G.R. No. 142830 March 24, 2006

WILLIAM GOLANGCO CONSTRUCTION CORPORATION, Petitioner, vs.PHILIPPINE COMMERCIAL INTERNATIONAL BANK*, Respondent

The facts of this case are straightforward.1

William Golangco Construction Corporation (WGCC) and the Philippine Commercial International Bank (PCIB) entered into a contract for the construction of the extension of PCIB Tower II (denominated as PCIB Tower II, Extension Project [project])2 on October 20, 1989. The project included, among others, the application of a granitite wash-out finish3 on the exterior walls of the building.

PCIB, with the concurrence of its consultant TCGI Engineers (TCGI), accepted the turnover of the completed work by WGCC in a letter dated June 1, 1992. To answer for any defect arising within a period of one year, WGCC submitted a guarantee bond dated July 1, 1992 issued by Malayan Insurance Company, Inc. in compliance with the construction contract.4

The controversy arose when portions of the granitite wash-out finish of the exterior of the building began peeling off and falling from the walls in 1993. WGCC made minor repairs after PCIB requested it to rectify the construction defects. In 1994, PCIB entered into another contractwith Brains and Brawn Construction and Development Corporation to re-do the entire granitite wash-out finish after WGCC manifested that it was "not in a position to do the new finishing work," though it was willing to share part of the cost. PCIB incurred expenses amounting to P11,665,000 for the repair work.PCIB filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC) for the reimbursement of its expenses for the repairs made by another contractor. It complained of WGCC’s alleged non-compliance with their contractual terms on materials and workmanship. WGCC interposed a counterclaim forP5,777,157.84 for material cost adjustment.The CIAC declared WGCC liable for the construction defects in the project.5 WGCC filed a petition for review with the Court of Appeals (CA) which dismissed it for lack of merit.6 Its motionfor reconsideration was similarly denied.7In this petition for review on certiorari, WGCC raises this main question of law: whether or not petitioner WGCC is liable for defects in the granitite wash-out finish that occurred after the lapse of the one-year defects liability period provided in Art. XI of the construction contract.8We rule in favor of WGCC.The controversy pivots on a provision in the construction contract referred to as the defects liability period:ARTICLE XI – GUARANTEEUnless otherwise specified for specific works, and without prejudice to the rights and causes of action of the OWNER under Article 1723 of the Civil Code, the CONTRACTOR hereby guarantees the work stipulated in this Contract, and shall make good any defect in materials andworkmanship which [becomes] evident within one (1) year after the final acceptance of the work. The CONTRACTOR shall leave the work in perfect order upon completion and present thefinal certificate to the ENGINEER promptly.If in the opinion of the OWNER and ENGINEER, the CONTRACTOR has failed to act promptly in rectifying any defect in the work which appears within the period mentioned above, the OWNER and the ENGINEER may, at their own discretion, using the Guarantee Bond amount forcorrections, have the work done by another contractor at the expense of the CONTRACTOR or his bondsmen.However, nothing in this section shall in any way affect or relieve the CONTRACTOR’S responsibility to the OWNER. On the completion of the [w]orks, the CONTRACTOR shall clear away and remove from the site all constructional plant, surplus materials, rubbish and temporaryworks of every kind, and leave the whole of the [s]ite and [w]orks clean and in a workmanlike condition to the satisfaction of the ENGINEER and OWNER.9(emphasis ours)

Although both parties based their arguments on the same stipulations, they reached conflicting conclusions. A careful reading of the stipulations, however, leads us to the conclusion that WGCC’s arguments are more tenable.Autonomy of contractsThe autonomous nature of contracts is enunciated in Article 1306 of the Civil Code.Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.Obligations arising from contracts have the force of law between the parties and should be complied with in good faith.10 In characterizing the contract as having the force of law between the parties, the law stresses the obligatory nature of a binding and valid agreement.The provision in the construction contract providing for a defects liability period was not shown as contrary to law, morals, good customs, pubic order or public policy. By the nature of the obligation in such contract, the provision limiting liability for defects and fixing specific guaranty periods was not only fair and equitable; it was also necessary. Without such limitation, the contractor would be expected to make a perpetual guarantee on all materials and workmanship.The adoption of a one-year guarantee, as done by WGCC and PCIB, is established usage in thePhilippines for private and government construction contracts.11 The contract did not specify a different period for defects in the granitite wash-out finish; hence, any defect therein should havebeen brought to WGCC’s attention within the one-year defects liability period in the contract.We cannot countenance an interpretation that undermines a contractual stipulation freely and validly agreed upon. The courts will not relieve a party from the effects of an unwise or unfavorable contract freely entered into.12[T]he inclusion in a written contract for a piece of work [,] such as the one in question, of a provision defining a warranty period against defects, is not uncommon. This kind of a stipulation is of particular importance to the contractor, for as a general rule, after the lapse of the period agreed upon therein, he may no longer be held accountable for whatever defects, deficiencies orimperfections that may be discovered in the work executed by him.13Interpretation of contractsTo challenge the guarantee period provided in Article XI of the contract, PCIB calls our attention to Article 62.2 which provides:62.2 Unfulfilled ObligationsNotwithstanding the issue of the Defects Liability Certificate[,] the Contractor and the Owner shall remain liable for the fulfillment of any obligation[,] incurred under the provisions of the Contract prior to the issue of the Defects Liability Certificate[,] which remains unperformed at thetime such Defects Liability Certificate is issued[. And] for the purpose of determining the nature and extent of any such obligation, the Contract shall be deemed to remain in force between the parties of the Contract. (emphasis ours)The defects in the granitite wash-out finish were not the "obligation" contemplated in Article 62.2.It was not an obligation that remained unperformed or unfulfilled at the time the defects liability certificate was issued. The alleged defects occurred more than a year from the final acceptance by PCIB.An examination of Article 1719 of the Civil Code is enlightening:Art. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in the work, unless:(1) The defect is hidden and the employer is not, by his special knowledge, expected to recognize the same; or(2) The employer expressly reserves his rights against the contractor by reason of the defect.The lower courts conjectured that the peeling off of the granitite wash-out finish was probably due to "defective materials and workmanship." This they characterized as hidden or latent defects. We, however, do not agree with the conclusion that the alleged defects were hidden.First, PCIB’s team of experts14 (who were specifically employed to detect such defects early on)supervised WGCC’s workmanship. Second, WGCC regularly submitted progress reports and photographs. Third, WGCC worked under fair and transparent circumstances. PCIB had access to the site and it exercised reasonable supervision over WGCC’s work. Fourth, PCIB issued several "punch lists" for WGCC’s compliance before the issuance of PCIB’s final certificate of acceptance. Fifth, PCIB supplied the materials for the granitite wash-out finish. And finally, PCIB’s team of experts gave their concurrence to the turnover of the project.

The purpose of the defects liability period was precisely to give PCIB additional, albeit limited, opportunity to oblige WGCC to make good any defect, hidden or otherwise, discovered within one year.Contrary to the CA’s conclusion, the first sentence of the third paragraph of Article XI on guarantee previously quoted did not operate as a blanket exception to the one-year guarantee period under the first paragraph. Neither did it modify, extend, nullify or supersede the categorical terms of the defects liability period.Under the circumstances, there were no hidden defects for which WGCC could be held liable. Neither was there any other defect for which PCIB made any express reservation of its rights against WGCC. Indeed, the contract should not be interpreted to favor the one who caused the confusion, if any. The contract was prepared by TCGI for PCIB.15WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No. 41152 is ANNULED and SET ASIDE. SO ORDERED.

G.R. No. 197861 June 5, 2013

SPOUSES FLORENTINO T. MALLARI and AUREA V. MALLARI, Petitioners, vs.PRUDENTIAL BANK (now BANK OF THE PHILIPPINE ISLANDS), Respondent.

Before us is a Petition for Review on Certiorari under Rule 45, assailing the Decision1 dated June 17, 2010 and the Resolution2 dated July 20, 2011 of the Court of Appeals (CA) in CA-G.R. CV No. 65993.

The antecedent facts are as follows:

On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from respondent Prudential Bank-Tarlac Branch (respondent bank), a loan in the amount of P300,000.00 as evidenced by Promissory Note (PN) No. BD 84-055.3 Under the promissory note, the loan was subject to an interest rate of 21% per annum (p.a.), attorney's fees equivalent to 15% of the totalamount due but not less than P200.00 and, in case of default, a penalty and collection charges of 12% p.a. of the total amount due. The loan had a maturity date of January 10, 1985, but was renewed up to February 17, 1985. Petitioner Florentino executed a Deed of Assignment4 wherein he authorized the respondent bank to pay his loan with his time deposit with the latter in the amount ofP300,000.00.

On December 22, 1989, petitioners spouses Florentino and Aurea Mallari (petitioners) obtained again from respondent bank another loan of P1.7 million as evidenced by PN No. BDS 606-895 with a maturity date of March 22, 1990. They stipulated that the loan will bear 23% interest p.a., attorney's fees equivalent to 15% p.a. of the total amount due, but not less than P200.00, and penalty and collection charges of 12% p.a. Petitioners executed a Deed of Real Estate Mortgage6 in favor of respondent bank covering petitioners' property under Transfer Certificate of Title (TCT) No. T-215175 of the Register of Deeds of Tarlac to answer for the said loan.

Petitioners failed to settle their loan obligations with respondent bank, thus, the latter, through itslawyer, sent a demand letter to the former for them to pay their obligations, which when computed up to January 31, 1992, amounted to P571,218.54 for PN No. BD 84-055 and P2,991,294.82 for PN No. BDS 606-89.

On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC) of Tarlac, a petition for the extrajudicial foreclosure of petitioners' mortgaged property for the satisfaction of

the latter's obligation ofP1,700,000.00 secured by such mortgage, thus, the auction sale was setby the Provincial Sheriff on April 23, 1992.7

On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2) separate Statements of Account as of April 23, 1992, i.e., the loan of P300,000.00 was increased to P594,043.54, while the P1,700,000.00 loan was already P3,171,836.18.

On April 20, 1992, petitioners filed a complaint for annulment of mortgage, deeds, injunction, preliminary injunction, temporary restraining order and damages claiming, among others, that: (1) the P300,000.00 loan obligation should have been considered paid, because the time deposit with the same amount under Certificate of Time Deposit No. 284051 had already been assigned to respondent bank; (2) respondent bank still added theP300,000.00 loan to the P1.7 million loan obligation for purposes of applying the proceeds of the auction sale; and (3) they realized that there were onerous terms and conditions imposed by respondent bank when it triedto unilaterally increase the charges and interest over and above those stipulated. Petitioners asked the court to restrain respondent bank from proceeding with the scheduled foreclosure sale.

Respondent bank filed its Answer with counterclaim arguing that: (1) the interest rates were clearly provided in the promissory notes, which were used in computing for interest charges; (2) as early as January 1986, petitioners' time deposit was made to apply for the payment of interestof their P300,000.00 loan; and (3) the statement of account as of April 10, 1992 provided for a computation of interest and penalty charges only from May 26, 1989, since the proceeds of petitioners' time deposit was applied to the payment of interest and penalty charges for the preceding period. Respondent bank also claimed that petitioners were fully apprised of the bank's terms and conditions; and that the extrajudicial foreclosure was sought for the satisfactionof the second loan in the amount of P1.7 million covered by PN No. BDS 606-89 and the real estate mortgage, and not theP300,000.00 loan covered by another PN No. 84-055.

In an Order8 dated November 10, 1992, the RTC denied the Application for a Writ of Preliminary Injunction. However, in petitioners' Supplemental Motion for Issuance of a Restraining Order and/or Preliminary Injunction to enjoin respondent bank and the Provincial Sheriff from effecting or conducting the auction sale, the RTC reversed itself and issued the restraining order in its Order9 dated January 14, 1993.

Respondent bank filed its Motion to Lift Restraining Order, which the RTC granted in its Order10 dated March 9, 1993. Respondent bank then proceeded with the extrajudicial foreclosure of the mortgaged property. On July 7, 1993, a Certificate of Sale was issued to respondent bank being the highest bidder in the amount ofP3,500,000.00.

Subsequently, respondent bank filed a Motion to Dismiss Complaint11 for failure to prosecute action for unreasonable length of time to which petitioners filed their Opposition.12 On November 19, 1998, the RTC issued its Order13 denying respondent bank's Motion to Dismiss Complaint.

Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for the plaintiffs.Subsequently, respondent bank filed a Demurrer to Evidence.

On November 15, 1999, the RTC issued its Order14 granting respondent's demurrer to evidence,the dispositive portion of which reads:

WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no evidence of bad faith, the Court need not order the plaintiffs to pay damages under the general concept that there should be no premium on the right to litigate.

NO COSTS.

SO ORDERED.15

The RTC found that as to the P300,000.00 loan, petitioners had assigned petitioner Florentino's time deposit in the amount of P300,000.00 in favor of respondent bank, which maturity coincidedwith petitioners' loan maturity. Thus, if the loan was unpaid, which was later extended to February 17, 1985, respondent bank should had just applied the time deposit to the loan. However, respondent bank did not, and allowed the loan interest to accumulate reaching the amount of P594,043.54 as of April 10, 1992, hence, the amount of P292,600.00 as penalty charges was unjust and without basis.

As to the P1.7 million loan which petitioners obtained from respondent bank after the P300,000.00 loan, it had reached the amount of P3,171,836.18 per Statement of Account dated April 27, 1993, which was computed based on the 23% interest rate and 12% penalty charge agreed upon by the parties; and that contrary to petitioners' claim, respondent bank did not add the P300,000.00 loan to the P1.7 million loan obligation for purposes of applying the proceeds of the auction sale.

The RTC found no legal basis for petitioners' claim that since the total obligation was P1.7 million and respondent bank's bid price was P3.5 million, the latter should return to petitioners the difference of P1.8 million. It found that since petitioners' obligation had reached P2,991,294.82 as of January 31, 1992, but the certificate of sale was executed by the sheriff only on July 7, 1993, after the restraining order was lifted, the stipulated interest and penalty charges from January 31, 1992 to July 7, 1993 added to the loan already amounted to P3.5 million as of the auction sale.

The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of interestcould not be considered unconscionable, since banks are not hospitable or equitable institutions but are entities formed primarily for profit. It also found that Article 1229 of the Civil Code invoked by petitioners for the reduction of the interest was not applicable, since petitioners had not paid any single centavo of the P1.7 million loan which showed they had not complied with any part of the obligation.

Petitioners appealed the RTC decision to the CA. A Comment was filed by respondent bank andpetitioners filed their Reply thereto.

On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of which reads:

WHEREFORE, the instant appeal is hereby DENIED. The Order dated November 15, 1999 issued by the Regional Trial Court (RTC), Branch 64, Tarlac City, in Civil Case No. 7550 is hereby AFFIRMED.16

The CA found that the time deposit of P300,000.00 was equivalent only to the principal amount of the loan ofP300,000.00 and would not be sufficient to cover the interest, penalty, collection charges and attorney's fees agreed upon, thus, in the Statement of Account dated April 10, 1992, the outstanding balance of petitioners' loan was P594,043.54. It also found not persuasivepetitioners' claim that the P300,000.00 loan was added to the P1.7 million loan. The CA, likewise, found that the interest rates and penalty charges imposed were not unconscionable and adopted in toto the findings of the RTC on the matter.

Petitioners filed their Motion for Reconsideration, which the CA denied in a Resolution dated July 20, 2011.

Hence, petitioners filed this petition for review arguing that:

THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF THE RTC-BRANCH 64, TARLAC CITY, DATED NOVEMBER 15, 1999, DESPITE THE FACT THAT THE SAME IS CONTRARY TO SETTLED JURISPRUDENCE ON THE MATTER.17

The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. penalty charge on petitioners'P1,700,000.00 loan to which they agreed upon is excessive or unconscionable under the circumstances.

Parties are free to enter into agreements and stipulate as to the terms and conditions of their contract, but such freedom is not absolute. As Article 1306 of the Civil Code provides, "The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy." Hence, if the stipulations in the contract are valid, the parties thereto are bound to comply with them, since such contract is the law between the parties. In this case, petitioners and respondent bank agreed upon on a 23% p.a. interest rate on the P1.7 million loan. However, petitioners now contend that the interest rate of 23% p.a. imposed by respondent bankis excessive or unconscionable, invoking our ruling in Medel v. Court of Appeals,18 Toring v. Spouses Ganzon-Olan,19 and Chua v. Timan.20

We are not persuaded.

In Medel v. Court of Appeals,21 we found the stipulated interest rate of 66% p.a. or a 5.5% per month on aP500,000.00 loan excessive, unconscionable and exorbitant, hence, contrary to morals if not against the law and declared such stipulation void. In Toring v. Spouses Ganzon-Olan,22 the stipulated interest rates involved were 3% and 3.81% per month on a P10 million loan, which we find under the circumstances excessive and reduced the same to 1% per month. While in Chua v. Timan,23 where the stipulated interest rates were 7% and 5% a month, which are equivalent to 84% and 60% p.a., respectively, we had reduced the same to 1% per month or12% p.a. We said that we need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was void for being contrary to morals.24

In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per month, which are much lower than those interest rates agreed upon by the parties in the above-mentioned cases. Thus, there is no similarity of factual milieu for the application of those cases.

We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to be unconscionable.

In Villanueva v. Court of Appeals,25 where the issue raised was whether the 24% p.a. stipulated interest rate is unreasonable under the circumstances, we answered in the negative and held:

In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, this Court held that the interest rate of 24% per annum on a loan of P244,000.00, agreed upon by the parties, may not be considered as unconscionable and excessive. As such, the Court ruled that the borrowers cannot renege on their obligation to comply with what is incumbent upon them under the contract of loan as the said contract is the law between the parties and they are bound by its stipulations.

Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan finding the same to be reasonable and clearly

evidenced by the amended credit line agreement entered into by the parties as well as two promissory notes executed by the borrower in favor of the lender.

Based on the above jurisprudence, the Court finds that the 24% per annum interest rate, provided for in the subject mortgage contracts for a loan of P225,000.00, may not be consideredunconscionable. Moreover, considering that the mortgage agreement was freely entered into by both parties, the same is the law between them and they are bound to comply with the provisions contained therein.26

Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable, thus, the 23% p.a. interest rate imposed on petitioners' loan in this case can by no means be considered excessive or unconscionable.

We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.

In Ruiz v. CA,27 we held:

The 1% surcharge on the principal loan for every month of default is valid.1âwphi1 This surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Art. 2227 of the New Civil Code, and is separate and distinct from interest payment. Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. The obligor would then be bound to pay the stipulated amount of indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. x x x28 And in Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd.,29 we held that:

x x x The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order to avoid the payment of the penalty, the debtor has the burden of proving an excuse - the failure of the performance was due to either force majeure or the acts of the creditor himself.30

Here, petitioners defaulted in the payment of their loan obligation with respondent bank and theircontract provided for the payment of 12% p.a. penalty charge, and since there was no showing that petitioners' failure to perform their obligation was due to force majeure or to respondent bank's acts, petitioners cannot now back out on their obligation to pay the penalty charge. A contract is the law between the parties and they are bound by the stipulations therein.

WHEREFORE, the petition for review is DENIED. The Decision dated June 17, 2010 and the Resolution dated July 20, 2011 of the Court of Appeals are hereby AFFIRMED.

SO ORDERED.

G.R. No. 176425

HEIRS OF MANUEL UY EK LIONG, represented by BELEN LIM VDA. DE UY, Petitioners, vs.MAURICIA MEER CASTILLO, HEIRS OF BUENAFLOR C. UMALI, represented by NANCY UMALI, VICTORIA H. CASTILLO, BERTILLA C. RADA, MARIETTA C. CAVANEZ, LEOVINA C. JALBUENA and PHILIP M. CASTILLO, Respondents.

Assailed in this Petition for Review on Certiorari filed pursuant to Rule 45 of the Rules of Court isthe Decision1dated 23 January 2007 rendered by the Fifteenth Division of the Court of Appeals in CA-G.R. CV No. 84687,2 the dispositive portion of which states:

WHEREFORE, premises considered, the assailed January 27, 2005 Decision of the Regional Trial Court of Lucena City, Branch 59, in Civil Case No. 93-176, is hereby REVERSED and SET ASIDE and a new one entered declaring the AGREEMENT and the KASUNDUAN void ab initio for being contrary to law and public policy, without prejudice to the attorney’s filing a proper action for collection of reasonable attorney’s fees based on quantum meruit and without prejudice also to administrative charges being filed against counsel for counsel’s openly enteringinto such an illegal AGREEMENT in violation of the Canons of Professional Responsibility whichaction may be instituted with the Supreme Court which has exclusive jurisdiction to impose such penalties on members of the bar.

No pronouncement as to costs.

SO ORDERED.3 (Italics and Underscore Ours)

The Facts

Alongside her husband, Felipe Castillo, respondent Mauricia Meer Castillo was the owner of fourparcels of land with an aggregate area of 53,307 square meters, situated in Silangan Mayao, Lucena City and registered in their names under Transfer Certificate of Title (TCT) Nos. T-42104, T-32227, T-31752 and T-42103. With the death of Felipe, a deed of extrajudicial partitionover his estate was executed by his heirs, namely, Mauricia, Buenaflor Umali and respondents Victoria Castillo, Bertilla Rada, Marietta Cavanez, Leovina Jalbuena and Philip Castillo. Utilized as security for the payment of a tractor purchased by Mauricia’s nephew, Santiago Rivera, from Bormaheco, Inc., it appears, however, that the subject properties were subsequently sold at a public auction where Insurance Corporation of the Philippines (ICP) tendered the highest bid. Having consolidated its title, ICP likewise sold said parcels in favor of Philippine Machinery PartsManufacturing Co., Inc. (PMPMCI) which, in turn, caused the same to be titled in its name.4

On 29 September 1976, respondents and Buenaflor instituted Civil Case No. 8085 before the then Court of First Instance (CFI) of Quezon, for the purpose of seeking the annulment of the transactions and/or proceedings involving the subject parcels, as well as the TCTs procured by PMPMCI.5 Encountering financial difficulties in the prosecution of Civil Case No. 8085, respondents and Buenaflor entered into an Agreement dated 20 September 1978 whereby they procured the legal services of Atty. Edmundo Zepeda and the assistance of Manuel Uy Ek Liongwho, as financier, agreed to underwrite the litigation expenses entailed by the case. In exchange, it was stipulated in the notarized Agreement that, in the event of a favorable decision in Civil Case No. 8085, Atty. Zepeda and Manuel would be entitled to "a share of forty (40%) percent of all the realties and/or monetary benefits, gratuities or damages" which may be adjudicated in favor of respondents.6

On the same date, respondents and Buenaflor entered into another notarized agreement denominated as a Kasunduan whereby they agreed to sell their remaining sixty (60%) percent share in the subject parcels in favor of Manuel for the sum of P180,000.00. The parties stipulated that Manuel would pay a downpayment in the sum of P1,000.00 upon the execution ofthe Kasunduan and that respondents and Buenaflor would retain and remain the owners of a 1,750-square meter portion of said real properties. It was likewise agreed that any party violatingthe Kasunduan would pay the aggrieved party a penalty fixed in the sum of P50,000.00, togetherwith the attorney’s fees and litigation expenses incurred should a case be subsequently filed in court. The parties likewise agreed to further enter into such other stipulations as would be necessary to ensure that the sale would push through and/or in the event of illegality or impossibility of any part of the Kasunduan.7

With his death on 19 August 1989,8 Manuel was survived by petitioners, Heirs of Manuel Uy Ek Liong, who were later represented in the negotiations regarding the subject parcels and in this suit by petitioner BelenLim Vda. de Uy. The record also shows that the proceedings in Civil Case No. 8085 culminated in this Court’s rendition of a 13 September 1990 Decision in G.R. No.895619 in favor of respondents and Buenaflor.10 Subsequent to the finality of the Court’s Decision,11 it appears that the subject parcels were subdivided in accordance with the Agreement, with sixty (60%) percent thereof consisting of 31,983 square meters equally apportioned among and registered in the names of respondents and Buenaflor under TCT Nos. T-72027, T-72028, T-72029, T-72030, T-72031, T-72032 and T-72033.12 Consisting of 21,324 square meters, the remaining forty (40%) percent was, in turn, registered in the names of petitioners and Atty. Zepeda under TCT No. T-72026.13

Supposedly acting on the advice of Atty. Zepeda, respondents wrote petitioners a letter dated 22March 1993, essentially informing petitioners that respondents were willing to sell their sixty (60%) percent share in the subject parcels for the consideration of P500.00 per square meter.14 Insisting on the price agreed upon in the Kasunduan, however, petitioners sent a letter dated 19 May 1993, requesting respondents to execute within 15 days from notice the necessary Deed of Absolute Sale over their 60% share as aforesaid, excluding the 1,750-squaremeter portion specified in their agreement with Manuel. Informed that petitioners were ready to pay the remaining P179,000.00 balance of the agreed price,15 respondents wrote a 28 May 1993

reply, reminding the former of their purported refusal of earlier offers to sell the shares of Leovina and of Buenaflor who had, in the meantime, died.16 In a letter dated 1 June 1993, respondents also called petitioners’ attention to the fact, among others, that their right to ask for an additional consideration for the sale was recognized under the Kasunduan.17

On 6 October 1993, petitioners commenced the instant suit with the filing of their complaint for specific performance and damages against the respondents and respondent Heirs of Buenaflor, as then represented by Menardo Umali. Faulting respondents with unjustified refusal to comply with their obligation under the Kasunduan, petitioners prayed that the former be ordered to execute the necessary Deed of Absolute Sale over their shares in the subject parcels, with indemnities for moral and exemplary damages, as well as attorney’s fees, litigation expenses and the costs of the suit.18 Served with summons, respondents filed their Answer with Counterclaim and Motion to File Third Party Complaint on 3 December 1993. Maintaining that the Agreement and the Kasunduan were illegal for being unconscionable and contrary to public policy, respondents averred that Atty. Zepeda was an indispensable party to the case. Together with the dismissal of the complaint and the annulment of said contracts and TCT No. T-72026, respondents sought the grant of their counterclaims for moral and exemplary damages, as well as attorney’s fees and litigation expenses.19

The issues thereby joined, the Regional Trial Court (RTC), Branch 54, Lucena City, proveeded to conduct the mandatory preliminary conference in the case.20 After initially granting respondents’ motion to file a third party complaint against Atty. Zepeda,21 the RTC, upon petitioners’ motion for reconsideration,22 went on to issue the 18 July 1997 Order disallowing the filing of said pleading on the ground that the validity of the Agreement and the cause of action against Atty. Zepeda, whose whereabouts were then unknown, would be better threshed out in aseparate action.23 The denial24 of their motion for reconsideration of the foregoing order25 prompted respondents to file a notice of appeal26 which was, however, denied due course by the RTC on the ground that the orders sought to be appealed were non-appealable.27 On 14 December 1997, Menardo died28 and was substituted by his daughter Nancy as representative of respondent Heirs of Buenaflor.29

In the ensuing trial of the case on the merits, petitioners called to the witness stand Samuel Lim Uy Ek Liong30whose testimony was refuted by Philip31 and Leovina32 during the presentation of the defense evidence. On 27 January 2005, the RTC rendered a decision finding the Kasunduanvalid and binding between respondents and petitioners who had the right to demand its fulfillment as Manuel’s successors-in-interest. Brushing aside Philip’s testimony that respondentswere forced to sign the Kasunduan, the RTC ruled that said contract became effective upon the finality of this Court’s 13 September 1990 Decision in G.R. No. 89561 which served as a suspensive condition therefor. Having benefited from the legal services rendered by Atty. Zepeda and the financial assistance extended by Manuel, respondents were also declared estopped from questioning the validity of the Agreement, Kasunduan and TCT No. T-72026. With the Kasunduan upheld as the law between the contracting parties and their privies,33 the RTC disposed of the case in the following wise:

WHEREFORE, premises considered, the Court finds for the petitioners and hereby:

1. Orders the respondents to execute and deliver a Deed of Conveyance in favor of the petitioners covering the 60% of the properties formerly covered by Transfer Certificates of Title Nos. T-3175, 42104, T-42103, T-32227 and T-42104 which are now covered by Transfer Certificates of Title Nos. T-72027, T-72028, T-72029, T-72030, T-72031, T-72032, T-72033 and T-72026, all of the Registry of Deeds of Lucena City, for and in consideration of the amount of P180,000.00 in accordance with the provisions of the KASUNDUAN, and

2. Orders the petitioners to pay and deliver to the respondents upon the latter’s execution of the Deed of Conveyance mentioned in the preceding paragraph, the amount of P179,000.00 representing the balance of the purchase price as provided in the KASUNDUAN, and

3. Orders the respondents to pay the petitioners the following amounts:

a). P50,000.00 as and for moral damages;

b). P50,000.00 as and for exemplary damages; and

c). P50,000.00 as and for attorney’s fees.

and to pay the costs.

SO ORDERED.34

Dissatisfied with the RTC’s decision, both petitioners35 and respondents perfected their appeals36 which were docketed before the CA as CA-G.R. CV No. 84687. While petitioners prayed for the increase of the monetary awards adjudicated a quo, as well as the further grant ofliquidated damages in their favor,37 respondents sought the complete reversal of the appealed decision on the ground that the Agreement and the Kasunduan were null and void.38 On 23 January 2007, the CA rendered the herein assailed decision, setting aside the RTC’s decision, upon the following findings and conclusions, to wit: (a) the Agreement and Kasunduan are byproducts of the partnership between Atty. Zepeda and Manuel who, as a non-lawyer, was not authorized to practice law; (b) the Agreement is void under Article 1491 (5) of the Civil Code of the Philippines which prohibits lawyers from acquiring properties which are the objects of the litigation in which they have taken part; (c) jointly designed to completely deprive respondents of the subject parcels, the Agreement and the Kasunduan are invalid and unconscionable; and (d) without prejudice to his liability for violation of the Canons of Professional Responsibility, Atty. Zepeda can file an action to collect attorney’s fees based on quantum meruit.39

The Issue

Petitioners seek the reversal of the CA’s decision on the following issue:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS, FIFTEENTH DIVISION, COMITTED A REVERSIBLE ERROR WHEN IT REVERSED AND SET ASIDE THE DECISION OF THE RTC BRANCH 59, LUCENA CITY, IN CIVIL CASE NO. 93-176 DECLARING THE AGREEMENT AND KASUNDUAN VOID AB INITIO FOR BEING CONTRARY TO LAW AND PUBLIC POLICY FOR BEING VIOLATIVE OF ART. 1491 OF THE NEW CIVIL CODE AND THECANONS OF PROFESSIONAL RESPONSIBILITY.40

The Court’s Ruling

We find the petition impressed with partial merit.

At the outset, it bears pointing out that the complaint for specific performance filed before the RTC sought only the enforcement of petitioners’ rights and respondents’ obligation under the Kasunduan. Although the answer filed by respondents also assailed the validity of the Agreement and TCT No. T-72026, the record shows that the RTC, in its order dated 18 July

1997, disallowed the filing of a third-party complaint against Atty. Zepeda on the ground that the causes of action in respect to said contract and title would be better threshed out in a separate action. As Atty. Zepeda’s whereabouts were then unknown, the RTC also ruled that, far from contributing to the expeditious settlement of the case, the grant of respondents’ motion to file a third-party complaint would only delay the proceedings in the case.41 With the 1 October 1998 denial of their motion for reconsideration of the foregoing order, respondents subsequently filed a notice of appeal which was, however, denied due course on the ground that the orders denying their motion to file a third-party complaint and their motion for reconsideration were interlocutory and non-appealable.42

Absent a showing that the RTC’s ruling on the foregoing issues was reversed and set aside, we find that the CA reversibly erred in ruling on the validity of the Agreement which respondents executed not only with petitioners’ predecessor-in-interest, Manuel, but also with Atty. Zepeda. Since it is generally accepted that no man shall be affected by any proceeding to which he is a stranger,43 the rule is settled that a court must first acquire jurisdiction over a party – either through valid service of summons or voluntary appearance – for the latter to be bound by a courtdecision.44 The fact that Atty. Zepeda was not properly impleaded in the suit and given a chance to present his side of the controversy before the RTC should have dissuaded the CA from invalidating the Agreement and holding that attorney’s fees should, instead, be computed on a quantum meruit basis. Admittedly, Article 1491 (5)45 of the Civil Code prohibits lawyers from acquiring by purchase or assignment the property or rights involved which are the object of the litigation in which they intervene by virtue of their profession. The CA lost sight of the fact, however, that the prohibition applies only during the pendency of the suit46 and generally does not cover contracts for contingent fees where the transfer takes effect only after the finality of a favorable judgment.47

Although executed on the same day, it cannot likewise be gainsaid that the Agreement and the Kasunduan are independent contracts, with parties, objects and causes different from that of theother. Defined as a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service,48 a contract requires the concurrence of the following requisites: (a) consent of the contracting parties; (b) object certain which is the subject matter of the contract; and, (c) cause of the obligation which is established.49 Executed in exchange for the legal services of Atty. Zepeda and the financial assistance to be extended by Manuel, the Agreement concerned respondents’ transfer of 40% of the avails of the suit, in the event of a favorable judgment in Civil Case No. 8085. While concededly subject to the same suspensive condition, the Kasunduan was, in contrast, concluded by respondents with Manuel alone, for the purpose of selling in favor of the latter 60%of their share in the subject parcels for the agreed price of P180,000.00. Given these clear distinctions, petitioners correctly argue that the CA reversibly erred in not determining the validityof the Kasunduan independent from that of the Agreement.

Viewed in the light of the autonomous nature of contracts enunciated under Article 130650 of the Civil Code, on the other hand, we find that the Kasunduan was correctly found by the RTC to be a valid and binding contract between the parties. Already partially executed with respondents’ receipt of P1,000.00 from Manuel upon the execution thereof, the Kasunduan simply concerned the sale of the former’s 60% share in the subject parcel, less the 1,750-square meter portion to be retained, for the agreed consideration of P180,000.00. As a notarized document that carries the evidentiary weight conferred upon it with respect to its due execution,51 the Kasunduan was shown to have been signed by respondents with full knowledge of its contents, as may be gleaned from the testimonies elicited from Philip52 and Leovina.53

Although Philip had repeatedly claimed that respondents had been forced to sign the Agreementand the Kasunduan, his testimony does not show such vitiation of consent as would warrant the avoidance of the contract. He simply meant that respondents felt constrained to accede to the stipulations insisted upon by Atty. Zepeda and Manuel who were not otherwise willing to push through with said contracts.54

At any rate, our perusal of the record shows that respondents’ main objection to the enforcementof the Kasunduan was the perceived inadequacy of the P180,000.00 which the parties had fixed as consideration for 60% of the subject parcels. Rather than claiming vitiation of their consent in the answer they filed a quo, respondents, in fact, distinctly averred that the Kasunduan was tantamount to unjust enrichment and "a clear source of speculative profit" at their expense since their remaining share in said properties had "a current market value of P9,594,900.00, more or less."55 In their 22 March 1993 letter to petitioners, respondents also cited prices then prevailing for the sale of properties in the area and offered to sell their 60% share for the price of P500.00 per square meter56 or a total of P15,991,500.00. In response to petitioners’ insistence on the price originally agreed upon by the parties,57 respondents even invoked the last paragraph58 of the Kasunduan to the effect that the parties agreed to enter into such other stipulations as wouldbe necessary to ensure the fruition of the sale.59

In the absence of any showing, however, that the parties were able to agree on new stipulations that would modify their agreement, we find that petitioners and respondents are bound by the original terms embodied in the Kasunduan. Obligations arising from contracts, after all, have the force of law between the contracting parties60who are expected to abide in good faith with their contractual commitments, not weasel out of them.61 Moreover, when the terms of the contract are clear and leave no doubt as to the intention of the contracting parties, the rule is settled that the literal meaning of its stipulations should govern. In such cases, courts have no authority to alter a contract by construction or to make a new contract for the parties. Since their duty is confined to the interpretation of the one which the parties have made for themselves without regard to its wisdom or folly, it has been ruled that courts cannot supply material stipulations or read into the contract words it does not contain.62Indeed, courts will not relieve a party from the adverse effects of an unwise or unfavorable contract freely entered into.63

Our perusal of the Kasunduan also shows that it contains a penal clause64 which provides that a party who violates any of its provisions shall be liable to pay the aggrieved party a penalty fixed at P50,000.00, together with the attorney’s fees and litigation expenses incurred by the latter should judicial resolution of the matter becomes necessary.65 An accessory undertaking to assume greater liability on the part of the obligor in case of breach of an obligation, the foregoingstipulation is a penal clause which serves to strengthen the coercive force of the obligation and provides for liquidated damages for such breach.66 "The obligor would then be bound to pay the stipulated indemnity without the necessity of proof of the existence and the measure of damagescaused by the breach."67 Articles 1226 and 1227 of the Civil Code state:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted to him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced."

In the absence of a showing that they expressly reserved the right to pay the penalty in lieu of the performance of their obligation under the Kasunduan, respondents were correctly ordered bythe RTC to execute and deliver a deed of conveyance over their 60% share in the subject parcels in favor of petitiOners. Considering that the Kasunduan stipulated that respondents

would retain a portion of their share consisting of 1,750 square meters, said disposition should, however, be modified to give full effect to the intention of the contracting parties. Since the parties also fixed liquidated damages in the sum of P50,000.00 in case of breach, we find that said amount should suffice as petitioners' indemnity, without further need of compensation for moral and exemplary damages. In obligations with a penal clause, the penalty generally substitutes the indemnity for damages and the payment of interests in case of non-compliance.68 Usually incorporated to create an effective deterrent against breach of the obligation by making the consequences of such breach as onerous as it may be possible, the rule is settled that a penal clause is not limited to actual and compensatory damages69

The RTC's award of attorney's fees in the sum of P50,000.00 is, however, proper.1âwphi1 Asidefrom the fact that the penal clause included a liability for said award in the event of litigation overa breach of the Kasunduan, petitioners were able to prove that they incurred said sum in engaging the services of their lawyer to pursue their rights and protect their interests.70

WHEREFORE, premises considered, the Court of Appeals' assailed 23 January 2007 Decision is REVERSED and SET ASIDE. In lieu thereof, the RTC's 27 January 2005 Decision is REINSTATED subject to the following MODIFICATIONS: (a) the exclusion of a 1,750-square meter portion from the 60% share in the subject parcel respondents were ordered to convey in favor of petitioners; and (b) the deletion of the awards of moral and exemplary damages. The rights of the parties under the Agreement may be determined in a separate litigation.

SO ORDERED.

G.R. No. 107569 November 8, 1994

PHILIPPINE NATIONAL BANK, petitioner, vs.COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents.

Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of Appeals 1 in CA G.R. CV No. 27195, the dispositive portion of which reads as follows:

WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness and to accordingly take the appropriate charges from plaintiffs-appellants' (private respondents') payment of P81,000.00 made on December 26, 1985. Any balance on the indebtednessshould, likewise, be charged interest at the rate of 12% per annum.

SO ORDERED.

The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:

On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a Credit Agreement. Underthe Promissory Note covering the loan, the loan was to be amortized over a period of three (3) years to end on March 29, 1985, at twelve (12%) percent interest annually.

To secure the loan, (private respondents) executed a Real Estate Mortgage over a 1.5542-hectare parcel of unregistered agricultural land located at Cambang-ug, Toledo City, which was appraised by the PNB at P1,062.52 and given a loan value of P531.26 by the Bank. In addition, (private respondents) executed a Chattel Mortgage over a thermo plastic-forming machine, which had an appraisal value of P8,800 and a loan value of P4,400.00.

The Credit Agreement provided inter alia, that —

(a) The BANK reserves the right to increase the interestrate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board. In either

case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase ordecrease in the maximum interest rate.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."

The Real Estate Mortgage contract likewise provided that —

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGE, in accordance with the provision hereof, shall be subject during the life of this contract to such an increase withinthe rate allowed by law, as the Board of Directors of theMORTGAGEE may prescribe for its debtors.

On February 17, 1983, (private respondents) were granted an additional NACIDA loan of Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private respondents) executed another Promissory Note, which was to mature on April 1, 1985. Other than the date of maturity, the second promissory note contained the same terms and stipulations as the previous note. The parties likewise executed a new Credit Agreement, changing the amount of the loan from P50,000.00 to P100,000.00, but otherwise preserving the stipulations contained in the original agreement.

As additional security for the loan, (private respondents) constituted anotherreal estate mortgage over 2 parcels of registered land, with a combined area of 311 square meters, located at Guadalupe, Cebu City. The land, upon which several buildings are standing, was appraised by the PNB to have a value of P40,000.00 and a loan value of P28,000.00.

In a letter dated August 1, 1984, the PNB informed (private respondents) "that the interest rate of your CIGLF loan account with us is now 25% per annum plus a penalty of 6% per annum on past dues." The PNB further increased this interest rate to 30% on October 15, 1984; and to 42% on October 25, 1984.

The records show that as of December 1985, (private respondents) had an outstanding principal account of P81,000.00 of which P18,523.14 was credited to the principal, P57,488.89 to the interest, and the rest to penalty and other charges. Thus, as of said date, the unpaid principal obligation of (private respondent) amounted to P62,830.32.

Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12% interest and to condone the present interest and penalties due; but to no avail. 2 (Citations omitted.)

On December 15, 1987, private respondents filed a suit for specific performance against petitioner PNB and the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to theRegional Trial Court, 7th Judicial Region, Cebu City, Br. 7. 3 Private respondents prayed the trial court to order:

1. The PNB and NACIDA to issue in (private respondents') favor, a release of mortgage;

2. The PNB to pay pecuniary consequential damages for the destruction of (private respondents') enterprise;

3. The PNB to pay moral and exemplary damages as well as the costs of suit; and

4. Granting (private respondents') such other relief as may be found just andequitable in the premises. 4

On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No. CEB-5610. On October 15, 1992, the Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the increases in interest rates.

Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled (1) that the increase in interest rates are unauthorized; (2) that the Credit Agreement and the Promissory Notes are not the law between the parties; (3) that CB Circular No. 773 and CB Circular No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the increase of rate interest made by petitioner." 5

The petition is bereft of merit.

In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their credit agreement which provides, as follows:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in thefuture and provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:

Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board; Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.

Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:

Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read as follows:

Sec. 1303. Interest and Other Charges. — The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other's consent.

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one whocontracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. 6

Similarly, contract changes must be made with the consent of the contracting parties. The mindsof all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, anychange must be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right tounilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

. . . The unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force or law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that

the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null andvoid for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. (Citation omitted.)

Private respondents are not also estopped from assailing the unilateral increases in interest rate made by petitioner bank. No one receiving a proposal to change a contract to which he is a party, is obliged to answer the proposal, and his silence per se cannot be construed as an acceptance. 7 In the case at bench, the circumstances do not show that private respondents implicitly agreed to the proposed increases in interest rate which by any standard were too sudden and too stiff.

IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. 124290 January 16, 1998

ALLIED BANKING CORPORATION, petitioner, vs.COURT OF APPEALS , HON. JOSE C. DE GUZMAN, OSCAR D. TAN-QUECO, LUCIA D. TANQUECO-MATIAS, RUBEN D. TANQUECO and NESTOR D. TANQUECO, respondents.

BELLOSILLO, J.:

There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a contract of lease to the effect that the contract "may be renewed for a like term at the option of the lessee" is void for being potestative or violative of the principle of mutuality of contracts under Art. 1308 of the Civil Code and, corollarily, what is the meaning of the clause "may be renewed for a like term at the option of the lessee;" and, (b) whether a lessee has the legal personality to assail the validity of a deed of donation executed by the lessor over the leased premises.

Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located at No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered byTCT No. 136779 in their name. On 30 June 1978 they leased the property to petitioner Allied Banking Corporation (ALLIED) for a monthly rental of P1,000.00 for the first three (3) years, adjustable by 25% every three (3) years thereafter. 1 The lease contract specifically states in its Provision No. 1 that "the term of this lease shall be fourteen (14) years commencing from April 1,1978 and may be renewed for a like term at the option of the lessee."

Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of a concrete building with a floor area of 340-square meters which it used as a branch office. As stipulated, the ownership of the building would be transferred to the lessors upon the expiration of the original term of the lease.

Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject property in favor of their four (4) children, namely, private respondents herein Oscar D. Tanqueco, Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who accepted the donation in the same public instrument.

On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos notified petitioner ALLIED that they were no longer interested in renewing the lease. 2 ALLIED

replied that it was exercising its option to renew their lease under the same terms with additionalproposals. 3 Respondent Ruben D. Tanqueco, acting in behalf of all the donee-lessors, made a counter-proposal. 4 ALLIED however rejected the counter-proposal and insisted on Provision No.1 of their lease contract.

When the lease contract expired in 1992 private respondents demanded that ALLIED vacate thepremises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a cashier's check in the amount of P68,400.00 representing the advance rental payments for six (6) months taking into account the escalation clause. Private respondents however returned the check to ALLIED, prompting the latter to consign the amount in court.

An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violativeof Art. 1308 of the Civil Code thus —

. . . but such provision [in the lease contract], to the mind of the Court, does not add luster to defendant's cause nor constitutes as an unbridled or unlimited license or sanctuary of the defendants to perpetuate its occupancyon the subject property. The basic intention of the law in any contract is mutuality and equality. In other words, the validity of a contract cannot be left at (sic) the will of one of the contracting parties. Otherwise, it infringes (upon) Article 1308 of the New Civil Code, which provides: The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them . . . Using the principle laid down in the case of Garcia v.Legarda as cornerstone, it is evident that the renewal of the lease in this case cannot be left at the sole option or will of the defendant notwithstanding provision no. 1 of their expired contract. For that would amount to a situation where the continuance and effectivity of a contract willdepend only upon the sole will or power of the lessee, which is repugnant tothe very spirit envisioned under Article 1308 of the New Civil Code . . . . the theory adopted by this Court in the case at bar finds ample affirmation from the principle echoed by the Supreme Court in the case of Lao Lim v. CA, 191 SCRA 150, 154, 155.

On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision was affirmed. 5

On 20 February 1993, while the case was pending in the Court of Appeals ALLIED vacated the leased premises by reason of the controversy. 6

ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence valid and binding on both parties, and the exercise by petitioner of its option to renew the contract was part of their agreement and in pursuance thereof.

We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of contracts. It provides that "the contract must bind both the contracting parties; its validity or compliance cannot be left to the will of one of them." This binding effect of a contract on both parties is based on the principle that the obligations arising from the contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.

An express agreement which gives the lessee the sole option to renew the lease is frequent andsubject to statutory restrictions, valid and binding on the parties. This option, which is provided inthe same lease agreement, is fundamentally part of the consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of the lessor toact conditioned on the performance by the lessee. It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the rights is made to depend. The right of renewal constitutes a part of the lessee's interest in the land andforms a substantial and integral part of the agreement.

The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment. 7

The case of Lao Lim v. Court of Appeals 8 relied upon by the trial court is not applicable here. In that case, the stipulation in the disputed compromise agreement was to the effect that the lesseewould be allowed to stay in the premises "as long as he needs it and can pay the rents." In the present case, the questioned provision states that the lease "may be renewed for a like term at the option of the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes bound only when he exercises his option and the lessor cannot thereafter be executed from performing his part of the agreement.

Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., 9 is misplaced. In that case, what was involved was a contract to sell involving residential lots, whichgave the vendor the right to declare the contract called and of no effect upon the failure of the vendee to fulfill any of the conditions therein set forth. In the instant case, we are dealing with a contract of lease which gives the lessee the right to renew the same.

With respect to the meaning of the clause "may be renewed for a like term at the option of the lessee," we sustain petitioner's contention that its exercise of the option resulted in the automaticextension of the contract of lease under the same terms and conditions. The subject contract simply provides that "the term of this lease shall be fourteen (14) years and may be renewed for a like term at the option of the lessee." As we see it, the only term on which there has been a clear agreement is the period of the new contract, i.e., fourteen (14) years, which is evident fromthe clause "may be renewed for a like term at the option of the lessee," the phrase "for a like term"referring to the period. It is silent as to what the specific terms and conditions of the renewed lease shall be. Shall it be the same terms and conditions as in the original contract, or shall it be under the terms and conditions as may be mutually agreed upon by the parties after the expiration of the existing lease?

In Ledesma v. Javellana 10 this Court was confronted with a similar problem. In the case the lessee was given the sole option to renew the lease, but the contract failed to specify the terms and conditions that would govern the new contract. When the lease expired, the lessee demanded an extension under the same terms and conditions. The lessor expressed conformity to the renewal of the contract but refused to accede to the claim of the lessee that the renewal should be under the same terms and conditions as the original contract. In sustaining the lessee,this Court made the following pronouncement:

. . . in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It was held that "such a clause relates to the very contract in which it is placed, and does not permit the defendant upon the renewal of the contract in which the clause is found, to insist upon different terms and those embraced in the contract to be renewed;" and that "a stipulation to renew always relates to the contract in which it is found and the rights granted thereunder, unless it expressly provides for variations in the terms of the contract to be renewed."

The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: "The rule is well-established that a general covenant to renew or extend a lease which makes no provision as to the terms of a renewal or extension implies a renewal or extension upon the same terms as provided in the original lease."

In the lease contract under consideration, there is no provision to indicate that the renewal will be subject to new terms and conditions that the parties may yet agree upon. It is to renewal provisions of lease contracts of the kindpresently considered that the principles stated above squarely apply. We donot agree with the contention of the appellants that if it was intended by the parties to renew the contract under the same terms and conditions stipulated in the contract of lease, such should have expressly so stated in the contract itself. The same argument could easily be interposed by the appellee who could likewise contend that if the intention was to renew the contract of lease under such new terms and conditions that the parties may agree upon, the contract should have so specified. Between the two assertions, there is more logic in the latter.

The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to a contract of lease, the tenant is the one favored and not the landlord. "As a general rule, in construing provisions relating to renewals or extensions, where there is any uncertainty, the tenants is favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to do so; and also upon the principle that every man's grant is to be taken most strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).

Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied inthe renewed contract were still subject to mutual agreement by and between the parties, then the option — which is an integral part of the consideration for the contract — would be rendered worthless. For then, the lessor could easily defeat the lessee's right of renewal by simply imposing unreasonable and onerous conditions to prevent the parties from reaching an agreement, as in the case at bar. As in a statute no word, clause, sentence, provision or part of a contract shall be considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To this end, a construction which will render every word operative is to be preferred over that which would make some words idle and nugatory. 11

Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating its abandonment of whatever rights it had under the renewal clause. Consequently, what remains to be done is for ALLIED to pay rentals for the continued use of premises until it vacated the same, computed from the expiration of the original term of the contract on 31 March 1992 to the time it actually left the premises on 20 February 1993, deducting therefrom the amount of P68,400.00 consigned in court by ALLIED and any other amount which it may have deposited or advanced in connection with the lease. Since the old lease contract was deemed

renewed under the same terms and conditions upon the exercise by ALLIED of its option, the basis of the computation of rentals should be the rental rate provided for in the existing contract.

Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A person who is not principally or subsidiarily bound has no legal capacity to challenge the validity of the contract. 12 He must first have an interest in it. "Interest" within the meaning of the term means material interest, an interest to be affected by the deed, as distinguished from a mere incidental interest. Hence, a person who is not a party to a contract and for whose benefit it was not expressly made cannot maintain an action on it, even if the contract, if performed by the parties thereto would incidentally affect him,13 except when he is prejudiced in his rights with respect to one of the contracting parties and can show the detriment which could positively result to him from the contract in which he had no intervention. 14 We find none in the instant case.

WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering that petitioner ALLIED BANKING CORPORATION already vacated the leased premises as of 20 February 1993, the renewed lease contract is deemed terminated as of that date. However, petitioner is required to pay rentals to respondent lessors at the rate provided in their existing contract, subject to computation in view of the consignment in court of P68,400.00 by petitioner, and of such other amounts it may have deposited or advanced in connection with the lease.

SO ORDERED.

.R. No. 161718 December 14, 2011

MANILA INTERNATIONAL AIRPORT AUTHORITY, Petitioner, vs.DING VELAYO SPORTS CENTER, INC., Respondent.

D E C I S I O N

LEONARDO-DE CASTRO, J.:

Before Us is a Petition for Review under Rule 45 of the Rules of Court of the Decision1 dated January 8, 2004 of the Court Appeals in CA-G.R. CV No. 68787, affirming the Decision2 dated October 29, 1999 of Branch 111 of the Regional Trial Court (RTC) of Pasay City in Civil Case No. 8847, which granted the Complaint for Injunction, Consignation, and Damages with prayer for a Temporary Restraining Order filed by respondent Ding Velayo Sports Center, Inc. against petitioner Manila International Airport Authority (MIAA), and essentially compelled petitioner to renew the lease of respondent over a parcel of land within the airport premises.

Below are the facts as culled from the records of the case:

On February 15, 1967, petitioner (then still called the Civil Aeronautics Administration or CAA) and Salem Investment Corporation (Salem) entered into a Contract of Lease whereby petitioner leased in favor of Salem a parcel of land known as Lot 2-A, with an area of 76,328 square meters, located in front of the Manila International Airport (MIA) in Pasay City, and registered under Transfer Certificate of Title (TCT) No. 6735 in the name of the Republic (Lot 2-A). Petitioner and Salem entered into said Contract of Lease for the following reasons:

WHEREAS, this particular portion of land is presently an eyesore to the airport premises due to the fact that a major portion of it consists of swampy and talahib infested silt and abandoned fishponds and occupied by squatters and some [petitioner’s] employees with ungainly makeshift dwellings;

WHEREAS, the LESSOR, in accordance with its general plan to improve and beautify the airportpremises, is interested in developing this particular area by providing such facilities and conveniences as may be necessary for the comfort, convenience and relaxation of transients, tourists and the general public;

WHEREAS, the LESSEE, a corporation engaged in hostelry and other allied business, is ready, willing and able to cooperate with the LESSOR in the implementation of this general development plan for the airport premises;

x x x x

WHEREAS, the LESSEE’s main interest is to have a sufficient land area within which to construct a modern hotel with such facilities as would ordinarily go with modern hostelry, including recreation halls, facilities for banks, tourist agencies, travel bureaus, laundry shops, postal stations, curio and native shops and other allied business calculated to make the hotel and its facilities comfortable, convenient and attractive, and for this purpose, an initial land area of some Thirty[-]Five Thousand Ten (35,010) square meters would be first utilized.3

The term of the lease and renewal thereof as stipulated upon by petitioner and Salem are as follows:

3. That the term of the lease shall be for a period of Twenty-Five (25) years, commencing from the date of receipt of approval of this Contract by the Secretary of Public Works and Communications, and at the option of the LESSEE, renewable for another Twenty-Five (25) years. It is understood, that after the first 25 years lease, the ownership of, and full title to, all thebuildings and permanent improvements introduced by the LESSEE on the leased premises including those introduced on the Golf Driving Range shall automatically vest in the LESSOR, without cost.

Upon the termination of the lease or should the LESSEE not exercise this option for renewal, theLESSEE shall deliver the peaceful possession of all the building and other permanent improvements herein above referred to, with the understanding that the LESSEE shall have the right to remove from the premises such equipment, furnitures, accessories and other articles as would ordinarily be classified as movable property under pertinent provisions of law.

4. That the renewal of this lease contract shall be for another period of Twenty-Five (25) years, under the same terms and conditions herein stipulated; provided, however that, since the ownership of the hotel building and permanent improvement have passed on the LESSOR, the LESSEE shall pay as rental, in addition to the rentals herein agreed upon, an amount equivalentto One percent (1%) of the appraised value of the hotel building and permanent improvements at the time of expiration of Twenty-Five (25) years lease period, payable annually.4

Subsequently, in a Transfer of Lease Rights and Existing Improvements dated September 30, 1974, Salem conveyed in favor of Ding Velayo Export Corporation (Velayo Export), for the consideration of P1,050,000.00, its leasehold rights over a portion of Lot 2-A, measuring about 15,534 square meters, with the improvements thereon, consisting of an unfinished cinema-theater. Accordingly, petitioner and Velayo Export executed a Contract of Lease dated November 26, 1974 pertaining to the aforementioned leased portion of Lot 2-A.

In turn, Velayo Export executed a Transfer of Lease Rights dated April 27, 1976 by which it conveyed to respondent, for the consideration of P500,000.00, its leasehold rights over an 8,481-square meter area (subject property) out of the 15,534-square meter portion it was leasingfrom petitioner. As a result, petitioner and respondent executed another Contract of Lease5 dated May 14, 1976 covering the subject property.

The Contract of Lease dated May 14, 1976 between petitioner (as lessor) and respondent (as lessee) specified how respondent shall develop and use the subject property:

2. That the LESSEE shall utilize the premises as the site for the construction of a Sports Complex facilities and shopping centers in line with the Presidential Decree for Sports Development and Physical Fitness, including the beautification of the premises and providing cemented parking areas.

3. That the LESSEE shall construct at its expense on the leased premises a parking area parallel to and fronting the Domestic Airport Terminal to be open to the traveling public free of charge to ease the problem of parking congestion at the Domestic Airport.6

Pursuant to the aforequoted objectives, respondent agreed to the following:

9. Physical improvements on building spaces and areas subject of this agreement may be undertaken by and at the expenses of the LESSEE. However, no improvements may be commenced without prior approval of the plans by the LESSOR and, whenever deemed necessary a cash deposit shall be made in favor of the LESSOR which shall be equivalent to thecost of restoration of any portion affected by such alteration or improvements;

10. The LESSEE agrees and binds himself to complete the physical improvements or contemplated structures within the leased premises for a period of one (1) year. Failure on the part of the LESSEE to do so within said period shall automatically revoke the Contract of Lease without necessity of judicial process.7

The lease rental shall be computed as follows:

5. That the LESSEE shall pay to the LESSOR as monthly rentals for the leased premises the rate of P0.45 per square meter for the first 300 square meters, P0.30 per square meter for the next 500 square meters, and P0.25 per square meter for the remaining area pursuant to Part VIII, Section 4 of Administrative Order No. 4, Series of 1970, which in the case of the 8,481 square meters herein leased shall amount to P2,205.25 per month, or a royalty equivalent to one percent (1%) of the monthly gross income of the LESSEE, whichever is higher.

6. That for the purpose of accurately determining the monthly gross income, the LESSEE herebygives its consent for the examination of the books by authorized representatives of the LESSOR or the Commission on Audit;

x x x x

13. If, during the lifetime of this agreement and upon approval by the LESSOR, the leased area is increased or diminished, or the LESSEE is relocated to another area, rentals, fees, and charges imposed shall be amended accordingly. Subsequent amendments to the Administrative Order which will affect an increase of the rates of fees, charges and rentals agreed upon in this contract shall automatically amend this contract to the extent that the rates of fees, rentals, and charges are increased.

In the event of relocation of the LESSEE to other areas, the cost of relocation shall be shouldered by the LESSEE.8

Nonpayment of lease rentals shall have the following consequence:

8. Failure on the part of the LESSEE TO PAY ANY fees, charges, rentals or the royalty of one percent (1%) within thirty (30) days after receipt of written demand, the LESSOR shall deny the LESSEE of the further use of the leased premises and /or any of its facilities, utilities and services. x x x.9

The Contract of Lease prohibits respondent from transferring its leasehold rights, engaging in any other business outside those mentioned in said Contract, and subletting the premises whether in whole or in part, thus:

16. The LESSEE agrees not to assign, sell, transfer or mortgage his rights under this agreementor sublet the whole or part of premises covered by it to a third party or parties nor engage in any other business outside of those mentioned in this contract. Violation of this provision shall also be a ground for revocation of the lease contract without need of judicial process.10

Period of the lease and renewal thereof are governed by paragraphs 4 and 17 of the Contract of Lease that read:

4. That the period of this lease shall take effect from June 1, 1976 up to February 15, 1992 which is equivalent to the unexpired portion of the lease contract executed between [petitioner] and Ding Velayo Export Corporation.

x x x x

17. The LESSEE, if desirous of continuing his lease, should notify the LESSOR sixty (60) days prior to expiration of the period agreed upon for the renewal of the Contract of Lease.11

The lease may be revoked/terminated under the following conditions:

15. This contract of lease may be terminated by other party upon thirty (30) days notice in writing. Failure on the part of the LESSEE to comply with any of the provisions of this lease contract or any violation of any rule or regulations of the Airport shall give the LESSOR the right to revoke this contract effective thirty (30) days after notice of revocation without need of judicial demand. However, the LESSEE shall remain liable and obligated to pay rentals and other fees and charges due and in arrears with interest at the rate of twelve percent (12%) per annum;

x x x x

18. Upon termination or revocation of this contract of lease as herein provided, the LESSEE shall deliver possession of the premises to the LESSOR in the same condition that they were received giving allowance to normal wear and tear and to damage or destruction caused by act of God. All permanent improvements, however, which the LESSEE might have constructed in the premises by virtue hereof shall upon the termination of this lease automatically become the absolute property of the LESSOR without cost;

19. In the event that the LESSOR shall need the leased premises in its airport development program, the LESSEE agrees to vacate the premises within thirty (30) days from receipt of

notice. All improvements not removed by the LESSEE within the thirty (30) day period shall become the property of the LESSOR without cost.12

Respondent began occupying the subject property and paying petitioner the amount of P2,205.25 per month as rental fee. Respondent then constructed a multi-million plaza with a three-storey building on said property. Respondent leased spaces in the building to various business proprietors.

In a Letter13 dated April 11, 1979, petitioner requested respondent for a copy of the latter’s GrossIncome Statement from December 1977 to December 1978, duly certified by a certified public accountant, for the purpose of computing the royalty equivalent to 1% of the monthly gross income of respondent. Acceding to this request, respondent sent petitioner a Letter14 dated May 31, 1979 and appended therewith the requested income statements which disclosed that the total gross income of respondent for the period in question amounted toP1,972,968.11. Respondent also submitted to petitioner and the Commission on Audit (COA) its duly audited financial statements15 for the years 1984 to 1988. Meanwhile, petitioner had continued billing respondent the amount of P2,205.25 as monthly rental fee, which the latter obediently paid.

Petitioner eventually issued Administrative Order (AO) No. 4, series of 1982,16 and AO No. 1, series of 1984, fixing various rates for the lease rentals of its properties. AO No. 4, series of 1982, and AO No. 1, series of 1984, allegedly effected an increase in the lease rental of respondent for the subject property, as provided for in paragraph 13 of the Contract of Lease dated May 14, 1976 between petitioner and respondent. However, said issuances were subjected to review for revision purposes and their implementation was suspended. Still, petitioner, through a letter dated September 23, 1986, required respondent to pay a moratorium rental at the rate of P5.00 per square meter rate per month or a total of P42,405.00 every month.

In a Letter17 dated October 18, 1986, respondent opposed the implementation of any increase in its lease rental for the subject property. Respondent wrote:

We believe that an increase in rental of a property which does not form part of the Airport or its immediate premises, like the premises leased to DVSC, although owned by MIAA is not coveredby Batas Pambansa Blg. 325 or Finance Ministry Order No. 6-83. Furthermore, the language of B.P. No. 325 and Ministry Order No. 6-83 authorizes the fixing or revision of fees and charges only for "services and functions."

x x x x

Assuming that the increase in rental of MIAA property is authorized by B.P. No. 325 and MinistryOrder No. 6-83, such increase as ordered in your moratorium rental rate insofar as it is made applicable to DVSC is not valid.

The increase which is around 2,000 percent or 20 times above present rental rate is unreasonably high. Both B.P. No. 325 and Ministry Order No. 6-83 prescribed only "just and reasonable rates sufficient to cover administrative costs."

Such increase in rental is uncalled for considering that:

Upon termination of the lease, all the improvements on the property shall belong to MIAA without costs. The original cost of the buildings and other improvements on the land we have leased is P10,600,000.00. Said improvements would now cost over P30,000,000.00. In effect the Government would be collecting another P2.0 million a year.

We, therefore, request that the moratorium rate be not applied to us.

Following the foregoing exchange, petitioner had kept on charging respondent the original monthly rental ofP2,205.25.

More than 60 days prior to the expiration of the lease between petitioner and respondent, the latter, through its President, Conrado M. Velayo (Velayo), sent the former a Letter18 dated December 2, 1991 stating that respondent was interested in renewing the lease for another 25 years.

Petitioner, through its General Manager, Eduardo O. Carrascoso, in a Letter19 dated February 24, 1992, declined to renew the lease, ordered respondent to vacate the subject property within five days, and demanded respondent to pay arrears in lease rentals as of January 1992 in the sum of P15,671,173.75.

Velayo, on behalf of respondent, replied to petitioner through a Letter20 dated March 3, 1992 thatreads:

This refers to your letters which we received on 26 February 1992 and 27 February 1992, respectively, the first as a response to our letter of 2 December 1991 where we informed you of our intention to renew our lease contract, and the second wherein you asked us to vacate within five (5) days the leased premises.

Your second letter surprised us inasmuch as we have been negotiating with you for the renewal of our lease. In addition, your sudden decision gave us no time to discuss your terms and conditions with our Board considering that the issues involved major decision.

For a smoother transition and for the mutual interest of the government, the tenants and ourselves, may we request for a reconsideration of your decision, and we be given up to the endof March 1992 to peacefully turn-over to you the leased premises. This will enable you to create a committee that will take-over the leased property and its operations.

Likewise, consistent with our previous stand as communicated to you by our legal counsel, copy of which is hereto attached, we deny any liability on rental increases.

In Letters21 all dated March 10, 1992, Velayo informed petitioner that he already sent individual letters to Manila Electric Company, Philippine Long Distance Telephone Company, and Manila Waterworks and Sewerage System, instructing the said utility companies that succeeding billings for electric, telephone, and water consumptions should already be transferred to the account of petitioner in light of the expected turn-over of the subject property and improvements thereon from respondent to petitioner.

However, around the same time, Samuel Alomesen (Alomesen) became the new President and General Manager of respondent, replacing Velayo. Alomesen, acting on behalf of respondent, sent petitioner a Letter22 dated March 25, 1992, revoking the aforementioned Letters dated March 3 and 10, 1992 since these were purportedly sent by Velayo without authority from respondent’s Board of Directors. Respondent expressed its interest in continuing the lease of the subject property for another 25 years and tendered to petitioner a manager’s check in the amount of P8,821.00 as payment for the lease rentals for the subject property from December 1991 until March 1992.

Petitioner entirely disregarded the claims of respondent and threatened to take-over the subject property.

On March 30, 1992, respondent filed against petitioner before the RTC a Complaint for Injunction, Consignation, and Damages with a Prayer for a Temporary Restraining Order.23 Respondent essentially prayed for the RTC to order the renewal of the Contract of Lease between the parties for another 25-year term counted from February 15, 1992. On even date, the RTC issued a Temporary Restraining Order24 preventing petitioner and all persons acting on its behalf from taking possession of the entire or any portion of the subject property, from administering the said property, from collecting rental payments from sub-lessees, and from taking any action against respondent for the collection of alleged arrears in rental paymentsuntil further orders from the trial court.

In its Answer,25 petitioner contended that its Contract of Lease with respondent was already terminated on February 15, 1992, the expiration date explicitly stated under paragraph 4 of the same Contract. Petitioner was not bound to renew the Contract of Lease with respondent. The renewal provision under paragraph 17 of the Contract was not automatic but merely directory and procedural and that, in any event, Velayo, the former President of respondent, already conceded to the non-renewal of the Contract.

Petitioner likewise invoked paragraph 15 of the Contract of Lease, i.e., its right to revoke the said Contract in case of violation of any of the provisions thereof by respondent. Petitioner averred that respondent committed the following violations: (1) respondent failed to fulfill the conditions set forth under paragraphs 2 and 3 of the Contract as it did not establish a shopping center on the subject property and did not help ease the problems of parking congestion at the Domestic Airport; (2) respondent "sub-leased" the subject property in defiance of the prohibition under paragraph 16 of the Contract; and (3) respondent did not pay the lease rentals in accordance with paragraphs 5 and 13 of the Contract, thus, incurring a total outstanding balanceof P15,671,173.75 as of February 1992.

By way of counter-claim, petitioner demanded that respondent pay the total outstanding balanceof its lease rentals for the subject property and turn-over lease rentals it had collected from sub-lessees beginning February 15, 1992.

After the preliminary hearing, the RTC issued a Writ of Preliminary Injunction26 against petitioner on April 30, 1992 upon the posting by respondent of a bond in the amount of P100,000.00.

In an Order27 dated June 11, 1996, the RTC denied the Omnibus Motion of petitioner for the dissolution of the writ of injunction and appointment of a receiver for the fruits of the subject property; and at the same time, granted the motion of respondent for the consignment of their monthly lease rentals for the subject property with the RTC.

The RTC terminated the pre-trial proceedings in an Order28 dated October 23, 1997 for failure of the parties to amicably settle the dispute. Thereafter, trial on the merits ensued.

Respondent presented the testimonies of Mariano Nocom, Jr.,29 Gladioluz Segundo,30 Mariano Nocom, Sr.,31and Rosila Mabanag.32 The RTC admitted all the documentary evidence of respondent in an Order33 dated December 14, 1998.

Petitioner, on the other hand, presented the lone testimony of their accounting manager, Arlene Britanico.34Among the numerous documents submitted by petitioner as evidence were its own issuances imposing various rates for the lease of its properties, which allegedly effected an increase in the lease rentals of respondent for the subject property, specifically, AO No. 4, seriesof 1982;35 AO No. 1, series of 1984;36 AO No. 1, series of 1990;37AO No. 1, series of

1993;38 Resolution No. 94-74,39 Resolution No. 96-32,40 and Resolution No. 97-51,41 all amending AO No. 1, series of 1993; and AO No. 1, series of 1998.42 All of the documentary evidence of petitioner were admitted by the RTC in an Order43 dated May 28, 1999.

In its Decision dated October 29, 1999, the RTC ruled in favor of respondent, disposing thus:

WHEREFORE, judgment is hereby rendered in favor of [respondent] and against [petitioner].

Accordingly, [petitioner] is hereby ordered to:

1. Grant renewal of the lease contract for the same term as stipulated in the old contract and the rental to be based on the applicable rate of the time or renewal;

2. To respect and maintain [respondent’s] peaceful possession of the premises;

3. To accept the rental payment consigned by the [respondent] to the court beginning December 1991 onward until and after a renewal has been duly executed by both parties;

4. To pay [respondent] as and by way of attorney’s fees the sum of P500,000.00; and

5. To pay the cost of suit.44

Petitioner appealed the RTC judgment before the Court of Appeals and assigned these errors:

I. The trial court gravely erred in declaring that [respondent] is entitled to a renewal of the contract of lease.

II. The trial court gravely erred in ordering the renewal of the contract of lease despite of the fact that it has no legal authority to do so.

III. The trial court gravely erred in declaring that [respondent] did not violate the terms and conditions of the contract.

IV. The trial court gravely erred in declaring that [petitioner’s] act of effecting the increase in the rental during the stipulated lifetime of the contract has no valid basis.

V. The trial court gravely erred in not finding that [petitioner] is entitled to its counterclaim.45

The Court of Appeals promulgated its Decision on January 8, 2004, finding no reversible error inthe appealed judgment of the RTC and decreeing as follows:

WHEREFORE, finding no reversible error committed by the trial court, the instant appeal is hereby DISMISSED, and the assailed decision is hereby AFFIRMED.46

Hence, the instant Petition for Review, wherein petitioner basically attributed to the Court of Appeals the very same errors it assigned to the RTC.

Petitioner argues that the renewal of the Contract of Lease cannot be made to depend on the sole will of respondent for the same would then be void for being a potestative condition.

We do not agree. As we have already explained in Allied Banking Corporation v. Court of Appeals 47 :

Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of contracts. It provides that "the contract must bind both the contracting parties; its validity or compliance cannot be left to the will of one of them." This binding effect of a contract on both parties is based on the principle that the obligations arising from contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially ontheir equality under which it is repugnant to have one party bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a conditionwhich makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.

An express agreement which gives the lessee the sole option to renew the lease is frequent andsubject to statutory restrictions, valid and binding on the parties. This option, which is provided inthe same lease agreement, is fundamentally part of the consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of the lessor toact conditioned on the performance by the lessee. It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the right is made to depend. The right of renewal constitutes a part of the lessee's interest in the land and forms a substantial and integral part of the agreement.

The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment.48

Paragraph 17 of the Contract of Lease dated May 14, 1976 between petitioner and respondent solely granted to respondent the option of renewing the lease of the subject property, the only express requirement was for respondent to notify petitioner of its decision to renew the lease within 60 days prior to the expiration of the original lease term. It has not been disputed that saidContract of Lease was willingly and knowingly entered into by petitioner and respondent. Thus, petitioner freely consented to giving respondent the exclusive right to choose whether or not to renew the lease. As we stated in Allied Banking, the right of renewal constitutes a part of the interest of respondent, as lessee, in the subject property, and forms a substantial and integral part of the lease agreement with petitioner. Records show that respondent had duly complied with the only condition for renewal under Section 17 of the Contract of Lease by notifying petitioner 60 days prior to the expiration of said Contract that it chooses to renew the lease. We cannot now allow petitioner to arbitrarily deny respondent of said right after having previously agreed to the grant of the same.

Equally unmeritorious is the assertion of petitioner that paragraph 17 of the Contract of Lease dated May 14, 1976 merely provides a procedural basis for a negotiation for renewal of the lease and the terms thereof. The exercise by respondent of its option to renew the lease need no longer be subject to negotiations. We reiterate the point we made in Allied Banking that:

[I]f we were to adopt the contrary theory that the terms and conditions to be embodied in the renewed contract were still subject to mutual agreement by and between the parties, then the option - which is an integral part of the consideration for the contract - would be rendered worthless. For then, the lessor could easily defeat the lessee's right of renewal by simply imposing unreasonable and onerous conditions to prevent the parties from reaching an agreement, as in the case at bar. As in a statute, no word, clause, sentence, provision or part of a contract shall be considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To this end, a construction which will render every word operative is to be preferred over that which would make some words idle and nugatory.49

In case the lessee chooses to renew the lease but there are no specified terms and conditions for the new contract of lease, the same terms and conditions as the original contract of lease shall continue to govern, as the following survey of cases in Allied Banking would show:

In Ledesma v. Javellana this Court was confronted with a similar problem. In that case the lessee was given the sole option to renew the lease, but the contract failed to specify the terms and conditions that would govern the new contract. When the lease expired, the lessee demanded an extension under the same terms and conditions. The lessor expressed conformity to the renewal of the contract but refused to accede to the claim of the lessee that the renewal should be under the same terms and conditions as the original contract. In sustaining the lessee,this Court made the following pronouncement:

x x x [i]n the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It was held that 'such a clause relates to the very contract in which it is placed, and does not permit the defendant upon the renewal of the contract in which the clause is found, to insist upondifferent terms than those embraced in the contract to be renewed'; and that 'a stipulation to renew always relates to the contract in which it is found and the rights granted thereunder, unless it expressly provides for variations in the terms of the contract to be renewed.'

The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: 'The rule is well-established that a general covenant to renew or extend a lease which makes no provision as to the terms of a renewal or extension implies a renewal or extension upon the same terms as provided in the original lease.'

In the lease contract under consideration, there is no provision to indicate that the renewal will be subject to new terms and conditions that the parties may yet agree upon. It is to renewal provisions of lease contracts of the kind presently considered that the principles stated above squarely apply. We do not agree with the contention of the appellants that if it was intended by the parties to renew the contract under the same terms and conditions stipulated in the contract of lease, such should have expressly so stated in the contract itself. The same argument could easily be interposed by the appellee who could likewise contend that if the intention was to renew the contract of lease under such new terms and conditions that the parties may agree upon, the contract should have so specified. Between the two assertions, there is more logic in the latter.

The settled rule is that in case of uncertainty as to the meaning of a provision granting extensionto a contract of lease, the tenant is the one favored and not the landlord. 'As a general rule, in construing provisions relating to renewals or extensions, where there is any uncertainty, the tenant is favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to do so; and also upon the principle that every man's grant is to be taken most strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).'50 (Emphases supplied.)

Being consistent with the foregoing principles, we sustain the interpretation of the RTC of paragraph 17 of the Contract of Lease dated May 14, 1976 between petitioner and respondent, to wit:

[Paragraph 17 of the Contract of Lease dated May 14, 1976] admits several meanings. In simpler terms, the phrase, i.e., "if desirous of continuing his lease, may be simply restated, i.e., ifhe wants to go on with his lease, considering the word `CONTINUE’ in its verb form ordinarily means – to go on in present state, or even restated in another way – if desirous of extending his lease, because the word `continue’ in its verb form also means – extend uniformly." Thus, if we are to adopt the interpretation of [petitioner] that the stipulation merely established the procedural basis for a negotiation for renewal then the aforequoted phrase would be rendered a mere surplusage, meaningless and insignificant. But if we are to prod deeper to the very context of the entire stipulations setforth in the contract and from what is obvious with respect to the intentions of the contracting parties based on their contemporaneous and subsequent acts including but not limited to the historical antecedents of the agreement then an interpretation invariably different from that of [petitioner] becomes inevitable.

Specifically, the extraneous source of the lease contract in question could be the original and renewed contract of lease by and between Salem Investment Corporation and CAA – the predecessor-in-interest of [petitioner] – executed on February 10, 1967 (Exh. "M"). Under the said lease contract between CAA and Salem, the term is for a period of twenty-five (25) years renewable for another 25 years at the option of the lessee – Salem (Exh. "Y-1"). Later, with the approval of CAA, Salem transferred its leasehold rights over a portion of the land leased to Ding Velayo Export Corporation on September 30, 1974 (Exh. "N") and in turn Velayo Export transferred its leasehold rights over a portion of the leased land transferred to it by Salem to Velayo Sports Complex, Inc. – [respondent] herein – on April 29, 1976 (Exh. "O"). Thus, on May 14, 1976, [respondent] and CAA, predecessor-in-interest of [petitioner], concluded the lease agreement in question with a term equivalent to the unexpired portion of the lease between Velayo Export and CAA.

As culled from the transfers effected prior to the May 14, 1976 agreement of [respondent] and [petitioner]’s predecessor-in-interest, the renewal of the contract was clearly at the option of the lessee. Considering that there was no evidence positively showing that [respondent] and CAA expressly intended the removal of the option for the renewal of the lease contract from the lessee, it is but logical to conclude, although the stipulation setforth in paragraph 17 appears to have been worded or couched in somewhat uncertain terms, that the parties agreed that the option should remain with the lessee. This must be so because based on the context of their agreements and bolstered by the testimony of Mr. Mariano Nocom of Salem Investment and particularly Rosila Mabanag, one of the signatory witness to the contract and a retired employee of CAA’s Legal Division the parties really intended a renewal for the same term as it was then the usual practice of CAA to have the term of leases on lands where substantial amount will be involved in the construction of the improvements to be undertaken by the lessee to give a renewal. In fact, it clearly appears that the right of renewal constitutes a part of the lessee’s interest in the land considering the multimillion investments it made relative to the construction ofthe building and facilities thereon and forms a substantial and integral part of the agreement.51 (Emphases supplied.)

In sum, the renewed contract of lease of the subject property between petitioner and respondentshall be based on the same terms and conditions as the original contract of lease. The "original contract of lease" does not pertain to the Contract of Lease dated May 14, 1976 between petitioner and respondent alone, but also to the Contract of Lease dated February 15, 1967 between petitioner (then still called CAA) and Salem, as well as the Contract of Lease dated November 26, 1974 between petitioner and Velayo Export – all three contracts being inextricablyconnected. Since the Contract of Lease between petitioner and Salem was for a term of 25 years, then the renewed contract of lease of between petitioner and respondent shall be for another term of 25 years. This construction of the renewal clause under paragraph 17 of the

Contract of Lease dated May 14, 1976 between petitioner and respondent is most consistent with the intent of the parties at the time of the execution of said Contract and most effectual in implementing the same.

In addition to challenging the exclusive right of respondent to renew the Contract of Lease over the subject property, petitioner insists on its right to refuse the renewal because of purported violations of the said Contract by respondent, particularly: (1) subleasing of the premises; (2) failure to ease the problems of parking congestion at the Domestic Airport and to provide a shopping center and sports facilities, such as an oval track and a swimming pool; and (3) failure to pay monthly lease rentals in the form of royalties equivalent to 1% of the gross income of respondent or in accordance with the rates fixed in the administrative orders of petitioner.

We find no violations by the respondent of the Contract of Lease dated May 14, 1976 as to justify the revocation or refusal to renew of said Contract by petitioner.

The RTC is once again correct in its construal that paragraph 16 of the Contract of Lease, prohibiting the subleasing of the "premises," refers only to the subject property. We stress that when the said Contract was executed on May 14, 1976, the "premises" leased by petitioner to respondent, and which respondent was not allowed to sublease, is the subject property, i.e., an idle piece of land with an area of 8,481 square meters. More importantly, being the builder of theimprovements on the subject property, said improvements are owned by respondent until their turn-over to petitioner at the end of the 25-year lease in 1992. As respondent is not leasing the improvements from petitioner, then it is not subleasing the same to third parties.

While the Contract of Lease expressly obligated respondent to build certain improvements, suchas parking, shopping mall, and sports facilities, the belated insistence by petitioner on compliance with the same appears to be a mere afterthought.

Article 1235 of the Civil Code states that "[w]hen the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with."

As aptly observed by the RTC, paragraphs 9 and 10 of the Contract of Lease likewise expressly require respondent to submit, for prior approval by petitioner, all construction plans on the subject property; and to complete the contemplated improvements thereon within a year. The Contract of Lease was executed on May 14, 1976, and the one-year period expired on May 14, 1977. Yet, petitioner did not register any protest or objection to the alleged incompleteness of or irregularity in the performance by respondent of its obligation to build and develop improvementson the subject property. In fact, upon the expiration of the original 25-year lease period in February 1992, petitioner was already ready and willing to accept and appropriate as its own theimprovements built on the subject property in 1992. Petitioner only raised the issue of the purported incompleteness/irregularity of the said improvements when it was brought to court by respondent for refusing to renew the lease.

Just as the RTC adjudged, no fault could be attributed to respondent for deficient payment of lease rentals. Lease rentals were based on either the rates fixed by AO No. 4, series of 1970, or 1% of the monthly gross income of respondent, whichever is higher. At the very beginning of thelease, respondent had been paying monthly lease rentals based on the rates fixed by AO No. 4, series of 1970, which amounted to P2,205.25 per month. When requested, respondent submitted to petitioner its gross income statements, so petitioner could very well compute the 1% royalty. However, petitioner continued to charge respondent only P2,205.25 monthly lease rental, which the latter faithfully paid.

Petitioner later demanded an increase in lease rentals based on subsequent administrative issuances raising the rates for the rental of its properties. But the RTC found that the adverted administrative orders were not published in full, thus, the same were legally invalid within the context of Article 2 of the Civil Code which provides that "[l]aws shall take effect after fifteen days following the completion of their publication in the Official Gazette, unless it is otherwise provided. x x x" In Tañada v. Tuvera,52http://sc.judiciary.gov.ph/jurisprudence/2008/april2008/173918.htm - _ftn we enunciated that publication is indispensable in order that all statutes, including administrative rules that are intended to enforce or implement existing laws, attain binding force and effect, to wit:

We hold therefore that all statutes, including those of local application and private laws, shall be published as a condition for their effectivity, which shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the President in the exercise of legislative powers whenever the same are validly delegated by the legislature or, at present, directly conferred by the Constitution. Administrative rules and regulations must also be published if their purpose is to enforce or implement existing law pursuant also to a valid delegation.53

There is no basis for the argument of petitioner that the validity of its administrative orders cannot be collaterally attacked. To the contrary, we have previously declared that a party may raise the unconstitutionality or invalidity of an administrative regulation on every occasion that said regulation is being enforced.54 Since it is petitioner which first invoked its administrative orders to justify the increase in lease rentals of respondent, then respondent may raise before the court the invalidity of said administrative orders on the ground of non-publication thereof.

Finally, petitioner cannot oppose the renewal of the lease because of estoppel. Our following disquisition in Kalalo v. Luz55 is relevant herein:

Under Article 1431 of the Civil Code, in order that estoppel may apply the person, to whom representations have been made and who claims the estoppel in his favor must have relied or acted on such representations. Said article provides:

"Art. 1431. 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."

An essential element of estoppel is that the person invoking it has been influenced and has relied on the representations or conduct of the person sought to be estopped, and this element is wanting in the instant case. In Cristobal vs. Gomez, this Court held that no estoppel based on a document can be invoked by one who has not been misled by the false statements contained therein. And in Republic of the Philippines vs. Garcia, et al.,this Court ruled that there is no estoppel when the statement or action invoked as its basis did not mislead the adverse party. Estoppel has been characterized as harsh or odious, and not favored in law. When misapplied, estoppel becomes a most effective weapon to accomplish an injustice, inasmuch as it shuts a man's mouth from speaking the truth and debars the truth in a particular case. Estoppel cannot be sustained by mere argument or doubtful inference; it must be clearly proved in all its essentialelements by clear, convincing and satisfactory evidence. No party should be precluded from making out his case according to its truth unless by force of some positive principle of law, and, consequently, estoppel in pais must be applied strictly and should not be enforced unless substantiated in every particular.1âwphi1

The essential elements of estoppel in pais may be considered in relation to the party sought to be estopped, and in relation to the party invoking the estoppel in his favor. As related to the party to be estopped, the essential elements are: (1) conduct amounting to false representation or concealment of material facts; or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation that his conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the real facts. As related to the party claiming the estoppel, the essential elements are (1) lack of knowledge and of the means of knowledge of the truth as the facts in questions; (2) reliance, in good faith, upon the conduct or statements of the party to be estopped; (3) action or inaction based thereon of such character as to change the position or status of the party claiming the estoppel, to his injury, detriment or prejudice.56 (Emphases ours.)

Indeed, Velayo’s Letters dated March 3 and 10, 1992 to petitioner may have already expressed acquiescence to the non-renewal of the lease and turn-over of the improvements on the subject property to petitioner. But not long thereafter, Alomesen, the new President of respondent, already wrote another Letter dated March 25, 1992, which revoked Velayo’s earlier Letters for having been sent without authority of the Board of Directors of respondent, insisted on the renewal of the lease, and tendered payment of past due lease rentals. Respondent, through Alomesen, timely acted to correct Velayo’s mistakes. In the 15-day interval between Velayo’s Letter dated March 10, 1992 and Alomesen’s Letter dated March 25, 1992, there is no showing that petitioner, relying in good faith on Velayo’s Letters, acted or did not act as to have caused it injury, detriment, or prejudice. There is an utter lack of clear, convincing, and satisfactory evidence on the part of petitioner, as the party claiming estoppel, of the second and third elements for the application of said principle against respondent.

WHEREFORE, the instant Petition is hereby DENIED for lack of merit. The Decision dated January 8, 2004 of the Court Appeals in CA-G.R. CV No. 68787, which affirmed the Decision dated October 29, 1999 of Branch 111 of the RTC of Pasay City in Civil Case No. 8847, is hereby AFFIRMED.

SO ORDERED.

G.R. No. 187678 April 10, 2013

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners, vs.CHINA BANKING CORPORATION, Respondent.

D E C I S I O N

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the February 20, 2009 Decision1 and April 27, 2009 Resolution2 of the Court of Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision3 of the Regional Trial Court (RTC) of Makati City, Branch 147.

The factual antecedents:

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation (respondent) as evidenced by two Promissory Notes both dated October 6, 1998 and numbered 507-001051-34and 507-001052-0,5 for the sums of !!6,216,000 and P4, 139,000, respectively. The loan was secured by a Real Estate Mortgage (REM) over petitioners’ property located at 49 Greensville St., White Plains, Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394) PR-412086 of the Register of Deeds of Quezon City.

When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of the outstanding balance with accrued monthly interests. On September 5, 2000, petitioners received respondent’s last demand letter7 dated August 29, 2000.

As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776.63 representing the principal, interests, penalties and attorney’s fees. On the same day, the mortgaged property was sold at public auction, with respondent as highest bidder for the amountof P10,300,000.

On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent for the payment ofP8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to the mortgage debt. As its demand remained unheeded, respondent filed a collection suit in the trial court. In its Complaint,10respondent prayed that judgment be rendered ordering the petitioners to pay jointly and severally: (1)P8,901,776.63 representing the amount of deficiency, plus interests at the legal rate, from February 23, 2001 until fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; (3) an amount equivalent to 10% of the foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs of suit.

In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of specialand affirmative defense, that the complaint states no cause of action considering that the principal of the loan was already paid when the mortgaged property was extrajudicially foreclosed and sold for P10,300,000. Petitioners contended that should they be held liable for any deficiency, it should be only for P55,000 representing the difference between the total outstanding obligation of P10,355,000 and the bid price of P10,300,000. Petitioners also argued that even assuming there is a cause of action, such deficiency cannot be enforced by respondent because it consists only of the penalty and/or compounded interest on the accrued interest which is generally not favored under the Civil Code. By way of counterclaim, petitioners prayed that respondent be ordered to pay P100,000 in attorney’s fees and costs of suit.

At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. She testified that she handled the account of petitioners and assisted them in processing their loan application. She called them monthly to inform them of the prevailing rates to be used in computing interest due on their loan. As of the date of the public auction, petitioners’ outstanding balance was P19,201,776.6312 based on the following statement of account which she prepared:

STATEMENT OF ACCOUNTAs of FEBRUARY 23, 2001

IGNACIO F. JUICO

PN# 507-0010520 due on 04-07-2004

1âwphi1

Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00

Interest on P4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96

Interest on P4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99

Interest on P4,139,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27

Interest on P4,139,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64

Interest on P4,139,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86

Penalty charge @ 1/10 of 1% of the total amount due(P4,139,000.00 from 11-04-99 to 02-23-2001 @1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73

PN# 507-0010513 due on 04-07-2004Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00

Interest on P6,216,000.00 fr. 06-Oct-9904-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62

Interest on P6,216,000.00 fr. 04-Nov-200004-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51

Interest on P6,216,000.00 fr. 04-Dec-200004-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86

Interest on P6,216,000.00 fr. 04-Jan-200104-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18

Interest on P6,216,000.00 fr. 04-Feb-200123-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07

Penalty charge @ 1/10 of 1% of the total amount due(P6,216,000.00 from 10-06-99 to 02-23-2001 @1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39) 17,456,160.57

Add: 10% Attorney’s Fee 1,745,616.06

Total amount due 19,201,776.63

Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OFFEB. 23, 2001 8,901,776.63 13

Petitioners thereafter received a demand letter14 dated May 2, 2001 from respondent’s counsel for the deficiency amount of P8,901,776.63. Ms. Yu further testified that based on the Statementof Account15 dated March 15, 2002 which she prepared, the outstanding balance of petitioners was P15,190,961.48.16

On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the prevailing market rate and she notified petitioners of the prevailing rate by calling them monthly before their account becomes past due. When asked if there was any written authority from petitioners for respondent to increase the interest rate unilaterally, she answered that petitioners signed a promissory note indicating that they agreed to pay interest at the prevailing rate.17

Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign ablank promissory note and was informed that the interest rate on the loan will be based on prevailing market rates. Every month, respondent informs him by telephone of the prevailing interest rate. At first, he was able to pay his monthly amortizations but when he started to incur delay in his payments due to the financial crisis, respondent pressured him to pay in full, including charges and interests for the delay. His property was eventually foreclosed and was sold at public auction.18

On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the business of distributing medical supplies. He admitted having read the promissory notes andthat he is aware of his obligation under them before he signed the same.19

In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:

WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is rendered ordering herein defendants to pay jointly and severally to plaintiff, the following:

1. P8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus interest thereon at the legal rate after February 23, 2001;

2. An amount equivalent to 10% of the total amount due as and for attorney’s fees, there being stipulation therefor in the promissory notes;

3. Costs of suit.

SO ORDERED.20

The trial court agreed with respondent that when the mortgaged property was sold at public auction on February 23, 2001 for P10,300,000 there remained a balance of P8,901,776.63 sincebefore foreclosure, the total amount due on the two promissory notes aggregated to P19,201,776.63 inclusive of principal, interests, penalties and attorney’s fees. It ruled that the amount realized at the auction sale was applied to the interest, conformably with Article 1253 of the Civil Code which provides that if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. This being the case, petitioners’ principal obligation subsists but at a reduced amount of P8,901,776.63.

The trial court further held that Ignacio’s claim that he signed the promissory notes in blank cannot negate or mitigate his liability since he admitted reading the promissory notes before signing them. It also ruled that considering the substantial amount involved, it is unbelievable that petitioners threw all caution to the wind and simply signed the documents without reading and understanding the contents thereof. It noted that the promissory notes, including the terms and conditions, are pro forma and what appears to have been left in blank were the promissory note number, date of the instrument, due date, amount of loan, and condition that interest will beat the prevailing rates. All of these details, the trial court added, were within the knowledge of thepetitioners.

When the case was elevated to the CA, the latter affirmed the trial court’s decision. The CA recognized respondent’s right to claim the deficiency from the debtor where the proceeds of the sale in an extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt. Also, it found as valid the stipulation in the promissory notes that interest will be based on the prevailing rate. It noted that the parties agreed on the interest rate which was not unilaterally imposed by the bank but was the rate offered daily by all commercial banks as approved by the Monetary Board. Having signed the promissory notes, the CA ruled that petitioners are bound bythe stipulations contained therein.

Petitioners are now before this Court raising the sole issue of whether the interest rates imposedupon them by respondent are valid. Petitioners contend that the interest rates imposed by respondent are not valid as they were not by virtue of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation that was passed by an appropriate government entity. They insist that the interest rates were unilaterally imposed by the bank and thus violate the principle of mutuality of contracts. They argue that the escalation clause in the promissory notes does notgive respondent the unbridled authority to increase the interest rate unilaterally. Any change must be mutually agreed upon.

Respondent, for its part, points out that petitioners failed to show that their case falls under any of the exceptions wherein findings of fact of the CA may be reviewed by this Court. It contends that an inquiry as to whether the interest rates imposed on the loans of petitioners were supported by appropriate regulations from a government agency or the Central Bank requires a reevaluation of the evidence on records. Thus, the Court would in effect, be confronted with a factual and not a legal issue.

The appeal is partly meritorious.

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless it has been expressly stipulated in writing."

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contractwhich is left solely to the will of one of the parties, is likewise, invalid.21

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts.22 Hence, such stipulations are not void per se.23

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of contracts.24 Thus, this Court has previously nullified the unilateral determination and imposition by creditor banks of increases in the rate of interest provided in loan contracts.25

In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the escalation clause stated: "I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan." While escalation clauses in general are considered valid, we ruled that Banco Filipino may not increase the interest on respondent borrower’s loan, pursuant to Circular No. 494 issued by the Monetary Board on January 2, 1976, because said circular is not a law although it has the force and effect of law and the escalation clause has no provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board" (de-escalation clause).

Subsequently, in Insular Bank of Asia and America v. Spouses Salazar27 we reiterated that escalation clauses are valid stipulations but their enforceability are subject to certain conditions. The increase of interest rate from 19% to 21% per annum made by petitioner bank was disallowed because it did not comply with the guidelines adopted by the Monetary Board to govern interest rate adjustments by banks and non-banks performing quasi-banking functions.

In the 1991 case of Philippine National Bank v. Court of Appeals,28 the promissory notes authorized PNB to increase the stipulated interest per annum "within the limits allowed by law at any time depending on whatever policy PNB may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." This Court declared the increases (from 18% to 32%, then to 41% and then to 48%) unilaterally imposed by PNB to be in violation of the principle of mutuality essential in contracts.29

A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement provided that "PNB reserves the right to increase the interest rate within the limits allowed by lawat any time depending on whatever policy it may adopt in the future: Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board x x x".

Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated interest rate at any time without notice, within the limits allowed by law. The Court observed that there was no attempt made by PNB to secure the conformity of respondent borrower to the successive increases in the interest rate. The borrower’s assent to the increases cannot be implied from their lack of response to the letters sent by PNB, informing them of the increases.31

In the more recent case of Philippine Savings Bank v. Castillo,32 we sustained the CA in declaring as unreasonable the following escalation clause: "The rate of interest and/or bank charges herein stipulated, during the terms of this promissory note, its extensions, renewals or other modifications, may be increased, decreased or otherwise changed from time to time withinthe rate of interest and charges allowed under present or future law(s) and/or government regulation(s) as the PSBank may prescribe for its debtors." Clearly, the increase or decrease of interest rates under such clause hinges solely on the discretion of petitioner as it does not require the conformity of the maker before a new interest rate could be enforced. We also said that respondents’ assent to the modifications in the interest rates cannot be implied from their lack of response to the memos sent by petitioner, informing them of the amendments, nor from the letters requesting for reduction of the rates. Thus:

… the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust interest rates. The adjustment should have still been subjected to the mutual agreement of the contracting parties. In light of the absence of consent on the part of respondents to the modifications in the interest rates, the adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation clause in the loan agreement.33

It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly would completely take away from the debtors the right to assent to an important modification in their agreement and would also negate the element of mutuality in their contracts.34 While a ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to raise interest rates to levels whichwill either enslave their borrowers or lead to a hemorrhaging of their assets."35

The two promissory notes signed by petitioners provide:

I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the interest rate/service charge presently stipulated in this note without any advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or appropriate government entities, increasing or decreasing such interest rate or service charge.36

Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank and Trust Company37 where this Court ruled:

The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the rate of interest and/or bank charges "without advance notice" to petitioner, "in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines," does not give respondent bank unrestrained freedom to charge any rate other than that which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone.It violates the essence of mutuality of the contract.38

More recently in Solidbank Corporation v. Permanent Homes, Incorporated,39 we upheld as validan escalation clause which required a written notice to and conformity by the borrower to the increased interest rate. Thus:

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account. Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing.

The three promissory notes between Solidbank and Permanent all contain the following provisions:

"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if nodate is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due underthis Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment."

The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and "adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent," emphasize that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates. (Emphasis supplied.)

In this case, the trial and appellate courts, in upholding the validity of the escalation clause, underscored the fact that there was actually no fixed rate of interest stipulated in the promissory notes as this was made dependent on prevailing rates in the market. The subject promissory notes contained the following condition written after the first paragraph:

With one year grace period on principal and thereafter payable in 54 equal monthly instalments to start on the second year. Interest at the prevailing rates payable quarterly in arrears.40

In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate courts in ruling for the validity of the escalation clause in the Cardholder’s Agreement. On petitioner’s contention that the interest rate was unilaterally imposed and based on the standards and rate formulated solely by respondent credit card company, we held:

The contractual provision in question states that "if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder." This could not be considered an

escalation clause for the reason that it neither states an increase nor a decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market rate.

Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholderhereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates x x x" is an escalation clause. However, it cannot be said to be dependent solely on the will of private respondent as it is also dependent on the prevailing market rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not solelypotestative but based on reasonable and valid grounds. Obviously, the fluctuation in the market rates is beyond the control of private respondent.42 (Emphasis supplied.)

In interpreting a contract, its provisions should not be read in isolation but in relation to each other and in their entirety so as to render them effective, having in mind the intention of the parties and the purpose to be achieved. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of themtaken jointly.43

Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rateof interest on the basis of a law or regulation issued by the Central Bank of the Philippines, should be read together with the statement after the first paragraph where no rate of interest was fixed as it would be based on prevailing market rates. While the latter is not strictly an escalation clause, its clear import was that interest rates would vary as determined by prevailing market rates. Evidently, the parties intended the interest on petitioners’ loan, including any upward or downward adjustment, to be determined by the prevailing market rates and not dictated by respondent’s policy. It may also be mentioned that since the deregulation of bank rates in 1983, the Central Bank has shifted to a market-oriented interest rate policy.44

There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business, admitted having understood his obligations before signing them. At no time did petitioners protest the new rates imposed on their loan even when their property was foreclosed by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants respondentthe power to impose an increased rate of interest without a written notice to petitioners and their written consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. A detailed billing statement based on the new imposed interest with corresponding computation of the total debt should have been provided bythe respondent to enable petitioners to make an informed decision. An appropriate form must also be signed by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties’ essential equality.45

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an agreement between the parties. Unless such important change in the contract terms is mutually agreed upon, it has no binding effect.46 In the absence of consent on the part of the

petitioners to the modifications in the interest rates, the adjusted rates cannot bind them. Hence,we consider as invalid the interest rates in excess of 15%, the rate charged for the first year.

Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal obligationunder the two promissory notes which they failed to settle is P10,355,000. However, due to China Bank’s unilateral increases in the interest rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for the period November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to P19,201,776.63. Note that the original amount of principal loan almost doubled in only 16 months. The Court also finds the penalty charges imposed excessive and arbitrary, hence the same is hereby reduced to 1% per month or 12% per annum.1âwphi1

Petitioners’ Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings, should thus be modified as follows:

Principal P10,355,000.00

Interest at 15% per annumP10,355,000 x .15 x 477 days/365 days 2,029,863.70

Penalty at 12% per annum 1,623 ,890. 96

P10,355,000 x .12 x 477days/365 days

Sub-Total 14,008,754.66

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39)

13,692,605.27

Add: Attorney's Fees 1,369,260.53

Total Amount Due 15,061,865.79

Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT 4,761,865.79

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20, 2009 · Decision and April 27, 2009 Resolution of the Court of Appeals in CA G.R. CV No. 80338are hereby MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay jointly and severally respondent China Banking Corporation P4, 7 61 ,865. 79representing the amount of deficiency inclusive of interest, penalty charge and attorney's fees. Said amount shall bear interest at 12% per annum, reckoned from the time of the filing of the complaint until its full satisfaction.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 174433 February 24, 2014

PHILIPPINE NATIONAL BANK, Petitioner, vs.SPOUSES ENRIQUE MANALO & ROSALINDA JACINTO, ARNOLD J. MANALO, ARNEL J. MANALO, and ARMA J. MANALO, Respondents.

D E C I S I O N

BERSAMIN, J.:

Although banks are free to determine the rate of interest they could impose on their borrowers, they can do so only reasonably, not arbitrarily. They may not take advantage of the ordinary borrowers' lack of familiarity with banking procedures and jargon. Hence, any stipulation on interest unilaterally imposed and increased by them shall be struck down as violative of the principle of mutuality of contracts.

Antecedents

Respondent Spouses Enrique Manalo and Rosalinda Jacinto (Spouses Manalo) applied for an All-Purpose Credit Facility in the amount of P1,000,000.00 with Philippine National Bank (PNB) to finance the construction of their house. After PNB granted their application, they executed a Real Estate Mortgage on November 3, 1993 in favor of PNB over their property covered by Transfer Certificate of Title No. S- 23191 as security for the loan.1 The credit facility was renewed and increased several times over the years. On September 20, 1996, the credit facility was again renewed for P7,000,000.00. As a consequence, the parties executed a Supplement to and Amendment of Existing Real Estate Mortgage whereby the property covered by TCT No. 171859 was added as security for the loan.

The additional security was registered in the names of respondents Arnold, Arnel, Anthony, and Arma, all surnamed Manalo, who were their children.2

It was agreed upon that the Spouses Manalo would make monthly payments on the interest. However, PNB claimed that their last recorded payment was made on December, 1997. Thus, PNB sent a demand letter to them on their overdue account and required them to settle the account. PNB sent another demand letter because they failed to heed the first demand.3

After the Spouses Manalo still failed to settle their unpaid account despite the two demand letters, PNB foreclose the mortgage. During the foreclosure sale, PNB was the highest bidder for P15,127,000.00 of the mortgaged properties of the Spouses Manalo. The sheriff issued to PNB the Certificate of Sale dated November 13, 2000.4

After more than a year after the Certificate of Sale had been issued to PNB, the Spouses Manalo instituted this action for the nullification of the foreclosure proceedings and damages. They alleged that they had obtained a loan for P1,000,000.00 from a certain Benito Tan upon arrangements made by Antoninus Yuvienco, then the General Manager of PNB’s Bangkal Branch where they had transacted; that they had been made to understand and had been assured that the P1,000,000.00 would be used to update their account, and that their loan wouldbe restructured and converted into a long-term loan;5 that they had been surprised to learn, therefore, that had been declared in default of their obligations, and that the mortgage on their property had been foreclosed and their property had been sold; and that PNB did not comply with Section 3 of Act No. 3135, as amended.6

PNB and Antoninus Yuvienco countered that the P1,000,000.00 loan obtained by the Spouses Manalo from Benito Tan had been credited to their account; that they did not make any assurances on the restructuring and conversion of the Spouses Manalo’s loan into a long-term one;7 that PNB’s right to foreclose the mortgage had been clear especially because the SpousesManalo had not assailed the validity of the loans and of the mortgage; and that the Spouses Manalo did not allege having fully paid their indebtedness.8

Ruling ofthe RTC

After trial, the RTC rendered its decision in favor of PNB, holding thusly:

In resolving this present case, one of the most significant matters the court has noted is that while during the pre-trial held on 8 September 2003, plaintiff-spouses Manalo with the assistance counsel had agreed to stipulate that defendants had the right to foreclose upon the subject properties and that the plaintiffs[‘] main thrust was to prove that the foreclosure proceedings were invalid, in the course of the presentation of their evidence, they modified their position and claimed [that] the loan document executed were contracts of adhesion which were null and void because they were prepared entirely under the defendant bank’s supervision. Theyalso questioned the interest rates and penalty charges imposed arguing that these were iniquitous, unconscionable and therefore likewise void.

Not having raised the foregoing matters as issues during the pre-trial, plaintiff-spouses are presumably estopped from allowing these matters to serve as part of their evidence, more so because at the pre-trial they expressly recognized the defendant bank’s right to foreclose upon the subject property (See Order, pp. 193-195).

However, considering that the defendant bank did not interpose any objection to these matters being made part of plaintiff’s evidence so much so that their memorandum contained discussions rebutting plaintiff spouses arguments on these issues, the court must necessarily include these matters in the resolution of the present case.9

The RTC held, however, that the Spouses Manalo’s "contract of adhesion" argument was unfounded because they had still accepted the terms and conditions of their credit agreement with PNB and had exerted efforts to pay their obligation;10 that the Spouses Manalo were now estopped from questioning the interest rates unilaterally imposed by PNB because they had paidat those rates for three years without protest;11 and that their allegation about PNB violating the notice and publication requirements during the foreclosure proceedings was untenable because personal notice to the mortgagee was not required under Act No. 3135.12

The Spouses Manalo appealed to the CA by assigning a singular error, as follows:

THE COURT A QUO SERIOUSLY ERRED IN DISMISSING PLAINTIFF-APPELLANTS’ COMPLAINT FOR BEING (sic) LACK OF MERIT NOTWITHSTANDING THE FACT THAT IT WAS CLEARLY SHOWN THAT THE FORECLOSURE PROCEEDINGS WAS INVALID AND ILLEGAL.13

The Spouses Manalo reiterated their arguments, insisting that: (1) the credit agreements they entered into with PNB were contracts of adhesion;14 (2) no interest was due from them because their credit agreements with PNB did not specify the interest rate, and PNB could not unilaterallyincrease the interest rate without first informing them;15 and (3) PNB did not comply with the notice and publication requirements under Section 3 of Act 3135.16On the other hand, PNB and Yuvienco did not file their briefs despite notice.17

Ruling ofthe CA

In its decision promulgated on March 28, 2006,18 the CA affirmed the decision of the RTC insofaras it upheld the validity of the foreclosure proceedings initiated by PNB, but modified the Spouses Manalo’s liability for interest. It directed the RTC to see to the recomputation of their indebtedness, and ordered that should the recomputed amount be less than the winning bid in the foreclosure sale, the difference should be immediately returned to the Spouses Manalo.

The CA found it necessary to pass upon the issues of PNB’s failure to specify the applicable interest and the lack of mutuality in the execution of the credit agreements considering the earlier cited observation made by the trial court in its decision. Applying Article 1956 of the Civil Code, the CA held that PNB’s failure to indicate the rate of interest in the credit agreements would not excuse the Spouses Manalo from their contractual obligation to pay interest to PNB because of the express agreement to pay interest in the credit agreements. Nevertheless, the CA ruled that PNB’s inadvertence to specify the interest rate should be construed against it because the credit agreements were clearly contracts of adhesion due to their having been prepared solely by PNB.

The CA further held that PNB could not unilaterally increase the rate of interest considering that the credit agreements specifically provided that prior notice was required before an increase in interest rate could be effected. It found that PNB did not adduce proof showing that the SpousesManalo had been notified before the increased interest rates were imposed; and that PNB’s unilateral imposition of the increased interest rate was null and void for being violative of the principle of mutuality of contracts enshrined in Article 1308 of the Civil Code. Reinforcing its "contract of adhesion" conclusion, it added that the Spouses Manalo’s being in dire need of money rendered them to be not on an equal footing with PNB. Consequently, the CA, relying on Eastern Shipping Lines, v. Court of Appeals,19 fixed the interest rate to be paid by the Spouses Manalo at 12% per annum, computed from their default.

The CA deemed to be untenable the Spouses Manalo’s allegation that PNB had failed to complywith the requirements for notice and posting under Section 3 of Act 3135. The CA stated that Sheriff Norberto Magsajo’s testimony was sufficient proof of his posting of the required Notice of Sheriff’s Sale in three public places; that the notarized Affidavit of Publication presented by Sheriff Magsajo was prima facie proof of the publication of the notice; and that the Affidavit of Publication enjoyed the presumption of regularity, such that the Spouses Manalo’s bare allegation of non-publication without other proof did not overcome the presumption.

On August 29, 2006, the CA denied the Spouses Manalo’s Motion for Reconsideration and PNB’s Partial Motion for Reconsideration.20

Issues

In its Memorandum,21 PNB raises the following issues:

I

WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN NULLIFYING THE INTEREST RATES IMPOSED ON RESPONDENT SPOUSES’ LOAN AND IN FIXING THE SAME AT TWELVE PERCENT (12%) FROM DEFAULT, DESPITE THE FACT THAT (i) THE SAME WAS RAISED BY THE RESPONDENTS ONLY FOR THE FIRST TIME ON APPEAL (ii) IT WAS NEVER PART OF THEIR COMPLAINT (iii) WAS EXLUDED AS AN ISSUE DURING PRE-TRIAL, AND WORSE, (iv) THERE WAS NO FORMALLY OFFERED PERTAINING TO THE SAME DURING TRIAL.

II

WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT THERE WAS NO MUTUALITY OF CONSENT IN THE IMPOSITION OF INTEREST RATES ON THE RESPONDENT SPOUSES’ LOAN DESPITE THE EXISTENCE OF FACTS AND CIRCUMSTANCES CLEARLY SHOWING RESPONDENTS’ ASSENT TO THE RATES OF INTEREST SO IMPOSED BY PNB ON THE LOAN.

Anent the first issue, PNB argues that by passing upon the issue of the validity of the interest rates, and in nullifying the rates imposed on the Spouses Manalo, the CA decided the case in a manner not in accord with Section 15, Rule 44 of the Rules of Court, which states that only questions of law or fact raised in the trial court could be assigned as errors on appeal; that to allow the Spouses Manalo to raise an issue for the first time on appeal would "offend the basic rules of fair play, justice and due process;"22 that the resolution of the CA was limited to the issues agreed upon by the parties during pre-trial;23 that the CA erred in passing upon the validity of the interest rates inasmuch as the Spouses Manalo did not present evidence thereon; and that the Judicial Affidavit of Enrique Manalo, on which the CA relied for its finding, was not offered to prove the invalidity of the interest rates and was, therefore, inadmissible for that purpose.24

As to the substantive issues, PNB claims that the Spouses Manalo’s continuous payment of interest without protest indicated their assent to the interest rates imposed, as well as to the subsequent increases of the rates; and that the CA erred in declaring that the interest rates and subsequent increases were invalid for lack of mutuality between the contracting parties.

Ruling

The appeal lacks merit.

1.Procedural Issue

Contrary to PNB’s argument, the validity of the interest rates and of the increases, and on the lack of mutuality between the parties were not raised by the Spouses Manalo’s for the first time on appeal. Rather, the issues were impliedly raised during the trial itself, and PNB’s lack of vigilance in voicing out a timely objection made that possible.

It appears that Enrique Manalo’s Judicial Affidavit introduced the issues of the validity of the interest rates and the increases, and the lack of mutuality between the parties in the following manner, to wit:

5. True to his words, defendant Yuvienco, after several days, sent us a document through a personnel of defendant PNB, Bangkal, Makati City Branch, who required meand my wife to affix our signature on the said document;

6. When the document was handed over me, I was able to know that it was a Promissory Note which was in ready made form and prepared solely by the defendantPNB;

x x x x

21. As above-noted, the rates of interest imposed by the defendant bank were never the subject of any stipulation between us mortgagors and the defendant PNB as mortgagee;

22. The truth of the matter is that defendant bank imposed rate of interest which ranges from 19% to as high as 28% and which changes from time to time;

23. The irregularity, much less the invalidity of the imposition of iniquitous rates of interest was aggravated by the fact that we were not informed, notified, nor the same had our prior consent and acquiescence therefor. x x x25

PNB cross-examined Enrique Manalo upon his Judicial Affidavit. There is no showing that PNB raised any objection in the course of the cross examination.26 Consequently, the RTC rightly passed upon such issues in deciding the case, and its having done so was in total accord with Section 5, Rule 10 of the Rules of Court, which states:

Section 5. Amendment to conform to or authorize presentation of evidence. – When issues not raised by the pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action and the ends of substantial justice will be subserved thereby. The court may grant a continuance to enable the amendment to be made.

In Bernardo Sr. v. Court of Appeals,27 we held that:

It is settled that even if the complaint be defective, but the parties go to trial thereon, and the plaintiff, without objection, introduces sufficient evidence to constitute the particular cause of action which it intended to allege in the original complaint, and the defendant voluntarily produces witnesses to meet the cause of action thus established, an issue is joined as fully and as effectively as if it had been previously joined by the most perfect pleadings. Likewise, 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.

The RTC did not need to direct the amendment of the complaint by the Spouses Manalo. Section 5, Rule 10 of the Rules of Court specifically declares that the "failure to amend does not affect the result of the trial of these issues." According to Talisay-Silay Milling Co., Inc. v. Asociacion de Agricultores de Talisay-Silay, Inc.:28

The failure of a party to amend a pleading to conform to the evidence adduced during trial does not preclude an adjudication by the court on the basis of such evidence which may embody new issues not raised in the pleadings, or serve as a basis for a higher award of damages. Although the pleading may not have been amended to conform to the evidence submitted during trial, judgment may nonetheless be rendered, not simply on the basis of the issues alleged but also on the basis of issues discussed and the assertions of fact proved in the course of trial.1âwphi1 The court may treat the pleading as if it had been amended to conform to the evidence, although it had not been actually so amended. Former Chief Justice Moran put the matter in this way:

When evidence is presented by one party, with the expressed or implied consent of the adverse party, as to issues not alleged in the pleadings, judgment may be rendered validly as regards

those issues, which shall be considered as if they have been raised in the pleadings. There is implied, consent to the evidence thus presented when the adverse party fails to object thereto." (Emphasis supplied)

Clearly, a court may rule and render judgment on the basis of the evidence before it even though the relevant pleading had not been previously amended, so long as no surprise or prejudice is thereby caused to the adverse party. Put a little differently, so long as the basic requirements of fair play had been met, as where litigants were given full opportunity to support their respective contentions and to object to or refute each other's evidence, the court may validly treat the pleadings as if they had been amended to conform to the evidence and proceed to adjudicate on the basis of all the evidence before it.

There is also no merit in PNB’s contention that the CA should not have considered and ruled on the issue of the validity of the interest rates because the Judicial Affidavit of Enrique Manalo hadnot been offered to prove the same but only "for the purpose of identifying his affidavit."29 As such, the affidavit was inadmissible to prove the nullity of the interest rates.

We do not agree.

Section 5, Rule 10 of the Rules of Court is applicable in two situations.1âwphi1 The first is when evidence is introduced on an issue not alleged in the pleadings and no objection is interposed bythe adverse party. The second is when evidence is offered on an issue not alleged in the pleadings but an objection is raised against the offer.30 This case comes under the first situation. Enrique Manalo’s Judicial Affidavit would introduce the very issues that PNB is now assailing. The question of whether the evidence on such issues was admissible to prove the nullity of the interest rates is an entirely different matter. The RTC accorded credence to PNB’s evidence showing that the Spouses Manalo had been paying the interest imposed upon them without protest. On the other hand, the CA’s nullification of the interest rates was based on the credit agreements that the Spouses Manalo and PNB had themselves submitted.

Based on the foregoing, the validity of the interest rates and their increases, and the lack of mutuality between the parties were issues validly raised in the RTC, giving the Spouses Manalo every right to raise them in their appeal to the CA. PNB’s contention was based on its wrong appreciation of what transpired during the trial. It is also interesting to note that PNB did not itselfassail the RTC’s ruling on the issues obviously because the RTC had decided in its favor. In fact, PNB did not even submit its appellee’s brief despite notice from the CA.

2.Substantive Issue

The credit agreement executed succinctly stipulated that the loan would be subjected to interest at a rate "determined by the Bank to be its prime rate plus applicable spread, prevailing at the current month."31 This stipulation was carried over to or adopted by the subsequent renewals of the credit agreement. PNB thereby arrogated unto itself the sole prerogative to determine and increase the interest rates imposed on the Spouses Manalo. Such a unilateral determination of the interest rates contravened the principle of mutuality of contracts embodied in Article 1308 of the Civil Code.32

The Court has declared that a contract where there is no mutuality between the parties partakes of the nature of a contract of adhesion,33 and any obscurity will be construed against the party who prepared the contract, the latter being presumed the stronger party to the agreement, and who caused the obscurity.34 PNB should then suffer the consequences of its failure to specifically indicate the rates of interest in the credit agreement. We spoke clearly on this in Philippine Savings Bank v. Castillo,35 to wit:

The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of contracts under Article 1308 of the Civil Code, which provides that ‘[t]he contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.’ A perusal of the Promissory Note will readily show that the increase or decrease of interest rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker before a new interest rate could be enforced. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is likewise invalid. (Emphasis supplied)

PNB could not also justify the increases it had effected on the interest rates by citing the fact thatthe Spouses Manalo had paid the interests without protest, and had renewed the loan several times. We rule that the CA, citing Philippine National Bank v. Court of Appeals,36 rightly concluded that "a borrower is not estopped from assailing the unilateral increase in the interest made by the lender since no one who receives a proposal to change a contract, to which he is a party, is obliged to answer the same and said party’s silence cannot be construed as an acceptance thereof."37

Lastly, the CA observed, and properly so, that the credit agreements had explicitly provided that prior notice would be necessary before PNB could increase the interest rates. In failing to notify the Spouses Manalo before imposing the increased rates of interest, therefore, PNB violated thestipulations of the very contract that it had prepared. Hence, the varying interest rates imposed by PNB have to be vacated and declared null and void, and in their place an interest rate of 12%per annum computed from their default is fixed pursuant to the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.38

The CA’s directive to PNB (a) to recompute the Spouses Manalo’s indebtedness under the oversight of the RTC; and (b) to refund to them any excess of the winning bid submitted during the foreclosure sale over their recomputed indebtedness was warranted and equitable. Equally warranted and equitable was to make the amount to be refunded, if any, bear legal interest, to be reckoned from the promulgation of the CA’s decision on March 28, 2006.39 Indeed, the Court said in Eastern Shipping Lines, Inc. v. Court of Appeals40 that interest should be computed from the time of the judicial or extrajudicial demand. However, this case presents a peculiar situation, the peculiarity being that the Spouses Manalo did not demand interest either judicially or extrajudicially. In the RTC, they specifically sought as the main reliefs the nullification of the foreclosure proceedings brought by PNB, accounting of the payments they had made to PNB, and the conversion of their loan into a long term one.41In its judgment, the RTC even upheld the validity of the interest rates imposed by PNB.42 In their appellant’s brief, the Spouses Manalo again sought the nullification of the foreclosure proceedings as the main relief.43 It is evident, therefore, that the Spouses Manalo made no judicial or extrajudicial demand from which to reckon the interest on any amount to be refunded to them. Such demand could only be reckoned from the promulgation of the CA’s decision because it was there that the right to the refund was first judicially recognized. Nevertheless, pursuant to Eastern Shipping Lines, Inc. v. Court of Appeals,44 the amount to be refunded and the interest thereon should earn interest to be computed from the finality of the judgment until the full refund has been made.

Anent the correct rates of interest to be applied on the amount to be refunded by PNB, the Court, in Nacar v. Gallery Frames45 and S.C. Megaworld Construction v. Parada,46 already applied Monetary Board Circular No. 799 by reducing the interest rates allowed in judgments from 12% per annum to 6% per annum.47 According to Nacar v. Gallery Frames, MB Circular No.799 is applied prospectively, and judgments that became final and executory prior to its effectivity on July 1, 2013 are not to be disturbed but continue to be implemented applying the old legal rate of 12% per annum. Hence, the old legal rate of 12% per annum applied to judgments becoming final and executory prior to July 1, 2013, but the new rate of 6% per annumapplies to judgments becoming final and executory after said dater.

Conformably with Nacar v. Gallery Frames and S.C. Megaworld Construction v. Parada, therefore, the proper interest rates to be imposed in the present case are as follows:

1. Any amount to be refunded to the Spouses Manalo shall bear interest of 12% per annum computed from March 28, 2006, the date of the promulgation of the CA decision, until June 30, 2013; and 6% per annum computed from July 1, 2013 until finality of this decision; and

2. The amount to be refunded and its accrued interest shall earn interest of 6% per annum until full refund.

WHEREFORE, the Court AFFIRMS the decision promulgated by the Court of Appeals on March 28, 2006 in CA-G.R. CV No. 84396, subject to the MODIFICATION that any amount to be refunded to the respondents shall bear interest of 12% per annum computed from March 28, 2006 until June 30, 2013, and 6% per annum computed from July 1, 2013 until finality hereof; that the amount to be refunded and its accrued interest shall earn interest at 6o/o per annum until full refund; and DIRECTS the petitioner to pay the costs of suit.

SO ORDERED.

G.R. No. 122947 July 22, 1999

TIMOTEO BALUYOT, JAIME BENITO, BENIGNO EUGENIO, ROLANDO GONZALES, FORTUNATO FULGENCIO and CRUZ-NA-LIGAS HOMESITE ASSOCIATION, INC., petitioners, vs.THE HONORABLE COURT OF APPEALS, THE QUEZON CITY GOVERNMENT and UNIVERSITY OF THE PHILIPPINES, respondents.

This is a petition for review of the decision of the Court of Appeals, dated November 24, 1995, setting aside an order of the Regional Trial Court of Quezon City, Branch 89, and dismissing the complaint filed by petitioners against private respondents University of the Philippines and the Quezon City government.

The facts are as follows:

Petitioners Timoteo Baluyot, Jaime Benito, Benigno Eugenio, Rolando Gonzales, and Fortunato Fulgencio are residents of Barangay Cruz-na-Ligas, 1 Diliman, Quezon City. The Cruz-na-Ligas Homesite Association, Inc. is a non-stock corporation of which petitioners and other residents of Barangay Cruz-na-Ligas are members. On March 13, 1992, petitioners filed a complaint for specific performance and damages against, private respondent University of the Philippines before the Regional Trial Court of Quezon City, docketed as Civil Case No. 4-92-11663. The complaint was later on amended to include private respondent Quezon City government as defendant. As amended, the complaint alleges: 2

5. That plaintiffs and their ascendants have been in open, peaceful, adverseand continuous possession in the concept of an owner since memory can no longer recall of that parcel of riceland known [as] Sitio Libis, Barrio Cruz-na-Ligas, Quezon City (now Diliman, Quezon City), as delineated in the Plan herein attached as Annex "B" while the members of the plaintiff Association and their ascendants have possessed since time immemorial openly, adversely, continuously and also in the concept of an owner, the rest of the area embraced by and within the Barrio Cruz-na-Ligas, Diliman, Quezon City as shown in that Plan herein attached as Annex "C" in all consisting of at least forty (42) hectares;

6. That since October 1972, the claims of the plaintiffs and/or members of plaintiff Association have been the subject of quasi-judicial proceedings and administrative investigations in the different branches of the government penultimately resulting in the issuance of that Indorsement dated May 7, 1975 by the Bureau of Lands, a copy of which is made an integral pan of Annex "D", and ultimately, in the issuance of the Indorsement of February 12, 1985, by the office of the President of the Republic of the Philippines, a copy of which is herein attached as Annex "E" confirming the rights of the bonafide residents of Barrio Cruz-na-Ligas to the parcel of land they have been possessing or occupying as originally found and recommended in that Brief dated November 2, 1972 and Recommendation dated November 7, 1972, copies of which are made integral parts hereof as Annexes "F" and "G";

7. That defendant UP, pursuant to the said Indorsement (Annex E) from the Office of the President of the Republic of the Philippines, issued that Reply Indorsement dated September 19, 1984, a copy of which is herein attached as Annex "H", pertinent portion of which is quoted as follows:

2. In 1979, the U.P. Board of Regents approved the donation of about 9.2 hectares of the site, directly to theresidents of Brgy. Krus Na Ligas. After several negotiations with the residents, the area was increased to 15.8 hectares (158,379 square meters); (emphasis supplied).1âwphi1.nêt

3. Notwithstanding the willingness of U.P. to proceed with the donation, Execution of the legal instrument to formalize it failed because of the unreasonable demandof the residents for an area bigger than 15.8 hectares.

8. That upon advise of counsel and close study of the said offer of defendant UP to Donate 15.8379 hectares, plaintiff Association proposed to accept and the defendant UP manifested in writing [its] consent to the intended donation directly to the plaintiff Association for the benefit of the bonafide residents of Barrio Cruz-na-Ligas and plaintiffs' Association have agreed to comply with the terms and conditions of the donation;

9. That, however, defendant UP backed-out from the arrangement to Donate directly to the plaintiff Association for the benefit of the qualified residents and high-handedly resumed to negotiate the donation thru the defendant Quezon City Government under the terms disadvantageous or contrary to the rights of the bonafide residents of the Barrio as shown in the Draft of Deed of Donation herein attached as Annex "I";

10. That plaintiff Association forthwith amended [its] petition in the pending case LRC No. 3151 before Branch 100 of the Regional Trial Court of Quezon City by adding the additional cause of action for specific performance aside from the exclusion from the technical description of certificate of title of defendant UP the area embraced in the Barrio Cruz-na-Ligas, consisting of at least forty-two (42) hectares, more or less, and praying in the said Amended Petition for a writ of preliminary injunction to restrain defendant UP from donating the area to the defendant Quezon City Government, a copy of the said Amended Petition is herein attached as Annex "J";

11. That, after due notice and hearing, the application for writ of injunction as well as the opposition of defendant UP, the Order dared January 24, 1986 granting the writ of preliminary injunction was issued, a copy of which is herein attached as Annex "K";

12. That in the hearing of the Motion for Reconsideration filed by defendant UP. Reconsideration is herein copy of the said Motion for attached as Annex "L", plaintiff Association finally agreed to the lifting of the said Order (Annex K) granting the injunction after defendant UP made an assurance in their said Motion for Reconsideration that the donation to the defendant Quezon City Government will be for the benefit of the residents of Cruz-Na-Ligas as shown in the following:

6. The execution of the Deed of Donation in favor of theQuezon City government will not work any injustice to the petitioners.

As well stated in Respondent's Opposition to the Prayerfor Issuance of a Writ of Preliminary Injunction, it is to the best interest of the Petitioners that such a deed be executed.

The plan to Donate said property to the residents of Bgy. Krus-na-Ligas, that is, throughthe Quezon City government, is to their best interests. Left alone, the present land and physical development of the area leaves much to be desired. Road and drainage networks have to be constructed, water and electric facilities installed, and garbage collection provided for. The residents, even collectively, do not have the meansand resources to provide for themselves such basis facilities which are necessary if only to upgrade their living condition.

Should the proposed donation push through, the residents would be the first to benefit.

thus, Branch 100 of this Honorable Court issued that Order dated April 2, 1986, lifting the injunction, a copy of which is hereby attached as Annex "M";

13. That, however, defendant UP took exception to the aforesaid Order lifting the Order of Injunction and insisted [on] the dismissal of the case; thus, it was stated that:

2. Respondent has consistently taken the position that efforts to expedite the formalization of a Deed of Donation for the benefit of the residents of Barangay Kruz-na-Ligas should not only be pre-conditioned on the lifting of the Writ of Preliminary Injunction, but also the dismissal of the Petition;

in defendant UP's Motion for Reconsideration of the Order dated April 2, 1986, a copy of the said Motion is herein attached as Annex "N";

14. That plaintiff Association in [its] "Comment" on the Motion for Reconsideration of the Order dated April 2, 1986, filed on June 2, 1986, manifested [its] willingness to the dismissal of the case, aside from [its] previous consent to the lifting of the preliminary injunction; provided, that thearea to be Donated thru the defendant Quezon City government be subdivided into lots to be given to the qualified residents together with the certificate of titles, without cost, a copy of the said Comment is hereby attached as Annex "O";

15. That, that was why, in the hearing re-scheduled on June 13, 1986 of defendant UP's Motion for Reconsideration of the Order dated April 2, 1986 (Annex N), the Order dated June 13, 1986, was issued, the full text of whichis quoted as follows:

After hearing the manifestation of Atty. Angeles for the petitioners and Atty. Raval for the respondent Universityof the Philippines, since the petitioners' counsel was thefirst to make a manifestation that this case which is nowfiled before this court should be dismissed first without prejudice but because of the vehement objection of the University of the Philippines, thru counsel, that a dismissal without prejudice creates a cloud on the title of the University of the Philippines and even with or without this case filed, the University of the Philippines has already decided to have the property subject of litigation Donated to the residents of Cruz-na-ligas with,of course, the conditions set therein, let this case be DISMISSED without pronouncement as to cost.

As to the charging lien filed by Petitioners thru counsel, it will be a sole litigation between the petitioners and theoppositors both represented by counsel, with the University of the Philippines being neutral in this case.

and a copy of the said Order is herein attached as Annex "P";

16. That, true to [its] commitment stated in the aforesaid Order of June 13, 1986, defendant UP executed that Deed of Donation on August 5, 1986, in favor of the defendant Quezon City Government for the benefit of the qualified residents of Cruz-na-Ligas; however, neither the plaintiffs herein nor plaintiff Association officers had participated in any capacity in the act ofexecution of the said deed of donation, a copy of the said executed Deed of Donation is herein attached as Annex "Q";

17. That under the said deed of donation, the 15.8379 hectares were ceded,transferred and conveyed and the defendant Quezon City Government accepted the Donation under the terms and conditions, pertinent portions of which are quoted as follows:

This donation is subject to the following conditions:

xxx xxx xxx

2. The DONEE shall, within eighteen (18) months from the signing hereof, undertake at its expense the following:

a. Cause the removal of structures built on the boundaries of the Donated lot;

b. Relocate inside the Donated lot all families who are presently outside of the Donated lot;

c. Relocate all families who cannot be relocated within the boundaries of the Donated lot to a site outside of the University of the Philippines campus in Diliman, Quezon City;

d. Construct a fence on the boundaries adjoining Kruz-na-Ligasand the University.

In the construction of the fence, the DONEE shall establish a ten-meter setback in the area adjacent to Pook Amorsolo and the Peripheral Road (C.P. Garcia Street);

e. Construct a drainage canal within the area Donated along the boundary line between Kruz- na-ligas and Pook Amorsolo.

In the construction of the fence and the drainage canal, the DONEE shall conform to the plans and specifications prescribed by the DONOR.

xxx xxx xxx

5. The DONEE shall, after the lapse of three (3) years, transfer to the qualified residents by way of donation the individual lots occupied by each of them, subject to whatever conditions the DONEE may wish to impose on said donation;

6. Transfer of the use of any lot in the property Donatedduring the period of three (3) years referred to in Item 4 above, shall be allowed only in these cases where transfer is to be effected to immediate members of the family in the ascending and descending line and said Transfer shall be made known to the DONOR. Transfer shall be affected by the Donee;

7. The costs incidental to this Deed, including the registration of the property Donated shall be at the expense of the DONEE.

The Donee shall also be responsible for any other legitimate obligation in favor of any third person arising out of, in connection with, or by reason of, this donation.

18. That the defendant Quezon City Government immediately prepared the groundworks in compliance with the afore-quoted terms and conditions; however, defendant UP under the officer-in-charge then and even under theincumbent President, Mr. Jose Abueva, had failed to deliver the certificate oftitle covering the property to be Donated to enable the defendant Quezon City Government to register the said Deed of Donation so that corresponding certificate of title be issued under its name;

19. That defendant UP had continuously and unlawfully refused, despite requests and several conferences made, to comply with their reciprocal duty, to deliver the certificate of title to enable the Donee, the defendant Quezon City Government, to register the ownership so that the defendant Quezon City Government can legally and fully comply with their obligations under the said deed of donation;

20. That upon expiration of the period of eighteen (18) [months], for alleged non-compliance of the defendant Quezon City Government with terms and conditions quoted in par. 16 hereof, defendant UP thru its President, Mr. Jose Abueva, unilaterally, capriciously, whimsically and unlawfully issued that Administrative Order No. 21 declaring the deed of donation revoked and the Donated property be reverted to defendant UP;

21. That the said revocation and reversion without judicial declaration is illegal and prejudicial to the rights of the plaintiffs who are the bonafide residents or who represent the bonafide residents of the Barrio Cruz-na-Ligas because: firstly, they were not made bound to comply with the terms and conditions of the said donation allegedly violated by the defendant Quezon City Government;secondly, defendant UP, as averred in the preceding paragraphs 9 and 11, was the one who insisted that the donation be coursed through the defendant Quezon City Government; and the said revocation or reversion are likewise pre-judicial to third parties who acquiredrights therefrom;

22. That, as it apparently turned out, the plaintiff Association, who duly represented the qualified or bonafide resident of Barrio Cruz-na-Ligas, was deceived into consenting to the lifting of the injunction in said LRC Case No.Q-3151 and in agreeing to the dismissal of the said LRC Case No. Q-3151 when defendant unjustifiably revoked the donation which they undertook as a condition to the dismissal of LRC Case No. 3151;

23. That by reason of the deception, the herein plaintiffs hereby reiterate their claims and the claims of the bonafide residents and resident/farmers ofBarrio Cruz-na-Ligas [to] the ownership of forty-two (42) hectares area they and their predecessors-in-interest have occupied and possessed; parenthetically, the said 42 hectares portion are included in the tax declaration under the name of defendant UP who is exempted from paying real estate tax; hence, there is no assessment available;

24. That by reason of bad faith and deceit by defendant UP in the executionand in compliance with [its] obligations under the said Deed of Donation (Annex Q hereof) plaintiffs have suffered moral damages in the amount of atleast P300,000.00;

25. That because of wanton and fraudulent acts of defendant UP in refusingto comply with what is incumbent upon [it] under the Deed of Donation (Annex Q) and in whimsically and oppressively declaring the revocation of the said deed of donation and the reversion of the 15.8 hectares Donated, [it] should be made liable to pay exemplary damages in the sum of P50,000.00 to serve as example in the interest of public good;

26. That because of said defendant UP's unlawful acts, plaintiffs have been compelled to retain the services of their attorneys to prosecute this case with whom they agreed to pay the sum of Fifty Thousand Pesos (P50,000.00) as attorney's fees; and by way of:

APPLICATION FOR WRIT OF

PRELIMINARY INJUNCTION

(a) Plaintiffs hereby reallege and reproduce herein by reference all the material and relevant allegations in the preceding paragraphs;

(b) Having legally established and duly recognized rights on the said parcel of lands as shown in the documents marked herein as Annexes "D"; E; F; G; and M, plaintiffs have the rights to be protected by an injunctive writ or at least a restraining order to restrain and to order defendant UP from:

1) Ejecting the plaintiffs-farmers and from demolishing the improvements in the parcel of riceland or farmlands situated at Sitio Libis of Barrio Cruz-na-Ligas, embraced in the claims of the plaintiffs as shown in these photographs herein attached as Annexes "R" to "R-3";

2) Executing another deed of donation with different terms and conditions infavor of another and for the benefit of additional occupants who are not bonafide residents of the Barrio or Barangay Cruz-na-Ligas;

(c) Defendant UP has already started ejecting the plaintiffs and demolishing their improvements on the said riceland and farmlands in order to utilize the same for the residential house project to the irreparable damages and injuries to the plaintiffs-farmers, unless restrained or enjoined to desist, plaintiffs will continue to suffer irreparable damages and injuries;

(d) Plaintiffs are ready and willing to file the injunctive bond in such amount that may be reasonably fixed;

P R A Y E R

WHEREFORE, it is respectfully prayed to this Honorable Court that before the conduct of the proper proceedings, a writ of preliminary injunction or at least a temporary restraining order be issued, ordering defendant UP to observe status quo; thereafter, after due notice and hearing, a writ of preliminary injunction be issued; (a) to restrain defendant UP or to their representative from ejecting the plaintiffs from and demolishing their improvements on the riceland or farmland situated at Sitio Libis; (b) to order defendant UP to refrain from executing another deed of donation in favor another person or entity and in favor of non-bonafide residents of Barrio Cruz-na-Ligas different from the Deed of Donation (Annex Q hereof), and after trial on the merits, judgment be rendered:

1. Declaring the Deed of Donation (Annex Q) as valid and subsisting and ordering the defendant UP to abide by the terms and conditions thereof;

2. Adjudging the defendant University of the Philippines to segregate the riceland or farmlands as additional area embraced by the Barrio Cruz-na-Ligas, pursuant to the First Indorsement of August 10, 1984 (Annex E) and pursuant to Findings, Reports and Recommendation (Annex G) of the Bureau of Lands with an estimated assessed value of P700,000.00;

3. Ordering defendant UP to pay for plaintiffs' moral damages of P300,000.00, exemplary damages of P50,000.00, and costs of suit;

4. Enjoining defendant UP to pay professional fees of P50,000.00 of the undersigned attorneys for the plaintiffs; and

Plaintiffs further respectfully pray for other just and equitable reliefs.

Earlier, on May 15, 1992, the trial court denied petitioners' application for preliminary injunction. Its order stated: 3

ORDER

Acting on plaintiffs' application for the issuance of a temporary restraining order/preliminary injunction and the opposition thereto of the defendant filedon April 3, 1992, as well as plaintiffs' reply therewith filed on April 23, 1992, considered in the light of the affidavit executed on April 23, 1992 by TimoteoBaluyot, Sr. and by Jaime Benito, Benigno Eugenio, Rolando Gonzales and Fortunato Fulgencio executed on April 21, 1929, for the plaintiffs; and, the affidavit of merit executed on April 28, 1992, by Atty. Carmelita Yadao-Guno, for the defendant, it appearing that the principal action in this case is one for the specific performance, apparently, of the Deed of Donation executed on August 8, 1986, by defendant University of the Philippines in

favor of the Quezon City Government, involving the land in question, in virtue of which, it is clear that the plaintiffs are not parties to the said deed ofdonation, by reason of which, consequently, there has not been established by the plaintiffs a clear legal right to the enforcement of the said deed of donation, especially as the said deed was already validly revoked by the University of the Philippines, thru its president, Jose Abueva, in his Administrative Order No. 21, for which reason the same could no longer be enforced, plaintiffs' prayer for the issuance of a temporary restraining order/writ of preliminary injunction, is DENIED.

SO ORDERED.

Petitioners moved for a reconsideration of the above order. Without resolving petitioners' motion,the trial court ordered petitioners to amend their complaint to implead respondent Quezon City government as defendant. 4Hence, the amended complaint was filed on June 10, 1992, in which it is alleged:

4. That the Quezon City Government . . . which should be joined as party plaintiff is instead impleaded herein as party defendant, because its consentcan not be secured within a reasonable time;

On July 27, 1992, respondent city government filed its Answer to the Amended Complaint with Cross-Claim. 5However, on November 29, 1993, it moved to withdraw its cross-claim against UP 6 on the ground that, after conferring with university officials, the city government had recognized "the propriety, validity and legality of the revocation of the Deed of Donation." 7

The motion was granted by the trial court in its order, dated December 22, 1994. 8 On the same day, a Joint Motion to Dismiss was filed by UP and the Quezon City government on the ground that the complaint fails to state a cause of action. 9Petitioners opposed the motion.

On April 26, 1995, the trial court denied respondents' motion to dismiss on the ground that "a perusal of [petitioners'] amended complaint, specifically paragraph 5 thereof, . . . shows that it necessarily alleges facts entitling [petitioners] to acquire ownership over the land in question, by reason of laches, which cannot be disposed of and resolved at this stage without a trial on the merits." 10 The trial court, however, reiterated its ruling that petitioners did not have a cause of action for specific performance on the ground that the deed of donation had already been revoked as stated in its order denying injunction.

On August 14, 1995, respondents filed a petition for certiorari with the Court of Appeals, charging the trial court with grave abuse of discretion in refusing to dismiss the complaint filed bypetitioners. Respondents contended that —

1. Respondent Judge himself had declared that [petitioners] clearly are not parties to the deed of donation sought to be enforced thus they had not shown clear legal right to the enforcement of said deed of donation which is their principal cause of action; and

2. Under the factual circumstances obtaining, the respondent judge gravely erred in denying the joint motion to dismiss and declaring that [petitioners] are entitled to acquire ownership over the land in question by reason of laches through a trial on the merits; such constitutes a collateral attack on [respondent UP's] title in the same suit for specific performance.

On November 24, 1995, the appellate court rendered a decision setting aside the trial court's order of April 26, 1995 and ordering the dismissal of Civil Case No. 4-92-11663. The appellate court ruled that —

1. Petitioners' complaint did not allege any claim for the annulment of UP's title over the portion of land concerned or the reconveyance thereof to petitioners;

2. The alleged cause of action based on ownership of the land by petitioners was tantamount to a collateral attack on the title of UP which is not allowed under the law; and

3. There is no acquisition of ownership by laches.

Hence, this petition for review on certiorari based on the following grounds:

I. THE RESPONDENT COURT OF APPEALS WAS IN ERROR IN CONCLUDING THAT THE TRIAL COURT ACTED WITH GRAVE ABUSE OF DISCRETION IN DENYING THE JOINT MOTION TO DISMISS.

II. IN DISMISSING THE AMENDED COMPLAINT, THE RESPONDENT APPELLATE COURT HAS ACTED IN EXCESS [OF] JURISDICTION WHEN IT MADE [THE] FINDING AND CONCLUSION THAT THE REVOCATION OF THE DONATION IS VALID WHEN THAT IS THE PRIMARY AND CONTROVERTED ISSUE INVOLVING VARIED QUESTIONS OF FACTS.

Petitioners argue that, on its face, their amended complaint alleges facts constituting a cause of action which must be fully explored during trial. They cite paragraphs 18, 19, and 20 of their complaint questioning the validity of the revocation of the donation and seek the enforcement of the donation through specific performance. 11

On the other hand, respondents contend that by seeking specific performance of the deed of donation as their primary cause of action, petitioners cannot at the same time claim ownership over the property subject of the donation by virtue of laches or acquisitive prescription. Petitioners cannot base their case on inconsistent causes of action. Moreover, as the trial court already found the deed to have been validly revoked, the primary cause of action was already thereby declared in existent. Hence, according to respondents, the Court of Appeals correctly dismissed the complaint. 12

First. The question is whether the complaint states a cause of action. The trial court held that inasmuch as the donation made by UP to the Quezon City government had already been revoked, petitioners, for whose benefit the donation had been made, had no cause of action for specific performance. Nevertheless, it denied respondents' joint motion to dismiss petitioners' action on the ground that respondent UP was barred from contesting petitioners' right to remain in possession on the ground of laches.

This is error. While prescription does not run against registered lands, nonetheless a registered owner's action to recover possession of his land may be barred by laches. As held in Mejia de Lucas v. Gamponia: 13

[W]hile no legal defense to the action lies, an equitable one lies in favor of the defendant and that is, the equitable defense of laches. No hold that the defense of prescription or adverse possession in derogation of the title of the registered owner Domingo Mejia does not lie, but that of the equitable defense of laches. Otherwise stated, we hold that while defendant may not

be considered as having acquired title by virtue of his and his predecessors'long continued possession for 37 years, the original owner's right to recover back the possession of the property and the title thereto from the defendant has, by the long period of 37 years and by patentee's inaction and neglect, been converted into a stale demand.

Thus, laches is a defense against a registered owner suing to recover possession of the land registered in its name. But UP is not suing in this case. It is petitioners who are, and their suit is mainly to seek enforcement of the deed of donation made by UP in favor of the Quezon City government. The appellate court therefore correctly overruled the trial court on this point. Indeed, petitioners do not invoke laches. What they allege in their complaint is that they have been occupying the land in question from time immemorial, adversely, and continuously in the concept of owner, but they are not invoking laches. If at all, they are claiming ownership by prescription which, as already stated, is untenable considering that the land in question is a registered land. Nor can petitioners question the validity of UP's title to the land. For as the Courtof Appeals correctly held, this constitutes a collateral attack on registered title which is not permitted.

On the other hand, we think that the Court of Appeals erred in dismissing petitioners' complaint for failure to state a cause of action.

A cause of action exists if the following elements are present, namely: (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 defendant to respect or not to violate such right; and (3) an act or omission on thepart of such defendant in violation of the right of the plaintiff or constituting a breach of the obligations of the defendant to the plaintiff for which the latter may maintain an action for recovery of damages. 14

We find all the elements of a cause of action contained in the amended complaint of petitioners. While, admittedly, petitioners were not parties to the deed of donation, they anchor their right to seek its enforcement upon their allegation that they are intended beneficiaries of the donation to the Quezon City government. Art. 1311, second paragraph, of the Civil Code provides:

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to theobliger before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

Under this provision of the Civil Code, the following requisites must be present in order to have astipulation pour autrui: 15

(1) there must be a stipulation in favor of a third person;

(2) the stipulation must be a part, not the whole of the contract;

(3) the contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest;

(4) the third person must have communicated his acceptance to the obliger before its revocation;and

(5) neither of the contracting parties bears the legal representation or authorization of the third party.

The allegations in the following paragraphs of the amended complaint are sufficient to bring petitioners' action within the purview of the second paragraph of Art. 1311 on stipulations pour autrui:

1. Paragraph 17, that the deed of donation contains a stipulation that the Quezon City government, as donee, is required to transfer to qualified residents of Cruz-na-Ligas, by way of donations, the lots occupied by them;

2. The same paragraph, that this stipulation is part of conditions and obligations imposed by UP,as donor, upon the Quezon City government, as donee;

3. Paragraphs 15 and 16, that the intent of the parties to the deed of donation was to confer a favor upon petitioners by transferring to the latter the lots occupied by them;

4. Paragraph 19, that conferences were held between the parties to convince UP to surrender the certificates of title to the city government, implying that the donation had been accepted by petitioners by demanding fulfillment thereof 16 and that private respondents were aware of such acceptance; and

5. All the allegations considered together from which it can be fairly inferred that neither of private respondents acted in representation of the other; each of the private respondents had its own obligations, in view of conferring a favor upon petitioners.

The amended complaint further alleges that respondent UP has an obligation to transfer the subject parcel of land to the city government so that the latter can in turn comply with its obligations to make improvements on the land and thereafter transfer the same to petitioners butthat, in breach of this obligation, UP failed to deliver the title to the land to the city government and then revoked the deed of donation after the latter failed to fulfill its obligations within the timeallowed in the contract.

For the purpose of determining the sufficiency of petitioners' cause of action, these allegations ofthe amended complaint must be deemed to be hypothetically true. So assuming the truth of the allegations, we hold that petitioners have a cause of action against UP. Thus, in Kauffman v. National Bank, 17 where the facts were —

Stated in bare simplicity the admitted facts show that the defendant bank fora valuable consideration paid by the Philippine Fiber and Produce Companyagreed on October 9, 1918, to cause a sum of money to be paid to the plaintiff in New York City; and the question is whether the plaintiff can maintain an action against the bank for the non performance of said undertaking. In other words, is the lack of privity with the contract on the part of the plaintiff fatal to the maintenance of an action by him? 18

it was held:

In the light of the conclusions thus stated, the right of the plaintiff to maintainthe present action is clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the paragraph

above quoted; and the circumstances under which that promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have that money upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it; and indeed if the provision in question were not applicable to the facts now before us, it would be difficult to conceive of a case arising under it.

It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank by demanding payment; and although the Philippine National Bank had already directed its New York agency to withhold payment when this demand was made, the rights of the plaintiff cannot be considered to have been prejudiced by that fact. The word "revoked," as there used, must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the partypurchasing the exchange. 19

It is hardly necessary to state that our conclusion that petitioners' complaint states a cause of action against respondents is in no wise a ruling on the merits. That is for the trial court to determine in light of respondent UP's defense that the donation to the Quezon City government, upon which petitioners rely, has been validly revoked.

Respondents contend, however, that the trial court has already found that the donation (on which petitioners base their action) has already been revoked. This contention has no merit. Thetrial court's ruling on this point was made in connection with petitioners' application for a writ of preliminary injunction to stop respondent UP from ejecting petitioners. The trial court denied injunction on the ground that the donation had already been revoked and therefore petitioners had no clear legal right to be protected. It is evident that the trial court's ruling on this question was only tentative, without prejudice to the final resolution of the question after the presentation by the parties of theirevidence. 20

Second. It is further contended that the amended complaint alleges inconsistent causes of action for specific performance of the deed of donation. Respondents make much of the fact thatwhile petitioners claim to be the beneficiaries-donees of 15.8 hectares subject of the deed, 21 they at the same time seek recovery/delivery of title to the 42 hectares of land included in UP's certificate of title. 22

These are not inconsistent but, rather, alternative causes of action which Rule 8, §2 of the Rulesof Court allows:

Alternative causes of action or defenses. — A party may set forth two or more statements of a claim or defense alternatively or hypothetically, either in one cause of action or defense or in separate causes of action or defenses. When two or more statements are made in the alternative and one of them if made independently would be sufficient, the pleading is not made insufficient by the insufficiency of one or more of the alternative statements.

Thus, the parties are allowed to plead as many separate claims as they may have, regardless of consistency, provided that no rules regarding venue and joinder of parties are violated. 23

Moreover, the subjects of these claims are not exactly and entirely the same parcel of land; petitioners' causes of action consist of two definite and distinct claims. The rule is that a trial court judge cannot dismiss a complaint which contained two or more causes of action where oneof them clearly states a sufficient cause of action against the defendant. 24

WHEREFORE, the decision of the Court of Appeals is REVERSED and the case is REMANDEDto the Regional Trial Court of Quezon City, Branch 89, for trial on the merits.

SO ORDERED.

G.R. No. 115117 June 8, 2000

INTEGRATED PACKAGING CORP., petitioner, vs.COURT OF APPEALS and FIL-ANCHOR PAPER CO., INC., respondents.

QUISUMBING, J.:

This is a petition to review the decision of the Court of Appeals rendered on April 20, 1994 reversing the judgment of the Regional Trial Court of Caloocan City in an action for recovery of sum of money filed by private respondent against petitioner. In said decision, the appellate court decreed:

WHEREFORE, in view of all the foregoing, the appealed judgment is hereby REVERSED and SET ASIDE. Appellee [petitioner herein] is hereby ordered to pay appellant [private respondent herein] the sum of P763,101.70, with legal interest thereon, from the date of the filing of the Complaint, until fully paid.

SO ORDERED.1

The RTC judgment reversed by the Court of Appeals had disposed of the complain as follows:

WHEREFORE, judgment is hereby rendered:

Ordering plaintiff [herein private respondent] to pay defendant [herein petitioner] the sum of P27,222.60 as compensatory and actual damages after deducting P763,101.70 (value of materials received by defendant) from P790,324.30 representing compensatory damages as defendant's unrealized profits;

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

Ordering plaintiff to pay the sum of P30,000.00 for attorney's fees; and to pay the costs of suit.

SO ORDERED.2

The facts, as culled from the records, are as follows:

Petitioner and private respondent executed on May 5, 1978, an order agreement whereby private respondent bound itself to deliver to petitioner 3,450 reams of printing paper, coated, 2

sides basis, 80 lbs., 38" x 23", short grain, worth P1,040,060.00 under the following schedule: May and June 1978 — 450 reams at P290.00/ream; August and September 1978 — 700 reams at P290/ream; January 1979 — 575 reams at P307.20/ream; March 1979 — 575 reams at P307.20/ream; July 1979 — 575 reams at 307.20/ream; and October 1979 — 575 reams at P307.20/ream. In accordance with the standard operating practice of the parties, the materials were to be paid within a minimum of thirty days and maximum of ninety days from delivery.

Later, on June 7, 1978, petitioner entered into a contract with Philippine Appliance Corporation (Philacor) to print three volumes of "Philacor Cultural Books" for delivery on the following dates: Book VI, on or before November 1978; Book VII, on or before November 1979 and; Book VIII, on or before November 1980, with a minimum of 300,000 copies at a price of P10.00 per copy ora total cost of P3,000,000.00.

As of July 30, 1979, private respondent had delivered to petitioner 1,097 reams of printing paperout of the total 3,450 reams stated in the agreement. Petitioner alleged it wrote private respondent to immediately deliver the balance because further delay would greatly prejudice petitioner. From June 5, 1980 and until July 23, 1981, private respondent delivered again to petitioner various quantities of printing paper amounting to P766,101.70. However, petitioner encountered difficulties paying private respondent said amount. Accordingly, private respondent made a formal demand upon petitioner to settle the outstanding account. On July 23 and 31, 1981 and August 27, 1981, petitioner made partial payments totalling P97,200.00 which was applied to its back accounts covered by delivery invoices dated September 29-30, 1980 and October 1-2, 1980.3

Meanwhile, petitioner entered into an additional printing contract with Philacor. Unfortunately, petitioner failed to fully comply with its contract with Philacor for the printing of books VIII, IX, X and XI. Thus, Philacor demanded compensation from petitioner for the delay and damage it suffered on account of petitioner's failure.

On August 14, 1981, private respondent filed with the Regional Trial Court of Caloocan City a collection suit against petitioner for the sum of P766,101.70, representing the unpaid purchase price of printing paper bought by petitioner on credit.

In its answer, petitioner denied the material allegations of the complaint. By way of counterclaim,petitioner alleged that private respondent was able to deliver only 1,097 reams of printing paper which was short of 2,875 reams, in total disregard of their agreement; that private respondent failed to deliver the balance of the printing paper despite demand therefor, hence, petitioner suffered actual damages and failed to realize expected profits; and that petitioner's complaint was prematurely filed.

After filing its reply and answer to the counterclaim, private respondent moved for admission of its supplemental complaint, which was granted. In said supplemental complaint, private respondent alleged that subsequent to the enumerated purchase invoices in the original complaint, petitioner made additional purchases of printing paper on credit amounting to P94,200.00. Private respondent also averred that petitioner failed and refused to pay its outstanding obligation although it made partial payments in the amount of P97,200.00 which was applied to back accounts, thus, reducing petitioner's indebtedness to P763,101.70.

On July 5, 1990, the trial court rendered judgment declaring that petitioner should pay private respondent the sum of P763,101.70 representing the value of printing paper delivered by privaterespondent from June 5, 1980 to July 23, 1981. However, the lower court also found petitioner's counterclaim meritorious. It ruled that were it not for the failure or delay of private respondent to deliver printing paper, petitioner could have sold books to Philacor and realized profit of P790,324.30 from the sale. It further ruled that petitioner suffered a dislocation of business on

account of loss of contracts and goodwill as a result of private respondent's violation of its obligation, for which the award of moral damages was justified.

On appeal, the respondent Court of Appeals reversed and set aside the judgment of the trial court. The appellate court ordered petitioner to pay private respondent the sum of P763,101.70 representing the amount of unpaid printing paper delivered by private respondent to petitioner, with legal interest thereon from the date of the filing of the complaint until fully paid.4 However, the appellate court deleted the award of P790,324.30 as compensatory damages as well as the award of moral damages and attorney's fees, for lack of factual and legal basis.

Expectedly, petitioner filed this instant petition contending that the appellate court's judgment is based on erroneous conclusions of facts and law. In this recourse, petitioner assigns the following errors:

[I]

THE COURT OF APPEALS ERRED IN CONCLUDING THAT PRIVATE RESPONDENT DID NOT VIOLATE THE ORDER AGREEMENT.

[II]

THE COURT OF APPEALS ERRED IN CONCLUDING THAT RESPONDENT IS NOTLIABLE FOR PETITIONER'S BREACH OF CONTRACT WITH PHILACOR.

[III]

THE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER IS NOT ENTITLED TO DAMAGES AGAINST PRIVATE RESPONDENT. 5

In our view, the crucial issues for resolution in this case are as follows:

(1) Whether or not private respondent violated the order agreement, and;

(2) Whether or not private respondent is liable for petitioner's breach of contract with Philacor.

Petitioner's contention lacks factual and legal basis, hence, bereft of merit.

Petitioner contends, firstly, that private respondent violated the order agreement when the latter failed to deliver the balance of the printing paper on the dates agreed upon.

The transaction between the parties is a contract of sale whereby private respondent (seller) obligates itself to deliver printing paper to petitioner (buyer) which, in turn, binds itself to pay therefor a sum of money or its equivalent (price).6 Both parties concede that the order agreement gives rise to a reciprocal obligations7 such that the obligation of one is dependent upon the obligation of the other. Reciprocal obligations are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other.8 Thus, private respondent undertakes to deliver printing paper of various quantities subject to petitioner's corresponding obligation to pay, on a maximum 90-day credit, for these materials. Note that in the contract, petitioner is not even required to make any deposit, down payment or advance payment, hence, the undertaking of private respondent to deliver the materials is

conditional upon payment by petitioner within the prescribed period. Clearly, petitioner did not fulfill its side of the contract as its last payment in August 1981 could cover only materials covered by delivery invoices dated September and October 1980.

There is no dispute that the agreement provides for the delivery of printing paper on different dates and a separate price has been agreed upon for each delivery. It is also admitted that it is the standard practice of the parties that the materials be paid within a minimum period of thirty (30) days and a maximum of ninety (90) days from each delivery.9 Accordingly, the private respondent's suspension of its deliveries to petitioner whenever the latter failed to pay on time, as in this case, is legally justified under the second paragraph of Article 1583 of the Civil Code which provides that:

When there is a contract of sale of goods to be delivered by stated installments, whichare to be separately paid for, and the seller makes defective deliveries in respect of one or more installments, or the buyer neglects or refuses without just cause to take delivery of or pay for one or more installments, it depends in each case on the terms of the contract and the circumstances of the case, whether the breach of contract is somaterial as to justify the injured party in refusing to proceed further and suing for damages for breach of the entire contract, or whether the breach is severable, giving rise to a claim for compensation but not to a right to treat the whole contract as broken. (Emphasis supplied)

In this case, as found a quo petitioner's evidence failed to establish that it had paid for the printing paper covered by the delivery invoices on time. Consequently, private respondent has the right to cease making further delivery, hence the private respondent did not violate the order agreement. On the contrary, it was petitioner which breached the agreement as it failed to pay on time the materials delivered by private respondent. Respondent appellate court correctly ruled that private respondent did not violate the order agreement.

On the second assigned error, petitioner contends that private respondent should be held liable for petitioner's breach of contract with Philacor. This claim is manifestly devoid of merit.

As correctly held by the appellate court, private respondent cannot be held liable under the contracts entered into by petitioner with Philacor. Private respondent is not a party to said agreements. It is also not a contract pour autrui. Aforesaid contracts could not affect third persons like private respondent because of the basic civil law principle of relativity of contracts which provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, 10 even if he is aware of such contract and has acted with knowledge thereof. 11

Indeed, the order agreement entered into by petitioner and private respondent has not been shown as having a direct bearing on the contracts of petitioner with Philacor. As pointed out by private respondent and not refuted by petitioner, the paper specified in the order agreement between petitioner and private respondent are markedly different from the paper involved in the contracts of petitioner with Philacor. 12 Furthermore, the demand made by Philacor upon petitioner for the latter to comply with its printing contract is dated February 15, 1984, which is clearly made long after private respondent had filed its complaint on August 14, 1981. This demand relates to contracts with Philacor dated April 12, 1983 and May 13, 1983, which were entered into by petitioner after private respondent filed the instant case.lawphi1

To recapitulate, private respondent did not violate the order agreement it had with petitioner. Likewise, private respondent could not be held liable for petitioner's breach of contract with Philacor. It follows that there is no basis to hold private respondent liable for damages. Accordingly, the appellate court did not err in deleting the damages awarded by the trial court to petitioner.

The rule on compensatory damages is well established. True, indemnification for damages comprehends not only the loss suffered, that is to say actual damages (damnum emergens), butalso profits which the obligee failed to obtain, referred to as compensatory damages (lucrum cessans). However, to justify a grant of actual or compensatory damages, it is necessary to prove with a reasonable degree of certainty, premised upon competent proof and on the best evidence obtainable by the injured party, the actual amount of loss. 13 In the case at bar, the trial court erroneously concluded that petitioner could have sold books to Philacor at the quoted selling price of P1,850,750.55 and by deducting the production cost of P1,060,426.20, petitioner could have earned profit of P790,324.30. Admittedly, the evidence relied upon by the trial court in arriving at the amount are mere estimates prepared by petitioner. 14 Said evidence is highly speculative and manifestly hypothetical. It could not provide sufficient legal and factual basis for the award of P790,324.30 as compensatory damages representing petitioner's self-serving claimof unrealized profit.

Further, the deletion of the award of moral damages is proper, since private respondent could not be held liable for breach of contract. Moral damages may be awarded when in a breach of contract the defendant acted in bad faith, or was guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligation. 15 Finally, since the award of moral damages is eliminated, so must the award for attorney's fees be also deleted. 16

WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals is AFFIRMED. Costs against petitioner. SO ORDERED.

G.R. No. 172268 October 10, 2007

A & C MINIMART CORPORATION, petitioner, vs.PATRICIA S. VILLAREAL, TRICIA ANN VILLAREAL and CLAIRE HOPE VILLAREAL, respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the Decision1 dated 13 October 2004, rendered by the Court of Appeals in CA-G.R. SP No. 81875, modifying the Order2 dated 29 December 2003, of Branch 194 of the Regional Trial Court (RTC) of Parañaque City. The appellate court ordered petitioner A & C Minimart Corporation to pay respondents Patricia Villareal, Tricia Ann Villareal and Claire Hope Villareal, a monthly interest of3% on the total amount of rental and other charges not paid on time, in addition to the unpaid rental and other charges which the trial court ordered petitioner to pay.

The subject property is a one-storey commercial building constructed on a parcel of land locatedat Aguirre St., BF Homes, Parañaque, Metro Manila. Petitioner leased the six stalls/units of the subject property from Joaquin Bonifacio, under a lease agreement dated 3 August 1992, and which expired on 3 August 1997.3 A Lease Contract, dated 22 January 1998, was executed between petitioner and Teresita Bonifacio renewing the earlier contract for another five years.4

However, ownership of the subject property is under dispute. Respondents and spouses Joaquin and Teresita Bonifacio (spouses Bonifacio) claim ownership over the subject property.

The respondents claim ownership based on a sale of property on execution pending appeal in a separate case. Civil Case No. 16194 is an independent action for damages filed by respondents

against spouses Eliseo and Erna Sevilla (spouses Sevilla), original owners of the disputed property, arising from the murder of Jose Villareal, the husband of respondent Patricia Villareal and father of respondents Tricia Ann and Claire Hope Villareal. In its Decision dated 2 April 1990, Branch 132 of the RTC of Makati awarded damages to respondents in the amount of P10,882,040.00.5 Thereafter, the Makati RTC, Branch 132, issued a writ of execution pendingappeal. Deputy Sheriff Eulalio Juanson levied on two parcels of land registered under the name of the Sevillas covered by Transfer Certificates of Title (TCT) No. 41338 and No. 41339, issued by the Register of Deeds of Parañaque City, and a one-storey commercial building built thereon.On 17 September 1990, Deputy Sheriff Juanson sold the subject property at a public auction to respondent Patricia Villareal, the sole and highest bidder therein. The Certificate of Sale, dated 17 September 1990, was registered and annotated in TCT No. 41338 and No. 41339 as Entry 6621 on 18 September 1990.6 The spouses Sevilla filed an appeal questioning the damages awarded and execution orders issued by the Makati RTC, Branch 132 in Civil Case No. 16194, which is now pending before the Supreme Court and docketed as G.R. No. 150824.

On the other hand, the spouses Bonifacio claim to have purchased the property from the spouses Sevilla. Twice they challenged the Villareals’ ownership of the property. The first was on 12 September 1990, when they filed Civil Case No. 90-2551 against respondent Patricia Villareal before Branch 58, later unloaded to Branch 63, of the Makati RTC, for declaration of nullity of levy on real property, damages and injunction with prayer for issuance of a temporary restraining order against the sheriff of the Makati RTC, Branch 132. They allegedly bought the property from the spouses Sevilla on 17 June 1986, but were unable to transfer the titles to their names when they discovered that notice of levy on execution was already annotated in the TCTs.7 On 8 November 1994, the Makati RTC, Branch 63, declared that the Deed of Sale in favor of the Bonifacios was null and void and thus dismissed the complaint filed by the spouses Bonifacio for lack of merit. The spouses Bonifacio filed an appeal, docketed as C.A. G.R. CV No.48478, which was dismissed by the Court of Appeals. The dismissal of the said case became final and executory on 27 December 1997.8

Despite the final and executory decision dismissing the claim of the Bonifacios, the latter, for the second time filed on 25 January 1999, Civil Case No. 99-037 against respondent Patricia Villareal for Declaration of Ownership, Annulment and Cancellation of Attachment, Notice of Levy, and Execution Sale with Damages at Branch 257 of the Parañaque RTC, which was dismissed in an Order dated 8 November 1999.9 They filed an appeal of the dismissal with the Court of Appeals, docketed as CA-G.R. SP No. 60176, which was likewise dismissed in a Decision, dated 22 October 2004.10 An appeal was filed before the Supreme Court, docketed as G.R. No. 175857, but the same was denied in a Resolution dated 14 March 2007.11

Meanwhile, upon learning that the spouses Bonifacio’s claim of ownership over the subject property had been seriously challenged and denied in the Decision dated 8 November 1994 of the Makati RTC, Branch 63, in Civil Case No. 90-2551, petitioner stopped paying its rentals on the subject property on 2 March 1999, in violation of the renewed Lease Contract dated 22 January 1998.12

On 19 July 1999, respondents filed a case for Unlawful Detainer with Damages, against the petitioner before Branch 78 of the Metropolitan Trial Court (MTC) of Parañaque City. Respondents also filed a case against the spouses Bonifacio for the recovery of the advanced rentals paid to the latter by the petitioner. The spouses Bonifacio also filed a separate case against the petitioner for Unlawful Detainer. The cases were consolidated and heard by the Parañaque MTC, Branch 78, docketed as Civil Cases No. 11200, 11201, and 11262. The Parañaque MTC, Branch 78, dismissed the cases on the ground that the issue of possession in this case was intertwined with the issue of ownership, and that it lacked the jurisdiction to determine the issue of ownership.13

Respondents appealed before Branch 194 of the Parañaque RTC, the dismissal ordered by the Parañaque MTC, Branch 78, in Civil Cases No. 11200, 11201, and 11262. The cases were

docketed as Civil Cases No. 02-0538 to 40. The Parañaque RTC, Branch 194, affirmed the decision of the Parañaque MTC, Branch 78, as to its lack of jurisdiction, and then treated the complaint as if it were originally filed with the RTC, in accordance with Section 8, Rule 40 of the Rules of Court.14 Thereafter, in its Decision dated 25 June 2003, the Parañaque RTC, Branch 194, found that the spouses Bonifacio did not acquire ownership over the subject property. It further ruled that the petitioner had the obligation to pay the rentals for use of the subject property and directed the petitioner to deposit its rental payments to a Land Bank account established by the Makati RTC, Branch 132, where the rentals accruing on the subject property will be held in trust for the rightful owners, whether it be the respondents or the spouses Sevilla, pending the final determination of G.R. No. 150824. The Decision of the Parañaque RTC, Branch 194, in Civil Case Nos. 02-0538 to 40 reads:

WHEREFORE foregoing considered, judgment is hereby ordered:

1. Directing and ordering defendant Spouses Bonifacios (sic) to deposit the amount of P315,000.00 paid by A & C Minimart to Account No. 1831-0166-91, with the Land Bank of the Philippines, J.P. Rizal Branch, Makati City.

2. Ordering defendant A & C Minimart to deposit with Account No. 1831-0166-91, Land Bank of the Philippines, J.P. Rizal Branch, Makati City, the monthly rentals due from the premises form (sic) the last rental payment consigned with the Clerk of Court,Metropolitan Trial Court, Parañaque City.

3. Ordering defendant A & C Minimart to furnish the Villareals copies of the Lease Contract it entered into with the Bonifacios.

4. And for convenience, ordering the Clerk of Court, Metropolitan Trial Court, Parañaque City to transfer and deposit the rental payments made by A & C Minimart together with the accrued interest to Account No. 1831-0166-91 with Land Bank of thePhilippines, J.P. Rizal Branch, Makati City.

No pronouncement as to costs, attorney’s fees and damages.15

On 1 October 2003, upon petitioners’ Motion for Partial Reconsideration, the Parañaque RTC, Branch 194, modified its decision. It ruled that the rental should accrue in favor of the respondents only after the turnover of the possession of the subject property to them sometime on 2 March 1999. Moreover, it found that petitioner did not act in bad faith when it refused to payrentals and, thus, should not be liable for damages. Additionally, it also ordered the petitioner to pay 12% interest per annum on the monthly rentals due from its receipt of the respondents’ demand letter on 25 June 1999, until full payment; to pay respondents’ attorney’s fees in the amount of P100,000.00 and the costs of suit; and to vacate the subject property, to wit:

1. [O]rdering defendant A & C Minimart to deposit with account no. 1831-0166-91 of the Land Bank of the Philippines, J.P. Rizal Branch[,] Makati City, the monthly rentals due from March 2, 1999, in accordance with the Lease Contract until it delivers possession thereof to the Villareals plus 12% interest per annum from the date of receipt of the demand letter in 25 June 1999 until full satisfaction less the rental payment consigned to the Clerk of Court, Metropolitan Trial Court, Parañaque City.

2. [F]or convenience, ordering the Clerk of Court, Metropolitan Trial Court, Parañaque City to transfer and deposit the rental payments made by A & C Minimart together withthe accrued interest to Account No. 1831-0166-91 with the Land Bank of the Philippines, J. P. Rizal Branch, Makati City.

3. [D]irecting and ordering defendant A & C Minimart to pay the Plaintiff Attorney’s fees in the amount of ONE HUNDRED THOUSAND PESOS (P100,000.00) and the cost of suit.

4. [O]rdering defendant A & C Minimart Corp. to vacate the portion of the building located at 340 Aguirre Avenue, BF Homes, Parañaque City where it conducts its business of a grocery store and other activities, and deliver the same peacefully and in good condition to the Villareals.16

On 27 October 2003, upon motion of the respondents, the Parañaque RTC, Branch 194, issued a Writ of Execution requiring petitioner to deposit in Land Bank Account No. 1831-0166-91 the amount of P3,186,154.68, plus 12% yearly interest, computed from the date of petitioner’s receipt of the demand letter on 25 June 1999.17

On 4 November 2003, respondents filed a Motion for Recomputation of the amount of rentals as the writ of execution allegedly did not conform to the Decision dated 1 October 2003. Respondents claimed that the computation should include a monthly interest of 3% on the total amount of rental and other charges not paid on time, in accordance with paragraph 6(g) of the Contract of Lease, dated 22 January 1998, between petitioner and Teresita Bonifacio, to wit:

g) To pay the LESSOR three (3%) percent interest per month on the total amount of rental and other charges not paid on time under this contract with said amount accruing automatically upon default without necessity of any demand.18

Respondents anchored their claim on the Amended Decision dated 1 October 2003, and the Writ of Execution dated 27 October 2003, in Civil Cases No. 02-0538 to 40, which both used the phrase "in accordance with the Lease Contract," when referring to the monthly rentals due and were to be deposited in the bank by the petitioner.

In an Order dated 29 December 2003, the Parañaque RTC, Branch 194, denied respondents’ claim for interest penalty at the rate of 3% per month on the total amount of rent in default.19

Respondents filed a Petition for Certiorari under Rule 65, before the Court of Appeals, which ruled in favor of the respondents. In the assailed Decision, the appellate court found that petitioner consigned the rental payments after they fell due and, thus, it ruled that the 3% interest stipulated in the Contract of Lease dated 22 January 1998 should be imposed. The dispositive part of the assailed Decision,20 dated 13 October 2004, reads:

WHEREFORE, there being merit in the petition, it is GRANTED. The assailed Order isMODIFIED in that respondent A and C Minimart is additionally DIRECTED to pay a monthly interest of 3% on the total amount of rental and other charges not paid on time pursuant to the contract of lease. This case is REMANDED to the court of origin for proper computation and execution.

Petitioner filed a Motion for Reconsideration of the foregoing Decision, which the Court of Appeals denied in a Resolution dated 27 March 2006.

Hence, the present Petition, where petitioner raises the following issues:

I

THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING VILLAREALS’ PETITION FOR CERTIORARI CONSIDERING THAT APPEAL IS THE PROPER AND ADEQUATE REMEDY TO QUESTION THE DECISION OF THE RTC (BRANCH 194) OF PARAÑAQUE CITY.

II

THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE CLAIM OF THE VILLAREALS’ THAT THEY ARE ENTITLED TO THE BENEFITS (RENTALS AND INTERESTS) OF THE CONTRACT OF LEASE ENTERED INTO BETEWEN "A & C MINIMART CORP." AND TERESITA BONIFACIO.

III

THE HONRABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE PETITION FOR CERTIORARI (SPECIAL CIVIL ACTION) FILED BY THE VILLAREALS CONSIDERING THAT THE LATTER HAVE NO RIGHTS AND INTEREST OVER THE CONTRACT OF LEASE BETWEEN THE SPOUSES BONIFACIOS (sic) AND THE "A & C MINIMART CORP."

IV

THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING C.A.-G.R. SP NO. 81875 CONSIDERING THAT THE VILLAREALS’ CLAIM OF OWNERSHIP OVER THE PROPERTY IS STILL THE SUBJECT OF A PENDING CASE WHICH PRO TANTO RENDERED THE EJECTMENT SUIT FILED BY THE VILLAREALS AGAINST THE PETITIONER OBVIOUSLY PREMATURE.

V

THE HONORABLE COURT OF APPEALS ERRED IN NOT OVERRULLING THE RTC OF PARANAQUE (BR. 194) WHICH REVERSED THE DECISION OF THE MTCOF PARANAQUE CITY DISMISSING THE CONSOLIDATED EJECTMENT CASES (02-0538; 02-0539; 02-540) FOR LACK OF JURISDICTION CONSIDERING THAT THE FUNDAMENTAL ISSUE INVOLVED IS OWNERSHIP OF THE SUBJECT PREMISES WHICH ISSUE REQUIRES FULL-BLOWN TRIAL IN A DIRECT ACTION BEFORE A COURT OF GENERAL JURISDICTION FOR FULL DETERMINATION.21

The petition is partly meritorious.

Petitioner avers that the respondents should have filed with the Court of Appeals an ordinary appeal instead of a special civil action for certiorari, when it questioned the computation made by the Parañaque RTC, Branch 194, of the rentals due the owner of the subject property.

Such contention runs counter to Section 1, Rule 41 of the Rules of Court, which provides:

Section 1. Subject of appeal. – An appeal may be taken from a judgment or final orderthat completely disposes of the case, or of a particular matter therein when declared by these Rules to be appealable.

No appeal may be taken from:

x x x x

(f) an order of execution;

x x x x

In all the above instances where the judgment or final order is not appealable, the aggrieved party may file an appropriate special civil action under Rule 65.

It is explicit from the afore-quoted provision that no appeal may be taken from an order of execution; instead, such order may be challenged by the aggrieved party via a special civil action for certiorari under Rule 65 of the Rules of Court. Respondents filed the petition in CA-G.R. SP No. 81875, to question the Writ of Execution dated 27 October 2003, issued by the Parañaque RTC, Branch 194, which computed the rentals to be paid by the petitioner to whoever is declared the owner of the subject property, without including the 3% penalty interest stipulated in the Lease Contract dated 22 January 2002. Contrary to the position taken by the petitioner, respondents’ recourse to an appeal would have been unavailing under Section 1, Rule 41, of the Rules of Court. The filing of a special civil action for certiorari under Rule 65 of the Rules of Court was the proper remedy questioning an order of execution.

Petitioner argues that respondents are not entitled to the 3% penalty stipulated under the Lease Contract dated 22 January 1998, which becomes payable to the lessor whenever the petitioner incurs delay in the payment of its rentals. This argument is well-taken.

It is a well-known rule that a contractual obligation or liability, or an action ex-contractu, must be founded upon a contract, oral or written, either express or implied. If there is no contract, there isno corresponding liability and no cause of action may arise therefrom.22 This is provided for in Article 1311 of the Civil Code:

Article 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.

The Lease Contract dated 22 January 1998, was executed between the spouses Bonifacio and petitioner. It is undisputed that none of the respondents had taken part, directly or indirectly, in the contract in question. Respondents also did not enter into contract with either the lessee or the lessor, as to an assignment of any right under the Lease Contract in question. The Lease Contract, including the stipulation for the 3% penalty interest, was bilateral between petitioner and Teresita Bonifacio. Respondents claim ownership over the subject property, but not as a successor-in-interest of the spouses Bonifacios. They purchased the property in an execution sale from the spouses Sevilla. Thus, respondents cannot succeed to any contractual rights which may accrue to the spouses Bonifacio.

Contracts produce an effect as between the parties who execute them. A contract cannot be binding upon and cannot be enforced by one who is not party to it. Although the respondents were adjudged to be entitled to rentals accruing from 2 March 1999, until the time the petitioner vacated the premises, the obligation to pay rent was not derived from the Lease Contract dated 22 January 1998, but from a quasi-contract. Article 2142 of the Civil Code reads:

Art. 2142. 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.

In the present case, the spouses Bonifacio, who were named as the lessors in the Lease Contracts, dated 3 August 1992 and 22 January 1998, are already adjudged not to be the real owners of the subject property. In Civil Case No. 90-2551, Branch 63 of the Makati RTC declared that the Deed of Sale, executed on 17 June 1986, between the spouses Bonifacio and the spouses Sevilla was a forgery and, hence, did not validly transfer ownership to the spouses Bonifacio. At present, there is a pending appeal before the Supreme Court docketed as G.R. No.150824, which would determine who between the respondents and the spouses Sevilla are the rightful owners of the property.

Since the spouses Bonifacio are not the owners of the subject property, they cannot unjustly benefit from it by collecting rent which should accrue to the rightful owners of the same. Hence, the Makati RTC, Branch 132, had set up a bank account where the rent due on the subject property should be deposited and kept in trust for the real owners thereto.

The last two issues raised by the petitioner on whether the Parañaque RTC, Branch 194, shouldhave dismissed the case for being premature or for any other ground cannot be raised in this petition. Such issues should be, and were, in fact, raised by petitioner in CA- G.R. No. 86157, which was an appeal of the Amended Decision dated 1 October 2003, rendered by the Parañaque RTC, Branch 194, in Civil Cases No. 02-0538 to 40. Pending the resolution of the said case by the Court of Appeals, this Court refrains from ruling thereon. What is on appeal in the present petition is the Decision rendered by the Court of Appeals in CA-G.R. SP No. 81875, where the sole issue raised was the correctness of the computation made during the execution of the Amended Decision dated 1 October 2003 of the Parañaque RTC, Branch 194.

IN VIEW OF THE FOREGOING, the instant Petition is partially GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 81875, promulgated on 13 October 2004, is REVERSED and SET ASIDE. The petitioner A & C Minimart Corporation is not obligated to pay the penalty interest of 3% per month on the total amount of rental and other charges not paid on time pursuant to the Contract of Lease dated 22 January 1998. This Court AFFIRMS thecomputation of the rent and interest due from petitioner A&C Minimart Corporation in the Writ of Execution dated 27 October 2003, issued by Branch 194 of the Parañaque Regional Trial Court,in Civil Cases No. 02-0538 to 40.

SO ORDERED.

G.R. No. 145736 March 4, 2009

ESTATE OF ORLANDO LLENADO and WENIFREDA T. LLENADO, in her capacity as (a) Administratrix of the Estate of Orlando A. Llenado and (b) Judicial Guardian of the Minor children of Orlando A. Llenado, and (c) in her Own behalf as the Surviving Spouse and Legal Heir of Orlando A. Llenado, Petitioners, vs.EDUARDO LLENADO, JORGE LLENADO, FELIZA GALLARDO VDA. DE LLENADO and REGISTER OF DEEDS of Valenzuela City, Metro Manila, Respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the May 30, 2000 Decision1 of the Court of Appeals in CA-G.R. CV No. 58911 which reversed the May 5, 1997 Decision2 of the Regional Trial Court of Valenzuela City, Branch 75 in Civil Case No. 4248-V-93, and the October 6, 2000 Resolution3 which denied the motion for reconsideration. The appellate court dismissed for lack of merit the complaint for annulment of deed of conveyance, title and damages filed by petitioneragainst herein respondents.

The subject of this controversy is a parcel of land denominated as Lot 249-D-1 (subject lot) consisting of 1,554 square meters located in Barrio Malinta, Valenzuela, Metro Manila and registered in the names of Eduardo Llenado (Eduardo) and Jorge Llenado (Jorge) under Transfer of Certificate of Title (TCT) No. V-1689.4 The subject lot once formed part of Lot 249-D owned by and registered in the name of their father, Cornelio Llenado (Cornelio), under TCT No.T-16810.

On December 2, 1975, Cornelio leased Lot 249-D-1 to his nephew, Romeo Llenado (Romeo), for a period of five years, renewable for another five years at the option of Cornelio. On March 31, 1978, Cornelio, Romeo and the latter’s cousin Orlando Llenado (Orlando) executed an Agreement5 whereby Romeo assigned all his rights to Orlando over the unexpired portion of the aforesaid lease contract. The parties further agreed that Orlando shall have the option to renew the lease contract for another three years commencing from December 3, 1980, up to December2, 1983, renewable for another four years or up to December 2, 1987, and that "during the period that [this agreement] is enforced, the x x x property cannot be sold, transferred, alienated or conveyed in whatever manner to any third party."

Shortly thereafter or on June 24, 1978, Cornelio and Orlando entered into a Supplementary Agreement6amending the March 31, 1978 Agreement. Under the Supplementary Agreement, Orlando was given an additional option to renew the lease contract for an aggregate period of 10years at five-year intervals, that is, from December 3, 1987 to December 2, 1992 and from December 3, 1992 to December 2, 1997. The said provision was inserted in order to comply withthe requirements of Mobil Philippines, Inc. for the operation of a gasoline station which was subsequently built on the subject lot.

Upon the death of Orlando on November 7, 1983, his wife, Wenifreda Llenado (Wenifreda), tookover the operation of the gasoline station. Meanwhile, on January 29, 1987, Cornelio sold Lot 249-D to his children, namely, Eduardo, Jorge, Virginia and Cornelio, Jr., through a deed of sale,denominated as "Kasulatan sa Ganap Na Bilihan,"7 for the sum of P160,000.00. As stated earlier, the subject lot, which forms part of Lot 249-D, was sold to Eduardo and Jorge, and titled

in their names under TCT No. V-1689. Several months thereafter or on September 7, 1987, Cornelio passed away.

Sometime in 1993, Eduardo informed Wenifreda of his desire to take over the subject lot. However, the latter refused to vacate the premises despite repeated demands. Thus, on September 24, 1993, Eduardo filed a complaint for unlawful detainer before the Metropolitan Trial Court of Valenzuela, Metro Manila against Wenifreda, which was docketed as Civil Civil Case No. 6074.

On July 22, 1996, the Metropolitan Trial Court rendered its Decision in favor of Eduardo and ordered Wenifreda to: (1) vacate the leased premises; (2) pay Eduardo reasonable compensation for the use and occupation of the premises plus attorney’s fees, and (3) pay the costs of the suit.

Wenifreda appealed to the Regional Trial Court of Valenzuela, Metro Manila, which reversed thedecision of the court a quo. Thus, Eduardo appealed to the Court of Appeals which rendered a Decision8 on March 31, 1998 reversing the decision of the Regional Trial Court and reinstating the decision of the Metropolitan Trial Court. It also increased the amount of reasonable compensation awarded to Eduardo for the use of the leased premises. Wenifreda’s appeal to this Court, docketed as G.R. No. 135001, was dismissed in a Resolution9 dated December 2, 1998. Accordingly, an Entry of Judgment10 was made in due course on July 8, 1999.

Previously, after Eduardo instituted the aforesaid unlawful detainer case on September 24, 1993, herein petitioner Wenifreda, in her capacity as administratrix of the estate of Orlando Llenado, judicial guardian of their minor children, and surviving spouse and legal heir of Orlando,commenced the subject Complaint,11 later amended, on November 10, 1993 for annulment of deed of conveyance, title and damages against herein respondents Eduardo, Jorge, Feliza Llenado (mother of the Llenado brothers), and the Register of Deeds of Valenzuela, Metro Manila. The case was docketed as Civil Case No. 4248-V-93 and raffled to Branch 75 of the Regional Trial Court of Valenzuela, Metro Manila.

Petitioner alleged that the transfer and conveyance of the subject lot by Cornelio in favor of respondents Eduardo and Jorge, was fraudulent and in bad faith considering that the March 31, 1978 Agreement provided that while the lease is in force, the subject lot cannot be sold, transferred or conveyed to any third party; that the period of the lease was until December 3, 1987 with the option to renew granted to Orlando; that the subject lot was transferred and conveyed to respondents Eduardo and Jorge on January 29, 1987 when the lease was in full force and effect making the sale null and void; that Cornelio verbally promised Orlando that in case he (Cornelio) decides to sell the subject lot, Orlando or his heirs shall have first priority or option to buy the subject lot so as not to prejudice Orlando’s business and because Orlando is the owner of the property adjacent to the subject lot; and that this promise was wantonly disregarded when Cornelio sold the said lot to respondents Jorge and Eduardo.

In their Answer,12 respondents Eduardo and Jorge claimed that they bought the subject lot from their father, Cornelio, for value and in good faith; that the lease agreement and its supplement were not annotated at the back of the mother title of the subject lot and do not bind them; that said agreements are personal only to Cornelio and Orlando; that the lease expired upon the death of Orlando on November 7, 1983; that they were not aware of any verbal promise to sell the subject lot granted by Cornelio to Orlando and, even if there was, said option to buy is unenforceable under the statute of frauds.

After the parties presented their respective evidence, the Regional Trial Court rendered judgment on May 5, 1997 in favor of petitioner, viz:

WHEREFORE, PREMISES CONSIDERED, this Court finds the [petitioner’s] civil action duly established by preponderance of evidence, renders judgment (adjudicates) in favor of the [petitioner], Estate of Orlando Llenado represented by Wenifreda Llenado, and against [respondents] e.g. Jorge, Eduardo, Felisa Gallardo, all surnamed Llenado, and the Register of Deeds of Valenzuela, Metro Manila, as follows:

1) It hereby judicially declare as non-existence (sic) and null and void, the following:

a) The Kasulatan Sa Ganap na Kasunduan or Deed of Sale;

b) TCT- Transfer Certificate of Title No. V-9440, in the name of [respondent]Eduardo Llenado, TCT- Transfer Certificate of Title No. V-1689, in the nameof Jorge Llenado, and Eduardo Llenado, and all deeds, documents or proceedings leading to the issuance of said title, and all subsequent title issued therefrom and likewise whatever deeds, documents or proceedings leading to the issuance of said subsequent titles;

2) It hereby orders the reconveyance of the said properties embraced in the said TCTs-Transfer Certificate of Title Nos. V-9440 and V-1689 to the [petitioner] for the same consideration, or purchase price, paid by [respondents] Eduardo Llenado and Jorge Llenado for the same properties;

3) It hereby orders [respondent], Register of Deeds of Valenzuela, Metro Manila, to cause the issuance of new transfer certificates of title over the said property in the name of the [petitioner];

4) And, because this Court is not only a court of law, but of equity, it hereby rendered the following damages to be paid by the [respondents], as the [respondents] litigated under bonafide assertions that they have meritorious defense, viz:

a) P400,000.00 as moral damages;

b) 10,000.00 as nominal damages;

c) 10,000.00 as temperate damages;

d) 10,000.00 as exemplary damages;

e) 10,000.00 attorney’s fees on the basis of quantum merit; and

f) costs of suit.

SO ORDERED.13

The Regional Trial Court found that upon the death of Orlando on November 7, 1983, his rights under the lease contract were transmitted to his heirs; that since the lease was in full force and effect at the time the subject lot was sold by Cornelio to his sons, the sale violated the prohibitory clause in the said lease contract. Further, Cornelio’s promise to sell the subject lot to Orlando may be established by parole evidence since an option to buy is not covered by the statute of frauds. Hence, the same is binding on Cornelio and his heirs.

Respondents appealed before the Court of Appeals which rendered the assailed May 30, 2000 Decision reversing the judgment of the Regional Trial Court and dismissing the Complaint. The appellate court held that the death of Orlando did not extinguish the lease agreement and had the effect of transmitting his lease rights to his heirs. However, the breach of the non-alienation clause of the said agreement did not nullify the sale between Cornelio and his sons because the heirs of Orlando are mere lessees on the subject lot and can never claim a superior right of ownership over said lot as against the registered owners thereof. It further ruled that petitioner failed to establish by a preponderance of evidence that Cornelio made a verbal promise to Orlando granting the latter the right of first refusal if and when the subject lot was sold.

Upon the denial of its motion for reconsideration, petitioner is now before this Court on the following assignment of errors:

[T]he Court of Appeals erred:

1.- In finding and concluding that there is no legal basis to annul the deed of conveyance involved in the case and in not applying R.A. No. 3516, further amending R.A. No. 1162; and

2.- In not finding and holding as null and void the subject deed of conveyance, the same having been executed in direct violation of an expressed covenant in said deed and in total disregard of the pre-emptive, or preferential rights of the herein petitioners to buy the property subject of their lease contract under said R.A. No. 3516, further amending R.A. No. 1162.14

The petition lacks merit.

Petitioner contends that the heirs of Orlando are entitled to the rights of a tenant under Republic Act (R.A.) No. 1162,15 as amended by R.A. No. 3516.16 The right of first refusal or preferential right to buy the leased premises is invoked pursuant to Section 517 of said law and this Court’s ruling in Mataas Na Lupa Tenants Association, Inc. v. Dimayuga.18

This issue is being raised for the first time on appeal. True, in Mataas Na Lupa Tenants Association, Inc., the Court explained that Section 1 of R.A. No. 1162, as amended by R.A. No. 3516, authorizes the expropriation of any piece of land in the City of Manila, Quezon City and suburbs which have been and are actually being leased to tenants for at least 10 years, provided said lands have at least 40 families of tenants thereon.19 Prior to and pending the expropriation, the tenant shall have a right of first refusal or preferential right to buy the leased premises should the landowner sell the same. However, compliance with the conditions for the application of the aforesaid law as well as the qualifications of the heirs of Orlando to be beneficiaries thereunder were never raised before the trial court, or even the Court of Appeals, because petitioner solely anchored its claim of ownership over the subject lot on the alleged violation of the prohibitory clause in the lease contract between Cornelio and Orlando, and the alleged non-performance of the right of first refusal given by Cornelio to Orlando. The rule is settled, impelled by basic requirements of due process, that points of law, theories, issues and arguments not adequately brought to the attention of the lower court will not be ordinarily considered by a reviewing court as they cannot be raised for the first time on appeal.20 As the issue of the applicability of R.A. No. 1162, as amended, was neither averred in the pleadings norraised during the trial below, the same cannot be raised for the first time on appeal.

At any rate, the allegations in the Complaint and the evidence presented during the trial below do not establish that Orlando or his heirs are covered by R.A. No. 1162, as amended. It was not alleged nor shown that the subject lot is part of the landed estate or haciendas in the City of Manila which were authorized to be expropriated under said law; that the Solicitor General has

instituted the requisite expropriation proceedings pursuant to Section 221 thereof; that the subjectlot has been actually leased for a period of at least ten (10) years; and that the subject lot has at least forty (40) families of tenants thereon. Instead, what was merely established during the trial is that the subject lot was leased by Cornelio to Orlando for the operation of a gasoline station, thus, negating petitioner’s claim that the subject lot is covered by the aforesaid law. In Mataas Na Lupa Tenants Association, Inc., the Court further explained that R.A. No. 1162, as amended,has been superseded by Presidential Decree (P.D.) No. 151722 entitled "Proclaiming Urban LandReform in the Philippines and Providing for the Implementing Machinery Thereof."23 However, asheld in Tagbilaran Integrated Settlers Association Incorporated v. Court of Appeals,24 P.D. No. 1517 is applicable only in specific areas declared, through presidential proclamation,25 to be located within the so-called urban zones.26 Further, only legitimate tenants who have resided on the land for ten years or more who have built their homes on the land and residents who have legally occupied the lands by contract, continuously for the last ten years, are given the right of first refusal to purchase the land within a reasonable time.27 Consequently, those lease contractsentered into for commercial use are not covered by said law.28 Thus, considering that petitioner failed to prove that a proclamation has been issued by the President declaring the subject lot as within the urban land reform zone and considering further that the subject lot was leased for the commercial purpose of operating a gasoline station, P.D. No. 1517 cannot be applied to this case.

In fine, the only issue for our determination is whether the sale of the subject lot by Cornelio to his sons, respondents Eduardo and Jorge, is invalid for (1) violating the prohibitory clause in the lease agreement between Cornelio, as lessor-owner, and Orlando, as lessee; and (2) contravening the right of first refusal of Orlando over the subject lot.

It is not disputed that the lease agreement contained an option to renew and a prohibition on thesale of the subject lot in favor of third persons while the lease is in force. Petitioner claims that when Cornelio sold the subject lot to respondents Eduardo and Jorge the lease was in full force and effect, thus, the sale violated the prohibitory clause rendering it invalid. In resolving this issue, it is necessary to determine whether the lease agreement was in force at the time of the subject sale and, if it was in force, whether the violation of the prohibitory clause invalidated the sale.

Under Article 1311 of the Civil Code, the heirs are bound by the contracts entered into by their predecessors-in-interest except when the rights and obligations therein are not transmissible by their nature, by stipulation or by provision of law. A contract of lease is, therefore, generally transmissible to the heirs of the lessor or lessee. It involves a property right and, as such, the death of a party does not excuse non-performance of the contract.29The rights and obligations pass to the heirs of the deceased and the heir of the deceased lessor is bound to respect the period of the lease.30 The same principle applies to the option to renew the lease. As a general rule, covenants to renew a lease are not personal but will run with the land.31 Consequently, the successors-in-interest of the lessee are entitled to the benefits, while that of the lessor are burdened with the duties and obligations, which said covenants conferred and imposed on the original parties.

The foregoing principles apply with greater force in this case because the parties expressly stipulated in the March 31, 1978 Agreement that Romeo, as lessee, shall transfer all his rights and interests under the lease contract with option to renew "in favor of the party of the Third Part(Orlando), the latter’s heirs, successors and assigns"32 indicating the clear intent to allow the transmissibility of all the rights and interests of Orlando under the lease contract unto his heirs, successors or assigns. Accordingly, the rights and obligations under the lease contract with option to renew were transmitted from Orlando to his heirs upon his death on November 7, 1983.

It does not follow, however, that the lease subsisted at the time of the sale of the subject lot on January 29, 1987. When Orlando died on November 7, 1983, the lease contract was set to

expire 26 days later or on December 3, 1983, unless renewed by Orlando’s heirs for another four years. While the option to renew is an enforceable right, it must necessarily be first exercised to be given effect.33 As the Court explained in Dioquino v. Intermediate Appellate Court:34

A clause found in an agreement relative to the renewal of the lease agreement at the option of the lessee gives the latter an enforceable right to renew the contract in which the clause is foundfor such time as provided for. The agreement is understood as being in favor of the lessee, and the latter is authorized to renew the contract and to continue to occupy the leased property after notifying the lessor to that effect. A lessor’s covenant or agreement to renew gives a privilege to the tenant, but is nevertheless an executory contract, and until the tenant has exercised the privilege by way of some affirmative act, he cannot be held for the additional term. In the absence of a stipulation in the lease requiring notice of the exercise of an option or an election torenew to be given within a certain time before the expiration of the lease, which of course, the lessee must comply with, the general rule is that a lessee must exercise an option or election to renew his lease and notify the lessor thereof before, or at least at the time of the expiration of hisoriginal term, unless there is a waiver or special circumstances warranting equitable relief.1avvphi1.zw+

There is no dispute that in the instant case, the lessees (private respondents) were granted the option to renew the lease for another five (5) years after the termination of the original period of fifteen years. Yet, there was never any positive act on the part of private respondents before or after the termination of the original period to show their exercise of such option. The silence of the lessees after the termination of the original period cannot be taken to mean that they opted to renew the contract by virtue of the promise by the lessor, as stated in the original contract of lease, to allow them to renew. Neither can the exercise of the option to renew be inferred from their persistence to remain in the premises despite petitioners’ demand for them to vacate. x x x.35

Similarly, the election of the option to renew the lease in this case cannot be inferred from petitioner Wenifreda’s continued possession of the subject lot and operation of the gasoline station even after the death of Orlando on November 7, 1983 and the expiration of the lease contract on December 3, 1983. In the unlawful detainer case against petitioner Wenifreda and inthe subject complaint for annulment of conveyance, respondents consistently maintained that after the death of Orlando, the lease was terminated and that they permitted petitioner Wenifreda and her children to remain in possession of the subject property out of tolerance and respect for the close blood relationship between Cornelio and Orlando. It was incumbent, therefore, upon petitioner as the plaintiff with the burden of proof during the trial below to establish by some positive act that Orlando or his heirs exercised the option to renew the lease. After going over the records of this case, we find no evidence, testimonial or documentary, of such nature was presented before the trial court to prove that Orlando or his heirs exercised the option to renew prior to or at the time of the expiration of the lease on December 3, 1983. In particular, the testimony of petitioner Wenifreda is wanting in detail as to the events surrounding the implementation of the subject lease agreement after the death of Orlando and any overt actsto establish the renewal of said lease.

Given the foregoing, it becomes unnecessary to resolve the issue on whether the violation of theprohibitory clause invalidated the sale and conferred ownership over the subject lot to Orlando’s heirs, who are mere lessees, considering that at the time of said sale on January 29, 1987 the lease agreement had long been terminated for failure of Orlando or his heirs to validly renew thesame. As a result, there was no obstacle to the sale of the subject lot by Cornelio to respondentsEduardo and Jorge as the prohibitory clause under the lease contract was no longer in force.

Petitioner also anchors its claim over the subject lot on the alleged verbal promise of Cornelio to Orlando that should he (Cornelio) sell the same, Orlando would be given the first opportunity to purchase said property. According to petitioner, this amounted to a right of first refusal in favor of

Orlando which may be proved by parole evidence because it is not one of the contracts covered by the statute of frauds. Considering that Cornelio sold the subject lot to respondents Eduardo and Jorge without first offering the same to Orlando’s heirs, petitioner argues that the sale is in violation of the latter’s right of first refusal and is, thus, rescissible.

The question as to whether a right of first refusal may be proved by parole evidence has been answered in the affirmative by this Court in Rosencor Development Corporation v. Inquing:36

We have previously held that not all agreements "affecting land" must be put into writing to attainenforceability. Thus, we have held that the setting up of boundaries, the oral partition of real property, and an agreement creating a right of way are not covered by the provisions of the statute of frauds. The reason simply is that these agreements are not among those enumerated in Article 1403 of the New Civil Code.

A right of first refusal is not among those listed as unenforceable under the statute of frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code presupposes the existence of a perfected, albeit unwritten, contract of sale. A right of first refusal, such as the oneinvolved in the instant case, is not by any means a perfected contract of sale of real property. At best, it is a contractual grant, not of the sale of the real property involved, but of the right of first refusal over the property sought to be sold.

It is thus evident that the statute of frauds does not contemplate cases involving a right of first refusal. As such, a right of first refusal need not be written to be enforceable and may be proven by oral evidence.37

In the instant case, the Regional Trial Court ruled that the right of first refusal was proved by oralevidence while the Court of Appeals disagreed by ruling that petitioner merely relied on the allegations in its Complaint to establish said right. We have reviewed the records and find that no testimonial evidence was presented to prove the existence of said right. The testimony of petitioner Wenifreda made no mention of the alleged verbal promise given by Cornelio to Orlando. The two remaining witnesses for the plaintiff, Michael Goco and Renato Malindog, were representatives from the Register of Deeds of Caloocan City who naturally were not privy to this alleged promise. Neither was it established that respondents Eduardo and Jorge were aware of said promise prior to or at the time of the sale of the subject lot. On the contrary, in their answer to the Complaint, respondents denied the existence of said promise for lack of knowledge thereof.38 Within these parameters, petitioner’s allegations in its Complaint cannot substitute for competent proof on such a crucial factual issue. Necessarily, petitioner’s claims based on this alleged right of first refusal cannot be sustained for its existence has not been dulyestablished.

WHEREFORE, the petition is DENIED. The May 30, 2000 Decision of the Court of Appeals in CA-G.R. CV No. 58911 dismissing the complaint for annulment of deed of conveyance, title and damages, and the October 6, 2000 Resolution denying the motion for reconsideration, are AFFIRMED.

Costs against petitioner.

SO ORDERED.

G.R. No. 182128 February 19, 2014

PHILIPPINE NATIONAL BANK, Petitioner, vs.TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC., (now PRIME EAST PROPERTIES, INC.) and AFP-RSBS, INC., Respondents.

This is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the Decision2 dated August 13, 2007 and Resolution3 dated March 13, 2008 rendered by the Court of Appeals (CA) in CA-G.R. SP No. 86033, which affirmed the Decision4 dated August 4, 2004 of the Office of thePresident (OP) in O.P. Case No. 04-D-182 (HLURB Case No. REM-A-030724-0186).

Facts of the Case

Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties Inc.5(PEPI) on an installment basis a residential lot located in Binangonan, Rizal,with an area of 204 square meters6and covered by Transfer Certificate of Title (TCT) No. 619608. Subsequently, PEPI assigned its rights over a 213,093-sq m property on August 1996

to respondent Armed Forces of the Philippines-Retirement and Separation Benefits System, Inc.(AFP-RSBS), which included the property purchased by Dee.

Thereafter, or on September 10, 1996, PEPI obtained a P205,000,000.00 loan from petitioner Philippine National Bank (petitioner), secured by a mortgage over several properties, including Dee’s property. The mortgage was cleared by the Housing and Land Use Regulatory Board (HLURB) on September 18, 1996.7

After Dee’s full payment of the purchase price, a deed of sale was executed by respondents PEPI and AFP-RSBS on July 1998 in Dee’s favor. Consequently, Dee sought from the petitionerthe delivery of the owner’s duplicate title over the property, to no avail. Thus, she filed with the HLURB a complaint for specific performance to compel delivery of TCT No. 619608 by the petitioner, PEPI and AFP-RSBS, among others. In its Decision8dated May 21, 2003, the HLURB ruled in favor of Dee and disposed as follows:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Directing [the petitioner] to cancel/release the mortgage on Lot 12, Block 21-A, Village East Executive Homes covered by Transfer Certificate of Title No. -619608-(TCT No. -619608-), and accordingly, surrender/release the title thereof to [Dee];

2. Immediately upon receipt by [Dee] of the owner’s duplicate of Transfer Certificate ofTitle No. -619608- (TCT No. -619608-), respondents PEPI and AFP-RSBS are hereby ordered to deliver the title of the subject lot in the name of [Dee] free from all liens andencumbrances;

3. Directing respondents PEPI and AFP-RSBS to pay [the petitioner] the redemption value of Lot 12, Block 21-A, Village East Executive Homes covered by Transfer Certificate of Title No. -619608- (TCT No. -619608-) as agreed upon by them in their Real Estate Mortgage within six (6) months from the time the owner’s duplicate of Transfer Certificate of Title No. -619608- (TCT No. -619608-) is actually surrendered and released by [the petitioner] to [Dee];

4. In the alternative, in case of legal and physical impossibility on the part of [PEPI, AFP-RSBS, and the petitioner] to comply and perform their respective obligation/s, as above-mentioned, respondents PEPI and AFP-RSBS are hereby ordered to jointly and severally pay to [Dee] the amount of FIVE HUNDRED TWENTY THOUSAND PESOS ([P]520,000.00) plus twelve percent (12%) interest to be computed from the filing of complaint on April 24, 2002 until fully paid; and

5. Ordering [PEPI, AFP-RSBS, and the petitioner] to pay jointly and severally [Dee] the following sums:

a) The amount of TWENTY FIVE THOUSAND PESOS ([P]25,000.00) as attorney’s fees;

b) The cost of litigation[;] and

c) An administrative fine of TEN THOUSAND PESOS ([P]10,000.00) payable to this Office fifteen (15) days upon receipt of this decision, for violation of Section 18 in relation to Section 38 of PD 957.

SO ORDERED.9

The HLURB decision was affirmed by its Board of Commissioners per Decision dated March 15, 2004, with modification as to the rate of interest.10

On appeal, the Board of Commissioners’ decision was affirmed by the OP in its Decision dated August 4, 2004, with modification as to the monetary award.11

Hence, the petitioner filed a petition for review with the CA, which, in turn, issued the assailed Decision dated August 13, 2007, affirming the OP decision. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated August 4, 2004 rendered by the Office of the President in O. P. Case No. 04-D-182 (HLURB Case No. REM-A-030724-0186) is hereby AFFIRMED.

SO ORDERED.12

Its motion for reconsideration having been denied by the CA in the Resolution dated March 13, 2008, the petitioner filed the present petition for review on the following grounds:

I. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING OUTRIGHT RELEASE OF TCT NO. 619608 DESPITE PNB’S DULY REGISTERED AND HLURB[-] APPROVED MORTGAGE ON TCT NO. 619608.

II. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING CANCELLATION OF MORTGAGE/RELEASE OF TITLE IN FAVOR OF RESPONDENT DEE DESPITE THE LACK OF PAYMENT OR SETTLEMENT BY THE MORTGAGOR (API/PEPI and AFP-RSBS) OF ITS EXISTING LOAN OBLIGATION TO PNB, OR THE PRIOR EXERCISE OF RIGHT OF REDEMPTION BY THE MORTGAGOR AS MANDATED BY SECTION 25 OF PD 957 OR DIRECT PAYMENT MADE BY RESPONDENT DEE TO PNB PURSUANT TO THE DEED OF UNDERTAKING WHICH WOULD WARRANT RELEASE OF THE SAME.13

The petitioner claims that it has a valid mortgage over Dee’s property, which was part of the property mortgaged by PEPI to it to secure its loan obligation, and that Dee and PEPI are boundby such mortgage. The petitioner also argues that it is not privy to the transactions between the subdivision project buyers and PEPI, and has no obligation to perform any of their respective undertakings under their contract.14

The petitioner also maintains that Presidential Decree (P.D.) No. 95715 cannot nullify the subsisting agreement between it and PEPI, and that the petitioner’s rights over the mortgaged properties are protected by Act 313516. If at all, the petitioner can be compelled to release or cancel the mortgage only after the provisions of P.D. No. 957 on redemption of the mortgage by the owner/developer (Section 25) are complied with. The petitioner also objects to the denomination by the CA of the provisions in the Affidavit of Undertaking as stipulations pour autrui,17 arguing that the release of the title was conditioned on Dee’s direct payment to it.18

Respondent AFP-RSBS, meanwhile, contends that it cannot be compelled to pay or settle the obligation under the mortgage contract between PEPI and the petitioner as it is merely an investor in the subdivision project and is not privy to the mortgage.19

Respondent PEPI, on the other hand, claims that the title over the subject property is one of the properties due for release by the petitioner as it has already been the subject of a Memorandum of Agreement and dacion en pago entered into between them.20 The agreement was reached after PEPI filed a petition for rehabilitation, and contained the stipulation that the petitioner agreed to release the mortgage lien on fully paid mortgaged properties upon the issuance of the certificates of title over the dacioned properties.21

For her part, respondent Dee adopts the arguments of the CA in support of her prayer for the denial of the petition for review.22

Ruling of the Court

The petition must be DENIED.

The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of respondent PEPI and AFP-RSBS in its transactions with Dee because it is not a privy thereto. The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it,23 and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof.24 "Where there is no privity of contract, there is likewise no obligation or liability to speak about."25

The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFP-RSBS.1avvphi1 In this case, there are two phases involved in the transactions between respondents PEPI and Dee – the first phase is the contract to sell, which eventually became the second phase, the absolute sale, after Dee’s full payment of the purchase price. In a contract of sale, the parties’ obligations are plain and simple. The law obliges the vendor to transfer the ownership of and to deliver the thing that is the object of sale.26 On the other hand, the principal obligation of a vendee is to pay the full purchase price at the agreed time.27 Based on the final contract of sale between them, the obligation of PEPI, as owners and vendors of Lot 12, Block 21-A, Village East Executive Homes, is to transfer the ownership of and to deliver Lot 12, Block 21-A to Dee, who, in turn, shall pay, and has in fact paid, the full purchase price of the property. There is nothing in the decision of the HLURB, as affirmed by the OP and the CA, which shows that the petitioner is being ordered to assume the obligation of any of the respondents. There is also nothing in the HLURB decision, which validates the petitioner’s claim that the mortgage hasbeen nullified. The order of cancellation/release of the mortgage is simply a consequence of Dee’s full payment of the purchase price, as mandated by Section 25 of P.D. No. 957, to wit:

Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer upon full payment of the lot or unit. No fee, except those required for the registration of thedeed of sale in the Registry of Deeds, shall be collected for the issuance of such title. In the event a mortgage over the lot or unit is outstanding at the time of the issuance of the title to the buyer, the owner or developer shall redeem the mortgage or the corresponding portion thereof within six months from such issuance in order that the title over any fully paid lot or unit may be secured and delivered to the buyer in accordance herewith.

It must be stressed that the mortgage contract between PEPI and the petitioner is merely an accessory contract to the principal three-year loan takeout from the petitioner by PEPI for its expansion project. It need not be belaboured that "[a] mortgage is an accessory undertaking to secure the fulfillment of a principal obligation,"28 and it does not affect the ownership of the property as it is nothing more than a lien thereon serving as security for a debt.29

Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract between respondents PEPI and Dee was still the Contract to Sell, as Dee was yet to fully pay the purchase price of the property. On this point, PEPI was acting fully well within its right when

it mortgaged the property to the petitioner, for in a contract to sell, ownership is retained by the seller and is not to pass until full payment of the purchase price.30 In other words, at the time of the mortgage, PEPI was still the owner of the property. Thus, in China Banking Corporation v. Spouses Lozada,31 the Court affirmed the right of the owner/developer to mortgage the property subject of development, to wit: "[P.D.] No. 957 cannot totally prevent the owner or developer from mortgaging the subdivision lot or condominium unit when the title thereto still resides in the owner or developer awaiting the full payment of the purchase price by the installment buyer."32 Moreover, the mortgage bore the clearance of the HLURB, in compliance with Section 18 of P.D. No. 957, which provides that "[n]o mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the [HLURB]."

Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI, theformer is still bound to respect the transactions between respondents PEPI and Dee. The petitioner was well aware that the properties mortgaged by PEPI were also the subject of existing contracts to sell with other buyers. While it may be that the petitioner is protected by Act No. 3135, as amended, it cannot claim any superior right as against the installment buyers. This is because the contract between the respondents is protected by P.D. No. 957, a social justice measure enacted primarily to protect innocent lot buyers.33 Thus, in Luzon Development Bank v. Enriquez,34 the Court reiterated the rule that a bank dealing with a property that is already subject of a contract to sell and is protected by the provisions of P.D. No. 957, is bound by the contract to sell.35

However, the transferee BANK is bound by the Contract to Sell and has to respect Enriquez’s rights thereunder. This is because the Contract to Sell, involving a subdivision lot, is covered and protected by PD 957.

x x x.

x x x x

x x x Under these circumstances, the BANK knew or should have known of the possibility and risk that the assigned properties were already covered by existing contracts to sell in favor of subdivision lot buyers. As observed by the Court in another case involving a bank regarding a subdivision lot that was already subject of a contract to sell with a third party:

"[The Bank] should have considered that it was dealing with a property subject of a real estate development project. A reasonable person, particularly a financial institution x x x, should have been aware that, to finance the project, funds other than those obtained from the loan could have been used to serve the purpose, albeit partially. Hence, there was a need to verify whetherany part of the property was already intended to be the subject of any other contract involving buyers or potential buyers. In granting the loan, [the Bank] should not have been content merely with a clean title, considering the presence of circumstances indicating the need for a thorough investigation of the existence of buyers x x x. Wanting in care and prudence, the [Bank] cannot be deemed to be an innocent mortgagee. x x x"36 (Citation omitted)

More so in this case where the contract to sell has already ripened into a contract of absolute sale.1âwphi1

Moreover, PEPI brought to the attention of the Court the subsequent execution of a Memorandum of Agreement dated November 22, 2006 by PEPI and the petitioner. Said agreement was executed pursuant to an Order dated February 23, 2004 by the Regional Trial Court (RTC) of Makati City, Branch 142, in SP No. 02-1219, a petition for Rehabilitation under the Interim Rules of Procedure on Corporate Rehabilitation filed by PEPI. The RTC order approved PEPI’s modified Rehabilitation Plan, which included the settlement of the latter’s

unpaid obligations to its creditors by way of dacion of real properties. In said order, the RTC alsoincorporated certain measures that were not included in PEPI’s plan, one of which is that "[t]itles to the lots which have been fully paid shall be released to the purchasers within 90 days after the dacion to the secured creditors has been completed."37Consequently, the agreement stipulated that as partial settlement of PEPI’s obligation with the petitioner, the former absolutely and irrevocably conveys by way of "dacion en pago" the properties listed therein,38 which included the lot purchased by Dee. The petitioner also committed to –

[R]elease its mortgage lien on fully paid Mortgaged Properties upon issuance of the certificates of title over the Dacioned Properties in the name of the [petitioner]. The request for release of a Mortgaged Property shall be accompanied with: (i) proof of full payment by the buyer, together with a certificate of full payment issued by the Borrower x x x. The [petitioner] hereby undertakesto cause the transfer of the certificates of title over the Dacioned Properties and the release of the Mortgaged Properties with reasonable dispatch.39

Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.40 It is a mode of extinguishing an existing obligation41 and partakes the nature of sale as the creditor is really buying the thing or property of the debtor, the payment for which is to be charged against the debtor’s debt.42 Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the partiesby agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished.43

There is nothing on record showing that the Memorandum of Agreement has been nullified or is the subject of pending litigation; hence, it carries with it the presumption of validity.44 Consequently, the execution of the dation in payment effectively extinguished respondent PEPI’s loan obligation to the petitioner insofar as it covers the value of the property purchased by Dee. This negates the petitioner’s claim that PEPI must first redeem the property before it can cancel or release the mortgage. As it now stands, the petitioner already stepped into the shoes of PEPI and there is no more reason for the petitioner to refuse the cancellation or release of the mortgage, for, as stated by the Court in Luzon Development Bank, in acceptingthe assigned properties as payment of the obligation, "[the bank] has assumed the risk that some of the assigned properties are covered by contracts to sell which must be honored under PD 957."45 Whatever claims the petitioner has against PEPI and AFP-RSBS, monetary or otherwise, should not prejudice the rights and interests of Dee over the property, which she has already fully paid for.

As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is obvious that the law—as an instrument of social justice—must favor the weak.46 (Emphasis omitted)

Finally, the Court will not dwell on the arguments of AFP-RSBS given the finding of the OP that "[b]y its non-payment of the appeal fee, AFP-RSBS is deemed to have abandoned its appeal and accepts the decision of the HLURB."47 As such, the HLURB decision had long been final and executory as regards AFP-RSBS and can no longer be altered or modified.48

WHEREFORE, the petition for review is DENIED for lack of merit. Consequently, the Decision dated August 13, 2007 and Resolution dated March 13, 2008 of the Court of Appeals in CA-G.R.SP No. 86033 are AFFIRMED.

Petitioner Philippine National Bank and respondents Prime East Properties Inc. and Armed Forces of the Philippines-Retirement and Separation Benefits System, Inc. are hereby ENJOINED to strictly comply with the Housing and Land Use Regulatory Board Decision dated

May 21, 2003, as modified by its Board of Commissioners Decision dated March 15, 2004 and Office of the President Decision dated August 4, 2004.

SO ORDERED.

G.R. No. 123892 May 21, 2001

JASMIN SOLER, petitioner, vs.COURT OF APPEALS, COMMERCIAL BANK OF MANILA, and NIDA LOPEZ, respondents.

PARDO, J.:

Appeal via certiorari from a decision of the Court of Appeals,1 declaring that there was no perfected contract between petitioner Jazmin Soler and The Commercial Bank of Manila (COMBANK FOR BREVITY, formerly Boston Bank of the Philippines) for the renovation of its Ermita Branch, thereby denying her claim for payment of professional fees for services rendered.

The antecedent facts are as follows:

Petitioner Jazmin Soler is a Fine Arts graduate of the University of Sto. Tomas, Manila. She is a well known licensed professional interior designer. In November 1986, her friend Rosario Pardo asked her to talk to Nida Lopez, who was manager of the COMBANK Ermita Branch for they were planning to renovate the branch offices.2

Even prior to November 1986, petitioner and Nida Lopez knew each other because of Rosario Pardo, the latter's sister. During their meeting, petitioner was hesitant to accept the job because of her many out of town commitments, and also considering that Ms. Lopez was asking that the designs be submitted by December 1986, which was such a short notice. Ms. Lopez insisted, however, because she really wanted petitioner to do the design for renovation. Petitioner acceded to the request. Ms. Lopez assured her that she would be compensated for her services.Petitioner even told Ms. Lopez that her professional fee was ten thousand pesos (P10,000.00), to which Ms. Lopez acceded.3

During the November 1986 meeting between petitioner and Ms. Lopez, there were discussions as to what was to be renovated, which included a provision for a conference room, a change in the carpeting and wall paper, provisions for bookshelves, a clerical area in the second floor, dressing up the kitchen, change of the ceiling and renovation of the tellers booth. Ms. Lopez again assured petitioner that the bank would pay her fees.4

After a few days, petitioner requested for the blueprint of the building so that the proper design, plans and specifications could be given to Ms. Lopez in time for the board meeting in December 1986. Petitioner then asked her draftsman Jackie Barcelon to go to the jobsite to make the proper measurements using the blue print. Petitioner also did her research on the designs and individual drawings of what the bank wanted. Petitioner hired Engineer Ortanez to make the electrical layout, architects Frison Cruz and De Mesa to do the drafting. For the services rendered by these individuals, petitioner paid the engineer P4,000.00, architects Cruz and de Mesa P5,000.00 and architect Barcelon P6,000.00. Petitioner also contacted the suppliers of thewallpaper and the sash makers for their quotation. So come December 1986, the lay out and thedesign were submitted to Ms. Lopez. She even told petitioner that she liked the designs.5

Subsequently, petitioner repeatedly demanded payment for her services but Ms. Lopez just ignored the demands. In February 1987, by chance petitioner and Ms. Lopez saw each other in a concert at the Cultural Center of the Philippines. Petitioner inquired about the payment for her services, Ms. Lopez curtly replied that she was not entitled to it because her designs did not conform to the bank's policy of having a standard design, and that there was no agreement between her and the bank.6

To settle the controversy, petitioner referred the matter to her lawyers, who wrote Ms. Lopez on May 20, 1987, demanding payment for her professional fees in the amount of P10,000.00 which Ms. Lopez ignored. Hence, on June 18, 1987, the lawyers wrote Ms. Lopez once again demanding the return of the blueprint copies petitioner submitted which Ms. Lopez refused to return.7

On October 13, 1987, petitioner filed at the Regional Trial Court of Pasig, Branch 153 a complaint against COMBANK and Ms. Lopez for collection of professional fees and damages.8

In its answer, COMBANK stated that there was no contract between COMBANK and petitioner;9 that Ms. Lopez merely invited petitioner to participate in a bid for the renovation of theCOMBANK Ermita Branch; that any proposal was still subject to the approval of the COMBANK's head office.10

After due trial, on November 19, 1990, the trial court rendered a decision, the dispositive portion of which reads:

"WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiffand against defendants, ordering defendants jointly and severally, to pay plaintiff the following, to wit:

"1. P15,000.00 representing the actual and compensatory damages or at least a reasonable compensation for the services rendered based on a quantum meruit;

"2. P5,000.00 as attorney's fees, and P2,000.00 as litigation expenses;

"3. P5,000.00 as exemplary damages; and

"4. The cost of suit.

"SO ORDERED."11

On November 29, 1990, COMBANK, and Ms. Nida Lopez, filed their notice of appeal.12 On December 5, 1990, the trial court ordered13 the records of the case elevated to the Court of Appeals.14

In the appeal, COMBANK reiterated that there was no contract between petitioner, Nida Lopez and the bank.15Whereas, petitioner maintained that there was a perfected contract between her and the bank which was facilitated through Nida Lopez. According to petitioner there was an offer and an acceptance of the service she rendered to the bank.16

On October 26, 1995, the Court of Appeals rendered its decision the relevant portions of which state:

"After going over the record of this case, including the transcribed notes taken during the course of the trial, We are convinced that the question here is not really whether the alleged contract purportedly entered into between the plaintiff and defendant Lopez is enforceable, but whether a contract even exists between the parties.

"Article 1318 of the Civil Code provides that there is no contract unless the following requisites concur:

"(1) consent of the contracting parties;

"(2) object certain which is the subject matter of the contract;

"(3) cause of the obligation which is established.

xxx

"The defendant bank never gave its imprimatur or consent to the contract considering that the bidding or the question of renovating the ceiling of the branch office of defendant bank was deferred because the commercial bank is for sale. It is under privatization. xxx

"At any rate, we find that the appellee failed to prove the allegations in her complaint. xxx

"WHEREFORE, premises considered, the appealed decision (dated November 19, 1990) of the Regional Trial Court (Branch 153) in Pasig (now 55238, is hereby REVERSED. No pronouncement as to costs.

"SO ORDERED."17

Hence, this petition.18

Petitioner forwards the argument that:

1. The Court of Appeals erred in ruling that there was no contract between petitioner and respondents, in the absence of the element of consent;

2. The Court of Appeals erred in ruling that respondents merely invited petitioner to present her proposal;

3. The Court of Appeals erred in ruling that petitioner knew that her proposal was still subject to bidding and approval of the board of directors of the bank;

4. The Court of Appeals erred in reversing the decision of the trial court.

We find the petition meritorious.

We see that the issues raised boil down to whether or not there was a perfected contract between petitioner Jazmin Soler and respondents COMBANK and Nida Lopez, and whether or not Nida Lopez, the manager of the bank branch, had authority to bind the bank in the transaction.

The discussions between petitioner and Ms. Lopez was to the effect that she had authority to engage the services of petitioner. During their meeting, she even gave petitioner specifications as to what was to be renovated in the branch premises and when petitioners requested for the blueprints of the building, Ms. Lopez supplied the same.

Ms. Lopez was aware that petitioner hired the services of people to help her come up with the designs for the December, 1986 board meeting of the bank. Ms. Lopez even insisted that the designs be rushed in time for presentation to the bank. With all these discussion and transactions, it was apparent to petitioner that Ms. Lopez indeed had authority to engage the services of petitioner.1âwphi1.nêt

The next issue is whether there was a perfected contract between petitioner and the Bank.

"A contract is a meeting of the minds between two persons whereby one binds himself to give something or to render some service to bind himself to give something to render some service toanother for consideration. There is no contract unless the following requisites concur: 1. Consentof the contracting parties; 2. Object certain which is the subject matter of the contract; and 3. Cause of the obligation which is established.19

"A contract undergoes three stages:

"(a) preparation, conception, or generation, which is the period of negotiation and bargaining, ending at the moment of agreement of the parties;

"(b) perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and

"(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract."20

In the case at bar, there was a perfected oral contract. When Ms. Lopez and petitioner met in November 1986, and discussed the details of the work, the first stage of the contract commenced. When they agreed to the payment of the ten thousand pesos (P10,000.00) as professional fees of petitioner and that she should give the designs before the December 1986 board meeting of the bank, the second stage of the contract proceeded, and when finally petitioner gave the designs to Ms. Lopez, the contract was consummated.

Petitioner believed that once she submitted the designs she would be paid her professional fees.Ms. Lopez assured petitioner that she would be paid.

It is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority.21

Also, petitioner may be paid on the basis of quantum meruit. "It is essential for the proper operation of the principle that there is an acceptance of the benefits by one sought to be charged for the services rendered under circumstances as reasonably to notify him that the lawyer performing the task was expecting to be paid compensation therefor. The doctrine of quantum meruit is a device to prevent undue enrichment based on the equitable postulate that it is unjust for a person to retain benefit without paying for it."22

We note that the designs petitioner submitted to Ms. Lopez were not returned. Ms. Lopez, an officer of the bank as branch manager used such designs for presentation to the board of the bank. Thus, the designs were in fact useful to Ms. Lopez for she did not appear to the board without any designs at the time of the deadline set by the board.

IN VIEW WHEREOF, the decision appealed from is REVERSED and SET ASIDE.

The decision of the trial court23 is REVIVED, REINSTATED and AFFIRMED.

No costs.

SO ORDERED.

G.R. No. 173038 September 14, 2011

ELENA JANE DUARTE, Petitioner, vs.MIGUEL SAMUEL A.E. DURAN, Respondent.

D E C I S I O N

DEL CASTILLO, J.:

Preponderance of evidence only requires that evidence be greater or more convincing than the opposing evidence.1

Assailed in this Petition for Review on Certiorari2 under Rule 45 of the Rules of Court are the October 26, 2005 Decision3 and May 22, 2006 Resolution4 of the Court of Appeals (CA) in CA-G.R. SP No. 84461.

Factual Antecedents

This petition arose from a suit5 for collection of sum of money filed by respondent Miguel SamuelA.E. Duran6against petitioner Elena Jane Duarte with

Branch 5 of the Municipal Trial Court in Cities (MTCC), Cebu.

According to respondent, on February 14, 2002, he offered to sell a laptop computer for the sumof P15,000.00 to petitioner thru the help of a common friend, Josephine Dy (Dy).7 Since petitioner was undecided, respondent left the laptop with petitioner for two days.8 On February 16, 2002, petitioner told respondent that she was willing to buy the laptop on installment.9 Respondent agreed; thus, petitioner gave P5,000.00 as initial payment and promised to pay P3,000.00 on February 18, 2002 and P7,000.00 on March 15, 2002.10 On February 18, 2002, petitioner gave her second installment of P3,000.00 to Dy, who signed the handwritten receipt11 allegedly made by petitioner as proof of payment.12 But when Dy returned to get the remaining balance on March 15, 2002, petitioner offered to pay only P2,000.00 claiming that the laptop was only worth P10,000.00.13 Due to the refusal of petitioner to pay the remaining balance, respondent thru counsel sent petitioner a demand letter dated July 29, 2002.14

Petitioner, however, denied writing the receipt dated February 18, 2002,15 and receiving the demand letter dated July 29, 2002.16 Petitioner claimed that there was no contract of sale.17 Petitioner said that Dy offered to sell respondent’s laptop but because petitioner was not interested in buying it, Dy asked if petitioner could instead lend respondent the amount of P5,000.00.18 Petitioner agreed and in turn, Dy left the laptop with petitioner.19 On February 18,2002, Dy came to get the laptop but petitioner refused to give it back because the loan was not yet paid.20 Dy then asked petitioner to lend an additional amount of P3,000.00 to respondent who allegedly was in dire need of money.21 Petitioner gave the money under agreement that the amounts she lent to respondent would be considered as partial payments for the laptop in case she decides to buy it.22 Sometime in the first week of March 2002, petitioner informed respondent that she has finally decided not to buy the laptop.23Respondent, however, refused to pay and insisted that petitioner purchase the laptop instead.24

Ruling of the Municipal Trial Court in Cities

On June 2, 2003, the MTCC rendered a Decision25 in favor of respondent. It found the receipt dated February 18, 2002 and the testimonies of respondent and his witness, Dy, sufficient to prove that there was a contract of sale between the parties.26 Thus:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the latter to pay plaintiff the following measure of damages:

(a) Actual damages in the amount of Seven Thousand (P7,000.00) Pesos with interestthereon at 12% per annum from July 29, 2002 until fully paid;

(b) Attorney’s fees in the amount of Five Thousand (P5,000.00) Pesos; and

(c) Litigation expenses in the amount of Three Thousand (P3,000.00) Pesos.

SO ORDERED.27

Ruling of the Regional Trial Court

On appeal,28 the Regional Trial Court (RTC) of Cebu, Branch 12, reversed the MTCC Decision. Pertinent portions of the Decision,29 including the dispositive portion, read:

x x x x

As shown in the records of the case, this Court finds the alleged receipt issued by the witness Josephine Dy [in] her own handwriting a mere product of machination, trickery and self-serving. It shows no proof of conformity or acknowledgment on the part of the defendant that indeed she agreed on the stipulations. Thus, it cannot be given any credence and ultimately, did not bind her.

x x x x

WHEREFORE, the assailed Decision is REVERSED and SET ASIDE. The defendant Elena Jane Duarte is hereby directed to return the computer laptop to plaintiff Miguel Samuel A.E. Duran and plaintiff is directed to return the money borrowed from defendant.

SO ORDERED.30

Respondent moved for reconsideration but the same was denied by the RTC in an Order31 datedMay 13, 2004.

Ruling of the Court of Appeals

On June 1, 2004, respondent filed a Petition for Review32 with the CA. Finding the petition meritorious, the CA reversed the RTC Decision and reinstated the Decision of the MTCC. The CA said that the RTC erred in not giving weight and credence to the demand letter dated July 29, 2002 and the receipt dated February 18, 2002.33The CA pointed out that petitioner failed to overturn the presumption that the demand letter dated July 29, 2002 sent by respondent’s counsel by registered mail was received by her.34 Neither was she able to deny under oath the genuineness and due execution of the receipt dated February 18, 2002.35 Thus, the fallo of the Decision36reads:

WHEREFORE, premises considered, the petition for review is hereby GRANTED. The decision of the Regional Trial Court, Branch 12, Cebu City is REVERSED and the judgment of Municipal Trial Court in Cities Branch 5, Cebu City is REINSTATED. No pronouncement as to costs.

SO ORDERED.37

Petitioner filed a Motion for Reconsideration38 which the CA denied in a Resolution39 dated May 22, 2006.

Issues

Hence, the present recourse by petitioner raising five issues, to wit:

I. Whether x x x the [CA] committed grave error in not resolving the issue as to whether or not the petition for review that respondent filed in the said court was filed out of time.

II. Whether x x x the [CA] committed grave error when it reinstated the judgment of the[MTCC], Branch 5, Cebu City which awarded excessive attorney’s fees and litigation expenses without factual and legal justification since the awards were merely stated inthe dispositive portion of the decision and the factual and legal bases thereof were notdiscussed in the text thereof.

III. Whether x x x the [CA] committed grave error in holding that the denial by the petitioner of a receipt of the demand letter, sent through registered mail has not overturned the principal presumption of regularity in the performance of duty.

IV. Whether x x x the [CA] committed grave error in holding that a "receipt" which doesnot contain the signature of the petitioner is an actionable document.

V. Whether x x x the [CA] committed grave error in holding that the evidence availableconfirm the existence of a contract of sale.40

Summed up, the issues boil down to: (1) the timeliness of the filing of the Petition for Review with the CA; (2) the existence of a contract of sale; and (3) respondent’s entitlement to attorney’sfees and litigation expenses.

Petitioner’s Arguments

Petitioner contends that the filing of the Petition for Review with the CA on June 1, 2004 was beyond the reglementary period.41 Records show that respondent received a copy of the RTC Decision on March 25, 2004, filed a Motion for Reconsideration on April 12, 2004 since April 9 and 10 were holidays and April 11, 2004 was a Sunday, and received a copy of the RTC Order denying his Motion for Reconsideration on May 27, 2004.42Thus, he only had one day left from May 27, 2004 within which to file a Petition for Review with the CA.43

Petitioner likewise denies the existence of a contract of sale, insisting that the laptop was not sold to her but was given as a security for respondent’s debt. To prove that there was no contract of sale, petitioner calls attention to respondent’s failure to present a written contract of sale.44 She claims that under the Statute of Frauds, a contract of sale to be enforceable must be in writing.45 She also imputes error on the part of the CA in giving weight and credence to the

receipt dated February 18, 2002 and the demand letter dated July 29, 2002.46 She claims that the receipt dated February 18, 2002, which she denies having written, is not an actionable document; thus, there was no need for her to deny under oath its genuineness and due execution.47 Furthermore, she claims that her denial of the receipt of the demand letter dated July 29, 2002 shifted the burden upon respondent to prove that the letter was indeed received by her.48 As to the attorney’s fees and litigation expenses, petitioner contends that these were not discussed in the MTCC Decision but were only stated in the dispositive portion and that the amount of P5,000.00 is excessive considering that it is 70% of the principal amount claimed by respondent.49

Respondent’s Arguments

Respondent, on the other hand, argues that his Petition for Review was timely filed with the CA because he has 15 days from receipt of the RTC Order dated May 13, 2004 within which to file aPetition for Review with the CA under Section 150 of Rule 42 of the Rules of Court.51 Respondentdefends the ruling of the CA by arguing that the receipt dated February 18, 2002 is an actionabledocument, and thus, petitioner’s failure to deny under oath its genuineness and due execution constitutes an admission thereof.52 In addition, petitioner’s denial of the receipt of the demand letter dated July 29, 2002 cannot overcome the presumption that the said letter was received in the regular course of mail.53 Respondent likewise points out that the Statute of Frauds does not apply in the instant case.54 Finally, respondent claims that the award of attorney’s fees and litigation expenses are not excessive and that the factual and legal bases of the award were stated in the body of MTCC Decision.55

Our Ruling

The Petition lacks merit.

The Petition for Review was timely filed with the CA

To standardize the appeal periods and afford litigants fair opportunity to appeal their cases, we ruled in Neypes v. Court of Appeals56 that litigants must be given a fresh period of 15 days withinwhich to appeal, counted from receipt of the order dismissing a motion for a new trial or motion for reconsideration under Rules 40, 41, 42, 43 and 45 of the Rules of Court.57 This ruling, as we have said in Fil-Estate Properties, Inc. v. Homena-Valencia,58retroactively applies even to cases pending prior to the promulgation of Neypes on September 14, 2005, there being no vested rights in the rules of procedure.59

Since the instant case was pending in the CA at the time Neypes was promulgated, respondent is entitled to a fresh period of 15 days, counted from May 27, 2004, the date respondent received the RTC Order dated May 13, 2004 denying his motion for reconsideration of the RTC Decision dated March 19, 2004 or until June 11, 2004, within which to file his Petition for Reviewwith the CA. Thus, we find that when he filed the Petition for Review with the CA on June 1, 2004, his period to appeal had not yet lapsed.

There was a contract of sale between the parties

As to whether there was a contract of sale between the parties, we hold that there was, and the absence of a written contract of sale does not mean otherwise. A contract of sale is perfected the moment the parties agree upon the object of the sale, the price, and the terms of payment.60 Once perfected, the parties are bound by it whether the contract is verbal or in writingbecause no form is required.61 Contrary to the view of petitioner, the Statute of Frauds does not apply in the present case as this provision applies only to executory, and not to completed, executed or partially executed contracts.62 In this case, the contract of sale had been partially

executed because the possession of the laptop was already transferred to petitioner and the partial payments had been made by her. Thus, the absence of a written contract is not fatal to respondent’s case. Respondent only needed to show by a preponderance of evidence that therewas an oral contract of sale, which he did by submitting in evidence his own affidavit, the affidavit of his witness Dy, the receipt dated February 18, 2002 and the demand letter dated July29, 2002.

As regards the receipt dated February 18, 2002, we agree with petitioner that it is not an actionable document. Hence, there was no need for her to deny its genuineness and due execution under oath. Nonetheless, we find no error on the part of the CA in giving full weight and credence to it since it corroborates the testimonies of respondent and his witness Dy that there was an oral contract of sale between the parties.

With regard to petitioner’s denial of the receipt of the demand letter dated July 29, 2002, we believe that this did not overturn the presumption of regularity that the letter was delivered and received by the addressee in the regular course of the mail considering that respondent was able to present the postmaster’s certification63 stating that the letter was indeed sent to the address of petitioner. Bare denial of receipt of a mail cannot prevail over the certification of the postmaster, whose official duty is to send notices of registered mail.64

As we see it then, the evidence submitted by respondent weigh more than petitioner’s bare denials. Other than her denials, no other evidence was submitted by petitioner to prove that the laptop was not sold but was only given as security for respondent’s loan. What adds doubt to herstory is the fact that from the first week of March 2002, the time she allegedly decided not to buythe laptop, up to the time the instant case was filed against her, she did not exert any effort to recover from respondent the payment of the alleged loan. Her inaction leads us to conclude that the alleged loan was a mere afterthought.

All told, no error can be attributed to the CA in finding that there was a contract of sale between the parties

The award for attorney’s fees and litigation expenses was proper

Neither do we find any error in the award of attorney’s fees and litigation expenses.

Article 220865 of the Civil Code enumerates the legal grounds which justify or warrant the grant of attorney’s fees and expenses of litigation, among which is when the defendant’s act or omission has compelled the plaintiff to incur expenses to protect his interest.66 The reason for the award of attorney’s fees and litigation expenses, however, must be set forth in the decision of the court and not in the dispositive portion only.67 In this case, the factual and legal bases for the award were set forth in the body of the MTCC Decision dated June 2, 2003, to wit:

x x x As the defendant refused to satisfy plaintiff’s just and valid claim, the latter was compelled to litigate and engage the services of counsel to protect his interest and in the process, incurred litigation expenses.68 1avvphi1

The award of attorney’s fees in the amount of P5,000.00 is also reasonable and not excessive considering that this case, a simple collection of a measly sum of P7,000.00, has dragged for almost a decade and even had to reach this Court only because petitioner refused to pay. The fact that it is 70% of the principal amount claimed is of no moment as the amount of attorney’s fees is discretionary upon the court as long as it is reasonable.69

Finally, although not raised as an issue, we find it necessary to modify the legal interest rate imposed on the principal amount claimed. Since the claim involves an obligation arising from a contract of sale and not a loan or forbearance of money, the interest rate should be six percent (6%) per annum of the amount claimed from July 29, 2002.70 The interest rate of twelve percent (12%) per annum, however, shall apply from the finality of judgment until the total amount awarded is fully paid.71

WHEREFORE, the petition is hereby DENIED. The assailed October 26, 2005 Decision and May 22, 2006 Resolution of the Court of Appeals in CA-G.R. SP No. 84461 are hereby AFFIRMED with MODIFICATION as to the legal interest imposed on the principal amount claimed. The legal interest shall be at the rate of six percent (6%) per annum from July 29, 2002 and at the rate of twelve percent (12%) per annum from the time the judgment of this Court becomes final and executory until the obligation is fully satisfied.

SO ORDERED.

G.R. No. 173622 March 11, 2013

ROBERN DEVELOPMENT CORPORATION and RODOLFO M. BERNARDO, JR., Petitioners, vs.PEOPLE'S LANDLESS ASSOCIATION represented by FLORIDA RAMOS and NARDO LABORA,Respondent.

D E C I S I O N

DEL CASTILLO, J.:

"This Court cannot presume the existence of a sale of land, absent any direct proof of it."1

Challenged in this Petition for Review on Certiorari are the August 16, 2005 Decision2 and May 30, 2006 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 66071, which ordered petitioner Robern Development Corporation (Robern) to reconvey the 2,000-square meter lot it bought from Al-Amanah Islamic Development Bank of the Philippines (Al-Amanah) to respondent People's Landless Association (PELA).

Factual Antecedents

Al-Amanah owned a 2000-square meter lot located in Magtu-od, Davao City and covered by Transfer Certificate of Title (TCT) No. 138914.4 On December 12, 1992, Al-Amanah Davao Branch, thru its officer-in-charge Febe O. Dalig (OIC Dalig), asked5 some of the members of PELA6 to desist from building their houses on the lot and to vacate the same, unless they are interested to buy it. The informal settlers thus expressed their interest to buy the lot at P100.00 per square meter, which Al-Amanah turned down for being far below its asking price.7Consequently, Al-Amanah reiterated its demand to the informal settlers to vacate the lot.8

In a letter9 dated March 18, 1993, the informal settlers together with other members comprising PELA offered to purchase the lot for P300,000.00, half of which shall be paid as down payment and the remaining half to be paid within one year. In the lower portion of the said letter, Al-Amanah made the following annotation:

Note:

Subject offer has been acknowledged/received but processing to take effect upon putting up of the partial amt. of P150,000.00 on or before April 15, 1993.

By May 3, 1993, PELA had deposited P150,000.00 as evidenced by four bank receipts.10 For thefirst three receipts, the bank labelled the payments as "Partial deposit on sale of TCT No. 138914", while it noted the 4th receipt as "Partial/Full payment on deposit on sale of A/asset TCT No. 138914."

In the meantime, the PELA members remained in the property and introduced further improvements.

On November 29, 1993, Al-Amanah, thru Davao Branch Manager Abraham D. Ututalum-Al Haj, wrote then PELA President Bonifacio Cuizon, Sr. informing him of the Head Office’s disapproval of PELA’s offer to buy the said 2,000-square meter lot, viz:

Dear Mr. Cuizon, Sr.,

Please be inform[ed] that your offer to purchase the lot covered by TCT No. T-138914, containing an area of 2,000 square meters, located at Bakingan, Barangay Magtuod, Davao CityforP300,000.00 has been turned down by the top management, due to the reason that your offered price is way below the selling price of the Bank which is P500.00 per square meter, or negotiate but on Cash basis only.

You had been told regarding this matter, but you failed to counter offer since you have [conferred] with the Bank’s local management. Despite x x x the time given to you to counter offer or to vacate the lot presently and illegally occupied by you and the members of the association, still you refrain to hear our previous notices. You even deliberately construct more residential structures without our permission. As such, you are finally instructed to vacate the lot and remove all the house structures erected on the said lot within 15 days upon receipt of this letter. Failure on your part including that of the members, the Bank will be constrained to take legal action against you.

Furthermore, you can withdraw the amount deposited in the name of your association anytime during banking hours.11

Subsequently, Al-Amanah sent similarly worded letters,12 all dated December 14, 1993, to 19 PELA members demanding that they vacate the lot.

In a letter13 dated December 20, 1993, PELA, through Atty. Pedro S. Castillo, replied that it had already reached an agreement with Al-Amanah regarding the sale of the subject lot based on their offered price:

Dear Mr. Ututalum-Al-Haj,

The People’s Landless Association, Inc., through Mr. Bonifacio Cuizon, Sr. has requested us to assist them in communicating with you anent your letter of 29 November 1993. According to Mr. Cuizon the present occupants of the lot covered by T.C.T. No. T-138914 with an area of 2,000 square meters, had a definite agreement with the Islamic Bank through its previous Manager or

Officer-in-Charge to buy this foreclosed property at P300,000.00. As a matter of fact their deposit of P150,000.00 was on that basis. For this reason, the occupants, who are members of the association, have already made lot allocations among themselves and have improved their respective houses.

It would be most unfair if the Bank would now renege on its commitment and eject these occupants. In line with the national policy of granting landless members of our society the opportunity of owning land and providing shelter to their families, it would be equitable and socially justifiable to grant these occupants their occupied areas pursuant to the earlier agreement with the Bank.

For the foregoing reasons we hope that the Islamic Bank, for legal, moral and social grounds would reconsider.

Meanwhile, acting on Robern’s undated written offer,14 Al-Amanah issued a Recommendation Sheet15 dated December 27, 1993 addressed to its Board Operations Committee, indicating therein that Robern is interested to buy the lot for P400,000.00; that it has already deposited 20% of the offered purchase price; that it is buying the lot on "as is" basis; and, that it is willing toshoulder the relocation of all informal settlers therein. On December 29, 1993, the Head Office informed the Davao Branch Manager that the Board Operations Committee had accepted Robern’s offer.16

Eight days later, Robern was informed of the acceptance. Al-Amanah stressed that it is Robern’sresponsibility to eject the occupants in the subject lot, if any, as well as the payment of the remaining amount within 15 days; otherwise, the P80,000.00 deposit shall be forfeited.17

In a letter18 dated January 13, 1994, Robern expressed to Al-Amanah its uncertainty on the status of the subject lot, viz.:

This is in connection with TCT No. 138914 which your bank offered to sell to us and which we committed to buy.

A group calling itself PEOPLE’S LANDLESS ASSOCIATION, INC. made representation with ouroffice bringing with them copies of official receipts totalling P150,000.00 issued by your bank which stated---"PARTIAL PAYMENT/DEPOSIT on sale of TCT #138914".

While condition no. 6 in the sale of property to us states that the buyer shall be responsible for ejecting the squatters of the property, the occupants of the said lot could hardly be categorized as squatters considering the supposed transaction previously entered by your bank with them. We were greatly appalled that we should learn about this not from the bank but from outside sources.1âwphi1

My company is ready to finalize our transaction provided, however, that the problem with this group is cleared. In this connection, we are requesting for a definite statement from your bank on whether the official receipts being brandished by this group are genuine or not, and if they were, were they ever invalidated by virtue of the return of their deposit and whether there was a cancellation of your agreement with them.

In the meantime, please consider the 15-day period for us to pay the amount of P320,000.00 imposed by your bank suspended until such time that the legal problem with the lot occupants is settled.

To convince Robern that it has no existing contract with PELA, Al-Amanah furnished it with copies of the Head Office’s rejection letter of PELA’s bid, the demand letters to vacate, and the proof of consignment of PELA’sP150,000.00 deposit to the Regional Trial Court (RTC) of Davao City that PELA refused to withdraw.19Thereafter, on February 2, 1994, it informed Robern that should the latter fail to pay the balance by February 9, 1994, its P80,000.00 deposit will be forfeited and the lot shall be up for sale to other prospective buyers.20Meanwhile, Al-Amanah requested for assistance for the removal of the houses not only from the Office of the City Engineer of Davao City21 but also from Mayor Rodrigo Duterte. Gaining a favorable legal opinionfrom the City Legal Officer, the matter was indorsed to the Chief of Demolition Consensus of the Department of Public Services for action.22

On March 4, 1994, Robern paid the balance of the purchase price.23 The Deed of Sale24 over therealty was executed on April 6, 1994 and TCT No. T-21298325 was issued in Robern’s name the following day.

A week later, PELA consigned P150,000.00 in the RTC of Davao City.26 Then on April 14, 1994, it wrote27 Al-Amanah asking the latter to withdraw the amount consigned. Part of the letter states:

x x x x

On March 21, 1994 (almost one month before the April 15, 1994 deadline) we came to your bank to remit the balance and full payment [for] the abovementioned lot. [Inasmuch] as you refuse[d] to accept the payment, we have decided to deposit the amount consigned to your bank.

In our dialogue at your office in 1993, we have agreed that documents will be processed as soonas we pay theP150,000.00 initial deposit. [Inasmuch] as we have not only paid the deposit but have also made full payment of the account, kindly facilitate processing of the documents to finalize transaction.

We have not been remiss in doing our part of the transaction; please do your share.

Thank you.

Very truly yours,

For the occupants/claimants

T.C.T. No. T-13891428

Three months later, as its members were already facing eviction and possible demolition of their houses, and in order to protect their rights as vendees, PELA filed a suit for Annulment and Cancellation of Void Deed of Sale29against Al-Amanah, its Director Engr. Farouk Carpizo (Engr. Carpizo), OIC Dalig, Robern, and Robern’s President and General Manager, petitioner Rodolfo Bernardo (Bernardo) before the RTC of Davao City. It insisted that as early as March 1993 it hasa perfected contract of sale with Al-Amanah. However, in an apparent act of bad faith and in cahoots with Robern, Al-Amanah proceeded with the sale of the lot despite the prior sale to PELA.

Incidentally, the trial court granted PELA’s prayer for a temporary restraining order.30 Subsequently, it issued on August 12, 1994 an Order31 finding merit in the issuance of the writ of preliminary injunction, inter alia. The RTC’s grant of injunctive relief was affirmed by the CA in CA-G.R. SP No. 3523832 when the factual and legal bases for its issuance were questioned before the appellate court.

The respondents in the annulment case filed their respective Answers.33 Al-Amanah and Engr. Carpizo claimed that the bank has every right to sell its lot to any interested buyer with the best offer and thus they chose Robern. They clarified that the P150,000.00 PELA handed to them is not part of the payment but merely a deposit in connection with its offer. They asserted that PELA was properly apprised that its offer to buy was subject to the approval of Al-Amanah’s Head Office. They stressed that Al-Amanah never entered into a sale with PELA for there was no perfected agreement as to the price since the Head Office rejected

PELA’s offer.

For their part, Robern and Bernardo asserted the corporation’s standing as a purchaser in good faith and for value in the sale of the property, having relied on the clean title of Al-Amanah. They also alleged that the purported sale to PELA is violative of the Statute of Frauds34 as there is no written agreement covering the same.

Ruling of the Regional Trial Court

In its August 10, 1999 Decision,35 the RTC dismissed PELA’s Complaint. It opined that the March 18, 1993 letter PELA has been relying upon as proof of a perfected contract of sale was amere offer which was already rejected.

Furthermore, the annotation appearing in the bottom part of the said letter could not be construed as an acceptance because the same is a mere acknowledgment of receipt of the letter (not the offer) which will still be subject to processing. The RTC likewise ruled that being a corporation, only Al-Amanah’s board of directors can bind the bank with third persons involving the sale of its property. Thus, the purported offer made by Al-Amanah’s OIC, who was never conferred authority by the board of directors to sell the lot, cannot bind the bank. In contrast, when the Head Office accepted Robern’s offered price, it was duly approved by the board of directors, giving birth to a perfected contract of sale between Al-Amanah and Robern.

Refusing to accept the Decision, PELA elevated its case to the CA.36

Ruling of the Court of Appeals

Reversing the RTC in its assailed Decision37 of August 16, 2005, the CA ruled that there was already a perfected contract of sale between PELA and Al-Amanah. It held that the annotationonthe lower portion of the March 18, 1993 letter could be construed to mean that for Al-Amanah to accept PELA’s offer, the sum of P150,000.00 must be first put up. The CA also observed that the subsequent receipt by Al-Amanah of the amounts totallingP150,000.00, and the annotation of "deposit on sale of TCT No. 138914," on the receipts it issued explicitly indicated an acceptance of the association’s offer to buy. Consequently, the CA invalidated the sale between Robern and Al-Amanah.

The CA also concluded that Al-Amanah is guilty of bad faith in dealing with PELA because it took Al-Amanah almost seven months to reject PELA’s offer while holding on to the P150,000.00deposit. The CA thus adjudged PELA entitled to moral and exemplary damages as well as attorney’s fees.

The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the assailed Decision is SET ASIDE. Judgment is hereby rendered:

1. DECLARING the contract of sale between PELA and defendant Bank valid and subsisting.

2. ORDERING the defendant Bank to receive the balance of P150,000.00 of the purchase price from PELA as consigned in court.

3. DECLARING the deed of sale executed by defendant Bank in favor or Robern Development Corporation as invalid and, therefore, void.

4. ORDERING defendant Bank to return to Robern the full amount of P400,000.00 which Robern paid as the purchase price of the subject property within ten (10) days from finality of this decision. It shall earn a legal interest of twelve percent (12%) per annum from the tenth (10th) day aforementioned if there is delay in payment.

5. ORDERING Robern Development Corporation to reconvey the land covered by T.C.T. No. 212983 in favor of People’s Landless Association within a similar period of ten (10) days from finality of this decision.

6. ORDERING defendant Bank to pay plaintiffs-appellants the following:

a. The sum of P100,000.00 as moral damages;

b. The sum of P30,000.00 as exemplary damages;

c. The sum of P30,000.00 as attorney’s fees;

d. A legal interest of SIX PERCENT (6%) per annum on the sums awarded in (a), (b), and (c) from the date of this Decision up to the time of full payment thereof.

SO ORDERED.38

Robern and Bernardo filed a Motion for Reconsideration39 which Al-Amanah adopted. The CA, however, was firm in its disposition and thus denied40 the same. Aggrieved, Robern and Al-Amanah separately filed Petitions for Review on Certiorari before us. However, Al-Amanah’s Petition docketed as G.R. No. 173437, was denied on September 27, 2006 on procedural grounds.41 Al-Amanah’s Motion for Reconsideration of the said Resolution of dismissal was

denied with finality on December 4, 2006.42

Hence, only the Petition of Robern and Bernardo subsists.

Petitioners’ Arguments

Petitioners stress that there was no sale between PELA and Al-Amanah, for neither a deed nor any written agreement was executed. They aver that Dalig was a mere OIC of Al-Amanah’s Davao Branch, who was never vested with authority by the board of directors of Al-Amanah to sell the lot. With regard to the notation on the March 18, 1993 letter and the four bank receipts, Robern contends that these are only in connection with PELA’s offer.

Petitioners likewise contend that Robern is a purchaser in good faith. The PELA members are mere informal settlers. The title to the lot was clean on its face, and at the time Al-Amanah accepted Robern’s offer, the latter was unaware of the alleged transaction with PELA. And whenPELA later represented to Robern that it entered into a transaction with Al-Amanah regarding the subject lot, Robern even wrote Al-Amanah to inquire about PELA’s claim over the property. And when informed by Al-Amanah that it rejected the offer of PELA and of its action of

requesting assistance from the local government to remove the occupants from the subject property, only then did Robern push through with the sale.

Respondent’s Arguments

PELA, on the other hand, claims that petitioners are not the proper parties who can assail the contract of sale between it and the bank. It likewise argues that the Petition should be dismissedbecause the petitioners failed to attach the material portions of the records that would support itsallegations, as required by Section 4, Rule 45 of the Rules of Court.43

Aside from echoing the finding of the CA that Al-Amanah has a perfected contract of sale with PELA, the latter further invokes the reasoning of the RTC and the CA (CA-G.R. SP No. 35238) in finding merit in the issuance of the writ of preliminary injunction, that is, that there was ‘an apparent perfection of contract (of sale) between the Bank and PELA.’44 Furthermore, PELA claims that Al-Amanah accepted its offered price and the P150,000.00, thus barring the application of the Statute of Frauds as the contract was already partially executed. As to the non-existence of a written contract evidencing the same, PELA ascribes fault on the bank claiming that nothing happened despite its repeated follow-ups for the OIC of Al-Amanah to execute the deed after payment of theP150,000.00 in May 1993.

Issue

At issue before us is whether there was a perfected contract of sale between PELA and Al-Amanah, the resolution of which will decide whether the sale of the lot to Robern should be sustained or not.

Our Ruling

We shall first briefly address some matters raised by PELA.

PELA’s contention that Robern cannot assail the alleged sale between PELA and Al-Amanah is untenable. Robern is one of the parties who claim title to the disputed lot. As such, it is a real party in interest since it stands to be benefited or injured by the judgment.45

Petitioners’ failure to attach the material portions of the record that would support the allegationsin the Petition is not fatal. We ruled in F.A.T. Kee Computer Systems, Inc. v. Online Networks International, Inc.,46 thus:

x x x However, such a requirement failure to attach material portions of the record was not meant to be an ironclad rule such that the failure to follow the same would merit the outright dismissal of the petition. In accordance with Section 7 of Rule 45, ‘the Supreme Court may require or allow the filing of such pleadings, briefs, memoranda or documents as it may deem necessary within such periods and under such conditions as it may consider appropriate.’ More importantly, Section 8 of Rule 45 declares that ‘[i]f the petition is given due course, the Supreme Court may require the elevation of the complete record of the case or specified parts thereof within fifteen (15) days from notice.’ x x x47

Anent the statement of the courts below that there was ‘an apparent perfection of contract (of sale) between Al-Amanah and PELA’, we hold that the same is strictly confined to the resolution of whether a writ of preliminary injunction should issue since the PELA members were then about to be evicted. PELA should not rely on such statement as the same is not decisive of the rights of the parties and the merits of this case.

We shall now delve into the crucial issue of whether there was a perfected contract of sale between PELA and Al-Amanah.

Essential Elements of a Contract of Sale

A contract of sale is perfected at the moment there is a meeting of minds upon the thing which isthe object of the contract and upon the price.48 Thus, for a contract of sale to be valid, all of the following essential elements must concur: "a) consent or meeting of the minds; b) determinate subject matter; and c) price certain in money or its equivalent."49

In the case at bench, there is no controversy anent the determinate subject matter, i.e., the 2,000-square meter lot. This leaves us to resolve whether there was a concurrence of the remaining elements.

As for the price, fixing it can never be left to the decision of only one of the contracting parties.50 "But a price fixed by one of the contracting parties, if accepted by the other, gives rise to a perfected sale."51

As regards consent, "when there is merely an offer by one party without acceptance of the other,there is no contract."52 The decision to accept a bidder’s proposal must be communicated to the bidder.53 However, a binding contract may exist between the parties whose minds have met, although they did not affix their signatures to any written document,54 as acceptance may be expressed or implied.55 It "can be inferred from the contemporaneous and subsequent acts of the contracting parties."56 Thus, we held:

x x x The rule is that except where a formal acceptance is so required, although the acceptance must be affirmatively and clearly made and must be evidenced by some acts or conduct communicated to the offeror, it may be made either in a formal or an informal manner, and may be shown by acts, conduct, or words of the accepting party that clearly manifest a present intention or determination to accept the offer to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party recognizing the existence of the contract of sale.57

There is no perfected contract of sale between PELA and Al-Amanah for want of consent and agreement on the price.

After scrutinizing the testimonial and documentary evidence in the records of the case, we find no proof of a perfected contract of sale between Al-Amanah and PELA. The parties did not agree on the price and no consent was given, whether express or implied.

When PELA Secretary Florida Ramos (Ramos) testified, she referred to the March 18, 1993 letter which PELA sent to Al-Amanah as the document supposedly embodying the perfected contract of sale.58 However, we find that the March 18, 1993 letter referred to was merely an offer to buy, viz:

March 18, 1993

The ManagerIslamic BankDavao Branch

Davao City

Sir/Madam:

This has reference to the offer made by Messrs. Alejandro Padilla, Leonardo Labora, Boy Bartiana, Francisco Paig, and Mr. Asterio Aki for the purchase of the acquired asset of the bank with an area of 2,000 square meters and covered by T.C.T. No. T-138914, portions of which are occupied by their houses. These occupants have formed and registered a group of x x x landless families who have occupied shoulders of National Highways, to be able to raise an amount that would meet the approval of the Bank as the consideration for the purchase of the property. The group which is known as PELA or People’s Landless Association, is offering the bank the amount of THREE HUNDRED THOUSAND PESOS (P300,000.00) for the whole 2,000sq. meters. Of this amount the buyers will pay a down payment of ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00) and the balance payable in one (1) year.

According to the plan of PELA, about 24 landless families can be accommodated in the property. We hope the Bank can help these families own even a small plot for their shelter. This would be in line with the government’s program of housing which the present administration promised to put in high gear this year.59 (Emphasis supplied)

Neither can the note written by the bank that "subject offer has been acknowledged/received butprocessing to take effect upon putting up of the partial amount of P150,000.00 on or before April 15, 1993" be construed as acceptance of PELA’s offer to buy. Taken at face value, the annotation simply means that the bank merely acknowledged receipt of PELA’s letter-offer. Furthermore, by ‘processing,’ Al-Amanah only meant that it will ‘act on the offer’, i.e., it still has to evaluate whether PELA’s offer is acceptable. Until and unless Al-Amanah accepts, there is asyet no perfected contract of sale. Notably here, the bank never signified its ‘approval’ or ‘acceptance’ of the offer.

We cannot agree with the CA’s ratiocination that receipt of the amount, coupled with the phrase written on the four receipts as "deposit on sale of TCT No. 138914," signified a tacit acceptance by Al-Amanah of PELA’s offer. For sure, the money PELA gave was not in the concept of an earnest money. Besides, as testified to by then OIC Dalig, it is the usual practice of Al-Amanah to require submission of a bid deposit which is acknowledged by way of bank receipts before it entertains offers. Thus:

Atty. Bolcan:

Now, as far as you can remember, these receipts state that these are partial deposits, what do you mean by that?

WITNESS:

A: x x x, we normally request an offeror to submit or make deposit, actually the bank does not entertain any offer without any deposit and just like that, during my time x x x in buying the property for those interested the bank does not entertain any offer unless they make a deposit.

x x x x

Q: Why do you issue receipts as officer-in-charge stating only partial deposits?

A: Because there was no sale, there was no consu[m]mated sale, so any amount which you will give as a deposit will be accepted by the bank for the offer and that if their offer will be

disapproved we will return the deposit because their offer was very low and this might be disapproved by the head office in Manila.60

x x x x

Atty. Taasan:

Do you confirm that based on the interest of the plaintiff to acquire the property they made a deposit with said bank, as evidenced by the receipts that were shown to you by your counsel, correct?

A: Yes, sir.

Q: And according to you, the bank does not entertain any offer to buy the property without deposits?

A: Yes, sir.

Q: In this case since the plaintiffs made a deposit x x x they were properly entertained, correct?

A: Yes because it is under negotiation, now while their offer price is below the selling price of thebank.61

The absence of a perfected contract of sale was further buttressed by the testimony of PELA Secretary Ramos on cross examination, viz:

Atty. Rabor:

Since it was x x x hard earned money you did not require the Amanah Bank when you gave that P150,000.00 to reduce your agreement into writing regarding the sale of this property?

A: I insisted but she will not issue that.62

x x x x

Atty. Bolcan:

Now, on April 15, 1993 when the deposit was made, you were present?

A: Yes, sir.

Q: Now, after making the deposit of One Hundred Fifty Thousand (P150,000.00) Pesos on April 15, 1993 did you not request for the bank to execute a document to prove that actually you are buying the property?

A: I even said to the OIC or the manager that ma’am, now that you have received our money, where is our paper that we were the ones to buy that property, sir.

Q: To whom are you referring to?

A: Febe Dalig, the OIC, sir.

Q: And this OIC Febe Dalig informed you that the Offer on your part to buy the property is subject for approval by the head office in Manila, is that correct?

A: Yes she told me that it would be subject to approval in Manila x x x.

Q: And later on you were informed by the bank that your offer was not accepted by the head office in Manila, is that correct?

A: She did not inform us but we kept on following it up with their office and she told us that it did not arrive yet, sir.63 (Emphasis supplied)

PELA Secretary Ramos’ testimony thus corroborated OIC Dalig’s consistent stand that it is the Head Office which will decide whether Al-Amanah would accept PELA’s offer:

Atty. Bolcan:

And now, if there are interested persons making offer x x x what would you do?

A: Well, we have to screen the offer before we forward the offer to Manila for approval because…

Court:

What would you do before you forward that to Manila?

A: We will be screening the offer x x x.

Atty. Bolcan:

And you said that it is referred to Manila?

A: Yes, sir.

Q: Who will eventually approve the offer made by the interested persons to buy the property?

A: We have a committee in Manila to approve the sale of the property.

Q: Do you have any idea who will approve the offer of the property?

A: I have no idea but the president, rather it consists of the president I think and then signed alsoby the vice-president and some officers in the office, sir.

x x x x

Q: Now, in case of offers of the property of the bank, x x x the officer-in-charge of the bank, Al-Amanah Bank branch, usually refers this matter to the head office in Manila?

A: Yes, sir.

Q: And it is the head office that will decide whether the offer will be approved or not?

A: Yes as head of the branch, we have to forward the offer whether it was acceptable or not.64

It is thus undisputed, and PELA even acknowledges, that OIC Dalig made it clear that the acceptance of the offer, notwithstanding the deposit, is subject to the approval of the Head Office. Recognizing the corporate nature of the bank and that the power to sell its real propertiesis lodged in the higher authorities,65 she never falsely represented to the bidders that she has authority to sell the bank’s property. And regardless of PELA’s insistence that she execute a written agreement of the sale, she refused and told PELA to wait for the decision of the Head Office, making it clear that she has no authority to execute any deed of sale.

Contracts undergo three stages: "a) negotiation which begins from the time the prospective contracting parties indicate interest in the contract and ends at the moment of their agreement[; b) perfection or birth, x x x which takes place when the parties agree upon all the essential elements of the contract x x x; and c) consummation, which occurs when the parties fulfill or perform the terms agreed upon, culminating in the extinguishment thereof."66

In the case at bench, the transaction between Al-Amanah and PELA remained in the negotiationstage. The offer never materialized into a perfected sale, for no oral or documentary evidence categorically proves that Al-Amanah expressed amenability to the offered P300,000.00 purchase price. Before the lapse of the 1-year period PELA had set to pay the remaining ‘balance,’ Al-Amanah expressly rejected its offered purchase price, although it took the latter around seven months to inform the former and this entitled PELA to award of damages.67 Al-Amanah’s act of selling the lot to another buyer is the final nail in the coffin of the negotiation with PELA. Clearly, there is no double sale, thus, we find no reason to disturb the consummated sale between Al-Amanah and Robern.

At this juncture, it is well to stress that Al-Amanah’s Petition before this Court docketed as G.R. No. 173437 was already denied with finality on December 4, 2006. Hence, we see no reason to disturb paragraph 6 of the CA’s Decision ordering Al-Amanah to pay damages to PELA.

WHEREFORE, we PARTIALLY GRANT the Petition. Except for paragraph 6 of the Court of Appeals Decision which had already been long settled,68 the rest of the judgment in the assailed August 16, 2005 Decision and May 30, 2006 Resolution of the Court of Appeals in CA-G.R. No. CV No. 66071 are hereby ANNULLED and SET ASIDE. The August 10, 1999 Decision of the Regional Trial Court of Davao City, Branch 12, dismissing the Complaint for Annulment and Cancellation of Void Deed of Sale filed by respondent People's Landless Association is REINSTATED and AFFIRMED. The amount of Pesos: Three Hundred Thousand (P300,000.00) consigned with the Regional Trial Court of Davao City may now be withdrawn by People's Landless Association.

SO ORDERED.

G.R. No. 173586 March 14, 2012

MCA-MBF COUNTDOWN CARDS PHILIPPINES INC., AMABLE R. AGUILUZ V, AMABLE C. AGUILUZ IX, CIELO C. AGUILUZ, ALBERTO L. BUENVIAJE, VICENTE ACSAY and MCA HOLDINGS AND MANAGEMENT CORPORATION, Petitioners, vs.MBf CARD INTERNATIONAL LIMITED and MBf DISCOUNT CARD LIMITED, Respondents.

R E S O L U T I O N

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari assailing the Resolutions of the Court of Appeals in CA-G.R. CV No. 84370 dated March 20, 20061 and July 6, 2006.2

Herein respondents MBf Card International Limited (MBf Card) and MBf Discount Card Limited (MBf Discount Card), both foreign corporations not doing business in the Philippines, filed a complaint for Recovery of Money, Unfair Competition and Damages, with Application for Preliminary Injunction against herein petitioners MCA-MBF Countdown Cards Phils., Inc. (MCA-MBF), Amable R. Aguiluz V (Aguiluz V), Amable C. Aguiluz IX, Cielo C. Aguiluz, Alberto L. Buenviaje, Vicente Acsay and MCA Holdings and Management Corporation (MCA Holdings). The complaint alleged that sometime in the second half of 1993, respondent MBf Card and petitioner MCA Holdings, the latter principally acting through petitioner Aguiluz V, entered into negotiations for the execution of a Joint Venture Agreement wherein: (1) they would establish a Joint Venture Company (JVC) in the Philippines with MBf Card owning about 40% and MCA Holdings owning 60% of the capital stock thereof, and (2) said JVC would execute a "Countdown Country License Agreement" with respondent MBf Discount Card, under which the JVC would conduct the business of discount cards in the Philippines under the "Countdown" mark, and use the distinctive business format and method for the operation of the "Countdown Discount Card."3

The Complaint further alleged that even before respondent MBf Card and petitioner MCA Holdings could agree on drafts of the Joint Venture and Licensing Agreement, and pending negotiations thereon, petitioner Aguiluz V, on January 3, 1994, wrote respondent MBf Card that he had already incorporated on October 18, 1993, a company which would later be converted into the proposed JVC upon the execution and approval of the pertinent Agreements. The company incorporated by Aguiluz V with the Securities and Exchange Commission (SEC) was

stated in the letter as "MBF-MCA Discount Card Corp. Philippines," but is actually named "MCA-MBF Countdown Cards Philippines, Inc.," i.e., petitioner MCA-MBF. Acceding to a request in thesame letter, respondent MBf Card remitted on January 21, 1994 the amount of US$74,074.04 toAccount No. 838-06 (Metrobank, Quezon Avenue Branch), which, as it turned out, belongs to petitioner MCA-MBF. The understanding was that such amount was to be applied as MBf Card’spayment of its 40% shareholding in the JVC upon the execution and approval of the Joint Venture and Licensing Agreements.4 However, without the prior authority of the respondents, and while the parties were still discussing and negotiating on the terms and conditions of the Joint Venture and Licensing Agreements, petitioners, through the intended JVC (petitioner MCA-MBF), began to promote, market and sell the Countdown Discount Cards to the public, using the"Countdown" name, logo and trademark.5

The Complaint then alleged the facts that led up to respondents’ decision to end its negotiations with petitioners:

8. Accordingly, [respondent] MBf card advised [petitioners] not to promote, market andsell Countdown Discount Cards to the public until the Joint Venture Agreement and the License Agreement (for the use of the tradename "Countdown" and the format andmethod for the operation of the Countdown Discount Card) had been signed and, thereafter, approved by the appropriate government agency.

9. In particular, on March 8 and 17, 1994, [respondent] MBf Card wrote [petitioner] MCA-MBF’s Ruby Pearl M. Shan to "freeze" all selling activities on the Countdown Discount Card until after the pertinent Agreements had been signed and approved. x xx.

10. In reply to [respondent] MBf Card’s freeze advice, [petitioner] Amable R. Aguiluz Vpromised that they would comply therewith. This was confirmed by Ruby Pearl M. Shan, who wrote [respondent] MBf Card on March 19, 1994 "to confirm that selling activities of Discount Card have been ordered [frozen] temporarily, effective 10th March 1994." x x x.

11. On March 30 and April 3, 1994, before any of the Joint Venture and License Agreements had been signed and approved, and with malice, bad faith and in breach of [petitioner’s] promise to [respondent] MBf Card, the [petitioners] illegally caused the publication of two advertisements in the Manila Bulletin, promoting, marketing and selling the Countdown Discount Card. x x x.

11.1 In the said ads, [petitioners] fraudulently misrepresented to the public that they have already been authorized by [respondents] to promote, marketand sell the Countdown Discount Card and that the discount cards they offer are valid and enforceable, and as such would be honored in various establishments in the Philippines and elsewhere.

11.2 Moreover, in the said advertisements, [petitioners] offered to the public,aside from the regular features of the Countdown Discount Card, a purchase protection plan and even personal accident insurance. This caused great concern for [respondents] as, to their knowledge, these have not been firmed up with any insurance company.

12. What is worse, in his column appearing in the April 15, 1994 issue of the Philippine Star[,] [petitioner] Amable R. Aguiluz V misrepresented to the public that he,"representing the MCA Holdings had actually signed a joint venture agreement with Mr. Gordon Yuen, Chairman, of the Malaysia Borneo Finance." No such joint venture

agreement has to date been signed and Mr. Gordon Yuen is president and chief executive officer of [respondent] MBf Card and not the chairman of Malaysia Borneo Finance.

13. On April 20, 1994, [respondent] MBf Card wrote [petitioners], advising them that it had decided not to proceed with the joint venture project on the Countdown Discount Card, and demanding that [petitioners] immediately:

(a) refund to [respondent] MBf Card the US$74,074.04 it had remitted;

(b) cease and desist from using the MBf and Countdown names, logos and trademarks; and

(c) delete "MBf" and "Countdown" from MCA-MBF’s corporate name as registered with the Securities and Exchange Commission.

x x x x

14. To date, to the damage and prejudice of [respondents], the [petitioners] continue to promote, market and sell the Countdown Discount Card, thereby misrepresenting tothe public that they have been authorized to do so, and that the Countdown Discount Card they offer are valid and binding against [respondents]. These acts of [petitioners], including their continued use of "Countdown" and "MBf" in the corporate name and business of MCA-MBF, are in violation of [respondent’s] lawful and exclusive proprietary rights to such names. Furthermore, they are in fraud of the publicand constitute unfair competition which should be enjoined and for which [petitioners] are liable to [respondents] in damages.6

Respondents prayed before the trial court that petitioners be enjoined from promoting, marketingand selling Countdown Discount Cards and from using the "MBf" and "Countdown" names, logos and trademarks. They also prayed that petitioners be ordered to refund to respondent MBfCard the sum of US$74,074.04, and to payP2,000,000.00 as moral damages, and P500,000.00 as attorney’s fees and expenses of litigation.

On April 22, 1994, the trial court issued a temporary restraining order enjoining petitioners, particularly MCA-MBF, to refrain and desist from promoting, marketing and selling Countdown Discount Cards and from using the "MBf" and "Countdown" names, logos and trademarks.

After hearings on April 28 and 29, and March 4, 1994, the trial court, in an Order dated May 6, 1994, granted respondents’ prayer for a preliminary injunction.

On August 8, 1994, petitioner MCA-MBF filed its Answer with Counterclaim, claiming that the contract between the parties had already been perfected. The parties allegedly agreed that (1) they jointly undertook the task of marketing the MBf Discount Card in the Philippines; (2) MBf Card was solely responsible for securing the necessary selling paraphernalia from the main Licensor, Countdown of London, England; and (3) Gordon Yuen and T.K. Wong were elected asmembers of the Board of Directors of the Joint Venture Corporation. Petitioner MCA-MBF asserted that MBf Card did not suffer any damage from the introduction and marketing of the MBf Countdown Discount Card in the Philippines since all acts pertaining to the business were jointly undertaken by the parties. In its Counterclaim, petitioner MCA-MBF prayed for damages in the amount of P22,500,000.00, and an order directing respondents to execute, sign and submit the form of the Joint Venture Agreement as allegedly approved and accepted by petitioners on March 16, 1994.

On August 10, 1994, the trial court issued the Writ of Preliminary Injunction on account of the posting by the respondents of the required bond.

On October 18, 1996, petitioners Vicente R. Acsay, Amable R. Aguiluz V, Amable C. Aguiluz IX, Cielo C. Aguiluz, Alberto Buenviaje and MCA Holdings filed their Answer, alleging practically the same defenses as those raised by petitioner MCA-MBF.

On June 8, 1998, the law firm of Castillo Laman Tan Pantaleon & San Jose (CLTPSJ) filed a Motion to Record Attorney’s Lien. However, while CLTPSJ did not withdraw its appearance in the case, the law firm of Poblador Bautista & Reyes (PBR) entered its appearance in October 1994 and has since then been the firm representing respondents. On August 27, 1998, the trial court noted the prayer to record attorney’s lien and held that the same shall be considered in theadjudication of the case.

On March 8, 2000, the trial court rendered its Decision in favor of respondents. The dispositive portion of the Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered permanently enjoining the [petitioners] from promoting, marketing and selling Countdown Discount Cards, and from using "MBf" and "Countdown" names, logos and trademarks; ordering [petitioners] to jointly and severally refund to [respondent] MBf Card the sum of US$74,074.04 or its equivalent in Philippine currency, with legal interest thereon from date of demand until full payment; and ordering [petitioners] to jointly and severally pay [respondents] the amount of TWO HUNDRED THOUSAND (P200,000.00) PESOS as attorney’s fees and expenses of litigation.

As regards CLTPSJ’s claim, [respondents] are ordered to pay the amount of FIFTY THOUSAND(P50,000.00) PESOS, as attorney’s fees.7

On August 15, 2003, petitioners filed a Notice of Appeal. On September 28, 2005, petitioners received an Order from the Court of Appeals requiring them to file their Appellant’s Brief within 45 days from receipt of said notice.

Petitioners failed to file the Brief within the period allotted by the Court of Appeals. Thus, on March 20, 2006, the Court of Appeals issued the first assailed Resolution dismissing petitioners’ appeal on the ground of abandonment of the same:

For failure of defendants-appellants to file the required brief within the prescribed period as per report of the Judicial Records Division dated March 1, 2006, their appeal is considered ABANDONED and consequently, ordered DISMISSED pursuant to Section 1(e), Rule 50 of the 1997 Rules of Civil Procedure.8

Petitioners filed a Motion for Reconsideration with Motion to Admit Appellant’s Brief, wherein they claimed that the lawyer who was handling the case suddenly resigned from the law firm in October 2005, shortly after they received the notice to file the Brief. The other counsels allegedlyhad been handling voluminous cases and attending to numerous court appearances and out of town hearings.

On July 6, 2006, the Court of Appeals issued the second assailed Resolution denying petitioners’ Motion for Reconsideration. According to the Court of Appeals, the reason given by the counsels is not substantial or meritorious to merit the relaxation of the rules. The Court of Appeals also noted that there was no action on the part of the petitioners from the time they received the notice to file their Brief on September 28, 2005 until the Resolution of the appellate court on March 20, 2006.9

Hence, the present Petition for Review, wherein petitioners rely on the following grounds:

A.

The Court of Appeals grievously committed a reversible error in dismissing the case based on procedural technicalities without considering at all whether or not petitioners’appeal deserved full consideration on the merits.

B.

In the interest of substantial justice, petitioners’ appeal should be reinstated considering that the errors of the trial court in rendering its appealed decision are evident on the face of the said decision and more so after an examination of the evidence on record.

1. The Trial Court erred in perfunctorily disregarding corporate fiction and adjudging individual petitioners personally liable in its Decision.

2. The Trial Court erred when it disregarded basic principles of contract law when it ruled that there was no joint venture agreement yet between respondent MBf Card and petitioner MCA because they have not yet executed the documents formalizing said contract.

3. The Trial Court erred in finding that petitioners have not proven Tan Sri’s authority to represent and bind the respondents to the joint venture agreement.

4. The Trial Court’s award of attorney’s fees is devoid of legal basis.10

Petitioners pray before this Court that their appeal before the Court of Appeals, CA-G.R. CV No. 84370, be reinstated.11

We resolve to deny the present petition.

Confronted with the necessity to justify their failure to file their Appellants’ Brief before the Court of Appeals, all that the petitioners could offer was that the lawyer who was handling the case resigned from the law firm shortly after they received the notice to file the Brief, while other counsels have been handling voluminous cases, numerous court appearances, and out of town hearings. Petitioners did not allege that the other lawyers of the firm were not informed of the appellate court’s notice to file the Brief. Petitioners did not even ask the court for an extension. Instead, petitioners claim that the rules concerning the filing of the Appellant’s Brief are mere "insignificant and harmless technicalities"12 and argue that because of the alleged merits of their case, they do not have to prove that their failure to file the said brief was excusable:

In light of the merits of petitioners’ appeal as will be further discussed below, and in accordance with the jurisprudence discouraging dismissal of appeals grounded on pure technicalities, whether or not the inadvertence resulting in the late filing of the appellant’s brief is excusable is already beside the point. The focus should have been on whether or not the appeal deserved fullconsideration on the merits, and this can only be determined if a preliminary consideration of themerits is made.13 (Emphasis added.)

This contention, which in effect advances that the appellate court does not even deserve a valid explanation for the appellant’s failure to its Brief, cannot be countenanced. Liberality is given to litigants who are worthy of the same, and not to ones who flout the rules, give explanations to the effect that the counsels are busy with other things, and expect the court to disregard the procedural lapses on the mere self-serving claim that their case is meritorious.

In Rural Bankers Association of the Philippines v. Tanghal-Salvaña,14 this Court held:

Obedience to the requirements of procedural rules is needed if the parties are to expect fair results therefrom, and utter disregard of the rules cannot justly be rationalized by harking on the policy of liberal construction. Procedural rules are tools designed to facilitate the adjudication of cases. Courts and litigants alike are thus enjoined to abide strictly by the rules. And while the Court, in some instances, allows a relaxation in the application of the rules, this was never intended to forge a bastion for erring litigants to violate the rules with impunity. The liberality in the interpretation and application of the rules applies only in proper cases and under justifiable causes and circumstances. While it is true that litigation is not a game of technicalities, it is equally true that every case must be prosecuted in accordance with the prescribed procedure to insure an orderly and speedy administration of justice.15

Furthermore, petitioners’ characterization of the rules concerning the filing of the Appellant’s Brief as "insignificant and harmless technicalities" is downright improper as it is contrary to established jurisprudence. In Casim v. Flordeliza,16 this Court particularly held that:

It would be incorrect to perceive the procedural requirements of the rules on appeal as being merely "harmless and trivial technicalities" that can just be discarded. As this Court so explained in Del Rosario vs. Court of Appeals –

"Petitioners' plea for liberality in applying these rules in preparing Appellants' Brief does not deserve any sympathy.1âwphi1 Long ingrained in our jurisprudence is the rule that the right to appeal is a statutory right and a party who seeks to avail of the right must faithfully comply with the rules. In People vs. Marong, we held that deviations from the rules cannot be tolerated. The rationale for this strict attitude is not difficult to appreciate. These rules are designed to facilitate the orderly disposition of appealed cases. In an age where courts are bedeviled by clogged dockets, these rules need to be followed by appellants with greater fidelity. Their observance cannot be left to the whims and caprices of appellants."17

Petitioners’ claim that the trial court Decision was erroneous on its face and that even a cursory reading of the same would show prima facie merit in the appeal is in itself a grave exaggeration. In alleging the prima facie merit of its appeal, petitioners rely on two main grounds: (1) the RTC allegedly disregarded the basic principles of contract law when it ruled that the joint venture agreement had not yet been perfected; and (2) the RTC allegedly disregarded corporate fiction in adjudging individual petitioners personally liable to respondents.

The basic principles of contract law referred to by petitioners are those enshrined in Article 131518 of the Civil Code, which provides that contracts are perfected by mere consent, and in Article 1356,19 which states that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity is present.

It is clear from a reading of the RTC Decision that the above principles were not disregarded. Onthe contrary, the RTC went beyond the fact that the Joint Venture and Licensing Agreement has yet to be signed, and carefully weighed the evidence in order to determine whether or not there was a perfected oral joint venture agreement:

1. The trial court had to look into whether Tan Sri had the authority to bind respondents in the alleged oral agreement. In this regard, the trial court found no evidence proving the same. The RTC instead considered the admission of Aguiluz V that he neither knew nor inquired whether Tan Sri was an officer or director of the plaintiff corporations.20

2. Despite the absence of a written contract, the RTC discussed whether or not the remittance of US$74,074.04 and conveyance of trade secrets and advice should be considered partial execution of the Joint Venture Agreement.21 However, the trial courtapparently found the testimony of the respondents’ witness to be credible and believed that the respondents were assured that the money will only be applied to its proposed 40% shareholding upon the execution and approval of the Joint Venture Licensing Agreements.22 Furthermore, it appeared to the RTC that the advice and suggestions from respondents for the sale, promotion and marketing of the discount cards are merely preparatory acts and does not necessarily indicate the existence of aperfected contract.23

3. It was shown that the RTC sought to determine the existence of a Joint Venture andLicensing Agreement despite the absence of a written contract evidencing the same when it considered therefor the letter of witness Luis Pangulayan in behalf of petitionerAguiluz V. The RTC quoted Pangulayan’s April 14, 1994 letter wherein it was admittedthat (a) the signing of the Joint Venture Agreement is required to finalize the formationof the JVC since the provisions of the contract shall be incorporated in the JVC’s By-Laws; and (2) even the formation of the JVC does not necessarily complete the process since a Licensing Agreement still needs to be executed between the JVC andrespondents.24

In addition to the above, while we agree with petitioners that the absence of a written Joint Venture and Licensing Agreement does not necessarily negate the perfection of a contract, we nevertheless find that this very lack of a written contract constitutes convincing circumstantial proof that said parties were indeed in the process of negotiating the contract’s terms. When there is as of yet no meeting of the minds as to the subject matter or the cause or consideration of the contract being negotiated, the same cannot be considered to have been perfected.

In ruling in favor of respondents, the RTC made a factual finding that the Joint Venture and Licensing Agreement being negotiated between petitioners and respondents was never perfected. Respondents are neither incorporators nor stockholders of MCA-MBF, the company that was supposedly intended to be converted into the Joint Venture Company. It must be stressed that MCA-MBF has not yet been converted into the Joint Venture Company as no shares of stock have been delivered to respondents. As alleged by respondents and found by the RTC, the respondents were assured that the money remitted by them will only be applied to its proposed 40% shareholding in the JVC upon the execution and approval of the Joint Venture and Licensing Agreements. Therefore, while the US$74,074.04 was remitted to the account of MCA-MBF as requested by Aguiluz V, said money was, insofar as respondents are concerned, with the persons they are negotiating with for the creation of the JVC. Consequently, respondents cannot be said to be suing the natural persons among the petitioners as officers of the yet-to-be-created JVC. They were instead held liable for the US$74,074.04 in their individualcapacities as the persons negotiating with respondents for the creation of the JVC and, thus, there was no need to pierce the corporate fiction of MCA-MBF.

IN VIEW OF THE FOREGOING, the instant Petition for Review on Certiorari is hereby DISMISSED.

SO ORDERED.

G.R. No. 154878 March 16, 2007

CAROLYN M. GARCIA, Petitioner, vs.RICA MARIE S. THIO, Respondent.

D E C I S I O N

CORONA, J.:

Assailed in this petition for review on certiorari1 are the June 19, 2002 decision2 and August 20, 2002 resolution3of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58.

Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the order of a certain Marilou Santiago.5 Thereafter, petitioner received from respondent every month (specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount of US$3,0006 and P76,5007 on July 26,8 August 26, September 26 and October 26, 1995.

In June 1995, respondent received from petitioner another crossed check9 dated June 29, 1995 in the amount ofP500,000, also payable to the order of Marilou Santiago.10 Consequently, petitioner received from respondent the amount of P20,000 every month on August 5, September 5, October 5 and November 5, 1995.11

According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of money and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the sums of US$100,000, with interest thereon at 3% a month from October 26, 1995 and P500,000, with interest thereon at 4% a month from November 5, 1995, plus attorney’s feesand actual damages.12

Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on October 26, 1995.13 The amount of this loan was covered by the first check. On June 29, 1995, respondent again borrowed the amount of P500,000 at an agreed monthly interest of 4%, the maturity date of which was on November 5, 1995.14 The amount of this loan was covered by the second check. For both loans, no promissory note was executed since petitioner and respondent were close friends at the time.15 Respondent paid the stipulated monthly interest for both loans but on their maturity dates, she failed to pay the principal amounts despite repeated demands.161awphi1.nét

Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give the crossed checks to Santiago.17 She issued the checks for P76,000 and P20,000 not as payment of interest but to accommodate petitioner’s request that respondent use her own checks instead of Santiago’s.18

In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It found that respondent borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and P500,000 at a monthly interest of 4%:20

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:

1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October 26, 1995 until fully paid;

2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.

3. P100,000.00 as and for attorney’s fees; and

4. P50,000.00 as and for actual damages.

For lack of merit, [respondent’s] counterclaim is perforce dismissed.

With costs against [respondent].

IT IS SO ORDERED.21

On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loanbetween the parties:

A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that [respondent] indeed borrowed money from her. There is nothing in the record that shows that [respondent] received money from [petitioner]. What is evident is the fact that [respondent] received a MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of P500,000.00, again payable to the order of Marilou Santiago, both of which were issued by [petitioner]. The checks received by [respondent], being crossed, may not be encashed but only deposited in the bank by the payee thereof, that is, by Marilou Santiago herself.

It must be noted that crossing a check has the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once—to one who has an account with the bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he hasreceived the check pursuant to that purpose, otherwise, he is not a holder in due course.

Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the payee in contemplation of law since the latter is not the person who could take the checks as a holder, i.e., as a payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as an agent of Marilou Santiago with respect to the checks because she was merely facilitating the transactions between the former and [petitioner].

With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan that existed between the parties. x x x (emphasis supplied)22

Hence this petition.23

As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45of the Rules of Court. However, this case falls under one of the exceptions, i.e., when the factualfindings of the CA (which held that there were no contracts of loan between petitioner and respondent) and the RTC (which held that there werecontracts of loan) are contradictory.24

The petition is impressed with merit.

A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the contract.25 This is evident in Art. 1934 of the Civil Code which provides:

An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (Emphasis supplied)

Upon delivery of the object of the contract of loan (in this case the money received by the debtorwhen the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount.26

It is undisputed that the checks were delivered to respondent. However, these checks were crossed and payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main question to be answered is: who borrowed money from petitioner — respondent or Santiago?

Petitioner insists that it was upon respondent’s instruction that both checks were made payable to Santiago.27She maintains that it was also upon respondent’s instruction that both checks weredelivered to her (respondent) so that she could, in turn, deliver the same to Santiago.28 Furthermore, she argues that once respondent received the checks, the latter had possession and control of them such that she had the choice to either forward them to Santiago (who was already her debtor), to retain them or to return them to petitioner.29

We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the actual or constructive possession or control of another.30 Although respondent did not physically receive the proceeds of the checks, these instruments were placed in her control and possession under an arrangement whereby she actually re-lent the amounts to Santiago.

Several factors support this conclusion.

First, respondent admitted that petitioner did not personally know Santiago.31 It was highly improbable that petitioner would grant two loans to a complete stranger without requiring as much as promissory notes or any written acknowledgment of the debt considering that the amounts involved were quite big. Respondent, on the other hand, already had transactions with Santiago at that time.32

Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both parties’ list of witnesses) testified that respondent’s plan was for petitioner to lend her money at a monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a higher rate of 5% and realize a profit of 2%.33 This explained why respondent instructed petitioner to make the checks payable to Santiago. Respondent has not shown any reason why Ruiz’ testimony should not be believed.

Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of P76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the P500,000 loan, she also issued her own checks in the amount of P20,000 each for four months.34 According to respondent, she merely accommodated petitioner’s request for her to issue her own checks to cover the interest payments since petitioner was not personally acquainted with Santiago.35 She claimed, however, that Santiago would replace the checks with cash.36 Her explanation is simply incredible. It is difficult to believe that respondent would put herself in a position where she would be compelled to pay interest, from her own funds, for loansshe allegedly did not contract. We declared in one case that:

In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to be believed, it must not only proceed from the mouth of a credible witness, but must be credible in itself such as the common experience of mankind can approve as probable under the circumstances. We have no test of the truth of human testimony except its conformity to our knowledge, observation, and experience. Whatever is repugnant to these belongs to the miraculous, and is outside of juridical cognizance.37

Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner, who was listed as one of her (Santiago’s) creditors.38

Last, respondent inexplicably never presented Santiago as a witness to corroborate her story.39 The presumption is that "evidence willfully suppressed would be adverse if produced."40 Respondent was not able to overturn this presumption.

We hold that the CA committed reversible error when it ruled that respondent did not borrow the amounts of US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the RTC making respondent liable for the principal amounts of the loans.

We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the US$100,000 andP500,000 loans respectively. There was no written proof of the interest payableexcept for the verbal agreement that the loans would earn 3% and 4% interest per month. Article1956 of the Civil Code provides that "[n]o interest shall be due unless it has been expressly stipulated in writing."

Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to Article 2209 of the Civil Code. It is well-settled that:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.41

Hence, respondent is liable for the payment of legal interest per annum to be computed from November 21, 1995, the date when she received petitioner’s demand letter.42 From the finality ofthe decision until it is fully paid, the amount due shall earn interest at 12% per annum, the interim period being deemed equivalent to a forbearance of credit.43

The award of actual damages in the amount of P50,000 and P100,000 attorney’s fees is deletedsince the RTC decision did not explain the factual bases for these damages.

WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20,2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the amounts of US$100,000 and P500,000 at 12% per annum interest from November 21, 1995 until the finality of the decision. The total amount due as of the date of finality will earn interest of12% per annum until fully paid. The award of actual damages and attorney’s fees is deleted.

SO ORDERED.

G.R. No. 157374 August 27, 2009

HEIRS OF CAYETANO PANGAN and CONSUELO PANGAN,* Petitioners, vs.SPOUSES ROGELIO PERRERAS and PRISCILLA PERRERAS, Respondents.

D E C I S I O N

BRION, J.:

The heirs1 of spouses Cayetano and Consuelo Pangan (petitioners-heirs) seek the reversal of the Court of Appeals’ (CA) decision2 of June 26, 2002, as well its resolution of February 20, 2003, in CA-G.R. CV Case No. 56590 through the present petition for review on certiorari.3 The CA decision affirmed the Regional Trial Court’s (RTC) ruling4 which granted the complaint for specific performance filed by spouses Rogelio and Priscilla Perreras (respondents) against the petitioners-heirs, and dismissed the complaint for consignation instituted by Consuelo Pangan (Consuelo) against the respondents.

THE FACTUAL ANTECEDENTS

The spouses Pangan were the owners of the lot and two-door apartment (subject properties) located at 1142 Casañas St., Sampaloc, Manila.5 On June 2, 1989, Consuelo agreed to sell to the respondents the subject properties for the price of P540,000.00. On the same day, Consueloreceived P20,000.00 from the respondents as earnest money, evidenced by a receipt (June 2, 1989 receipt)6 that also included the terms of the parties’ agreement.

Three days later, or on June 5, 1989, the parties agreed to increase the purchase price from P540,000.00 toP580,000.00.

In compliance with the agreement, the respondents issued two Far East Bank and Trust Company checks payable to Consuelo in the amounts of P200,000.00 and P250,000.00 on June 15, 1989. Consuelo, however, refused to accept the checks. She justified her refusal by saying that her children (the petitioners-heirs) – co-owners of the subject properties – did not want to sell the subject properties. For the same reason, Consuelo offered to return the P20,000.00 earnest money she received from the respondents, but the latter rejected it.

Thus, Consuelo filed a complaint for consignation against the respondents on September 5, 1989, docketed as Civil Case No. 89-50258, before the RTC of Manila, Branch 28.

The respondents, who insisted on enforcing the agreement, in turn instituted an action for specific performance against Consuelo before the same court on September 26, 1989. This case was docketed as Civil Case No. 89-50259. They sought to compel Consuelo and the petitioners-heirs (who were subsequently impleaded as co-defendants) to execute a Deed of Absolute Sale over the subject properties.

In her Answer, Consuelo claimed that she was justified in backing out from the agreement on the ground that the sale was subject to the consent of the petitioners-heirs who became co-owners of the property upon the death of her husband, Cayetano. Since the petitioners-heirs disapproved of the sale, Consuelo claimed that the contract became ineffective for lack of the requisite consent. She nevertheless expressed her willingness to return theP20,000.00 earnest money she received from the respondents.

The RTC ruled in the respondents’ favor; it upheld the existence of a perfected contract of sale, at least insofar as the sale involved Consuelo’s conjugal and hereditary shares in the subject properties. The trial court found that Consuelo’s receipt of the P20,000.00 earnest money was an "eloquent manifestation of the perfection of the contract." Moreover, nothing in the June 2, 1989 receipt showed that the agreement was conditioned on the consent of the petitioners-heirs.Even so, the RTC declared that the sale is valid and can be enforced against Consuelo; as a co-owner, she had full-ownership of the part pertaining to her share which she can alienate, assign,or mortgage. The petitioners-heirs, however, could not be compelled to transfer and deliver their shares in the subject properties, as they were not parties to the agreement between Consuelo and the respondents. Thus, the trial court ordered Consuelo to convey one-half (representing Consuelo’s conjugal share) plus one-sixth (representing Consuelo’s hereditary share) of the subject properties, and to pay P10,000.00 as attorney’s fees to the respondents. Corollarily, it dismissed Consuelo’s consignation complaint.

Consuelo and the petitioners-heirs appealed the RTC decision to the CA claiming that the trial court erred in not finding that the agreement was subject to a suspensive condition – the consent of the petitioners-heirs to the agreement. The CA, however, resolved to dismiss the appeal and, therefore, affirmed the RTC decision. As the RTC did, the CA found that the payment and receipt of earnest money was the operative act that gave rise to a perfected contract, and that there was nothing in the parties’ agreement that would indicate that it was subject to a suspensive condition. It declared:

Nowhere in the agreement of the parties, as contained in the June 2, 1989 receipt issued by [Consuelo] xxx, indicates that [Consuelo] reserved titled on [sic] the property, nor does it contain any provision subjecting the sale to a positive suspensive condition.

Unconvinced by the correctness of both the RTC and the CA rulings, the petitioners-heirs filed the present appeal by certiorari alleging reversible errors committed by the appellate court.

THE PETITION

The petitioners-heirs primarily contest the finding that there was a perfected contract executed by the parties. They allege that other than the finding that Consuelo received P20,000.00 from the respondents as earnest money, no other evidence supported the conclusion that there was aperfected contract between the parties; they insist that Consuelo specifically informed the respondents that the sale still required the petitioners-heirs’ consent as co-owners. The refusal of the petitioners-heirs to sell the subject properties purportedly amounted to the absence of the requisite element of consent.

Even assuming that the agreement amounted to a perfected contract, the petitioners-heirs posed the question of the agreement’s proper characterization – whether it is a contract of sale or a contract to sell. The petitioners-heirs posit that the agreement involves a contract to sell, and the respondents’ belated payment of part of the purchase price, i.e., one day after the June 14, 1989 due date, amounted to the non-fulfillment of a positive suspensive condition that prevented the contract from acquiring obligatory force. In support of this contention, the petitioners-heirs cite the Court’s ruling in the case of Adelfa Rivera, et al. v. Fidela del Rosario, et al.: 7

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. In a contract to sell, the payment of the purchase price is a positive suspensive condition, 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.

[Rivera], 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. [Emphasis in the original.]

From these contentions, we simplify the basic issues for resolution to three questions:

1. Was there a perfected contract between the parties?

2. What is the nature of the contract between them? and

3. What is the effect of the respondents’ belated payment on their contract?

THE COURT’S RULING

There was a perfected contract between the parties since all the essential requisites of a contract were present

Article 1318 of the Civil Code declares that no contract exists unless the following requisites concur: (1) consent of the contracting parties; (2) object certain which is the subject matter of thecontract; and (3) cause of the obligation established. Since the object of the parties’ agreement involves properties co-owned by Consuelo and her children, the petitioners-heirs insist that their approval of the sale initiated by their mother, Consuelo, was essential to its perfection. Accordingly, their refusal amounted to the absence of the required element of consent.

That a thing is sold without the consent of all the co-owners does not invalidate the sale or render it void. Article 493 of the Civil Code8 recognizes the absolute right of a co-owner to freely dispose of his pro indiviso share as well as the fruits and other benefits arising from that share, independently of the other co-owners. Thus, when Consuelo agreed to sell to the respondents the subject properties, what she in fact sold was her undivided interest that, as quantified by the RTC, consisted of one-half interest, representing her conjugal share, and one-sixth interest, representing her hereditary share.

The petitioners-heirs nevertheless argue that Consuelo’s consent was predicated on their consent to the sale, and that their disapproval resulted in the withdrawal of Consuelo’s consent. Yet, we find nothing in the parties’ agreement or even conduct – save Consuelo’s self-serving testimony – that would indicate or from which we can infer that Consuelo’s consent depended on

her children’s approval of the sale. The explicit terms of the June 8, 1989 receipt9 provide no occasion for any reading that the agreement is subject to the petitioners-heirs’ favorable consentto the sale.

The presence of Consuelo’s consent and, corollarily, the existence of a perfected contract between the parties are further evidenced by the payment and receipt of P20,000.00, an earnestmoney by the contracting parties’ common usage. The law on sales, specifically Article 1482 of the Civil Code, provides that whenever earnest money is given in a contract of sale, it shall be considered as part of the price and proof of the perfection of the contract. Although the presumption is not conclusive, as the parties may treat the earnest money differently, there is nothing alleged in the present case that would give rise to a contrary presumption. In cases where the Court reached a conclusion contrary to the presumption declared in Article 1482, we found that the money initially paid was given to guarantee that the buyer would not back out from the sale, considering that the parties to the sale have yet to arrive at a definite agreement as to its terms – that is, a situation where the contract has not yet been perfected.10 These situations do not obtain in the present case, as neither of the parties claimed that the P20,000.00 was given merely as guarantee by the respondents, as vendees, that they wouldnot back out from the sale. As we have pointed out, the terms of the parties’ agreement are clearand explicit; indeed, all the essential elements of a perfected contract are present in this case. While the respondents required that the occupants vacate the subject properties prior to the payment of the second installment, the stipulation does not affect the perfection of the contract, but only its execution.

In sum, the case contains no element, factual or legal, that negates the existence of a perfected contract between the parties.

The characterization of the contract can be considered irrelevant in this case in light of Article 1592 and the Maceda Law, and the petitioners-heirs’ payment

The petitioners-heirs posit that the proper characterization of the contract entered into by the parties is significant in order to determine the effect of the respondents’ breach of the contract (which purportedly consisted of a one-day delay in the payment of part of the purchase price) and the remedies to which they, as the non-defaulting party, are entitled.

The question of characterization of the contract involved here would necessarily call for a thorough analysis of the parties’ agreement as embodied in the June 2, 1989 receipt, their contemporaneous acts, and the circumstances surrounding the contract’s perfection and execution. Unfortunately, the lower courts’ factual findings provide insufficient detail for the purpose. A stipulation reserving ownership in the vendor until full payment of the price is, under case law, typical in a contract to sell.11 In this case, the vendor made no reservation on the ownership of the subject properties. From this perspective, the parties’ agreement may be considered a contract of sale. On the other hand, jurisprudence has similarly established that theneed to execute a deed of absolute sale upon completion of payment of the price generally indicates that it is a contract to sell, as it implies the reservation of title in the vendor until the vendee has completed the payment of the price. When the respondents instituted the action for specific performance before the RTC, they prayed that Consuelo be ordered to execute a Deed of Absolute Sale; this act may be taken to conclude that the parties only entered into a contract to sell.

Admittedly, the given facts, as found by the lower courts, and in the absence of additional details, can be interpreted to support two conflicting conclusions. The failure of the lower courts to pry into these matters may understandably be explained by the issues raised before them, which did not require the additional details. Thus, they found the question of the contract’s characterization immaterial in their discussion of the facts and the law of the case. Besides, the

petitioners-heirs raised the question of the contract’s characterization and the effect of the breach for the first time through the present Rule 45 petition.

Points of law, theories, issues and arguments not brought to the attention of the lower court need not be, and ordinarily will not be, considered by the reviewing court, as they cannot be raised for the first time at the appellate review stage. Basic considerations of fairness and due process require this rule.12

At any rate, we do not find the question of characterization significant to fully pass upon the question of default due to the respondents’ breach; ultimately, the breach was cured and the contract revived by the respondents’ payment a day after the due date.1avvphi1

In cases of breach due to nonpayment, the vendor may avail of the remedy of rescission in a contract of sale. Nevertheless, the defaulting vendee may defeat the vendor’s right to rescind the contract of sale if he pays the amount due before he receives a demand for rescission, eitherjudicially or by a notarial act, from the vendor. This right is provided under Article 1592 of the Civil Code:

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

Nonpayment of the purchase price in contracts to sell, however, does not constitute a breach; rather, nonpayment is a condition that prevents the obligation from acquiring obligatory force and results in its cancellation. We stated in Ong v. CA13 that:

In a contract to sell, the payment of the purchase price is a positive suspensive condition, 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 obligatory force. The non-fulfillment of the condition of full payment rendered the contract to sell ineffective and without force and effect. [Emphasis supplied.]

As in the rescission of a contract of sale for nonpayment of the price, the defaulting vendee in a contract to sell may defeat the vendor’s right to cancel by invoking the rights granted to him under Republic Act No. 6552 or the Realty Installment Buyer Protection Act (also known as the Maceda Law); this law provides for a 60-day grace period within which the defaulting vendee (who has paid less than two years of installments) may still pay the installments due. Only after the lapse of the grace period with continued nonpayment of the amounts due can the actual cancellation of the contract take place. The pertinent provisions of the Maceda Law provide:

xxxx

Section 2. It is hereby declared a public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions.

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

xxxx

Section 4. In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than 60 days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancelthe contract after thirty days from the receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by notarial act. [Emphasis supplied.]

Significantly, the Court has consistently held that the Maceda Law covers not only sales on installments of real estate, but also financing of such acquisition; its Section 3 is comprehensive enough to include both contracts of sale and contracts to sell, provided that the terms on payment of the price require at least two installments. The contract entered into by the parties herein can very well fall under the Maceda Law.

Based on the above discussion, we conclude that the respondents’ payment on June 15, 1989 of the installment due on June 14, 1989 effectively defeated the petitioners-heirs’ right to have the contract rescinded or cancelled. Whether the parties’ agreement is characterized as one of sale or to sell is not relevant in light of the respondents’ payment within the grace period provided under Article 1592 of the Civil Code and Section 4 of the Maceda Law. The petitioners-heirs’ obligation to accept the payment of the price and to convey Consuelo’s conjugal and hereditary shares in the subject properties subsists.

WHEREFORE, we DENY the petitioners-heirs’ petition for review on certiorari, and AFFIRM the decision of the Court of Appeals dated June 24, 2002 and its resolution dated February 20, 2003in CA-G.R. CV Case No. 56590. Costs against the petitioners-heirs.

SO ORDERED.

G.R. No. 128066 June 19, 2000

JARDINE DAVIES INC., petitioner, vs.COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 128069

PURE FOODS CORPORATION, petitioner, vs.COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents.

BELLOSILLO, J.:

This is rather a simple case for specific performance with damages which could have been resolved through mediation and conciliation during its infancy stage had the parties been earnest in expediting the disposal of this case. They opted however to resort to full court proceedings and denied themselves the benefits of alternative dispute resolution, thus making the process more arduous and long-drawn.

The controversy started in 1992 at the height of the power crisis which the country was then experiencing. To remedy and curtail further losses due to the series of power failures, petitioner PURE FOODS CORPORATION (hereafter PUREFOODS) decided to install two (2) 1500 KW generators in its food processing plant in San Roque, Marikina City.

Sometime in November 1992 a bidding for the supply and installation of the generators was held. Several suppliers and dealers were invited to attend a pre-bidding conference to discuss the conditions, propose scheme and specifications that would best suit the needs of PUREFOODS. Out of the eight (8) prospective bidders who attended the pre-bidding conference, only three (3) bidders, namely, respondent FAR EAST MILLS SUPPLY CORPORATION (hereafter FEMSCO), MONARK and ADVANCE POWER submitted bid proposals and gave bid bonds equivalent to 5% of their respective bids, as required.

Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po, PUREFOODS confirmed the award of the contract to FEMSCO —

Gentlemen:

This will confirm that Pure Foods Corporation has awarded to your firm the project: Supply and Installation of two (2) units of 1500 KW/unit Generator Sets at the Processed Meats Plant, Bo. San Roque, Marikina, based on your proposal number PC 28-92 dated November 20, 1992, subject to the following basic terms and conditions:

1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials and labor for the local portion and the labor for the imported materials, payable by progress billing twice a month, with ten percent (10%) retention. The retained amount shall be released thirty (30) days after acceptance of the completed project and upon posting of Guarantee Bond in an amount equivalent to twenty percent (20%) of the contract price. The Guarantee Bond shall be valid for one (1) year from completion and acceptance of project. The contract price includes future increase/s in costs of materials and labor;

2. The projects shall be undertaken pursuant to the attached specifications. It is understood that any item required to complete the project, and those not included in the list of items shall be deemed included and covered and shall be performed;

3. All materials shall be brand new;

4. The project shall commence immediately and must be completed within twenty (20) working days after the delivery of Generator Set to Marikina Plant, penalty equivalent to 1/10 of 1% of the purchase price for every day of delay;

5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the contract price, and shall procure All Risk Insurance equivalent to the contract price upon commencement of the project. The All Risk Insurance Policy shall be endorsed in favor of and shall be delivered to Pure Foods Corporation;

6. Warranty of one (1) year against defective material and/or workmanship.

Once finalized, we shall ask you to sign the formal contract embodying the foregoing terms and conditions.

Immediately, FEMSCO submitted the required performance bond in the amount of P1,841,187.90 and contractor's all-risk insurance policy in the amount of P6,137,293.00 which PUREFOODS through its Vice President Benedicto G. Tope acknowledged in a letter dated 18 December 1992. FEMSCO also made arrangements with its principal and started the PUREFOODS project by purchasing the necessary materials. PUREFOODS on the other hand returned FEMSCO's Bidder's Bond in the amount of P1,000,000.00, as requested.

Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice President Teodoro L. Dimayuga unilaterally canceled the award as "significant factors were uncovered and brought to (their) attention which dictate (the) cancellation and warrant a total review and re-bid of (the) project." Consequently, FEMSCO protested the cancellation of the award and sought a meeting with PUREFOODS. However, on 26 March 1993, before the mattercould be resolved, PUREFOODS already awarded the project and entered into a contract with

JARDINE NELL, a division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was not one of the bidders.1âwphi1.nêt

FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to cease and desist from delivering and installing the two (2) generators at PUREFOODS. Its demand letters unheeded, FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS for reneging on its contract, and JARDINE for its unwarranted interference and inducement. Trial ensued. After FEMSCO presented its evidence, JARDINE filed a Demurrer to Evidence.

On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, 1 granted JARDINE's Demurrer to Evidence. The trial court concluded that "[w]hile it may seem to the plaintiff that by the actions of the two defendants there is something underhanded going on, this is all a matter of perception, and unsupported by hard evidence, mere suspicions and suppositions would not stand up very well in a court of law." 2 Meanwhile trial proceeded as regards the case against PUREFOODS.

On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify FEMSCO the sum of P2,300,000.00 representing the value of engineering services it rendered; (b) to pay FEMSCO the sum of US$14,000.00 or its peso equivalent, and P900,000.00 representing contractor's mark-up on installation work, considering that it would be impossible tocompel PUREFOODS to honor, perform and fulfill its contractual obligations in view of PUREFOOD's contract with JARDINE and noting that construction had already started thereon; (c) to pay attorney's fees in an amount equivalent to 20% of the total amount due; and, (d) to paythe costs. The trial court dismissed the counterclaim filed by PUREFOODS for lack of factual and legal basis.

Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the 27 June 1994 Resolution of the trial court which granted the Demurrer to Evidence filed by JARDINE resulting in the dismissal of the complaint against it, while PUREFOODS appealed the28 July 1994 Decision of the same court which ordered it to pay FEMSCO.

On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the trial court. 3 It also reversed the 27 June 1994 Resolution of the lower court and ordered JARDINE topay FEMSCO damages for inducing PUREFOODS to violate the latter's contract with FEMSCO.As such, JARDINE was ordered to pay FEMSCO P2,000,000.00 for moral damages. In addition,PUREFOODS was also directed to pay FEMSCO P2,000,000.00 as moral damages and P1,000,000.00 as exemplary damages as well as 20% of the total amount due as attorney's fees.

On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for reconsideration filed by PUREFOODS and JARDINE. Hence, these two (2) petitions for review filed by PUREFOODS and JARDINE which were subsequently consolidated.

PUREFOODS maintains that the conclusions of both the trial court and the appellate court are premised on a misapprehension of facts. It argues that its 12 December 1992 letter to FEMSCO was not an acceptance of the latter's bid proposal and award of the project but more of a qualified acceptance constituting a counter-offer which required FEMSCO's express conforme. Since PUREFOODS never received FEMSCO's conforme, PUREFOODS was very well within reason to revoke its qualified acceptance or counter-offer. Hence, no contract was perfected between PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad faith when it dealt with FEMSCO. Hence moral and exemplary damages should not have been awarded.

Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior knowledge of the supposed contract between PUREFOODS and FEMSCO, and that it induced

PUREFOODS to violate the latter's alleged contract with FEMSCO. Moreover, JARDINE reasons that FEMSCO, an artificial person, is not entitled to moral damages. But granting arguendo that the award of moral damages is proper, P2,000,000.00 is extremely excessive.

In the main, these consolidated cases present two (2) issues: first, whether there existed a perfected contract between PUREFOODS and FEMSCO; and second, granting there existed a perfected contract, whether there is any showing that JARDINE induced or connived with PUREFOODS to violate the latter's contract with FEMSCO.

A contract is defined as "a juridical convention manifested in legal form, by virtue of which one ormore persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of aprestation to give, to do, or not to do." 4 There can be no contract unless the following requisites concur: (a) consent of the contracting parties; (b) object certain which is the subject matter of thecontract; and, (c) cause of the obligation which is established.5 A contract binds both contracting parties and has the force of law between them.

Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by the offeror. From that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, maybe in keeping with good faith, usage and law. 6 To produce a contract, the acceptance must not qualify the terms of the offer. However, the acceptance may be express or implied. 7 For a contract to arise, the acceptance must be made known to the offeror. Accordingly, the acceptance can be withdrawn or revoked before it is made known to the offeror.

In the instant case, there is no issue as regards the subject matter of the contract and the cause of the obligation. The controversy lies in the consent — whether there was an acceptance of the offer, and if so, if it was communicated, thereby perfecting the contract.

To resolve the dispute, there is a need to determine what constituted the offer and the acceptance. Since petitioner PUREFOODS started the process of entering into the contract by conducting a bidding, Art. 1326 of the Civil Code, which provides that "[a]dvertisements for bidders are simply invitations to make proposals," applies. Accordingly, the Terms and Conditions of the Bidding disseminated by petitioner PUREFOODS constitutes the "advertisement" to bid on the project. The bid proposals or quotations submitted by the prospective suppliers including respondent FEMSCO, are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection of the respective offers.

Quite obviously, the 12 December 1992 letter of petitioner. PUREFOODS to FEMSCO constituted acceptance of respondent FEMSCO's offer as contemplated by law. The tenor of theletter, i.e., "This will confirm that Pure Foods has awarded to your firm (FEMSCO) the project," could not be more categorical. While the same letter enumerated certain "basic terms and conditions," these conditions were imposed on the performance of the obligation rather than on the perfection of the contract. Thus, the first "condition" was merely a reiteration of the contract price and billing scheme based on the Terms and Conditions of Bidding and the bid or previous offer of respondent FEMSCO. The second and third "conditions" were nothing more than general statements that all items and materials including those excluded in the list but necessaryto complete the project shall be deemed included and should be brand new. The fourth "condition" concerned the completion of the work to be done, i.e., within twenty (20) days from the delivery of the generator set, the purchase of which was part of the contract. The fifth "condition" had to do with the putting up of a performance bond and an all-risk insurance, both ofwhich should be given upon commencement of the project. The sixth "condition" related to the standard warranty of one (1) year. In fine, the enumerated "basic terms and conditions" were prescriptions on how the obligation was to be performed and implemented. They were far from being conditions imposed on the perfection of the contract.

In Babasa v. Court of Appeals 8 we distinguished between a condition imposed on the perfectionof a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party options and/or remedies to protect his interests.

We thus agree with the conclusion of respondent appellate court which affirmed the trial court —

As can be inferred from the actual phrase used in the first portion of the letter, the decision to award the contract has already been made. The letter only serves as a confirmation of such decision. Hence, to the Court's mind, there is already an acceptance made of the offer received by Purefoods. Notwithstanding the terms and conditions enumerated therein, the offer has been accepted and/or amplified the details of the terms and conditions contained in the Terms and Conditions of Bidding given out by Purefoods to prospective bidders. 9

But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted a "conditional counter-offer," respondent FEMCO's submission of the performance bond and contractor's all-risk insurance was an implied acceptance, if not a clear indication of itsacquiescence to, the "conditional counter-offer," which expressly stated that the performance bond and the contractor's all-risk insurance should be given upon the commencement of the contract. Corollarily, the acknowledgment thereof by petitioner PUREFOODS, not to mention its return of FEMSCO's bidder's bond, was a concrete manifestation of its knowledge that respondent FEMSCO indeed consented to the "conditional counter-offer." After all, as earlier adverted to, an acceptance may either be express or implied, 10 and this can be inferred from thecontemporaneous and subsequent acts of the contracting parties.

Accordingly, for all intents and purposes, the contract at that point has been perfected, and respondent FEMSCO's conforme would only be a mere surplusage. The discussion of the price of the project two (2) months after the 12 December 1992 letter can be deemed as nothing morethan a pressure being exerted by petitioner PUREFOODS on respondent FEMSCO to lower the price even after the contract had been perfected. Indeed from the facts, it can easily be surmised that petitioner PUREFOODS was haggling for a lower price even after agreeing to the earlier quotation, and was threatening to unilaterally cancel the contract, which it eventually did. Petitioner PUREFOODS also makes an issue out of the absence of a purchase order (PO). Suffice it to say that purchase orders or POs do not make or break a contract. Thus, even the tenor of the subsequent letter of petitioner PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling the award to your company of the project," presupposes that the contract has been perfected. For, there can be no cancellation if the contract was not perfected in the first place.

Petitioner PUREFOODS also argues that it was never in bad faith.1avvphi1 On the contrary, it believed in good faith that no such contract was perfected. We are not convinced. We subscribe to the factual findings and conclusions of the trial court which were affirmed by the appellate court —

Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE FOODS) has acted with bad faith and this was further aggravated by the subsequent inking of a contract between defendant Purefoods and erstwhile co-defendant Jardine.It is very evident that Purefoods thought that by the expedient means of merely writinga letter would automatically cancel or nullify the existing contract entered into by both parties after a process of bidding. This, to the Court's mind, is a flagrant violation of the express provisions of the law and is contrary to fair and just dealings to which every man is due. 11

This Court has awarded in the past moral damages to a corporation whose reputation has been besmirched. 12 In the instant case, respondent FEMSCO has sufficiently shown that its reputation was tarnished after it immediately ordered equipment from its suppliers on account of the urgency of the project, only to be canceled later. We thus sustain respondent appellate court's award of moral damages. We however reduce the award from P2,000,000.00 to P1,000,000.00, as moral damages are never intended to enrich the recipient. Likewise, the award of exemplary damages by way of example for the public good is excessive and should be reduced to P100,000.00.

Petitioner JARDINE maintains on the other hand that respondent appellate court erred in ordering it to pay moral damages to respondent FEMSCO as it supposedly induced PUREFOODS to violate the contract with FEMSCO. We agree. While it may seem that petitioners PUREFOODS and JARDINE connived to deceive respondent FEMSCO, we find no specific evidence on record to support such perception. Likewise, there is no showing whatsoever that petitioner JARDINE induced petitioner PUREFOODS. The similarity in the design submitted to petitioner PUREFOODS by both petitioner JARDINE and respondent FEMSCO, and the tender of a lower quotation by petitioner JARDINE are insufficient to show that petitioner JARDINE indeed induced petitioner PUREFOODS to violate its contract with respondent FEMSCO.

WHEREFORE, judgment is hereby rendered as follows:

(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court of Appeals reversing the 27 June 1994 resolution of the trial court and ordering petitioner JARDINE DAVIES, INC., to pay private respondent FAR EAST MILLS SUPPLY CORPORATION P2,000,000.00 as moral damages is REVERSED and SET ASIDE for insufficiency of evidence; and

(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of Appeals ordering petitioner PUREFOODS CORPORATION to pay private respondent FAR EAST MILLS SUPPLY CORPORATION the sum of P2,300,000.00 representing the value of engineering services it rendered, US$14,000.00 or its peso equivalent, and P900,000.00 representing the contractor's mark-up on installation work, as well asattorney's fees equivalent to twenty percent (20%) of the total amount due, is AFFIRMED. In addition, petitioner PURE FOODS CORPORATION is ordered to pay private respondent FAR EAST MILLS SUPPLY CORPORATION moral damages in the amount of P1,000,000.00 and exemplary damages in the amount of P1,000,000.00. Costs against petitioner.

SO ORDERED.

G.R. No. 137290 July 31, 2000

SAN MIGUEL PROPERTIES PHILIPPINES, INC., petitioner, vs.SPOUSES ALFREDO HUANG and GRACE HUANG, respondents.

This is a petition for review of the decision,1 dated April 8, 1997, of the Court of Appeals which reversed the decision of the Regional Trial Court, Branch 153, Pasig City dismissing the complaint brought by respondents against petitioner for enforcement of a contract of sale.

The facts are not in dispute.

Petitioner San Miguel Properties Philippines, Inc. is a domestic corporation engaged in the purchase and sale of real properties. Part of its inventory are two parcels of land totalling 1, 738 square meters at the corner of Meralco Avenue and General Capinpin Street, Barrio Oranbo, Pasig City, which are covered by TCT Nos. PT-82395 and PT-82396 of the Register of Deeds ofPasig City.

On February 21, 1994, the properties were offered for sale for P52,140,000.00 in cash. The offerwas made to Atty. Helena M. Dauz who was acting for respondent spouses as undisclosed principals. In a letter2 dated March 24, 1994, Atty. Dauz signified her clients’ interest in purchasing the properties for the amount for which they were offered by petitioner, under the following terms: the sum of P500,000.00 would be given as earnest money and the balance would be paid in eight equal monthly installments from May to December, 1994. However, petitioner refused the counter-offer.

On March 29, 1994, Atty. Dauz wrote another letter3 proposing the following terms for the purchase of the properties, viz:

This is to express our interest to buy your-above-mentioned property with an area of 1, 738 sq. meters. For this purpose, we are enclosing herewith the sum of P1,000,000.00 representing earnest-deposit money, subject to the following conditions.

1. We will be given the exclusive option to purchase the property within the 30 days from date of your acceptance of this offer.

2. During said period, we will negotiate on the terms and conditions of the purchase; SMPPI will secure the necessary Management and Board approvals; and we initiate the documentation if there is mutual agreement between us.

3. In the event that we do not come to an agreement on this transaction, the said amount of P1,000,000.00 shall be refundable to us in full upon demand. . . .

Isidro A. Sobrecarey, petitioner’s vice-president and operations manager for corporate real estate, indicated his conformity to the offer by affixing his signature to the letter and accepted

the "earnest-deposit" of P1 million. Upon request of respondent spouses, Sobrecarey ordered the removal of the "FOR SALE" sign from the properties.

Atty. Dauz and Sobrecarey then commenced negotiations. During their meeting on April 8, 1994,Sobrecarey informed Atty. Dauz that petitioner was willing to sell the subject properties on a 90-day term. Atty. Dauz countered with an offer of six months within which to pay.

On April 14, 1994, the parties again met during which Sobrecarey informed Atty. Dauz that petitioner had not yet acted on her counter-offer. This prompted Atty. Dauz to propose a four-month period of amortization.

On April 25, 1994, Atty. Dauz asked for an extension of 45 days from April 29, 1994 to June 13, 1994 within which to exercise her option to purchase the property, adding that within that period,"[we] hope to finalize [our] agreement on the matter."4 Her request was granted.

On July 7, 1994, petitioner, through its president and chief executive officer, Federico Gonzales, wrote Atty. Dauz informing her that because the parties failed to agree on the terms and conditions of the sale despite the extension granted by petitioner, the latter was returning the amount of P1 million given as "earnest-deposit."5

On July 20, 1994, respondent spouses, through counsel, wrote petitioner demanding the execution within five days of a deed of sale covering the properties. Respondents attempted to return the "earnest-deposit" but petitioner refused on the ground that respondents’ option to purchase had already expired.

On August 16, 1994, respondent spouses filed a complaint for specific performance against petitioner before the Regional Trial Court, Branch 133, Pasig City where it was docketed as CivilCase No. 64660.

Within the period for filing a responsive pleading, petitioner filed a motion to dismiss the complaint alleging that (1) the alleged "exclusive option" of respondent spouses lacked a consideration separate and distinct from the purchase price and was thus unenforceable and (2)the complaint did not allege a cause of action because there was no "meeting of the minds" between the parties and, therefore, no perfected contract of sale. The motion was opposed by respondents.

On December 12, 1994, the trial court granted petitioner’s motion and dismissed the action. Respondents filed a motion for reconsideration, but it was denied by the trial court. They then appealed to the Court of Appeals which, on April 8, 1997, rendered a decision6 reversing the judgment of the trial court. The appellate court held that all the requisites of a perfected contract of sale had been complied with as the offer made on March 29, 1994, in connection with which the earnest money in the amount of P1 million was tendered by respondents, had already been accepted by petitioner. The court cited Art. 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." The fact the parties had not agreed on the mode of payment did not affect the contract as such is not an essential element for its validity. Inaddition, the court found that Sobrecarey had authority to act in behalf of petitioner for the sale of the properties.7

Petitioner moved for reconsideration of the trial court’s decision, but its motion was denied. Hence, this petition.

Petitioner contends that the Court of Appeals erred in finding that there was a perfected contractof sale between the parties because the March 29, 1994 letter of respondents, which petitioner accepted, merely resulted in an option contract, albeit it was unenforceable for lack of a distinct consideration. Petitioner argues that the absence of agreement as to the mode of payment was fatal to the perfection of the contract of sale. Petitioner also disputes the appellate court’s ruling that Isidro A. Sobrecarey had authority to sell the subject real properties.8

Respondents were required to comment within ten (10) days from notice. However, despite 13 extensions totalling 142 days which the Court had given to them, respondents failed to file their comment. They were thus considered to have waived the filing of a comment.

The petition is meritorious.

In holding that there is a perfected contract of sale, the Court of Appeals relied on the following findings: (1) earnest money was allegedly given by respondents and accepted by petitioner through its vice-president and operations manager, Isidro A. Sobrecarey; and (2) the documentary evidence in the records show that there was a perfected contract of sale.

With regard to the alleged payment and acceptance of earnest money, the Court holds that respondents did not give the P1 million as "earnest money" as provided by Art. 1482 of the Civil Code. They presented the amount merely as a deposit of what would eventually become the earnest money or downpayment should a contract of sale be made by them. The amount was thus given not as a part of the purchase price and as proof of the perfection of the contract of sale but only as a guarantee that respondents would not back out of the sale. Respondents in fact described the amount as an "earnest-deposit." In Spouses Doromal, Sr. v. Court of Appeals,9 it was held:

. . . While the P5,000 might have indeed been paid to Carlos in October, 1967, there is nothing to show that the same was in the concept of the earnest money contemplated in Art. 1482 of theCivil Code, invoked by petitioner, as signifying perfection of the sale. Viewed in the backdrop of the factual milieu thereof extant in the record, We are more inclined to believe that the said P 5,000.00 were paid in the concept of earnest money as the term was understood under the Old Civil Code, that is, as a guarantee that the buyer would not back out, considering that it is not clear that there was already a definite agreement as to the price then and that petitioners were decided to buy 6/7 only of the property should respondent Javellana refuse to agree to partwith her 1/7 share.10

In the present case, the P1 million "earnest-deposit" could not have been given as earnest money as contemplated in Art. 1482 because, at the time when petitioner accepted the terms of respondents’ offer of March 29, 1994, their contract had not yet been perfected. This is evident from the following conditions attached by respondents to their letter, to wit: (1) that they be giventhe exclusive option to purchase the property within 30 days from acceptance of the offer; (2) that during the option period, the parties would negotiate the terms and conditions of the purchase; and (3) petitioner would secure the necessary approvals while respondents would handle the documentation.

The first condition for an option period of 30 days sufficiently shows that a sale was never perfected.1âwphi1 As petitioner correctly points out, acceptance of this condition did not give rise to a perfected sale but merely to an option or an accepted unilateral promise on the part of respondents to buy the subject properties within 30 days from the date of acceptance of the offer. Such option giving respondents the exclusive right to buy the properties within the period agreed upon is separate and distinct from the contract of sale which the parties may enter.11 All that respondents had was just the option to buy the properties which privilege was not, however,exercised by them because there was a failure to agree on the terms of payment. No contract of sale may thus be enforced by respondents.

Furthermore, even the option secured by respondents from petitioner was fatally defective. Under the second paragraph of Art. 1479, an accepted unilateral promise to buy or sell a determinate thing for a price certain is binding upon the promisor only if the promise is supportedby a distinct consideration. Consideration in an option contract may be anything of value, unlike in sale where it must be the price certain in money or its equivalent. There is no showing here of any consideration for the option. Lacking any proof of such consideration, the option is unenforceable.

Equally compelling as proof of the absence of a perfected sale is the second condition that, during the option period, the parties would negotiate the terms and conditions of the purchase. The stages of a contract of sale are as follows: (1) negotiation, covering the period from the timethe prospective contracting parties indicate interest in the contract to the time the contract is perfected; (2) perfection, which takes place upon the concurrence of the essential elements of the sale which are the meeting of the minds of the parties as to the object of the contract and upon the price; and (3) consummation, which begins when the parties perform their respective undertakings under the contract of sale, culminating in the extinguishment thereof.12 In the present case, the parties never got past the negotiation stage. The alleged "indubitable evidence"13 of a perfected sale cited by the appellate court was nothing more than offers and counter-offers which did not amount to any final arrangement containing the essential elements of a contract of sale. While the parties already agreed on the real properties which were the objects of the sale and on the purchase price, the fact remains that they failed to arrive at mutually acceptable terms of payment, despite the 45-day extension given by petitioner.

The appellate court opined that the failure to agree on the terms of payment was no bar to the perfection of the sale because Art. 1475 only requires agreement by the parties as to the price ofthe object. This is error. InNavarro v. Sugar Producers Cooperative Marketing Association, Inc.,14 we laid down the rule that the manner of payment of the purchase price is an essential element before a valid and binding contract of sale can exist. Although the Civil Code does not expressly state that the minds of the parties must also meet on the terms or manner of payment of the price, the same is needed, otherwise there is no sale. As held in Toyota Shaw, Inc. v. Court of Appeals,15 agreement on the manner of payment goes into the price such that a disagreement on the manner of payment is tantamount to a failure to agree on the price.16 In Velasco v. Court of Appeals,17 the parties to a proposed sale had already agreed on the object of sale and on the purchase price. By the buyer’s own admission, however, the parties still had to agree on how and when the downpayment and the installments were to be paid. It was held:

. . . Such being the situation, it can not, therefore, be said that a definite and firm sales agreement between the parties had been perfected over the lot in question. Indeed, this Court has already ruled before that a definite agreement on the manner of payment of the purchase price is an essential element in the formation of a binding and enforceable contract of sale. The fact, therefore, that the petitioners delivered to the respondent the sum of P10,000 as part of the down-payment that they had to pay cannot be considered as sufficient proof of the perfection of any purchase and sale agreement between the parties herein under Art. 1482 of the new Civil Code, as the petitioners themselves admit that some essential matter - the terms of the payment- still had to be mutually covenanted.18

Thus, it is not the giving of earnest money, but the proof of the concurrence of all the essential elements of the contract of sale which establishes the existence of a perfected sale.

In the absence of a perfected contract of sale, it is immaterial whether Isidro A. Sobrecarey had the authority to enter into a contract of sale in behalf of petitioner. This issue, therefore, needs no further discussion.

WHEREFORE, the decision of the Court of Appeals is REVERSED and respondents’ complaint is DISMISSED.

SO ORDERED.

G.R. No. 135929 April 20, 2001

LOURDES ONG LIMSON, petitioner, vs.COURT OF APPEALS, SPOUSES LORENZO DE VERA and ASUNCION SANTOS-DE VERA,TOMAS CUENCA, JR. and SUNVAR REALTY DEVELOPMENT CORPORATION, respondents.

BELLOSILLO, J.:

Filed under Rule 45 of the Rules of Court this Petition for Review on Certiorari seeks to review, reverse and set aside the Decision1 of the Court of Appeals dated 18 May 1998 reversing that ofthe Regional Trial Court dated 30 June 1993. The petitioner likewise assails the Resolution2 of the appellate court of 19 October 1998 denying petitioner’s Motion for Reconsideration.

Petitioner Lourdes Ong Limson, in her 14 may 1979 Complaint filed before the trial court,3 alleged that in July 1978 respondent spouses Lorenzo de Vera and Asuncion Santos-de Vera, through their agent Marcosa Sanchez, offered to sell to petitioner a parcel of land consisting of 48, 260 square meters, more or less, situated in Barrio San Dionisio, Parañaque, Metro Manila; that respondent spouses informed her that they were the owners of the subject property; that on 31 July 1978 she agreed to buy the property at the price of P34.00 per square meter and gave the sum of P20,000.00 to respondent spouses as "earnest money;" that respondent spouses signed a receipt therefor and gave her a 10-day option period to purchase the property; that respondent Lorenzo de Vera then informed her that the subject property was mortgaged to Emilio Ramos and Isidro Ramos; that respondent Lorenzo de Vera asked her to pay the balance of the purchase price to enable him and his wife to settle their obligation with the Ramoses.1âwphi1.nêt

Petitioner also averred that she agreed to meet respondent spouses and the Ramoses on 5 August 1978 at the Office of the Registry of deeds of Makati, Metro Manila, to consummate the transaction but due to the failure of respondent Asuncion Santos-de Vera and the Ramoses to appear, no transaction was formalized. In a second meeting scheduled on 11 August 1978 she claimed that she was willing and ready to pay the balance of the purchase price but the transaction again did not materialize as respondent spouses failed to pay the back taxes of subject property. Subsequently, on 23 August 1978 petitioner allegedly gave respondent Lorenzo de Vera three (3) checks in the total amount of P36, 170.00 for the settlement of the back taxes of the property and for the payment of the quitclaims of the three (3) tenants of

subject land. The amount was purportedly considered part of purchase price and respondent Lorenzo de Vera signed the receipts therefor.

Petitioner alleged that on 5 September 1978 she was surprised to learn from the agent of respondent spouses that the property was the subject of a negotiation for the sale to respondentSunvar Realty Development Corporation (SUNVAR) represented by respondent Tomas Cuenca,Jr. On 15 September 1978 petitioner discovered that although respondent spouses purchased the property from the Ramoses on 20 March 1970 it was only on 15 September 1978 that TCT No. S-72946 covering the property was issued to respondent spouses. As a consequence, she file on the same day an affidavit of Adverse Claim with the Office of the Registry of Deeds of Makati, Metro, which was annotated on TCT No. S-72946. She also claimed that on the same day she informed respondent Cuenca of her "contract" to purchase the property.

The Deed of Sale between respondent spouses and respondent SUNVAR was executed on 15 September 1978 and TCT N0. S-72377 was issued in favor of the latter on 26 September 1978 with the adverse Claim of petitioner annotated thereon. Petitioner claimed that when respondent spouses sold the property in dispute to SUNVAR, her valid and legal right to purchase it was ignored if not violated. Moreover, she maintained that SUNVAR was in bad faith, as it knew of her "contract" to purchase the subject property fro respondent spouse.

Finally, for the alleged unlawful and unjust acts of respondent spouses, which caused her damage, prejudice and injury, petitioner claimed that the Deed of Sale, should be annuled and TCT No. S-72377 in the name of respondent SUNVAR canceled and TCT No. S-72946 restored. She also insisted that a Deed of Sale between her an respondent spouses be now executed upon her payment of the balance of the purchase price agreed upon, plus damages and attorney’s fees.

In their Answer4 respondent spouses maintained that petitioner had no sufficient cause of action against them; that she was not the real party in interest; that the option to buy the property had long expired; that there was no perfected contract to sell between them; and, that petitioner had no legal capacity to sue. Additionally, respondent spouses claimed actual, moral and exemplary damages, and attorney’s fees against petitioner.

On the other hand, respondents SUNVAR and Cuenca, in their Answer5 alleged that petitioner was not the proper party in interest and/or had no cause of action against them. But, even assuming that petitioner was the proper party in interest, they claimed that she could only be entitled to the return of any amount received by respondent spouses. In the alternative, they argued that petitioner had lost her option to buy the property for failure to comply with the terms and conditions of the agreement as embodied in the receipt issued therefor. Moreover, they contended that at the time of the execution of the Deed of Sale and the payment of consideration to respondent spouses, they "did not know nor was informed" of petitioner’s interest or claim over the subject property. They claimed furthermore that it was only after the signing of the Deed of Sale and the payment of the corresponding amounts to respondent spouses that they came to know of the claim of petitioner as it was only then that they were furnished copy to the title to the properly where the Adverse Claim of petitioner was annotated. Consequently, they also instituted a Cross-Claim against respondent spouses for bad faith in encouraging the negotiations between them without telling them of the claim of petitioner. The same respondents maintained that had they known of the claim of petitioner, they would not have initiated negotiations with respondent spouses for the purchase of the property. Thus, they prayed for reimbursement of all amounts and monies received from them by respondent spouses, attorney’s fees and expenses for litigation in the event that the trial court should annul the Deed of Sale and deprive them of their ownership and possessio of the subject land.

In their Answer to the Cross-Claim6 of respondents SUNVAR and Cuenca, respondent spouses insisted that they negotiated with the former only after expiration of the option period given to

petitioner and her failure with her commitments thereunder. Respondent spouses contended that they acted legally and validly, in all honesty and good faith. According to them, respondent SUNVAR made a verification of the title with the office of the register of Deeds of Metro Manila District IV before the execution of the Deed of Absolute Sale. Also, they claimed that theCross-Claim was written executed by respondent SUNVAR in their favor. Thus, respondent spouses prayed for actual damages for the unjustified filling of the Cross-Claim, moral damages for the mental anguish and similar injuries they suffered by reason thereof, exemplary damages "to prevent others from emulation the bad example" of respondents SUNVAR and Cuenca, plus attorney’s fees.

After a protracted trial and reconstitution of the court records due to the fire that razed the PasayCity Hall on 18 January 1992, the Regional Trial Court rendered its 30 June 1993 Decision7 in favor of petitioner. It ordered (a) the annulment and rescission of the Deed of Absolute Sale executed on 15 September 1978 by respondent spouses in favor of respondent SUNVAR; (b) the cancellation and revocation of TCT No. S-75377 of the Registry of Deeds, Makati, Metro Manila, issued in the name of respondent Sunvar Realty Development Corporation, and the restoration or reinstatement of TCT No. S-72946 of the same Registry issued in the name of respondent spouses; (c) respondent spouses to execute a deed of sale conveying ownership of the property covered by TCT No. S-72946 in favor of petitioner upon her payment of the balanceof the purchase price agreed upon; and, (d) respondent spouses to pay petitioner P50,000.00 asand for attorney’s fees, and to pay the costs.

On appeal, the Court of Appeals completely reversed the decision of the trial court. It ordered (a)the Register of Deeds of Makati City to lift the Adverse Claim and such other encumbrances petitioner might have filed or caused to be annotated on TCT No. S-75377; and, (b) petitioner to pay (1) respondent SUNVAR P50,000.00 as nominal damages, P30,000.00 as exemplary damages and P20,000 as attorney’s fees; (2) respondent spouses, P15,000.00 as nominal damages, P10,000.00 as exemplary damages and P10,000.00 as attorney’s fees; and, (3) the costs.

Petitioner timely filed a Motion for Reconsideration which was denied by the Court of Appeals on19 October 1998. Hence, this petition.

At issue for resolution by the Court is the nature of the contract entered into between petitioner Lourdes Ong Limson on one hand, and respondent spouses Lorenzo de Vera and Asuncion Santos-de Vera on the other.

The main argument of petitioner is that there was a perfected contract to sell between her and respondent spouses. On the other hand, respondent spouses and respondents SUNVAR and Cuenca argue that what was perfected between petitioner and respondent spouses was a mere option.

A scrutiny of the facts as well as the evidence of the parties overwhelmingly leads to the conclusion that the agreement between the parties was a contract of option and not a contract tosell.

An option, as used in the law of sales, is a continuing offer or contract by which the owner sitpulates with another that the latter shall have the right to buy the property at a fixed price within a time certain, or under, or in compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell or demand a sale. It is also sometimes called an "unaccepted offer." An option is not itself a purchase, but merely secures the privilege to buy.8 It is not a sale of property but a sale of right to purchase.9 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 not sell something, i.e., the right or privilege to buy at the election or option of the

other party.10 Its distinguishing characteristic is that it imposes no binding obligation on the person holding the option, aside from the consideration for the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest, transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but is merely a contract by which the owner of the property gives the optionee the right or privilege of accepting the offer and buying the property on certain terms.11

On the other hand, a contract, like a contract to sell, involves the meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.12 Contracts, in general, are perfected by mere consent,13 which is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitutethe contract. The offer must be certain and the acceptance absolute.14

The Receipt15 that contains the contract between petitioner and respondent spouses provides –

Received from Lourdes Limson the sum of Twenty Thousand Peso (P20,000.00) under Check No. 22391 dated July 31, 1978 as earnest money with option to purchase a parcel of land owned by Lorenzo de Vera located at Barrio San Dionisio, Municipality of Parañaque, Province of Rizal with an area of forty eight thousand two hundred sixty square meters more or less at the price of Thirty Four Pesos (34.00)16 cash subject to the condition and stipulation that have been agreed upon by the buyer and me which will form part of the receipt. Should the transaction of the property not materialize not on the fault of the buyer, I obligate myself to return the fullamount of P20,000.00 earnest money with option to buy or forfeit on the fault of the buyer. I guarantee to notify the buyer Lourdes Limson or her representative and get her conformity should I sell or encumber this property to a third person. This option to buy is good within ten (10) days until the absolute deed of sale is finally signed by the parties or the failure of the buyer to comply with the terms of the option to buy as herein attached.

In the interpretation of contracts, the ascertainment of the intention of the contracting parties is to be discharged by looking to the words they used to project that intention in their contracts, all the words standing alone.17 The above Receipt readily shows that respondent spouses and petitioner only entered into a contract of option; a contract by which respondent spouses agreed with petitioner that the latter shall have the right to buy the former's property at a fixed price of P34.00 per square meter within ten (10) days from 31 July 1978. Respondent spouses did not sell their property; they did not also agree to sell it; but they sold something, i.e., the privilege to buy at the election or option of petitioner. The agreement imposed no binding obligation on petitioner, aside from the consideration for the offer.

The consideration of P20,000.00 paid by petitioner to respondent spouses was referred to as "earnest money." However, a careful examination of the words used indicated that the money is not earnest money but option money. "Earnest money" and "option money" are not the same but distinguished thus; (a) earnest money is part of the purchase price, while option money is the money given as a distinct consideration for an option contract; (b) earnest money given only where there is already a sale, while option money applies to a sale not yet perfected; and, (c) when earnest money is given, the buyer is bound to pay the balance, while when the would-be buyer gives option money, he is not required to buy,18 but may even forfeit it depending on the terms of the option.

There is nothing in the Receipt which indicates that the P20,000.00 was part of the purchase price. Moreover, it was not shown that there was a perfected sale between the parties where earnest money was given. Finally, when petitioner gave the "earnest money" the Receipt did not reveal that she was bound to pay the balance of the purchase price. In fact, she could even forfeit the money given if the terms of the option were not met. Thus, the P20,000.00 could only

be money given as consideration for the option contract. That the contract between the parties isone of option is buttressed by the provision therein that should the transaction of the provision therein that should the transaction of the property not materialize without fault of petitioner as buyer, respondent Lorenzo de Vera obligates himself to return the full amount of P20,000.00 "earnest money" with option to buy or forfeit the same on the fault of petitioner. It is further bolstered by the provision therein that guarantees petitioner that she or her representative wouldbe notified in case the subject property was sold or encumbered to a third person. Finally, the Receipt provided for a period within which the option to buy was to be exercised, i.e., "within ten (10) days" from 31 July 1978.

Doubtless, the agreement between respondent spouses and petitioner was an "option contract" or what is sometimes called an "unaccepted offer." During the option period the agreement was not converted into a bilateral promise to sell and to buy where both respondent spouses and petitioner were then reciprocally bound to comply with their respective undertakings as petitionerdid not timely, affirmatively and clearly accept the offer of respondent spouses.

The rule is that except where a formal acceptance is not required, although the acceptance mustbe affirmatively and clearly made and evidenced by some acts or conduct communicated to the offeror, it may be made either in a formal or an informal manner, and may be shown by acts, conduct or words by the accepting party that clearly manifest a present intention or determination to accept the offer to buy the property of respondent spouses within the 10-day option period. The only occasion within the option period when petitioner could have demonstrated her acceptance was on 5 August 1978 when, according to her, she agreed to meet respondent spouses and the Ramoses at the Office of the Registrar of Deeds of Makati. Petitioner’s agreement to meet with respondent spouses presupposes an invitation from the latter, which only emphasizes their persistence in offering the property to the former. But whether that showed acceptance by petitioner of the offer is hazy and dubious.

On or before 10 August 1978, the last day of the option period, no affirmative or clear manifestation was made by petitioner to accept the offer. Certainly, there was no concurrence ofprivate respondent spouses’ offer and petitioner’s acceptance thereof within the option period. Consequently, there was no perfected contract to sell between the parties.

On 11 August 1978 the option period expired and the exclusive right of petitioner to buy the property of respondent spouses ceased. The subsequent meetings and negotiations, specificallyon 11 and 23 August 1978, between the parties only showed the desire of respondent spouses to sell their property to petitioner. Also, on 14 September 1978 when respondent spouses sent atelegram to petitioner demanding full payment of the purchase price on even date simply demonstrated an inclination to give her preference to buy subject property. Collectively, these instances did not indicate that petitioner still had the exclusive right to purchase subject property.Verily, the commencement of negotiations between respondent spouses and respondent SUNVAR clearly manifested that their offer to sell subject property to petitioner was no longer exclusive to her.

We cannot subscribe to the argument of petitioner that respondent spouses extended the option period when they extended the authority of their until 31 August 1978. The extension of the contract of agency could not operate to extend the option period between the parties in the instant case. The extension must not be implied but categorical and must show the clear intention of the parties.1âwphi1.nêt

As to whether respondent spouses were at fault for the non-consummation of their contract with petitioner, we agree with the appellate court that they were not to be blammed. First, within the option period, or on 4 August 1978, it was respondent spouses and not petitioner who initiated the meeting at the Office of The Register of Deeds of Makati. Second, that the Ramoses filed to appear on 4 August 1978 was beyond the control of respondent spouses. Third, the succeeding

meetings that transpired to consummate the contract were all beyond the option period and, as declared by the Court of Appeals, the question of who was at fault was already immaterial. Fourth, even assuming that the meetings were within the option period, the presenceof petitioner was not enough as she was not even prepared to pay the purchase price in cash asagreed upon. Finally, even without the presence of the Ramoses, petitioner could have easily made the necessary payment in cash as the price of the property was already set at P34.00 per square meter and payment of the mortgage could every well be left to respondent spouses.

Petitioner further claims that when respondent spouses sent her a telegram demanding full payment of the purchase price on 14 September 1978 it was an acknowledgment of their contract to sell, thus denying them the right to claim otherwise.

We do not agree. As explained above, there was no contract to sell between petitioner and respondent spouses to speak of. Verily, the telegram could not operate to estop them from claiming that there was such contract between them and petitioner. Neither could it mean that respondent spouses extended the option period. The telegram only showed that respondent spouses were willing to give petitioner a chance to buy subject property even if it no longer exclusive.

The option period having expired and acceptance was not effectively made by petitioner, the purchase of subject property by respondent SUNVAR was perfectly valid and entered into in good faith. Petitioner claims that in August 1978 Hermigildo Sanchez, the son of respondent spouses’ agent, Marcosa Snachez, informed Marixi Prieto, a member of the Board of Directors of respondent SUNVAR, that the property was already sold to petitioner. Also, petitioner maintains that on 5 September 1978 respondent Cuenca met with her and offered to buy the property from her at P45.00 per square meter. Petitioner contends that these incidents, includingthe annotation of her Adverse Claim on the title of subject property on 15 September 1978 show that respondent SUNVAR was aware of the perfected sale between her and respondent spouses, thus making respondent SUNVAR a buyer in bad faith.

Petitioner is not correct. The dates mentioned, at least 5 and 15 September 1978, are immaterialas they were beyond the option period given to petitioner. On the other hand, the referral to sometime in August 1978 in the testimony of Hermigildo Sanchez as emphasized by petitioner in her petition is very vague. It could be within or beyond the option period. Clearly then, even assuming that the meeting with Marixi Prieto actually transpired, it could not necessarily mean that she knew of the agreement between petitioner and respondent spouses for the purchase of subject property as the meeting could have occurred beyond the option period. In which case, no bad faith could be attributed to respondent SUNVAR. If, on the other hand, the meeting was within the option period, petitioner was remiss in her duty to prove so. Necessarily, we are left with the conclusion that respondent SUNVAR bought subject property from respondent spouses in good faith, for value and without knowledge of any flaw or defect in its title.

The appellate court awarded nominal and exemplary damages plus attorney’s fees to respondent spouses and respondent SUNVAR. But nominal damages are adjudicated to vindicate or recognize the right of the plaintiff that has been violated or invaded by the defendant.19 In the instant case, the Court recognizes the rights of all the parties and finds no violation or invasion of the rights of respondents by petitioner. Petitioner, in filing her complaint, only seeks relief, in good faith, for what she believes she was entitled to and should not be awarded to respondents as they are imposed only by way of example or correction for the publicgood and only in addition tothe moral, temperate, liquidated or compensatory damages.20 No such kinds of damages were awarded by the Court of Appeals, only nominal, which was not justified in this case. Finally, attorney’s fees could not also be recovered as the Court does not deem it just and equitable under the circumtances.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals ordering the Register of Deeds of Makati City to lift the adverse claim and such other encumbrances petitioners Lourdes Ong Limson may have filed or caused to be annotated on TCT No. S-75377 is AFFIRMED, with the MODIFICATION that the award of nominal and exemplary damages as well as attorney’s fees is DELETED.

SO ORDERED.

G.R. No. 134971 March 25, 2004

HERMINIO TAYAG, petitioner, vs.AMANCIA LACSON, ROSENDO LACSON, ANTONIO LACSON, JUAN LACSON, TEODISIA LACSON-ESPINOSA and THE COURT OF APPEALS, respondents.

Before us is a petition for review on certiorari of the Decision1 and the Resolution2 of respondent Court of Appeals in CA-G.R. SP No. 44883.

The Case for the Petitioner

Respondents Angelica Tiotuyco Vda. de Lacson,3 and her children Amancia, Antonio, Juan, and Teodosia, all surnamed Lacson, were the registered owners of three parcels of land located in Mabalacat, Pampanga, covered by Transfer Certificates of Title (TCT) Nos. 35922-R, 35923-R, and 35925-R, registered in the Register of Deeds of San Fernando, Pampanga. The properties, which were tenanted agricultural lands,4 were administered by Renato Espinosa for the owner.

On March 17, 1996, a group of original farmers/tillers, namely, Julio Tiamson, Renato Gozun, Rosita Hernandez, Bienvenido Tongol, Alfonso Flores, Norma Quiambao, Rosita Tolentino, JoseSosa, Francisco Tolentino, Sr., Emiliano Laxamana, Ruben Torres, Meliton Allanigue, Dominga Laxamana, Felicencia de Leon, Emiliano Ramos, and another group, namely, Felino G. Tolentino, Rica Gozun, Perla Gozun, Benigno Tolentino, Rodolfo Quiambao, Roman Laxamana,Eddie San Luis, Ricardo Hernandez, Nicenciana Miranda, Jose Gozun, Alfredo Sosa, Jose Tiamson, Augusto Tolentino, Sixto Hernandez, Alex Quiambao, Isidro Tolentino, Ceferino de Leon, Alberto Hernandez, Orlando Flores, and Aurelio Flores,5 individually executed in favor of the petitioner separate Deeds of Assignment6 in which the assignees assigned to the petitioner their respective rights as tenants/tillers of the landholdings possessed and tilled by them for and in consideration of P50.00 per square meter. The said amount was made payable "when the legal impediments to the sale of the property to the petitioner no longer existed." The petitioner was also granted the exclusive right to buy the property if and when the respondents, with the concurrence of the defendants-tenants, agreed to sell the property. In the interim, the petitioner gave varied sums of money to the tenants as partial payments, and the latter issued receipts for the said amounts.

On July 24, 1996, the petitioner called a meeting of the defendants-tenants to work out the implementation of the terms of their separate agreements.7 However, on August 8, 1996, the defendants-tenants, through Joven Mariano, wrote the petitioner stating that they were not attending the meeting and instead gave notice of their collective decision to sell all their rights and interests, as tenants/lessees, over the landholding to the respondents.8 Explaining their reasons for their collective decision, they wrote as follows:

Kami ay nagtiwala sa inyo, naging tapat at nanindigan sa lahat ng ating napagkasunduan, hindi tumanggap ng ibang buyer o ahente, pero sinira ninyo ang aming pagtitiwala sa pamamagitan ng demanda ninyo at pagbibigay ng problema sa amin na hindi naman nagbenta ng lupa.

Kaya kami ay nagpulong at nagpasya na ibenta na lang ang aming karapatan o ang aming lupang sinasaka sa landowner o sa mga pamilyang Lacson, dahil ayaw naming magkaroon ng problema.

Kaya kung ang sasabihin ninyong ito’y katangahan, lalo sigurong magiging katangahan kung ibebenta pa namin sa inyo ang aming lupang sinasaka, kaya pasensya na lang Mister Tayag. Dahil sinira ninyo ang aming pagtitiwala at katapatan.9

On August 19, 1996, the petitioner filed a complaint with the Regional Trial Court of San Fernando, Pampanga, Branch 44, against the defendants-tenants, as well as the respondents, for the court to fix a period within which to pay the agreed purchase price of P50.00 per square meter to the defendants, as provided for in the Deeds of Assignment. The petitioner also prayed for a writ of preliminary injunction against the defendants and the respondents therein.10 The case was docketed as Civil Case No. 10910.

In his complaint, the petitioner alleged, inter alia, the following:

4. That defendants Julio Tiamson, Renato Gozun, Rosita Hernandez, Bienvenido Tongol, Alfonso Flores, Norma Quiambao, Rosita Tolentino, Jose Sosa, Francisco Tolentino, Sr., Emiliano Laxamana, Ruben Torres, Meliton Allanigue, Dominga Laxamana, Felicencia de Leon, Emiliano Ramos are original farmers or direct tillers of landholdings over parcels of lands covered by Transfer Certificate of Title Nos. 35922-R, 35923-R and 35925-R which are registered in the names of defendants LACSONS;while defendants Felino G. Tolentino, Rica Gozun, Perla Gozun, Benigno Tolentino, Rodolfo Quiambao, Roman Laxamana, Eddie San Luis, Alfredo Gozun, Jose Tiamson, Augusto Tolentino, Sixto Hernandez, Alex Quiambao, Isidro Tolentino, Ceferino de Leon, Alberto Hernandez, and Aurelio Flores are sub-tenants over the same parcel of land.

5. That on March 17, 1996 the defendants TIAMSON, et al., entered into Deeds of Assignmentwith the plaintiff by which the defendants assigned all their rights and interests on their landholdings to the plaintiff and that on the same date (March 17, 1996), the defendants received from the plaintiff partial payments in the amounts corresponding to their names. Subsequent payments were also received:

1stPAYMENT

2ndPAYMENT

CHECKNO.

TOTAL

1.Julio Tiamson - - - - --

P 20,000 P 10,621.54 231281 P 30,621.54

2. Renato Gozun - - - -- -[son of Felix Gozun (deceased)]

P 10,000 96,000 106,000.00

3. Rosita Hernandez - - - -

P 5,000 14,374.24 231274 P 19,374.24

4. Bienvenido Tongol -- - [Son of Abundio Tongol (deceased)]

P 10,000 14,465.90 231285 24,465.90

5. Alfonso Flores - - - - P 30,000 26,648.40 231271 56,648.40

- -

6. Norma Quiambao - - - -

P 10,000 41,501.10 231279 51,501.10

7. Rosita Tolentino - - - - -

P 10,000 22,126.08 231284 32,126.08

8. Jose Sosa - - - - - - -- -

P 10,000 14,861.31 231291 24,861.31

9. Francisco Tolentino,Sr.

P 10,000 24,237.62 231283 34,237.62

10. Emiliano Laxamana - -

P 10,000 ------ ------ ------

11. Ruben Torres - - - - - - [Son of Mariano Torres (deceased)]

P 10,000 P 33,587.31 ------ P 43,587.31

12. Meliton Allanigue P 10,000 12,944.77 231269 P 22,944.77

13. Dominga Laxamana

P 5,000 22,269.02 231275 27,269.02

14. Felicencia de Leon 10,000 ------ ------ ------

15. Emiliano Ramos 5,000 18,869.60 231280 23,869.60

16. Felino G. Tolentino 10,000 ------ ------ ------

17. Rica Gozun 5,000 ------ ------ ------

18. Perla Gozun 10,000 ------ ------ ------

19. Benigno Tolentino 10,000 ------ ------ ------

20. Rodolfo Quiambao 10,000 ------ ------ ------

21. Roman Laxamana 10,000 ------ ------ ------

22. Eddie San Luis 10,000 ------ ------ ------

23. Ricardo Hernandez

10,000 ------ ------ ------

24. Nicenciana Miranda

10,000 ------ ------ ------

25. Jose Gozun 10,000 ------ ------ ------

26. Alfredo Sosa 5,000 ------ ------ ------

27. Jose Tiamson 10,000 ------ ------ ------

28. Augusto Tolentino 5,000 ------ ------ ------

29. Sixto Hernandez 10,000 ------ ------ ------

30. Alex Quiambao 10,000 ------ ------ ------

31. Isidro Tolentino 10,000 ------ ------ ------

32. Ceferino de Leon ------ 11,378.70 231270 ------

33. Alberto Hernandez 10,000 ------ ------ ------

34. Orlando Florez 10,000 ------ ------ ------

35. Aurelio Flores 10,000 ------ ------ ------

6. That on July 24, 1996, the plaintiff wrote the defendants TIAMSON, et al., inviting them for a meeting regarding the negotiations/implementations of the terms of their Deeds of Assignment;

7. That on August 8, 1996, the defendants TIAMSON, et al., through Joven Mariano, replied that they are no longer willing to pursue with the negotiations, and instead theygave notice to the plaintiff that they will sell all their rights and interests to the registered owners (defendants LACSONS).

A copy of the letter is hereto attached as Annex "A" etc.;

8. That the defendants TIAMSON, et. al., have no right to deal with the defendants LACSON or with any third persons while their contracts with the plaintiff are subsisting; defendants LACSONS are inducing or have induced the defendants TIAMSON, et. al., to violate their contracts with the plaintiff;

9. That by reason of the malicious acts of all the defendants, plaintiff suffered moral damages in the forms of mental anguish, mental torture and serious anxiety which in the sum of P500,000.00 for which defendants should be held liable jointly and severally.11

In support of his plea for injunctive relief, the petitioner, as plaintiff, also alleged the following in his complaint:

11. That to maintain the status quo, the defendants TIAMSON, et al., should be restrained from rescinding their contracts with the plaintiff, and the defendants LACSONS should also be restrained from accepting any offer of sale or alienation with the defendants TIAMSON, et al., in whatever form, the latter’s rights and interestsin the properties mentioned in paragraph 4 hereof; further, the LACSONS should be restrained from encumbering/alienating the subject properties covered by TCT No. 35922-R, 35923-R and TCT No. 35925-R, Registry of Deeds of San Fernando, Pampanga;

12. That the defendants TIAMSON, et al., threaten to rescind their contracts with the plaintiff and are also bent on selling/alienating their rights and interests over the subject properties to their co-defendants (LACSONS) or any other persons to the damage and prejudice of the plaintiff who already invested much money, efforts and time in the said transactions;

13. That the plaintiff is entitled to the reliefs being demanded in the complaint;

14. That to prevent irreparable damages and prejudice to the plaintiff, as the latter hasno speedy and adequate remedy under the ordinary course of law, it is essential that

a Writ of Preliminary Injunction be issued enjoining and restraining the defendants TIAMSON, et al., from rescinding their contracts with the plaintiff and from selling/alienating their properties to the LACSONS or other persons;

15. That the plaintiff is willing and able to put up a reasonable bond to answer for the damages which the defendants would suffer should the injunction prayed for and granted be found without basis.12

The petitioner prayed, that after the proceedings, judgment be rendered as follows:

1. Pending the hearing, a Writ of Preliminary Injunction be issued prohibiting, enjoiningand restraining defendants Julio Tiamson, Renato Gozun, Rosita Hernandez, Bienvenido Tongol, Alfonso Flores, Norma Quiambao, Rosita Tolentino, Jose Sosa, Francisco Tolentino Sr., Emiliano Laxamana, Ruben Torres, Meliton Allanigue, Dominga Laxamana, Felicencia de Leon, Emiliano Ramos, Felino G. Tolentino, Rica Gozun, Perla Gozun, Benigno Tolentino, Rodolfo Quiambao, Roman Laxamana, Eddie San Luis, Ricardo Hernandez, Nicenciana Miranda, Jose Gozun, Alfredo Sosa, Jose Tiamson, Augusto Tolentino, Ceferino de Leon, Alberto Hernandez, Orlando Flores, and Aurelio Flores from rescinding their contracts with the plaintiff and from alienating their rights and interest over the aforementioned properties in favor of defendants LACSONS or any other third persons; and prohibiting the defendants LACSONS from encumbering/alienating TCT Nos. 35922-R, 35923-R and 35925-R of the Registry of Deeds of San Fernando, Pampanga.

2. And pending the hearing of the Prayer for a Writ of Preliminary Injunction, it is prayed that a restraining order be issued restraining the aforementioned defendants (TIAMSON, et al.) from rescinding their contracts with the plaintiff and from alienating the subject properties to the defendants LACSONS or any third persons; further, restraining and enjoining the defendants LACSONS from encumbering/selling the properties covered by TCT Nos. 35922-R, 35923-R, and 35925-R of the Registry of Deeds of San Fernando, Pampanga.

3. Fixing the period within which plaintiff shall pay the balance of the purchase price tothe defendants TIAMSON, et al., after the lapse of legal impediment, if any.

4. Making the Writ of Preliminary Injunction permanent;

5. Ordering the defendants to pay the plaintiff the sum of P500,000.00 as moral damages;

6. Ordering the defendants to pay the plaintiff attorney’s fees in the sum of P100,000.00 plus litigation expenses of P50,000.00;

Plaintiff prays for such other relief as may be just and equitable under the premises.13

In their answer to the complaint, the respondents as defendants asserted that (a) the defendant Angelica Vda. de Lacson had died on April 24, 1993; (b) twelve of the defendants were tenants/lessees of respondents, but the tenancy status of the rest of the defendants was uncertain; (c) they never induced the defendants Tiamson to violate their contracts with the petitioner; and, (d) being merely tenants-tillers, the defendants-tenants had no right to enter into any transactions involving their properties without their knowledge and consent. They also averred that the transfers or assignments of leasehold rights made by the defendants-tenants to the petitioner is contrary to Presidential Decree (P.D.) No. 27 and Republic Act No. 6657, the

Comprehensive Agrarian Reform Program (CARP).14 The respondents interposed counterclaimsfor damages against the petitioner as plaintiff.

The defendants-tenants Tiamson, et al., alleged in their answer with counterclaim for damages, that the money each of them received from the petitioner were in the form of loans, and that theywere deceived into signing the deeds of assignment:

a) That all the foregoing allegations in the Answer are hereby repleaded and incorporated in so far as they are material and relevant herein;

b) That the defendants Tiamson, et al., in so far as the Deeds of Assignment are concern[ed] never knew that what they did sign is a Deed of Assignment. What they knew was that they were made to sign a document that will serve as a receipt for the loan granted [to] them by the plaintiff;

c) That the Deeds of Assignment were signed through the employment of fraud, deceitand false pretenses of plaintiff and made the defendants believe that what they sign[ed] was a mere receipt for amounts received by way of loans;

d) That the documents signed in blank were filled up and completed after the defendants Tiamson, et al., signed the documents and their completion and accomplishment was done in the absence of said defendants and, worst of all, defendants were not provided a copy thereof;

e) That as completed, the Deeds of Assignment reflected that the defendants Tiamson, et al., did assign all their rights and interests in the properties or landholdings they were tilling in favor of the plaintiff. That if this is so, assuming arguendo that the documents were voluntarily executed, the defendants Tiamson, et al., do not have any right to transfer their interest in the landholdings they are tilling as they have no right whatsoever in the landholdings, the landholdings belong to their co-defendants, Lacson, et al., and therefore, the contract is null and void;

f) That while it is admitted that the defendants Tiamson, et al., received sums of money from plaintiffs, the same were received as approved loans granted by plaintiff to the defendants Tiamson, et al., and not as part consideration of the alleged Deeds of Assignment; and by way of:…15

At the hearing of the petitioner’s plea for a writ of preliminary injunction, the respondents’ counsel failed to appear. In support of his plea for a writ of preliminary injunction, the petitioner adduced in evidence the Deeds of Assignment,16 the receipts17 issued by the defendants-tenantsfor the amounts they received from him; and the letter18 the petitioner received from the defendants-tenants. The petitioner then rested his case.

The respondents, thereafter, filed a Comment/Motion to dismiss/deny the petitioner’s plea for injunctive relief on the following grounds: (a) the Deeds of Assignment executed by the defendants-tenants were contrary to public policy and P.D. No. 27 and Rep. Act No. 6657; (b) the petitioner failed to prove that the respondents induced the defendants-tenants to renege on their obligations under the "Deeds of Assignment;" (c) not being privy to the said deeds, the respondents are not bound by the said deeds; and, (d) the respondents had the absolute right tosell and dispose of their property and to encumber the same and cannot be enjoined from doing so by the trial court.

The petitioner opposed the motion, contending that it was premature for the trial court to resolve his plea for injunctive relief, before the respondents and the defendants-tenants adduced evidence in opposition thereto, to afford the petitioner a chance to adduce rebuttal evidence and prove his entitlement to a writ of preliminary injunction. The respondents replied that it was the burden of the petitioner to establish the requisites of a writ of preliminary injunction without any evidence on their part, and that they were not bound to adduce any evidence in opposition to thepetitioner’s plea for a writ of preliminary injunction.

On February 13, 1997, the court issued an Order19 denying the motion of the respondents for being premature. It directed the hearing to proceed for the respondents to adduce their evidence. The court ruled that the petitioner, on the basis of the material allegations of the complaint, was entitled to injunctive relief. It also held that before the court could resolve the petitioner’s plea for injunctive relief, there was need for a hearing to enable the respondents and the defendants-tenants to adduce evidence to controvert that of the petitioner. The respondents filed a motion for reconsideration, which the court denied in its Order dated April 16, 1997. The trial court ruled that on the face of the averments of the complaint, the pleadings of the parties and the evidence adduced by the petitioner, the latter was entitled to injunctive relief unless the respondents and the defendants-tenants adduced controverting evidence.

The respondents, the petitioners therein, filed a petition for certiorari in the Court of Appeals for the nullification of the February 13, 1997 and April 16, 1997 Orders of the trial court. The case was docketed as CA-G.R. SP No. 44883. The petitioners therein prayed in their petition that:

1. An order be issued declaring the orders of respondent court dated February 13, 1997 and April 16, 1997 as null and void;

2. An order be issued directing the respondent court to issue an order denying the application of respondent Herminio Tayag for the issuance of a Writ of Preliminary Injunction and/or restraining order.

3. In the meantime, a Writ of Preliminary Injunction be issued against the respondent court, prohibiting it from issuing its own writ of injunction against Petitioners, and thereafter making said injunction to be issued by this Court permanent.

Such other orders as may be deemed just & equitable under the premises also prayed for.20

The respondents asserted that the Deeds of Assignment executed by the assignees in favor of the petitioner were contrary to paragraph 13 of P.D. No. 27 and the second paragraph of Section70 of Rep. Act No. 6657, and, as such, could not be enforced by the petitioner for being null and void. The respondents also claimed that the enforcement of the deeds of assignment was subject to a supervening condition:

3. That this exclusive and absolute right given to the assignee shall be exercised only when no legal impediments exist to the lot to effect the smooth transfer of lawful ownership of the lot/property in the name of the ASSIGNEE.21

The respondents argued that until such condition took place, the petitioner would not acquire any right to enforce the deeds by injunctive relief. Furthermore, the petitioner’s plea in his complaint before the trial court, to fix a period within which to pay the balance of the amounts due to the tenants under said deeds after the "lapse" of any legal impediment, assumed that the deeds were valid, when, in fact and in law, they were not. According to the respondents, they were not parties to the deeds of assignment; hence, they were not bound by the said deeds. Theissuance of a writ of preliminary injunction would restrict and impede the exercise of their right to

dispose of their property, as provided for in Article 428 of the New Civil Code. They asserted thatthe petitioner had no cause of action against them and the defendants-tenants.

On April 17, 1998, the Court of Appeals rendered its decision against the petitioner, annulling and setting aside the assailed orders of the trial court; and permanently enjoining the said trial court from proceeding with Civil Case No. 10901. The decretal portion of the decision reads as follows:

However, even if private respondent is denied of the injunctive relief he demands in the lower court still he could avail of other course of action in order to protect his interest such as the institution of a simple civil case of collection of money against TIAMSON, et al.

For all the foregoing considerations, the orders dated 13 February 1997 and 16 April 1997 are hereby NULLIFIED and ordered SET ASIDE for having been issued with grave abuse of discretion amounting to lack or excess of jurisdiction. Accordingly, public respondent is permanently enjoined from proceeding with the case designated as Civil Case No. 10901.22

The CA ruled that the respondents could not be enjoined from alienating or even encumbering their property, especially so since they were not privies to the deeds of assignment executed by the defendants-tenants. The defendants-tenants were not yet owners of the portions of the landholdings respectively tilled by them; as such, they had nothing to assign to the petitioner. Finally, the CA ruled that the deeds of assignment executed by the defendants-tenants were contrary to P.D. No. 27 and Rep. Act No. 6657.

On August 4, 1998, the CA issued a Resolution denying the petitioner’s motion for reconsideration.23

Hence, the petitioner filed his petition for review on certiorari before this Court, contending as follows:

I

A MERE ALLEGATION IN THE ANSWER OF THE TENANTS COULD NOT BE USED AS EVIDENCE OR BASIS FOR ANY CONCLUSION, AS THIS ALLEGATION, IS STILL THE SUBJECT OF TRIAL IN THE LOWER COURT (RTC).24

II

THE COURT OF APPEALS CANNOT ENJOIN THE HEARING OF A PETITION FOR PRELIMINARY INJUNCTION AT A TIME WHEN THE LOWER COURT (RTC) IS STILL RECEIVING EVIDENCE PRECISELY TO DETERMINE WHETHER OR NOT THE WRIT OF PRELIMINARY INJUNCTION BEING PRAYED FOR BY TAYAG SHOULD BE GRANTED OR NOT.25

III

THE COURT OF APPEALS CANNOT USE "FACTS" NOT IN EVIDENCE, TO SUPPORT ITS CONCLUSION THAT THE TENANTS ARE NOT YET "AWARDEES OF THE LAND REFORM.26

IV

THE COURT OF APPEALS CANNOT CAUSE THE PERMANENT STOPPAGE OF THE ENTIRE PROCEEDINGS BELOW INCLUDING THE TRIAL ON THE MERITS OF THE CASE CONSIDERING THAT THE ISSUE INVOLVED ONLY THE PROPRIETY OF MAINTAINING THE STATUS QUO.27

V

THE COURT OF APPEALS CANNOT INCLUDE IN ITS DECISION THE CASE OF THE OTHER35 TENANTS WHO DO NOT QUESTION THE JURISDICTION OF THE LOWER COURT (RTC)OVER THE CASE AND WHO ARE IN FACT STILL PRESENTING THEIR EVIDENCE TO OPPOSE THE INJUNCTION PRAYED FOR, AND TO PROVE AT THE SAME TIME THE COUNTER-CLAIMS THEY FILED AGAINST THE PETITIONER.28

VI

THE LOWER COURT (RTC) HAS JURISDICTION OVER THE CASE FILED BY TAYAG FOR "FIXING OF PERIOD" UNDER ART. 1197 OF THE NEW CIVIL CODE AND FOR "DAMAGES" AGAINST THE LACSONS UNDER ART. 1314 OF THE SAME CODE. THIS CASE CANNOT BE SUPPRESSED OR RENDERED NUGATORY UNCEREMONIOUSLY.29

The petitioner faults the Court of Appeals for permanently enjoining the trial court from proceeding with Civil Case No. 10910. He opines that the same was too drastic, tantamount to adismissal of the case. He argues that at that stage, it was premature for the appellate court to determine the merits of the case since no evidentiary hearing thereon was conducted by the trialcourt. This, the Court of Appeals cannot do, since neither party moved for the dismissal of Civil Case No. 10910. The petitioner points out that the Court of Appeals, in making its findings, went beyond the issue raised by the private respondents, namely, whether or not the trial court committed a grave abuse of discretion amounting to excess or lack of jurisdiction when it denied the respondent’s motion for the denial/dismissal of the petitioner’s plea for a writ of preliminary injunction. He, likewise, points out that the appellate court erroneously presumed that the leaseholders were not DAR awardees and that the deeds of assignment were contrary to law. He contends that leasehold tenants are not prohibited from conveying or waiving their leasehold rights in his favor. He insists that there is nothing illegal with his contracts with the leaseholders, since the same shall be effected only when there are no more "legal impediments."

At bottom, the petitioner contends that, at that stage, it was premature for the appellate court to determine the merits of his case since no evidentiary hearing on the merits of his complaint had yet been conducted by the trial court.

The Comment/Motion of theRespondents to Dismiss/DenyPetitioner’s Plea for a Writof Preliminary InjunctionWas Not Premature.

Contrary to the ruling of the trial court, the motion of the respondents to dismiss/deny the petitioner’s plea for a writ of preliminary injunction after the petitioner had adduced his evidence, testimonial and documentary, and had rested his case on the incident, was proper and timely. It bears stressing that the petitioner had the burden to prove his right to a writ of preliminary injunction. He may rely solely on the material allegations of his complaint or adduce evidence in support thereof. The petitioner adduced his evidence to support his plea for a writ of preliminary injunction against the respondents and the defendants-tenants and rested his case on the said incident. The respondents then had three options: (a) file a motion to deny/dismiss the motion onthe ground that the petitioner failed to discharge his burden to prove the factual and legal basis

for his plea for a writ of preliminary injunction and, if the trial court denies his motion, for them to adduce evidence in opposition to the petitioner’s plea; (b) forgo their motion and adduce testimonial and/or documentary evidence in opposition to the petitioner’s plea for a writ of preliminary injunction; or, (c) waive their right to adduce evidence and submit the incident for consideration on the basis of the pleadings of the parties and the evidence of the petitioner. The respondents opted not to adduce any evidence, and instead filed a motion to deny or dismiss the petitioner’s plea for a writ of preliminary injunction against them, on their claim that the petitioner failed to prove his entitlement thereto. The trial court cannot compel the respondents to adduce evidence in opposition to the petitioner’s plea if the respondents opt to waive their right to adduce such evidence. Thus, the trial court should have resolved the respondents’ motion even without the latter’s opposition and the presentation of evidence thereon.

The RTC Committed a GraveAbuse of Discretion Amountingto Excess or Lack of Jurisdictionin Issuing its February 13, 1997and April 16, 1997 Orders

In its February 13, 1997 Order, the trial court ruled that the petitioner was entitled to a writ of preliminary injunction against the respondents on the basis of the material averments of the complaint. In its April 16, 1997 Order, the trial court denied the respondents’ motion for reconsideration of the previous order, on its finding that the petitioner was entitled to a writ of preliminary injunction based on the material allegations of his complaint, the evidence on record,the pleadings of the parties, as well as the applicable laws:

… For the record, the Court denied the LACSONS’ COMMENT/MOTION on the basis of the facts culled from the evidence presented, the pleadings and the law applicable unswayed by the partisan or personal interests, public opinion or fear of criticism (Canon 3, Rule 3.02, Code of Judicial Ethics).30

Section 3, Rule 58 of the Rules of Court, as amended, enumerates the grounds for the issuance of a writ of preliminary injunction, thus:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts complained of during the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do,or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual.

A preliminary injunction is an extraordinary event calculated to preserve or maintain the status quo of things ante litem and is generally availed of to prevent actual or threatened acts, until the merits of the case can be heard. Injunction is accepted as the strong arm of equity or a transcendent remedy.31 While generally the grant of a writ of preliminary injunction rests on the sound discretion of the trial court taking cognizance of the case, extreme caution must be observed in the exercise of such discretion.32 Indeed, in Olalia v. Hizon,33 we held:

It has been consistently held that there is no power the exercise of which is more delicate, whichrequires greater caution, deliberation and sound discretion, or more dangerous in a doubtful case, than the issuance of an injunction. It is the strong arm of equity that should never be extended unless to cases of great injury, where courts of law cannot afford an adequate or commensurate remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of the defendant and should not be granted lightly or precipitately. It should be granted only when the court is fully satisfied that the law permits it and the emergency demands it.34

The very foundation of the jurisdiction to issue writ of injunction rests in the existence of a cause of action and in the probability of irreparable injury, inadequacy of pecuniary compensation and the prevention of the multiplicity of suits. Where facts are not shown to bring the case within these conditions, the relief of injunction should be refused.35

For the court to issue a writ of preliminary injunction, the petitioner was burdened to establish the following: (1) a right in esse or a clear and unmistakable right to be protected; (2) a violation of that right; (3) that there is an urgent and permanent act and urgent necessity for the writ to prevent serious damage.36 Thus, in the absence of a clear legal right, the issuance of the injunctive writ constitutes a grave abuse of discretion. Where the complainant’s right is doubtful or disputed, injunction is not proper. Injunction is a preservative remedy aimed at protecting substantial rights and interests. It is not designed to protect contingent or future rights. The possibility of irreparable damage without proof of adequate existing rights is not a ground for injunction.37

We have reviewed the pleadings of the parties and found that, as contended by the respondents, the petitioner failed to establish the essential requisites for the issuance of a writ ofpreliminary injunction. Hence, the trial court committed a grave abuse of its discretion amountingto excess or lack of jurisdiction in denying the respondents’ comment/motion as well as their motion for reconsideration.

First. The trial court cannot enjoin the respondents, at the instance of the petitioner, from selling,disposing of and encumbering their property. As the registered owners of the property, the respondents have the right to enjoy and dispose of their property without any other limitations than those established by law, in accordance with Article 428 of the Civil Code. The right to dispose of the property is the power of the owner to sell, encumber, transfer, and even destroy the property. Ownership also includes the right to recover the possession of the property from any other person to whom the owner has not transmitted such property, by the appropriate action for restitution, with the fruits, and for indemnification for damages.38 The right of ownershipof the respondents is not, of course, absolute. It is limited by those set forth by law, such as the agrarian reform laws. Under Article 1306 of the New Civil Code, the respondents may enter into contracts covering their property with another under such terms and conditions as they may deem beneficial provided they are not contrary to law, morals, good conduct, public order or public policy.

The respondents cannot be enjoined from selling or encumbering their property simply and merely because they had executed Deeds of Assignment in favor of the petitioner, obliging themselves to assign and transfer their rights or interests as agricultural farmers/laborers/sub-tenants over the landholding, and granting the petitioner the exclusive right to buy the property subject to the occurrence of certain conditions. The respondents were not parties to the said deeds. There is no evidence that the respondents agreed, expressly or impliedly, to the said deeds or to the terms and conditions set forth therein. Indeed, they assailed the validity of the said deeds on their claim that the same were contrary to the letter and spirit of P.D. No. 27 and Rep. Act No. 6657. The petitioner even admitted when he testified that he did not know any of the respondents, and that he had not met any of them before he filed his complaint in the RTC.

He did not even know that one of those whom he had impleaded as defendant, Angelica Vda. deLacson, was already dead.

Q: But you have not met any of these Lacsons?

A: Not yet, sir.

Q: Do you know that two (2) of the defendants are residents of the United States?

A: I do not know, sir.

Q: You do not know also that Angela Tiotuvie (sic) Vda. de Lacson had already been dead?

A: I am aware of that, sir.39

We are one with the Court of Appeals in its ruling that:

We cannot see our way clear on how or why injunction should lie against petitioners. As owners of the lands being tilled by TIAMSON, et al., petitioners, under the law, have the right to enjoy and dispose of the same. Thus, they have the right to possess the lands, as well as the right to encumber or alienate them. This principle of law notwithstanding, private respondent in the lowercourt sought to restrain the petitioners from encumbering and/or alienating the properties covered by TCT No. 35922-R, 35923-R and TCT No. 35925-R of the Registry of Deeds of San Fernando, Pampanga. This cannot be allowed to prosper since it would constitute a limitation or restriction, not otherwise established by law on their right of ownership, more so considering thatpetitioners were not even privy to the alleged transaction between private respondent and TIAMSON, et al.40

Second. A reading the averments of the complaint will show that the petitioner clearly has no cause of action against the respondents for the principal relief prayed for therein, for the trial court to fix a period within which to pay to each of the defendants-tenants the balance of the P50.00 per square meter, the consideration under the Deeds of Assignment executed by the defendants-tenants. The respondents are not parties or privies to the deeds of assignment. The matter of the period for the petitioner to pay the balance of the said amount to each of the defendants-tenants is an issue between them, the parties to the deed.

Third. On the face of the complaint, the action of the petitioner against the respondents and the defendants-tenants has no legal basis. Under the Deeds of Assignment, the obligation of the petitioner to pay to each of the defendants-tenants the balance of the purchase price was conditioned on the occurrence of the following events: (a) the respondents agree to sell their property to the petitioner; (b) the legal impediments to the sale of the landholding to the petitioner no longer exist; and, (c) the petitioner decides to buy the property. When he testified, the petitioner admitted that the legal impediments referred to in the deeds were (a) the respondents’ refusal to sell their property; and, (b) the lack of approval of the Department of Agrarian Reform:

Q : There is no specific agreement prior to the execution of those documents as when they will pay?

A : We agreed to that, that I will pay them when there are no legal impediment, sir.

Q : Many of the documents are unlattered (sic) and you want to convey to this Honorable Court that prior to the execution of these documents you have those tentative agreement for instance that the amount or the cost of the price is to be paid when there are no legal impediment, you are using the word "legal impediment," do you know the meaning of that?

A : When there are (sic) no more legal impediment exist, sir.

Q : Did you make how (sic) to the effect that the meaning of that phrase that you used the unlettered defendants?

A : We have agreed to that, sir.

ATTY. OCAMPO:

May I ask, Your Honor, that the witness please answer my question not to answer in the way he wanted it.

COURT:

Just answer the question, Mr. Tayag.

WITNESS:

Yes, Your Honor.

ATTY. OCAMPO:

Q : Did you explain to them?

A : Yes, sir.

Q : What did you tell them?

A : I explain[ed] to them, sir, that the legal impediment then especially if the Lacsons will not agree to sell their shares to me or to us it would be hard to (sic) me to pay them in full. And those covered by DAR. I explain[ed] to them and it was clearly statedin the title that there is [a] prohibited period of time before you can sell the property. I explained every detail to them.41

It is only upon the occurrence of the foregoing conditions that the petitioner would be obliged to pay to the defendants-tenants the balance of the P50.00 per square meter under the deeds of assignment. Thus:

2. That in case the ASSIGNOR and LANDOWNER will mutually agree to sell the said lot to the ASSIGNEE, who is given an exclusive and absolute right to buy the lot, the ASSIGNOR shall receive the sum of FIFTY PESOS (P50.00) per square meter as consideration of the total area actually tilled and possessed by the ASSIGNOR, less whatever amount received by the ASSIGNOR including commissions, taxes and all allowable deductions relative to the sale of the subject properties.

3. That this exclusive and absolute right given to the ASSIGNEE shall be exercised only when no legal impediments exist to the lot to effect the smooth transfer of lawful ownership of the lot/property in the name of the ASSIGNEE;

4. That the ASSIGNOR will remain in peaceful possession over the said property and shall enjoy the fruits/earnings and/or harvest of the said lot until such time that full payment of the agreed purchase price had been made by the ASSIGNEE.42

There is no showing in the petitioner’s complaint that the respondents had agreed to sell their property, and that the legal impediments to the agreement no longer existed. The petitioner and the defendants-tenants had yet to submit the Deeds of Assignment to the Department of Agrarian Reform which, in turn, had to act on and approve or disapprove the same. In fact, as alleged by the petitioner in his complaint, he was yet to meet with the defendants-tenants to discuss the implementation of the deeds of assignment. Unless and until the Department of Agrarian Reform approved the said deeds, if at all, the petitioner had no right to enforce the same in a court of law by asking the trial court to fix a period within which to pay the balance of the purchase price and praying for injunctive relief.

We do not agree with the contention of the petitioner that the deeds of assignment executed by the defendants-tenants are perfected option contracts.43 An option is a contract by which the owner of the property agrees with another person that he shall have the right to buy his property at a fixed price within a certain time. It is a condition offered or contract by which the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a certain time, or under, or in compliance with certain terms and conditions, or which givesto the owner of the property the right to sell or demand a sale. It imposes no binding obligation on the person holding the option, aside from the consideration for the offer. Until accepted, it is not, properly speaking, treated as a contract.44 The second party gets in praesenti, not lands, notan agreement that he shall have the lands, but the right to call for and receive lands if he elects.45 An option contract is a separate and distinct contract from which the parties may enter into upon the conjunction of the option.46

In this case, the defendants-tenants-subtenants, under the deeds of assignment, granted to the petitioner not only an option but the exclusive right to buy the landholding. But the grantors were merely the defendants-tenants, and not the respondents, the registered owners of the property. Not being the registered owners of the property, the defendants-tenants could not legally grant to the petitioner the option, much less the "exclusive right" to buy the property. As the Latin saying goes, "NEMO DAT QUOD NON HABET."

Fourth. The petitioner impleaded the respondents as parties-defendants solely on his allegation that the latter induced or are inducing the defendants-tenants to violate the deeds of assignment, contrary to the provisions of Article 1314 of the New Civil Code which reads:

Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party.

In So Ping Bun v. Court of Appeals,47 we held that for the said law to apply, the pleader is burdened to prove the following: (1) the existence of a valid contract; (2) knowledge by the third person of the existence of the contract; and (3) interference by the third person in the contractualrelation without legal justification.

Where there was no malice in the interference of a contract, and the impulse behind one’s conduct lies in a proper business interest rather than in wrongful motives, a party cannot be a malicious interferer. Where the alleged interferer is financially interested, and such interest motivates his conduct, it cannot be said that he is an officious or malicious intermeddler.48

In fine, one who is not a party to a contract and who interferes thereon is not necessarily an officious or malicious intermeddler. The only evidence adduced by the petitioner to prove his claim is the letter from the defendants-tenants informing him that they had decided to sell their rights and interests over the landholding to the respondents, instead of honoring their obligation under the deeds of assignment because, according to them, the petitioner harassed those tenants who did not want to execute deeds of assignment in his favor, and because the said defendants-tenants did not want to have any problem with the respondents who could cause their eviction for executing with the petitioner the deeds of assignment as the said deeds are in violation of P.D. No. 27 and Rep. Act No. 6657.49 The defendants-tenants did not allege therein that the respondents induced them to breach their contracts with the petitioner. The petitioner himself admitted when he testified that his claim that the respondents induced the defendants-assignees to violate contracts with him was based merely on what "he heard," thus:

Q: Going to your last statement that the Lacsons induces (sic) the defendants, did yousee that the Lacsons were inducing the defendants?

A: I heard and sometime in [the] first week of August, sir, they went in the barrio (sic). As a matter of fact, that is the reason why they sent me letter that they will sell it to theLacsons.

Q: Incidentally, do you knew (sic) these Lacsons individually?

A: No, sir, it was only Mr. Espinosa who I knew (sic) personally, the alleged negotiator and has the authority to sell the property.50

Even if the respondents received an offer from the defendants-tenants to assign and transfer their rights and interests on the landholding, the respondents cannot be enjoined from entertaining the said offer, or even negotiating with the defendants-tenants. The respondents could not even be expected to warn the defendants-tenants for executing the said deeds in violation of P.D. No. 27 and Rep. Act No. 6657. Under Section 22 of the latter law, beneficiaries under P.D. No. 27 who have culpably sold, disposed of, or abandoned their land, are disqualifiedfrom becoming beneficiaries.

From the pleadings of the petitioner, it is quite evident that his purpose in having the defendants-tenants execute the Deeds of Assignment in his favor was to acquire the landholding without any tenants thereon, in the event that the respondents agreed to sell the property to him. The petitioner knew that under Section 11 of Rep. Act No. 3844, if the respondents agreed to sell theproperty, the defendants-tenants shall have preferential right to buy the same under reasonable terms and conditions:

SECTION 11. Lessee’s Right of Pre-emption. – In case the agricultural lessor desires to sell the landholding, the agricultural lessee shall have the preferential right to buy the same under reasonable terms and conditions: Provided, That the entire landholding offered for sale must be pre-empted by the Land Authority if the landowner so desires, unless the majority of the lessees object to such acquisition: Provided, further, That where there are two or more agricultural lessees, each shall be entitled to said preferential right only to the extent of the area actually cultivated by him. …51

Under Section 12 of the law, if the property was sold to a third person without the knowledge of the tenants thereon, the latter shall have the right to redeem the same at a reasonable price andconsideration. By assigning their rights and interests on the landholding under the deeds of assignment in favor of the petitioner, the defendants-tenants thereby waived, in favor of the petitioner, who is not a beneficiary under Section 22 of Rep. Act No. 6657, their rights of preemption or redemption under Rep. Act No. 3844. The defendants-tenants would then have to

vacate the property in favor of the petitioner upon full payment of the purchase price. Instead of acquiring ownership of the portions of the landholding respectively tilled by them, the defendants-tenants would again become landless for a measly sum of P50.00 per square meter.The petitioner’s scheme is subversive, not only of public policy, but also of the letter and spirit of the agrarian laws. That the scheme of the petitioner had yet to take effect in the future or ten years hence is not a justification. The respondents may well argue that the agrarian laws had been violated by the defendants-tenants and the petitioner by the mere execution of the deeds of assignment. In fact, the petitioner has implemented the deeds by paying the defendants-tenants amounts of money and even sought their immediate implementation by setting a meeting with the defendants-tenants. In fine, the petitioner would not wait for ten years to evict the defendants-tenants. For him, time is of the essence.

The Appellate Court ErredIn Permanently EnjoiningThe Regional Trial CourtFrom Continuing with theProceedings in Civil Case No. 10910.

We agree with the petitioner’s contention that the appellate court erred when it permanently enjoined the RTC from continuing with the proceedings in Civil Case No. 10910. The only issue before the appellate court was whether or not the trial court committed a grave abuse of discretion amounting to excess or lack of jurisdiction in denying the respondents’ motion to deny or dismiss the petitioner’s plea for a writ of preliminary injunction. Not one of the parties prayed to permanently enjoin the trial court from further proceeding with Civil Case No. 10910 or to dismiss the complaint. It bears stressing that the petitioner may still amend his complaint, and the respondents and the defendants-tenants may file motions to dismiss the complaint. By permanently enjoining the trial court from proceeding with Civil Case No. 10910, the appellate court acted arbitrarily and effectively dismissed the complaint motu proprio, including the counterclaims of the respondents and that of the defendants-tenants. The defendants-tenants were even deprived of their right to prove their special and affirmative defenses.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision of the Court of Appeals nullifying the February 13, 1996 and April 16, 1997 Orders of the RTC is AFFIRMED. The writ of injunction issued by the Court of Appeals permanently enjoining the RTC from further proceeding with Civil Case No. 10910 is hereby LIFTED and SET ASIDE. The Regional Trial Court of Mabalacat, Pampanga, Branch 44, is ORDERED to continue with the proceedings in Civil Case No. 10910 as provided for by the Rules of Court, as amended.

SO ORDERED

G.R. No. 155043 September 30, 2004

ARTURO R. ABALOS, petitioner, vs.DR. GALICANO S. MACATANGAY, JR., respondent.

D E C I S I O N

TINGA, J.:

The instant petition seeks a reversal of the Decision of the Court of Appeals in CA-G.R. CV No. 48355 entitled "Dr. Galicano S. Macatangay, Jr. v. Arturo R. Abalos and Esther Palisoc-Abalos," promulgated on March 14, 2002. The appellate court reversed the trial court’s decision which dismissed the action for specific performance filed by respondent, and ordered petitioner and hiswife to execute in favor of herein respondent a deed of sale over the subject property.

Spouses Arturo and Esther Abalos are the registered owners of a parcel of land with improvements located at Azucena St., Makati City consisting of about three hundred twenty-seven (327) square meters, covered by Transfer Certificate of Title (TCT) No. 145316 of the Registry of Deeds of Makati.

Armed with a Special Power of Attorney dated June 2, 1988, purportedly issued by his wife, Arturo executed aReceipt and Memorandum of Agreement (RMOA) dated October 17, 1989, in favor of respondent, bindinghimself to sell to respondent the subject property and not to offer thesame to any other party within thirty (30) days from date. Arturo acknowledged receipt of a check from respondent in the amount of Five Thousand Pesos (P5,000.00), representing earnest money for the subject property, the amount of which would be deducted from the purchase price of One Million Three Hundred Three Hundred Thousand Pesos (P1,300,000.00).Further, the RMOA stated that full payment would be effected as soon as possession of the property shall have been turned over to respondent.

Subsequently, Arturo’s wife, Esther, executed a Special Power of Attorney dated October 25, 1989, appointing her sister, Bernadette Ramos, to act for and in her behalf relative to the transfer of the property to respondent. Ostensibly, a marital squabble was brewing between Arturo and Esther at the time and to protect his interest, respondent caused the annotation of hisadverse claim on the title of the spouses to the property on November 14, 1989.

On November 16, 1989, respondent sent a letter to Arturo and Esther informing them of his readiness and willingness to pay the full amount of the purchase price. The letter contained a demand upon the spouses to comply with their obligation to turn over possession of the propertyto him. On the same date, Esther, through her attorney-in-fact, executed in favor of respondent, a Contract to Sell the property to the extent of her conjugal interest therein for the sum of six hundred fifty thousand pesos (P650,000.00) less the sum already received by her and Arturo. Esther agreed to surrender possession of the property to respondent within twenty (20) days from November 16, 1989, while the latter promised to pay the balance of the purchase price in the amount of one million two hundred ninety thousand pesos (P1,290,000.00) after being placed in possession of the property. Esther also obligated herself to execute and deliver to respondent a deed of absolute sale upon full payment.

In a letter dated December 7, 1989, respondent informed the spouses that he had set aside the amount of One Million Two Hundred Ninety Thousand Pesos (P1,290,000.00) as evidenced by

Citibank Check No. 278107 as full payment of the purchase price. He reiterated his demand upon them to comply with their obligation to turn over possession of the property. Arturo and Esther failed to deliver the property which prompted respondent to cause the annotation of another adverse claim on TCT No. 145316. On January 12, 1990, respondent filed a complaint for specific performance with damages against petitioners. Arturo filed his answer to the complaint while his wife was declared in default.

The Regional Trial Court (RTC) dismissed the complaint for specific performance. It ruled that the Special Power of Attorney (SPA) ostensibly issued by Esther in favor of Arturo was void as itwas falsified. Hence, the court concluded that the SPA could not have authorized Arturo to sell the property to respondent. The trial court also noted that the check issued by respondent to cover the earnest money was dishonored due to insufficiency of funds and while it was replaced with another check by respondent, there is no showing that the second check was issued as payment for the earnest money on the property.

On appeal taken by respondent, the Court of Appeals reversed the decision of the trial court. It ruled that the SPA in favor of Arturo, assuming that it was void, cannot affect the transaction between Esther and respondent. The appellate court ratiocinated that it was by virtue of the SPAexecuted by Esther, in favor of her sister, that the sale of the property to respondent was effected. On the other hand, the appellate court considered the RMOA executed by Arturo in favor of respondent valid to effect the sale of Arturo’s conjugal share in the property.

Dissatisfied with the appellate court’s disposition of the case, petitioner seeks a reversal of its decision alleging that:

I.

The Court of Appeals committed serious and manifest error when it decided on the appeal without affording petitioner his right to due process.

II.

The Court of Appeals committed serious and manifest error in reversing and setting aside the findings of fact by the trial court.

III.

The Court of Appeals erred in ruling that a contract to sell is a contract of sale, and in ordering petitioner to execute a registrable form of deed of sale over the property in favor of respondent.1

Petitioner contends that he was not personally served with copies of summons, pleadings, and processes in the appeal proceedings nor was he given an opportunity to submit an appellee’s brief. He alleges that his counsel was in the United States from 1994 to June 2000, and he never received any news or communication from him after the proceedings in the trial court wereterminated. Petitioner submits that he was denied due process because he was not informed of the appeal proceedings, nor given the chance to have legal representation before the appellate court.

We are not convinced. The essence of due process is an opportunity to be heard. Petitioner’s failure to participate in the appeal proceedings is not due to a cause imputable to the appellate court but because of petitioner’s own neglect in ascertaining the status of his case. Petitioner’s

counsel is equally negligent in failing to inform his client about the recent developments in the appeal proceedings. Settled is the rule that a party is bound by the conduct, negligence and mistakes of his counsel.2 Thus, petitioner’s plea of denial of due process is downright baseless.

Petitioner also blames the appellate court for setting aside the factual findings of the trial court and argues that factual findings of the trial court are given much weight and respect when supported by substantial evidence. He asserts that the sale between him and respondent is voidfor lack of consent because the SPA purportedly executed by his wife Esther is a forgery and therefore, he could not have validly sold the subject property to respondent.

Next, petitioner theorizes that the RMOA he executed in favor of respondent was not perfected because the check representing the earnest money was dishonored. He adds that there is no evidence on record that the second check issued by respondent was intended to replace the firstcheck representing payment of earnest money.

Respondent admits that the subject property is co-owned by petitioner and his wife, but he objects to the allegations in the petition bearing a relation to the supposed date of the marriage of the vendors. He contends that the alleged date of marriage between petitioner and his wife is a new factual issue which was not raised nor established in the court a quo. Respondent claims that there is no basis to annul the sale freely and voluntarily entered into by the husband and thewife.

The focal issue in the instant petition is whether petitioner may be compelled to convey the property to respondent under the terms of the RMOA and the Contract to Sell. At bottom, the resolution of the issue entails the ascertainment of the contractual nature of the two documents and the status of the contracts contained therein.

Contracts, in general, require the presence of three essential elements: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause ofthe obligation which is established.3

Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation.4 In a contract of sale, the seller must consent to transfer ownership in exchange for the price, the subject matter must be determinate, and the price must be certain in money or its equivalent.5 Being essentially consensual, a 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.6 However, ownership of the thing sold shall not be transferred to the vendee untilactual or constructive delivery of the property.7

On the other hand, 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.8 An option merely grants a privilege to buy or sell within an agreed time and at a determined price. It is separate and distinctfrom that which the parties may enter into upon the consummation of the option.9 A perfected contract of option does not result in the perfection or consummation of the sale; only when the option is exercised may a sale be perfected.10 The option must, however, be supported by a consideration distinct from the price.11

Perusing the RMOA, it signifies a unilateral offer of Arturo to sell the property to respondent for aprice certain within a period of thirty days. The RMOA does not impose upon respondent an obligation to buy petitioner’s property, as in fact it does not even bear his signature thereon. It is quite clear that after the lapse of the thirty-day period, without respondent having exercised his option, Arturo is free to sell the property to another. This shows that the intent of Arturo is merelyto grant respondent the privilege to buy the property within the period therein stated. There is

nothing in the RMOA which indicates that Arturo agreed therein to transfer ownership of the landwhich is an essential element in a contract of sale. Unfortunately, the option is not binding upon the promissory since it is not supported by a consideration distinct from the price.12

As a rule, the holder of the option, after accepting the promise and before he exercises his option, is not bound to buy. He is free either to buy or not to buy later. In Sanchez v. Rigos13 we ruled that in an accepted unilateral promise to sell, the promissor is not bound by his promise and may, accordingly, withdraw it, since there may be no valid contract without a cause or consideration. Pending notice of its withdrawal, his accepted promise partakes of the nature of an offer to sell which, if acceded or consented to, results in a perfected contract of sale.

Even conceding for the nonce that respondent had accepted the offer within the period stated and, as a consequence, a bilateral contract of purchase and sale was perfected, the outcome would be the same. To benefit from such situation, respondent would have to pay or at least make a valid tender of payment of the price for only then could he exact compliance with the undertaking of the other party.14 This respondent failed to do. By his own admission, he merely informed respondent spouses of his readiness and willingness to pay. The fact that he had set aside a check in the amount of One Million Two Hundred Ninety Thousand Pesos (P1,290,000.00) representing the balance of the purchase price could not help his cause. Settled is the rule that tender of payment must be made in legal tender. A check is not legal tender, and therefore cannot constitute a valid tender of payment.15 Not having made a valid tender of payment, respondent’s action for specific performance must fail.

With regard to the payment of Five Thousand Pesos (P5,000.00), the Court is of the view that the amount is not earnest money as the term is understood in Article 1482 which signifies proof of the perfection of the contract of sale, but merely a guarantee that respondent is really interested to buy the property. It is not the giving of earnest money, but the proof of the concurrence of all the essential elements of the contract of sale which establishes the existence of a perfected sale.16 No reservation of ownership on the part of Arturo is necessary since, as previously stated, he has never agreed to transfer ownership of the property to respondent.

Granting for the sake of argument that the RMOA is a contract of sale, the same would still be void not only for want of consideration and absence of respondent’s signature thereon, but also for lack of Esther’s conformity thereto. Quite glaring is the absence of the signature of Esther in the RMOA, which proves that she did not give her consent to the transaction initiated by Arturo. The husband cannot alienate any real property of the conjugal partnership without the wife’s consent.17

However, it was the Contract to Sell executed by Esther through her attorney-in-fact which the Court of Appeals made full use of. Holding that the contract is valid, the appellate court explained that while Esther did not authorize Arturo to sell the property, her execution of the SPA authorizing her sister to sell the land to respondent clearly shows her intention to convey her interest in favor of respondent. In effect, the court declared that the lack of Esther’s consent to the sale made by Arturo was cured by her subsequent conveyance of her interest in the property through her attorney-in-fact.

We do not share the ruling.

The nullity of the RMOA as a contract of sale emanates not only from lack of Esther’s consent thereto but also from want of consideration and absence of respondent’s signature thereon. Such nullity cannot be obliterated by Esther’s subsequent confirmation of the putative transaction as expressed in the Contract to Sell. Under the law, a void contract cannot be ratified18 and the action or defense for the declaration of the inexistence of a contract does not prescribe.19 A void contract produces no effect either against or in favor of anyone–it cannot create, modify or extinguish the juridical relation to which it refers.20

True, in the Contract to Sell, Esther made reference to the earlier RMOA executed by Arturo in favor of respondent. However, the RMOA which Arturo signed is different from the deed which Esther executed through her attorney-in-fact. For one, the first is sought to be enforced as a contract of sale while the second is purportedly a contract to sell only. For another, the terms and conditions as to the issuance of title and delivery of possession are divergent.

The congruence of the wills of the spouses is essential for the valid disposition of conjugal property. Where the conveyance is contained in the same document which bears the conformity of both husband and wife, there could be no question on the validity of the transaction. But whenthere are two (2) documents on which the signatures of the spouses separately appear, textual concordance of the documents is indispensable. Hence, in this case where the wife’s putative consent to the sale of conjugal property appears in a separate document which does not, however, contain the same terms and conditions as in the first document signed by the husband,a valid transaction could not have arisen.

Quite a bit of elucidation on the conjugal partnership of gains is in order.

Arturo and Esther appear to have been married before the effectivity of the Family Code. There being no indication that they have adopted a different property regime, their property relations would automatically be governed by the regime of conjugal partnership of gains.21

The subject land which had been admittedly acquired during the marriage of the spouses forms part of their conjugal partnership.22

Under the Civil Code, the husband is the administrator of the conjugal partnership. This right is clearly granted to him by law.23 More, the husband is the sole administrator. The wife is not entitled as of right to joint administration.24

The husband, even if he is statutorily designated as administrator of the conjugal partnership, cannot validly alienate or encumber any real property of the conjugal partnership without the wife’s consent.25 Similarly, the wife cannot dispose of any property belonging to the conjugal partnership without the conformity of the husband. The law is explicit that the wife cannot bind the conjugal partnership without the husband’s consent, except in cases provided by law.26

More significantly, it has been held that prior to the liquidation of the conjugal partnership, the interest of each spouse in the conjugal assets is inchoate, a mere expectancy, which constitutesneither a legal nor an equitable estate, and does not ripen into title until it appears that there are assets in the community as a result of the liquidation and settlement. The interest of each spouse is limited to the net remainder or "remanente liquido" (haber ganancial) resulting from the liquidation of the affairs of the partnership after its dissolution.27 Thus, the right of the husband or wife to one-half of the conjugal assets does not vest until the dissolution and liquidation of the conjugal partnership, or after dissolution of the marriage, when it is finally determined that, after settlement of conjugal obligations, there are net assets left which can be divided between the spouses or their respective heirs.28

In not a few cases, we ruled that the sale by the husband of property belonging to the conjugal partnership without the consent of the wife when there is no showing that the latter is incapacitated is void ab initio because it is in contravention of the mandatory

requirements of Article 166 of the Civil Code.29 Since Article 166 of the Civil Code requires the consent of the wife before the husband may alienate or encumber any real property of the conjugal partnership, it follows that acts or transactions executed against this mandatory provision are void except when the law itself authorizes their validity.30

Quite recently, in San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,31 we ruled that neither spouse could alienate in favor of another, his or her interest in the partnership or in any property belonging to it, or ask for partition of the properties before the partnership itself hadbeen legally dissolved. Nonetheless, alienation of the share of each spouse in the conjugal partnership could be had after separation of property of the spouses during the marriage had been judicially decreed, upon their petition for any of the causes specified in Article 19132 of the Civil Code in relation to Article 21433 thereof.

As an exception, the husband may dispose of conjugal property without the wife’s consent if such sale is necessary to answer for conjugal liabilities mentioned in Articles 161 and 162 of the Civil Code.34 In Tinitigan v. Tinitigan, Sr.,35 the Court ruled that the husband may sell property belonging to the conjugal partnership even without the consent of the wife if the sale is necessary to answer for a big conjugal liability which might endanger the family’s economic standing. This is one instance where the wife’s consent is not required and, impliedly, no judicial intervention is necessary.

Significantly, the Family Code has introduced some changes particularly on the aspect of the administration of the conjugal partnership. The new law provides that the administration of the conjugal partnership is now a joint undertaking of the husband and the wife. In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the conjugal partnership, the other spouse may assume sole powers of administration. However, thepower of administration does not include the power to dispose or encumber property belonging to the conjugal partnership.36 In all instances, the present law specifically requires the written consent of the other spouse, or authority of the court for the disposition or encumbrance of conjugal partnership property without which, the disposition or encumbrance shall be void.37

Inescapably, herein petitioner’s action for specific performance must fail. Even on the supposition that the parties only disposed of their respective shares in the property, the sale, assuming that it exists, is still void for as previously stated, the right of the husband or the wife toone-half of the conjugal assets does not vest until the liquidation of the conjugal partnership. Nemo dat qui non habet. No one can give what he has not.

WHEREFORE, the appealed Decision is hereby REVERSED and SET ASIDE. The complaint inCivil Case No. 90-106 of the Regional Trial Court of Makati is ordered DISMISSED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 174118 April 11, 2012

THE ROMAN CATHOLIC CHURCH, represented by the Archbishop of Caceres, Petitioner, vs.REGINO PANTE, Respondent.

D E C I S I O N

BRION, J.:

Through a petition for review on certiorari,1 the petitioner Roman Catholic Church (Church) seeks to set aside the May 18, 2006 decision2 and the August 11, 2006 resolution3 of the Court of Appeals (CA) in CA-G.R.-CV No. 65069. The CA reversed the July 30, 1999 decision4 of the Regional Trial Court (RTC) of Naga City, Branch 24, in Civil Case 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.5 On September 25, 1992, the Church contracted with respondent Regino Pante for the sale of the lot (thru a Contract to Sell and to Buy6) on the belief that the latter was an actual occupant of the lot. The contract between them fixed the purchase price at P11,200.00, with the initial P1,120.00 payableas 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, inbad 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, 1999,9 the RTC ruled in favor of the Church, finding that the Church’s consent to the sale 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 P10,905.00 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, 2006,11 the CA granted Pante’s appeal 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 periodprovided; 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 saleis 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 theseller’s consent and invalidating the contract

Consent is an essential requisite of contracts12 as it pertains to the meeting of the offer and the acceptance upon the thing and the cause which constitute the contract.13 To create a valid contract, the meeting of the minds must be free, voluntary, willful and with a reasonable understanding of the various obligations the parties assumed for themselves.14 Where consent, however, is given through mistake, violence, intimidation, undue influence, or fraud, the contract is deemed voidable.15 However, not every mistake renders a contract voidable. The Civil Code clarifies 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 oneor 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 landcould 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,18 attached to the contract executed by the Church and Pante, which clearly labeled the 2x16-meter lot as a "RIGHT OF WAY"; below thesewords 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.20 The then parish priest of Canaman, Fr. Marcaida, was apparently aware that Pante was not 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 afact 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.21 The right to repurchase given to the Church in case Pante fails to pay within the grace period provided22 would have been unnecessary had ownership not already passed to Pante.

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 forthe 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.23 Under either mode of delivery, the facts show that Pante was the first to acquire possession of the lot.

Actual delivery of a thing sold occurs when it is placed under the control and possession of the vendee.24 Pante claimed that he had been using the lot as a passageway, with the Church’s permission, since 1963.1âwphi1 After 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.25 Thus, any assertion of 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 thepossession 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.27 In Navera v. Court of Appeals,28 the Court ruled that:

[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. 146222 January 15, 2004

ERLINDA DELA CRUZ, PRISCILLA DE MESA, ZENAIDA LAMBERTO, FLORA DRISKELL and ANGELITO DELA CRUZ, Petitioners, vs.FORTUNATO DELA CRUZ, DIVINA GUTIERREZ and CLARK GUTIERREZ, Respondents.

D E C I S I O N

This petition seeks to annul and set aside the decision1 of the Court of Appeals, promulgated on September 14, 2000, in CA-G.R. CV No. 53679, affirming the decision2 of the Regional Trial Court (RTC) of Malolos, Bulacan, Branch 17, dated December 14, 1995, in Civil Case No. 37-M-89. The trial court dismissed the complaint in Civil Case No. 37-M-89 and held that herein respondents Clark and Divina Gutierrez are the lawful owners of the property in dispute. Petitioners also seek to annul the appellate court’s resolution,3 dated November 28, 2000, denying their motion for reconsideration.

As culled from the records, the following are the facts of the case:

Paciencia dela Cruz, the original plaintiff in Civil Case No. 37-M-89, was the owner of a parcel ofland with an area of two (2) ares4 and ninety (90) centares,5 located at Lolomboy, Bocaue, Bulacan. Said parcel was registered in her name under Transfer Certificate of Title (TCT) No. T-14.585 (M). A flea market (talipapa) with fifty or so vendors was located on the property and Paciencia collected from them their daily stall rentals. Paciencia had six (6) children, namely Priscilla, Erlinda, Fortunato, Flora, Angelita and Zenaida, all surnamed dela Cruz.

On September 25, 1980, Paciencia allegedly executed a Deed of Sale whereby for and in consideration ofP21,000, she conveyed said parcel in favor of her son, Fortunato dela Cruz.6 OnNovember 26, 1980, the Register of Deeds of Bulacan issued TCT No. T-34.723 (M) in Fortunato’s name.7 Fortunato declared the property for taxation purposes and paid realty taxes due thereon.8 Sometime between August 1985 to September 1988, Fortunato mortgaged the property three (3) times to one Erlinda de Guzman for the sums of P25,000,P50,000 and P100,000.9 Fortunato was unable to pay these loans.

On January 11, 1989, Fortunato executed a "Kasulatan ng Bilihang Patuluyan"10 in favor of Clarkand Divina Gutierrez, the children of Claudio and Adoracion Gutierrez, to whom he earlier offered to sell the property. TheKasulatan alleged the purchase price to be P58,000 only but the amount actually paid by the Gutierrezes to Fortunato was P600,000 as evidenced by a receipt showing the true consideration for the sale.11 That same day, the sale was registered, leading to the cancellation of TCT No. T-34.723 (M) in the name of Fortunato. Seven days later, a new certificate of title, TCT No. T-101011 (M) was issued in the name of Clark and Divina Gutierrez. Thereafter, the Gutierrezes took possession of the property, had the talipapa repaired, and collected the daily stall rentals from the vendors.

On January 20, 1989, Paciencia instituted an action for reconveyance of property with preliminary injunction against Fortunato and the spouses Claudio and Adoracion Gutierrez, before the RTC of Malolos, Bulacan, which docketed the complaint as Civil Case No. 37-M-89.

On February 8, 1989, the Complaint was amended to implead Clark and Divina Gutierrez, the children of spouses Claudio and Adoracion Gutierrez, as defendants who had the subject property titled in their names.

In her Complaint, Paciencia alleged that sometime in 1980, her son Fortunato, took advantage of his close ties with her to induce her to sign an instrument which appeared to be a Deed of Sale. Paciencia alleged that Fortunato assured her that she would remain the owner thereof while Fortunato would hold the property in trust for her and upon her death, all her children

would share in the property. Fortunato allegedly did not pay her any consideration for such sale. She also claimed that she continued to collect the daily stall rentals from the talipapa tenants until sometime in 1986 when she fell ill and had to be hospitalized. As a result, Fortunato took over the collection of the rentals. After Paciencia had recovered, she sought to resume collectingthe daily rentals but upon the plea of Fortunato who had no means of income at that time, Paciencia allowed him to continue collecting the stall rentals. Fortunato, however, was remiss in remitting the daily collections to Paciencia.

Sometime in December 1988, Paciencia was shocked to learn that Fortunato was offering the property for sale. She then demanded that the property be reconveyed to her but Fortunato refused to do so. Meanwhile upon learning that Fortunato was negotiating the sale of the land with the Gutierrez spouses, Paciencia sent her daughter, Erlinda dela Cruz, to warn them that Paciencia owned the property, and not Fortunato. However, the Gutierrez couple insisted on buying the property and registered the same in favor of their children, Divina and Clark Gutierrez. Consequently, the Gutierrezes took over the collection of stall rentals from the tenantsof the subject property.

In sum, Paciencia alleged that the sale of the property to the Gutierrezes was null and void and fraudulently made as Fortunato had neither right nor authority from her to sell or convey the subject property, as he only held it in trust for her.

In his Answer, Fortunato averred that he lawfully acquired the subject property from Paciencia, who absolutely conveyed the same to him, delivered to him the owner’s duplicate of the title, andupon her instructions, caused the registration of the property in his name.

For their part, Clark and Divina Gutierrez alleged that: (1) the subject property was titled in the name of Fortunato dela Cruz; (2) Fortunato was also the one collecting the daily rentals from themarket vendors; (3) Fortunato feared he would lose the property due to his inability to pay his mortgage indebtedness to Erlinda de Guzman; and (4) he pleaded with them to help him, as a result of which they turned to their parents who withdrew their lifetime savings just to be able to buy the property. Clark and Divina likewise alleged that Fortunato disclosed to them that Paciencia herself did not like this instant suit as she had already given to all her children her properties through similar transfers.

On December 14, 1995, the trial court decided Civil Case No. 37-M-89 in this wise:

WHEREFORE, premises considered, judgment is hereby rendered:

1) dismissing the case and declaring defendants Clark and Divina Gutierrez as the lawful owners of the property now covered by TCT No. T-101011(M);

2) ordering the plaintiff to pay defendant Fortunato dela Cruz litigation expenses of P2,000.00 and to pay the costs of the suit;

3) dismissing the counterclaim of defendants Gutierrezes for moral damages and attorney’s fees.

SO ORDERED.12

Paciencia then moved for reconsideration, but the trial court denied the motion. She then interposed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 53679.

On January 22, 1997, Paciencia dela Cruz died and was substituted by her children, namely: petitioners Erlinda dela Cruz, Priscilla de Mesa y dela Cruz, Zenaida Lamberto y dela Cruz, Flora Driskell y dela Cruz and Angelita dela Cruz.

On September 14, 2000, the Court of Appeals affirmed the trial court’s decision, thus:

WHEREFORE, premises considered, the appealed decision in Civil Case No. 37-M-89 is herebyAFFIRMED. No costs.

SO ORDERED.13

Herein petitioners then moved for reconsideration, but it was denied by the appellate court.

Hence, this instant petition grounded on the following issues:

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE DECEASED PACIENCIA DELA CRUZ VOLUNTARILY EXECUTED THE DEED OF ABSOLUTE SALE IN FAVOR OF RESPONDENT DELA CRUZ.

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE RESPONDENTS GUTIERREZES ARE BUYERS IN GOOD FAITH.

3. WHETHER OR NOT THE EVIDENCE ON RECORD SUPPORTS THE DECISION OF THE HONORABLE COURT OF APPEALS SUBJECT MATTER OF THE INSTANT PETITION FOR REVIEW.14

Simply put, we find that the core issue in this case is whether the Deed of Absolute Sale executed by the mother, Paciencia dela Cruz, in favor of her son – respondent Fortunato dela Cruz – is simulated and must be declared void.

Petitioners contend that the Court of Appeals erred in holding that Paciencia dela Cruz, now deceased, had voluntarily executed the Deed of Absolute Sale in favor of her son, Fortunato. They fault the court a quo for failing to appreciate the fact that the Deed was entirely and completely written in English, a language neither known nor understood by his mother, Paciencia. Hence, the appellate court went against the dictates of Articles 1330 and 1332 of the Civil Code.15 Petitioners stress that there is no showing that the terms of the Deed had been fullyexplained to Paciencia who allegedly executed the document.

Petitioners also contend that respondents Clark and Divina Gutierrez are not buyers in good faith. A buyer in good faith is one who buys a thing for value and is not aware of any defect in the title of the seller. Their father, Claudio Gutierrez, was the actual buyer of the subject property, and was aware of the defect in the title of Fortunato. Hence, Claudio could not be a buyer in good faith. Neither could his children — respondents Clark and Divina Gutierrez — qualify and be deemed as buyers in good faith, since the said property was actually bought by their father, who then caused the registration of the property in their names.

Respondents, for their part, maintain that the Court of Appeals did not err in affirming the trial court’s ruling that Paciencia dela Cruz voluntarily executed the Deed of Sale in Fortunato’s favor. They aver there was nothing amiss in said Deed. The Gutierrezes were innocent purchasers in good faith entitled to the full protection of the law. In order that the purchaser of

land with a Torrens title may be considered in good faith, according to respondents, it is enough that he examined the latest certificate of title, which was issued in the name of the immediate transferor. This the Gutierrezes did. Moreover, they had reason to believe that respondent Fortunato dela Cruz’s title was free from flaws and defects upon learning that the latter was the one collecting the daily stall rentals from the tenants and the fact that respondent Fortunato had mortgaged the said property three (3) times and was then selling the property to pay off his loans.

We find for respondents. Petitioners’ arguments are less than persuasive, to say the least. As a rule, when the terms of a contract are clear and unambiguous as to the intention of the contracting parties, the literal meaning of its stipulations shall control. It is only when the words appear to contravene the evident intention of the parties that the latter shall prevail over the former. The real nature of a contract may be determined from the express terms of the agreement and from the contemporaneous and subsequent acts of the parties thereto.16 When they have no intention to be bound at all, the purported contract is absolutely simulated and void. Hence, the parties may recover what they gave under the simulated contract. If, on the other hand, the parties state a false cause in the contract to conceal their real agreement, the contract is relatively simulated and the parties’ real agreement may be held binding between them.17

In the present case, it is not disputed that Paciencia dela Cruz executed a Deed of Sale in favor of her son, respondent Fortunato dela Cruz. However, petitioners insist that the said document does not reflect the true intention and agreement of the parties. According to petitioners, Fortunato was to merely hold the property in trust for their mother and that ownership thereof would remain with the mother. Petitioners, however, failed to produce even one credible witness who could categorically testify that such was the intent of Paciencia and Fortunato. There is nothing on record to support sufficiently petitioners’ contention. Instead, the evidence is unclear on whether Paciencia in her lifetime, or later the petitioners themselves, actually asserted or attempted to assert rights of ownership over the subject property after the alleged sale thereof toFortunato. The lot in dispute was thrice mortgaged by Fortunato with nary a protest or complaint from petitioners. When they learned that Fortunato mortgaged the property to Erlinda de Guzman on three occasions: August 26, 1985, April 6, 1987 and September 7, 1988, they refused to redeem the property. They reasoned that if they would redeem the property and pay the debts of Fortunato, the property would merely return to him.18 Indeed, how could Fortunato have thrice obtained a mortgage over the property, without having dominion over it? Fortunato declared the property in his name for taxation purposes and paid the realty taxes, without any protest from Paciencia or petitioners. His actions are contrary to petitioners’ allegation that the parties never intended to be bound by the assailed contract. Tax receipts and declaration of ownership for taxation purposes are strong evidence of ownership. It has been ruled that although tax declarations or realty tax payments are not conclusive evidence of ownership, nevertheless, they are good indicia of possession in the concept of owner for no one in his right mind will be paying taxes for a property that is not in his actual or constructive possession.19

As the Court of Appeals well observed, for nine (9) years, Paciencia allowed Fortunato to benefitfrom the property.1âwphi1 It was only when she learned of its impending sale to the Gutierrez spouses, that she took action to forestall the transfer of the property to a third person. She then caused the annotation of her adverse claim on the certificate of title on the same day the deed infavor of the Gutierrez children was registered. This was rather belated, for the deed was already done.

Petitioners harp on the fact that the assailed Deed was in English and that it was not explained to Paciencia. But we find that the petitioners failed to prove their allegation that Pacencia could not speak, read, or understand English. Moreover, Paciencia’s bare testimony20 on this point is uncorroborated. For Article 1332 to apply, it must first be convincingly established that the illiterate or disadvantaged party could not read or understand the language in which the contract

was written,21 or that the contract was left unexplained to said party. Petitioners failed to discharge this burden.

The Deed of Absolute Sale dated September 25, 1980 was duly acknowledged before a notary public. As a notarized document, it has in its favor the presumption of regularity and it carries theevidentiary weight conferred upon it with respect to its due execution. It is admissible in evidence without further proof of its authenticity and is entitled to full faith and credit upon its face.22

Coming now to whether the Gutierrezes were buyers in good faith, we note that both the trial and appellate courts found that when Fortunato executed the "Kasulatan ng Bilihang Patuluyan" on January 11, 1989 in favor of respondents Clark and Divina Gutierrez, the name of the registered owner appearing in the certificate of title was that of Fortunato dela Cruz. This Kasulatan was duly executed and acknowledged before a notary public. At the time of its execution, there was no annotation on Fortunato’s certificate of title to indicate any adverse claim of any third person. Only two cautionary entries regarding Section 4,23 Rule 74 of the Rulesof Court appear thereon. Nothing more substantial appears in the certificate of title to indicate a scintilla of flaw or defect in Fortunato’s title. Hence, we cannot fairly rule that in relying upon saidtitle, the respondent Gutierrezes were in bad faith. A person dealing with registered land may safely rely upon the correctness of the certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to determine the condition of the property. The law considers said person as an innocent purchaser for value. An innocent purchaser for value is one who buys the property of another, without notice that some other person has a right or interest in such property and pays the full price for the same, at the time of such purchase or before he has notice of the claims or interest of some other person in the property.24

We note, furthermore, that the Gutierrezes did not simply rely upon the face of Fortunato’s Certificate of Title to the property. They also employed the services of counsel Atty. Crisanta Abarrientos, who verified the title with the Registry of Deeds. Thus, they took all the necessary precautions to ascertain the true ownership of the property, even engaging the services of legal counsel for that specific purpose, and it was only after said counsel assured them that everything was in order did they finalize the arrangements to purchase the property. Hence, we entertain no doubt that the respondent Gutierrezes were purchasers for value and in good faith.25

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision dated September 14, 2000 of the Court of Appeals in CA-G.R. CV No. 53679, which sustained the decision of the Regional Trial Court of Malolos, Bulacan, Branch 17, dated December 14, 1995, in Civil Case No. 37-M-89, as well as the appellate court’s resolution of November 28, 2000, is AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. 162593 September 26, 2006

REMEGIA Y. FELICIANO, Substituted by the Heirs of REMEGIA Y. FELICIANO, as represented by NILO Y. FELICIANO, petitioners, vs.SPOUSES AURELIO and LUZ ZALDIVAR, respondents.

D E C I S I O N

CALLEJO, SR., J.:

Before the Court is the petition for review on certiorari filed by the Heirs of Remegia Y. Feliciano (as represented by Nilo Y. Feliciano) seeking the reversal of the Decision1 dated July 31, 2003 ofthe Court of Appeals (CA) in CA-G.R. CV No. 66511 which ordered the dismissal of the complaint filed by Remegia Y. Feliciano2 for declaration of nullity of title and reconveyance of property. The assailed decision of the appellate court reversed and set aside that of the Regional Trial Court (RTC) of Cagayan de Oro City, Branch 25 in Civil Case No. 92-423.

The factual and procedural antecedents of the present case are as follows:

Remegia Y. Feliciano filed against the spouses Aurelio and Luz Zaldivar a complaint for declaration of nullity of Transfer Certificate of Title (TCT) No. T-17993 and reconveyance of the property covered therein consisting of 243 square meters of lot situated in Cagayan de Oro City.The said title is registered in the name of Aurelio Zaldivar.

In her complaint, Remegia alleged that she was the registered owner of a parcel of land situatedin the District of Lapasan in Cagayan de Oro City with an area of 444 square meters, covered byTCT No. T-8502. Sometime in 1974, Aurelio, allegedly through fraud, was able to obtain TCT No. T-17993 covering the 243-sq-m portion of Remegia’s lot as described in her TCT No. T-8502.

According to Remegia, the 243-sq-m portion (subject lot) was originally leased from her by Pio Dalman, Aurelio’s father-in-law, for P5.00 a month, later increased to P100.00 a month in 1960. She further alleged that she was going to mortgage the subject lot to Ignacio Gil for P100.00, which, however, did not push through because Gil took back the money without returning the receipt she had signed as evidence of the supposed mortgage contract. Thereafter, in 1974, Aurelio filed with the then Court of First Instance of Misamis Oriental a petition for partial cancellation of TCT No. T-8502. It was allegedly made to appear therein that Aurelio and his spouse Luz acquired the subject lot from Dalman who, in turn, purchased it from Gil. The petitionwas granted and TCT No. T-17993 was issued in Aurelio’s name.

Remegia denied that she sold the subject lot either to Gil or Dalman. She likewise impugned as falsified the joint affidavit of confirmation of sale that she and her uncle, Narciso Labuntog, purportedly executed before a notary public, where Remegia appears to have confirmed the saleof the subject property to Gil. She alleged that she never parted with the certificate of title and that it was never lost. As proof that the sale of the subject lot never transpired, Remegia pointed out that the transaction was not annotated on TCT No. T-8502.

In their answer, the spouses Zaldivar denied the material allegations in the complaint and raised the affirmative defense that Aurelio is the absolute owner and possessor of the subject lot as

evidenced by TCT No. 17993 and Tax Declaration No. 26864 covering the same. Aurelio claimed that he acquired the subject lot by purchase from Dalman who, in turn, bought the samefrom Gil on April 4, 1951. Gil allegedly purchased the subject lot from Remegia and this sale wasallegedly conformed and ratified by the latter and her uncle, Narciso Labuntog, before a notary public on December 3, 1965.

After Aurelio obtained a loan from the Government Service Insurance System (GSIS), the spouses Zaldivar constructed their house on the subject lot. They alleged that they and their predecessors-in-interest had been occupying the said property since 1947 openly, publicly, adversely and continuously or for over 41 years already. Aurelio filed a petition for the issuance of a new owner’s duplicate copy of TCT No. T-8502 because when he asked Remegia about it, the latter claimed that it had been lost.

After due trial, the RTC rendered judgment in favor of Remegia. It declared that TCT No. 17993 in the name of Aurelio was null and void for having been obtained through misrepresentation, fraud or evident bad faith by claiming in his affidavit that Remegia’s title (TCT No. T-8502) had been lost, when in fact it still existed.

The court a quo explained that "the court that orders a title reconstituted when the original is still existing has not acquired jurisdiction over the case. A judgment otherwise final may be annulled not only on extrinsic fraud but also for lack of jurisdiction."3 Aurelio’s use of a false affidavit of loss, according to the court a quo, was similar to the use during trial of a forged document or perjured testimony that prevented the adverse party, Remegia, from presenting her case fully and fairly.

The RTC likewise noted that no public instrument was presented in evidence conveyancing or transferring title to the subject lot from Remegia to Dalman, the alleged predecessor-in-interest of the spouses Zaldivar. The only evidence presented by the said spouses was a joint affidavit ofconfirmation of sale purportedly signed by Remegia and her uncle, the execution of which was denied by the latter’s children. The certificate of title of the spouses Zaldivar over the subject property was characterized as irregular because it was issued in a calculated move to deprive Remegia of dominical rights over her own property. Further, the spouses Zaldivar could not set up the defense of indefeasibility of Torrens title since this defense does not extend to a transferor who takes the certificate of title with notice of a flaw therein. Registration, thus, did notvest title in favor of the spouses; neither could they rely on their adverse or continuous possession over the subject lot for over 41 years, as this could not prevail over the title of the registered owner pursuant to Sections 504 and 515 of Act No. 496, otherwise known as The LandRegistration Act.

The dispositive portion of the decision of the court a quo reads:

IN THE LIGHT OF THE FOREGOING, and by preponderance of evidence, judgment is hereby rendered canceling TCT T-17993 and reconveyance of 243 square meters the title and possession of the same, by vacating and turning over possession of the 243 square meters of the subject property to the plaintiff [referring to Remegia] which is part of the land absolutely owned by the plaintiff covered by [TCT] T-8502 and to solidarily pay the plaintiff Fifty Thousand Pesos (P50,000.00) as moral damages; Ten Thousand Pesos (P10,000.00) as exemplary damages; Fifty Thousand Pesos (P50,000.00) as attorney’s fees and Ten Thousand Pesos (P10,000.00) expenses for litigation to the plaintiff.

SO ORDERED.6

On appeal, the CA reversed the decision of the RTC and ruled in favor of the spouses Zaldivar. In holding that Remegia sold to Gil a 243 sq m portion of the lot covered by TCT No. T-8502, the

appellate court gave credence to Exhibit "5," the deed of sale presented by the spouses Zaldivarto prove the transaction. The CA likewise found that Gil thereafter sold the subject property to Dalman who took actual possession thereof. By way of a document denominated as joint affidavit of confirmation of sale executed before notary public Francisco Velez on December 3, 1965, Remegia and her uncle, Narciso Labuntog, confirmed the sale by Remegia of the subject lot to Gil and its subsequent conveyance to Dalman. Per Exhibit "6," the CA likewise found that Dalman had declared the subject lot for taxation purposes in his name. In 1965, Dalman sold thesame to the spouses Zaldivar who, in turn, had it registered in their names for taxation purposes beginning 1974. Also in the same year, Aurelio filed with the then CFI of Misamis Oriental a petition for the issuance of a new owner’s duplicate copy of TCT No. T-8502, alleging that the owner’s duplicate copy was lost; the CFI granted the petition on March 20, 1974. Shortly, Aureliofiled with the same CFI another petition, this time for the partial cancellation of TCT No. T-8502 and for the issuance of a new certificate of title in Aurelio’s name covering the subject lot. The CFI issued an order granting the petition and, on the basis thereof, the Register of Deeds of Cagayan de Oro City issued TCT No. T-17993 covering the subject lot in Aurelio’s name.

Based on the foregoing factual findings, the appellate court upheld the spouses Zaldivar’s ownership of the subject lot. The CA stated that Remegia’s claim that she did not sell the same to Gil was belied by Exhibit "5," a deed which showed that she transferred ownership thereof in favor of Gil. The fact that the said transaction was not annotated on Remegia’s title was not given significance by the CA since the lack of annotation would merely affect the rights of persons who are not parties to the said contract. The CA also held that the joint affidavit of confirmation of sale executed by Remegia and Narciso Labuntog before a notary public was a valid instrument, and carried the evidentiary weight conferred upon it with respect to its due execution.7 Moreover, the CA found that the notary public (Atty. Francisco Velez) who notarized the said document testified not only to its due execution and authenticity but also to the truthfulness of its contents. The contradiction between the testimonies of the children of Narciso Labuntog and the notary public (Atty. Velez), according to the CA, casts doubt on the credibility of the former as it was ostensible that their version of the story was concocted.8

The CA further accorded in favor of the judge who issued the order for the issuance of the new owner’s duplicate copy of TCT No. T-8502 the presumption of regularity in the performance of his official duty. It noted that the same was issued by the CFI after due notice and hearing.

Moreover, prescription and laches or estoppel had already set in against Remegia. The appellate court pointed out that TCT No. T-17993 in the name of Aurelio was issued on September 10, 1974, while Remegia’s complaint for annulment and reconveyance of property was filed more than 17 years thereafter or on August 10, 1992. Consequently, Remegia’s action was barred by prescription because an action for reconveyance must be filed within 10 years from the issuance of the title since such issuance operates as a constructive notice.9 The CA also noted that the spouses Zaldivar constructed their house on the subject lot some time in 1974-1975, including a 12-foot firewall made of hollow blocks, and Remegia took no action to prevent the said construction.

The dispositive portion of the assailed CA decision reads:

WHEREFORE, foregoing premises considered, the December 3, 1999 Decision of the Regional Trial Court of Misamis Oriental, Cagayan de Oro City, in Civil Case No. 92-423, is REVERSED and SET ASIDE and a new one is entered DISMISSING the said civil case.

SO ORDERED.10

When their motion for reconsideration was denied by the CA in the assailed Resolution dated February 4, 2004, the heirs of Remegia (the petitioners) sought recourse to the Court. In their petition for review, they allege that the appellate court gravely erred –

A.

IN NOT DISMISSING THE APPEAL OF THE RESPONDENTS (DEFENDANTS-APELLANTS) MOTU PROPIO OR EXPUNGING THE BRIEF FOR DEFENDANTS-APPELLANTS FROM RECORD FOR FAILURE TO FILE THE REQUIRED BRIEF FOR THE DEFENDANTS-APPELLANTS ON TIME BUT BEYOND THE LAST AND FINAL EXTENDED PERIOD WITHIN WHICH TO FILE THE SAID BRIEF IN VIOLATION TO Section 7 and section 12, rule 44 of the revised rules of court and in contradiction to the ruling enunciated in catalina roxas, et al. vs. court of appeals, g.r. no. L-76549, december 10, 1987.

B.

in denying the motion for reconsideration which was filed within the fifteen-day reglementary period in violation to the rules of court.

c.

in ruling that the court who ordered the issuance of new certificate of title despite existence of owner’s duplicate copy that was never lost has jurisdiction over the case.

d.

in concluding that petitioner’s (Plaintiff-appellee) claim of ownership over the subject lot was barred by estoppel or laches.

e.

in concluding that the respondents (defendants-appellants) are the absolute owners of the subject lot based on tct no. 17993 issued to them.

f.

in obviating essential and relevant facts, had it been properly appreciated, would maintain absolute ownership of petitioner (plaintiff-appellee) over the subject lot as evidenced by existing tct no. t-8502.11

The Court finds the petition meritorious.

It should be recalled that respondent Aurelio Zaldivar filed with the then CFI of Misamis Oriental a petition for issuance of a new owner’s duplicate copy of TCT No.T-8502, alleging that the owner’s duplicate copy was lost. In the Order dated March 20, 1974, the said CFI granted the petition and consequently, a new owner’s duplicate copy of TCT No. T-8502 was issued.

However, as the trial court correctly held, the CFI which granted respondent Aurelio’s petition forthe issuance of a new owner’s duplicate copy of TCT No. T-8502 did not acquire jurisdiction to issue such order. It has been consistently ruled that "when the owner’s duplicate certificate of title has not been lost, but is in fact in the possession of another person, then the reconstituted certificate is void, because the court that rendered the decision had no jurisdiction. Reconstitution can validly be made only in case of loss of the original certificate."12In such a case, the decision authorizing the issuance of a new owner’s duplicate certificate of title may be attacked any time.13

The new owner’s duplicate TCT No. T-8502 issued by the CFI upon the petition filed by respondent Aurelio is thus void. As Remegia averred during her testimony, the owner’s duplicatecopy of TCT No. T-8502 was never lost and was in her possession from the time it was issued toher:

Q A while ago, you said that you were issued a title in 1968, can you tell the Honorable Court who was in possession of the title?

A I am the one in possession and I am the one keeping the title.

Q Even up to the present?

A Yes, Sir.

Q Was there any instance that this title was borrowed from you?

A No, Sir.

Q Was there any instance that this title was lost from your possession?

A No, Sir.

Q Was there any instance that this title was surrendered to the Register of Deeds of the City of Cagayan de Oro?

A No, Sir. There never was an instance … There never was an instance that this title was surrendered to the Register of Deeds.

Q As there any instance that you petitioned to the Honorable Court for the issuance of a new owner’s duplicate copy of this title in lieu of the lost copy of said title?

A No, Sir. There was never an instance because this title was never lost.14

Consequently, the court a quo correctly nullified TCT No. T-17993 in Aurelio’s name, emanating as it did from the new owner’s duplicate TCT No. T-8502, which Aurelio procured through fraud. Respondent Aurelio cannot raise the defense of indefeasibility of title because "the principle of indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title. The Torrens title does not furnish a shield for fraud."15 As such, a title issued based on void documents may be annulled.16

The appellate court’s reliance on the joint affidavit of confirmation of sale purportedly executed by Remegia and her uncle, Narciso Labuntog, is not proper. In the first place, respondent Aurelio cannot rely on the joint affidavit of confirmation of sale to prove that they had validly acquired the subject lot because, by itself, an affidavit is not a mode of acquiring ownership.17 Moreover, the affidavit is written entirely in English in this wise:

JOINT AFFIDAVIT OF CONFIRMATION OF SALE18

We, NARCISO LABUNTOG and REMEGIA YAPE DE FELICIANO, both of legal age, Filipinocitizens and residents of Lapasan, Cagayan de Oro City, Philippines, after being duly sworn

according to law, depose and say:

1. That the late FRANCISCO LABUNTOG is our common ancestor, the undersigned NARCISO LABUNTOG being one of his sons and the undersigned REMEGIA YAPE DE FELICIANO being the daughter of the late Emiliana Labuntog, sister of Narciso Labuntog;

2. That after his death, the late Francisco Labuntog left behind a parcel of land known as Lot No.2166 C-2 of the Cagayan Cadastre situated at Lapasan, City of Cagayan de Oro, Philippines which is being administered by the undersigned Narciso Labuntog under Tax Decl. No. 27633;

3. That the entire Cadastral Lot No. 2166 C-2 has been subdivided and apportioned among the heirs of the late Francisco Labuntog, both of the undersigned affiants having participated and shared in the said property, Remegia Yape de Feliciano having inherited the share of her motherEmiliana Labuntog, sister of Narciso Labuntog;

4. That on April 4, 1951, Remegia Yape de Feliciano sold a portion of her share to one Ignacio Gil and which portion is more particularly described and bounded as follows:

"On the North for 13 ½ meters by Agustin Cabaraban;

On the South for 13 ½ meters by Antonio Babanga;

On the East for 18 meters by Clotilde Yape; and

On the West for 18meters by Agustin Cabaraban;"

5. That sometime in the year 1960, the said Ignacio Gil conveyed the same portion to Pio Dalman, who is of legal age, Filipino citizen and likewise a resident of Lapasan, Cagayan de OroCity and that since 1960 up to the present, the said Pio Dalman has been in continuous, open, adverse and exclusive possession of the property acquired by him in concept of owner;

6. That we hereby affirm, ratify and confirm the acquisition of the above described portion acquired by Pio Dalman inasmuch as the same is being used by him as his residence and familyhome and we hereby request the Office of the City Assessor to segregate this portion from our Tax Decl. No. 27633 and that a new tax declaration be issued in the name of PIO DALMAN embracing the area acquired and occupied by him.

IN WITNESS WHEREOF, we have hereunto affixed our signatures on this 3rd day of December,1965 at Cagayan de Oro City, Philippines.

(SGD.) Narciso Labuntog (SGD.)Remegia Yape de Feliciano

NARCISO LABUNTOG REMEGIA YAPE DE FELICIANO

Affiant Affiant

SUBSCRIBED & SWORN to before me this 3rd day of December, 1965 at Cagayan de Oro City,Philippines, affiants exhibited their Residence Certificates as follows: NARCISO LABUNTOG, A-

1330509 dated Oct. 5, 1965 and REMEGIA YAPE DE FELICIANO, A-1811104 dated Dec. 3, 1965 both issued at Cagayan de Oro City.

(SGD.) ILLEGIBLE

FRANCISCO X. VELEZ

Notary Public

However, based on Remegia’s testimony, she could not read and understand English:

COURT:

Can you read English?

A No, I cannot read and understand English.

ATTY. LEGASPI:

Q What is your highest educational attainment?

A Grade 3.

Q But you can read and understand Visayan?

A Yes, I can read Visayan, but I cannot understand well idiomatic visayan terms (laglom nga visayan).19

On this point, Article 1332 of the Civil Code is relevant:

ART.1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must showthat the terms thereof have been fully explained to the former.

The principle that a party is presumed to know the import of a document to which he affixes his signature is modified by the foregoing article. Where a party is unable to read or when the contract is in a language not understood by the party and mistake or fraud is alleged, the obligation to show that the terms of the contract had been fully explained to said party who is unable to read or understand the language of the contract devolves on the party seeking to enforce the contract to show that the other party fully understood the contents of the document. If he fails to discharge this burden, the presumption of mistake, if not, fraud, stands unrebutted and controlling.20

Applying the foregoing principles, the presumption is that Remegia, considering her limited educational attainment, did not understand the full import of the joint affidavit of confirmation of sale and, consequently, fraud or mistake attended its execution. The burden is on respondents, the spouses Zaldivar, to rebut this presumption. They tried to discharge this onus by presenting Atty. Francisco Velez (later RTC Judge) who notarized the said document. Atty. Velez testified that he "read and interpreted" the document to the affiants and he asked them whether the contents were correct before requiring them to affix their signatures thereon.21 The bare

statement of Atty. Velez that he "read and interpreted" the document to the affiants and that he asked them as to the correctness of its contents does not necessarily establish that Remegia actually comprehended or understood the import of the joint affidavit of confirmation of sale. Nowhere is it stated in the affidavit itself that its contents were fully explained to Remegia in the language that she understood before she signed the same. Thus, to the mind of the Court, the presumption of fraud or mistake attending the execution of the joint affidavit of confirmation of sale was not sufficiently overcome.

Moreover, the purported joint affidavit of confirmation of sale failed to state certain important information. For example, it did not mention the consideration or price for the alleged sale by Remegia of the subject lot to Ignacio Gil. Also, while it stated that the subject lot was conveyed by Ignacio Gil to Pio Dalman, it did not say whether the conveyance was by sale, donation or any other mode of transfer. Finally, it did not also state how the ownership of the subject lot was transferred from Pio Dalman to respondent Aurelio or respondents.

Respondents’ claim that they had been occupying the subject lot since 1947 openly, publicly, adversely and continuously or for over 41 years is unavailing. In a long line of cases,22 the Court has consistently ruled that lands covered by a title cannot be acquired by prescription or adversepossession. A claim of acquisitive prescription is baseless when the land involved is a registeredland following Article 112623 of the Civil Code in relation to Section 46 of Act No. 496 or the LandRegistration Act (now Section 4724 of P.D. No 1529):

Appellants’ claim of acquisitive prescription is likewise baseless. Under Article 1126 of the Civil Code, prescription of ownership of lands registered under the Land Registration Act shall be governed by special laws. Correlatively, Act No. 496 provides that no title to registered land in derogation of that of the registered owner shall be acquired by adverse possession. Consequently, proof of possession by the defendants is both immaterial and inconsequential.25

Neither can the respondents spouses Zaldivar rely on the principle of indefeasibility of TCT No. 17793 which was issued on September 10, 1974 in favor of respondent Aurelio. As it is, the subject lot is covered by two different titles: TCT No. T-8502 in Remegia’s name covering an area of 444 sq m including therein the subject lot, and TCT No. 17793 in the name of respondent Aurelio covering the subject lot. Aurelio’s title over the subject lot has not become indefeasible, by virtue of the fact that TCT No. T-8502 in the name of Remegia has remained valid. The following disquisition is apropos:

The claim of indefeasibility of the petitioner’s title under the Torrens land title system would be correct if previous valid title to the same parcel of land did not exist. The respondent had a valid title x x x It never parted with it; it never handed or delivered to anyone its owner’s duplicate of the transfer certificate of title; it could not be charged with negligence in the keeping of its duplicate certificate of title or with any act which could have brought about the issuance of another certificate upon which a purchaser in good faith and for value could rely. If the petitioner’s contention as to indefeasibility of his title should be upheld, then registered owners without the least fault on their part could be divested of their title and deprived of their property. Such disastrous results which would shake and destroy the stability of land titles had not been foreseen by those who had endowed with indefeasibility land titles issued under the Torrens system.26

Remegia’s TCT No. T-8502, thus, prevails over respondent Aurelio’s TCT No. 17793, especially considering that, as earlier opined, the latter was correctly nullified by the RTC as it emanated from the new owner’s duplicate TCT No. T-8502, which in turn, respondent Aurelio was able to procure through fraudulent means.

Contrary to the appellate court’s holding, laches has not set in against Remegia. She merely tolerated the occupation by the respondents of the subject lot:

Q You also stated in the direct that the defendants in this case, Mr. and Mrs. Zaldivar, were issued a title over a portion of this land which you described a while ago?

A We knew about that only recently.

Q When was that when you knew that the defendants were issued title over a portion of the landyou described a while ago?

A In June, 1992.

Q In what way did you discover that a portion of the land was titled in the name of the defendants?

A I discovered that my property was titled by Mr. and Mrs. Zaldivar when I went to the Register of Deeds for the purpose of partitioning my property among my children.

Q And you were surprised why it is titled in their names?

A Yes.

Q Is it not a fact that the defendants have constructed their house on a portion of the land you described a while ago?

A Yes. I knew that the Zaldivars built a house on the property I described a while ago, but I did not bother because I know that I can get that property because I own that property.

Q And the defendants constructed that house in 1974-75, am I correct?

A Yes.

Q And as a matter of fact, you have also a house very near to the house that was constructed bythe defendants in this case?

A Yes.

Q Can you tell us what is the distance between your house and the house constructed by the defendants in 1974?

A They are very near because they constructed their house in my lot.

Q How many meters, more or less?

A It is very near, very close.

Q When they constructed their house, meaning the defendants, did you not stop the defendants from the construction?

A I did not bother in stopping the Zaldivars in constructing the house because I am certain that I can get the land because I own the land.

Q Aside from not protesting to the construction, did you not bring this matter to the attention of the barangay captain or to the police authorities?

A No, because I did not bring this matter to the barangay captain nor to the police authorities. It is only now that we discovered that it is already titled.

Q When you said now, it is in 1992?

A Yes.

Q Is it not a fact that after the house was finished the defendants and their family resided in that house which they constructed?

A Yes, after the house was finished, they resided in that house.

Q As a matter of fact, from that time on up to the present, the defendants are still residing in that house which they constructed in 1974 or 1975, am I correct?

A Yes.

Q As a matter of fact also the defendants fenced the lot in which their house was constructed with hollow blocks, am I correct?

A Yes, the house of the Zaldivars was fenced by them with hollow blocks and I did not stop themto avoid trouble.

Q As a matter of fact, the boundary between your house and the house of Zaldivar, there was constructed a firewall made of hollow blocks about twelve feet in height, am I correct?

A Yes.

Q Such that you cannot see their house and also the Zaldivars cannot see your house because of that high firewall, am I correct?

A We can still see each other because the firewall serves as the wall of their house.

Q When did the Zaldivars construct that hollow blocks fence? After the house was finished?

A I cannot remember.

Q But it could be long time ago?

ATTY. VEDAD:

Q That would be repetitious. She answered she could not remember.

ATTY. LEGASPI:

Q It could be many years ago?

A I cannot remember when they constructed the fence.

Q Did you [file] any protest or complaint when the Zaldivars constructed the hollow blocks fence?

A No.

Q Neither did you bring any action in court or with the barangay captain or the police authorities when the Zaldivars constructed that hollow blocks fence?

A No, I did not complain the fencing by the Zaldivars. Only now that we know that we bring this matter to the barangay captain.

Q And in the [office of the] barangay captain, you were able to meet the defendants, am I correct?

A No. When we went to the barangay captain, the Zaldivars did not appear there; therefore, we hired a lawyer and filed this case.27

Case law teaches that if the claimant’s possession of the land is merely tolerated by its lawful owner, the latter’s right to recover possession is never barred by laches:

As registered owners of the lots in question, the private respondents have a right to eject any person illegally occupying their property. This right is imprescriptible. Even if it be supposed that they were aware of the petitioner’s occupation of the property, and regardless of the length of that possession, the lawful owners have a right to demand the return of their property at any time as long as the possession was unauthorized or merely tolerated, if at all. This right is never barred by laches.28

Nonetheless, the Court is not unmindful of the fact that respondents had built their house on the subject lot and, despite knowledge thereof, Remegia did not lift a finger to prevent it. Article 453 of the Civil Code is applicable to their case:

ART. 453. If there was bad faith, not only on the part of the person who built, planted or sowed on the land of another, but also on the part of the owner of such land, the rights of one and the other shall be the same as though both had acted in good faith.

It is understood that there is bad faith on the part of the landowner whenever the act was done with his knowledge and without opposition on his part.

Under the circumstances, respondents and Remegia are in mutual bad faith and, as such, wouldentitle the former to the application of Article 448 of the Civil Code governing builders in good faith:

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 54629 and 548,30 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 a case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees after the proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.

Following the above provision, 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 building, planting or sowing, after payment to the builder, planter or sower of the necessary and useful expenses, and in the proper case, expenses for pure luxury or mere pleasure.31

The owner of the land may also oblige the builder, planter or sower to purchase and pay the price of the land. If the owner chooses to sell his land, the builder, planter or sower must purchase the land, otherwise the owner may remove the improvements thereon. The builder, planter, or sower, however, is not obliged to purchase the land if its value is considerably more than the building, planting or sowing. In such case, the builder, planter or sower must pay rent tothe owner of the land. If the parties cannot come to terms over the conditions of the lease, the court must fix the terms thereof. 32

The right to choose between appropriating the improvement or selling the land on which the improvement of the builder, planter or sower stands, is given to the owner of the land,33 Remegia, in this case, who is now substituted by petitioners as her heirs.

Consequently, the petitioners are obliged to exercise either of the following options: (1) to appropriate the improvements, including the house, built by the respondents on the subject lot by paying the indemnity required by law, or (2) sell the subject lot to the respondents. Petitionerscannot refuse to exercise either option and compel respondents to remove their house from the land.34 In case petitioners choose to exercise the second option, respondents are not obliged to purchase the subject lot if its value is considerably more than the improvements thereon and in which case, respondents must pay rent to petitioners. If they are unable to agree on the terms ofthe lease, the court shall fix the terms thereof.

In light of the foregoing disquisition, the Court finds it unnecessary to resolve the procedural issues raised by petitioners.

WHEREFORE, the petition is GRANTED. The Decision dated July 31, 2003 and Resolution dated February 4, 2004 of the Court of Appeals in CA-G.R. CV No. 66511 are REVERSED and SET ASIDE. The Decision dated December 3, 1999 of the Regional Trial Court of Cagayan de Oro City, Branch 25 in Civil Case No. 92-423 is REINSTATED with the MODIFICATION that petitioners are likewise ordered to exercise the option under Article 448 of the Civil Code.

SO ORDERED.

G.R. No. 170486 September 12, 2011

SWIFT FOODS, INC., Petitioner, vs.SPOUSES JOSE MATEO, JR. and IRENE MATEO, Respondents.

D E C I S I O N

DEL CASTILLO, J.:

A review of the facts of the case is necessary when the courts below fail to make findings that are necessary for a proper disposition of the case.

Before the Court is a Petition for Review1 of the November 15, 2005 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 73368. The dispositive portion of the assailed Decision reads:

WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION, in that the trial court’s award of attorney’s fees to the [respondents] is deleted for lack of basis.

SO ORDERED.3

The affirmed ruling of the trial court contained the following disposition:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of [respondents] SPS. JOSE & IRENE MATEO and against [petitioner] SWIFT FOODS, INC., directing [petitioner] to:

1. RETURN the Owner’s Duplicate Copies of Transfer Certificates of Title Nos. T-19808 P(M), T-19809 P (M) and T-19810 P(M) of the Registry of Deeds of Bulacan immediately;

2. RETURN P100,000.00 cash bond upon the finality of this Decision with interest at twelve [percent] (12%) per annum from the filing of this Complaint until fully satisfied;

3. PAY to [respondents] the following amounts, to wit:

a. Two Hundred Forty Three Thousand (P243,000.00) Pesos as actual damages representing the warehousing fees from May 13, 1996 up to June 30, 1997;

b. Two Hundred Thousand (P200,000.00) Pesos as moral damages;

c. One Hundred Thousand (P100,000.00) Pesos for and as attorney’s fees; and

d. Cost of suit.

SO ORDERED.4

Factual antecedents

Petitioner Swift Foods, Inc. (Swift) is a corporation engaged in the manufacture, sale, and distribution of animal feeds.

Respondent-spouses Jose and Irene Mateo (respondents) are businessmen engaged in a dealership in poultry and feeds supply and a trucking business in San Jose Del Monte, Bulacan.

In 1984, the two parties entered into a Trucking Agreement whereby respondents’ trucks hauled Swift’s feeds from its central office in Pioneer Street in Mandaluyong City to its various warehouses in Luzon. Under this agreement, respondents deposited cash bonds of P100,000.00 per truck. Several years into their contract, only one truck of respondents remained under contract but Swift maintained respondents’ cash bond of P100,000.00. Respondents requested the return of the excess cash bond but the same was inexplicably denied by Swift.

In June 1995, respondent Jose Mateo (Jose) spoke with Swift’s Feeds Sales Supervisor, Efren Buhain5 (Buhain), regarding the possible lease of Jose’s warehouse for the storage of Swift’s feeds products. The two agreed and on July 5, 1995, Jose signed the Warehousing Agreement, which was to remain in force for a two-year period.6The signatory for Swift was its Vice-Presidentfor Feed Operations, Edward R. Acosta.7 While the warehousing agreement required Jose to post a bond to secure his faithful compliance with his obligations,8 both parties nonetheless proceeded with the enforcement of the contract even without compliance with such requirement.

In the same month, Swift began delivering feeds to respondents’ warehouse.9 Swift’s booking salesman, Rosalino Enfestan10 (Enfestan), worked closely with respondents in the warehouse operations, even supervising the work of respondents’ bodegero, Vicente Mateo (Vicente).11 To properly document the movement of the stocks, Swift, through Enfestan gave respondents two kinds of warehouse documents: the Daily Warehouse Stock Report (DWSR), which is the inventory of incoming stocks, and the Warehouse Issue Slip (WIS), which is a receipt for released stocks.12 According to Swift, the WIS should contain the signature of the sales personnel as proof that the latter received the released stocks, in accordance with Paragraph V of the agreement. According to Jose, Wilfredo Pacres (Wilfredo), Swift’s National Feed Sales Manager, would sometimes inspect respondents’ warehouse and the warehouse documents.13

On February 16, 1996, seven months into the contract, the respondents in apparent compliance with the bond requirement, delivered three land titles to Swift.14 The acknowledgment receipt issued by Swift for the surrendered titles stated that these were "collateral for feeds warehousing."15 The receipt was duly signed by Swift officials and by respondent Jose.

On May 9, 1996, Swift’s personnel, Wilfredo and Jasmine Pena, conducted an audit of the stocks stored in respondents’ warehouse. They went over the warehousing documents (i.e., WISand DWSR) and counted the remaining stocks. A comparison of the two warehouse documents revealed one missing bag, which respondent Jose duly paid on the same day.16

On May 20, 1996, however, Swift informed respondents that it was terminating their contract effective May 13, 1996 because of respondents’ violations of their Warehousing Agreement.17 Swift explained that, under Paragraph V of the Warehousing Agreement, the warehouse operator should only release stocks to Swift’s sales personnel after the latter presents a clearance to withdraw stocks.18 This was to ensure that Swift’s stocks would only be released to authorized individuals and Swift could collect payment accordingly. Contrary to this provision, respondents released stocks without the necessary clearance to withdraw and withoutthe participation of Swift’s sales personnel. The violations were evident from the WIS which did not contain the signatures of Swift’s sales personnel. The absence of the sales personnel’s signature meant that the warehouseman released stocks, without the participation of Swift’s sales personnel, and without any written authority from Swift. These unauthorized releases caused Swift a cash shortage of around P2 million, for which respondents should be held liable.19 Swift then retained respondents’ three land titles until the latter shall have fully complied with their obligation. It cited as its basis Paragraph XII of the Warehousing Agreement, which states that the "bond x x x shall answer for whatever obligation the warehouse operator may have with [Swift]."20

Respondents denied violating the terms of the warehousing agreement. They explained their actions as mere obeisance to Buhain and Enfestan’s instructions to release the stocks directly tocustomers. As proof of these instructions, respondents presented the handwritten letter they received from Buhain21 authorizing them to release the stocks directly to customers. Respondents maintained that Buhain and Enfestan should answer for the cash shortages. Expecting their explanation to be satisfactory, respondents demanded that Swift return their three land titles.22 When Swift did not accede to their demand,23 respondents filed a complaint against Swift for the surrender of their certificates of title with damages24

Respondents’ complaint alleged that petitioner is retaining respondents’ titles without legal justification. They maintained that the alleged cash shortage is attributable to petitioner’s negligence in the supervision of its sales personnel. Respondents claimed actual damages from petitioner consisting of the monthly rentals for the unexpired term of the contract for the unjustified termination of their warehousing agreement.

Respondents then filed an Amended Complaint.25 They included an additional cause of action, whereby respondents asserted that petitioner is in possession of respondents’ cash bond, worth P100,000.00, under their expired trucking agreement. Respondents argued that petitioner had no right to retain the bond because the trucking agreement had already expired and respondents did not incur liabilities under the said trucking agreement that may be chargeable tothe cash bond.

Petitioner countered in its Answer that it was respondents’ breach of the clear written terms of the agreement which facilitated the unauthorized sales committed by the sales personnel.26 It was respondents who were well aware that petitioner’s sales personnel were not following the procedure set out in the warehousing agreement. It was therefore incumbent upon them to have alerted petitioner to the matter. Respondents’ failure to do so constitutes bad faith in the performance of their contractual obligations.27

Ruling of the Regional Trial Court28

The trial court ruled in favor of respondents and ordered petitioner to return

the three land titles. The RTC held that respondents did not breach the Warehousing Agreementfor which their titles may be answerable. They merely followed the instructions given to them by Swift’s sales personnel, which instructions they had no reason to doubt. Since respondents werefirst-time warehouse operators, they could not have been presumed to have any knowledge of the warehouse operating procedures. It was therefore incumbent upon Swift to have conducted

training and seminars for respondents. It was Swift’s failure to conduct such trainings for respondents that allowed the Swift sales personnel to take advantage of the novice warehouse operators. Moreover, Swift should recover their cash shortages from its own employees who appear to have malversed the same.

In the absence of a breach of contract, Swift was not justified in prematurely terminating the warehouse agreement. For this, it was ordered by the court to pay respondents the unrealized warehousing fees for the remaining duration of the contract.

Since Swift did not allege damages incurred pursuant to the trucking agreement, it is not justifiedin keeping theP100,000.00 cash bond beyond its purpose. Thus, the trial court ordered petitioner to return respondent’s cash bond.29

The trial court also ordered petitioner to pay P100,000.00 as attorney’s fees and P200,000.00 asmoral damages, as well as costs of suit.30

Petitioner appealed the adverse Decision. It argued that the trial court erred in finding respondents free of any liability under the warehousing agreement. Respondents were not justified in contravening the written terms of their agreement. Their contractual breach is clear and their bond, consisting of the three land titles, is properly answerable for the damages caused to petitioner.1avvphi1

Ruling of the Court of Appeals31

The CA disagreed with petitioner. First, the CA held that petitioner had no basis for terminating the Warehousing Agreement. The CA observed that petitioner did not bring the alleged contractual breach to respondents’ attention. Its silence can be taken as its condonation of respondents’ acts.32 Having condoned these acts for several months, petitioner’s sudden unilateral termination of the warehouse agreement was tainted with bad faith for which petitionershould be held liable for damages.33

Second, petitioner failed to prove its allegation that respondents incurred cash shortages that can be charged against the surrendered titles. The CA noted petitioner’s utter failure to present the Audit Report, which could have proven the existence and extent of the cash shortage. Moreover, it failed to present the original or duplicate originals of the WIS. Weighing the evidence on record, the CA ruled that the shortages appear to be attributable to petitioner’s employees, Buhain and Enfestan, not to respondents. Thus, petitioner has no justification for withholding respondents’ titles and was ordered to return the same to respondents.34

The CA also found sufficient basis for the trial court’s award of moral damages to respondents inthe amount ofP200,000.00.35 The CA, however, deleted the award of attorney’s fees to respondents for lack of basis.36

Hence, this petition.

Petitioner’s arguments

Petitioner assails the CA Decision that petitioner has no right to withhold respondents’ land titles.

Petitioner points out that respondent Jose and his bodegero, Vicente, admitted in open court that they issued stocks directly to customers without a prior written clearance from the petitioner and without obtaining the signature of the sales personnel on the WIS. Respondents’ irregular

practice constitutes a breach of the contract, which caused substantial financial losses to petitioner and is chargeable against respondents’ collateral.37

Petitioner likewise assails the CA Decision for relieving respondents of all the blame and finding petitioner’s sales personnel responsible for the incurred cash shortage. Petitioner insists that respondents did not present admissible proof of the sales personnel’s culpability.38

Petitioner maintains that the CA erred in ordering petitioner to return respondents’ cash bond of P100,000.00 under an alleged trucking agreement. Petitioner argues that there was no basis for the said Decision given that respondents never presented such agreement and any proof of the delivery of the cash bond to petitioner. It invoked the Best Evidence Rule that when the contents of a document are in issue, the best evidence thereof is the original document which contains all the terms between the contracting parties.39

Respondents’ arguments

Respondents pray for the dismissal of the petition on the ground that it raises factual issues, which is beyond the province of a Rule 45 petition for review.40 1avvphil

With respect to the allegation that releasing stocks without prior written authority constitutes a breach of the Warehousing Agreement, respondents replied that the breach was caused by petitioner itself when it never issued any written authority for the release of stocks. Moreover, petitioner was content to receive the collections from the sales of respondents’ warehouse, without questioning the absence of prior written authorizations.41

Respondents maintain that petitioner failed to prove respondents’ liability for cash shortages. The photocopies of the WIS were inadmissible because petitioner could not adequately explain why the originals were lost. Moreover, petitioner could not present the audit report on the cash shortages despite its contention that such report exists.42

As for the failure to present the Trucking Agreement in court, respondents argue that petitioner never objected to respondent Jose’s testimony regarding the existence of the same and the delivery of the cash bond to petitioner. Thus, respondents maintain that this is a question of fact that was raised for the first time in the appeal.43

Issue

Whether the CA erred in its appreciation of the evidence

Our Ruling

This case involves respondents’ complaint against Swift to surrender their land titles. Swift refused to return the titles on the ground that they were being held as security for respondents’ liabilities for their breach of the warehousing agreement. Respondents denied incurring any liability under the agreement. Thus, at the heart of the case is the issue of whether respondents committed a breach of the warehousing agreement for which they may be held liable to Swift.

From a reading of the decisions below, it appears that the trial and appellate courts side-steppedthis issue of breach. Both Decisions did not make categorical findings on the matter. Instead, they pronounced that respondents’ actions, whether violative of the written contract or not, were justified because petitioner neglected to inform respondents of their duties under the warehousing agreement and to conduct trainings and seminars to orient respondents to

warehouse operations. According to the lower courts, it was petitioner’s negligence that made the novice warehouse operators easy prey to petitioner’s erring employees, and petitioner should have monitored its employees better to avoid the situation. The error in the Decisions below is apparent. They failed to decide the main question of whether respondents breached thecontract. It is for this reason that this Court, which generally does not review facts, is pressed to make its own findings for a proper disposition of the case.

The vinculum that binds respondents and petitioner is their contract, denominated as a warehousing agreement. Under the said contract, the parties agreed that petitioner will pay respondents a monthly warehousing fee ofP18,000.00, and in return, respondents will warehouse petitioner’s stocks and be accountable for all the stocks duly received and released by them.44 Their contract also required respondents to post a bond to answer for whatever obligations they may have with petitioner.45

The agreement also provided the procedures that respondents should observe "in order to promote an effective and efficient warehouse operation."46 For the purpose of this disposition, the relevant procedural provision is Paragraph V, to wit:

V- RECEIPTS AND ISSUANCE OF STOCKS

The WAREHOUSE OPERATORS shall duly acknowledge all incoming deliveries from [Swift] signing on the corresponding Delivery Receipts and Waybills.

The WAREHOUSE OPERATORS shall issue stocks, duly documented, to all feeds salesmen assigned in the area, which stocks may be issued only upon presentment of the clearance to withdraw stocks.

Under no circumstanc[e] that the WAREHOUSE OPERATORS shall issue any stocks to any person, including themselves without any prior written authority from [Swift]. In any event all stocks withdrawals must pass thru the authorized feeds salesman of [Swift].47

The foregoing provision of the Warehousing Agreement states that the warehouseman should only release stocks to Swift’s sales personnel who present a clearance to withdraw stocks.

The records reveal that, contrary to this provision, respondents released stocks without the necessary clearance. They admitted in court that they never required a clearance prior to the release of stocks. Moreover, they admitted that there were times when they released stocks directly to customers and not to petitioner’s sales personnel. When asked to explain his actions which were in contrast to his contractual undertakings, respondent Jose admitted not reading, much less understanding, the warehouse agreement. He simply followed all the verbal instructions given to him by Buhain and Enfestan. Thus, respondents’ breach of Paragraph V of the Warehousing Agreement is clear.

These admissions were ignored by the trial and appellate courts, which seemed to brush off Jose’s negligence as understandable because he was a novice in the warehousing business. But one’s newness to the business is not an excuse to violate the clear terms of one’s contract. A seasoned businessman such as Jose (who admitted in open court to having several successful businesses) should have been alert to the dangers of contravening the clear terms ofone’s contract. He should not have deviated from the procedure provided in the contract in the absence of any amendment therein. At the very least, ordinary diligence required him to inquire with the head office whether the changes being introduced by Buhain or Enfestan were proper or authorized. Respondents’ total reliance on the word of petitioner’s sales personnel, contrary to the written contract, is a clear act of negligence. A contract is the law between the parties and

those who are guilty of negligence in the performance of their obligations are liable for damages.48

Worse, the real reason why respondent Jose did not notice the dubious nature of the proceduresbeing introduced by the Swift personnel was his total ignorance of his obligations under the warehousing agreeement. He admitted not reading the agreement, which was a total abdication of his duties. Unless a contracting party cannot read or does not understand the language in which the agreement was written, he is presumed to know the import of his contract and is bound thereby.49 Not having alleged any of the foregoing, respondent Jose has no excuse for hisactions. It was his nonchalance to his contractual duties and obligations, which facilitated the malfeasance of petitioner’s personnel and exposed petitioner to undue risks.

Having come to the finding of breach, we come to the determination of respondents’ liability. Swift maintains that, due to respondents’ unauthorized stock releases, it was unable to collect the payments for 4,444 bags of feeds, the price of which amounts to P2,197,063.00.50 What Swift is trying to recover are actual damages, which is only awarded to the extent that pecuniary loss had been proven.51 Unfortunately for Swift, it miserably failed to prove its actual damage.

According to Paragraph IV of the Warehouse Agreement, Swift’s "claims x x x against the operators shall be based on prevailing price list at the time of loss."52 The records show that Swift failed to prove the existence and extent of the alleged shortages for which respondents arebeing held liable. It did not even attempt to show in court the prevailing price of the feeds that respondents released. The least that Swift could have done was to produce the audit report to serve as basis of its claims against respondents. As it is, Swift only presented the WIS that did not contain the signatures of the sales personnel, which is only proof that respondents violated paragraph V of the warehouse agreement, but is not sufficient proof of the damages caused by the violation.

In these situations where there has been a breach of contract but actual damages have not been established, nominal damages may be awarded to vindicate the injured party’s rights.53 Considering that the respondents did not perform or even take efforts to fully comply with their duties and obligations under the warehousing agreement, it is only just that they be ordered to return P150,000.00 as nominal damages which is an approximation of whatever benefit they received from such agreement.

As for the land titles surrendered by respondents, the Court determines that Swift has no basis for retaining the same as "collateral for feeds warehousing."54 While the warehousing agreementstipulated that the respondents shall post a bond (which may be in the form of a property bond), this was merely a future undertaking that did not actually materialize. Although the respondents delivered their land titles to Swift, they did not actually execute any bond agreement or security instrument (such as real estate mortgage). In the absence of such bond agreement or security instrument, it cannot be said that a bond has actually been posted or constituted. Besides, even assuming arguendo that the real properties served as collateral, petitioner cannot just appropriate them in view of the prohibition against pactum commissorium.55

Considering petitioner’s wrongful retention of respondents’ titles, we affirm the lower courts’ award of moral damages in favor of respondents. "The person claiming moral damages must prove the existence of bad faith by clear and convincing evidence for the law always presumes good faith."56 "Bad faith is defined in jurisprudence as a state of mind affirmatively operating with furtive design or with some motive of self interest or ill will or for ulterior purpose."57 Respondentswere able to prove that petitioner acted in bad faith in keeping the titles despite its knowledge that there was no bond or real estate mortgage to justify its retention thereof. Petitioner knew that it needed a real estate mortgage to keep the titles, as shown by the fact that its officer even went to respondents’ home to try to obtain their signatures to a deed of real estate mortgage

(without success).58 Despite its failure to obtain such bond, petitioner bull-headedly kept the titles.

The Court, however, finds the sum awarded as moral damages excessive under the circumstances.59 The Court believes that the amount of P50,000.00 as moral damages is reasonable and sufficient. Moral damages are not punitive in nature and not intended to enrich the claimant at the expense of the defendant.60

As for the cash bond of P100,000.00 still held by petitioner despite the termination of the trucking agreement, the Court affirms the trial and appellate courts’ findings that the same has been duly established. Petitioner did not deny receiving the cash bond. Neither did it allege that it has already returned the cash bond, nor did it allege that respondents incurred liabilities under the trucking agreement for which the bond may answer. The inevitable conclusion is that it remains indebted to respondents for the said cash bond. Moreover, such debt was impliedly admitted by petitioner when it stated in its Answer61 that it had agreed to offset the amount it owes respondent under the cash bond with respondents’ liability for breaching the warehousing agreement.

Nevertheless, the Court finds basis for modifying the trial and the appellate courts’ disposition regarding the interest rate imposable on the cash bond.62 Since the bond is not a loan or a forbearance of money, the interest rate should only be six percent (6%) per annum from May 17,1999,63 which is the date of judicial demand. The interest rate of twelve percent (12%) per annum shall apply from the finality of judgment until its full satisfaction.64

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The November 15, 2005 Decision of the Court of Appeals in CA-G.R. CV No. 73368 is REVERSED AND SET ASIDE insofar as it found SWIFT FOODS, INC. liable to the spouses Jose Mateo, Jr. and Irene Mateo for actual damages. Instead, the spouses Jose Mateo, Jr. and Irene Mateo are ordered toPAY SWIFT FOODS, INC. the amount of P150,000.00 by way of NOMINAL DAMAGES, which amount may be offset (to the extent applicable) against the monetary award in favor of spouses Jose Mateo, Jr. and Irene Mateo.

The rest of the assailed Decision of the Court of Appeals is AFFIRMED with the MODIFICATIONS, to wit:

1. The legal interest imposed on the P100,0000.00 cash bond shall be at the rate of six percent (6%) per annum from May 17, 1999 and at the rate of twelve percent (12%) per annum from the time the judgment of this Court becomes final and executory until the obligation is fully satisfied;

2. The award of moral damages in favor of spouses Jose Mateo, Jr. and Irene Mateo is REDUCED toP50,000.00.

SO ORDERED.

G.R. No. 154390, March 17, 2014

METROPOLITAN FABRICS, INC. AND ENRIQUE ANG, Petitioners, v. PROSPERITY CREDITRESOURCES INC., DOMINGO ANG AND CALEB ANG, Respondents.

D E C I S I O N

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 undothe judgment promulgated on July 23, 2002,1 whereby the Court of Appeals (CA) reversed and set aside the decision rendered in 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),2 and dismissed their complaint as well as the counterclaim of respondents.

Antecedents

The CA summarized the antecedents as follows:chanRoblesvirtualLawlibrary

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 coveredby 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 the Africa 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 releasedthe 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 signingwas allegedly witnessed by Vicky, Ellen and Alice, all surnamed Ang, without any PCRI representative present. Immediately thereafter, Enrique and Vicky proceeded to the PCRI officeat 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 herstrong 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 outthe 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 wellas 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 Integrated Appraisal 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. Ismael Andres.

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 Memorandumof 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 laterable to raise P3 million plus P540,000.00 representing the 18% interest per annum. On October26, 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:chanRoblesvirtualLawlibrary

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,5 disposing:chanRoblesvirtualLawlibrary

WHEREFORE, IN VIEW OF THE FOREGOING, judgment is hereby rendered, to wit:chanRoblesvirtualLawlibrary

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:chanRoblesvirtualLawlibrary

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:chanRoblesvirtualLawlibrary

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 FOR A PERIOD 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 BY THE 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 PRACTICES AND INIQUITOUS CONDUCT.

6. THE TRIAL COURT GRAVELY ERRED WHEN IT AWARDED DAMAGES AND ATTORNEY’S FEES TO PLAINTIFFS–APPELLEES NOTWITHSTANDING ITS ADMITTED FAILURE TO PAY ITS LOAN OBLIGATIONS TO DEFENDANTS–APPELLANTS, AND FILING OF THIS BASELESS AND 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,8 reversing and setting aside the decision of the RTC, and dismissing the complaint and the counterclaim upon the following ratiocination:chanRoblesvirtualLawlibrary

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 SCRA 706, 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 thefacts 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 plaintiffsrelied 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 ofMFI 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 Vicky Ang.

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 Edmund Ang 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 appellantsand 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 didnot 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 askingfor 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 agreedto 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 topay 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 24blank 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 andits 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 wereasked 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 ofQuezon 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 dated August 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 invalidatethe 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 suretyagreement (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” showthat 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 isno 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 willingto 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 judgmentof 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:chanRoblesvirtualLawlibrary

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN:chanRoblesvirtualLawlibrary

a. DISREGARDING THR FACTUAL FINDINGS OF THE TRIAL COURT;

b. NOT HOLDING THAT THE ABSENCE OF CONSENT MAKES A CONTRACT VOID, NOT MERELY VOIDABLE;

c. NOT HOLDING THAT AN ACTION TO DECLARE A CONTRACT VOID DOES NOT PRESCRIBE; and

d. NOT HOLDING THAT PETITIONERS ARE NOT GUILTY OF ESTOPPEL AND LACHES.10

Ruling

The appeal has no merit.

1.The CA did not disregard thefactual 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.11 Indeed, the trial court’s findings are always presumed correct. Nonetheless, the CA is not precluded frommaking 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.12 As an appellate court, the CA is not necessarily bound 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.14 InSamson v. Court of Appeals,15 causal fraud is defined as “a deception employedby one 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.17 Whoever alleges fraud affecting 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.18 To be remembered is that mere allegation is definitelynot 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.20 As a notarized document, the deed carried the evidentiary weight conferred upon it with respect to its due execution,21 and had in its favor the presumption of regularity.22 Hence, it was admissible in evidence without further proof of its authenticity, and was entitled to full faith and credit upon its face.23 To rebut its 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 at arms–length, thereby belying the intervention of fraud.

To start with, the evidence adduced by Vicky Ang, 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 motherNatividad 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:chanRoblesvirtualLawlibrary

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 Enrique Ang, 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 offerthe 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 itsforeclosure 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.26 They confirmed their original stance in their pre–trial brief,27 wherein they raised the following issues, to wit:chanRoblesvirtualLawlibrary

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 resolutionis 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 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 theconsent was given through fraud, the contract was voidable, not void ab initio.29 This is because a voidable or annullable contract is existent, valid and 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.31 The discovery of fraud is reckoned from the time the document was registered in the Register of Deeds in view of the rule that registration was notice to the whole world.32 Thus, because the mortgage 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 onOctober 10, 1991.33Hence, 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. 161407 June 5, 2009

JOAQUIN VILLEGAS and EMMA M. VILLEGAS, Petitioners, vs.RURAL BANK OF TANJAY, INC., Respondent.

This petition for review on certiorari under Rule 45 of the Rules of Court assails the Court of Appeals (CA) Decision1 in CA-G.R. CV No. 40613 which affirmed with modification the Regional Trial Court (RTC) Decision in Civil Case No. 9570.2

The facts, as summarized by the CA, follow.

Sometime in June, 1982, [petitioners], spouses Joaquin and Emma Villegas, obtained an agricultural loan ofP350,000.00 from [respondent] Rural Bank of Tanjay, Inc. The loan was secured by a real estate mortgage on [petitioners’] residential house and 5,229 – sq.m. lot situated in Barrio Bantayan, Dumaguete City and covered by TCT No. 12389.

For failure of [petitioners] to pay the loan upon maturity, the mortgage was extrajudicially foreclosed. At the foreclosure sale, [respondent], being the highest bidder, purchased the foreclosed properties for P367,596.16. Thereafter, the Sheriff executed in favor of [respondent] acertificate of sale, which was subsequently registered with the Registry of Deeds of Dumaguete City.

[Petitioners] failed to redeem the properties within the one-year redemption period.

In May, 1987, [respondent] and [petitioner] Joaquin Villegas, through his attorney-in-fact[,] Marilen Victoriano, entered into an agreement denominated as "Promise to Sell," whereby [respondent] promised to sell to [petitioners] the foreclosed properties for a total price of P713,312.72, payable within a period of five (5) years. The agreement reads in part:

PROMISE TO SELL

x x x x

WITNESSETH:

x x x x

2) That for and in consideration of SEVEN HUNDRED THIRTEEN THOUSAND AND THREE HUNDRED TWELVE & 72/100 PESOS (P713,312.72), the VENDOR do hereby promise to sell, transfer, and convey unto the VENDEE, their heirs, successorsand assigns, all its rights, interests and participations over the above parcel of land with all the improvements thereon and a residential house.

3) That upon signing of this Promise To Sell, the VENDEE shall agree to make payment of P250,000.00 (Philippine Currency) and the balance of P463,312.72 payable in equal yearly installments plus interest based on the prevailing rate countingfrom the date of signing this Promise to Sell for a period of five (5) years.

x x x x

5) Provided further, that in case of a delay in any yearly installment for a period ofninety (90) days, this sale will become null and void and no further effect or validity;

and provided further, that payments made shall be reimbursed (returned) to theVENDEE less interest on the account plus additional 15% liquidated damages and

charges.

Upon the signing of the agreement, [petitioners] gave [respondent] the sum of P250,000.00 as down payment. [Petitioners], however, failed to pay the first yearly installment, prompting [respondent] to consolidate its ownership over the properties. Accordingly, TCT No. 12389 was cancelled and a new one, TCT No. 19042, (Exh. 14) was issued in [respondent’s] name on November 8, 1989. Thereafter, [respondent] took possession of the properties. Hence, the action by [petitioners for declaration of nullity of loan and mortgage contracts, recovery of possession of real property, accounting and damages and, in the alternative, repurchase of real estate] commenced on January 15, 1990.

In resisting the complaint, [respondent] averred that [petitioners] have absolutely no cause of action against it, and that the complaint was filed only to force it to allow [petitioners] to reacquirethe foreclosed properties under conditions unilaterally favorable to them.

x x x x

After trial on the merits, the [RTC] rendered a Decision dismissing the complaint, disposing as follows:

"In the light of the foregoing, it is considered opinion of this Court, that [petitioners] failed to prove by preponderance of evidence their case and therefore the herein complaint is ordered dismissed. [Petitioners] are ordered to pay [respondent] the sum of P3,000.00 as attorney’s feesand to pay costs without pronouncement as to counterclaim.

SO ORDERED."3

On appeal by both parties, the CA affirmed with modification the RTC’s ruling, thus:

WHEREFORE, the appealed Decision is hereby MODIFIED by (a) ORDERING [respondent] to reimburse [petitioners] their down payment of P250,000.00 and (b) DELETING the award of attorney’s fees to [respondent].

SO ORDERED.4

Hence, this appeal by certiorari raising the following issues:

(1) The Court of Appeals erred in not holding that the loan and mortgage contracts arenull and void ab initio for being against public policy;

(2) The Court of Appeals erred in not holding that, by reason of the fact that the loan and mortgage contracts are null and void ab initio for being against public policy, the doctrine of estoppel does not apply in this case;

(3) The Court of Appeals erred in not finding that the addendum on the promissory notes containing an escalation clause is null and void ab initio for not being signed by petitioner Emma M. Villegas, wife of petitioner Joaquin Villegas, there being a showingthat the companion real estate mortgage involves conjugal property. x x x.

(4) The Court of Appeals erred in not finding that the addendum on the promissory notes containing an escalation clause is null and void ab initio for being so worded that the implementation thereof would deprive petitioners due process guaranteed by [the] constitution, the petitioners not having been notified beforehand of said implementation.5

Notwithstanding petitioners’ formulation of the issues, the core issue for our resolution is whether petitioners may recover possession of the mortgaged properties.

The petition deserves scant consideration and ought to have been dismissed outright. Petitioners are precluded from seeking a declaration of nullity of the loan and mortgage contracts; they are likewise barred from recovering possession of the subject property.lavvphil

Petitioners insist on the nullity of the loan and mortgage contracts. Unabashedly, petitioners admit that the loan (and mortgage) contracts were made to appear as several sugar crop loans not exceeding P50,000.00 each – even if they were not – just so the respondent rural bank could grant and approve the same pursuant to Republic Act (R.A.) No. 720, the Rural Banks Act.

Petitioners boldly enumerate the following circumstances that show that these loans were obtained in clear contravention of R.A. No. 720:

(a) The petitioners never planted sugar cane on any parcel of agricultural land;

(b) The mortgaged real estate is residential, with a house, located in the heart of Dumaguete City, with an area of only one-half (1/2) hectare;

(c) Petitioners never planted any sugar cane on this one-half (1/2) hectare parcel of land;

(d) Petitioners were never required to execute any chattel mortgage on standing crops;

(e) To make it appear that the petitioners were entitled to avail themselves of loan benefits under Republic Act No. 720, Rural Banks Act, respondent made them sign promissory notes for P350,000.00 in split amounts not exceeding P50,000.00 each.6

In short, petitioners aver that the sugar crop loans were merely simulated contracts and, therefore, without any force and effect.

Articles 1345 and 1346 of the Civil Code are the applicable laws, and they unmistakably provide:

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when theparties do not intend to be bound at all; the latter, when the parties conceal their true agreement.

Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.

Given the factual antecedents of this case, it is obvious that the sugar crop loans were relatively simulated contracts and that both parties intended to be bound thereby. There are two juridical acts involved in relative simulation— the ostensible act and the hidden act.7 The ostensible act isthe contract that the parties pretend to have executed while the hidden act is the true agreementbetween the parties.8 To determine the enforceability of the actual agreement between the parties, we must discern whether the concealed or hidden act is lawful and the essential requisites of a valid contract are present.

In this case, the juridical act which binds the parties are the loan and mortgage contracts, i.e., petitioners’ procurement of a loan from respondent. Although these loan and mortgage contractswere concealed and made to appear as sugar crop loans to make them fall within the purview ofthe Rural Banks Act, all the essential requisites of a contract9 were present. However, the purpose thereof is illicit, intended to circumvent the Rural Banks Act requirement in the procurement of loans.10 Consequently, while the parties intended to be bound thereby, the agreement is void and inexistent under Article 140911 of the Civil Code.

In arguing that the loan and mortgage contracts are null and void, petitioners would impute all fault therefor to respondent. Yet, petitioners’ averments evince an obvious knowledge and voluntariness on their part to enter into the simulated contracts. We find that fault for the nullity of the contract does not lie at respondent’s feet alone, but at petitioners’ as well. Accordingly, neither party can maintain an action against the other, as provided in Article 1412 of the Civil Code:

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.

Petitioners did not come to court with clean hands. They admit that they never planted sugarcane on any property, much less on the mortgaged property. Yet, they eagerly accepted the proceeds of the simulated sugar crop loans. Petitioners readily participated in the ploy to circumvent the Rural Banks Act and offered no objection when their original loan of P350,000.00was divided into small separate loans not exceeding P50,000.00 each. Clearly, both petitioners and respondent are in pari delicto, and neither should be accorded affirmative relief as against the other.

In Tala Realty Services Corp. v. Banco Filipino Savings and Mortgage Bank,12 we held that whenthe parties are in pari delicto, neither will obtain relief from the court, thus:

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 creationor the use of a juridical relation such as a trust to subvert, directly or indirectly, the law. 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. 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.13

Petitioners stubbornly insist that respondent cannot invoke the pari delicto doctrine, ostensibly because of our obiter in Enrique T. Yuchengco, Inc., et al. v. Velayo.14

In Yuchengco, appellant sold 70% of the subscribed and outstanding capital stock of a Philippine corporation, duly licensed as a tourist operator, to appellees without the required prior notice and approval of the Department of Tourism (DOT). Consequently, the DOT cancelled the corporation’s Local Tour Operator’s License. In turn, appellees asked for a rescission of the saleand demanded the return of the purchase price.

We specifically ruled therein that the pari delicto doctrine is not applicable, because:

The obligation to secure prior Department of Tourism approval devolved upon the defendant (herein appellant) for it was he as the owner vendor who had the duty to give clear title to the properties he was conveying. It was he alone who was charged with knowing about rules attendant to a sale of the assets or shares of his tourist-oriented organization. He should have known that under said rules and regulations, on pain of nullity, shares of stock in his company could not be transferred without prior approval from the Department of Tourism. The failure to secure this approval is attributable to him alone.15

Thus, we declared that even assuming both parties were guilty of the violation, it does not always follow that both parties, being in pari delicto, should be left where they are. We recognized as an exception a situation when courts must interfere and grant relief to one of the

parties because public policy requires their intervention, even if it will result in a benefit derived by a plaintiff who is in equal guilt with defendant.16

In stark contrast to Yuchengco, the factual milieu of the present case does not compel us to grant relief to a party who is in pari delicto. The public policy requiring rural banks to give preference to bona fide small farmers in the grant of loans will not be served if a party, such as petitioners, who had equal participation and equal guilt in the circumvention of the Rural Banks Act, will be allowed to recover the subject property.

The following circumstances reveal the utter poverty of petitioners’ arguments and militate against their bid to recover the subject property:

1. As previously adverted to, petitioners readily and voluntarily accepted the proceeds of the loan, divided into small loans, without question.

2. After failing to redeem the mortgaged subject property, thereby allowing respondentto consolidate title thereto,17 petitioners then entered into a Promise to Sell and made a down payment of P250,000.00.

3. Failing anew to comply with the terms of the Promise to Sell and pay the first yearly installment, only then did petitioners invoke the nullity of the loan and mortgage contracts.

In all, petitioners explicitly recognized respondent’s ownership over the subject property and merely resorted to the void contract argument after they had failed to reacquire the property and a new title thereto in respondent’s name was issued.

We are not unmindful of the fact that the Promise to Sell ultimately allows petitioners to recover the subject property which they were estopped from recovering under the void loan and mortgage contracts. However, the Promise to Sell, although it involves the same parties and subject matter, is a separate and independent contract from that of the void loan and mortgage contracts.

To reiterate, under the void loan and mortgage contracts, the parties, being in pari delicto, cannot recover what they each has given by virtue of the contract.18 Neither can the parties demand performance of the contract. No remedy or affirmative relief can be afforded the parties because of their presumptive knowledge that the transaction was tainted with illegality.19 The courts will not aid either party to an illegal agreement and will instead leave the parties where they find them.20

Consequently, the parties having no cause of action against the other based on a void contract, and possession and ownership of the subject property being ultimately vested in respondent, thelatter can enter into a separate and distinct contract for its alienation. Petitioners recognized respondent’s ownership of the subject property by entering into a Promise to Sell, which expressly designates respondent as the vendor and petitioners as the vendees. At this point, petitioners, originally co-owners and mortgagors of the subject property, unequivocally acquiesced to their new status as buyers thereof. In fact, the Promise to Sell makes no reference whatsoever to petitioners’ previous ownership of the subject property and to the void loan and mortgage contracts.21 On the whole, the Promise to Sell, an independent contract, did not purport to ratify the void loan and mortgage contracts.lawphi1

By its very terms, the Promise to Sell simply intended to alienate to petitioners the subject property according to the terms and conditions contained therein. Article 1370 of the Civil Code reads:

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 stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.

Thus, the terms and conditions of the Promise to Sell are controlling.

Paragraph 5 of the Promise to Sell provides:

5) Provided further, that in case of a delay in any yearly installment for a period of ninety (90) days, this sale will become null and void [without] further effect or validity; and provided further, that payments made shall be reimbursed (returned to the VENDEE less interest on the account plus additional 15% liquidated damages and charges.22

As stipulated in the Promise to Sell, petitioners are entitled to reimbursement of the P250,000.00down payment. We agree with the CA’s holding on this score:

We note, however, that there is no basis for the imposition of interest and additional 15% liquidated damages and charges on the amount to be thus reimbursed. The "Promise to Sell" is separate and distinct from the loan and mortgage contracts earlier executed by the parties. Obviously, after the foreclosure, there is no more loan or account to speak of to justify the said imposition.23

Finally, contrary to petitioners’ contention, the CA, in denying petitioners’ appeal, did not commit an error; it did not ratify a void contract because void contracts cannot be ratified. The CA simplyrefused to grant the specific relief of recovering the subject property prayed for by petitioners. Nonetheless, it ordered respondent to reimburse petitioners for their down payment of P250,000.00 and disallowed respondent’s claim for actual, moral and exemplary damages and attorney’s fees.

WHEREFORE, premises considered, the petition is hereby DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 40613 is hereby AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. 169055 February 22, 2012

SPOUSES JOSE and MILAGROS VILLACERAN and FAR EAST BANK & TRUST COMPANY, Petitioners, vs.JOSEPHINE DE GUZMAN, Respondent.

Before us is a petition for review on certiorari assailing the November 26, 2004 Decision1 and June 29, 2005 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 71831. The CA had affirmed with modification the Decision3 of the Regional Trial Court (RTC), Branch 24, of Echague, Isabela, in Civil Case No. 24-0495 entitled "Josephine De Guzman vs. Spouses Jose and Milagros Villaceran, et al."

The antecedent facts follow:

Josephine De Guzman filed a Complaint4 with the RTC of Echague, Isabela against the spousesJose and Milagros Villaceran and Far East Bank & Trust Company (FEBTC), Santiago City Branch, for declaration of nullity of sale, reconveyance, redemption of mortgage and damages with preliminary injunction. The complaint was later amended to include annulment of foreclosure and Sheriff’s Certificate of Sale.

In her Amended Complaint,5 De Guzman alleged that she is the registered owner of a parcel of land covered by Transfer Certificate of Title (TCT) No. T-236168,6 located in Echague, Isabela, having an area of 971 square meters and described as Lot 8412-B of the Subdivision Plan Psd-93948. On April 17, 1995, she mortgaged the lot to the Philippine National Bank (PNB) of Santiago City to secure a loan of P600,000. In order to secure a bigger loan to finance a business venture, De Guzman asked Milagros Villaceran to obtain an additional loan on her behalf. She executed a Special Power of Attorney in favor of Milagros. Considering De Guzman’s unsatisfactory loan record with the PNB, Milagros suggested that the title of the property be transferred to her and Jose Villaceran and they would obtain a bigger loan as they have a credit line of up to P5,000,000 with the bank.

On June 19, 1996, De Guzman executed a simulated Deed of Absolute Sale7 in favor of the spouses Villaceran. On the same day, they went to the PNB and paid the amount of P721,891.67 using the money of the spouses Villaceran. The spouses Villaceran registered the Deed of Sale and secured TCT No. T-2574168 in their names. Thereafter, they mortgaged the property with FEBTC Santiago City to secure a loan of P1,485,000. However, the spouses Villaceran concealed the loan release from De Guzman. Later, when De Guzman learned of the loan release, she asked for the loan proceeds less the amount advanced by the spouses Villaceran to pay the PNB loan. However, the spouses Villaceran refused to give the money stating that they are already the registered owners of the property and that they would reconvey the property to De Guzman once she returns theP721,891.67 they paid to PNB.9

De Guzman offered to pay P350,000 provided that the spouses Villaceran would execute a deedof reconveyance of the property. In view of the simulated character of their transaction, the spouses Villaceran executed a Deed of Absolute Sale10 dated September 6, 1996 in favor of De Guzman. They also promised to pay their mortgage debt with FEBTC to avoid exposing the property to possible foreclosure and auction sale. However, the spouses Villaceran failed to settle the loan and subsequently the property was extrajudicially foreclosed. A Sheriff’s Certificate of Sale was issued in favor of FEBTC for the amount of P3,594,000. De Guzman asserted that the spouses Villaceran should be compelled to redeem their mortgage so as not toprejudice her as the real owner of the property.11

On the other hand, the spouses Villaceran and FEBTC, in their Amended Answer,12 averred that in 1996 De Guzman was introduced to Milagros by a certain Digna Maranan. Not long afterwards, De Guzman requested Milagros to help her relative who had a loan obligation with the PNB in the amount of P300,000. As a consideration for the accommodation, De Guzman would convey her property located at Maligaya, Echague, Isabela which was then being held in trust by her cousin, Raul Sison. Because of this agreement, Milagros paid De Guzman’s obligation with the PNB in the amount of P300,000.

When Milagros asked for the title of the lot, De Guzman explained that her cousin would not partwith the property unless he is reimbursed the amount of P200,000 representing the amount he spent tilling the land. Milagros advanced the amount of P200,000 but De Guzman’s cousin still refused to reconvey the property. In order for De Guzman to settle her obligation, she offered to sell her house and lot in Echague, Isabela. At first, Milagros signified her non-interest in acquiring the same because she knew that it was mortgaged with the PNB Santiago for P600,000. De Guzman proposed that they will just secure a bigger loan from another bank using her house and lot as security. The additional amount will be used in settling De Guzman’s obligation with PNB. Later, De Guzman proposed that she borrow an additional amount from Milagros which she will use to settle her loan with PNB. To this request, Milagros acceded. Hence, they went to the PNB and paid in full De Guzman’s outstanding obligation with PNB which already reached P880,000.13

Since De Guzman’s total obligation already reached P1,380,000, the spouses Villaceran requested her to execute a deed of absolute sale over the subject property in their favor. Thus, the Deed of Absolute Sale is supported by a valuable consideration, and the spouses Villaceran

became the lawful owners of the property as evidenced by TCT No. 257416 issued by the Officeof the Register of Deeds of Isabela. Later, they mortgaged the property to FEBTC for P1,485,000.

The spouses Villaceran denied having executed a deed of conveyance in favor of De Guzman relative to the subject property and asserted that the signatures appearing on the September 6, 1996 Deed of Sale, which purported to sell the subject property back to De Guzman, are not genuine but mere forgeries.14

After due proceedings, the trial court rendered its decision on September 27, 2000.

The RTC ruled that the Deed of Sale dated June 19, 1996 executed by De Guzman in favor of the spouses Villaceran covering the property located in Echague, Isabela was valid and binding on the parties. The RTC ruled that the said contract was a relatively simulated contract, simulated only as to the purchase price, but nonetheless binding upon the parties insofar as their true agreement is concerned. The RTC ruled that De Guzman executed the Deed of Absolute Sale dated June 19, 1996 so that the spouses Villaceran may use the property located in Echague, Isabela as collateral for a loan in view of De Guzman’s need for additional capital to finance her business venture. The true consideration for the sale, according to the RTC, was the P300,000 the spouses Villaceran gave to De Guzman plus the P721,891.67 they paid to PNB in order that the title to the subject property may be released and used to secure a bigger loan in another bank.

The RTC also found that although the spouses Villaceran had already mortgaged the subject property with FEBTC and the title was already in the possession of FEBTC -- which facts were known to De Guzman who even knew that the loan proceeds amounting to P1,485,000 had been released -- the spouses Villaceran were nonetheless still able to convince De Guzman thatthey could still reconvey the subject property to her if she pays the amount they had paid to PNB. The RTC found that the Deed of Sale dated September 6, 1996 was actually signed by thespouses Villaceran although De Guzman was able to pay only P350,000, which amount was stated in said deed of sale as the purchase price. The RTC additionally said that the spouses Villaceran deceived De Guzman when the spouses Villaceran mortgaged the subject property with the understanding that the proceeds would go to De Guzman less the amounts the spouseshad paid to PNB. Hence, according to the RTC, the spouses Villaceran should return to De Guzman (1) the P350,000 which she paid to them in consideration of the September 6, 1996 Deed of Sale, which sale did not materialize because the title was in the possession of FEBTC; and (2) the amount of P763,108.33 which is the net proceeds of the loan after deducting theP721,891.67 that the spouses paid to PNB. Thus, the decretal portion of the RTC decision reads:

WHEREFORE, judgment is hereby rendered as follows:

a) declaring the Deed of Sale, dated June 1996 (Exhibit "B") as valid and binding;

b) ordering defendants Villaceran to pay to plaintiff the amount of P763,108.33 and P350,000.00 or the total amount of P1,113,108.33 plus the legal rate of interest starting from the date of the filing of this case;

c) declaring the Extrajudicial Foreclosure and the Certificate of Sale as valid;

d) ordering defendants Villaceran to pay attorney’s fees in the amount of P20,000.00 and to pay the costs of suit.

SO ORDERED.15

Aggrieved, the spouses Villaceran appealed to the CA arguing that the trial court erred in declaring the June 19, 1996 Deed of Sale as a simulated contract and ordering them to pay De Guzman P1,113,108.33 plus legal rate of interest and attorney’s fees.16

On November 26, 2004, the CA rendered its Decision, the dispositive portion of which reads as follows:

IN VIEW OF ALL THE FOREGOING, the judgment appealed from is hereby AFFIRMED with MODIFICATION, to read as follows:

WHEREFORE, judgment is hereby rendered as follows:

1. Declaring the Deed of Sale dated June 16, 1996 (Exh. "B") and September 6, 1996,as not reflective of the true intention of the parties, as the same were merely executedfor the purpose of the loan accommodation in favor of the plaintiff-appellee by the defendants-appellants;

2. Ordering defendants-appellants Villaceran to pay plaintiff-appellee the difference between the FEBTCloan of P1,485,000.00 less P721,891.67 (used to redeem the PNB loan), plus legal interest thereon starting from the date of the filing of this case;

3. Declaring the extrajudicial foreclosure and certificate of sale in favor of FEBTC, as valid; and

4. For the appellants to pay the costs of the suit.

SO ORDERED.17

The CA ruled that the RTC was correct in declaring that there was relative simulation of contract because the deeds of sale did not reflect the true intention of the parties. It found that the evidence established that the documents were executed for the purpose of an agency to secure a higher loan whereby the spouses Villaceran only accommodated De Guzman. However, the CA did not find any evidence to prove that De Guzman actually parted away with the P350,000 as consideration of the reconveyance of the property. Thus, it held the trial court erred in ordering the spouses Villaceran to return the P350,000 to De Guzman.

Furthermore, the CA observed that the spouses Villaceran were the ones who redeemed the property from the mortgage with PNB by paying P721,891.67 so that De Guzman’s title could bereleased. Once registered in their name, the spouses Villaceran mortgaged the property with FEBTC for P1,485,000. With the loan proceeds ofP1,485,000, there was no need for the spouses Villaceran to demand for the return of the P721,891.67 they paid in releasing the PNB loan before the property is reconveyed to De Guzman. All they had to do was to deduct theamount of P721,891.67 from the P1,485,000 FEBTC loan proceeds. Hence, the CA ruled that only the balance of the P1,485,000 loan proceeds from FEBTC minus the P721,891.67 used to redeem the PNB loan should be paid by the spouses Villaceran to De Guzman. The CA also deleted the grant of attorney’s fees for lack of factual, legal or equitable justification.

On December 22, 2004, the spouses Villaceran filed a motion for reconsideration of the foregoing decision. Said motion, however, was denied for lack of merit by the CA in its Resolution dated June 29, 2005. Hence, this appeal.

In their petition for review on certiorari, the spouses Villaceran allege that:

1. THE RESPONDENT COURT OF APPEALS ERRED AND GRAVELY ABUSED ITSDISCRETION IN DECLARING THE DEED OF SALE DATED JUNE 19, 1996 AS SIMULATED AND THAT THE SAME WAS MERELY EXECUTED FOR THE PURPOSE OF THE LOAN ACCOMODATION OF PETITIONERS VILLACERAN IN FAVOR OF THE RESPONDENT DE GUZMAN INSTEAD OF DECLARING SAID DEED AS A VALID DEED OF ABSOLUTE SALE, THE CONTENTS OF WHICH ARE CLEARLY REFLECTIVE OF THEIR TRUE INTENTION TO ENTER INTO A CONTRACT OF SALE AND NOT OTHERWISE, IN DIRECT CONTRAVENTION OF THE RULES ON EVIDENCE AND OF THE ADMISSIONS OF THE PARTIES AND THE HONORABLE COURT’S RULINGS OR JURISPRUDENCE ON THE MATTER; AND

2. THE RESPONDENT COURT OF APPEALS ERRED AND GRAVELY ABUSED ITSDISCRETION IN ORDERING PETITIONERS VILLACERAN TO PAY RESPONDENT DE GUZMAN THE DIFFERENCE BETWEEN THE FAR EAST BANK AND TRUST COMPANY (FEBTC) LOAN OF PHP1,485,000.00 LESS P721,891.67 (USED TO PAYTHE PHILIPPINE NATIONAL BANK [PNB] LOAN) PLUS LEGAL INTEREST THEREON AND TO PAY THE COSTS OF SUIT.18

Essentially, the issue for our resolution is whether the CA erred in ruling that the Deed of Sale dated June 19, 1996 is a simulated contract and not a true sale of the subject property.

Petitioners contend that the previous loans they extended to De Guzman in the amounts of P300,000, P600,000 and P200,000 should have been considered by the CA. When added to the P721,891.67 used to settle the PNB loan, De Guzman’s total loan obtained from them wouldamount to P1,821,891.67. Thus, it would clearly show that the Deed of Sale dated June 19, 1996, being supported by a valuable consideration, is not a simulated contract.

We do not agree.

Article 134519 of the Civil Code provides that the simulation of a contract may either be absolute or relative. In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties.20 As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract. However, if the parties state a false cause in the contract to conceal their real agreement, the contract is only relatively simulated and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest.21

The primary consideration in determining the true nature of a contract is the intention of the parties. If the words of a contract appear to contravene the evident intention of the parties, the latter shall prevail. Such intention is determined not only from the express terms of their agreement, but also from the contemporaneous and subsequent acts of the parties.22 In the caseat bar, there is a relative simulation of contract as the Deed of Absolute Sale dated June 19,

1996 executed by De Guzman in favor of petitioners did not reflect the true intention of the parties.

It is worthy to note that both the RTC and the CA found that the evidence established that the aforesaid document of sale was executed only to enable petitioners to use the property as collateral for a bigger loan, by way of accommodating De Guzman. Thus, the parties have agreed to transfer title over the property in the name of petitioners who had a good credit line with the bank. The CA found it inconceivable for De Guzman to sell the property for P75,000 as stated in the June 19, 1996 Deed of Sale when petitioners were able to mortgage the property with FEBTC for P1,485,000. Another indication of the lack of intention to sell the property is when a few months later, on September 6, 1996, the same property, this time already registeredin the name of petitioners, was reconveyed to De Guzman allegedly for P350,000.

As regards petitioners’ assertion that De Guzman’s previous loans should have been consideredto prove that there was an actual sale, the Court finds the same to be without merit. Petitioners failed to present any evidence to prove that they indeed extended loans to De Guzman in the amounts of P300,000, P600,000 and P200,000. We note that petitioners tried to explain that on account of their close friendship and trust, they did not ask for any promissory note, receipts or documents to evidence the loan. But in view of the substantial amounts of the loans, they shouldhave been duly covered by receipts or any document evidencing the transaction. Consequently, no error was committed by the CA in holding that the June 19, 1996 Deed of Absolute Sale was a simulated contract.

The issue of the genuineness of a deed of sale is essentially a question of fact.1âwphi1 It is settled that this Court is not duty-bound to analyze and weigh again the evidence considered in the proceedings below. This is especially true where the trial court’s factual findings are adoptedand affirmed by the CA as in the present case. Factual findings of the trial court, affirmed by the CA, are final and conclusive and may not be reviewed on appeal.23

The Court has time and again ruled that conclusions and findings of fact of the trial court are entitled to great weight and should not be disturbed on appeal, unless strong and cogent reasons dictate otherwise. This is because the trial court is in a better position to examine the real evidence, as well as to observe the demeanor of the witnesses while testifying in the case.24 In sum, the Court finds that there exists no reason to disturb the findings of the CA.

WHEREFORE, the petition for review on certiorari is DENIED. The Decision dated November 26, 2004 and Resolution dated June 29, 2005 of the Court of Appeals in CA-G.R. CV No. 71831 are AFFIRMED.

With costs against the petitioners. 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.

D E C I S I O N

MENDOZA, J.:

This is a "Petition for Review on Certiorari (under Rule 45)" of the Rules of Court assailing the June 16, 2009 Decision1 of the Court of Appeals (CA) in CA-GR. CV No. 81469 entitled "Milagros De Belen Vda de Cabalu v. 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 July27, 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, theyrefused 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 Decision10reads:

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 ofRenato 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 saidinstrument were also void and should be cancelled.

Respondent spouses, in their Comment15 and Memorandum,16 counter that the issues raised arenot questions of law 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 ofDomingo, 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 subjectproperty. 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 atthe 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 Laxamanain 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. 173211 October 11, 2012

HEIRS OF DR. MARIO S. INTAC and ANGELINA MENDOZA-INTAC, Petitioners, vs.COURT OF APPEALS and SPOUSES MARCELO ROY, JR. and JOSEFINA MENDOZA-ROY and SPOUSES DOMINADOR LOZADA and MARTINA MENDOZA-LOZADA, Respondents.

D E C I S I O N

MENDOZA, J.:

This is a Petition for Review on Certiorari under Rule 45 assailing the February 16, 2006 Decision1 of the Court of Appeals (CA), in CA G.R. CV No. 75982, which modified the April 30, 2002 Decision2 of the Regional Trial Court, Branch 220, Quezon City ( RTC), in Civil Case No. Q-94-19452, an action for cancellation of transfer certificate of title and reconveyance of property.

The Facts

From the records, it appears that Ireneo Mendoza (Ireneo), married to Salvacion Fermin (Salvacion), was the owner of the subject property, presently covered by TCT No. 242655 of the Registry of Deeds of Quezon City and situated at No. 36, Road 8, Bagong Pag-asa, Quezon City, which he purchased in 1954. Ireneo had two children: respondents Josefina and Martina (respondents), Salvacion being their stepmother. When he was still alive, Ireneo, also took care of his niece, Angelina, since she was three years old until she got married. The property was then covered by TCT No. 106530 of the Registry of Deeds of Quezon City. On October 25, 1977, Ireneo, with the consent of Salvacion, executed a deed of absolute sale of the property in favor of Angelina and her husband, Mario (Spouses Intac). Despite the sale, Ireneo and his family, including the respondents, continued staying in the premises and paying the realty taxes.After Ireneo died intestate in 1982, his widow and the respondents remained in the premises.3 After Salvacion died, respondents still maintained their residence there. Up to the present, they are in the premises, paying the real estate taxes thereon, leasing out portions of the property, and collecting the rentals.4

The Dispute

The controversy arose when respondents sought the cancellation of TCT No. 242655, claiming that the sale was only simulated and, therefore, void. Spouses Intac resisted, claiming that it was a valid sale for a consideration.

On February 22, 1994, respondents filed the Complaint for Cancellation of Transfer Certificate ofTitle (TCT) No. 2426555 against Spouses Intac before the RTC. The complaint prayed not only for the cancellation of the title, but also for its reconveyance to them. Pending litigation, Mario died on May 20, 1995 and was substituted by his heirs, his surviving spouse, Angelina, and theirchildren, namely, Rafael, Kristina, Ma. Tricia Margarita, Mario, and Pocholo, all surnamed Intac (petitioners).

Averments of the Parties

In their Complaint, respondents alleged, among others, that when Ireneo was still alive, SpousesIntac borrowed the title of the property (TCT No. 106530) from him to be used as collateral for a loan from a financing institution; that when Ireneo informed respondents about the request of Spouses Intac, they objected because the title would be placed in the names of said spouses and it would then appear that the couple owned the property; that Ireneo, however, tried to appease them, telling them not to worry because Angelina would not take advantage of the situation considering that he took care of her for a very long time; that during his lifetime, he informed them that the subject property would be equally divided among them after his death; and that respondents were the ones paying the real estate taxes over said property.

It was further alleged that after the death of Ireneo in 1982, a conference among relatives was held wherein both parties were present including the widow of Ireneo, Salvacion; his nephew, Marietto Mendoza (Marietto); and his brother, Aurelio Mendoza (Aurelio). In the said conference,it was said that Aurelio informed all of them that it was Ireneo’s wish to have the property dividedamong his heirs; that Spouses Intac never raised any objection; and that neither did they inform all those present on that occasion that the property was already sold to them in 1977.6

Respondents further alleged that sometime in 1993, after the death of Salvacion, rumors spread in the neighborhood that the subject property had been registered in the names of Spouses Intac; that upon verification with the Office of the Register of Deeds of Quezon City, respondentswere surprised to find out that TCT No. 106530 had indeed been cancelled by virtue of the deed of absolute sale executed by Ireneo in favor of Spouses Intac, and as a result, TCT No. 242655 was issued in their names; that the cancellation of TCT No. 106530 and the subsequent issuance of TCT No. 242655 were null and void and had no legal effect whatsoever because thedeed of absolute sale was a fictitious or simulated document; that the Spouses Intac were guilty of fraud and bad faith when said document was executed; that Spouses Intac never informed respondents that they were already the registered owners of the subject property although they had never taken possession thereof; and that the respondents had been in possession of the subject property in the concept of an owner during Ireneo’s lifetime up to the present.

In their Answer,7 Spouses Intac countered, among others, that the subject property had been transferred to them based on a valid deed of absolute sale and for a valuable consideration; thatthe action to annul the deed of absolute sale had already prescribed; that the stay of respondents in the subject premises was only by tolerance during Ireneo’s lifetime because theywere not yet in need of it at that time; and that despite respondents’ knowledge about the sale that took place on October 25, 1977, respondents still filed an action against them.

Ruling of the RTC

On April 30, 2002, the RTC rendered judgment in favor of respondents and against Spouses Intac. The dispositive portion of its Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered:

(1) Declaring the Deed of Absolute Sale executed by Ireneo Mendoza in favor of Mario and Angelina Intac dated October 25, 1977 as an equitable mortgage;

(2) Ordering the Register of Deeds of Quezon City to cancel Transfer Certificate Title No. 242655 and, in lieu thereof, issue a new Transfer Certificate of Title in the name ofIreneo Mendoza; and

(3) Ordering defendants to pay plaintiffs the amount of Thirty Thousand Pesos (Php30,000.00) as and for attorney’s fees.

The other claims for damages are hereby denied for lack of merit.

SO ORDERED.8

The RTC ruled, among others, that the sale between Ireneo and Salvacion, on one hand, and Spouses Intac was null and void for being a simulated one considering that the said parties had no intention of binding themselves at all. It explained that the questioned deed did not reflect the true intention of the parties and construed the said document to be an equitable mortgage on thefollowing grounds: 1 the signed document did not express the real intention of the contracting parties because Ireneo signed the said document only because he was in urgent need of funds; 2 the amount of ₱60,000.00 in 1977 was too inadequate for a purchase price of a 240-square meter lot located in Quezon City; 3 Josefina and Martina continued to be in possession ofthe subject property from 1954 and even after the alleged sale took place in 1977 until this case was filed in 1994; and 4 the Spouses Intac started paying real estate taxes only in 1999. The RTC added that the Spouses Intac were guilty of fraud because they effected the registration of the subject property even though the execution of the deed was not really intended to transfer the ownership of the subject property.

Ruling of the CA

On appeal, the CA modified the decision of the RTC. The CA ruled that the RTC erred in first declaring the deed of absolute sale as null and void and then interpreting it to be an equitable mortgage. The CA believed that Ireneo agreed to have the title transferred in the name of the Spouses Intac to enable them to facilitate the processing of the mortgage and to obtain a loan. This was the exact reason why the deed of absolute sale was executed. Marietto testified that Ireneo never intended to sell the subject property to the Spouses Intac and that the deed of sale was executed to enable them to borrow from a bank. This fact was confirmed by Angelina herself when she testified that she and her husband mortgaged the subject property sometime inJuly 1978 to finance the construction of a small hospital in Sta. Cruz, Laguna.

The CA further observed that the conduct of Spouses Intac belied their claim of ownership. When the deed of absolute sale was executed, Spouses Intac never asserted their ownership over the subject property, either by collecting rents, by informing respondents of their ownership or by demanding possession of the land from its occupants. It was not disputed that it was respondents who were in possession of the subject property, leasing the same and collecting rentals. Spouses Intac waited until Ireneo and Salvacion passed away before they disclosed the transfer of the title to respondents. Hence, the CA was of the view that the veracity of their claim of ownership was suspicious.

Moreover, wrote the CA, although Spouses Intac claimed that the purchase of the subject property was for a valuable consideration (P60,000.00), they admitted that they did not have anyproof of payment. Marietto, whose testimony was assessed by the RTC to be credible, testified that there was no such payment because Ireneo never sold the subject property as he had no intention of conveying its ownership and that his only purpose in lending the title was to help Spouses Intac secure a loan. Thus, the CA concluded that the deed of absolute sale was a simulated document and had no legal effect.

Finally, the CA stated that even assuming that there was consent, the sale was still null and voidbecause of lack of consideration. The decretal portion of the CA Decision reads:

WHEREFORE, in view of the foregoing premises, the decision of the Regional Trial Court of Quezon City, Branch 220, is AFFIRMED with modifications, as follows:

1. The Deed of Absolute Sale dated October 25, 1977 executed by Ireneo Mendoza and Salvacion Fermen in favor of Spouses Mario and Angelina Intac is hereby declared NULL AND VOID;

2. the Register of Deed[s] of Quezon City is ordered to cancel TCT No. 242655 and, inlieu thereof, issue a new one and reinstate Ireneo Mendoza as the registered owner;

3. The defendant appellants are hereby ordered to pay the plaintiff appellees the amount of thirty thousand pesos (Php30,000.00) as and for attorney’s fees; and

4. The other claims for damages are denied for lack of merit.

SO ORDERED.9

Not in conformity, petitioners filed this petition for review anchored on the following

ASSIGNMENT OF ERRORS

I

THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT AFFIRMED THE DECISION OF THE REGIONAL TRIAL COURT DATED FEBRUARY 16, 2006 WHICH WAS CONTRARY TO THE APPLICABLE LAWS AND EXISTING JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT CLEARLY OVERLOOKED, MISUNDERSTOOD AND/OR MISAPPLIED THE EVIDENCE PRESENTED IN THE COURT A QUO.10

Petitioners’ position

Petitioners primarily argue that the subject deed of sale was a valid and binding contract between the parties. They claim that all the elements of a valid contract of sale were present, to wit: [a] consent or meeting of the minds, that is, consent to transfer ownership in exchange of price; [b] determinate subject matter; and [c] price certain in money or its equivalent.

Petitioners claim that respondents have validly gave their consent to the questioned sale of the subject property. In fact, it was Ireneo and Salvacion who approached them regarding their intention to sell the subject property. Ireneo and Salvacion affixed their signatures on the questioned deed and never brought any action to invalidate it during their lifetime. They had all the right to sell the subject property without having to inform their children of their intention to sellthe same. Ordinary human experience dictates that a party would not affix his or her signature on any written instrument which would result in deprivation of one’s property right if there was really no intention to be bound by it. A party would not keep silent for several years regarding thevalidity and due execution of a document if there was an issue on the real intention of the vendors. The signatures of Ireneo and Salvacion meant that they had knowingly and willfully entered into such agreement and that they were prepared for the consequences of their act.

Respondents’ Position

Respondents are of the position that the RTC and the CA were correct in ruling that the questioned deed of absolute sale was a simulated one considering that Ireneo and Salvacion had no intention of selling the subject property. The true intention rather was that Spouses Intac would just borrow the title of the subject property and offer it as a collateral to secure a loan. No money actually changed hands.

According to respondents, there were several circumstances which put in doubt the validity of the deed of absolute sale. First, the parties were not on equal footing because Angelina was a doctor by profession while Ireneo and Salvacion were less educated people who were just motivated by their trust, love and affection for her whom they considered as their own child. Second, if there was really a valid sale, it was just and proper for Spouses Intac to divulge the conveyance to respondents, being compulsory heirs, but they did not. Third, Ireneo and Salvacion did nothing to protect their interest because they banked on the representation of Spouses Intac that the title would only be used to facilitate a loan with a bank. Fourth, Ireneo and Salvacion remained in possession of the subject property without being disturbed by Spouses Intac. Fifth, the price of the sale was inadequate and inequitable for a prime property located in Pag-asa, Quezon City. Sixth, Ireneo and Salvacion had no intention of selling the subject property because they had heirs who would inherit the same. Seventh, the Spouses Intac abused the trust and affection of Ireneo and Salvacion by arrogating unto themselves the ownership of the subject property to the prejudice of his own children, Josefina and Martina.

Finally, petitioners could not present a witness to rebut Marietto’s testimony which was straightforward and truthful.

The Court’s Ruling

Basically, the Court is being asked to resolve the issue of whether the Deed of Absolute Sale,11 dated October 25, 1977, executed by and between Ireneo Mendoza and Salvacion Fermin, as vendors, and Mario Intac and Angelina Intac, as vendees, involving the subject real property in Pagasa, Quezon City, was a simulated contract or a valid agreement.

The Court finds no merit in the petition.

A contract, as defined in the Civil Code, is a meeting of minds, with respect to the other, to give something or to render some service. Article 1318 provides:

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

Accordingly, for a contract to be valid, it must have three essential elements: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause ofthe obligation which is established.12

All these elements must be present to constitute a valid contract. Consent is essential to the existence of a contract; and where it is wanting, the contract is non-existent. In a contract of sale, its perfection is consummated at the moment there is a meeting of the minds upon the

thing that is the object of the contract and upon the price. Consent is manifested by the meeting of the offer and the acceptance of the thing and the cause, which are to constitute the contract.

In this case, the CA ruled that the deed of sale executed by Ireneo and Salvacion was absolutelysimulated for lack of consideration and cause and, therefore, void. Articles 1345 and 1346 of theCivil Code provide:

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when theparties do not intend to be bound at all; the latter, when the parties conceal their true agreement.

Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.

If the parties state a false cause in the contract to conceal their real agreement, the contract is only relatively simulated and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest.13

In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. "The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties."14 "As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract."15

In the case at bench, the Court is one with the courts below that no valid sale of the subject property actually took place between the alleged vendors, Ireneo and Salvacion; and the allegedvendees, Spouses Intac. There was simply no consideration and no intent to sell it.

Critical is the testimony of Marietto, a witness to the execution of the subject absolute deed of sale. He testified that Ireneo personally told him that he was going to execute a document of sale because Spouses Intac needed to borrow the title to the property and use it as collateral fortheir loan application. Ireneo and Salvacion never intended to sell or permanently transfer the full ownership of the subject property to Spouses Intac. Marietto was characterized by the RTC as a credible witness.

Aside from their plain denial, petitioners failed to present any concrete evidence to disprove Marietto’s testimony. They claimed that they actually paid P150,000.00 for the subject property. They, however, failed to adduce proof, even by circumstantial evidence, that they did, in fact, pay it. Even for the consideration of P60,000.00 as stated in the contract, petitioners could not show any tangible evidence of any payment therefor. Their failure to prove their payment only strengthened Marietto’s story that there was no payment made because Ireneo had no intention to sell the subject property.

Angelina’s story, except on the consideration, was consistent with that of Marietto. Angelina testified that she and her husband mortgaged the subject property sometime in July 1978 to finance the construction of a small hospital in Sta. Cruz, Laguna. Angelina claimed that Ireneo offered the property as he was in deep financial need.

Granting that Ireneo was in financial straits, it does not prove that he intended to sell the property to Angelina. Petitioners could not adduce any proof that they lent money to Ireneo or

that he shared in the proceeds of the loan they had obtained. And, if their intention was to build a hospital, could they still afford to lend money to Ireneo? And if Ireneo needed money, why would he lend the title to Spouses Intac when he himself could use it to borrow money for his needs? If Spouses Intac took care of him when he was terminally ill, it was not surprising for Angelina to reciprocate as he took care of her since she was three (3) years old until she got married. Their caring acts for him, while they are deemed services of value, cannot be considered as consideration for the subject property for lack of quantification and the Filipino culture of taking care of their elders.

Thus, the Court agrees with the courts below that the questioned contract of sale was only for the purpose of lending the title of the property to Spouses Intac to enable them to secure a loan. Their arrangement was only temporary and could not give rise to a valid sale. Where there is no consideration, the sale is null and void ab initio. In the case of Lequin v. Vizconde,16 the Court wrote:

There can be no doubt that the contract of sale or Kasulatan lacked the essential element of consideration. It is a well-entrenched rule that where the deed of sale states that the purchase price has been paid but in fact has never been paid, the deed of sale is null and void ab initio for lack of consideration. Moreover, Art. 1471 of the Civil Code, which provides that "if the price is simulated, the sale is void," also applies to the instant case, since the price purportedly paid as indicated in the contract of sale was simulated for no payment was actually made.

Consideration and consent are essential elements in a contract of sale.1âwphi1 Where a party’s consent to a contract of sale is vitiated or where there is lack of consideration due to a simulatedprice, the contract is null and void ab initio. [Emphases supplied]

More importantly, Ireneo and his family continued to be in physical possession of the subject property after the sale in 1977 and up to the present. They even went as far as leasing the sameand collecting rentals. If Spouses Intac really purchased the subject property and claimed to be its true owners, why did they not assert their ownership immediately after the alleged sale took place? Why did they have to assert their ownership of it only after the death of Ireneo and Salvacion? One of the most striking badges of absolute simulation is the complete absence of any attempt on the part of a vendee to assert his right of dominion over the property.17

On another aspect, Spouses Intac failed to show that they had been paying the real estate taxesof the subject property. They admitted that they started paying the real estate taxes on the property for the years 1996 and 1997 only in 1999. They could only show two (2) tax receipts (Real Property Tax Receipt No. 361105, dated April 21, 1999, and Real Property Tax Receipt No. 361101, dated April 21, 1999).18 Noticeably, petitioners’ tax payment was just an afterthought. The non-payment of taxes was also taken against the alleged vendees in the case of Lucia Carlos Aliño v. Heirs of Angelica A. Lorenzo.19 Thus,

Furthermore, Lucia religiously paid the realty taxes on the subject lot from 1980 to 1987.While tax receipts and declarations of ownership for taxation purposes are not, in themselves, incontrovertible evidence of ownership, they constitute at least proof that the holder has a claim of title over the property, particularly when accompanied by proof of actual possession. They aregood indicia of the possession in the concept of owner, for no one in his right mind would be paying taxes for a property that is not in his actual or at least constructive possession. The voluntary declaration of a piece of property for taxation purposes manifests not only one's sincere and honest desire to obtain title to the property and announces his adverse claim against the State and all other interested parties, but also the intention to contribute needed revenues to the Government. Such an act strengthens one's bona fide claim of acquisition of ownership.

On the other hand, respondent heirs failed to present evidence that Angelica, during her lifetime,paid the realty taxes on the subject lot. They presented only two tax receipts showing that Servillano, Sr. belatedly paid taxes due on the subject lot for the years 1980-1981 and part of year 1982 on September 8, 1989, or about a month after the institution of the complaint on August 3, 1989, a clear indication that payment was made as an afterthought to give the semblance of truth to their claim.

Thus, the subsequent acts of the parties belie the intent to be bound by the deed of sale. [Emphases supplied]

The primary consideration in determining the true nature of a contract is the intention of the parties. If the words of a contract appear to contravene the evident intention of the parties, the latter shall prevail. Such intention is determined not only from the express terms of their agreement, but also from the contemporaneous and subsequent acts of the parties.20 As heretofore shown, the contemporaneous and subsequent acts of both parties in this case, point to the fact that the intention of Ireneo was just to lend the title to the Spouses Intac to enable them to borrow money and put up a hospital in Sta. Cruz, Laguna. Clearly, the subject contract was absolutely simulated and, therefore, void.

In view of the foregoing, the Court finds it hard to believe the claim of the Spouses Intac that the stay of Ireneo and his family in the subject premises was by their mere tolerance as they were not yet in need of it. As earlier pointed out, no convincing evidence, written or testimonial, was ever presented by petitioners regarding this matter. It is also of no moment that TCT No. 106530covering the subject property was cancelled and a new TCT (TCT No. 242655)21 was issued in their names. The Spouses Intac never became the owners of the property despite its registrationin their names. After all, registration does not vest title.

As a logical consequence, petitioners did not become the owners of the subject property even after a TCT had been issued in their names. After all, registration does not vest title. Certificates of title merely confirm or record title already existing and vested. They cannot be used to protect a usurper from the true owner, nor can they be used as a shield for the commission of fraud, or to permit one to enrich oneself at the expense of others. Hence, reconveyance of the subject property is warranted.22

The Court does not find acceptable either the argument of the Spouses Intac that respondents’ action for cancellation of TCT No. 242655 and the reconveyance of the subject property is already barred by the Statute of Limitations. The reason is that the respondents are still in actualpossession of the subject property. It is a well-settled doctrine that "if the person claiming to be the owner of the property is in actual possession thereof, the right to seek reconveyance, which in effect seeks to quiet title to the property, does not prescribe."23 In Lucia Carlos Aliño, it was also written:

The lower courts fault Lucia for allegedly not taking concrete steps to recover the subject lot, demanding its return only after 10 years from the registration of the title. They, however, failed toconsider that Lucia was in actual possession of the property.

It is well-settled that an action for reconveyance prescribes in 10 years, the reckoning point of which is the date of registration of the deed or the date of issuance of the certificate of title over the property. In an action for reconveyance, the decree of registration is highly regarded as incontrovertible. What is sought instead is the transfer of the property or its title, which has been erroneously or wrongfully registered in another person's name, to its rightful or legal owner or to one who has a better right.

However, in a number of cases in the past, the Court has consistently ruled that if the person claiming to he the owner of the property is in actual possession thereof, the right to seek reconveyance, which in effect seeks to quiet title to the property, does not prescribe. The reasonfor this is that one who is in actual possession of a piece of land claiming to be the owner thereofmay wait until his possession is disturbed or his title is attacked before taking steps to vindicate his right. The reason being, that his undisturbed possession gives him the continuing right to seek the aid of a court of equity to ascertain the nature of the adverse claim of a third party and its effect on his title, which right can be claimed only by one who is in possession. Thus, considering that Lucia continuously possessed the subject lot, her right to institute a suit to clear the cloud over her title cannot he barred by the statute of limitations.:24[Emphases supplied]

WHEREFORE, the petition is DENIED.

SO ORDERED.

G.R. No. 183774 November 14, 2012

PHILIPPINE BANKING CORPORATION, Petitioner, vs.ARTURO DY, BERNARDO DY, JOSE DELGADO AND CIPRIANA DELGADO, Respondents.

The Factual Antecedents

Cipriana was the registered owner of a 58,129-square meter (sq.m.) lot, denominated as Lot No.6966, situated in Barrio Tongkil, Minglanilla, Cebu, covered by TCT No. 18568. She and her husband, respondent Jose Delgado (Jose), entered into an agreement with a certain Cecilia Tan(buyer) for the sale of the said property for a consideration of P10.00/sq.m. It was agreed that the buyer shall make partial payments from time to time and pay the balance when Cipriana andJose (Sps. Delgado) are ready to execute the deed of sale and transfer the title to her.

At the time of sale, the buyer was already occupying a portion of the property where she operates a noodle (bihon) factory while the rest was occupied by tenants which Sps. Delgado undertook to clear prior to full payment. After paying the total sum of P147,000.00 and being then ready to pay the balance, the buyer demanded the execution of the deed, which was refused. Eventually, the buyer learned of the sale of the property to the Dys and its subsequent mortgage to petitioner Philippine Banking Corporation (Philbank), prompting the filing of the Complaint5 for annulment of certificate of title, specific performance and/or reconveyance with damages against Sps. Delgado, the Dys and Philbank.

In their Answer, Sps. Delgado, while admitting receipt of the partial payments made by the buyer, claimed that there was no perfected sale because the latter was not willing to pay their asking price of P17.00/sq.m. They also interposed a cross-claim against the Dys averring that the deeds of absolute sale in their favor dated June 28, 19826 and June 30, 19827 covering Lot No. 6966 and the adjoining Lot No. 4100-A (on which Sps. Delgado's house stands), were fictitious and merely intended to enable them (the Dys) to use the said properties as collateral for their loan application with Philbank and thereafter, pay the true consideration of P17.00/sq.m.for Lot No. 6966. However, after receiving the loan proceeds, the Dys reneged on their agreement, prompting Sps. Delgado to cause the annotation of an adverse claim on the Dys' titles and to inform Philbank of the simulation of the sale. Sps. Delgado, thus, prayed for the dismissal of the complaint, with a counterclaim for damages and a cross-claim against the Dys for the payment of the balance of the purchase price plus damages.

For their part, the Dys denied knowledge of the alleged transaction between cross-claimants Sps. Delgado and buyer. They claimed to have validly acquired the subject property from Sps.

Delgado and paid the full consideration therefor as the latter even withdrew their adverse claim and never demanded for the payment of any unpaid balance.

On the other hand, Philbank filed its Answer8 asserting that it is an innocent mortgagee for value without notice of the defect in the title of the Dys. It filed a cross-claim against Sps. Delgado and the Dys for all the damages that may be adjudged against it in the event they are declared sellerand purchaser in bad faith, respectively.

In answer to the cross-claim, Sps. Delgado insisted that Philbank was not a mortgagee in good faith for having granted the loan and accepted the mortgage despite knowledge of the simulationof the sale to the Dys and for failure to verify the nature of the buyer’s physical possession of a portion of Lot No. 6966. They thereby prayed for the cancellation of the mortgage in Philbank's favor.

Subsequently, Sps. Delgado amended their cross-claim against the Dys to include a prayer for the nullification of the deeds of absolute sale in the latter's favor and the corresponding certificates of title, and for the consequent reinstatement of Cipriana’s title.9

The complaints against the Dys and Philbank were subsequently withdrawn. On the other hand, both the buyer and Sps. Delgado never presented any evidence in support of their respective claims. Hence, the RTC limited itself to the resolution of the claims of Sps. Delgado, Philbank and the Dys against one another.

The RTC Ruling

In the Decision10 dated October 5, 1994, the RTC dismissed the cross-claims of Sps. Delgado against the Dys and Philbank. It noted that other than Sps. Delgado's bare allegation of the Dys' supposed non-payment of the full consideration for Lot Nos. 6966 and 4100-A, they failed to adduce competent evidence to support their claim. On the other hand, the Dys presented a cashvoucher11 dated April 6, 1983 duly signed by Sps. Delgado acknowledging receipt of the total consideration for the two lots.

The RTC also observed that Sps. Delgado notified Philbank of the purported simulation of the sale to the Dys only after the execution of the loan and mortgage documents and the release of the loan proceeds to the latter, negating their claim of bad faith. Moreover, they subsequently notified the bank of the Dys' full payment for the two lots mortgaged to it.

The CA Ruling

However, on appeal, the CA set aside12 the RTC's decision and ordered the cancellation of the Dys' certificates of title and the reinstatement of Cipriana's title. It ruled that there were no perfected contracts of sale between Sps. Delgado and the Dys in view of the latter's admission that the deeds of sale were purposely executed to facilitate the latter's loan application with Philbank and that the prices indicated therein were not the true consideration. Being merely simulated, the contracts of sale were, thus, null and void, rendering the subsequent mortgage of the lots likewise void.

The CA also declared Philbank not to be a mortgagee in good faith for its failure to ascertain how the Dys acquired the properties and to exercise greater care when it conducted an ocular inspection thereof. It thereby canceled the mortgage over the two lots.

The Petition

In the present petition, Philbank insists that it is a mortgagee in good faith. It further contends that Sps. Delgado are estopped from denying the validity of the mortgage constituted over the two lots since they participated in inducing Philbank to grant a loan to the Dys.

On the other hand, Sps. Delgado maintain that Philbank was not an innocent mortgagee for value for failure to exercise due diligence in transacting with the Dys and may not invoke the equitable doctrine of estoppel to conceal its own lack of diligence.

For his part, Arturo Dy filed a Petition-in-Intervention13 arguing that while the deeds of absolute sale over the two properties were admittedly simulated, the simulation was only a relative one involving a false statement of the price. Hence, the parties are still bound by their true agreement. The same was opposed/objected to by both Philbank14 and Sps. Delgado15 as improper, considering that the CA judgment had long become final and executory as to the Dys who neither moved for reconsideration nor appealed the CA Decision.

The Ruling of the Court

The petition is meritorious.

At the outset, the Court takes note of the fact that the CA Decision nullifying the questioned contracts of sale between Sps. Delgado and the Dys had become final and executory. Accordingly, the Petition-in-Intervention filed by Arturo Dy, which seeks to maintain the subject contracts' validity, can no longer be entertained. The cancellation of the Dys' certificates of title over the disputed properties and the issuance of new TCTs in favor of Cipriana must therefore be upheld.

However, Philbank's mortgage rights over the subject properties shall be maintained. While it is settled that a simulated deed of sale is null and void and therefore, does not convey any right that could ripen into a valid title,16 it has been equally ruled that, for reasons of public policy,17 thesubsequent nullification of title to a property is not a ground to annul the contractual right which may have been derived by a purchaser, mortgagee or other transferee who acted in good faith.18

The ascertainment of good faith or lack of it, and the determination of whether due diligence andprudence were exercised or not, are questions of fact19 which are generally improper in a petitionfor review on certiorari under Rule 45 of the Rules of Court (Rules) where only questions of law may be raised. A recognized exception to the rule is when there are conflicting findings of fact bythe CA and the RTC,20 as in this case.

Primarily, it bears noting that the doctrine of "mortgagee in good faith" is based on the rule that all persons dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title. This is in deference to the public interest in upholding the indefeasibility of a certificate of title as evidence of lawful ownership of the land or of any encumbrance thereon.21 In the case of banks and other financial institutions, however, greater care and due diligence are required since they are imbued with public interest, failing which renders the mortgagees in bad faith. Thus, before approving a loan application, it is a standard operating practice for these institutions to conduct an ocular inspection of the property offered for mortgage and to verify the genuineness of the title to determine the real owner(s) thereof.22 The apparent purpose of an ocular inspection is to protect the "true owner" of the property as well as innocent third parties with a right, interest or claim thereon from a usurper who may have acquired a fraudulent certificate of title thereto.23

In this case, while Philbank failed to exercise greater care in conducting the ocular inspection of the properties offered for mortgage,24 its omission did not prejudice any innocent third parties. In particular, the buyer did not pursue her cause and abandoned her claim on the property. On the

other hand, Sps. Delgado were parties to the simulated sale in favor of the Dys which was intended to mislead Philbank into granting the loan application. Thus, no amount of diligence in the conduct of the ocular inspection could have led to the discovery of the complicity between the ostensible mortgagors (the Dys) and the true owners (Sps. Delgado).1âwphi1 In fine, Philbank can hardly be deemed negligent under the premises since the ultimate cause of the mortgagors' (the Dys') defective title was the simulated sale to which Sps. Delgado were privies.

Indeed, a finding of negligence must always be contextualized in line with the attendant circumstances of a particular case. As aptly held in Philippine National Bank v. Heirs of Estanislao Militar,25 "the diligence with which the law requires the individual or a corporation at alltimes to govern a particular conduct varies with the nature of the situation in which one is placed, and the importance of the act which is to be performed."26 Thus, without diminishing the time-honored principle that nothing short of extraordinary diligence is required of banks whose business is impressed with public interest, Philbank's inconsequential oversight should not and cannot serve as a bastion for fraud and deceit.

To be sure, fraud comprises "anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal duty or equitable duty, trust, or confidence justly reposed, resulting in damage to another, or by which an undue and unconscientious advantage is taken of another."27 In this light, the Dys' and Sps. Delgado's deliberate simulation of the sale intended to obtain loan proceeds from and to prejudice Philbank clearly constitutes fraudulent conduct. As such, Sps. Delgado cannot now be allowed to deny the validity of the mortgage executed by the Dys in favor of Philbank as to hold otherwise would effectively sanction their blatant bad faith to Philbank's detriment.

Accordingly, in the interest of public policy, fair dealing, good faith and justice, the Court accordsPhilbank the rights of a mortgagee in good faith whose lien to the securities posted must be respected and protected. In this regard, Philbank is entitled to have its mortgage carried over or annotated on the titles of Cipriana Delgado over the said properties.

WHERFORE, the assailed January 30, 2008 Decision of the Court of Appeals in CA-G.R. CV No. 51672 is hereby AFFIRMED with MODIFICATION upholding the mortgage rights of petitioner Philippine Banking Corporation over the subject properties.

SO ORDERED.

G.R. No. 186264 July 8, 2013

DR. LORNA C. FORMARAN, Petitioner, vs.DR. GLENDA B. ONG AND SOLOMON S. ONG, Respondents.

D E C I S I O N

This is an Appeal by certiorari under Rule 45 of the Revised Rules of Court of the Decision1 of the Court of Appeals (CA) rendered on August 30, 2007, the dispositive portion of which reads as follows:

"WHEREFORE, in the (sic) light of the foregoing, the assailed Decision is REVERSED AND SET ASIDE. The Complaint of appellee Lorna C. Formaran is DISMISSED. The appellee, her agents or representatives are ORDERED to vacate the land in question and to restore the same to appellants."

The facts adopted by both the trial court and the Court of Appeals are summarized thus:

"According to plaintiff (Petitioner)'s complaint, she owns the afore-described parcel of land whichwas donated to her intervivos by her uncle and aunt, spouses Melquiades Barraca and Praxedes Casidsid on June 25, 1967; that on August 12, 1967 upon the proddings and representation of defendant (Respondent) Glenda, that she badly needed a collateral for a loan which she was applying from a bank to equip her dental clinic, plaintiff made it appear that she sold one-half of the afore-described parcel of land to the defendant Glenda; that the sale was totally without any consideration and fictitious; that contrary to plaintiff’s agreement with defendant Glenda for the latter to return the land, defendant Glenda filed a case for unlawful detainer against the plaintiff who consequently suffered anxiety, sleepless nights and besmirched reputation; and that to protect plaintiff’s rights and interest over the land in question, she was constrained to file the instant case, binding herself to payP50,000.00 as and for attorney's fees.

In an answer filed on December 22, 1997, defendant Glenda insisted on her ownership over the land in question on account of a Deed of Absolute Sale executed by the plaintiff in her favor; andthat plaintiff’s claim of ownership therefore was virtually rejected by the Municipal Circuit Trial Court of Ibaja-Nabas, Ibajay, Aklan, when it decided in her favor the unlawful detainer case she filed against the plaintiff, docketed therein as Civil Case No. 183. Defendants are also claiming moral damages and attorney’s fees in view of the filing of the present case against them.

Plaintiff’s testimony tends to show that the land in question is part of the land donated to her on June 25, 1967 by spouses Melquiades Barraca and Praxedes Casidsid, plaintiff’s uncle and aunt, respectively. As owner thereof, she declared the land for taxation purposes (Exhibits A-1 toA-5, inclusive). She religiously paid its realty taxes (Exhibit A-6). She mortgaged the land to Aklan Development Bank to secure payment of a loan.

In 1967, defendant Glenda and her father, Melquiades Barraca came to her residence asking forhelp. They were borrowing one-half of land donated to her so that defendant Glenda could obtain a loan from the bank to buy a dental chair. They proposed that she signs an alleged sale over the said portion of land.

Acceding to their request, she signed on August 12, 1967 a prepared Deed of Absolute Sale (Exhibit C) which they brought along with them (TSN, p. 22, Ibid), covering the land in question without any money involved. There was no monetary consideration in exchange for executing Exhibit C. She did not also appear before the Notary Public Edilberto Miralles when Exhibit C was allegedly acknowledged by her on November 9, 1967.

A month thereafter, plaintiff inquired from her uncle, Melquiades Barracca if they have obtained the loan. The latter informed her that they did not push through with the loan because the bank’sinterest therefore was high. With her uncle’s answer, plaintiff inquired about Exhibit C. Her uncle replied that they crampled (kinumos) the Deed of Absolute Sale (Exhibit C) and threw it away.

Knowing that Exhibit C was already thrown away, plaintiff did not bother anymore about the document (TSN, p. 7, Ibid) she thought that there was no more transaction. Besides, she is also in actual possession of the land and have even mortgaged the same.

In 1974, plaintiff transferred her residence from Nabas, Aklan, to Antipolo City where she has been residing up to the present time. From the time she signed the Deed of Absolute Sale (Exhibit C) in August, 1967 up to the present time of her change of residence to Antipolo City, defendant Glenda never demanded actual possession of the land in question, except when the latter filed on May 30, 1996 a case for unlawful detainer against her. Following the filing of the ejectment case, she learned for the first time that the Deed of Absolute Sale was registered on May 25, 1991 and was not thrown away contrary to what Melquiades Barraca told her. Moreover, she and Melquiades Barraca did not talk anymore about Exhibit C. That was also the first time she learned that the land in question is now declared for taxation purposes in the nameof defendant Glenda.

In closing her direct testimony, plaintiff declared that the filing of the unlawful detainer case against her, caused her some sleepless nights and humiliation. She also suffered hypertension.

Upon the other hand, relevant matters that surfaced from the testimonies of the defendants shows that on June 25, 1967, Melquiades Barraca, father of the defendant Glenda, donated a parcel of land to her niece, plaintiff Lorna C. Formaran (Exhibit 3). At the time of the donation, plaintiff was still single. She married Atty. Formaran only in September, 1967.

Subsequently, on August 12, 1967, Dr. Lorna B. Casidsid, herein plaintiff, executed a Deed of Absolute Sale (Exhibit 1) over one-half portion of the land donated to her, in favor of defendant Glenda. On account of the Sale (Exhibit 1) defendant Glenda was able to declare in her name the land in question for taxation purposes (Exhibit 4) and paid the realty taxes (Exhibits 6, 6-A, 6-B and 6-C). She also was able to possess the land in question.

Defendant Glenda maintained that there was money involved affecting the sale of the land in herfavor. The sale was not to enable her to buy a dental chair for she had already one at the time. Besides, the cost of a dental chair in 1967 was only P2,000.00 which she can readily afford.

The document of sale (Exhibit 1) affecting the land in question was not immediately registered after its execution in 1967 but only on May 25, 1991 in order to accommodate the plaintiff who mortgaged the land to Aklan Development Bank on May 18, 1978.

Based on the admissions of the parties in their pleadings, during the pre-trial and evidence on record, there is no contention that on June 25, 1967, the afore-described parcel of land was donated intervivos (Exhibit 3) by spouses Melquiades Barraca and Praxedes Casidsid to therein plaintiff, Dr. Lorna Casidsid Formaran who was yet single. She was married to Atty. Formaran in September 1967. Praxedes was the aunt of Lorna as the latter’s father was the brother of Praxedes.

Following the donation, plaintiff immediately took possession of the land wherein one-half (1/2) thereof is the land in question. Since then up to the present time, is still in actual possession of the land, including the land in question.

Indeed, on May 30, 1996, herein defendant Glenda filed a complaint for unlawful detainer against the plaintiff before the 7th Municipal Circuit Trial Court of Ibajay-Nabas, Ibajay, Aklan, docketed there in as Civil Case No. 183. The case was decided on September 2, 1997, (Exhibit 2) in favor of herein defendant Glenda; ordering the herein plaintiff to vacate the land in question.

After the plaintiff acquired ownership by way of donation over the afore-described parcel of land which includes the land in question, she declared the same for taxation purposes under Tax Declaration No. 12533, effective 1969 (Exhibit A-1). Revision caused the subsequent and successive cancellation of Exhibit A-1 by Tax Declaration No. 177, effective 1974 (Exhibit A-2);

Tax Declaration No. 183 effective 1980 (Exhibit A-3); Tax Declaration No. 187, effective 1985 (Exhibit A-4); PIN-038-14-001-06-049, effective 1990 (Exhibit A-5); and APP/TD No. 93-001-330, effective 1994 (Exhibit A-6).

The last two Tax Declarations (Exhibits A-5 and A-6) no longer covered the land in question which was segregated therefrom when the Deed of Sale executed on August 12, 1967 (Exhibit C) was registered for the first time on May 25, 1991.

Realty taxes of the afore-described parcel of land, including the land in question, have been paidby the plaintiff since 1967 up to the present time (Exhibit B). However, defendant Glenda paid for the first time the realty taxes of the land in question on January 9, 1995 (Exhibit 6) and up to the present time (Exhibit 6-A and 6-B).1âwphi1

On account of the Deed of Absolute Sale (Exhibit C or 1) signed by the plaintiff, during the cadastral survey, the land in question was surveyed in the name of defendant and designated asLot No. 188 (Exhibit 5) and the other half on the western side was designated as Lot No. 189. The land in question is particularly described as follows:

A parcel of residential land (Lot No. 188, Cad. No. 758-D Nabas Cadastre) located at Poblacion Nabas, Aklan, Bounded on North by Lot No. 196; on the East by Lot No. 187; on the West by LotNo. 189 all of Cad. No. 758-D; and on the South by Mabini St., containing an area of THREE HUNDRED FIFTY SEVEN (357) SQUARE METERS, more or less."

Petitioner filed on action for annulment of the Deed of Sale (Civil Case No. 5398) against respondents before the Regional Trial Court (RTC), of Kalibo, Aklan, Branch 5.

On December 3, 1999, the trial court rendered a Decision in favor of petitioner and against the respondent by declaring the Deed of Absolute Sale null and void for being an absolutely simulated contract and for want of consideration; declaring the petitioner as the lawful owner entitled to the possession of the land in question; as well as ordering (a) the cancellation of respondent Glenda’s Tax Declaration No. 1031, and (b) respondents to pay petitioner P25,000.00 for attorney’s fees and litigation expenses.

Respondents coursed an appeal to the CA. The CA, on August 30, 2007, reversed and set asidethe Decision of the trial court and ordered petitioner to vacate the land in question and restore the same to respondents.

Hence, the present petition.

The petition sufficiently shows with convincing arguments that the decision of the CA is based on a misappreciation of facts.

The Court believes and so holds that the subject Deed of Sale is indeed simulated,2 as it is: (1) totally devoid of consideration; (2) it was executed on August 12, 1967, less than two months from the time the subject land was donated to petitioner on June 25, 1967 by no less than the parents of respondent Glenda Ong; (3) on May 18, 1978, petitioner mortgaged the land to the Aklan Development Bank for a P23,000.00 loan; (4) from the time of the alleged sale, petitioner

has been in actual possession of the subject land; (5) the alleged sale was registered on May 25, 1991 or about twenty four (24) years after execution; (6) respondent Glenda Ong never introduced any improvement on the subject land; and (7) petitioner’s house stood on a part of the subject land. These are facts and circumstances which may be considered badges of bad faith that tip the balance in favor of petitioner.

The Court is in accord with the observation and findings of the (RTC,3 Kalibo, Aklan) thus:

"The amplitude of foregoing undisputed facts and circumstances clearly shows that the sale of the land in question was purely simulated. It is void from the very beginning (Article 1346, New Civil Code). If the sale was legitimate, defendant Glenda should have immediately taken possession of the land, declared in her name for taxation purposes, registered the sale, paid realty taxes, introduced improvements therein and should not have allowed plaintiff to mortgage the land. These omissions properly militated against defendant Glenda’s submission that the sale was legitimate and the consideration was paid.

While the Deed of Absolute Sale was notarized, it cannot justify the conclusion that the sale is a true conveyance to which the parties are irrevocably and undeniably bound. Although the notarization of Deed of Absolute Sale, vests in its favor the presumption of regularity, it does not validate nor make binding an instrument never intended, in the first place, to have any binding legal effect upon the parties thereto (Suntay vs. Court of Appeals, G.R. No. 114950, December 19, 1995; cited in Ruperto Viloria vs. Court of Appeals, et al., G.R. No. 119974, June 30, 1999)."

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals rendered on August 30, 2007 in CA G.R. CV No. 66187 is hereby REVERSED and SET ASIDE. The Decision of the Regional Trial Court, Branch 5, Kalibo, Aklan in Civil Case No. 5398 dated December 3, 1999 is REINSTATED.

SO ORDERED.

G.R. No. 123547 May 21, 2001

REV. FR. DANTE MARTINEZ, petitioner, vs.HONORABLE COURT OF APPEALS, HONORABLE JUDGE JOHNSON BALLUTAY, PRESIDING JUDGE, BRANCH 25, REGIONAL TRIAL COURT OF CABANA TUAN CITY, HONORABLE JUDGE ADRIANO TUAZON, JR., PRESIDING JUDGE, BRANCH 28, REGIONAL TRIAL COURT OF CABANATUAN CITY, SPOUSES REYNALDO VENERACION and SUSAN VENERACION, SPOUSES MAXIMO HIPOLITO and MANUELA DE LA PAZ and GODOFREDO DE LA PAZ, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision, dated 7, 1995, and resolution, dated January 31, 1996, of the Court of Appeals, which affirmed the decisions of the Regional Trial Court, Branches 251 and 28,2Cabanatuan City, finding private respondents spouses Reynaldo and Susan Veneracion owners of the land in dispute, subject to petitioner's rights as a builder in good faith.

The facts are as follows:

Sometime in February 1981, private respondents Godofredo De la Paz and his sister Manuela De la Paz, married to Maximo Hipolito, entered into an oral contract with petitioner Rev. Fr. Dante Martinez, then Assistant parish priest of Cabanatuan City, for the sale of Lot No. 1337-A-3at the Villa Fe Subdivision in Cabanatuan City for the sum of P15,000.00. The lot is located along Maharlika Road near the Municipal Hall of Cabanatuan City. At the time of the sale, the lotwas still registered in the name of Claudia De la Paz, mother of private respondents, although the latter had already sold it to private respondent Manuela de la Paz by virtue of a Deed of Absolute Sale dated May 26, 1976 (Exh. N/Exh. 2-Veneracion).3 Private respondent Manuela subsequently registered the sale in her name on October 22, 1981 and was issued TCT No. T-40496 (Exh. 9).4 When the land was offered for sale to petitioner, private respondents De la Paz were accompanied by their mother, since petitioner dealt ' with the De la Fazes as a family and not individually. He was assured by them that the lot belonged to Manuela De la Paz. It was agreed that petitioner would give a downpayment of P3,000.00 to private respondents De la Pazand that the balance would be payable by installment. After giving the P3,000.00 downpayment, petitioner started the construction of a house on the lot after securing a building permit from the City Engineer's Office on April 23, 1981, with the written consent of the then registered owner, Claudia de la Paz (Exh. B/Exh, 1).5Petitioner likewise began paying the real estate taxes on saidproperty (Exh. D, D-l, D-2).6 Construction on the house was completed on October 6, 1981 (Exh.V).7 Since then, petitioner and his family have maintained their residence there.8

On January 31, 1983, petitioner completed payment of the lot for which private respondents De la Paz executed two documents. The first document (Exh. A) read:

1-31-83

Ang halaga ng Lupa sa Villa Fe Subdivision na ipinagbili kay Fr. Dante Martinez ay P15,000.00 na pinangangako namin na ibibigay ang Deed of Sale sa ika-25 ng Febrero 1983.

[SGD.] METRING HIPOLITO

[SGD.] JOSE GODOFREDO DE LA PAZ9

The second writing (Exh. O) read:

Cabanatuan City

March 19, 1986

TO WHOM IT MAY CONCERN:

This is to certify that Freddie dela Paz has agreed to sign tomorrow (March 20) the affidavit of sale of lot located at Villa Fe Subdivision sold to Fr. Dante Martinez.

[Sgd.] Freddie dela Paz

FREDDIE DELA PAZ10

However, private respondents De la Paz never delivered the Deed of Sale they promised to petitioner.

In the meantime, in a Deed of. Absolute Sale with Right to Repurchase dated October 28, 1981 (Exh. 10),11private respondents De la Paz sold three lots with right to repurchase the same within one year to private respondents spouses Reynaldo and Susan Veneracion for the sum of P150,000.00. One of the lots sold was the lot previously sold to petitioner.12

Reynaldo Veneracion had been a resident of Cabanatuan City since birth. He used to pass along Maharlika Highway in going to the Municipal Hall or in going to and from Manila. Two of the lots subject of the sale were located along Maharlika Highway, one of which was the lot sold earlier by the De la Pazes to petitioner. The third lot (hereinafter referred to as the Melencio lot) was occupied by private respondents De la Paz. Private respondents Veneracion never took actual possession of any of these lots during the period of redemption, but all titles to the lots were given to him.13

Before the expiration of the one year period, private respondent Godofredo De la Paz informed private respondent Reynaldo Veneracion that he was selling the three lots to another person for P200,000.00. Indeed, private respondent Veneracion received a call from a Mr. Tecson verifyingif he had the titles to the properties, as private respondents De la Paz were offering to sell the two lots along Maharlika Highway to him (Mr. Tecson) for P180,000.00 The offer included the lotpurchased by petitioner in February, 1981. Private respondent Veneracion offered to purchase the same two lots from the De la razes for the same amount, The offer was accepted by private respondents De la Paz. Accordingly, on June 2, 1983, a Deed of Absolute Sale was executed over the two lots (Exh. I/Exh. 5-Veneracion).14 Sometime in January, 1984, private respondent Reynaldo Veneracion asked a certain Renato Reyes, petitioner's neighbor, who the owner of thebuilding erected on the subject lot was. Reyes told him that it was Feliza Martinez, petitioner's mother, who was in possession of the property. Reynaldo Veneracion told private respondent Godofredo about the matter and was assured that Godofredo would talk to Feliza. Based on thatassurance, private respondents Veneracion registered the lots with the Register of Deeds of Cabanatuan on March 5, 1984. The lot in dispute was registered under TCT No. T-44612 (Exh. L/Exh. 4-Veneracion).15

Petitioner discovered that the lot he was occupying with his family had been sold to the spouses Veneracion after receiving a letter, (Exh. P/Exh. 6-Veneracion) from private respondent Reynaldo Veneracion on March 19, 1986, claiming ownership of the land and demanding that they vacate the property and remove their improvements thereon.16 Petitioner, in turn, demanded through counsel the execution of the deed of sale from private respondents De la Paz and informed Reynaldo Veneracion that he was the owner of the property as he had previously purchased the same from private respondents De la Paz.17

The matter was then referred to the Katarungang Pambarangay of San Juan, Cabanatuan City for conciliation, but the parties failed to reach an agreement (Exh. M/Exh. 13).18 As a consequence, on May 12, 1986, private respondent Reynaldo Veneracion brought an action for ejectment in the Municipal Trial Court, Branch III, Cabanatuan City against petitioner and his mother (Exh. 14).19

On the other hand, on June 10, 1986, petitioner caused a notice of lis pendens to be recorded on TCT No. T-44612 with the Register of Deeds of Cabanatuan City (Exh. U).20

During the pre-trial conference, the parties agreed to have the case decided under the Rules on Summary Procedure and defined the issues as follows:

1. Whether of not defendant (now petitioner) may be judicially ejected.

2. Whether or not the main issue in this case is ownership.

3. Whether or not damages may be awarded.21

On January 29, 1987, the trial court rendered its decision, pertinent portions of which are quotedas follows:

With the foregoing findings of the Court, defendants [petitioner Rev. Fr. Dante Martinez and his mother] are the rightful possessors and in good faith and in concept of owner, thus cannot be ejected from the land in question. Since the main issue is ownership, the better remedy of the plaintiff [herein private respondents Veneracion] isAccion Publiciana in the Regional Trial Court, having jurisdiction to adjudicate on ownership.

Defendants' counterclaim will not be acted upon it being more than P20,000.00 is beyond this Court's power to adjudge.

WHEREFORE, judgment is hereby rendered, dismissing plaintiff's complaint and ordering plaintiff to pay Attorney's fee of P5,000.00 and cost of suit.

SO ORDERED.22

On March 3, 1987, private respondents Veneracion filed a notice of appeal with the Regional Trial Court, but failed to pay the docket fee. On June 6, 1989, or over two years after the filing of the notice of appeal, petitioner filed a Motion for Execution of the Judgment, alleging finality of judgment for failure of private respondents Veneracion to perfect their appeal and failure to prosecute the appeal for an unreasonable length of time.

Upon objection of private respondents Veneracion, the trial court denied on June 28, 1989 the motion for execution and ordered the records of the case to be forwarded to the appropriate Regional Trial Court. On July 11, 1989, petitioner appealed from this order. The appeal of private respondents Veneracion from the decision of the MTC and the appeal of petitioner from the order denying petitioner's motion for execution were forwarded to the Regional Trial Court, Branch 28, Cabanatuan City. The cases were thereafter consolidated under Civil Case No. 670-AF.

On February 20, 1991, the Regional Trial Court rendered its decision finding private respondentsVeneracion as the true owners of the lot in dispute by virtue of their prior registration with the Register of Deeds, subject to petitioner's rights as builder in good faith, and ordering petitioner and his privies to Vacate the lot after receipt of the cost of the construction of the house, as well as to pay the sum of P5,000.00 as attorney's fees and the costs of the suit. It, however, failed to rule on petitioner's appeal of the Municipal Trial Court's order denying their Motion for Execution of Judgment.

Meanwhile, on May 30, 1986, while the ejectment case was pending before the Municipal Trial Court, petitioner Martinez filed a complaint for annulment of sale with damages against the Veneracions and De la Pazes with the Regional Trial Court, Branch 25, Cabanatuan City. On March 5, 1990, the trial court rendered its decision finding private respondents Veneracion owners of the land in dispute, subject to the rights of petitioner as a builder in good faith, and ordering private respondents De la Paz to pay petitioner the sum of P50,000.00 as moral damages and P10,000.00 as attorney's fees, and for private respondents to pay the costs of the suit.

On March 20, 1991, petitioner then filed a petition for review with the Court of Appeals of the RTC's decision in Civil Case No. 670-AF (for ejectment). Likewise, on April 2, 1991, petitioner appealed the trial court's decision in Civil Case No. 44-[AF]-8642-R (for annulment of sale and damages) to the Court of Appeals. The cases were designated as CA G.R. SP. No. 24477 and CA G.R. CY No. 27791, respectively, and were subsequently consolidated. The Court of Appeals affirmed the trial courts' decisions, without ruling on petitioner's appeal from the Municipal Trial Court's order denying his Motion for Execution of Judgment. It declared the Veneracions to be owners of the lot in dispute as they were the first registrants in good faith, in accordance with Art. 1544 of the Civil Code. Petitioner Martinez failed to overcome the presumption of good faith for the following reasons:

1. when private respondent Veneracion discovered the construction on the lot, he immediately informed private respondent Godofredo about it and relied on the latter's assurance that he will take care of the matter.

2. the sale between petitioner Martinez and private respondents De la Paz was not notarized, as required by Arts. 1357 and 1358 of the Civil Code, thus it cannot be said that the private respondents Veneracion had knowledge of the first sale.23

Petitioner's motion for reconsideration was likewise denied in a resolution dated January 31, 1996.24 Hence this petition for review. Petitioner raises the following assignment of errors:

I THE PUBLIC RESPONDENTS HONORABLE COURT OF APPEALS AND REGIONAL TRIAL COURT JUDGES JOHNSON BALLUTAY AND ADRIANO TUAZON ERRED IN HOLDING THAT PRIVATE RESPONDENTS REYNALDO VENERACION AND WIFE ARE BUYERS AND REGISTRANTS IN GOOD FAITH IN RESOLVING THE ISSUE OF OWNERSHIP AND POSSESSION OF THE LAND IN DISPUTE.

II THAT PUBLIC RESPONDENTS ERRED IN NOT RESOLVING AND DECIDING THE APPLICABILITY OF THE DECISION OF THIS HONORABLE COURT IN THE CASES OF SALVORO VS. TANEGA, ET AL., G. R. NO. L 32988 AND IN ARCENAS VS. DEL ROSARIO, 67 PHIL 238, BY TOTALLY IGNORING THE SAID DECISIONS OF THIS HONORABLE COURT IN THE ASSAILED DECISIONS OF THE PUBLIC RESPONDENTS.

III THAT THE HONORABLE COURT OF APPEALS ERRED IN NOT GIVING DUE COURSE TO THE PETITION FOR REVIEW IN CA G. R. SP. NO. 24477.

IV THAT THE HONORABLE COURT OF APPEALS IN DENYING PETITIONER'S PETITION FOR REVIEW AFORECITED INEVITABLY SANCTIONED AND/OR WOULD ALLOW A VIOLATION OF LAW AND DEPARTURE FROM THE USUAL COURSE OF JUDICIAL PROCEEDINGS BY PUBLIC RESPONDENT HONORABLE JUDGE ADRIANO TUAZON WHEN THE LATTER RENDERED A DECISION IN CIVIL CASE NO. 670-AF [ANNEX "D"] REVERSING THE DECISION OF THE MUNICIPAL TRIAL COURT JUDGE SENDON DELIZO IN CIVIL CASE NO. 9523 [ANNEX "C"] AND IN NOT RESOLVING IN THE SAME CASE THE APPEAL INTERPOSED BY DEFENDANTS ON THE ORDER OF THE SAME COURT DENYING THE MOTION FOR EXECUTION.

V THAT THE RESOLUTION [ANNEX "B"] (OF THE COURT OF APPEALS) DENYING PETITIONER'S MOTION FOR RECONSIDERATION [ANNEX "1"] WITHOUT STATING CLEARLY THE FACTS AND THE LAW ON WHICH SAID RESOLUTION WAS BASED, (IS ERRONEOUS).

These assignment of errors raise the following issues:

1. Whether or not private respondents Veneracion are buyers in good faith of the lot indispute as to make them the absolute owners thereof in accordance with Art. 1544 of the Civil Code on double sale of immovable property.

2. Whether or not payment of the appellate docket fee within the period to appeal is not necessary for the perfection of the appeal after a notice of appeal has been filed within such period.

3. Whether or not the resolution of the Court of Appeals denying petitioner's motion forreconsideration is contrary to the constitutional requirement that a denial of a motion for reconsideration must state the legal reasons on which it is based.

First. It is apparent from the first and second assignment of errors that petitioner is assailing the findings of fact and the appreciation of the evidence made by the trial courts and later affirmed by the respondent court. While, as a general rule, only questions of law may be raised in a petition for review under Rule 45 of the Rules of Court, review may nevertheless be granted under certain exceptions, namely: (a) when the conclusion is a finding grounded entirely on speculation, surmises, or conjectures; (b) when the inference made is manifestly mistaken, absurd, or impossible; (c) where there is a grave abuse of discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the findings of fact are conflicting; (f) when the Court of Appeals, in making its findings, went beyond the issue of the case and the same is contrary to the admissions of both appellant and appellee; (g) when the findings of the Court of Appeals are contrary to those of the trial court; (h) when the findings of fact are conclusions without citation of specific evidence on which they are based; (I) when the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondents; (j) when the finding of fact of the Court of Appeals is premised on the supposed absence of evidence but is contradicted by the evidence on record; and (k) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion.25

In this case, the Court of Appeals based its ruling that private respondents Veneracion are the owners of the disputed lot on their reliance on private respondent Godofredo De la Paz's assurance that he would take care of the matter concerning petitioner's occupancy of the disputed lot as constituting good faith. This case, however, involves double sale and, on this matter, Art. 1544 of the Civil Code provides that where immovable property is the subject of a double sale, ownership shall be transferred (1) to the person acquiring it who in good faith first recorded it to the Registry of Property; (2) in default thereof, to the person who in good faith was first in possession; and (3) in default thereof, to the person who presents the oldest title.26 The requirement of the law, where title to the property is recorded in the Register of Deeds, is two-fold: acquisition in good faith and recording in good faith. To be entitled to priority, the second purchaser must not only prove prior recording of his title but that he acted in good faith, i.e., without knowledge or notice of a prior sale to another. The presence of good faith should be ascertained from the circumstances surrounding the purchase of the land.27

1. With regard to the first sale to private respondents Veneracion, private respondent Reynaldo Veneracion testified that on October 10, 1981, 18 days before the execution of the first Deed of Sale with Right to Repurchase, he inspected the premises and found it vacant.28 However, this isbelied by the testimony of Engr. Felix D. Minor, then building inspector of the Department of Public Works and Highways, that he conducted on October 6, 1981 an ocular inspection of the lot in dispute in the performance of his duties as a building inspector to monitor the progress of the construction of the building subject of the building permit issued in favor of petitioner on April23, 1981, and that he found it 100 % completed (Exh. V).29 In the absence of contrary evidence, he is to be presumed to have regularly performed his official duty.30 Thus, as early as October,

1981, private respondents Veneracion already knew that there was construction being made on the property they purchased.

2. The Court of Appeals failed to determine the nature of the first contract of sale between the private respondents by considering their contemporaneous and subsequent acts.31 More specifically, it overlooked the fact that the first contract of sale between the private respondents shows that it is in fact an equitable mortgage.

The requisites for considering a contract of sale with a right of repurchase as an equitable mortgage are (1) that the parties entered into a contract denominated as a contract of sale and (2) that their intention was to secure an existing debt by way of mortgage.32 A contract of sale with right to repurchase gives rise to the presumption that it is an equitable mortgage in any of the following cases: (1) when the price of a sale with a right to repurchase is unusually inadequate; (2) when the vendor remains in possession as lessee or otherwise; (3) when, upon or after the expiration of the right to repurchase, another instrument extending the period of redemption or granting a new period is executed; (4) when the purchaser retains for himself a part of the purchase price; (5) when the vendor binds himself to pay the taxes on the thing sold; (6) in any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.33 In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.34

In this case, the following circumstances indicate that the private respondents intended the transaction to be an equitable mortgage and not a contract of sale: (1) Private respondents Veneracion never took actual possession of the three lots; (2) Private respondents De la Paz remained in possession of the Melencio lot which was co-owned by them and where they resided; (3) During the period between the first sale and the second sale to private respondents Veneracion, they never made any effort to take possession of the properties; and (4) when the period of redemption had expired and private respondents Veneracion were informed by the De la Pazes that they are offering the lots for sale to another person for P200,000.00, they never objected. To the contrary, they offered to purchase the two lots for P180,000.00 when they found that a certain Mr. Tecson was prepared to purchase it for the same amount. Thus, it is clear from these circumstances that both private respondents never intended the first sale to be a contract of sale, but merely that of mortgage to secure a debt of P150,000.00.

With regard to the second sale, which is the true contract of sale between the parties, it should be noted that this Court in several cases,35 has ruled that a purchaser who is aware of facts which should put a reasonable man upon his guard cannot turn a blind eye and later claim that he acted in good faith. Private respondent Reynaldo himself admitted during the pre-trial conference in the MTC in Civil Case No. 9523 (for ejectment) that petitioner was already in possession of the property in dispute at the time the second Deed of Sale was executed on June1, 1983 and registered on March 4, 1984. He, therefore, knew that there were already occupantson the property as early as 1981. The fact that there are persons, other than the vendors, in actual possession of the disputed lot should have put private respondents on inquiry as to the nature of petitioner's right over the property. But he never talked to petitioner to verify the nature of his right. He merely relied on the assurance of private respondent Godofredo De la Paz, who was not even the owner of the lot in question, that he would take care of the matter. This does not meet the standard of good faith.

3. The appellate court's reliance on Arts. 1357 and 1358 of the Civil Code to determine private respondents Veneracion's lack of knowledge of petitioner's ownership of the disputed lot is erroneous.

Art. 135736 and Art. 1358,37 in relation to Art. 1403(2)38 of the Civil Code, requires that the sale of real property must be in writing for it to be enforceable. It need not be notarized. If the sale has

not been put in writing, either of the contracting parties can compel the other to observe such requirement.39 This is what petitioner did when he repeatedly demanded that a Deed of AbsoluteSale be executed in his favor by private respondents De la Paz. There is nothing in the above provisions which require that a contract of sale of realty must be executed in a public document. In any event, it has been shown that private respondents Veneracion had knowledge of facts which would put them on inquiry as to the nature of petitioner's occupancy of the disputed lot.

Second. Petitioner contends that the MTC in Civil Case No. 9523 (for ejectment) erred in denying petitioner's Motion for Execution of the Judgment, which the latter filed on June 6, 1989,two years after private respondents Veneracion filed a notice of appeal with the MTC on March 3, 1987 without paying the appellate docket fee. He avers that the trial court's denial of his motion is contrary to this Court's ruling in the cases of Republic v. Director of Lands,40 and Aranas v. Endona41 in which it was held that where the appellate docket fee is not paid in full within the reglementary period, the decision of the MTC becomes final and unappealable as the payment of docket fee is not only a mandatory but also a jurisdictional requirement.

Petitioner's contention has no merit. The case of Republic v. Director of Lands deals with the requirement for appeals from the Courts of First Instance, the Social Security Commission, and the Court of Agrarian Relations to the Court of Appeals. The case of Aranas v. Endona, on the other hand, was decided under the 1964 Rules of Court and prior to the enactment of the Judiciary Reorganization Act of 1981 (B. P. Blg. 129) and the issuance of its Interim Rules and Guidelines by this Court on January 11, 1983. Hence, these cases are not applicable to the matter at issue.1âwphi1.nêt

On the other hand, in Santos v. Court of Appeals,42 it was held that although an appeal fee is required to be paid in case of an appeal taken from the municipal trial court to the regional trial court, it is not a prerequisite for the perfection of an appeal under §2043 and §2344 of the Interim Rules and Guidelines issued by this Court on January 11, 1983 implementing the Judiciary Reorganization Act of 1981 (B.P. Blg. 129). Under these sections, there are only two requirements for the perfection of an appeal, to wit: (a) the filing of a notice of appeal within the reglementary period; and (b) the expiration of the last day to appeal by any party. Even in the procedure for appeal to the regional trial courts,45 nothing is mentioned about the payment of appellate docket fees.

Indeed, this Court has ruled that, in appealed cases, the failure to pay the appellate docket fee does not automatically result in the dismissal of the appeal, the dismissal being discretionary on the part of the appellate court.46 Thus, private respondents Veneracions' failure to pay the appellate docket fee is not fatal to their appeal.

Third. Petitioner contends that the resolution of the Court of Appeals denying his motion for reconsideration was rendered in violation of the Constitution because it does not state the legal basis thereof.

This contention is likewise without merit.

Art. VIII, Sec. 14 of the Constitution provides that "No petition for review or motion for reconsideration of a decision of the court shall be refused due course or denied without stating the basis therefor." This requirement was fully complied with when the Court of Appeals, in denying. reconsideration of its decision, stated in its resolution that it found no reason to change its ruling because petitioner had not raised anything new.47 Thus, its resolution denying petitioner's motion for reconsideration states:

For resolution is the Motion for Reconsideration of Our Decision filed by the petitioners.

Evidently, the motion poses nothing new. The points and arguments raised by the movants have been considered and passed upon in the Decision sought to be reconsidered. Thus, We find no reason to disturb the same.

WHEREFORE, the motion is hereby DENIED.

SO ORDERED.48

Attorney's. fees should be awarded as petitioner was compelled to litigate to protect his interest due to private respondents' act or omission.49

WHEREFORE, the decision of the Court of Appeals is REVERSED and a new one is RENDERED:

(1) declaring as null and void the deed of sale executed by private respondents Godofredo and Manuela De la Paz in favor of private respondents spouses Reynaldo and Susan Veneracion;

(2) ordering private respondents Godofredo and Manuela De la Paz to execute a deedof absolute sale in favor of petitioner Rev. Fr. Dante Martinez;

(3) ordering private respondents Godofredo and Manuela De la Paz to reimburse private respondents spouses Veneracion the amount the latter may have paid to the former;

(4) ordering the Register of Deeds of Cabanatuan City to cancel TCT No. T-44612 and issue a new one in the name of petitioner Rev. Fr. Dante Martinez; and

(5) ordering private respondents to pay petitioner jointly and severally the sum of P20,000.00 as attorney's fees and to pay the costs of the suit.

SO ORDERED.

G.R. No. 162333 December 23, 2008

BIENVENIDO C. TEOCO and JUAN C. TEOCO, JR., petitioners, vs.METROPOLITAN BANK AND TRUST COMPANY, respondent.

D E C I S I O N

REYES, R.T., J.:

REAL creditors are rarely unwilling to receive their debts from any hand which will pay them.1 Ang tunay na may pautang ay bihirang tumanggi sa kabayaran mula kaninuman.

This is a petition for review on certiorari seeking the reversal of the Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 58891 dated February 20, 2004 which annulled and set aside the decision of the Regional Trial Court (RTC) of Catbalogan, Samar on July 22, 1997 in Cadastral Record No. 1378. The RTC originally dismissed the petition for writ of possession filedby respondent Metropolitan Bank and Trust Company (Metrobank) on the ground that intervenors and present petitioners, the brothers Bienvenido Teoco and Juan Teoco, Jr. (the brothers Teoco), have redeemed the subject property. The CA reversed this dismissal and ordered the issuance of a writ of possession in favor of respondent Metrobank.

Culled from the records, the facts are as follows:

Lydia T. Co, married to Ramon Co, was the registered owner of two parcels of land situated in Poblacion, Municipality of Catbalogan, Province of Samar under Transfer Certificate of Title (TCT) Nos. T-6220 and T-6910.3 Ramon Co mortgaged the said parcels of land to Metrobank fora sum of P200,000.00.

On February 14, 1991, the properties were sold to Metrobank in an extrajudicial foreclosure saleunder Act No. 3135. One year after the registration of the Certificates of Sale, the titles to the properties were consolidated in the name of Metrobank for failure of Ramon Co to redeem the same within the one year period provided for by law. TCT Nos. T-6220 and T-6910 were cancelled and TCT Nos. T-8482 and T-8493 were issued in the name of Metrobank.

On November 29, 1993, Metrobank filed a petition for the issuance of a writ of possession against Ramon Co and Lydia Co (the spouses Co). However, since the spouses Co were no longer residing in the Philippines at the time the petition was filed, the trial court ordered

Metrobank, on January 12, 1994 and again on January 26, 1994 to effect summons by publication against the spouses Co.

On May 17, 1994, the brothers Teoco filed an answer-in-intervention alleging that they are the successors-in-interest of the spouses Co, and that they had duly and validly redeemed the subject properties within the reglementary period provided by law. The brothers Teoco thus prayed for the dismissal of Metrobank’s petition for a writ of possession, and for the nullification of the TCTs issued in the name of Metrobank. The brothers Teoco further prayed for the issuance in their name of new certificates of title.

Metrobank, in its reply, alleged that the amount deposited by the brothers Teoco as redemption price was not sufficient, not being in accordance with Section 78 of the General Banking Act. Metrobank also said the assignment of the right of redemption by the spouses Co in favor of the brothers Teoco was not properly executed, as it lacks the necessary authentication from the Philippine Embassy.

On February 24, 1995, the trial court was informed that the brothers Teoco had deposited the amount ofP356,297.57 to the clerk of court of the RTC in Catbalogan, Samar. The trial court ordered Metrobank to disclose whether it is allowing the brothers Teoco to redeem the subject properties. Metrobank refused to accept the amount deposited by the brothers Teoco, alleging that they are obligated to pay the spouses Co’s subsequent obligations to Metrobank as well. The brothers Teoco claimed that they are not bound to pay all the obligations of the spouses Co,but only the value of the property sold during the public auction.

On February 26, 1997, the trial court reiterated its earlier order directing Metrobank to effect summons by publication to the spouses Co. Metrobank complied with said order by submitting documents showing that it caused the publication of summons against the spouses Co. The brothers Teoco challenged this summons by publication, arguing that the newspaper where the summons by publication was published, the Samar Reporter, was not a newspaper of general circulation in the Philippines. The brothers Teoco furthermore argued that Metrobank did not present witnesses to identify the documents to prove summons by publication.

RTC Disposition

On July 22, 1997, the RTC rendered its decision in favor of the brothers Teoco, to wit:

WHEREFORE, judgment is hereby rendered dismissing the petition for a writ of possession under Section 7 of Act 3135 it appearing that intervenor Atty. Juan C. Teoco, Jr. and his brother Atty. Bienvenido C. Teoco have legally and effectively redeemed Lot 61 and 67 of Psd-66654, Catbalogan, Cadastre, from the petitioner Metropolitan Bank and Trust Company.

Accordingly, Metrobank may now withdraw the aforesaid redemption money of P356,297.57 deposited by Juan C. Teoco, Jr., on February 10, 1992 with the clerk of court and it is ordered that the Transfer Certificate of Title Nos. T-8492 and T-8493 of Metropolitan Bank and Trust Company be and are cancelled and in their place new transfer certificates of title be issued in favor of Intervenors Attys. Bienvenido C. Teoco and Juan C. Teoco, Jr., of legal age, married, and residents of Calbiga, Samar,Philippines, upon payment of the prescribed fees therefore. No pronouncement as to costs.4

According to the RTC, the case filed by Metrobank should be dismissed since intervenor Juan C. Teoco, Jr., by his tender of P356,297.57 to Metrobank on February 10, 1992, within the reglementary period of redemption of the foreclosed property, had legally and effectively

redeemed the subject properties from Metrobank. This redemption amount is a fair and reasonable price and is in keeping with the letter and spirit of Section 78 of the General Banking Act because Metrobank purchased the mortgaged properties from the sheriff of the same court for only P316,916.29. In debunking the argument that the amount tendered was insufficient, the RTC held:

It is contended for Metrobank that the redemption money deposited by Juan C. Teoco,Jr., is insufficient and ineffective because the spouses Ramon Co and Lydia T. Co owe it the total amount of P6,856,125 excluding interest and other charges and the mortgage contract executed by them in favor of Metrobank in 1985 and 1986 (Exh. A and B) are not only security for payment of their obligation in the amount ofP200,000 but also for those obligations that may have been previously and later extended to the Co couple including interest and other charges as appears in the accounts, books andrecords of the bank.

Metrobank cites the case of Mojica v. Court of Appeals, 201 SCRA 517 (1991) where the Supreme Court held that mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract donot limit the amount for which the mortgage may stand as security; that a mortgage given to secure the advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage until the full amount of the advancements are paid. In the opinion of this court, it is not fair and just to apply this rule to the case at bar. There is no evidence offered by Metrobank that these other obligations of Ramon Co and his wife were not secured by real estate mortgages of other lands. If the other indebtedness of the Co couple to Metrobank are secured by a mortgage on their other lands or properties the obligation can be enforced by foreclosure which the court assumes Metrobank has already done. There is no proof that Metrobank asked for a deficiency judgment for these unpaid loans.

The Supreme Court in the Mojica case was dealing with the rights of the mortgagee under a mortgage from an owner of the land. It determined the security covered by themortgage the intention of the parties and the equities of the case. What was held in that case was hedged about so as to limit the decision to the particular facts. It must be apparent that the Mojica ruling cannot be construed to give countenance or approval to the theory that in all cases without exception mortgages given to secure past and future advancements are valid and legal contracts.

In construing a contract between the bank and a borrower such a construction as would be more favorable to the borrower should be adopted since the alleged past and future indebtedness of Ramon Co to the bank was not described and specified therein and that the addendum was made because the mortgage given therefore werenot sufficient or that these past and future advancements were unsecured. That being the case the mortgage contracts, Exh. A and B should be interpreted against Metrobank which drew said contracts. A written contract should, in case of doubt, be interpreted against the party who has drawn the contract (6 R.C.L. 854; H.E. Heackock Co. vs. Macondray & Co., 42 Phil. 205). Here, the mortgage contracts are inprinted form prepared by Metrobank and therefore ambiguities therein should be construed against the party causing it (Yatco vs. El Hogar Filipino, 67 Phil. 610; Hodges vs. Tazaro, CA, 57 O.G. 6970).5

The RTC added that there is another reason for dismissing Metrobank’s petition: the RTC failed to acquire jurisdiction over the spouses Co. The RTC noted that Metrobank published its petitionfor writ of possession, but did not publish the writ of summons issued by said court on February 16, 1994. According to the RTC:

A petition for a writ of possession of foreclosed property is in reality a possession suit. That Metrobank prayed for a writ of possession in an independent special proceeding does not alter the nature of the case as a possessory suit (Cabrera v. Sinoy, L.-12648,23 November 1959).

The defendant or owner of the property foreclosed by the petitioner should be summoned to answer the petition. Accordingly, the publication made by the petitioner is fatally flawed and defective and on that basis alone this court acquired no jurisdiction over the person of respondents Ramon Co and his wife (Mapa vs. Court ofAppeals, G.R. No. 79394, October 2, 1992; Lopez vs. Philippine National Bank, L-34223, December 10, 1982).6

Metrobank appealed to the CA. In its appeal, Metrobank claimed that the RTC erred in finding that the publication made by it is fatally flawed, and that the brothers Teoco had effectively redeemed the properties in question.

CA Disposition

On February 20, 2004, the CA decided the appeal in favor of Metrobank, with the following disposition:

WHEREFORE, the appeal is hereby GRANTED. The assailed Decision dated July 22,1997 rendered by the Regional Trial Court of Catbalogan, Samar Branch 29 in Cadastral Record No. 1378 is hereby ANNULLED and SET ASIDE. Accordingly, let a writ of possession in favor of petitioner-appellant METROPOLITAN BANK AND TRUST COMPANY be issued over the properties and improvements covered by Transfer Certificates of Title Nos. T-8492 and T-8493 of the Registry of Deeds of Western Samar.

SO ORDERED.7

As regards the question of jurisdiction, the CA ruled that since the parcels of land in question were already registered in the name of Metrobank at the time the petition was filed, and since the certificates of title of the spouses Co were already cancelled, there is no more need to issue summons to the spouses Co. The CA noted that the best proof of ownership of the parcel of land is a certificate of title.8

The CA also held that the issue of the validity of summons to the spouses Co is unimportant considering that the properties in question were mortgaged to Metrobank and were subsequently sold to the same bank after the spouses Co failed to satisfy the principal obligation. Hence, the applicable law is Act No. 3135,9 as amended by Act No. 4118. Section 7 of said Act No. 3135 states that a petition for the issuance of a writ of possession filed by the purchaser of a property in an extrajudicial foreclosure sale may be done ex parte. It is the ministerial duty of the trial court to grant such writ of possession. No discretion is left to the trial court. Any question regarding the cancellation of the writ, or with respect to the validity and regularity of the public sale should be determined in a subsequent proceeding as outlined in Section 9 of Act No. 3135.10

Further, the CA held that the brothers Teoco were not able to effectively redeem the subject properties, because the amount tendered was insufficient, and the brothers Teoco have not sufficiently shown that the spouses Co’s right of redemption was properly transferred to them.

Issues

In this Rule 45 petition, the brothers Teoco impute to the CA the following errors:

I

THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR OF JUDGMENT IN HOLDING THAT PETITIONERS FAILED TO REDEEM THE SUBJECT PROPERTIES WITHIN THE REGLEMENTARY PERIOD OF ONE YEAR AND THAT THE REDEMPTION PRICE TENDERED IS INSUFFICIENT.

II

THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR OF JUDGMENT IN HOLDING PETITIONERS TO PAY NOT ONLY THE P 200,000 PRINCIPAL OBLIGATION BUT ALSO THAT PREVIOUSLY EXTENDED, WHETHER DIRECT OR INDIRECT, PRINCIPAL OR SECONDARY AS APPEARS IN THE ACCOUNTS, BOOKS AND RECORDS.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONERS HAVE NOT SUFFICIENTLY SHOW(N) THAT THE RIGHT OF REDEMPTION WAS PROPERLY TRANSFERRED TO THEM.

IV

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT, BRANCH 29, AND GRANTING THE WRIT OF POSSESSION TO THE RESPONDENT.11(Underscoring supplied)

Our Ruling

Sufficiency of Amount Tendered

We find that neither petitioners, the brothers Teoco, nor respondent, Metrobank, were able to present sufficient evidence to prove whether the additional loans granted to the spouses Co by Metrobank were covered by the mortgage agreement between them. The brothers Teoco failed to present any evidence of the supposed trust receipt agreement between Metrobank and the spouses Co, or an evidence of the supposed payment by the spouses Co of the other loans extended by Metrobank. Metrobank, on the other hand, merely relied on the stipulation on the mortgage deed that the mortgage was intended to secure "the payment of the same (P200,000.00 loan) and those that may hereafter be obtained."12 However, there was no mentionwhatsoever of the mortgage agreement in the succeeding loans entered into by the spouses Co.

While we agree with Metrobank that mortgages intended to secure future advancements are valid and legal contracts,13 entering into such mortgage contracts does not necessarily put withinits coverage all loan agreements that may be subsequently entered into by the parties. If Metrobank wishes to apply the mortgage contract in order to satisfy loan obligations not stated on the face of such contract, Metrobank should prove by a preponderance of evidence that suchsubsequent obligations are secured by said mortgage contract and not by any other form of security.

In order to prevent any injustice to, or unjust enrichment of, any of the parties, this Court holds that the fairest resolution is to allow the brothers Teoco to redeem the foreclosed properties based on the amount for which it was foreclosed (P255,441.14 plus interest). This is subject, however, to the right of Metrobank to foreclose the same property anew in order to satisfy the succeeding loans entered into by the spouses Co, if they were, indeed, covered by the mortgagecontract. The right of Metrobank to foreclose the mortgage would not be hampered by the transfer of the properties to the brothers Teoco as a result of this decision, since Article 2127 of the Civil Code provides:

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with thedeclarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. (Emphasis supplied)

Further, Article 2129 of the Civil Code provides:

Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said thirdperson possesses, in the terms and with the formalities which the law establishes.

The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be to the fulfillment of the obligation for whose security it was constituted. Otherwise stated, a mortgage creates a real right which is enforceable against the whole world. Hence, even if the mortgage property is sold or its possession transferred to another, the property remains subject to the fulfillment of the obligation for whose security it was constituted.14

Thus, the redemption by the brothers Teoco shall be without prejudice to the subsequent foreclosure of same properties by Metrobank in order to satisfy other obligations covered by the Real Estate Mortgage.

Transfer of Right of Redemption

The CA held that the brothers Teoco have not sufficiently shown that the spouses Co’s right of redemption was properly transferred to them. The assignment of the right of redemption only stated that the spouses Co are transferring the right of redemption to their parents, brothers, andsisters, but did not specifically include the brothers Teoco, who are just brothers-in-law of Ramon Co. Furthermore, the spouses Co no longer reside in the Philippines, and the assignment of the right of redemption was not properly executed and/or authenticated.

The alleged transfer of the right of redemption is couched in the following language:

KNOW ALL MEN BY THESE PRESENTS:

That we, RAMON CO and LYDIA CO, of legal ages, for and in considerationof preserving the continuous ownership and possession of family owned properties, by these presents, hereby cede, transfer and convey in favor of my parents, brothers and sisters, the right to redeem the properties underTCT Nos. T-6910 and T-6220, located in Patag district, Catbalogan, Samar,

sold by public auction sale on February 14, 1991 to the Metropolitan Bank and Trust Company.

Furthermore, we waived whatever rights we may have over the properties infavor of the successor-in-interest including that of transferring the title to whoever may redeem the aforesaid properties.

IN WITNESS WHEREOF, we have hereunto affixed our signatures this 10th day of January, 1992 at Vancouver, Canada.15

The brothers Teoco may be brothers-in-law only of Ramon Co, but they are also the brothers of Lydia Teoco Co, who is actually the registered owner of the properties covered by TCT Nos. T-6910 and T-6220. Clearly, the brothers Teoco are two of the persons referred to in the above transfer of the right of redemption executed by the spouses Co.

Anent the CA observation that the assignment of the right of redemption was not properly executed and/or authenticated, Lopez v. Court of Appeals16 is instructive. In Lopez, this Court ruled that a special power of attorney executed in a foreign country is generally not admissible inevidence as a public document in our courts. The Court there held:

Is the special power of attorney relied upon by Mrs. Ty a public document? We find that it is. It has been notarized by a notary public or by a competent public official with all the solemnities required by law of a public document. When executed and acknowledged in the Philippines, such a public document or a certified true copy thereof is admissible in evidence. Its due execution and authentication need not be proven unlike a private writing.

Section 25, Rule 132 of the Rules of Court provides –

Sec. 25. Proof of public or official record. – An official record or an entry therein, when admissible for any purpose, may be evidenced by an official publication thereof or by a copy attested by the officer having the legal custody of the record, or by his deputy, and accompanied, if the record is not kept in the Philippines, with a certificate that such officer has the custody. If the office in which the record is kept is in a foreign country, the certificate may be made by a secretary of embassy or legation consul general, consul, vice consul, or consular agent or by any officer in the foreign service of the Philippines stationed in the foreign country in which the record is kept, and authenticated by the seal of his office.

From the foregoing provision, when the special power of attorney is executed and acknowledged before a notary public or other competent official in a foreign country, it cannot be admitted in evidence unless it is certified as such in accordance with the foregoing provision of the rules by a secretary of embassy or legation, consul general, consul, vice consul, or consular agent or by any officer in the foreign service of the Philippines stationed in the foreign country in which the record is kept of said public document and authenticated by the seal of his office. A city judge-notary who notarized the document, as in this case, cannot issue such certification.17

Verily, the assignment of right of redemption is not admissible in evidence as a public document in our courts. However, this does not necessarily mean that such document has no probative value.

There are generally three reasons for the necessity of the presentation of public documents. First, public documents are prima facie evidence of the facts stated in them, as provided for in Section 23, Rule 132 of the Rules of Court:

SEC. 23. Public documents as evidence. – Documents consisting of entries in public records made in the performance of a duty by a public officer are prima facie evidenceof the facts therein stated. All other public documents are evidence, even against a third person, of the fact which gave rise to their execution and of the date of the latter. (Underscoring supplied)

Second, the presentation of a public document dispenses with the need to prove a document’s due execution and authenticity, which is required under Section 20, Rule 132 of the Rules of Court for the admissibility of private documents offered as authentic:

SEC. 20. Proof of private document. – Before any private document offered as authentic is received in evidence, its due execution and authenticity must be proved either:

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.

Any other private document need only be identified as that which it is claimed to be. (Underscoring supplied)

In the presentation of public documents as evidence, on the other hand, due execution and authenticity are already presumed:

SEC. 23. Public documents are evidence. – Documents consisting of entries in public records made in the performance of a duty by a public officer are prima facie evidenceof the facts therein stated. All other public documents are evidence, even against a third person, of the fact which gave rise to their execution and of the date of the latter. (Underscoring supplied)

SEC. 30. Proof of notarial documents. – Every instrument duly acknowledged or proved and certified as provided by law, may be presented in evidence without further proof, the certificate of acknowledgment being prima facie evidence of the execution of the instrument or document involved. (Underscoring supplied)

Third, the law may require that certain transactions appear in public instruments, such as Articles 1358 and 1625 of the Civil Code, which respectively provide:

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 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 thirdperson;

(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.

Art. 1625. An assignment of a credit, right or action shall produce no effect as against third person, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. (Underscoring supplied)

Would the exercise by the brothers Teoco of the right to redeem the properties in question be precluded by the fact that the assignment of right of redemption was not contained in a public document? We rule in the negative.

Metrobank never challenged either the content, the due execution, or the genuineness of the assignment of the right of redemption. Consequently, Metrobank is deemed to have admitted thesame. Having impliedly admitted the content of the assignment of the right of redemption, there is no necessity for a prima facie evidence of the facts there stated. In the same manner, since Metrobank has impliedly admitted the due execution and genuineness of the assignment of the right of redemption, a private document evidencing the same is admissible in evidence.18

True it is that the Civil Code requires certain transactions to appear in public documents. However, the necessity of a public document for contracts which transmit or extinguish real rights over immovable property, as mandated by Article 1358 of the Civil Code, is only for convenience; it is not essential for validity or enforceability.19 Thus, in Cenido v. Apacionado,20 this Court ruled that the only effect of noncompliance with the provisions of Article1358 of the Civil Code is that a party to such a contract embodied in a private document may be compelled to execute a public document:

Article 1358 does not require the accomplishment of the acts or contracts in a public instrument in order to validate the act or contract but only to insure its efficacy, so that after the existence of said contract has been admitted, the party bound may be compelled to execute the proper document. This is clear from Article 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."21

On the other hand, Article 1625 of the Civil Code provides that "[a]n assignment of a credit, right or action shall produce no effect as against third person, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property."

In Co v. Philippine National Bank,22 the Court interpreted the phrase "effect as against a third person" to bedamage or prejudice to such third person, thus:

x x x In Lichauco vs. Olegario, et al., 43 Phil. 540, this Court held that "whether or not x x x an execution debtor was legally authorized to sell his right of redemption, is a question already decided by this Court in the affirmative in numerous decisions on the precepts of Sections 463 and 464 and other sections related thereto, of the Code of Civil Procedure." (The mentioned provisions are carried over in Rule 39 of the RevisedRules of Court.) That the transfers or conveyances in question were not registered is of miniscule significance, there being no showing that PNB was damaged or could be damaged by such omission. When CITADEL made its tender on May 5, 1976, PNB did not question the personality of CITADEL at all. It is now too late and purely technical to raise such innocuous failure to comply with Article 1625 of the Civil Code.23

In Ansaldo v. Court of Appeals,24 the Court held:

In its Decision, the First Division of the Appellate Tribunal, speaking through the Presiding Justice at the time, Hon. Magno S. Gatmaitan, held as regards Arnaldo’s contentions, that –

x x x x

2) there was no need that the assignment be in a public document this being required only "to produce x x x effect as against third persons" (Article1625, Civil Code), i.e., "to adversely affect 3rd persons," i.e., "a 3rd person with a right against original creditor, for example, an original creditor of creditor, – against whom surely such an assignment by his debtor (creditor in the credit assigned) would be prejudicial, because he, creditor of assigning creditor, would thus be deprived of an attachable asset of his debtor x x x;

x x x x

Except for the question of the claimed lack of authority on the part of TFC’s president to execute the assignment of credit in favor of PCIB improperly raised for the first time on appeal, as observed by the Court of Appeals – the issues raised by Ansaldo were set up by him in, and after analysis and assessment rejected by, both the Trial Court and the Appellate Tribunal. This court sees no error whatever in the appreciation of the facts by either Court or their application of the relevant law and jurisprudence to those facts, inclusive of the question posed anew by Ansaldo relative to the alleged absence of authority on the part of TFC’s president to assign the corporation’s credit to PCIB.25

In the case at bar, Metrobank would not be prejudiced by the assignment by the spouses Co of their right of redemption in favor of the brothers Teoco. As conceded by Metrobank, the assignees, the brothers Teoco, would merely step into the shoes of the assignors, the spouses Co. The brothers Teoco would have to comply with all the requirements imposed by law on the spouses Co. Metrobank would not lose any security for the satisfaction of any loan obtained from it by the spouses Co. In fact, the assignment would even prove to be beneficial to Metrobank, as it can foreclose on the subject properties anew, provided it proves that the subsequent loans entered into by the spouses Co are covered by the mortgage contract.

WHEREFORE, the decision of the Court of Appeals is SET ASIDE. The decision of the RegionalTrial Court in Catbalogan, Samar is REINSTATED with the following MODIFICATION: the redemption by Bienvenido C. Teoco and Juan C. Teoco, Jr. of the properties covered by TCT Nos. T-6910 and T-6220 shall be without prejudice to the subsequent foreclosure of same

properties by Metropolitan Bank and Trust Company to satisfy other loans covered by the Real Estate Mortgage.

SO ORDERED.

G.R. No. 172196 October 19, 2011

ADELAIDA MENESES (deceased), substituted by her heir MARILYN M. CARBONEL-GARCIA, Petitioner, vs.ROSARIO G. VENTUROZO, Respondent.

D E C I S I O N

PERALTA, J.:

This is a petition for review on certiorari1 of the Court of Appeals’ Decision dated October 27, 2005 in CA-G.R. CV No. 78217 and its Resolution dated April 5, 2006, denying petitioner’s motion for reconsideration.

The Court of Appeals’ Decision reversed and set aside the Decision of the Regional Trial Court (RTC) of Dagupan City, Branch 40 in Civil Case No. D-9040, as the appellate court declared respondent Rosario G. Venturozo the owner of the land in dispute, and ordered petitioner Adelaida Meneses to vacate and surrender her possession thereof to respondent.

The facts are as follows:

On June 8, 1988, plaintiff Rosario G. Venturozo, respondent herein, filed a Complaint2 for "ownership, possession x x x and damages" in the Regional Trial Court (RTC) of Dagupan City against defendant Adelaida Meneses, petitioner herein, alleging that she (plaintiff) is the absolute owner of an untitled coconut land, containing an area of 2,109 square meters, situated

at Embarcadero, Mangaldan, Pangasinan, and declared under Tax Declaration No. 239. Plaintiffalleged that she purchased the property from the spouses Basilio de Guzman and Crescencia Abad on January 31, 1973 as evidenced by a Deed of Absolute Sale,3 and that the vendors, in turn, purchased the property from defendant as evidenced by a Deed of Absolute Sale4 dated June 20, 1966. Plaintiff alleged that she has been in possession of the land until May 1983 whendefendant with some armed men grabbed possession of the land and refused to vacate despite repeated demands prompting her to engage the services of counsel. Plaintiff prayed that after preliminary hearing, a writ of preliminary mandatory injunction be issued; and that after hearing, a decision be rendered declaring her as the owner of the property in dispute, ordering defendantto vacate the property in question and to pay her P5,000.00 as attorney’s fees;P1,000.00 as litigation expenses; P10,000.00 as damages and to pay the costs of suit.

In her Answer,5 defendant Adelaida Meneses stated that plaintiff is the daughter of Basilio de Guzman, the vendee in the Deed of Absolute Sale dated June 20, 1966 that was purportedly executed by her (defendant) covering the subject property. Defendant alleged that she never signed any Deed of Absolute Sale dated June 20, 1966, and that the said deed is a forgery. Defendant also alleged that she never appeared before any notary public, and she did not obtaina residence certificate; hence, her alleged sale of the subject property to Basilio de Guzman is null and void ab initio. Consequently, the Deed of Absolute Sale dated January 31, 1973, executed by Basilio de Guzman in favor of plaintiff, covering the subject property, is likewise nulland void. Defendant stated that she acquired the subject property from her deceased father and she has been in possession of the land for more than 30 years in the concept of owner. Plaintiff’s allegation that she (defendant) forcibly took possession of the land is a falsehood. Defendant stated that this is the fourth case the plaintiff filed against her concerning the land in question.

In her Counterclaim, defendant stated that in view of the nullity of the falsified Deed of Absolute Sale of the subject property, and the fact that plaintiff and her father Basilio de Guzman had never been in actual possession of the property, plaintiff is under legal obligation to execute a deed of reconveyance over the said property in her favor.

The issue before the trial court was whether the sale made by defendant Adelaida Meneses in favor of plaintiff’s father, Basilio de Guzman, was valid.6

On July 18, 1991, the RTC of Dagupan City, Branch 40 (trial court) rendered a Decision in favor of defendant Adelaida Meneses. The dispositive portion of the Decision reads:

WHEREFORE, judgment is hereby rendered:

1) Declaring the Deed of Absolute and Definite Sale dated June 20, 1966 (Exhibit "B") and the Deed of Absolute and Definite Sale dated January 31, 1973 (Exhibit "A") null and void ab initio;

2) Declaring the defendant Adelaida Meneses as the owner of the property in question;

3) Ordering the plaintiff Rosario G. Venturozo to execute a Deed of Reconveyance in favor of the defendant Adelaida Meneses over the property in question described in paragraph 2 of the complaint;

4) Ordering the plaintiff to pay to the defendant P10,000.00 as damages; and P1,000.00, as litigation expenses.

SO ORDERED.7

The trial court found that defendant Adelaida Meneses inherited the land in dispute from her father, Domingo Meneses; that she did not sell her property to Basilio de Guzman in 1966; and that the signature of Adelaida Meneses on the Deed of Absolute Sale dated June 20, 1966 is a forgery. The trial court stated that the signature of Adelaida Meneses, as appearing on the Deedof Absolute Sale dated June 20, 1966, is very much different from her specimen signatures and those appearing in the records of Civil Case No. 1096 in the Municipal Trial Court of Mangaldan.It held that since there was no valid transfer of the property by Adelaida Meneses to Basilio de Guzman, the conveyance of the same property in 1973 by Basilio de Guzman to his daughter, plaintiff Rosario G. Venturozo, was also invalid. The trial court stated that the claim of plaintiff Rosario G. Venturozo, that her parents, Spouses Basilio and Crescencia de Guzman, purchased from defendant Adelaida Meneses the subject property in 1966, is negated by defendant’s continued possession of the land and she gathered the products therefrom.

Plaintiff appealed the decision of the trial court to the Court of Appeals.

On October 27, 2005, the Court of Appeals rendered a Decision reversing the decision of the trial court. The dispositive portion of the appellate court’s decision reads:

WHEREFORE, the appealed decision of the Regional Trial Court of Dagupan City (Branch 40) isREVERSED and SET ASIDE and a new one rendered declaring plaintiff-appellant the owner of the subject land and ordering defendant-appellee to vacate and surrender possession thereof to the former.8

The Court of Appeals stated that appellee Adelaida Meneses failed to prove by clear and convincing evidence that her signature on the Deed of Absolute Sale dated June 20, 1966 was aforgery. Instead, she admitted on direct examination that her signature on the Deed of Absolute Sale was genuine, thus:

Q. I am showing to you Exhibit "6" and Exhibit "A" for the plaintiff a Deed of Absolute Sale o[f] Real Property of one (1) Adelaida Meneses in favor of Basilio de Guzman. Will you examine thisif you know this Deed of Absolute Sale?

A. I do not know this document, sir.

Q. There is a signature over the name of the vendor Adelaida Meneses which was previously marked as Exhibit "6-a" and Exhibit "A-1" for the plaintiff, will you examine this signature, if do you (sic) know this signature?

A. This is my signature, sir.9

According to the Court of Appeals, such admission is binding on her, there being no showing that it was made through palpable mistake or that no such admission was made.10

The Court of Appeals also stated that mere variance of signatures cannot be considered as conclusive proof that the same were forged, as forgery cannot be presumed.11 Appellee Adelaida Meneses should have produced specimen signatures appearing on documents executed in or about the year 1966 for a better comparison and analysis.12

The Court of Appeals held that a notarized document, like the questioned Deed of Absolute Saledated June 20, 1966, has in its favor the presumption of regularity, and to overcome the same,

there must be evidence that is clear, convincing and more than merely preponderant; otherwise, the document should be upheld.13 Moreover, Atty. Abelardo G. Biala − the notary public before whom the questioned Deed of Sale was acknowledged − testified and confirmed its genuinenessand due execution, particularly the signature in question. The appellate court stated that as against appellee Adelaida Meneses’ version, Atty. Biala’s testimony, that appellee appeared before him and acknowledged that the questioned deed was her free and voluntary act, is more credible. The testimony of a notary public enjoys greater credence than that of an ordinary witness.14

The Court of Appeals held that appellee Adelaida Meneses failed to present clear and convincing evidence to overcome the evidentiary force of the questioned Deed of Absolute Sale dated June 1966, which appears on its face to have been executed with all the formalities required by law.

Adelaida Meneses’ motion for reconsideration was denied for lack of merit by the Court of Appeals in a Resolution15 dated April 5, 2006.

Hence, Adelaida Meneses, substituted by her heir, filed this petition raising this lone issue:

IWHETHER THE DECISION OF THE COURT OF APPEALS, WHICH REVERSED THE

DECISION OF THE REGIONAL TRIAL COURT, IS IN KEEPING WITH BOTH LAW ANDJURISPRUDENCE.16

Petitioner contends that her statement, made during the course of her testimony in the trial court, was taken out of context by respondent to be used merely as an argumentative point. Theexamining lawyer used the words, "Do you know this signature?" viz.:

Q. I am showing to you Exhibit "6" and Exhibit "A" for the plaintiff a Deed of Absolute Sale o[f] Real Property of one (1) Adelaida Meneses in favor of Basilio de Guzman. Will you examine thisif you know this Deed of Absolute Sale?

A. I do not know this document, sir.

Q. There is a signature over the name of the vendor Adelaida Meneses which was previously marked as Exhibit "6-a" and Exhibit "A-1" for the plaintiff, will you examine this signature, if do you (sic) know this signature?

A. This is my signature, sir.17

Petitioner contends that in the above-quoted transcript of stenographic notes, she was merely asked if she was cognizant of such a signature as hers or whether the signature appearing on the questioned document was similar to that of her signature, and not if she was the one who indeed affixed such signature on the said deed of sale.1avvphil

She avers that the general rule that a judicial admission is conclusive upon the party invoking it and does not require proof admits of two exceptions: (1) when it is shown that the admission was made through palpable mistake; and (2) when it is shown that no such admission was in fact made. The latter exception allows one to contradict an admission by denying that he made such an admission. For instance, if a party invokes an "admission" by an adverse party, but citesthe admission "out of context," then the one making the admission may show that he made no

such admission, or that his admission was taken out of context.18 This may be interpreted as to mean not in the sense in which the admission is made to appear.19

Petitioner also contends that a comparison of the signature on the Deed of Absolute Sale dated June 20, 1966 and her specimen signatures, as well as her genuine signature on pleadings, were made by the trial court, and it ruled that her signature on the Deed of Absolute Sale dated June 20, 1966 was a forgery. She submits that the trial court’s evaluation of the credibility of witnesses and their testimonies is entitled to great respect,20 and the appellate court should havegiven weight to the trial court’s findings that her signature on the said Deed of Absolute Sale wasa forgery.

The petition is meritorious.

The rule is that the jurisdiction of the Court over appealed cases from the Court of Appeals is limited to the review and revision of errors of law allegedly committed by the appellate court, as its findings of fact are deemed conclusive.21 Thus, this Court is not duty-bound to analyze and weigh all over again the evidence already considered in the proceedings below.22 However, this rule admits exceptions,23 such as when the findings of fact of the Court of Appeals are contrary to the findings and conclusions of the trial court24 like in this case.

The necessity of a public document for contracts which transmit or extinguish real rights over immovable property, as mandated by Article 1358 of the Civil Code,25 is only for convenience; it is not essential for validity or enforceability.26 As notarized documents, Deeds of Absolute Sale carry evidentiary weight conferred upon them with respect to their due execution27 and enjoy the presumption of regularity which may only be rebutted by evidence so clear, strong and convincing as to exclude all controversy as to falsity.28 The presumptions that attach to notarizeddocuments can be affirmed only so long as it is beyond dispute that the notarization was regular.29 A defective notarization will strip the document of its public character and reduce it to aprivate instrument.30 Consequently, when there is a defect in the notarization of a document, the clear and convincing evidentiary standard normally attached to a duly-notarized document is dispensed with, and the measure to test the validity of such document is preponderance of evidence.311avvphi1

In this case, it should be pointed out that contrary to the finding of the Court of Appeals, the Deed of Sale dated June 20, 1966 did not comply with the formalities required by law, specifically Act No. 496,32 otherwise known as The Land Registration Act, which took effect on January 1, 1903, as Section 127 of the Act provides:

FORMS

Section 127. Deeds, conveyances, mortgages, leases, releases, and discharges affecting lands, whether registered under this Act or unregistered, shall be sufficient in law when made substantially in accordance with the following forms, and shall be as effective to convey, encumber, lease, release, discharge, or bind the lands as though made in accordance with the more prolix form heretofore in use: Provided, That every such instrument shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the instrument as witnesses to the execution thereof, and shall be acknowledged to be his or their free act and deed by the person or persons executing the same, before the judge of a court of record or clerk of a court of record, or a notary public, or a justice of the peace, who shall certify to such acknowledgment x x x.33

In the Deed of Absolute Sale dated June 20, 1966, the Notary Public signed his name as one of the two witnesses to the execution of the said deed; hence, there was actually only one witness thereto. Moreover, the residence certificate of petitioner was issued to petitioner and then it was

given to the Notary Public the day after the execution of the deed of sale and notarization; hence, the number of petitioner’s residence certificate and the date of issuance (June 21, 1966) thereof was written on the Deed of Absolute Sale by the Notary Public on June 21, 1966, after the execution and notarization of the said deed on June 20, 1966.34 Considering the defect in thenotarization, the Deed of Absolute Sale dated June 20, 1966 cannot be considered a public document, but only a private document,35 and the evidentiary standard of its validity shall be based on preponderance of evidence.

Section 20, Rule 132 of the Rules of Court provides that before any private document offered as authentic is received in evidence, its due execution and authenticity must be proved either: (a) by anyone who saw the document executed or written; or (b) by evidence of the genuineness of the signature or handwriting of the maker.

In regard to the genuineness of petitioner’s signature appearing on the Deed of Absolute Sale dated June 20, 1966,36 the Court agrees with the trial court that her signature therein is very much different from her specimen signatures37 and those appearing in the pleadings38 of other cases filed against her, even considering the difference of 17 years when the specimen signatures were made. Hence, the Court rules that petitioner’s signature on the Deed of Absolute Sale dated June 20, 1966 is a forgery.

The Court agrees with petitioner that her admission was taken out of context, considering that in her Answer39 to the Complaint, she stated that the alleged Deed of Sale purportedly executed byher in favor of Basilio de Guzman is a forgery; that she never signed the said Deed of Sale; that she did not appear personally before the Notary Public; and that she did not secure the residence certificate mentioned in the said Deed of Sale. She also testified that she never sold her land to Basilio de Guzman;40 that she never met the Notary Public, Attorney Abelardo Biala,41 and that she did not meet Basilio de Guzman on June 20, 1966.42 The trial court found petitioner and her testimony to be credible, and declared the Deed of Sale dated June 20, 1966 null and void ab initio. These circumstances negate the said admission.

The Court finds the Notary Public’s testimony self-serving and unreliable, because although he testified that petitioner was the one who submitted her residence certificate to him on June 21, 1966,43 the next day after the Deed of Absolute Sale was executed on June 20, 1966, Crescencia de Guzman, respondent’s mother, testified that she and her husband got the residence certificate from petitioner and gave it to the Notary Public on June 21, 1966.44 Thus, it is doubtful whether the Notary Public really knew the identity of the vendor who signed the Deedof Absolute Sale45 dated June 20, 1966.

The Court notes that the trial court found petitioner and her testimony to be credible. It is a well-settled doctrine that findings of trial courts on the credibility of witnesses deserve a high degree of respect.46 Having observed the deportment of witnesses during the trial, the trial judge is in a better position to determine the issue of credibility.47

In fine, the preponderance of evidence is with petitioner.

WHEREFORE, the petition is GRANTED. The Court of Appeals’ Decision dated October 27, 2005 and its Resolution dated April 5, 2006 in CA-G.R. CV No. 78217 are REVERSED and SET ASIDE, and the Decision of the Regional Trial Court of Dagupan City, Branch 40 in Civil Case No. D-9040 is hereby REINSTATED.

No costs.

SO ORDERED.

G.R. No. 128991 April 12, 2000

YOLANDA ROSELLO-BENTIR, SAMUEL PORMIDA and CHARITO PORMIDA, petitioners, vs.HONORABLE MATEO M. LEANDA, in his capacity as Presiding Judge of RTC, Tacloban City, Branch 8, and LEYTE GULF TRADERS, INC., respondents.

KAPUNAN, J.:

Reformation. of an instrument is that remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. 1 It is predicated on the equitable maxim that equity treats as done that which ought to be done. 2 Therationale of the doctrine is that it would be unjust and unequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. 3 However, an action for reformation must be brought within the period prescribed by law, otherwise, it will be barred by the mere lapse of time. The issue in this case is whether or not the complaint for reformation filed by respondent Leyte Gulf Traders, Inc. has prescribed and in the negative, whether or not it is entitled to the remedy of reformation sought.

On May 15, 1992, respondent Leyte Gulf Traders, Inc. (herein referred to as respondent corporation) filed a complaint for reformation of instrument, specific performance, annulment of conditional sale and damages with prayer for writ of injunction against petitioners Yolanda Rosello-Bentir and the spouses Samuel and Charito Pormida. The case was docketed as Civil Case No. 92-05-88 and raffled to Judge Pedro S. Espina, RTC, Tacloban City, Branch 7. Respondent corporation alleged that it entered into a contract of lease of a parcel of land with

petitioner Bentir for a period of twenty (20) years starting May 5, 1968. According to respondent corporation, the lease was extended for another four (4) years or until May 31, 1992. On May 5, 1989, petitioner Bentir sold the leased premises to petitioner spouses Samuel Pormada and Charito Pormada. Respondent corporation questioned the sale alleging that it had a right of first refusal. Rebuffed, it filed Civil Case No. 92-05-88 seeking the reformation of the expired contractof lease on the ground that its lawyer inadvertently omitted to incorporate in the contract of leaseexecuted in 1968, the verbal agreement or understanding between the parties that in the event petitioner Bentir leases or sells the lot after the expiration of the lease, respondent corporation has the right to equal the highest offer.

In due time, petitioners filed their answer alleging that the inadvertence of the lawyer who prepared the lease contract is not a ground for reformation. They further contended that respondent corporation is guilty of laches for not bringing the case for reformation of the lease contract within the prescriptive period of ten (10) years from its execution.

Respondent corporation then filed its reply and on November 18, 1992, filed a motion to admit amended complaint. Said motion was granted by the lower court. 4

Thereafter, petitioners filed a motion to dismiss reiterating that the complaint should be dismissed on the ground of prescription.

On December 15, 1995, the trial court through Judge Pedro S. Espina issued an order dismissing the complaint premised on its finding that the action for reformation had already prescribed. The order reads:

ORDER

Resolved here is the defendants' MOTION TO DISMISS PLAINTIFF'S complaint on ground of prescription of action.

It is claimed by plaintiff that he and defendant Bentir entered into a contract of lease ofa parcel of land on May 5, 1968 for a period of 20 years (and renewed for an additional 4 years thereafter) with the verbal agreement that in case the lessor decides to sell the property after the lease, she shall give the plaintiff the right to equalthe offers of other prospective buyers. It was claimed that the lessor violated this tight of first refusal of the plaintiff when she sureptitiously (sic) sold the land to co-defendant Pormida on May 5, 1989 under a Deed of Conditional Sale. Plaintiffs right was further violated when after discovery of the final sale, plaintiff ordered to equal theprice of co-defendant Pormida was refused and again defendant Bentir surreptitiously executed a final deed of sale in favor of co-defendant Pormida in December 11, 1991.

The defendant Bentir denies that she bound herself to give the plaintiff the right of firstrefusal in case she sells the property. But assuming for the sake of argument that such right of first refusal was made, it is now contended that plaintiffs cause of action to reform the contract to reflect such right of first refusal, has already prescribed after 10 years, counted from May 5, 1988 when the contract of lease incepted. Counsel for defendant cited Conde vs. Malaga, L-9405 July 31, 1956 and Ramos vs. Court of Appeals, 180 SCRA 635, where the Supreme Court held that the prescriptive period for reformation of a written contract is ten (10) years under Article 1144 of the Civil Code.

This Court sustains the position of the defendants that this action for reformation of contract has prescribed and hereby orders the dismissal of the case.

SO ORDERED. 5

On December 29, 1995, respondent corporation filed a motion for reconsideration of the order dismissing the complaint.

On January 11, 1996, respondent corporation filed an urgent ex-parte motion for issuance of an order directing the petitioners, or their representatives or agents to refrain from taking possession of the land in question.

Considering that Judge Pedro S. Espina, to whom the case was raffled for resolution, was assigned to the RTC, Malolos, Bulacan, Branch 19, Judge Roberto A. Navidad was designated in his place.

On March 28, 1996, upon motion of herein petitioners, Judge Navidad inhibited himself from hearing the case. Consequently, the case was re-raffled and assigned to RTC, Tacloban City, Branch 8, presided by herein respondent judge Mateo M. Leanda.

On May 10, 1996, respondent judge issued an order reversing the order of dismissal on the grounds that the action for reformation had not yet prescribed and the dismissal was "premature and precipitate", denying respondent corporation of its right to procedural due process. The order reads:

ORDER

Stated briefly, the principal objectives of the twin motions submitted by the plaintiffs, for resolution are:

(1) for the reconsideration of the Order of 15 December 1995 of the Court (RTC, Br. 7), dismissing this case, on the sole ground of prescription of one (1) of the five (5) causes of action of plaintiff in its complaint for "reformation" of a contract of lease; and,

(2) for issuance by this Court of an Order prohibiting the defendants and their privies-in-interest, from taking possession of the leased premises, until a final court order issues for their exercise of dominical or possessory right thereto.

The records of this case reveal that co-defendant BENTER (Yolanda) and plaintiff Leyte Gulf Traders Incorporation, represented by Chairman Benito Ang, entered into acontract of lease of a parcel of land, denominated as Lot No. 878-D, located at Sagkahan District, Tacloban City, on 05 May 1968, for a period of twenty (20) years, (later renewed for an additional two (2) years). Included in said covenant of lease is the verbal understanding and agreement between the contracting parties, that when the defendant (as lessor) will sell the subject property, the plaintiff as (lessee) has the "right of first refusal", that is, the right to equal the offer of any other prospective third-party buyer. This agreement (sic) is made apparent by paragraph 4 of the lease agreement stating:

4. IMPROVEMENT. The lessee shall have the right to erect on the leased premises any building or structure that it may desire without the consent or approval of the Lessor . . . provided that any improvements existing at the

termination of the lease shall remain as the property of the Lessor without right to reimbursement to the Lessee of the cost or value thereof.

That the foregoing provision has been included in the lease agreement if only to convince the defendant-lessor that plaintiff desired a priority right to acquire the property (ibid) by purchase, upon expiration of the effectivity of the deed of lease.

In the course of the interplay of several procedural moves of the parties herein, the defendants filed their motion to admit their amended answer to plaintiff's amended complaint. Correspondingly, the plaintiff filed its opposition to said motion. The former court branch admitted the amended answer, to which order of admission, the plaintiff seasonably filed its motion for reconsideration. But, before the said motion for reconsideration was acted upon by the court, the latter issued an Order on 15 December 1995, DISMISSING this case on the lone ground of prescription of the cause of action of plaintiff's complaint on "reformation" of the lease contract, without anymore considering the remaining cause of action, viz.: (a) on Specific Performance; (b) an Annulment of Sale and Title; (c) on Issuance of a Writ of Injunction, and (d) on Damages.

With due respect to the judicial opinion of the Honorable Presiding Judge of Branch 7 of this Court, the undersigned, to whom this case was raffled to after the inhibition of Judge Roberto Navidad, as acting magistrate of Branch 7, feels not necessary any more to discuss at length that even the cause of action for "reformation" has not, as yet, prescribed.

To the mind of this Court, the dismissal order adverted to above, was obviously premature and precipitate, thus resulting denial upon the right of plaintiff that procedural due process. The other remaining four (4) causes of action of the complaint must have been deliberated upon before that court acted hastily in dismissing this case.

WHEREFORE, in the interest of substantial justice, the Order of the court, (Branch 7, RTC) dismissing this case, is hereby ordered RECONSIDERED and SET ASIDE.

Let, therefore, the motion of plaintiff to reconsider the Order admitting the amended answer and the Motion to Dismiss this case (ibid), be set for hearing on May 24, 1996,at 8:30 o'clock in the morning. Service of notices must be effected upon parties and counsel as early as possible before said scheduled date.

Concomitantly, the defendants and their privies-in-interest or agents, are hereby STERNLY WARNED not to enter, in the meantime, the litigated premises, before a final court order issues granting them dominical as well as possessory right thereto.

To the motion or petition for contempt, filed by plaintiff, thru Atty. Bartolome C. Lawsin,the defendants may, if they so desire, file their answer or rejoinder thereto, before the said petition will be set for hearing. The latter are given ten (10) days to do so, from the date of their receipt of a copy of this Order.

SO ORDERED. 6

On June 10, 1996, respondent judge issued an order for status quo ante, enjoining petitioners todesist from occupying the property. 7

Aggrieved, petitioners herein filed a petition for certiorari to the Court of Appeals seeking the annulment of the order of respondent court with prayer for issuance of a writ of preliminary injunction and temporary restraining order to restrain respondent judge from further hearing the case and to direct respondent corporation to desist from further possessing the litigated premises and to turn over possession to petitioners.

On January 17, 1997, the Court of Appeals, after finding no error in the questioned order nor grave abuse of discretion on the part of the trial court that would amount to lack, or in excess of jurisdiction, denied the petition and affirmed the questioned order. 8 A reconsideration of said decision was, likewise, denied on April 16, 1997. 9

Thus, the instant petition for review based on the following assigned errors, viz:

6:01 THE COURT OF APPEALS ERRED IN HOLDING THAT AN ACTION FOR REFORMATION IS PROPER AND JUSTIFIED UNDER THE CIRCUMSTANCES OF THE PRESENT CASE;

6.02 THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACTION FOR REFORMATION HAS NOT YET PRESCRIBED;

6.03 THE COURT OF APPEALS ERRED IN HOLDING THAT AN OPTION TO BUY IN A CONTRACT OF LEASE IS REVIVED FROM THE IMPLIED RENEWAL OF SUCH LEASE; AND,

6.04 THE COURT OF APPEALS ERRED IN HOLDING THAT A STATUS QUO ANTE ORDER IS NOT AN INJUNCTIVE RELIEF THAT SHOULD COMPLY WITH THE PROVISIONS OF RULE 58 OF THE RULES OF COURT. 10

The petition has merit.

The core issue that merits our consideration is whether the complaint for reformation of instrument has prescribed.1awp++i1

The remedy of reformation of an instrument is grounded on the principle of equity where, in order to express the true intention of the contracting parties, an instrument already executed is allowed by law to be reformed. The right of reformation is necessarily an invasion or limitation of the parol evidence rule since, when a writing is reformed, the result is that an oral agreement is by court decree made legally effective. 11 Consequently, the courts, as the agencies authorized by law to exercise the power to reform an instrument, must necessarily exercise that power sparingly and with great caution and zealous care. Moreover, the remedy, being an extraordinary one, must be subject to limitations as may be provided by law. Our law and jurisprudence set such limitations, among which is laches. A suit for reformation of an instrumentmay be barred by lapse of time. The prescriptive period for actions based upon a written contract and for reformation of an instrument is ten (10) years under Article 1144 of the Civil Code. 12 Prescription is intended to suppress stale and fraudulent claims arising from transactions like the one at bar which facts had become so obscure from the lapse of time or defective memory. 13 In the case at bar, respondent corporation had ten (10) years from 1968, the time when the contract of lease was executed, to file an action for reformation. Sadly, it did so only on May 15, 1992 or twenty-four (24) years after the cause of action accrued, hence, its cause of action has become stale, hence, time-barred.

In holding that the action for reformation has not prescribed, the Court of Appeals upheld the ruling of the Regional Trial Court that the 10-year prescriptive period should be reckoned not

from the execution of the contract of lease in 1968, but from the date of the alleged 4-year extension of the lease contract after it expired in 1988. Consequently, when the action for reformation of instrument was filed in 1992 it was within ten (10) years from the extended period of the lease. Private respondent theorized, and the Court of Appeals agreed, that the extended period of lease was an "implied new lease" within the contemplation of Article 1670 of the Civil Code, 14under which provision, the other terms of the original contract were deemed revived in the implied new lease.

We do not agree. First, if, according to respondent corporation, there was an agreement between the parties to extend the lease contract for four (4) years after the original contract expired in 1988, then Art. 1670 would not apply as this provision speaks of an implied new lease(tacita reconduccion) where at the end of the contract, the lessee continues to enjoy the thing leased "with the acquiescence of the lessor", so that the duration of the lease is "not for the period of the original contract, but for the time established in Article 1682 and 1687." In other words, if the extended period of lease was expressly agreed upon by the parties, then the term should be exactly what the parties stipulated, not more, not less. Second, even if the supposed 4-year extended lease be considered as an implied new lease under Art. 1670, "the other terms of the original contract" contemplated in said provision are only those terms which are germane to the lessee's right of continued enjoyment of the property leased. 15 The prescriptive period of ten (10) years provided for in Art. 1144 16 applies by operation of law, not by the will of the parties. Therefore, the right of action for reformation accrued from the date of execution of the contract of lease in 1968.

Even if we were to assume for the sake of argument that the instant action for reformation is not time-barred, respondent corporation's action will still not prosper. Under Section 1, Rule 64 of the New Rules of Court, 17 an action for the reformation of an instrument is instituted as a specialcivil action for declaratory relief. Since the purpose of an action for declaratory relief is to secure an authoritative statement of the rights and obligations of the parties for their guidance in the enforcement thereof, or compliance therewith, and not to settle issues arising from an alleged breach thereof, it may be entertained only before the breach or violation of the law or contract to which it refers. 18 Here, respondent corporation brought the present action for reformation after an alleged breach or violation of the contract was already committed by petitioner Bentir. Consequently, the remedy of reformation no longer lies.

We no longer find it necessary to discuss the other issues raised considering that the same are predicated upon our affirmative resolution on the issue of the prescription of the action for reformation.

WHEREFORE, the petition is hereby GRANTED. The Decision of the Court of Appeals dated January 17, 1997 is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Tacloban City, Branch 7, dated December 15, 1995 dismissing the action for reformation is REINSTATED.1âwphi1.nêt

SO ORDERED.

G.R. No. 174240 March 20, 2013

SPOUSES LEHNER and LUDY MARTIRES, Petitioners, vs.MENELIA CHUA, Respondent.

D E C I S I O N

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seekingto reverse and set aside the Amended Decision,1 as well as the Resolutions2 of the Court of Appeals (CA), dated September 30, 2005, July 5, 2006 and August 28, 2006, respectively, in CA-G.R. CV No. 76388. The assailed Decision of the CA reversed and set aside its earlier Decision, dated April 30, 2004, in favor of petitioners. The July 5, 2006 Resolution denied petitioners' Motion for Reconsideration, while the August 28, 2006 Resolution denied petitioners' Second Motion for Reconsideration.

The factual and procedural antecedents of the case are as follows:

Subject of the instant controversy are twenty-four memorial lots located at the Holy Cross Memorial Park in Barangay Bagbag, Novaliches, Quezon City. The property, more particularly described as "Lot: 24 lots, Block 213, Section: Plaza of Heritage-Reg.," is covered by Transfer Certificate of Title (TCT) No. 342914. Respondent, together with her mother, Florencia R. Calagos, own the disputed property. Their co-ownership is evidenced by a Deed of Sale and Certificate of Perpetual Care, denominated as Contract No. 31760, which was executed on June4, 1992.3

On December 18, 1995, respondent borrowed from petitioner spouses the amount of P150,000.00. The loan was secured by a real estate mortgage over the abovementioned property. Respondent committed to pay a monthly interest of 8% and an additional 10% monthlyinterest in case of default.4

Respondent failed to fully settle her obligation.

Subsequently, without foreclosure of the mortgage, ownership of the subject lots were transferred in the name of petitioners via a Deed of Transfer.5

On June 23, 1997, respondent filed with the Regional Trial Court (RTC) of Quezon City a Complaint against petitioners, Manila Memorial Park Inc., the company which owns the Holy Cross Memorial Park, and the Register of Deeds of Quezon City, praying for the annulment of the contract of mortgage between her and petitioners on the ground that the interest rates imposed are unjust and exorbitant. Respondent also sought accounting to determine her liability under the law. She likewise prayed that the Register of Deeds of Quezon City and Manila Memorial Park, Inc. be directed to reconvey the disputed property to her.6

On November 20, 1998, respondent moved for the amendment of her complaint to include the allegation that she later discovered that ownership of the subject lots was transferred in the name of petitioners by virtue of a forged Deed of Transfer and Affidavit of Warranty. Respondentprayed that the Deed of Transfer and Affidavit of Warranty be annulled.7 In their Manifestation dated January 25, 1999, petitioners did not oppose respondent's motion.8 Trial ensued.

After trial, the RTC of Quezon City rendered a Decision in favor of petitioners, the dispositive portion of which reads, thus:

Wherefore, premises considered, judgment is hereby rendered against Menelia R. Chua and in favor of the Sps. Lehner Martires and Ludy Martires; and Manila Memorial Park Cemetery, Inc. as follows:

1. The Complaint is denied and dismissed for lack of merit;

2. The counterclaims are granted as follows:

a. Menelia R. Chua is ordered to pay the Sps. Martires the amount of P100,000.00 as moral damages; the amount of P50,000.00 as exemplarydamages; and the amount of P30,000.00 as reasonable attorney’s fees pluscosts of suit.

b. Menelia R. Chua is ordered to pay Manila Memorial Park Cemetery, Inc. the amount ofP30,000.00 as reasonable attorney's fees plus costs of suit.

SO ORDERED.9

On appeal, the CA affirmed, with modification, the judgment of the RTC, disposing as follows:

WHEREFORE, premises considered, the instant appeal is hereby DENIED for lack of merit, and the decision of the trial court dated 03 August 2002 is hereby AFFIRMED with MODIFICATION as to the amount of moral and exemplary damages, and attorney's fees. Plaintiff-appellant Menelia R. Chua is hereby ordered to pay the defendant-appellees Spouses Martires the

amount of P30,000.00 as moral damages; P20,000.00 as exemplary damages; and attorney's fees of P10,000.00 plus costs of suit.

Insofar as defendant-appellee Manila Memorial Park Cemetery, Inc. is concerned, the attorney's fees awarded is reduced to P10,000.00 plus costs of suit.

SO ORDERED.10

The CA ruled that respondent voluntarily entered into a contract of loan and that the execution ofthe Deed of Transfer is sufficient evidence of petitioners' acquisition of ownership of the subject property.

Respondent filed a Motion for Reconsideration.11 Petitioners opposed it.12

On September 30, 2005, the CA promulgated its assailed Amended Decision with the following dispositive portion:

WHEREFORE, the Court grants the movant's Motion for Reconsideration.

Accordingly, the decision of this Court dated April 30, 2004 in CA-G.R. CV No. 76388, which hadaffirmed the judgment of the Regional Trial Court of Quezon City, Branch 221, in Civil Case No. Q-97-31408, is REVERSED and SET ASIDE, and it is hereby declared that:

(1) The assailed decision dated August 3, 2002 of the Regional Trial Court of Quezon City Branch 221 in Civil Case No. Q-97-31408 is hereby Reversed with the following MODIFICATIONS, to wit:

(1) The Deed of Transfer dated July 3, 1996, as well as the Affidavit of Warranty, are hereby declared void ab initio;

(2) The loan of P150,000.00 is hereby subject to an interest of 12% per annum.

(3) The Manila Memorial Park Cemetery, Inc. and the Register of Deeds of Quezon City [are] hereby directed to cancel the registration or annotation of ownership of the spouses Martires on Lot: 24 lots, Block 213, Section: Plaza Heritage – Regular, Holy Cross Memorial Park, being a portion of Transfer Certificate of Title No. 342914 issued by the Register of Deeds of Quezon City, and revert registration of ownership over the same in the name of appellant Menelia R. Chua, and Florencia R. Calagos.

(4) The movant, Menelia R. Chua, is hereby ordered to pay the spouses Martires the amount ofP150,000.00 plus interest of 12% per annum computed from December 18, 1995 up to the time of full payment thereof and, after deducting payments made in thetotal amount of P80,000.00, the same shall be paid within ninety (90) days from the finality of this decision. In case of failure to pay the aforesaid amount and the accrued interests from the period hereinstated, the property shall be sold at public auction to satisfy the mortgage debt and costs, and if there is an excess, the same is to be givento the owner.

No costs.

SO ORDERED.13

The CA reconsidered its findings and concluded that the Deed of Transfer which, on its face, transfers ownership of the subject property to petitioners, is, in fact, an equitable mortgage. The CA held that the true intention of respondent was merely to provide security for her loan and not to transfer ownership of the property to petitioners. The CA so ruled on the basis of its findings that: (1) the consideration, amounting to P150,000.00, for the alleged Deed of Transfer is unusually inadequate, considering that the subject property consists of 24 memorial lots; (2) the Deed of Transfer was executed by reason of the same loan extended by petitioners to respondent; (3) the Deed of Transfer is incomplete and defective; and (4) the lots subject of the Deed of Transfer are one and the same property used to secure respondent's P150,000.00 loan from petitioners.

Petitioners filed a Motion for Reconsideration,14 but the CA denied it in its Resolution dated July 5, 2006.

On July 26, 2006, petitioners filed a Second Motion for Reconsideration,15 but again, the CA denied it via its Resolution dated August 28, 2006.

Hence, the present petition based on the following grounds:

A. THE COURT OF APPEALS PATENTLY ERRED IN NOT UPHOLDING THE DEED OF TRANSFER EXECUTED BY THE RESPONDENT IN FAVOR OF THE PETITIONERS BY RULING THAT:

1. The Deed of Transfer executed by respondent in favor of petitioners over the subject property was not entered in the Notarial Book of Atty. Francisco Talampas andreported in the Notarial Section of the Regional Trial Court of Makati City.

2. The Deed of Transfer was not duly notarized by Atty. Francisco Talampas inasmuch as there was no convincing proof that respondent appeared before Notary Public Atty. Talampas.

B. THE COURT OF APPEALS PATENTLY ERRED IN RULING THAT THE DEED OF TRANSFER EXECUTED BETWEEN THE RESPONDENT AND THE PETITIONERS CONSTITUTED AN EQUITABLE MORTGAGE CONSIDERING THAT:

1. Said issue was not raised in any pleading in the appellate and trial courts.1âwphi1

2. Respondent herself admitted that a separate mortgage was executed to secure the loan.16

The petition lacks merit.

At the outset, the instant petition should be denied for being filed out of time. Petitioners admit inthe instant petition that: (1) on July 18, 2006, they received a copy of the July 5, 2006 Resolutionof the CA which denied their Motion for Reconsideration of the assailed Amended Decision; (2) on July 26, 2006, they filed a Motion to Admit Second Motion for Reconsideration attaching thereto the said Second Motion for Reconsideration; (3) on September 5, 2006, they received a copy of the August 28, 2006 Resolution of the CA which denied their Motion to Admit as well as their Second Motion for Reconsideration; and (4) they filed the instant petition on October 20, 2006.

Section 2, Rule 45 of the Rules of Court provides that a petition for review on certiorari under thesaid Rule "shall be filed within fifteen (15) days from notice of the judgment or final order or resolution appealed from or of the denial of the petitioner's motion for new trial or reconsideration filed in due time after notice of the judgment." Relative thereto, Section 2, Rule 52 of the same Rules provides that "no second motion for reconsideration of a judgment or final resolution by the same party shall be entertained." Based on the abovementioned dates, the start f the 15-day period for the filing of this petition should have been reckoned from July 18, 2006, the time of petitioners' receipt of the CA Resolution denying their Motion for Reconsideration, and not on September 5, 2006, the date when they received the CA Resolutiondenying their Second Motion for Reconsideration. Thus, petitioners should have filed the instant petition not later than August 2, 2006. It is wrong for petitioners to reckon the 15-day period for the filing of the instant petition from the date when they received the copy of the CA Resolution denying their Second Motion for Reconsideration. Since a second motion for reconsideration is not allowed, then unavoidably, its filing did not toll the running of the period to file an appeal by certiorari.17Petitioners made a critical mistake in waiting for the CA to resolve their second motion for reconsideration before pursuing an appeal.

Perfection of an appeal within the reglementary period is not only mandatory but also jurisdictional.18 For this reason, petitioners' failure to file this petition within the 15-day period rendered the assailed Amended CA Decision and Resolutions final and executory, thus, depriving this Court of jurisdiction to entertain an appeal therefrom.19On this ground alone, the instant petition should be dismissed.

In any case, even granting, arguendo, that the present petition is timely filed, the Court finds no cogent reason to depart from the findings and conclusions of the CA in its disputed Amended Decision.

Anent the first assigned error, petitioners are correct in pointing out that notarized documents carry evidentiary weight conferred upon them with respect to their due execution and enjoy the presumption of regularity which may only be rebutted by evidence so clear, strong and convincing as to exclude all controversy as to falsity.20However, the presumptions that attach to notarized documents can be affirmed only so long as it is beyond dispute that the notarization was regular.21 A defective notarization will strip the document of its public character and reduce itto a private instrument.22 Consequently, when there is a defect in the notarization of a document,the clear and convincing evidentiary standard normally attached to a duly-notarized document is dispensed with, and the measure to test the validity of such document is preponderance of evidence.23

In the present case, the CA has clearly pointed out the dubious circumstances and irregularities attendant in the alleged notarization of the subject Deed of Transfer, to wit: (1) the Certification24 issued by the Clerk of Court of the Notarial Section of the RTC of Makati City which supposedly attested that a copy of the subject Deed of Transfer is on file with the said court, was contradicted by the Certification25 issued by the Administrative Officer of the Notarial Section of the same office as well as by the testimony of the court employee who prepared the Certification issued by the Clerk of Court, to the effect that the subject Deed of Transfer cannot, in fact, be found in their files; (2) respondent's categorical denial that she executed the subject Deed of Transfer; and (3) the subject document did not state the date of execution and lacks themarital consent of respondent's husband.

Indeed, petitioners' heavy reliance on the Certification issued by the notary public who supposedly notarized the said deed, as well as the Certification issued by the Clerk of Court of the Notarial Section of the RTC of Makati City, is misplaced for the following reasons: first, the persons who issued these Certifications were not presented as witnesses and, as such, they could not be cross-examined with respect to the truthfulness of the contents of their Certifications; second, as mentioned above, these Certifications were contradicted by the Certification issued by the Administrative Officer of the Notarial Section of the RTC of Makati

City as well as by the admission, on cross-examination, of the clerk who prepared the Certification of the Clerk of Court, that their office cannot, in fact, find a copy of the subject Deed of Transfer in their files;26 and third, the further admission of the said clerk that the Certification, which was issued by the clerk of court and relied upon by petitioners, was not based on documents existing in their files, but was simply based on the Certification issued by the notary public who allegedly notarized the said Deed of Transfer.27

Assuming further that the notarization of the disputed Deed of Transfer was regular, the Court, nonetheless, is not persuaded by petitioners' argument that such Deed is a sufficient evidence ofthe validity of the agreement between petitioners and respondent.

While indeed a notarized document enjoys the presumption of regularity, the fact that a deed is notarized is not a guarantee of the validity of its contents.28 The presumption is not absolute and may be rebutted by clear and convincing evidence to the contrary.29 In the present case, the presumption cannot be made to apply, because aside from the regularity of its notarization, the validity of the contents and execution of the subject Deed of Transfer was challenged in the proceedings below where its prima facie validity was subsequently overthrown by the questionable circumstances attendant in its supposed execution. These circumstances include: (1) the alleged agreement between the parties that the ownership of the subject property be simply assigned to petitioners instead of foreclosure of the contract of mortgage which was earlier entered into by them; (2) the Deed of Transfer was executed by reason of the loan extended by petitioners to respondent, the amount of the latter's outstanding obligation being thesame as the amount of the consideration for the assignment of ownership over the subject property; (3) the inadequacy of the consideration; and (4) the claim of respondent that she had no intention of transferring ownership of the subject property to petitioners.

Based on the foregoing, the Court finds no cogent reason to depart from the findings of the CA that the agreement between petitioners and respondent is, in fact, an equitable mortgage.

An equitable mortgage has been defined as one which, although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, there being no impossibility nor anything contrary to law in this intent.30

One of the circumstances provided for under Article 1602 of the Civil Code, where a contract shall be presumed to be an equitable mortgage, is "where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation." In the instant case, it has been established that the intent of both petitioners and respondent is that the subject property shall serve as security for the latter's obligation to the former. As correctly pointed out by the CA, the circumstances surrounding the execution of the disputed Deed of Transfer would show that the said document was executed to circumvent the terms of the original agreement and deprive respondent of her mortgaged property without the requisite foreclosure.

With respect to the foregoing discussions, it bears to point out that in Misena v. Rongavilla,31 a case which involves a factual background similar to the present case, this Court arrived at the same ruling. In the said case, the respondent mortgaged a parcel of land to the petitioner as security for the loan which the former obtained from the latter. Subsequently, ownership of the property was conveyed to the petitioner via a Deed of Absolute Sale. Applying Article 1602 of the Civil Code, this Court ruled in favor of the respondent holding that the supposed sale of the property was, in fact, an equitable mortgage as the real intention of the respondent was to provide security for the loan and not to transfer ownership over the property.

Since the original transaction between the parties was a mortgage, the subsequent assignment of ownership of the subject lots to petitioners without the benefit of foreclosure proceedings,

partakes of the nature of a pactum commissorium, as provided for under Article 2088 of the CivilCode.

Pactum commissorium is a stipulation empowering the creditor to appropriate the thing given as guaranty for the fulfillment of the obligation in the event the obligor fails to live up to his undertakings, without further formality, such as foreclosure proceedings, and a public sale.32

In the instant case, evidence points to the fact that the sale of the subject property, as proven bythe disputed Deed of Transfer, was simulated to cover up the automatic transfer of ownership in petitioners' favor. While there was no stipulation in the mortgage contract which provides for petitioners' automatic appropriation of the subject mortgaged property in the event that respondent fails to pay her obligation, the subsequent acts of the parties and the circumstances surrounding such acts point to no other conclusion than that petitioners were empowered to acquire ownership of the disputed property without need of any foreclosure.

Indeed, the Court agrees with the CA in not giving credence to petitioners' contention in their Answer filed with the RTC that respondent offered to transfer ownership of the subject property in their name as payment for her outstanding obligation. As this Court has held, all persons in need of money are liable to enter into contractual relationships whatever the condition if only to alleviate their financial burden albeit temporarily.33

Hence, courts are duty-bound to exercise caution in the interpretation and resolution of contractslest the lenders devour the borrowers like vultures do with their prey.34 Aside from this aforementioned reason, the Court cannot fathom why respondent would agree to transfer ownership of the subject property, whose value is much higher than her outstanding obligation topetitioners. Considering that the disputed property was mortgaged to secure the payment of her obligation, the most logical and practical thing that she could have done, if she is unable to pay her debt, is to wait for it to be foreclosed. She stands to lose less of the value of the subject property if the same is foreclosed, rather than if the title thereto is directly transferred to petitioners. This is so because in foreclosure, unlike in the present case where ownership of the property was assigned to petitioners, respondent can still claim the balance from the proceeds ofthe foreclosure sale, if there be any. In such a case, she could still recover a portion of the value of the subject property rather than losing it completely by assigning its ownership to petitioners.

As to the second assigned error, the Court is not persuaded by petitioners' contention that the issue of whether or not the subject Deed of Transfer is, in fact, an equitable mortgage was not raised by the latter either in the RTC or the CA.

It is true that, as a rule, no issue may be raised on appeal unless it has been brought before the lower tribunal for its consideration.35 Higher courts are precluded from entertaining matters neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the first time only in a motion for reconsideration or on appeal.36 However, as with most procedural rules, this maxim is subject to exceptions.37 In this regard, the Court's ruling in Mendoza v. Bautista38 is instructive, to wit:

x x x Indeed, our rules recognize the broad discretionary power of an appellate court to waive the lack of proper assignment of errors and to consider errors not assigned. Section 8 of Rule 51of the Rules of Court provides:

SEC. 8 Questions that may be decided. - No error which does not affect the jurisdiction over the subject matter or the validity of the judgment appealed from or the proceedings therein will be considered, unless stated in the assignment of errors, or closely related to or dependent on an assigned error and properly argued in the brief, save as the court may pass upon plain errors and clerical errors.

Thus, an appellate court is clothed with ample authority to review rulings even if they are not assigned as errors in the appeal in these instances: (a) grounds not assigned as errors but affecting jurisdiction over the subject matter; (b) matters not assigned as errors on appeal but are evidently plain or clerical errors within contemplation of law; (c) matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just decision and complete resolution of the case or to serve the interests of justice or to avoid dispensing piecemeal justice; (d) matters not specifically assigned as errors on appeal but raised in the trial court and are matters of record having some bearing on the issue submitted which the parties failed to raise or which the lower court ignored; (e) matters not assigned as errors on appeal but closely related to an error assigned; and (f) matters not assigned as errors on appeal but upon which the determination of a question properly assigned, is dependent.39

In the present case, petitioners must be reminded that one of the main issues raised by respondent in her appeal with the CA is the validity and due execution of the Deed of Transfer which she supposedly executed in petitioners' favor. The Court agrees with respondent that, under the factual circumstances obtaining in the instant case, the determination of the validity of the subject Deed of Transfer would necessarily entail or involve an examination of the true nature of the said agreement. In other words, the matter of validity of the disputed Deed of Transfer and the question of whether the agreement evidenced by such Deed was, in fact, an equitable mortgage are issues which are closely related, which can, thus, be resolved jointly by the CA.

WHEREFORE, the instant petition is DENIED. The assailed Amended Decision and Resolutionsof the Court of Appeals, dated September 30, 2005, July 5, 2006 and August 28, 2006, respectively, in CA-G.R. CV No. 76388, are AFFIRMED.

SO ORDERED.

G.R. No. 141733 February 8, 2007

(NOTE: UNSURE IF THIS IS THE RIGHT CASE)

SECURITY BANK CORPORATION, Petitioner, vs.HON. COURT OF APPEALS, LIBERTY INSURANCE CORPORATION and PHILIPPINE INDUSTRIAL SECURITY AGENCY CORPORATION, Respondents.

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the Decision dated August 31, 1999 and the Resolution dated January 31, 2000 of the Court of Appeals in CA-G.R. CV No. 45259,1which affirmed the Order dated July 12, 1993 of the Regional Trial Court (RTC), dismissing the complaint of petitioner Security Bank Corporation (SBC) pro tanto as against respondent Philippine Industrial Security Agency Corporation (PISA). 2

On October 23, 1991, SBC and PISA entered into a "Contract of Security Services" (CSS)3 wherein PISA undertook to secure, guard, and protect the personnel and property of SBC through the deployment of qualified and properly equipped guards in SBC’s premises and branches. Paragraph 9 of the CSS provides:

[PISA] shall be liable for any loss, damage or injury suffered by [SBC], its officers, employees, clients, guests, visitors and other persons allowed entry into [SBC’s] premises where such loss, damage or injury is due to the negligence or willful act of the guards or representatives of [PISA].If such loss, damage or injury is caused by a party other than the guards or representatives of [PISA], [PISA] shall be jointly and severally liable with said party if [PISA] failed to exercise due [diligence] in preventing such loss, damage or injury. 4

Paragraph 12 of the CSS also provides:

12. [SBC] obliges itself to inform [PISA] in writing through [the] Guard-in-Charge assigned to the former, the existence of any loss or damage to [SBC’s] properties within Forty-Eight (48) hours after its discovery by [SBC]; otherwise, [SBC] shall be considered to have waived its right to proceed against [PISA] by reason of such loss or damage. Such written notice is not required if [PISA] took part in the investigation of the loss or damage or in case the loss or damage is caused by [PISA’s] guard/s or representative/s, in which case [SBC] may assert the claim for reimbursement at any time. x x x 5 (Emphasis added)

On March 12, 1992, the Taytay Branch Office of SBC was robbed PHP12,927,628.01. Among the suspects in the robbery were two regular security guards of PISA. 6

At the time, SBC Taytay Branch was covered by a "Money, Securities and Payroll Robbery Policy" with Liberty Insurance Corporation (LIC), wherein the latter endeavored to indemnify the former against "loss of money, payroll and securities that may result from robbery or any attemptthereof within the premises of SBC’s Taytay Branch Office, up to the maximum amount of PHP9,900,000.00." 7 The insurance policy provided, however, that LIC would not be liable if the loss was caused by any dishonest, fraudulent or criminal act of SBC officers, employees or by its authorized representative.8

On June 23, 1992, SBC and PISA entered into a Post-Robbery Agreement (PRA) whereby PISApaid PHP3,027,728.01, which was the difference between the total amount lost and the maximum amount insured.9PISA made the payment in the interest of maintaining good relations,without necessarily admitting its liability for the loss suffered by SBC by reason of the Taytay robbery. 10

Paragraph 5 of the PRA specifically states that PISA’s payment was subject to express terms and conditions, one of which was the following:

(e) The parties hereto further agree that this agreement and/or payment of the whole amount of P3,027,728.01, shall not affect or prejudice, directly or indirectly, whatever cause of action SBC may have against PISA and whatever claim or defense the latter may have against SBC, if the maximum recoverable proceeds of the insurance covering the loss suffered by SBC could not berecovered from the insurer. Further, it is agreed that should Security Guards Wilson Taca and Ernesto Mariano be absolved from the charge of robbery in band and/or are found by the proper court not to have been involved at all in the alleged conspiracy, and that it is duly established through legal action before the competent court that their failure to prevent the robbery was not due to their, or their PISA co-guards’ negligence and/or willful act, whatever installments may have been paid by PISA under this Agreement shall be reimbursed with legal interest to be computed from the time of actual payment, the same to be amortized in eighteen (18) equally monthly installments, with the interest thereto being based on the diminishing balance. 11 (Emphasis added)

SBC filed a claim with LIC based on its existing insurance policy. LIC denied the claim for indemnification on August 5, 1992, on the ground that the loss suffered by SBC fell under the general exceptions to the policy, in view of the alleged involvement of PISA’s two security guards. 12

In its letter dated August 28, 1992, SBC informed PISA of the denial of the former’s insurance claim with LIC and thereafter sought indemnification of the unrecovered amount of PHP9,900,000.00.13 PISA denied the claim in a letter written by its counsel, dated September 17, 1992, to wit: 14

We have advised our client that your letter of demand appears to be premature, in light of the following circumstances:

(a) precisely under par. 5(e) of the [PRA], upon which your demand letter is based, it is too early in the day to impute to our client any responsibility for the loss suffered by the bank.

(b) The mere rejection by the insurer of the Bank’s claim does not really seal the fate of said claim, for the Bank can very ably show that the insurer erred in rejecting the claim.

(c) In any case, the question of criminal involvement of PISA’s guards has not been resolved as yet by a competent court as called for by par. 5(e) of the [PRA], let alone with any degree of finality. 15

On November 16, 1992, SBC filed a complaint for a sum of money against LIC based on the "Money, Securities and Payroll Robbery Policy," and against PISA as an alternative defendant based on the CSS. SBC prayed that it be indemnified by either one of the defendants for PHP9,900,000.00 plus 15% as attorney’s fees and cost of suit.16

Instead of filing an answer, PISA filed a motion to dismiss, on the ground that the complaint failed to state a cause of action and/or the supposed cause of action was premature.17 PISA, noting that it was being sued by SBC under an alternative cause of action, invoked paragraph 5(e) of the PRA and claimed that SBC’s right of action against PISA was subject to at least two suspensive conditions. First, SBC could not recover the PHP9.9-million from the insurer, defendant LIC; and second, the two security guards facing criminal prosecution for robbery in band must first be convicted and found to have been involved in the robbery or otherwise found by a competent court to have been negligent. According to PISA, SBC’s complaint made no averment that (a) there had been a final judgment rejecting SBC’s claim against the insurer; or (b) that the two PISA guards had been convicted of the charge of robbery in band, or had been found by a competent court to have been involved in the alleged conspiracy or to have been negligent in connection with the robbery. Hence, PISA concluded that SBC’s complaint against itwas premature and should be dismissed. 18

SBC opposed PISA’s motion to dismiss, arguing that the latter’s interpretation of the PRA was erroneous.19According to SBC, the CSS was expressly made an integral part of the PRA, so their provisions "should be used hand in hand" in determining the respective rights and obligations of the parties. Thus, the PRA "does not, to the exclusion of [the CSS], control or govern the determination of the right — or accrual of the right" of SBC to sue PISA.20 Invoking paragraph 12 of the CSS, SBC asserted that it could pursue its claim for reimbursement against PISA at any time, without regard to the fulfillment or non-fulfillment of the supposed suspensive conditions.

SBC also denied that the PRA had suspensive conditions. It claimed that the interim non-recovery of the insured amount may only be an occasion for SBC to suspend the collection of PISA’s liability, but does not operate to prevent SBC from pursuing its claim against PISA anytime. SBC pointed out that the insurance contract was not intended for PISA’s benefit, as thelatter was not privy to the contract and hence, could not avail itself of the benefits thereby given to SBC. As for the second alleged suspensive condition, SBC disagreed that the conviction or acquittal of the guards (from the robbery charge) would preclude SBC from recovering against PISA, as the former could still prove the other security guards’ negligence, for which PISA may be made liable. SBC then stressed that the main issue in the criminal case was the guilt of the accused guards, whereas the issue in its civil complaint pertains to the negligence of the same, or that of the other guards of PISA, and PISA’s liability therefor. SBC thus posits that it was not necessary for it to make averments as to the fulfillment of these two alleged suspensive conditions.

The RTC granted PISA’s motion, and dismissed the case pro tanto as against PISA.21 The trial court sustained PISA’s interpretation of the PRA, i.e., that the latter’s liability to SBC for the losses incurred from the March 12, 1992 robbery was dependent upon the occurrence of two events: (1) SBC’s claim for indemnity against LIC is resolved by final judgment against the bank;and (2) the two security guards of PISA facing criminal charges for robbery are found guilty, or declared to have been negligent in the performance of their guard duties. Since SBC’s complaintmade no averment as to the fulfillment of these suspensive conditions, the RTC held that the suit by SBC against PISA was premature.22

The RTC likewise denied SBC’s motion for reconsideration. 23

On appeal, the Court of Appeals affirmed the dismissal. 24 Although it ruled that SBC’s right of action against PISA was not subject to the condition that the two security guards of PISA facing criminal charges for robbery should have been found guilty, or declared to have been negligent in the performance of their guard duties, the appellate court held that SBC’s right of action against PISA was subject to a condition precedent, i.e., that there first be a final adjudication of SBC’s case against LIC, denying SBC’s claim for indemnification. According to the Court of Appeals, the PRA takes precedence over the CSS in respect of PISA’s liability for the robbery.

Unsatisfied, SBC comes now before this Court, on the grounds that the Court of Appeals erred in declaring:

(1) A suspensive condition exists in paragraph 5 of the PRA which bars SBC from impleading PISA as an alternative defendant in civil case No. 92-337 until after the final adjudication of the suit instituted by SBC against LIC for payment of indemnity; and

(2) The PRA takes precedence over the CSS.

We grant the petition.

At the outset, it should be noted that at the heart of this controversy is the proper interpretation of paragraph 5(e) of the PRA, which provides:

The parties hereto further agree that this agreement and/or payment of the whole amount of P3,027,728.01, shall not affect or prejudice, directly or indirectly, whatever cause of action SBC may have against PISA and whatever claim or defense the latter may have against SBC, if the maximum recoverable proceeds of the insurance covering the loss suffered by SBC could not berecovered from the insurer. x x x

Prior to the robbery, the right of SBC to claim indemnity from PISA for the damage done by the willful or negligent acts of the former’s guards could be asserted at any time, under paragraphs 9and 12 of the CSS. But after the robbery and the execution of the PRA, the question now raised is whether SBC’s right of action against PISA accrues only upon the non-recovery of indemnity from LIC; and if so, whether the non-recovery should be the result of a final adjudication by a court.

It is the thrust of PISA’s arguments that while the CSS governs generally the question of PISA’s liability to SBC (for the loss, damage or injury that is due to the negligence or willful act of PISA’sguards or representatives), SBC’s complaint deals with a specific situation arising from a distinct,particular event of robbery, for which PISA and SBC have executed a new special "Agreement" (the PRA) to govern their rights and obligations. Invoking the maxim generalia specialibus non derogant (general provisions do not derogate special or specific ones), PISA asserts that the PRA precisely governs the question of whether SBC’s right to sue PISA for an alleged liability arising from robbery has accrued and become enforceable. Thus, it is alleged that SBC’s right tosue PISA is no longer unrestricted, as the clear import of paragraph 5(e) of the PRA is that recovery of the insurance proceeds would affect or prejudice SBC’s claim against PISA. PISA argues, therefore, that it is only upon the failure of SBC to recover from the insurance proceeds, by final judgment, that the latter would have recourse against PISA.

SBC, on the other hand, argues that the legal effect of a contract (the PRA) is not to be determined alone by any particular provision taken separately and independently from other provisions thereof. The contract must be taken as a whole, inclusive of all annexes that have been made an integral part. SBC argues that there was no intention to make the PRA a separate and independent agreement that would take precedence over other agreements between the parties because of the following reasons:

(a) paragraph 1 of the PRA explicitly states that "the respective rights and obligations of the parties x x x with respect to the security services being performed by PISA is embodied in x x x the ‘Contract of Security Services;’"

(b) the contract of security services was explicitly attached and made an integral part of the PRA; and

(c) it is in paragraph 9 of the CSS that PISA’s liability is determined for the loss, damage or injury due to the negligence or willful act of the guards or representative of PISA, or when such loss, damage or injury is caused by another party if PISA failed toexercise due diligence in preventing such loss, damage or injury.

SBC, therefore, denies that paragraph 5(e) made the non-recovery from LIC a condition precedent before SBC could file a case against PISA.

SBC also asserts that even if it could be argued that the PRA governs the liability of PISA as to the robbery, this liability would only be for the amount of PHP3,027,728.01 which the latter has paid, and not the PHP9,900,000.00, which is the balance of the loss suffered by SBC from the robbery. This balance, SBC said it could pursue against PISA at any time, pursuant to the CSS.

SBC also objects to the interpretation of paragraph 5(e) that there must be a finality of denial by LIC before SBC can pursue its claim against PISA. SBC argues that this paragraph only provides the availability of recourse against PISA in the event of non-recovery from LIC, and is not a suspensive condition.

Finally, SBC claims that nowhere in the PRA is the liability of PISA made dependent on and subsidiary to LIC, and points out that PISA and LIC have no privity of contract between them. According to SBC, the sole reason for impleading PISA in the civil suit was pursuant to Rule 3 ofthe Rules of Court on alternative defendants. SBC thus stresses that inasmuch as the liabilities of LIC and PISA are primary under their respective contracts, and both have denied the claim of SBC, the latter has properly impleaded LIC and PISA in order to be afforded complete relief in one instance.

To start with, we agree with the Court of Appeals that SBC’s right of action against PISA was modified by the PRA, insofar as the PISA’s liability for the Taytay robbery is concerned, particularly through paragraph 5(e). The Court of Appeals stated:25

While it cannot be gainsaid that the terms and conditions in the Contract of Security Services (CSS) were incorporated to the PRA (sic) as integral parts thereof, nevertheless, We conform to the finding of the court of origin that the 2nd contract (PRA) precisely and particularly dealt with the mode of resolving PISA’s liability resulting, if any, from [the] March 12, 1992 robbery. (Order dated July 12, 1993, p.1; Records, p.113). It distinctively provides a clear cut manner by which the right of action against PISA may be exercised by [SBC] pertaining to a specific robbery incident—a matter visibly non-existent in the CSS. Indeed, this special provision controls and prevails over the general terms and conditions extant on the CSS. (Yatco v. El Hogar Filipino, 67Phil. 610) When a general and a particular provision are inconsistent, the latter is paramount to the former. Ergo, a particular intent, as in this case reflected in letter e, paragraph 5 of the PRA will control a general intent embodied in paragraph 9 of the Contract of Security Services. (Section 12, Rule 130, Revised Rules of Court) Thus, the PRA is paramount to and prevails overthe terms and stipulations in the first contract (CSS) on matters relevant and material to PISA’s liability relating to the robbery. 26

Indeed, the clear import of paragraph 5(e) of the PRA is that recovery of the insurance proceedswould affect or prejudice SBC’s claim against PISA. If LIC had granted SBC’s claim for indemnity, then SBC could no longer claim the same amount from PISA. As a corollary, it is onlyupon LIC’s denial of SBC’s claim that SBC’s right of action against PISA could accrue. To rule otherwise would be to countenance SBC’s double recovery from its loss and lead to its unjust enrichment.

The more important question is whether the written letter of LIC, rejecting SBC’s claim for indemnity, satisfied this condition.

PISA claims that the condition "could not be recovered from the insurer" requires a final judgment against SBC’s claim for indemnity against LIC, because only then would the non-recovery be "a final, immutable fact." Since SBC has only just filed a case against LIC, and recovery is still possible, the action against PISA is allegedly premature as the fact of non-recovery is not yet in esse. 27 That SBC may be able to prove the negligence of the other security guards of PISA in the event of the acquittal of the two accused security guards is of no moment; PISA posits that the condition requires that recovery from the insurer be impossible, i.e., upon a final adjudication by a court, and not merely a denial by LIC of the claim. Only in such event may suit be brought and proof of the other guards’ negligence adduced, otherwise, paragraph 5(e) of the PRA would be rendered nugatory.28

We hold that reading the clause as requiring a final judgment is a strained interpretation and contrary to settled rules of interpretation of contracts. Paragraph 5(e) only requires that the proceeds "could not be recovered from the insurer," and does not state that it should be so declared by a court, or even with finality. In determining the signification of terms, words are presumed to have been used in their primary and general acceptance, and there was no evidence presented to show that the words used signified a judicial adjudication.29 Indeed, if the parties had intended the non-recovery to be through a judicial and final adjudication, they shouldhave stated so. In its primary and general meaning, paragraph 5(e) would cover LIC’s extrajudicial denial of SBC’s claim.

In sustaining PISA, the Court of Appeals relied on the argument that paragraph 5(e) of the PRA was intended to benefit PISA. The appellate court held that the phrase "could not be recovered from the insurer" gives rise to doubt as to the intention of the parties, as it is capable of two interpretations: either (1) the insurer rejects the written demand for indemnification by the insured; or (2) a court adjudges that the insurer is not liable under the policy. The Court of Appeals then interpreted the antecedent circumstances prior to the institution of Civil Case No. 92-3337 as manifesting SBC’s agreement to suspend the filing of the suit against PISA until after the case against LIC has been decisively terminated.30

We have gone over the records and are unable to agree with the Court of Appeal’s findings on this matter. Even if we are to agree with the Court of Appeals that paragraph 5(e) is susceptible of two interpretations, the stipulations in the PRA and the parties’ acts contemporaneous with and subsequent to the execution of the PRA31 belie any intent of SBC to delay its suit against PISA until a judicial declaration of non-recovery against LIC.

It should be noted that the PRA was entered into as a result of the robbery, in which two of PISA’s security guards were implicated. The PRA expressly stated that the agreement was entered into with respect to certain facts, among which were that (a) PISA was providing securityguards for SBC pursuant to the CSS, the said contract being attached to the PRA and forming an integral part thereof; 32 and (b) pursuant to paragraph nine (9) of the CSS, PISA "shall be liable for any loss, damage or injury suffered by [SBC], its officers, employees, clients, guests, visitors and other persons allowed entry into [SBC’s] premises where such loss, damage or injury is due to the negligence or willful act of the guards or representatives of [PISA]." Moreover, "if such loss, damage or injury is caused by a party other than the guards or representatives of [PISA], [PISA] shall be jointly and severally liable with said party if [PISA] failed to exercise due diligence in preventing such loss, damage or injury." 33

The express inclusion of these provisions—particularly those relating to the liability of PISA for the willful or negligent acts of its guards, or its failure to exercise diligence, and the right of SBC to hold PISA liable— speaks of SBC’s diligence in ensuring that notwithstanding the PRA and the partial payment by PISA, SBC’s right of action against PISA for its liabilities under the CSS is

preserved. SBC may have agreed to delay the suit against PISA until after the former’s claim for indemnity against LIC has been decided, but it is far-fetched to believe that SBC agreed to hold such right of action in abeyance until after a legal claim against LIC had been adjudicated. This conclusion is further bolstered by the following material events:

1. The Taytay robbery was committed on March 12, 1992.

2. SBC made a written demand on April 10, 1992 against PISA for the losses sustained by SBC from the robbery.

3. SBC and PISA executed the PRA on June 23, 1992.1awphi1.net

4. LIC rejected SBC’s claim for indemnity under the insurance on August 5, 1992.

5. SBC protested the LIC rejection in a letter dated August 28, 1992.

6. On the same date, August 28, 1992, SBC informed PISA of the denial by LIC of SBC’s insurance claim, and demanded from PISA indemnification based on paragraph 5(e) of the PRA.

7. On September 17, 1992, PISA denied the letter of demand of SBC.

8. On November 16, 1992, SBC sued LIC and PISA.

From the above events, it seems clear that SBC’s suit against LIC was not a mere afterthought after LIC had rejected its claim. Rather, SBC exercised its right of action against PISA pursuant to paragraph 5(e) of the PRA. This interpretion is consistent with settled canons of contract interpretation, has the import that would make SBC’s right of action effectual, and would yield the greatest reciprocity of interests. Indeed, we agree with SBC that PISA’s interpretation of the clause would lead to an effective waiver of SBC’s right of action, because to await the judicial determination of the LIC suit may lead to the prescription of SBC’s right of action against PISA.

If some stipulations of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual.34 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. 35 When it is impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of an onerous contract, the doubt shall be settled in favor of the greatest reciprocity of interests. 36

We therefore hold that SBC’s suit against PISA was not premature, and the dismissal of the action as against PISA was improper.

IN VIEW WHEREOF, the petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. CV No. 45259, dated August 31, 1999, as well as its Resolution dated January 31, 2000, is REVERSED. Civil Case No. 92337 is REMANDED to the RTC, NCJR, Makati City for further proceedings.

SO ORDERED.

(NOTE: UNSURE IF THIS IS THE RIGHT CASE)

(NOTE: UNSURE IF THIS IS THE RIGHT CASE)

G.R. No. 161479 October 18, 2007

ADORACION REDONDO, Petitioner, vs.ANGELINA JIMENEZ, Respondent.

D E C I S I O N

QUISUMBING, J.:

For review on certiorari are the Decision1 dated August 28, 2003 and the Resolution2 dated December 30, 2003 of the Court of Appeals in CA-G.R. CV No. 54849, which had affirmed the July 9, 1996 Decision3 of the Regional Trial Court (RTC), Branch 21 of Imus, Cavite.

The facts, borne by the records, are as follows.

Petitioner Adoracion Redondo, with her siblings, Vicente, Celerina, and Efren Redondo, were the registered co-owners of a 282 square-meter residential lot with Transfer Certificate of Title No. T-58204 situated in Mabolo, Bacoor, Cavite.

Adoracion’s interest in the lot consisting of a one-fourth pro indiviso share, or about 70 square meters, appears in the title. This had been sold and conveyed to herein respondent Angelina Jimenez, the widow of Efren Redondo.

The sale was evidenced by a notarized Deed of Absolute Sale of a Portion of Land5 dated February 17, 1981, showing a consideration of P3,000. The Register of Deeds inscribed the saidsale in the title on July 5, 1988 as entry number 4796.6

On November 27, 1992, Adoracion filed with the RTC a Complaint7 for annulment of sale and recovery of ownership with damages. She claimed that she was deceived into signing the deed of sale when all she wanted was to borrow money from Angelina.

The trial court dismissed the complaint, to wit:

WHEREFORE, let this case be, as it is hereby, dismissed.

On the counterclaim, the plaintiff is ordered to pay the defendant attorney’s fees of P20,000.00 plus reasonable litigation expenses of P10,000.00.

SO ORDERED.8

On appeal, the Court of Appeals affirmed the court a quo with modification, thus:

IN VIEW OF THE FOREGOING, the decision appealed from is AFFIRMED, with the modificationthat the attorney’s fees and litigation expenses awarded to the defendant are deleted.

SO ORDERED.9

Hence, the present petition raising the following as issues:

I.

The Court of Appeals overlooked material circumstances and facts which were not disputed and if taken into account would significantly alter the decision and resolution on appeal.

II.

The Court of Appeals committed glaring errors contrary to the clear mandate of law and jurisprudence justifying reexamination of its decision and resolution by this Honorable Tribunal.

III.

The Court of Appeals rendered findings principally grounded on presumptions, contrary to the admissions of the parties and drew inferences which are manifestly mistaken.10

Petitioner Adoracion contends that the alleged sale was in fact an equitable mortgage since (1) the consideration was grossly inadequate; (2) she paid the realty taxes on the property; (3) she remained in possession of the property; and (4) she was in financial distress at the time of the transaction. She insists that the deed of sale was tainted with fraud and thus voidable. She cites her low educational attainment, inability to speak English, advanced age, and sickness, as reasons for her weakness of mind. She also argues that the presumption of regularity of a publicdocument does not apply when the circumstances surrounding its notarization are suspect.

Respondent Angelina, however, counters that Adoracion failed to adduce convincing evidence to rebut the presumption of regularity of the notarization of the deed of sale. Angelina further avers that Adoracion failed to prove by competent evidence her alleged weakness of mind, which supposedly vitiated her consent. She claims she opted not to pursue physical possession of the subject property because of a long-standing conflict with Adoracion. Finally, Angelina maintains she was the one who had been paying the realty taxes on the property.

Is the transaction between Adoracion and Angelina an equitable mortgage?

Article 1602 of the Civil Code states:

ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance ofany other obligation.

x x x x

In this case, none of the instances enumerated above attended the assailed transaction between Adoracion and Angelina.

We are unable to sustain Adoracion’s claim that the consideration of P3,000 for the absolute sale of a 70-square meter residential lot in suburban Mabolo, Bacoor, Cavite was grossly inadequate. Records show that the market value in 1981 of the entire property, consisting of 282square meters, was only P22,560.11 Thus, her one-fourth share in the said property would have roughly amounted to a market value of about P5,640, not exactly grossly disproportionate to the selling price of P3,000. The sale should be viewed in light of Adoracion’s own admission that she was in dire financial straits at the time of the transaction. This explains why the selling price was below the actual market value of the property.

Adoracion also claims that she paid the real estate taxes on the property. It is true that payment of realty taxes is a usual burden attached to ownership of real property. Coupled with continuouspossession of the property, it constitutes evidence of great weight that a person under whose name the realty taxes were declared has a valid and rightful claim over the land.12 However, the Tax Receipts13 on record clearly indicate that it was Angelina who had been paying the realty taxes on the property from the time of the sale until the filing by Adoracion of the Complaint for its annulment. Adoracion, on the other hand, failed to present any evidence to support her claim that she was the one who paid the said taxes.

Neither are we prepared to indulge Adoracion’s bare allegation of continuous possession of the disputed property. Note in this particular case that Adoracion is a sister-in-law of Angelina. At thetime of the controversy, Adoracion was already advanced in age and ailing, with no husband or children to look after her. Angelina, on the other hand, already had a comfortable place to live in and was faring better than Adoracion. At the time of the sale, Angelina had just received a hefty sum of money following the death of her husband. A subtle interplay of complex family issues explains why Angelina opted not to assert her superior right to possession of the said property. Such mere tolerated possession is not enough to prove that the transaction between the parties was an equitable mortgage.

In sum, we are convinced the transaction entered into by Adoracion and Angelina in 1981 was indeed a sale, not an equitable mortgage.

Is the said sale nevertheless voidable on account of alleged fraud?

Article 1390 of the Civil Code provides:

ART. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

(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. …

Based on the foregoing, when the consent of one of the contracting parties is vitiated by fraud, the contract is voidable. However, even granting that Adoracion’s consent to the sale was indeed obtained through fraud, the action to annul the contract is subject to a prescriptive period of four years from the time of the discovery of the fraud.14 The time of discovery is the date whenthe deed of sale was registered with the Register of Deeds because registration constitutes constructive notice to the world.15

In the instant case, records show that the deed of sale was registered on July 5, 1988. Hence, Adoracion’s action to annul the sale on the ground of fraud prescribed on July 5, 1992. Therefore, when Adoracion filed on November 27, 1992 her Complaint16 for annulment of the sale, the action had long prescribed.

With the effective prescription of the action to annul the sale on the ground of fraud, it would nowbe futile to discuss the issue of presumption of regularity of the execution of the notarized deed of sale.

WHEREFORE, the petition is DENIED. The assailed Decision dated August 28, 2003 and the Resolution dated December 30, 2003 of the Court of Appeals in CA-G.R. CV No. 54849, which affirmed with modification the July 9, 1996 Decision of the Regional Trial Court, Branch 21 of Imus, Cavite, are AFFIRMED. No pronouncement as to costs.SO ORDERED.

G.R. No. 199650 June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner, vs.UTILITY ASSURANCE CORPORATION, Respondent.

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the Decision1 dated January 27,2011 and Resolution2 dated December 8, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 112808.

The Facts

On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its Chairman, Joo Han Lee, and Martin E. Mabunay, doing business under the name and style of Seven Shades of Blue Trading and Services, entered into a Construction Agreement3 whereby the latter undertook to build the former's 72-room condominium/hotel (Condotel Building 25) located at the Fairways & Bluewaters Golf & Resort in Boracay Island, Malay, Aklan. The project, costing P42,000,000.00, was to be completed within one year or 365 days reckoned from the first calendar day after signing of the Notice of Award and Notice to Proceed and receipt of down payment (20% of contract price). The P8,400,000.00 down payment was fully paid on January 14, 2008.4Payment of the balance of the contract price will be based on actual work finished within 15 days from receipt of the monthly progress billings. Per the agreed work schedule, the completion date of the project was December 2008.5 Mabuhay also submitted the required Performance Bond6 issued by respondent Utility Assurance Corporation (UTASSCO) in the amount equivalent to 20% down payment or P8.4 million.

Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up to the 7th monthly progress billing sent by Mabunay. As of September 16, 2008, petitioner had paid the total amount of P15,979,472.03 inclusive of the 20% down payment. However, as of said date, Mabunay had accomplished only 27.5% of the project.7

In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay assisted by Arch. Elwin Olavario, and Joo Han Lee assisted by Roy V. Movido, the following findings were accepted as true, accurate and correct:

III STATUS OF PROJECT AS OF 14 NOVEMBER 2008

1) After conducting a joint inspection and evaluation of the project to determine the actual percentage of accomplishment, the contracting parties, assisted by their respective technical groups, SSB assisted by Arch. Elwin Olavario and JPLUS assisted by Engrs. Joey Rojas and Shiela Botardo, concluded and agreed that as of 14 November 2008, the project is only Thirty One point Thirty Nine Percent (31.39%) complete.

2) Furthermore, the value of construction materials allocated for the completion of the project and currently on site has been determined and agreed to be ONE MILLION FORTY NINE THOUSAND THREE HUNDRED SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS (P1,049,364.45)

3) The additional accomplishment of SSB, reflected in its reconciled and consolidated 8th and 9th billings, is Three point Eighty Five Percent (3.85%) with a gross value of P1,563,553.34 amount creditable to SSB after deducting the withholding tax is P1,538,424.84

4) The unrecouped amount of the down payment is P2,379,441.53 after deducting thecost of materials on site and the net billable amount reflected in the reconciled and consolidated 8th and 9th billings. The uncompleted portion of the project is 68.61% with an estimated value per construction agreement signed isP27,880,419.52.9 (Emphasis supplied.)

On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay and respondent surety. As its demands went unheeded, petitioner filed a Request for Arbitration10 before the Construction Industry Arbitration Commission (CIAC). Petitioner prayed that Mabunay and respondent be ordered to pay the sums of P8,980,575.89 as liquidated damages and P2,379,441.53 corresponding to the unrecouped down payment or overpayment petitioner made to Mabunay.11

In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision works ordered by Joo Han Lee. He asserted that he actually had until April 30, 2009 to finish theproject since the 365 days period of completion started only on May 2, 2008 after clearing the retrofitted old structure. Hence, the termination of the contract by petitioner was premature and the filing of the complaint against him was baseless, malicious and in bad faith.

Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no cause of action and the complaint states no cause of action against it. The CIAC denied the motion to dismiss. Respondent’s motion for reconsideration was likewise denied.13

In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-claims,14 respondent argued that the performance bond merely guaranteed the 20% down payment and not the entire obligation of Mabunay under the Construction Agreement. Since the value of the project’s accomplishment already exceeded the said amount, respondent’s obligation under the performance bond had been fully extinguished. As to the claim for alleged overpayment to Mabunay, respondent contended that it should not be credited against the 20% down payment which was already exhausted and such application by petitioner is tantamount to reviving an obligation that had been legally extinguished by payment. Respondent also set up a

cross-claim against Mabunay who executed in its favor an Indemnity Agreement whereby Mabunay undertook to indemnify respondent for whatever amounts it may be adjudged liable to pay petitioner under the surety bond.

Both petitioner and respondent submitted their respective documentary and testimonial evidence. Mabunay failed to appear in the scheduled hearings and to present his evidence despite due notice to his counsel of record. The CIAC thus declared that Mabunay is deemed to have waived his right to present evidence.15

On February 2, 2010, the CIAC rendered its Decision16 and made the following award:

Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and directs:

1. Respondents Mabunay and Utassco to jointly and severally pay claimant the following:

a) P4,469,969.90, as liquidated damages, plus legal interest thereon at the rate of 6% per annum computed from the date of this decision up to the timethis decision becomes final, and 12% per annum computed from the date this decision becomes final until fully paid, and

b) P2,379,441.53 as unrecouped down payment plus interest thereon at therate of 6% per annum computed from the date of this decision up to the timethis decision becomes final, and 12% per annum computed from the date this decision becomes final until fully paid.

It being understood that respondent Utassco’s liability shall in no case exceed P8.4 million.

2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which is respondent Mabunay’s share in the arbitration cost claimant had advanced, with legal interest thereon from January 8, 2010 until fully paid.

3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have paid to claimant under this decision, plus interest thereon at the rateof 12% per annum computed from the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to pay Utassco P100,000.00 as attorney’s fees.

SO ORDERED.17

Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, as amended.

In the assailed decision, the CA agreed with the CIAC that the specific condition in the Performance Bond did not clearly state the limitation of the surety’s liability. Pursuant to Article 137718 of the Civil Code, the CA said that the provision should be construed in favor of petitioner considering that the obscurely phrased provision was drawn up by respondent and Mabunay. Further, the appellate court stated that respondent could not possibly guarantee the down payment because it is not Mabunay who owed the down payment to petitioner but the other way around. Consequently, the completion by Mabunay of 31.39% of the construction would not lead

to the extinguishment of respondent’s liability. The P8.4 million was a limit on the amount of respondent’s liability and not a limitation as to the obligation or undertaking it guaranteed.

However, the CA reversed the CIAC’s ruling that Mabunay had incurred delay which entitled petitioner to the stipulated liquidated damages and unrecouped down payment. Citing Aerospace Chemical Industries, Inc. v. Court of Appeals,19 the appellate court said that not all requisites in order to consider the obligor or debtor in default were present in this case. It held that it is only from December 24, 2008 (completion date) that we should reckon default because the Construction Agreement provided only for delay in the completion of the project and not delay on a monthly basis using the work schedule approved by petitioner as the reference point. Hence, petitioner’s termination of the contract was premature since the delay in this case was merely speculative; the obligation was not yet demandable.

The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision dated 13 January 2010 rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REVERSED and SET ASIDE. Accordingly, the Writ of Execution dated 24 November 2010 issued by the same tribunal is hereby ANNULLED and SET ASIDE.

SO ORDERED.20

Petitioner moved for reconsideration of the CA decision while respondent filed a motion for partial reconsideration. Both motions were denied.

The Issues

Before this Court petitioner seeks to reverse the CA insofar as it denied petitioner’s claims underthe Performance Bond and to reinstate in its entirety the February 2, 2010 CIAC Decision. Specifically, petitioner alleged that –

A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE ALTERNATIVE DISPUTE RESOLUTION ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE RESOLUTION HAVE STRIPPED THE COURT OF APPEALS OF JURISDICTION TO REVIEW ARBITRAL AWARDS.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRALAWARD ON AN ISSUE THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT ARGUED IN ANY OF THE PLEADINGS FILED BEFORE THE COURT.

C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OFAEROSPACE CHEMICAL INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO DO WITH CONSTRUCTION AGREEMENTS.21

Our Ruling

On the procedural issues raised, we find no merit in petitioner’s contention that with the institutionalization of alternative dispute resolution under Republic Act (R.A.) No. 9285,22 otherwise known as the Alternative Dispute Resolution Act of 2004, the CA was divestedof jurisdiction to review the decisions or awards of the CIAC. Petitioner erroneously relied on the

provision in said law allowing any party to a domestic arbitration to file in the Regional Trial Court (RTC) a petition either to confirm, correct or vacate a domestic arbitral award.

We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards ordecisions of the CIAC in construction disputes. On the contrary, Section 40 thereof expressly declares that confirmation by the RTC is not required, thus:

SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be governed by Section 23 of R.A. 876.

A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory decisions of the Regional Trial Court.

The confirmation of a domestic award shall be made by the regional trial court in accordance with the Rules of Procedure to be promulgated by the Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided under E.O. No. 1008. (Emphasis supplied.)

Executive Order (EO) No. 1008 vests upon the CIAC 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. By express provision of Section 19 thereof, the arbitral award of the CIAC is final and unappealable, except on questions of law, which are appealable to the Supreme Court. With the amendments introduced by R.A. No. 7902 and promulgation of the 1997 Rules of Civil Procedure, as amended, the CIAC was included in the enumeration of quasijudicial agencies whose decisions or awards may be appealed to the CA in a petition for review under Rule 43. Such review of the CIAC award may involve either questions of fact, of law, or of fact and law.23

Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by this Court and which took effect on October 30, 2009. Since R.A. No. 9285 explicitly excluded CIAC awards from domestic arbitration awards that need to be confirmed to be executory, said awards are therefore not covered by Rule 11 of the Special ADR Rules,24 as they continue to be governed by EO No. 1008, as amended and the rules of procedure of the CIAC. The CIAC Revised Rules of Procedure Governing Construction Arbitration25 provide for the manner and mode of appeal from CIAC decisions or awards in Section 18 thereof, which reads:

SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by any of the parties within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the Rules of Court.

As to the alleged error committed by the CA in deciding the case upon an issue not raised or litigated before the CIAC, this assertion has no basis. Whether or not Mabunay had incurred delay in the performance of his obligations under the Construction Agreement was the very first issue stipulated in the Terms of Reference26(TOR), which is distinct from the issue of the extent of respondent’s liability under the Performance Bond.

Indeed, resolution of the issue of delay was crucial upon which depends petitioner’s right to the liquidated damages pursuant to the Construction Agreement. Contrary to the CIAC’s findings, the CA opined that delay should be reckoned only after the lapse of the one-year contract period, and consequently Mabunay’s liability for liquidated damages arises only upon the happening of such condition.

We reverse the CA.

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reasonof a cause imputable to the former. It is the non-fulfillment of an obligation with respect to time.27

Article 1169 of the Civil Code provides:

ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

x x x x

It is a general rule that one who contracts to complete certain work within a certain time is liable for the damage for not completing it within such time, unless the delay is excused or waived.28

The Construction Agreement provides in Article 10 thereof the following conditions as to completion time for the project

1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1) YEAR or 365 Days reckoned from the 1st calendar day after signing of the Notice of Award and Notice to Proceed and receipt of down payment.

2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER within Seven (7) days after signing of this Agreement and full payment of 20% of the agreed contract price. Said detailed work schedule shall follow the general schedule of activities and shall serve as basis for the evaluation of the progress of work by CONTRACTOR.29

In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially.30

In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform or complete the project was not yet demandable as of November 19, 2008 when petitioner terminated the contract, because the agreed completion date was still more than one month away (December 24, 2008). Since the parties contemplated delay in the completion of theentire project, the CA concluded that the failure of the contractor to catch up with schedule of work activities did not constitute delay giving rise to the contractor’s liability for damages.

We cannot sustain the appellate court’s interpretation as it is inconsistent with the terms of the Construction Agreement. Article 1374 of the Civil Code requires that the various stipulations of acontract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. Here, the work schedule approved by petitioner was intended, not only to serve as its basis for the payment of monthly progress billings, but also for evaluation of the progress of work by the contractor. Article 13.01 (g) (iii) of the Construction Agreement provides that the contractor shall be deemed in default if, among others, it had delayed without justifiable cause the completion of the project "by more than thirty (30) calendar days based on official work schedule duly approved by the OWNER."31

Records showed that as early as April 2008, or within four months after Mabunay commenced work activities, the project was already behind schedule for reasons not attributable to petitioner.In the succeeding months, Mabunay was still unable to catch up with his accomplishment even

as petitioner constantly advised him of the delays, as can be gleaned from the following notices of delay sent by petitioner’s engineer and construction manager, Engr. Sheila N. Botardo:

April 30, 2008

Seven Shades of BlueBoracay IslandMalay, Aklan

1âwphi1

Attention : Mr. Martin MabunayGeneral Manager

Thru : Engr. Reynaldo Gapasin

Project : Villa Beatriz

Subject : Notice of Delay

Dear Mr. Mabunay:

This is to formalize our discussion with your Engineers during our meeting last April 23, 2008 regarding the delay in the implementation of major activities based on your submitted construction schedule. Substantial delay was noted in concreting works that affects your roof framing that should have been 40% completed as of this date. This delay will create major impact on your over-all schedule as the finishing works will all be dependent on the enclosure of the building.

In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery ofcritical materials on site. We would highly appreciate if you could attend our next regular meetingso we could immediately address this matter. Thank you.

Very truly yours,

Engr. Sheila N. BotardoConstruction Manager – LMI/FEPI32

October 15, 2008

x x x x

Dear Mr. Mabunay,

We have noticed continuous absence of all the Engineers that you have assigned on-site to administer and supervise your contracted work. For the past two (2) weeks, your company does not have a Technical Representative manning the jobsite considering the critical activities that are in progress and the delays in schedule that you have already incurred. In this regard, we would highly recommend the immediate replacement of your Project Engineer within the week.

We would highly appreciate your usual attention on this matter.

x x x x33

November 5, 2008

x x x x

Dear Mr. Mabunay,

This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30, 2008 regarding the construction of the Field Office and Stock Room for Materials intended for Villa Beatriz use only. We understand that you have committed to complete it November 5, 2008but as of this date there is no improvement or any ongoing construction activity on the said field office and stockroom.

We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is badly needed. We will highly appreciate if this matter will be given your immediate attention.

Thank you.

x x x x34

November 6, 2008

x x x x

Dear Mr. Mabunay,

We would like to call your attention regarding the decrease in your manpower assigned on site. We have observed that for the past three (3) weeks instead of increasing your manpower to catch up with the delay it was reduced to only 8 workers today from an average of 35 workers in the previous months.

Please note that based on your submitted revised schedule you are already delayed by approximately 57% and this will worsen should you not address this matter properly.

We are looking forward for [sic] your cooperation and continuous commitment in delivering this project as per contract agreement.

x x x x35

Subsequently, a joint inspection and evaluation was conducted with the assistance of the architects and engineers of petitioner and Mabunay and it was found that as of November 14, 2008, the project was only 31.39% complete and that the uncompleted portion was 68.61% with an estimated value per Construction Agreement as P27,880,419.52. Instead of doubling his efforts as the scheduled completion date approached, Mabunay did nothing to remedy the delays and even reduced the deployment of workers at the project site. Neither did Mabunay, at anytime, ask for an extension to complete the project. Thus, on November 19, 2008, petitioner advised Mabunay of its decision to terminate the contract on account of the tremendous delay the latter incurred. This was followed by the claim against the Performance Bond upon the respondent on December 18, 2008.

Petitioner’s claim against the Performance Bond included the liquidated damages provided in the Construction Agreement, as follows:

ARTICLE 12 – LIQUIDATED DAMAGES:

12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the PROJECT within the period stipulated herein or within the period of extension granted by the OWNER, plus One (1) Week grace period, without any justifiable reason, the CONTRACTOR hereby agrees –

a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One Percent (1/10 of 1%) of the Contract Amount for each day of delay after any and all extensions and the One (1) week Grace Period until completed by the CONTRACTOR.

b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or delays shall not relieve it of the obligation to complete and finish the construction.

Any sum which maybe payable to the OWNER for such loss may be deducted from the amountsretained under Article 9 or retained by the OWNER when the works called for under this Agreement have been finished and completed.

Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors collectibles without prior consent and concurrence by the CONTRACTOR.

12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any further act and deed, authorizes the OWNER to deduct any amount that may be due under Item (a) above, from any and all money or amounts due or which will become due to the CONTRACTOR by virtue of this Agreement and/or to collect such amounts from the Performance Bond filed by the CONTRACTOR in this Agreement.36 (Emphasis supplied.)

Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which provide:

ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof.

ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.

ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated by the parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation.

A stipulation for liquidated damages is attached to an obligation in order to ensure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach.37 The amount agreed upon answers for damages suffered by the owner due to delays inthe completion of the project.38 As a precondition to such award, however, there must be proof ofthe fact of delay in the performance of the obligation.39

Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the contractor to complete the project within the stipulated period or the extension granted by the owner. However, this will not defeat petitioner’s claim for damages nor respondent’s liability under the Performance Bond. Mabunay was clearly in default considering the dismal percentageof his accomplishment (32.38%) of the work he contracted on account of delays in executing thescheduled work activities and repeated failure to provide sufficient manpower to expedite construction works. The events of default and remedies of the Owner are set forth in Article 13, which reads:

ARTICLE 13 – DEFAULT OF CONTRACTOR:

13.01 Any of the following shall constitute an Event of Default on the part of the CONTRACTOR.

x x x x

g. In case the CONTRACTOR has done any of the following:

(i.) has abandoned the Project

(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress of the Project for twenty-eight days

(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30) calendar days based on official work schedule duly approved by the OWNER

(iv.) despite previous written warning by the OWNER, is not executing the constructionworks in accordance with the Agreement or is persistently or flagrantly neglecting to carry out its obligations under the Agreement.

(v.) has, to the detriment of good workmanship or in defiance of the Owner’s instructions to the contrary, sublet any part of the Agreement.

13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may after giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site and expel the CONTRACTOR therefrom without voiding this Agreement, or releasing the CONTRACTOR from any of its obligations, and liabilities under this Agreement. Also without diminishing or affecting the rights and powers conferred on the OWNER by this Agreement and the OWNER may himself complete the work or may employ any other contractorto complete the work. If the OWNER shall enter and expel the CONTRACTOR under this clause,the OWNER shall be entitled to confiscate the performance bond of the CONTRACTOR to compensate for all kinds of damages the OWNER may suffer. All expenses incurred to finish theProject shall be charged to the CONTRACTOR and/or his bond. Further, the OWNER shall not be liable to pay the CONTRACTOR until the cost of execution, damages for the delay in the completion, if any, and all; other expenses incurred by the OWNER have been ascertained which amount shall be deducted from any money due to the CONTRACTOR on account of this Agreement. The CONTRACTOR will not be compensated for any loss of profit, loss of goodwill, loss of use of any equipment or property, loss of business opportunity, additional financing cost or overhead or opportunity losses related to the unaccomplished portions of the work.40 (Emphasis supplied.)

As already demonstrated, the contractor’s default in this case pertains to his failure to substantially perform the work on account of tremendous delays in executing the scheduled work activities. Where a party to a building construction contract fails to comply with the duty imposed by the terms of the contract, a breach results for which an action may be maintained to recover the damages sustained thereby, and of course, a breach occurs where the contractor inexcusably fails to perform substantially in accordance with the terms of the contract.41

The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the Performance Bond to answer for all kinds of damages it may suffer as a result of the contractor’s failure to complete the building. Having elected to terminate the contract and expel the contractor from the project site under Article 13 of the said Agreement, petitioner is clearly entitled to the proceeds of the bond as indemnification for damages it sustained due to the breach committed by Mabunay. Such stipulation allowing the confiscation of the contractor’s performance bond partakes of the nature of a penalty clause. A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of the obligor in case of breach of an obligation. It functions to strengthen the coercive force of obligation and to provide, in effect, for what could be the liquidated damages resulting from sucha breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. It is well-settled that so long as such stipulation does not contravene law, morals, or public order, it is strictly binding upon the obligor.42

Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the terms of the surety bond it issued, its liability is limited to the performance by said contractor to the extent equivalent to 20% of the down payment. It stresses that with the 32.38%completion of the project by Mabunay, its liability was extinguished because the value of such accomplishment already exceeded the sum equivalent to 20% down payment (P8.4 million).

The appellate court correctly rejected this theory of respondent when it ruled that the Performance Bond guaranteed the full and faithful compliance of Mabunay’s obligations under the Construction Agreement, and that nowhere in law or jurisprudence does it state that the obligation or undertaking by a surety may be apportioned.

The pertinent portions of the Performance Bond provide:

The conditions of this obligation are as follows:

Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION AND DEVELOPMENT, INC. to post a bond of the abovestated sum to guarantee 20% down payment for the construction of Building 25 (Villa Beatriz) 72-Room Condotel, The Lodgings inside Fairways and Bluewater, Boracay Island, Malay, Aklan.

Whereas, said contract required said Principal to give a good and sufficient bond in the above-stated sum to secure the full and faithful performance on his part of said contract.

It is a special provision of this undertaking that the liability of the surety under this bond shall in no case exceed the sum of P8,400,000.00 Philippine Currency.

Now, Therefore, if the Principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements stipulated in said contract, then this obligation shall be null and void; otherwise to remain in full force and effect.43 (Emphasis supplied.)

While the above condition or specific guarantee is unclear, the rest of the recitals in the bond unequivocally declare that it secures the full and faithful performance of Mabunay’s obligations under the Construction Agreement with petitioner. By its nature, a performance bond guaranteesthat the contractor will perform the contract, and usually provides that if the contractor defaults and fails to complete the contract, the surety can itself complete the contract or pay damages upto the limit of the bond.44 Moreover, the rule is that if the language of the bond is ambiguous or uncertain, it will be construed most strongly against a compensated surety and in favor of the obligees or beneficiaries under the bond, in this case petitioner as the Project Owner, for whose benefit it was ostensibly executed.45

The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth Insurance Corporation v. Court of Appeals46

Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on the condition that its liability shall in no case exceed the amount of the said bonds.

We are not persuaded. Petitioner’s argument is misplaced.

Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co.and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc.,we have sustained the principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection.

Petitioner’s liability under the suretyship contract is different from its liability under the law.1âwphi1 There is no question that as a surety, petitioner should not be made to pay more than its assumed obligation under the surety bonds. However, it is clear from the above-cited jurisprudence that petitioner’s liability for the payment of interest is not by reason of the suretyship agreement itself but because of the delay in the payment of its obligation under the said agreement.47 (Emphasis supplied; citations omitted.)

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and Resolution dated December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are hereby REVERSED and SET ASIDE.

The Award made in the Decision dated February 2, 2010 of the Construction Industry ArbitrationCommission Is hereby REINSTATED with the following MODIFICATIONS:

"Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and directs:

1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the Performance Bond, P8,400,000.00, pursuant to Art. 13 of the Construction Agreement dated December 24, 2007, with interest at the rate of 6% per annum computed from the date of the filing of the complaint until the finality of this decision, and 12% per annum computed from the date this decision becomes final until fully paid; and

2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondentUtassco will have paid to claimant under this decision, plus interest thereon at the rate

of 12% per annum computed from the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to pay Utassco P100,000.00 as attorney's fees.

SO ORDERED.

With the above modifications, the Writ of Execution dated November 24, 2010 issued by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and UPHELD.

No pronouncement as to costs.

SO ORDERED.