equipment, shall not exceed fifty percent (50%) of net worth: Provided, further, That real estate
used for the bank’s purposes, owned by another corporation in which the bank owns equity, shall be
considered as part of the bank’s total investment in real estate.

xxx xxx xxx

Sec. 34. Savings and mortgage banks may purchase, hold and convey real estate under the same
conditions as those governing commercial banks as specified in Section 25 of this Act."
 To avoid exceeding the limit set by law as it pursued its expansion program, the Bank had to reduce its
branch site holdings and merely lease, instead of own or buy, branch sites. The matter of reducing the
Bank’s existing branch site holdings and leasing them, and leasing new properties instead of buying them
was taken up by Nancy Lim Ty, then senior vice president and director of the Bank, with Tomas Aguirre and
other major stockholders.21 The major stockholders agreed to form an allied corporation to which the Bank’s
existing branch sites could be unloaded and leased back from, and which would acquire new branch sites
for the Bank that the latter would lease. That allied corporation is the petitioner Tala. It was originally named
Alta Realty Services Corporation, but its name was changed to Tala Realty Services Corporation upon
registration with the Securities and Exchange Commission (SEC) as there was already an entity named Alta.
Alta or Tala is an acronym formed by the first letters of the family names of four major stockholders of the
Bank, namely Antonio Tiu, Tomas B. Aguirre, Nancy Lim Ty, and Pedro B. Aguirre. These four major
stockholders contributed P250,000.00 each to put up a P1,000,000.00 capital for Tala. The names of the
four, however, did not appear in Tala’s incorporation papers, and instead the names of their nominees
appeared therein.22

On August 18, 1981, the Bank’s Board of Directors voted to authorize the negotiation for sale and
conclusion of an agreement to sell eleven of their branch sites, including the subject Bulacan property which
was to be sold for P975,000.00. 23 The sale was part of a "warehousing agreement" 24 between the Bank and
Tala, viz:

"The Respondent (Bank) was to transfer or unload25 a number of its existing branch sites to the Petitioner
(Tala) and the latter was to simultaneously lease them back to the former. New branch sites which the
Respondent will be disqualified from buying, by reason of the aforecited limitations under existing banking
laws and regulations, will be acquired for it by the Petitioner which will forthwith lease them to the
Respondent. Any or all of these branch sites will be returned or reconveyed to the Respondent by the
Petitioner at the former’s demand or pleasure at the same transfer or acquisition cost." 26

On August 25, 1981, in accordance with this "warehousing agreement," the Bank executed in favor of Tala eleven
separate deeds of absolute sale, transferring to the latter eleven branch sites, including the subject Bulacan
property.27 On the same day, Tala executed in favor of the Bank eleven separate contracts of lease over the eleven
properties, leasing the branch sites for a term of twenty years "renewable for another period of twenty (20) years, at
the option of the LESSEE."28 All eleven lease contracts were uniform except for the amounts of monthly rentals and
advance rentals. All eleven contracts provided the Bank a "first preference to buy" 29 which was meant to express the
above agreement between the Bank and Tala that "any or all of these branch sites will be returned or reconveyed to
the Respondent by the Petitioner at the former’s demand or pleasure at the same transfer or acquisition cost." This
agreement to reconvey was not spelled out in the lease contracts because the Bank was apprehensive that it might
provide basis for the Central Bank to question the sale and simultaneous lease back of the branch sites between the
Bank and Tala, for being merely simulated, and thereby derail the Bank’s expansion program. But the Bank was
nevertheless confident that Tala would honor the agreement though not written "not only because among bankers,
commitments, though not written, are as binding and are honored as written ones, but also because the Bank was
dealing with an entity owned and backed up by four major stockholders of the Bank: three of whom, namely, Antonio
Tiu, Nancy Lim Ty and Pedro Aguirre, were members of the Bank’s Board of Directors at that time, with one of them,
Nancy Lim Ty, also Senior Vice President at the same time; and the fourth, Tomas Aguirre, was the founder of the
Bank who, in his Affidavit, confirmed the Agreement." 30 That the Bank intended to keep the leased properties can be
gleaned from the fact that as of the filing of the instant case, more than ten years after their sale, their titles remain
in the name of the Bank as shown by TCT No. RT-39662 (T-261735) and RT-39663 (T-261736) of the Registry of
Deeds of the Province of Bulacan.31

As Tala had only P1,000,000.00 paid-up capital as of August 25, 1981, while the combined selling price of the
Bank’s branch sites being unloaded to it was nearly P30,000,000.00, the Bank and Tala devised a way for Tala to
pay the selling price through loans and the Bank’s payment of advance rentals. The eleven lease contracts provided
for payment of substantial advance rentals for the eleventh to the twentieth year of the 20-year contracts of lease.
These advance rentals in the eleven lease contracts were applied to the purchase price stipulated in the eleven
deeds of absolute sale. The balance of the purchase price was paid through loans obtained by Tala, through the
intercession of the Bank, from Pacific Bank and Metrobank with the branch sites as collaterals. The monthly rental
rates for the lease of the eleven properties were pegged at an amount that would allow Tala to meet the
amortizations for said loans and retain 3% of the rentals as compensation for its services. 32 On December 18, 1981,
the Bank paid Tala advance rental in the amount of P487,500.00 and monthly rentals of P39,200.00 for the period
covering September 1981 to December 1981 at P9,800.00 per month over the Bulacan property, less withholding
tax of P26,335.00, or a total of P500,365.00.33

On January 25, 1985, the Central Bank closed the Bank, placed it under receivership, and took over all of its assets,
books and records to the exclusion of the Bank’s board of directors and management. The latter questioned the
closure in several cases, among which was Banco Filipino Savings and Mortgage Bank v. Monetary Board, Central
Bank of the Philippines.34 In this case decided on December 11, 1991, the Court ruled that the Central Bank’s
closure of the Bank was null and void for having been effected arbitrarily and with grave abuse of discretion. 35 As
this decision became final and executory on February 4, 1992, the Bank on February 6, 1992 demanded from the
Central Bank the immediate return of its assets, records and books of account. 36 After about two months, the Central
Bank complied with the Bank’s demand, but returned the records in trickles.

In mid-1992, when the Bank was still in the process of recovering its assets, records, and books of account from the
Central Bank, it received notice from Tala that the Bank’s lease over a number of its branches, including the subject
Bulacan property, was expiring in August 1992. Tala urged the Bank to negotiate with it for the renewal of the lease.
As the Central Bank had not completed the turn-over of the Bank’s records, the Bank asked Tala to furnish it with
copies of the lease contracts which were about to expire. Tala took a while to furnish copies of said contracts and
when it did, it furnished the Bank with lease contracts executed on August 25, 1981 which provided for an eleven-
year lease term renewable for another nine years. 37 The Bank could not simply ignore Tala’s demand to negotiate
the renewal of the lease and thus met with Tala’s representatives. At the same time, however, the Bank pressed the
Central Bank to return the contracts of lease over its branch sites since its officers recalled that the lease contracts
were executed as part of an agreement to unload its branch sites to Tala and that the contracts provided not for
eleven-year, but twenty-year lease terms. Subsequently, the Central Bank returned the lease contracts over the
branch sites, and just as the Bank’s officers recalled, said contracts showed a lease term of twenty years, renewable
for another twenty years at the option of the Bank. Nowhere in the records could be found a lease contract for
eleven years due to expire in August 1992 and renewable for nine years, similar to those Tala furnished the Bank.

The Bank investigated the matter and based on its findings, its board of directors directed the management to
demand from Tala the return or reconveyance of its branch sites in accordance with their 1981 "warehousing
agreement." The Bank posits that this agreement is one of implied trust where Tala as trustee or holder of the legal
title over the leased properties had the duty to reconvey the properties to the Bank which was both the trustor and
beneficiary. The Bank further claims that it is entitled to possession of the subject Bulacan property as an incident of
its ownership of the property. In a letter from the Bank to Tala dated April 12, 1994, the Bank demanded the return
of the subject property.38

In early 1994, the Bank's minority stockholders also filed a derivative suit with the Securities and Exchange
Commission (SEC) against Tala’s stockholders, officers and directors 39 seeking principally to nullify the unloading or
"warehousing agreement" between the Bank and Tala and the return or reconveyance to the Bank of all the branch
sites it had unloaded to Tala, including the subject Bulacan property. Tala moved to dismiss the suit on the ground
of lack of jurisdiction over the nature and subject matter of the action. The SEC denied its motion. 40 The Bank posits
that it was the April 12, 1994 letter and the derivative suit filed with the SEC that precipitated the filing of the instant
case in the Municipal Trial Court of Malolos, Bulacan (MTC of Malolos), as well as eight other ejectment cases
involving the other "warehoused" properties.

After weighing the evidence adduced by both parties, the MTC of Malolos ruled in favor of the Bank, viz:

"Well-settled is the rule that the main issue in an action for an unlawful detainer is determination of who between the
rival claimants has better right of possession to property (Dolido vs. CA, 17 SCRA 400). From the evidence on
record the herein defendant has a better right of possession over the subject property on the basis of a Contract of
Lease dated August 25, 1981 (Exh. ‘5’) wherein it states, among other things, that the term of the lease is for twenty
(20) years. Hence, the said lease will commence from August 25, 1981 and will end on August 5, 2001 (sic).

It cannot be said that the defendant failed to comply with the terms and conditions of the said Contract of Lease
(Exh. ‘5’), particularly the alleged non-payment of rentals thereof considering the provision of paragraph 3 of the
said Contract of Lease. The defendant herein has paid to the plaintiff on December 18, 1981 (Exhibit ‘13’) the sum
of FOUR HUNDRED EIGHTY-SEVEN THOUSAND FIVE HUNDRED PESOS (P487,500.00) as advance rentals, to
be applied to the rentals due from the eleventh (11th) through the twentieth (20th) years of the lease or from 1992
through the year 2001.

The alleged amended Contract of Lease executed by Banco Filipino and TALA Realty dated August 26, 1981 (sic),
marked as Annex ‘A’ in the complaint wherein the term of the lease has been fixed ‘for a period of eleven (11) years,
renewable for another period of nine (9) years at the option of the LESSEE under terms and conditions mutually
agreeable to the parties’ cannot be given credence at all considering that the original of the same were (sic) not
submitted before the Honorable Court. The best evidence to prove the existence of a certain document, the
contents of which is the subject of inquiry, is the original of the same. . .

Although this court has no authority or jurisdiction to pronounce that the contract of lease (Exh. ‘A’ for the plaintiff) is
either genuine, simulated or fictitious, but (sic) this court cannot hesitate to believe that the said Contract of Lease,
with a period of eleven years, is spurious or fictitious. Even Mr. Teodoro O. Arcenas, Jr. who made (sic) to appear in
the said Contract of Lease having signed the (sic) same for and on behalf of the defendant bank, in his capacity as
executive Vice-President thereof denies having signed the same. . .

Needless to say that (sic) even the Clerk of Court of the Regional Trial Court of Manila certified that the notarized
Contract (sic) of Lease allegedly notarized by Rolando C. Salonga, a notary public for and in the City of Manila, on
August 26, 1981 was never reported to that office by the said notary public as required by the notarial law. (Exh. ‘15’
of the Position Paper for the Defendant)
This court cannot (sic) inclined to believe that for (sic) a corporation, as in the instant case Banco Filipino, to execute
two (2) Contract (sic) of Lease almost on the same date involving the same property. (sic) If the Contract of Lease
for eleven (11) years was really executed by the same party (sic) and almost at the same time, a provision would
have been inserted to state that the previous Contract of Lease for twenty (20) years, executed one day prior to the
execution of the Contract of Lease with a period of 11 years, is rescinded or amended, (sic) as the case may be. But
in (sic) the alleged subsequent Contract of Lease provides nothing about it. Besides only (sic) Contract of Lease
with a period of twenty years was submitted to the Central Bank.

Even on the assumption that these two (2) Contract (sic) of Lease (Exh. ‘5’ for the defendant and Exh. ‘A’ for the
plaintiff) are valid and effective as this Court has likewise no jurisdiction to declare either or both contract, as well as
null and void, rescinded or amended, (sic) the defendant has clearly proven by the preponderance of evidence that
it (defendant) has a better right to possess the subject property considering the validity of the said Contract of Lease
(Exhibit ‘5’ for the defendant) stands valid and effective.

xxx xxx xxx

In the verified complaint in the present case, plaintiff admits that there is a pending case before the Securities and
Exchange Commission (SEC), SEC Case No. 04-94-4750, a derivative suit filed by some stockholders of the
defendant bank, for and on its behalf, against the herein plaintiff and other parties, and that said case ‘seek, among
others, the reconveyance of certain properties including the subject matter hereof and prays for the ancillary remedy
of restraining any rental collection.’ (Paragraph 3 of the Complaint)

xxx xxx xxx

Clearly, therefore, that which the plaintiff seeks in this case in (sic) the ejectment of the defendant bank from the
premises in question and the collection of goodwill, deposit and adjusted rentals are the very acts sought to be
restrained in SEC Case No. 04-94-4750. . .

This Court believes that the instant case is an example of forum shopping considering that the essential facts and
circumstances pending in the Securities and Exchange Commission are practically the same facts and
circumstances pending before this Court.

On this score alone the instant complaint should be dismissed."41

The Regional Trial Court of Malolos, Bulacan, Branch 78 ("RTC of Malolos") dismissed petitioner’s appeal of the
decision of the MTC of Malolos for lack of merit, viz:

"The core of the controversy involved in this case revolves around the issue of which of the two (2) contracts of
lease, involving the same premises, should be upheld. One lease contract, providing for a rent period of twenty (20)
years and the other, providing for an eleven-year period. Defendant claims that the latter contract is spurious.
Plaintiff-appellant, on the other hand, contends that the 11-year contract was validly executed superseding the 20-
year lease agreement.

Sustaining the defendant's claim would make valid its continued stay on the questioned premises and would leave
the plaintiff without any cause to evict the defendant. On the other hand, to uphold the plaintiff’s 11-year lease
contract would give the plaintiff-appellant every right to eject the defendant.

Declaring one contract spurious which resultantly declares the other valid is not within the jurisdiction of the
Municipal Trial Court. An action to declare one of the said contracts valid is an action which is incapable of
pecuniary estimation and is therefore cognizable by the Regional Trial Courts. Furthermore, such issue is not proper
in an ejectment suit. It must be properly decided in a separate action filed for that purpose and threshed out before
the proper forum. Absent such finding, ejectment suit against the defendant bank would be premature.

As to the other issues raised, this Court believes, and so holds, that discussion of the same would be futile in view of
the above expositions."42

On appeal to the Court of Appeals, the decision of the RTC of Malolos was affirmed, viz:

"The issue in an ejectment case is the right to physical possession of the premises or possession de facto (Del
Rosario v. Court of Appeals, 241 SCRA 519). Respondent’s assertion of a different contractual relations (sic) with
petitioner and its introduction into evidence of a different contract of lease having a 20-year term, which contract was
indeed the first instrument executed by the parties, as admitted by petitioner, put into issue the real nature of the
contract between the parties, and further bring into fore a second issue: which of the two lease contracts embodies
the real agreement between the parties. As correctly stated by the Regional Trial Court, this would necessitate a
determination of the validity of one contract and conversely, a pronouncement as to the invalidity of the other.
 xxx xxx xxx

There can be no determination by the Municipal Trial Court of whether petitioner had the right to eject respondent
from the premises until the real nature of its transactional relations with respondent is first settled and also until the
question of which contract is binding upon the parties is finally resolved. Since the determination of the contractual
relations between the parties and the issue of validity of contracts are beyond the jurisdiction of the Municipal Trial
Court to adjudicate or pass upon, and the summary action for ejectment which is a mere quieting process could not
proceed until the aforesaid issues have been resolved, the Municipal Trial Court did not err in dismissing the
complaint. Similarly, the Regional Trial Court did not commit a reversible error in holding that the Municipal Trial
Court had no jurisdiction over the issues of the case and that the complaint for ejectment was premature. Indeed,
petitioner should have filed, instead, a plenary action before the proper Regional Trial Court for quieting of title and
recovery of possession, in which proceeding the real contract between it and respondent and their respective rights
and obligations thereunder could be fully ventilated and determined.

With regard to the second assignment of error, since the ejectment suit was premature, there was no reason or
need for the court a quo to pass upon the question of whether sufficient grounds existed to eject respondent from
the leased premises."43

Hence, this petition for review with the following assignment of errors:

"I.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THE MUNICIPAL TRIAL COURT OF MALOLOS,
BULACAN HAS NO JURISDICTION OVER THE INSTANT COMPLAINT FOR EJECTMENT BECAUSE
RESPONDENT HAVING PRESENTED A DIFFERENT SET OF CONTRACT OF LEASE IN ITS ANSWER
TRANSFORMED THIS SUIT INTO ONE INCAPABLE OF PECUNIARY ESTIMATION.

II.

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SUFFICIENT GROUNDS EXIST TO EJECT
RESPONDENT FROM THE LEASED PREMISES."44

At the outset, the Bank clarifies that Tala’s first assignment of error is inaccurate. The Bank points out that the Court
of Appeals upheld the dismissal of the instant case by the MTC of Malolos on two jurisdictional grounds: (1) it did
not have jurisdiction to determine whether the 20-year or 11-year lease contract was valid and genuine, which
transformed the instant suit into one incapable of pecuniary estimation, and (2) it did not have jurisdiction to resolve
the preliminary issue of the real nature of the contractual relation between Tala and the Bank. 45 The latter issue
necessitates a determination of whether there was indeed a lessor-lessee relationship between the parties, or their
transaction partook of an implied trust where the Bank was the trustor and beneficiary and Tala was the trustee with
an obligation to return the subject Bulacan property to the Bank upon the latter’s demand.

The Bank also asserts that the MTC of Malolos was correct in dismissing the complaint for ejectment on the ground
that Tala was guilty of forum shopping in that it filed the complaint for ejectment after the SEC’s denial of its motion
to dismiss on the ground of lack of jurisdiction over the subject matter in SEC Case No. 04-94-4750, the derivative
suit filed in the SEC by the Bank’s minority stockholders for and on behalf of the Bank against Tala. 46 The Bank is of
the view that as pronounced by the MTC of Malolos, "the essential facts and circumstances pending in the
Securities and Exchange Commission are practically the same facts and circumstances pending before the Court." 47

A careful perusal of the decisions of the MTC of Malolos, RTC of Malolos and Court of Appeals would show the
following grounds for their dismissal of the cases before them:

1. The MTC of Malolos dismissed the complaint for ejectment on the ground of forum shopping as the
ejectment and collection of goodwill money, deposit and adjusted rentals in the instant case are the very
acts sought to be restrained by the Bank’s minority stockholders in the derivative suit pending in the SEC.
The MTC decision also discussed that the 20-year lease contract was valid and genuine and that the Bank
had a better right to possess the subject Bulacan property, while the 11-year contract was spurious and
fictitious and its original copy was not presented to the court. The court concluded, however, that it could not
uphold or strike down either contract as it had no jurisdiction to determine the validity of these contracts.

2. The RTC of Malolos dismissed the appeal of the MTC decision and affirmed that the MTC of Malolos had
no jurisdiction to declare a contract valid or invalid as this involves an action incapable of pecuniary
estimation cognizable by the Regional Trial Court. In addition, the RTC of Malolos ruled that such issue is
not proper in an ejectment suit.

3. The Court of Appeals dismissed the petition for review on the ground that the MTC had no jurisdiction to
determine two issues: (1) the nature of the contractual relations between the Bank and Tala; and (2) the
 validity of the 11-year and the 20-year contracts. Since these issues must first be resolved, the summary
action for ejectment was premature and thus could not proceed.

The Memoranda of Tala and the Bank discuss all the grounds upon which the MTC of Malolos, RTC of Malolos and
Court of Appeals based their dismissal of the actions before them. To avoid further prolonging litigation and to settle
the foregoing issues which involve not only the subject Bulacan property but other properties leased by Tala to the
Bank, we will tackle these grounds one by one.

We first deal with the forum shopping issue. For forum shopping to exist, both actions - the derivative suit in the SEC
and the instant ejectment case filed in the MTC of Malolos - must involve the same transactions, same essential
facts and circumstances, and must raise identical causes of actions, subject matter and issues. 48 While the SEC
case seeking annulment of the sale of the Bank’s properties by "warehousing agreement" with Tala includes the
transactions and subject matter as well as the essential facts and circumstances of the instant ejectment suit, the
causes of action and issues in the two cases are different. In the SEC case, the Bank’s minority stockholders seek
the reconveyance of its branch sites transferred to Tala through the "warehousing agreement" in 1981 on the
ground that their sale was simulated and fictitious and without valuable consideration, thus the Bank was the true
owner of the "warehoused" properties. On the other hand, in the instant ejectment suit, Tala seeks physical
possession or possession de facto of the subject Bulacan property and does not deal with the issue of ownership
brought to the fore by an allegation that the sale of the subject Bulacan property is simulated and fictitious. Even the
Bank’s demand for reconveyance in the instant case does not make this case similar to the SEC case. In the latter
case, the Bank’s stockholders seek reconveyance of the subject property on the ground of nullity of the contract of
sale between the Bank and Tala, while in the instant case, the Bank does not seek the declaration of nullity of the
contract of sale executed between it and Tala and instead seeks reconveyance as an enforcement of an alleged
implied trust relationship between it and Tala. The two actions for reconveyance - one based on nullity of sale and
the other on enforcement of an implied trust - are different. 49 An action for reconveyance based on nullity of a
contract of sale does not divest the MTC of jurisdiction over an ejectment suit 50 precisely because the causes of
action and issues in the two cases are different. At any rate, the derivative suit in the SEC was eventually dismissed
for lack of jurisdiction on March 6, 1995.51 We thus find that petitioner is not guilty of forum shopping in filing the
instant case.

We next deal with the jurisdictional issues. The Court of Appeals held that the RTC of Malolos did not err in ruling
that the MTC of Malolos did not have jurisdiction to determine two issues in the present case: (1) jurisdiction to
determine the nature of the contractual relations between the parties, i.e., whether lessor-lessee or trustor-trusee;
and (2) jurisdiction to determine the validity of the 20-year and 11-year contracts.

Anent the first jurisdictional issue, the MTC of Malolos had jurisdiction to determine the contractual relations
between the Bank and Tala in order to settle the issue of ownership and possession of the subject property. The
Revised Rules on Summary Procedure, effective November 15, 1991, prior to the filing of the instant case in
November 1994, provide in Section 1, A(1), viz:

"Section 1. Scope. - This rule shall govern the summary procedure in the Metropolitan Trial Courts, the
Municipal Trial Courts in Cities, the Municipal Trial Courts, and the Municipal Circuit Trial Courts in the
following cases falling within their jurisdiction:

A. Civil Cases:

(1) All cases of forcible entry and unlawful detainer, irrespective of the amount of damages or unpaid
rentals sought to be recovered. x x x."

All ejectment cases are covered by the rules on summary procedure and are within the jurisdiction of
the said inferior courts regardless of whether they involve questions of ownership. The courts in
ejectment cases may determine questions of ownership whenever necessary to decide the question
of possession.52

Rep. Act No. 7691, approved on March 25, 1994, amended Section 33 of the Judiciary
Reorganization Act of 1980, viz:

"Sec. 33. Jurisdiction of Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial
Courts in Civil Cases. - Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial
Courts shall exercise:

xxx xxx xxx

(2) Exclusive original jurisdiction over cases of forcible entry and unlawful detainer: Provided, That
when, in such cases, the defendant raises the question of ownership in his pleadings and the
question of possession cannot be resolved without deciding the issue of ownership, the issue of
ownership shall be resolved only to determine the issue of possession . . ." (emphasis supplied)
 The 1997 Rules of Civil Procedure also provide in Section 16, viz:

"Sec. 16. Resolving defense of ownership. - When the defendant raises the defense of ownership in his
pleadings and the question of possession cannot be resolved without deciding the issue of ownership, the
issue of ownership shall be resolved only to determine the issue of possession."

The pivotal question in the instant case, therefore, is whether or not it is necessary to settle the question of
ownership based on the alleged "warehousing agreement" or trustor-trustee relationship in order to settle the issue
of possession. The decision of the MTC of Malolos discussed the validity of the 11-year and the 20-year contracts. It
noted that the 11-year contract was spurious and the 20-year contract was genuine and governed the relationship
between Tala and the Bank, but the court did not uphold the 20-year contract nor strike down the 11-year contract
for want of jurisdiction. The decision also touched upon the "warehousing" circumstances under which the 20-year
contract was executed as described by the Bank, but only in its narration of facts. It did not discuss, much less rule
on, the validity of the "warehousing agreement." The RTC of Malolos did not also rule upon whether or not the issue
of ownership based on the "warehousing agreement" needed to be resolved to determine the issue of possession.
The Court of Appeals, however, found that the resolution of the real nature of the contractual relations between the
parties is a prerequisite to determine the issue of ownership and possession.

We agree with the appellate court that it is necessary to resolve the real nature of the contractual relations between
Tala and the Bank to determine ownership over the subject property and consequently settle the issue of who
between the Bank or Tala has the right to possess the property. Tala’s right to lease the property to the Bank
proceeds from its (Tala’s) claim of ownership of the property based on a contract of sale executed between it and
the Bank on August 25, 1981. The Bank, however, disputes Tala’s ownership "in fee simple" as stated in its 20-year
lease contract with Tala as it (the Bank) alleges that there is an implied trust relationship between the Bank as
trustor and beneficiary and Tala as trustee. Pursuant to this implied trust, the Bank in April 1994 demanded Tala to
perform its obligation as trustee and return the disputed property to the Bank as trustor and beneficiary. The Bank is
of the view, therefore, that since it had already sought enforcement of the implied trust and reconveyance of the
subject property, the Bank had the right to its possession and Tala did not have a right to eject it from the property.

There is no doubt that the Bank sold the subject property to Tala on August 25, 1981 and that the latter leased the
property to the Bank on the same day. The Bank itself admits that it executed the August 25, 1981 contract of sale
over the subject property with Tala. Its provisions are clear that the Bank transferred ownership of the subject
property to Tala, viz:

"NOW, THEREFORE, for and in consideration of the foregoing premises and of the agreed purchase price of Nine
Hundred Seventy Five Thousand Pesos Only (P975,000.00), Philippine Currency, which the VENDEE have (sic)
now paid to the VENDOR and receipt whereof in full the VENDOR acknowledged and confessed to its entire and
complete satisfaction, the said VENDOR do (sic) hereby SELL, TRANSFER, CEDE, and CONVEY and by these
presents have SOLD, TRANSFERRED, CEDED, and CONVEYED absolutely and perpetually, unto the VENDEE,
its transferee and assigns, all of its above described properties as free from all liens and encumbrances
whatsoever . . ."

With the limitation set by the General Banking Act on the Bank’s real estate holdings, the Bank did not have a
choice but to transfer ownership of the subject property to Tala. Hence, in the 20-year lease contract which the Bank
claims is the valid and genuine lease contract, it is stated that Tala is "the owner in fee simple" of the subject
property.

The contemporaneous and subsequent acts of the parties unequivocally show that a genuine sale and lease of the
Bulacan property were consummated. The Bank paid advance rentals in the amount of P487,500.00 and monthly
rentals of P39,200.00 for the first three months of the lease, i.e., from September to December 1981, as evidenced
by the Bank’s own Exhibit 13, the official receipt that Tala issued to the Bank for the said amounts. 53 The Bank,
however, argues that the sale and lease of the property were not really contemplated by the parties because part of
the payment for the purchase price came from the Bank’s own payment of advance rentals, and the amortizations of
the loan which paid the balance of the purchase price were paid out of the Bank’s monthly rentals on the property.
In other words, Tala did not really pay for the purchase price as it did not have to shell out a single centavo under
the arrangement. Instead, according to the Bank, the arrangement between Tala and the Bank should be
understood as a "warehousing agreement" whereby Tala holds the subject property for the Bank.

The Bank’s argument fails to support its cause. The application of the advance rentals to the purchase price and the
monthly rentals to the loan amortizations does not negate, but even bolsters the conclusion that there was a
genuine sale and lease between the Bank and Tala because the arrangement shows that there was in fact valuable
consideration for the sale and lease. Simply put, Tala truly had to pay the purchase price for the Bank to sell the
subject property to it and the Bank truly had to pay rentals to Tala for its lease. It is of no moment that the purchase
price came from the advance and monthly rentals paid by the Bank itself because these amounts were due to Tala
as the lessor. As such, it could dispose of the money by applying it to a portion of the purchase price and the
amortizations of its loan that covered the balance of the purchase price.
Having established that there was a genuine sale and lease of the disputed property, we now determine which of
the two lease contracts - the 20-year contract or 11-year contract - is valid and genuine. Tala claims it is the former
while the Bank asserts that it is the latter. This brings us to the other jurisdictional issue of whether or not the MTC of
Malolos had jurisdiction to determine the validity of the lease contracts. The MTC of Malolos, RTC of Malolos and
Court of Appeals all ruled that the MTC of Malolos did not have jurisdiction to decide this question of validity as this
is an issue incapable of pecuniary estimation cognizable by the Regional Trial Court. We find it unnecessary to
settle this jurisdictional issue at this point as this Court has already ruled upon the validity of similar contracts in
several cases between the same parties, involving the same issues and set of facts and circumstances, with only
the property subject of the lease contracts varying.

Dictated by the doctrine of stare decisis,54 we adhere to the factual finding of this Court that the 20-year lease
contract governs the relationship between the parties and that the 11-year lease contract is spurious in the following
cases: Tala Realty Services Corporation v. Banco Filipino Savings and Mortgage Bank, G.R. No. 129887, February
17, 2000, penned by Justice Sabino de Leon, Jr.; Tala Realty Services Corporation v. Banco Filipino Savings and
Mortgage Bank, G.R. No. 137980, June 20, 2000, penned by Justice Consuelo Ynares-Santiago; and Tala Realty
Services Corporation v. Banco Filipino Savings and Mortgage Bank, G.R. No. 132051, June 25, 2001, penned by
Justice Angelina Sandoval-Gutierrez. Following the stare decisis doctrine, the last two cases adhered to and quoted
the following conclusion of the first case that the 20-year contract is valid and the 11-year contract is spurious:

"Second. Petitioner Tala Realty insists that its eleven (11)-year lease contract controls. We agree with the MTC and
the RTC, however, that the eleven (11)-year contract is a forgery because (1) Teodoro O. Arcenas, then Executive
Vice-President of private respondent Banco Filipino, denied having signed the contract; (2) the records of the notary
public who notarized the said contract, Atty. Generoso S. Fulgencio, Jr. do not include the said document; and (3)
the said contract was never submitted to the Central Bank as required by the latter’s rules and regulations (Rollo,
pp. 383-384.).

Clearly, the foregoing circumstances are badges of fraud and simulation that rightly make any court suspicious and
wary of imputing any legitimacy and validity to the said lease contract.

Executive Vice-President Arcenas of private respondent Banco Filipino testified that he was responsible for the daily
operations of said bank. He denied having signed the eleven (11)-year contract and reasoned that it was not in the
interest of Banco Filipino to do so (Rollo, p. 384). That fact was corroborated by Josefina C. Salvador, typist of
Banco Filipino’s Legal Department, who allegedly witnessed the said contract and whose initials allegedly appear in
all the pages thereof. She disowned the said marginal initials (Id., p. 385).

The Executive Judge of the RTC supervises a notary public by requiring submission to the Office of the Clerk of
Court of his monthly notarial report with copies of acknowledged documents thereto attached. Under this procedure
and requirement of the Notarial Law, failure to submit such notarial report and copies of acknowledged documents
has dire consequences including the possible revocation of the notary’s notarial commission.

The fact that the notary public who notarized petitioner Tala Realty’s alleged eleven (11)-year lease contract did not
retain a copy thereof for submission to the Office of the Clerk of Court of the proper RTC militates against the use of
said document as a basis to uphold petitioner’s claim. The said alleged eleven (11)-year lease contract was not
submitted to the Central Bank whose strict documentation rules must be complied with by banks to ensure their
continued good standing. On the contrary, what was submitted to the Central Bank was the twenty-year lease
contract.

Granting arguendo that private respondent Banco Filipino deliberately omitted to submit the eleven (11)-year
contract to the Central Bank, we do not consider that fact as violative of the res inter alios acta aliis non nocet
(Section 28, Rule 130, Revised Rules of Court provides, viz.: ‘Sec. 28. Admission by third party - The rights of a
party cannot be prejudiced by an act, declaration or omission of another, except as hereinafter provided;’ Compania
General de Tabacos v. Ganson, 13 Phil. 472, 477 [1909]) rule in evidence. Rather, it is an indication of said
contract’s inexistence.

It is not the eleven (11)-year contract but the twenty (20)-year lease contract which is the real and genuine contract
between petitioner Tala Realty and private respondent Banco Filipino. Considering that the twenty (20)-year lease
contract is still subsisting and will expire in 2001 yet, Banco Filipino is entitled to the possession of the subject
premises for as long as it pays the agreed rental and does not violate the other terms and conditions thereof (Art.
1673, New Civil Code)."55 (emphasis supplied)

In the case at bar, the above-quoted "badges of fraud and simulation that rightly make any court suspicious and
wary of imputing any legitimacy and validity to the said lease contract" are also present. The MTC of Malolos found
that Teodoro Arcenas, then Executive Vice-President of the Bank at the time the alleged 11-year contract was
signed, denied having signed the 11-year contract.56 Josefina G. Corpuz, then clerk typist in the Bank’s legal
department also disowned her alleged marginal initials in every page of the contract. 57 The Clerk of Court of the
Regional Trial Court of Manila certified that the notarized 11-year contract of lease dated August 26, 1981, allegedly
notarized by Rolando C. Salonga, a notary public for the City of Manila, was never reported to that office by the
notary public as required by law.58 The 11-year lease contract was also not submitted to the Central Bank. 59 We find
no reason to depart from the finding in the other cases between Tala and the Bank that the 20-year contract is the
real and genuine contract between the parties and the 11-year contract is spurious.

In addition, Tala admits that the nine ejectment cases it filed against the Bank with respect to the nine properties it
leased to the latter, including the subject property, "involve the same parties-litigants and stemmed from a single
chain of events and issues." In collecting unpaid rentals from the Bank, Tala itself invokes the doctrine of stare
decisis in inviting this Court’s attention to the decisions in G.R. No. 129887, G.R. No. 137980, and G.R. No. 132051,
all similarly entitled Tala Realty Services Corporation v. Banco Filipino Savings and Mortgage Bank, holding that "it
is the TWENTY (20)-year lease agreement which governs the relations of the parties." 60

The Bank alleges that the sale and twenty-year lease of the disputed property were part of a larger implied trust
"warehousing agreement." Concomitant with this Court’s factual finding that the 20-year contract governs the
relations between the parties, we find the Bank’s allegation of circumstances surrounding its execution worthy of
credence; the Bank and Tala entered into contracts of sale and lease back of the disputed property and created an
implied trust "warehousing agreement" for the reconveyance of the property. In the eyes of the law, however, this
implied trust is inexistent and void for being contrary to law.61

A trust is defined as a "fiduciary relationship with respect to property which involves the existence of equitable duties
imposed upon the holder of the title to the property to deal with it for the benefit of another. A person who
establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of
another is known as the trustee; and the person for whose benefit the trust has been created is referred to as the
beneficiary or cestui que trust." 62 In the instant case, the Bank claims to be both the trustor and beneficiary while
Tala is the trustee.

Trust is either express or implied. The Bank, in alleging the existence of an implied trust between it and Tala, relies
on Articles 1448 and 1453 of the New Civil Code which provide:

"Art. 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price
is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while
the latter is the beneficiary. . .

xxx xxx xxx

Art. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it
to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated." 63

Implied trusts are either resulting or constructive trusts. Morales v. Court of Appeals 64 describes the two, viz:

"Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines the
equitable title or interest and are presumed always to have been contemplated by the parties. They arise from the
nature or circumstances of the consideration involved in a transaction whereby one person thereby becomes
invested with legal title but is obliged in equity to hold his legal title for the benefit of another. On the other hand,
constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent
unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence,
obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold." 65

Both Articles 1448 and 1453 invoked by the Bank are examples of resulting trusts. 66

An implied trust could not have been formed between the Bank and Tala as this Court has held that "where the
purchase is made in violation of an existing statute and in evasion of its express provision, no trust can result in
favor of the party who is guilty of the fraud." 67 In Ramos v. Court of Appeals, 68 Lydia Celestino was a Central Bank
employee disqualified from owning a lot through the People’s Homesite & Housing Corporation (PHHC) which
awarded rights to buy certain parcels of land to employees of the Central Bank. Only those who did not own lots in
Quezon City were qualified, but she already owned a residential lot in Quezon City. To circumvent her
disqualifaction, she "purchased" a lot from the PHHC through a qualified Central Bank employee. After Celestino
paid the full purchase price of the PHHC-awarded lot and issues arose regarding the ownership of the property,
Celestino filed an action for reconveyance to enforce the resulting trust between her and the qualified Central Bank
employee based on Article 1448 of the New Civil Code. The Court ruled that the alleged resulting trust was void, viz:

"The inevitable conclusion then is that Lydia Celestino, knowing of her disqualification to acquire a lot from the
PHHC at the subdivision reserved for qualified Central Bank employees, tried to get one through the backdoor.
Otherwise stated, she wanted to get indirectly that which she could not do so directly. Having acted with evident bad
faith, she did not come to court with clean hands when she asked for the reconveyance of the property on the basis
of a resulting trust under Article 1448 of the Civil Code.
A resulting trust is an ‘intent-enforcing’ trust, based on a finding by the court that in view of the relationship of the
parties their acts express an intent to have a trust, even though they did not use language to that effect. The trust is
said to result in law from the acts of the parties. However, if the purpose of the payor of the consideration in having
title placed in the name of another was to evade some rule of the common or statute law, the courts will not assist
the payor in achieving his improper purpose by enforcing a resultant trust for him in accordance with the ‘clean
hands’ doctrine. The court generally refuses to give aid to claims from rights arising out of an illegal transaction,
such as where the payor could not lawfully take title to land in his own name and he used the grantee as mere
dummy to hold for him and enable him to evade the land laws. . . (George T. Bogert, Trusts, sec. 74 [6th ed. 1987]).

Otherwise stated, as an exception to the law on trusts, ‘[a] trust or a provision in the terms of a trust is invalid if the
enforcement of the trust or provision would be against public policy, even though its performance does not involve
the commission of a criminal or tortuous act by the trustee.’ (Restatement [Second] of Trusts 62 [1959]) The parties
must necessarily be subject to the same limitations on allowable stipulations in ordinary contracts, i.e., their
stipulations must not be contrary to law, morals, good customs, public order, or public policy (Article 1306, Civil
Code). What the parties then cannot expressly provide in their contracts for being contrary to law and public policy,
they cannot impliedly or implicitly do so in the guise of a resulting trust." 69 (emphasis supplied)

Applying the Ramos ruling to the case at bar, the Bank cannot use the defense of nor seek enforcement of its
alleged implied trust with Tala since its purpose was contrary to law. As admitted by the Bank, it "warehoused" its
branch site holdings to Tala to enable it to pursue its expansion program and purchase new branch sites including
its main branch in Makati, and at the same time avoid the real property holdings limit under Sections 25(a) and 34 of
the General Banking Act which it had already reached.70 The Bank stated in its Memorandum that "the (n)ew branch
sites which the Respondent (Bank) will be disqualified from buying, by reason of the aforecited limitations under
existing banking laws and regulations, will be acquired for it by the Petitioner (Tala) which will forthwith lease them
to the Respondent (Bank)."71 The Bank also admitted that the agreement that the branch sites "will be returned to
the bank anytime at its pleasure at the same transfer price" was differently stated in the lease contracts as a "first
preference to buy" because the Bank was apprehensive that the agreement to return property, "if spelled out as-is in
the documents, might provide basis for the Central Bank to question the sale and simultaneous lease back of the
branch sites as simulated and accordingly, derail the expansion program of the Respondent." 72

Clearly, the Bank was well aware of the limitations on its real estate holdings under the General Banking Act and
that its "warehousing agreement" with Tala was a scheme to circumvent the limitation. Thus, the Bank opted not to
put the agreement in writing and call a spade a spade, but instead phrased its right to reconveyance of the subject
property at any time as a "first preference to buy" at the "same transfer price." This arrangement which the Bank
claims to be an implied trust is contrary to law. Thus, while we find the sale and lease of the subject property
genuine and binding upon the parties, we cannot enforce the implied trust even assuming the parties intended to
create it. In the words of the Court in the Ramos case, "the courts will not assist the payor in achieving his improper
purpose by enforcing a resultant trust for him in accordance with the ‘clean hands’ doctrine." 73 The Bank cannot thus
demand reconveyance of the property based on its alleged implied trust relationship with Tala.

We now come to the second assignment of error involving the issue of whether or not sufficient grounds exist to
eject the Bank from the leased premises. In G.R. No. 137980 and G.R. No. 132051, this Court ruled that there was
a ground for ejectment as the Bank failed to pay rent, viz:

"While advance rentals appear to have been made to be applied for the payment of rentals due from the eleventh
year to the twentieth year of the lease, to wit-

‘3. That upon the signing and execution of this Contract, the LESSEE shall pay the LESSOR ONE MILLION
TWENTY THOUSAND PESOS ONLY (P1,020,000.00) Philippine Currency representing advance rental to be
applied on the monthly rental for the period from the eleventh to the twentieth year.’

the records show that such advance rental had already been applied for rent on the property for the period of
August, 1985 to November, 1989.

Thus, when respondent stopped paying any rent at all beginning April, 1994, it gave petitioner good ground for
instituting ejectment proceedings. We reiterate the ruling in T & C Development Corporation, supra, that if ever
petitioner took exception to the unilateral or illegal increase in rental rate, it should not have completely stopped
paying rent but should have deposited the original rent amount with the judicial authorities or in a bank in the name
of, and with notice to, petitioner. This circumstance, i.e., respondent’s failure to pay rent at the old rate, does not
appear in G.R. No. 129887. Thus, while we are bound by the findings of this Court’s Second Division in that case
under the principle of stare decisis, the fact that respondent’s failure to pay any rentals beginning April 1994, which
provided ground for its ejectment from the premises, justifies our departure from the outcome of G.R. No. 129887. In
this case, we uphold petitioner’s right to eject respondent from the leased premises." 74 (emphasis supplied)

On motion for reconsideration of the decision in G.R. No. 137980, the Bank insisted that it should be excused from
liability as its closure and consequent lack of access to its funds to pay its obligations, including the rentals on the
leased premises, was a fortuitous event. In its Resolution,75 the Court ruled on this issue, viz:
"Granting, without conceding, that liability should not lie with respondent for unpaid rentals on the leased premises
while it was under control of the Central Bank, this matter is not an issue in the instant case, where the subject
matter is merely ejectment. As the lessee of the premises, respondent had the exclusive obligation to settle any
unpaid rentals. Petitioner dealt directly with respondent, and therefore had the right to enforce the lease contract
against respondent only. Any right of action that respondent may have against the Central Bank is a matter that can
be best ventilated in the proper forum."76

A close scrutiny of the facts of the case at bar compels us to arrive at a conclusion different from the resolution of
the motion for reconsideration of the decision in G.R. No. 137980. The question of whether the Bank was liable to
pay rents at the time it was arbitrarily closed by the Central Bank is decisive of the issue of ejectment on the ground
of non-payment of rent.

Equity dictates that Tala should not be allowed to collect rent from the Bank. The factual milieu of the instant case
clearly shows that both the Bank and Tala participated in the deceptive creation of a trust to circumvent the real
estate investment limit under Sections 25(a) and 34 of the General Banking Act. Upholding Tala’s right to collect
rent for the period during which the Bank was arbitrarily closed would allow Tala to benefit from the illegal
"warehousing agreement." This would result in the application of the Bank’s advance rentals covering the eleventh
to the twentieth years of the lease, to the rentals due for the period during which the Bank was arbitrarily closed.
With the advance rentals already used up, and the Bank having stopped payment of rent on the thirteenth year of
the lease or in April 1994, rentals would be due Tala from the time the Bank stopped paying rent in April 1994 up to
the expiration of the lease period. Just as the Bank should not be allowed to benefit from its deceptive "warehousing
agreement," Tala should also not benefit from the arrangement as it was the Bank’s major stockholders that
proposed the arrangement and incorporated Tala. Tala committed deception by participating in the "warehousing
agreement," and committed another deception when it turned the tables on the Bank and denied the arrangement.
Allowing Tala to further benefit from the "warehousing agreement" is unconscionable, to say the least.

The Bank and Tala are in pari delicto, thus, no affirmative relief should be given to one against the other. 77 The Bank
should not be allowed to dispute the sale of its lands to Tala nor should Tala be allowed to further collect rent from
the Bank. The clean hands doctrine will not allow the creation or the use of a juridical relation such as a trust to
subvert, directly or indirectly, the law.78 Neither the Bank nor Tala came to court with clean hands; neither will obtain
relief from the court as one who seeks equity and justice must come to court with clean hands. 79 By not allowing
Tala to collect from the Bank rent for the period during which the latter was arbitrarily closed, both Tala and the Bank
will be left where they are, each paying the price for its deception.

In hindsight, the payment of rent on the subject Bulacan property covering the period August 1985 to November
1989 by the Bank’s liquidator and the lawyer of the latter was a payment by mistake because as a matter of equity,
Tala did not have the right to collect nor did the Bank have the corresponding obligation to pay rent for the period of
its arbitrary closure. Tala thus holds in trust for the Bank the erroneous payment made by the Bank’s liquidator
pursuant to Article 1456 of the New Civil Code, which provides:

"Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a
trustee of an implied trust for the benefit of the person from whom the property comes."

Consequently, we rule that the advance rentals paid by the Bank for the period covering the eleventh to the
twentieth year of the 20-year lease contract, i.e., from 1992 to 2001, subsist as advance rentals and should not have
been applied to the payment of rentals on the Bulacan property for the period covering August 1985 to November
1989 during which the Bank was arbitrarily closed. If at all, Tala should seek remedy for its loss from the Central
Bank which caused the Bank’s arbitrary closure and not from the Bank which was itself a victim of the arbitrary act
of government.

In sum, there is no ground for ejectment in the case at bar at the time the ejectment suit was instituted in the MTC of
Malolos, whether on the ground of expiration of the lease contract or non-payment of rent. We note, however, that
by this time, the lease contract over the subject Bulacan property executed between Tala and the Bank on August
25, 1981, which stipulated a twenty-year lease period beginning September 1, 1981 already expired in August 2001.
In the absence of renewal or extension of the lease contract, Tala has the right to eject the Bank from the subject
Bulacan property on the ground of expiration of the contract.

WHEREFORE, the petition is dismissed. Costs against petitioner.

SO ORDERED.
G.R. No. 143185 February 20, 2006

NESTOR MENDIZABEL, ELIZABETH MENDIZABEL, IGNACIO MENDIZABEL, and ADELINA

VILLAMOR, Petitioners,
vs.
FERNANDO APAO and TEOPISTA PARIDELA-APAO, Respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review1 to set aside the Decision2 dated 30 July 1999 and the Resolution3 dated 5 April 2000 of
the Court of Appeals in CA-G.R. CV No. 52803. The Court of Appeals affirmed the Decision 4 dated 25 August 1995
of the Regional Trial Court of Pagadian City, Branch 18 ("trial court") in Civil Case No. 2737.

The Facts

On 21 March 1955, Fernando Apao ("Fernando") purchased from spouses Alejandro 5 and Teofila Magbanua
("vendors") a parcel of land with an area of 61,616 square meters ("property") situated in Malangas, Zamboanga del
Sur. Fernando bought the property for ₱400. The vendors executed a deed of sale which stated inter alia that they
could purchase back the property within six months for ₱400, failing which, the sale would become absolute. The
vendors failed to repurchase the property. Fernando thus took possession of the same. 6

On 1 April 1958, Fernando had the property surveyed by Engr. Ernesto Nuval together with the piece of land
adjacent to it, which he had previously purchased from one Leopoldo Carloto. The Bureau of Lands approved the
survey on 2 July 1959 resulting in the issuance of Survey Plan Psu-173083 covering both lots. 7 Upon receipt of the
approved survey plan, Fernando immediately filed an application with the Bureau of Lands for a free patent over the
entirety of Psu-173083.8 His application was docketed as F.P.A. No. 18-1481.9

After the survey of Fernando’s land, the Survey Party of the Bureau of Lands surveyed the same area. This latter
survey resulted in a subdivision of the land into two separate and distinct lots identified as Lot Nos. 407 and
1080.10 Fernando learned that Ignacio Mendizabel ("Ignacio") had filed prior to the Bureau of Lands’ survey a
homestead application over Lot No. 1080. Fernando became the claimant-protestant in Ignacio’s application,
docketed as H.A. No. 18-8905 (E-18-8521).11

On 11 May 1962, the Bureau of Lands Regional Office in Zamboanga City rendered a decision awarding Lot No.
1080 to Ignacio.12

On appeal,13 the Secretary of Agriculture and Natural Resources modified the decision of the Bureau of Lands. The
dispositive portion of the decision of the Secretary of Agriculture and Natural Resources reads:

Wherefore, the decision of the Director of Lands dated May 11, 1962, should be, as hereby it is set aside. The free
patent application No. 18-1481 of Fernando Apao shall be given due course for Lot No. 407 and Homestead
Application No. 18-8905 of Ignacio Mendizabel for Lot No. 1080.14

Dissatisfied with the decision of the Secretary of Agriculture and Natural Resources, Fernando appealed to the
Office of the President.15 Fernando did not receive any notice of the decision on his appeal. Barely 10 days after he
filed his appeal, Fernando found out from the Office of the Register of Deeds of Pagadian City that Lot No. 1080 had
been partitioned between Ignacio and his son Nestor Mendizabel ("Nestor"). Fernando learned that Lot No. 1080
was already titled separately as Lot No. 1080-A covered by Original Certificate of Title No. P-29,822 in the name of
Nestor, and Lot No. 1080-B covered by Original Certificate of Title No. P-29,823 in the name of Ignacio. The
Register of Deeds issued the certificates of title on 14 December 1982.16

Fernando talked to Nestor and Ignacio, pleading with them to reconvey the property to him. Nestor and Ignacio
rejected Fernando’s request.
On 6 August 1987, Fernando and his wife Teopista Paridela-Apao 17 ("respondents") filed before the trial court a
complaint18 for Annulment of Titles, Reconveyance and Damages against spouses Nestor and Elizabeth Mendizabel
and spouses Ignacio Mendizabel and Adelina Villamor ("petitioners"). Respondents alleged in their complaint that
they were the "true and actual possessors" of a parcel of agricultural land more particularly described as follows:

Certain parcel of land actually devoted to corn and rice cultivation, root crops, bananas and about one hundred
(100) punos of coconut fruit bearing trees and with four (4) residential houses occupied by produce-sharing tenants
and with all other existing improvements thereon, located at Kilometer 4, Barangay Mabini, Malangas, Zamboanga
del Sur. Bounded on the NORTH by the lot of Ricardo Conwi; on the SOUTH by the lot of the herein plaintiffs; on the
EAST by the National Highway; and on the WEST by the lot of Leonardo Aban, containing an area of sixty-one
thousand six hundred-sixteen (61,616) sq.m., more or less.19

Respondents also alleged that petitioners secured the titles to the property "fraudulently." Respondents asserted
that –

x x x Assuming, arguendo, that the issuance thereof, could have been based and predicated upon the resolution of
the aforesaid land conflict by and between herein plaintiffs and defendant, Nestor Mendizabel, which has been
raised on appeal to the Office of [the] President, nonetheless, such administrative decision/order and/or resolution, if
any there be, did not since then ripen into or attain its finality and enforceability, for the basic and fundamental
reason that plaintiffs who, are directly affected thereby, has [sic] not been furnished with a copy thereof. 20

In their answer,21 petitioners claimed that Ignacio, whose wife Adelina Villamor ("Adelina") had since died, purchased
the property, identified as Lot No. 1080, from Alejandro Magbanua on 24 May 1955. Petitioners claimed that Ignacio
took possession of the property and introduced improvements on it. Petitioners also asserted that the issuance of
Original Certificate of Title No. P-29,822 covering Lot No. 1080-A in the name of Nestor, and Original Certificate of
Title No. P-29,823 covering Lot No. 1080-B in the name of Ignacio was based on a homestead patent granted by
then President Ferdinand Marcos on 6 April 1971.

As affirmative defenses, petitioners claimed that respondents had no cause of action against them as respondents
had no personality to institute the present case "seeking the nullity of a patent issued by order of the President of
the Philippines."

As counterclaim, petitioners alleged that the present case was filed merely to harass them because respondents
knew that the Bureau of Lands, Secretary of Agriculture and Natural Resources, and the Office of the President had
already adjudged petitioners the owners of the property. Petitioners sought the dismissal of the complaint and asked
for damages.

On 25 March 1988, respondents filed their Answer to Counterclaims and Petition for Issuance of an Ancillary
Restraining Writ.22 Respondents alleged that on 21 March 1988, petitioners, through Lorenzo Brañanula
("Brañanula"),23 respondents’ tenant for 25 years, surreptitiously harvested coconuts from the coconut trees on the
property. Respondents claimed that when they confronted Brañanula, he told them that Oscar Guevarra, the INP
Station Commander of the Buug Police Force in Pagadian City and who was petitioners’ administrator of the
property, directed him to harvest the coconuts.

Respondents asked the trial court to issue "an injunctive, prohibitory, mandatory restraining writ" ordering petitioners
to desist and refrain from disturbing the peaceful enjoyment and possession of respondents of the property during
the pendency of the proceedings, lest respondents suffer more damages.

On 30 March 1988, the trial court issued an Order granting respondents’ petition for issuance of a restraining order. 24

On 29 April 1988, petitioners filed a Motion for Leave to Amend Answer. 25

On 16 May 1988, respondents filed an Opposition to Defendants’ Motion for Leave to Amend Answer and Motion to
Declare Co-Defendants Ignacio Mendizabel and Wife in Default. 26 Respondents claimed that petitioners’ Amended
Answer had substantially altered petitioners’ defenses. Respondents asserted that allowance of petitioners’
Amended Answer would only cause undue delay in deciding the present case. Respondents further asserted that
Ignacio and his wife Adelina should be declared in default considering that from the time petitioners were served
with summons and copies of the complaint on 21 October 1987, only Nestor had filed his Answer.

The trial court denied respondents’ Motion to Declare Ignacio and Wife in Default in its Order dated 15 June 1988.
The trial court allowed petitioners’ Amended Answer.27

In their Amended Answer,28 petitioners included the defenses of prescription, estoppel and laches, and the
indefeasibility and incontrovertibility of their titles.
On 12 January 1989, respondents filed an Urgent Motion to Declare Defendants and Hired Hands in Contempt of
Court.29 Respondents asserted that despite the restraining order issued by the trial court, petitioners, through their
hired hands, namely, Brañanula, Francisco Briones, and Oscar Guevarra, harvested palay, corn, and coconuts from
the property in October 1988 and on 2 December 1988. Respondents asserted that unless petitioners and their
agents are enjoined from disturbing respondents’ peaceful possession of the property, respondents would continue
to suffer irreparable damages.

On 13 January 1989, the trial court issued an Order citing petitioners and their hired hands in contempt of
court.30 Upon petitioners’ Motion for Reconsideration, the trial court set aside the order. 31

On 9 November 1989, petitioners filed a Notice of Death 32 stating that Adelina died on 8 April 1983. The Notice
stated that Adelina was survived by her six children. In its Order 33 dated 28 November 1989, the trial court directed
petitioners to submit the names of Adelina’s children. The trial court stated that Adelina’s children would substitute
her in the proceedings.

Respondents presented three witnesses: Brañanula, Justiniano Lizardo ("Lizardo"), both of whom were residents of
Malangas, Zamboanga del Sur, and Fernando himself. Respondents also offered documentary evidence consisting
of a Sketch Plan and the blue print of the approved subdivision plan of respondents’ land identified as Psu-173083.

On the other hand, petitioners repeatedly failed to present evidence at the scheduled hearings. 34

On 13 September 1994, the trial court issued the following Order:

When the above-entitled case was called for continuation of trial today, counsel for the plaintiffs appeared and
manifested that he is ready for today’s continuation of hearing. On the other hand, counsel for the defendants had
requested that this case be reset to another date. Counsel for the plaintiffs manifested that he is not interposing to
the postponement of this case today but requested that this will be the last postponement with the warning that
should the defendants fail to present any evidence in the next hearing of this case, the case shall be deemed
submitted for decision.

Finding the manifestation of counsel for the plaintiffs to be proper and in order, the same is hereby granted.

WHEREFORE, let the continuation of trial of the above-entitled case be set again on October 18, 1994, at 8:30 in
the morning, with the warning that should defendants fail to present their evidence in the next hearing, the case is
deemed submitted for decision.

SO ORDERED.35

Petitioners’ counsel failed to present evidence at the scheduled hearing of 18 October 1994. Thus, the trial court
issued an Order stating that the case was deemed submitted for decision. 36 Petitioners filed a motion for
reconsideration of the order.37

On 25 October 1994, the trial court issued the following Order:

Acting on the Motion for Reconsideration filed by counsel for the defendants, the court resolves to DENY the same.

As borne out by the record of the instant case, as of March 24, 1992, defendants per Court’s Order were considered
to have waived their right to present their evidences for failure to appear on the hearing set on the said date. Upon
Motion by counsel for the defendants, said Order was set aside and defendants were allowed to present their
evidences.

Despite the indulgence of the Court, defendants choose to delay the proceedings of this case thus, in an Order
dated September 13, 1994, the defendants were warned that should they fail to present their evidences in the next
hearing, the case will be deemed submitted for decision.

However, on October 18, 1994, still defendants failed to present their evidences, thus the Court considered the case
submitted for decision.

WHEREFORE, considering that this case has logged for a long time already, the instant Motion for Reconsideration
is hereby DENIED and this case is deemed submitted for resolution. Stenographers who took the proceedings of
this case are hereby ordered to submit their transcripts of their stenographic notes within 15 days from the date of
this order.

SO ORDERED.38
On 28 October 1994, petitioners filed a Motion to Offer Documentary Exhibits with Prayer to Submit
Memorandum.39 The trial court granted the motion in its Order40 dated 3 November 1994.

The Ruling of the Trial Court

On 25 August 1995, the trial court rendered judgment, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing and premises considered, judgment is hereby rendered: 1avvphil.net

a. Declaring Original Certificate of Title No. P-29,822 for Lot No. 1080-A and Original Certificate of Title No.
P-29,823 for Lot No. 1080-B issued in the name of Nestor Mendizabel and Ignacio Mendizabel, respectively
their rights as NULL AND VOID AB INITIO and held said property as trustees for the benefit of plaintiffs;

b. Ordering the Register of Deeds of Pagadian City to require defendants Nestor Mendizabel and Ignacio
Mendizabel to surrender the above named titles immediately;

c. Ordering the Provincial Sheriff through the Clerk of Court, Regional Trial Court, Pagadian City, to execute
the necessary Deed of Reconveyance of the above-specified titles in favor of plaintiffs; and

d. Pronouncing exemplary and incidental damages against defendants, in favor of plaintiffs to include cost of
suit and attorney’s fees in the amount of seventy five (₱75,000.00) pesos, Philippine Currency.

SO ORDERED.41

The trial court explained its decision in this wise:

From the documents presented and from the oral testimonies given by the witnesses, it is very clear that defendants
never acquired actual possession of the land in question. In fact, after they were issued the titles, they had to
employ the services of an INP Station Commander in the person of Oscar Guevarra to be able to enjoy the harvest
and fruits of the plants in the litigated area.

There is also no showing that defendants acted to eject plaintiff if the latter forcibly entered and took possession of
the land.

Although it is true that the Deed of Sale in Cebuano (Exhibit "A" for plaintiff) remains a private document being
devoid of notarial registration, it stands as plain proof of plaintiffs prior acquisition and right of possession which
defendants have not demolished, except by their having secured titles thereon.

The tenants who testified affirmed plaintiffs[’] claim of ownership. Under the land reform law, they have all the right
to have the land they are tenanting acquired by opting to avail of the benefits provided by law, but not one of them
ventured, perhaps, out of respect or goodwill with the landholders.

How plaintiff failed to secure title over the land in question is explained by the fact that some other persons were
applying for it. It is clear, however, that the battle or contest to secure the title was not waged in the venue itself,
meaning, while one party applying for title over the land was in actual possession, the other parties applying for title
over the same area was in a better position to facilitate the documents, as shown by the fact that defendant Nestor
Mendizabel was working with the Bureau of Lands as a skilled employee.

This Court would like to believe defendants as the true and lawful owners of Lot No. 1080, which was subdivided
and apportioned among father and son as Lot Nos. 1080-A and 1080-B, because of the titles they have thereon. But
ownership of real property is better recognized by actual possession thereof and not by mere possession of
documents relative thereto.

Nowhere in the records of this case was there any evidence to show from whom defendants acquired and how they
acquired the land they succeeded to have titles to, except the allegation that they bought the property from
Alejandro Magbanua, on May 24, 1955, as pointed out in their answer. Besides there is no showing that the alleged
vendor, Alejandro Magbanua from whom defendants acquired said property has been in possession of the subject
property, either constructive in the form of a Tax Declaration or other monuments of title or physically.

It is obvious that the authorities, namely, the DENR, the Secretary of Agriculture and the [O]ffice of the President
were made to believe that defendants, at the time they applied for homestead title, were in actual possession of and
occupying the land in question, when the contrary was true.

Ironically, the Decision of the Secretary of Agriculture which was accordingly affirmed in toto by the [O]ffice of the
President placed defendants in an awkward situation, because the "free patent" application of Fernando Apao was
given due course for Lot No. 407 and the "homestead" application of Ignacio Mendizabel was similarly given due
course for Lot No. 1080. If it was the other way around, that would have saved defendants from an awkward
situation. "Homestead" presupposes actual occupation and possession of the land and enjoyment of its fruits, but,
unfortunately, plaintiffs were the ones in actual possession and enjoying the fruits thereof who were disturbed only
by the issuance of Original Certificate of Title No. P-29,822 and Original Certificate No. P-29,823 to defendants
twenty seven (27) years after and entitling plaintiffs to have acquired the property by acquisitive prescription bearing
in mind that defendants or their predecessors had never taken any legal steps or remedy to demolish plaintiffs[’]
possession.

The documentary evidences and the oral testimonies have conjured a very clear picture sufficient to convince this
Court that the original certificate of titles issued in the name of defendants Ignacio Mendizabel and Nestor
Mendizabel, namely Original Certificate of Title No. P-29,822 and Original Certificate of Title No. P-29,823, could
have been obtained through fraud, manipulation, and stratagem to the disadvantage of plaintiffs. Accordingly, under
these circumstances an implied trust is created by operation of law for the benefit of the plaintiffs. 42 (Emphasis
supplied)

On 25 October 1995, the trial court issued the following Order:

The Court in the exercise of its inherent power hereby corrects its Decision dated August 25, 1995, issued in the
above-entitled case particularly in the dispositive portion of page 8, paragraph d of said decision which should read
as follows:

d. Pronouncing exemplary and incidental damages against defendants, in favor of plaintiffs to include cost of suit
and attorney’s fees in the amount of seventy five thousand (₱75,000.00) pesos, Philippine Currency.

SO ORDERED.43

Petitioners appealed to the Court of Appeals.

The Court of Appeals’ Ruling

On 30 July 1999, the Court of Appeals rendered judgment as follows:

WHEREFORE, prescinding from the foregoing disquisitions, the decision appealed from is hereby AFFIRMED in
toto. Costs against defendants-appellants.

SO ORDERED.44

The Court of Appeals held that there is no cogent reason for it to deviate from the rule that factual findings of the
trial court shall not be disturbed on appeal unless the trial court has overlooked or ignored some fact or
circumstance of sufficient weight or significance, which, if considered, would alter the situation. The Court of
Appeals held that while factual findings of administrative agencies must be respected, the same holds true only if
the findings are supported by substantial evidence. The Court of Appeals held that the evidence presented by
respondents "tend to disprove the factual findings of the administrative bodies."

The Court of Appeals further held that respondents have adequately proven by the testimonies of their witnesses
that Fernando actually possessed and cultivated the property at the time of the homestead application and was then
enjoying its fruits.

The Court of Appeals noted that the only instance when petitioners "voiced out" their title to the property was in
1988 when Oscar Guevarra vehemently told respondents’ tenants to vacate Lot No. 1080. Since prior to that time,
respondents were undisturbed in their possession of the property, the Court of Appeals ruled that the possessor has
a better right.

The Court of Appeals, moreover, held that reliance by petitioners on the fact that respondents never appealed the
1971 decision of the Office of the President could not be given credence because the decision was not properly
identified. The Court of Appeals held that petitioners’ failure to prove that respondents received the decision or that
petitioners enforced the decision against respondents was fatal to petitioners’ defense.

The Court of Appeals also ruled that the doctrine of implied trust as enunciated in Article 1456 of the Civil Code
operates in favor of Respondents. The Court of Appeals stated that under Article 1456, when a person through
fraud succeeds in registering a property in his name, the law creates what is called a "constructive or implied trust"
in favor of the defrauded party and grants the latter the right to recover the property fraudulently registered.

The Court of Appeals also ruled that the action for reconveyance that respondents availed of in the present case is
proper. The Court of Appeals held that while it is doctrinal that a decree of registration is no longer open to review or
attack after the lapse of one year, although its issuance is attended with fraud, it does not necessarily mean that the
aggrieved party is without remedy at law. An action for reconveyance is still available to the aggrieved party if the
property has not passed to an innocent purchaser for value.

The Court of Appeals held that in the present case prescription has not set in. The Court of Appeals held that
considering that respondents are in possession of the property in the concept of an owner, the action for
reconveyance, which in effect seeks to quiet title to the property, does not prescribe. The Court of Appeals held that
an action for reconveyance based on implied trust prescribes in 10 years only if the claimant is not in actual
possession.45

The Court of Appeals denied petitioners’ motion for reconsideration in its Resolution 46 dated 5 April 2000.

Hence, this petition.

The Issues

Petitioners raise the following issues:

1. Whether the petition lacks cause of action considering that the alleged circumstances constituting fraud or
mistake were not stated with particularity in the complaint.

2. Whether the action for reconveyance has already prescribed.

3. Whether respondents have acquired ownership of the lands covered by the homestead titles granted to
petitioners.

4. Whether the Court of Appeals erred in not giving weight to the factual findings of the Department of
Agriculture and Natural Resources.

5. Whether implied trust exists in this case.47

The Ruling of the Court

The petition must fail.

Action for Reconveyance Based on Implied Trust

Petitioners claim that while respondents’ complaint alleged "fraud or mistake," it did not state with particularity the
circumstances constituting fraud or mistake, pursuant to Section 5, Rule 8 of the Rules of Court. Petitioners claim
that on this score alone, both the trial court and the Court of Appeals should have decided the case in their favor.

Petitioners’ argument is untenable.

In an action for reconveyance, all that must be alleged in the complaint are two facts which, admitting them to be
true, would entitle the plaintiff to recover title to the disputed land, namely, (1) that the plaintiff was the owner of the
land or possessed the land in the concept of owner, 48 and (2) that the defendant had illegally dispossessed him of
the land.49

In their complaint, respondents clearly asserted that: (1) they were the "true and actual possessors" of the property;
(2) they purchased the property from spouses Alejandro and Teofila Magbanua on 21 March 1955 as evidenced by
a deed of sale pacto de retro which spouses Magbanua executed in their favor; (3) their ownership of the property
became absolute when the vendors failed to repurchase it within the period stipulated in their contract; and (4) they
were fraudulently deprived of ownership of the property when petitioners obtained homestead patents and
certificates of title in their names.50 These allegations certainly measure up to the requisite statement of facts to
constitute an action for reconveyance based on an implied trust.

Indubitably, the act of petitioners in misrepresenting that they were in actual possession and occupation of the
property, obtaining patents and original certificates of title in their names, 51 created an implied trust in favor of the
actual possessors of the property. The Civil Code provides:

ART. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a
trustee of an implied trust for the benefit of the person from whom the property comes.

In other words, if the registration of the land is fraudulent, the person in whose name the land is registered holds it
as a mere trustee, and the real owner is entitled to file an action for reconveyance of the property. 52
Petitioners would nonetheless insist that respondents failed to present any proof of fiduciary relation between them
and respondents and "breach of such trust by petitioners."

Whether there is fiduciary relation between petitioners and respondents is of no moment. Construing the provision
of Article 1456, the Court in Aznar Brothers Realty Company v. Aying 53 stated:

A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in a typical trust, confidence
is reposed in one person who is named a trustee for the benefit of another who is called the cestui que trust,
respecting property which is held by the trustee for the benefit of the cestui que trust. A constructive trust, unlike an
express trust, does not emanate from, or generate a fiduciary relation. While in an express trust, a beneficiary and a
trustee are linked by confidential or fiduciary relations, in a constructive trust, there is neither a promise nor any
fiduciary relation to speak of and the so-called trustee neither accepts any trust nor intends holding the property for
the beneficiary.

xxxx

… implied trusts are those which, without being expressed, are deducible from the nature of the transaction as
matters of intent or which are superinduced on the transaction by operation of law as matters of equity,
independently of the particular intention of the parties. In turn, implied trusts are either resulting or constructive
trusts. x x x

x x x constructive trusts are created by the construction of equity in order to satisfy the demands of justice and
prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, to
hold.54 (Emphasis supplied)

The records show that respondents bought the property from spouses Alejandro and Teofila Magbanua on 21
March 1955 as evidenced by a deed of sale.55 Fernando testified that he was in actual, open, peaceful, and
continuous possession of the property at the time he filed his application for a free patent and was then enjoying its
fruits. These facts were corroborated by the testimonies of Brañanula and Lizardo, residents of Barangay Mabini,
Malangas, Zamboanga del Sur.56 Petitioners, however, assert that the deed of sale, "although Annex A of
respondents’ complaint," should not be given weight for it was not offered in evidence. 57

Petitioners’ assertion has no merit. All documents attached to a complaint, the due execution and genuineness of
which are not denied under oath by the defendant, must be considered as part of the complaint without need of
introducing evidence.58 In petitioners’ answer, there was no denial under oath of the due execution and genuineness
of the deed of sale. Thus, the deed of sale is not only incorporated into respondents’ complaint, it is also deemed
admitted by petitioners.59 This has the effect of relieving respondents from the duty of expressly presenting such
document as evidence. The court, for the proper resolution of the case, may and should consider without the
introduction of evidence the facts admitted by the parties.60

Moreover, despite the opportunities given them by the trial court, petitioners still failed to prove that they were the
owners of the property or that they had been in possession of the same. 61 In fact, it was only on 21 March 1988, or
after respondents had filed their complaint, that petitioners tried to occupy the property by attempting to eject
respondents’ tenants.62 Hence, petitioners never exercised any right of ownership over the land.

In a number of cases, the Court has ordered reconveyance of property to the true owner or to one with a better
right, where the property had been erroneously or fraudulently titled in another person’s name. 63 In Bustarga v. Navo
II,64 the Court held that "reconveyance is just and proper in order to terminate the intolerable anomaly that the
patentees should have a Torrens title for the land which they and their predecessors never possessed and which
has been possessed by [another person] in the concept of owner." After all, the Torrens system was not designed to
shield and protect one who had committed fraud or misrepresentation and thus holds title in bad faith. 65

Considering the circumstances in the present case, therefore, we hold that respondents have a better right to the
property since they had long been in possession of the property in the concept of owners. In contrast, petitioners
were never in possession of the property. Despite the irrevocability of the Torrens titles issued in their names,
petitioners, even if they are already the registered owners under the Torrens system, may still be compelled under
the law to reconvey the property to Respondents.

Prescriptive Period of an Action for Reconveyance

The essence of an action for reconveyance is that the free patent and certificate of title are respected as
incontrovertible. What is sought is the transfer of the property, in this case its title, which has been wrongfully or
erroneously registered in another person’s name, to its rightful owner or to one with a better right. 66
It is of no moment that respondents filed this action for reconveyance more than four years after the property was
registered in favor of petitioners. An action for reconveyance of registered land based on implied trust prescribes in
10 years, the point of reference being the date of registration of the deed or the date of the issuance of the
certificate of title over the property.67 Besides, respondents were in possession of the property at the time they filed
their complaint in the present case. 68 The Court has ruled that the 10-year prescriptive period applies only when the
person enforcing the trust is not in possession of the property. If a person claiming to be its owner is in actual
possession of the property, the right to seek reconveyance, which in effect seeks to quiet title to the property, does
not prescribe. The reason is that the one who is in actual possession of the land claiming to be its owner may wait
until his possession is disturbed or his title is attacked before taking steps to vindicate his right. His undisturbed
possession gives him a continuing right to seek the aid of a court of equity to ascertain and determine the nature of
the adverse claim of a third party and its effect on his own title, which right can be claimed only by one who is in
possession.69

Factual Findings of Administrative Agencies

The decision70 of the Office of the President affirming the decision of the Secretary of Agriculture and Natural
Resources in DANR Case No. 2481, which petitioners offered in evidence, could hardly carry the day for them.
Factual findings of administrative agencies such as the Department of Agriculture and Natural Resources ("DANR")
are accorded not only respect but also even finality if they are supported by substantial evidence. However,
deviation from this rule must be made when the administrative agency itself clearly misappreciated the facts. 71 In the
present case, the factual findings of the Court of Appeals are at variance with those of the DANR. We have carefully
reviewed the records and found that petitioners have not sufficiently proved that the findings of fact of the Court of
Appeals are totally devoid of support in the records, or that they are so glaringly erroneous as to constitute serious
abuse of discretion. Wherefore, we hold that the findings of fact made by the Court of Appeals are conclusive and
binding on this Court even if contrary to those of the DANR, so long as such findings are supported by the records
or based on substantial evidence.72

Besides, there is no showing that respondents received a copy of the decision of the Office of the President. 73 No
judgment or order, whether final or interlocutory, has juridical existence unless it is set down in writing, signed,
promulgated, and released to the parties. Even after its promulgation, a decision does not bind the parties until
notice of the decision is duly served on them by any of the modes prescribed by law. 74

WHEREFORE, we DISMISS the petition and AFFIRM the Decision of the Court of Appeals in CA-G.R. CV No.
52803.

SO ORDERED.
G.R. No. 165696 April 30, 2008

ALEJANDRO B. TY, petitioner,

vs.
SYLVIA S. TY, in her capacity as Administratrix of the Intestate Estate of Alexander Ty, respondent.

DECISION

AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court against the Decision 1 of the Court of
Appeals (CA) in CA-G.R. No. 66053 dated July 27, 2004 and the Resolution therein dated October 18, 2004.

The facts are stated in the CA Decision:

On May 19, 1988, Alexander Ty, son of Alejandro B. Ty and Bella Torres, died of cancer at the age of 34.
He was survived by his wife, Sylvia Ty, and his only daughter, Krizia Katrina Ty. A few months after his
death, a petition for the settlement of his intestate estate was filed by Sylvia Ty in the Regional Trial Court of
Quezon City.

Meanwhile, on July 20, 1989, upon petition of Sylvia Ty, as Administratrix, for settlement and distribution of
the intestate estate of Alexander in the County of Los Angeles, the Superior Court of California ordered the
distribution of the Hollywood condominium unit, the Montebello lot, and the 1986 Toyota pick-up truck to
Sylvia Ty and Krizia Katrina Ty.

On November 23, 1990, Sylvia Ty submitted to the intestate Court in Quezon City an inventory of the assets
of Alexander’s estate, consisting of shares of stocks and a schedule of real estate properties, which included
the following:

1. EDSA Property – a parcel of land with an area of 1,728 square meters situated in EDSA, Greenhills,
Mandaluyong, Metro Manila, registered in the name of Alexander Ty when he was still single, and covered
by TCT No. 0006585;

2. Meridien Condominium – A residential condominium with an area of 167.5 square meters situated in 29
Annapolis Street, Greenhills, Mandaluyong, Metro Manila, registered in the name of the spouses Alexander
Ty and Sylvia Ty, and covered by Condominium Certificate of Title No. 3395;

3. Wack-Wack Property – A residential land with an area of 1,584 square meters situated in Notre Dame,
Wack-Wack, Mandaluyong, Metro Manila, registered in the name of the spouses Alexander Ty and Sylvia
Ty, and covered by TCT No. 62670.

On November 4, 1992, Sylvia Ty asked the intestate Court to sell or mortgage the properties of the estate in
order to pay the additional estate tax of P4,714,560.02 assessed by the BIR.

Apparently, this action did not sit well with her father-in-law, the plaintiff-appellee, for on December 16, 1992,
Alejandro Ty, father of the deceased Alexander Ty, filed a complaint for recovery of properties with prayer
for preliminary injunction and/or temporary restraining order. Docketed as Civil Case No. 62714, of the
Regional Trial Court of Pasig, Branch 166, the complaint named Sylvia Ty as defendant in her capacity as
[Administratrix] of the Intestate Estate of Alexander Ty.

Forthwith, on December 28, 1992, defendant Sylvia Ty, as Administratrix of the Intestate Estate of
Alexander Ty, tendered her opposition to the application for preliminary injunction. She claimed that plaintiff
Alejandro Ty had no actual or existing right, which entitles him to the writ of preliminary injunction, for the
reason that no express trust concerning an immovable maybe proved by parole evidence under the law. In
addition, Sylvia Ty argued that the claim is barred by laches, and more than that, that irreparable injury will
be suffered by the estate of Alexander Ty should the injunction be issued.

To the aforementioned opposition, plaintiff filed a reply, reiterating the arguments set forth in his complaint,
and denying that his cause of action is barred by laches.

In an order dated February 26, 1993, the Regional Trial Court granted the application for a writ of preliminary
injunction.

As to the complaint for recovery of properties, it is asserted by plaintiff Alejandro Ty that he owns the EDSA
property, as well as the Meridien Condominium, and the Wack-Wack property, which were included in the
inventory of the estate of Alexander Ty. Plaintiff alleged that on March 17, 1976, he bought the EDSA
property from a certain Purificacion Z. Yujuico; and that he registered the said property in the name of his
son, Alexander Ty, who was to hold said property in trust for his brothers and sisters in the event of his
(plaintiffs) sudden demise. Plaintiff further alleged that at the time the EDSA property was purchased, his
son and name-sake was still studying in the United States, and was financially dependent on him.

As to the two other properties, plaintiff averred that he bought the Meridien Condominium sometime in 1985
and the Wack-Wack property sometime in 1987; that titles to the aforementioned properties were also
placed in the name of his son, Alexander Ty, who was also to hold these properties in trust for his brothers
and sisters. Plaintiff asserted that at [the] time the subject properties were purchased, Alexander Ty and
Sylvia Ty were earning minimal income, and were thus financially incapable of purchasing said properties.
To bolster his claim, plaintiff presented the income tax returns of Alexander from 1980-1984, and the profit
and loss statement of defendant’s Joji San General Merchandising from 1981-1984.

Plaintiff added that defendant acted in bad faith in including the subject properties in the inventory of
Alexander Ty’s estate, for she was well aware that Alexander was simply holding the said properties in trust
for his siblings.

In her answer, defendant denied that the subject properties were held in trust by Alexander Ty for his
siblings. She contended that, contrary to plaintiff’s allegations, Alexander purchased the EDSA property with
his own money; that Alexander was financially capable of purchasing the EDSA property as he had been
managing the family corporations ever since he was 18 years old, aside from the fact that he was personally
into the business of importing luxury cars. As to the Meridien Condominium and Wack-Wack property,
defendant likewise argued that she and Alexander Ty, having been engaged in various profitable business
endeavors, they had the financial capacity to acquire said properties.

By way of affirmative defenses, defendant asserted that the alleged verbal trust agreement over the subject
properties between the plaintiff and Alexander Ty is not enforceable under the Statute of Frauds; that
plaintiff is barred from proving the alleged verbal trust under the Dead Man’s Statute; that the claim is also
barred by laches; that defendant’s title over the subject properties cannot be the subject of a collateral
attack; and that plaintiff and counsel are engaged in forum-shopping.

In her counterclaim, defendant prayed that plaintiff be sentenced to pay attorney’s fees and costs of
litigation.

On November 9, 1993, a motion for leave to intervene, and a complaint-in-intervention were filed by
Angelina Piguing-Ty, legal wife of plaintiff Alejandro Ty. In this motion, plaintiff-intervenor prayed that she be
allowed to intervene on the ground that the subject properties were acquired during the subsistence of her
marriage with the plaintiff, hence said properties are conjugal. On April 27, 1994, the trial court issued an
Order granting the aforementioned motion.

During the hearing, plaintiff presented in evidence the petition filed by defendant in Special Proceedings No.
Q-88-648; the income tax returns and confirmation receipts of Alexander Ty from 1980-1984; the profit and
loss statement of defendant’s Joji San General Merchandising from 1981-1984; the deed of sale of the
EDSA property dated March 17, 1976; the TCT’s and CCT of the subject properties; petty cash vouchers,
official receipts and checks to show the plaintiff paid for the security and renovation expenses of both the
Meridien Condominium and the Wack-Wack property; checks issued by plaintiff to defendant between June
1988 – November 1991 to show that plaintiff provided financial support to defendant in the amount
 of P51,000.00; and the articles of incorporations of various corporations, to prove that he, plaintiff, had put
up several corporations.

Defendant for her presented in evidence the petition dated September 6, 1988 in Special Proceedings No.
Q-88-648; the TCTs and CCT of the subject properties; the deed of sale of stock dated July 27, 1988
between the ABT Enterprises, Incorporated, and plaintiff; the transcript of stenographic notes dated January
5, 1993 in SEC Case No. 4361; the minutes of the meetings, and the articles of incorporation of various
corporations; the construction agreement between the defendant and the Home Construction, for the
renovation of the Wack-Wack property; the letters of Home Construction to defendant requesting for
payment of billings and official receipts of the same, to show that defendant paid for the renovation of the
Wack-Wack property; the agreement between Drago Daic Development International, Incorporated, and the
spouses Alexander Ty and Sylvia Ty, dated March, 1987, for the sale of the Wack-Wack property covered
by TCT No. 55206 in favor of the late Alexander Ty and the defendant; a photograph of Krizia S. Ty;
business cards of Alexander Ty; the Order and the Decree No. 10 of the Superior Court of California, dated
July 20, 1989; the agreement between Gerry L. Contreras and the Spouses Alexander Ty and Sylvia Ty,
dated January 26, 1988, for the Architectural Finishing and Interior Design of the Wack-Wack property;
official receipts of the Gercon Enterprises; obituaries published in several newspapers; and a letter
addressed to Drago Daic dated February 10, 1987.2

Furthermore, the following findings of facts of the court a quo, the Regional Trial Court of Pasig City, Branch 166
(RTC), in Civil Case No. 62714, were adopted by the CA, thus:

We adopt the findings of the trial court in respect to the testimonies of the witnesses who testified in this
case, thus:

"The gist of the testimony of defendant as adverse witness for the plaintiff:

"Defendant and Alexander met in Los Angeles, USA in 1975. Alexander was then only 22 years old. They
married in 1981. Alexander was born in 1954. He finished high school at the St. Stephen High School in
1973. Immediately after his graduation from high school, Alexander went to the USA to study. He was a full-
time student at the Woodberry College where he took up a business administration course. Alexander
graduated from the said college in 1977. He came back to the Philippines and started working in the Union
Ajinomoto, Apha Electronics Marketing Corporation and ABT Enterprises. After their marriage in 1981,
Alexander and defendant lived with plaintiff at the latter’s residence at 118 Scout Alcaraz St.[,] Quezon City.
Plaintiff has been engaged in manufacturing and trading business for almost 50 years. Plaintiff has
established several corporations. While in the USA, Alexander stayed in his own house in Montebello,
California, which he acquired during his college days. Alexander was a stockholder of companies owned by
plaintiff’s family and got yearly dividend therefrom. Alexander was an officer in the said companies and
obtained benefits and bonuses therefrom. As stockholder of Ajinomoto, Royal Porcelain, Cartier and other
companies, he obtained stock dividends. Alexander engaged in buy and sell of cars. Defendant cannot give
the exact amount how much Alexander was getting from the corporation since 1981. In 1981, defendant
engaged in retail merchandising i.e., imported jewelry and clothes. Defendant leased two (2) units at the
Greenhills Shoppesville. Defendant had dividends from the family business which is real estate and from
another corporation which is Perway. During their marriage, defendant never received allowance from
Alexander. The Wack-Wack property cost P5.5 million. A Car Care Center was established by Alexander
and defendant was one of the stockholders. Defendant and Alexander spent for the improvement of the
Wack-Wack property. Defendant and Alexander did not live in the condominium unit because they followed
the Chinese tradition and lived with plaintiff up to the death of Alexander. Defendant and Alexander started
putting improvements in the Wack-Wack property in 1988, or a few months before Alexander died.

"The gist of the testimony of Conchita Sarmiento:

"In 1966, Conchita Sarmiento was employed in the Union Chemicals as secretary of plaintiff who was the
president. Sarmiento prepared the checks for the school expenses and allowances of plaintiff’s children and
their spouses. Sarmiento is familiar with the Wack-Wack property. Plaintiff bought the Wack-Wack property
and paid the architect and spent for the materials and labor in connection with the construction of the Wack-
Wack property (Exhs. ‘M’ to ‘Z’ inclusive; Exhs. ‘AA’ to ‘ZZ,’ inclusive; Exhs. ‘AAA’ to ‘ZZZ,’ inclusive; Exhs.
‘AAAA’ to ‘FFFF,’ inclusive). Plaintiff entrusted to Alexander the supervision of the construction of the Wack-
Wack property, so that Exhibit ‘M’ shows that the payment was received from Alexander. Plaintiff visited the
Wack-Wack property several times and even pointed the room which he intended to occupy. Sarmiento was
told by plaintiff that it was very expensive to maintain the house. The documents, referring to the numerous
exhibits, were in the possession of plaintiff because they were forwarded to him for payment. Sarmiento
knows the residential condominium unit because in 1987 plaintiff purchased the materials and equipments
for its renovation, as shown by Exhs. ‘GGGG’ to ‘QQQQ’ inclusive. Plaintiff supported defendant after the
death of Alexander, as shown by Exhs. ‘RRRR’ to ‘TTTT’ inclusive. Sarmiento was plaintiff’s secretary and
assisted him in his official and personal affairs. Sarmiento knew that Alexander was receiving a monthly
allowance in the amount of P5,000.00 from Alpha.
"The gist of the testimony of the plaintiff:

Plaintiff is 77 years old and has been engaged in business for about 50 years. Plaintiff established several
trading companies and manufacturing firms. The articles of incorporation of the companies are shown in
Exhs. ‘UUUUU’ (Manila Paper Mills, Inc.); ‘UUUUU-1’ (Union Chemicals Inc.); ‘UUUUU-2’ (Starlight
Industrial Company Inc.); ‘UUUUU-3’ (Hitachi Union, Inc.); ‘UUUUU-4’ (Philippine Crystal Manufacturing
Corp.). Alexander completed his elementary education in 1969 at the age of 15 years and finished high
school education in 1973. Alexander left in 1973 for the USA to study in the Woodberry College in Los
Angeles. Alexander returned to the Philippines in 1977. When Alexander was 18 years old, he was still in
high school, a full-time student. Alexander did not participate in the business operation. While in High School
Alexander, during his free time attended to his hobby about cars – Mustang, Thunderbird and Corvette.
Alexander was not employed. Plaintiff took care of Alexander’s financial needs. Alexander was plaintiff’s
trusted son because he lived with him from childhood until his death. In 1977 when Alexander returned to
the Philippines from the USA, he did not seek employment. Alexander relied on plaintiff for support. After
Alexander married defendant, he put up a Beer Garden and a Car Care Center. Plaintiff provided the capital.
The Beer Garden did not make money and was closed after Alexander’s death. Defendant and Alexander
lived with plaintiff in Quezon City and he spent for their needs. Plaintiff purchased with his own money the
subject properties. The EDSA property was for investment purposes. When plaintiff accompanied Alexander
to the USA in 1973, he told Alexander that he will buy some properties in Alexander’s name, so that if
something happens to him, Alexander will distribute the proceeds to his siblings. When the EDSA property
was bought, Alexander was in the USA. Plaintiff paid the real estate taxes. With plaintiff’s permission,
Alexander put up his Beer Garden and Car Care Center in the EDSA property. It was Alexander who
encouraged plaintiff to buy the condominium unit because Alexander knew the developer. The condominium
unit was also for investment purposes. Plaintiff gave Alexander the money to buy the condominium unit.
After sometime, Alexander and defendant asked plaintiff’s permission for them to occupy the condominium
unit. Plaintiff spent for the renovation of the condominium unit. It was Alexander who encouraged plaintiff to
buy the Wack-Wack property. Plaintiff spent for the renovation of the condominium unit. It was Alexander
who encouraged plaintiff to buy the Wack-Wack property. Plaintiff paid the price and the realty taxes.
Plaintiff spent for the completion of the unfinished house on the Wack-Wack property. Plaintiff bought the
Wack-Wack property because he intended to transfer his residence from Quezon City to Mandaluyong.
During the construction of the house on the Wack-Wack property plaintiff together with Conchita Sarmiento,
used to go to the site. Plaintiff even told Sarmiento the room which he wanted to occupy. Alexander and
defendant were not in a financial position to buy the subject properties because Alexander was receiving
only minimal allowance and defendant was only earning some money from her small stall in Greenhills.
Plaintiff paid for defendant’s and Alexander income taxes (Exhs. ‘B,’ ‘C,’ ‘D,’ ‘E,’ and ‘F’). Plaintiff kept the
Income Tax Returns of defendant and Alexander in his files. It was one of plaintiff’s lawyers who told him
that the subject properties were included in the estate of Alexander. Plaintiff called up defendant and told her
about the subject properties but she ignored him so that plaintiff was saddened and shocked. Plaintiff gave
defendant monthly support of P 51, 000.00 (Exhs. ‘RRRR’ to ‘TTTTT," inclusive) P 50,000.00 for defendant
and P1,000.00 for the yaya. The Wack-Wack property cost about P5.5 million.

"The gist of the testimony of Robert Bassig:

"He is 73 years old and a real estate broker. Bassig acted as broker in the sale of the EDSA property from
Purificacion Yujuico to plaintiff. In the Deed of Sale (Exh. ‘G’) it was the name of Alexander that was placed
as the vendee, as desired by plaintiff. The price was paid by plaintiff. Bassig never talked with Alexander. He
does not know Alexander.

"The gist of the testimony of Tom Adarne as witness for defendant:

Adarne is 45 years old and an architect. He was a friend of Alexander. Adarne was engaged by defendant
for the preparation of the plans of the Wack-Wack property. The contractor who won the bidding was Home
Construction, Inc. The Agreement (Exh. ‘26’) was entered into by defendant and Home Construction Inc.
The amount of P955,555.00 (Exh. ’26-A’) was for the initial scope of the work. There were several letter-
proposals made by Home Construction (Exhs. ‘27-34-A,’ inclusive). There were receipts issued by Home
Construction Inc. (Exhs. ’35,’ ‘36’ and ‘37’). The proposal were accepted and performed. The renovation
started in 1992 and was finished in 1993 or early 1994.

"The gist of the testimony of Rosanna Regalado:

"Regalado is 43 years old and a real estate broker. Regalado is a close friend of defendant. Regalado acted
as broker in the sale of the Wack-Wack property between defendant and Alexander and the owner. The sale
Agreement (Exh. ‘38’) is dated March 5, 1987. The price is P5.5 million in Far East Bank and Trust
Company manager’s checks. The four (4) checks mentioned in paragraph 1 of the Agreement were issued
by Alexander but she is not sure because it was long time ago.

"The gist of the testimony of Sylvia Ty:

 "She is 40 years old, businesswoman and residing at 675 Notre Dame, Wack-Wack Village, Mandaluyong
City. Sylvia and Alexander have a daughter named Krizia Katrina Ty, who is 16 years old. Krizia is in
11th grade at Brent International School. Alexander was an executive in several companies as shown by his
business cards (Exhs. ’40,’ ‘40-A,’ ’40-B,’ ‘40-C,’ ‘40-D,’ ‘40-E,’ ‘40-F,’ and ‘40-G’). Before defendant and
Alexander got married, the latter acquired a condominium unit in Los Angeles, USA, another property in
Montebello, California and the EDSA property. The properties in the USA were already settled and
adjudicated in defendant’s favor (Exhs. ‘41’ and ‘41-A’). Defendant did not bring any property into the
marriage. After the marriage, defendant engaged in selling imported clothes and eventually bought four (4)
units of stall in Shoppesville Greenhills and derived a monthly income of P50,000.00. the price for one (1)
unit was provided by defendant’s mother. The other three (3) units came from the house and lot at Wack-
Wack Village. The P3.5 million manager’s check was purchased by Alexander. The sale Agreement was
signed by Alexander and defendant (Exhs. ’38-A’ and ‘38-B’). After the purchase, defendant and Alexander
continued the construction of the property. After Alexander’s death, defendant continued the construction.
The first architect that defendant and Alexander engaged was Gerry Contreras (Exhs. ’42,’ ‘42-A’ and ‘42-A-
1’ to ‘42-A-7’). The post-dated checks issued by Alexander were changed with the checks of plaintiff. After
the death of Alexander, defendant engaged the services of Architect Tom Adarne. Home Construction, Inc.
was contracted to continue the renovation. Defendant and Alexander made payments to Contreras from
January to May 1998 (Exhs. ’43,’ ‘43-A’ to ‘43-H,’ inclusive). A general contractor by the name of Nogoy was
issued some receipts (Exhs. ’43-J’ and ‘43-K’). a receipt was also issued by Taniog (Exh. ‘43-L’). the
payments were made by defendant and Alexander from the latter’s accounts. The Agreement with Home
Construction Inc. (Exhs. ‘26’) shows defendant’s signature (Exh. ‘26-A’). the additional works were covered
by the progress billings (Exhs. ‘27’ to ‘34-A’). Defendant paid them from her account. The total contract
amount was P5,049,283.04. The total expenses, including the furnishings, etc. reached the amount of P8 to
10 million and were paid from defendant’s and Alexander’s funds. After the death of Alexander, plaintiff
made payments for the renovation of the house (Exh. ‘M’) which plaintiff considered as advantages but
plaintiff did not make any claim for reimbursement from the estate of Alexander. Defendant’s relationship
with plaintiff became strained when he asked her to waive her right over the Union Ajinomoto shares.
Alexander was a friend of Danding Cojuangco and was able to import luxury cars. Alexander made a written
offer to purchase the Wack-Wack property. Alexander graduated from the Woodberry College in 1978 or
1979 and returned to the Philippines in 1979 defendant returned to the Philippines about six (6) months
later. Plaintiff was financially well off or wealthy. Alexander was very close to plaintiff and he was the most
trusted son and the only one who grew up in plaintiff’s house. Plaintiff observed Chinese traditions.
Alexander was not totally dependent on plaintiff because he had his own earnings. Upon his return from the
USA, Alexander acquired the properties in the USA while studying there. At the time of his death, Alexander
was vice president of Union Ajinomoto. Defendant could not say how much was the compensation of
Alexander from Union Ajinomoto. Defendant could not also say how much did Alexander earn as vice
president of Royal Porcelain Corporation. Alexander was the treasurer of Polymark Paper Industries.
Alexander was the one handling everything for plaintiff in Horn Blower Sales Enterprises, Hi-Professional
Drilling, Round Consumer, MVR Picture Tubes, ABT Enterprises. Plaintiff supported defendant and her
daughter in the amount of P51,000.00 per month from 1988-1990. Defendant did not offer to reimburse
plaintiff the advances he made on the renovation of the Wack-Wack property because their relationship
became strained over the Ajinomoto shares. Defendant could not produce the billings which were indicated
in the post-dated checks paid to Architect Contreras. After the birth of her child, defendant engaged in the
boutique business. Defendant could not recall how much she acquired the boutique (for). In 1983 or 1984
defendant started to earn P50,000.00 a month. The properties in the USA which were acquired by
Alexander while still single were known to plaintiff but the latter did not demand the return of the titles to him.
The Transfer Certificates of Title of the Wack-Wack and EDSA properties were given to defendant and
Alexander. The Condominium Certificate of Title was also given to defendant and Alexander. The plaintiff
did not demand the return of the said titles.

"The gist of the testimony of Atty. Mario Ongkiko:

"Atty. Ongkiko prepared the Deed of Sale of the EDSA property. There was only one Deed of Sale regarding
the said property. The plaintiff was not the person introduced to him by Yujuico as the buyer. 3

On January 7, 2000, the RTC rendered its decision, disposing as follows:

WHEREFORE, judgment is hereby rendered:

1. Declaring plaintiff as the true and lawful owner of the subject properties, as follows:

A. A parcel of land with an area of 1728 square meters, situated along EDSA Greenhills,
Mandaluyong City, covered by TCT No. 006585.

B. A residential land with an area of 1584 square meters, together with the improvements thereon,
situated in Notre Dame, Wack-Wack Village, Mandaluyong City, covered by TCT No. 62670.
 C. A residential condominium unit with an area of 167.5 square meters, situated in 29 Annapolis St.,
Greenhills, Mandaluyong City, covered by Condominium Certificate Title No. 3395.

2. Ordering the defendant to transfer or convey the subject properties in favor of plaintiff and the Register of
Deeds for Mandaluyong City to transfer and issue in the name of plaintiff the corresponding certificates of
title.

3. Ordering the defendant to pay plaintiff the amount of P100,000.00, as moral damages and P200,000.00,
as attorney’s fees plus the cost of the suit.

SO ORDERED.4

Respondent herein, Sylvia S. Ty, appealed from the RTC Decision to the CA, assigning the following as errors:

I.

THE TRIAL COURT ERRED IN HOLDING THAT APPELLEE PURCHASED THE EDSA PROPERTY BUT
PLACED TITLE THERETO IN THE NAME OF ALEXANDER T. TY, SO THAT AN EXPRESS TRUST WAS
CREATED BETWEEN APPELLEE, AS TRUSTOR AND ALEXANDER AS TRUSTEE IN FAVOR OF THE
LATTER’S SIBLINGS, AS BENEFICIARIES EVEN WITHOUT ANY WRITING THEREOF;
ALTERNATIVELY, THE TRIAL COURT ERRED IN ANY CASE IN HOLDING THAT AN IMPLIED TRUST
EXISTED BETWEEN APPELLEE AND ALEXANDER TY IN FAVOR OF APPELLEE UNDER THE SAME
CIRCUMSTANCES.

II.

THE TRIAL COURT ERRED IN HOLDING THAT APPELLEE PURCHASED THE WACK-WACK AND
MERIDIEN CONDOMINIUM PROPERTIES BUT PLACED ITS TITLES THERETO IN THE NAMES OF
SPOUSES ALEXANDER AND APPELLANT BECAUSE HE WAS FINANCIALLY CAPABLE OF PAYING
FOR THE PROPERTIES WHILE ALEXANDER OR HIS WIFE, APPELLANT SYLVIA S. TY, WERE
INCAPABLE. HENCE, A RESULTING TRUST WAS CREATED BETWEEN APPELLEE AND HIS SON,
ALEXANDER, WITH THE FORMER, AS OWNER-TRUSTOR AND BENEFICIARY AND THE LATTER AS
TRUSTEE CONCERNING THE PROPERTIES.

III.

THE TRIAL COURT ERRED IN AWARDING MORAL DAMAGES OF P100,000 AND ATTORNEY’S FEES
OF P200,000 IN FAVOR OF APPELLEE AND AGAINST DEFENDANT-APPELLANT IN HER CAPACITY
AS ADMINISTRATRIX OF THE INTESTATE ESTATE OF ALEXANDER TY, INSTEAD OF AWARDING
APPELLANT IN HER COUNTERCLAIM ATTORNEY’S FEES AND EXPENSES OF LITIGATION
INCURRED BY HER IN DEFENDING HER HUSBAND’S ESTATE AGAINST THE UNJUST SUIT OF HER
FATHER-IN-LAW, HEREIN APPELLEE, WHO DISCRIMINATED AGAINST HIS GRAND DAUGHTER
KRIZIA KATRINA ON ACCOUNT OF HER SEX.

The arguments in the respective briefs of appellant and appellee are summarized by the CA Decision, as well as
other preliminary matters raised and tackled, thus:

In her Brief, defendant-appellant pointed out that, based on plaintiff-appellee’s testimony, he actually
intended to establish an express trust; but that the trial court instead found that an implied trust existed with
respect to the acquisition of the subject properties, citing Art. 1448 of the Civil Code of the Philippines.

It is defendant-appellant’s contention that the trial court erred: In applying Art. 1448 on implied trust, as
plaintiff-appellee did not present a shred of evidence to prove that the money used to acquire said properties
came from him; and in holding that both she and her late husband were financially incapable of purchasing
said properties. On the contrary, defendant-appellant claimed that she was able to show that she and her
late husband had the financial capacity to purchase said properties.

Defendant-appellant likewise questioned the admission of the testimony of plaintiff-appellee, citing the Dead
Man’s Statute; she also questioned the admission of her late husband’s income tax returns, citing Section 71
of the NIRC and the case of Vera v. Cusi, Jr.

On July 10, 2001, plaintiff-appellee filed his appellee’s Brief, whereunder he argued: That the trial court did
not err in finding that the subject properties are owned by him; that the said properties were merely
registered in Alexander’s name, in trust for his siblings, as it was plaintiff-appellee who actually purchased
the subject properties he having the financial capacity to acquire the subject properties, while Alexander and
defendant-appellant had no financial capacity to do so; that defendant-appellant should be sentenced to pay
him moral damages for the mental anguish, serious anxiety, wounded feelings, moral shock and similar
injury by him suffered, on account of defendant-appellant’s wrongful acts; and that defendant appellant
should also pay for attorney’s fees and litigation expenses by him incurred in litigating this case.

In a nutshell, it is plaintiff-appellee’s thesis that in 1973, when he accompanied his son, Alexander, to
America, he told his son that he would put some of the properties in Alexander’s name, so that if death
overtakes him (plaintiff-appellee), Alexander would distribute the proceeds of the property among his
siblings. According to plaintiff-appellee, the three properties subject of this case are the very properties he
placed in the name of his son and name-sake; that after the death of Alexander, he reminded his daughter-
in-law, the defendant appellant herein, that the subject properties were only placed in Alexander’s name for
Alexander to hold trust for his siblings; but that she rejected his entreaty, and refused to reconvey said
properties to plaintiff-appellee, thereby compelling him to sue out a case for reconveyance.

On September 5, 2001, defendant-appellant filed her reply Brief and a motion to admit additional evidence.
Thereafter, several motions and pleadings were filed by both parties. Plaintiff-appellee filed a motion for
early resolution dated May 17, 2002 while defendant-appellant filed a motion to resolve dated August 6,
2003 and a motion to resolve incident dated August 12, 2003.

Plaintiff-appellee then filed a comment on the motion to resolve incident, to which defendant-appellant
tendered a reply. Not to be outdone, the former filed a rejoinder.

Thus, on February 13, 2004, this Court issued a resolution, to set the case for the reception of additional
evidence for the defendant-appellant.

In support of her motion to admit additional evidence, defendant-appellant presented receipts of payment of
real estate taxes for the years 1987 to 2004, obviously for the purpose of proving that she and her late
husband in their own right were financially capable of acquiring the contested properties. Plaintiff-appellee
however did not present any countervailing evidence.

Per resolution of March 25, 2004, this Court directed both parties to submit their respective memorandum of
authorities in amplification of their respective positions regarding the admissibility of the additional evidence.

Defendant-appellant in her memorandum prayed that the additional evidence be considered in resolving the
appeal in the interest of truth and substantial justice. Plaintiff-appellee, on the other hand, in his
memorandum, argued that the additional evidence presented by the defendant-appellant is forgotten
evidence, which can lo longer be admitted, much less considered, in this appeal. Thereafter, the case was
submitted for decision.

Before taking up the main issue, we deem it expedient to address some collateral issues, which the parties
had raised, to wit: (a) the admissibility of the additional evidence presented to this Court, (b) the admissibility
of plaintiff’s testimony, (c) the admissibility of the income tax return, and (d) laches.

On the propriety of the reception of additional evidence, this Court falls backs (sic) upon the holding of the
High Court in Alegre v. Reyes, 161 SCRA 226 (1961) to the effect that even as there is no specific provision
in the Rules of Court governing motions to reopen a civil case for the reception of additional evidence after
the case has been submitted for decision, but before judgment is actually rendered, nevertheless such
reopening is controlled by no other principle than that of the paramount interest of justice, and rests entirely
upon the sound judicial discretion of the court. At any rate, this Court rules that the tax declaration receipts
for the EDSA property for the years 1987-1997, and 1999; for the Wack-Wack property for the years 1986-
1987, 1990-1999; and for the Meridien Condominium for the years 1993-1998 cannot be admitted as they
are deemed forgotten evidence. Indeed, these pieces of evidence should have been presented during the
hearing before the trial court.

However, this Court in the interest of truth and justice must hold, as it hereby holds, that the tax declaration
receipts for the EDSA property for the years 2000-2004; the Wack-Wack property for the years 2000-2004;
and the Meridien Condominium for the years 2000-2001 may be admitted to show that to this date, it is the
defendant-appellant, acting as an administratrix, who has been paying the real estate taxes on the
aforestated properties.

As regards the admissibility of plaintiff-appellee’s testimony, this Court agrees with the trial court that:

"Defendant’s argument to the effect that plaintiff’s testimony proving that the deceased Alexander Ty
was financially dependent on him is inadmissible in evidence because he is barred by the Dead
Man’s Statute (Rule 130, Sec. 20, Rules of Court) for making such testimony, is untenable. A
reading of pages 10 to 45 of the TSN, taken on November 16, 1998, which contain the direct-
examination testimony of plaintiff, and pages 27, 28, 30, 34, 35, 37, 39, 40 of the TSN, taken on
January 15, 1999; page 6 of the TSN taken on December 11, 1998, pages 8, 10, 11, 12, 14, 23 24 of
 TSN, taken on taken on February 19, 1999; and pages 4,5,6,7,8,11,25 and 27 of the TSN taken on
March 22, 1999, will show that defendant’s lawyer did not object to the plaintiff as witness against
defendant, and that plaintiff was exhaustively cross-examined by defendant’s counsel regarding the
questioned testimony, hence, the same is not covered by the Dead Man’s Statute (Marella v. Reyes,
12 Phil. 1; Abrenica v. Gonda and De Gracia, 34 Phil. 739; Tongco v. Vianzon, 50 Phil. 698).

A perusal of the transcript of stenographic notes will show that counsel for defendant-appellant was not able
to object during the testimony of plaintiff-appellee. The only time that counsel for defendant-appellant
interposed his objection was during the examination of Rosemarie Ty, a witness (not a party) to this case.
Thus the Dead Man’s Statute cannot apply.

With regard to the income tax returns filed by the late Alexander Ty, this Court holds that the same are
admissible in evidence. Neither Section 71 of the NIRC nor the case of Vera v. Cusi applies in this case. The
income tax returns were neither obtained nor copied from the Bureau of Internal Revenue, nor produced in
court pursuant to a court order; rather these were produced by plaintiff-appellee from his own files, as he
was the one who kept custody of the said income tax returns. Hence, the trial court did not err in admitting
the income tax returns as evidence.

Anent the issue of laches, this Court finds that the plaintiff-appellee is not guilty of laches. There is laches
when: (1) the conduct of the defendant or one under whom he claims, gave rise to the situation complained
of; (2) there was delay in asserting a right after knowledge defendant’s conduct and after an opportunity to
sue; (3) defendant had no knowledge or notice that the complainant would assert his right; and (4) there is
injury or prejudice to the defendant in the event relief is accorded to the complainant. These conditions do
not obtain here.

In this case, there was no delay on the part of plaintiff-appellee in instituting the complaint for recovery of
real properties. The case was files four years after Alexander’s death; two years after the inventory of assets
of Alexander’s estate was submitted to the intestate court; and one month after defendant-appellant filed a
motion to sell or mortgage the real estate properties. Clearly, such length of time was not unreasonable. 5

The CA then turned to "the critical, crucial and pivotal issue of whether a trust, express or implied, was established
by the plaintiff-appellee in favor of his late son and name-sake Alexander Ty."

The CA proceeded to distinguish express from implied trust, then found that no express trust can be involved here
since nothing in writing was presented to prove it and the case involves real property. It then stated that it disagrees
with the court a quo’s application of Art. 1448 of the Civil Code on implied trust, the so-called purchase money
resulting trust, stating that the very Article provides the exception that obtains when the person to whom the title is
conveyed is the child, legitimate or illegitimate, of the one paying the price of the sale, in which case no trust is
implied by law, it being disputably presumed that there is a gift in favor of the child.

The CA therefore reasoned that even assuming that plaintiff-appellee paid at least part of the price of the EDSA
property, the law still presumes that the conveyance was a discretion (a gift of devise) in favor of Alexander.

As to plaintiff-appellee’s argument that there was no donation as shown by his exercise of dominion over the
property, the CA held that no credible evidence was presented to substantiate the claim.

Regarding the residence condominium and the Wack-Wack property, the CA stated that it did not agree either with
the findings of the trial court that an implied trust was created over these properties.

The CA went over the testimonies of plaintiff-appellee and the witness Conchita Sarmiento presented to show that
spouses Alexander and Sylvia S. Ty were financially dependent of plaintiff-appellee and did not have the financial
means or wherewithals to purchase these properties. It stated:

Consider this testimony of plaintiff-appellee:

Q During the time that Alex was staying with you, did you ever come to know that Alexander and his wife
did go to the States?

A Yes, sir. But I do not know the exact date. But they told me they want to go to America for check up.

Q Was that the only time that Alexander went to the States?

A Only that time, sir. Previously, he did not tell me. That last he come ( sic) to me and tell [sic] me that he
will go to America for check up. That is the only thing I know.
 Q Would you say for the past five years before his death Alex and his wife were going to the States at
least once a year?

A I cannot say exactly. They just come to me and say that I [sic] will go to "bakasyon." They are already
grown people. They don’t have to tell me where they want to go.

Q You are saying that Alexander did not ask you for assistance whenever he goes to the States?

A Sometimes Yes.

Q In what form?

A I gave him peso, sir.

Q For what purpose?

A Pocket money, sir.

There is no evidence at all that it was plaintiff-appellee who spent for the cancer treatment abroad of his son.
Nor is there evidence that he paid for the trips abroad of Alexander and the defendant-appellant. Admittedly,
he only gave his son Alexander pocket money once in a while. Simply put, Alexander was not financially
dependent upon the plaintiff-appellee, given that Alexander could afford the costs of his cancer treatment
abroad, this on top of the trips he made to the United States at least once a year for five successive years
without the support of his father.

The fact that Alexander stayed with his father, the plaintiff-appellee in this case, even after he married Sylvia
and begot Krizia, does not at all prove that Alexander was dependent on plaintiff-appellee. Neither does it
necessarily mean that it was plaintiff-appellee who was supporting Alexander’s family. If anything, plaintiff-
appellee in his testimony admitted that Alexander and his family went to live with him in observance of
Chinese traditions.

In addition, the income tax returns of Alexander from 1980-1984, and the profit and loss statement of
defendant-appellant’s Joji San General Merchandising from 1981-1984, are not enough to prove that the
spouses were not financially capable of purchasing the said properties. Reason: These did not include
passive income earned by these two, such as interests on bank deposits, royalties, cash dividends, and
earnings from stock trading as well as income from abroad as was pointed out by the defendant-appellant.
More importantly, the said documents only covered the years 1980-1984. The income of the spouses from
1985 to 1987 was not shown. Hence, it is entirely possible that at the time the properties in question were
purchased, or acquired, Alexander and defendant-appellant had sufficient funds, considering that Alexander
worked in various capacities in the family corporations, and his own business enterprises, while defendant-
appellant had thriving businesses of her own, from which she acquired commercial properties.

And this is not even to say that plaintiff-appellee is this case failed to adduce conclusive, incontrovertible
proof that the money use to purchase the two properties really came from him; or that he paid for the price of
the two properties in order to have the beneficial interest or estate in the said properties.

A critical examination of the testimony of plaintiff-appellee’s witness, Conchita Sarmiento, must also show
that this witness did not have actual knowledge as to who actually purchased the Wack-Wack property and
the Meridien Condominium. Her testimony that plaintiff-appellee visited the Wack-Wack property and paid
for the costs of the construction of the improvements over the said property, in the very nature of things,
does not prove that it was the plaintiff-appellee who in fact purchased the Wack-Wack property. 6

On the other hand, the CA found defendant-appellant’s evidence convincing:

In contrast, Rosana Regalado had actual knowledge of the transaction she testified to, considering that she
was the real estate broker who negotiated the sale of the Wack-Wack property between its previous owner
Drago Daic and the spouses Alexander and Sylvia Ty. In her testimony, she confirmed that the checks,
which were issued to pay for the purchase price of the Wack-Wack property, were signed and issued by
Alexander, thereby corroborating the testimony of defendant-appellant on this point.

Significantly, during the trial, Conchita Sarmiento identified some receipts wherein the payor was the late
Alexander Ty. Apparently, prior to the death of Alexander, it was Alexander himself who was paying for the
construction of the Wack-Wack property; and that the only time plaintiff-appellee paid for the costs of the
construction was when Alexander died.

Quite compelling is the testimony of defendant-appellant in this respect:

 Q And after the death and burial of your husband, will you tell this Honorable Court what happened to the
construction of this residence in Wack-Wack?

A Well, of course, during the period I was mourning and I was reorganizing myself and my life, so I was
not mainly focused on the construction, so it took a couple of months before I realized that the post-dated
checks issued by my husband was changed through checks by my father-in-law Mr. Alejandro Ty.

Q And did you had [sic] any conversation with Mr. Alejandro Ty regarding as to why he did that?

A Yes, sir, that was the beginning of our misunderstanding, so I decided to hire a lawyer and that is Atty.
Ongkiko, to be able to settle my estate and to protect myself from with the checks that they changed that my
husband issued to Architect Gerry Contreras.

Q Was there any point in time that you yourself took over the construction?

A Yes, sir, right after a year of that property after I was more settled.

Q And did you engaged [sic] the services of any professional or construction company for the purpose?

A Yes, sir.

Q Who was that?

A Architect Tom Adarme.

Q What is his first name, if you recall?

A Architect Tommy Adarme.

Q And was there any company or office which helped Architect Adarme in the continuation of the
construction?

A Yes, I also signed a contract with Architect Adarme and he hired Home Construction to finish the
renovation and completion of the construction in Wack-Wack, sir.

Q Do you have any document to show that you yourself overtook personally the continuation of the
construction of your residence?

A Yes, sir I have the whole construction documents and also the documents through Arch. Gerry
Contreras, that contract that we signed.

In other words, plaintiff-appellee took over the management of the construction of the Wack-Wack property
only because defendant-appellant was still in mourning. And, If ever plaintiff-appellee did pay for the costs of
the construction after the death of Alexander, it would be stretching logic to absurd proportions to say that
such fact proved that he owns the subject property. If at all, it only shows that he is entitled to
reimbursement for what he had spent for the construction.7

Accordingly, the CA concluded, as follows:

Going by the records, we hold that plaintiff-appellee in this case was not able to show by clear
preponderance of evidence that his son and the defendant-appellant were not financially capable of
purchasing said property. Neither was plaintiff-appellee able to prove by clear preponderance of evidence
(i.e., credible documentary evidence) that the money used to purchase the said properties really came from
him. (And even if we assume that it came from him, it would still not establish an implied trust, as it would
again be considered a donation, or a gift, by express mandate of the saving clause of Art. 1448 of the Civil
Code, as heretofore stated).

If anything, what is clear from the evidence at bench is that Alexander and the defendant-appellant were not
exactly bereft of the means, the financial capability or resources, in their own right, to purchase, or acquire,
the Meridien Condominium and the Wack-Wack property.

The evidence on record shows that Alexander Ty was 31 years old when he purchased the Meridien
Condominium and was 33 years old when he purchased the Wack-Wack property. In short, when he
purchased these properties, he had already been working for at least nine years. He had a car care
business and a beer garden business. He was actively engaged in the business dealings of several family
corporations, from which he received emoluments and other benefits. As a matter of fact, Alexander and
plaintiff-appellee had common interest in various family corporations of which they were stockholders, and
officers and directors, such as: International Paper Industries, Inc.; Agro-Industries Specialists Services,
Inc.; Hi-Professional Drillings and Manufacturing, Inc.; MVR-TV Picture Tube, Inc.; Crown Consumer
Products, Inc.; Philippine Crystal Manufacturing Corporation; and Union Emporium, Inc.

Furthermore, at the time of his death, the son Alexander was Vice-President of Union Ajinomoto (Exh. "40");
Executive Vice-President of Royal Porcelain Corporation (Exh. "40-A"); Treasurer of Polymart Paper
Industries, Inc. (Exh. "40-B"); General Manager of Hornblower Sales Enterprises and Intercontinental Paper
Industries, Inc. (Exh. "40-C"); President of High Professional Drilling and Manufacturing, Inc. (Exh. "40-D");
President of Crown Consumer Products, Inc. (Exh. "40-E"); (Executive Vice-President of MVR-TV Picture
Tube, Inc. (Exh."40-F"); and Director of ABT Enterprise, Inc. (Exh. "40-G"). He even had a controlling
interest in ABT Enterprises, which has a majority interest in Union Ajinomoto, Inc.

What is more, the tax declaration receipts for the Wack-Wack property covering the years 2000-2004, and
the tax declaration receipts for the Meridien Condominium covering the years 2000-2001, showed that to his
date it is still the estate of Alexander that is paying for the real estate taxes thereon.

In the context of this formidable circumstances, we are constrained to overturn the judgment of the trial
court, which made these findings:

Based on the facts at hand and the applicable law, the ineluctable conclusion is that a fiduciary
relationship or an implied trust existed between plaintiff and Alexander Ty with the former as the
owner, trustor and beneficiary and the latter as the trustee, concerning the subject real properties.
The death of Alexander automatically extinguished the said fiduciary relationship, hence, plaintiff’s
instant action to recover the subject properties from the intestate estate of Alexander Ty is
meritorious.

We do not agree. To belabor a point, we are not persuaded that an implied trust was created concerning the
subject properties. On the assumption, as elsewhere indicated, the plaintiff-appellee at the very least, paid
for part of its purchase price, the EDSA property is presumed to be a gift, or donation, in favor of Alexander
Ty, defendant-appellant’s late husband, following the saving clause or exception in Art. 1448 of the Civil
Code. To repeat, it is the saving clause, or exception, not the general rule, that should here apply, the late
Alexander Ty being the son of Plaintiff-appellee.

Nor are we convinced, given the state of the evidence on record, that the plaintiff-appellee paid for the price
of the Meridien Condominium and the Wack-Wack property. Therefore, the general rule announced in the
first sentence of Art. 1448 of the Civil Code has no application in this case. Or, if the article is to be applied
at all, it should be the exception, or the saving clause, that ought to apply here, the deceased Alexander Ty
being the son, as stated, of plaintiff-appellee.

To sum up: Since plaintiff-appellee has erected his case upon Art. 1448 of the Civil Code, a prime example
of an implied trust, viz.: that it was he who allegedly paid for the purchase price of some of the realties
subject of this case, legal title or estate over which he allegedly granted or conveyed unto his son and
namesake, Alexander Ty, for the latter to hold these realties in trust for his siblings in case of his (plaintiff-
appellee’s) demise, plaintiff-appellee is charged with the burden of establishing the existence of an implied
trust by evidence described or categorized as "sufficiently strong," "clear and satisfactory," or "trustworthy."
As will be presently discussed. Sad to say, plaintiff-appellee has miserably failed to discharge that burden.
For, if the records are any indication, the evidence adduced by plaintiff-appellee on this score, can hardly
merit the descriptive attributes "sufficiently strong," or "clear and satisfactory," or "trustworthy."

If only to emphasize and reiterate what the Supreme Court has in the past declared about implied trusts,
these case law rulings are worth mentioning –

Where a trust is to be established by oral proof, the testimony supporting it must be sufficiently
strong to prove that the right of the alleged beneficiary with as much certainty as if a document were
shown. A trust cannot be established, contrary to the recitals of a Torrens title, upon vague and
inconclusive proof.

As a rule, the burden of proving the existence of a trust is on the party asserting its existence, and
such proof must be clear and satisfactorily show the existence of the trust and its elements. While
implied trusts may be proved by oral evidence, the evidence must be trustworthy and received by
the courts with extreme caution and should not be made to rest on loose, equivocal or indefinite
declarations. Trustworthy evidence is required because oral evidence can easily be fabricated.

The route to the reversal of the trial court’s finding that an implied trust had been constituted over the subject
realties is, thus, indubitably clear.
 As a final point, this Court finds that the plaintiff-appellee is not entitled to moral damages, attorney’s fees
and costs of litigation, considering that the instant case is clearly a vexatious and unfounded suit by him filed
against the estate of the late Alejandro Ty. Hence, all these awards in the judgment a quo are hereby
DELETED.8

The CA therefore reversed and set aside the judgment appealed from and entered another one dismissing the
complaint.

On October 18, 2004 the CA resolved to deny therein plaintiff-appellee’s motion for reconsideration. 9

Hence, this petition.

Petitioner submits the following grounds:

IN REVERSING THE TRIAL COURT’S JUDGMENT, THE COURT OF APPEALS –

1. MADE FACTUAL FINDINGS GROUNDED ON MANIFESTLY MISTAKEN INFERENCES,

SPECULATIONS, SURMISES, OR CONJECTURES OR PREMISED ON THE ABSENCE OF, OR ARE
CONTRADICTED BY, THE EVIDENCE ON RECORD, AND WITHOUT CITATIONS OF THE SPECIFIC
EVIDENCE ON WHICH THEY ARE BASED.

2. RULED THAT THERE WAS A "PRESUMED DONATION", WHICH IS A MATTER NEVER RAISED AS
AN ISSUE IN THE CASE AS IT, IN FACT, CONFLICTS WITH THE PARTIES’ RESPECTIVE THEORIES
OF THE CASE, AND THUS DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS AS TO CALL FOR THIS HONORABLE COURT’S EXERCISE OF ITS POWER OF
SUPERVISION.

3. APPLIED THE PROVISION ON PRESUMPTIVE DONATION IN FAVOR OF A CHILD IN ARTICLE 1448

OF THE CIVIL CODE DESPITE AB TY’S EXPRESS DECLARATION THAT HE DID NOT INTEND TO
DONATE THE SUBJECT PROPERTIES TO ALEXANDER AND THUS DECIDED A QUESTION OF
SUBSTANCE NOT THERETOFORE DETERMINED BY THIS HONORABLE COURT.

4. REQUIRED THAT THE IMPLIED TRUST BE PROVEN WITH DOCUMENTARY EVIDENCE AND THUS
DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND
JURISPRUDENCE.10

The Court disposes of the petition, as follows:

The EDSA Property

Petitioner contends that the EDSA property, while registered in the name of his son Alexander Ty, is covered by an
implied trust in his favor under Article 1448 of the Civil Code. This, petitioner argues, is because he paid the price
when the property was purchased and did so for the purpose of having the beneficial interest of the property.

Article 1448 of the Civil Code provides:

Art. 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the
price is paid by another for the purpose of having the beneficial interest of the property. The former is the
trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child,
legitimate or illegitimate, of one paying the price of the sale, no trust is implied by law, it being disputably
presumed that there is a gift in favor of the child.

The CA conceded that at least part of the purchase price of the EDSA property came from petitioner. However, it
ruled out the existence of an implied trust because of the last sentence of Article 1448: x x x However, if the person
to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is
implied by law, it being disputably presumed that there is a gift in favor of the child.

Petitioner now claims that in so ruling, the CA departed from jurisprudence in that such was not the theory of the
parties.

Petitioner, however, forgets that it was he who invoked Article 1448 of the Civil Code to claim the existence of an
implied trust. But Article 1448 itself, in providing for the so-called purchase money resulting trust, also provides the
parameters of such trust and adds, in the same breath, the proviso: "However, if the person to whom the title is
conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, NO TRUST IS IMPLIED BY
LAW, it being disputably presumed that there is a gift in favor of the child." (Emphasis supplied.)
Stated otherwise, the outcome is the necessary consequence of petitioner’s theory and argument and is inextricably
linked to it by the law itself.

The CA, therefore, did not err in simply applying the law.

Article 1448 of the Civil Code is clear. If the person to whom the title is conveyed is the child of the one paying the
price of the sale, and in this case this is undisputed, NO TRUST IS IMPLIED BY LAW. The law, instead, disputably
presumes a donation in favor of the child.

On the question of whether or not petitioner intended a donation, the CA found that petitioner failed to prove the
contrary. This is a factual finding which this Court sees no reason the record to reverse.

The net effect of all the foregoing is that respondent is obliged to collate into the mass of the estate of petitioner, in
the event of his death, the EDSA property as an advance of Alexander’s share in the estate of his father, 11 to the
extent that petitioner provided a part of its purchase price.

The Meridien Condominium and the Wack-Wack property.

Petitioner would have this Court overturn the finding of the CA that as regards the Meridien Condominium and the
Wack-Wack property, petitioner failed to show that the money used to purchase the same came from him.

Again, this is clearly a factual finding and petitioner has advanced no convincing argument for this Court to alter the
findings reached by the CA.

The appellate court reached its findings by a thorough and painstaking review of the records and has supported its
conclusions point by point, providing citations from the records. This Court is not inclined to reverse the same.

Among the facts cited by the CA are the sources of income of Alexander Ty who had been working for nine years
when he purchased these two properties, who had a car care business, and was actively engaged in the business
dealings of several family corporations, from which he received emoluments and other benefits. 12

The CA, therefore, ruled that with respect to the Meridien Condominium and the Wack-Wack property, no implied
trust was created because there was no showing that part of the purchase price was paid by petitioner and, on the
contrary, the evidence showed that Alexander Ty had the means to pay for the same.

WHEREFORE, the petition is PARTLY GRANTED in that the Decision of the Court of Appeals dated July 27, 2004
and its Resolution dated October 18, 2004, in CA-G.R. No. 66053, are AFFIRMED, with the MODIFICATION that
respondent is obliged to collate into the mass of the estate of petitioner, in the event of his death, the EDSA property
as an advance of Alexander Ty’s share in the estate of his father, to the extent that petitioner provided a part of its
purchase price.

No costs.

SO ORDERED.
G.R. No. 58010. March 31, 1993.

EMILIA O'LACO and HUCO LUNA, petitioners, vs. VALENTIN CO CHO CHIT, O LAY KIA and COURT OF
APPEALS, respondents.

Sergio L. Guadiz for petitioners.

Norberto J . Quisumbing & Associates for private respondents.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; ACTIONS; CONDITION PRECEDENT TO FILING OF SUIT BETWEEN
MEMBERS OF THE SAME FAMILY; EFFECT OF FAILURE TO COMPLY WITH CONDITION. — Admittedly, the
present action is between members of the same family since petitioner Emilia O'Laco and respondent O Lay Kia are
half-sisters. Consequently, there should be an averment in the compliant that earnest efforts toward a compromise
have been made, pursuant to Art. 222 of the New Civil Code, or a motion to dismiss could have been filed under
Sec. 1, par. (j), Rule 16 of the Rules of Court. For, it is well-settled that the attempt to compromise as well as the
inability to succeed is a condition precedent to the filing of a suit between members of the same family. Hence, the
defect in the complaint is assailable at any stage of the proceedings, even on appeal, for lack of cause of action.

2. ID.; ID.; AMENDMENT TO COMPLAINT; WHEN PROPER; AMENDMENT TO CONFORM TO EVIDENCE. —

Plaintiff may be allowed to amend his complaint to correct the defect if the amendment does not actually confer
jurisdiction on the court in which the action is filed, i.e., if the cause of action was originally within that court's
jurisdiction. In such case, the amendment is only to cure the perceived defect in the complaint, thus may be allowed.
In the case before Us, while respondent-spouses did not formally amend their complaint, they were nonetheless
allowed to introduce evidence purporting to show that earnest efforts toward a compromise had been made, that is,
respondent O Lay Kia importuned Emilia O'Laco and pressed her for the transfer of the title of the Oroquieta
property in the name of spouses O Lay Kia and Valentin Co Cho Chit, just before Emilia's marriage to Hugo Luna.
But, instead of transferring the title as requested, Emilia sold the property to the Roman Catholic Archbishop of
Manila. This testimony was not objected to by petitioner-spouses. Hence, the complaint was deemed accordingly
amended to conform to the evidence, pursuant to Sec. 5, Rule 10 of the Rules of Court which reads — "Sec. 5.
Amendment to conform to or authorize presentation of evidence. — When issues not raised by the pleadings are
tried by express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in
the pleadings . . ." Indeed, if the defendant permits evidence to be introduced without objection and which supplies
the necessary allegations of a defective complaint, then the evidence is deemed to have the effect of curing the
defects of the complaint. The insufficiency of the allegations in the complaint is deemed ipso facto rectified.
3. CIVIL LAW; OBLIGATIONS AND CONTRACTS; TRUSTS; EXPRESS TRUST; DEFINED; IMPLIED TRUST;
DEFINED. — By definition, trust relations between parties may either be express or implied. Express trusts are
those which are created by the direct and positive acts of the parties, by some writing or deed, or will, or by words
evincing an intention to create a trust. Implied trusts are those which, without being express, are deducible from the
nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of law as
matters of equity, independently of the particular intention of the parties.

4. ID.; ID.; ID.; IMPLIED TRUSTS; RESULTING TRUST; BASIS THEREOF; CONSTRUCTIVE TRUST; BASIS
THEREOF. — Implied trust may either be resulting or constructive trusts, both coming into being by operation of
law. Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines
the equitable title or interest and are presumed always to have been contemplated by the parties. They arise from
the nature or circumstances of the consideration involved in a transaction whereby one person thereby becomes
invested with legal title but is obligated in equity to hold his legal title for the benefit of another. On the other hand,
constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent
unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence,
obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold.

5. ID.; ID.; ID.; EXPRESS TRUSTS CONCERNING IMMOVABLES NOT PROVED BY PAROL EVIDENCE;
IMPLIED TRUST IN REAL PROPERTY ESTABLISHED BY PAROL EVIDENCE; PROOF REQUIRED; CASE AT
BAR. — Unlike express trusts concerning immovables or any interest therein which cannot be proved by parol
evidence, implied trusts may be established by oral evidence. However, in order to establish an implied trust in real
property by parol evidence, the proof should be as fully convincing as if the acts giving rise to the trust obligation
were proven by an authentic document. It cannot be established upon vague and inconclusive proof. After a
thorough review of the evidence on record, We hold that a resulting trust was indeed intended by the parties under
Art. 1448 of the New Civil Code which states — "Art. 1448. There is an implied trust when property is sold, and the
legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest
of the property. The former is the trustee, while the latter is the beneficiary . . ." As stipulated by the parties, the
document of sale, the owner's duplicate copy of the certificate of title, insurance policies, receipt of initial premium of
insurance coverage and real estate tax receipts were all in the possession of respondent-spouses which they
offered in evidence. As emphatically asserted by respondent O Lay Kia, the reason why these documents of
ownership remained with her is that the land in question belonged to her. Indeed, there can be no persuasive
rationalization for the possession of these documents of ownership by respondent-spouses for seventeen (17) years
after the Oroquieta property was purchased in 1943 than that of precluding its possible sale, alienation or
conveyance by Emilia O'Laco, absent any machination or fraud. This continued possession of the documents,
together with other corroborating evidence spread on record, strongly suggests that Emilia O'Laco merely held the
Oroquieta property in trust for respondent-spouses.

6. ID.; ID.; ID.; CONSTRUCTIVE TRUST SUBJECT TO PRESCRIPTION; RESULTING TRUST

IMPRESCRIPTIBLE; RESULTING TRUST CONVERTED TO CONSTRUCTIVE TRUST BY REPUDIATION;
REQUISITES; PRESCRIPTIVE PERIOD FOR ACTION FOR RECONVEYANCE BASED ON CONSTRUCTIVE
TRUST. — As differentiated from constructive trusts, where the settled rule is that prescription may supervene, in
resulting trust, the rule of imprescriptibility may apply for as long as the trustee has not repudiated the trust. Once
the resulting trust is repudiated, however, it is converted into a constructive trust and is subject to prescription. A
resulting trust is repudiated if the following requisites concur: (a) the trustee has performed unequivocal acts of
repudiation amounting to an ouster of the cestui qui trust; (b) such positive acts of repudiation have been made
known to the cestui qui trust; and, (c) the evidence thereon is clear and convincing. In Tale v. Court of Appeals the
Court categorically ruled that an action for reconveyance based on an implied or constructive trust must perforce
prescribe in ten (10) years, and not otherwise, thereby modifying previous decisions holding that the prescriptive
period was four (4) years. So long as the trustee recognizes the trust, the beneficiary may rely upon the recognition,
and ordinarily will not be in fault for omitting to bring an action to enforce his rights. There is no running of the
prescriptive period if the trustee expressly recognizes the resulting trust. Since the complaint for breach of trust was
filed by respondent-spouses two (2) months after acquiring knowledge of the sale, the action therefore has not yet
prescribed.

DECISION

BELLOSILLO, J p:

History is replete with cases of erstwhile close family relations put asunder by property disputes. This is one of them.
It involves half-sisters each claiming ownership over a parcel of land. While petitioner Emilia O'Laco asserts that she
merely left the certificate of title covering the property with private respondent O Lay Kia for safekeeping, the latter
who is the former's older sister insists that the title was in her possession because she and her husband bought the
property from their conjugal funds. To be resolved therefore is the issue of whether a resulting trust was intended by
them in the acquisition of the property. The trial court declared that there was no trust relation of any sort between
the sisters. 1 The Court of Appeals ruled otherwise. 2 Hence, the instant petition for review on certiorari of the
decision of the appellate court together with its resolution denying reconsideration. 3
It appears that on 31 May 1943, the Philippine Sugar Estate Development Company, Ltd., sold a parcel of land, Lot
No. 5, Block No. 10, Plan Psu-10038, situated at Oroquieta St., Sta. Cruz, Manila, with the Deed of Absolute Sale
naming Emilia O'Laco as vendee; thereafter, Transfer Certificate of Title No. 66456 was issued in her name.

On 17 May 1960, private respondent-spouses Valentin Co Cho Chit and O Lay Wa learned from the newspapers
that Emilia O'Laco sold the same property to the Roman Catholic Archbishop of Manila for P230,000.00, with
assumption of the real estate mortgage constituted thereon. 4

On 22 June 1960, respondent-spouses Valentin Co Cho Chit and O Lay Kia sued petitioner-spouses Emilia O'Laco
and Hugo Luna to recover the purchase price of the land before the then Court of First Instance of Rizal,
respondent-spouses asserting that petitioner Emilia O'Laco knew that they were the real vendees of the Oroquieta
property sold in 1943 by Philippine Sugar Estate Development Company, Ltd., and that the legal title thereto was
merely placed in her name. They contend that Emilia O'Laco breached the trust when she sold the land to the
Roman Catholic Archbishop of Manila. Meanwhile, they asked the trial court to garnish all the amounts still due and
payable to petitioner-spouses arising from the sale, which was granted on 30 June 1960. 5

Petitioner-spouses deny the existence of any form of trust relation. They aver that Emilia O'Laco actually bought the
property with her own money; that she left the Deed of Absolute Sale and the corresponding title with respondent-
spouses merely for safekeeping; that when she asked for the return of the documents evidencing her ownership,
respondent-spouses told her that these were misplaced or lost; and, that in view of the loss, she filed a petition for
issuance of a new title, and on 18 August 1944 the then Court of First Instance of Manila granted her petition.

On 20 September 1976, finding no trust relation between the parties, the trial court dismissed the complaint together
with the counterclaim. Petitioners and respondents appealed.

On 9 April 1981, the Court of Appeals set aside the decision of the trial court thus —

". . . We set aside the decision of the lower court dated September 20, 1976 and the order of January 5, 1977 and
another one is hereby entered ordering the defendants-appellees to pay plaintiffs-appellants jointly and severally the
sum of P230,000.00 representing the value of the property subject of the sale with assumption of mortgage to the
Roman Catholic Archbishop of Manila with legal interest from the filing of the complaint until fully paid, the sum of
P10,000.00 as attorney's fees, plus costs."

On 7 August 1981, the Court of Appeals denied reconsideration of its decision, prompting petitioners to come to this
Court for relief.

Petitioners contend that the present action should have been dismissed. They argue that the complaint fails to
allege that earnest efforts toward a compromise were exerted considering that the suit is between members of the
same family, and no trust relation exists between them. Even assuming ex argumenti that there is such a relation,
petitioners further argue, respondents are already barred by laches.

We are not persuaded. Admittedly, the present action is between members of the same family since petitioner
Emilia O'Laco and respondent O Lay Kia are half-sisters. Consequently, there should be an averment in the
complaint that earnest efforts toward a compromise have been made, pursuant to Art. 222 of the New Civil Code, 6
or a motion to dismiss could have been filed under Sec. 1, par. (j), Rule 16, of the Rules of Court. 7 For, it is well-
settled that the attempt to compromise as well as the inability to succeed is a condition precedent to the filing of a
suit between members of the same family. 8 Hence, the defect in the complaint is assailable at any stage of the
proceedings, even on appeal, for lack of cause of action. 9

But, plaintiff may be allowed to amend his complaint to correct the defect if the amendment does not actually confer
jurisdiction on the court in which the action is filed, i.e., if the cause of action was originally within that court's
jurisdiction. 10 In such case, the amendment is only to cure the perceived defect in the complaint, thus may be
allowed.

In the case before Us, while respondent-spouses did not formally amend their complaint, they were nonetheless
allowed to introduce evidence purporting to show that earnest efforts toward a compromise had been made, that is,
respondent O Lay Kia importuned Emilia O'Laco and pressed her for the transfer of the title of the Oroquieta
property in the name of spouses O Lay Kia and Valentin Co Cho Chit, just before Emilia's marriage to Hugo Luna.
11 But, instead of transferring the title as requested, Emilia sold the property to the Roman Catholic Archbishop of
Manila. This testimony was not objected to by petitioner-spouses. Hence, the complaint was deemed accordingly
amended to conform to the evidence, 12 pursuant to Sec. 5, Rule 10 of the Rules of Court which reads —

"SECTION 5. Amendment to conform to or authorize presentation of evidence. — When issues not raised by the
pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as, if they had
been raised in the pleadings . . ." (emphasis supplied).
Indeed, if the defendant permits evidence to be introduced without objection and which supplies the necessary
allegations of a defective complaint, then the evidence is deemed to have the effect of curing the defects of the
complaint. 13 The insufficiency of the allegations in the complaint is deemed ipso facto rectified. 14

But the more crucial issue before Us is whether there is a trust relation between the parties in contemplation of law.

We find that there is. By definition, trust relations between parties may either be express or implied. 15 Express
trusts are those which are created by the direct and positive acts of the parties, by some writing or deed, or will, or
by words evincing an intention to create a trust. 16 Implied trusts are those which, without being express, are
deducible from the nature of the transaction as matters of intent, or which are superinduced on the transaction by
operation of law as matters of equity, independently of the particular intention of the parties.17 Implied trusts may
either be resulting or constructive trusts, both coming into being by operation of law. 18

Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines the
equitable title or interest 19 and are presumed always to have been contemplated by the parties. They arise from
the nature or circumstances of the consideration involved in a transaction whereby one person thereby becomes
invested with legal title but is obligated in equity to hold his legal title for the benefit of another. 20 On the other
hand, constructive trusts are created by the construction of equity in order to satisfy the demands of justice 21 and
prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold.
22

Specific examples of resulting trusts may be found in the Civil Code, particularly Arts. 1448, 1449, 1451,1452 and
1453, 23 while constructive trusts are illustrated in Arts. 1450, 1454, 1455 and 1456. 24

Unlike express trusts concerning immovables or any interest therein which cannot be proved by parol evidence, 25
implied trusts may be established by oral evidence. 26 However, in order to establish an implied trust in real
property by parol evidence, the proof should be as fully convincing as if the acts giving rise to the trust obligation
were proven by an authentic document. 27 It cannot be established upon vague and inconclusive proof. 28

After a thorough review of the evidence on record, We hold that a resulting trust was indeed intended by the parties
under Art. 1448 of the New Civil Code which states —

"ARTICLE 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the
price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee,
while the latter is the beneficiary . . ." (emphasis supplied).

First. As stipulated by the parties, the document of sale, the owner's duplicate copy of the certificate of title,
insurance policies, receipt of initial premium of insurance coverage and real estate tax receipts ware all in the
possession of respondent spouses which they offered in evidence. As emphatically asserted by respondent O Lay
Kia, the reason why these documents of ownership remained with her is that the land in question belonged to her.
29

Indeed, there can be no persuasive rationalization for the possession of these documents of ownership by
respondent-spouses for seventeen (17) years after the Oroquieta property was purchased in 1943 than that of
precluding its possible sale, alienation or conveyance by Emilia O'Laco, absent any machination or fraud. This
continued possession of the documents, together with other corroborating evidence spread on record, strongly
suggests that Emilia O'Laco merely held the Oroquieta property in trust for respondent-spouses.

Second. It may be worth to mention that before buying the Oroquieta property, respondent-spouses purchased
another property situated in Kusang-Loob, Sta. Cruz, Manila, where the certificate of title was placed in the name of
Ambrosio O'Laco, older brother of Emilia, under similar or identical circumstances. The testimony of former counsel
for respondent-spouses, then Associate Justice Antonio G. Lucero of the Court of Appeals, is enlightening —

"Q In the same conversation he told you how he would buy the property (referring to the Oroquieta property), he and
his wife?

"A Yes, Sir, he did.

"Q What did he say?

xxx xxx xxx

"A He said he and his wife has (sic) already acquired by purchase a certain property located at Kusang-Loob, Sta.
Cruz, Manila. He told me he would like to place the Oroquieta Maternity Hospital in case the negotiation
materialize(s) in the name of a sister of his wife (O'Laco)" (emphasis supplied). 30
On the part of respondent-spouses, they explained that the reason why they did not place these Oroquieta and
Kusang-Loob properties in their name was that being Chinese nationals at the time of the purchase they did not
want to execute the required affidavit to the effect that they were allies of the Japanese. 31 Since O Lay Kia took
care of Emilia who was still young when her mother died, 32 respondent-spouses did not hesitate to place the title of
the Oroquieta property in Emilia's name.

Quite significantly, respondent-spouses also instituted an action for reconveyance against Ambrosio O'Laco when
the latter claimed the Kusang-Loob property as his own. A similar stipulation of facts was likewise entered, i.e.,
respondent-spouses had in their possession documents showing ownership of the Kusang-Loob property which
they offered in evidence. In that case, the decision of the trial court, now final and executory, declared respondent-
spouses as owners of the Kusang-Loob property and ordered Ambrosio O'Laco to reconvey it to them. 33

Incidentally, Ambrosio O'Laco thus charged respondent spouses Valentin Co Cho Cit and O Lay Kia before the Anti-
Dummy Board, docketed as Case No. 2424, for their acquisition of the Kusang-Loob and Oroquieta properties. 34
He claimed that respondent-spouses utilized his name in buying the Kusang-Loob property while that of petitioner
O'Laco was used in the purchase of the Oroquieta property. In effect, there was an implied admission by Ambrosio
that his sister Emilia, like him, was merely used as a dummy. However, the Anti-Dummy Board exonerated
respondent-spouses since the purchases were made in 1943, or during World War II, when the Anti-Dummy Law
was not enforceable.

Third. The circumstances by which Emilia O'Laco obtained a new title by reason of the alleged loss of the old title
then in the possession of respondent-spouses cast serious doubt on the veracity of her ownership. The petitions
respectively filed by Emilia O'Laco and Ambrosio O'Laco for the Oroquieta and the Kusang-Loob properties were
both granted on the same day, 18 August 1944, by the then Court of First Instance of Manila. These orders were
recorded in the Primary Entry Book of the Register of Deeds of Manila at the same time, 2:35 o'clock in the
afternoon of 1 September 1944, in consecutive entries, Entries Nos. 246117-18. 35 This coincidence lends
credence to the position of respondent-spouses that there was in fact a conspiracy between the siblings Ambrosio
and Emilia to defraud and deprive respondents of their title to the Oroquieta and Kusang-Loob properties.

Fourth. Until the sale of the Oroquieta property to the Roman Catholic Archbishop of Manila, petitioner Emilia
O'Laco actually recognized the trust. Specifically, when respondent spouses learned that Emilia was getting married
to Hugo, O Lay Kia asked her to have the title to the property already transferred to her and her husband Valentin,
and Emilia assured her that "would be arranged (maaayos na)" after her wedding. 36 Her answer was an express
recognition of the trust, otherwise, she would have refused the request outright. Petitioners never objected to this
evidence; nor did they attempt to controvert it.

Fifth. The trial court itself determined that "Valentin Co Cho Chit and O Lay Kia had some money with which they
could buy the property." 37 In fact, Valentin was the Chief Mechanic of the Paniqui Sugar Mills, was engaged in the
buy and sell business, operated a gasoline station, and owned an auto supply store as well as a ten-door apartment
in Caloocan City. 38 In contrast, Emilia O'Laco failed to convince the Court that she was financially capable of
purchasing the Oroquieta property. In fact, she opened a bank account only in 1946 and likewise began filing
income tax returns that same year, 39 while the property in question was bought in 1943. Respondent-spouses
even helped Emilia and her brothers in their expenses and livelihood. Emilia could only give a vague account on
how she raised the money for the purchase of the property. Her narration of the transaction of sale abounds with "I
don't know" and "I don't remember." 40

Having established a resulting trust between the parties, the next question is whether prescription has set in.

As differentiated from constructive trusts, where the settled rule is that prescription may supervene, in resulting trust,
the rule of imprescriptibility may apply for as long as the trustee has not repudiated the trust. 41 Once the resulting
trust is repudiated, however, it is converted into a constructive trust and is subject to prescription.

A resulting trust is repudiated if the following requisites concur: (a) the trustee has performed unequivocal acts of
repudiation amounting to an ouster of the cestui qui trust; (b) such positive acts of repudiation have been made
known to the cestui qui trust; and, (c) the evidence thereon is clear and convincing. 42

In Tale v. Court of Appeals 43 the Court categorically ruled that an action for reconveyance based on an implied or
constructive trust must perforce prescribe in ten (10) years, and not otherwise, thereby modifying previous decisions
holding that the prescriptive period was four (4) years.

Neither the registration of the Oroquieta property in the name of petitioner Emilia O'Laco nor the issuance of a new
Torrens title in 1944 in her name in lieu of the alleged loss of the original may be made the basis for the
commencement of the prescriptive period. For, the issuance of the Torrens title in the name of Emilia O'Laco could
not be considered adverse, much less fraudulent. Precisely, although the property was bought by respondent-
spouses, the legal title was placed in the name of Emilia O'Laco. The transfer of the Torrens title in her name was
only in consonance with the deed of sale in her favor. Consequently, there was no cause for any alarm on the part
of respondent-spouses. As late as 1959, or just before she got married, Emilia continued to recognize the ownership
of respondent-spouses over the Oroquieta property. Thus, until that point, respondent-spouses were not aware of
any act of Emilia which would convey to them the idea that she was repudiating the resulting trust. The second
requisite is therefore absent. Hence, prescription did not begin to run until the sale of the Oroquieta property, which
was clearly an act of repudiation.

But immediately after Emilia sold the Oroquieta property which is obviously a disavowal of the resulting trust,
respondent-spouses instituted the present suit for breach of trust. Correspondingly, laches cannot lie against them.

After all, so long as the trustee recognizes the trust, the beneficiary may rely upon the recognition, and ordinarily will
not be in fault for omitting to bring an action to enforce his rights. 44 There is no running of the prescriptive period if
the trustee expressly recognizes the resulting trust. 45 Since the complaint for breach of trust was filed by
respondent-spouses two (2) months after acquiring knowledge of the sale, the action therefore has not yet
prescribed.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The Decision of the Court of Appeals of 9 April
1981, which reversed the trial court, is AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. L-20449 January 29, 1968

ESPERANZA FABIAN, BENITA FABIAN and DAMASO PAPA Y FABIAN, plaintiffs-appellants,

vs.
SILBINA FABIAN, FELICIANO LANDRITO, TEODORA FABIAN and FRANCISCO DEL MONTE, defendants-
appellees.

Felix Law Office for plaintiffs-appellants.

J.G. Mendoza for defendants-appellees.

CASTRO, J.:

Before us is the appeal taken by Esperanza Fabian, Benita I Fabian and Damaso Papa y Fabian from the decision
of the Court of First Instance of Rizal which dismissed their complaint for reconveyance, in civil case 295-R, filed
against the defendants spouses Silbina Fabian and Feliciano Landrito and Teodora Fabian and Francisco del
Monte, upon the ground that the latter had acquired a valid and complete title to the land in question by acquisitive
prescription.

This case traces its origin way back to January 1, 1909 when Pablo Fabian bought from the Philippine Government
lot 164 of the Friar Lands Estate in Muntinlupa, Rizal, of an area 1 hectare, 42 ares and 80 centares, for the sum of
P112 payable in installments. By virtue of this purchase, he was issued sale certificate 547. He died on August 2,
1928, survived by four children, namely, Esperanza, Benita I, Benita II, 1 and Silbina.

On October 5, 1928 Silbina Fabian and Teodora Fabian, niece of the deceased, executed an affidavit, reciting,
among other things,
 Que el finado Pablo Fabian, no dejo ningun otro heredero sino los declarantes, con derecho a heredar el
lote No. 164 de la hacienda Muntinlupa, relicto por dicho finado Pablo Fabian y para la aprobacion de
traspaso a nosotros el referido lote No. 164, prestamos esta declaracion para todos los efectos que pueden
covenir a la Oficina de Terenos a defender por nuestro mayor derecho de heredar dicho lote contra las
reclamaciones juntas de quien las presentare.

On the strength of this affidavit, sale certificate 547 was assigned to them. On November 14, 1928 the acting
Director of Lands, on behalf of the Government, sold lot 164, under deed 17272, to Silbina Fabian, married to
Feliciano Landrito, and to Teodora Fabian, married to Francisco del Monte, for the sum of P120. The vendees
spouses forthwith in 1929 took physical possession thereof, cultivated it, and appropriated the produce therefrom
(and concededly have up to the present been appropriating the fruits from the land exclusively for themselves). In
that same year, they declared the lot in their names for taxation purposes under tax declaration 3374. This tax
declaration was later cancelled, and in lieu thereof two tax declarations (2418 and 2419) were issued in favor of
Teodora Fabian and Silbina Fabian, respectively. Since 1929 up to the present, they have been paying the real
estate taxes thereon. In 1937 the Register of Deeds of Rizal issued TCT 33203 over lot 164 in their names. And on
May 4, 1945, they subdivided the lot into two equal parts; TCT 33203 was then cancelled and TCT 38095 was
issued over lot 164-A in the name of Silbina Fabian, married to Feliciano Landrito, and 38096 was issued over lot
164-B in the name of Teodora Fabian, married to Francisco del Monte.

On July 18, 1960 the plaintiffs filed the present action for reconveyance against the defendants spouses, averring
that Silbina and Teodora, through fraud perpetrated in their affidavit aforesaid, made it appear that "el finado Pablo
Fabian no dejo ningun otro heredero sino los declarantes con derecho a heredar el lote No. 164 de la hacienda de
Muntinlupa", which is a false narration of facts because Silbina knew that she is not the only daughter and heir of
the deceased Pablo Fabian, and Teodora likewise knew all along that, as a mere niece of the deceased, she was
precluded from inheriting from him in the presence of his four surviving daughters; that by virtue of this affidavit, the
said defendants succeeded in having sale certificate 547 assigned to them and thereafter in having lot 164 covered
by said certificate transferred in their names; and that by virtue also of these assignment and transfer, the
defendants succeeded fraudulently in having lot 164 registered in their names under TCT 33203. They further allege
that the land has not been transferred to an innocent purchaser for value. A reconveyance thereof is prayed for,
aside from P3,000 attorney's fees and costs.

In their answer of August 31, 1960, 2 the defendants spouses claim that Pablo Fabian was not the owner of lot 164
at the time of his death on August 2, 1928 because he had not paid in full the amortizations on the lot; that they are
the absolute owners thereof, having purchased it from the Government for the sum of P120, and from that year
having exercised all the attributes of ownership thereof up to the present; and that the present action for
reconveyance has already prescribed. The dismissal of the complaint is prayed for.

On the basis of a partial stipulation of facts together with annexes, the lower court rendered judgment on June 28,
1962, declaring that the defendants spouses had acquired a valid and complete title to the property by acquisitive
prescription, and accordingly dismissed the complaint, with costs against the plaintiffs. The latter's motion for
reconsideration was thereafter denied.

Hence, the present recourse.

The three resulting issues of law tendered for resolution in this appeal, by the formulation of the parties are: (1) Was
Pablo Fabian the owner of lot 164 at the time of his death, in the face of the fact, admitted by the defendants-
appellees, that he had not then paid the entire purchase price thereof? (2) May laches constitute a bar to an action
to enforce a constructive trust? (3) Has title to the land vested in the appellees through the mode of acquisitive
prescription?

1. Lot 164 was a part of the Friar Lands Estate of Muntinlupa, Rizal; its sale to Pablo Fabian was therefore governed
by Act 1120, otherwise known as the Friar Lands Act. While under section 15 of the said Act, title to the land sold is
reserved to the Government until the purchaser makes full payment of all the required installments and the interest
thereon, this legal reservation refers.

to the bare, naked title. The equitable and beneficial title really went to the purchaser the moment he paid
the first installment and was given a certificate of sale. The reservation of the title in favor of the Government
is made merely to protect the interest of the Government so as to preclude or prevent the purchaser from
encumbering or disposing of the lot purchased before the payment in full of the purchase price. Outside of
this protection the Government retains no right as an owner. For instance, after issuance of the sales
certificate and pending payment in full of the purchase price, the Government may not sell the lot to another.
It may not even encumber it. It may not occupy the land to use or cultivate; neither may it lease it or even
participate or share in its fruits. In other words, the Government does not and cannot exercise the rights and
prerogatives of owner. And when said purchaser finally pays the final installment on the purchase price and
is given a deed of conveyance and a certificate of title, the title at least in equity, retroacts to the time he first
occupied the land, paid the first installment and was issued the corresponding certificate of sale. In other
 words, pending the completion of the payment of the purchase price, the purchaser is entitled to all the
benefits and advantages which may accrue to the land as well as suffer the losses that may befall it. 3

That Pablo Fabian had paid five annual installments to the Government, and in fact been issued sale certificate 547
in his name, are conceded. He was therefore the owner of lot 164 at the time of his death. He left four daughters,
namely, Esperanza, Benita I, Benita II and Silbina to whom all his rights and interest over lot 164 passed upon his
demise.

In case a holder of a certificate dies before the giving of the deed and does not leave a widow, then the
interest of the holder of the certificate shall descend and deed shall issue to the person who under the laws
of the Philippine Islands would have taken had the title been perfected before the death of the holder of the
certificate, upon proof of the holders thus entitled of compliance with all the requirements of the certificate. 4

The assignment and sale of the lot to the defendants. Silbina and Teodora were therefore null and void as to that
portion sold to Teodora, and as well as to that portion which lawfully devolved in favor of the appellants. To the
extent of the participation of the appellants, application must be made of the principle that if property is acquired
through fraud, the person obtaining it is considered a trustee of an implied trust for the benefit of the person from
whom the property comes (Gayondato vs. Insular Treasurer, 49 Phil. 244).

2. In Diaz, et al. vs. Gorricho, et al., 103 Phil. 264-265 (1958), this Court, speaking through Mr. Justice J.B.L. Reyes,
declared in no uncertain terms that laches may bar an action brought to enforce a constructive trust such as the one
in the case at bar. Illuminating are the following excerpts from the decision penned by Mr. Justice Reyes:

Article 1456 of the new Civil Code, while not retroactive in character, merely expresses a rule already
recognized by our courts prior to the Code's promulgation (see Gayondato vs. Insular Treasurer, 49 Phil.
244). Appellants are, however, in error in believing that like express trust, such constructive trusts may not
be barred by lapse of time. The American law on trusts has always maintained a distinction between
express trusts created by the intention of the parties, and the implied or constructive trusts that are
exclusively created by law, the latter not being trusts in their technical sense (Gayondato vs. Insular
Treasurer, supra). The express trusts disable the trustee from acquiring for his own benefit the property
committed to his management or custody, at least while he does not openly repudiate the trust, and makes
such repudiation known to the beneficiary or cestui que trust. For this reason, the old Code of Civil
Procedure (Act 190) declared that the rules on adverse possession does not apply to "continuing and
subsisting" (i.e., unrepudiated) trusts.

But in constructive trusts, . . . the rule is that laches constitutes a bar to actions to enforce the trust, and
repudiation is not required, unless there is a concealment of the facts giving rise to the trust (54 Am. Jur.,
secs. 580, 581; 65 C.J., secs. 956, 957; Amer. Law Institute, Restatement of Trusts, section 219; on
Restitution, section 179; Stianson vs. Stianson 6 ALR 287; Claridad vs. Benares, 97 Phil. 973.

The assignment of sale certificate 547 was effected on October 5, 1928; and the actual transfer of lot 164 was made
on the following November 14. It was only on July 8, 1960, 32 big years later, that the appellants for the first time
came forward with their claim to the land. The record does not reveal, and it is not seriously asserted, that the
appellees concealed the facts giving rise to the trust. Upon the contrary, paragraph 13 of the stipulation of facts of
the parties states with striking clarity "that defendants herein have been in possession of the land in question since
1928 up to the present publicly and continuously under claim of ownership; they have cultivated it, harvested and
appropriated the fruits for themselves." (emphasis supplied.)

3. Six years later, in Gerona, et al. vs. De Guzman, et al., L-19060, May 29, 1964, the factual setting attending
which is substantially similar to that obtaining in the case at bar, this Court, in an excellently-phrased decision
penned by Chief Justice, then Associate Justice, Roberto Concepcion, unequivocally reaffirmed the rule, overruling
previous decisions to the contrary, that "an action for reconveyance of real property based upon a constructive or
implied trust, resulting from fraud, may be barred by the statute of limitations," and further that "the action therefor
may be filed within four years from the discovery of the fraud," the discovery in that case being deemed to have
taken place when new certificates of title were issued exclusively in the names of the respondents therein. The
following is what Justice Concepcion, speaking for the Court, said:

[A]lthough, as a general rule, an action for partition among co-heirs does not prescribe, this is true only as
long as the defendants do not hold the property in question under an adverse title (Cordova vs. Cordova, L-
9936, January 14, 1948). The statute of limitations operates, as in other cases, from the moment such
adverse title is asserted by the possessor of the property (Ramos v. Ramos, 45 Phil., 362; Bargayo v.
Camumot, 40 Phil., 857; Castro v. Echarri, 20 Phil., 23).

When respondents executed the aforementioned deed of extra-judicial settlement stating therein that they
are the sole heirs of the late Marcelo de Guzman, and secured new transfer certificates of title in their own
name, they thereby excluded the petitioners from the estate of the deceased, and consequently, set up a
 title adverse to them. And this is why petitioners have brought this action for the annulment of said deed
upon the ground that the same is tainted with fraud.

Although, there are some decisions to the contrary (Jacinto v. Mendoza, L-12540, February 28, 1959;
Cuison v. Fernandez, L-11764, January 31, 1959; Marabiles v. Quito, L-10408, October 18, 1956 and
Sevilla v. De los Angeles, L-7745, November 18, 1955), it is already settled in this jurisdiction that an action
for reconveyance of real property based upon a constructive or implied trusts, resulting from fraud, may be
barred by the statute of limitations (Candelaria vs. Romero, L-12149, September 30, 1960; Alzona v.
Capunita, L-10220, February 28, 1962).

Inasmuch as petitioners seek to annul the aforementioned deed of "extra-judicial settlement" upon the
ground of fraud in the execution thereof, the action therefor may be filed within four (4) years from the
discovery of the fraud (Mauricio v. Villanueva, L-11072, September 24, 1959). Such discovery is deemed to
have taken place, in the case at bar, on June 25, 1948, when said instrument was filed with the Register of
Deeds and new certificates of title in the name of the respondents exclusively, for the registration of the
deed of extra-judicial settlement constitutes constructive notice to the whole world (Diaz v. Gorricho, L-
11229, March 29, 1958; Avecilla v. Yatco, L-11578, May 14, 1958; J. M. Tuason & Co., Inc. v. Magdangal,
L-15539, January 30, 1962; Lopez v. Gonzaga, L-18788, January 31, 1964). (Emphasis supplied.)

Upon the undisputed facts in the case at bar, not only had laches set in when the appellants instituted their action
for, reconveyance in 1960, but as well their right to enforce the constructive trust had already prescribed. 5

It logically follows from the above disquisition that acquisitive prescription has likewise operated to vest absolute title
in the appellees, pursuant to the provisions of section 41 of Act 190 that

Ten years actual adverse possession by any person claiming to be the owner for that time of any land or
interest in land, uninterruptedly continued for ten years by occupancy, descent, grants, or otherwise, in
whatever way such occupancy may have commenced or continued, 6shall vest in every actual occupant or
possessor of such land a full and complete title. . . . (Emphasis ours.)

The stringent mandate of said section 41 that "the possession by the claimant or by the person under or through
whom he claims must have been actual, open, public, continuous under a claim of title exclusive of any other right
and adverse to all other claimants," was adjudged by the lower court as having been fulfilled in the case at hand.
And we agree. Although paragraph 13 of the stipulation of facts hereinbefore adverted to does not explicitly employ
the word "adverse" to characterize the possession of the defendants from 1928 up to the filing of the complaint in
1960, the words, "defendants have been in possession of the land since 1928 up to the present [1960] publicly and
continuously under claim of ownership; they have cultivated it, harvested and appropriated the fruits for
themselves," clearly delineate, and can have no other logical meaning than, the adverse character of the
possession exercised by the appellees over the land. If the import of the abovequoted portion of the stipulation of
facts is at all doubted, such doubt is dispelled completely by additional cumulative facts in the record which are
uncontroverted. Thus, the appellees declared the lot for taxation purposes in their names, and the resulting tax
declaration was later concelled and two tax declarations were issued in favor of Silbina Fabian and Teodora Fabian,
respectively. They have been paying the real estate taxes thereon from 1929 to the present. And in 1945 they
subdivided the lot into two equal parts, and two transfer certificates of title were issued separately in their names.

Upon the foregoing disquisition, we hold not only that the appellants' action to enforce the constructive trust created
in their favor has prescribed, but as well that a valid, full and complete title has vested in the appellees by acquisitive
prescription.1äwphï1.ñët

ACCORDINGLY, the judgment a quo, dismissing the complaint, is affirmed. No pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.
Makalintal, J., concurs in the result.
G.R. No. 159571. July 15, 2005

DELFINA Vda. de RIGONAN and Spouses VALERIO LAUDE and VISMINDA LAUDE, Petitioners,
vs.
ZOROASTER DERECHO Representing the Heirs of RUBEN DERECHO, ABEL DERECHO, HILARION
DERECHO, NUNELA D. PASAOL, EFRAIM DERECHO, NOEL DERECHO, CORAZON D. OCARIZA
Representing the Heirs of Marcial Derecho, LANDILINO D. PRIETO Representing the Heirs of Pilar D. Prieto,
JUSTA D. BUENO, ADA D. MAPA, EMMANUEL DERECHO, POMPOSO DERECHO Representing the Heirs of
Apolinar Derecho, VICENTE D. RIGONAN, RUFA D. JAYME Representing the Heirs of Gerardo Derecho,
MARDONIO D. HERMOSILLA Representing the Heirs of Oliva D. Hermosilla, Respondents.

DECISION

PANGANIBAN, J.:

Owners who, for a long period of time, fail to assert their rights to unregistered real property may be deprived of it
through prescription. Although the present respondents initially owned part of the subject property by virtue of
succession, their inaction for several decades bars them from recovering it from petitioners who have possessed it
as owners since 1928. The purpose of prescription is to protect the diligent and vigilant, not those who sleep on their
rights.
The Case

Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, challenging the July 28, 2003 Decision 2 of
the Court of Appeals (CA) in CA-GR CV No. 62535. The assailed Decision disposed as follows:

"WHEREFORE, premises considered, the instant appeal is hereby DISMISSED for lack of merit. The assailed
decision of the court a quo dated October 26, 1998 is AFFIRMED WITH THE MODIFICATION that its declaration of
the [petitioners] as lawful heirs of Dolores Derecho-Rigonan, and indicating their lawful share equivalent to the share
of one child of the deceased Hilarion Derecho is DELETED.

"Costs against the [petitioners]."3

The trial court’s Decision, modified by the CA, had disposed as follows:

"WHEREFORE, premises considered, judgment is hereby rendered in favor of [respondents], declaring the Affidavit
of Adjudication executed by Leandro Rigonan on April 24, 1980 and the Deed of Sale executed by Teodoro Rigonan
in favor of Valerio Laude null and void; ordering the cancellation of Tax Dec. No. 00667 in the name of Valerio
Laude; ordering the [petitioners] to pay [respondents], jointly and severally, moral damages in the sum of
₱10,000.00 and litigation expenses in the sum of ₱5,000.00.

"[Petitioners] are hereby ordered to give-up and deliver the possession and ownership of the parcel of land in
question to [respondents]. [Petitioners] being the heirs of the late Dolores Derecho are entitled to the rightful share
equivalent to the share of one child of deceased Hilarion Derecho."4

The Facts

The instant controversy revolves around a parcel of land located at Tuburan Sur, Danao City, originally owned by
Hilarion Derecho. When Hilarion died long before World War II, his eight children -- Leonardo, Apolinar, Andres,
Honorata, Dolores, Gerardo, Agaton, and Oliva -- became pro indiviso co-owners of the subject property by
intestate succession. Subsequently, Tax Declaration No. 002675 was issued under the name "Heirs of Hilarion."

On July 16, 1921, five of the co-owners -- Leonardo, Apolinar, Andres, Honorata, and Dolores -- sold the inherited
property to Francisco Lacambra, subject to a five-year redemption clause. 6 Notably, the three other Derecho heirs --
Gerardo, Agaton, and Oliva -- were not parties to the pacto de retro sale.

Sometime in 1928, two years after the period for redemption expired, Dolores -- together with her husband, Leandro
Rigonan -- purchased7 the land from Lacambra and immediately occupied it.8

More than five decades passed without any controversy. On April 24, 1980, Leandro Rigonan executed the assailed
Affidavit of Adjudication in favor of his son, Teodoro Rigonan (the deceased husband of Petitioner Delfina vda. de
Rigonan).9 Under this instrument, Leandro declared himself to be the sole heir of Hilarion, 10 while Teodoro obtained
the cancellation of Tax Declaration No. 00267,11 and acquired Tax Declaration No. 00667 in his own name.12

During the same year, Teodoro mortgaged the subject property to the Rural Bank of Compostela of Cebu. Dreading
foreclosure, he settled his obligations with the bank 13 by securing the aid of Spouses Valerio and Visminda Laude.
On April 5, 1984, Teodoro executed the assailed Deed of Absolute Sale of Unregistered Land in favor of Valerio
Laude,14 who then obtained Tax Declaration No. 00726 under the latter’s name on May 10, 1984. 15

On November 10, 1993, respondents -- as the alleged heirs of Hilarion and pro indiviso owners of the subject realty
-- brought an action before the Regional Trial Court (RTC) of Danao City (Branch 25), first, to recover the property;
and, second, to annul the Deed of Sale in favor of Laude 16 and the Affidavit of Adjudication, whose validity and
authenticity they assailed on the ground of fraud. They likewise maintained that the subject property had not been
partitioned among the heirs; thus, it was still co-owned at the time it was conveyed to Petitioner Laude. 17

Petitioners did not deny the imputed fraud in the execution of the Affidavit of Adjudication. They, however, averred
that the document had no bearing on their claim of ownership, which had long pertained to the Rigonan spouses
following the 1928 conveyance from the absolute owner, Lacambra. 18 They theorized that the co-ownership over the
property ended when the period for redemption lapsed without any action on the part of the co-owners. 19 Therefore,
the Rigonan spouses bought the property as legitimate vendees for value and in good faith, not in the capacity of
redeeming co-owners.20

Petitioners likewise argued that they and their predecessors-in-interest had continuously owned and possessed the
subject property for 72 years. Accordingly, acquisitive prescription had allegedly set in, in their favor, when the case
was filed in 1993.21
Lastly, petitioners maintained that they were entitled to the equitable defense of laches. Respondents and their
forebears were rebuked for not asserting their rights over the property for the past 72 years. They supposedly did so
only after finding that the land had been developed, and that it had appreciated in value. 22

Ruling of the Court of Appeals

On appeal, the CA held that the Affidavit of Adjudication and the Deed of Absolute Sale were both void. The Affidavit
was deemed fraudulent because of the undisputed factual finding that some of the heirs of Hilarion were still alive at
the time of its execution; hence, the statement that Leandro was the sole heir was indubitably false. 23 The Deed of
Sale in favor of Laude was held void because the vendor, Teodoro, had no legal right to dispose of the entire co-
owned property. Moreover, the appellate court found that the evident purpose of the Contract was to deprive the
other lawful heirs of their claims over the realty. Under Article 1409 (pars. 1 & 2), of the Civil Code, the Contract was
considered void ab initio.24

As the Contracts were void, the defense of prescription was inapplicable. Article 1410 of the Civil Code states that
actions for the declaration of the inexistence of a contract do not prescribe. 25

As for the defense that the co-ownership ended when the period to redeem expired, the CA ruled that the
redemption or repurchase by the Rigonan spouses did not end the state of co-ownership. At most, the repurchase
gave rise to an implied trust in favor of the other co-owners.26

The CA added that prescription was inapplicable, because it did not run in favor of a co-owner as long as the latter
recognized the co-ownership. In the present case, petitioners failed to show that the co-heirs, except Dolores, had
repudiated their rights over the inherited property.27

The appellate court further ruled that Valerio Laude was not a buyer in good faith for two reasons; one, he had been
forewarned by Respondent Ruben Derecho that the property was still co-owned; and, two, Valerio had admitted
seeing the cancelled Tax Declaration under the name of the heirs of Hilarion. These matters should have alerted
Valerio, who should have then exercised prudence as a buyer.28

Finally, the appellate court held that the action for recovery prescribed within ten years from the issuance of the
Certificate of Title, which operated as a constructive notice. Considering, however, that the subject property was
unregistered, the CA ruled that the prescriptive period should be reckoned from the issuance of the Tax Declaration
on May 10, 1984. It concluded that the action was filed well within the period allowed by law for its recovery. 29

Hence, this Petition.30

Issues

Petitioners raise the following issues for our consideration:

"1. Respondent Court of Appeals erred in holding that the land subject matter hereof is property held in common by
the Heirs of Hilarion Derecho and an [i]mplied [t]rust was created by the act of repurchase.

"2. Respondent Court of Appeals erred in holding that the action for the recovery of possession and ownership is not
time-barred by prescription and/or laches.

"3. Respondent Court of Appeals erred in holding that respondents’ action for annulment of the Deed of Sale and
Affidavit of Adjudication is not time-barred by prescription and/or laches.

"4. Respondent Court of Appeals erred in holding that Petitioner Valerio Laude is not a buyer in good faith and
cannot be considered as legitimate and lawful owner of the subject property.

"5. Respondent Court of Appeals erred in resolving the case with an award of litigation expenses and attorney’s
fees.

"6. Respondent Court of Appeals acted with grave abuse of discretion when it ruled on the issue of [h]eirship." 31

Simply stated, the issues are as follows:

1. Whether at the time of the purchase in 1928, co-ownership still subsisted among the heirs of Hilarion Derecho

2. Whether an implied trust was created

3. Whether the action in the RTC was barred by prescription and laches
The Court’s Ruling

The Petition has merit.

First Issue:

Co-Ownership

Petitioners argue that the co-ownership ended when the heirs entered into a sale with the right to repurchase and
subsequently failed to redeem the property within the stipulated period. Consequently, when the Rigonan spouses
bought the subject land from Lacambra, it was a conveyance to the spouses in their personal capacities, not as co-
owners.32

On the other hand, respondents merely adopted33 the CA’s disquisitions discussed earlier.

Since the Spanish Civil Code was still in effect when Hilarion died long before the outbreak of the Second World
War34 and when the sale was executed on July 16, 1921, it is evident that the said law governed both the co-
ownership and the pacto de retro sale.

Pacto de Retro and

Failure to Redeem

Under a pacto de retro sale, title to and ownership of property are immediately vested in the vendee a retro, subject
only to the resolutory condition that the vendor repurchases it within the stipulated period. Pending the redemption,
the vendor loses all ownership rights over the property, save for the right to repurchase it upon compliance with the
requirements provided in Article 1518 of the Spanish Civil Code.35

In a number of cases, this Court has held that once the vendor fails to redeem the property within the stipulated
period, irrevocable title shall be vested in the vendee by operation of law.36

In the instant case, the parties to the contract stipulated a five-year redemption period, which expired on July 16,
1926. The failure of the sellers to redeem the property within the stipulated period indubitably vested absolute title
and ownership in the vendee, Lacambra. Consequently, barring any irregularities in the sale, the vendors definitively
lost all title, rights and claims over the thing sold. To all intents and purposes, therefore, the vendors a retro ceased
to be co-owners on July 16, 1926.

Clearly then, the parties to the sale -- Leonardo, Apolinar, Andres, and Honorata (but not Dolores, as will be
explained later), as well as all their successors-in-interest -- no longer had any legal interest in the disputed
property, none that they could have asserted in this action.

Purchase Beyond the

Redemption Period

As for Dolores, she reacquired legal interest in the property by virtue of the purchase in 1928, two years after the
period to redeem had already expired.37

This purchase cannot be considered as a redemption in the concept of a pacto de retro sale, which would imply that
the period to redeem was extended long after it had already expired. Such automatic extension is not possible
because, as succinctly stated by Manresa, "if the extension is made after the expiration of the period, then it is void
and of no effect because there is nothing to extend."38

Adiarte v. Tumaneng39 illustrates the legal effect of the expiration of the stipulated period for redemption. In that
case, Amanda Madamba sold two parcels of land to Spouses Cirilo Agudong and Emiliana Tumaneng. However,
she reserved for herself the right to repurchase the lots within ten years. Five years after the period expired,
Agudong executed a Contract promising to resell the land to Madamba. When the former died without fulfilling his
promise, the latter filed a suit to compel the widow to execute a deed of sale in the plaintiff’s favor. The widow
argued that Madamba could no longer redeem the property, because the period for redemption had already expired.

In debunking the widow’s defense, this Court ruled that the Contract did not constitute a promise to resell, because
the right to repurchase had been lost after the expiration of the stipulated period. The original Contract of Sale with a
right of repurchase no longer existed at the time Agudong made the promise to sell. Therefore, the parties entered
into an entirely new and independent agreement to sell, which was binding on the widow.
In Umale v. Fernandez,40 the Court ruled that the vendors were entitled to redeem the property despite the lapse of
the period for redemption, inasmuch as the vendees had renounced their right. On April 13, 1905, a parcel of land
was sold a retro by Emigdio Umale and his wife to Spouses Fernandez, without fixing any period for redemption. On
June 12, 1909, Fernandez executed a Contract allowing the Umale spouses to redeem the land despite the lapse of
the four-year period of redemption. This period was mandated by Article 1508 41 of the Spanish Civil Code for cases
in which no period had been stipulated. In 1911, Emigdio Umale redeemed the land and took possession of it.

He then sued to compel the Fernandez couple to execute the instrument of redemption. The defendants countered
that the land belonged to them, because the vendors had failed to redeem it within the term allowed by law. The
Court ruled:

"In the absence of an express stipulation with regard to the period of redemption, the purchaser, in the exercise of
the freedom to make contracts that is possessed by all, has the power to extend the period allowed by law, provided
that the new period stipulated does not exceed the ten years fixed by article 1508 of the code. For nothing in this
article prohibits an extension, by agreement, of the four years, which is the period prescribed by law in cases where,
in sales with right of repurchase, no period for redemption has been fixed by the parties." 42 [Emphasis supplied]

In his Concurring Opinion,43 Justice Torres arrived at the same conclusion, but on a different ground. He explained
that the contracting parties had no right to extend the legal period for redemption after it had already lapsed; and
that, when the vendees alienated and returned the property afterwards, they did so by virtue of a new Contract of
Sale, independent of and distinct from the previous one already terminated.

It is clear from Adiarte and Umale that after the expiration of the period for redemption, the parties could either (1)
enter into an entirely new contract involving the same property; or (2) if they did not expressly stipulate the period,
extend the time for redemption, provided the extension did not exceed the maximum period of ten years allowed by
Article 1508.44

In the present case, Lacambra and the heirs stipulated a five-year redemption period. When it lapsed, the vendee
acquired absolute title, while the five co-owners-sellers were stripped of their co-ownership of the property.

Therefore, when Dolores repurchased the property in 1928, she did so in her personal capacity, no longer as a co-
owner-seller. Following the ruling in Adiarte, she is deemed to have entered into an entirely new contract,
independent of the 1921 pacto de retro sale.

Second Issue:

Implied Trust

Petitioners contend that the appellate court erred in holding that an implied trust had arisen from the 1928
repurchase by the Rigonan spouses. They argue that the sale was a conveyance of the absolute ownership of
Lacambra over the land, which he had acquired by virtue of a failure to redeem. Therefore, when he sold it, the
spouses likewise acquired absolute ownership.45

We clarify.

Satisfy Demands of

Justice and Equity

An implied trust arises, not from any presumed intention of the parties, but by operation of law in order to satisfy the
demands of justice and equity and to protect against unfair dealing or downright fraud. 46 Under Article 1456 of the
new Civil Code, "if property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes." Although this
provision is not retroactive in character, and thus inapplicable to the 1928 purchase, it merely expresses a rule
already recognized by our courts prior to the effectivity of the Code.47

In the present case, the implied trust arose in 1921, when five of the eight co-owners assumed ownership of the
whole inherited property and sold it in its entirety to Lacambra. The sale clearly defrauded the three other co-heirs
who were not parties to the transaction -- Gerardo, Agaton, and Oliva -- and unlawfully deprived them of their
undivided shares in the inheritance. Thus, to the extent of their participation, the property is deemed to have been
acquired through fraud; and the person who acquired it, a trustee for the benefit of the person from whom it was
acquired.48

In the present case, Lacambra was the trustee who held the property partly for the benefit of the three mentioned
heirs (cestuis que trustent).
The CA, however, erred in finding that the implied trust had arisen in 1928, when the Rigonan spouses repurchased
the property from Lacambra.49 By then, Petitioners Rigonan were merely stepping into the shoes of Lacambra as
trustee.

Third Issue:

Prescription or Laches

Petitioners argue that even if an implied trust existed, acquisitive prescription is still applicable. They rely on the
pronouncement in Medina v. Court of Appeals50 that acquisitive prescription applies to implied trusts, provided there
is continuous adverse possession of property in the concept of owner.51

Petitioners maintain that they obtained absolute ownership of the subject land through acquisitive prescription. They
point out that the heirs did not impugn the validity of the documents of sale until after seventy-two years, in 1993
when the case was filed before the trial court.52

Petitioners are correct.

It is settled in this jurisdiction that prescription,53 as well as laches,54 supervenes in the enforcement of implied trusts.

Prescription of Action

Possession of the property by petitioners commenced way back in 1928, 55 when the prescriptive periods applicable
were those provided in Act 190 (Code of Civil Procedure). Their argument finds basis in Article 1116 of the new Civil
Code, which states that "prescription already running before the effectivity of this Code shall be governed by laws
previously in force x x x."

Under Section 40 of the Code of Civil Procedure, an action for recovery of real property, or of an interest therein,
can be brought only within ten years after the cause of action accrues.56

The cause of action of respondents accrued in 1928, when they lost possession of the property to the forebears of
petitioners. These predecessors-in-interest took possession from 1928 57 until 1980 when Laude, their successor-in-
interest, continued possession up to the present. During this entire time, respondents inexcusably failed to take
action to recover the property. In 1993, they finally rose from their seeming slumber when they filed the present suit.
Unfortunately, 65 years had already lapsed and, by that time, their right of action had clearly been barred by
extinctive prescription.

Acquisitive Prescription

Moreover, petitioners acquired title to the subject property by prescription. Section 41 of Act 190 (Code of Civil
Procedure) provides:

"Title to land by prescription. -- Ten years actual adverse possession by any person claiming to be the owner for
that time of any land or interest in land, uninterruptedly continued for ten years by occupancy, descent, grants, or
otherwise, in whatever way such occupancy may have commenced or continued, shall vest in every actual occupant
or possessor of such land a full and complete title, saving to the person under disabilities the rights secured by the
next section. In order to constitute such title by prescription or adverse possession, the possession by the claimant
or by the person under or through whom he claims must be actual, open, public, continuous, under a claim of title
exclusive of any other right and adverse to all claimants x x x."

This provision, as authoritatively and consistently interpreted by this Court, allows adverse possession
in any character to ripen into ownership after the lapse of ten years. 58 "Prescription lies under the said section even
in the absence of good faith and just title."59

In the instant case, the Rigonan spouses possessed the property in the concept of owners after their purchase in
1928. They peacefully occupied it, were never ousted from it, and never prevented from enjoying its fruits.

Furthermore, possession by the Rigonan spouses was adverse to the other heirs, as shown by the
following: one, the former obtained the cancellation of the Tax Declaration in the latter’s name; two, the spouses
executed the Affidavit of Adjudication, claiming that Leandro Rigonan was the sole heir; three, petitioners did not
share with respondents the enjoyment of the property for a half-century; and four, Teodoro sold the property to
Laude. Respondents were aware of these facts and of their rightful share in the land. Therefore, they knew that
petitioners were holding the property adverse to their interests.

As petitioners have been in continuous possession and enjoyment of the disputed land since 1928, a length of time
that has never been questioned, there can be no doubt that they obtained title to it by acquisitive prescription.
To stress the folly of respondents’ protracted inaction, may we add that the present action would still be barred,
even if the Court were to apply the thirty-year period fixed by the present Civil Code for the acquisition of ownership
by extraordinary prescription60 or for the extinction of the right of action over immovables.61

Action to Annul Contracts

Imprescriptible, but Recovery

of Realty Barred by Acquisitive

Prescription

The CA dismissed petitioners’ defense of prescription on the ground that the action for annulment of contracts was
imprescriptible, as mandated by Article 1410 of the Civil Code.62

There is no question that the said action does not prescribe, but the principal question in this case is the recovery of
the subject property, which is the ultimate goal of respondents. They seek the nullification of the Contracts, merely
as a means or prelude to the recovery of the property. Unfortunately for them, acquisitive prescription has already
set in to bar the recovery.

As stated in Bargayo v. Camumot,63 "the prescription of an action and the acquisitive prescription of ownership
cannot and should not be confounded. They are two different and distinct things, although equally transcendent,
being of identical result and effect."

In that case, the Complaint filed by the heirs was one for partition, which did not prescribe, while the defendant
raised the defense of acquisitive prescription. This Court took a moment to explain that the law spoke only of the
imprescriptibility of the action, not of ownership. It explained thus: "x x x [I]t is evident that to deny the prescription of
the ownership of an inheritance, because Article 1965 of the Civil Code declares the action for its partition
imprescriptible, is to confound the prescription of ownership and that of an action x x x." 64 But the Court overruled
the defense, because the defendant had failed to prove adverse possession, an essential element of acquisitive
prescription.

Similarly, the imprescriptibility of an action to annul a contract does not mean that the present respondents are
perpetually allowed to recover the property, the subject of the void contract. They may file the action to annul, but
their right to recover based on ownership is contingent on the premise that they still own the property. Ownership
may have been lost in the interval during which they remained inactive. For this reason, the Court constantly
reminds parties to remain vigilant over their rights.

This matter is likewise illuminated by Heirs of Maningding v. CA.65 In that case, Ramon owned two parcels of land in
Pangasinan. When he died intestate, his four children -- Roque, Segunda, Juan, and Maria -- inherited the
contested properties. While Juan and Maria renounced their rights to the inheritance, Roque claimed the land as his
own by virtue of a donation propter nuptias, previously executed in his favor by their father. Having been excluded
from the enjoyment of the property, the heirs of Segunda filed an action for partition against Roque, as well as for
the annulment of the conveyance documents.

The Court ruled that the parcels of land had devolved to the children of Ramon by right of succession. Roque did
not acquire exclusive ownership of those properties by virtue of the Deed of Donation, which was null and void.
Nevertheless, the Court held that his thirty-six years of exclusive possession and enjoyment of the property sufficed
to confer ownership through acquisitive prescription. The heirs of Segunda were thus barred from recovering their
shares in the inheritance.

It will be noted that Maningding sustained the defense of acquisitive prescription despite the imprescriptibility of the
actions for annulment of contracts and partition. Simply put, the imprescriptibility of an action is distinct from the
prescription of ownership and rights.

In the present case, we hold that respondents can no longer recover the property despite the nullity of the assailed
contracts, because they have lost their ownership by reason of prescription.

Laches

Assuming arguendo that the action does not prescribe, laches would still bar respondents from belatedly asserting
their claim. The defense of laches, which is a question of inequity in permitting a claim to be enforced, applies
independently of prescription, which is a question of time.66 Prescription is statutory; laches is equitable.67

In Miguel v. Catalino,68 Bacaquio sold a parcel of land to Catalino in 1928. The latter possessed it and enjoyed its
fruits from then until 1962, when the heirs of Bacaquio filed a complaint for recovery of possession of the property.
The heirs asserted that the sale was void for lacking the requisite executive approval. The Court held that, despite
the nullity of the sale and the fact that no prescription had run against the title of the heirs, the action was already
barred by laches due to their passivity and inaction for more than thirty-four years.

Again in Mejia de Lucas v. Gamponia,69 the Court held that while the legal defense of prescription did not lie, the
equitable defense of laches did.

In that case, Domingo sold a parcel of registered land to Zacarias, who immediately took possession of it and
enjoyed its fruits. When the heirs of Domingo filed an action for the annulment of the sale, Gamponia -- Zacarias’
successor-in-interest -- proffered the defense of prescription. The lower court overruled the defense on the ground
that registered lands could not be acquired by prescription.

The lower court was reversed by this Court. Although Gamponia could not be deemed to have acquired title by
virtue of the fact that he and his predecessors had long and continued possession of the property for thirty-seven
years, the owners’ right to recover it as well as the title to it was held to have been converted into a stale demand by
their inaction and negligence.

Laches is defined as the failure to assert a right for an unreasonable and unexplained length of time, warranting a
presumption that the party entitled to assert it has either abandoned or declined to assert it. This equitable defense
is based upon grounds of public policy, which requires the discouragement of stale claims for the peace of society. 70

As previously mentioned, an action to enforce an implied trust may be circumscribed by laches. Under this
circumstance, repudiation is not even required,71 unless the facts that give rise to the trust are concealed. This
principle holds because of the nature of an implied trust, which involves a certain antagonism between the cestui
que trust and the trustee.72 There is neither promise nor fiduciary relation; the trustee does not recognize any trust
and has no intention of holding the property for the beneficiary; therefore, the latter is not justified in delaying action
to recover the property. Having incurred unreasonable delay, the beneficiary is estopped by laches. 73

Coming to the present case, the record does not reveal, and respondents do not even assert, that there was a
concealment of the 1921 sale of the property to Lacambra. Although three of the co-heirs were not parties to that
transaction, there is no showing whatsoever that they interjected any objection to the conveyance. There is no
allegation, either, that respondents were unaware of the sale in favor of Dolores or of her family’s possession of the
property since 1928. On the contrary, Respondent Ruben Derecho warned Laude not to buy the land because it had
not been partitioned.74 This fact shows that respondents were aware that Teodoro intended to sell the land, a move
that was clearly an act of dominion over the entire property. Their cognizance of these facts eliminates the need for
a repudiation on the part of petitioners.

It was held in Go Chi Gun v. Co Cho75 that four elements had to be shown in order to use laches as a defense: (1)
conduct on the part of the defendant, or of one under whom a claim is made, giving rise to a situation for which a
complaint is filed and a remedy sought; (2) delay in asserting the rights of the complainant, who has knowledge or
notice of the defendant’s conduct and has been afforded an opportunity to institute a suit; (3) lack of knowledge or
notice on the part of the defendant that the complainant will assert the right on which the latter has based the suit;
and (4) injury or prejudice to the defendant in the event that the complainant is granted a relief or the suit is not
deemed barred.

The four requisites are present in the instant case. First, the five co-owners’ act of selling the entire property
deprived respondents’ predecessors of the enjoyment of their rightful shares in the inheritance. This deprivation was
the basis of the Complaint filed by respondents.

Second, respondents waited more than six decades to file a suit without offering any excuse for the long delay in
the assertion of their rights. They do not at all claim that they were unaware of their co-heirs’ actions. They could
have instituted an action to annul in 1921 or to recover the property in 1928, since they were legally presumed to
know of the invalidity of the sale as to their shares; they did not have to wait for sixty-five years to institute this suit.

Third, after being allowed more than six decades of peaceful possession of the property, petitioners were certainly
not expecting respondents to reclaim it. Although Ruben Derecho warned Laude not to buy the land because it was
still co-owned, the former still took no immediate action to prevent Teodoro from selling the entire property or to
recover it. Respondents even allowed nine more years to pass before rising from their stupor to institute the
Complaint.

Fourth, there is no doubt that petitioners will suffer if respondents are allowed to recover the property. The former
have already developed, invested in, and religiously paid the taxes for it for at least a half-century. On the other
hand, respondents nonchalantly allowed petitioners to continue with their possession and enjoyment of the property,
and then pounced upon them when the latter least expected it.

Although we condemn the fraudulent acts of Leandro and the five co-owners in their scheme to deprive their
relatives of the latter’s rightful shares in the inheritance, the fact remains that respondents and their forebears
wasted their opportunity through a lifetime of indifference and apathy. They cannot now be permitted to recover
property that others have possessed, developed, and invested in for sixty-five years. It would be sheer injustice to
allow the latter to reap benefits after generations of predecessors passively slept on their rights. The Court aptly
stated in Miguel v. Catalino:

"x x x. Courts cannot look with favor at parties who, by their silence, delay, and inaction, knowingly induce another
to spend time, effort, and expense in cultivating the land, paying taxes and making improvements thereon x x x only
to spring from ambush and claim title when the possessor’s efforts and the rise of land values offer an opportunity to
make easy profit at his expense."76

To grant respondents relief when they have not even offered any justifiable excuse for their inaction would be
unjust. It is certainly beyond our comprehension how they could have remained silent for more than 50 years. They
have only themselves to blame if the Court at this late hour can no longer afford them relief against the inequities
they allegedly suffered.

Considering the undisputed facts, not only had laches set in when respondents instituted their action for
reconveyance in 1993, but their right to enforce the constructive trust had already prescribed as well.

WHEREFORE, the Petition is GRANTED. The assailed July 28, 2003 Decision of the Court of Appeals is
hereby REVERSED and SET ASIDE. The Complaint before the Regional Trial Court of Danao City is
hereby DISMISSED. No costs.

SO ORDERED.

G.R. No. 150175 March 10, 2006

ERLINDA PILAPIL, HEIRS OF DONATA ORTIZ BRIONES, namely: ESTELA, ERIBERTO AND VIRGILIO
SANTOS, ANA SANTOS CULTURA, ELVIRA SANTOS INOCENTES, ERNESTO MENDOZA, RIZALINA
SANTOS, ADOLFO MENDOZA and PACITA MENDOZA, Petitioners,
vs.
HEIRS OF MAXIMINO R. BRIONES, namely: SILVERIO S. BRIONES, PETRA BRIONES, BONIFACIO
CABAHUG, JR., ANITA TRASMONTE, CIRILITA FORTUNA, CRESENCIA BRIONES, FUGURACION MEDALLE
and MERCEDES LAGBAS, Respondents.

DECISION

CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, seeking the annulment and
the setting aside of the Decision of the Court of Appeals in CA-GR CV No. 55194, dated 31 August 2001, 1 affirming
the decision of the Cebu City Regional Trial Court (RTC), Branch 17, in Civil Case No. CEB-5794, dated 28
September 1986.2

Petitioners are the heirs of the late Donata Ortiz-Briones (Donata), consisting of her surviving sister, Rizalina Ortiz-
Aguila (Rizalina); Rizalina’s daughter, Erlinda Pilapil (Erlinda); and the other nephews and nieces of Donata, in
representation of her two other sisters who had also passed away. Respondents, on the other hand, are the heirs of
the late Maximino Briones (Maximino), composed of his nephews and nieces, and grandnephews and grandnieces,
in representation of the deceased siblings of Maximino.

The facts that gave rise to the petition at bar are recounted as follows.

Maximino was married to Donata but their union did not produce any children. When Maximino died on 1 May 1952,
Donata instituted intestate proceedings to settle her husband’s estate with the Cebu City Court of First Instance
(CFI), 14th Judicial District, designated as Special Proceedings No. 928-R. On 8 July 1952, the CFI issued Letters
of Administration3 appointing Donata as the administratrix of Maximino’s estate. She submitted an Inventory 4 of
Maximino’s properties, which included, among other things, the following parcels of land –

1. Transfer Certificate of Title (TCT) No. RT-599, acquired by Maximino prior to his marriage (now covered
by TCT No. 21546);5

2. TCT No. RT-600, acquired by Maximino prior to his marriage (now covered by TCT No. 21545); 6

3. TCT No. 220, acquired by Maximino during the marriage (now covered by TCT No. 21543); 7

4. TCT No. 221, acquired by Maximino during the marriage (now covered by TCT No. 21544); 8 and

5. TCT No. 702, acquired by Maximino during the marriage (now covered by TCT No. 21542). 9

The CFI would subsequently issue an Order, dated 2 October 1952, awarding ownership of the aforementioned real
properties to Donata. On 27 June 1960, Donata had the said CFI Order recorded in the Primary Entry Book of the
Register of Deeds,10 and by virtue thereof, received new TCTs, covering the said properties, now in her name.

Donata died on 1 November 1977. Erlinda, one of Donata’s nieces, instituted with the RTC a petition for the
administration of the intestate estate of Donata. Erlinda and her husband, Gregorio, were appointed by the RTC as
administrators of Donata’s intestate estate. Controversy arose among Donata’s heirs when Erlinda claimed
exclusive ownership of three parcels of land, covered by TCTs No. 21542, 21545, and 58684, based on two Deeds
of Donation, both dated 15 September 1977,11 allegedly executed in her favor by her aunt Donata. The other heirs of
Donata opposed Erlinda’s claim. This Court, however, was no longer informed of the subsequent development in
the intestate proceedings of the estate of Donata; and as far as this Petition is concerned, all the heirs of Donata,
including Erlinda, appear to be on the same side.

On 21 January 1985, Silverio Briones (Silverio), a nephew of Maximino, filed a Petition 12 with the RTC for Letters of
Administration13 for the intestate estate of Maximino, which was initially granted by the RTC. The RTC also issued
an Order, dated 5 December 1985, allowing Silverio to collect rentals from Maximino’s properties. But then,
Gregorio filed with the RTC a Motion to Set Aside the Order, dated 5 December 1985, claiming that the said
properties were already under his and his wife’s administration as part of the intestate estate of Donata. 14 Silverio’s
Letters of Administration for the intestate estate of Maximino was subsequently set aside by the RTC. 15

On 3 March 1987, the heirs of Maximino filed a Complaint 16 with the RTC against the heirs of Donata for the
partition, annulment, and recovery of possession of real property, docketed as Civil Case No. CEB-5794. They later
filed an Amended Complaint,17 on 11 December 1992. They alleged that Donata, as administratrix of the estate of
Maximino, through fraud and misrepresentation, in breach of trust, and without the knowledge of the other heirs,
succeeded in registering in her name the real properties belonging to the intestate estate of Maximino.

In their Answer18 to the Complaint in Civil Case No. CEB-5794, the heirs of Donata raised, as affirmative and special
defenses, the following –

1. The complaint does not state a sufficient cause of action against the defendants;

2. That the titles to the lots in question were legally transferred to the name of the late Donata Ortiz Briones
since 1952 when the surviving heirs of Maximino Briones sold their rights over the said properties to the late
Donata Ortiz Briones;
 3. That even granting arguendo that plaintiffs have the right to question the transfer to the name of the late
Donata Ortiz Briones the titles of the said lots any action of that effect has definitely prescribed for more than
30 years have already occurred when the titles to said lots were transferred to the name of the late Donata
Ortiz Briones;

4. That moreover, even granting arguendo that there is an implied trust, an implied trust prescribed in 10
years from the day titles to said lots have been transferred to the name of the late Donata Ortiz Briones.
Consequently, the plaintiff’s action to enforce an implied trust has definitely prescribed;

5. Be that as it may, plaintiffs whose claim is merely in a representative capacity acquires no better right or
title than that of their predecessor-in-interest.

After trial in due course, the RTC rendered its Decision, dated 8 April 1986, in favor of the heirs of
Maximino,19 pertinent portions thereof are reproduced below –

When Donata Ortiz Briones filed Special Proceedings No. 928-R she was fully aware of the existence of the
hereditary rights of the brothers and sisters of her husband Maximino S. Briones and their surviving heirs and it was
her duty to have informed the Court of such fact instead of asking the Court to have her declared as the sole heir of
her deceased husband in the alleged order mentioned by the defendants which was never presented at the trial but
was made the basis of the transfer of all the titles of the real properties left by Maximino S. Briones to the name of
Donata Ortiz Briones to the prejudice of the heirs of the brothers and sisters of Maximino S. Briones.

xxxx

By having the immovable properties of the deceased Maximino S. Briones transferred in her name as the sole heir
of the said deceased despite her knowledge of the existence of other co-heirs like the plaintiffs, Donata Ortiz
Briones’s alleged ownership and possession of the subject properties in question was that of a trustee in an implied
trust under Article 1451 of the New Civil Code x x x.

xxxx

In the absence of partition of the estate of Maximino S. Briones all the properties left upon his death remained
owned in common by his heirs consisting of his surviving spouse and the heirs of his deceased brothers and sisters
the herein plaintiffs. Donata Ortiz Briones’s possession and transfer of the title in her name of her late husband’s
properties was no more than that of a co-owner and no prescription shall run in favor of a co-owner or co-heir
against his co-owners or co-heirs so long as he expressly or impliedly recognizes the co-ownership (Last paragraph,
Art. 494, New Civil Code). Such titles cannot be used as a shield to perpetrate fraud.

xxxx

Since the inventory filed by Donata Ortiz Briones (Exhibit B) has been adopted as Exhibit 3 by defendants Erlinda
Pilapil, Rizalina Ortiz Aguila and the Mendozas, said defendants are bound by the contents thereof. Defendants,
however, failed to show the order of the Court of First Instance of Cebu dated October 2, 1952 mentioned in the
primary entry book (Exhibit 4) and marked as Exhibit 4-C, an omission which amounts to suppression of evidence
which is presumed adverse to the defendant’s interest when produced. This supposed declaration of heirs declaring
the late Donata O. Briones as the sole, absolute and exclusive heir of the late Maximino S. Briones entered in the
primary entry book in the office of the Register of Deeds of Cebu City has been made thru Donata O. Briones’s
misrepresentation to the Court as Administratrix of the estate of her husband Maximino S. Briones by failing to
honestly disclose to the Court that the decedent was survived not only by his widow but also by his brothers and
sisters and/or their children by right of representation which fact was known to her at the time of her husband’s
death.

Hence, the RTC declared that the heirs of Maximino were entitled to ½ of the real properties covered by TCTs No.
21542, 21543, 21544, 21545, 21546, and 58684. It also ordered Erlinda to reconvey to the heirs of Maximino the
said properties and to render an accounting of the fruits thereof.

The heirs of Donata appealed the RTC Decision, dated 8 April 1986, to the Court of Appeals. The Court of Appeals,
in its Decision,20 promulgated on 31 August 2001, affirmed the RTC Decision, ratiocinating thus –

The contentions of defendants-appellants are devoid of merit.

At the outset, the proceeding for the issuance of letters of administration was invalid. Firstly, Donata did not include
in her petition for letters of administration the names, ages and residences of the heirs as required by Rule 79,
Section 2(b) of the Rules of Court. Secondly, the court failed to give notice to the known heirs that a petition has
been filed, and the time and place for hearing thereof as provided in Section 3 of the same rule, to give them ample
opportunity to oppose it, if warranted. Thirdly, the court failed to do its specific duty to require proof, at the hearing of
the petition, that the aforementioned notice has been given to the heirs in accordance with Section 5 of the same
rule.

Consequently, the Order declaring Donata as the sole and exclusive heir would not be binding against herein
plaintiffs-appellees.

xxxx

It should be noted that plaintiffs-appellees’ cause of action was not based merely on fraud but was primarily
anchored on their right to inheritance and to have a partition of the same, both of which are imprescriptible as a
general rule. With marked relevance is the fact that their Complaint is for Partition, Annulment and Recovery of
Possession of Real Property.

With respect to the argument on implied trust, We subscribe to the view that there existed an implied/constructive
trust where, through fraudulent representations or by pretending to be the sole heir of the deceased, an heir
succeeded in having the original title of a land in the name of the deceased cancelled and a new one issued in his
name thereby enabling him to possess the land and get its produce. [Baysa vs. Baysa, [CA] 53 O.G. 7282, October
1957]

This being so, the trustee may claim title by prescription founded on adverse possession where it appears that: (a)
he has performed open and unequivocal acts of repudiation amounting to an ouster of the other co-owners; (b) such
positive acts of repudiation have been made known to the other co-owners; and (c) the evidence thereon should be
clear and convincing; and (d) the period fixed by law has prescribed. [De Leon, Partnership, Agency and Trusts, 4th
Edition, 1996]

These conditions were not complied with in the case at bench. Assuming arguendo that the issuance of the TCT
would constitute an open and clear repudiation of the trust, it is well to note however that the required period has not
yet elapsed. Article 1137 [New Civil Code] provides that, "ownership and other real rights over immovables also
prescribe through uninterrupted adverse possession thereof for thirty years, without need of title or of good faith ."
This period should be counted from the date the adverse title was asserted, that is, from the registration of the title.
The TCTs covering the property in question were registered in 1960 or 27 years at the time of the filing of the
Complaint in 1987.

Moreover, there is neither an adverse possession to speak of since Donata and the Heirs of Briones are deemed
co-owners of the property in question in accordance with Article 1078. [New Civil Code] Hence, mere actual
possession by Donata will not give rise to the inference that the possession was adverse. This is because Donata
after all is entitled to possession of the property as a co-owner.

xxxx

Furthermore, it is a well-entrenched jurisprudential rule that a co-owner may not acquire exclusive ownership of
common property thru prescription. [Castillo vs. Court of Appeals, L-18046, March 31, 1964]

xxxx

In determining whether a delay in seeking to enforce a right constitutes laches, the existence of a confidential
relationship between the parties is an important circumstance for consideration. The doctrine of laches is not strictly
applied between near relatives, and the fact that parties are connected by ties of blood or marriage tends to excuse
an otherwise unreasonable delay. [Gallardo vs. Intermediate Appellate Court, G.R. No. 67742, 29 October 1987]

Unsatisfied with the afore-quoted Decision of the Court of Appeals, the heirs of Donata filed the present
Petition,21 raising the following errors:

I. THAT THE COURT OF APPEALS ERRED IN NOT FINDING THE CASE AS HAVING BEEN BARRED BY
PRESCRIPTION;

II. THAT THE COURT OF APPEALS ERRED IN NOT FINDING THE CASE AS HAVING BEEN BARRED BY
LACHES; AND

III. THAT THE COURT OF APPEALS ERRED IN RULING THAT ALL THE PROPERTIES, WHETHER CAPITAL
PROPERTIES OF MAXIMINO OR CONJUGAL PROPERTIES OF MAXIMINO AND DONATA BRIONES, BE
DIVIDED EQUALLY BETWEEN PETITIONERS AND RESPONDENTS.

Contrary to the conclusions of the Court of Appeals and the RTC in their respective Decisions, this Court finds the
Petition at bar meritorious and dismisses the Complaint for partition, annulment, and recovery of possession of real
property filed before the RTC by the heirs of Maximino in Civil Case No. CEB-5794. Not only is the Complaint barred
by prior judgment, the complainants therein, the heirs of Maximino, failed to satisfactorily establish their right to the
remedies prayed for therein.

Maximino left no will at the time of his death, on 1 May 1952, and his estate was to be settled in accordance with the
rules on legal or intestate succession. The heirs of Maximino, respondents in the Petition at bar, claimed the right to
inherit, together with Donata, from the estate of Maximino, based on the Articles 995 and 1001 of the New Civil
Code, which read –

ART. 995. In the absence of legitimate descendants and ascendants, and illegitimate children and their
descendants, whether legitimate or illegitimate, the surviving spouse shall inherit the entire estate, without prejudice
to the rights of brothers and sisters, nephews and nieces, should there be any, under article 1001.

ART. 1001. Should brothers and sisters or their children survive with the widow or widower, the latter shall be
entitled to one-half of the inheritance and the brothers and sisters or their children to the other half.

The heirs of Maximino asserted that Donata had fraudulently excluded them from the intestate proceedings of the
estate of Maximino before the CFI . They were not given notice of the institution of Special Proceedings No. 928-R
and the scheduled hearings therein. When Donata was declared the "sole, absolute, and exclusive heir" of
Maximino in the CFI Order, dated 2 October 1952, and when she managed to have the real properties of Maximino
registered in her own name on the basis of the foregoing CFI Order, she should be deemed to have held the said
properties in trust for her other co-heirs.

The RTC in its Decision, dated 8 April 1986, justified its finding of implied trust on Article 1451 of the New Civil
Code, which provides that, "When land passes by succession to any person and he causes the legal title to be put
in the name of another, a trust is established by implication of law for the benefit of the true owner." This Court,
though, believes that Article 1451 is not applicable to the instant Petition considering that it refers to a situation
wherein the heir himself causes the registration of his legal title under the name of another; the heir, by his voluntary
action, establishes the implied trust and constitutes himself as the trustee. In contrast, in the Petition herein, Donata
managed to have the real properties belonging to the estate of Maximino registered under her own name to the
supposed exclusion of all other legal heirs of her deceased husband. In such a case, implied trust may be more
appropriately in accordance with Article 1456 of the New Civil Code, which declares that, "If the property is acquired
through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the
benefit of the person from whom the property comes."

Now the foremost question that needs to be answered is whether an implied trust under Article 1456 of the New
Civil Code had been sufficiently established in the instant Petition. This Court answers in the negative.

Since it was the respondents, heirs of Maximino, who claimed the existence of an implied trust, they bear the burden
of proving that Donata registered in her own name the real properties belonging to the estate of Maximino either by
fraud or mistake, pursuant to Article 1456 of the New Civil Code. The heirs of Maximino never contended that
Donata may have registered the real properties in her name by mistake, but repeatedly maintain that she did so by
fraud. Both the Court of Appeals and the RTC, in their respective Decisions, found that Donata secured the CFI
Order, dated 02 October 1952, and the new TCTs covering the real properties in her name fraudulently.

While it is true that findings of fact of the Court of Appeals and the RTC are binding and conclusive upon this Court,
such is not absolute, and there are recognized exceptions thereto. This Court justifies its departure from the general
rule and the conduct of its own review of the evidence and other records in the Petition at bar, given that (1) the
factual conclusions of the Court of Appeals and the RTC are grounded entirely on speculation, surmise and
conjecture; (2) the inference made were manifestly mistaken; and (3) the findings of fact of the Court of Appeals and
the RTC are conclusions without citation of specific evidence on which they are based. 22

At the onset, it should be emphasized that Donata was able to secure the TCTs covering the real properties
belonging to the estate of Maximino by virtue of a CFI Order, dated 2 October 1952. It is undisputed that the said
CFI Order was issued by the CFI in Special Proceedings No. 928-R, instituted by Donata herself, to settle the
intestate estate of Maximino. The petitioners, heirs of Donata, were unable to present a copy of the CFI Order, but
this is not surprising considering that it was issued 35 years prior to the filing by the heirs of Maximino of their
Complaint in Civil Case No. CEB-5794 on 3 March 1987. The existence of such CFI Order, nonetheless, cannot be
denied. It was recorded in the Primary Entry Book of the Register of Deeds on 27 June 1960, at 1:10 p.m., as Entry
No. 1714.23 It was annotated on the TCTs covering the real properties as having declared Donata the sole, absolute,
and exclusive heir of Maximino. The non-presentation of the actual CFI Order was not fatal to the cause of the heirs
of Donata considering that its authenticity and contents were never questioned. The allegation of fraud by the heirs
of Maximino did not pertain to the CFI Order, but to the manner or procedure by which it was issued in favor of
Donata. Moreover, the non-presentation of the CFI Order, contrary to the declaration by the RTC, does not amount
to a willful suppression of evidence that would give rise to the presumption that it would be adverse to the heirs of
Donata if produced.24 As this Court already expounded in the case of People v. Jumamoy25 –
x x x We reiterate the rule that the adverse presumption from a suppression of evidence is not applicable when (1)
the suppression is not willful; (2) the evidence suppressed or withheld is merely corroborative or cumulative; (3) the
evidence is at the disposal of both parties; and (4) the suppression is an exercise of a privilege. Moreover, if the
accused believed that the failure to present the other witnesses was because their testimonies would be
unfavorable to the prosecution, he should have compelled their appearance, by compulsory process, to testify as his
own witnesses or even as hostile witnesses.

If there is indeed a surviving copy of the CFI Order, dated 2 October 1952, then there is no reason to believe that it
would be exclusively available only to the heirs of Donata and not to the heirs of Maximino. It is important to note
that two of the documents relating to Special Proceedings No. 928-R, namely, (1) the Letters of Administration
issued in favor of Donata by the CFI, and (2) the Inventory submitted by Donata to the CFI, were actually produced
before the RTC in Civil Case No. CEB-5794 by the heirs of Maximino. It only goes to show that the heirs of
Maximino did have access to the records of Special Proceedings No. 928-R in which the CFI Order, dated 2
October 1952, was issued. If there was still a copy of the CFI Order, dated 2 October 1952, in the records of Special
Proceedings No. 928-R, and the contents of such Order were truly adverse to the heirs of Donata, then it would
have been more compelling for the heirs of Maximino to present it before the RTC in Civil Case No. CEB-5794, with
the aid of the appropriate court processes if necessary.

The CFI Order, dated 2 October 1952, issued in Special Proceedings No. 928-R, effectively settled the intestate
estate of Maximino by declaring Donata as the sole, absolute, and exclusive heir of her deceased husband. The
issuance by the CFI of the said Order, as well as its conduct of the entire Special Proceedings No. 928-R, enjoy the
presumption of validity pursuant to the Section 3(m) and (n) of Rule 131 of the Revised Rules of Court, reproduced
below –

SEC. 3. Disputable presumptions. – The following presumptions are satisfactory if uncontradicted, but may be
contradicted and overcome by other evidence:

xxxx

(m) That official duty has been regularly performed;

(n) That a court, or judge acting as such, whether in the Philippines or elsewhere, was acting in the lawful exercise
of jurisdiction.

By reason of the foregoing provisions, this Court must presume, in the absence of any clear and convincing proof to
the contrary, that the CFI in Special Proceedings No. 928-R had jurisdiction of the subject matter and the parties,
and to have rendered a judgment valid in every respect; 26 and it could not give credence to the following statements
made by the Court of Appeals in its Decision27 –

At the outset, the proceeding for the issuance of letters of administration was invalid. Firstly, Donata did not include
in her petition for letters of administration the names, ages and residences of the heirs as required by Rule 79,
Section 2(b) of the Rules of Court. Secondly, the court failed to give notice to the known heirs that a petition has
been filed, and the time and place for hearing thereof as provided in Section 3 of the same rule, to give them ample
opportunity to oppose it, if warranted. Thirdly, the court failed to do its specific duty to require proof, at the hearing of
the petition, that the aforementioned notice has been given to the heirs in accordance with Section 5 of the same
rule.

There was totally no evidentiary basis for the foregoing pronouncements. First of all, the Petition filed by Donata for
Letters of Administration in Special Proceedings No. 928-R before the CFI was not even referred to nor presented
during the course of the trial of Civil Case No. CEB-5794 before the RTC. How then could the Court of Appeals
make a finding that Donata willfully excluded from the said Petition the names, ages, and residences of the other
heirs of Maximino? Second, there was also no evidence showing that the CFI actually failed to send notices of
Special Proceedings No. 928-R to the heirs of Maximino or that it did not require presentation of proof of service of
such notices. It should be remembered that there stands a presumption that the CFI Judge had regularly performed
his duties in Special Proceedings No. 928-R, which included sending out of notices and requiring the presentation of
proof of service of such notices; and, the heirs of Maximino did not propound sufficient evidence to debunk such
presumption. They only made a general denial of knowledge of Special Proceedings No. 928-R, at least until 1985.
There was no testimony or document presented in which the heirs of Maximino categorically denied receipt of notice
from the CFI of the pendency of Special Proceedings No. 928-R. The only evidence on record in reference to the
absence of notice of such proceedings was the testimony of Aurelia Briones (Aurelia), 28 one of the heirs of
Maximino, to wit –

Q When the husband of defendant Erlinda Pilapil was presented before this Court he testified that when the late
Donata Ortiz filed a petition to be declared sole heir according to him the brothers and sisters of the late Maximino
Briones were notified of the said hearing. What can you say about this, Ms. Witness?
A No, I don’t think they were notified. They would have contested their right to inherit their brother’s property
because he had no issue with his wife.

Q Likewise the same witness testified that at the time the petition was granted there was no opposition from the
heirs. What can you say about this, Ms. Witness?

A I don’t think they were notified because I know they will contest that declaration.

Aurelia’s testimony deserves scant credit considering that she was not testifying on matters within her personal
knowledge. The phrase "I don’t think" is a clear indication that she is merely voicing out her opinion on how she
believed her uncles and aunts would have acted had they received notice of Special Proceedings No. 928-R.

In further support of their contention of fraud by Donata, the heirs of Maximino even emphasized that Donata lived
along the same street as some of the siblings of Maximino and, yet, she failed to inform them of the CFI Order,
dated 2 October 1952, in Special Proceedings No. 928-R, and the issuance in her name of new TCTs covering the
real properties which belonged to the estate of Maximino. This Court, however, appreciates such information
differently. It actually works against the heirs of Maximino. Since they only lived nearby, Maximino’s siblings had
ample opportunity to inquire or discuss with Donata the status of the estate of their deceased brother. Some of the
real properties, which belonged to the estate of Maximino, were also located within the same area as their
residences in Cebu City, and Maximino’s siblings could have regularly observed the actions and behavior of Donata
with regard to the said real properties. It is uncontested that from the time of Maximino’s death on 1 May 1952,
Donata had possession of the real properties. She managed the real properties and even collected rental fees on
some of them until her own death on 1 November 1977. After Donata’s death, Erlinda took possession of the real
properties, and continued to manage the same and collect the rental fees thereon. Donata and, subsequently,
Erlinda, were so obviously exercising rights of ownership over the real properties, in exclusion of all others, which
must have already put the heirs of Maximino on guard if they truly believed that they still had rights thereto.

The heirs of Maximino knew he died on 1 May 1952. They even attended his wake. They did not offer any
explanation as to why they had waited 33 years from Maximino’s death before one of them, Silverio, filed a Petition
for Letters of Administration for the intestate estate of Maximino on 21 January 1985. After learning that the intestate
estate of Maximino was already settled in Special Proceedings No. 928-R, they waited another two years, before
instituting, on 3 March 1987, Civil Case No. CEB-5794, the Complaint for partition, annulment and recovery of the
real property belonging to the estate of Maximino. The heirs of Maximino put off acting on their rights to the estate of
Maximino for so long that when they finally did, attributing fraud to Maximino’s wife, Donata, the latter had already
passed away, on 1 November 1977, and was no longer around to explain and defend herself. The delay of the heirs
of Maximino is not without consequence, as this Court explained in Ramos v. Ramos29 –

Parenthetically, it may be noted that the filing of the instant case long after the death of Jose Ramos and other
persons involved in the intestate proceeding renders it difficult to determine with certitude whether the
plaintiffs had really been defrauded - What Justice Street said in Sinco vs. Longa, 51 Phil. 507, 518-9 is relevant
to this case:

"In passing upon controversies of this character experience teaches the danger of accepting lightly charges
of fraud made many years after the transaction in question was accomplished, when death may have sealed
the lips of the principal actors and changes effected by time may have given a totally different color to the
cause of controversy. In the case before us the guardian, Emilio Tevez, is dead. The same is true of Trinidad
Diago, mother of the defendant Agueda Longa; while Agapito Longa is now living in Spain. It will be borne in mind
also that, insofar as oral proof is concerned, the charge of fraud rests principally on the testimony of a single witness
who, if fraud was committed, was a participant therein and who naturally would now be anxious, so far as
practicable, to put the blame on others. In this connection it is well to bear in mind the following impressive language
of Mr. Justice Story:

"x x x But length of time necessarily obscures all human evidence; and as it thus removes from the parties
all the immediate means to verify the nature of the original transactions, it operates by way of presumption,
in favor of innocence, and against imputation of fraud. It would be unreasonable, after a great length of time, to
require exact proof of all the minute circumstances of any transaction, or to expect a satisfactory explanation of
every difficulty, real or apparent, with which it may be encumbered. The most that can fairly be expected, in such
cases, if the parties are living, from the frailty of memory, and human infirmity, is, that the material facts can be given
with certainty to a common intent; and, if the parties are dead, and the cases rest in confidence, and in parol
agreements, the most that we can hope is to arrive at probable conjectures, and to substitute general presumptions
of law, for exact knowledge. Fraud, or breach of trust, ought not lightly to be imputed to the living; for, the
legal presumption is the other way; as to the dead, who are not here to answer for themselves, it would be
the height of injustice and cruelty, to disturb their ashes, and violate the sanctity of the grave, unless the
evidence of fraud be clear, beyond a reasonable doubt (Prevost vs. Gratz, 6 Wheat. [U.S.], 481, 498)."

It is granted that the heirs of Maximino had rights to his intestate estate upon his death on 1 May 1952, by virtue of
Articles 995 and 1005 of the New Civil Code. Nonetheless, the CFI, in Special Proceedings No. 928-R, had declared
Donata as the sole, absolute, and exclusive heir of Maximino in its Order, dated 2 October 1952. This Court, in the
absence of evidence to the contrary, can only presume that Special Proceedings No. 928-R was fair and regular,
which would consequently mean that the CFI complied with the procedural requirements for intestate proceedings
such as publication and notice to interested parties, and that the CFI had carefully reviewed and studied the claims
of creditors, as well as the rights of heirs to the estate, before issuing the Order, dated 2 October 1952. There is no
showing that the Order, dated 2 October 1952, had been appealed and had, therefore, long attained finality, which
even this Court would be bound to respect. Without doubt, if the action for partition, annulment, and recovery of
possession instituted by the heirs of Maximino in Civil Case No. CEB-5794 succeeds, then, it would be a
circumvention of the finality of the CFI Order, dated 2 October 1952, in Special Proceedings No. 928-R, because,
necessarily, a recognition of the rights of the other heirs to the estate of Maximino would violate the sole, absolute,
and exclusive right of Donata to the same estate previously determined by the CFI. As this Court had discussed
in Ramos v. Ortuzar30 –

If we are to assume that Richard Hill and Marvin Hill did not formally intervene, still they would be concluded by the
result of the proceedings, not only as to their civil status but as the distribution of the estate as well. As this Court
has held in Manolo vs. Paredes, 47 Phil. 938, "The proceeding for probate is one in rem (40 Cyc., 1265) and
the court acquires jurisdiction over all persons interested, through the publication of the notice prescribed
by sec. 630 C. P. C.; and any order that may be entered therein is binding against all of them." (See also in re
Estate of Johnson, 39 Phil. 156) "A final order of distribution of the estate of a deceased person vests the title to the
land of the estate in the distributees." (Santos vs. Roman Catholic Bishop of Nueva Caceres, 45 Phil. 895) There is
no reason why, by analogy, these salutory doctrines should not apply to intestate proceedings.

The only instance that we can think of in which a party interested in a probate proceeding may have a final
liquidation set aside is when he is left out by reason of circumstances beyond his control or through mistake or
inadvertence not imputable to negligence. Even then, the better practice to secure relief is reopening of the
same case by proper motion within the reglementary period, instead of an independent action the effect of
which, if successful, would be, as in the instant case, for another court or judge to throw out a decision or
order already final and executed and reshuffle properties long ago distributed and disposed of.

In summary, the heirs of Maximino failed to prove by clear and convincing evidence that Donata managed, through
fraud, to have the real properties, belonging to the intestate estate of Maximino, registered in her name. In the
absence of fraud, no implied trust was established between Donata and the heirs of Maximino under Article 1456 of
the New Civil Code. Donata was able to register the real properties in her name, not through fraud or mistake, but
pursuant to an Order, dated 2 October 1952, issued by the CFI in Special Proceedings No. 928-R. The CFI Order,
presumed to be fairly and regularly issued, declared Donata as the sole, absolute, and exclusive heir of Maximino;
hence, making Donata the singular owner of the entire estate of Maximino, including the real properties, and not
merely a co-owner with the other heirs of her deceased husband. There being no basis for the Complaint of the
heirs of Maximino in Civil Case No. CEB-5794, the same should have been dismissed.

IN VIEW OF THE FOREGOING, the assailed Decision of the Court of Appeals in CA-GR CV No. 55194, dated 31
August 2001, affirming the Decision of the Cebu City RTC in Civil Case No. CEB-5794, dated 28

September 1986, is hereby REVERSED and SET ASIDE; and the Complaint for partition, annulment, and recovery
of possession filed by the heirs of Maximino in Civil Case No. CEB-5794 is hereby DISMISSED.

SO ORDERED.

G.R. No. 144773 May 16, 2005

AZNAR BROTHERS REALTY COMPANY, petitioner,

vs.
LAURENCIO AYING, IN HIS OWN BEHALF AND IN BEHALF OF THE OTHER HEIRS OF EMILIANO AYING,
PAULINO AYING, IN HIS OWN BEHALF AND IN BEHALF OF THE OTHER HEIRS OF SIMEON AYING, AND
WENCESLAO SUMALINOG, IN HIS OWN BEHALF AND IN BEHALF OF THE OTHER HEIRS OF ROBERTA
AYING, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

This resolves the petition for review on certiorari seeking the modification of the Decision1 of the Court of Appeals
(CA) dated March 7, 2000 which affirmed with modification the Decision of the Regional Trial Court (RTC) of Lapu-
Lapu City, Branch 27 in Civil Case No. 2930-L; and the Resolution dated August 2, 2000 denying petitioner’s motion
for reconsideration of the aforementioned decision.

The antecedent facts are as follows:

The disputed property is Lot No. 4399 with an area of 34,325 square meters located at Dapdap, Lapu-Lapu City.
Crisanta Maloloy-on petitioned for the issuance of a cadastral decree in her favor over said parcel of land. After her
death in 1930, the Cadastral Court issued a Decision directing the issuance of a decree in the name of Crisanta
Maloloy-on’s eight children, namely: Juan, Celedonio, Emiliano, Francisco, Simeon, Bernabe, Roberta and Fausta,
all surnamed Aying. The certificate of title was, however, lost during the war.

Subsequently, all the heirs of the Aying siblings executed an Extra-Judicial Partition of Real Estate with Deed of
Absolute Sale dated March 3, 1964, conveying the subject parcel of land to herein petitioner Aznar Brothers Realty
Company. Said deed was registered with the Register of Deeds of Lapu-Lapu City on March 6, 1964 under Act No.
3344 (the law governing registration for unregistered land), and since then, petitioner had been religiously paying
real property taxes on said property.

In 1988, herein petitioner filed a Petition for Reconstitution of the Original Title as the original title over the subject
property had been lost during the war. On April 12, 1988, the court granted said petition, thereby directing the
Register of Deeds of Lapu-Lapu City to issue a reconstituted title in the name of the abovementioned Aying siblings.
Thus, Original Certificate of Title (OCT) No. RO-2856 was issued.

In 1991, petitioner, claiming to be the rightful owner of the subject property, sent out notices to vacate, addressed to
persons occupying the property. Unheeded, petitioner then filed a complaint for ejectment against the occupants
before the Metropolitan Trial Court (MTC), Lapu-Lapu City.

On February 1, 1994, the MTC ordered the occupants to vacate the property. The case eventually reached this
Court, docketed as G.R. No. 128102, entitled Aznar Brothers Realty Company vs. Court of Appeals, Luis Aying,
Demetrio Sida, Felomino Augusto, Federico Abing, and Romeo Augusto.2 On March 7, 2000, a Decision was
promulgated in favor of herein petitioner, declaring it as the rightful possessor of the parcel of land in question.

Meanwhile, herein respondents, along with other persons claiming to be descendants of the eight Aying siblings, all
in all numbering around 220 persons, had filed a complaint for cancellation of the Extra-Judicial Partition with
Absolute Sale, recovery of ownership, injunction and damages with the RTC of Lapu-Lapu City. The complaint was
dismissed twice without prejudice. Said complaint was re-filed on August 19, 1993, docketed as Civil Case No.
2930-L.

In their amended complaint, herein respondents (plaintiffs before the RTC) alleged that: they are co-owners of
subject property, being descendants of the registered owners thereof under OCT No. RO-2856; they had been in
actual, peaceful, physical, open, adverse, continuous and uninterrupted possession in concept of owner of subject
parcel of land since time immemorial; their possession was disturbed only in the last quarter of 1991 when some of
them received notices to vacate from petitioner and several weeks thereafter, earthmoving equipment entered the
disputed land, bulldozing the same and destroying plants, trees and concrete monuments ("mohon"); respondents
discovered that such activities were being undertaken by petitioner together with Sta. Lucia Realty and
Development, Inc.; petitioner claimed to be the owner of subject property by virtue of an extra-judicial partition of
real estate with deed of absolute sale executed in petitioner’s favor by the alleged heirs of Crisanta Maloloy-on; the
aforementioned extra-judicial partition of real estate with deed of absolute sale is a fraud and is null and void ab
initio because not all the co-owners of subject property affixed their signature on said document and some of the co-
owners who supposedly signed said document had been dead at the time of the execution thereof; petitioner
entered subject land in bad faith, knowing fully well that it did not have any right to the land and used force, threat
and intimidation against respondents; and they suffered moral damages.3

Petitioner (defendant before the RTC) filed its Answer, denying that respondents are the lawful owners of subject
parcel of land by virtue of their being descendants or heirs of the registered owners of subject property. Instead,
petitioner alleged that it had been in actual possession of subject land as owner thereof by virtue of the extra-judicial
partition of real property and deed of absolute sale executed in its favor; that in fact, it had been paying taxes
thereon religiously; that it tolerated about 6 persons to live on said land but said persons were eventually ejected by
court order. Petitioner then raised the affirmative defenses of failure to state cause of action and prescription, as it
took respondents 27 years, 10 months and 27 days to file the action to recover subject property, when an action to
recover property based on an implied trust should be instituted within 4 years from discovery of the fraud. 4

In the Pre-Trial Order dated January 30, 1995 of the RTC, the issues were narrowed down to the following:

1. Whether or not the plaintiffs [herein respondents] are the heirs of the registered owners of Lot No. 4399.

2. Whether or not plaintiffs are the owners of Lot No. 4399.

3. Whether or not the defendant Aznar [herein petitioner] is estopped to make any claim on Lot No. 4399.

4. Whether or not the defendant Aznar is a builder in bad faith.

5. Whether or not the defendants are liable for damages and attorney’s fees in favor of the plaintiffs.

6. Whether or not the Extra-Judicial Partition of Real Estate with Deed of Absolute Sale is valid and had, in
effect, validly conveyed to defendant Aznar Lot No. 4399.

7. Whether or not the plaintiffs’ action has prescribed.5

After trial, the RTC rendered a Decision dated July 4, 1997, ruling that respondents’ evidence failed to prove that the
extra-judicial partition with deed of absolute sale was a totally simulated or fictitious contract and concluded that said
document is valid, thus, effectively conveying to petitioner the property in question. It further held that respondents’
action had prescribed in that the action is considered as one for reconveyance based on implied or constructive
trust, it prescribed in 10 years from the registration of the deed on March 6, 1964; and if the action is considered as
one for annulment of contract on the ground of fraud, it should have been filed within 4 years from discovery of the
fraud. The trial court also ruled that respondents failed to present any admissible proof of filiation, hence, they were
not able to prove that they are indeed heirs of the eight Aying siblings who appear as the registered owners under
OCT No. RO-2856.

The dispositive portion of the RTC Decision reads as follows:

WHEREFORE, judgment is hereby rendered dismissing the amended complaint on the ground of
prescription, and declaring the Extra-Judicial Partition of Real Estate with Deed of Absolute Sale dated
March 3, 1964 as valid and binding, adjudging that Lot 4399 with an area of 34,325 square meters located at
Dapdap, Mactan, Lapu-Lapu City had been validly conveyed to and in favor of Aznar Brothers Realty
Company, and directing the Register of Deeds of Lapu-Lapu City to register the above-mentioned deed in
accordance with law and to cancel Original Certificate of Title No. RO-2856, and to issue a transfer
certificate of title in the name of Aznar Brothers Realty Company upon payment of the necessary registration
fees pursuant thereto.

The Writ of Preliminary Injunction issued in this case is hereby ordered dissolved.

The Motion for Contempt filed by the plaintiffs against defendants is dismissed for want of factual and legal
basis.

Costs against the plaintiffs.

SO ORDERED.6

Herein respondents appealed the foregoing decision to the CA and on March 7, 2000, said court promulgated its
Decision, the dispositive portion of which is reproduced hereunder:

THE FOREGOING CONSIDERED, the contested Decision while AFFIRMED is hereby MODIFIED. The
heirs of Emiliano Aying, Simeon Aying and Roberta Aying are hereby declared as the lawful owners of the
contested property but equivalent only to 3/8.

SO ORDERED.

In modifying the RTC judgment, the CA ratiocinated that "an action for recovery of possession of registered land
never prescribes in view of the provision of Section 44, Act No. 496 (now Sec. 47, PD 1520), to the effect that no
title to registered land in derogation to that of a registered owner shall be acquired by prescription." The CA further
ruled that even if the action is deemed to be based on implied trust, prescription did not begin to run since there is
no evidence that positive acts of repudiation were made known to the heirs who did not participate in the execution
of the Extra-Judicial Partition of Real Estate with Deed of Absolute Sale. Thus, striking down the RTC’s ruling that
the respondents’ complaint is dismissible on the ground of prescription, the CA held instead that herein
respondents’ action had not prescribed but upheld the validity of the Extra-Judicial Partition of Real Estate with
Deed of Absolute Sale, except as to the shares of the heirs of Emiliano, Simeon and Roberta, who did not
participate in the execution of said document.

Herein petitioner’s motion for reconsideration of the CA decision was denied per Resolution dated August 2, 2000.

Hence, the present petition for review on certiorari assailing the CA decision on the following grounds:

THE COURT OF APPEALS ERRED IN FAILING TO APPLY THE RULE THAT AN HEIR OF THE
ORIGINAL REGISTERED OWNER MAY LOSE HIS RIGHT TO RECOVER A TITLED PROPERTY BY
REASON OF LACHES;

II

THE COURT OF APPEALS ERRED IN FAILING TO APPLY THE RULE THAT THE ACT OF
REGISTRATION OF THE DEED OF PARTITION WITH SALE MAY BE CONSIDERED AN UNEQUIVOCAL
REPUDIATION OF THE TRUST GIVING RISE TO PRESCRIPTION;

III

THE COURT OF APPEALS ERRED IN FAILING TO APPLY THE PROVISIONS OF ARTICLE 1104 OF
THE CIVIL CODE TO THE EFFECT THAT IN THE ABSENCE OF BAD FAITH OR FRAUD, THE
PARTITION WITH PRETERITION OF ANY COMPULSORY HEIR SHALL NOT BE RESCINDED. 7

In their Comment, respondents argue that this case is an action to declare as null and void the Extra-Judicial
Partition of Real Estate with Deed of Absolute Sale, hence, under Article 1410 of the Civil Code, an action for
declaration of an inexistent contract does not prescribe. Respondents further posit that the principle of laches should
be applied against petitioner and not against them, as they (respondents) had been in actual possession of the
subject property, while petitioner merely brought action to eject them more than 29 years after the alleged execution
of the Extra-Judicial Partition of Real Estate with Deed of Absolute Sale. They also refuted petitioner’s arguments
regarding the application of the principles of implied and constructive trusts in this case.

At the outset, it should be stressed that not all the plaintiffs who filed the amended complaint before the trial court
had been impleaded as respondents in the present petition. The only parties impleaded are the heirs of Emiliano,
Simeon and Roberta Aying, whom the CA adjudged as owners of a 3/8 portion of the land in dispute for not having
participated in the execution of the Extra-Judicial Partition of Real Estate with Deed of Absolute Sale.

It is significant to note that herein petitioner does not question the CA conclusion that respondents are heirs of the
aforementioned three Aying siblings. Hence, the trial court and appellate court’s findings that the Extra- Judicial
Partition of Real Estate with Deed of Absolute Sale was not forged nor simulated and that the heirs of Emiliano,
Simeon and Roberta Aying did not participate in the execution thereof, are now beyond cavil.

The issues raised by petitioner for the Court’s resolution are (1) whether or not respondents’ cause of action is
imprescriptible; and (2) if their right to bring action is indeed imprescriptible, may the principle of laches apply.

Respondents alleged in their amended complaint that not all the co-owners of the land in question signed or
executed the document conveying ownership thereof to petitioner and made the conclusion that said document is
null and void. We agree with the ruling of the RTC and the CA that the Extra-Judicial Partition of Real Estate with
Deed of Absolute Sale is valid and binding only as to the heirs who participated in the execution thereof, hence, the
heirs of Emiliano, Simeon and Roberta Aying, who undisputedly did not participate therein, cannot be bound by said
document.

However, the facts on record show that petitioner acquired the entire parcel of land with the mistaken belief that all
the heirs have executed the subject document. Thus, the trial court is correct that the provision of law applicable to
this case is Article 1456 of the Civil Code which states:

ART. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes.

In Vda. De Esconde vs. Court of Appeals,8 the Court expounded thus:

Construing this provision of the Civil Code, in Philippine National Bank v. Court of Appeals, the Court stated:
 A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in a typical
trust, confidence is reposed in one person who is named a trustee for the benefit of another who is
called the cestui que trust, respecting property which is held by the trustee for the benefit of the
cestui que trust. A constructive trust, unlike an express trust, does not emanate from, or generate a
fiduciary relation. While in an express trust, a beneficiary and a trustee are linked by confidential or
fiduciary relations, in a constructive trust, there is neither a promise nor any fiduciary relation to
speak of and the so-called trustee neither accepts any trust nor intends holding the property for the
beneficiary.9

The concept of constructive trusts was further elucidated in the same case, as follows:

. . . implied trusts are those which, without being expressed, are deducible from the nature of the transaction
as matters of intent or which are superinduced on the transaction by operation of law as matters of equity,
independently of the particular intention of the parties. In turn, implied trusts are either resulting or
constructive trusts. These two are differentiated from each other as follows:

Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title
determines the equitable title or interest and are presumed always to have been contemplated by
the parties. They arise from the nature of circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but is obligated in equity
to hold his legal title for the benefit of another. On the other hand, constructive trusts are created
by the construction of equity in order to satisfy the demands of justice and prevent unjust
enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or holds the legal right to property which he ought not, in equity and
good conscience, to hold.10 (Emphasis supplied)

Based on such concept of constructive trusts, the Court ruled in said case that:

The rule that a trustee cannot acquire by prescription ownership over property entrusted to him until and
unless he repudiates the trust, applies to express trusts and resulting implied trusts. However,
in constructive implied trusts, prescription may supervene even if the trustee does not repudiate the
relationship. Necessarily, repudiation of said trust is not a condition precedent to the running of the
prescriptive period.11

The next question is, what is the applicable prescriptive period?

In Amerol vs. Bagumbaran,12 the Court expounded on the prescriptive period within which to bring an action for
reconveyance of property based on implied or constructive trust, to wit:

. . . under the present Civil Code, we find that just as an implied or constructive trust is an offspring of the
law (Art. 1456, Civil Code), so is the corresponding obligation to reconvey the property and the title thereto
in favor of the true owner. In this context, and vis-à-vis prescription, Article 1144 of the Civil Code is
applicable.

Article 1144. The following actions must be brought within ten years from the time the right of action
accrues:

(1) Upon a written contract;

(2) Upon an obligation created by law;

(3) Upon a judgment.

xxx xxx xxx

An action for reconveyance based on an implied or constructive trust must perforce prescribe in ten years
and not otherwise. A long line of decisions of this Court, and of very recent vintage at that, illustrates this
rule. Undoubtedly, it is now well-settled that an action for reconveyance based on an implied or constructive
trust prescribes in ten years from the issuance of the Torrens title over the property. 13

It has also been ruled that the ten-year prescriptive period begins to run from the date of registration of the deed or
the date of the issuance of the certificate of title over the property, but if the person claiming to be the owner thereof
is in actual possession of the property, the right to seek reconveyance, which in effect seeks to quiet title to the
property, does not prescribe.14
In the present case, respondents Wenceslao Sumalinog, an heir of Roberta Aying; Laurencio Aying, an heir of
Emiliano Aying; and Paulino Aying, an heir of Simeon Aying, all testified that they had never occupied or been in
possession of the land in dispute.15 Hence, the prescriptive period of ten years would apply to herein respondents.

The question then arises as to the date from which the ten-year period should be reckoned, considering that the
Extra-Judicial Partition of Real Estate with Deed of Absolute Sale was registered under Act No. 3344 and not under
Act No. 496 (Land Registration Act), despite the fact the land in dispute was already titled under Act No. 496 in the
names of the Aying siblings at the time the subject document was executed.

In Spouses Abrigo vs. De Vera,16 it was held that registration of instruments must be done in the proper registry, in
order to affect and bind the land and, thus, operate as constructive notice to the world. 17 Therein, the Court ruled:

x x x If the land is registered under the Land Registration Act (and has therefore a Torrens Title), and it is
sold but the subsequent sale is registered not under the Land Registration Act but under Act 3344, as
amended, such sale is not considered REGISTERED x x x .18

In this case, since the Extra-Judicial Partition of Real Estate with Deed of Absolute Sale was registered under Act
No. 3344 and not under Act No. 496, said document is deemed not registered. Accordingly, the ten-year prescriptive
period cannot be reckoned from March 6, 1964, the date of registration of the subject document under Act No. 3344.
The prescriptive period only began to run from the time respondents had actual notice of the Extra-Judicial Partition
of Real Estate with Deed of Absolute Sale.

The only evidence on record as to when such prescriptive period commenced as to each of the respondents are
Wenceslao Sumalinog’s (heir of Roberta Aying) testimony that about three years after 1964, they already learned of
the existence of the Extra-Judicial Partition of Real Estate with Deed of Absolute Sale; 19 and Laurencio Aying’s (heir
of Emiliano Aying) admission that he found out about the sale of the land in dispute a long time ago and can only
estimate that it must be after martial law. 20 Paulino Aying (heir of Simeon Aying) gave no testimony whatsoever as to
when the children of Simeon Aying actually learned of the existence of the document of sale. On the other hand,
petitioner did not present any other evidence to prove the date when respondents were notified of the execution of
the subject document.

In view of the lack of unambiguous evidence of when the heirs of Emiliano Aying and Simeon Aying discovered the
existence of the document of sale, it must be determined which party had the burden of proof to establish such fact.

The test for determining where the burden of proof lies is to ask which party to an action or suit will fail if he offers no
evidence competent to show the facts averred as the basis for the relief he seeks to obtain. 21 Moreover, one alleging
a fact that is denied has the burden of proving it and unless the party asserting the affirmative of an issue sustains
the burden of proof of that issue by a preponderance of the evidence, his cause will not succeed. 22 Thus, the
defendant bears the burden of proof as to all affirmative defenses which he sets up in answer to the plaintiff’s claim
or cause of action; he being the party who asserts the truth of the matter he has alleged, the burden is upon him to
establish the facts on which that matter is predicated and if he fails to do so, the plaintiff is entitled to a verdict or
decision in his favor.23

In the case at bar, it was petitioner, as the defendant before the RTC, which set up in its Answer the affirmative
defense of prescription. It was, therefore, incumbent upon petitioner to prove the date from which the prescriptive
period began to run. Evidence as to the date when the ten-year prescriptive period began exists only as to the heirs
of Roberta Aying, as Wenceslao Sumalinog admitted that they learned of the existence of the document of sale in
the year 1967. As to the heirs of Emiliano Aying and Simeon Aying, there is no clear evidence of the date when they
discovered the document conveying the subject land to petitioner. Petitioner miserably failed to adduce proof of
when the heirs of Emiliano Aying and Simeon Aying were notified of the subject document. Hence, with regard to
said heirs, the Court may consider the admission in the amended complaint that they learned of the conveyance of
the disputed land only in 1991 when petitioner sent notices to vacate to the occupants of the subject land, as the
date from which the ten-year prescriptive period should be reckoned.

Respondents filed their Amended Complaint on December 6, 1993. 24 Thus, with regard to respondent heirs of
Roberta Aying who had knowledge of the conveyance as far back as 1967, their cause of action is already barred
by prescription when said amended complaint was filed as they only had until 1977 within which to bring action. As
to the respondent heirs of Emiliano and Simeon Aying, they were able to initiate their action for reconveyance of
property based on implied or constructive trust well within the ten-year prescriptive period reckoned from 1991 when
they were sent by petitioner a notice to vacate the subject property.

Evidently, laches cannot be applied against respondent heirs of Emiliano and Simeon Aying, as they took action to
protect their interest well within the period accorded them by law.

With regard to petitioner’s argument that the provision of Article 1104 of the Civil Code, stating that a partition made
with preterition of any of the compulsory heirs shall not be rescinded, should be applied, suffice it to say that the
Extra-Judicial Partition of Real Estate with Deed of Absolute Sale is not being rescinded. In fact, its validity had been
upheld but only as to the parties who participated in the execution of the same. As discussed above, what was
conveyed to petitioner was ownership over the shares of the heirs who executed the subject document. Thus, the
law, particularly, Article 1456 of the Civil Code, imposed the obligation upon petitioner to act as a trustee for the
benefit of respondent heirs of Emiliano and Simeon Aying who, having brought their action within the prescriptive
period, are now entitled to the reconveyance of their share in the land in dispute.

IN VIEW OF THE FOREGOING, the petition is PARTIALLY GRANTED and the Decision of the Court of Appeals
dated March 7, 2000 is MODIFIED, as follows: The amended complaint of the heirs of Roberta Aying is DISMISSED
on the ground of prescription. However, the heirs of Emiliano Aying and Simeon Aying, having instituted the action
for reconveyance within the prescriptive period, are hereby DECLARED as the LAWFUL OWNERS of a 2/8 portion
of the parcel of land covered by Original Certificate of Title No. RO-2856.

SO ORDERED.