PAUL SCHENKER, plaintiff-appellant,

vs.
WILLIAM F. GEMPERLE, defendant-appellee.
PAREDES, J.:
The amended complaint, in a nutshell, avers that sometime in the summer of 1953, at Zurich, Switzerland, plaintiff
Paul Schenker and defendant William F. Gemperle agreed to organize a Philippine Corporation, later named as "The
Philippine Swiss Trading Co., Inc.", and to divide the capital stock equally between themselves and/or their
associates. This verbal agreement was acknowledged and confirmed in writing by defendant in his letter of
September 14, 1953 (Annex A, amended complaint). Defendant caused articles of incorporation to be drafted and
sent to plaintiff at Zurich. In a moment of indiscretion and mistaken trust, according to him, the plaintiff signed and
remitted to the defendant at Manila, the said articles which placed in the name of plaintiff only 24% of the total
subscription and the balance of 76% being in the name of defendant and his relatives. Explaining the discrepancy
between the articles and their verbal covenant, the defendant stated in said letter Annex A, that "Temporarily, I had to
place in my name 75% of the shares because there is a local law which provides that when one intends to make
contracts with the government, 75% of the subscribed capital has to be Filipino as otherwise the Flag Law will be
applied." In the same letter, how ever defendant assured the plaintiff that he would give the latter "exactly the same
share holding as I have". The plaintiff paid to the defendant the sum of P7,000. for his subscription. In view of the
consistent refusal of the defendant to live up to their agreement, notwithstanding repeated demands, the plaintiff filed
the present complaint, praying that defendant be condemned:
(a) upon the first cause of action, to transfer or cause to be transferred or assigned to the plaintiff 26% of
the entire capital stock issued and subscribed, as of the date he obeys said judgment, of Philippine
Swiss Trading Co., Inc., or enough thereof to make the plaintiff's interest and participation in said
corporation total 50% of said entire capital stock issued an subscribed, which ever may be more;
(b) upon the second cause of action, to return to the plaintiff or properly account to him for the unexpended
balance, in the sum of P2,000.00, Philippine Currency, of the remittance alleged in paragraph 18(a) of the
complaint;
(b) Upon the third cause of action, to pay the plaintiff the sum of P25,000.00, Philippine Currency, by way of
recompense for business lost, profits unrealized and goodwill impaired or destroyed; and
(c) upon all three causes of actions, to pay the plaintiff the additional sum of P100,000.00, Philippine
Currency, .... The plaintiff also prays for costs, and for such other an further relief as to the Court may
appear just and equitable.
An Answer was filed, with the customary admissions an denials and with affirmative defenses and
counterclaims.
On November 21, 1958, the defendant filed a pleading styled "manifestation and motion to dismiss" (Section 10 Rule
9) alleging that "With reference to the first cause of action, the amended complaint states no cause of action".
In support of the motion to dismiss, defendant claimed that
There is no allegation in the amended complaint that the alleged obligation of the defendant to have the
plaintiff's share holding in the capital stock subscribed in Articles of Incorporation in the proportion of 50%
thereof is already due.1wph1.t
Such being the situation, the demands allegedly made upon the defendant for his compliance with the
obligation sued upon have been futile, because legally the alleged obligation is not yet due. It not having
fixed a period for its compliance, there has been no default thereof.
xxx
xxx
xxx
In his opposition to the motion to dismiss, filed on November 3, 1958, plaintiff contended that the oral agreement was
the actual as well as the expressed basis of plaintiff's cause of action; the letter Annex A, was not the agreement but
only an evidence of it and if the references of Annex A were deleted from the amended complaint, the latter would
not, for that reason alone, cease to state a cause of action; the obligation being pure, it is demandable immediately
(Art. 1179, Civil Code); the filing of the complaint itself constituted a judicial demand for performance, thereby making
the defendant's obligation to become due; even if Annex A is considered as the basis of the action, it is still a pure

obligation, because it says "will give you, however, exactly the same share holding as I have" which imparts an
unconditional promise; and supposing that from the allegations of the complaint, it may reasonably be inferred that it
was intended to give the defendant time to fulfill his obligation, the present action can be considered one for the fixing
of such time (Art. 1197, Civil Code).
On September 30, 1959; the trial court granted the motion to dismiss in so far as the first cause of action is
concerned, predicating its ruling upon the following considerations: that the agreement did not fix the time within
which the defendant sought to perform its alleged promise and, therefore, the obligation was not due and the action
for its compliance was premature (Barreto v. City of Manila, 7 Phil. 416-420); that the obligation is not pure, because
its compliance is dependent upon a future or uncertain event; that the alleged oral agreement had been novated,
after the execution of the articles of incorporation, and that the action being for specific performance and there being
a need to fix the period for compliance of the agreement and the present complaint does not allege facts or lacks the
characteristics for an action to fix the period, a separate action to that effect should have been filed, because the
action to that effect be brought in order to have a term fixed is different from the action to enforce the obligation; thus
conveying the notion that the fixing of the period is incompatible with an action for specific performance. Plaintiff
appealed questions of law.
Article 1197 of the Civil Code, provides
If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period may under the circumstances have been probably
contemplate by the parties. Once fixed by the courts, the period cannot be changed by them.
The ultimate facts to be alleged in a complaint to properly and adequately plead the right of action granted the above
quoted provision of law are (1) Facts showing that a contract was entered into, imposing on one the parties an
obligation or obligations in favor of the other; (2) Facts showing that the performance of the obligation was left to the
will of the obligor or clean showing or from which an inference may reasonably drawn, that a period was intended by
the parties. The first cause of action, under consideration, sets out fact describing an obligation with an indefinite
period, there by bringing the case within the pale of the article above quoted, albeit it fails to specifically and
categorically demand that the court fix the duration of the period. Under the circumstances, the court could render
judgment granting the remedy indicated in said article 1197, notwithstanding standing the fact that the complaint does
not positive and by explicit expression ask for such relief. What determines the nature and character of an action is
not the prayer but the essential basic allegations of fact set forth in the pertinent pleading. A judgment may grant the
relief to which a party in whose favor it is entered is entitled, even if the party has not demanded such relief in his
pleadings (Sec. 9, Rule 35; Baguioro v. Barrios, 77 Phil. 120). The amended complaint in question moreover, "prays
for . . . such other and further relief as the Court may appear just and equitable" which is broad and comprehensive
enough, to justify the extension of a remedy different from or together with, the right to be declared owner or to
recover the ownership or the possession of Twenty-six (26%) percent of the capital stock of the Philippine Swiss
Trading Co., Inc. presently in the name of the defendant. The case of Barrette v. City of Manila, supra, cited by the
trial court, is of little help to the defendant-appellee. It strengthens rather the plaintiff-appellant's position. In the
Barreto case as in the present, the essential allegations of the pleadings made out an obligation subject to an
indefinite period. In the Barretto case, like the one at bar, the complaint did not risk for the fixing of the period, but for
immediate and more positive relief, yet this Court remanded the said case to the court of origin "for determination of
the time within which the contiguous property must be acquired by the city in order to comply with the condition of the
donation" all of which go to show that the fixing of the period in the case at bar, may and/or could be properly
undertaken by the trial court.
Even discarding the above considerations, still there is no gainsaying the fact that the obligation in question, is pure,
because "its performance does not depend upon a future or uncertain event or upon a past event unknown to the
parties" and as such, "is demandable at once" (Art. 1179, New York Code). It was so understood and treated by the
defendant-appellee himself. The immediate payment by the plaintiff-appellant of his subscriptions, after the
organization of the corporation, can only mean that the obligation should be immediately fulfilled. giving the defendant
only such time as might reasonably be necessary for its actual fulfillment. The contract was to organize the
corporation and to divide equally, after its organization, its capital stock.

IN VIEW HEREOF, the order appealed from is reversed and the case remanded to the court of origin, for further and
appropriate proceedings. No costs.

Reyes v. Tuparan
G.R. No. 188064, 01 June 2011
Plaintiff Mila A. Reyes filed a complaint against defendant Victoria T. Tuparan for rescission of contract with damages.
Plaintiff, defendant, and FSL Bank entered into an executed a Deed of Conditional Sale with Assumption of Mortgage,
whereby defendant bound herself to assume the loan and mortgage payments of plaintiff with the bank. The
payments made by defendant would be considered as purchase price of the mortgaged property. After defendant
failed to pay several amortizations to the bank, plaintiff filed this suit. One of the issues raised was whether plaintiff
and defendant had entered into a contract of sale.
HELD: Plaintiff and defendant entered into a contact to sell, and not a contract of sale. The plaintiffs obligation to sell
the subject properties becomes demandable only upon the happening of the positive suspensive condition which
is the defendants full payment of the purchase price. Until defendant makes full payment, there is no breach of
contract as plaintiff does not have yet any obligation to turn over the title.
As a sub-set also of a conditional obligation, a resolutory condition is a future event the happening of which results
in the extinguishment or loss of a right already acquired. Otherwise stated, a resolutory condition automatically grants
the exercise of a right and creates the corresponding obligation subject to the happening of the event that may result
in the termination of the right or obligation.
Example: A clothing company engaged a celebrity as its product ambassador so long the latter does not endorse a
particular rival business. If the celebrity is caught promoting the products of that rival business, the clothing company
may terminate the contract as the resolutory condition took effect.
Best Legal Practices:
State in plain, clear, and categorical language the consequences for suspensive or resolutory conditions If a
contract comes with it a suspensive or a resolutory condition, these conditions should be stated in plain, clear, and
categorical language in order to effectively communicate the consequences of the happening of the event.
Send notice of rescission in case of happening of resolutory condition As the happening of a resolutory condition
entitles the innocent party to rescission, the requirement of notice of rescission should be observed.
While conditional obligations are allowed, some are void as in these cases: (a) a potestative condition or one wherein
the fulfillment depends upon the sole will of the debtor resulting in injustice to the creditor; or (b) a condition not to do
an impossible thing as it simply cannot be done.
Meanwhile, an obligation may be annulled if: (a) it depends on impossible conditions; (b) it is contrary to good
customs or public policy; and (c) it is prohibited by law.
Whether a condition is suspensive or resolutory, such condition is considered fulfilled if the debtor voluntarily prevents
its fulfillment. A conditional obligation which has been fulfilled retroacts to the day of its constitution, including its
effects. If the obligation carries reciprocal prestations upon the parties, the fruits and interests are deemed mutually
compensated during the pendency of the condition. If the obligation is unilateral, the debtor is to appropriate the fruits
and interests received except as otherwise may have been intended by the parties through the inference of the
nature and circumstances of the obligation.
Example: A realty company engaged the services of a construction firm for the purpose of building a townhouse. The
two businesses agreed to a progress billing wherein payment will be made for every phase completed. To be entitled
to the remaining balance, the last phase involves the painting of the townhouse. If the realty company refuses to have
it painted regardless of the reasons despite having agreed to it, the construction firms obligation to paint is
considered fulfilled. The latter may demand for the release and payment of the remaining balance.
Further, prior to the fulfillment of the condition, the creditor has the right to initiate proper actions in order to preserve
its right. On the other hand, the debtor is allowed to recover what has been paid by mistake prior to the happening of
the suspensive condition.

If the conditions were imposed for the purpose of suspending the efficacy of an obligation to give, the following are
the rules to be observed in case of improvement, loss, or deterioration of the thing during the pendency of the
condition:
(1) If the thing is lost without the fault of the debtor, the obligation is extinguished;
(2) If the thing is lost through the fault of the debtor, he is obliged to pay damages; it is understood that the thing is
lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot
be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation
and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement inures to the benefit of the creditor; and
(6) If it is improved at the expense of the debtor, he has no other right than that granted to the usufructuary.
In addition to the above rules, if the conditions are designed to extinguish an obligation to give, the parties are
required to return to each other what they have received upon the happening of the conditions. In case of loss,
deterioration or improvement of the thing, the party bound to return is to observe the rules mentioned in the earlier
paragraph.
Reyes Vs. Tuparan
MENDOZA, J.:
Subject of this petition for review is the February 13, 2009 Decision[1] of the Court of Appeals (CA) which affirmed with
modification the February 22, 2006 Decision[2]of the Regional Trial Court, Branch 172, Valenzuela City (RTC), in Civil Case No.
3945-V-92, an action for Rescission of Contract with Damages.
On September 10, 1992, Mila A. Reyes (petitioner) filed a complaint for Rescission of Contract with Damages against
Victoria T. Tuparan (respondent) before the RTC. In her Complaint, petitioner alleged, among others, that she was the registered
owner of a 1,274 square meter residential and commercial lot located in Karuhatan, Valenzuela City, and covered by TCT No. V4130; that on that property, she put up a three-storey commercial building known as RBJ Building and a residential apartment
building; that since 1990, she had been operating a drugstore and cosmetics store on the ground floor of RBJ Building where she
also had been residing while the other areas of the buildings including the sidewalks were being leased and occupied by tenants
and street vendors.
In December 1989, respondent leased from petitioner a space on the ground floor of the RBJ Building for her
pawnshop business for a monthly rental of 4,000.00. A close friendship developed between the two which led to the respondent
investing thousands of pesos in petitioners financing/lending business from February 7, 1990 to May 27, 1990, with interest at the
rate of 6% a month.
On June 20, 1988, petitioner mortgaged the subject real properties to the Farmers Savings Bank and Loan Bank,
Inc. (FSL Bank) to secure a loan of 2,000,000.00 payable in installments. On November 15, 1990, petitioners outstanding
account on the mortgage reached 2,278,078.13. Petitioner then decided to sell her real properties for at least 6,500,000.00 so
she could liquidate her bank loan and finance her businesses. As a gesture of friendship, respondent verbally offered to
conditionally buy petitioners real properties for 4,200,000.00 payable on installment basis without interest and to assume the
bank loan. To induce the petitioner to accept her offer, respondent offered the following conditions/concessions:
1. That the conditional sale will be cancelled if the plaintiff (petitioner) can find a buyer of said
properties for the amount of 6,500,000.00 within the next three (3) months provided all amounts received by
the plaintiff from the defendant (respondent) including payments actually made by defendant to Farmers
Savings and Loan Bank would be refunded to the defendant with additional interest of six (6%) monthly;
2. That the plaintiff would continue using the space occupied by her and drugstore and cosmetics
store without any rentals for the duration of the installment payments;
3. That there will be a lease for fifteen (15) years in favor of the plaintiff over the space for
drugstore and cosmetics store at a monthly rental of only 8,000.00 after full payment of the stipulated
installment payments are made by the defendant;
4. That the defendant will undertake the renewal and payment of the fire insurance policies on the
two (2) subject buildings following the expiration of the then existing fire insurance policy of the plaintiff up
to the time that plaintiff is fully paid of the total purchase price of 4,200,000.00. [3]

After petitioners verbal acceptance of all the conditions/concessions, both parties worked together to obtain FSL Banks
approval for respondent to assume her (petitioners) outstanding bank account. The assumption would be part of respondents
purchase price for petitioners mortgaged real properties. FSL Bank approved their proposal on the condition that petitioner would
sign or remain as co-maker for the mortgage obligation assumed by respondent.
On November 26, 1990, the parties and FSL Bank executed the corresponding Deed of Conditional Sale of Real
Properties with Assumption of Mortgage. Due to their close personal friendship and business relationship, both parties chose not
to reduce into writing the other terms of their agreement mentioned in paragraph 11 of the complaint. Besides, FSL Bank did not
want to incorporate in the Deed of Conditional Sale of Real Properties with Assumption of Mortgage any other side agreement
between petitioner and respondent.
Under the Deed of Conditional Sale of Real Properties with Assumption of Mortgage, respondent was bound to pay the
petitioner a lump sum of 1.2 million pesos without interest as part of the purchase price in three (3) fixed installments as
follows:
a)
b)
c)

200,000.00 due January 31, 1991

200,000.00 due June 30, 1991
800,000.00 due December 31, 1991

Respondent, however, defaulted in the payment of her obligations on their due dates. Instead of paying the amounts due
in lump sum on their respective maturity dates, respondent paid petitioner in small amounts from time to time. To compensate for
her delayed payments, respondent agreed to pay petitioner an interest of 6% a month. As ofAugust 31, 1992, respondent had only
paid 395,000.00, leaving a balance of 805,000.00 as principal on the unpaid installments and 466,893.25 as unpaid
accumulated interest.
Petitioner further averred that despite her success in finding a prospective buyer for the subject real properties within
the 3-month period agreed upon, respondent reneged on her promise to allow the cancellation of their deed of conditional sale.
Instead, respondent became interested in owning the subject real properties and even wanted to convert the entire property into a
modern commercial complex. Nonetheless, she consented because respondent repeatedly professed friendship and assured her
that all their verbal side agreement would be honored as shown by the fact that since December 1990, she (respondent) had not
collected any rentals from the petitioner for the space occupied by her drugstore and cosmetics store.
On March 19, 1992, the residential building was gutted by fire which caused the petitioner to lose rental income in the
amount of 8,000.00 a month since April 1992. Respondent neglected to renew the fire insurance policy on the subject buildings.
Since December 1990, respondent had taken possession of the subject real properties and had been continuously
collecting and receiving monthly rental income from the tenants of the buildings and vendors of the sidewalk fronting the RBJ
building without sharing it with petitioner.
On September 2, 1992, respondent offered the amount of 751,000.00 only payable on September 7, 1992, as full
payment of the purchase price of the subject real properties and demanded the simultaneous execution of the corresponding deed
of absolute sale.
Respondents Answer
Respondent countered, among others, that the tripartite agreement erroneously designated by the petitioner as a Deed of
Conditional Sale of Real Property with Assumption of Mortgage was actually a pure and absolute contract of sale with a term
period. It could not be considered a conditional sale because the acquisition of contractual rights and the performance of the
obligation therein did not depend upon a future and uncertain event. Moreover, the capital gains and documentary stamps and
other miscellaneous expenses and real estate taxes up to 1990 were supposed to be paid by petitioner but she failed to do so.
Respondent further averred that she successfully rescued the properties from a definite foreclosure by paying the
assumed mortgage in the amount of 2,278,078.13 plus interest and other finance charges. Because of her payment, she was able
to obtain a deed of cancellation of mortgage and secure a release of mortgage on the subject real properties including petitioners
ancestral residential property in Sta. Maria, Bulacan.
Petitioners claim for the balance of the purchase price of the subject real properties was baseless and unwarranted
because the full amount of the purchase price had already been paid, as she did pay more than 4,200,000.00, the agreed
purchase price of the subject real properties, and she had even introduced improvements thereon worth more than 4,800,000.00.
As the parties could no longer be restored to their original positions, rescission could not be resorted to.

Respondent added that as a result of their business relationship, petitioner was able to obtain from her a loan in the
amount of 400,000.00 with interest and took several pieces of jewelry worth 120,000.00. Petitioner also failed and refused to
pay the monthly rental of 20,000.00 since November 16, 1990 up to the present for the use and occupancy of the ground floor of
the building on the subject real property, thus, accumulating arrearages in the amount of 470,000.00 as of October 1992.
Ruling of the RTC
On February 22, 2006, the RTC handed down its decision finding that respondent failed to pay in full the 4.2 million total
purchase price of the subject real properties leaving a balance of 805,000.00. It stated that the checks and receipts presented by
respondent refer to her payments of the mortgage obligation with FSL Bank and not the payment of the balance of
1,200,000.00. The RTC also considered the Deed of Conditional Sale of Real Property with Assumption of Mortgage executed
by and among the two parties and FSL Bank a contract to sell, and not a contract of sale. It was of the opinion that although the
petitioner was entitled to a rescission of the contract, it could not be permitted because her non-payment in full of the purchase
price may not be considered as substantial and fundamental breach of the contract as to defeat the object of the parties in entering
into the contract.[4] The RTC believed that the respondents offer stated in her counsels letter dated September 2, 1992 to settle
what she thought was her unpaid balance of 751,000.00 showed her sincerity and willingness to settle her obligation. Hence, it
would be more equitable to give respondent a chance to pay the balance plus interest within a given period of time.
Finally, the RTC stated that there was no factual or legal basis to award damages and attorneys fees because there was no proof
that either party acted fraudulently or in bad faith.
Thus, the dispositive portion of the RTC Decision reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Allowing the defendant to pay the plaintiff within thirty (30) days from the finality
hereof the amount of 805,000.00, representing the unpaid purchase price of the subject property,
with interest thereon at 2% a month from January 1, 1992 until fully paid. Failure of the defendant
to pay said amount within the said period shall cause the automatic rescission of the contract (Deed
of Conditional Sale of Real Property with Assumption of Mortgage) and the plaintiff and the
defendant shall be restored to their former positions relative to the subject property with each
returning to the other whatever benefits each derived from the transaction;
2. Directing the defendant to allow the plaintiff to continue using the space occupied by
her for drugstore and cosmetic store without any rental pending payment of the aforesaid balance
of the purchase price.
3. Ordering the defendant, upon her full payment of the purchase price together with
interest, to execute a contract of lease for fifteen (15) years in favor of the plaintiff over the space for
the drugstore and cosmetic store at a fixed monthly rental of 8,000.00; and

4. Directing the plaintiff, upon full payment to her by the defendant of the purchase price
together with interest, to execute the necessary deed of sale, as well as to pay the Capital Gains Tax,
documentary stamps and other miscellaneous expenses necessary for securing the BIR Clearance,
and to pay the real estate taxes due on the subject property up to 1990, all necessary to transfer
ownership of the subject property to the defendant.
No pronouncement as to damages, attorneys fees and costs.
SO ORDERED.[5]
Ruling of the CA
On February 13, 2009, the CA rendered its decision affirming with modification the RTC Decision. The CA agreed with the RTC
that the contract entered into by the parties is a contract to sell but ruled that the remedy of rescission could not apply because the
respondents failure to pay the petitioner the balance of the purchase price in the total amount of 805,000.00 was not a breach of
contract, but merely an event that prevented the seller (petitioner) from conveying title to the purchaser (respondent). It reasoned
that out of the total purchase price of the subject property in the amount of 4,200,000.00, respondents remaining unpaid balance

was only 805,000.00. Since respondent had already paid a substantial amount of the purchase price, it was but right and just to
allow her to pay the unpaid balance of the purchase price plus interest. Thus, the decretal portion of the CA Decision reads:
WHEREFORE, premises considered, the Decision dated 22 February 2006 and Order
dated 22 December 2006 of the Regional Trial Court of Valenzuela City, Branch 172 in Civil Case
No. 3945-V-92 are AFFIRMED with MODIFICATION in that defendant-appellant Victoria T.
Tuparan is hereby ORDERED to pay plaintiff-appellee/appellant Mila A. Reyes, within 30 days
from finality of this Decision, the amount of 805,000.00 representing the unpaid balance of the
purchase price of the subject property, plus interest thereon at the rate of 6% per annum from 11
September 1992 up to finality of this Decision and, thereafter, at the rate of 12% per annum until
full payment. The ruling of the trial court on the automatic rescission of the Deed of Conditional
Sale with Assumption of Mortgage is hereby DELETED. Subject to the foregoing, the dispositive
portion of the trial courts decision is AFFIRMED in all other respects.
SO ORDERED.[6]
After the denial of petitioners motion for reconsideration and respondents motion for partial reconsideration, petitioner
filed the subject petition for review praying for the reversal and setting aside of the CA Decision anchored on the following
ASSIGNMENT OF ERRORS
A. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
DISALLOWING THE OUTRIGHT RESCISSION OF THE SUBJECT DEED OF CONDITIONAL
SALE OF REAL PROPERTIES WITH ASSUMPTION OF MORTGAGE ON THE GROUND THAT
RESPONDENT TUPARANS FAILURE TO PAY PETITIONER REYES THE BALANCE OF THE
PURCHASE PRICE OF 805,000.00 IS NOT A BREACH OF CONTRACT DESPITE ITS OWN
FINDINGS THAT PETITIONER STILL RETAINS OWNERSHIP AND TITLE OVER THE
SUBJECT REAL PROPERTIES DUE TO RESPONDENTS REFUSAL TO PAY THE BALANCE OF
THE TOTAL PURCHASE PRICE OF 805,000.00 WHICH IS EQUAL TO 20% OF THE TOTAL
PURCHASE PRICE OF 4,200,000.00 OR 66% OF THE STIPULATED LAST INSTALLMENT OF
1,200,000.00 PLUS THE INTEREST THEREON. IN EFFECT, THE COURT OF APPEALS
AFFIRMED AND ADOPTED THE TRIAL COURTS CONCLUSION THAT THE RESPONDENTS
NON-PAYMENT OF THE 805,000.00 IS ONLY A SLIGHT OR CASUAL BREACH OF
CONTRACT.
B. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
DISREGARDING AS GROUND FOR THE RESCISSION OF THE SUBJECT CONTRACT THE
OTHER FRAUDULENT AND MALICIOUS ACTS COMMITTED BY THE RESPONDENT
AGAINST THE PETITIONER WHICH BY THEMSELVES SUFFICIENTLY JUSTIFY A DENIAL
OF A GRACE PERIOD OF THIRTY (30) DAYS TO THE RESPONDENT WITHIN WHICH TO PAY
TO THE PETITIONER THE 805,000.00 PLUS INTEREST THEREON.
C. EVEN ASSUMING ARGUENDO THAT PETITIONER IS NOT ENTITLED TO THE
RESCISSION OF THE SUBJECT CONTRACT, THE COURT OF APPEALS STILL SERIOUSLY
ERRED AND ABUSED ITS DISCRETION IN REDUCING THE INTEREST ON THE 805,000.00
TO ONLY 6% PER ANNUM STARTING FROM THE DATE OF FILING OF THE COMPLAINT ON
SEPTEMBER 11, 1992 DESPITE THE PERSONAL COMMITMENT OF THE RESPONDENT AND
AGREEMENT BETWEEN THE PARTIES THAT RESPONDENT WILL PAY INTEREST ON THE
805,000.00 AT THE RATE OF 6% MONTHLY STARTING THE DATE OF DELINQUENCY ON
DECEMBER 31, 1991.
D. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
THE APPRECIATION AND/OR MISAPPRECIATION OF FACTS RESULTING INTO THE
DENIAL OF THE CLAIM OF PETITIONER REYES FOR ACTUAL DAMAGES WHICH
CORRESPOND TO THE MILLIONS OF PESOS OF RENTALS/FRUITS OF THE SUBJECT REAL
PROPERTIES WHICH RESPONDENT TUPARAN COLLECTED CONTINUOUSLY SINCE
DECEMBER 1990, EVEN WITH THE UNPAID BALANCE OF 805,000.00 AND DESPITE THE
FACT THAT RESPONDENT DID NOT CONTROVERT SUCH CLAIM OF THE PETITIONER AS
CONTAINED IN HER AMENDED COMPLAINT DATED APRIL 22, 2006.

E. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN

THE APPRECIATION OF FACTS RESULTING INTO THE DENIAL OF THE CLAIM OF
PETITIONER REYES FOR THE 29,609.00 BACK RENTALS THAT WERE COLLECTED BY
RESPONDENT TUPARAN FROM THE OLD TENANTS OF THE PETITIONER.
F. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
DENYING THE PETITIONERS EARLIER URGENT MOTION FOR ISSUANCE OF A
PRELIMINARY MANDATORY AND PROHIBITORY INJUNCTION DATED JULY 7, 2008 AND
THE SUPPLEMENT THERETO DATED AUGUST 4, 2008 THEREBY CONDONING THE
UNJUSTIFIABLE FAILURE/REFUSAL OF JUDGE FLORO ALEJO TO RESOLVE WITHIN
ELEVEN (11) YEARS THE PETITIONERS THREE (3) SEPARATE MOTIONS FOR
PRELIMINARY INJUNCTION/ TEMPORARY RESTRAINING ORDER, ACCOUNTING AND
DEPOSIT OF RENTAL INCOME DATED MARCH 17, 1995, AUGUST 19, 1996 AND JANUARY 7,
2006 THEREBY PERMITTING THE RESPONDENT TO UNJUSTLY ENRICH HERSELF BY
CONTINUOUSLY COLLECTING ALL THE RENTALS/FRUITS OF THE SUBJECT REAL
PROPERTIES WITHOUT ANY ACCOUNTING AND COURT DEPOSIT OF THE COLLECTED
RENTALS/FRUITS AND THE PETITIONERS URGENT MOTION TO DIRECT DEFENDANT
VICTORIA TUPARAN TO PAY THE ACCUMULATED UNPAID REAL ESTATE TAXES AND SEF
TAXES ON THE SUBJECT REAL PROPERTIES DATED JANUARY 13, 2007 THEREBY
EXPOSING THE SUBJECT REAL PROPERTIES TO IMMINENT AUCTION SALE BY THE CITY
TREASURER OF VALENZUELA CITY.
G. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN
DENYING THE PETITIONERS CLAIM FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES AGAINST THE RESPONDENT.
In sum, the crucial issue that needs to be resolved is whether or not the CA was correct in ruling that there was no legal
basis for the rescission of the Deed of Conditional Sale with Assumption of Mortgage.
Position of the Petitioner
The petitioner basically argues that the CA should have granted the rescission of the subject Deed of Conditional Sale of Real
Properties with Assumption of Mortgage for the following reasons:
1. The subject deed of conditional sale is a reciprocal obligation whose outstanding characteristic is
reciprocity arising from identity of cause by virtue of which one obligation is correlative of the other.
2. The petitioner was rescinding not enforcing the subject Deed of Conditional Sale pursuant to
Article 1191 of the Civil Code because of the respondents failure/refusal to pay the 805,000.00 balance of
the total purchase price of the petitioners properties within the stipulated period ending December 31, 1991.
3. There was no slight or casual breach on the part of the respondent because she (respondent)
deliberately failed to comply with her contractual obligations with the petitioner by violating the terms or
manner of payment of the 1,200,000.00 balance and unjustly enriched herself at the expense of the
petitioner by collecting all rental payments for her personal benefit and enjoyment.
Furthermore, the petitioner claims that the respondent is liable to pay interest at the rate of 6% per month on her unpaid
installment of 805,000.00 from the date of the delinquency, December 31, 1991, because she obligated herself to do so.
Finally, the petitioner asserts that her claim for damages or lost income as well as for the back rentals in the amount of
29,609.00 has been fully substantiated and, therefore, should have been granted by the CA. Her claim for moral and exemplary
damages and attorneys fees has been likewise substantiated.
Position of the Respondent
The respondent counters that the subject Deed of Conditional Sale with Assumption of Mortgage entered into between the parties
is a contract to sell and not a contract of sale because the title of the subject properties still remains with the petitioner as she
failed to pay the installment payments in accordance with their agreement.

Respondent echoes the RTC position that her inability to pay the full balance on the purchase price may not be considered as a
substantial and fundamental breach of the subject contract and it would be more equitable if she would be allowed to pay the
balance including interest within a certain period of time. She claims that as early as 1992, she has shown her sincerity by
offering to pay a certain amount which was, however, rejected by the petitioner.
Finally, respondent states that the subject deed of conditional sale explicitly provides that the installment payments shall not bear
any interest. Moreover, petitioner failed to prove that she was entitled to back rentals.
The Courts Ruling
The petition lacks merit.
The Court agrees with the ruling of the courts below that the subject Deed of Conditional Sale with Assumption of
Mortgage entered into by and among the two parties and FSL Bank on November 26, 1990 is a contract to sell and not a contract
of sale. The subject contract was correctly classified as a contract to sell based on the following pertinent stipulations:
8. That the title and ownership of the subject real properties shall remain with the First
Party until the full payment of the Second Party of the balance of the purchase price and liquidation
of the mortgage obligation of 2,000,000.00. Pending payment of the balance of the purchase price
and liquidation of the mortgage obligation that was assumed by the Second Party, the Second Party
shall not sell, transfer and convey and otherwise encumber the subject real properties without the
written consent of the First and Third Party.
9. That upon full payment by the Second Party of the full balance of the purchase price and
the assumed mortgage obligation herein mentioned the Third Party shall issue the corresponding
Deed of Cancellation of Mortgage and the First Party shall execute the corresponding Deed of
Absolute Sale in favor of the Second Party. [7]
Based on the above provisions, the title and ownership of the subject properties remains with the petitioner until the
respondent fully pays the balance of the purchase price and the assumed mortgage obligation. Thereafter, FSL Bank shall then
issue the corresponding deed of cancellation of mortgage and the petitioner shall execute the corresponding deed of absolute sale
in favor of the respondent.
Accordingly, the petitioners obligation to sell the subject properties becomes demandable only upon the happening of
the positive suspensive condition, which is the respondents full payment of the purchase price. Without respondents full payment,
there can be no breach of contract to speak of because petitioner has no obligation yet to turn over the title. Respondents failure to
pay in full the purchase price is not the breach of contract contemplated under Article 1191 of the New Civil Code but rather just
an eventthat prevents the petitioner from being bound to convey title to the respondent. The 2009 case of Nabus v. Joaquin &
Julia Pacson[8] is enlightening:
The Court holds that the contract entered into by the Spouses Nabus and respondents was
a contract to sell, not a contract of sale.
A contract of sale is defined in Article 1458 of the Civil Code, thus:
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.
xxx
Sale, by its very nature, is a consensual contract because it is perfected by mere
consent. The essential elements of a contract of sale are the following:
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.
Under this definition, a Contract to Sell may not be considered as a Contract of Sale
because the first essential element is lacking. In a contract to sell, the prospective seller explicitly
reserves the transfer of title to the prospective buyer, meaning, the prospective seller does not as yet

agree or consent to transfer ownership of the property subject of the contract to sell until the
happening of an event, which for present purposes we shall take as the full payment of the purchase
price. What the seller agrees or obliges himself to do is to fulfill his promise to sell the subject
property when the entire amount of the purchase price is delivered to him. In other words, the full
payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which
prevents the obligation to sell from arising and, thus, ownership is retained by the prospective seller
without further remedies by the prospective buyer.
xxx xxx xxx
Stated positively, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, the prospective sellers obligation to sell the subject property by
entering into a contract of sale with the prospective buyer becomes demandable as provided in
Article 1479 of the Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissor if the promise is supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective
seller, while expressly reserving the ownership of the subject property despite delivery thereof to
the prospective buyer, binds 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.
A contract to sell as defined hereinabove, may not even be considered as a conditional
contract of sale where the seller may likewise reserve title to the property subject of the sale until
the fulfillment of a suspensive condition, because in a conditional contract of sale, the first element
of consent is present, although it is conditioned upon the happening of a contingent event which
may or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract of
sale is completely abated. However, if the suspensive condition is fulfilled, the contract of sale is
thereby perfected, such that if there had already been previous delivery of the property subject of
the sale to the buyer, ownership thereto automatically transfers to the buyer by operation of law
without any further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, ownership will not automatically transfer to the buyer although the
property may have been previously delivered to him. The prospective seller still has to convey title
to the prospective buyer by entering into a contract of absolute sale.
Further, Chua v. Court of Appeals, cited this distinction between a contract of sale and a
contract to sell:
In a contract of sale, the title to the property passes to the vendee upon
the delivery of the thing sold; in a contract to sell, ownership is, by agreement,
reserved in the vendor and is not to pass to the vendee until full payment of the
purchase price. Otherwise stated, in a contract of sale, the vendor loses
ownership over the property and cannot recover it until and unless the contract is
resolved or rescinded; whereas, in a contract to sell, title is retained by the vendor
until full payment of the price. In the latter contract, payment of the price is a
positive suspensive condition, failure of which is not a breach but an event that
prevents the obligation of the vendor to convey title from becoming effective.
It is not the title of the contract, but its express terms or stipulations that determine the
kind of contract entered into by the parties. In this case, the contract entitled Deed of Conditional
Sale is actually a contract to sell. The contract stipulated that as soon as the full consideration of the
sale has been paid by the vendee, the corresponding transfer documents shall be executed by the
vendor to the vendee for the portion sold. Where the vendor promises to execute a deed of absolute
sale upon the completion by the vendee of the payment of the price, the contract is only a contract
to sell. The aforecited stipulation shows that the vendors reserved title to the subject property until
full payment of the purchase price.
xxx

Unfortunately for the Spouses Pacson, since the Deed of Conditional Sale executed in their
favor was merely a contract to sell, the obligation of the seller to sell becomes demandable only
upon the happening of the suspensive condition. The full payment of the purchase price is the
positive suspensive condition, the failure of which is not a breach of contract, but simply an event
that prevented the obligation of the vendor to convey title from acquiring binding force. Thus, for its
non-fulfilment, there is no contract to speak of, the obligor having failed to perform the suspensive
condition which enforces a juridical relation. With this circumstance, there can be no rescission or
fulfillment of an obligation that is still non-existent, the suspensive condition not having occurred
as yet. Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code
is the obligors failure to comply with an obligation already extant, not a failure of a condition to render
binding that obligation. [Emphases and underscoring supplied]
Consistently, the Court handed down a similar ruling in the 2010 case of Heirs of Atienza v. Espidol, [9] where it was
written:
Regarding the right to cancel the contract for non-payment of an installment, there is need to
initially determine if what the parties had was a contract of sale or a contract to sell. In a contract of
sale, the title to the property passes to the buyer upon the delivery of the thing sold. In a contract to
sell, on the other hand, the ownership is, by agreement, retained by the seller and is not to pass to
the vendee until full payment of the purchase price. In the contract of sale, the buyers non-payment
of the price is a negative resolutory condition; in the contract to sell, the buyers full payment of the
price is a positive suspensive condition to the coming into effect of the agreement. In the first case,
the seller has lost and cannot recover the ownership of the property unless he takes action to set
aside the contract of sale. In the second case, the title simply remains in the seller if the buyer does
not comply with the condition precedent of making payment at the time specified in the contract.
Here, it is quite evident that the contract involved was one of a contract to sell since the Atienzas, as
sellers, were to retain title of ownership to the land until respondent Espidol, the buyer, has paid
the agreed price. Indeed, there seems no question that the parties understood this to be the case.
Admittedly, Espidol was unable to pay the second installment of P1,750,000.00 that fell
due in December 2002. That payment, said both the RTC and the CA, was a positive suspensive
condition failure of which was not regarded a breach in the sense that there can be no rescission of an
obligation (to turn over title) that did not yet exist since the suspensive condition had not taken place . x
x x. [Emphases and underscoring supplied]
Thus, the Court fully agrees with the CA when it resolved: Considering, however, that the Deed of Conditional Sale
was not cancelled by Vendor Reyes (petitioner) and that out of the total purchase price of the subject property in the amount of
4,200,000.00, the remaining unpaid balance of Tuparan (respondent) is only 805,000.00, a substantial amount of the purchase
price has already been paid. It is only right and just to allow Tuparan to pay the said unpaid balance of the purchase price to
Reyes.[10]
Granting that a rescission can be permitted under Article 1191, the Court still cannot allow it for the reason that,
considering the circumstances, there was only a slight or casual breach in the fulfillment of the obligation.
Unless the parties stipulated it, rescission is allowed only when the breach of the contract is substantial and
fundamental to the fulfillment of the obligation. Whether the breach is slight or substantial is largely determined by the attendant
circumstances.[11] In the case at bench, the subject contract stipulated the following important provisions:
2. That the purchase price of 4,200,000.00 shall be paid as follows:
a) 278,078.13 received in cash by the First Party but directly paid to the Third Party as partial
payment of the mortgage obligation of the First Party in order to reduce the amount to 2,000,000.00 only as
of November 15, 1990;
b) 721,921.87 received in cash by the First Party as additional payment of the Second Party;
c)

1,200,000.00 to be paid in installments as follows:

1.

200,000.00 payable on or before January 31, 1991;

2.
3.

200,000.00 payable on or before June 30, 1991;

800,000.00 payable on or before December 31, 1991;

Note: All the installments shall not bear any interest.

d)
2,000,000.00 outstanding balance of the mortgage obligation as of November 15,
1990 which is hereby assumed by the Second Party.
xxx
3. That the Third Party hereby acknowledges receipts from the Second Party P278,078.13 as
partial payment of the loan obligation of First Party in order to reduce the account to only 2,000,000.00 as
of November 15, 1990 to be assumed by the Second Party effective November 15, 1990. [12]
From the records, it cannot be denied that respondent paid to FSL Bank petitioners mortgage obligation in the amount
of 2,278,078.13, which formed part of the purchase price of the subject property. Likewise, it is not disputed that respondent
paid directly to petitioner the amount of 721,921.87 representing the additional payment for the purchase of the subject
property. Clearly, out of the total price of 4,200,000.00, respondent was able to pay the total amount of 3,000,000.00, leaving a
balance of 1,200,000.00 payable in three (3) installments.
Out of the 1,200,000.00 remaining balance, respondent paid on several dates the first and second installments of
200,000.00 each. She, however, failed to pay the third and last installment of 800,000.00 due on December 31, 1991.
Nevertheless, on August 31, 1992, respondent, through counsel, offered to pay the amount of 751,000.00, which was rejected by
petitioner for the reason that the actual balance was 805,000.00 excluding the interest charges.
Considering that out of the total purchase price of 4,200,000.00, respondent has already paid the substantial amount of
3,400,000.00, more or less, leaving an unpaid balance of only 805,000.00, it is right and just to allow her to settle, within a
reasonable period of time, the balance of the unpaid purchase price. The Court agrees with the courts below that the respondent
showed her sincerity and willingness to comply with her obligation when she offered to pay the petitioner the amount of
751,000.00.
On the issue of interest, petitioner failed to substantiate her claim that respondent made a personal commitment to pay a
6% monthly interest on the 805,000.00 from the date of delinquency, December 31, 1991. As can be gleaned from the contract,
there was a stipulation stating that: All the installments shall not bear interest. The CA was, however, correct in imposing interest
at the rate of 6% per annum starting from the filing of the complaint on September 11, 1992.

Finally, the Court upholds the ruling of the courts below regarding the non-imposition of damages and attorneys fees.
Aside from petitioners self-serving statements, there is not enough evidence on record to prove that respondent acted fraudulently
and maliciously against the petitioner. In the case of Heirs of Atienza v. Espidol,[13] it was stated:
Respondents are not entitled to moral damages because contracts are not referred to in
Article 2219 of the Civil Code, which enumerates the cases when moral damages may be recovered.
Article 2220 of the Civil Code allows the recovery of moral damages in breaches of contract where
the defendant acted fraudulently or in bad faith. However, this case involves a contract to sell,
wherein full payment of the purchase price is a positive suspensive condition, the non-fulfillment of
which is not a breach of contract, but merely an event that prevents the seller from conveying title
to the purchaser. Since there is no breach of contract in this case, respondents are not entitled to
moral damages.
In the absence of moral, temperate, liquidated or compensatory damages, exemplary
damages cannot be granted for they are allowed only in addition to any of the four kinds of damages
mentioned.
WHEREFORE, the petition is DENIED.
SO ORDERED.

NICOLAS P. DIEGO, Petitioner,

vs.
RODOLFO P. DIEGO and EDUARDO P. DIEGO, Respondents.
DECISION
DEL CASTILLO, J.:
It is settled jurisprudence, to the point of being elementary, that an agreement which stipulates that the seller shall
execute a deed of sale only upon or after tl1ll payment of the purchase price is a contract to sell, not a contract of
sale. In Reyes v. Tuparan, 1 this Court declared in categorical terms that "[w]here the vendor promises to execute
a deed of absolute sale upon the completion by the vendee of the payment of the price, the contract is only a
contract to sell. The aforecited stipulation shows that the vendors reserved title to the subject property until
full payment of the purchase price."
In this case, it is not disputed as in tact both parties agreed that the deed of sale shall only be executed upon
payment of the remaining balance of the purchase price. Thus, pursuant to the above stated jurisprudence, we
similarly declare that the transaction entered into by the parties is a contract to sell.
Before us is a Petition for Review on Certiorari2 questioning the June 29, 2007 Decision3 and the October 3, 2007
Resolution4 of the Court of Appeals (CA) in CA-G.R. CV No. 86512, which affirmed the April 19, 2005 Decision5 of the
Regional Trial Court (RTC), Branch 40, of Dagupan City in Civil Case No. 99-02971-D.
Factual Antecedents
In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother Rodolfo, respondent herein, entered into an oral
contract to sell covering Nicolass share, fixed at P500,000.00, as co-owner of the familys Diego Building situated in
Dagupan City. Rodolfo made a downpayment of P250,000.00. It was agreed that the deed of sale shall be executed
upon payment of the remaining balance of P250,000.00. However, Rodolfo failed to pay the remaining balance.
Meanwhile, the building was leased out to third parties, but Nicolass share in the rents were not remitted to him by
herein respondent Eduardo, another brother of Nicolas and designated administrator of the Diego Building. Instead,
Eduardo gave Nicolass monthly share in the rents to Rodolfo. Despite demands and protestations by Nicolas,
Rodolfo and Eduardo failed to render an accounting and remit his share in the rents and fruits of the building, and
Eduardo continued to hand them over to Rodolfo.

Thus, on May 17, 1999, Nicolas filed a Complaint6 against Rodolfo and Eduardo before the RTC of Dagupan City and
docketed as Civil Case No. 99-02971-D. Nicolas prayed that Eduardo be ordered to render an accounting of all the
transactions over the Diego Building; that Eduardo and Rodolfo be ordered to deliver to Nicolas his share in the rents;
and that Eduardo and Rodolfo be held solidarily liable for attorneys fees and litigation expenses.
Rodolfo and Eduardo filed their Answer with Counterclaim7 for damages and attorneys fees. They argued that
Nicolas had no more claim in the rents in the Diego Building since he had already sold his share to Rodolfo. Rodolfo
admitted having remitted only P250,000.00 to Nicolas. He asserted that he would pay the balance of the purchase
price to Nicolas only after the latter shall have executed a deed of absolute sale.
Ruling of the Regional Trial Court
After trial on the merits, or on April 19, 2005, the trial court rendered its Decision8 dismissing Civil Case No. 9902971-D for lack of merit and ordering Nicolas to execute a deed of absolute sale in favor of Rodolfo upon payment
by the latter of the P250,000.00 balance of the agreed purchase price. It made the following interesting
pronouncement:
It is undisputed that plaintiff (Nicolas) is one of the co-owners of the Diego Building, x x x. As a co-owner, he is
entitled to [his] share in the rentals of the said building. However, plaintiff [had] already sold his share to defendant
Rodolfo Diego in the amount of P500,000.00 and in fact, [had] already received a partial payment in the purchase
price in the amount of P250,000.00. Defendant Eduardo Diego testified that as per agreement, verbal, of the
plaintiff and defendant Rodolfo Diego, the remaining balance of P250,000.00 will be paid upon the execution
of the Deed of Absolute Sale. It was in the year 1997 when plaintiff was being required by defendant Eduardo Diego
to sign the Deed of Absolute Sale. Clearly, defendant Rodolfo Diego was not yet in default as the plaintiff claims
which cause [sic] him to refuse to sign [sic] document. The contract of sale was already perfected as early as the year
1993 when plaintiff received the partial payment, hence, he cannot unilaterally revoke or rescind the same. From then
on, plaintiff has, therefore, ceased to be a co-owner of the building and is no longer entitled to the fruits of the Diego
Building.
Equity and fairness dictate that defendant [sic] has to execute the necessary document regarding the sale of his
share to defendant Rodolfo Diego. Correspondingly, defendant Rodolfo Diego has to perform his obligation as per
their verbal agreement by paying the remaining balance of P250,000.00.9
To summarize, the trial court ruled that as early as 1993, Nicolas was no longer entitled to the fruits of his aliquot
share in the Diego Building because he had "ceased to be a co-owner" thereof. The trial court held that when Nicolas
received the P250,000.00 downpayment, a "contract of sale" was perfected. Consequently, Nicolas is obligated to
convey such share to Rodolfo, without right of rescission. Finally, the trial court held that theP250,000.00 balance
from Rodolfo will only be due and demandable when Nicolas executes an absolute deed of sale.
Ruling of the Court of Appeals
Nicolas appealed to the CA which sustained the trial courts Decision in toto. The CA held that since there was a
perfected contract of sale between Nicolas and Rodolfo, the latter may compel the former to execute the proper sale
document. Besides, Nicolass insistence that he has since rescinded their agreement in 1997 proved the existence of
a perfected sale. It added that Nicolas could not validly rescind the contract because: "1) Rodolfo ha[d] already made
a partial payment; 2) Nicolas ha[d] already partially performed his part regarding the contract; and 3) Rodolfo
opposes the rescission."10
The CA then proceeded to rule that since no period was stipulated within which Rodolfo shall deliver the balance of
the purchase price, it was incumbent upon Nicolas to have filed a civil case to fix the same. But because he failed to
do so, Rodolfo cannot be considered to be in delay or default.

Finally, the CA made another interesting pronouncement, that by virtue of the agreement Nicolas entered into with
Rodolfo, he had already transferred his ownership over the subject property and as a consequence, Rodolfo is legally
entitled to collect the fruits thereof in the form of rentals. Nicolas remaining right is to demand payment of the balance
of the purchase price, provided that he first executes a deed of absolute sale in favor of Rodolfo.
Nicolas moved for reconsideration but the same was denied by the CA in its Resolution dated October 3, 2007.
Hence, this Petition.
Issues
The Petition raises the following errors that must be rectified:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THERE WAS NO PERFECTED
CONTRACT OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND RESPONDENT RODOLFO DIEGO OVER
NICOLASS SHARE OF THE BUILDING BECAUSE THE SUSPENSIVE CONDITION HAS NOT YET BEEN
FULFILLED.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT OF SALE BETWEEN
PETITIONER AND RESPONDENT RODOLFO DIEGO REMAINS LEGALLY BINDING AND IS NOT RESCINDED
GIVING MISPLACED RELIANCE ON PETITIONER NICOLAS STATEMENT THAT THE SALE HAS NOT YET BEEN
REVOKED.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONER NICOLAS DIEGO ACTED
LEGALLY AND CORRECTLY WHEN HE UNILATERALLY RESCINDED AND REVOKED HIS AGREEMENT OF
SALE WITH RESPONDENT RODOLFO DIEGO CONSIDERING RODOLFOS MATERIAL, SUBSTANTIAL BREACH
OF THE CONTRACT.
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAS NO MORE RIGHTS
OVER HIS SHARE IN THE BUILDING, DESPITE THE FACT THAT THERE WAS AS YET NO PERFECTED
CONTRACT OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND RODOLFO DIEGO AND THERE WAS YET
NO TRANSFER OF OWNERSHIP OF PETITIONERS SHARE TO RODOLFO DUE TO THE NON-FULFILLMENT
BY RODOLFO OF THE SUSPENSIVE CONDITION UNDER THE CONTRACT.
V
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT RODOLFO HAS
UNJUSTLY ENRICHED HIMSELF AT THE EXPENSE OF PETITIONER BECAUSE DESPITE NOT HAVING PAID
THE BALANCE OF THE PURCHASE PRICE OF THE SALE, THAT RODOLFO HAS NOT YET ACQUIRED
OWNERSHIP OVER THE SHARE OF PETITIONER NICOLAS, HE HAS ALREADY BEEN APPROPRIATING FOR
HIMSELF AND FOR HIS PERSONAL BENEFIT THE SHARE OF THE INCOME OF THE BUILDING AND THE
PORTION OF THE BUILDING ITSELF WHICH WAS DUE TO AND OWNED BY PETITIONER NICOLAS.
VI
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ACTUAL DAMAGES, ATTORNEYS FEES
AND LITIGATION EXPENSES TO THE PETITIONER DESPITE THE FACT THAT PETITIONERS RIGHTS HAD
BEEN WANTONLY VIOLATED BY THE RESPONDENTS.11
Petitioners Arguments
In his Petition, the Supplement12 thereon, and Reply,13 Nicolas argues that, contrary to what the CA found, there was
no perfected contract of sale even though Rodolfo had partially paid the price; that in the absence of the third element
in a sale contract the price there could be no perfected sale; that failing to pay the required price in full, Nicolas
had the right to rescind the agreement as an unpaid seller.
Nicolas likewise takes exception to the CA finding that Rodolfo was not in default or delay in the payment of the
agreed balance for his (Nicolass) failure to file a case to fix the period within which payment of the balance should be
made. He believes that Rodolfos failure to pay within a reasonable time was a substantial and material breach of the

agreement which gave him the right to unilaterally and extrajudicially rescind the agreement and be discharged of his
obligations as seller; and that his repeated written demands upon Rodolfo to pay the balance granted him such rights.
Nicolas further claims that based on his agreement with Rodolfo, there was to be no transfer of title over his share in
the building until Rodolfo has effected full payment of the purchase price, thus, giving no right to the latter to collect
his share in the rentals.
Finally, Nicolas bewails the CAs failure to award damages, attorneys fees and litigation expenses for what he
believes is a case of unjust enrichment at his expense.
Respondents Arguments
Apart from echoing the RTC and CA pronouncements, respondents accuse the petitioner of "cheating" them, claiming
that after the latter received the P250,000.00 downpayment, he "vanished like thin air and hibernated in the USA, he
being an American citizen,"14 only to come back claiming that the said amount was a mere loan.
They add that the Petition is a mere rehash and reiteration of the petitioners arguments below, which are deemed to
have been sufficiently passed upon and debunked by the appellate court.
Our Ruling
The Court finds merit in the Petition.
The contract entered into by Nicolas and Rodolfo was a contract to sell.
a) The stipulation to execute a deed of sale upon full payment of the purchase price is a unique and
distinguishing characteristic of a contract to sell. It also shows that the vendor reserved title to the property
until full payment.
There is no dispute that in 1993, Rodolfo agreed to buy Nicolass share in the Diego Building for the price
ofP500,000.00. There is also no dispute that of the total purchase price, Rodolfo paid, and Nicolas
received,P250,000.00. Significantly, it is also not disputed that the parties agreed that the remaining amount
ofP250,000.00 would be paid after Nicolas shall have executed a deed of sale.
This stipulation, i.e., to execute a deed of absolute sale upon full payment of the purchase price, is a unique and
distinguishing characteristic of a contract to sell. In Reyes v. Tuparan,15 this Court ruled that a stipulation in the
contract, "[w]here the vendor promises to execute a deed of absolute sale upon the completion by the vendee
of the payment of the price," indicates that the parties entered into a contract to sell. According to this Court, this
particular provision is tantamount to a reservation of ownership on the part of the vendor. Explicitly stated, the Court
ruled that the agreement to execute a deed of sale upon full payment of the purchase price"shows that the vendors
reserved title to the subject property until full payment of the purchase price." 16
In Tan v. Benolirao,17 this Court, speaking through Justice Brion, ruled that the parties entered into a contract to
sell as revealed by the following stipulation:
d) That in case, BUYER has complied with the terms and conditions of this contract, then the SELLERS shall execute
and deliver to the BUYER the appropriate Deed of Absolute Sale;18
The Court further held that "[j]urisprudence has established that where the seller promises to execute a deed
of absolute sale upon the completion by the buyer of the payment of the price, the contract is only a contract
to sell."19

b) The acknowledgement receipt signed by Nicolas as well as the contemporaneous acts of the parties show
that they agreed on a contract to sell, not of sale. The absence of a formal deed of conveyance is indicative
of a contract to sell.
In San Lorenzo Development Corporation v. Court of Appeals,20 the facts show that spouses Miguel and Pacita Lu
(Lu) sold a certain parcel of land to Pablo Babasanta (Pablo). After several payments, Pablo wrote Lu demanding
"the execution of a final deed of sale in his favor so that he could effect full payment of the purchase price."21 To prove
his allegation that there was a perfected contract of sale between him and Lu, Pablo presented a receipt signed by Lu
acknowledging receipt of P50,000.00 as partial payment.22
However, when the case reached this Court, it was ruled that the transaction entered into by Pablo and Lu was only
a contract to sell, not a contract of sale. The Court held thus:
The receipt signed by Pacita Lu merely states that she accepted the sum of fifty thousand pesos (P50,000.00) from
Babasanta as partial payment of 3.6 hectares of farm lot situated in Sta. Rosa, Laguna. While there is no stipulation
that the seller reserves the ownership of the property until full payment of the price which is a distinguishing feature of
a contract to sell, the subsequent acts of the parties convince us that the Spouses Lu never intended to transfer
ownership to Babasanta except upon full payment of the purchase price.
Babasantas letter dated 22 May 1989 was quite telling. He stated therein that despite his repeated requests for the
execution of the final deed of sale in his favor so that he could effect full payment of the price, Pacita Lu allegedly
refused to do so. In effect, Babasanta himself recognized that ownership of the property would not be
transferred to him until such time as he shall have effected full payment of the price. Moreover, had the
sellers intended to transfer title, they could have easily executed the document of sale in its required form
simultaneously with their acceptance of the partial payment, but they did not. Doubtlessly, the receipt signed
by Pacita Lu should legally be considered as a perfected contract to sell.23
In the instant case, records show that Nicolas signed a mere receipt24 acknowledging partial payment ofP250,000.00
from Rodolfo. It states:
July 8, 1993
Received the amount of [P250,000.00] for 1 share of Diego Building as partial payment for Nicolas Diego.
(signed)
Nicolas Diego25
As we ruled in San Lorenzo Development Corporation v. Court of Appeals,26 the parties could have executed a
document of sale upon receipt of the partial payment but they did not. This is thus an indication that Nicolas did not
intend to immediately transfer title over his share but only upon full payment of the purchase price. Having thus
reserved title over the property, the contract entered into by Nicolas is a contract to sell. In addition, Eduardo admitted
that he and Rodolfo repeatedly asked Nicolas to sign the deed of sale27 but the latter refused because he was not yet
paid the full amount. As we have ruled in San Lorenzo Development Corporation v. Court of Appeals,28 the fact that
Eduardo and Rodolfo asked Nicolas to execute a deed of sale is a clear recognition on their part that the ownership
over the property still remains with Nicolas. In fine, the totality of the parties acts convinces us that Nicolas never
intended to transfer the ownership over his share in the Diego Building until the full payment of the purchase price.
Without doubt, the transaction agreed upon by the parties was a contract to sell, not of sale.
In Chua v. Court of Appeals,29 the parties reached an impasse when the seller wanted to be first paid the
consideration before a new transfer certificate of title (TCT) is issued in the name of the buyer. Contrarily, the buyer
wanted to secure a new TCT in his name before paying the full amount. Their agreement was embodied in a receipt
containing the following terms: "(1) the balance of P10,215,000.00 is payable on or before 15 July 1989; (2) the

capital gains tax is for the account of x x x; and (3) if [the buyer] fails to pay the balance x x x the [seller] has the right
to forfeit the earnest money x x x."30 The case eventually reached this Court. In resolving the impasse, the Court,
speaking through Justice Carpio, held that "[a] perusal of the Receipt shows that the true agreement between the
parties was a contract to sell."31 The Court noted that "the agreement x x x was embodied in a receipt rather than in a
deed of sale, ownership not having passed between them."32 The Court thus concluded that "[t]he absence of a
formal deed of conveyance is a strong indication that the parties did not intend immediate transfer of
ownership, but only a transfer after full payment of the purchase price." 33 Thus, the "true agreement between
the parties was a contract to sell."34
In the instant case, the parties were similarly embroiled in an impasse. The parties agreement was likewise
embodied only in a receipt. Also, Nicolas did not want to sign the deed of sale unless he is fully paid. On the other
hand, Rodolfo did not want to pay unless a deed of sale is duly executed in his favor. We thus say, pursuant to our
ruling in Chua v. Court of Appeals35 that the agreement between Nicolas and Rodolfo is a contract to sell.
This Court cannot subscribe to the appellate courts view that Nicolas should first execute a deed of absolute sale in
favor of Rodolfo, before the latter can be compelled to pay the balance of the price. This is patently ridiculous, and
goes against every rule in the book. This pronouncement virtually places the prospective seller in a contract to sell at
the mercy of the prospective buyer, and sustaining this point of view would place all contracts to sell in jeopardy of
being rendered ineffective by the act of the prospective buyers, who naturally would demand that the deeds of
absolute sale be first executed before they pay the balance of the price. Surely, no prospective seller would
accommodate.
In fine, "the need to execute a deed of absolute sale upon completion of payment of the price generally
indicates that it is a contract to sell, as it implies the reservation of title in the vendor until the vendee has
completed the payment of the price."36 In addition, "[a] stipulation reserving ownership in the vendor until full
payment of the price is x x x typical in a contract to sell."37 Thus, contrary to the pronouncements of the trial and
appellate courts, the parties to this case only entered into a contract to sell; as such title cannot legally pass to
Rodolfo until he makes full payment of the agreed purchase price.
c) Nicolas did not surrender or deliver title or possession to Rodolfo.
Moreover, there could not even be a surrender or delivery of title or possession to the prospective buyer Rodolfo. This
was made clear by the nature of the agreement, by Nicolass repeated demands for the return of all rents unlawfully
and unjustly remitted to Rodolfo by Eduardo, and by Rodolfo and Eduardos repeated demands for Nicolas to execute
a deed of sale which, as we said before, is a recognition on their part that ownership over the subject property still
remains with Nicolas.
Significantly, when Eduardo testified, he claimed to be knowledgeable about the terms and conditions of the
transaction between Nicolas and Rodolfo. However, aside from stating that out of the total consideration
ofP500,000.00, the amount of P250,000.00 had already been paid while the remaining P250,000.00 would be paid
after the execution of the Deed of Sale, he never testified that there was a stipulation as regards delivery of title or
possession.38
It is also quite understandable why Nicolas belatedly demanded the payment of the rentals. Records show that the
structural integrity of the Diego Building was severely compromised when an earthquake struck Dagupan City in
1990.39 In order to rehabilitate the building, the co-owners obtained a loan from a bank.40 Starting May 1994, the
property was leased to third parties and the rentals received were used to pay off the loan.41 It was only in 1996, or
after payment of the loan that the co-owners started receiving their share in the rentals.42 During this time, Nicolas
was in the USA but immediately upon his return, he demanded for the payment of his share in the rentals which
Eduardo remitted to Rodolfo. Failing which, he filed the instant Complaint. To us, this bolsters our findings that
Nicolas did not intend to immediately transfer title over the property.

It must be stressed that it is anathema in a contract to sell that the prospective seller should deliver title to the
property to the prospective buyer pending the latters payment of the price in full. It certainly is absurd to assume that
in the absence of stipulation, a buyer under a contract to sell is granted ownership of the property even when he has
not paid the seller in full. If this were the case, then prospective sellers in a contract to sell would in all likelihood not
be paid the balance of the price.
This ponente has had occasion to rule that "[a] contract to sell is one where the prospective seller reserves the
transfer of title to the prospective buyer until the happening of an event, such as full payment of the purchase price.
What the seller obliges himself to do is to sell the subject property only when the entire amount of the purchase price
has already been delivered to him. In other words, the full payment of the purchase price partakes of a suspensive
condition, the nonfulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the
prospective seller without further remedies by the prospective buyer. It does not, by itself, transfer ownership to the
buyer."43
The contract to sell is terminated or cancelled.
Having established that the transaction was a contract to sell, what happens now to the parties agreement?
The remedy of rescission is not available in contracts to sell.44 As explained in Spouses Santos v. Court of Appeals:45
In view of our finding in the present case that the agreement between the parties is a contract to sell, it follows that
the appellate court erred when it decreed that a judicial rescission of said agreement was necessary. This is because
there was no rescission to speak of in the first place. As we earlier pointed out, in a contract to sell, title remains with
the vendor and does not pass on to the vendee until the purchase price is paid in full. Thus, in a contract to sell, the
payment of the purchase price is a positive suspensive condition. Failure to pay the price agreed upon is not a mere
breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an
obligatory force. This is entirely different from the situation in a contract of sale, where non-payment of the price is a
negative resolutory condition. The effects in law are not identical. In a contract of sale, the vendor has lost ownership
of the thing sold and cannot recover it, unless the contract of sale is rescinded and set aside. In a contract to sell,
however, the vendor remains the owner for as long as the vendee has not complied fully with the condition of paying
the purchase price. If the vendor should eject the vendee for failure to meet the condition precedent, he is enforcing
the contract and not rescinding it. When the petitioners in the instant case repossessed the disputed house and lot for
failure of private respondents to pay the purchase price in full, they were merely enforcing the contract and not
rescinding it. As petitioners correctly point out, the Court of Appeals erred when it ruled that petitioners should have
judicially rescinded the contract pursuant to Articles 1592 and 1191 of the Civil Code. Article 1592 speaks of nonpayment of the purchase price as a resolutory condition. It does not apply to a contract to sell. As to Article 1191, it is
subordinated to the provisions of Article 1592 when applied to sales of immovable property. Neither provision is
applicable in the present case.46
Similarly, we held in Chua v. Court of Appeals47 that "Article 1592 of the Civil Code permits the buyer to pay, even
after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either
judicially or by notarial act. However, Article 1592 does not apply to a contract to sell where the seller reserves the
ownership until full payment of the price,"48 as in this case.1wphi1
Applying the above jurisprudence, we hold that when Rodolfo failed to fully pay the purchase price, the contract to
sell was deemed terminated or cancelled.49 As we have held in Chua v. Court of Appeals,50 "[s]ince the agreement x x
x is a mere contract to sell, the full payment of the purchase price partakes of a suspensive condition. The nonfulfillment of the condition prevents the obligation to sell from arising and ownership is retained by the seller
without further remedies by the buyer." Similarly, we held in Reyes v. Tuparan51 that "petitioners obligation to sell
the subject properties becomes demandable only upon the happening of the positive suspensive condition, which is
the respondents full payment of the purchase price. Without respondents full payment, there can be no breach
of contract to speak of because petitioner has no obligation yet to turn over the title. Respondents failure to
pay in full the purchase price in full is not the breach of contract contemplated under Article 1191 of the New Civil

Code but rather just an event that prevents the petitioner from being bound to convey title to respondent." Otherwise
stated, Rodolfo has no right to compel Nicolas to transfer ownership to him because he failed to pay in full the
purchase price. Correlatively, Nicolas has no obligation to transfer his ownership over his share in the Diego Building
to Rodolfo.52
Thus, it was erroneous for the CA to rule that Nicolas should have filed a case to fix the period for Rodolfos payment
of the balance of the purchase price. It was not Nicolass obligation to compel Rodolfo to pay the balance; it was
Rodolfos duty to remit it.
It would appear that after Nicolas refused to sign the deed as there was yet no full payment, Rodolfo and Eduardo
hired the services of the Daroya Accounting Office "for the purpose of estimating the amount to which [Nicolas] still
owes [Rodolfo] as a consequence of the unconsummated verbal agreement regarding the formers share in the coownership of [Diego Building] in favor of the latter."53 According to the accountants report, after Nicolas revoked his
agreement with Rodolfo due to non-payment, the downpayment of P250,000.00 was considered a loan of Nicolas
from Rodolfo.54 The accountant opined that the P250,000.00 should earn interest at 18%.55Nicolas however objected
as regards the imposition of interest as it was not previously agreed upon. Notably, the contents of the accountants
report were not disputed or rebutted by the respondents. In fact, it was stated therein that "[a]ll the bases and
assumptions made particularly in the fixing of the applicable rate of interest have been discussed with [Eduardo]."56
We find it irrelevant and immaterial that Nicolas described the termination or cancellation of his agreement with
Rodolfo as one of rescission. Being a layman, he is understandably not adept in legal terms and their implications.
Besides, this Court should not be held captive or bound by the conclusion reached by the parties. The proper
characterization of an action should be based on what the law says it to be, not by what a party believed it to be. "A
contract is what the law defines it to be x x x and not what the contracting parties call it."57
On the other hand, the respondents additional submission that Nicolas cheated them by "vanishing and
hibernating" in the USA after receiving Rodolfos P250,000.00 downpayment, only to come back later and claim that
the amount he received was a mere loan cannot be believed. How the respondents could have been cheated or
disadvantaged by Nicolass leaving is beyond comprehension. If there was anybody who benefited from Nicolass
perceived "hibernation", it was the respondents, for they certainly had free rein over Nicolass interest in the Diego
Building. Rodolfo put off payment of the balance of the price, yet, with the aid of Eduardo, collected and appropriated
for himself the rents which belonged to Nicolas.
Eduardo is solidarily liable with Rodolfo as regards the share of Nicolas in the rents.
For his complicity, bad faith and abuse of authority as the Diego Building administrator, Eduardo must be held
solidarily liable with Rodolfo for all that Nicolas should be entitled to from 1993 up to the present, or in respect of
actual damages suffered in relation to his interest in the Diego Building. Eduardo was the primary cause of Nicolass
loss, being directly responsible for making and causing the wrongful payments to Rodolfo, who received them under
obligation to return them to Nicolas, the true recipient.1wphi1 As such, Eduardo should be principally responsible to
Nicolas as well. Suffice it to state that every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith; and every person who, contrary
to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same.58
Attorneys fees and other costs.
"Although attorneys fees are not allowed in the absence of stipulation, the court can award the same when the
defendants act or omission has compelled the plaintiff to incur expenses to protect his interest or where the
defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just and demandable
claim."59 In the instant case, it is beyond cavil that petitioner was constrained to file the instant case to protect his
interest because of respondents unreasonable and unjustified refusal to render an accounting and to remit to the
petitioner his rightful share in rents and fruits in the Diego Building. Thus, we deem it proper to award to petitioner

attorneys fees in the amount of P50,000.00,60 as well as litigation expenses in the amount ofP20,000.00 and the sum
of P1,000.00 for each court appearance by his lawyer or lawyers, as prayed for.
WHEREFORE, premises considered, the Petition is GRANTED. The June 29, 2007 Decision and October 3, 2007
Resolution of the Court of Appeals in CA-G.R. CV No. 86512, and the April 19, 2005 Decision of the Dagupan City
Regional Trial Court, Branch 40 in Civil Case No. 99-02971-D, are hereby ANNULLED and SET ASIDE.
The Court further decrees the following:
1. The oral contract to sell between petitioner Nicolas P. Diego and respondent Rodolfo P. Diego
isDECLARED terminated/cancelled;
2. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to surrender possession and
control, as the case may be, of Nicolas P. Diegos share in the Diego Building. Respondents are further
commanded to return or surrender to the petitioner the documents of title, receipts, papers, contracts, and all
other documents in any form or manner pertaining to the latters share in the building, which are deemed to
be in their unauthorized and illegal possession;
3. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to immediately render an
accounting of all the transactions, from the period beginning 1993 up to the present, pertaining to Nicolas P.
Diegos share in the Diego Building, and thereafter commanded to jointly and severally remit to the petitioner
all rents, monies, payments and benefits of whatever kind or nature pertaining thereto, which are hereby
deemed received by them during the said period, and made to them or are due, demandable and
forthcoming during the said period and from the date of this Decision, with legal interest from the filing of the
Complaint;
4. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED, immediately and without further
delay upon receipt of this Decision, to solidarily pay the petitioner attorneys fees in the amount
ofP50,000.00; litigation expenses in the amount of P20,000.00 and the sum of P1,000.00 per counsel for
each court appearance by his lawyer or lawyers;
5. The payment of P250,000.00 made by respondent Rodolfo P. Diego, with legal interest from the filing of
the Complaint, shall be APPLIED, by way of compensation, to his liabilities to the petitioner and to answer
for all damages and other awards and interests which are owing to the latter under this Decision; and
6. Respondents counterclaim is DISMISSED.
SO ORDERED.

Roman Catholic
REGALADO, J.:
These two petitions for review on certiorari1 seek to overturn the decision of the Court of Appeals in CA-G.R. CV No.
054562 which reversed and set aside the order of the Regional Trial Court of Imus, Cavite dismissing Civil Case No.
095-84, as well as the order of said respondent court denying petitioner's motions for the reconsideration of its
aforesaid decision.
On November 29, 1984, private respondents as plaintiffs, filed a complaint for nullification of deed of donation,
rescission of contract and reconveyance of real property with damages against petitioners Florencio and Soledad C.
Ignao and the Roman Catholic Bishop of Imus, Cavite, together with the Roman Catholic Archbishop of Manila,
before the Regional Trial Court, Branch XX, Imus, Cavite and which was docketed as Civil Case No. 095-84 therein.3
In their complaint, private respondents alleged that on August 23, 1930, the spouses Eusebio de Castro and Martina
Rieta, now both deceased, executed a deed of donation in favor of therein defendant Roman Catholic Archbishop of
Manila covering a parcel of land (Lot No. 626, Cadastral Survey of Kawit), located at Kawit, Cavite, containing an
area of 964 square meters, more or less. The deed of donation allegedly provides that the donee shall not dispose or
sell the property within a period of one hundred (100) years from the execution of the deed of donation, otherwise a
violation of such condition would render ipso facto null and void the deed of donation and the property would revert to
the estate of the donors.
It is further alleged that on or about June 30, 1980, and while still within the prohibitive period to dispose of the
property, petitioner Roman Catholic Bishop of Imus, in whose administration all properties within the province of
Cavite owned by the Archdiocese of Manila was allegedly transferred on April 26, 1962, executed a deed of absolute
sale of the property subject of the donation in favor of petitioners Florencio and Soledad C. Ignao in consideration of
the sum of P114,000. 00. As a consequence of the sale, Transfer Certificate of Title No. 115990 was issued by the
Register of Deeds of Cavite on November 15, 1980 in the name of said petitioner spouses.
What transpired thereafter is narrated by respondent court in its assailed decision.4
On December 17, 1984, petitioners Florencio Ignao and Soledad C. Ignao filed a motion to dismiss based on the
grounds that (1) herein private respondents, as plaintiffs therein, have no legal capacity to sue; and (2) the complaint
states no cause of action.
On December 19, 1984, petitioner Roman Catholic Bishop of Imus also filed a motion to dismiss on three (3)
grounds, the first two (2) grounds of which were identical to that of the motion to dismiss filed by the Ignao spouses,
and the third ground being that the cause of action has prescribed.
On January 9, 1985, the Roman Catholic Archbishop of Manila likewise filed a motion to dismiss on the ground that
he is not a real party in interest and, therefore, the complaint does not state a cause of action against him.
After private respondents had filed their oppositions to the said motions to dismiss and the petitioners had countered
with their respective replies, with rejoinders thereto by private respondents, the trial court issued an order dated
January 31, 1985, dismissing the complaint on the ground that the cause of action has prescribed.5
Private respondents thereafter appealed to the Court of Appeals raising the issues on (a) whether or not the action for
rescission of contracts (deed of donation and deed of sale) has prescribed; and (b) whether or not the dismissal of
the action for rescission of contracts (deed of donation and deed of sale) on the ground of prescription carries with it
the dismissal of the main action for reconveyance of real property.6
On December 23, 1986, respondent Court of Appeals, holding that the action has not yet prescibed, rendered a
decision in favor of private respondents, with the following dispositive portion:

WHEREFORE, the Order of January 31, 1985 dismissing appellants' complaint is SET ASIDE and Civil
Case No. 095-84 is hereby ordered REINSTATED and REMANDED to the lower court for further
proceedings. No Costs.7
Petitioners Ignao and the Roman Catholic Bishop of Imus then filed their separate motions for reconsideration which
were denied by respondent Court of Appeals in its resolution dated February 6, 1987,8 hence, the filing of these
appeals by certiorari.
It is the contention of petitioners that the cause of action of herein private respondents has already prescribed,
invoking Article 764 of the Civil Code which provides that "(t)he donation shall be revoked at the instance of the
donor, when the donee fails to comply with any of the conditions which the former imposed upon the latter," and that
"(t)his action shall prescribe after four years from the non-compliance with the condition, may be transmitted to the
heirs of the donor, and may be exercised against the donee's heirs.
We do not agree.
Although it is true that under Article 764 of the Civil Code an action for the revocation of a donation must be brought
within four (4) years from the non-compliance of the conditions of the donation, the same is not applicable in the case
at bar. The deed of donation involved herein expressly provides for automatic reversion of the property donated in
case of violation of the condition therein, hence a judicial declaration revoking the same is not necessary, As aptly
stated by the Court of Appeals:
By the very express provision in the deed of donation itself that the violation of the condition thereof would
render ipso facto null and void the deed of donation, WE are of the opinion that there would be no legal
necessity anymore to have the donation judicially declared null and void for the reason that the very deed of
donation itself declares it so. For where (sic) it otherwise and that the donors and the donee contemplated a
court action during the execution of the deed of donation to have the donation judicially rescinded or
declared null and void should the condition be violated, then the phrase reading "would render ipso facto
null and void" would not appear in the deed of donation.9
In support of its aforesaid position, respondent court relied on the rule that a judicial action for rescission of a contract
is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and
conditions.10 It called attention to the holding that there is nothing in the law that prohibits the parties from entering
into an agreement that a violation of the terms of the contract would cause its cancellation even without court
intervention, and that it is not always necessary for the injured party to resort to court for rescission of the contract.11 It
reiterated the doctrine that a judicial action is proper only when there is absence of a special provision granting the
power of cancellation.12
It is true that the aforesaid rules were applied to the contracts involved therein, but we see no reason why the same
should not apply to the donation in the present case. Article 732 of the Civil Code provides that donationsinter
vivos shall be governed by the general provisions on contracts and obligations in all that is not determined in Title III,
Book III on donations. Now, said Title III does not have an explicit provision on the matter of a donation with a
resolutory condition and which is subject to an express provision that the same shall be considered ipso
facto revoked upon the breach of said resolutory condition imposed in the deed therefor, as is the case of the deed
presently in question. The suppletory application of the foregoing doctrinal rulings to the present controversy is
consequently justified.
The validity of such a stipulation in the deed of donation providing for the automatic reversion of the donated property
to the donor upon non-compliance of the condition was upheld in the recent case of De Luna, et al. vs. Abrigo, et
al.13 It was held therein that said stipulation is in the nature of an agreement granting a party the right to rescind a
contract unilaterally in case of breach, without need of going to court, and that, upon the happening of the resolutory
condition or non-compliance with the conditions of the contract, the donation is automatically revoked without need of
a judicial declaration to that effect. While what was the subject of that case was an onerous donation which, under
Article 733 of the Civil Code is governed by the rules on contracts, since the donation in the case at bar is also
subject to the same rules because of its provision on automatic revocation upon the violation of a resolutory
condition, from parity of reasons said pronouncements in De Luna pertinently apply.
The rationale for the foregoing is that in contracts providing for automatic revocation, judicial intervention is necessary
not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of an
agreement providing for rescission even without judicial intervention, but in order to determine whether or not the
rescission was proper.14
When a deed of donation, as in this case, expressly provides for automatic revocation and reversion of the property
donated, the rules on contract and the general rules on prescription should apply, and not Article 764 of the Civil
Code. Since Article 1306 of said Code authorizes the parties to a contract to establish such stipulations, clauses,

terms and conditions not contrary to law, morals, good customs, public order or public policy, we are of the opinion
that, at the very least, that stipulation of the parties providing for automatic revocation of the deed of donation, without
prior judicial action for that purpose, is valid subject to the determination of the propriety of the rescission sought.
Where such propriety is sustained, the decision of the court will be merely declaratory of the revocation, but it is not in
itself the revocatory act.
On the foregoing ratiocinations, the Court of Appeals committed no error in holding that the cause of action of herein
private respondents has not yet prescribed since an action to enforce a written contract prescribes in ten (10)
years.15 It is our view that Article 764 was intended to provide a judicial remedy in case of non-fulfillment or
contravention of conditions specified in the deed of donation if and when the parties have not agreed on the
automatic revocation of such donation upon the occurrence of the contingency contemplated therein. That is not the
situation in the case at bar.
Nonetheless, we find that although the action filed by private respondents may not be dismissed by reason of
prescription, the same should be dismissed on the ground that private respondents have no cause of action against
petitioners.
The cause of action of private respondents is based on the alleged breach by petitioners of the resolutory condition in
the deed of donation that the property donated should not be sold within a period of one hundred (100) years from
the date of execution of the deed of donation. Said condition, in our opinion, constitutes an undue restriction on the
rights arising from ownership of petitioners and is, therefore, contrary to public policy.
Donation, as a mode of acquiring ownership, results in an effective transfer of title over the property from the donor to
the donee. Once a donation is accepted, the donee becomes the absolute owner of the property donated. Although
the donor may impose certain conditions in the deed of donation, the same must not be contrary to law, morals, good
customs, public order and public policy. The condition imposed in the deed of donation in the case before us
constitutes a patently unreasonable and undue restriction on the right of the donee to dispose of the property
donated, which right is an indispensable attribute of ownership. Such a prohibition against alienation, in order to be
valid, must not be perpetual or for an unreasonable period of time.
Certain provisions of the Civil Code illustrative of the aforesaid policy may be considered applicable by
analogy.1wphi1Under the third paragraph of Article 494, a donor or testator may prohibit partition for a period which
shall not exceed twenty (20) years. Article 870, on its part, declares that the dispositions of the testator declaring all or
part of the estate inalienable for more than twenty (20) years are void.
It is significant that the provisions therein regarding a testator also necessarily involve, in the main, the devolution of
property by gratuitous title hence, as is generally the case of donations, being an act of liberality, the imposition of an
unreasonable period of prohibition to alienate the property should be deemed anathema to the basic and actual intent
of either the donor or testator. For that reason, the regulatory arm of the law is or must be interposed to prevent an
unreasonable departure from the normative policy expressed in the aforesaid Articles 494 and 870 of the Code.
In the case at bar, we hold that the prohibition in the deed of donation against the alienation of the property for an
entire century, being an unreasonable emasculation and denial of an integral attribute of ownership, should be
declared as an illegal or impossible condition within the contemplation of Article 727 of the Civil Code. Consequently,
as specifically stated in said statutory provision, such condition shall be considered as not imposed. No reliance may
accordingly be placed on said prohibitory paragraph in the deed of donation. The net result is that, absent said
proscription, the deed of sale supposedly constitutive of the cause of action for the nullification of the deed of
donation is not in truth violative of the latter hence, for lack of cause of action, the case for private respondents must
fail.
It may be argued that the validity of such prohibitory provision in the deed of donation was not specifically put in issue
in the pleadings of the parties. That may be true, but such oversight or inaction does not prevent this Court from
passing upon and resolving the same.
It will readily be noted that the provision in the deed of donation against alienation of the land for one hundred (100)
years was the very basis for the action to nullify the deed of d donation. At the same time, it was likewise the
controverted fundament of the motion to dismiss the case a quo, which motion was sustained by the trial court and
set aside by respondent court, both on the issue of prescription. That ruling of respondent court interpreting said
provision was assigned as an error in the present petition. While the issue of the validity of the same provision was
not squarely raised, it is ineluctably related to petitioner's aforesaid assignment of error since both issues are
grounded on and refer to the very same provision.
This Court is clothed with ample authority to review matters, even if they are not assigned as errors on appeal, if it
finds that their consideration is necessary in arriving at a just decision of the case:16 Thus, we have held that an
unassigned error closely related to an error properly assigned,17 or upon which the determination of the question

properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as
error.18
Additionally, we have laid down the rule that the remand of the case to the lower court for further reception of
evidence is not necessary where the Court is in a position to resolve the dispute based on the records before it. On
many occasions, the Court, in the public interest and for the expeditious administration of justice, has resolved
actions on the merits instead of remanding them to the trial court for further proceedings, such as where the ends of
justice, would not be subserved by the remand of the case.19 The aforestated considerations obtain in and apply to
the present case with respect to the matter of the validity of the resolutory condition in question.
WHEREFORE, the judgment of respondent court is SET ASIDE and another judgment is hereby rendered
DISMISSING Civil Case No. 095-84 of the Regional Trial Court, Branch XX, Imus, Cavite.
SO ORDERED.

G.R. No. 77425

June 19, 1991
THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF IMUS, and the SPOUSES
FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE CASTRO and MARTINA RIETA,
represented by MARINA RIETA GRANADOS and THERESA RIETA TOLENTINO, respondents.
G.R. No. 77450
June 19, 1991
THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF IMUS, and the SPOUSES
FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE CASTRO and MARTINA RIETA,
represented by MARINA RIETA GRANADOS and THERESA RIETA TOLENTINO, respondents.

REGALADO, J.:
These two petitions for review on certiorari1 seek to overturn the decision of the Court of Appeals in CA-G.R. CV No. 054562 which
reversed and set aside the order of the Regional Trial Court of Imus, Cavite dismissing Civil Case No. 095-84, as well as the order
of said respondent court denying petitioner's motions for the reconsideration of its aforesaid decision.
On November 29, 1984, private respondents as plaintiffs, filed a complaint for nullification of deed of donation, rescission of contract
and reconveyance of real property with damages against petitioners Florencio and Soledad C. Ignao and the Roman Catholic
Bishop of Imus, Cavite, together with the Roman Catholic Archbishop of Manila, before the Regional Trial Court, Branch XX, Imus,
Cavite and which was docketed as Civil Case No. 095-84 therein.3
In their complaint, private respondents alleged that on August 23, 1930, the spouses Eusebio de Castro and Martina Rieta, now
both deceased, executed a deed of donation in favor of therein defendant Roman Catholic Archbishop of Manila covering a parcel of
land (Lot No. 626, Cadastral Survey of Kawit), located at Kawit, Cavite, containing an area of 964 square meters, more or less. The

deed of donation allegedly provides that the donee shall not dispose or sell the property within a period of one hundred (100) years
from the execution of the deed of donation, otherwise a violation of such condition would render ipso facto null and void the deed of
donation and the property would revert to the estate of the donors.
It is further alleged that on or about June 30, 1980, and while still within the prohibitive period to dispose of the property, petitioner
Roman Catholic Bishop of Imus, in whose administration all properties within the province of Cavite owned by the Archdiocese of
Manila was allegedly transferred on April 26, 1962, executed a deed of absolute sale of the property subject of the donation in favor
of petitioners Florencio and Soledad C. Ignao in consideration of the sum of P114,000. 00. As a consequence of the sale, Transfer
Certificate of Title No. 115990 was issued by the Register of Deeds of Cavite on November 15, 1980 in the name of said petitioner
spouses.
What transpired thereafter is narrated by respondent court in its assailed decision.4
On December 17, 1984, petitioners Florencio Ignao and Soledad C. Ignao filed a motion to dismiss based on the grounds that (1)
herein private respondents, as plaintiffs therein, have no legal capacity to sue; and (2) the complaint states no cause of action.
On December 19, 1984, petitioner Roman Catholic Bishop of Imus also filed a motion to dismiss on three (3) grounds, the first two
(2) grounds of which were identical to that of the motion to dismiss filed by the Ignao spouses, and the third ground being that the
cause of action has prescribed.
On January 9, 1985, the Roman Catholic Archbishop of Manila likewise filed a motion to dismiss on the ground that he is not a real
party in interest and, therefore, the complaint does not state a cause of action against him.
After private respondents had filed their oppositions to the said motions to dismiss and the petitioners had countered with their
respective replies, with rejoinders thereto by private respondents, the trial court issued an order dated January 31, 1985, dismissing
the complaint on the ground that the cause of action has prescribed.5
Private respondents thereafter appealed to the Court of Appeals raising the issues on (a) whether or not the action for rescission of
contracts (deed of donation and deed of sale) has prescribed; and (b) whether or not the dismissal of the action for rescission of
contracts (deed of donation and deed of sale) on the ground of prescription carries with it the dismissal of the main action for
reconveyance of real property.6
On December 23, 1986, respondent Court of Appeals, holding that the action has not yet prescibed, rendered a decision in favor of
private respondents, with the following dispositive portion:
WHEREFORE, the Order of January 31, 1985 dismissing appellants' complaint is SET ASIDE and Civil Case No. 095-84
is hereby ordered REINSTATED and REMANDED to the lower court for further proceedings. No Costs. 7
Petitioners Ignao and the Roman Catholic Bishop of Imus then filed their separate motions for reconsideration which were denied by
respondent Court of Appeals in its resolution dated February 6, 1987,8 hence, the filing of these appeals by certiorari.
It is the contention of petitioners that the cause of action of herein private respondents has already prescribed, invoking Article 764
of the Civil Code which provides that "(t)he donation shall be revoked at the instance of the donor, when the donee fails to comply
with any of the conditions which the former imposed upon the latter," and that "(t)his action shall prescribe after four years from the
non-compliance with the condition, may be transmitted to the heirs of the donor, and may be exercised against the donee's heirs.
We do not agree.
Although it is true that under Article 764 of the Civil Code an action for the revocation of a donation must be brought within four (4)
years from the non-compliance of the conditions of the donation, the same is not applicable in the case at bar. The deed of donation
involved herein expressly provides for automatic reversion of the property donated in case of violation of the condition therein,
hence a judicial declaration revoking the same is not necessary, As aptly stated by the Court of Appeals:
By the very express provision in the deed of donation itself that the violation of the condition thereof would render ipso
facto null and void the deed of donation, WE are of the opinion that there would be no legal necessity anymore to have
the donation judicially declared null and void for the reason that the very deed of donation itself declares it so. For where

(sic) it otherwise and that the donors and the donee contemplated a court action during the execution of the deed of
donation to have the donation judicially rescinded or declared null and void should the condition be violated, then the
phrase reading "would render ipso facto null and void" would not appear in the deed of donation.9
In support of its aforesaid position, respondent court relied on the rule that a judicial action for rescission of a contract is not
necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. 10 It
called attention to the holding that there is nothing in the law that prohibits the parties from entering into an agreement that a
violation of the terms of the contract would cause its cancellation even without court intervention, and that it is not always necessary
for the injured party to resort to court for rescission of the contract.11 It reiterated the doctrine that a judicial action is proper only
when there is absence of a special provision granting the power of cancellation.12
It is true that the aforesaid rules were applied to the contracts involved therein, but we see no reason why the same should not apply
to the donation in the present case. Article 732 of the Civil Code provides that donationsinter vivos shall be governed by the general
provisions on contracts and obligations in all that is not determined in Title III, Book III on donations. Now, said Title III does not have
an explicit provision on the matter of a donation with a resolutory condition and which is subject to an express provision that the
same shall be considered ipso facto revoked upon the breach of said resolutory condition imposed in the deed therefor, as is the
case of the deed presently in question. The suppletory application of the foregoing doctrinal rulings to the present controversy is
consequently justified.
The validity of such a stipulation in the deed of donation providing for the automatic reversion of the donated property to the donor
upon non-compliance of the condition was upheld in the recent case of De Luna, et al. vs. Abrigo, et al.13 It was held therein that
said stipulation is in the nature of an agreement granting a party the right to rescind a contract unilaterally in case of breach, without
need of going to court, and that, upon the happening of the resolutory condition or non-compliance with the conditions of the
contract, the donation is automatically revoked without need of a judicial declaration to that effect. While what was the subject of that
case was an onerous donation which, under Article 733 of the Civil Code is governed by the rules on contracts, since the donation in
the case at bar is also subject to the same rules because of its provision on automatic revocation upon the violation of a resolutory
condition, from parity of reasons said pronouncements in De Luna pertinently apply.
The rationale for the foregoing is that in contracts providing for automatic revocation, judicial intervention is necessary not for
purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of an agreement providing for
rescission even without judicial intervention, but in order to determine whether or not the rescission was proper.14
When a deed of donation, as in this case, expressly provides for automatic revocation and reversion of the property donated, the
rules on contract and the general rules on prescription should apply, and not Article 764 of the Civil Code. Since Article 1306 of said
Code authorizes the parties to a contract to establish such stipulations, clauses, terms and conditions not contrary to law, morals,
good customs, public order or public policy, we are of the opinion that, at the very least, that stipulation of the parties providing for
automatic revocation of the deed of donation, without prior judicial action for that purpose, is valid subject to the determination of the
propriety of the rescission sought. Where such propriety is sustained, the decision of the court will be merely declaratory of the
revocation, but it is not in itself the revocatory act.
On the foregoing ratiocinations, the Court of Appeals committed no error in holding that the cause of action of herein private
respondents has not yet prescribed since an action to enforce a written contract prescribes in ten (10) years.15 It is our view that
Article 764 was intended to provide a judicial remedy in case of non-fulfillment or contravention of conditions specified in the deed of
donation if and when the parties have not agreed on the automatic revocation of such donation upon the occurrence of the
contingency contemplated therein. That is not the situation in the case at bar.
Nonetheless, we find that although the action filed by private respondents may not be dismissed by reason of prescription, the same
should be dismissed on the ground that private respondents have no cause of action against petitioners.
The cause of action of private respondents is based on the alleged breach by petitioners of the resolutory condition in the deed of
donation that the property donated should not be sold within a period of one hundred (100) years from the date of execution of the
deed of donation. Said condition, in our opinion, constitutes an undue restriction on the rights arising from ownership of petitioners
and is, therefore, contrary to public policy.
Donation, as a mode of acquiring ownership, results in an effective transfer of title over the property from the donor to the donee.
Once a donation is accepted, the donee becomes the absolute owner of the property donated. Although the donor may impose
certain conditions in the deed of donation, the same must not be contrary to law, morals, good customs, public order and public
policy. The condition imposed in the deed of donation in the case before us constitutes a patently unreasonable and undue

restriction on the right of the donee to dispose of the property donated, which right is an indispensable attribute of ownership. Such
a prohibition against alienation, in order to be valid, must not be perpetual or for an unreasonable period of time.
Certain provisions of the Civil Code illustrative of the aforesaid policy may be considered applicable by analogy.1wphi1Under the
third paragraph of Article 494, a donor or testator may prohibit partition for a period which shall not exceed twenty (20) years. Article
870, on its part, declares that the dispositions of the testator declaring all or part of the estate inalienable for more than twenty (20)
years are void.
It is significant that the provisions therein regarding a testator also necessarily involve, in the main, the devolution of property by
gratuitous title hence, as is generally the case of donations, being an act of liberality, the imposition of an unreasonable period of
prohibition to alienate the property should be deemed anathema to the basic and actual intent of either the donor or testator. For
that reason, the regulatory arm of the law is or must be interposed to prevent an unreasonable departure from the normative policy
expressed in the aforesaid Articles 494 and 870 of the Code.
In the case at bar, we hold that the prohibition in the deed of donation against the alienation of the property for an entire century,
being an unreasonable emasculation and denial of an integral attribute of ownership, should be declared as an illegal or impossible
condition within the contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in said statutory provision,
such condition shall be considered as not imposed. No reliance may accordingly be placed on said prohibitory paragraph in the
deed of donation. The net result is that, absent said proscription, the deed of sale supposedly constitutive of the cause of action for
the nullification of the deed of donation is not in truth violative of the latter hence, for lack of cause of action, the case for private
respondents must fail.
It may be argued that the validity of such prohibitory provision in the deed of donation was not specifically put in issue in the
pleadings of the parties. That may be true, but such oversight or inaction does not prevent this Court from passing upon and
resolving the same.
It will readily be noted that the provision in the deed of donation against alienation of the land for one hundred (100) years was the
very basis for the action to nullify the deed of d donation. At the same time, it was likewise the controverted fundament of the motion
to dismiss the case a quo, which motion was sustained by the trial court and set aside by respondent court, both on the issue of
prescription. That ruling of respondent court interpreting said provision was assigned as an error in the present petition. While the
issue of the validity of the same provision was not squarely raised, it is ineluctably related to petitioner's aforesaid assignment of
error since both issues are grounded on and refer to the very same provision.
This Court is clothed with ample authority to review matters, even if they are not assigned as errors on appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case:16 Thus, we have held that an unassigned error closely related to
an error properly assigned,17 or upon which the determination of the question properly assigned is dependent, will be considered by
the appellate court notwithstanding the failure to assign it as error.18
Additionally, we have laid down the rule that the remand of the case to the lower court for further reception of evidence is not
necessary where the Court is in a position to resolve the dispute based on the records before it. On many occasions, the Court, in
the public interest and for the expeditious administration of justice, has resolved actions on the merits instead of remanding them to
the trial court for further proceedings, such as where the ends of justice, would not be subserved by the remand of the case. 19 The
aforestated considerations obtain in and apply to the present case with respect to the matter of the validity of the resolutory
condition in question.
WHEREFORE, the judgment of respondent court is SET ASIDE and another judgment is hereby rendered DISMISSING Civil Case
No. 095-84 of the Regional Trial Court, Branch XX, Imus, Cavite.
SO ORDERED.
DORIE ABESA NICOLAS, G.R. No. 158026
Petitioner,
Present:
PUNO, C.J., Chairperson,
CARPIO,
- versus - *CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.

DEL-NACIA CORPORATION, Promulgated:

Respondent. April 23, 2008
DECISION
PUNO, C.J.:
This case arose from a complaint for unfair business practice [1] filed by petitioner Dorie Abesa Nicolas (Mrs. Nicolas) against respondent DelNacia Corporation (Del-Nacia) before the Housing and Land Use Regulatory Board (HLURB).
On February 20, 1988, the spouses Armando Nicolas and Dorie Abesa Nicolas (Spouses Nicolas) and Del-Nacia entered into a Land
Purchase Agreement[2] (Agreement) for the sale by the latter to the former of a parcel of land, covered by Transfer Certificate of Title No. 233702,
consisting of 10,000 square meters, situated at Lot No. 3-B-4, Del Nacia Ville No. 5, San Jose del Monte, Bulacan.
The relevant parts of the Agreement are:
(1) The PURCHASER agrees to pay to the OWNER upon execution of this Contract the sum of FORTY THOUSAND
PESOS (P40,000) as first payment on account of the purchase price and agrees to pay the balance of FIVE HUNDRED
TEN THOUSAND PESOS (P510,000) at the office of the OWNER in the City of Quezon, Philippines, or such other office
as the OWNER may designate in 120 equal monthly installment of NINE THOUSAND ONE HUNDRED EIGHTY NINE
AND 45/100 PESOS (P9,189.45) interest being included on successive monthly balance at 18% per annum, and payments
to be made on the _____ day of each month thereafter beginning April 20, 1988.
xxxx
(5) In the event that any of the payments as stipulated be not paid when, where, and as the same become due; it
is agreed that sums in arrears shall bear interest at the rate of EIGHTEEN (18%) per centum per annum payable monthly
from the date on which said sums is due and payable.
(6) If any such payment or payments shall continue in arrears for more than sixty-days, or if the PURCHASER shall
violate any of the conditions herein set forth then the entire unpaid balance due under this contract, with any interest which
may have attached shall at once become due and payable and shall bear interest at the rate of TWELVE (12%) per centum
per annum until paid, and in such case, the PURCHASER further agrees to pay to the OWNER a sum equal to ten (10%)
per centum of the amount due as attorneys fees.[3]
Under the Agreement, the ownership of the land remains with Del-Nacia until full payment of the stipulated purchase price under the following
terms and conditions:
(3) Title to said parcel of land shall remain in the name of the OWNER until complete payment by the PURCHASER of all
obligations herein stipulated, at which time the OWNER agree to execute a final deed of sale in favor of the PURCHASER
and cause the issuance of a certificate of title in the name of the latter, free from liens and encumbrances except those
provided in the Land Registration Act, those imposed by the authorities, and those contained in Clauses (10) and (16) of
this agreement. Registration fees and documentary stamps of the deed of sale shall be paid by the PURCHASER.
(4) Only the PURCHASER shall be deemed for all legal purposes to take possession of the parcel of land upon payment of
the down payment provided, however, that his/her possession under this section shall be only that of a tenant or lessee, and
subject to ejectment proceedings during all the period of this agreement.
xxxx
(7) In case the PURCHASER fails to comply with any conditions of this contract and/or to pay any payments
herein agreed upon, the PURCHASER shall be granted a period or periods of grace which in no case shall exceed (60) days
to be counted from the condition breached ought to be complied with or the said payments ought have been made, during
which period of grace the PURCHASER must comply with the said condition or satisfy all due monetary obligations
including those which correspond to the period of grace. OTHERWISE, the Contract shall be automatically cancelled and
rescinded and of no force and effect, and as a consequence therefore, the OWNER may dispose of the parcels of land
covered by this Contract in favor of other persons, as if this Contract had never been entered into. In case of such
cancellation of this Contract all amounts paid in accordance with this agreement, together with all the improvements
introduced in the premises, shall be considered as rents for the use and occupation of the abovementioned premises and as
payments for the damages suffered on the OWNER on account of the failure of the PURCHASER to fulfill his part of this
Contract and the PURCHASER hereby renounces all his rights to demand or reclaim the return of the same and further
obligates himself to peacefully vacate the premises and deliver the same to the OWNER; PROVIDED, HOWEVER, that
any consideration, concession, tolerance or relaxation of provisions shall not be interpreted as a renunciation on the part of
OWNER of any rights granted in this Contract.[4]
Upon signing of the Agreement, the Spouses Nicolas paid the down payment of P40,000. Thereupon, the Spouses Nicolas took possession of the
land, and for several months thereafter, paid on or before the 20th of each month, the monthly amortizations.[5]
Unfortunately, however, Armando Nicolas died shortly after the signing of the Agreement and Mrs. Nicolas began to falter in her payments. As
found by Arbiter Jose A. Atencio, Jr. (HLURB Arbiter) of the Office of Appeals, Adjudication and Legal Affairs (OAAL), HLURB Region III, the
records of Del-Nacia indicate that Mrs. Nicolas is delinquent in her monthly amortization for the following months: November 1988; March
1989; May 1989; June 1989-July 1989; September 1989; October 1989; November 1989-December 1989; February 1990-September 1990;
October 1990-November 1990; December 1990-April 1991. The last payment of Mrs. Nicolas was made on July 19, 1991.[6]
Del-Nacia sent Mrs. Nicolas notice to pay her arrearages with a grace period of sixty (60) days within which to make payment but to no avail.
Del-Nacia then caused the notarial cancellation of the Agreement on December 3, 1991.[7]

Subsequently, Del-Nacia verbally informed Mrs. Nicolas to get the cash surrender value of her payment at its office. However, Mrs.
Nicolas did not claim the same. Del-Nacia prepared a check in the amount of P270,651.88 representing the cash surrender value of Mrs. Nicolass
payment and sent it to her by registered mail. The check was received by Mrs. Nicolas and until now it remains in her possession. [8]
On February 23, 1993, Mrs. Nicolas filed a Complaint [9] against Del-Nacia before the HLURB. On December 15, 1994, the HLURB Arbiter
rendered a Decision[10] (Arbiter Decision) with the following disposition:
PREMISES considered, judgment is hereby rendered as follows:
a. Declaring the notarial cancellation of the contract on December 3, 1991 as null and void.
b. Ordering respondent to fortwith furnish complainant accounting of the paid and unpaid amortizations
including interests and penalty interests and other stipulated fees or charges covering the period or delinquent payments, as
a consequence of the latters default stating clearly and specifically the bases as stated in the contract and for the
complainant to pay her unpaid obligations within forty five (45) days from receipt of the said computation/accounting.
c. Ordering the same respondent to execute the pertinent deed in favor of the complainant within fifteen (15)
days from receipt of complainants full payment under paragraph b aforementioned and thereafter to deliver to the latter the
Transfer Certificate of Title of the lot in question.
d. Remedies provided under R.A. 6552 and other legal remedies may be resorted to, at the option of the
respondent, if complainant fails or refuses to pay within the period provided under paragraph b.
So Ordered.[11]
Mrs. Nicolas sought review of the Arbiter Decision by the HLURB Board of Commissions (HLURB Board) on the following assignment of
errors:
FIRST ASSIGNMENT OF ERROR
THE HON. ARBITER ERRED IN ORDERING THE INCLUSION OF INTERESTS, PENALTY INTERESTS AND
OTHER STIPULATED FEES OR CHARGES IN THE UNILATERAL COMPUTATION TO BE MADE BY THE
RESPONDENT-APPELLEE AS THE UNPAID OBLIGATION OF COMPLAINANT-APPELLANT.
SECOND ASSIGNMENT OF ERROR
THE HON. ARBITER ERRED IN ORDERING THE COMPLAINANT-APPELLANT TO PAY HER SUPPOSED
UNPAID OBLIGATION BASED UPON THE UNILATERAL COMPUTATION OF RESPONDENT-APPELLEE
WITHIN FORTY FIVE (45) DAYS FROM RECEIPT OF SAID COMPUTATION/ACCOUNTING.
THIRD ASSIGNMENT OF ERROR
THE HON. ARBITER ERRED IN GIVING RESPONDENT-APPELLEE THE RIGHT TO RESORT TO REMEDIES
PROVIDED UNDER R.A. 6552 AND OTHER LEGAL REMEDIES.
FOURTH ASSIGNMENT OF ERROR
THE HON. ARBITER ERRED IN NOT AWARDING ATTORNEYS FEES IN THE SUM OF P50,000.00 TO
COMPLAINANT-APPELLANT.
FIFTH ASSIGNMENT OF ERROR
THE HON. ARBITER ERRED IN NOT GRANTING THE PRAYER OF COMPLAINANT-APPELLANT IN HER
COMPLAINT.[12]
The HLURB Board was partly receptive of the appeal and, on December 1, 1995, it handed down a Decision [13] (HLURB Board Decision)
adjudging that:
WHEREFORE, in light of the foregoing premises, we hereby MODIFY the Decision dated 15 December
1994 of the Office a Quo, insofar as paragraph (b) of the dispositive portion is concerned and an additional paragraph e, to
wit:
(b)

Ordering complainant to pay respondent within sixty (60) days from receipt hereof the amount of one hundred
seventy three thousand nine hundred fifty seven pesos and 29/1000 (P173,957.29) representing the remaining
balance of the installment purchase price of the land inclusive of legal interests at the rate of twelve percent
(12%) per annum.

(e)

Ordering respondent to pay this Board the amount of ten thousand (P10,000) as an administrative fine for
violation of Section 5 of P.D. 957 within thirty (30) days from finality hereof.

SO ORDERED. Quezon City.[14]

Del-Nacia filed a Motion for Reconsideration [15] and a Supplement to Motion for Reconsideration. [16] Meanwhile, Mrs. Nicolas filed a motion for
the consignment ofP173,957.29, representing the balance of the purchase price of the land as found by the HLURB Board.
On June 21, 1996, the HLURB Board resolved to deny Del-Nacias motion for reconsideration and ordered Mrs. Nicolas to deposit with it for
safekeeping the amount indicated in its Decision until Del-Nacia is willing to accept the same. [17]
Consequently, Del-Nacia appealed to the Office of the President which, however, was dismissed by its Decision dated March 4, 1998 (O.P.
Original Decision).[18] Upon motion for reconsideration, however, the Office of the President, in a Resolution dated January 5, 2001[19] (O.P.
Resolution), set aside the O.P. Original Decision and affirmed theArbiter Decision in toto.
Unsuccessful in her bid at overturning the O.P. Resolution, Mrs. Nicolas filed a Petition for Review [20] with the Court of Appeals (CA) docketed
as CA-G.R. SP No. 68407. The CA initially dismissed her petition for failing to comply with the procedural requirements of Section 6(c) of Rule
43 of the Revised Rules of Court. [21] Mrs. Nicolas filed an omnibus motion praying that the CA reconsider and set aside the dismissal of her
petition and to admit her amended petition.[22] The CA then required Del-Nacia to submit its comment to the petition. [23]

On January 23, 2003, the CA rendered its Decision,[24] affirming the O.P. Resolution, to wit:
WHEREFORE, finding no flaw in the appealed O.P. Resolution, the same is hereby AFFIRMED in toto, with costs against
Mrs. Nicolas.
SO ORDERED.
The Motion for Reconsideration[25] filed by Mrs. Nicolas was denied by the CA in its Resolution dated April 29, 2003.[26]
Hence, this Petition for Review on Certiorari[27], raising the lone issue of:
WHETHER OR NOT complainant (now petitioner) is bound to pay the interests, penalty interests and other stipulated
charges based on the unilateral accounting or computation made by respondent.[28]
The instant petition prays that the O.P. Original Decision, which affirmed the HLURB Board Decision, be reinstated by this Court.
In its Comment, Del-Nacia argues that the instant petition be denied for the following reasons: (1) failure to comply with section 4,
Rule 45, and (2) failure to advance any special reason that would warrant the exercise by this Court of its discretionary power of review.
Before discussing the merits of the case, we shall first discuss its procedural aspect.
Del-Nacia urges this Court to dismiss the instant petition for failing to attach material portions of the records of the case that will
support the same as required under Section 6 of Rule 46 of the Revised Rules of Court, such as, for instance, copies of her own pleadings filed
before the proceedings below.[29] It appears that the Agreement of the parties, subject of the dispute, was not attached to the petition. Nevertheless,
since the Agreement and the other documents that were not attached to the petition are already part of the records of this case, and could easily be
referred to by this Court if necessary, a dismissal of the instant petition purely on technical grounds is not warranted. Indeed, the Court has, in
past cases, granted relief in favor of the petitioner despite this procedural infirmity. [30] Thus, we explained the rationale behind the Courts liberal
stance as follows:
We must stress that cases should be determined on the merits, after all parties have been given full opportunity
to ventilate their causes and defenses, rather than on technicalities or procedural imperfections. In that way, the ends of
justice would be served better. Rules of procedure are mere tools designed to expedite the decision or resolution of cases
and other matters pending in court. A strict and rigid application of rules, resulting in technicalities that tend to frustrate
rather than promote substantial justice, must be avoided. In fact, Section 6 of Rule 1 states that the Rules shall be liberally
construed in order to promote their objective of ensuring the just, speedy and inexpensive disposition of every action
and proceeding.[31]
Now on the merits of the case. The issue is whether Mrs. Nicolas is liable to pay interests, penalty interests and other stipulated
charges to Del-Nacia.
We rule in the affirmative.
Mrs. Nicolas contends that based on the payments she already made, she has overpaid the purchase price due under the Agreement. [32] She assails
the application of her payments made by Del-Nacia since the latter applied the bulk of her payments to interest rather than the principal.
[33]
According to her, therefore, the penalties, interests and surcharges being collected by Del-Nacia have no basis in fact or in law. [34] In this
regard, she urges this Court to affirm the HLURB Board Decision[35] which reads:
Cursory reading of the abovementioned document reveal that there is indeed no specific date indicated, as to when
complainant should pay her monthly installments. It is clear that that the space provided for in Paragraph 1 of said
document for the date or day of the month on which payment is to be made has been left blank.
Considering that the Land Purchase Agreement is a pro-forma document prepared by respondent, any ambiguity therein
should be interpreted in favor of the complainant.
On the basis of the foregoing, we find that complainant did not incur any delay, hence, the imposition of surcharges and
penalty interests are unjustified.[36]
According to Del-Nacia, however, Mrs. Nicolas disregarded paying the regular rate of interest, overdue interest and penalty interest which were
voluntarily agreed upon under paragraphs (1), (5) and (6), respectively, of their Agreement. [37] Del-Nacia contends that the records clearly
establish that Mrs. Nicolas was in delay in her payments of the monthly amortizations and she has not disputed the same. [38]
As found by the HLURB Arbiter, the records of Del-Nacia shows that Mrs. Nicolas incurred delay in the payment of her monthly amortizations.
[39]
It is a well-settled rule that factual findings of administrative agencies are conclusive and binding on the Court when supported by substantial
evidence. We agree with the O.P. Resolution,[40] which was adopted and affirmed by the CA, to wit:
Appellants [Del-Nacia] submission, however, that appellee [Mrs. Nicolas] incurred delay in the manner of payment of her
monthly installment obligations is impressed with merit. The Housing Arbiter, in his evaluation as trier of facts of appellees
records of payment, was of the same view. Under #1 of the basic purchase agreement, supra, appellee undertook to
pay 120 equal monthly installments of P9,189.45, payments to be made on the __ day of each month thereafter
beginning April 20, 1988. A fair understanding of this provision would simply mean that payment should be made effected
every 20th day of each month following April 20, 1988. Based on the records, one can safely presume that the same was
fully understood by appellee, as she had repeatedly paid her monthly amortization on the 20 th day of each, or a few days
thereafter. Neither did she question the interest imposed by appellant for her payments made after the 20 th. Be that as it
may, this Office is at a loss to understand the HLURBs conclusion about appellee not having defaulted in her installment
payments. The explanation given by the HLURB Proper why it considered appellee not to have been in delay, i.
e., because no specific date [ is] indicated [in the purchase agreement] as to when complainant should pay her monthly
installments adding thatthe space provided for . . . the date or day of the month which payment is to be made has been left
blank, strikes this Office as too simplistic to be accorded cogency. The adverted fact of a space in blank is of no moment
for, to reiterate, the agreement was for appellee to [the] pay the balance (P510,000.00) of the purchase price in 120 equal
monthly installments, the installment period to start from April 20, 1988. The use of the phrase 120 equal monthly
installments and thereafter beginning April 20, 1988 can mean only one thing that after April 20, 1988, the monthly
installment is to fall due and be payable on the 20th day of the succeeding months. The explanation adverted to above of the

HLURB, if pursued to its logical conclusion, would virtually allow appellee to perpetually withhold installment payment
without risk of being considered in default. The absurdity of this explanation needs no belaboring.[41]
Clearly, under paragraphs (1), (5) and (6) of the Agreement, supra, Mrs. Nicolas was bound to pay regular interest, and in case of
delay, overdue interest and penalty. It cannot be overemphasized that a contract is the law between the parties, [42] and courts have no choice but to
enforce such contract so long as they are not contrary to law, morals, good customs or public policy.[43]
In this connection, a stipulation for the payment of interest and penalty apart from interest in case of delay is not contrary to law, moral, good
customs or public policy. To be sure, the same is sanctioned by the following provisions of the Civil Code:
Article 1956. No interest shall be due unless it has been expressly stipulated in writing.
Article 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no stipulation to the contrary.
Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon x x x.
In Bachrach Motor Company v. Espiritu,[44] the Court ruled that the Civil Code permits the agreement upon a penalty apart from the
interest. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which
may be demanded separately. The same principle was reiterated inEquitable Banking Corp. v. Liwanag et al.,[45] where this Court held that the
stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law.
On Mrs. Nicolas contention that she should not pay interest and the other charges based on the unilateral accounting or computation
made by Del-Nacia, a perusal of the formula[46] for the computation of regular interest, overdue interest and penalty interest used by Del-Nacia
reveal that the same is in accord with the provisions of the Agreement and cannot be said to have been unilaterally imposed by Del-Nacia.
Moreover, the case of Relucio v. Brillante-Garfin (Relucio),[47] involves similar facts to the case at bar where we ruled as follows:
Examination of the record shows that the questioned Contract to Buy and Sell the subdivision lots provided for
payment by private respondent of the sum of P200.00 as downpayment, and that "the balance [of P10,600.00] shall be paid
in 180 monthly installments at P89.45 per month, including interest rate at six percent (6%) per annum, until the purchase
price is fully paid."This stipulation clearly specified that an interest charge of six percent (6%) per annum was included in
the monthly installment price: private respondent could not have helped noticing that P89.45 multiplied by 180 monthly
installments equals P16,101.00, and not P10,600.00. The contract price of P10,800.00 may thus be seen to be the cash price
of the subdivision lots, that is, the amount payable if the price of the lots were to be paid in cash and in full at the execution
of the contract; it is not the amount that the vendor will have received in the aggregate after fifteen (15) years if the vendee
shall have religiously paid the monthly installments. The installment price, upon the other hand, of the subdivision lots the
sum total of the monthly installments (i.e., P16,101.00) typically, as in the instant case, has an interest component which
compensates the vendor for waiting fifteen (15) years before receiving the total principal amount of P10,600.00.
Economically or financially, P10,600.00 delivered in full today is simply worth much more than a long series of small
payments totalling, after fifteen (15) years, P10,600.00. For the vendor, upon receiving the full cash price, could have
deposited that amount in a bank, for instance, and earned interest income which at six percent (6%) per year and for fifteen
(15) years, would precisely total P5,501.00 (the difference between the installment price of P16,101.00 and the cash price
of P10,600.00 ) To suppose, as private respondent argues, that mere prompt payment of the monthly installments as they
fell due would obviate application of the interest charge of six percent (6%) per annum, is to ignore that simple economic
fact. That economic fact is, of course, recognized by law, which authorizes the payment of interest when contractually
stipulated for by the parties or when implied in recognized commercial custom or usage.
Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision
lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system,
he is in effect paying interest on the cash price, whether the fact and rate of such interest payment is disclosed in the
contract or not. The contract for the purchase and sale of a piece of land on the installment payment system in the
case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our present day
commercial life.[48]
In Relucio, the Court also sustained the sellers theory of declining balance whereby the seller credited a bigger sum of the monthly amortization
to interest rather than the principal, such that in [During] the succeeding monthly payments, however, as the outstanding balance on the principal
gradually declined, the interest component (in absolute terms) correspondingly fell while the component credited to the principal increased
proportionately, thus amortizing the balance of the principal purchase price as that balance gradually declined. [49]
In the same vein, an examination of the application of Mrs. Nicolas payments by Del-Nacia in the table [50] the latter prepared as reflected in the
records of the case, shows that the same is in accord with the theory of declining balance which was affirmed by this Court in Relucio.

Given the foregoing, it appears that the only dilemma which Mrs. Nicolas currently finds herself in is that the obligations which she
voluntary undertook under the Agreement turned out to be more onerous than what she expected. Doctrinal is the rule that courts may not
extricate parties from the necessary consequences of their acts. [51] That the terms of a contract turn out to be financially disadvantageous to them
will not relieve them of their obligations therein.[52]
IN VIEW WHEREOF, the petition is DISMISSED. The decision of the Court of Appeals is affirmed. Costs against the petitioner.
SO ORDERED.

ERMINDA F. FLORENTINO,
Petitioner,

G.R. No. 172384

Present:
YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

- versus -

SUPERVALUE, INC.,
Respondent.

DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, filed by petitioner Erminda F. Florentino,
seeking to reverse and set aside the Decision, [1] dated 10 October 2003 and the Resolution,[2] dated 19 April 2006 of the Court of Appeals in CAG.R. CV No. 73853. The appellate court, in its assailed Decision and Resolution, modified the Decision dated 30 April 2001 of the Regional Trial
Court (RTC) of Makati, Branch 57, in Civil Case No. 00-1015, finding the respondentSupervalue, Inc., liable for the sum of P192,000.00,
representing the security deposits made by the petitioner upon the commencement of their Contract of Lease. The dispositiveportion of the
assailed appellate courts Decision thus reads:
WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The April 30, 2001 Decision of the
Regional Trial Court of Makati, Branch 57 is therefore MODIFIED to wit: (a) the portion ordering the [herein respondent]
to pay the amount of P192,000.00 representing the security deposits and P50,000.00 as attorneys fees in favor of
the [herein petitioner] as well as giving [respondent] the option to reimburse [petitioner] of the value of the improvements
introduced by the [petitioner] on the leased [premises] should [respondent] choose to appropriate itself or require the
[petitioner] to remove the improvements, is hereby REVERSED and SET ASIDE; and (b) the portion ordering the return to
[petitioner] the properties seized by [respondent] after the former settled her obligation with the latter is however
MAINTAINED.[3]
The factual and procedural antecedents of the instant petition are as follows:
Petitioner is doing business under the business name Empanada Royale, a sole proprietorship engaged in the retail of empanada with
outlets in different malls and business establishments within Metro Manila.[4]
Respondent, on the other hand, is a domestic corporation engaged in the business of leasing stalls and commercial store spaces located
inside SM Malls found all throughout the country.[5]
On 8 March 1999, petitioner and respondent executed three Contracts of Lease containing similar terms and conditions over the cart-type stalls at
SM North Edsa and SMSouthmall and a store space at SM Megamall. The term of each contract is for a period of four months and may be
renewed upon agreement of the parties.[6]
Upon the expiration of the original Contracts of Lease, the parties agreed to renew the same by extending their terms until 31 March 2000.[7]
Before the expiration of said Contracts of Lease, or on 4 February 2000, petitioner received two letters from the respondent, both dated 14
January 2000, transmitted through facsimile transmissions.[8] In the first letter, petitioner was charged with violating Section 8 of the Contracts of
Lease by not opening on 16 December 1999 and 26 December 1999.[9] Respondent also charged petitioner with selling a new variety

of empanada called mini-embutido and of increasing the price of her merchandise from P20.00 to P22.00, without the prior approval of the
respondent.[10]
Respondent observed that petitioner was frequently closing earlier than the usual mall hours, either because of non-delivery or delay in
the delivery of stocks to her outlets, again in violation of the terms of the contract. A stern warning was thus given to petitioner to refrain from
committing similar infractions in the future in order to avoid the termination of the lease contract. [11]
In the second letter, respondent informed the petitioner that it will no longer renew the Contracts of Lease for the three outlets, upon their
expiration on 31 March 2000.[12]
In a letter-reply dated 11 February 2000, petitioner explained that the mini-embutido is not a new variety of empanada but had similar fillings,
taste and ingredients as those of pork empanada; only, its size was reduced in order to make it more affordable to the buyers. [13]
Such explanation notwithstanding, respondent still refused to renew its Contracts of Lease with the petitioner. To the contrary, respondent took
possession of the store space in SM Megamall and confiscated the equipment and personal belongings of the petitioner found therein after the
expiration of the lease contract.[14]
In a letter dated 8 May 2000, petitioner demanded that the respondent release the equipment and personal belongings it seized from the
SM Megamall store space and return the security deposits, in the sum of P192,000.00, turned over by the petitioner upon signing of the Contracts
of Lease. On 15 June 2000, petitioner sent respondent another letter reiterating her previous demands, but the latter failed or refused to comply
therewith. [15]
On 17 August 2000, an action for Specific Performance, Sum of Money and Damages was filed by the petitioner against the respondent before
the RTC of Makati, Branch 57.[16]
In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged that the respondent made verbal representations that the
Contracts of Lease will be renewed from time to time and, through the said representations, the petitioner was induced to introduce improvements
upon the store space at SM Megamall in the sum of P200,000.00, only to find out a year later that the respondent will no longer renew her lease
contracts for all three outlets.[17]
In addition, petitioner alleged that the respondent, without justifiable cause and without previous demand, refused to return the security deposits
in the amount of P192,000.00.[18]
Further, petitioner claimed that the respondent seized her equipment and personal belongings found inside the store space in SM Megamall after
the lease contract for the said outlet expired and despite repeated written demands from the petitioner, respondent continuously refused to return
the seized items.[19]
Petitioner thus prayed for the award of actual damages in the sum of P472,000.00, representing the sum of security deposits, cost of
improvements and the value of the personal properties seized. Petitioner also asked for the award of P300,000.00 as moral damages; P50,000.00
as exemplary damages; and P80,000.00 as attorneys fees and expenses of litigation.[20]
For its part, respondent countered that petitioner committed several violations of the terms of their Contracts of Lease by not opening from 16
December 1999 to 26 December 1999, and by introducing a new variety of empanada without the prior consent of the respondent, as mandated
by the provision of Section 2 of the Contract of Lease. Respondent also alleged that petitioner infringed the lease contract by frequently closing
earlier than the agreed closing hours. Respondent finally averred that petitioner is liable for the amount P106,474.09, representing the penalty for
selling a new variety of empanada, electricity and water bills, and rental adjustment, among other charges incidental to the lease
agreements. Respondent claimed that the seizure of petitioners personal belongings and equipment was in the exercise of its retaining lien,
considering that the petitioner failed to settle the said obligations up to the time the complaint was filed. [21]
Considering that petitioner already committed several breaches of contract, the respondent thus opted not to renew its Contracts of Lease with
her anymore. The security deposits were made in order to ensure faithful compliance with the terms of their lease agreements; and since
petitioner committed several infractions thereof, respondent was justified in forfeiting the security deposits in the latters favor.
On 30 April 2001, the RTC rendered a Judgment[22] in favor of the petitioner and found that the physical takeover by the respondent of the leased
premises and the seizure of petitioners equipment and personal belongings without prior notice were illegal. The decretal part of the RTC
Judgment reads:
WHEREFORE, premises duly considered, judgment is hereby rendered ordering the [herein respondent] to pay
[herein petitioner] the amount of P192,000.00 representing the security deposits made by the [petitioner] and P50,000.00 as
and for attorneys fees.
The [respondent] is likewise ordered to return to the [petitioner] the various properties seized by the former
after settling her account with the [respondent].
Lastly, the [respondent] may choose either to reimburse the [petitioner] one half (1/2) of the value of the
improvements introduced by the plaintiff at SM Megamall should [respondent] choose to appropriate the improvements to
itself or require the [petitioner] to remove the improvements, even though the principal thing may suffer damage
thereby. [Petitioner] shall not, however, cause anymore impairment upon the said leased premises than is necessary.
The other damages claimed by the plaintiff are denied for lack of merit.
Aggrieved, the respondent appealed the adverse RTC Judgment to the Court of Appeals.
In a Decision[23] dated 10 October 2003, the Court of Appeals modified the RTC Judgment and found that the respondent was justified in
forfeiting the security deposits and was not liable to reimburse the petitioner for the value of the improvements introduced in the leased premises
and to pay for attorneys fees. In modifying the findings of the lower court, the appellate court declared that in view of the breaches of contract
committed by the petitioner, the respondent is justified in forfeiting the security deposits. Moreover, since the petitioner did not obtain the consent
of the respondent before she introduced improvements on the SM Megamall store space, the respondent has therefore no obligation to reimburse
the petitioner for the amount expended in connection with the said improvements. [24] The Court of Appeals, however, maintained the order of the

trial court for respondent to return to petitioner her properties after she has settled her obligations to the respondent. The appellate court denied
petitioners Motion for Reconsideration in a Resolution[25] dated 19 April 2006.
Hence, this instant Petition for Review on Certiorari[26] filed by the petitioner assailing the Court of Appeals Decision. For the resolution of this
Court are the following issues:
I. Whether or not the respondent is liable to return the security deposits to the petitions.
II. Whether or not the respondent is liable to reimburse the petitioner for the sum of the improvements she introduced in the leased premises.
III. Whether or not the respondent is liable for attorneys fees.[27]
The appellate court, in finding that the respondent is authorized to forfeit the security deposits, relied on the provisions of Sections 5 and 18 of the
Contract of Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of SIXTY THOUSAND PESOS (P60,000.00)
equivalent to three (3) months rent as security for the full and faithful performance to each and every term,
provision, covenant and condition of this lease and not as a pre-payment of rent. If at any time during the term of this
lease the rent isincreased[,] the LESSEE on demand shall make an additional deposit equal to the increase in rent. The
LESSOR shall not be required to keep the deposit separate from its general funds and the deposit shall not be entitled to
interest. The deposit shall remain intact during the entire term and shall not be applied as payment for any monetary
obligations of the LESSEE under this contract. If the LESSEE shall faithfully perform every provision of this lease[,] the
deposit shall be refunded to the LESSEE upon the expiration of this Lease and upon satisfaction of all monetary obligation
to the LESSOR.
xxxx
Section 18. TERMINATION. Any breach, non-performance or non-observance of the terms and conditions herein
provided shall constitute default which shall be sufficient ground to terminate this lease, its extension or renewal. In
which event, the LESSOR shall demand that LESSEE immediately vacate the premises, and LESSOR shall forfeit in its
favor the deposit tendered without prejudice to any such other appropriate action as may be legally authorized. [28]
Since it was already established by the trial court that the petitioner was guilty of committing several breaches of contract, the Court of
Appeals decreed that she cannot therefore rightfully demand the return of the security deposits for the same are deemed forfeited by reason of
evident contractual violations.
It is undisputed that the above-quoted provision found in all Contracts of Lease is in the nature of a penal clause to ensure petitioners faithful
compliance with the terms and conditions of the said contracts.
A penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to an obligation in order to insure
performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of breach. [29] The obligor would then be bound to pay the stipulated indemnity without the necessity of
proof of the existence and the measure of damages caused by the breach.[30] Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be
paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on such terms and conditions as they see fit as long as
they are not contrary to law, morals, good customs, public order or public policy. Nevertheless, courts may equitably reduce a stipulated penalty
in the contracts in two instances: (1) if the principal obligation has been partly or irregularly complied with; and (2) even if there has been no
compliance if the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code which clearly provides:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.[31]
In ascertaining whether the penalty is unconscionable or not, this court set out the following standard in Ligutan v. Court of Appeals,[32] to wit:
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factor as, but not necessarily confined to, the type, extent and purpose of the penalty, the
nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship
of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. xxx.

In the instant case, the forfeiture of the entire amount of the security deposits in the sum of P192,000.00 was excessive and
unconscionable considering that the gravity of the breaches committed by the petitioner is not of such degree that the respondent was unduly
prejudiced thereby. It is but equitable therefore to reduce the penalty of the petitioner to 50% of the total amount of security deposits.
It is in the exercise of its sound discretion that this court tempered the penalty for the breaches committed by the petitioner to 50% of
the amount of the security deposits.The forfeiture of the entire sum of P192,000.00 is clearly a usurious and iniquitous penalty for the
transgressions committed by the petitioner. The respondent is therefore under the obligation to return the 50% of P192,000.00 to the petitioner.
Turning now to the liability of the respondent to reimburse the petitioner for one-half of the expenses incurred for the improvements on the leased
store space at SM Megamall, the following provision in the Contracts of Lease will enlighten us in resolving this issue:
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The LESSEE shall not make any alterations,
additions, or improvements without the prior written consent of LESSOR; and all alterations, additions or improvements
made on the leased premises, except movable or fixtures put in at LESSEEs expense and which are removable, without
defacing the buildings or damaging its floorings, shall become LESSORs property without compensation/reimbursement
but the LESSOR reserves the right to require the removal of the said alterations, additions or improvements upon
expiration of the lease.
The foregoing provision in the Contract of Lease mandates that before the petitioner can introduce any improvement on the leased premises, she
should first obtain respondents consent. In the case at bar, it was not shown that petitioner previously secured the consent of the respondent before
she made the improvements on the leased space in SMMegamall. It was not even alleged by the petitioner that she obtained such consent or she at
least attempted to secure the same. On the other hand, the petitioner asserted that respondent allegedly misrepresented to her that it would renew
the terms of the contracts from time to time after their expirations, and that the petitioner was so induced thereby that she expended the sum
of P200,000.00 for the improvement of the store space leased.
This argument was squarely addressed by this court in Fernandez v. Court of Appeals,[33] thus:
The Court ruled that the stipulation of the parties in their lease contract to be renewable at the option of both parties
stresses that the faculty to renew was given not to the lessee alone nor to thelessor by himself but to the two
simultaneously; hence, both must agree to renew if a new contract is to come about.
Petitioners contention that respondents had verbally agreed to extend the lease indefinitely is inadmissible to
qualify the terms of the written contract under the parole evidence rule, and unenforceable under the statute of frauds. [34]
Moreover, it is consonant with human experience that lessees, before occupying the leased premises, especially store spaces located inside malls
and big commercial establishments, would renovate the place and introduce improvements thereon according to the needs and nature of their
business and in harmony with their trademark designs as part of their marketing ploy to attract customers. Certainly, no inducement or
misrepresentation from the lessor is necessary for this purpose, for it is not only a matter of necessity that a lessee should re-design its place of
business but a business strategy as well.
In ruling that the respondent is liable to reimburse petitioner one half of the amount of improvements made on the leased store space should it
choose to appropriate the same, the RTC relied on the provision of Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the
lease is intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease
shall pay the lessee one-half of the value of the improvements at that time. Should the lessor refuse to reimburse said
amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall
not, however, cause any more impairment upon the property leased than is necessary.
While it is true that under the above-quoted provision of the Civil Code, the lessor is under the obligation to pay the lessee one-half of the value
of the improvements made should the lessor choose to appropriate the improvements, Article 1678 however should be read together with Article
448 and Article 546 of the same statute, which provide:
Art. 448. The owner of the land on which anything has been built, sown or planted in good faith, shall have the
right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in articles 546
and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper
rent. However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the
building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the
building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the
court shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to every possessor; but only possessor in good faith may retain the thing
until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has
defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value
which the thing may have acquired by reason thereof.
Thus, to be entitled to reimbursement for improvements introduced on the property, the petitioner must be considered a builder in
good faith. Further, Articles 448 and 546 of the Civil Code, which allow full reimbursement of useful improvements and retention of the premises
until reimbursement is made, apply only to a possessor in good faith, i.e.,one who builds on land with the belief that he is the owner thereof. A

builder in good faith is one who is unaware of any flaw in his title to the land at the time he builds on it. [35]In this case, the petitioner cannot claim
that she was not aware of any flaw in her title or was under the belief that she is the owner of the subject premises for it is a settled fact that she is
merely a lessee thereof.
In Geminiano v. Court of Appeals,[36] this Court was emphatic in declaring that lessees are not possessors or builders in good faith,
thus:
Being mere lessees, the private respondents knew that their occupation of the premises would continue
only for the life of the lease. Plainly, they cannot be considered as possessors nor builders in good faith.
In a plethora of cases, this Court has held that Article 448 of the Civil Code, in relation to Article 546 of the
same Code, which allows full reimbursement of useful improvements and retention of the premises until reimbursement is
made, applies only to a possessor in good faith, i.e., one who builds on land with the belief that he is the owner thereof. It
does not apply where one's only interest is that of a lessee under a rental contract; otherwise, it would always be in
the power of the tenant to "improve" his landlord out of his property.
Since petitioners interest in the store space is merely that of the lessee under the lease contract, she cannot therefore be considered a builder in
good faith. Consequently, respondent may appropriate the improvements introduced on the leased premises without any obligation to reimburse
the petitioner for the sum expended.
Anent the claim for attorneys fees, we resolve to likewise deny the award of the same. Attorneys fees may be awarded when a party is compelled
to litigate or to incur expenses to protect its interest by reason of unjustified act of the other.[37]
In the instant petition, it was not shown that the respondent unjustifiably refused to grant the demands of the petitioner so as to compel
the latter to initiate legal action to enforce her right. As we have found herein, there is basis for respondents refusal to return to petitioner the
security deposits and to reimburse the costs of the improvements in the leased premises. The award of attorneys fees is therefore not proper in the
instant case.
WHEREFORE, premises considered, the instant Petition is PARTLY GRANTED. The Court of Appeals Decision dated 10 October 2003 in
CA-G.R. CV No. 73853 is herebyAFFIRMED with the MODIFICATION that the respondent may forfeit only 50% of the total amount of the
security deposits in the sum of P192,000.00, and must return the remaining 50% to the petitioner. No costs.
SO ORDERED.

SPOUSES FLORENTINO T. MALLARI and AUREA V. MALLARI, Petitioners,

vs.
PRUDENTIAL BANK (now BANK OF THE PHILIPPINE ISLANDS), Respondent.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing the Decision1 dated June 17, 2010 and the
Resolution2 dated July 20, 2011 of the Court of Appeals (CA) in CA-G.R. CV No. 65993.
The antecedent facts are as follows:
On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from respondent Prudential Bank-Tarlac
Branch (respondent bank), a loan in the amount of P300,000.00 as evidenced by Promissory Note (PN) No. BD 84055.3 Under the promissory note, the loan was subject to an interest rate of 21% per annum (p.a.), attorney's fees
equivalent to 15% of the total amount due but not less than P200.00 and, in case of default, a penalty and collection
charges of 12% p.a. of the total amount due. The loan had a maturity date of January 10, 1985, but was renewed up
to February 17, 1985. Petitioner Florentino executed a Deed of Assignment4 wherein he authorized the respondent
bank to pay his loan with his time deposit with the latter in the amount ofP300,000.00.
On December 22, 1989, petitioners spouses Florentino and Aurea Mallari (petitioners) obtained again from
respondent bank another loan of P1.7 million as evidenced by PN No. BDS 606-895 with a maturity date of March 22,
1990. They stipulated that the loan will bear 23% interest p.a., attorney's fees equivalent to 15% p.a. of the total
amount due, but not less than P200.00, and penalty and collection charges of 12% p.a. Petitioners executed a Deed
of Real Estate Mortgage6 in favor of respondent bank covering petitioners' property under Transfer Certificate of Title
(TCT) No. T-215175 of the Register of Deeds of Tarlac to answer for the said loan.
Petitioners failed to settle their loan obligations with respondent bank, thus, the latter, through its lawyer, sent a
demand letter to the former for them to pay their obligations, which when computed up to January 31, 1992,
amounted to P571,218.54 for PN No. BD 84-055 and P2,991,294.82 for PN No. BDS 606-89.
On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC) of Tarlac, a petition for the
extrajudicial foreclosure of petitioners' mortgaged property for the satisfaction of the latter's obligation
ofP1,700,000.00 secured by such mortgage, thus, the auction sale was set by the Provincial Sheriff on April 23,
1992.7
On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2) separate Statements of Account as
of April 23, 1992, i.e., the loan of P300,000.00 was increased to P594,043.54, while the P1,700,000.00 loan was
already P3,171,836.18.
On April 20, 1992, petitioners filed a complaint for annulment of mortgage, deeds, injunction, preliminary injunction,
temporary restraining order and damages claiming, among others, that: (1) the P300,000.00 loan obligation should
have been considered paid, because the time deposit with the same amount under Certificate of Time Deposit No.
284051 had already been assigned to respondent bank; (2) respondent bank still added theP300,000.00 loan to
the P1.7 million loan obligation for purposes of applying the proceeds of the auction sale; and (3) they realized that
there were onerous terms and conditions imposed by respondent bank when it tried to unilaterally increase the
charges and interest over and above those stipulated. Petitioners asked the court to restrain respondent bank from
proceeding with the scheduled foreclosure sale.
Respondent bank filed its Answer with counterclaim arguing that: (1) the interest rates were clearly provided in the
promissory notes, which were used in computing for interest charges; (2) as early as January 1986, petitioners' time
deposit was made to apply for the payment of interest of their P300,000.00 loan; and (3) the statement of account as
of April 10, 1992 provided for a computation of interest and penalty charges only from May 26, 1989, since the
proceeds of petitioners' time deposit was applied to the payment of interest and penalty charges for the preceding
period. Respondent bank also claimed that petitioners were fully apprised of the bank's terms and conditions; and
that the extrajudicial foreclosure was sought for the satisfaction of the second loan in the amount of P1.7 million
covered by PN No. BDS 606-89 and the real estate mortgage, and not the P300,000.00 loan covered by another PN
No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied the Application for a Writ of Preliminary Injunction. However,
in petitioners' Supplemental Motion for Issuance of a Restraining Order and/or Preliminary Injunction to enjoin
respondent bank and the Provincial Sheriff from effecting or conducting the auction sale, the RTC reversed itself and
issued the restraining order in its Order9 dated January 14, 1993.

Respondent bank filed its Motion to Lift Restraining Order, which the RTC granted in its Order10 dated March 9, 1993.
Respondent bank then proceeded with the extrajudicial foreclosure of the mortgaged property. On July 7, 1993, a
Certificate of Sale was issued to respondent bank being the highest bidder in the amount ofP3,500,000.00.
Subsequently, respondent bank filed a Motion to Dismiss Complaint11 for failure to prosecute action for unreasonable
length of time to which petitioners filed their Opposition.12 On November 19, 1998, the RTC issued its Order13 denying
respondent bank's Motion to Dismiss Complaint.
Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for the plaintiffs. Subsequently,
respondent bank filed a Demurrer to Evidence.
On November 15, 1999, the RTC issued its Order14 granting respondent's demurrer to evidence, the dispositive
portion of which reads:
WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no evidence of bad faith, the Court
need not order the plaintiffs to pay damages under the general concept that there should be no premium on the right
to litigate.
NO COSTS.
SO ORDERED.15
The RTC found that as to the P300,000.00 loan, petitioners had assigned petitioner Florentino's time deposit in the
amount of P300,000.00 in favor of respondent bank, which maturity coincided with petitioners' loan maturity. Thus, if
the loan was unpaid, which was later extended to February 17, 1985, respondent bank should had just applied the
time deposit to the loan. However, respondent bank did not, and allowed the loan interest to accumulate reaching the
amount of P594,043.54 as of April 10, 1992, hence, the amount of P292,600.00 as penalty charges was unjust and
without basis.
As to the P1.7 million loan which petitioners obtained from respondent bank after the P300,000.00 loan, it had
reached the amount of P3,171,836.18 per Statement of Account dated April 27, 1993, which was computed based on
the 23% interest rate and 12% penalty charge agreed upon by the parties; and that contrary to petitioners' claim,
respondent bank did not add the P300,000.00 loan to the P1.7 million loan obligation for purposes of applying the
proceeds of the auction sale.
The RTC found no legal basis for petitioners' claim that since the total obligation was P1.7 million and respondent
bank's bid price was P3.5 million, the latter should return to petitioners the difference of P1.8 million. It found that
since petitioners' obligation had reached P2,991,294.82 as of January 31, 1992, but the certificate of sale was
executed by the sheriff only on July 7, 1993, after the restraining order was lifted, the stipulated interest and penalty
charges from January 31, 1992 to July 7, 1993 added to the loan already amounted to P3.5 million as of the auction
sale.
The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of interest could not be
considered unconscionable, since banks are not hospitable or equitable institutions but are entities formed primarily
for profit. It also found that Article 1229 of the Civil Code invoked by petitioners for the reduction of the interest was
not applicable, since petitioners had not paid any single centavo of the P1.7 million loan which showed they had not
complied with any part of the obligation.
Petitioners appealed the RTC decision to the CA. A Comment was filed by respondent bank and petitioners filed their
Reply thereto.
On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of which reads:
WHEREFORE, the instant appeal is hereby DENIED. The Order dated November 15, 1999 issued by the Regional
Trial Court (RTC), Branch 64, Tarlac City, in Civil Case No. 7550 is hereby AFFIRMED. 16
The CA found that the time deposit of P300,000.00 was equivalent only to the principal amount of the loan
ofP300,000.00 and would not be sufficient to cover the interest, penalty, collection charges and attorney's fees
agreed upon, thus, in the Statement of Account dated April 10, 1992, the outstanding balance of petitioners' loan
was P594,043.54. It also found not persuasive petitioners' claim that the P300,000.00 loan was added to the P1.7
million loan. The CA, likewise, found that the interest rates and penalty charges imposed were not unconscionable
and adopted in toto the findings of the RTC on the matter.
Petitioners filed their Motion for Reconsideration, which the CA denied in a Resolution dated July 20, 2011.
Hence, petitioners filed this petition for review arguing that:
THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF THE RTC-BRANCH 64, TARLAC CITY,
DATED NOVEMBER 15, 1999, DESPITE THE FACT THAT THE SAME IS CONTRARY TO SETTLED
JURISPRUDENCE ON THE MATTER.17
The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. penalty charge on
petitioners'P1,700,000.00 loan to which they agreed upon is excessive or unconscionable under the circumstances.
Parties are free to enter into agreements and stipulate as to the terms and conditions of their contract, but such
freedom is not absolute. As Article 1306 of the Civil Code provides, "The contracting parties may establish such

stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy." Hence, if the stipulations in the contract are valid, the parties
thereto are bound to comply with them, since such contract is the law between the parties. In this case, petitioners
and respondent bank agreed upon on a 23% p.a. interest rate on the P1.7 million loan. However, petitioners now
contend that the interest rate of 23% p.a. imposed by respondent bank is excessive or unconscionable, invoking our
ruling in Medel v. Court of Appeals,18 Toring v. Spouses Ganzon-Olan,19 and Chua v. Timan.20
We are not persuaded.
In Medel v. Court of Appeals,21 we found the stipulated interest rate of 66% p.a. or a 5.5% per month on
aP500,000.00 loan excessive, unconscionable and exorbitant, hence, contrary to morals if not against the law and
declared such stipulation void. In Toring v. Spouses Ganzon-Olan,22 the stipulated interest rates involved were 3%
and 3.81% per month on a P10 million loan, which we find under the circumstances excessive and reduced the same
to 1% per month. While in Chua v. Timan,23 where the stipulated interest rates were 7% and 5% a month, which are
equivalent to 84% and 60% p.a., respectively, we had reduced the same to 1% per month or 12% p.a. We said that
we need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per
month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was void for being contrary to
morals.24
In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per month, which are
much lower than those interest rates agreed upon by the parties in the above-mentioned cases. Thus, there is no
similarity of factual milieu for the application of those cases.
We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to be
unconscionable.
In Villanueva v. Court of Appeals,25 where the issue raised was whether the 24% p.a. stipulated interest rate is
unreasonable under the circumstances, we answered in the negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank, Dagupan City
Branch, this Court held that the interest rate of 24% per annum on a loan of P244,000.00, agreed upon by the parties,
may not be considered as unconscionable and excessive. As such, the Court ruled that the borrowers cannot renege
on their obligation to comply with what is incumbent upon them under the contract of loan as the said contract is the
law between the parties and they are bound by its stipulations.
Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the parties to a 24% per annum interest on
an P8,649,250.00 loan finding the same to be reasonable and clearly evidenced by the amended credit line
agreement entered into by the parties as well as two promissory notes executed by the borrower in favor of the
lender.
Based on the above jurisprudence, the Court finds that the 24% per annum interest rate, provided for in the subject
mortgage contracts for a loan of P225,000.00, may not be considered unconscionable. Moreover, considering that
the mortgage agreement was freely entered into by both parties, the same is the law between them and they are
bound to comply with the provisions contained therein.26
Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable, thus,
the 23% p.a. interest rate imposed on petitioners' loan in this case can by no means be considered excessive or
unconscionable.
We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.
In Ruiz v. CA,27 we held:
The 1% surcharge on the principal loan for every month of default is valid.1wphi1 This surcharge or penalty
stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Art. 2227 of the
New Civil Code, and is separate and distinct from interest payment. Also referred to as a penalty clause, it is
expressly recognized by law. It is an accessory undertaking to assume greater liability on the part of an obligor in
case of breach of an obligation. The obligor would then be bound to pay the stipulated amount of indemnity without
the necessity of proof on the existence and on the measure of damages caused by the breach. x x x28 And in
Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd.,29 we held that:
x x x The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the
fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order to avoid the payment
of the penalty, the debtor has the burden of proving an excuse - the failure of the performance was due to either force
majeure or the acts of the creditor himself.30
Here, petitioners defaulted in the payment of their loan obligation with respondent bank and their contract provided for
the payment of 12% p.a. penalty charge, and since there was no showing that petitioners' failure to perform their

obligation was due to force majeure or to respondent bank's acts, petitioners cannot now back out on their obligation
to pay the penalty charge. A contract is the law between the parties and they are bound by the stipulations therein.
WHEREFORE, the petition for review is DENIED. The Decision dated June 17, 2010 and the Resolution dated July
20, 2011 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.