G.R. No.

107569 November 8, 1994

PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO
FERNANDEZ, respondents.
Vidad, Corpus & Associates for petitioner.
Remedios Jayme-Fernandez for privaate respondents.

PUNO, J.:
Petitioner bank seeks the review of the decision, dated October 15, 1992, of the
Court of Appeals 1 in CA G.R. CV No. 27195, the dispositive portion of which reads as
follows:
WHEREFORE, the judgment appealed from is hereby SET ASIDE and a
new one is entered ordering defendant-appellee PNB to re-apply the
interest rate of 12% per annum to plaintiffs-appellants' (referring to
herein private respondents) indebtedness and to accordingly take the
appropriate charges from plaintiffs-appellants' (private respondents')
payment of P81,000.00 made on December 26, 1985. Any balance on
the indebtedness should, likewise, be charged interest at the rate of
12%per annum.
SO ORDERED.
The parties do not dispute the facts as laid down by respondent court in its
impugned decision, viz.:
On April 7, 1982, (private respondents) as owners of a NACIDAregistered enterprise, obtained a loan under the Cottage Industry
Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in
the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a
Credit Agreement. Under the Promissory Note covering the loan, the
loan was to be amortized over a period of three (3) years to end on
March 29, 1985, at twelve (12%) percent interest annually.
To secure the loan, (private respondents) executed a Real Estate
Mortgage over a 1.5542-hectare parcel of unregistered agricultural
land located at Cambang-ug, Toledo City, which was appraised by the
PNB at P1,062.52 and given a loan value of P531.26 by the Bank. In

addition, (private respondents) executed a Chattel Mortgage over a

thermo plastic-forming machine, which had an appraisal value of
P8,800 and a loan value of P4,400.00.
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest
rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the
future; Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the
event that the applicable maximum interest is reduced by
law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take
effect on the effectivity date of the increase or decrease
in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of
interest, at any time without notice, beyond the stipulated rate of 12%
but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest
charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been
advanced by the MORTGAGE, in accordance with the
provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may
prescribe for its debtors.
On February 17, 1983, (private respondents) were granted an
additional NACIDA loan of Fifty Thousand (P50,000.00) Pesos by the
PNB, for which (private respondents) executed another Promissory
Note, which was to mature on April 1, 1985. Other than the date of
maturity, the second promissory note contained the same terms and
stipulations as the previous note. The parties likewise executed a new
Credit Agreement, changing the amount of the loan from P50,000.00 to
P100,000.00, but otherwise preserving the stipulations contained in
the original agreement.
As additional security for the loan, (private respondents) constituted
another real estate mortgage over 2 parcels of registered land, with a

combined area of 311 square meters, located at Guadalupe, Cebu City.

The land, upon which several buildings are standing, was appraised by
the PNB to have a value of P40,000.00 and a loan value of P28,000.00.
In a letter dated August 1, 1984, the PNB informed (private
respondents) "that the interest rate of your CIGLF loan account with us
is now 25% per annum plus a penalty of 6% per annum on past dues."
The PNB further increased this interest rate to 30% on October 15,
1984; and to 42% on October 25, 1984.
The records show that as of December 1985, (private respondents) had
an outstanding principal account of P81,000.00 of which P18,523.14
was credited to the principal, P57,488.89 to the interest, and the rest
to penalty and other charges. Thus, as of said date, the unpaid
principal obligation of (private respondent) amounted to P62,830.32.
Thereafter, (private respondents) exerted efforts to get the PNB to readopt the 12% interest and to condone the present interest and
penalties due; but to no avail. 2 (Citations omitted.)
On December 15, 1987, private respondents filed a suit for specific performance
against petitioner PNB and the NACIDA. It was docketed as Civil Case No. CEB-5610,
and raffled to the Regional Trial Court, 7th Judicial Region, Cebu City, Br. 7. 3 Private
respondents prayed the trial court to order:
1. The PNB and NACIDA to issue in (private respondents') favor, a
release of mortgage;
2. The PNB to pay pecuniary consequential damages for the
destruction of (private respondents') enterprise;
3. The PNB to pay moral and exemplary damages as well as the costs
of suit; and
4. Granting (private respondents') such other relief as may be found
just and equitable in the premises. 4
On February 26, 1990, the trial court dismissed private respondents' complaint in
Civil Case No. CEB-5610. On October 15, 1992, the Court of Appeals reversed the
dismissal with respect to petitioner bank, and disallowed the increases in interest
rates.
Petitioner bank now contends that "respondent Court of Appeals committed grave
error when it ruled (1) that the increase in interest rates are unauthorized; (2) that

the Credit Agreement and the Promissory Notes are not the law between the
parties; (3) that CB Circular No. 773 and CB Circular
No. 905 are not applicable; and (4) that private respondents are not estopped from
questioning the increase of rate interest made by petitioner." 5
The petition is bereft of merit.
In making the unilateral increases in interest rates, petitioner bank relied on the
escalation clause contained in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever policy it may
adopt in the future and provided, that, the interest rate on this
accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or
decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.)
No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended,
thus:
Section 2. The same Act is hereby amended by adding a new section
after Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of
money, goods or credits may stipulate that the rate of interest agreed
upon may be increased in the event that the applicable maximum rate
of interest is increased by law or by the Monetary Board; Provided,
That such stipulation shall be valid only if there is also a stipulation in
the agreement that the rate of interest agreed upon shall be reduced
in the event that the applicable maximum rate of interest is reduced by
law or by the Monetary Board; Provided further, That the adjustment in
the rate of interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to
prescribe the maximum rates of interest for loans and certain forbearances.
Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular
No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other
Financial Intermediaries) is hereby amended to read as follows:

Sec. 1303. Interest and Other Charges. The rate of

interest, including commissions, premiums, fees and other
charges, on any loan, or forbearance of any money, goods
or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree
to adjust, upward or downward, the interest previously stipulated. However,
contrary to the stubborn insistence of petitioner bank, the said law and circular did
not authorize either party to unilaterally raise the interest rate without the other's
consent.
It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is wanting
on the part of the one who contracts, his act has no more efficacy than if it had
been done under duress or by a person of unsound mind. 6
Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan
contracts, it cannot be gainsaid that the rate of interest is always a vital component,
for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at
bench gives it unbridled right tounilaterally upwardly adjust the interest on private
respondents' loan. That would completely take away from private respondents the
right to assent to an important modification in their agreement, and would negate
the element of mutuality in contracts. In Philippine National Bank v. Court of
Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
. . . The unilateral action of the PNB in increasing the interest rate on
the private respondent's loan violated the mutuality of contracts
ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them.
In order that obligations arising from contracts may have the force or
law between the parties, there must be mutuality between the parties

based on their essential equality. A contract containing a condition

which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void . . . . Hence,
even assuming that
the . . . loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase
the interest rate at will during the term of the loan, that license would
have been null and void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan agreement with
the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation
being reduced to the alternative "to take it or leave it" . . . . Such a
contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition. (Citation omitted.)
Private respondents are not also estopped from assailing the unilateral increases in
interest rate made by petitioner bank. No one receiving a proposal to change a
contract to which he is a party, is obliged to answer the proposal, and his
silence per se cannot be construed as an acceptance. 7 In the case at bench, the
circumstances do not show that private respondents implicitly agreed to the
proposed increases in interest rate which by any standard were too sudden and too
stiff.
IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision
of the Court of Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is
AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 173622

March 11, 2013

ROBERN DEVELOPMENT CORPORATION and RODOLFO M. BERNARDO,

JR., Petitioners,
vs.
PEOPLE'S LANDLESS ASSOCIATION represented by FLORIDA RAMOS and
NARDO LABORA, Respondent.
DECISION
DEL CASTILLO, J.:

"This Court cannot presume the existence of a sale of land, absent any direct proof
of it."1
Challenged in this Petition for Review on Certiorari are the August 16, 2005
Decision2 and May 30, 2006 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV
No. 66071, which ordered petitioner Robern Development Corporation (Robern) to
reconvey the 2,000-square meter lot it bought from Al-Amanah Islamic
Development Bank of the Philippines (Al-Amanah) to respondent People's Landless
Association (PELA).
Factual Antecedents
Al-Amanah owned a 2000-square meter lot located in Magtu-od, Davao City and
covered by Transfer Certificate of Title (TCT) No. 138914. 4 On December 12, 1992,
Al-Amanah Davao Branch, thru its officer-in-charge Febe O. Dalig (OIC Dalig),
asked5 some of the members of PELA6 to desist from building their houses on the lot
and to vacate the same, unless they are interested to buy it. The informal settlers
thus expressed their interest to buy the lot at P100.00 per square meter, which AlAmanah turned down for being far below its asking price. 7Consequently, Al-Amanah
reiterated its demand to the informal settlers to vacate the lot. 8
In a letter9 dated March 18, 1993, the informal settlers together with other members
comprising PELA offered to purchase the lot for P300,000.00, half of which shall be
paid as down payment and the remaining half to be paid within one year. In the
lower portion of the said letter, Al-Amanah made the following annotation:
Note:
Subject offer has been acknowledged/received but processing to take effect upon
putting up of the partial amt. of P150,000.00 on or before April 15, 1993.
By May 3, 1993, PELA had deposited P150,000.00 as evidenced by four bank
receipts.10 For the first three receipts, the bank labelled the payments as "Partial
deposit on sale of TCT No. 138914", while it noted the 4th receipt as "Partial/Full
payment on deposit on sale of A/asset TCT No. 138914."
In the meantime, the PELA members remained in the property and introduced
further improvements.
On November 29, 1993, Al-Amanah, thru Davao Branch Manager Abraham D.
Ututalum-Al Haj, wrote then PELA President Bonifacio Cuizon, Sr. informing him of
the Head Offices disapproval of PELAs offer to buy the said 2,000-square meter lot,
viz:

Dear Mr. Cuizon, Sr.,

Please be inform[ed] that your offer to purchase the lot covered by TCT No. T138914, containing an area of 2,000 square meters, located at Bakingan, Barangay
Magtuod, Davao City for P300,000.00 has been turned down by the top
management, due to the reason that your offered price is way below the selling
price of the Bank which is P500.00 per square meter, or negotiate but on Cash basis
only.
You had been told regarding this matter, but you failed to counter offer since you
have [conferred] with the Banks local management. Despite x x x the time given to
you to counter offer or to vacate the lot presently and illegally occupied by you and
the members of the association, still you refrain to hear our previous notices. You
even deliberately construct more residential structures without our permission. As
such, you are finally instructed to vacate the lot and remove all the house structures
erected on the said lot within 15 days upon receipt of this letter. Failure on your part
including that of the members, the Bank will be constrained to take legal action
against you.
Furthermore, you can withdraw the amount deposited in the name of your
association anytime during banking hours.11
Subsequently, Al-Amanah sent similarly worded letters, 12 all dated December 14,
1993, to 19 PELA members demanding that they vacate the lot.
In a letter13 dated December 20, 1993, PELA, through Atty. Pedro S. Castillo, replied
that it had already reached an agreement with Al-Amanah regarding the sale of the
subject lot based on their offered price:
Dear Mr. Ututalum-Al-Haj,
The Peoples Landless Association, Inc., through Mr. Bonifacio Cuizon, Sr. has
requested us to assist them in communicating with you anent your letter of 29
November 1993. According to Mr. Cuizon the present occupants of the lot covered
by T.C.T. No. T-138914 with an area of 2,000 square meters, had a definite
agreement with the Islamic Bank through its previous Manager or
Officer-in-Charge to buy this foreclosed property at P300,000.00. As a matter of fact
their deposit of P150,000.00 was on that basis. For this reason, the occupants, who
are members of the association, have already made lot allocations among
themselves and have improved their respective houses.
It would be most unfair if the Bank would now renege on its commitment and eject
these occupants. In line with the national policy of granting landless members of our

society the opportunity of owning land and providing shelter to their families, it
would be equitable and socially justifiable to grant these occupants their occupied
areas pursuant to the earlier agreement with the Bank.
For the foregoing reasons we hope that the Islamic Bank, for legal, moral and social
grounds would reconsider.
Meanwhile, acting on Roberns undated written offer, 14 Al-Amanah issued a
Recommendation Sheet15 dated December 27, 1993 addressed to its Board
Operations Committee, indicating therein that Robern is interested to buy the lot
for P400,000.00; that it has already deposited 20% of the offered purchase price;
that it is buying the lot on "as is" basis; and, that it is willing to shoulder the
relocation of all informal settlers therein. On December 29, 1993, the Head Office
informed the Davao Branch Manager that the Board Operations Committee had
accepted Roberns offer.16
Eight days later, Robern was informed of the acceptance. Al-Amanah stressed that it
is Roberns responsibility to eject the occupants in the subject lot, if any, as well as
the payment of the remaining amount within 15 days; otherwise, the P80,000.00
deposit shall be forfeited.17
In a letter18 dated January 13, 1994, Robern expressed to Al-Amanah its uncertainty
on the status of the subject lot, viz.:
This is in connection with TCT No. 138914 which your bank offered to sell to us and
which we committed to buy.
A group calling itself PEOPLES LANDLESS ASSOCIATION, INC. made representation
with our office bringing with them copies of official receipts totalling P150,000.00
issued by your bank which stated---"PARTIAL PAYMENT/DEPOSIT on sale of TCT
#138914".
While condition no. 6 in the sale of property to us states that the buyer shall be
responsible for ejecting the squatters of the property, the occupants of the said lot
could hardly be categorized as squatters considering the supposed transaction
previously entered by your bank with them. We were greatly appalled that we
should learn about this not from the bank but from outside sources.1wphi1
My company is ready to finalize our transaction provided, however, that the
problem with this group is cleared. In this connection, we are requesting for a
definite statement from your bank on whether the official receipts being brandished
by this group are genuine or not, and if they were, were they ever invalidated by
virtue of the return of their deposit and whether there was a cancellation of your
agreement with them.

In the meantime, please consider the 15-day period for us to pay the amount
of P320,000.00 imposed by your bank suspended until such time that the legal
problem with the lot occupants is settled.
To convince Robern that it has no existing contract with PELA, Al-Amanah furnished
it with copies of the Head Offices rejection letter of PELAs bid, the demand letters
to vacate, and the proof of consignment of PELAsP150,000.00 deposit to the
Regional Trial Court (RTC) of Davao City that PELA refused to withdraw. 19 Thereafter,
on February 2, 1994, it informed Robern that should the latter fail to pay the
balance by February 9, 1994, itsP80,000.00 deposit will be forfeited and the lot shall
be up for sale to other prospective buyers. 20 Meanwhile, Al-Amanah requested for
assistance for the removal of the houses not only from the Office of the City
Engineer of Davao City21 but also from Mayor Rodrigo Duterte. Gaining a favorable
legal opinion from the City Legal Officer, the matter was indorsed to the Chief of
Demolition Consensus of the Department of Public Services for action. 22
On March 4, 1994, Robern paid the balance of the purchase price. 23 The Deed of
Sale24 over the realty was executed on April 6, 1994 and TCT No. T-212983 25 was
issued in Roberns name the following day.
A week later, PELA consigned P150,000.00 in the RTC of Davao City.26 Then on April
14, 1994, it wrote27 Al-Amanah asking the latter to withdraw the amount consigned.
Part of the letter states:
xxxx
On March 21, 1994 (almost one month before the April 15, 1994 deadline) we came
to your bank to remit the balance and full payment [for] the abovementioned lot.
[Inasmuch] as you refuse[d] to accept the payment, we have decided to deposit the
amount consigned to your bank.
In our dialogue at your office in 1993, we have agreed that documents will be
processed as soon as we pay theP150,000.00 initial deposit. [Inasmuch] as we have
not only paid the deposit but have also made full payment of the account, kindly
facilitate processing of the documents to finalize transaction.
We have not been remiss in doing our part of the transaction; please do your share.
Thank you.
Very truly yours,
For the occupants/claimants

T.C.T. No. T-13891428

Three months later, as its members were already facing eviction and possible
demolition of their houses, and in order to protect their rights as vendees, PELA filed
a suit for Annulment and Cancellation of Void Deed of Sale 29against Al-Amanah, its
Director Engr. Farouk Carpizo (Engr. Carpizo), OIC Dalig, Robern, and Roberns
President and General Manager, petitioner Rodolfo Bernardo (Bernardo) before the
RTC of Davao City. It insisted that as early as March 1993 it has a perfected contract
of sale with Al-Amanah. However, in an apparent act of bad faith and in cahoots
with Robern, Al-Amanah proceeded with the sale of the lot despite the prior sale to
PELA.
Incidentally, the trial court granted PELAs prayer for a temporary restraining
order.30 Subsequently, it issued on August 12, 1994 an Order 31 finding merit in the
issuance of the writ of preliminary injunction, inter alia. The RTCs grant of injunctive
relief was affirmed by the CA in CA-G.R. SP No. 35238 32 when the factual and legal
bases for its issuance were questioned before the appellate court.
The respondents in the annulment case filed their respective Answers. 33 Al-Amanah
and Engr. Carpizo claimed that the bank has every right to sell its lot to any
interested buyer with the best offer and thus they chose Robern. They clarified that
the P150,000.00 PELA handed to them is not part of the payment but merely a
deposit in connection with its offer. They asserted that PELA was properly apprised
that its offer to buy was subject to the approval of Al-Amanahs Head Office. They
stressed that Al-Amanah never entered into a sale with PELA for there was no
perfected agreement as to the price since the Head Office rejected
PELAs offer.
For their part, Robern and Bernardo asserted the corporations standing as a
purchaser in good faith and for value in the sale of the property, having relied on
the clean title of Al-Amanah. They also alleged that the purported sale to PELA is
violative of the Statute of Frauds34 as there is no written agreement covering the
same.
Ruling of the Regional Trial Court
In its August 10, 1999 Decision,35 the RTC dismissed PELAs Complaint. It opined
that the March 18, 1993 letter PELA has been relying upon as proof of a perfected
contract of sale was a mere offer which was already rejected.
Furthermore, the annotation appearing in the bottom part of the said letter could
not be construed as an acceptance because the same is a mere acknowledgment of
receipt of the letter (not the offer) which will still be subject to processing. The RTC

likewise ruled that being a corporation, only Al-Amanahs board of directors can bind
the bank with third persons involving the sale of its property. Thus, the purported
offer made by Al-Amanahs OIC, who was never conferred authority by the board of
directors to sell the lot, cannot bind the bank. In contrast, when the Head Office
accepted Roberns offered price, it was duly approved by the board of directors,
giving birth to a perfected contract of sale between Al-Amanah and Robern.
Refusing to accept the Decision, PELA elevated its case to the CA. 36
Ruling of the Court of Appeals
Reversing the RTC in its assailed Decision 37 of August 16, 2005, the CA ruled that
there was already a perfected contract of sale between PELA and Al-Amanah. It held
that the annotationon the lower portion of the March 18, 1993 letter could be
construed to mean that for Al-Amanah to accept PELAs offer, the sum
of P150,000.00 must be first put up. The CA also observed that the subsequent
receipt by Al-Amanah of the amounts totallingP150,000.00, and the annotation of
"deposit on sale of TCT No. 138914," on the receipts it issued explicitly indicated an
acceptance of the associations offer to buy. Consequently, the CA invalidated the
sale between Robern and Al-Amanah.
The CA also concluded that Al-Amanah is guilty of bad faith in dealing with PELA
because it took Al-Amanah almost seven months to reject PELAs offer while holding
on to the P150,000.00 deposit. The CA thus adjudged PELA entitled to moral and
exemplary damages as well as attorneys fees.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the assailed Decision is SET ASIDE. Judgment is
hereby rendered:
1. DECLARING the contract of sale between PELA and defendant Bank valid
and subsisting.
2. ORDERING the defendant Bank to receive the balance of P150,000.00 of
the purchase price from PELA as consigned in court.
3. DECLARING the deed of sale executed by defendant Bank in favor or
Robern Development Corporation as invalid and, therefore, void.
4. ORDERING defendant Bank to return to Robern the full amount
of P400,000.00 which Robern paid as the purchase price of the subject
property within ten (10) days from finality of this decision. It shall earn a legal

interest of twelve percent (12%) per annum from the tenth (10th) day
aforementioned if there is delay in payment.
5. ORDERING Robern Development Corporation to reconvey the land covered
by T.C.T. No. 212983 in favor of Peoples Landless Association within a similar
period of ten (10) days from finality of this decision.
6. ORDERING defendant Bank to pay plaintiffs-appellants the following:
a. The sum of P100,000.00 as moral damages;
b. The sum of P30,000.00 as exemplary damages;
c. The sum of P30,000.00 as attorneys fees;
d. A legal interest of SIX PERCENT (6%) per annum on the sums
awarded in (a), (b), and (c) from the date of this Decision up to the
time of full payment thereof.
SO ORDERED.38
Robern and Bernardo filed a Motion for Reconsideration 39 which Al-Amanah adopted.
The CA, however, was firm in its disposition and thus denied 40 the same. Aggrieved,
Robern and Al-Amanah separately filed Petitions for Review on Certiorari before us.
However, Al-Amanahs Petition docketed as G.R. No. 173437, was denied on
September 27, 2006 on procedural grounds. 41 Al-Amanahs Motion for
Reconsideration of the said Resolution of dismissal was
denied with finality on December 4, 2006. 42
Hence, only the Petition of Robern and Bernardo subsists.
Petitioners Arguments
Petitioners stress that there was no sale between PELA and Al-Amanah, for neither a
deed nor any written agreement was executed. They aver that Dalig was a mere
OIC of Al-Amanahs Davao Branch, who was never vested with authority by the
board of directors of Al-Amanah to sell the lot. With regard to the notation on the
March 18, 1993 letter and the four bank receipts, Robern contends that these are
only in connection with PELAs offer.
Petitioners likewise contend that Robern is a purchaser in good faith. The PELA
members are mere informal settlers. The title to the lot was clean on its face, and at
the time Al-Amanah accepted Roberns offer, the latter was unaware of the alleged

transaction with PELA. And when PELA later represented to Robern that it entered
into a transaction with Al-Amanah regarding the subject lot, Robern even wrote AlAmanah to inquire about PELAs claim over the property. And when informed by AlAmanah that it rejected the offer of PELA and of its action of requesting assistance
from the local government to remove the occupants from the subject property, only
then did Robern push through with the sale.
Respondents Arguments
PELA, on the other hand, claims that petitioners are not the proper parties who can
assail the contract of sale between it and the bank. It likewise argues that the
Petition should be dismissed because the petitioners failed to attach the material
portions of the records that would support its allegations, as required by Section 4,
Rule 45 of the Rules of Court. 43
Aside from echoing the finding of the CA that Al-Amanah has a perfected contract of
sale with PELA, the latter further invokes the reasoning of the RTC and the CA (CAG.R. SP No. 35238) in finding merit in the issuance of the writ of preliminary
injunction, that is, that there was an apparent perfection of contract (of sale)
between the Bank and PELA. 44 Furthermore, PELA claims that Al-Amanah accepted
its offered price and the P150,000.00, thus barring the application of the Statute of
Frauds as the contract was already partially executed. As to the non-existence of a
written contract evidencing the same, PELA ascribes fault on the bank claiming that
nothing happened despite its repeated follow-ups for the OIC of Al-Amanah to
execute the deed after payment of theP150,000.00 in May 1993.
Issue
At issue before us is whether there was a perfected contract of sale between PELA
and Al-Amanah, the resolution of which will decide whether the sale of the lot to
Robern should be sustained or not.
Our Ruling
We shall first briefly address some matters raised by PELA.
PELAs contention that Robern cannot assail the alleged sale between PELA and AlAmanah is untenable. Robern is one of the parties who claim title to the disputed
lot. As such, it is a real party in interest since it stands to be benefited or injured by
the judgment.45
Petitioners failure to attach the material portions of the record that would support
the allegations in the Petition is not fatal. We ruled in F.A.T. Kee Computer Systems,
Inc. v. Online Networks International, Inc., 46 thus:

x x x However, such a requirement failure to attach material portions of the record

was not meant to be an ironclad rule such that the failure to follow the same would
merit the outright dismissal of the petition. In accordance with Section 7 of Rule 45,
the Supreme Court may require or allow the filing of such pleadings, briefs,
memoranda or documents as it may deem necessary within such periods and under
such conditions as it may consider appropriate. More importantly, Section 8 of Rule
45 declares that [i]f the petition is given due course, the Supreme Court may
require the elevation of the complete record of the case or specified parts thereof
within fifteen (15) days from notice. x x x47
Anent the statement of the courts below that there was an apparent perfection of
contract (of sale) between Al-Amanah and PELA, we hold that the same is strictly
confined to the resolution of whether a writ of preliminary injunction should issue
since the PELA members were then about to be evicted. PELA should not rely on
such statement as the same is not decisive of the rights of the parties and the
merits of this case.
We shall now delve into the crucial issue of whether there was a perfected contract
of sale between PELA and Al-Amanah.
Essential Elements of a Contract of Sale
A contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price. 48 Thus, for a contract of
sale to be valid, all of the following essential elements must concur: "a) consent or
meeting of the minds; b) determinate subject matter; and c) price certain in money
or its equivalent."49
In the case at bench, there is no controversy anent the determinate subject matter,
i.e., the 2,000-square meter lot. This leaves us to resolve whether there was a
concurrence of the remaining elements.
As for the price, fixing it can never be left to the decision of only one of the
contracting parties.50 "But a price fixed by one of the contracting parties, if accepted
by the other, gives rise to a perfected sale." 51
As regards consent, "when there is merely an offer by one party without acceptance
of the other, there is no contract."52 The decision to accept a bidders proposal must
be communicated to the bidder. 53 However, a binding contract may exist between
the parties whose minds have met, although they did not affix their signatures to
any written document,54 as acceptance may be expressed or implied.55 It "can be
inferred from the contemporaneous and subsequent acts of the contracting
parties."56 Thus, we held:

x x x The rule is that except where a formal acceptance is so required, although the
acceptance must be affirmatively and clearly made and must be evidenced by some
acts or conduct communicated to the offeror, it may be made either in a formal or
an informal manner, and may be shown by acts, conduct, or words of the accepting
party that clearly manifest a present intention or determination to accept the offer
to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a
party recognizing the existence of the contract of sale. 57
There is no perfected contract of sale between PELA and Al-Amanah for want of
consent and agreement on the price.
After scrutinizing the testimonial and documentary evidence in the records of the
case, we find no proof of a perfected contract of sale between Al-Amanah and PELA.
The parties did not agree on the price and no consent was given, whether express
or implied.
When PELA Secretary Florida Ramos (Ramos) testified, she referred to the March 18,
1993 letter which PELA sent to Al-Amanah as the document supposedly embodying
the perfected contract of sale.58 However, we find that the March 18, 1993 letter
referred to was merely an offer to buy, viz:
March 18, 1993
The Manager
Islamic Bank
Davao Branch
Davao City
Sir/Madam:
This has reference to the offer made by Messrs. Alejandro Padilla, Leonardo Labora,
Boy Bartiana, Francisco Paig, and Mr. Asterio Aki for the purchase of the acquired
asset of the bank with an area of 2,000 square meters and covered by T.C.T. No. T138914, portions of which are occupied by their houses. These occupants have
formed and registered a group of x x x landless families who have occupied
shoulders of National Highways, to be able to raise an amount that would meet the
approval of the Bank as the consideration for the purchase of the property. The
group which is known as PELA or Peoples Landless Association, is offering the bank
the amount of THREE HUNDRED THOUSAND PESOS (P300,000.00) for the whole
2,000 sq. meters. Of this amount the buyers will pay a down payment of ONE
HUNDRED FIFTY THOUSAND PESOS (P150,000.00) and the balance payable in one
(1) year.

According to the plan of PELA, about 24 landless families can be accommodated in

the property. We hope the Bank can help these families own even a small plot for
their shelter. This would be in line with the governments program of housing which
the present administration promised to put in high gear this year. 59 (Emphasis
supplied)
Neither can the note written by the bank that "subject offer has been
acknowledged/received but processing to take effect upon putting up of the partial
amount of P150,000.00 on or before April 15, 1993" be construed as acceptance of
PELAs offer to buy. Taken at face value, the annotation simply means that the bank
merely acknowledged receipt of PELAs letter-offer. Furthermore, by processing, AlAmanah only meant that it will act on the offer, i.e., it still has to evaluate whether
PELAs offer is acceptable. Until and unless Al-Amanah accepts, there is as yet no
perfected contract of sale. Notably here, the bank never signified its approval or
acceptance of the offer.
We cannot agree with the CAs ratiocination that receipt of the amount, coupled
with the phrase written on the four receipts as "deposit on sale of TCT No. 138914,"
signified a tacit acceptance by Al-Amanah of PELAs offer. For sure, the money PELA
gave was not in the concept of an earnest money. Besides, as testified to by then
OIC Dalig, it is the usual practice of Al-Amanah to require submission of a bid
deposit which is acknowledged by way of bank receipts before it entertains offers.
Thus:
Atty. Bolcan:
Now, as far as you can remember, these receipts state that these are partial
deposits, what do you mean by that?
WITNESS:
A: x x x, we normally request an offeror to submit or make deposit, actually the
bank does not entertain any offer without any deposit and just like that, during my
time x x x in buying the property for those interested the bank does not entertain
any offer unless they make a deposit.
xxxx
Q: Why do you issue receipts as officer-in-charge stating only partial deposits?
A: Because there was no sale, there was no consu[m]mated sale, so any amount
which you will give as a deposit will be accepted by the bank for the offer and that if
their offer will be disapproved we will return the deposit because their offer was
very low and this might be disapproved by the head office in Manila. 60

xxxx
Atty. Taasan:
Do you confirm that based on the interest of the plaintiff to acquire the property
they made a deposit with said bank, as evidenced by the receipts that were shown
to you by your counsel, correct?
A: Yes, sir.
Q: And according to you, the bank does not entertain any offer to buy the property
without deposits?
A: Yes, sir.
Q: In this case since the plaintiffs made a deposit x x x they were properly
entertained, correct?
A: Yes because it is under negotiation, now while their offer price is below the selling
price of the bank.61
The absence of a perfected contract of sale was further buttressed by the testimony
of PELA Secretary Ramos on cross examination, viz:
Atty. Rabor:
Since it was x x x hard earned money you did not require the Amanah Bank when
you gave that P150,000.00 to reduce your agreement into writing regarding the sale
of this property?
A: I insisted but she will not issue that. 62
xxxx
Atty. Bolcan:
Now, on April 15, 1993 when the deposit was made, you were present?
A: Yes, sir.
Q: Now, after making the deposit of One Hundred Fifty Thousand (P150,000.00)
Pesos on April 15, 1993 did you not request for the bank to execute a document to
prove that actually you are buying the property?

A: I even said to the OIC or the manager that maam, now that you have received
our money, where is our paper that we were the ones to buy that property, sir.
Q: To whom are you referring to?
A: Febe Dalig, the OIC, sir.
Q: And this OIC Febe Dalig informed you that the Offer on your part to buy the
property is subject for approval by the head office in Manila, is that correct?
A: Yes she told me that it would be subject to approval in Manila x x x.
Q: And later on you were informed by the bank that your offer was not accepted by
the head office in Manila, is that correct?
A: She did not inform us but we kept on following it up with their office and she told
us that it did not arrive yet, sir.63 (Emphasis supplied)
PELA Secretary Ramos testimony thus corroborated OIC Daligs consistent stand
that it is the Head Office which will decide whether Al-Amanah would accept PELAs
offer:
Atty. Bolcan:
And now, if there are interested persons making offer x x x what would you do?
A: Well, we have to screen the offer before we forward the offer to Manila for
approval because
Court:
What would you do before you forward that to Manila?
A: We will be screening the offer x x x.
Atty. Bolcan:
And you said that it is referred to Manila?
A: Yes, sir.
Q: Who will eventually approve the offer made by the interested persons to buy the
property?
A: We have a committee in Manila to approve the sale of the property.

Q: Do you have any idea who will approve the offer of the property?
A: I have no idea but the president, rather it consists of the president I think and
then signed also by the vice-president and some officers in the office, sir.
xxxx
Q: Now, in case of offers of the property of the bank, x x x the officer-in-charge of
the bank, Al-Amanah Bank branch, usually refers this matter to the head office in
Manila?
A: Yes, sir.
Q: And it is the head office that will decide whether the offer will be approved or
not?
A: Yes as head of the branch, we have to forward the offer whether it was
acceptable or not.64
It is thus undisputed, and PELA even acknowledges, that OIC Dalig made it clear
that the acceptance of the offer, notwithstanding the deposit, is subject to the
approval of the Head Office. Recognizing the corporate nature of the bank and that
the power to sell its real properties is lodged in the higher authorities, 65 she never
falsely represented to the bidders that she has authority to sell the banks property.
And regardless of PELAs insistence that she execute a written agreement of the
sale, she refused and told PELA to wait for the decision of the Head Office, making it
clear that she has no authority to execute any deed of sale.
Contracts undergo three stages: "a) negotiation which begins from the time the
prospective contracting parties indicate interest in the contract and ends at the
moment of their agreement[; b) perfection or birth, x x x which takes place when
the parties agree upon all the essential elements of the contract x x x; and c)
consummation, which occurs when the parties fulfill or perform the terms agreed
upon, culminating in the extinguishment thereof." 66
In the case at bench, the transaction between Al-Amanah and PELA remained in the
negotiation stage. The offer never materialized into a perfected sale, for no oral or
documentary evidence categorically proves that Al-Amanah expressed amenability
to the offered P300,000.00 purchase price. Before the lapse of the 1-year period
PELA had set to pay the remaining balance, Al-Amanah expressly rejected its
offered purchase price, although it took the latter around seven months to inform
the former and this entitled PELA to award of damages. 67 Al-Amanahs act of selling
the lot to another buyer is the final nail in the coffin of the negotiation with PELA.

Clearly, there is no double sale, thus, we find no reason to disturb the consummated
sale between Al-Amanah and Robern.
At this juncture, it is well to stress that Al-Amanahs Petition before this Court
docketed as G.R. No. 173437 was already denied with finality on December 4, 2006.
Hence, we see no reason to disturb paragraph 6 of the CAs Decision ordering AlAmanah to pay damages to PELA.
WHEREFORE, we PARTIALLY GRANT the Petition. Except for paragraph 6 of the Court
of Appeals Decision which had already been long settled, 68 the rest of the judgment
in the assailed August 16, 2005 Decision and May 30, 2006 Resolution of the Court
of Appeals in CA-G.R. No. CV No. 66071 are hereby ANNULLED and SET ASIDE. The
August 10, 1999 Decision of the Regional Trial Court of Davao City, Branch 12,
dismissing the Complaint for Annulment and Cancellation of Void Deed of Sale filed
by respondent People's Landless Association is REINSTATED and AFFIRMED. The
amount of Pesos: Three Hundred Thousand (P300,000.00) consigned with the
Regional Trial Court of Davao City may now be withdrawn by People's Landless
Association.
SO ORDERED.

G.R. No. 182128, February 19, 2014 - PHILIPPINE NATIONAL BANK, Petitioner, v.
TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC., (NOW PRIME EAST PROPERTIES,
INC.) AND AFPRSBS, INC., Respondents.

FIRST DIVISION
G.R. No. 182128, February 19, 2014
PHILIPPINE NATIONAL BANK, Petitioner, v. TERESITA TAN DEE, ANTIPOLO
PROPERTIES, INC., (NOW PRIME EAST PROPERTIES, INC.) AND AFPRSBS,
INC., Respondents.
DECISION
REYES, J.:

This is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the
Decision2 dated August 13, 2007 and Resolution3 dated March 13, 2008 rendered by
the Court of Appeals (CA) in CAG.R. SP No. 86033, which affirmed the
Decision4 dated August 4, 2004 of the Office of the President (OP) in O.P. Case No.
04D182 (HLURB Case No. REMA0307240186).
Facts of the Case
Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from respondent
Prime East Properties Inc.5 (PEPI) on an installment basis a residential lot located in
Binangonan, Rizal, with an area of 204 square meters 6 and covered by Transfer
Certificate of Title (TCT) No. 619608. Subsequently, PEPI assigned its rights over a
213,093sq m property on August 1996 to respondent Armed Forces of the
PhilippinesRetirement and Separation Benefits System, Inc. (AFPRSBS), which
included the property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI obtained a P205,000,000.00 loan from
petitioner Philippine National Bank (petitioner), secured by a mortgage over several
properties, including Dees property. The mortgage was cleared by the Housing and
Land Use Regulatory Board (HLURB) on September 18, 1996. 7cralawred
After Dees full payment of the purchase price, a deed of sale was executed by
respondents PEPI and AFPRSBS on July 1998 in Dees favor. Consequently, Dee
sought from the petitioner the delivery of the owners duplicate title over the
property, to no avail. Thus, she filed with the HLURB a complaint for specific
performance to compel delivery of TCT No. 619608 by the petitioner, PEPI and AFP
RSBS, among others. In its Decision 8 dated May 21, 2003, the HLURB ruled in favor
of Dee and disposed as follows:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is hereby rendered as
follows:chanroblesvirtuallawlibrary
1. Directing [the petitioner] to cancel/release the mortgage on Lot 12, Block 21
A, Village East Executive Homes covered by Transfer Certificate of Title No.
619608 (TCT No. 619608), and accordingly, surrender/release the title
thereof to [Dee];
2. Immediately upon receipt by [Dee] of the owners duplicate of Transfer
Certificate of Title No. 619608 (TCT No. 619608), respondents PEPI and
AFPRSBS are hereby ordered to deliver the title of the subject lot in the
name of [Dee] free from all liens and encumbrances;
3. Directing respondents PEPI and AFPRSBS to pay [the petitioner] the
redemption value of Lot 12, Block 21A, Village East Executive Homes
covered by Transfer Certificate of Title No. 619608 (TCT No. 619608) as
agreed upon by them in their Real Estate Mortgage within six (6) months
from the time the owners duplicate of Transfer Certificate of Title No.
619608 (TCT No. 619608) is actually surrendered and released by [the
petitioner] to [Dee];

4. In the alternative, in case of legal and physical impossibility on the part of

[PEPI, AFPRSBS, and the petitioner] to comply and perform their respective
obligation/s, as abovementioned, respondents PEPI and AFPRSBS are
hereby ordered to jointly and severally pay to [Dee] the amount of FIVE
HUNDRED TWENTY THOUSAND PESOS ([P]520,000.00) plus twelve
percent (12%) interest to be computed from the filing of complaint on April
24, 2002 until fully paid; and
5. Ordering [PEPI, AFPRSBS, and the petitioner] to pay jointly and severally
[Dee] the following sums:
a)

The amount of TWENTY FIVE THOUSAND PESOS ([P]25,000.00) as

attorneys fees;

b)

The cost of litigation[;] and

c)

An administrative fine of TEN THOUSAND PESOS ([P]10,000.00) payable to

this Office fifteen (15) days upon receipt of this decision, for violation of Section
18 in relation to Section 38 of PD 957.
SO ORDERED.9ChanRoblesVirtualawlibrary
The HLURB decision was affirmed by its Board of Commissioners per Decision dated
March 15, 2004, with modification as to the rate of interest. 10
On appeal, the Board of Commissioners decision was affirmed by the OP in its
Decision dated August 4, 2004, with modification as to the monetary
award.11cralawred
Hence, the petitioner filed a petition for review with the CA, which, in turn, issued
the assailed Decision dated August 13, 2007, affirming the OP decision. The
dispositive portion of the decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated
August 4, 2004 rendered by the Office of the President in O. P. Case No. 04D182
(HLURB Case No. REMA0307240186) is
hereby AFFIRMED.chanroblesvirtualawlibrary
SO ORDERED. 12ChanRoblesVirtualawlibrary
Its motion for reconsideration having been denied by the CA in the Resolution dated
March 13, 2008, the petitioner filed the present petition for review on the following
grounds:chanRoblesvirtualLawlibrary
I.

II.

THE HONORABLE COURT OF APPEALS ERRED IN ORDERING OUTRIGHT

RELEASE OF TCT NO. 619608 DESPITE PNBS DULY REGISTERED AND
HLURB[] APPROVED MORTGAGE ON TCT NO. 619608.
THE HONORABLE COURT OF APPEALS ERRED IN ORDERING CANCELLATION OF
MORTGAGE/RELEASE OF TITLE IN FAVOR OF RESPONDENT DEE DESPITE THE
LACK OF PAYMENT OR SETTLEMENT BY THE MORTGAGOR (API/PEPI and AFP
RSBS) OF ITS EXISTING LOAN OBLIGATION TO PNB, OR THE PRIOR EXERCISE
OF RIGHT OF REDEMPTION BY THE MORTGAGOR AS MANDATED BY SECTION
25 OF PD 957 OR DIRECT PAYMENT MADE BY RESPONDENT DEE TO PNB

PURSUANT TO THE DEED OF UNDERTAKING WHICH WOULD WARRANT

RELEASE OF THE SAME.13
The petitioner claims that it has a valid mortgage over Dees property, which was
part of the property mortgaged by PEPI to it to secure its loan obligation, and that
Dee and PEPI are bound by such mortgage. The petitioner also argues that it is not
privy to the transactions between the subdivision project buyers and PEPI, and has
no obligation to perform any of their respective undertakings under their contract. 14
The petitioner also maintains that Presidential Decree (P.D.) No. 957 15 cannot nullify
the subsisting agreement between it and PEPI, and that the petitioners rights over
the mortgaged properties are protected by Act 3135 16 . If at all, the petitioner can
be compelled to release or cancel the mortgage only after the provisions of P.D. No.
957 on redemption of the mortgage by the owner/developer (Section 25) are
complied with. The petitioner also objects to the denomination by the CA of the
provisions in the Affidavit of Undertaking as stipulations pour autrui,17 arguing that
the release of the title was conditioned on Dees direct payment to it. 18
Respondent AFPRSBS, meanwhile, contends that it cannot be compelled to pay or
settle the obligation under the mortgage contract between PEPI and the petitioner
as it is merely an investor in the subdivision project and is not privy to the
mortgage.19
Respondent PEPI, on the other hand, claims that the title over the subject property
is one of the properties due for release by the petitioner as it has already been the
subject of a Memorandum of Agreement and dacion en pago entered into between
them.20 The agreement was reached after PEPI filed a petition for rehabilitation, and
contained the stipulation that the petitioner agreed to release the mortgage lien on
fully paid mortgaged properties upon the issuance of the certificates of title over
the dacioned properties.21
For her part, respondent Dee adopts the arguments of the CA in support of her
prayer for the denial of the petition for review. 22
Ruling of the Court
The petition must be DENIED.
The petitioner is correct in arguing that it is not obliged to perform any of the
undertaking of respondent PEPI and AFPRSBS in its transactions with Dee because
it is not a privy thereto. The basic principle of relativity of contracts is that contracts
can only bind the parties who entered into it, 23 and cannot favor or prejudice a third
person, even if he is aware of such contract and has acted with knowledge
thereof.24 Where there is no privity of contract, there is likewise no obligation or
liability to speak about.25cralawred
The petitioner, however, is not being tasked to undertake the obligations of PEPI
and AFPRSBS. In this case, there are two phases involved in the transactions
between respondents PEPI and Dee the first phase is the contract to sell, which
eventually became the second phase, the absolute sale, after Dees full payment of

the purchase price. In a contract of sale, the parties obligations are plain and
simple. The law obliges the vendor to transfer the ownership of and to deliver the
thing that is the object of sale.26 On the other hand, the principal obligation of a
vendee is to pay the full purchase price at the agreed time. 27 Based on the final
contract of sale between them, the obligation of PEPI, as owners and vendors of Lot
12, Block 21A, Village East Executive Homes, is to transfer the ownership of and to
deliver Lot 12, Block 21A to Dee, who, in turn, shall pay, and has in fact paid, the
full purchase price of the property. There is nothing in the decision of the HLURB, as
affirmed by the OP and the CA, which shows that the petitioner is being ordered to
assume the obligation of any of the respondents. There is also nothing in the HLURB
decision, which validates the petitioners claim that the mortgage has been
nullified. The order of cancellation/release of the mortgage is simply a consequence
of Dees full payment of the purchase price, as mandated by Section 25 of P.D. No.
957, to wit:chanRoblesvirtualLawlibrary
Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or
unit to the buyer upon full payment of the lot or unit. No fee, except those required
for the registration of the deed of sale in the Registry of Deeds, shall be collected for
the issuance of such title. In the event a mortgage over the lot or unit is outstanding
at the time of the issuance of the title to the buyer, the owner or developer shall
redeem the mortgage or the corresponding portion thereof within six months from
such issuance in order that the title over any fully paid lot or unit may be secured
and delivered to the buyer in accordance herewith.
It must be stressed that the mortgage contract between PEPI and the petitioner is
merely an accessory contract to the principal threeyear loan takeout from the
petitioner by PEPI for its expansion project. It need not be belaboured that [a]
mortgage is an accessory undertaking to secure the fulfillment of a principal
obligation,28 and it does not affect the ownership of the property as it is nothing
more than a lien thereon serving as security for a debt. 29
Note that at the time PEPI mortgaged the property to the petitioner, the prevailing
contract between respondents PEPI and Dee was still the Contract to Sell, as Dee
was yet to fully pay the purchase price of the property. On this point, PEPI was
acting fully well within its right when it mortgaged the property to the petitioner, for
in a contract to sell, ownership is retained by the seller and is not to pass until full
payment of the purchase price.30 In other words, at the time of the mortgage, PEPI
was still the owner of the property. Thus, in China Banking Corporation v. Spouses
Lozada,31 the Court affirmed the right of the owner/developer to mortgage the
property subject of development, to wit: [P.D.] No. 957 cannot totally prevent the
owner or developer from mortgaging the subdivision lot or condominium unit when
the title thereto still resides in the owner or developer awaiting the full payment of
the purchase price by the installment buyer. 32 Moreover, the mortgage bore the
clearance of the HLURB, in compliance with Section 18 of P.D. No. 957, which
provides that [n]o mortgage on any unit or lot shall be made by the owner or
developer without prior written approval of the [HLURB].
Nevertheless, despite the apparent validity of the mortgage between the petitioner
and PEPI, the former is still bound to respect the transactions between respondents
PEPI and Dee. The petitioner was well aware that the properties mortgaged by PEPI
were also the subject of existing contracts to sell with other buyers. While it may be
that the petitioner is protected by Act No. 3135, as amended, it cannot claim any

superior right as against the installment buyers. This is because the contract
between the respondents is protected by P.D. No. 957, a social justice measure
enacted primarily to protect innocent lot buyers. 33 Thus, in Luzon Development
Bank v. Enriquez,34 the Court reiterated the rule that a bank dealing with a property
that is already subject of a contract to sell and is protected by the provisions of P.D.
No. 957, is bound by the contract to sell. 35
However, the transferee BANK is bound by the Contract to Sell and has to respect
Enriquezs rights thereunder. This is because the Contract to Sell, involving a
subdivision lot, is covered and protected by PD 957. x x x.
xxx
x x x Under these circumstances, the BANK knew or should have known of the
possibility and risk that the assigned properties were already covered by existing
contracts to sell in favor of subdivision lot buyers. As observed by the Court in
another case involving a bank regarding a subdivision lot that was already subject
of a contract to sell with a third party:chanRoblesvirtualLawlibrary
[The Bank] should have considered that it was dealing with a property subject of a
real estate development project. A reasonable person, particularly a financial
institution x x x, should have been aware that, to finance the project, funds other
than those obtained from the loan could have been used to serve the purpose,
albeit partially. Hence, there was a need to verify whether any part of the property
was already intended to be the subject of any other contract involving buyers or
potential buyers. In granting the loan, [the Bank] should not have been content
merely with a clean title, considering the presence of circumstances indicating the
need for a thorough investigation of the existence of buyers x x x. Wanting in care
and prudence, the [Bank] cannot be deemed to be an innocent mortgagee. x x
x36 (Citation omitted)chanroblesvirtualawlibrary
More so in this case where the contract to sell has already ripened into a
contract of absolute sale.
Moreover, PEPI brought to the attention of the Court the subsequent execution of a
Memorandum of Agreement dated November 22, 2006 by PEPI and the petitioner.
Said agreement was executed pursuant to an Order dated February 23, 2004 by the
Regional Trial Court (RTC) of Makati City, Branch 142, in SP No. 021219, a petition
for Rehabilitation under the Interim Rules of Procedure on Corporate Rehabilitation
filed by PEPI. The RTC order approved PEPIs modified Rehabilitation Plan, which
included the settlement of the latters unpaid obligations to its creditors by way
of dacion of real properties. In said order, the RTC also incorporated certain
measures that were not included in PEPIs plan, one of which is that [t]itles to the
lots which have been fully paid shall be released to the purchasers within 90 days
after the dacion to the secured creditors has been completed. 37Consequently, the
agreement stipulated that as partial settlement of PEPIs obligation with the
petitioner, the former absolutely and irrevocably conveys by way of dacion en
pago the properties listed therein,38 which included the lot purchased by Dee. The
petitioner also committed to
[R]elease its mortgage lien on fully paid Mortgaged Properties upon issuance of the
certificates of title over the Dacioned Properties in the name of the [petitioner]. The
request for release of a Mortgaged Property shall be accompanied with: (i) proof of
full payment by the buyer, together with a certificate of full payment issued by the

Borrower x x x. The [petitioner] hereby undertakes to cause the transfer of the

certificates of title over the Dacioned Properties and the release of the Mortgaged
Properties with reasonable dispatch.39ChanRoblesVirtualawlibrary
Dacion en pago or dation in payment is the delivery and transmission of ownership
of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation.40 It is a mode of extinguishing an existing
obligation41 and partakes the nature of sale as the creditor is really buying the thing
or property of the debtor, the payment for which is to be charged against the
debtors debt.42 Dation in payment extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement express or implied, or by their silence
consider the thing as equivalent to the obligation, in which case the obligation is
totally extinguished.43
There is nothing on record showing that the Memorandum of Agreement has been
nullified or is the subject of pending litigation; hence, it carries with it the
presumption of validity.44 Consequently, the execution of the dation in payment
effectively extinguished respondent PEPIs loan obligation to the petitioner insofar
as it covers the value of the property purchased by Dee. This negates the
petitioners claim that PEPI must first redeem the property before it can cancel or
release the mortgage. As it now stands, the petitioner already stepped into the
shoes of PEPI and there is no more reason for the petitioner to refuse the
cancellation or release of the mortgage, for, as stated by the Court in Luzon
Development Bank, in accepting the assigned properties as payment of the
obligation, [the bank] has assumed the risk that some of the assigned properties
are covered by contracts to sell which must be honored under PD 957. 45 Whatever
claims the petitioner has against PEPI and AFPRSBS, monetary or otherwise, should
not prejudice the rights and interests of Dee over the property, which she has
already fully paid for.
As between these small lot buyers and the gigantic financial institutions which the
developers deal with, it is obvious that the lawas an instrument of social justice
must favor the weak.46 (Emphasis omitted)chanroblesvirtualawlibrary
Finally, the Court will not dwell on the arguments of AFPRSBS given the finding of
the OP that [b]y its nonpayment of the appeal fee, AFPRSBS is deemed to have
abandoned its appeal and accepts the decision of the HLURB. 47 As such, the HLURB
decision had long been final and executory as regards AFPRSBS and can no longer
be altered or modified.48
WHEREFORE, the petition for review is DENIED for lack of merit. Consequently,
the Decision dated August 13, 2007 and Resolution dated March 13, 2008 of the
Court of Appeals in CAG.R. SP No. 86033 are AFFIRMED.
Petitioner Philippine National Bank and respondents Prime East Properties Inc. and
Armed Forces of the PhilippinesRetirement and Separation Benefits System, Inc.
are hereby ENJOINED to strictly comply with the Housing and Land Use Regulatory
Board Decision dated May 21, 2003, as modified by its Board of Commissioners
Decision dated March 15, 2004 and Office of the President Decision dated August 4,
2004.ChanRoblesVirtualawlibrary
SO ORDERED.

MULTI-VENTURES CAPITAL
and MANAGEMENT
CORPORATION,
Petitioner.
- versus -

G.R. No. 157439

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

STALWART MANAGEMENT
SERVICES CORPORATION,
MARIAN G. TAJO, CESAR
TAJO and ARIANA GALANG,
Promulgated:
Respondents*.
July 4, 2007
x------------------------------------------------x
DECISION
AUSTRIA-MARTINEZ, J.:

The sole issue in this case is whether the contract entered into by Multi-Ventures
Capital and Management Corporation (petitioner) and Stalwart Management
Services Corporation (respondent) is one of loan or sale.
The facts are as follows:
On July 10, 1991, Multi-Ventures Capital and Management Corporation filed with the
Regional Trial Court (RTC) of Makati, Branch 134, a Complaint for Reformation of
Instrument with application for attachment against Stalwart Management Services
Corporation and its officers. Petitioner alleged that on January 11, 1991, respondent
obtained from the former a loan in the amount of P9,000,000.00, with interest, but
for purposes of expediency, said transaction was denominated as a sale whereby
petitioner bought from respondent various Land Bank bonds originally valued
at P11,557,972.60 at discounted price, as shown in a Confirmation of Agreement;
that the bonds serve as a partial collateral for the payment of the loan; that
respondent and some of its officers, however, have plans of defrauding their
creditors by absconding and disposing of its properties, thus constraining petitioner
to file the complaint for reformation in order to express the true intent of the
parties, i.e., that the ostensible sale of the bonds is actually a loan agreement. [1]

Respondent, together with its co-defendants, filed an Answer denying petitioner's

allegations and claiming, among others, that both petitioner and respondent are
companies engaged in dealing and trading government securities. According to
respondent, the transaction entered into on January 11, 1991 is really a purchase of
Land Bank bonds, and there is no mistake, fraud, inequitable conduct or accident in
the preparation of the true agreement of the parties such that reformation is called
for.[2]
After trial on the merits, the RTC rendered a Decision dated May 11, 1995, in favor
of petitioner. The dispositive portion of the RTC Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant:
1. These instruments subject matter of this case are
hereby ordered REFORMED as Contract of Loan and
not a Contract of Sale.
2. To order the defendants, jointly and severally, to pay
the plaintiff the sum of P11,557,972.60 PESOS
from June 11, 1992 as the date of maturity plus legal
interest until fully paid;
3. To order defendants, jointly and severally, to pay the
plaintiff the sum of P100,000.00 PESOS by way of
attorneys fees;
4. Ordering the dismissal of defendants counter-claim for
being devoid of legal merit; and
5. To order defendants' jointly and severally, to pay the
costs of suit.
SO ORDERED.[3]
Dissatisfied, respondent and its officers appealed to the Court of Appeals (CA). In a
Decision dated February 24, 2003,[4] the CA sustained respondents position that the
transaction was, in fact, a sale; reversed the RTC Decision; and dismissed
petitioners complaint and respondents counterclaim.

Hence, the present Petition for Review on Certiorari predicated on the following
grounds:
A. THAT DUE TO MISAPPRECIATION OF FACTS AND EVIDENCE, THE
COURT OF APPEALS ERRED IN REVERSING THE COURT A QUO'S
DECISION AND IN NOT DECLARING THAT THE INTENDED AND TRUE
TRANSACTION AGREED UPON AND ENTERED INTO BETWEEN MULTIVENTURES AND STALWART WAS THAT OF LOAN, NOT SALE OF LAND
BANK BONDS.
B. THAT THE COURT OF APPEALS ERRED IN NOT ORDERING THE
REFORMATION OF THE INSTRUMENT OSTENSIBLY APPEARING AS A
PURCHASE AND SALE WITH THE RIGHT TO REPURCHASE LAND
BANK BONDS SO AS TO REFLECT THE TRUE INTENTION AND
AGREEMENT OF PARTIES THAT THE TRANSACTION WAS THAT OF
LOAN OF P9 MILLION PAYABLE FOR A PERIOD OF ONE (1) YEAR,
JANUARY 11, 1992 IN THE AMOUNT OF P11,537,972.60 INCLUSIVE
OF INTEREST.[5]
Ordinarily, the Court will not dwell on the issues raised in this petition as it
pertains to questions of fact, and under Rule 45 of the Rules of Court, only questions
of law may be raised, the reason being that this Court is not a trier of facts, and it is
not for this Court to re-examine and re-evaluate the evidence on record.
[6]

Considering, however, that the CA and the RTC came up with divergent findings

regarding the real nature of the transaction in question, the Court is now
constrained to review the evidence on record so as to resolve the conflict. [7]
After a careful examination of the evidence on record, the Court sustains the CAs
ruling that the transaction between the parties was one of sale and not of loan.
An action for reformation of an instrument finds ground in Article 1359 of the Civil
Code, which provides:
ARTICLE 1359. When, there having been a meeting of the minds of the
parties to a contract, their true intention is not expressed in the
instrument purporting to embody the agreement, by reason of mistake,
fraud, inequitable conduct or accident, one of the parties may ask for
the reformation of the instrument to the end that such true intention
may be expressed.
xxxx
Reformation is a remedy in equity, whereby a written instrument is made or
construed so as to express or conform to the real intention of the parties, where

some error or mistake has been committed. In granting reformation, the remedy in
equity is not making a new contract for the parties, but establishing and
perpetuating the real contract between the parties which, under the technical rules
of law, could not be enforced but for such reformation. [8]
In order that an action for reformation of instrument may prosper, the following
requisites must concur: (1) there must have been a meeting of the minds of the
parties to the contract; (2) the instrument does not express the true intention of the
parties; and (3) the failure of the instrument to express the true intention of the
parties is due to mistake, fraud, inequitable conduct or accident. [9]
In the present case, there is no question that there was a meeting of the minds
between the parties. What remains to be resolved is whether the contract
expressed their true intention; and, if not, whether it was due to mistake, fraud,
inequitable conduct or accident.
While intentions involve a state of mind which may sometimes be difficult to
decipher, subsequent and contemporaneous acts of the parties as well as the
evidentiary facts as proved and admitted can be reflective of ones intention. [10]
The onus probandi is upon the party who insists that the contract should be
reformed.[11] Moreover, the presumption is that an instrument sets out the true
agreement of the parties thereto and that it was executed for valuable
consideration.[12] Unfortunately, petitioner was not able to overturn the presumption
of validity of the contract and it also failed to discharge the burden of proving that
the true intention of the parties has not been expressed.
In support of its contention that the transaction is one of loan, petitioner relies
principally on the letter dated January 11, 1991, wherein respondent offered to
purchase on January 10, 1992 the Land Bank bonds from petitioner for the total
amount of P11,557,972.60.[13] According to petitioner, the amount borrowed by
respondent was P9,000,000.00, with interest, or a total of P11,557,972.60, payable
within one year.[14] Petitioner insists that the buy-back letter proves that the
transaction was indeed a loan, for if it was a sale, why would respondent buy back
the bonds in the same amount that was payable under their alleged loan
agreement?[15]

There is nothing on record, as well as in the buy-back letter, that clearly and
convincingly proves or substantiates petitioners contention that the real intent of
the parties was to enter into a loan agreement for the amount of P11,557,972.60,
inclusive of interest. In fact, respondents buy-back letter supports the finding that
the agreement entered into by the parties was a sale transaction. For if the bonds
were only to serve as a collateral for the loan, why would respondent offer to buy
them back from petitioner if they were not sold in the first place? Obviously,
ownership of the bonds had been transferred from respondent to petitioner on
January 11, 1991; for if it were not so and the bonds were merely being held by
petitioner as a security for the payment of the alleged loan, then ownership would
have remained with respondent and there would have been no need to buy it back.
The Court agrees with and adopts the findings of the CA, thus:
The lower court, and the appellee, advance that it was highly
improbable that plaintiff would really purchase the Land Bank bonds
for 9 million pesos, when it would have called for only 6.5 million pesos
if sold in the market. Aside from such self-serving statements,
however, there is no direct or substantial proof that the bonds would
have demanded a lower actual price when it was sold. In any case,
poor business decisions are not adequate grounds to nullify the effects
of a contract entered into in the course of business operations. x x x
Furthermore, the fact that the Confirmation of Agreement (Exhibit 1)
and offer to purchase by defendants (Exhibit B) were executed
simultaneously and delivered to the plaintiff, is not inconsistent with
the conclusion that the contract between the parties was truly
a Sale. In order to hold that the parties' agreement was really a loan,
more concrete and convincing evidence must be produced. x x x[16]
In addition, and more significantly, what militates against petitioners argument that
their agreement was a loan is the fact that subsequent thereto, petitioner endorsed
and transferred the bonds to the AFP Mutual Benefits Association, Inc., as collateral
for an investment. Petitioner did not rebut or at the very least, offer a plausible
explanation for said transfer which is unmistakably an act of ownership. It
sufficiently established the CA finding that the transaction is one of sale, thus:
Aside from Exhibit 1, evidence on record, particularly Exhibits 8 to 9
show that the bonds were indeed delivered to the plaintiff pursuant to
the Contract of Sale. Furthermore, almost immediately after
taking possession of the subject bonds, plaintiff corporation
through its Vice-President and incorporator, Natividad Aureola,

endorsed and transferred the same to the AFP Mutual Benefits

Association, Inc., as collateral for an investment made by the
latter. Such endorsement and transfer, to our mind, amount to
an act of ownership, which can only be made by one who owns
a certain property, and not by one who holds a property only
as security for loan. Defendants' position that it had sold the bonds
to the plaintiff pursuant to Exhibit 1 is thus fortified. [17]
Finally, petitioner failed to show that mistake, fraud, inequitable conduct or accident
attended the execution of the agreement such that their true intention was not
reflected. As admitted by petitioner, the parties agreed to execute a purchase and
sale agreement for purposes of expediency and convenience. [18] Expediency and
convenience, however, are not grounds for the reformation of an instrument. As
such, absent any proof of mistake, fraud, inequitable conduct or accident, the
Confirmation of Agreement dated January 11, 1991 remains the best evidence to
ascertain the real intent of the parties.
The transaction of sale entered into by the parties on January 11, 1991 is
accurately expressed in the Confirmation of Agreement. Petitioner, therefore, has no
cause of action for its reformation.
WHEREFORE, the petition is DENIED for lack of merit.
G.R. No. L-39592 January 28, 1975
The Spouses ANTONIO JAYME and ANA SOLIDARIOS, petitioners,
vs.
Hon. Judge NESTOR ALAMPAY and BENITO ONG, respondents.
Edmundo G. Manlapao for petitioners.
Osmundo R. Victoriano and Eduardo P. Arboleda for private respondents.

TEEHANKEE, J.:
In this review on pure questions of law of respondent court's granting of the motion
to dismiss petitioners' action for reformation of instrument, the Court reverses and
remands the case for trial and adjudication on the merits. The Civil Code provides
that where, as alleged in the complaint, two parties agree upon the mortgage of
real property but the instrument states that the property is sold absolutely or with a

right of repurchase, an action for reformation of the instrument is proper. The

prescriptive period must be determined on the basis of the allegations of the
complaint for reformation of instrument and not on the counter-allegations of the
motion to dismiss (which must hypothetically admit the factual allegations of the
complaint) that the transaction was actually a true sale (which is a matter of
defense), of an action for annulment of which would prescribe in the lesser period of
four years. The existence of a bona fide mortgage in favor of a third party clearly
constitutes no impediment to petitioners' action for reformation and recovery of
title.
On November 29, 1972, petitioners-spouses filed a complaint against private
respondent in the court of first instance of Negros Occidental presided by
respondent judge for reformation of instrument and praying that the deed of
absolute sale of the parcel of land in Bacolod City executed by them on December
24, 1964 in favor of private respondent which did not embody their true agreement
be reformed and declared a contract of mortgage and that their property be
returned to them upon their payment of the loan consideration of P16,500.00 and
that they be awarded damages, attorneys' fees and costs.
In their complaint, petitioners allege that "on December 24, 1964 the plaintiffs and
the defendant Ong entered into an agreement whereby they agreed that the
plaintiffs will borrow from the defendant the sum of P16,500.00 on the security of
the parcel of land above mentioned;" "that the deed of sale does not embody the
true agreement of the parties which was to constitute a mortgage over Lot No. 270A, Bacolod Cadastre above mentioned to secure payment of the loan of
P16,500.00;" "that plaintiffs acceded to the condition required by the defendant Ong
(to execute in his favor a deed of sale) for the reason that they reposed great
confidence in said defendant, being a good family friend and because they were in
dire need of money "that simultaneous to the execution of the deed of sale, Annex
A, the defendant Ong executed in favor of the plaintiff an option (for six months) to
purchase the ... parcel of land for the same sum of P16,500.00;" that since the
purported sale up to now, petitioners "continue to occupy part of the premises
without paying rentals to the defendant; moreover, plaintiffs collect up to the
present time all the rentals due from the other occupants of the premises;" that the
"sum of P16,500.00 ... is grossly inadequate for purpose of definite sale ...;" that the
"plaintiffs had on several occasions offered to the defendant Ong to pay the sum of
P16,500.00 representing the loan ...;" that the plaintiffs are "willing and ready to
pay defendant the loan of P16,500.00 plus lawful interest if due;" that "due to the
defendant Ong's unjust refusal to execute the proper document of mortgage and to
accept plaintiff's payment of their loan to him they suffered damages." 1
Respondent filed his answer with counterclaim and raised the defense of
prescription in his answer. Respondent court after pre-trial directed respondent to
raise the issue of prescription squarely in a motion to dismiss. Petitioners filed their

opposition to the dismissal motion and after hearing, respondent court issued its
order of June 10, 1974 granting the motion to dismiss and dismissing petitioners'
case.
No evidence on the sole issue of prescription was received by respondent court at
the hearing of the dismissal motion. It merely relied on the allegations of the
complaint and the pleadings and granted dismissal on two grounds, to wit,
1. The proper remedy of petitioners on the basis of the complaint is annulment of
the sale on the ground of "vitiated consent" which action has prescribed within the
statutory four-year period citing Article 1391, Civil Code; 2and
2. The existence of a mortgage for P100,000.00 over the lot executed by
respondent in favor of Jose del Castillo 3who is a mortgagee in good faith presents a
legal impediment to petitioners' action for reformation of instrument and recovery
of the property free from all liens and encumbrances.
Reconsideration was peremptorily denied in respondent court's order of August 5,
1974. Hence, the present petition for review on certiorari on pure questions of law.
The Court per its resolution of January 13, 1975 in view of the simple issues involved
resolved to consider the case as a special civil action and respondent's motion to
dismiss as his answer to the petition in order to expeditiously dispose of the legal
questions presented without the need and expense of parties' briefs.
The petition has merit and calls for the setting aside of the dismissal order.
1. Respondent court manifestly erred in holding that petitioners' action prescribed
four years after the execution of the questioned deed of sale on the premise of its
unsupported prejudgment in its dismissal order (without trial and evidence) that
"the ultimate agreement of the parties (was) for the definite sale and conveyance
(of the property)", 4 and that petitioners' action "would involve, not the reformation
of said document of sale into a mortgage as they so contend, but inherently the
annulment itself of the deed of sale and only because of an alleged vitiated consent
of the plaintiffs in acceding to the conditions required by the defendant." 5
Respondent court instead of disregarding, should have adhered to the established
rule that in motions to dismiss, the allegations of the complaint are deemed to be
hypothetically admitted. Here, the complaint for reformation of instrument clearly
alleged that the deed of sale did not express the true agreement of the parties and
should be reformed into the mortgage that it actually was and prayed that
petitioners be allowed to redeem the property by repaying the loan of P16,500.00
(the true value of the property being much more, as evidenced by the mortgage
loan for P100,000.00 which respondent in turn secured on it). Such allegations are
binding for purposes of the dismissal motion and therefore the applicable

prescription period for such actions based upon a written contract and for
reformation thereof as provided by law is ten (10 years as provided in Article 1144,
Civil Code. 6
Such right to reformation is expressly recognized in Article 1365 of the Civil Code
which provides that "If two parties agree upon the mortgage or pledge of real or
personal property but the instrument states that the property is sold absolutely or
with a right to repurchase, reformation of the instrument is proper."
Petitioners' action for reformation and recovery of title was brought on November
29, 1972 less than eight years after execution of the questioned deed on December
24, 1964 and had therefore not prescribed.
Respondent's counter-theory that the questioned contract was in truth and reality a
bona fide sale is clearly a matter of defense, which was yet to be established at the
trial and could not be availed of at the pre-trial stage to dismiss the case as if it
were already a proven fact, contrary to the very allegations of fact of the complaint
which petitioners must be given an opportunity and their day in court to establish.
2. Respondent court's other ground for dismissal, to wit, that the existing P100.00mortgage of the property in favor of Jose del Castillo (whom the parties have
conceded to be a mortgagee in good faith) constitutes an impediment to
petitioners' action as an innocent party's "undisputed rights ... would be impaired
and prejudiced" is clear error.
It is obvious that the mortgagee's rights over the property are recognized but that
would in no way defeat petitioners' action for reformation and recovery of title to
the property. If petitioners prevail, they simply would recover the title to the
property, subject to the mortgage thereon in favor of del Castillo or as prayed for by
them, respondent may be duly sentenced "to deliver title to the plaintiffs free from
any encumbrances including the mortgage to defendant del Castillo" 7 which merely
means that respondent would in such case be obliged and sentenced to discharge
del Castillo's mortgage credit (which mortgage loan he obtained after all for his own
exclusive benefit).
ACCORDINGLY, judgment is hereby rendered setting aside the dismissal order of
June 10, 1974 and remanding the case to respondent court for trial and adjudication
on the merits. Without pronouncement as to costs. SO ORDERED.

JESUS CAMPOS and ROSEMARIE

CAMPOS-BAUTISTA,
Petitioners,

G.R. No. 175994

- versus -

Present:

NENITA BUENVENIDA PASTRANA,

ROGER BUENVENIDA,
SONIA BUENVENIDA,
TEDDY BUENVENIDA,
VICTOR BUENVENIDA,
HARRY BUENVENIDA,
MILDRED BUENVENIDA,
MANOLITO BUENVENIDA
and DAISY BUENVENIDA,
represented by their Attorney-in-Fact
CARLITO BUENVENIDA,***
Respondents.
x----------------------------------

CARPIO,* J., Chairperson,

LEONARDO-DE CASTRO,**
BRION,
DEL CASTILLO, and
ABAD, JJ.

Promulgated:
December 8, 2009
-------------------------x

DECISION
DEL CASTILLO, J.:
It sometimes happens that a creditor, after securing a judgment against a debtor,
finds that the debtor had transferred all his properties to another leaving nothing to satisfy
the obligation to the creditor. In this petition for review on certiorari,[1] petitioners ask us to
set aside the November 23, 2005 Decision[2] of the Court of Appeals (CA) in CA-G.R. CV No.
68731 declaring as null the sale of several parcels of land made by their parents in their
favor, for being absolutely simulated transactions. Also assailed is the November 21,
2006 Resolution.[3]
Factual antecedents
This is the third case between essentially the same parties and the second among
those cases to reach this Court on appeal, spanning a period of close to three decades.
The first case arose from the refusal of Carlito Campos (Carlito), the father of herein
petitioners, to surrender the possession of a fishpond he leased from respondents mother,
Salvacion Buenvenida, despite the expiration of their contract of lease in 1980. Alleging
that he was an agricultural lessee, Carlito filed an agrarian case docketed as CAR Case No.
1196 (Agrarian Case)against his lessor. After trial, the Regional Trial Court of Roxas City,
Branch 14, found that Carlito was not an agricultural tenant. He then appealed to the CA
and subsequently to this Court, but was unsuccessful.

While the appeal in the Agrarian Case was pending before the CA, herein
respondents filed the second case, Civil Case No. V-5417, against Carlito for Recovery of
Possession and Damages with Preliminary Mandatory Injunction (Possession Case)
involving the same fishpond subject of the earlier agrarian case. On November 27, 1990,
the Regional Trial Court of Roxas City, Branch 16, rendered a Decision [4] finding Carlito to
have retained possession of the fishpond notwithstanding the expiration of the contract of
lease and ordering him to pay rentals, the value of the produce and damages to the herein
respondents. The Decision became final and executory and a Writ of Execution [5] was
issued on February 7, 1995. Subsequently, on September 19, 1995, an Alias Writ of
Execution[6] was also issued. Both were returned unsatisfied as per Sheriffs Return of
Service dated November 14, 1995.
During the pendency of the Agrarian Case, as well as prior to the filing of the
Possession Case, Carlito was the registered owner of the following properties:

1.

Residential Lots 3715-A and 3715-B-2 covered by Transfer Certificates of

Title Nos. 18205[7] and 18417,[8] respectively and

2.

Agricultural Lots 850 and 852 covered by Original Certificates of Title

Nos. P-9199[9] and P-9200,[10] respectively.

When the respondents were about to levy these properties to satisfy the judgment
in the Possession Case, they discovered that spouses Carlito and Margarita Campos
transferred these lots to their children Rosemarie and Jesus Campos, herein petitioners, by
virtue of Deeds of Absolute Sale dated October 18, 1985 [11] and November 2, 1988.
[12]

Specifically, spouses Campos sold the residential lots (Lots 3715-A and 3715-B-2), with

a total area of 1,393 square meters, to their daughter Rosemarie for P7,000.00 and the
agricultural lots (Lots 850 and 852) with a combined area of 7,972 square meters, to their
son Jesus for P5,600.00.
Proceedings before the Regional Trial Court
Civil Case No. V-7028

On February 18, 1997, respondents instituted the third case, Civil Case No.
V-7028 (Nullity of Sale Case),[13] subject of this appeal, seeking to declare as null the
aforesaid deeds of sale and the transfer certificates of title issued pursuant thereto. They
alleged that the contracts of sale between spouses Campos and petitioners were
simulated for the sole purpose of evading the levy of the abovementioned properties in
satisfaction of a money judgment that might be rendered in the Possession Case.

In their Answer with Counterclaim,[14] spouses Campos and petitioners averred that
Rosemarie and Jesus Campos acquired the lots in question in good faith and for value
because they were sold to them before they had any notice of the claims or interests of
other persons thereover.

On August 21, 2000, the Regional Trial Court of Roxas City, Branch 14, dismissed
the complaint.[15] It held that
In the Resolution of this case the issue is whether or not the spouses
Carlito Campos and Margarita Arduo, sensing that an unfavorable judgment
might be rendered against them in Civil Case No. V-5417 filed in Branch 16
on July 17, 1987 by the same plaintiffs for Recovery of Possession and
Damages with Preliminary Mandatory Injunction, in evident bad faith and
wanton disregard of the law, maliciously and fraudulently, executed a purely
fictitious and simulated sale of their properties thereby ceding and
transferring their ownership thereto to their children Rosemarie CamposBautista and Jesus Campos.
A close scrutiny of the defendants documentary exhibits and
testimonies showed that as early as 1981 defendant Jesus Campos was
already leasing a fishpond in Brgy. Majanlud, Sapi-an, Capiz from Victorino
Jumpay and defendant Rosemarie Campos was engaged in the sari-sari
store business starting 1985 so that they were able to purchase the
properties of their parents out of their profits derived therefrom.
The Deed of Absolute Sale (Exh. 6 & 10) executed by the spouses
Carlito Campos and Margarita Arduo to Rosemarie Campos and Jesus
Campos were dated October 17, 1985 and November 2, 1988, respectively.
It can readily [be] gleaned from the records that Civil Case No. V-5417
was filed on July 7, 1987 and was decided on November 27,
1990. Furthermore, the alias writ of execution was issued only onJuly 5,
1995 for which the Sheriffs Return of Service was returned unsatisfied
on November 14, 1995.

WHEREFORE, the complaint of the plaintiffs against the defendants is

DISMISSED. Their claim for damages is likewise DISMISSED. The counterclaim of the defendants must also be DISMISSED as the case was not filed in
evident bad faith and with malicious intent.
SO ORDERED.[16]
Proceedings before the Court of Appeals

Upon review of the evidence presented, the CA found that the conveyances were
made in 1990, and not in 1985 or 1988, or just before their actual registration with the
Registry of Deeds, evidently to avoid the properties from being attached or levied upon by
the respondents. The CA likewise noted that the zonal value of the subject properties were
much higher than the value for which they were actually sold. The appellate court further
observed that despite the sales, spouses Campos retained possession of the properties in
question. Finally, the CA took note of the fact that the writ of execution and alias writ
issued in the Possession Case remained unsatisfied as the lower court could not find any
other property owned by the spouses Campos that could be levied upon to satisfy its
judgment, except the parcels of land subject of the assailed transactions.

On these bases, the CA ruled that the assailed contracts of sale were indeed
absolutely simulated transactions and declared the same to be void ab initio. The
dispositive portion of the Decision of the CA reads:
WHEREFORE, the instant appeal is GRANTED. The decision of
the Regional Trial Court of Roxas City, Branch 14, dated August 21, 2000 in
Civil Case No. V-7028 is REVERSED and SET ASIDE. Let a copy of this
Decision be furnished to the Register of Deeds of the Province of Capiz who
is hereby ordered to cancel Transfer Certificates of Title Nos. T-26092 and T26093 in the name of Rosemarie Campos, and Transfer Certificates of Title
Nos. T-23248 and 23249 in the name of Jesus Campos and restore said titles
in the name of the previous owner, Carlito Campos.
SO ORDERED.

Only petitioners moved for reconsideration[17] but the CA denied the same.[18]

Issues
Hence, this petition for review on certiorari raising the following errors:
I.
THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN APPLYING
ARTICLE 1409, CIVIL CODE, INSTEAD OF ARTICLE 1381 (3), CIVIL CODE, AND
IN SPECULATING THAT A CAUSE OF ACTION OF SUPPOSED SALE IN FRAUD
OF CREDITORS EXISTS DESPITE NON-EXHAUSTION OF REMEDIES TO
ENFORCE THE JUDGMENT IN CIVIL CASE NO. V-5417.
II.
THE COURT OF APPEALS COMMITTED AN ERROR OF LAW OVERLOOKING
THAT THE CAUSE OF ACTION HAD PRESCRIBED, THE COMPLAINT HAVING
BEEN FILED AFTER SEVEN (7) YEARS OR ONLY ON 14 OCTOBER 1997, FROM
THE TIME THE TITLES WERE ISSUED IN 1990.
III.
THE COURT OF APPEALS ERRONEOUSLY ANCHORED ITS IMPUGNED
JUDGMENT ON MISAPPREHENSION OF FACTS THAT THE SALE WERE
ANTEDATED, HENCE SIMULATED DESPITE GLARING ABSENCE OF EVIDENCE
IN SUPPORT THEREOF.
IV.
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN
CASTING ASIDE OVERWHELMING EVIDENCE DULY APPRECIATED BY THE
TRIAL COURT THAT PETITIONERS ARE BUYERS IN GOOD FAITH AND FOR
VALUE, WHO EXERCISED DOMINION OVER THE SUBJECT LOTS, WHICH IF
PROPERLY CONSIDERED, SHALL WARRANT THE SINGULAR CONCLUSION
THAT THE SALE AND TRANSFER OF TITLES ARE VALID.[19]
Petitioners arguments

Petitioners assail the application of Article 1409[20] of the Civil Code on void
contracts as against Article 1381(3)[21] of the Civil Code on rescissible contracts in fraud of
creditors,

considering

that

the

questioned

conveyances

executed

by

the

spouses Campos to their children were allegedly done to evade the enforcement of the
writ of execution in the Possession Case.[22] In addition, petitioners allege that the CA
misappreciated the facts of this case when it found that the questioned transactions were
tainted with badges of fraud.[23]

Respondents arguments

Respondents argue that the application of Article 1409 on void contracts was a
natural and logical consequence of the CAs finding that subject deeds of sale were
absolutely simulated and fictitious, consistent with the nature of the respondents cause of
action which was for declaration of nullity of said contracts and the transfer certificates of
titles issued pursuant thereto.[24]Respondents also stressed that the CAs finding is
conclusive upon us and that only questions of law may be raised in a petition for review
on certiorari under Rule 45 of the Rules of Court.[25]

Our Ruling

The petition lacks merit.

Well-settled is the rule that this Court is not a trier of facts. When supported by
substantial evidence, the findings of fact of the CA are conclusive and binding, and are not
reviewable by this Court, unless the case falls under any of the following recognized
exceptions:
(1) When the conclusion is a finding grounded entirely on speculation, surmises and
conjectures;
(2) When the inference made is manifestly mistaken, absurd or impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misappreciation of facts;
(5) When the findings of fact are conflicting;
(6) When the CA in making its findings, went beyond the issues of the case and the
same is contrary to the admissions of both appellant and appellee;

(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of specific evidence
on which they are based;
(9) When the facts set forth in the petition as well as in the petitioners main and
reply briefs are not disputed by the respondents; and
(10) When the findings of fact of the CA are premised on the supposed absence of
evidence and contradicted by the evidence on record.

None of these exceptions is present in this case. We find that the Decision of the CA
is supported by the required quantum of evidence.
The
subject
Deeds
of
Absolute Sale executed
by
the
Spouses Campos to their children (herein
petitioners) are absolutely simulated and
fictitious.

The CA correctly held that the assailed Deeds of Absolute Sale were executed when
the Possession Case was already pending, evidently to avoid the properties subject thereof
from being attached or levied upon by the respondents. While the sales in question
transpired on October 18, 1985 and November 2, 1988, as reflected on the Deeds of
Absolute Sale, the same were registered with the Registry of Deeds only on October 25,
1990 and September 25, 1990.
We also agree with the findings of the CA that petitioners failed to explain the
reasons for the delay in the registration of the sale, leading the appellate court to conclude
that the conveyances were made only in 1990 or sometime just before their actual
registration and that the corresponding Deeds of Absolute Sale were antedated. This
conclusion is bolstered by the fact that the supposed notary public before whom the deeds
of sale were acknowledged had no valid notarial commission at the time of the
notarization of said documents.[26]

Indeed, the Deeds of Absolute Sale were executed for the purpose of putting the
lots in question beyond the reach of creditors. First, the Deeds of Absolute Sale were
registered exactly one month apart from each other and about another one month from
the time of the promulgation of the judgment in the Possession Case. The Deeds of
Absolute Sale were antedated and that the same were executed when the Possession
Case was already pending.
Second, there was a wide disparity in the alleged consideration specified in the
Deeds of Absolute Sale and the actual zonal valuation of the subject properties as per the
BIR Certification, as follows:

Residential Lots:
From Spouses
Campos to
daughter,
Rosemarie
Campos
Agricultural Lots:
From Spouses
Campos to son,
Jesus Campos

Consideration
specified in
Deed of
Absolute Sale

Market Value
as per Tax
Declaration

Computed
Zonal
Valuation (BIR
Certification)

P 7,000.00

P 83,580.00[2

P 417,900.00[2

P 5,600.00

P 25,000.19[2

P 39,860.00[30]

7]

9]

8]

As correctly noted by the CA, the appraised value of the properties subject of this
controversy may be lower at the time of the sale in 1990 but it could not go lower
than P7,000.00 andP5,600.00. We likewise find the considerations involved in the assailed
contracts of sale to be inadequate considering the market values presented in the tax
declaration and in the BIR zonal valuation.

Third, we cannot believe that the buyer of the 1,393-square meter[31] residential
land could not recall the exact area of the two lots she purchased. In her crossexamination, petitioner Rosemarie Campos stated:

Q: Can you tell us the total area of those two (2) lots that they sold to you?
A: It consists of One Thousand (1,000) Square Meters.[32]
xxxx
Q: By the way, for how much did you buy this [piece] of land consisting of
1,000 square meters?
A: Seven Thousand Pesos (P7,000.00) Your Honor.[33]

Fourth, it appears on record that the money judgment in the Possession Case has
not been discharged with. Per Sheriffs Service Return dated November 14, 1995, the Alias
Writ of Execution and Sheriffs Demand for Payment dated September 19, 1995 remain
unsatisfied.
Finally, spouses Campos continue to be in actual possession of the properties in
question. Respondents have established through the unrebutted testimony of Rolando
Azoro that spousesCampos have their house within Lot 3715-A and Lot 3715-B-2 and that
they

reside

there

together

with

their

daughter

Rosemarie.[34] In

addition,

spouses Campos continued to cultivate the rice lands which they purportedly sold to their
son Jesus.[35] Meantime, Jesus, the supposed new owner of said rice lands, has relocated to
Bulacan[36] where he worked as a security guard.[37] In other words, despite the transfer of
the said properties to their children, the latter have not exercised complete dominion over
the same. Neither have the petitioners shown if their parents are paying rent for the use of
the properties which they already sold to their children.

In Suntay v. Court of Appeals,[38] we held that:

The failure of the late Rafael to take exclusive possession of the
property allegedly sold to him is a clear badge of fraud. The fact that,
notwithstanding the title transfer, Federico remained in actual possession,
cultivation and occupation of the disputed lot from the time the deed of sale
was executed until the present, is a circumstance which is unmistakably
added proof of the fictitiousness of the said transfer, the same being
contrary to the principle of ownership.

While in Spouses Santiago v. Court of Appeals,[39] we held that the failure of

petitioners to take exclusive possession of the property allegedly sold to them, or in the
alternative, to collect rentals from the alleged vendor x x x is contrary to the principle of

ownership and a clear badge of simulation that renders the whole transaction void and
without force and effect, pursuant to Article 1409 of the Civil Code.
The issuance of transfer certificates of
title to petitioners did not vest upon them
ownership of the properties.

The fact that petitioners were able to secure titles in their names did not operate to
vest upon them ownership over the subject properties. That act has never been
recognized as a mode of acquiring ownership.[40] The Torrens system does not create or
vest title. It only confirms and records title already existing and vested. It does not protect
a usurper from the true owner. It cannot be a shield for the commission of fraud.[41]

In the instant case, petitioner Rosemarie Campos supposedly bought the residential
properties in 1985 but did not have the assailed Deed of Absolute Sale registered with the
proper Registry of Deeds for more than five years, or until a month before the
promulgation of the judgment in the Possession Case. Hence, we affirm the finding of the
CA that the purported deed was antedated. Moreover, her failure to take exclusive
possession of the property allegedly sold, or, alternatively, to collect rentals is contrary to
the principle of ownership and a clear badge of simulation. On these grounds, we cannot
hold that Rosemarie Campos was an innocent buyer for value.
Likewise, petitioner Jesus Campos supposedly bought the rice land from his parents
in 1988 but did not have the assailed Deed of Absolute Sale registered with the proper
Registry of Deeds for more than two years, or until two months before the promulgation of
the judgment in the Possession Case. Thus, we likewise affirm the finding of the CA that
the purported deed was antedated. In addition, on cross, he confirmed that he had
knowledge of the prior pending cases when he supposedly purchased his parents rice land
stating that:
Q: You never knew that your parents and the plaintiffs in this case have
cases in the past prior to this case now, is that right?
A: Yes, sir. I knew about it.

Q: And in spite of your knowledge, that there was a pending case between
your parents and the plaintiffs here, you still purchased these two (2)
lots 850 and 852 from your parents, is that what you are telling us?
A: All I knew was that, that case was a different case from the subject matter
then [sic] the lot now in question.[42]

On these findings of fact, petitioner Jesus Campos cannot be considered as an

innocent buyer and for value.

Since both the transferees, Rosemarie and Jesus Campos, are not innocent
purchasers for value, the subsequent registration procured by the presentation of the void
deeds of absolute sale is likewise null and void.
The action for the declaration of the
inexistence of the assailed Deeds of
Absolute Sale does not prescribe.

Petitioners argue that respondents cause of action had prescribed when they filed
the Nullity of the Sale Case on October 14, 1997, or seven years after the registration of
the questioned sales in 1990.

We cannot agree. As discussed above, the sale of subject properties to herein

petitioners are null and void. And under Article 1410 of the Civil Code, an action or
defense for the declaration of the inexistence of a contract is imprescriptible. Hence,
petitioners contention that respondents cause of action is already barred by prescription is
without legal basis.
Since
the
assailed
Deeds
of
Absolute Sale are null and void, the Civil
Code provisions on rescission have no
application in the instant case.

Finally, petitioners argument that the applicable law in this case is Article 1381(3) of
the Civil Code on rescissible contracts and not Article 1409 on void contracts is not a
question of first impression. This issue had already been settled several decades ago

when we held that an action to rescind is founded upon and presupposes the existence of
a contract.[43] A contract which is null and void is no contract at all and hence could not be
the subject of rescission.[44]

In the instant case, we have declared the Deeds of Absolute Sale to be fictitious
and inexistent for being absolutely simulated contracts. It is true that the CA cited
instances that may constitute badges of fraud under Article 1387 of the Civil Code on
rescissible contracts. But there is nothing else in the appealed decision to indicate that
rescission was contemplated under the said provision of the Civil Code. The
aforementioned badges must have been considered merely as grounds for holding that
the sale is fictitious. Consequently, we find that the CA properly applied the governing law
over the matter under consideration which is Article 1409 of the Civil Code on void or
inexistent contracts.
WHEREFORE, the petition is DENIED. Costs against petitioners.
HEIRS OF POLICRONIO M. URETA,
SR., namely: CONRADO B. URETA,
MACARIO B. URETA, GLORIA
URETA-GONZALES, ROMEO B.
URETA, RITA URETA-SOLANO, NENA
URETA-TONGCUA, VENANCIO B.
URETA, LILIA URETA-TAYCO, and
HEIRS OF POLICRONIO B. URETA,
JR., namely: MIGUEL T. URETA,
RAMON POLICRONIO T. URETA,
EMMANUEL T. URETA, and
BERNADETTE T. URETA,
Petitioners,
- versus HEIRS OF LIBERATO M. URETA,
namely: TERESA F. URETA,
AMPARO URETA-CASTILLO,
IGNACIO F. URETA, SR., EMIRITO F.
URETA, WILKIE F. URETA, LIBERATO
F. URETA, JR., RAY F. URETA, ZALDY
F. URETA, and MILA JEAN URETA

G.R. No. 165748

CIPRIANO;
HEIRS OF PRUDENCIA URETA
PARADERO, namely: WILLIAM U.
PARADERO, WARLITO U.
PARADERO, CARMENCITA P.
PERLAS, CRISTINA P. CORDOVA,
EDNA P. GALLARDO, LETICIA P.
REYES; NARCISO M. URETA;
VICENTE M. URETA;
HEIRS OF FRANCISCO M. URETA,
namely: EDITA T. URETA-REYES and
LOLLIE T. URETA-VILLARUEL;
ROQUE M. URETA; ADELA URETAGONZALES; HEIRS OF INOCENCIO
M. URETA, namely: BENILDA V.
URETA, ALFONSO V. URETA II, DICK
RICARDO V. URETA, and ENRIQUE
V. URETA; MERLINDA U. RIVERA;
JORGE URETA; ANDRES URETA,
WENEFREDA U. TARAN; and
BENEDICT URETA,
Respondents.
x--------------------------------------------------x
HEIRS OF LIBERATO M. URETA,
G.R. No. 165930
namely: TERESA F. URETA,
AMPARO URETA-CASTILLO,
IGNACIO F. URETA, SR., EMIRITO F.
URETA, WILKIE F. URETA, LIBERATO
F. URETA, JR., RAY F. URETA, ZALDY
F. URETA, and MILA JEAN URETA
CIPRIANO;
HEIRS OF PRUDENCIA URETA
PARADERO, namely: WILLIAM U.
PARADERO, WARLITO U.
PARADERO, CARMENCITA P.
PERLAS, CRISTINA P. CORDOVA,
EDNA P. GALLARDO, LETICIA P.
REYES; NARCISO M. URETA;
VICENTE M. URETA;
HEIRS OF FRANCISCO M. URETA,
namely: EDITA T. URETA-REYES and
LOLLIE T. URETA-VILLARUEL;
ROQUE M. URETA; ADELA URETAGONZALES; HEIRS OF INOCENCIO
M. URETA, namely: BENILDA V.
URETA, ALFONSO V. URETA II, DICK
RICARDO V. URETA, and ENRIQUE
V. URETA; MERLINDA U. RIVERA;
JORGE URETA; ANDRES URETA,

WENEFREDA U. TARAN; and

BENEDICT URETA,
Petitioners,
- versus
HEIRS OF POLICRONIO M. URETA,
SR., namely: CONRADO B. URETA,
MACARIO B. URETA, GLORIA
URETA-GONZALES, ROMEO B.
URETA, RITA URETA-SOLANO, NENA
URETA-TONGCUA, VENANCIO B.
URETA, LILIA URETA-TAYCO, and
HEIRS OF POLICRONIO B. URETA,
JR., namely: MIGUEL T. URETA,
RAMON POLICRONIO T. URETA,
EMMANUEL T. URETA, and
BERNADETTE T. URETA,
Respondents.

Present:
VELASCO, JR., J., Chairperson,
PERALTA,
ABAD,
MENDOZA, and
SERENO,* JJ.

Promulgated:
September 14, 2011

x--------------------------------------------------x
DECISION
MENDOZA, J.:
These consolidated petitions for review on certiorari under Rule 45 of
1997 Revised Rules of Civil Procedure assail the April 20, 2004 Decision[1] of
Court of Appeals (CA), and its October 14, 2004 Resolution [2] in C.A.-G.R. CV
71399, which affirmed with modification the April 26, 2001 Decision [3] of
Regional Trial Court, Branch 9, Kalibo, Aklan (RTC) in Civil Case No. 5026.

the
the
No.
the

The Facts
In his lifetime, Alfonso Ureta (Alfonso) begot 14 children, namely, Policronio,
Liberato, Narciso, Prudencia, Vicente, Francisco, Inocensio, Roque, Adela, Wenefreda,
Merlinda, Benedicto, Jorge, and Andres. The children of Policronio (Heirs of
Policronio), are opposed to the rest of Alfonsos children and their descendants (Heirs
of Alfonso).

Alfonso was financially well-off during his lifetime. He owned several fishpens, a
fishpond, a sari-sari store, a passenger jeep, and was engaged in the buying and
selling of copra. Policronio, the eldest, was the only child of Alfonso who failed to
finish schooling and instead worked on his fathers lands.
Sometime in October 1969, Alfonso and four of his children, namely, Policronio,
Liberato, Prudencia, and Francisco, met at the house of Liberato. Francisco, who was
then a municipal judge, suggested that in order to reduce the inheritance taxes,
their father should make it appear that he had sold some of his lands to his children.
Accordingly, Alfonso executed four (4) Deeds of Sale covering several parcels of land
in favor of Policronio,[4] Liberato,[5] Prudencia,[6] and his common-law wife, Valeriana
Dela Cruz.[7] The Deed of Sale executed on October 25, 1969, in favor of Policronio,
covered six parcels of land, which are the properties in dispute in this case.
Since the sales were only made for taxation purposes and no monetary
consideration was given, Alfonso continued to own, possess and enjoy the lands and
their produce.
When Alfonso died on October 11, 1972, Liberato acted as the administrator of his
fathers estate. He was later succeeded by his sister Prudencia, and then by her
daughter, Carmencita Perlas. Except for a portion of parcel 5, the rest of the parcels
transferred to Policronio were tenanted by the Fernandez Family. These tenants
never turned over the produce of the lands to Policronio or any of his heirs, but to
Alfonso and, later, to the administrators of his estate.
Policronio died on November 22, 1974. Except for the said portion of parcel 5,
neither Policronio nor his heirs ever took possession of the subject lands.
On April 19, 1989, Alfonsos heirs executed a Deed of Extra-Judicial Partition,
which included all the lands that were covered by the four (4) deeds of sale that
were previously executed by Alfonso for taxation purposes. Conrado, Policronios
eldest son, representing the Heirs of Policronio, signed the Deed of Extra-Judicial
Partition in behalf of his co-heirs.
[8]

After their fathers death, the Heirs of Policronio found tax declarations in his name
covering the six parcels of land. On June 15, 1995, they obtained a copy of the Deed
of Sale executed on October 25, 1969 by Alfonso in favor of Policronio.

Not long after, on July 30, 1995, the Heirs of Policronio allegedly learned about the
Deed of Extra-Judicial Partition involving Alfonsos estate when it was published in
the July 19, 1995 issue of the Aklan Reporter.
Believing that the six parcels of land belonged to their late father, and as
such, excluded from the Deed of Extra-Judicial Partition, the Heirs of Policronio
sought to amicably settle the matter with the Heirs of Alfonso. Earnest efforts
proving futile, the Heirs of Policronio filed a Complaint for Declaration of Ownership,
Recovery of Possession, Annulment of Documents, Partition, and Damages [9] against
the Heirs of Alfonso before the RTC on November 17, 1995 where the following
issues were submitted: (1) whether or not the Deed of Sale was valid; (2) whether or
not the Deed of Extra-Judicial Partition was valid; and (3) who between the parties
was entitled to damages.
The Ruling of the RTC
On April 26, 2001, the RTC dismissed the Complaint of the Heirs of Policronio and
ruled in favor of the Heirs of Alfonso in a decision, the dispositive portion of which
reads:
WHEREFORE, the Court finds that the preponderance of
evidence tilts in favor of the defendants, hence the instant case is
hereby DISMISSED.
The counterclaims are likewise DISMISSED.
With costs against plaintiffs.
SO ORDERED.
The RTC found that the Heirs of Alfonso clearly established that the Deed of
Sale was null and void. It held that the Heirs of Policronio failed to rebut the
evidence of the Heirs of Alfonso, which proved that the Deed of Sale in the
possession of the former was one of the four (4) Deeds of Sale executed by Alfonso
in favor of his 3 children and second wife for taxation purposes; that although tax
declarations were issued in the name of Policronio, he or his heirs never took
possession of the subject lands except a portion of parcel 5; and that all the produce
were turned over by the tenants to Alfonso and the administrators of his estate and
never to Policronio or his heirs.

The RTC further found that there was no money involved in the sale. Even
granting that there was, as claimed by the Heirs of Policronio, 2,000.00 for six
parcels of land, the amount was grossly inadequate. It was also noted that the
aggregate area of the subject lands was more than double the average share
adjudicated to each of the other children in the Deed of Extra-Judicial Partition; that
the siblings of Policronio were the ones who shared in the produce of the land; and
that the Heirs of Policronio only paid real estate taxes in 1996 and 1997. The RTC
opined that Policronio must have been aware that the transfer was merely for
taxation purposes because he did not subsequently take possession of the
properties even after the death of his father.
The Deed of Extra-Judicial Partition, on the other hand, was declared valid by
the RTC as all the heirs of Alfonso were represented and received equal shares and
all the requirements of a valid extra-judicial partition were met. The RTC considered
Conrados claim that he did not understand the full significance of his signature when
he signed in behalf of his co-heirs, as a gratutitous assertion. The RTC was of the
view that when he admitted to have signed all the pages and personally appeared
before the notary public, he was presumed to have understood their contents.
Lastly, neither party was entitled to damages. The Heirs of Alfonso failed to
present testimony to serve as factual basis for moral damages, no document was
presented to prove actual damages, and the Heirs of Policronio were found to have
filed the case in good faith.
The Ruling of the CA
Aggrieved, the Heirs of Policronio appealed before the CA, which rendered a
decision on April 20, 2004, the dispositive portion of which reads as follows:
WHEREFORE, the appeal is PARTIALLY GRANTED. The
appealed Decision, dated 26 April 2001, rendered by Hon. Judge Dean
R. Telan of the Regional Trial Court of Kalibo, Aklan, Branch 9, is
hereby AFFIRMED with MODIFICATION:
1.) The Deed of Sale in favor of Policronio Ureta, Sr., dated 25
October 1969, covering six (6) parcels of land is hereby
declared VOID for being ABSOLUTELY SIMULATED;
2.) The Deed of Extra-Judicial Partition, dated 19 April 1989,
is ANNULLED;
3.)
The
claim
for
actual
and
exemplary
are DISMISSED for lack of factual and legal basis.

damages

The case is hereby REMANDED to the court of origin for the

proper partition of ALFONSO URETAS Estate in accordance with Rule 69
of the 1997 Rules of Civil Procedure. No costs at this instance.
SO ORDERED.

The CA affirmed the finding of the RTC that the Deed of Sale was void. It found the
Deed of Sale to be absolutely simulated as the parties did not intend to be legally
bound by it. As such, it produced no legal effects and did not alter the juridical
situation of the parties. The CA also noted that Alfonso continued to exercise all the
rights of an owner even after the execution of the Deed of Sale, as it was undisputed
that he remained in possession of the subject parcels of land and enjoyed their
produce until his death.
Policronio, on the other hand, never exercised any rights pertaining to an
owner over the subject lands from the time they were sold to him up until his death.
He never took or attempted to take possession of the land even after his fathers
death, never demanded delivery of the produce from the tenants, and never paid
realty taxes on the properties. It was also noted that Policronio never disclosed the
existence of the Deed of Sale to his children, as they were, in fact, surprised to
discover its existence. The CA, thus, concluded that Policronio must have been
aware that the transfer was only made for taxation purposes.
The testimony of Amparo Castillo, as to the circumstances surrounding the
actual arrangement and agreement between the parties prior to the execution of the
four (4) Deeds of Sale, was found by the CA to be unrebutted. The RTCs assessment
of the credibility of her testimony was accorded respect, and the intention of the
parties was given the primary consideration in determining the true nature of the
contract.
Contrary to the finding of the RTC though, the CA annulled the Deed of ExtraJudicial Partition due to the incapacity of one of the parties to give his consent to the
contract. It held that before Conrado could validly bind his co-heirs to the Deed of
Extra-Judicial Partition, it was necessary that he be clothed with the proper authority.
The CA ruled that a special power of attorney was required under Article 1878 (5)
and (15) of the Civil Code. Without a special power of attorney, it was held that
Conrado lacked the legal capactiy to give the consent of his co-heirs, thus, rendering
the Deed of Extra-Judicial Partition voidable under Article 1390 (1) of the Civil Code.

As a consequence, the CA ordered the remand of the case to the RTC for the proper
partition of the estate, with the option that the parties may still voluntarily effect the
partition by executing another agreement or by adopting the assailed Deed of
Partition with the RTCs approval in either case. Otherwise, the RTC may proceed with
the compulsory partition of the estate in accordance with the Rules.
With regard to the claim for damages, the CA agreed with the RTC and
dismissed the claim for actual and compensatory damages for lack of factual and
legal basis.
Both parties filed their respective Motions for Reconsideration, which were
denied by the CA for lack of merit in a Resolution dated October 14, 2004.
In their Motion for Reconsideration, the Heirs of Policronio argued that the RTC
violated the best evidence rule in giving credence to the testimony of Amparo
Castillo with regard to the simulation of the Deed of Sale, and that prescription had
set in precluding any question on the validity of the contract.
The CA held that the oral testimony was admissible under Rule 130, Section 9
(b) and (c), which provides that evidence aliunde may be allowed to explain the
terms of the written agreement if the same failed to express the true intent and
agreement of the parties thereto, or when the validity of the written agreement was
put in issue. Furthermore, the CA found that the Heirs of Policronio waived their right
to object to evidence aliunde having failed to do so during trial and for raising such
only for the first time on appeal. With regard to prescription, the CA ruled that the
action or defense for the declaration of the inexistence of a contract did not
prescribe under Article 1410 of the Civil Code.
On the other hand, the Heirs of Alfonso argued that the Deed of Extra-Judicial
Partition should not have been annulled, and instead the preterited heirs should be
given their share. The CA reiterated that Conrados lack of capacity to give his coheirs consent to the extra-judicial settlement rendered the same voidable.
Hence, the present Petitions for Review on Certiorari.
The Issues
The issues presented for resolution by the Heirs of Policronio in G.R. No.
165748 are as follows:
I.

Whether the Court of Appeals is correct in ruling that the Deed

of Absolute Sale of 25 October 1969 is void for being
absolutely fictitious and in relation therewith, may parol
evidence be entertained to thwart its binding effect after the
parties have both died?
Assuming that indeed the said document is simulated, whether
or not the parties thereto including their successors in interest
are estopped to question its validity, they being bound by
Articles 1412 and 1421 of the Civil Code?
II.
Whether prescription applies to bar any question respecting
the validity of the Deed of Absolute Sale dated 25 October
1969? Whether prescription applies to bar any collateral attack
on the validity of the deed of absolute sale executed 21 years
earlier?
III.
Whether the Court of Appeals correctly ruled in nullifying the
Deed of Extrajudicial Partition because Conrado Ureta signed
the same without the written authority from his siblings in
contravention of Article 1878 in relation to Article 1390 of the
Civil Code and in relation therewith, whether the defense of
ratification and/or preterition raised for the first time on
appeal may be entertained?
The issues presented for resolution by the Heirs of Alfonso in G.R. No.
165930 are as follows:
I.
Whether or not grave error was committed by the Trial Court
and Court of Appeals in declaring the Deed of Sale of subject
properties as absolutely simulated and null and void thru parol
evidence based on their factual findings as to its fictitious
nature, and there being waiver of any objection based on
violation of the parol evidence rule.
II.
Whether or not the Court of Appeals was correct in holding
that Conrado Uretas lack of capacity to give his co-heirs
consent to the Extra-Judicial Partition rendered the same
voidable.
III.

Granting arguendo that Conrado Ureta was not authorized to

represent his co-heirs and there was no ratification, whether
or not the Court of Appeals was correct in ordering the remand
of the case to the Regional Trial Court for partition of the
estate of Alfonso Ureta.
IV.
Since the sale in favor of Policronio Ureta Sr. was null and void
ab initio, the properties covered therein formed part of the
estate of the late Alfonso Ureta and was correctly included in
the Deed of Extrajudicial Partition even if no prior action for
nullification of the sale was filed by the heirs of Liberato Ureta.
V.
Whether or not the heirs of Policronio Ureta Sr. can claim that
estoppel based on Article 1412 of the Civil Code as well as the
issue of prescription can still be raised on appeal.
These various contentions revolve around two major issues, to wit: (1)
whether the Deed of Sale is valid, and (2) whether the Deed of Extra-Judicial
Partition is valid. Thus, the assigned errors shall be discussed jointly and in seriatim.
The Ruling of the Court
Validity of the Deed of Sale
Two veritable legal presumptions bear on the validity of the Deed of Sale: (1)
that there was sufficient consideration for the contract; and (2) that it was the result
of a fair and regular private transaction. If shown to hold, these presumptions
infer prima facie the transactions validity, except that it must yield to the evidence
adduced.[10]
As will be discussed below, the evidence overcomes these two presumptions.
Absolute Simulation
First, the Deed of Sale was not the result of a fair and regular private transaction
because it was absolutely simulated.
The Heirs of Policronio argued that the land had been validly sold to Policronio
as the Deed of Sale contained all the essential elements of a valid contract of sale,
by virtue of which, the subject properties were transferred in his name as evidenced

by the tax declaration. There being no invalidation prior to the execution of the
Deed of Extra-Judicial Partition, the probity and integrity of the Deed of Sale should
remain undiminished and accorded respect as it was a duly notarized public
instrument.
The Heirs of Policronio posited that his loyal services to his father and his being the
eldest among Alfonsos children, might have prompted the old man to sell the
subject lands to him at a very low price as an advance inheritance. They explained
that Policronios failure to take possession of the subject lands and to claim their
produce manifests a Filipino family practice wherein a child would take possession
and enjoy the fruits of the land sold by a parent only after the latters
death. Policronio simply treated the lands the same way his father Alfonso treated
them - where his children enjoyed usufructuary rights over the properties, as
opposed to appropriating them exclusively to himself. They contended
that Policronios failure to take actual possession of the lands did not prove that he
was not the owner as he was merely exercising his right to dispose of them. They
argue that it was an error on the part of the CA to conclude that ownership by
Policronio was not established by his failure to possess the properties
sold. Instead, emphasis should be made on the fact that the tax declarations, being
indicia of possession, were in Policronios name.
They further argued that the Heirs of Alfonso failed to appreciate that the
Deed of Sale was clear enough to convey the subject parcels of land. Citing
jurisprudence, they contend that there is a presumption that an instrument sets out
the true agreement of the parties thereto and that it was executed for valuable
consideration,[11] and where there is no doubt as to the intention of the parties to a
contract, the literal meaning of the stipulation shall control. [12] Nowhere in the Deed
of Sale is it indicated that the transfer was only for taxation purposes. On the
contrary, the document clearly indicates that the lands were sold. Therefore, they
averred that the literal meaning of the stipulation should control.
The Court disagrees.
The Court finds no cogent reason to deviate from the finding of the CA that
the Deed of Sale is null and void for being absolutely simulated. The Civil Code
provides:
Art. 1345. Simulation of a contract may be absolute or relative. The
former takes place when the parties do not intend to be bound at all;
the latter, when the parties conceal their true agreement.

Art. 1346. An absolutely simulated or fictitious contract is void. A

relative simulation, when it does not prejudice a third person and is not
intended for any purpose contrary to law, morals, good customs, public
order or public policy binds the parties to their real agreement.

Valerio v. Refresca[13] is instructive on the matter of simulation of contracts:

In absolute simulation, there is a colorable contract but it has no
substance as the parties have no intention to be bound by it. The main
characteristic of an absolute simulation is that the apparent contract is
not really desired or intended to produce legal effect or in any way
alter the juridical situation of the parties. As a result, an absolutely
simulated or fictitious contract is void, and the parties may recover
from each other what they may have given under the
contract. However, if the parties state a false cause in the contract to
conceal their real agreement, the contract is relatively simulated and
the parties are still bound by their real agreement. Hence, where the
essential requisites of a contract are present and the simulation refers
only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their
successors in interest.
Lacking, therefore, in an absolutely simulated contract is consent which is
essential to a valid and enforceable contract.[14] Thus, where a person, in order to
place his property beyond the reach of his creditors, simulates a transfer of it to
another, he does not really intend to divest himself of his title and control of the
property; hence, the deed of transfer is but a sham. [15] Similarly, in this case, Alfonso
simulated a transfer to Policronio purely for taxation purposes, without intending to
transfer ownership over the subject lands.
The primary consideration in determining the true nature of a contract is the
intention of the parties. If the words of a contract appear to contravene the evident
intention of the parties, the latter shall prevail. Such intention is determined not
only from the express terms of their agreement, but also from the contemporaneous
and subsequent acts of the parties. [16] The true intention of the parties in this case
was sufficiently proven by the Heirs of Alfonso.
The Heirs of Alfonso established by a preponderance of evidence [17] that the
Deed of Sale was one of the four (4) absolutely simulated Deeds of Sale which
involved no actual monetary consideration, executed by Alfonso in favor of his
children, Policronio, Liberato, and Prudencia, and his second wife, Valeriana, for
taxation purposes.

Amparo Castillo, the daughter of Liberato, testified, to wit:

Q: Now sometime in the year 1969 can you recall if your grandfather
and his children [met] in your house?
A: Yes sir, that was sometime in October 1969 when they [met] in our
house, my grandfather, my late uncle Policronio Ureta, my late uncle
Liberato Ureta, my uncle Francisco Ureta, and then my auntie
Prudencia Ureta they talk[ed] about, that idea came from my uncle
Francisco Ureta to [sell] some parcels of land to his children to lessen
the inheritance tax whatever happened to my grandfather, actually no
money involved in this sale.
Q: Now you said there was that agreement, verbal agreement. [W]here
were you when this Alfonso Ureta and his children gather[ed] in your
house?
A: I was near them in fact I heard everything they were talking [about]
xxx
Q: Were there documents of sale executed by Alfonso Ureta in
furtherance of their verbal agreement?
A: Yes sir.
Q: To whom in particular did your grandfather Alfonso Ureta execute
this deed of sale without money consideration according to you?
A: To my uncle Policronio Ureta and to Prudencia Ureta Panadero.
Q: And who else?
A: To Valeriana dela Cruz.
Q: How about your father?
A: He has.[18]
The other Deeds of Sale executed by Alfonso in favor of his children
Prudencia and Liberato, and second wife Valeriana, all bearing the same date of
execution, were duly presented in evidence by the Heirs of Alfonso, and were
uncontested by the Heirs of Policronio. The lands which were the subject of these
Deeds of Sale were in fact included in the Deed of Extra-Judicial Partition executed
by all the heirs of Alfonso, where it was expressly stipulated:

That the above-named Amparo U. Castillo, Prudencia U.

Paradero, Conrado B. Ureta and Merlinda U. Rivera do hereby recognize
and acknowledge as a fact that the properties presently declared in
their respective names or in the names of their respective parents and
are included in the foregoing instrument are actually the properties of
the deceased Alfonso Ureta and were transferred only for the purpose
of effective administration and development and convenience in the
payment of taxes and, therefore, all instruments conveying or affecting
the transfer of said properties are null and void from the beginning. [19]
As found by the CA, Alfonso continued to exercise all the rights of an owner
even after the execution of the Deeds of Sale. It was undisputed that Alfonso
remained in possession of the subject lands and enjoyed their produce until his
death. No credence can be given to the contention of the Heirs of Policrionio that
their father did not take possession of the subject lands or enjoyed the fruits thereof
in deference to a Filipino family practice. Had this been true, Policronio should have
taken possession of the subject lands after his father died. On the contrary, it was
admitted that neither Policronio nor his heirs ever took possession of the subject
lands from the time they were sold to him, and even after the death of both Alfonso
and Policronio.
It was also admitted by the Heirs of Policronio that the tenants of the subject
lands never turned over the produce of the properties to Policronio or his heirs but
only to Alfonso and the administrators of his estate. Neither was there a demand for
their delivery to Policronio or his heirs. Neither did Policronio ever pay real estate
taxes on the properties, the only payment on record being those made by his heirs
in 1996 and 1997 ten years after his death. In sum, Policronio never exercised any
rights pertaining to an owner over the subject lands.
The most protuberant index of simulation of contract is the complete absence
of an attempt in any manner on the part of the ostensible buyer to assert rights of
ownership over the subject properties. Policronios failure to take exclusive
possession of the subject properties or, in the alternative, to collect rentals, is
contrary to the principle of ownership. Such failure is a clear badge of simulation
that renders the whole transaction void. [20]
It is further telling that Policronio never disclosed the existence of the Deed of
Sale to his children. This, coupled with Policronios failure to exercise any rights
pertaining to an owner of the subject lands, leads to the conclusion that he was
aware that the transfer was only made for taxation purposes and never intended to
bind the parties thereto.

As the above factual circumstances remain unrebutted by the Heirs of Policronio,

the factual findings of the RTC, which were affirmed by the CA, remain binding and
conclusive upon this Court.[21]
It is clear that the parties did not intend to be bound at all, and as such, the
Deed of Sale produced no legal effects and did not alter the juridical situation of the
parties. The Deed of Sale is, therefore, void for being absolutely simulated pursuant
to Article 1409 (2) of the Civil Code which provides:
Art. 1409. The following contracts are inexistent and void from the
beginning:
xxx
(2) Those which are absolutely simulated or fictitious;
xxx
For guidance, the following are the most fundamental characteristics of void
or inexistent contracts:
1) As a general rule, they produce no legal effects whatsoever in
accordance with the principle "quod nullum est nullum producit
effectum."
2) They are not susceptible of ratification.
3) The right to set up the defense of inexistence or absolute nullity
cannot be waived or renounced.
4) The action or defense for the declaration of their inexistence or
absolute nullity is imprescriptible.
5) The inexistence or absolute nullity of a contract cannot be invoked
by a person whose interests are not directly affected. [22]
Since the Deed of Sale is void, the subject properties were properly included
in the Deed of Extra-Judicial Partition of the estate of Alfonso.
Absence and Inadequacy of Consideration

The second presumption is rebutted by the lack of consideration for the Deed
of Sale.
In their Answer,[23] the Heirs of Alfonso initially argued that the Deed of Sale
was void for lack of consideration, and even granting that there was consideration,
such was inadequate. The Heirs of Policronio counter that the defenses of absence
or inadequacy of consideration are not grounds to render a contract void.
The Heirs of Policronio contended that under Article 1470 of the Civil
Code, gross inadequacy of the price does not affect a contract of sale, except as it
may indicate a defect in the consent, or that the parties really intended a donation
or some other act or contract. Citing jurisprudence, they argued that inadequacy of
monetary consideration does not render a conveyance inexistent as liberality may
be sufficient cause for a valid contract, whereas fraud or bad faith may render it
either rescissible or voidable, although valid until annulled. [24] Thus, they argued
that if the contract suffers from inadequate consideration, it remains valid until
annulled, and the remedy of rescission calls for judicial intervention, which remedy
the Heirs of Alfonso failed to take.
It is further argued that even granting that the sale of the subject lands for a
consideration of 2,000.00 was inadequate, absent any evidence of the fair market
value of the land at the time of its sale, it cannot be concluded that the price at
which it was sold was inadequate. [25] As there is nothing in the records to show that
the Heirs of Alfonso supplied the true value of the land in 1969, the amount of
2,000.00 must thus stand as its saleable value.
On this issue, the Court finds for the Heirs of Alfonso.
For lack of consideration, the Deed of Sale is once again found to be void. It
states that Policronio paid, and Alfonso received, the 2,000.00 purchase price on
the date of the signing of the contract:
That I, ALFONSO F. URETA, x x x for and in consideration of the
sum of TWO THOUSAND (2,000.00) PESOS, Philippine Currency, to me
in hand paid by POLICRONIO M. URETA, x x x, do hereby CEDE,
TRANSFER, and CONVEY, by way of absolute sale, x x x six (6) parcels
of land x x x.[26] [Emphasis ours]

Although, on its face, the Deed of Sale appears to be supported by valuable

consideration, the RTC found that there was no money involved in the sale. [27] This

finding was affirmed by the CA in ruling that the sale is void for being absolutely
simulated. Considering that there is no cogent reason to deviate from such factual
findings, they are binding on this Court.
It is well-settled in a long line of cases that where a deed of sale states that the
purchase price has been paid but in fact has never been paid, the deed of sale is
null and void for lack of consideration. [28] Thus, although the contract states that the
purchase price of 2,000.00 was paid by Policronio to Alfonso for the subject
properties, it has been proven that such was never in fact paid as there was no
money involved. It must, therefore, follow that the Deed of Sale is void for lack of
consideration.
Given that the Deed of Sale is void, it is unnecessary to discuss the issue on
the inadequacy of consideration.
Parol Evidence and Hearsay
The Heirs of Policronio aver that the rules on parol evidence and hearsay
were violated by the CA in ruling that the Deed of Sale was void.
They argued that based on the parol evidence rule, the Heirs of Alfonso and,
specifically, Amparo Castillo, were not in a position to prove the terms outside of the
contract because they were not parties nor successors-in-interest in the Deed of
Sale in question. Thus, it is argued that the testimony of Amparo Castillo violates
the parol evidence rule.
Stemming from the presumption that the Heirs of Alfonso were not parties to
the contract, it is also argued that the parol evidence rule may not be properly
invoked by either party in the litigation against the other, where at least one of the
parties to the suit is not a party or a privy of a party to the written instrument in
question and does not base a claim on the instrument or assert a right originating in
the instrument or the relation established thereby. [29]
Their arguments are untenable.
The objection against the admission of any evidence must be made at the
proper time, as soon as the grounds therefor become reasonably apparent, and if
not so made, it will be understood to have been waived. In the case of testimonial
evidence, the objection must be made when the objectionable question is asked or

after the answer is given if the objectionable features become apparent only by
reason of such answer.[30] In this case, the Heirs of Policronio failed to timely object
to the testimony of Amparo Castillo and they are, thus, deemed to have waived the
benefit of the parol evidence rule.
Granting that the Heirs of Policronio timely objected to the testimony of
Amparo Castillo, their argument would still fail.
Section 9 of Rule 130 of the Rules of Court provides:
Section 9. Evidence of written agreements. When the terms of an
agreement have been reduced to writing, it is considered as containing
all the terms agreed upon and there can be, between the parties and
their successors in interest, no evidence of such terms other than the
contents of the written agreement.
However, a party may present evidence to modify, explain or add to
the terms of written agreement if he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake or imperfection in the written
agreement;
(b) The failure of the written agreement to express the true intent and
agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their
successors in interest after the execution of the written agreement.
The term "agreement" includes wills.
[Emphasis ours]

Paragraphs (b) and (c) are applicable in the case at bench.

The failure of the Deed of Sale to express the true intent and agreement of
the parties was clearly put in issue in the Answer [31] of the Heirs of Alfonso to the
Complaint. It was alleged that the Deed of Sale was only made to lessen the
payment of estate and inheritance taxes and not meant to transfer ownership. The
exception in paragraph (b) is allowed to enable the court to ascertain the true intent
of the parties, and once the intent is clear, it shall prevail over what the document
appears to be on its face. [32] As the true intent of the parties was duly proven in the
present case, it now prevails over what appears on the Deed of Sale.

The validity of the Deed of Sale was also put in issue in the Answer, and was
precisely one of the issues submitted to the RTC for resolution. [33] The operation of
the parol evidence rule requires the existence of a valid written agreement. It is,
thus, not applicable in a proceeding where the validity of such agreement is the fact
in dispute, such as when a contract may be void for lack of consideration.
[34]
Considering that the Deed of Sale has been shown to be void for being absolutely
simulated and for lack of consideration, the Heirs of Alfonso are not precluded from
presenting evidence to modify, explain or add to the terms of the written
agreement.
The Heirs of Policronio must be in a state of confusion in arguing that the
Heirs of Alfonso may not question the Deed of Sale for not being parties or
successors-in-interest therein on the basis that the parol evidence rule may not be
properly invoked in a proceeding or litigation where at least one of the parties to the
suit is not a party or a privy of a party to the written instrument in question and
does not base a claim on the instrument or assert a right originating in the
instrument or the relation established thereby. If their argument was to be
accepted, then the Heirs of Policronio would themselves be precluded from invoking
the parol evidence rule to exclude the evidence of the Heirs of Alfonso.
Indeed, the applicability of the parol evidence rule requires that the case be
between parties and their successors-in-interest. [35] In this case, both the Heirs of
Alfonso and the Heirs of Policronio are successors-in-interest of the parties to the
Deed of Sale as they claim rights under Alfonso and Policronio, respectively. The
parol evidence rule excluding evidence aliunde, however, still cannot apply because
the present case falls under two exceptions to the rule, as discussed above.
With respect to hearsay, the Heirs of Policronio contended that the rule on
hearsay was violated when the testimony of Amparo Castillo was given weight in
proving that the subject lands were only sold for taxation purposes as she was a
person alien to the contract. Even granting that they did not object to her testimony
during trial, they argued that it should not have been appreciated by the CA
because it had no probative value whatsoever. [36]
The Court disagrees.
It has indeed been held that hearsay evidence whether objected to or not
cannot be given credence for having no probative value. [37] This principle, however,
has been relaxed in cases where, in addition to the failure to object to the

admissibility of the subject evidence, there were other pieces of evidence presented
or there were other circumstances prevailing to support the fact in issue. In TopWeld Manufacturing, Inc. v. ECED S.A., [38] this Court held:
Hearsay evidence alone may be insufficient to establish a fact in
an injunction suit (Parker v. Furlong, 62 P. 490) but, when no objection
is made thereto, it is, like any other evidence, to be considered and
given the importance it deserves. (Smith v. Delaware & Atlantic
Telegraph & Telephone Co., 51 A 464). Although we should warn of the
undesirability of issuing judgments solely on the basis of the affidavits
submitted, where as here, said affidavits are overwhelming,
uncontroverted by competent evidence and not inherently improbable,
we are constrained to uphold the allegations of the respondents
regarding the multifarious violations of the contracts made by the
petitioner.
In the case at bench, there were other prevailing circumstances which
corroborate the testimony of Amparo Castillo. First, the other Deeds of Sale which
were executed in favor of Liberato, Prudencia, and Valeriana on the same day as
that of Policronios were all presented in evidence. Second, all the properties subject
therein were included in the Deed of Extra-Judicial Partition of the estate of
Alfonso. Third, Policronio, during his lifetime, never exercised acts of ownership over
the subject properties (as he never demanded or took possession of them, never
demanded or received the produce thereof, and never paid real estate taxes
thereon). Fourth, Policronio never informed his children of the sale.
As the Heirs of Policronio failed to controvert the evidence presented, and to
timely object to the testimony of Amparo Castillo, both the RTC and the CA correctly
accorded probative weight to her testimony.
Prior Action Unnecessary
The Heirs of Policronio averred that the Heirs of Alfonso should have filed an
action to declare the sale void prior to executing the Deed of Extra-Judicial Partition.
They argued that the sale should enjoy the presumption of regularity, and until
overturned by a court, the Heirs of Alfonso had no authority to include the land in
the inventory of properties of Alfonsos estate. By doing so, they arrogated upon
themselves the power of invalidating the Deed of Sale which is exclusively vested in
a court of law which, in turn,can rule only upon the observance of due
process. Thus, they contended that prescription, laches, or estoppel have set in to
militate against assailing the validity of the sale.

The Heirs of Policronio are mistaken.

A simulated contract of sale is without any cause or consideration, and is,
therefore, null and void; in such case, no independent action to rescind or annul the
contract is necessary, and it may be treated as non-existent for all purposes. [39] A
void or inexistent contract is one which has no force and effect from the beginning,
as if it has never been entered into, and which cannot be validated either by time or
ratification. A void contract produces no effect whatsoever either against or in favor
of anyone; it does not create, modify or extinguish the juridical relation to which it
refers.[40] Therefore, it was not necessary for the Heirs of Alfonso to first file an
action to declare the nullity of the Deed of Sale prior to executing the Deed of ExtraJudicial Partition.
Personality to Question Sale
The Heirs of Policronio contended that the Heirs of Alfonso are not parties,
heirs, or successors-in-interest under the contemplation of law to clothe them with
the personality to question the Deed of Sale. They argued that under Article 1311 of
the Civil Code, contracts take effect only between the parties, their assigns and
heirs. Thus, the genuine character of a contract which personally binds the parties
cannot be put in issue by a person who is not a party thereto. They posited that the
Heirs of Alfonso were not parties to the contract; neither did they appear to be
beneficiaries by way of assignment or inheritance. Unlike themselves who are direct
heirs of Policronio, the Heirs of Alfonso are not Alfonsos direct heirs. For the Heirs of
Alfonso to qualify as parties, under Article 1311 of the Civil Code, they must first
prove that they are either heirs or assignees. Being neither, they have no legal
standing to question the Deed of Sale.
They further argued that the sale cannot be assailed for being barred under
Article 1421 of the Civil Code which provides that the defense of illegality of a
contract is not available to third persons whose interests are not directly affected.
Again, the Court disagrees.
Article 1311 and Article 1421 of the Civil Code provide:
Art. 1311. Contracts take effect only between the parties, their assigns
and heirs, x x x
Art. 1421. The defense of illegality of contracts is not available to third
persons whose interests are not directly affected.

The right to set up the nullity of a void or non-existent contract is not limited
to the parties, as in the case of annullable or voidable contracts; it is extended to
third persons who are directly affected by the contract. Thus, where a contract is
absolutely simulated, even third persons who may be prejudiced thereby may set
up its inexistence.[41] The Heirs of Alfonso are the children of Alfonso, with his
deceased children represented by their children (Alfonsos grandchildren). The Heirs
of Alfonso are clearly his heirs and successors-in-interest and, as such, their
interests are directly affected, thereby giving them the right to question the legality
of the Deed of Sale.
Inapplicability of Article 842
The Heirs of Policronio further argued that even assuming that the Heirs of
Alfonso have an interest in the Deed of Sale, they would still be precluded from
questioning its validity. They posited that the Heirs of Alfonso must first prove that
the sale of Alfonsos properties to Policronio substantially diminished their
successional rights or that their legitimes would be unduly prejudiced, considering
that under Article 842 of the Civil Code, one who has compulsory heirs may dispose
of his estate provided that he does not contravene the provisions of the Civil Code
with regard to the legitime of said heirs. Having failed to do so, they argued that the
Heirs of Alfonso should be precluded from questioning the validity of the Deed of
Sale.
Still, the Court disagrees.
Article 842 of the Civil Code provides:
Art. 842. One who has no compulsory heirs may dispose by will of all
his estate or any part of it in favor of any person having capacity to
succeed.
One who has compulsory heirs may dispose of his estate provided he
does not contravene the provisions of this Code with regard to the
legitime of said heirs.
This
involved in
the Heirs
diminished

article refers to the principle of freedom of disposition by will. What is

the case at bench is not a disposition by will but by Deed of Sale. Hence,
of Alfonso need not first prove that the disposition substantially
their successional rights or unduly prejudiced their legitimes.

Inapplicability of Article 1412

The Heirs of Policronio contended that even assuming that the contract was
simulated, the Heirs of Alfonso would still be barred from recovering the properties
by reason of Article 1412 of the Civil Code, which provides that if the act in which
the unlawful or forbidden cause does not constitute a criminal offense, and the fault
is both on the contracting parties, neither may recover what he has given by virtue
of the contract or demand the performance of the others undertaking. As the Heirs
of Alfonso alleged that the purpose of the sale was to avoid the payment of
inheritance taxes, they cannot take from the Heirs of Policronio what had been
given to their father.
On this point, the Court again disagrees.
Article 1412 of the Civil Code is as follows:
Art. 1412. If the act in which the unlawful or forbidden cause consists
does not constitute a criminal offense, the following rules shall be
observed:
(1) When the fault is on the part of both contracting parties, neither
may recover what he has given by virtue of the contract, or
demand the performance of the others undertaking;
(2) When only one of the contracting parties is at fault, he cannot
recover what he has given by reason of the contract, or ask for the
fulfillment of what has been promised him. The other, who is not at
fault, may demand the return of what he has given without any
obligation to comply with his promise.
Article 1412 is not applicable to fictitious or simulated contracts, because
they refer to contracts with an illegal cause or subject-matter. [42] This article
presupposes the existence of a cause, it cannot refer to fictitious or simulated
contracts which are in reality non-existent. [43] As it has been determined that the
Deed of Sale is a simulated contract, the provision cannot apply to it.
Granting that the Deed of Sale was not simulated, the provision would still
not apply. Since the subject properties were included as properties of Alfonso in the
Deed of Extra-Judicial Partition, they are covered by corresponding inheritance and
estate taxes. Therefore, tax evasion, if at all present, would not arise, and Article
1412 would again be inapplicable.

Prescription
From the position that the Deed of Sale is valid and not void, the Heirs of
Policronio argued that any question regarding its validity should have been initiated
through judicial process within 10 years from its notarization in accordance with
Article 1144 of the Civil Code. Since 21 years had already elapsed when the Heirs of
Alfonso assailed the validity of the Deed of Sale in 1996, prescription had set
in. Furthermore, since the Heirs of Alfonso did not seek to nullify the tax
declarations of Policronio, they had impliedly acquiesced and given due recognition
to the Heirs of Policronio as the rightful inheritors and should, thus, be barred from
laying claim on the land.
The Heirs of Policronio are mistaken.
Article 1410 of the Civil Code provides:
Art. 1410. The action for the declaration of the inexistence of a
contract does not prescribe.
This is one of the most fundamental characteristics of void or inexistent
contracts.[44]
As the Deed of Sale is a void contract, the action for the declaration of its nullity,
even if filed 21 years after its execution, cannot be barred by prescription for it is
imprescriptible. Furthermore, the right to set up the defense of inexistence or
absolute nullity cannot be waived or renounced. [45] Therefore, the Heirs of Alfonso
cannot be precluded from setting up the defense of its inexistence.
Validity of the Deed of Extra-Judicial Partition
The Court now resolves the issue of the validity of the Deed of Extra-Judicial
Partition.
Unenforceability
The Heirs of Alfonso argued that the CA was mistaken in annulling the Deed of
Extra-Judicial Partition due to the incapacity of Conrado to give the consent of his
co-heirs for lack of a special power of attorney. They contended that what was
involved was not the capacity to give consent in behalf of the co-heirs but the
authority to represent them. They argue that the Deed of Extra-Judicial Partition is

not a voidable or an annullable contract under Article 1390 of the Civil Code, but
rather, it is an unenforceable or, more specifically, an unauthorized contract under
Articles 1403 (1) and 1317 of the Civil Code. As such, the Deed of Extra-Judicial
Partition should not be annulled but only be rendered unenforceable against the
siblings of Conrado.
They further argued that under Article 1317 of the Civil Code, when the
persons represented without authority have ratified the unauthorized acts, the
contract becomes enforceable and binding. They contended that the Heirs of
Policronio ratified the Deed of Extra-Judicial Partition when Conrado took possession
of one of the parcels of land adjudicated to him and his siblings, and when another
parcel was used as collateral for a loan entered into by some of the Heirs of
Policronio. The Deed of Extra-Judicial Partition having been ratified and its benefits
accepted, the same thus became enforceable and binding upon them.
The Heirs of Alfonso averred that granting arguendo that Conrado was not
authorized to represent his co-heirs and there was no ratification, the CA should not
have remanded the case to the RTC for partition of Alfonsos estate. They argued
that the CA should not have applied the Civil Code general provision on contracts,
but the special provisions dealing with succession and partition. They contended
that contrary to the ruling of the CA, the extra-judicial parition was not an act of
strict dominion, as it has been ruled that partition of inherited land is not a
conveyance but a confirmation or ratification of title or right to the land.
[46]
Therefore, the law requiring a special power of attorney should not be applied to
partitions.
On the other hand, the Heirs of Policronio insisted that the CA pronouncement
on the invalidity of the Deed of Extra-Judicial Partition should not be disturbed
because the subject properties should not have been included in the estate of
Alfonso, and because Conrado lacked the written authority to represent his siblings.
They argued with the CA in ruling that a special power of attorney was required
before Conrado could sign in behalf of his co-heirs.
The Heirs of Policronio denied that they ratified the Deed of Extra-Judicial
Partition. They claimed that there is nothing on record that establishes that they
ratified the partition. Far from doing so, they precisely questioned its execution by
filing a complaint. They further argued that under Article 1409 (3) of the Civil Code,
ratification cannot be invoked to validate the illegal act of including in the partition

those properties which do not belong to the estate as it provides another mode of
acquiring ownership not sanctioned by law.
Furthermore, the Heirs of Policronio contended that the defenses of
unenforceability, ratification, and preterition are being raised for the first time on
appeal by the Heirs of Alfonso. For having failed to raise them during the trial, the
Heirs of Alfonso should be deemed to have waived their right to do so.
The Court agrees in part with the Heirs of Alfonso.
To begin, although the defenses of unenforceability, ratification and
preterition were raised by the Heirs of Alfonso for the first time on appeal, they are
concomitant matters which may be taken up. As long as the questioned items bear
relevance and close relation to those specifically raised, the interest of justice would
dictate that they, too, must be considered and resolved. The rule that only theories
raised in the initial proceedings may be taken up by a party thereto on appeal
should refer to independent, not concomitant matters, to support or oppose the
cause of action.[47]
In the RTC, the Heirs of Policronio alleged that Conrados consent was vitiated
by mistake and undue influence, and that he signed the Deed of Extra-Judicial
Partition without the authority or consent of his co-heirs.
The RTC found that Conrados credibility had faltered, and his claims were
rejected by the RTC as gratuitous assertions. On the basis of such, the RTC ruled
that Conrado duly represented his siblings in the Deed of Extra-Judicial Partition.
On the other hand, the CA annulled the Deed of Extra-Judicial Partition under
Article 1390 (1) of the Civil Code, holding that a special power of attorney was
lacking as required under Article 1878 (5) and (15) of the Civil Code. These articles
are as follows:
Art. 1878. Special powers of attorney are necessary in the following
cases:
xxx
(5) To enter into any contract by which the ownership of an immovable
is transmitted or acquired either gratuitously or for a valuable
consideration;
xxx
(15) Any other act of strict dominion.

Art. 1390. The following contracts are voidable or annullable, even

though there may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a
contract;
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper
action in court. They are susceptible of ratification.
This Court finds that Article 1878 (5) and (15) is inapplicable to the case at
bench. It has been held in several cases [48] that partition among heirs is not legally
deemed a conveyance of real property resulting in change of ownership. It is not a
transfer of property from one to the other, but rather, it is a confirmation or
ratification of title or right of property that an heir is renouncing in favor of another
heir who accepts and receives the inheritance. It is merely a designation and
segregation of that part which belongs to each heir. The Deed of Extra-Judicial
Partition cannot, therefore, be considered as an act of strict dominion. Hence, a
special power of attorney is not necessary.
In fact, as between the parties, even an oral partition by the heirs is valid if no
creditors are affected. The requirement of a written memorandum under the statute
of frauds does not apply to partitions effected by the heirs where no creditors are
involved considering that such transaction is not a conveyance of property resulting
in change of ownership but merely a designation and segregation of that part which
belongs to each heir.[49]
Neither is Article 1390 (1) applicable. Article 1390 (1) contemplates the
incapacity of a party to give consent to a contract. What is involved in the case at
bench though is not Conrados incapacity to give consent to the contract, but rather
his lack of authority to do so. Instead, Articles 1403 (1), 1404, and 1317 of the Civil
Code find application to the circumstances prevailing in this case. They are as
follows:
Art. 1403. The following contracts are unenforceable, unless they are
ratified:
(1) Those entered into in the name of another person by one who has
been given no authority or legal representation, or who has acted
beyond his powers;

Art. 1404. Unauthorized contracts are governed by Article 1317 and

the principles of agency in Title X of this Book.
Art. 1317. No one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent
him.
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers,
shall be unenforceable, unless it is ratified, expressly or impliedly, by
the person on whose behalf it has been executed, before it is revoked
by the other contracting party.
Such was similarly held in the case of Badillo v. Ferrer:
The Deed of Extrajudicial Partition and Sale is not a voidable or
an annullable contract under Article 1390 of the New Civil Code. Article
1390 renders a contract voidable if one of the parties is incapable of
giving consent to the contract or if the contracting partys consent is
vitiated by mistake, violence, intimidation, undue influence or fraud. x
xx
The deed of extrajudicial parition and sale is an unenforceable
or, more specifically, an unauthorized contract under Articles 1403(1)
and 1317 of the New Civil Code.[50]
Therefore, Conrados failure to obtain authority from his co-heirs to sign the
Deed of Extra-Judicial Partition in their behalf did not result in his incapacity to give
consent so as to render the contract voidable, but rather, it rendered the contract
valid but unenforceable against Conrados co-heirs for having been entered into
without their authority.
A closer review of the evidence on record, however, will show that the Deed
of Extra-Judicial Partition is not unenforceable but, in fact, valid, binding and
enforceable against all the Heirs of Policronio for having given their consent to the
contract. Their consent to the Deed of Extra-Judicial Partition has been proven by a
preponderance of evidence.
Regarding his alleged vitiated consent due to mistake and undue influence to
the Deed of Extra-Judicial Partition, Conrado testified, to wit:
Q: Mr. Ureta you remember having signed a document entitled deed of
extra judicial partition consisting of 11 pages and which have
previously [been] marked as Exhibit I for the plaintiffs?

A: Yes sir.
Q: Can you recall where did you sign this document?
A: The way I remember I signed that in our house.
Q: And who requested or required you to sign this document?
A: My aunties.
Q: Who in particular if you can recall?
A: Nay Pruding Panadero.
Q: You mean that this document that you signed was brought to your
house by your Auntie Pruding Pa[r]adero [who] requested you to sign
that document?
A: When she first brought that document I did not sign that said
document because I [did] no[t] know the contents of that document.
Q: How many times did she bring this document to you [until] you
finally signed the document?
A: Perhaps 3 times.
Q: Can you tell the court why you finally signed it?
A: Because the way she explained it to me that the land of my
grandfather will be partitioned.
Q: When you signed this document were your brothers and sisters who
are your co-plaintiffs in this case aware of your act to sign this
document?
A: They do not know.
xxx
Q: After you have signed this document did you inform your brothers
and sisters that you have signed this document?
A: No I did not. [51]
xxx
Q: Now you read the document when it was allegedly brought to your
house by your aunt Pruding Pa[r]adero?

A: I did not read it because as I told her I still want to ask the advise of
my brothers and sisters.
Q: So do I get from you that you have never read the document itself
or any part thereof?
A: I have read the heading.
xxx
Q: And why is it that you did not read all the pages of this document
because I understand that you know also how to read in English?
A: Because the way Nay Pruding explained to me is that the property of
my grandfather will be partitioned that is why I am so happy.
xxx
Q: You mean to say that after you signed this deed of extra judicial
partition up to the present you never informed them?
A: Perhaps they know already that I have signed and they read already
the document and they have read the document.
Q: My question is different, did you inform them?
A: The document sir? I did not tell them.
Q: Even until now?
A: Until now I did not inform them.[52]

This Court finds no cogent reason to reverse the finding of the RTC that
Conrados explanations were mere gratuitous assertions not entitled to any
probative weight. The RTC found Conrados credibility to have faltered when he
testified that perhaps his siblings were already aware of the Deed of Extra-Judicial
Partition. The RTC was in the best position to judge the credibility of the witness
testimony. The CA also recognized that Conrados consent was not vitiated by
mistake and undue influence as it required a special power of attorney in order to
bind his co-heirs and, as such, the CA thereby recognized that his signature was
binding to him but not with respect to his co-heirs. Findings of fact of the trial court,
particularly when affirmed by the CA, are binding to this Court. [53]
Furthermore, this Court notes other peculiarities in Conrados testimony.
Despite claims of undue influence, there is no indication that Conrado was forced to

sign by his aunt, Prudencia Paradero. In fact, he testified that he was happy to sign
because his grandfathers estate would be partitioned. Conrado, thus, clearly
understood the document he signed. It is also worth noting that despite the
document being brought to him on three separate occasions and indicating his
intention to inform his siblings about it, Conrado failed to do so, and still neglected
to inform them even after he had signed the partition. All these circumstances
negate his claim of vitiated consent. Having duly signed the Deed of Extra-Judicial
Partition, Conrado is bound to it. Thus, it is enforceable against him.
Although Conrados co-heirs claimed that they did not authorize Conrado to sign the
Deed of Extra-Judicial Partition in their behalf, several circumstances militate
against their contention.
First, the Deed of Extra-Judicial Partition was executed on April 19, 1989, and the
Heirs of Policronio claim that they only came to know of its existence on July 30,
1995through an issue of the Aklan Reporter. It is difficult to believe that Conrado did
not inform his siblings about the Deed of Extra-Judicial Partition or at least broach its
subject with them for more than five years from the time he signed it, especially
after indicating in his testimony that he had intended to do so.
Second, Conrado retained possession of one of the parcels of land adjudicated
to him and his co-heirs in the Deed of Extra-Judicial Partition.
Third, after the execution of the partition on April 19, 1989 and more than a
year before they claimed to have discovered the existence of the Deed of ExtraJudicial Partition on July 30, 1995, some of the Heirs of Policronio, namely, Rita
Solano, Macario Ureta, Lilia Tayco, and Venancio Ureta executed on June 1, 1994, a
Special Power of Attorney[54] in favor of their sister Gloria Gonzales, authorizing her
to obtain a loan from a bank and to mortgage one of the parcels of land adjudicated
to them in the Deed of Extra-Judicial Partition to secure payment of the loan. They
were able to obtain the loan using the land as collateral, over which a Real Estate
Mortgage[55] was constituted. Both the Special Power of Attorney and the Real Estate
Mortgage were presented in evidence in the RTC, and were not controverted or
denied by the Heirs of Policronio.
Fourth, in the letter dated August 15, 1995, sent by the counsel of the Heirs
of Policronio to the Heirs of Alfonso requesting for amicable settlement, there was no
mention that Conrados consent to the Deed of Extra-Judicial Partition was vitiated by
mistake and undue influence or that they had never authorized Conrado to
represent them or sign the document on their behalf. It is questionable for such a

pertinent detail to have been omitted. The body of said letter is reproduced
hereunder as follows:
Greetings:
Your nephews and nieces, children of your deceased brother Policronio
Ureta, has referred to me for appropriate legal action the property they
inherited from their father consisting of six (6) parcels of land which is
covered by a Deed of Absolute Sale dated October 25, 1969. These
properties ha[ve] already been transferred to the name of their
deceased father immediately after the sale, machine copy of the said
Deed of Sale is hereto attached for your ready reference.
Lately, however, there was published an Extra-judicial Partition of the
estate of Alfonso Ureta, which to the surprise of my clients included the
properties already sold to their father before the death of said Alfonso
Ureta. This inclusion of their property is erroneous and illegal because
these properties were covered by the Deed of Absolute Sale in favor of
their father Policronio Ureta no longer form part of the estate of Alfonso
Ureta. Since Policronio Ureta has [sic] died in 1974 yet, these
properties have passed by hereditary succession to his children who
are now the true and lawful owners of the said properties.
My clients are still entitled to a share in the estate of Alfonso Ureta who
is also their grandfather as they have stepped into the shoes of their
deceased father Policronio Ureta. But this estate of Alfonso Ureta
should already exclude the six (6) parcels of land covered by the Deed
of Absolute Sale in favor of Policronio Ureta.
My clients cannot understand why the properties of their late
father [should] be included in the estate of their grandfather and be
divided among his brothers and sisters when said properties should
only be divided among themselves as children of Policronio Ureta.
Since this matter involves very close members of the same family, I
have counseled my clients that an earnest effort towards a
compromise or amicable settlement be first explored before resort to
judicial remedy is pursued. And a compromise or amicable settlement
can only be reached if all the parties meet and discuss the problem
with an open mind. To this end, I am suggesting a meeting of the
parties on September 16, 1995 at 2:00 P.M. at B Place Restaurant at C.
Laserna St., Kalibo, Aklan. It would be best if the parties can come or
be represented by their duly designated attorney-in-fact together with
their lawyers if they so desire so that the problem can be discussed
unemotionally and intelligently.
I would, however, interpret the failure to come to the said meeting as
an indication that the parties are not willing to or interested in
amicable settlement of this matter and as a go signal for me to resort
to legal and/or judicial remedies to protest the rights of my clients.

Thank you very much.[56]

Based on the foregoing, this Court concludes that the allegation of Conrados
vitiated consent and lack of authority to sign in behalf of his co-heirs was a mere
afterthought on the part of the Heirs of Policronio. It appears that the Heirs of
Policronio were not only aware of the existence of the Deed of Extra-Judicial Partition
prior to June 30, 1995 but had, in fact, given Conrado authority to sign in their
behalf. They are now estopped from questioning its legality, and the Deed of ExtraJudicial Partition is valid, binding, and enforceable against them.
In view of the foregoing, there is no longer a need to discuss the issue of
ratification.
Preterition
The Heirs of Alfonso were of the position that the absence of the Heirs of
Policronio in the partition or the lack of authority of their representative results, at
the very least, in their preterition and not in the invalidity of the entire deed of
partition. Assuming there was actual preterition, it did not render the Deed of ExtraJudicial Partition voidable.Citing Article 1104 of the Civil Code, they aver that a
partition made with preterition of any of the compulsory heirs shall not be
rescinded, but the heirs shall be proportionately obliged to pay the share of the
person omitted. Thus, the Deed of Extra-Judicial Partition should not have been
annulled by the CA. Instead, it should have ordered the share of the heirs omitted to
be given to them.
The Heirs of Alfonso also argued that all that remains to be adjudged is the
right of the preterited heirs to represent their father, Policronio, and be declared
entitled to his share. They contend that remand to the RTC is no longer necessary as
the issue is purely legal and can be resolved by the provisions of the Civil Code for
there is no dispute that each of Alfonsos heirs received their rightful share. Conrado,
who received Policronios share, should then fully account for what he had received
to his other co-heirs and be directed to deliver their share in the inheritance.
These arguments cannot be given credence.
Their posited theory on preterition is no longer viable. It has already been
determined that the Heirs of Policronio gave their consent to the Deed of ExtraJudicial Partition and they have not been excluded from it. Nonetheless, even

granting that the Heirs of Policronio were denied their lawful participation in the
partition, the argument of the Heirs of Alfonso would still fail.
Preterition under Article 854 of the Civil Code is as follows:
Art. 854. The preterition or omission of one, some, or all of the
compulsory heirs in the direct line, whether living at the time of the
execution of the will or born after the death of the testator, shall annul
the institution of heir; but the devises and legacies shall be valid
insofar as they are not inofficious.
If the omitted compulsory heirs should die before the testator, the
institution shall be effectual, without prejudice to the right of
representation.
Preterition has been defined as the total omission of a compulsory heir from
the inheritance. It consists in the silence of the testator with regard to a compulsory
heir, omitting him in the testament, either by not mentioning him at all, or by not
giving him anything in the hereditary property but without expressly disinheriting
him, even if he is mentioned in the will in the latter case. [57] Preterition is thus a
concept of testamentary succession and requires a will. In the case at bench, there
is no will involved. Therefore, preterition cannot apply.
Remand Unnecessary
The Deed of Extra-Judicial Partition is in itself valid for complying with all the
legal requisites, as found by the RTC, to wit:
A persual of the Deed of Extra-judicial Partition would reveal that
all the heirs and children of Alfonso Ureta were represented therein;
that nobody was left out; that all of them received as much as the
others as their shares; that it distributed all the properties of Alfonso
Ureta except a portion of parcel 29 containing an area of 14,000
square meters, more or less, which was expressly reserved; that
Alfonso Ureta, at the time of his death, left no debts; that the heirs of
Policronio Ureta, Sr. were represented by Conrado B. Ureta; all the
parties signed the document, was witnessed and duly acknowledged
before Notary Public Adolfo M. Iligan of Kalibo, Aklan; that the
document expressly stipulated that the heirs to whom some of the
properties were transferred before for taxation purposes or their
children, expressly recognize and acknowledge as a fact that the
properties were transferred only for the purpose of effective
administration and development convenience in the payment of taxes
and, therefore, all instruments conveying or effecting the transfer of
said properties are null and void from the beginning (Exhs. 1-4, 7-d). [58]

Considering that the Deed of Sale has been found void and the Deed of ExtraJudicial Partition valid, with the consent of all the Heirs of Policronio duly given, there
is no need to remand the case to the court of origin for partition.
WHEREFORE, the petition in G.R. No. 165748 is DENIED. The petition in G.R.
No. 165930 is GRANTED. The assailed April 20, 2004 Decision and October 14,
2004Resolution of the Court of Appeals in CA-G.R. CV No. 71399, are
hereby MODIFIED in this wise:
(1)
The Deed of Extra-Judicial Partition, dated April 19, 1989, is
VALID, and
(2)

The order to remand

hereby DELETED.

the

case

to

the

court

of

origin

is

G.R. No. 96643. April 23, 1993.

ERNESTO DEIPARINE, JR., petitioner,
vs.
THE HON. COURT OF APPEALS, CESARIO CARUNGAY and ENGR. NICANOR TRINIDAD,
respondents.
Gregorio B. Escasinas for petitioner.
Florido and Associates for respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; RESCISSION IS USED IN TWO DIFFERENT CONTEXTS IN
THE CIVIL CODE. Deiparine seems to be confused over the right of rescission,
which is used in two different contexts in the Civil Code. Under the law on contracts,
there are what are called "rescissible contracts" which are enumerated in Article
1381 . . . There is also a right of rescission under the law on obligations as granted
in Article 1191.
2. ID.; ID.; ARTICLES 19, 1159, 1191, 1714, 1715 AND 1727, CIVIL CODE ARE
APPLICABLE, WHILE ARTICLES 1381, 1385 AND 1725, SAME CODE ARE NOT, IN CASE
OF BREACH OF CONSTRUCTION CONTRACT. The petitioner challenges the
application by the lower court of Article 1191 of the Civil Code in rescinding the
construction agreement. His position is that the applicable rules are Articles 1385
and 1725 of the Civil Code . . . Article 1385, upon which Deiparine relies, deals with
the rescission of the contracts enumerated above, which do not include the

construction agreement in question . . . The construction contract falls squarely

under the coverage of Article 1191 because it imposes upon Deiparine the
obligation to build the structure and upon the Carungays the obligation to pay for
the project upon its completion. Article 1191, unlike Article 1385, is not predicated
on economic prejudice to one of the parties but on breach of faith by one of them
that violates the reciprocity between them. The violation of reciprocity between
Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine's
failure to follow the stipulated plans and specifications, has given the Carungay
spouses the right to rescind or cancel the contract. Article 1725 cannot support the
petitioner's position either, for this contemplates a voluntary withdrawal by the
owner without fault on the part of the contractor, who is therefore entitled to
indemnity, and even damages, for the work he has already commenced. There is no
such voluntary withdrawal in the case at bar. On the contrary, the Carungays have
been constrained to ask for judicial rescission because of the petitioner's failure to
comply with the terms and conditions of their contract. The other applicable
provisions are: Article 1714 . . . Article 1715 . . . Article 1727 . . . It is a basic
principle in human relations, acknowledged in Article 19 of the Civil Code, that
"every person must, in the performance of his duties, act with justice, give everyone
his due, and observe honesty and good faith." This admonition is reiterated in
Article 1159, which states that "obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith." The
petitioner has ignored these exhortations and is therefore not entitled to the relief
he seeks.
3. ADMINISTRATIVE LAW; THE PHILIPPINE DOMESTIC CONSTRUCTION BOARD HAS
NO POWER TO ADJUDICATE A CASE FOR RESCISSION OF CONSTRUCTION CONTRACT.
The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine
Domestic Construction Board are meant to apply only to public construction
contracts. Its power over private construction contracts is limited to the formulation
and recommendation of rules and procedures for the adjudication and settlement of
disputes involving such (private) contracts. It therefore has no jurisdiction over
cases like the one at bar which remain cognizable by the regular courts of justice.
4. LEGAL AND JUDICIAL ETHICS; COUNSEL WHO TRIES TO MISLEAD THE COURT BY
DELIBERATELY MISQUOTING THE LAW IS SUBJECT TO DISCIPLINE. Counsel is
obviously trying to mislead the Court. First, he purposely misquotes Section 6(b),
paragraph 3, substituting the word "the" for "public," . . . Second, he makes the
wrong emphasis in paragraph 5, . . . For deliberately changing the language of the
above-quoted paragraph 3, Atty. Gregorio B. Escasinas has committed contempt of
this Court and shall be disciplined. As for paragraph 5, the correct stress should be
on the words "formulate and recommend," which is all the body can do, rather than
on adjudication and settlement."
DECISION

CRUZ, J p:
This case involves not only the factual issue of breach of contract and the legal
questions of jurisdiction and rescission. The basic inquiry is whether the building
subject of this litigation is safe enough for its future occupants. The petitioner says
it is, but the private respondents demur. They have been sustained by the trial court
and the appellate court. The petitioner says they have all erred.
The spouses Cesario and Teresita Carungay entered into an agreement with Ernesto
Deiparine, Jr. on August 13, 19B2, for the construction of a three-story dormitory in
Cebu City. 1 The Carungays agreed to pay P970,000.00, inclusive of contractor's
fee, and Deiparine bound himself to erect the building "in strict accordance to (sic)
plans and specifications." Nicanor Trinidad, Jr., a civil engineer, was designated as
the representative of the Carungay spouses, with powers of inspection and
coordination with the contractor.
Deiparine started the construction on September 1, 1982. 2 On November 6, 1982,
Trinidad sent him a document entitled General Conditions and Specifications which
inter alia prescribed 3,000 psi (pounds per square inch) as the minimum acceptable
compressive strength of the building. 3
In the course of the construction, Trinidad reported to Cesario Carungay that
Deiparine had been deviating from the plans and specifications, thus impairing the
strength and safety of the building. On September 25, 1982, Carungay ordered
Deiparine to first secure approval from him before pouring cement. 4 This order was
not heeded, prompting Carungay to send Deiparine another memorandum
complaining that the "construction works are faulty and done haphazardly . . .
mainly due to lax supervision coupled with . . . inexperienced and unqualified staff."
5 This memorandum was also ignored.
After several conferences, the parties agreed to conduct cylinder tests to ascertain
if the structure thus far built complied with safety standards. Carungay suggested
core testing. Deiparine was reluctant at first but in the end agreed. He even
promised that if the tests should show total failure, or if the failure should exceed
10%, he would shoulder all expenses; otherwise, the tests should be for the account
of Carungay.
The core testing was conducted by Geo-Testing International, a Manila-based firm,
on twenty-four core samples. On the basis of 3,000 psi, all the samples failed; on
the basis of 2,500 psi, only three samples passed; and on the basis of 2,000 psi,
nineteen samples failed. 6 This meant that the building was structurally defective.
In view of this finding, the spouses Carungay filed complaint with the Regional Trial
Court of Cebu for the rescission of the construction contract and for damages.

Deiparine moved to dismiss, alleging that the court had no jurisdiction over
construction contracts, which were now cognizable by the Philippine Construction
Development Board pursuant to Presidential Decree No. 1746. The motion was
denied in an order dated April 12, 1984.
After trial on the merits, Judge Juanito A. Bernad rendered judgment: a) declaring
the construction agreement rescinded; b) condemning Deiparine to have forfeited
his expenses in the construction in the same of P244,253.70; c) ordering Deiparine
to reimburse to the spouses Carungay the sum of P15,104.33 for the core testing; d)
ordering Deiparine to demolish and remove all the existing structures and restore
the premises to their former condition before the construction began, being allowed
at the same time to take back with him all the construction materials belonging to
him; and e) ordering Deiparine to pay the Carungay spouses attorney's fees in the
amount of P10,000.00 as well as the costs of the suit. 7
On appeal, the decision was affirmed in toto by the respondent court on August 14,
1990. 8 His motion for reconsideration having been denied, petitioner Ernesto
Deiparine, Jr. has come to this Court to question once more the jurisdiction of the
regular courts over the case and the power of the trial court to grant rescission. He
will lose again.
The challenge to the jurisdiction of the trial court is untenable.
P.D. 1746 created the Construction Industry Authority of the Philippines (CIAP) as
the umbrella organization which shall exercise jurisdiction and supervision over
certain administrative bodies acting as its implementing branches. The
implementing body in this case is the Philippine Domestic Construction Board
(PDCB) and not the inexistent Philippine Construction Development Board as
maintained by Deiparine.
Among the functions of the PDCB under Section 6 of the decree are to:
xxx xxx xxx
3. Adjudicate and settle claims and implementation of public construction contracts
and for this purpose, formulate and adopt the necessary rules and regulations
subject to the approval of the President:
xxx xxx xxx
5. Formulate and recommend rules and procedures for the adjudication and
settlement of claims and disputes in the implementation of contracts in private
construction; (Emphasis supplied)

Deiparine argues that the Philippine Construction Development Board (that is, the
Philippine Domestic Construction Board) has exclusive jurisdiction to hear and try
disputes arising from domestic constructions. He invokes the above-mentioned
functions to prove his point.
His counsel is obviously trying to mislead the Court. First, he purposely misquotes
Section 6(b), paragraph 3, substituting the word "the" for "public," thus:
3. Adjudicate and settle claims and disputes in the implementation of the
construction contracts and for this purpose, formulate and adopt the necessary
rules and regulations subject to the approval of the President; (Emphasis ours).
Second, he makes the wrong emphasis in paragraph 5, thus:
5. Formulate and recommend rules and procedures for the ADJUDICATION and
SETTLEMENT of CLAIMS and DISPUTES in the implementation of CONTRACTS in
PRIVATE CONSTRUCTIONS.
For deliberately changing the language of the abovequoted paragraph 3, Atty.
Gregorio P. Escasinas has committed contempt of this Court and shall be disciplined.
As for paragraph 5, the correct stress should be on the words "formulate and
recommend," which is all the body can do, rather than on "adjudication and
settlement."
The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine
Domestic Construction Board are meant to apply only to public construction
contracts. Its power over private construction contracts is limited to the formulation
and recommendation of rules and procedures for the adjudication and settlement of
disputes involving such (private) contracts. It therefore has no jurisdiction over
cases like the one at bar which remain cognizable by the regular courts of justice.
On the issue of rescission, Deiparine insists that the construction agreement does
not specify any compressive strength for the structure nor does it require that the
same be subjected to any kind of stress test. Therefore, since he did not breach any
of his covenants under the agreement, the court erred in rescinding the contract.
The record shows that Deiparine commenced the construction soon after the
signing of the contract, even before Trinidad had submitted the contract documents,
including the General Conditions and Specifications.
According to Eduardo Logarta, the petitioner's own project engineer, Deiparine
actually instructed him and some of the other workers to ignore the specific orders
or instructions of Carungay or Trinidad relative to the construction. 9 Most of these
orders involved safety measures such as: (1) the use of two concrete vibrators in

the pouring of all columns, beams and slabs; (2) making PVC pipes well-capped to
prevent concrete from setting inside them; (3) the use of 12-mm reinforcement bars
instead of 10-mm bars; (4) the use of mixed concrete reinforcements instead of
hollow block reinforcements; and (5) securing the approval of the owner or his
representative before any concrete-pouring so that it could be determined whether
the cement mixture complied with safety standards. Deiparine obviously wanted to
avoid additional expenses which would reduce his profit.
Parenthetically, it is not disputed that Deiparine is not a civil engineer or an
architect but a master mariner and former ship captain; 10 that Pio Bonilla, a
retainer of Deiparine Construction, was not the supervising architect of the protect;
11 that the real supervisor of the construction was Eduardo-Logarta, who was only a
third year civil engineering student at the time; 12 that his understudy was Eduardo
Martinez, who had then not yet passed the board examinations; 13 and that the
supposed project engineer, Nilo Paglinawan, was teaching full-time at the University
of San Jose-Recoletos, and had in fact entered the construction site only after
November 4, 1982, although the construction had already begun two months
earlier. 14
It was after discovering that the specifications and the field memorandums were not
being followed by Deiparine that Carungay insisted on the stress tests.
There were actually two sets of specifications. The first "Specifications" are labeled
as such and are but a general summary of the materials to be used in the
construction. These were prepared by Trinidad prior to the execution of the contract
for the purpose only of complying with the document requirements of the loan
application of Cesario Carungay with the Development Bank of the Philippines. The
other specifications, which were also prepared by Trinidad, are entitled "General
Conditions and Specifications" and laid down in detail the requirements of the
private respondent in the construction of his building.
In his testimony, Deiparine declared that when the contract was signed on August
13, 1982, it was understood that the plans and specifications would be given to him
by Trinidad later. 15 Deiparine thus admitted that the plans and specifications
referred to in the construction agreement were not the first Specifications but the
General Conditions and Specifications submitted by Trinidad in November 1982. This
second set of specifications required a structural compressive strength of 3,000 psi.
16 It completely belies Deiparine's contention that no compressive strength of the
dormitory was required.
Deiparine further argues that by following the concrete mixture indicated in the first
specifications, that is, 1:2:4, the structure would still attain a compressive strength
of 2,500 psi, which was acceptable for dormitories. According to him, the 3,000 psi
prescribed in the General Conditions and Specifications was recommended for

roads, not for buildings. In so arguing, he is interpreting the two specifications

together but applying only the first and rejecting the second.
Deiparine also avers that the contract does not also require any kind of test to be
done on the structure and that, test or no test, he has not violated the agreement.
Nevertheless, he subjected the building to a cylinder test just to convince Carungay
that the unfinished dormitory was structurally sound.
A cylinder test is done by taking samples from fresh concrete, placing them in a
cylinder mold and allowing them to harden for a maximum of 28 days, following
which they are subjected to compression to determine if the cement mixture to be
poured conforms to accepted standards in construction. 17 Carungay was not
satisfied with the results of the cylinder test because they were inconsistent and
could easily be falsified by the simple expedient of replacing the samples with a
good mixture although a different mixture had been used in the actual pouring.
Consequently, Carungay requested core testing, a more reliable procedure because
the specimens obtained by extracting concrete from the hardened existing structure
would determine its actual strength. The core test is less prone to manipulation than
the cylinder test because the samples in the former are taken from the building
which is already standing. 18
Deiparine vehemently refused to go along with the core test, insisting that the
results of the cylinder test earlier made were conclusive enough to prove that the
building was structurally sound. What was the real reason for this refusal? After all,
Carungay would shoulder the expenses if the specimens passed the core test, unlike
the cylinder test, which was for the petitioner's account. The only logical
explanation would be that Deiparine was not sure that the core test would prove
favorable to him.
We see no reason to disturb the factual finding of the courts below that Deiparine
did not deal with the Carungays in good faith. His breach of this duty constituted a
substantial violation of the contract correctible by judicial rescission.
The petitioner challenges the application by the lower court of Article 1191 of the
Civil Code in rescinding the construction agreement. His position is that the
applicable rules are Articles 1385 and 1725 of the Civil Code.
Article 1385 states:
Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can return whatever he
may be obliged to restore.

Article 1725 provides that in a contract for a piece of work:

The owner may withdraw at will from the construction of the work, although it may
have been commenced, indemnifying the contractor for all the latter's expenses,
work, and the usefulness which the owner may obtain therefrom, and damages.
Deiparine seems to be confused over the right of rescission, which is used in two
different contexts in the Civil Code.
Under the law on contracts, there are what are called "rescissible contracts" which
are enumerated in Article 1381 thus:
(1) Those which are entered into by guardians whenever the wards who they
represent suffer lesion by more than one-fourth of the value of the things which are
the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion
stated in the preceding number:
(3) Those undertaken in fraud of creditors when the later cannot in any other
manner collect the claims due them:
(4) Those which refer to things under litigation if they have been entered into by the
defendants without the knowledge and approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Article 1385, upon which Deiparine relies, deals with the rescission of the contracts
enumerated above, which do not include the construction agreement in question.
There is also a right of rescission under the law on obligations as granted in Article
1191, providing as follows:
"Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law.
This was the provision the trial court and the respondent court correctly applied
because it relates to contracts involving reciprocal obligations like the subject
construction contract. The construction contract fails squarely under the coverage
of Article 1191 because it imposes upon Deiparine the obligation to build the
structure and upon the Carungays the obligation to pay for the project upon its
completion.
Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of
the, parties but on breach of faith by one of them that violates the reciprocity
between them. 19 The violation of reciprocity between Deiparine and the Carungay
spouses, to wit, the breach caused by Deiparine's failure to follow the stipulated
plans and specifications, has given the Carungay spouses the right to rescind or
cancel the contract.
Article 1725 cannot support the petitioner's position either, for this contemplates a
voluntary withdrawal by the owner without fault on the part of the contractor, who
is therefore entitled to indemnity, and even damages, for the work he has already
commenced. there is no such voluntary withdrawal in the case at bar. On the
contrary, the Carungays have been constrained to ask for judicial rescission
because of the petitioner's failure to comply with the terms and conditions of their
contract.
The other applicable provisions are:
Article 1714. If the contractor agrees to produce the work from material furnished
by him, he shall deliver the thing produced to the employer and transfer dominion
over the thing. This contract shall be governed by the following articles as well as
by the pertinent provisions on warranty of title and against hidden defects and the
payment of price in a contract of sale.
Article 1715. The contractor shall execute the work in such a manner that it has the
qualities agreed upon and has no defects which destroy or lessen its value or fitness
for its ordinary or stipulated use. Should the work be not of such quality, the
employer may require that the contractor remove the defect or execute another
work. If the contractor fails or refuses to comply with this obligation, the employer
may have the defect removed or another work executed, at the contractor's cost.
Article 1727. The contractor is responsible for the work done by persons employed
by him.

While it is true that the stress test was not required in any of the contract
documents, conducting the test was the only manner by which the owner could
determine if the contractor had been faithfully complying with his presentations
under their agreement. Furthermore, both parties later agreed in writing that the
core test should be conducted. When the structure failed under this test the
Carungay spouses were left with no other recourse than to rescind their contract.
It is a basic principle in human relations, acknowledged in Article 19 of the Civil
Code, that "every person must, in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith." This admonition is
reiterated in Article 1159, which states that "obligations arising from contracts have
the force of law between the contracting parties and should be complied with in
good faith." The petitioner has ignored these exhortations and is therefore not
entitled to the relief he seeks.
WHEREFORE, the challenged decision is hereby AFFIRMED and the instant petition
for review is DENIED, with costs against the petitioner. For deliberately changing the
language of Section 6(b), paragraph 3, of P.D. No. 1746, Atty. Gregorio B. Escasinas
is hereby fined P1,000.00, with the warning that repetition of a similar offense will
be dealt with more severely. It is so ordered. Concur.
Grio-Aquino, Bellosillo and Quiason, JJ ., concur.

G.R. No. 175666

July 29, 2013

MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.

vs.
CRESENCIA P. ABAN, Respondent.
DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit
business from or provide insurance coverage only to legitimate and bona fide
clients, by requiring them to thoroughly investigate those they insure within two
years from effectivity of the policy and while the insured is still alive. If they do not,
they will be obligated to honor claims on the policies they issue, regardless of fraud,
concealment or misrepresentation. The law assumes that they will do just that and
not sit on their laurels, indiscriminately soliciting and accepting insurance business
from any Tom, Dick and Harry.

Assailed in this Petition for Review on Certiorari 1 are the September 28, 2005
Decision2 of the Court of Appeals' (CA) in CA-G.R. CV No. 62286 and its November 9,
2006 Resolution3 denying the petitioners Motion for Reconsideration. 4
Factual Antecedents
On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila
Bankers Life Insurance Corporation (Bankers Life), designating respondent
Cresencia P. Aban (Aban), her niece, 5 as her beneficiary.
Petitioner issued Insurance Policy No. 747411 (the policy), with a face value
of P100,000.00, in Soteros favor on August 30, 1993, after the requisite medical
examination and payment of the insurance premium. 6
On April 10, 1996,7 when the insurance policy had been in force for more than two
years and seven months, Sotero died. Respondent filed a claim for the insurance
proceeds on July 9, 1996. Petitioner conducted an investigation into the claim, 8 and
came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she was
illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have the financial capability to pay the insurance premiums
on Insurance Policy No. 747411;
4. Sotero did not sign the July 3, 1993 application for insurance; 9 and
5. Respondent was the one who filed the insurance application, and x x x
designated herself as the beneficiary.10
For the above reasons, petitioner denied respondents claim on April 16, 1997 and
refunded the premiums paid on the policy. 11
On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the
policy, which was docketed as Civil Case No. 97-867 and assigned to Branch 134 of
the Makati Regional Trial Court. The main thesis of the Complaint was that the policy
was obtained by fraud, concealment and/or misrepresentation under the Insurance
Code,12 which thus renders it voidable under Article 1390 13 of the Civil Code.
Respondent filed a Motion to Dismiss14 claiming that petitioners cause of action was
barred by prescription pursuant to Section 48 of the Insurance Code, which provides
as follows:

Whenever a right to rescind a contract of insurance is given to the insurer by any

provision of this chapter, such right must be exercised previous to the
commencement of an action on the contract.
After a policy of life insurance made payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of two years from the
date of its issue or of its last reinstatement, the insurer cannot prove that the policy
is void ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.
During the proceedings on the Motion to Dismiss, petitioners investigator testified
in court, stating among others that the insurance underwriter who solicited the
insurance is a cousin of respondents husband, Dindo Aban, 15and that it was the
respondent who paid the annual premiums on the policy. 16
Ruling of the Regional Trial Court
On December 9, 1997, the trial court issued an Order 17 granting respondents
Motion to Dismiss, thus:
WHEREFORE, defendant CRESENCIA P. ABANs Motion to Dismiss is hereby granted.
Civil Case No. 97-867 is hereby dismissed.
SO ORDERED.18
In dismissing the case, the trial court found that Sotero, and not respondent, was
the one who procured the insurance; thus, Sotero could legally take out insurance
on her own life and validly designate as she did respondent as the beneficiary. It
held further that under Section 48, petitioner had only two years from the effectivity
of the policy to question the same; since the policy had been in force for more than
two years, petitioner is now barred from contesting the same or seeking a rescission
or annulment thereof.
Petitioner moved for reconsideration, but in another Order 19 dated October 20,
1998, the trial court stood its ground.
Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286.
Petitioner questioned the dismissal of Civil Case No. 97-867, arguing that the trial
court erred in applying Section 48 and declaring that prescription has set in. It
contended that since it was respondent and not Sotero who obtained the
insurance, the policy issued was rendered void ab initio for want of insurable
interest.
Ruling of the Court of Appeals

On September 28, 2005, the CA issued the assailed Decision, which contained the
following decretal portion:
WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for
lack of merit.
SO ORDERED.20
The CA thus sustained the trial court. Applying Section 48 to petitioners case, the
CA held that petitioner may no longer prove that the subject policy was void ab
initio or rescindible by reason of fraudulent concealment or misrepresentation after
the lapse of more than two years from its issuance. It ratiocinated that petitioner
was equipped with ample means to determine, within the first two years of the
policy, whether fraud, concealment or misrepresentation was present when the
insurance coverage was obtained. If it failed to do so within the statutory two-year
period, then the insured must be protected and allowed to claim upon the policy.
Petitioner moved for reconsideration,21 but the CA denied the same in its November
9, 2006 Resolution.22Hence, the present Petition.
Issues
Petitioner raises the following issues for resolution:
I
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE TRIAL
COURT DISMISSING THE COMPLAINT ON THE GROUND OF PRESCRIPTION IN
CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE JURISPRUDENCE.
II
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION OF THE
INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE TRIAL COURT.
III
WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR
RECONSIDERATION.23
Petitioners Arguments
In praying that the CA Decision be reversed and that the case be remanded to the
trial court for the conduct of further proceedings, petitioner argues in its Petition

and Reply24 that Section 48 cannot apply to a case where the beneficiary under the
insurance contract posed as the insured and obtained the policy under fraudulent
circumstances. It adds that respondent, who was merely Soteros niece, had no
insurable interest in the life of her aunt.
Relying on the results of the investigation that it conducted after the claim for the
insurance proceeds was filed, petitioner insists that respondents claim was
spurious, as it appeared that Sotero did not actually apply for insurance coverage,
was unlettered, sickly, and had no visible source of income to pay for the insurance
premiums; and that respondent was an impostor, posing as Sotero and fraudulently
obtaining insurance in the latters name without her knowledge and consent.
Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not
have given rise to rights and obligations; as such, the action for the declaration of
its nullity or inexistence does not prescribe. 25
Respondents Arguments
Respondent, on the other hand, essentially argues in her Comment 26 that the CA is
correct in applying Section 48. She adds that petitioners new allegation in its
Petition that the policy is void ab initio merits no attention, having failed to raise the
same below, as it had claimed originally that the policy was merely voidable.
On the issue of insurable interest, respondent echoes the CAs pronouncement that
since it was Sotero who obtained the insurance, insurable interest was present.
Under Section 10 of the Insurance Code, Sotero had insurable interest in her own
life, and could validly designate anyone as her beneficiary. Respondent submits that
the CAs findings of fact leading to such conclusion should be respected.
Our Ruling
The Court denies the Petition.
The Court will not depart from the trial and appellate courts finding that it was
Sotero who obtained the insurance for herself, designating respondent as her
beneficiary. Both courts are in accord in this respect, and the Court is loath to
disturb this. While petitioner insists that its independent investigation on the claim
reveals that it was respondent, posing as Sotero, who obtained the insurance, this
claim is no longer feasible in the wake of the courts finding that it was Sotero who
obtained the insurance for herself. This finding of fact binds the Court.
With the above crucial finding of fact that it was Sotero who obtained the
insurance for herself petitioners case is severely weakened, if not totally
disproved. Allegations of fraud, which are predicated on respondents alleged posing

as Sotero and forgery of her signature in the insurance application, are at once
belied by the trial and appellate courts finding that Sotero herself took out the
insurance for herself. "Fraudulent intent on the part of the insured must be
established to entitle the insurer to rescind the contract." 27 In the absence of proof
of such fraudulent intent, no right to rescind arises.
Moreover, the results and conclusions arrived at during the investigation conducted
unilaterally by petitioner after the claim was filed may simply be dismissed as selfserving and may not form the basis of a cause of action given the existence and
application of Section 48, as will be discussed at length below.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer
and the insured. Under the provision, an insurer is given two years from the
effectivity of a life insurance contract and while the insured is alive to discover or
prove that the policy is void ab initio or is rescindible by reason of the fraudulent
concealment or misrepresentation of the insured or his agent. After the two-year
period lapses, or when the insured dies within the period, the insurer must make
good on the policy, even though the policy was obtained by fraud, concealment, or
misrepresentation. This is not to say that insurance fraud must be rewarded, but
that insurers who recklessly and indiscriminately solicit and obtain business must be
penalized, for such recklessness and lack of discrimination ultimately work to the
detriment of bona fide takers of insurance and the public in general.
Section 48 regulates both the actions of the insurers and prospective takers of life
insurance. It gives insurers enough time to inquire whether the policy was obtained
by fraud, concealment, or misrepresentation; on the other hand, it forewarns
scheming individuals that their attempts at insurance fraud would be timely
uncovered thus deterring them from venturing into such nefarious enterprise. At
the same time, legitimate policy holders are absolutely protected from unwarranted
denial of their claims or delay in the collection of insurance proceeds occasioned by
allegations of fraud, concealment, or misrepresentation by insurers, claims which
may no longer be set up after the two-year period expires as ordained under the
law.
Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer
and the insured are given the assurance that any dishonest scheme to obtain life
insurance would be exposed, and attempts at unduly denying a claim would be
struck down. Life insurance policies that pass the statutory two-year period are
essentially treated as legitimate and beyond question, and the individuals who wield
them are made secure by the thought that they will be paid promptly upon claim. In
this manner, Section 48 contributes to the stability of the insurance industry.
Section 48 prevents a situation where the insurer knowingly continues to accept
annual premium payments on life insurance, only to later on deny a claim on the

policy on specious claims of fraudulent concealment and misrepresentation, such as

what obtains in the instant case. Thus, instead of conducting at the first instance an
investigation into the circumstances surrounding the issuance of Insurance Policy
No. 747411 which would have timely exposed the supposed flaws and irregularities
attending it as it now professes, petitioner appears to have turned a blind eye and
opted instead to continue collecting the premiums on the policy. For nearly three
years, petitioner collected the premiums and devoted the same to its own profit. It
cannot now deny the claim when it is called to account. Section 48 must be applied
to it with full force and effect.
The Court therefore agrees fully with the appellate courts pronouncement that
the "incontestability clause" is a provision in law that after a policy of life insurance
made payable on the death of the insured shall have been in force during the
lifetime of the insured for a period of two (2) years from the date of its issue or of its
last reinstatement, the insurer cannot prove that the policy is void ab initio or is
rescindible by reason of fraudulent concealment or misrepresentation of the insured
or his agent.
The purpose of the law is to give protection to the insured or his beneficiary by
limiting the rescinding of the contract of insurance on the ground of fraudulent
concealment or misrepresentation to a period of only two (2) years from the
issuance of the policy or its last reinstatement.
The insurer is deemed to have the necessary facilities to discover such fraudulent
concealment or misrepresentation within a period of two (2) years. It is not fair for
the insurer to collect the premiums as long as the insured is still alive, only to raise
the issue of fraudulent concealment or misrepresentation when the insured dies in
order to defeat the right of the beneficiary to recover under the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the
beneficiary is given the stability to recover under the policy when the insured dies.
The provision also makes clear when the two-year period should commence in case
the policy should lapse and is reinstated, that is, from the date of the last
reinstatement.
After two years, the defenses of concealment or misrepresentation, no matter how
patent or well-founded, will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by
insurance companies to avoid liability.
The so-called "incontestability clause" precludes the insurer from raising the
defenses of false representations or concealment of material facts insofar as health

and previous diseases are concerned if the insurance has been in force for at least
two years during the insureds lifetime. The phrase "during the lifetime" found in
Section 48 simply means that the policy is no longer considered in force after the
insured has died. The key phrase in the second paragraph of Section 48 is "for a
period of two years."
As borne by the records, the policy was issued on August 30, 1993, the insured died
on April 10, 1996, and the claim was denied on April 16, 1997. The insurance policy
was thus in force for a period of 3 years, 7 months, and 24 days. Considering that
the insured died after the two-year period, the plaintiff-appellant is, therefore,
barred from proving that the policy is void ab initio by reason of the insureds
fraudulent concealment or misrepresentation or want of insurable interest on the
part of the beneficiary, herein defendant-appellee.
Well-settled is the rule that it is the plaintiff-appellants burden to show that the
factual findings of the trial court are not based on substantial evidence or that its
conclusions are contrary to applicable law and jurisprudence. The plaintiff-appellant
failed to discharge that burden.28
Petitioner claims that its insurance agent, who solicited the Sotero account, happens
to be the cousin of respondents husband, and thus insinuates that both connived to
commit insurance fraud. If this were truly the case, then petitioner would have
discovered the scheme earlier if it had in earnest conducted an investigation into
the circumstances surrounding the Sotero policy. But because it did not and it
investigated the Sotero account only after a claim was filed thereon more than two
years later, naturally it was unable to detect the scheme. For its negligence and
inaction, the Court cannot sympathize with its plight. Instead, its case precisely
provides the strong argument for requiring insurers to diligently conduct
investigations on each policy they issue within the two-year period mandated under
Section 48, and not after claims for insurance proceeds are filed with them.
Besides, if insurers cannot vouch for the integrity and honesty of their insurance
agents/salesmen and the insurance policies they issue, then they should cease
doing business. If they could not properly screen their agents or salesmen before
taking them in to market their products, or if they do not thoroughly investigate the
insurance contracts they enter into with their clients, then they have only
themselves to blame. Otherwise said, insurers cannot be allowed to collect
premiums on insurance policies, use these amounts collected and invest the same
through the years, generating profits and returns therefrom for their own benefit,
and thereafter conveniently deny insurance claims by questioning the authority or
integrity of their own agents or the insurance policies they issued to their premiumpaying clients. This is exactly one of the schemes which Section 48 aims to prevent.

Insurers may not be allowed to delay the payment of claims by filing frivolous cases
in court, hoping that the inevitable may be put off for years or even decades by
the pendency of these unnecessary court cases. In the meantime, they benefit from
collecting the interest and/or returns on both the premiums previously paid by the
insured and the insurance proceeds which should otherwise go to their
beneficiaries. The business of insurance is a highly regulated commercial activity in
the country,29 and is imbued with public interest.30 "An insurance contract is a
contract of adhesion which must be construed liberally in favor of the insured and
strictly against the insurer in order to safeguard the formers interest." 31
WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and
the November 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 62286
are AFFIRMED.
SO ORDERED.

FIRST PHILIPPINE
CORPORATION,

HOLDINGS

Petitioner,

G.R. No. 179505

Present:
CORONA, J.,
Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
- versus -

NACHURA, and
PERALTA, JJ.

Promulgated:

TRANS MIDDLE EAST (PHILS.)

EQUITIES INC.,

December 4, 2009

Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

This Petition for Review under Rule 45 of the Rules of Court seeks to reverse
and set aside the 22 February 2007 Resolution[1] of the Sandiganbayan, Fifth
Division in Civil Case No. 0035 granting respondent Trans Middle East (Phils.)
Equities Inc.s (TMEEs) Motion to Dismiss on the ground of prescription, petitioner
First Philippine Holdings Corporations (FPHCs) Complaint-in-Intervention, and its 6
September 2007 Resolution denying petitioners motion for reconsideration.

FPHC, formerly known as Meralco Securities Corporation, which was

incorporated in 30 June 1961 by Filipino entrepreneurs led by Eugenio Lopez, Sr., is
a holding company engaged in power generation and distribution, property
development and manufacturing.[2] FPHCs controlling interest is owned by the Lopez
family. TMEE, on the other hand, is also a domestic corporation, allegedly owned by
Benjamin (Kokoy) Romualdez.
On 24 May 1984, FPHC allegedly sold its 6,299,179 shares of common stock
in Philippine Commercial International Bank (PCIB), now Equitable-PCI Bank, to
TMEE.

The 6,299,179 shares of common stock in PCIB are part of the sequestered
properties that were allegedly illegally amassed by Benjamin Romualdez during the
twenty-year reign of former President Ferdinand E. Marcos, and are among the
purported ill-gotten wealth sought to be recovered by the Presidential Commission

on Good Government (PCGG) via a civil case docketed as Civil Case No. 0035 before
the Sandiganbayan.

According to FPHC, said shares were obtained by TMEE through fraud and
acts contrary to law, morals, good customs and public policy. [3] Such being the case,
their acquisition is either voidable or void or unenforceable.

On 28 December 1988, claiming ownership of said shares as well as the

corresponding rights appurtenant to ownership, FPHC filed before the
Sandiganbayan its Motion for Leave to Intervene and to Admit Complaint in
Intervention in Civil Case No. 0035. Although the Sandiganbayan denied FPHCs
motion for intervention, this Court on 1 February 1996, in First Philippine Holdings
Corporation v. Sandiganbayan,[4] reversed the Sandiganbayan and ruled that FPHC
had the legal right to intervene in Civil Case No. 0035 and directed the said court to
admit the proposed Complaint- in-Intervention of FPHC.

On 27 June 2006, TMEE filed a Motion to Dismiss the Complaint-inIntervention of FPHC on the ground, among other things, that the action of FPHC
had already prescribed. TMEE argued that under Article 1391 of the Civil Code,
FPHC only had four years from 24 May 1984, the date of the sale or until 24 May
1988 within which to annul the validity of the sale transaction on the ground of
fraud. Since FPHC filed the Complaint-in-Intervention only on 28 December 1988, it
meant that the action was seven months late from the prescriptive period.

FPHC disagreed. It maintained that the counting of four (4) years should
commence from the time the intimidation or the defect of consent ceased, i.e.,
when former President Ferdinand E. Marcos was deposed and left the country on 24
February 1986, and not from 24 May 1984. It argued that before 24 February 1986,
the Lopez family could not have asserted their ownership over the contested
shares. FPHC then concluded that when it assailed the questioned sale on 24 May
1988, the same was filed within the four-year prescriptive period.

On 22 February 2007, the Sandiganbayan ruled in TMEEs favor by granting its

motion to dismiss. The Sandiganbayan, citing Philippine Free Press, Inc. v. Court of
Appeals,[5] found no credible reason why FPHC could not institute the complaint to
annul the sale of the disputed shares of stock, simply for the alleged fear

engendered by the Marcos rule since, in 1984 when the sale was consummated,
martial rule was already lifted; and that, in the same year, protests against the then
president were already mounting and boisterous. The Sandiganbayan opined that
since FPHCs effort to recover the PCIB shares would have to be addressed by the
court, the element of fear would have been neutralized since the judiciary did not
lack gallant magistrates who refused to be cowed into silence by the dictator. The
Sandiganbayan likewise found suspect FPHCs late pursuit of the recovery of the
subject shares taking, in fact, two years after the late dictator was deposed.

FPHC filed a motion for reconsideration. In support thereof, FPHC maintained

that the sale of the PCIB shares was void ab initio, since the said transaction was
allegedly approved by the dummy board and signed by the dummy officers of
FPHC. Since the subject sale contract was null and void, the action for the
declaration of its nullity was imprescriptible.

FPHC alternatively argued that even if the case were dismissible on the
ground of prescription, the rule was that the facts demonstrating the lapse of the
prescriptive period must be apparent in the complaint. Since its complaint-inintervention did not show that there were averments that would demonstrate the
lapse of the prescriptive period, FPHC insisted that trial should be had before the
resolution of the issue of prescription and whether the governing board of FPHC was
so circumstanced that it was impossible for it to successfully institute an action
during the Marcos regime.

According to FPHC, even assuming that Article 1391 of the Civil Code applied,
the four-year prescriptive period should be reckoned from 26 February 1986, when
former President Ferdinand E. Marcos was deposed from power and left the country,
for it was only from that date onwards that the cause of vitiation of consent, i.e.,
intimidation, violence and threats, ceased.

In its Resolution dated 6 September 2007, the Sandiganbayan denied FPHCs

motion for reconsideration stressing anew that the subject sale was not void ab
initio, but merely voidable.
Hence, the instant petition.

A contract is void if one of the essential requisites of contracts under Article

1318 of the New Civil Code is lacking. Article 1318 provides:

Art. 1318. There is no contract unless the following requisites

concur:

(1) Consent of the contracting parties;

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

(3) Cause of the obligation which is established.

All these elements must be present to constitute a valid contract. Consent is

essential to the existence of a contract; and where it is wanting, the contract is nonexistent. In acontract of sale, its perfection is consummated at the moment there is
a meeting of the minds upon the thing that is the object of the contract and upon
the price. Consent is manifested by the meeting of the offer and the acceptance of
the thing and the cause, which are to constitute the contract. To enter into a valid
contract of sale, the parties must have the capacity to do so. Every person is
presumed to be capacitated to enter into a contract until satisfactory proof to the
contrary is presented.[6] The burden of proof is on the individual asserting a lack of
capacity to contract, and this burden has been characterized as requiring for its
satisfaction clear and convincing evidence.

While a corporation is a juridical person, it cannot act except through its

board of directors as a collective body, which is vested with the power and
responsibility to decide whether the corporation should enter into a contract that
will bind the corporation, subject to the articles of incorporation, by-laws, or relevant
provisions of law.[7] This grant to the board of all corporate powers is explicit under
Section 23 of the Corporation Code, stating: All corporate powers shall be exercised,
and all corporate business shall be conducted by the board of directors.

In the case under consideration, the dispute centers on the element of

consent, which FPHC claimed to be lacking since the supposed board of directors
that composed the FPHC was allegedly a dummy board of Benjamin Romualdez, the
members of which were allegedly installed after the management and control of
FPHC were supposedly fraudulently wrested from its true owners. The
Sandiganbayan, however, differed. It stood pat in its ruling that the consent by the
board of directors, who had the legal capacity to enter into said contract with a third
person, was duly obtained. This Court finds no reason to diverge from the
disquisition of the anti-graft court on this matter:

With respect to the insistence of FPHC that the Sale of Shares of Stock
and Escrow Agreement executed on May 24, 1984 is void since it was
approved by a dummy board that had no capacity to give consent, it
must be stressed that one of the requisites of a valid contract under
Article 1318 of the Civil Code is consent and the capacity of the parties
to give consent. The legal capacity of the parties is an essential
element for the existence of consent. There is no effective consent in
law without the capacity to give such consent. In other words, legal
consent presupposes capacity. Thus, there is said to be no consent,
and consequently, no contract when the agreement is entered into by
one in behalf of another who has never given him authorization
therefore unless he has by law a right to represent the latter.

Under Section 23 of B.P. 68, otherwise known as the Corporation Code

of the Philippines, a corporation can act only through its board of
directors. The law is settled that contracts between a corporation and
third persons must be made by or under the authority of its board of
directors and not by its stockholders. FPHC, for its part, was
represented by its board that had the legal right to act on behalf of the
corporation and gave its approval and consent to the Sale of Shares of
Stock and Escrow Agreement entered into on May 24, 1984. From that
standpoint therefore it is clear that the essential element of consent for
the existence of a valid contract was complied with in the transaction
in question.

The mere allegation of FPHC that the persons who composed the Board
of Directors of FPHC that approved the contract were mere dummies of
the Marcos and Romualdez group does not make the said contract
void. If that allegation of vitiated consent be true so as to incapacitate

the Board from giving its consent freely, the defect if at all only renders
the contract voidable.[8]

Indeed, a reading of the allegations of FPHCs Complaint-in-Intervention and

Petition for Review unveils the recurrent and persistent asseveration that fraud or
devious financial schemes and techniques attended the change of control and
management of the corporation. It can be seen therefore that the supposed fraud
employed by Benjamin Romualdez and alleged cohorts on the Lopezes constitutes
the root cause of the alleged nullity of the sale of the PCIB shares, thus:

15. Defendants Benjamin (Kokoy) Romualdez and his wife

Juliette Gomez Romualdez, acting by themselves and/or in unlawful
concert with defendants Ferdinand E. Marcos and Imelda R. Marcos,
and taking undue advantage of their relationship, influence and
connection with the latter defendant spouse, engaged in devices,
schemes and stategems to unjustly enrich themselves at the
expense either of plaintiff and the Filipino people or their private
individual victims. Thus

They obtained, with the active collaboration of defendants

Senen J. Gabaldon, Mario D. Camacho, Mamerto Nepomuceno, Carlos J.
Valdez, Delia S. Tantuico, Cesar Zalamea, and Atty. Jose F. S. Benzon, Jr.
and his law partners, namely: Edilberto S. Narciso, jr. and Leonardo C.
Cruz; Jose S. Sandejas and his fellow senior managers of FMMC/FNI
Holdings groups such as Leonardo Gamboa, Vicente T. Mills, jr., Jose M.
Mantecon, Abelardo S. Termulo, Rex C. Drillon II and Kurt Bachmann, jr.
control of the Manila Electric Company (Meralco), Pilipinas Shell
Corporation and the Philippine Commercial International Bank (PCI
Bank) (formerly Philippine Commercial and Industrial Bank)
by employing devious financial schemes and techniques(See
Part V, par. 14(a) Second Amended Complaint); formed the Meralco
Froundation, Inc. (MFI) to gain control of the Meralco group of
companies upon the false commitment, among others, to free
Eugenio Lopez, Jr. from detention. (Part V, par. 14(d) Second Amended
Complaint); effected, with the active collaboration of, among others,
defendants Edilberto S. Narciso, Jr., Jose F. S. Bengzon, Jr., Jose Vicente
E. Jimenez, Amando V. Faustino, Jr. and Leonardo C. Cruz, the sale of
share holdings of the First Philippine Holdings Corporation in the

Philippine Commercial and Industrial Bank (PCIB) to Trans Middle East

Philippine Equities, Inc., a front organization of defendant Benjamin
(Kokoy) Romualdez, in order to gain control of PCIB with minimum, or
negligible cash-out from said defendant. The manner by which PCIB in
effect funded the purchase of shares of its own capital stock was done
in violation of banking laws, rules and regulations (Part V, par. 14(j)
Second Amended Complaint); and at the onset of the present
administration and/or within the week following the February 1986
Peoples revolution, with the support, assistance and collaboration of
the aforenamed lawyers of the Bengzon Law Offices, cleverly hid
behind the veil of corporation entity, the ill-gotten wealth of defendant
Benjamin (kooky) Romualdez, including, among others, the 6,299,177
shares in PCIB registered in the names of Trans Middle East Philippines,
Equities, Inc. and defendant Edilberto S. Narciso, Jr. which they refused
to surrender to the PCGG (Part V, par. 14-q Second Amended
Complaint) despite defendant E. S. Narciso Jr.s admission/disclosure
that the beneficial owner of said shares is defendant Benjamin (Kokoy)
Romualdez (Part V, par. 17-a Second Amended Complaint). [9]

31.
The PCGG discovered and the plaintiff Republic of
the Philippines alleged that the sale of the PCIB shares of plaintiffintervenor First Philippine Holdings Corporation in the Philippine
Commercial and Industrial Bank (PCIB) to defendant-intervenor Trans
Middle East (Phils.) Equities, Inc. and defendant Edilberto S. narciso, Jr.
was packaged and financed by PCIB and the Philippine Commercial
Capital, Inc. thru loans extended to Southern Leyte Oil Mills, Inc.
(SOLOIL, INC.) for and in behalf of Trans Middle East (Phils.) Equities,
Inc., in violation of banking laws, rules and regulations; and was
effected with the active collaboration of, among others, defendants
Edilberto S. Narciso, Jr., Jose F. S. Bengzon, Jr., Jose Vicente E. Jimenez,
Armando Faustino, Jr., and Leonardo C. Cruz, by reason of which later
discovery plaintiff had to amend and accordingly filed its Second
Amended Complaint dated November 4, 1987 with this Court. Said
sale, is therefore, void or voidable on said ground, in addition
to having been obtained fraudulently with the connivance of
defendant Kokoy Romualdezs dummy directors and officers in plaintiffintervenors Board and Executive Committee, in breach of their
fiduciary obligations to plaintiff-intervenor and its stockholders under
the Corporation Code. x x x.[10]

Undoubtedly, the entirety of the allegations in the complaint-in-intervention

makes up a case of a voidable contract of sale - not a void one.

These circumstances surrounding the questioned transaction fit in with what

Article 1390 of the Civil Code contemplates as voidable contracts, viz:

Art. 1390. The following contracts are voidable or annullable,

even though there may have been no damage to the contracting
parties:

xxxx

(2) Those where the consent is vitiated by mistake, violence,

intimidation, undue influence, or fraud.

Thus, contracts where consent is given through fraud, are voidable or

annullable. These are not void ab initio since voidable or anullable contracts are
existent, valid, and binding, although they can be annulled because of want of
capacity or the vitiated consent of one of the parties. However, before such
annulment, they are considered effective and obligatory between parties. [11]

While FPHCs complaint prayed for the declaration of nullity of the disputed
sale transaction, such prayer does not determine the nature of the action at hand. It
is the material allegations of fact in the complaint, not the legal conclusion made
therein or the prayer that determines the nature of the case. [12] As ruled by this
Court, it is the body and not the caption or the prayer of the complaint that
determines the nature of the action.[13]
As the complaint-in-intervention substantially alleged that the contract was
voidable, the four-year prescriptive period under Art. 1391 of the New Civil Code will
apply.

Unyielding, FPHC invites this Courts attention to the applicability of

the Islamic Directorate of the Philippines v. Court of Appeals [14] to the instant
controversy.

In Islamic Directorate, there were several groups claiming to be the

legitimate board of trustees of Islamic Directorate of the Philippines (IDP). Two
groups, the Carpizo Group and the Abbas Group, separately contended that they
were the lawful board of trustees of IDP. This dispute reached the Securities and
Exchange Commission (SEC). The SEC, however, ruled that the election of both
groups as IDP board members was null and void. This declaration became final since
none of them bothered to question the SEC ruling. Subsequently, despite its lack of
authority, the Carpizo Group sold two parcels of land belonging to IDP. This sale was
assailed by the Tamano Group as null and void.This Court sustained the stance of
the Tamano Group and went on to explain that the questioned transaction was null
and void because the Carpizo Group was bereft of any authority to bind IDP in any
kind of transaction including the sale of the IDP property. The sale was therefore null
and void ab initio, because the consent of IDP was absolutely absent.

The pivotal fact that separates the instant case from Islamic Directorate is
that in the latter, the properties were alienated by an unauthorized body, the
Carpizo Group, whose election was previously voided by the SEC; while in the
former, the disposition of the disputed shares were sold by a legitimate and
authorized corporate officers, absent any declaration by the SEC or by any court or
tribunal against its legitimacy. Not a single stockholder even bothered to question
the election of the then board of directors of FPHC, much less objected to the
disputed sale. This being the situation, Islamic Directorate finds no application in
the instant case.

Also unavailing is FPHCs insistence that the issue of prescription cannot be

resolved on the basis of its complaint as the facts establishing prescription do not
appear on the face thereof.

A complaint may be dismissed when the facts establishing prescription are

apparent in the complaint or from the records. [15] In Gicano v. Gegato,[16] this Court
held that:

[T]rial courts have authority and discretion to dismiss an

action on the ground of prescription when the parties'
pleadings or other facts on record show it to be indeed timebarred; (Francisco v. Robles, Feb. 15, 1954; Sison v. McQuaid, 50 O.G.
97; Bambao v. Lednicky, Jan. 28, 1961; Cordova v. Cordova, Jan. 14,
1958; Convets, Inc. v. NDC, Feb. 28, 1958; 32 SCRA 529; Sinaon v.
Sorongan, 136 SCRA 408); and it may do so on the basis of a motion to
dismiss, or an answer which sets up such ground as an affirmative
defense; or even if the ground is alleged after judgment on the merits,
as in a motion for reconsideration; or even if the defense has not been
asserted at all, as where no statement thereof is found in the
pleadings; or where a defendant has been declared in default. What is
essential only, to repeat, is that the facts demonstrating the lapse of
the prescriptive period be otherwise sufficiently and satisfactorily
apparent on the record; either in the averments of the plaintiff's
complaint, or otherwise established by the evidence.

Here, the pleadings filed before the anti-graft court are replete with
averments and proof that PCIB shares of stock were sold on 24 May 1984, and that
FPHC filed its complaint-in-intervention on 28 December 1988. From the execution
of the sale to the filing of the complaint, it is readily apparent that four years and
seven months had lapsed.Certainly the complaint was filed beyond the four-year
prescriptive period.

FPHC, however, contends that the four-year prescriptive period should be

reckoned from 24 February 1986, the date when former President Marcos left the
country, as it was only then that the threat and intimidation against the Lopezes
ceased.

This argument is unconvincing. Based on FPHCs Petition for Review and its
Complaint-in-Intervention, the ground relied upon by petitioner is fraud. FPHCs
petition partly reads:

PCIBank shares were obtained xxx by means of fraud and acts

contrary to law, morals and public policy x x x. [17]

In its Complaint-in-Intervention, it is alleged:

32.
Said sale, is therefore, void or voidable on said
ground, in addition to having been obtained fraudulently with the
connivance of defendant Kokoy Romualdezs dummy directors and
officers in plaintiff-intervenors Board and Executive Committee, in
breach of their fiduciary obligations to plaintiff-intervenor and its
stockholders under the Corporation Code. x x x.[18]

Under Article 1391 of the Civil Code, a suit for the annulment of a voidable
contract on account of fraud shall be filed within four years from the discovery of
the same, thus:

Article 1391. An action for annulment shall be brought within four

years.

This period shall begin: In case of intimidation, violence or undue

influence, from the time the defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery of the

same.

Here, from the time the questioned sale transaction on 24 May 1984 took
place, FPHC did not deny that it had actual knowledge of the same. Simply,
petitioner was fully aware of the sale of the PCIB shares to TMEE. Despite all this
knowledge, petitioner did not question the said sale from its inception and some
time thereafter. It was only after four years and seven months had lapsed following
the knowledge or discovery of the alleged fraudulent sale that petitioner assailed

the same. By then, it was too late for petitioner to beset the same transaction, since
the prescriptive period had already come into play. As ruled in Philipppine Free
Press, Inc. v. Court of Appeals[19] -

Be that as it may, the Locsins mistrust of the courts and of judicial

processes is no excuse for their non-observance of the
prescriptive period set down by law.

If indeed the subject transaction was, to Lopezes point of view, questionable,

the Lopezes would have at least exerted a token effort to assail the validity of the
transaction, which they did not. Instead of immediately availing themselves of the
courts to retrieve said shares, the Lopezes gave them up without a fight and
discounted judicial recourse, as they looked upon the judiciary with indifference and
distrust. This attitude is certainly inconsistent with that of a person who strongly
believes in the veracity of his proprietary rights.

Based on the foregoing, the Sandiganbayan need not go through trial on the
merits to determine whether the fact of prescription has set in. As already said
earlier, the Sandiganbayan has the authority and discretion to dismiss an action on
the ground of prescription on the basis of a motion to dismiss alone. Moreover,
FPHC cannot successfully claim that it was denied due process, since the motion to
dismiss was set for hearing; and the parties, including FPHC, were given all the
opportunities to be heard through their numerous pleadings and counter-pleadings
filed before the Sandiganbayan.

In fine, this Court, defers to the findings of the Sandiganbayan, there being
no cogent reason to veer away from such findings.

WHEREFORE, the instant petition is DENIED. The Resolutions of the

Sandiganbayan dated 22 February 2007 and 6 September 2007 dismissing FPHCs
Complaint-in-Intervention, are hereby AFFIRMED. Costs against petitioner.

G.R. No. L-27010

April 30, 1969

MARLENE DAUDEN-HERNAEZ, petitioner,

vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of
Quezon City, HOLLYWOOD FAR EAST PRODUCTIONS, INC., and RAMON
VALENZUELA, respondents.
R. M. Coronado and Associates for petitioner.
Francisco Lavides for respondent.
REYES, J.B.L., Acting C.J.:
Petition for a writ of certiorari to set aside certain orders of the Court of First
Instance of Quezon City (Branch IV), in its Civil Case No. Q-10288, dismissing a
complaint for breach of contract and damages, denying reconsideration, refusing to
admit an amended complaint, and declaring the dismissal final and unappealable.
The essential facts are the following:
Petitioner Marlene Dauden-Hernaez, a motion picture actress, had filed a complaint
against herein private respondents, Hollywood Far East Productions, Inc., and its
President and General Manager, Ramon Valenzuela, to recover P14,700.00
representing a balance allegedly due said petitioner for her services as leading
actress in two motion pictures produced by the company, and to recover damages.
Upon motion of defendants, the respondent court (Judge Walfrido de los Angeles
presiding) ordered the complaint dismissed, mainly because the "claim of plaintiff
was not evidenced by any written document, either public or private", and the
complaint "was defective on its face" for violating Articles 1356 and 1358 of the
Civil, Code of the Philippines, as well as for containing defective allege, petitions.
Plaintiff sought reconsideration of the dismissal and for admission of an amended
complaint, attached to the motion. The court denied reconsideration and the leave
to amend; whereupon, a second motion for reconsideration was filed. Nevertheless,
the court also denied it for being pro forma, as its allegations "are, more or less, the
same as the first motion", and for not being accompanied by an affidavit of merits,
and further declared the dismissal final and unappealable. In view of the attitude of
the Court of First Instance, plaintiff resorted to this Court.
The answer sets up the defense that "the proposed amended complaint did not vary
in any material respect from the original complaint except in minor details, and
suffers from the same vital defect of the original complaint", which is the violation
of Article 1356 of the Civil Code, in that the contract sued upon was not alleged to
be in writing; that by Article 1358 the writing was absolute and indispensable,
because the amount involved exceeds five hundred pesos; and that the second
motion for reconsideration did not interrupt the period for appeal, because it was
not served on three days' notice.

We shall take up first the procedural question. It is a well established rule in our
jurisprudence that when a court sustains a demurrer or motion to dismiss it is error
for the court to dismiss the complaint without giving the party plaintiff an
opportunity to amend his complaint if he so chooses. 1 Insofar as the first order of
dismissal (Annex D, Petition) did not provide that the same was without prejudice to
amendment of the complaint, or reserve to the plaintiff the right to amend his
complaint, the said order was erroneous; and this error was compounded when the
motion to accept the amended complaint was denied in the subsequent order of 3
October 1966 (Annex F, Petition). Hence, the petitioner-plaintiff was within her
rights in filing her so-called second motion for reconsideration, which was actually a
first motion against the refusal to admit the amended complaint.
It is contended that the second motion for reconsideration was merely pro
forma and did not suspend the period to appeal from the first order of dismissal
(Annex D) because (1) it merely reiterated the first motion for reconsideration and
(2) it was filed without giving the counsel for defendant-appellee the 3 days' notice
provided by the rules. This argument is not tenable, for the reason that the second
motion for reconsideration was addressed to the court' refusal to allow an
amendment to the original complaint, and this was a ground not invoked in the first
motion for reconsideration. Thus, the second motion to reconsider was really
not pro forma, as it was based on a different ground, even if in its first part it set
forth in greater detail the arguments against the correctness of the first order to
dismiss. And as to the lack of 3 days' notice, the record shows that appellees had
filed their opposition (in detail) to the second motion to reconsider (Answer, Annex
4); so that even if it were true that respondents were not given the full 3 days'
notice they were not deprived of any substantial right. Therefore, the claim that the
first order of dismissal had become final and unappealable must be overruled.
It is well to observe in this regard that since a motion to dismiss is not a responsive
pleading, the plaintiff-petitioner was entitled as of right to amend the original
dismissed complaint. In Paeste vs. Jaurigue 94 Phil. 179, 181, this Court ruled as
follows:
Appellants contend that the lower court erred in not admitting their amended
complaint and in holding that their action had already prescribed. Appellants
are right on both counts.
Amendments to pleadings are favored and should be liberally allowed in the
furtherance of justice. (Torres vs. Tomacruz, 49 Phil. 913). Moreover, under
section 1 of Rule 17, Rules of Court, a party may amend his pleading once as
a matter of course, that is, without leave of court, at any time before a
responsive pleading is served. A motion to dismiss is not a "responsive
pleading". (Moran on the Rules of Court, vol. 1, 1952, ed., p. 376). As
plaintiffs amended their complaint before it was answered, the motion to

admit the amendment should not have been denied. It is true that the
amendment was presented after the original complaint had been ordered
dismissed. But that order was not yet final for it was still under
reconsideration.
The foregoing observations leave this Court free to discuss the main issue in this
petition. Did the court below abuse its discretion in ruling that a contract for
personal services involving more than P500.00 was either invalid of unenforceable
under the last paragraph of Article 1358 of the Civil Code of the Philippines?
We hold that there was abuse, since the ruling herein contested betrays a basic and
lamentable misunderstanding of the role of the written form in contracts, as
ordained in the present Civil Code.
In the matter of formalities, the contractual system of our Civil Code still follows that
of the Spanish Civil Code of 1889 and of the "Ordenamiento de Alcala" 2 of
upholding the spirit and intent of the parties over formalities: hence, in general,
contracts are valid and binding from their perfection regardless of form whether
they be oral or written. This is plain from Articles 1315 and 1356 of the present Civil
Code. Thus, the first cited provision prescribes:
ART. 1315. Contracts are perfected by mere consent, and from that moment
the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law. (Emphasis supplied)
Concordantly, the first part of Article 1356 of the Code Provides:
ART. 1356. Contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their validity are
present.... (Emphasis supplied)
These essential requisites last mentioned are normally (1) consent (2) proper
subject matter, and (3) consideration or causa for the obligation assumed (Article
1318). 3 So that once the three elements exist, the contract is generally valid and
obligatory, regardless of the form, oral or written, in which they are
couched.lawphi1.nt
To this general rule, the Code admits exceptions, set forth in the second portion of
Article 1356:
However, when the law requires that a contract be in some form in order that
it may be valid or enforceable, or that a contract be proved in a certain way,
that requirement is absolute and indispensable....

It is thus seen that to the general rule that the form (oral or written) is irrelevant to
the binding effect inter partes of a contract that possesses the three validating
elements of consent, subject matter, and causa, Article 1356 of the Code
establishes only two exceptions, to wit:
(a) Contracts for which the law itself requires that they be in some particular form
(writing) in order to make themvalid and enforceable (the socalled solemn contracts). Of these the typical example is the donation of immovable
property that the law (Article 749) requires to be embodied in a public instrument in
order "that the donation may be valid", i.e., existing or binding. Other instances are
the donation of movables worth more than P5,000.00 which must be in writing,
"otherwise the donation shall be void" (Article 748); contracts to pay interest on
loans (mutuum) that must be "expressly stipulated in writing" (Article 1956); and
the agreements contemplated by Article 1744, 1773, 1874 and 2134 of the present
Civil Code.
(b) Contracts that the law requires to be proved by some writing (memorandum) of
its terms, as in those covered by the old Statute of Frauds, now Article 1403(2) of
the Civil Code. Their existence not being provable by mere oral testimony (unless
wholly or partly executed), these contracts are exceptional in requiring a writing
embodying the terms thereof for their enforceability by action in court.
The contract sued upon by petitioner herein (compensation for services) does not
come under either exception. It is true that it appears included in Article 1358, last
clause, providing that "all other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one." But Article 1358
nowhere provides that the absence of written form in this case will make the
agreement invalid or unenforceable. On the contrary, Article 1357 clearly indicates
that contracts covered by Article 1358 are binding and enforceable by action or suit
despite the absence of writing.
ART. 1357. If the law requires a document or other special form, as in the acts
and contracts enumerated in the following article, the contracting parties
may compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action the
contract. (Emphasis supplied) .
It thus becomes inevitable to conclude that both the court a quo as well as the
private respondents herein were grossly mistaken in holding that because petitioner
Dauden's contract for services was not in writing the same could not be sued upon,
or that her complaint should be dismissed for failure to state a cause of action
because it did not plead any written agreement.

The basic error in the court's decision lies in overlooking that in our contractual
system it is not enough that the law should require that the contract be in writing,
as it does in Article 1358. The law must further prescribe that without the writing
the contract is not valid or not enforceable by action.
WHEREFORE, the order dismissing the complaint is set aside, and the case is
ordered remanded to the court of origin for further proceedings not at variance with
this decision.
Costs to be solidarity paid by private respondents Hollywood Far East Productions,
Inc., and Ramon Valenzuela.

ANTHONY ORDUA, DENNIS ORDUA,

and ANTONITA ORDUA,
Petitioners,

G.R. No. 176841

Present:
CORONA, C.J., Chairperson,
VELASCO, JR.,
LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.

- versus -

EDUARDO J. FUENTEBELLA,
MARCOS S. CID, BENJAMIN F. CID,
Promulgated:
BERNARD G. BANTA, and ARMANDO
GABRIEL, JR.,
June 29, 2010
Respondents.
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
In

this

Petition

for

Review[1] under

Rule

45

of

the

Rules

of

Court, Anthony Ordua, Dennis Ordua and Antonita Ordua assail and seek to set
aside the Decision[2] of the Court of Appeals (CA) dated December 4, 2006 in CAG.R. CV No. 79680, as reiterated in its Resolution of March 6, 2007, which affirmed
the May 26, 2003 Decision[3] of the Regional Trial Court (RTC), Branch 3 in Baguio
City, in Civil Case No. 4984-R, a suit for annulment of title and reconveyance
commenced by herein petitioners against herein respondents.
Central to the case is a residential lot with an area of 74 square meters
located at Fairview Subdivision, Baguio City, originally registered in the name of

Armando Gabriel, Sr. (Gabriel Sr.) under Transfer Certificate of Title (TCT) No. 67181
of the Registry of Deeds of Baguio City.[4]
As gathered from the petition, with its enclosures, and the comments thereon
of four of the five respondents, [5] the Court gathers the following relevant facts:
Sometime in 1996 or thereabouts, Gabriel Sr. sold the subject lot to petitioner
Antonita Ordua (Antonita), but no formal deed was executed to document the sale.
The contract price was apparently payable in installments as Antonita remitted from
time to time and Gabriel Sr. accepted partial payments. One of the Orduas would
later testify that Gabriel Sr. agreed to execute a final deed of sale upon full payment
of the purchase price.[6]
As early as 1979, however, Antonita and her sons, Dennis and Anthony
Ordua, were already occupying the subject lot on the basis of some arrangement
undisclosed in the records and even constructed their house thereon. They also paid
real property taxes for the house and declared it for tax purposes, as evidenced by
Tax Declaration No. (TD) 96-04012-111087 [7] in which they place the assessed value
of the structure at PhP 20,090.
After the death of Gabriel Sr., his son and namesake, respondent Gabriel Jr.,
secured TCT No. T-71499[8] over the subject lot and continued accepting payments
from the petitioners. On December 12, 1996, Gabriel Jr. wrote Antonita authorizing
her to fence off the said lot and to construct a road in the adjacent lot. [9] On
December 13, 1996, Gabriel Jr. acknowledged receipt of a PhP 40,000 payment from
petitioners.[10] Through a letter[11] dated May 1, 1997, Gabriel Jr. acknowledged that
petitioner had so far made an aggregate payment of PhP 65,000, leaving an
outstanding balance of PhP 60,000. A receipt Gabriel Jr. issued dated November 24,
1997 reflected a PhP 10,000 payment.
Despite all those payments made for the subject lot, Gabriel Jr. would later
sell it to Bernard Banta (Bernard) obviously without the knowledge of petitioners, as
later developments would show.
As narrated by the RTC, the lot conveyance from Gabriel Jr. to Bernard was
effected against the following backdrop: Badly in need of money, Gabriel Jr.

borrowed from Bernard the amount of PhP 50,000, payable in two weeks at a fixed
interest rate, with the further condition that the subject lot would answer for the
loan in case of default.Gabriel Jr. failed to pay the loan and this led to the execution
of a Deed of Sale[12] dated June 30, 1999 and the issuance later of TCT No. T72782[13] for subject lot in the name of Bernard upon cancellation of TCT No. 71499
in the name of Gabriel, Jr. As the RTC decision indicated, the reluctant Bernard
agreed to acquire the lot, since he had by then ready buyers in respondents Marcos
Cid and Benjamin F. Cid (Marcos and Benjamin or the Cids).
Subsequently, Bernard sold to the Cids the subject lot for PhP 80,000. Armed
with a Deed of Absolute Sale of a Registered Land [14] dated January 19, 2000, the
Cids were able to cancel TCT No. T-72782 and secure TCT No. 72783 [15] covering the
subject lot. Just like in the immediately preceding transaction, the deed of sale
between Bernard and the Cids had respondent Eduardo J. Fuentebella (Eduardo) as
one of the instrumental witnesses.
Marcos and Benjamin, in turn, ceded the subject lot to Eduardo through a
Deed of Absolute Sale[16] dated May 11, 2000. Thus, the consequent cancellation of
TCT No. T-72782 and issuance on May 16, 2000 of TCT No. T-3276 [17] over subject lot
in the name of Eduardo.
As successive buyers of the subject lot, Bernard, then Marcos and Benjamin,
and finally Eduardo, checked, so each claimed, the title of their respective
predecessors-in-interest with the Baguio Registry and discovered said title to be free
and unencumbered at the time each purchased the property. Furthermore,
respondent Eduardo, before buying the property, was said to have inspected the
same and found it unoccupied by the Orduas. [18]
Sometime in May 2000, or shortly after his purchase of the subject lot,
Eduardo, through his lawyer, sent a letter addressed to the residence of Gabriel Jr.
demanding that all persons residing on or physically occupying the subject lot
vacate the premises or face the prospect of being ejected. [19]
Learning of Eduardos threat, petitioners went to the residence of Gabriel Jr. at
No. 34 Dominican Hill, Baguio City. There, they met Gabriel Jr.s estranged wife,
Teresita, who informed them about her having filed an affidavit-complaint against

her husband and the Cids for falsification of public documents on March 30, 2000.
According to Teresita, her signature on the June 30, 1999 Gabriel Jr.Bernard deed of
sale was a forgery. Teresita further informed the petitioners of her intent to honor
the aforementioned 1996 verbal agreement between Gabriel Sr. and Antonita and
the partial payments they gave her father-in-law and her husband for the subject
lot.
On
Complaint

July
[20]

3,

2001,

petitioners,

joined

by

Teresita,

filed

for Annulment of Title, Reconveyance with Damages against the

respondents before the RTC, docketed as Civil Case No. 4984-R, specifically praying
that TCT No. T-3276 dated May 16, 2000 in the name of Eduardo be annulled.
Corollary to this prayer, petitioners pleaded that Gabriel Jr.s title to the lot be
reinstated and that petitioners be declared as entitled to acquire ownership of the
same upon payment of the remaining balance of the purchase price therefor agreed
upon by Gabriel Sr. and Antonita.
While impleaded and served with summons, Gabriel Jr. opted not to submit an
answer.
Ruling of the RTC
By Decision dated May 26, 2003, the RTC ruled for the respondents, as
defendants a quo, and against the petitioners, as plaintiffs therein, the dispositive
portion of which reads:
WHEREFORE, the instant complaint is hereby DISMISSED for lack of
merit. The four (4) plaintiffs are hereby ordered by this Court to
pay each defendant (except Armando Gabriel, Jr., Benjamin F. Cid, and
Eduardo J. Fuentebella who did not testify on these damages), Moral
Damages
of
Twenty
Thousand
(P20,000.00)
Pesos,
so
that each defendant shall receive Moral Damages of Eighty Thousand
(P80,000.00) Pesos each. Plaintiffs shall also pay all defendants (except
Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who
did not testify on these damages), Exemplary Damages of Ten
Thousand (P10,000.00) Pesos each so that each defendant shall
receive
Forty
Thousand
(P40,000.00)
Pesos
as
Exemplary
Damages. Also, plaintiffs are ordered to pay each defendant (except
Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who
did not testify on these damages), Fifty Thousand (P50,000.00) Pesos
as Attorneys Fees, jointly and solidarily.

Cost of suit against the plaintiffs.[21]

On the main, the RTC predicated its dismissal action on the basis of the following
grounds and/or premises:

1. Eduardo was a purchaser in good faith and, hence, may avail himself of the
provision of Article 1544[22] of the Civil Code, which provides that in case of double
sale, the party in good faith who is able to register the property has better right
over the property;
2. Under Arts. 1356[23] and 1358[24] of the Code, conveyance of real property
must be in the proper form, else it is unenforceable;
3. The verbal sale had no adequate consideration; and
4. Petitioners right of action to assail Eduardos title prescribes in one year
from date of the issuance of such title and the one-year period has already lapsed.
From the above decision, only petitioners appealed to the CA, their appeal
docketed as CA-G.R. CV No. 79680.
The CA Ruling
On December 4, 2006, the appellate court rendered the assailed Decision
affirming the RTC decision. The fallo reads:
WHEREFORE, premises considered, the instant appeal is hereby
DISMISSED and the 26 May 2003 Decision of the Regional Trial Court,
Branch 3 of Baguio City in Civil Case No. 4989-R is hereby AFFIRMED.
SO ORDERED.[25]

Hence, the instant petition on the submission that the appellate court committed
reversible error of law:

1. xxx
WHEN
IT
HELD
THAT
THE SALE OF
THE
SUBJECT LOT BY ARMANDO GABRIEL, SR. AND RESPONDENT
ARMANDO
GABRIEL,
JR.
TO
THE
PETITIONERS
IS
UNENFORCEABLE.
2. xxx IN NOT FINDING THAT THE SALE OF THE SUBJECT
LOT BY RESPONDENT ARMANDO GABRIEL, JR. TO RESPONDENT
BERNARD BANTA AND ITS SUBSEQUENT SALE BY THE LATTER TO
HIS CO-RESPONDENTS ARE NULL AND VOID.
3. xxx IN NOT FINDING THAT THE RESPONDENTS ARE
BUYERS IN BAD FAITH
4. xxx IN FINDING THAT THE SALE OF THE SUBJECT LOT
BETWEEN GABRIEL, SR. AND RESPONDENT GABRIEL, JR. AND
THE PETITIONERS HAS NO ADEQUATE CONSIDERATION.
5. xxx IN RULING THAT THE INSTANT ACTION HAD ALREADY
PRESCRIBED.
6. xxx IN FINDING THAT THE PLAINTIFFS-APPELLANTS ARE
LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND ATTORNEYS
FEES.[26]

The Courts Ruling

The core issues tendered in this appeal may be reduced to four and
formulated as follows, to wit: first, whether or not the sale of the subject lot by
Gabriel Sr. to Antonita is unenforceable under the Statute of Frauds; second,
whether or not such sale has adequate consideration; third, whether the instant
action has already prescribed; and, fourth, whether or not respondents are
purchasers in good faith.
The petition is meritorious.
Statute of Frauds Inapplicable
to Partially Executed Contracts

It is undisputed that Gabriel Sr., during his lifetime, sold the subject property
to Antonita, the purchase price payable on installment basis. Gabriel Sr. appeared to
have been a recipient of some partial payments. After his death, his son duly
recognized the sale by accepting payments and issuing what may be considered as
receipts therefor. Gabriel Jr., in a gesture virtually acknowledging the petitioners

dominion of the property, authorized them to construct a fence around it. And no
less than his wife, Teresita, testified as to the fact of sale and of payments received.
Pursuant to such sale, Antonita and her two sons established their residence
on the lot, occupying the house they earlier constructed thereon. They later
declared the property for tax purposes, as evidenced by the issuance of TD 9604012-111087 in their or Antonitas name, and paid the real estates due thereon,
obviously as sign that they are occupying the lot in the concept of owners.
Given the foregoing perspective, Eduardos assertion in his Answer that
persons

appeared

in

the

property [27] only

after

he

initiated

ejectment

proceedings[28] is clearly baseless. If indeed petitioners entered and took possession

of the property after he (Eduardo) instituted the ejectment suit, how could they
explain the fact that he sent a demand letter to vacate sometime in May 2000?
With the foregoing factual antecedents, the question to be resolved is
whether or not the Statute of Frauds bars the enforcement of the verbal sale
contract between Gabriel Sr. and Antonita.
The CA, just as the RTC, ruled that the contract is unenforceable for noncompliance with the Statute of Frauds.
We disagree for several reasons. Foremost of these is that the Statute of
Frauds expressed in Article 1403, par. (2), [29] of the Civil Code applies only to
executory contracts, i.e., those where no performance has yet been made. Stated a
bit differently, the legal consequence of non-compliance with the Statute does not
come into play where the contract in question is completed, executed, or partially
consummated.[30]
The Statute of Frauds, in context, provides that a contract for the sale of real
property or of an interest therein shall be unenforceable unless the sale or some
note or memorandum thereof is in writing and subscribed by the party or his
agent. However, where the verbal contract of sale has been partially executed
through the partial payments made by one party duly received by the vendor,
as in the present case, the contract is taken out of the scope of the Statute.

The purpose of the Statute is to prevent fraud and perjury in the enforcement
of obligations depending for their evidence on the unassisted memory of witnesses,
by requiring certain enumerated contracts and transactions to be evidenced by a
writing signed by the party to be charged. [31] The Statute requires certain contracts
to be evidenced by some note or memorandum in order to be enforceable. The
term Statute of Frauds is descriptive of statutes that require certain classes of
contracts to be in writing. The Statute does not deprive the parties of the right to
contract with respect to the matters therein involved, but merely regulates the
formalities of the contract necessary to render it enforceable.[32]

Since contracts are generally obligatory in whatever form they may have
been entered into, provided all the essential requisites for their validity are present,
[33]

the Statute simply provides the method by which the contracts enumerated in

Art. 1403 (2) may be proved but does not declare them invalid because they are not
reduced to writing. In fine, the form required under the Statute is for convenience
or evidentiary purposes only.

There can be no serious argument about the partial execution of the sale in
question. The records show that petitioners had, on separate occasions, given
Gabriel Sr. and Gabriel Jr. sums of money as partial payments of the purchase price.
These payments were duly receipted by Gabriel Jr. To recall, in his letter of May 1,
1997, Gabriel, Jr. acknowledged having received the aggregate payment of PhP
65,000 from petitioners with the balance of PhP 60,000 still remaining unpaid. But
on top of the partial payments thus made, possession of the subject of the sale had
been transferred to Antonita as buyer. Owing thus to its partial execution, the
subject sale is no longer within the purview of the Statute of Frauds.
Lest it be overlooked, a contract that infringes the Statute of Frauds is ratified
by the acceptance of benefits under the contract. [34] Evidently, Gabriel, Jr., as his
father earlier, had benefited from the partial payments made by the petitioners.
Thus, neither Gabriel Jr. nor the other respondentssuccessive purchasers of subject
lotscould plausibly set up the Statute of Frauds to thwart petitioners efforts towards
establishing their lawful right over the subject lot and removing any cloud in their

title. As it were, petitioners need only to pay the outstanding balance of the
purchase price and that would complete the execution of the oral sale.
There was Adequate Consideration
Without directly saying so, the trial court held that the petitioners cannot sue
upon the oral sale since in its own words: x x x for more than a decade, [petitioners]
have not paid in full Armando Gabriel, Sr. or his estate, so that the sale transaction
between Armando Gabriel Sr. and [petitioners] [has] no adequate consideration.
The trial courts posture, with which the CA effectively concurred, is patently
flawed. For starters, they equated incomplete payment of the purchase price with
inadequacy of price or what passes as lesion, when both are different civil law
concepts with differing legal consequences, the first being a ground to rescind an
otherwise valid and enforceable contract. Perceived inadequacy of price, on the
other hand, is not a sufficient ground for setting aside a sale freely entered into,
save perhaps when the inadequacy is shocking to the conscience. [35]
The Court to be sure takes stock of the fact that the contracting parties to the
1995 or 1996 sale agreed to a purchase price of PhP 125,000 payable on
installments. But the original lot owner, Gabriel Sr., died before full payment can be
effected. Nevertheless, petitioners continued remitting payments to Gabriel, Jr., who
sold the subject lot to Bernard on June 30, 1999. Gabriel, Jr., as may be noted,
parted with the property only for PhP 50,000. On the other hand, Bernard sold it for
PhP 80,000 to Marcos and Benjamin. From the foregoing price figures, what is
abundantly clear is that what Antonita agreed to pay Gabriel, Sr., albeit in
installment, was very much more than what his son, for the same lot, received from
his buyer and the latters buyer later. The Court, therefore, cannot see its way clear
as to how the RTC arrived at its simplistic conclusion about the transaction between
Gabriel Sr. and Antonita being without adequate consideration.
The Issues of Prescription and the Bona
Fides of the Respondents as Purchasers

Considering the interrelation of these two issues, we will discuss them jointly.

There can be no quibbling about the fraudulent nature of the conveyance of

the subject lot effected by Gabriel Jr. in favor of Bernard. It is understandable that
after his fathers death, Gabriel Jr. inherited subject lot and for which he was issued
TCT No. No. T-71499. Since the Gabriel Sr. Antonita sales transaction called for
payment of the contract price in installments, it is also understandable why the title
to the property remained with the Gabriels. And after the demise of his father,
Gabriel Jr. received payments from the Orduas and even authorized them to enclose
the subject lot with a fence. In sum, Gabriel Jr. knew fully well about the sale and is
bound by the contract as predecessor-in-interest of Gabriel Sr. over the property
thus sold.
Yet, the other respondents (purchasers of subject lot) still maintain that they
are innocent purchasers for value whose rights are protected by law and besides
which prescription has set in against petitioners action for annulment of title and
reconveyance.
The RTC and necessarily the CA found the purchaser-respondents thesis on
prescription correct stating in this regard that Eduardos TCT No. T-3276 was issued
on May 16, 2000 while petitioners filed their complaint for annulment only on July 3,
2001. To the courts below, the one-year prescriptive period to assail the issuance of
a certificate of title had already elapsed.
We are not persuaded.
The basic complaint, as couched, ultimately seeks the reconveyance of a
fraudulently registered piece of residential land. Having possession of the subject
lot, petitioners right to the reconveyance thereof, and the annulment of the
covering title, has not prescribed or is not time-barred. This is so for an action for
annulment of title or reconveyance based on fraud is imprescriptible where the
suitor is in possession of the property subject of the acts, [36] the action partaking as
it does of a suit for quieting of title which is imprescriptible. [37] Such is the case in
this instance. Petitioners have possession of subject lots as owners having
purchased the same from Gabriel, Sr. subject only to the full payment of the agreed
price.

The prescriptive period for the reconveyance of fraudulently registered real

property is 10 years, reckoned from the date of the issuance of the certificate of
title, if the plaintiff is not in possession, but imprescriptible if he is in possession of
the property.[38] Thus, one who is in actual possession of a piece of land claiming to
be the owner thereof may wait until his possession is disturbed or his title is
attacked before taking steps to vindicate his right. [39] As it is, petitioners action for
reconveyance is imprescriptible.

This brings us to the question of whether or not the respondentpurchasers, i.e., Bernard, Marcos and Benjamin, and Eduardo, have the status of
innocent purchasers for value, as was the thrust of the trial courts disquisition and
disposition.
We are unable to agree with the RTC.
It is the common defense of the respondent-purchasers that they each
checked the title of the subject lot when it was his turn to acquire the same and
found it clean, meaning without annotation of any encumbrance or adverse third
party interest. And it is upon this postulate that each claims to be an innocent
purchaser for value, or one who buys the property of another without notice that
some other person has a right to or interest in it, and who pays therefor a full and
fair price at the time of the purchase or before receiving such notice. [40]
The general rule is that one dealing with a parcel of land registered under the
Torrens System may safely rely on the correctness of the certificate of title issued
therefor and is not obliged to go beyond the certificate. [41] Where, in other words,
the certificate of title is in the name of the seller, the innocent purchaser for value
has the right to rely on what appears on the certificate, as he is charged with notice
only of burdens or claims on the res as noted in the certificate. Another formulation
of the rule is that (a) in the absence of anything to arouse suspicion or (b) except
where the party has actual knowledge of facts and circumstances that would impel
a reasonably cautious man to make such inquiry or (c) when the purchaser has
knowledge of a defect of title in his vendor or of sufficient facts to induce a
reasonably prudent man to inquire into the status of the title of the property, [42] said

purchaser is without obligation to look beyond the certificate and investigate the
title of the seller.
Eduardo and, for that matter, Bernard and Marcos and Benjamin, can hardly
claim to be innocent purchasers for value or purchasers in good faith. For each
knew or was at least expected to know that somebody else other than Gabriel, Jr.
has a right or interest over the lot. This is borne by the fact that the initial seller,
Gabriel Jr., was not in possession of subject property. With respect to Marcos and
Benjamin, they knew as buyers that Bernard, the seller, was not also in possession
of the same property. The same goes with Eduardo, as buyer, with respect to Marcos
and Benjamin.
Basic is the rule that a buyer of a piece of land which is in the actual
possession of persons other than the seller must be wary and should investigate the
rights of those in possession. Otherwise, without such inquiry, the buyer can hardly
be regarded as a buyer in good faith. When a man proposes to buy or deal with
realty, his duty is to read the public manuscript, i.e., to look and see who is there
upon it and what his rights are. A want of caution and diligence which an honest
man of ordinary prudence is accustomed to exercise in making purchases is, in
contemplation of law, a want of good faith. The buyer who has failed to know or
discover that the land sold to him is in adverse possession of another is a buyer in
bad faith.[43]
Where the land sold is in the possession of a person other than the vendor,
the purchaser must go beyond the certificates of title and make inquiries concerning
the rights of the actual possessor. [44] And where, as in the instant case, Gabriel Jr.
and the subsequent vendors were not in possession of the property, the prospective
vendees are obliged to investigate the rights of the one in possession. Evidently,
Bernard, Marcos and Benjamin, and Eduardo did not investigate the rights over the
subject lot of the petitioners who, during the period material to this case, were in
actual possession thereof. Bernard, et al. are, thus, not purchasers in good faith and,
as such, cannot be accorded the protection extended by the law to such purchasers.
[45]

Moreover, not being purchasers in good faith, their having registered the sale,

will not, as against the petitioners, carry the day for any of them under Art. 1544 of
the Civil Code prescribing rules on preference in case of double sales of immovable
property. Occea v. Esponilla[46] laid down the following rules in the application of Art.
1544: (1) knowledge by the first buyer of the second sale cannot defeat the first

buyers rights except when the second buyer first register in good faith the second
sale; and (2) knowledge gained by the second buyer of the first sale defeats his
rights even if he is first to register, since such knowledge taints his registration with
bad faith.
Upon the facts obtaining in this case, the act of registration by any of the
three respondent-purchasers was not coupled with good faith. At the minimum,
each was aware or is at least presumed to be aware of facts which should put him
upon such inquiry and investigation as might be necessary to acquaint him with the
defects in the title of his vendor.
The award by the lower courts of damages and attorneys fees to some of the
herein respondents was predicated on the filing by the original plaintiffs of what the
RTC characterized as an unwarranted suit. The basis of the award, needless to
stress, no longer obtains and, hence, the same is set aside.
WHEREFORE, the petition is hereby GRANTED. The appealed December 4,
2006 Decision and the March 6, 2007 Resolution of the Court of Appeals in CA-G.R.
CV No. 79680 affirming the May 26, 2003 Decision of the Regional Trial Court,
Branch 3 in Baguio City are hereby REVERSED and SET ASIDE. Accordingly,
petitioner Antonita Ordua is hereby recognized to have the right of ownership over
subject lot covered by TCT No. T-3276 of the Baguio Registry registered in the name
of

Eduardo

J.

Fuentebella. The

Register

of

Deeds

of

Baguio

City

is

hereby ORDERED to cancel said TCT No. T-3276 and to issue a new one in the
name of Armando Gabriel, Jr. with the proper annotation of the conditional sale of
the lot covered by said title in favor of Antonita Ordua subject to the payment of the
PhP 50,000 outstanding balance. Upon full payment of the purchase price by
Antonita Ordua, Armando Gabriel, Jr. is ORDERED to execute a Deed of Absolute
Sale for the transfer of title of subject lot to the name of Antonita Ordua, within
three (3) days from receipt of said payment.