Article 1306. AUTONOMY OF CONTRACTS.

1.

GOLANGCO v. PCIB

Construction Contract, 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.
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 the Philippines 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 have been brought to
WGCCs 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
The 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 or
imperfections that may be discovered in the work executed by
him.
2.

MALLARI vs. PRUDENTIAL BANK

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. 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, 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.
3.

HEIRS OF EK LIONG vs. CASTILLO

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 formers 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 Agreement and 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 enforcement of 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 ofP15,991,500.00.
In response to petitioners insistence on the price originally
agreed upon by the parties,57respondents even invoked the last
paragraph58 of the Kasunduan to the effect that the parties
agreed to enter into such other stipulations as would be
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.62 Indeed, courts will not relieve a party from the
adverse effects of an unwise or unfavorable contract freely
entered into.
Article 1308. MUTUALITY OF CONTRACTS. The
contracts must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

1.

PNB vs. CA

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 who
contracts, 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 minds of 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, any
change 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:
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 and void 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.
2.

ALLIED BANKING vs. CA

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.
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 and subject to statutory restrictions,
valid and binding on the parties. This option, which is provided
in the 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 to act 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 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.
3.

JUICO Vs. CHINA BANKING

Petitioners are now before this Court raising the sole issue of
whether the interest rates imposed upon 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 not give
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 contract which 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
borrowers 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" (deescalation 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
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 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 borrowers 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
within the 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 which will
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 valid an 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 no date 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 under this 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 Solidbanks 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 Cardholders Agreement. On
petitioners 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 Cardholder hereby 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 solely potestative 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 them
taken jointly.43

Here, the escalation clause in the promissory notes authorizing

the respondent to adjust the rate of 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 respondents 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 respondent the power to impose an
increased rate of interest without a written notice to petitioners
and their written consent. Respondents 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 by the 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, onesided 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 obligation under the two promissory
notes which they failed to settle is P10,355,000. However, due
to China Banks 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.
4.

PNB vs. MANALO

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.
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.
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 that the 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 partys silence cannot be construed as an
acceptance thereof.

Article 1311. RELATIVITY OF CONTRACTS

6.

5.

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.

BALUYOT vs. CA

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:
Under this provision of the Civil Code, the following requisites
must be present in order to have a stipulation 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;

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
12
Philacor. 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.
7.

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 but that, 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 time allowed in
the contract.

INTEGRATED PACKAGING vs. CA

A&C MINIMART vs. VILLAREAL

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
is no 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.
8.

BORROMEO vs. CA

In this case, petitioners rights to their property is restricted by

the REM they executed over it. Upon their default on the
mortgage debt, the right to foreclose the property would be
vested upon the creditor-mortgagee.34Nevertheless, the right of
foreclosure cannot be exercised against the petitioners by any
person other than the creditor-mortgagee or its assigns.
According to the pertinent provisions of the Civil Code:
Art. 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.
If a contract should contain some stipulation in favor of a third
person, he may demand its fulfillment provided he
communicated his acceptance to the obligor 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. (Emphasis

ours.)1avvphi1
An extrajudicial foreclosure instituted by a third party to the
Loan Agreement and the REM would, therefore, be a violation
of petitioners rights over their property.
It is clear that under Article 1311 of the Civil Code, contracts
take effect only between the parties who execute them.35 Where
there is no privity of contract, there is likewise no obligation or
liability to speak about.36 The civil law principle of relativity of
contracts provides that contracts can only bind the parties who
entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with
knowledge thereof.37 Since a contract may be violated only by
the parties thereto as against each other, a party who has not
taken part in it cannot sue for performance, unless he shows that
he has a real interest affected thereby.38
In the instant case, petitioners assert that their creditormortgagee is EPCIB and not respondent. While ESB claims that
petitioners have had transactions with it, particularly the five
check payments made in the name of ESB, it fails to
categorically state that ESB and not EPCIB is the real creditormortgagor in this loan and mortgage transaction. This Court
finds the position taken by the petitioners to be more credible.
The four Promissory Notes designate EPCIB as the
"lender."39 In a letter dated 19 December 2002, addressed to
Home Guaranty Corporation, EPCIB Vice President Gary
Vargas even specified petitioners loan as one of its housing
loans for which it sought insurance coverage.40 Records also
show that petitioners repeatedly dealt with EPCIB. When the
petitioners complained of not receiving the loan documents and
the allegedly excessive interest charges, they addressed their
letter dated 3 August 2003 to the president of EPCIB. 41 The
response, which explained the loan transactions in detail in a
letter dated 27 August 2003, was written by Gary Vargas,
EPCIB Vice President.42 Of almost three years amortizations,
the checks were issued by petitioners in the name of EPCIB,
except only for five checks which were issued in respondents
name.43
Respondent, although a wholly-owned subsidiary of EPCIB, has
an independent and separate juridical personality from its parent
company. The fact that a corporation owns all of the stocks of
another corporation, taken alone, is not sufficient to justify their
being treated as one entity. If used to perform legitimate
functions, a subsidiarys separate existence shall be respected,
and the liability of the parent corporation, as well as the
subsidiary, shall be confined to those arising from their
respective businesses. A corporation has a separate personality
distinct from its stockholders and other corporations to which it
may be conducted.44 Any claim or suit of the parent corporation
cannot be pursued by the subsidiary based solely on the reason
that the former owns the majority or even the entire stock of the
latter.
From a perusal of the records, petitioners did not enter into a
Loan Agreement and REM with respondent. Respondent,
therefore, has no right to foreclose the subject property even
after default, since this right can only be claimed by the creditormortgagor, EPCIB; and, consequently, the extrajudicial
foreclosure of the REM by respondent would be in violation of
petitioners property rights.

9.

HEIRS OF LLENADO vs. LLENADO

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.
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 the sale 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 latters heirs,
successors and assigns"32indicating 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
Orlandos 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
found for 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 lessors
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 to renew 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 his
original term, unless there is a waiver or special circumstances
warranting equitable relief.
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 Wenifredas 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 in
the 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 acts to establish the renewal of said lease.
Given the foregoing, it becomes unnecessary to resolve the issue
on whether the violation of the prohibitory clause invalidated
the sale and conferred ownership over the subject lot to
Orlandos 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 the same. As a result, there was no obstacle to the
sale of the subject lot by Cornelio to respondents Eduardo 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 Orlandos heirs, petitioner
argues that the sale is in violation of the latters 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 attain enforceability. 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 one involved 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 oral evidence 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,
petitioners allegations in its Complaint cannot substitute for
competent proof on such a crucial factual issue. Necessarily,
petitioners claims based on this alleged right of first refusal
cannot be sustained for its existence has not been duly
established.
10. PNB vs. DEE
The petitioner is correct in arguing that it is not obliged to
perform any of the undertaking of respondent PEPI and AFPRSBS 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
Dees 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 21A, 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 petitioners claim that the mortgage has been nullified. The
order of cancellation/release of the mortgage is simply a
consequence of Dees 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
the deed 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, the former 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, 34the
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 Enriquezs rights thereunder. This is because
the Contract to Sell, involving a subdivision lot, is covered and
protected by PD 957.
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
whether any 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.1wphi1

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 PEPIs modified Rehabilitation Plan,
which included the settlement of the latters unpaid obligations
to its creditors by way of dacion of real properties. In said order,
the RTC also incorporated certain measures that were not
included in PEPIs 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 PEPIs 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
undertakes to 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 debtors 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 parties by 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 PEPIs loan obligation to
the petitioner insofar as it covers the value of the property
purchased by Dee. This negates the petitioners 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 accepting
the 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
lawas an instrument of social justicemust favor the
weak.46 (Emphasis omitted)
Article
1315-1319.
PERFECTION/
STAGES/
CONSENSUAL/ REAL/ AND ESSENTIAL REQUISITES
OF CONTRACTS
11. JARDINE DAVIES vs. CA
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 or more persons bind
themselves in favor of another or others, or reciprocally, to the
fulfillment of a prestation 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 the contract; 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, may be 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 the letter, 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 necessary to
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 of which
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 perfection of a contract and a
condition imposed merely on the performance of an obligation.
While failure to comply with the first condition results in the
failure of a contract, failure to comply with the second merely
gives the other party 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 counteroffer," respondent FEMCO's submission of the performance
bond and contractor's all-risk insurance was an implied
acceptance, if not a clear indication of its acquiescence 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 the contemporaneous
and subsequent acts of the contracting parties.
Accordingly, for all intents and purposes, the contract at that
point
has
been
perfected,
and
respondent
FEMSCO'sconforme 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 more than 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 writing a 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.
12. SOLER vs. CA
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.
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
to another for consideration. 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; 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."
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.
13. PROVINCE OF CEBU vs. MORALES
The appellate court correctly ruled that petitioner, as successorin-interest of the City of Cebu, is bound to respect the contract
of sale entered into by the latter pertaining to Lot No. 646-A-3.
The City of Cebu was the owner of the lot when it awarded the
same to respondents predecessor-in-interest, Morales, who later
became its owner before the same was erroneously returned to
petitioner under the compromise judgment. The award is
tantamount to a perfected contract of sale between Morales and
the City of Cebu, while partial payment of the purchase price
and actual occupation of the property by Morales and
respondents effectively transferred ownership of the lot to the
latter. This is true notwithstanding the failure of Morales and
respondents to pay the balance of the purchase price.
Petitioner can no longer assail the award of the lot to Morales on
the ground that she had no right to match the highest bid during
the public auction. Whether Morales, as actual occupant and/or
lessee of the lot, was qualified and had the right to match the

highest bid is a foregone matter that could have been questioned

when the award was made. When the City of Cebu awarded the
lot to Morales, it is assumed that she met all qualifications to
match the highest bid. The subject lot was auctioned in 1965 or
more than four decades ago and was never questioned. Thus, it
is safe to assume, as the appellate court did, that all
requirements for a valid public auction sale were complied with.
A sale by public auction is perfected "when the auctioneer
announces its perfection by the fall of the hammer or in other
customary manner".21 It does not matter that Morales merely
matched the bid of the highest bidder at the said auction sale.
The contract of sale was nevertheless perfected as to Morales,
since she merely stepped into the shoes of the highest bidder.
Consequently, there was a meeting of minds between the City of
Cebu and Morales as to the lot sold and its price, such that each
party could reciprocally demand performance of the contract
from the other.22 A contract of sale is a consensual contract and
is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand
performance subject to the provisions of the law governing the
form of contracts. The elements of a valid contract of sale under
Article 1458 of the Civil Code are: (1) consent or meeting of the
minds; (2) determinate subject matter; and (3) price certain in
money or its equivalent.23 All these elements were present in the
transaction between the City of Cebu and Morales.
There is no merit in petitioners assertion that there was no
perfected contract of sale because no "Contract of Purchase and
Sale" was ever executed by the parties. As previously stated, a
contract of sale is a consensual contract that is perfected upon a
meeting of minds as to the object of the contract and its price.
Subject to the provisions of the Statute of Frauds, a formal
document is not necessary for the sale transaction to acquire
binding effect.24 For as long as the essential elements of a
contract of sale are proved to exist in a given transaction, the
contract is deemed perfected regardless of the absence of a
formal deed evidencing the same.
Similarly, petitioner erroneously contends that the failure of
Morales to pay the balance of the purchase price is evidence that
there was really no contract of sale over the lot between Morales
and the City of Cebu. On the contrary, the fact that there was an
agreed price for the lot proves that a contract of sale was indeed
perfected between the parties. Failure to pay the balance of the
purchase price did not render the sale inexistent or invalid, but
merely gave rise to a right in favor of the vendor to either
demand specific performance or rescission of the contract of
sale.25 It did not abolish the contract of sale or result in its
automatic invalidation.
As correctly found by the appellate court, the contract of sale
between the City of Cebu and Morales was also partially
consummated. The latter had paid the deposit and downpayment
for the lot in accordance with the terms of the bid award. She
first occupied the property as a lessee in 1961, built a house
thereon and was continuously in possession of the lot as its
owner until her death in 1969. Respondents, on the other hand,
who are all surviving heirs of Morales, likewise occupied the
property during the latters lifetime and continue to reside on the
property to this day.26

The stages of a contract of sale are as follows: (1) negotiation,

covering the period from the time the 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.27 In this case, respondents predecessor had undoubtedly
commenced performing her obligation by making a down
payment on the purchase price. Unfortunately, however, she was
not able to complete the payments due to legal complications
between petitioner and the city.
Thus, the City of Cebu could no longer dispose of the lot in
question when it was included as among those returned to
petitioner pursuant to the compromise agreement in Civil Case
No. 238-BC. The City of Cebu had sold the property to Morales
even though there remained a balance on the purchase price and
a formal contract of sale had yet to be executed. Incidentally, the
failure of respondents to pay the balance on the purchase price
and the non-execution of a formal agreement was sufficiently
explained by the fact that the trial court, in Civil Case No. 238BC, issued a writ of preliminary injunction enjoining the city
from further disposing the donated lots. According to
respondents, there was confusion as to the circumstances of
payment considering that both the city and petitioner had
refused to accept payment by virtue of the injunction. 28 It
appears that the parties simply mistook Lot 646-A-3 as among
those not yet sold by the city.
The City of Cebu was no longer the owner of Lot 646-A-3 when
it ceded the same to petitioner under the compromise agreement
in Civil Case No. 238-BC. At that time, the city merely retained
rights as an unpaid seller but had effectively transferred
ownership of the lot to Morales. As successor-in-interest of the
city, petitioner could only acquire rights that its predecessor had
over the lot. These rights include the right to seek rescission or
fulfillment of the terms of the contract and the right to damages
in either case.29
14. AKANG vs. MUNICIPAL OF ISULAN
WHETHER THE PETITIONER IS ENTITLED TO RECOVER
OWNERSHIP AND POSSESSION OF THE PROPERTY IN
DISPUTE.
Resolution of the above follows determination of these
questions: (1) whether the Deed of Sale dated July 18, 1962 is a
valid and perfected contract of sale; (2) whether there was
payment of consideration by the respondent; and (3) whether the
petitioners claim is barred by laches.
The petitioner claims that the acquisition of the respondent was
null and void because: (1) he is an illiterate non-Christian who
only knows how to sign his name in Arabic and knows how to
read the Quran but can neither read nor write in both Arabic and
English; (2) the respondent has not paid the price for the
property; (3) the Municipal Voucher is not admissible in
evidence as proof of payment; (4) the Deed of Sale was not duly
approved in accordance with Sections 145 and 146 of the
Administrative Code of Mindanao and Sulu, and Section 120 of
the PLA, as amended; and (4) the property is a registered land
covered by a TCT and cannot be acquired by prescription or

adverse possession.27 The petitioner also explained that the

delayed filing of the civil action with the RTC was due to
Martial Law and the Ilaga-Blackshirt Troubles in the then
Province of Cotabato.28
The respondent, however, counters that: (1) the petitioner is not
an illiterate non-Christian and he, in fact, was able to execute,
sign in Arabic, and understand the terms and conditions of the
Special Power of Attorney dated July 23, 1996 issued in favor of
Baikong Akang (Baikong); (2) the Deed of Sale is valid as its
terms and conditions were reviewed by the Municipal Council
of Isulan and the Provincial Board of Cotabato; and (3) the Deed
of Sale is a contract of sale and not a contract to sell.29
Ruling of the Court - The Court finds the petition devoid of
merit.
The Deed of Sale is a Valid Contract of Sale
The petitioner alleges that the Deed of Sale is merely an
agreement to sell, which was not perfected due to non-payment
of the stipulated consideration.32 The respondent, meanwhile,
claims that the Deed of Sale is a valid and perfected contract of
absolute sale.33
A contract of sale is defined under Article 1458 of the Civil
Code:
By the contract of sale, one of the contracting parties obligates
himself to transfer the ownership of and to deliver a determinate
thing, and the other to pay therefore a price certain in money or
its equivalent.
The elements of a contract of sale are: (a) consent or meeting of
the minds, that is, consent to transfer ownership in exchange for
the price; (b) determinate subject matter; and (c) price certain in
money or its equivalent.34
A contract to sell, on the other hand, is defined by Article 1479
of the Civil Code:
A bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the subject property
despite delivery thereof to the prospective buyer, binds himself
to sell the said property exclusively to the prospective buyer
upon fulfillment of the condition agreed upon, that is, full
payment of the purchase price.
In a contract of sale, the title to the property passes to the buyer
upon the delivery of the thing sold, whereas in a contract to sell,
the ownership is, by agreement, retained by the seller and is not
to pass to the vendee until full payment of the purchase price.35
The Deed of Sale executed by the petitioner and the respondent
is a perfected contract of sale, all its elements being present.
There was mutual agreement between them to enter into the
sale, as shown by their free and voluntary signing of the
contract. There was also an absolute transfer of ownership of the
property by the petitioner to the respondent as shown in the
stipulation: "x x x I petitioner hereby sell, transfer, cede, convey
and assign as by these presents do have sold, transferred, ceded,
conveyed and assigned, x x x."36 There was also a determine
subject matter, that is, the two-hectare parcel of land as
described in the Deed of Sale. Lastly, the price or consideration

is at Three Thousand Pesos (P3,000.00), which was to be paid

after the execution of the contract. The fact that no express
reservation of ownership or title to the property can be found in
the Deed of Sale bolsters the absence of such intent, and the
contract, therefore, could not be one to sell. Had the intention of
the petitioner been otherwise, he could have: (1) immediately
sought judicial recourse to prevent further construction of the
municipal building; or (2) taken legal action to contest the
agreement.37 The petitioner did not opt to undertake any of such
recourses.
Payment of consideration or purchase price
The petitioners allegation of non-payment is of no consequence
taking into account the Municipal Voucher presented before the
RTC, which proves payment by the respondent of Three
Thousand Pesos (P3,000.00). The petitioner, notwithstanding
the lack of the Municipal Treasurers approval, admitted that the
signature appearing on the Municipal Voucher was his and he is
now estopped from disclaiming payment.
Even assuming, arguendo, that the petitioner was not paid, such
non payment is immaterial and has no effect on the validity of
the contract of sale. A contract of sale is a consensual contract
and what is required is the meeting of the minds on the object
and the price for its perfection and validity.38 In this case, the
contract was perfected the moment the petitioner and the
respondent agreed on the object of the sale the two-hectare
parcel of land, and the price Three Thousand Pesos
(P3,000.00). Non-payment of the purchase price merely gave
rise to a right in favor of the petitioner to either demand specific
performance or rescission of the contract of sale.39
Sections 145 and 146 of the Administrative Code of Mindanao
and Sulu, and Section 120 of the PLA, as amended, are not
applicable
The petitioner relies on the foregoing laws in assailing the
validity of the Deed of Sale, claiming that the contract lacks
executive approval and that he is an illiterate non-Christian to
whom the benefits of Sections 145 and 146 of the
Administrative Code of Mindanao and Sulu should apply.
Section 145 of the Administrative Code of Mindanao and Sulu
essentially provides for the requisites of the contracts entered
into by a person with any Moro or other non-Christian
inhabitants.40 Section 146,41 meanwhile, provides that contracts
entered into in violation of Section 145 are void. These
provisions aim to safeguard the patrimony of the less developed
ethnic groups in the Philippines by shielding them against
imposition and fraud when they enter into agreements dealing
with realty.42
Section 120 of the PLA (Commonwealth Act No. 141) affords
the same protection.43 R.A. No. No. 387244 likewise provides
that conveyances and encumbrances made by illiterate nonChristian or literate non-Christians where the instrument of
conveyance or encumbrance is in a language not understood by
said literate non-Christians shall not be valid unless duly
approved by the Chairman of the Commission on National
Integration.
In Jandoc-Gatdula v. Dimalanta,45 however, the Court
categorically stated that while the purpose of Sections 145 and
146 of the Administrative Code of Mindanao and Sulu in

requiring executive approval of contracts entered into by

cultural minorities is indeed to protect them, the Court cannot
blindly apply that law without considering how the parties
exercised their rights and obligations. In this case, Municipality
Resolution No. 70, which approved the appropriation
of P3,000.00, was, in fact, accepted by the Provincial Board of
Cotabato. In approving the appropriation of P3,000.00, the
Municipal Council of Isulan and the Provincial Board of
Cotabato, necessarily, scrutinized the Deed of Sale containing
the terms and conditions of the sale. Moreover, there is nothing
on record that proves that the petitioner was duped into signing
the contract, that he was taken advantage of by the respondent
and that his rights were not protected.
The courts duty to protect the native vendor, however, should
not be carried out to such an extent as to deny justice to the
vendee when truth and justice happen to be on the latters side.
The law cannot be used to shield the enrichment of one at the
expense of another. More important, the law will not be applied
so stringently as to render ineffective a contract that is otherwise
valid, except for want of approval by the CNI. This principle
holds, especially when the evils sought to be avoided are not
obtaining.46
The Court must also reject the petitioners claim that he did not
understand the import of the agreement.1wphi1 He alleged that
he signed in Arabic the Deed of Sale, the Joint Affidavit and the
Municipal Voucher, which were all in English, and that he was
not able to comprehend its contents. Records show the contrary.
The petitioner, in fact, was able to execute in favor of Baikong a
Special Power of Attorney (SPA) dated July 23, 1996, which
was written in English albeit signed by the petitioner in Arabic.
Said SPA authorized Baikong, the petitioners sister, to followup the payment of the purchase price. This raises doubt on the
veracity of the petitioners allegation that he does not
understand the language as he would not have been able to
execute the SPA or he would have prevented its enforcement.
15. GARCIA vs. THIO
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 debtor when 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 respondents instruction that
both checks were made payable to Santiago. 27 She maintains
that it was also upon respondents instruction that both checks
were delivered 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.
>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 petitioners demand letter.42 From
the finality of the 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
16. PANGAN vs. PERRERAS
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?
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 the contract; and (3) cause of the obligation established. Since
the object of the parties agreement involves properties coowned 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 coowners. 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 Consuelos consent
was predicated on their consent to the sale, and that their
disapproval resulted in the withdrawal of Consuelos consent.
Yet, we find nothing in the parties agreement or even conduct
save Consuelos self-serving testimony that would indicate or
from which we can infer that Consuelos consent depended on
her childrens 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
consent to the sale.
The presence of Consuelos 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 earnest
money 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 thatthe 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 would not back out from the
sale. As we have pointed out, the terms of the parties agreement
are clear and 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
contracts 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 the need
to execute a deed of absolute sale upon completion of payment
of the price generally indicates that it is a contract to sell, as it
implies the reservation of title in the vendor until the vendee has
completed the payment of the price. 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 contracts
characterization immaterial in their discussion of the facts and
the law of the case. Besides, the petitioners-heirs raised the
question of the contracts 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 vendors right to rescind the
contract of sale if he pays the amount due before he receives a
demand for rescission, either judicially 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
vendors 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:
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 installment payments, including
residential condominium apartments but excluding industrial
lots, commercial buildings and sales to tenants under Republic
Act Numbered Thirty-eight hundred forty-four as amended by
Republic Act Numbered Sixty-three hundred eighty-nine, where
the buyer has paid at least two years of installments, the buyer is
entitled to the following rights in case he defaults in the
payment of succeeding installments:
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 cancel the 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 Consuelos
conjugal and hereditary shares in the subject properties subsists.
Article 1324. OPTION CONTRACT
17. ASSUNCION vs. CA
A not too recent development in real estate transactions is the
adoption of such arrangements as the right of first refusal, a
purchase option and a contract to sell. For ready reference, we
might point out some fundamental precepts that may find some
relevance to this discussion.

An obligation is a juridical necessity to give, to do or not to do

(Art. 1156, Civil Code). The obligation is constituted upon the
concurrence of the essential elements thereof, viz: (a)
The vinculum juris or juridical tie which is the efficient cause
established by the various sources of obligations (law, contracts,
quasi-contracts, delicts and quasi-delicts); (b) the object which
is the prestation or conduct; required to be observed (to give, to
do or not to do); and (c) the subject-persons who, viewed from
the demandability of the obligation, are the active (obligee) and
the passive (obligor) subjects.
Among the sources of an obligation is a contract (Art. 1157,
Civil Code), which is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to give
something or to render some service (Art. 1305, Civil Code). A
contract undergoes various stages that include its negotiation or
preparation,
its
perfection
and,
finally,
its
consummation. Negotiation covers the period from the time the
prospective contracting parties indicate interest in the
contract to the time the contract is concluded (perfected).
The perfection of the contract takes place upon the concurrence
of the essential elements thereof. A contract which
is consensual as to perfection is so established upon a mere
meeting of minds, i.e., the concurrence of offer and acceptance,
on the object and on the cause thereof. A contract which
requires, in addition to the above, the delivery of the object of
the agreement, as in a pledge or commodatum, is commonly
referred to as a real contract. In a solemn contract, compliance
with certain formalities prescribed by law, such as in a donation
of real property, is essential in order to make the act valid, the
prescribed form being thereby an essential element thereof. The
stage of consummationbegins when the parties perform their
respective undertakings under the contract culminating in the
extinguishment thereof.
Until the contract is perfected, it cannot, as an independent
source of obligation, serve as a binding juridical relation. In
sales, particularly, to which the topic for discussion about the
case at bench belongs, the contract is perfected when a person,
called the seller, obligates himself, for a price certain, to deliver
and to transfer ownership of a thing or right to another, called
the buyer, over which the latter agrees. Article 1458 of the Civil
Code provides:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
A contract of sale may
be absolute or conditional.
When the sale is not absolute but conditional, such as in a
"Contract to Sell" where invariably the ownership of the thing
sold is retained until the fulfillment of a positive suspensive
condition (normally, the full payment of the purchase price), the
breach of the condition will prevent the obligation to convey
title from acquiring an obligatory force. 2 In Dignos vs. Court of
Appeals (158 SCRA 375), we have said that, although
denominated a "Deed of Conditional Sale," a sale is still
absolute where the contract is devoid of any proviso that title is
reserved or the right to unilaterally rescind is stipulated, e.g.,
until or unless the price is paid. Ownership will then be
transferred to the buyer upon actual or constructive delivery
(e.g., by the execution of a public document) of the property
sold. Where the condition is imposed upon the perfection of the
contract itself, the failure of the condition would prevent such

perfection.3 If the condition is imposed on the obligation of a

party which is not fulfilled, the other party may either waive the
condition or refuse to proceed with the sale (Art. 1545, Civil
Code). 4
An unconditional mutual promise to buy and sell, as long as the
object is made determinate and the price is fixed, can be
obligatory on the parties, and compliance therewith may
accordingly be exacted. 5
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 ofoption. This contract
is legally binding, and in sales, it conforms with the second
paragraph of Article 1479 of the Civil Code, viz: Art. 1479. >An
accepted unilateral promise to buy or to sell a determinate thing
for a price certain is binding upon the promissor if the promise
is supported by a consideration distinct from the price. (1451a) 6
Observe, however, that the option is not the contract of sale
itself. 7 The optionee has the right, but not the obligation, to buy.
Once the option is exercised timely, i.e., the offer is accepted
before a breach of the option, a bilateral promise to sell and to
buy ensues and both parties are then reciprocally bound to
comply with their respective undertakings. 8
Let us elucidate a little. A negotiation is formally initiated by an
offer. An imperfect promise (policitacion) is merely an offer.
Public advertisements or solicitations and the like are ordinarily
construed as mere invitations to make offers or only as
proposals. These relations, until a contract is perfected, are not
considered binding commitments. Thus, at any time prior to the
perfection of the contract, either negotiating party may stop the
negotiation. The offer, at this stage, may be withdrawn; the
withdrawal is effective immediately after its manifestation, such
as by its mailing and not necessarily when the offeree learns of
the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a
period is given to the offeree within which to accept the offer,
the following rules generally govern:
(1) If the period is not itself founded upon or supported by a
consideration, the offeror is still free and has the right to
withdraw the offer before its acceptance, or, if an acceptance has
been made, before the offeror's coming to know of such fact, by
communicating that withdrawal to the offeree (see Art. 1324,
Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948,
holding that this rule is applicable to a unilateral promise to sell
under Art. 1479, modifying the previous decision in South
Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art.
1319, Civil Code; Rural Bank of Paraaque, Inc., vs.
Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368).
The right to withdraw, however, must not be exercised
whimsically or arbitrarily; otherwise, it could give rise to a
damage claim under Article 19 of the Civil Code which ordains
that "every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith."

in fact, the optioner-offeror withdraws the offer before its

acceptance (exercise of the option) by the optionee-offeree, the
latter may not sue for specific performance on the proposed
contract ("object" of the option) since it has failed to reach its
own stage of perfection. The optioner-offeror, however, renders
himself liable for damages for breach of the option. In these
cases, care should be taken of the real nature of
the consideration given, for if, in fact, it has been intended to be
part of the consideration for the main contract with a right of
withdrawal on the part of the optionee, the main contract could
be deemed perfected; a similar instance would be an "earnest
money" in a contract of sale that can evidence its perfection
(Art. 1482, Civil Code).
In the law on sales, the so-called "right of first refusal" is an
innovative juridical relation. Needless to point out, it cannot be
deemed a perfected contract of sale under Article 1458 of the
Civil Code. Neither can the right of first refusal, understood in
its normal concept, per se be brought within the purview of an
option under the second paragraph of Article 1479, aforequoted,
or possibly of an offer under Article 1319 9 of the same Code.
An option or an offer would require, among other things, 10 a
clear certainty on both the object and the cause or consideration
of the envisioned contract. In a right of first refusal, while the
object might be made determinate, the exercise of the right,
however, would be dependent not only on the grantor's eventual
intention to enter into a binding juridical relation with another
but also on terms, including the price, that obviously are yet to
be later firmed up. Prior thereto, it can at best be so described as
merely belonging to a class of preparatory juridical relations
governed not by contracts (since the essential elements to
establish the vinculum juris would still be indefinite and
inconclusive) but by, among other laws of general application,
the pertinent scattered provisions of the Civil Code on human
conduct.
Even on the premise that such right of first refusal has been
decreed under a final judgment, like here, its breach cannot
justify correspondingly an issuance of a writ of execution under
a judgment that merely recognizes its existence, nor would it
sanction an action for specific performance without thereby
negating the indispensable element of consensuality in the
perfection of contracts. 11 It is not to say, however, that the right
of first refusal would be inconsequential for, such as already
intimated above, an unjustified disregard thereof, given, for
instance, the circumstances expressed in Article 19 12 of the Civil
Code, can warrant a recovery for damages.
The final judgment in Civil Case No. 87-41058, it must be
stressed, has merely accorded a "right of first refusal" in favor
of petitioners. The consequence of such a declaration entails no
more than what has heretofore been said. In fine, if, as it is here
so conveyed to us, petitioners are aggrieved by the failure of
private respondents to honor the right of first refusal, the remedy
is not a writ of execution on the judgment, since there is none to
execute, but an action for damages in a proper forum for the
purpose.
18. LIMSON vs. CA

(2) If the period has a separate consideration, a contract of

"option" is deemed perfected, and it would be a breach of that
contract to withdraw the offer during the agreed period. The
option, however, is an independent contract by itself, and it is to
be distinguished from the projected main agreement (subject
matter of the option) which is obviously yet to be concluded. If,

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
to sell.
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
constitute the 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 Paraaque, 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 full amount 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 is one 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 would be 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 petitioner did 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 must be 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.
Petitioners 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 of private
respondent spouses offer and petitioners 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, specifically
on 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 a
telegram 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.1wphi1.nt
As to whether respondent spouses were at fault for the nonconsummation 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 presence of petitioner was not
enough as she was not even prepared to pay the purchase
price in cash as agreed 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, including the 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 immaterial as 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.
19. TAYAG vs. LACSON
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:
There is no showing in the petitioners 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.

There is no dispute that what Enrico sought to enforce in Civil

Case No. Q-99-36834 was his purported right to acquire
ownership of the subject property in the exercise of his option to
purchase the same under the Contract of Lease with Option to
Purchase. He ultimately wants to compel the spouses Apeles to
already execute the Deed of Sale over the subject property in his
favor.

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 gives to 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, not an
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

An option is a contract by which the owner of the property

agrees with another person that the latter shall have the right to
buy the formers 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 gives to
the owner of the property the right to sell or demand a sale. 22 An
option is not of itself a purchase, but merely secures the
privilege to buy. It is not a sale of property but a sale of the right
to purchase. It is simply 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. He
does not sell his land; he does not then agree to sell it; but he
does sell something, i.e., the right or privilege to buy at the
election or option of the other party. Its distinguishing
characteristic is that it imposes no binding obligation on the
person holding the option, aside from the consideration for the
offer.23

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."

It is also sometimes called an "unaccepted offer" and is

sanctioned by Article 1479 of the Civil Code:
Art. 1479. A promise to buy and sell a determinate thing for a
price certain is reciprocally demandable.

Fourth. The petitioner impleaded the respondents as partiesdefendants 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:

An accepted unilateral promise to buy or to sell a determinate

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

Art. 1314. Any third person who induces another to violate his
contract shall be liable for damages to the other contracting
party.

The second paragraph of Article 1479 provides for the definition

and consequent rights and obligations under an option contract.
For an option contract to be valid and enforceable against the
promissor, there must be a separate and distinct consideration
that supports it.24

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 contractual relation without legal
justification.
Where there was no malice in the interference of a contract, and
the impulse behind ones 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.
20. EULOGIO vs. APELES
Enrico assiduously prays before this Court to sustain the validity
of the Contract of Lease with Option to Purchase. Enrico asserts
that the said Contract was voluntarily entered into and signed by
Luz who had it notarized herself. The spouses Apeles should be
obliged to respect the terms of the agreement, and not be
allowed to renege on their commitment thereunder and frustrate
the sanctity of contracts.

In the landmark case of Southwestern Sugar and Molasses

Company v. Atlantic Gulf and Pacific Co., 25 we declared that for
an option contract to bind the promissor, it must be supported by
consideration:
There is no question that under Article 1479 of the new Civil
Code "an option to sell," or "a promise to buy or to sell," as used
in said article, to be valid must be "supported by a consideration
distinct from the price." This is clearly inferred from the context
of said article that a unilateral promise to buy or to sell, even if
accepted, is only binding if supported by a consideration. In
other words, "an accepted unilateral promise" can only
have a binding effect if supported by a consideration, which
means that the option can still be withdrawn, even if
accepted, if the same is not supported by any consideration.
Here it is not disputed that the option is without
consideration.
It
can
therefore
be
withdrawn
notwithstanding the acceptance made of it by
appellee. (Emphasis supplied.)

The doctrine requiring the payment of consideration in an option

contract enunciated in Southwestern Sugar is resonated in
subsequent cases and remains controlling to this day. Without
consideration that is separate and distinct from the purchase
price, an option contract cannot be enforced; that holds true
even if the unilateral promise is already accepted by the
optionee.

maliciously deceived [respondents] into believing that they have

the privilege to utilize Club facilities, only for [respondents] to
be later on denied such use of Club facilities. All these acts are
part of [petitioners] scheme to attract, induce and convince
[respondents] to buy shares, knowing that had they told the truth
about these matters, [respondents] would never have bought
shares in their project.

The consideration is "the why of the contracts, the essential

reason which moves the contracting parties to enter into the
contract." This definition illustrates that the consideration
contemplated to support an option contract need not be
monetary. Actual cash need not be exchanged for the option.
However, by the very nature of an option contract, as defined in
Article 1479, the same is an onerous contract for which the
consideration must be something of value, although its kind may
vary.26

18. On 28 August 1998, [respondents] requested their lawyer to

write [petitioner] Fontana Resort and Country Club, Inc. a letter
demanding for the return of their payment. x x x.

We have painstakingly examined the Contract of Lease with

Option to Purchase, as well as the pleadings submitted by the
parties, and their testimonies in open court, for any direct
evidence or evidence aliunde to prove the existence of
consideration for the option contract, but we have found none.
The only consideration agreed upon by the parties in the said
Contract is the supposed purchase price for the subject property
in the amount not exceeding P1.5 Million, which could not be
deemed to be the same consideration for the option contract
since the law and jurisprudence explicitly dictate that for the
option contract to be valid, it must be supported by a
consideration separate and distinct from the price.
In Bible Baptist Church v. Court of Appeals, 27 we stressed that
an option contract needs to be supported by a separate
consideration. The consideration need not be monetary but
could consist of other things or undertakings. However, if the
consideration is not monetary, these must be things or
undertakings of value, in view of the onerous nature of the
option contract. Furthermore, when a consideration for an
option contract is not monetary, said consideration must be
clearly specified as such in the option contract or clause.
In the present case, it is indubitable that no consideration was
given by Enrico to the spouses Apeles for the option contract.
The absence of monetary or any material consideration keeps
this Court from enforcing the rights of the parties under said
option contract.
Article 1330-1332. DEFECTS OF THE WILL
21. FONTANA RESORT vs. TAN
Respondents alleged in their Complaint that:
16. [Herein petitioners] failure to finish the development works
at the Fontana Leisure Park within the time frame that they
promised, and [petitioners] failure/refusal to accom[m]odate
[herein respondents] request for reservations on 17 October
1998 and 1 April 1999, constitute gross misrepresentation and a
form of deception, not only to the [respondents], but the general
public as well.
17. [Petitioners] deliberately and maliciously misrepresented
that development works will be completed when they knew
fully well that it was impossible to complete the development
works by the deadline. [Petitioners] also deliberately and

19. [Petitioner] Fontana Resort and Country Club, Inc.

responded to this letter, with a letter of its own dated 10
September 1998, denying [respondents] request for a refund. x
x x.
20. [Respondents] replied to [petitioner] Fontana Resort and
Country Clubs letter with a letter dated 13 October 1998, x x x.
But despite receipt of this letter, [petitioners] failed/refused and
continue to fail /refuse to refund/return [respondents]
payments.
xxxx
22. [Petitioners] acted in bad faith when it sold membership
shares to [respondents], promising development work will be
completed by the first quarter of 1998 when [petitioners] knew
fully well that they were in no position and had no intention to
complete development work within the time they promised.
[Petitioners] also were maliciously motivated when they
promised [respondents] use of Club facilities only to deny
[respondents] such use later on.
23. It is detrimental to the interest of [respondents] and quite
unfair that they will be made to suffer from the delay in the
completion of the development work, while [petitioners] are
already enjoying the purchase price paid by [respondents].
xxxx
26. Apart from the refund of the amount of P387,300.00,
[respondents] are also entitled to be paid reasonable interest
from their money. Afterall, [petitioners] have already benefitted
from this money, having been able to use it, if not for the
Fontana Leisure Park project, for their other projects as well.
And had [respondents] been able to deposit the money in the
bank, or invested it in some worthwhile undertaking, they would
have earned interest on the money at the rate of at least 21% per
annum.25
The aforequoted allegations in respondents Complaint
sufficiently state a cause of action for the annulment of a
voidable contract of sale based on fraud under Article 1390, in
relation to Article 1398, of the Civil Code, and/or rescission of a
reciprocal obligation under Article 1191, in relation to Article
1385, of the same Code. Said provisions of the Civil Code are
reproduced below:
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.
Article 1398. An obligation having been annulled, the
contracting parties shall restore to each other the things which
have been the subject matter of the contract, with their fruits,
and the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the
basis for damages.
Article 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with
Articles 1385 and 1388 and the Mortgage Law.
Article 1385. Rescission creates the obligation to return the
things which were the object of the contract, together with their
fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return
whatever he may be obliged to return.
Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third
persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the
person causing the loss.
It does not matter that respondents, in their Complaint, simply
prayed for refund of the purchase price they had paid for their
FRCCI shares,26 without specifically mentioning the annulment
or rescission of the sale of said shares. The Court of Appeals
treated respondents Complaint as one for annulment/rescission
of contract and, accordingly, it did not simply order petitioners
to refund to respondents the purchase price of the FRCCI shares,
but also directed respondents to comply with their correlative
obligation of surrendering their certificates of shares of stock to
petitioners.
Now the only issue left for us to determine whether or not
petitioners committed fraud or defaulted on their promises as
would justify the annulment or rescission of their contract of
sale with respondents requires us to reexamine evidence
submitted by the parties and review the factual findings by the
SEC and the Court of Appeals.
As a general rule, "the remedy of appeal by certiorari under
Rule 45 of the Rules of Court contemplates only questions of
law and not issues of fact. This rule, however, is inapplicable in
cases x x x where the factual findings complained of are
absolutely devoid of support in the records or the assailed

judgment of the appellate court is based on a misapprehension

of facts."27 Another well-recognized exception to the general
rule is when the factual findings of the administrative agency
and the Court of Appeals are contradictory. 28 The said
exceptions are applicable to the case at bar.
There are contradictory findings below as to the existence of
fraud: while Hearing Officer Bacalla and the SEC en banc found
that there is fraud on the part of petitioners in selling the FRCCI
shares to respondents, the Court of Appeals found none.
There is fraud when one party is induced by the other to enter
into a contract, through and solely because of the latters
insidious words or machinations. But not all forms of fraud can
vitiate consent. "Under Article 1330, fraud refers to dolo
causante or causal fraud, in which, prior to or simultaneous with
the execution of a contract, one party secures the consent of the
other by using deception, without which such consent would not
have been given."29 "Simply stated, the fraud must be the
determining cause of the contract, or must have caused the
consent to be given."30
"[T]he general rule is that he who alleges fraud or mistake in a
transaction must substantiate his allegation as the presumption is
that a person takes ordinary care for his concerns and that
private dealings have been entered into fairly and
regularly."31 One who alleges defect or lack of valid consent to a
contract by reason of fraud or undue influence must establish by
full, clear and convincing evidence such specific acts that
vitiated a partys consent, otherwise, the latters presumed
consent to the contract prevails.32
In this case, respondents have miserably failed to prove how
petitioners employed fraud to induce respondents to buy FRCCI
shares. It can only be expected that petitioners presented the
FLP and the country club in the most positive light in order to
attract investor-members. There is no showing that in their sales
talk to respondents, petitioners actually used insidious words or
machinations, without which, respondents would not have
bought the FRCCI shares. Respondents appear to be literate and
of above-average means, who may not be so easily deceived
into parting with a substantial amount of money. What is
apparent to us is that respondents knowingly and willingly
consented to buying FRCCI shares, but were later on
disappointed with the actual FLP facilities and club membership
benefits.
22. THE ROMAN CATHOLIC CHURCH vs. PANTE
No misrepresentation existed vitiating the sellers consent and
invalidating the contract
Consent is an essential requisite of contracts 12 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 one or both parties to enter into the contract.

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.

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.

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 these
words was written the name of "Mr. Regino Pante." Asked
during cross-examination where the sketch plan came from,
Pante answered that it was from the Archbishops Palace;
neither the Church nor the spouses Rubi contradicted this
statement.19

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
Pantes 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 buyers 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 Churchs 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 Pantes house to
the municipal road.
We find well-taken Pantes argument that, given the size of the
lot, it could serve no other purpose than as a mere passageway;
it is unthinkable to consider that a 2x16-meter strip of land
could be mistaken as anyones 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 records further reveal that the sales of the Churchs 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 Archdioceses Oeconomous. Relying on Fr.
Marcaidas recommendation and finding nothing objectionable,
Fr. Ragay (the Archdioceses Oeconomous) approved the sale to
Pante.
The above facts, in our view, establish that there could not have
been a deliberate, willful, or fraudulent act committed by Pante
that misled the Church into giving its consent to the sale of the
subject lot in his favor. That Pante was not an actual occupant of
the lot he purchased was a fact that the Church either ignored or
waived as a requirement. In any case, the Church was by no
means led to believe or do so by Pantes act; there had been no
vitiation of the Churchs 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 Churchs 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 provided 22 would have been unnecessary
had ownership not already passed to Pante.
23. DELA CRUZ vs. DELA CRUZ
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 fully explained 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 courts ruling that Paciencia dela
Cruz voluntarily executed the Deed of Sale in Fortunatos 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 Cruzs 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

themselves, actually asserted or attempted to assert rights of

ownership over the subject property after the alleged sale
thereof to Fortunato. 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 benefit from the
property.1wphi1 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 in favor 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, Paciencias
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 the
evidentiary 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
24. FELICIANO vs. ZALDIVAR

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

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 show
that 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.
Article 1345-1346. SIMULATION OF CONTRACTS
25. VILLEGAS vs. RURAL BANK of TANJAY
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.
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 the parties 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 is the contract that the
parties pretend to have executed while the hidden act is the true
agreement between 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 contracts
were concealed and made to appear as sugar crop loans to make
them fall within the purview of the Rural Banks Act, all the
essential requisites of a contract 9 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
respondents 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 others 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 P350,000.00
was 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 when the 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 creation or
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 corporations Local Tour
Operators License. In turn, appellees asked for a rescission of
the sale and 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
respondent
to
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 respondents 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 respondents 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, the
latter can enter into a separate and distinct contract for its
alienation. Petitioners recognized respondents 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.
As stipulated in the Promise to Sell, petitioners are entitled to
reimbursement of the P250,000.00 down payment. We agree
with the CAs 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.
26. VILACERAN vs. DE GUZMAN
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 Guzmans total
loan obtained from them would amount 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
case at 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
registered in the name of petitioners, was reconveyed to De
Guzman allegedly for P350,000.
As regards petitioners assertion that De Guzmans previous
loans should have been considered to 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 should have 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.
27. CABALU vs. TABU
The core issues to be resolved are 1) whether the Deed of Sale
of Undivided Parcel of Land covering the 9,000 square meter
property executed by Domingo in favor of Laureano Cabalu on
March 5, 1975, is valid; and 2) whether the Deed of Sale, dated
October 8, 1996, covering the 4,500 square meter portion of the
9,000 square meter property, executed by Domingo in favor of
Renato Tabu, is null and void.
Petitioners contend that the Deed of Absolute Sale executed by
Domingo in favor of Laureano Cabalu on March 5, 1975 should
have been declared valid because it enjoyed the presumption of
regularity. According to them, the subject deed, being a public
document, had in its favor the presumption of regularity, and to
contradict the same, there must be clear, convincing and more
than preponderant evidence, otherwise, the document should be
upheld. They insist that the sale transferred rights of ownership
in favor of the heirs of Laureano Cabalu.
They further argue that the CA, in modifying the decision of the
RTC, should not have deleted the portion declaring null and
void the Deed of Absolute Sale, dated October 8, 1996, executed
by Domingo in favor of Renato Tabu, because at the time of
execution of the said deed of sale, the seller, Domingo was
already dead. Being a void document, the titles originating from
the said instrument were also void and should be cancelled.

Respondent
spouses,
in
their
Comment15 and
16
Memorandum, counter that the issues raised are not 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 of Domingo, appeared as one
of the heirs. Thus, and as correctly found by the RTC, even if
Benjamin died sometime in 1960, Domingo in 1975 could not
yet validly dispose of the whole or even a portion thereof for the
reason that he was not the sole heir of Benjamin, as his mother
only died sometime in 1980.
Besides, under Article 1347 of the Civil Code, "No contract may
be entered into upon future inheritance except in cases expressly
authorized by law." Paragraph 2 of Article 1347, characterizes a
contract entered into upon future inheritance as void. The law
applies when the following requisites concur: (1) the succession
has not yet been opened; (2) the object of the contract forms part
of the inheritance; and (3) the promissor has, with respect to the
object, an expectancy of a right which is purely hereditary in
nature.18
In this case, at the time the deed was executed, Faustinas 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.1wphi1

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.
Domingos status as an heir of Faustina by right of
representation being undisputed, the RTC should have
maintained the validity of TCT No. 266583 covering the 9,000
square meter subject property. As correctly concluded by the
CA, this served as the inheritance of Domingo from Faustina.
Regarding the deed of sale covering the remaining 4,500 square
meters of the subject property executed in favor of Renato Tabu,
it is evidently null and void. The document itself, the Deed of
Absolute Sale, dated October 8, 1996, readily shows that it was
executed on August 4, 1996 more than two months after the
death of Domingo. Contracting parties must be juristic entities
at the time of the consummation of the contract. Stated
otherwise, to form a valid and legal agreement it is necessary
that there be a party capable of contracting and a party capable
of being contracted with. Hence, if any one party to a supposed
contract was already dead at the time of its execution, such
contract is undoubtedly simulated and false and, therefore, null
and void by reason of its having been made after the death of the
party who appears as one of the contracting parties therein. The
death of a person terminates contractual capacity.19
The contract being null and void, the sale to Renato Tabu
produced no legal effects and transmitted no rights whatsoever.
Consequently, TCT No. 286484 issued to Tabu by virtue of the
October 8, 1996 Deed of Sale, as well as its derivative titles,
TCT Nos. 291338 and 291339, both registered in the name of
Rena to Tabu, married to Dolores Laxamana, are likewise void.
The CA erred in deleting that portion in the RTC decision
declaring the Deed of Absolute Sale, dated October 8, 1996, null
and void and canceling TCT Nos. 291338 and 291339.
WHEREFORE, the petition is partially GRANTED. The
decretal portion of the June 16, 2009 Decision of the Court of
Appeals is hereby MODIFIED to read as follows:
1. The Deed of Absolute Sale, dated March 5, 1975, executed by
Domingo Laxamana in favor of Laureano Cabalu, is hereby
declared as null and void.
2. The Deed of Absolute Sale, dated October 8, 1996, executed
by Domingo Laxamana in favor of Renato Tabu, and TCT No.
286484 as well as the derivative titles TCT Nos. 291338 and
291339, both registered in the name of Renato Tabu, married to
Dolores Laxamana, are hereby declared null and void and
cancelled.
3. TCT No. 281353 in the name of Domingo Laxamana is
hereby ordered restored subject to the partition by his lawful
heirs.
28. HEIRS OF INTAC vs. CA
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 of the 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 absolutely simulated for lack of
consideration and cause and, therefore, void. Articles 1345 and
1346 of the Civil Code provide:
Art. 1345. Simulation of a contract may be absolute or relative.
The former takes place when the parties 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 alleged

vendees, 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 for their 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 Mariettos 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 Mariettos story that there was no payment made
because Ireneo had no intention to sell the subject property.
Angelinas 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 wellentrenched 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.1wphi1 Where a partys consent to a contract of sale is
vitiated or where there is lack of consideration due to a
simulated price, 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 same
and 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 taxes of 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.
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.
29. PHIL. BANKING CORP. vs. DY
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-Intervention 13 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, 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 the subsequent 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 and prudence were
exercised or not, are questions of fact 19 which are generally
improper in a petition for 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 by the 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).1wphi1 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 all times 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.
Article 1356-1358. FORMS OF CONTRACT
30. MARTINEZ vs. CA
1. Whether or not private respondents Veneracion are buyers in
good faith of the lot in dispute as to make them the absolute
owners thereof in accordance with Art. 1544 of the Civil Code
on double sale of immovable property.
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 is belied 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
April 23, 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
June 1, 1983 and registered on March 4, 1984. He, therefore,
knew that there were already occupants on 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
Absolute Sale 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.
31. TEOCO vs. METROBANK

Transfer of Right of Redemption

The CA held that the brothers Teoco have not sufficiently shown
that the spouses Cos 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, and sisters, but did not
specifically include the brothers Teoco, who are just brothers-inlaw 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
consideration of 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 under
TCT 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 in favor 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. T6910 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 in
evidence 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 evidence of 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 documents 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 evidence of 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 third person;
(4) The cession of actions or rights proceeding from an act
appearing in a public document.
All other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one. But
sales of goods, chattels or things in action are governed by
Articles 1403, No. 2, and 1405.
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 the same. 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 Article 1358 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 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.

implement and enforce it. However, such rule is not inflexible

for it admits of certain exceptions. In Santos v. Judge Isidro, 4 the
Court observed that special and exceptional circumstances, the
imperatives of substantial justice, or facts that may have
transpired after the finality of judgment which would render its
execution unjust, may warrant the suspension of execution of a
decision that has become final and executory. In the case at bar,
the ends of justice would be frustrated if a writ of execution is
issued considering the uncertainty of the object of the
agreement. To do so would open the possibility of error and
future litigations.
The Paknaan executed by respondent Marcelo Arjona purports
to convey a parcel of land consisting of more or less 1 hectare to
petitioners Quiros and Villegas. Another Paknaan, prepared on
the same date, and executed by one Jose Banda who signified
his intention to vacate the parcel of land he was tilling located at
Torrod, Brgy. Labney, San Jacinto, Pangasinan, for and in behalf
of the Arjona family. On ocular inspection however, the
municipal trial court found that the land referred to in the second
Paknaan was different from the land being occupied by
petitioners. Hence, no writ of execution could be issued for
failure to determine with certainty what parcel of land
respondent intended to convey.
In denying the issuance of the writ of execution, the appellate
court ruled that the contract is null and void for its failure to
describe with certainty the object thereof. While we agree that
no writ of execution may issue, we take exception to the
appellate courts reason for its denial.

Article 1359-1369. REFORMATION OF CONTRACTS

32. VILLEGAS vs. ARJONA
The pivotal issue is the validity and enforceability of the
amicable settlement between the parties and corollary to this,
whether a writ of execution may issue on the basis thereof.
In support of their stance, petitioners rely on Section 416 of the
Local Government Code which provides that an amicable
settlement shall have the force and effect of a final judgment
upon the expiration of 10 days from the date thereof, unless
repudiated or nullified by the proper court. They argue that since
no such repudiation or action to nullify has been initiated, the
municipal court has no discretion but to execute the agreement
which has become final and executory.
Petitioners likewise contend that despite the failure of the
Paknaan to describe with certainty the object of the contract, the
evidence will show that after the execution of the agreement,
respondent Marcelo Arjona accompanied them to the actual site
of the properties at Sitio Torod, Labney, San Jacinto, Pangasinan
and pointed to them the 1 hectare property referred to in the said
agreement.
In their Comment, respondents insist that respondent Arjona
could not have accompanied petitioners to the subject land at
Torrod, Labney because he was physically incapacitated and
there was no motorized vehicle to transport him to the said
place.
Generally, the rule is that where no repudiation was made during
the 10-day period, the amicable settlement attains the status of
finality and it becomes the ministerial duty of the court to

Since an amicable settlement, which partakes of the nature of a

contract, is subject to the same legal provisions providing for the
validity, enforcement, rescission or annulment of ordinary
contracts, there is a need to ascertain whether the Paknaan in
question has sufficiently complied with the requisites of validity
in accordance with Article 1318 of the Civil Code.5
There is no question that there was meeting of the minds
between the contracting parties. In executing the Paknaan, the
respondent undertook to convey 1 hectare of land to petitioners
who accepted. It appears that while the Paknaan was prepared
and signed by respondent Arjona, petitioners acceded to the
terms thereof by not disputing its contents and are in fact now
seeking its enforcement. The object is a 1-hectare parcel of land
representing petitioners inheritance from their deceased
grandmother. The cause of the contract is the delivery of
petitioners share in the inheritance. The inability of the
municipal court to identify the exact location of the inherited
property did not negate the principal object of the contract. This
is an error occasioned by the failure of the parties to describe the
subject property, which is correctible by reformation and does
not indicate the absence of the principal object as to render the
contract void. It cannot be disputed that the object is
determinable as to its kind, i.e.1 hectare of land as inheritance,
and can be determined without need of a new contract or
agreement.6Clearly, the Paknaan has all the earmarks of a valid
contract.
Although both parties agreed to transfer one-hectare real
property, they failed to include in the written document a
sufficient description of the property to convey. This error is not
one for nullification of the instrument but only for reformation.
Article 1359 of the Civil Code provides:

When, there having been a meeting of the minds of the parties to

a contract, their true intention is not expressed in the instrument
purporting to embody the agreement by reason of mistake,
fraud, inequitable conduct or accident, one of the parties may
ask for the reformation of the instrument to the end that such
true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented
a meeting of the minds of the parties, the proper remedy is not
reformation of the instrument but annulment of the contract.
Reformation is a remedy in equity whereby a written instrument
is made or construed so as to express or conform to the real
intention of the parties where some error or mistake has been
committed.7 In granting reformation, the remedy in equity is not
making a new contract for the parties, but establishing and
perpetuating the real contract between the parties which, under
the technical rules of law, could not be enforced but for such
reformation.
In order that an action for reformation of instrument as provided
in Article 1359 of the Civil Code may prosper, the following
requisites must concur: (1) there must have been a meeting of
the minds of the parties to the contract; (2) the instrument does
not express the true intention of the parties; and (3) the failure of
the instrument to express the true intention of the parties is due
to mistake, fraud, inequitable conduct or accident.8
When the terms of an agreement have been reduced to writing,
it is considered as containing all the terms agreed upon and there
can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written
agreement, except when it fails to express the true intent and
agreement of the parties thereto, in which case, one of the
parties may bring an action for the reformation of the instrument
to the end that such true intention may be expressed.9
Both parties acknowledge that petitioners are entitled to their
inheritance, hence, the remedy of nullification, which
invalidates the Paknaan, would prejudice petitioners and deprive
them of their just share of the inheritance. Respondent can not,
as an afterthought, be allowed to renege on his legal obligation
to transfer the property to its rightful heirs. A refusal to reform
the Paknaan under such circumstances would have the effect of
penalizing one party for negligent conduct, and at the same time
permitting the other party to escape the consequences of his
negligence and profit thereby. No person shall be unjustly
enriched at the expense of another.
33. MARTIRES vs. CHUA
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.20 However, 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 it to 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 dulynotarized 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 the marital 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 crossexamination, 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 of
the 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 the same 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.

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

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

Hence, courts are duty-bound to exercise caution in the

interpretation and resolution of contracts lest 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 to petitioners. 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 of the 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.

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 Civil Code.
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 by the 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

Article 1370-1379. INTERPRETATION OF CONTRACTS

34. SECURITY BANK vs. CA
The more important question is whether the written letter of
LIC, rejecting SBCs claim for indemnity, satisfied this
condition.
PISA claims that the condition "could not be recovered from the
insurer" requires a final judgment against SBCs claim for
indemnity against LIC, because only then would the nonrecovery 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 should have stated so. In its primary
and general meaning, paragraph 5(e) would cover LICs
extrajudicial denial of SBCs 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 SBCs 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 Appeals 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 PISAs 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 security guards 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 [SBCs] 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 provisionsparticularly 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 SBCs diligence in
ensuring that notwithstanding the PRA and the partial payment
by PISA, SBCs 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 formers 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 SBCs 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 SBCs 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 SBCs 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 SBCs right of action effectual, and
would yield the greatest reciprocity of interests. Indeed, we
agree with SBC that PISAs interpretation of the clause would
lead to an effective waiver of SBCs right of action, because to
await the judicial determination of the LIC suit may lead to the
prescription of SBCs 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 SBCs suit against PISA was not
premature, and the dismissal of the action as against PISA was
improper.

35. FORTUNE MEDICARE vs. AMORIN

I. The CA gravely erred in concluding that the phrase "approved
standard charges" is subject to interpretation, and that it did not
automatically mean "Philippine Standard"; and
The petition is bereft of merit.
The Court finds no cogent reason to disturb the CAs finding
that Fortune Cares liability to Amorin under the subject Health
Care Contract should be based on the expenses for hospital and
professional fees which he actually incurred, and should not be
limited by the amount that he would have incurred had his
emergency treatment been performed in an accredited hospital
in the Philippines.
We emphasize that for purposes of determining the liability of a
health care provider to its members, jurisprudence holds that a
health care agreement is in the nature of non-life insurance,
which is primarily a contract of indemnity. Once the member
incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under
the contract.18
To aid in the interpretation of health care agreements, the Court
laid down the following guidelines in Philamcare Health
Systems v. CA19:
When the terms of insurance contract contain limitations on
liability, courts should construe them in such a way as to
preclude the insurer from non-compliance with his obligation.
Being a contract of adhesion, the terms of an insurance contract
are to be construed strictly against the party which prepared the
contract the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted
against the insurer and liberally in favor of the insured,
especially to avoid forfeiture. This is equally applicable to
Health Care Agreements. The phraseology used in medical or
hospital service contracts, such as the one at bar, must be
liberally construed in favor of the subscriber, and if doubtful or
reasonably susceptible of two interpretations the construction
conferring coverage is to be adopted, and exclusionary clauses
of doubtful import should be strictly construed against the
provider.20 (Citations omitted and emphasis ours)
Consistent with the foregoing, we reiterated in Blue Cross
Health Care, Inc. v. Spouses Olivares21:
In Philamcare Health Systems, Inc. v. CA, we ruled that a health
care agreement is in the nature of a non-life insurance. It is an
established rule in insurance contracts that when their terms
contain limitations on liability, they should be construed strictly
against the insurer. These are contracts of adhesion the terms of
which must be interpreted and enforced stringently against the
insurer which prepared the contract. This doctrine is equally
applicable to health care agreements.
x x x [L]imitations of liability on the part of the insurer or health
care provider must be construed in such a way as to preclude it
from evading its obligations. Accordingly, they should be
scrutinized by the courts with "extreme jealousy" and "care" and
with a "jaundiced eye." x x x.22 (Citations omitted and emphasis
supplied)

In the instant case, the extent of Fortune Cares liability to

Amorin under the attendant circumstances was governed by
Section 3(B), Article V of the subject Health Care Contract,
considering that the appendectomy which the member had to
undergo qualified as an emergency care, but the treatment was
performed at St. Francis Medical Center in Honolulu, Hawaii,
U.S.A., a non-accredited hospital. We restate the pertinent
portions of Section 3(B):
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
1. Whether as an in-patient or out-patient, FortuneCare shall
reimburse the total hospitalization cost including the
professional fee (based on the total approved charges) to a
member who receives emergency care in a non-accredited
hospital. The above coverage applies only to Emergency
confinement within Philippine Territory. However, if the
emergency confinement occurs in foreign territory, Fortune Care
will be obligated to reimburse or pay eighty (80%) percent of
the approved standard charges which shall cover the
hospitalization costs and professional fees. x x x23 (Emphasis
supplied)
The point of dispute now concerns the proper interpretation of
the phrase "approved standard charges", which shall be the base
for the allowable 80% benefit. The trial court ruled that the
phrase should be interpreted in light of the provisions of Section
3(A), i.e., to the extent that may be allowed for treatments
performed by accredited physicians in accredited hospitals. As
the appellate court however held, this must be interpreted in its
literal sense, guided by the rule that any ambiguity shall be
strictly construed against Fortune Care, and liberally in favor of
Amorin.
The Court agrees with the CA. As may be gleaned from the
Health Care Contract, the parties thereto contemplated the
possibility of emergency care in a foreign country. As the
contract recognized Fortune Cares liability for emergency
treatments even in foreign territories, it expressly limited its
liability only insofar as the percentage of hospitalization and
professional fees that must be paid or reimbursed was
concerned, pegged at a mere 80% of the approved standard
charges.
The word "standard" as used in the cited stipulation was vague
and ambiguous, as it could be susceptible of different meanings.
Plainly, the term "standard charges" could be read as referring to
the "hospitalization costs and professional fees" which were
specifically cited as compensable even when incurred in a
foreign country. Contrary to Fortune Cares argument, from
nowhere in the Health Care Contract could it be reasonably
deduced that these "standard charges" referred to the "Philippine
standard", or that cost which would have been incurred if the
medical services were performed in an accredited hospital
situated in the Philippines. The RTC ruling that the use of the
"Philippine standard" could be inferred from the provisions of
Section 3(A), which covered emergency care in an accredited
hospital, was misplaced. Evidently, the parties to the Health
Care Contract made a clear distinction between emergency care
in an accredited hospital, and that obtained from a nonaccredited hospital.1wphi1 The limitation on payment based on
"Philippine standard" for services of accredited physicians was
expressly made applicable only in the case of an emergency care
in an accredited hospital.

The proper interpretation of the phrase "standard charges" could

instead be correlated with and reasonably inferred from the
other provisions of Section 3(B), considering that Amorins case
fell under the second case, i.e., emergency care in a nonaccredited hospital. Rather than a determination of Philippine or
American standards, the first part of the provision speaks of the
full reimbursement of "the total hospitalization cost including
the professional fee (based on the total approved charges) to a
member who receives emergency care in a non-accredited
hospital" within the Philippines. Thus, for emergency care in
non-accredited hospitals, this cited clause declared the standard
in the determination of the amount to be paid, without any
reference to and regardless of the amounts that would have been
payable if the treatment was done by an affiliated physician or
in an affiliated hospital. For treatments in foreign territories, the
only qualification was only as to the percentage, or 80% of that
payable for treatments performed in non-accredited hospital.
All told, in the absence of any qualifying word that clearly
limited Fortune Care's liability to costs that are applicable in the
Philippines, the amount payable by Fortune Care should not be
limited to the cost of treatment in the Philippines, as to do so
would result in the clear disadvantage of its member. If, as
Fortune Care argued, the premium and other charges in the
Health Care Contract were merely computed on assumption and
risk under Philippine cost and, that the American cost standard
or any foreign country's cost was never considered, such
limitations should have been distinctly specified and clearly
reflected in the extent of coverage which the company
voluntarily assumed. This was what Fortune Care found
appropriate when in its new health care agreement with the
House of Representatives, particularly in their 2006 agreement,
the provision on emergency care in non-accredited hospitals was
modified to read as follows:
However, if the emergency confinement occurs in a foreign
territory, Fortunecare will be obligated to reimburse or pay one
hundred (100%) percent under approved Philippine Standard
covered charges for hospitalization costs and professional fees
but not to exceed maximum allowable coverage, payable in
pesos at prevailing currency exchange rate at the time of
availment in said territory where he/she is confined. x x x24
Settled is the rule that ambiguities in a contract are interpreted
against the party that caused the ambiguity. "Any ambiguity in a
contract whose terms are susceptible of different interpretations
must be read against the party who drafted it."25
36. CALANASAN vs. DOLORITO
THE PARTIES ARGUMENTS
The petitioner filed the present petition for review on certiorari
with this Court to challenge the CA rulings. The petitioner
insists that Evelyn committed acts of ingratitude against her. She
argues that, if the donation was indeed onerous and was subject
to the rules of contracts, then greater reason exists to revoke it.
According to the petitioner, Evelyn violated all the terms of the
contract, especially the provision enjoining the latter from
acquiring ownership over the property during the lifetime of the
donor.
The respondents, for their part, point out that the petitioner
raises factual issues that a petition under Rule 45 of the Rules of
Court does not allow. Furthermore, the petitioner misleads the

Court in claiming that the deed of donation prohibited Evelyn

from acquiring ownership of the land. In fact, the deed of
donation confined the donation to only two conditions: 1)
redemption of the mortgage; and 2) the petitioners usufruct
over the land as long as she lived. The respondents complied
with these conditions. The respondents likewise remind the
Court that issues not advanced before the lower courts should
not be entertained the objective that Teodora is now trying to
accomplish. Finally, the respondents applaud the CA in finding
that the donation, being inter vivos and onerous, is irrevocable
under Article 765 of the New Civil Code.
We resolve to deny the petition for lack of merit.
The petitioner may not raise factual issues; arguments not raised
before the lower courts may not be introduced on appeal.
Teodora insists that Evelyn perpetrated ungrateful acts against
the petitioner. Moreover, the donation never materialized
because Evelyn violated a suspensive condition of the donation
when she had the property title transferred to her name during
the petitioners lifetime.
As correctly raised by the respondents, these allegations are
factual issues which are not proper for the present action. The
Court is not a trier of facts. 7 The Court cannot re-examine,
review or re-evaluate the evidence and the factual review made
by the lower courts.8 In the absence of compelling reasons, the
Court will not deviate from the rule that factual findings of the
lower tribunals are final and binding on this Court.
It has not escaped the Courts attention that this is the only time
the petitioner raised the arguments that donation never
materialized because the donee violated a condition of the
donation when she had the title of the property transferred to her
name. The petitioner never raised this issue before the lower
courts. It cant be emphasized enough that the Court will not
revisit the evidence presented below as well as any evidence
introduced for the first time on appeal. 9 Aside from being a
factual issue that is not proper for the present action, the Court
dismisses this new argument for being procedurally infirm and
violative of due process. As we have held in the past: "points of
law, theories, issues and arguments not brought to the attention
of the trial court will not be and ought not to be considered by a
reviewing court, as these cannot be raised for the first time on
appeal. Basic consideration of due process impels this rule."10
Rules of contract govern the onerous portion of donation; rules
of donation only apply to the excess, if any.
We now come to the appreciation of the legal incidents of the
donation vis--vis the alleged ungrateful acts.
In Republic of the Phils. v. Silim, 11 we classified donations
according to purpose. A pure/simple donation is the truest form
of donation as it is based on pure gratuity. The
remuneratory/compensatory type has for its purpose the
rewarding of the donee for past services, which services do not
amount to a demandable debt. A conditional/modal donation, on
the other hand, is a consideration for future services; it also
occurs where the donor imposes certain conditions, limitations
or charges upon the donee, whose value is inferior to the
donation given. Lastly, an onerous donation imposes upon the
donee a reciprocal obligation; this is made for a valuable

consideration whose cost is equal to or more than the thing

donated.12
In De Luna v. Judge Abrigo,13 we recognized the distinct, albeit
old, characterization of onerous donations when we declared:
Under the old Civil Code, it is a settled rule that donations with
an onerous cause are governed not by the law on donations but
by the rules on contracts, as held in the cases of Carlos v. Ramil
L-6736, September 5, 1911, 20 Phil. 183, Manalo vs. de Mesa
L-9449, February 12, 1915, 29 Phil. 495."14 In the same case, we
emphasized the retention of the treatment of onerous types of
donation, thus: "The same rules apply under the New Civil Code
as provided in Article 733 thereof which provides:
Article 733. Donations with an onerous cause shall be governed
by the rules on contracts, and remuneratory donations by the
provisions of the present Title as regards that portion which
exceeds the value of the burden imposed."15
We agree with the CA that since the donation imposed on the
donee the burden of redeeming the property forP15,000.00, the
donation was onerous. As an endowment for a valuable

consideration, it partakes of the nature of an ordinary contract;

hence, the rules of contract will govern and Article 765 of the
New Civil Code finds no application with respect to the onerous
portion of the donation.
Insofar as the value of the land exceeds the redemption price
paid for by the donee, a donation exists, and the legal provisions
on donation apply. Nevertheless, despite the applicability of the
provisions on donation to the gratuitous portion, the petitioner
may not dissolve the donation. She has no factual and legal
basis for its revocation, as aptly established by the RTC. First,
the ungrateful acts were committed not by the donee; it was her
husband who committed them. Second, the ungrateful acts were
perpetrated not against the donor; it was the petitioner's sister
who received the alleged ill treatments. These twin
considerations place the case out of the purview of Article 765
of the New Civil Code.