23.[4].1. P48,631.00 As reimbursement of the capital gains tax (Exh.
FF);
THIRD DIVISION
[G.R. No. 144735. October 18, 2001]
YU BUN GUAN, petitioner, vs. ELVIRA ONG, respondent.
DECISION
PANGANIBAN, J.:
A simulated deed of sale has no legal effect, and the transfer certificate of title issued in consequence thereof
should be cancelled. Pari delicto does not apply to simulated sales.
Statement of the Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the April 25, 2000 Decision [1] and
the August 31, 2000 Resolution[2] of the Court of Appeals[3] (CA) in CA-GR CV No. 61364. The decretal portion of the
Decision reads as follows:
We cannot see any justification for the setting aside of the contested Decision.
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED.[4]
The assailed Resolution denied petitioners Supplemental Motion for Reconsideration with Leave to Submit
[Newly] Discovered Evidence.
The CA sustained the Decision of the Regional Trial Court (RTC) of Makati City (Branch 60), which had
disposed as follows:[5]
23. WHEREFORE, the Court hereby renders judgment as follows:
23.1. The Deed of Sale dated July 24, 1992 (Exh. EE or Exh. 3) is declared VOID.
23.2. The plaintiff ELVIRA ONG is declared the OWNER of the property covered by Transfer
Certificate of Title No. 217614, Registry of Deeds, Makati (Exh. DD).
23.3. The Register of Deeds, City of Makati is ordered to:
23.2.1. Cancel Transfer Certificate of Title No. 181033 (Exh. HH); and
23.2.2. Issue in lieu thereof, a transfer certificate of title in the name of ELVIRA A.
ONG, of legal age, single, Filipino;
23.[4]. The defendant YU BUN GUAN is ordered to pay to the said plaintiff, the following:
23.[4].2. Six (6) percent of P48,631.00 per annum from November 23, 1993, until the said P48,631.00 is
paid as damages
23.[4].3. P100,000.00 - as moral damages;
23.[4].4. P 50,000.00 as exemplary damages;
23.[4].5. P 100,000.00 as attorneys fees.
23.[5]. The COUNTERCLAIM is DISMISSED.
23.[6]. Cost is taxed against the defendant.
24. In Chambers, City of Makati, June 23, 1998.
The Facts
The antecedents of the case are succinctly summarized by the Court of Appeals in this wise:
[Herein respondent] said that she and [petitioner] are husband and wife, having been married according to
Chinese rites on April 30, 1961. They lived together until she and her children were abandoned by
[petitioner] on August 26, 1992, because of the latters incurable promiscuity, volcanic temper and other
vicious vices; out of the reunion were born three (3) children, now living with her [respondent].
She purchased on March 20, 1968, out of her personal funds, a parcel of land, then referred to as the Rizal
property, from Aurora Seneris, and supported by Title No. 26795, then subsequently registered on April 17,
1968, in her name.
Also during their marriage, they purchased, out of their conjugal funds, a house and lot, in 1983, thereafter,
registered in their names, under Title No. 118884.
Before their separation in 1992, she reluctantly agreed to the [petitioners] importunings that she execute a
Deed of Sale of the J.P. Rizal property in his favor, but on the promise that he would construct a
commercial building for the benefit of the children. He suggested that the J.P. Rizal property should be in
his name alone so that she would not be involved in any obligation. The consideration for the simulated
sale was that, after its execution in which he would represent himself as single, a Deed of Absolute Sale
would be executed in favor of the three (3) children and that he would pay the Allied Bank, Inc. the loan he
obtained.
Because of the glib assurances of [petitioner], [respondent] executed a Deed of Absolute Sale in 1992, but
then he did not pay the consideration of P200,000.00, supposedly the ostensible valuable consideration. On
the contrary, she paid for the capital gains tax and all the other assessments even amounting to not less
than P60,000.00, out of her personal funds.
Because of the sale, a new title (TCT No. 181033) was issued in his name, but to insure that he would
comply with his commitment, she did not deliver the owners copy of the title to him.
Because of the refusal of [petitioner] to perform his promise, and also because he insisted on delivering to
him the owners copy of the title [to] the JP Rizal property, in addition to threats and physical violence, she
decided executing an Affidavit of Adverse Claim.
Also to avoid burdening the JP Rizal property with an additional loan amount, she wrote the Allied Bank,
Inc. on August 25, 1992, withdrawing her authority for [petitioner] to apply for additional loans.
To save their marriage, she even sought the help of relatives in an earnest effort [at] reconciliation, not to
mention a letter to [petitioner] on November 3, 1992.
[Petitioner], on the other hand, filed with the RTC, Makati, in 1993 (Case No. M-2905), a Petition for
Replacement of an owners duplicate title.
Attached to the Petition was the Affidavit of Loss dated March 26, 1993, in which he falsely made it appear
that the owners copy of the title was lost or misplaced, and that was granted by the court in an Order dated
September 17, 1993, following which a new owners copy of the title was issued to [petitioner].
Upon discovery of the fraudulent steps taken by the [petitioner], [respondent] immediately executed an
Affidavit of Adverse Claim on November 29, 1993.
She precisely asked the court that the sale of the JP Rizal property be declared as null and void; for the title
to be cancelled; payment of actual, moral and exemplary damages; and attorneys fees.
It was, on the other hand, the version of [petitioner] that sometime in 1968 or before he became a Filipino,
through naturalization, the JP Rizal property was being offered to him for sale. Because he was not a
Filipino, he utilized [respondent] as his dummy and agreed to have the sale executed in the name of
[respondent], although the consideration was his own and from his personal funds.
When he finally acquired a Filipino citizenship in 1972, he purchased another property being referred to as
the Juno lot out of his own funds. If only to reflect the true ownership of the JP Rizal property, a Deed of
Sale was then executed in 1972. Believing in good faith that his owners copy of the title was lost and not
knowing that the same was surreptitiously concealed by [respondent], he filed in 1993 a petition for
replacement of the owners copy of the title, in court.
[Petitioner] added that [respondent] could not have purchased the property because she had no financial
capacity to do so; on the other hand, he was financially capable although he was disqualified to acquire the
property by reason of his nationality. [Respondent] was in pari delicto being privy to the simulated sale.
Before the court a quo, the issues were: who purchased the JP Rizal property? [W]as the Deed of Sale
void? and damages.[6]
Ruling of the Trial Court
After examining the evidence adduced by both parties, the RTC found that the JP Rizal property was the
paraphernal property of respondent, because (1) the title had been issued in her name; (2) petitioner had categorically
admitted that the property was in her name; (3) petitioner was estopped from claiming otherwise, since he had signed the
Deed of Absolute Sale that stated that she was the absolute and registered owner; and (4) she had paid the real property
taxes thereon.[7]
The trial court further held that the in pari delicto rule found in Articles 1411 and 1412 of the Civil Code was not
applicable to the present case, because it would apply only to existing contracts with an illegal cause or object, not to
simulated or fictitious contracts or to those that were inexistent due to lack of an essential requisite such as cause or
consideration.[8] It likewise voided the Deed of Absolute Sale of the JP Rizal property for having been simulated and
executed during the marriage of the parties.[9]
Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts findings that the JP Rizal property had been acquired by respondent
alone, out of her own personal funds. It ruled thus:
x x x [T]he JP Rizal property was purchased by the [respondent] alone; therefore it is a paraphernal
property. As a matter of fact, the title was issued in her name, Exh. DD. This was even admitted by
[petitioner] in the Answer that the sale was executed in her name alone. He also signed the sale mentioning
[respondent] to be an absolute owner; therefore, he should be estopped from claiming otherwise. She alone
likewise did the payment of the taxes.[10]
The CA debunked the contention of petitioner that he had purchased the property out of his own funds and merely
used respondent as his dummy.[11] It also held that the latter was not in pari delicto with him, because the contract was
simulated or fictitious due to the lack of consideration. The contract was deemed void for having been executed during
the couples marriage.[12] The CA likewise affirmed the award of actual, moral and exemplary damages to respondent. [13]
Hence, this Petition.[14]
 Issues
In his Memorandum, petitioner raises the following issues for the Courts consideration:
I property was paraphernal. This issue is factual in nature. It is axiomatic that factual findings of the trial court, especially
Whether or not the Court of Appeals gravely erred in not applying [the] rules on co-ownership under
Article 144 of the New Civil Code in determining the proprietary rights of the parties herein even as
respondent herself expressly declared that the money with which she allegedly bought the property in
question in 1968 came from her funds, salaries and savings at the time she and petitioner already lived as
husband and wife.
II
Whether or not the Court of Appeals likewise palpably erred in declaring the sale of the subject property to
herein petitioner in 1992 to be fictitious, simulated and inexistent.
III
Whether or not the Court of Appeals further erred in not applying the [in] pari delicto rule to the sale of the
subject property in favor of the petitioner in 1992 contrary to the express declaration to that effect in the
very same case it cited (Rodriguez v. Rodriguez; 20 SCRA 908) in the decision herein sought to be
reviewed.
IV
Whether or not the Court of Appeals gravely erred in annul[l]ing the title (TCT No. 181033) to the subject
property in the name of herein petitioner in the absence of actual fraud.[15] (Underscoring in the original.)
This Courts Ruling
The Petition is devoid of merit.
First Issue: Nature of the Property
Petitioner contends that the JP Rizal property should be deemed as co-owned, considering that respondent testified
during trial that the money she used in purchasing it had come from her income, salaries and savings, which are conjugal
in nature.
On the other hand, respondent maintains that the finding of the two lower courts that the property was acquired
using funds solely owned by her is binding and supported by evidence. She further argues that the two defenses of
petitioner are contradictory to each other because, if the property is co-owned, he cannot claim to own it in its entirety.
We find no reason to disturb the findings of the RTC and the CA that the source of the money used to acquire the
when affirmed by the Court of Appeals, as in this case, are binding and conclusive on the Supreme Court. It is not the
function of this Court to reexamine the lower courts findings of fact. While there are exceptions to this rule, petitioner
has not shown its entitlement to any of them.[16]
The testimony of petitioner as to the source of the money he had supposedly used to purchase the property was at
best vague and unclear. At first he maintained that the money came from his own personal funds. Then he said that it
came from his mother; and next, from his father. Time and time again, we [have] held that the unnatural and
contradictory testimony of a witness, x x x makes him unreliable x x x. [17] His statement that the JP Rizal property was
bought with his own money can hardly be believed, when he himself was unsure as to the source of those funds.
On the other hand, the capacity of respondent to purchase the subject property cannot be questioned. It was
sufficiently established during trial that she had the means to do so. In fact, her testimony that she had purchased several
other lots using her personal funds was not disputed.
Equally without merit is the contention of petitioner that, because he was a Chinese national at the time,
respondent was merely used as a dummy in acquiring the property; thus, she could not have legally acquired title
thereto. He testified that sometime during the last month of 1968, he had consulted a certain Atty. Flores, who advised
him that the property be registered in the name of respondent. However, TCT No. 217614 had been issued earlier on
April 17, 1968. Thus, it appears that the subject property had already been bought and registered in the name of
respondent, long before Atty. Flores allegedly advised him to have the property registered in her name.
We therefore agree with the CAs affirmation of the RTCs findings that the property had been acquired using
respondents paraphernal property. The CA ruled thus:
The fact however, is that Yu never refuted Elviras testimony that: (a) the money with which she acquired
the JP Rizal property came from: (1) her income as a cashier in the Hong Kiat Hardware; (2) income from
her paraphernal property a lot in Guadalupe; (3) her savings from the money which her parents gave her
while she was still a student; and (4) the money which her sister gave her for helping her run the beauty
parlor; (b) her parents were well off they had stores, apartments and beauty parlors from which they
derived income; (c) before her marriage she bought lots in different places (p. 8, TSN, Jan. 26, 1998; pp.
22-23, TSN March 10, 1998).[18]
Second Issue: Fictitious, Simulated and Inexistent Sale
Next, petitioner argues that there was a valid sale between the parties, and that the consideration consisted of his
promise to construct a commercial building for the benefit of their three children and to pay the loan he had obtained
from Allied Bank.
 We disagree. In Rongavilla v. Court of Appeals,[19] the Court declared that a deed of sale, in which the stated Melo, (Chairman), and Sandoval-Gutierrez, JJ., concur.
consideration had not in fact been paid, is null and void: Vitug, J., on official leave.

The problem before the Court is whether a deed which states a consideration that in fact did not exist, is a
contract, without consideration, and therefore void ab initio, or a contract with a false consideration, and
therefore, at least under the Old Civil Code, voidable. x x x." [1]
Rollo, pp. 32-45.

[2]
"In our view, therefore, the ruling of this Court in Ocejo, Perez & Co. vs. Flores, 40 Phil. 921[,] is squarely Rollo, p. 47.

applicable herein. In that case we ruled that a contract of purchase and sale is null and null and void and [3]
First Division. Written by J. Bernardo Ll. Salas; concurred in by JJ Salome A. Montoya (presiding justice and Division chair), and Presbitero J. Velasco Jr.
produces no effect whatsoever where the same is without cause or consideration in that the purchase price
(member).
which appears thereon as paid has in fact never been paid by the purchaser to vendor."[20]
[4]
Assailed Decision, p. 14; rollo, p. 45.

In the present case, it is clear from the factual findings of both lower courts that the Deed of Sale was completely [5]
RTC Decision, p. 31; penned by Judge Pedro N. Laggui.
simulated and, hence, void and without effect. No portion of the P200,000 consideration stated in the Deed was ever
paid.And, from the facts of the case, it is clear that neither party had any intention whatsoever to pay that amount. [6]
CA Decision, pp. 3-8; rollo, pp. 34-39.

Instead, the Deed of Sale was executed merely to facilitate the transfer of the property to petitioner pursuant to an [7]
RTC Decision, p. 6; rollo, p. 68.
agreement between the parties to enable him to construct a commercial building and to sell the Juno property to their
[8]
Ibid., p. 10; rollo, p. 72.
children. Being merely a subterfuge, that agreement cannot be taken as the consideration for the sale.
[9]
Id., pp. 10-11; rollo, pp. 72-73.

[10]
Assailed CA Decision, p. 8; rollo, p. 39.
Third Issue: Inapplicability of the in Pari Delicto Principle
[11]
Ibid., p. 9; rollo, p. 40.

[12]
The principle of in pari delicto provides that when two parties are equally at fault, the law leaves them as they are Id., p. 13; rollo, p. 44.

and denies recovery by either one of them. However, this principle does not apply with respect to inexistent and void [13]
Id., pp. 13-14; rollo, pp. 44-45.
contracts. Said this Court in Modina v. Court of Appeals:[21]
[14]
The case was deemed submitted for decision on July 19, 2001 upon the Courts receipt of respondents Memorandum which was signed by Atty. Prospero A.

The principle of in pari delicto non oritur actio denies all recovery to the guilty parties inter se. It applies to Crescini. Petitioners Memorandum, signed by Attys. Agripino C. Baybay III and Dionisio U. Flores, was received by the Court on June 27, 2001.

cases where the nullity arises from the illegality of the consideration or the purpose of the contract. When [15]
Petitioners Memorandum, pp. 7-8; rollo, pp. 144-145. Original in capital letters.
two persons are equally at fault, the law does not relieve them. The exception to this general rule is when
the principle is invoked with respect to inexistent contracts.[22] [16]
Mars Construction Enterprises, Inc. v. Philippine National Construction Corporation, 325 SCRA 624, February 15, 2000, per Panganiban, J.

[17]
Madrid, Eligio v. Court of Appeals, 332 SCRA 570, May 31, 2000, per Mendoza, J.

[18]
Fourth Issue: Cancellation of TCT Assailed Decision, p. 11; rollo, p. 42.

[19]
294 SCRA 289, August 17, 1998, per Quisumbing, J.

Finally, based on the foregoing disquisition, it is quite obvious that the Court of Appeals did not err in ordering [20]
Rongavilla v. Court of Appeals, 294 SCRA 289, 305, August 17, 1998, per Quisumbing, J.
the cancellation of TCT No. 181033, because the Deed of Absolute Sale transferring ownership to petitioner was
[21]
completely simulated, void and without effect. In fact, there was no legal basis for the issuance of the certificate itself. 317 SCRA 696, 702-703, October 29, 1999, per Purisima, J.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioner. [22]
Ibid., pp. 702-703.

SO ORDERED.
 Republic of the Philippines The same discount shall be made on the amount of any invoice which Mr. Parsons may deem convenient to
SUPREME COURT pay in cash.
Manila
(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any alteration in price
EN BANC which he may plan to make in respect to his beds, and agrees that if on the date when such alteration takes
effect he should have any order pending to be served to Mr. Parsons, such order shall enjoy the advantage
G.R. No. L-11491 August 23, 1918 of the alteration if the price thereby be lowered, but shall not be affected by said alteration if the price
thereby be increased, for, in this latter case, Mr. Quiroga assumed the obligation to invoice the beds at the
ANDRES QUIROGA, plaintiff-appellant, price at which the order was given.
vs.
PARSONS HARDWARE CO., defendant-appellee. (F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.

Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant. ART. 2. In compensation for the expenses of advertisement which, for the benefit of both contracting
Crossfield & O'Brien for appellee. parties, Mr. Parsons may find himself obliged to make, Mr. Quiroga assumes the obligation to offer and
give the preference to Mr. Parsons in case anyone should apply for the exclusive agency for any island not
AVANCEÑA, J.: comprised with the Visayan group.

On January 24, 1911, in this city of manila, a contract in the following tenor was entered into by and ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of "Quiroga" beds in all the
between the plaintiff, as party of the first part, and J. Parsons (to whose rights and obligations the present towns of the Archipelago where there are no exclusive agents, and shall immediately report such action to
defendant later subrogated itself), as party of the second part: Mr. Quiroga for his approval.

CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J. PARSONS, BOTH
MERCHANTS ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF "QUIROGA" BEDS
IN THE VISAYAN ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the Visayan Islands to J.
Parsons under the following conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's establishment in Iloilo,
and shall invoice them at the same price he has fixed for sales, in Manila, and, in the invoices, shall make
and allowance of a discount of 25 per cent of the invoiced prices, as commission on the sale; and Mr.
Parsons shall order the beds by the dozen, whether of the same or of different styles.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a period of sixty days from
the date of their shipment.
ART. 4. This contract is made for an unlimited period, and may be terminated by either of the contracting
parties on a previous notice of ninety days to the other party.
Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute the
subject matter of this appeal and both substantially amount to the averment that the defendant violated the
following obligations: not to sell the beds at higher prices than those of the invoices; to have an open
establishment in Iloilo; itself to conduct the agency; to keep the beds on public exhibition, and to pay for
the advertisement expenses for the same; and to order the beds by the dozen and in no other manner. As
may be seen, with the exception of the obligation on the part of the defendant to order the beds by the
dozen and in no other manner, none of the obligations imputed to the defendant in the two causes of action
are expressly set forth in the contract. But the plaintiff alleged that the defendant was his agent for the sale
of his beds in Iloilo, and that said obligations are implied in a contract of commercial agency. The whole
question, therefore, reduced itself to a determination as to whether the defendant, by reason of the contract
hereinbefore transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.

(C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the freight, insurance,
and cost of unloading from the vessel at the point where the beds are received, shall be paid by Mr.
Parsons.
(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment when made shall
be considered as a prompt payment, and as such a deduction of 2 per cent shall be made from the amount of
the invoice.
In order to classify a contract, due regard must be given to its essential clauses. In the contract in question,
what was essential, as constituting its cause and subject matter, is that the plaintiff was to furnish the
defendant with the beds which the latter might order, at the price stipulated, and that the defendant was to
pay the price in the manner stipulated. The price agreed upon was the one determined by the plaintiff for
the sale of these beds in Manila, with a discount of from 20 to 25 per cent, according to their class.
Payment was to be made at the end of sixty days, or before, at the plaintiff's request, or in cash, if the
defendant so preferred, and in these last two cases an additional discount was to be allowed for prompt
payment. These are precisely the essential features of a contract of purchase and sale. There was the
obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant, to pay their price.
These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent
received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from
the sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the
contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to
pay their price within the term fixed, without any other consideration and regardless as to whether he had or
had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the defendant and the plaintiff is one
of purchase and sale, in order to show that it was not one made on the basis of a commission on sales, as
the plaintiff claims it was, for these contracts are incompatible with each other. But, besides, examining the
clauses of this contract, none of them is found that substantially supports the plaintiff's contention. Not a
single one of these clauses necessarily conveys the idea of an agency. The words commission on sales used
in clause (A) of article 1 mean nothing else, as stated in the contract itself, than a mere discount on the
invoice price. The word agency, also used in articles 2 and 3, only expresses that the defendant was the
only one that could sell the plaintiff's beds in the Visayan Islands. With regard to the remaining clauses, the
least that can be said is that they are not incompatible with the contract of purchase and sale.
this very reason, the plaintiff agreed to their return. And with respect to the so-called commissions, we have
said that they merely constituted a discount on the invoice price, and the reason for applying this benefit to
the beds sold directly by the plaintiff to persons in Iloilo was because, as the defendant obligated itself in
the contract to incur the expenses of advertisement of the plaintiff's beds, such sales were to be considered
as a result of that advertisement.
In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by the
contract, the effect of its breach would only entitle the plaintiff to disregard the orders which the defendant
might place under other conditions; but if the plaintiff consents to fill them, he waives his right and cannot
complain for having acted thus at his own free will.
For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the
defendant was one of purchase and sale, and that the obligations the breach of which is alleged as a cause
of action are not imposed upon the defendant, either by agreement or by law.
The judgment appealed from is affirmed, with costs against the appellant. So ordered.

The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the defendant Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.
corporation and who established and managed the latter's business in Iloilo. It appears that this witness,
prior to the time of his testimony, had serious trouble with the defendant, had maintained a civil suit against Republic of the Philippines
it, and had even accused one of its partners, Guillermo Parsons, of falsification. He testified that it was he SUPREME COURT
who drafted the contract Exhibit A, and, when questioned as to what was his purpose in contracting with Manila
the plaintiff, replied that it was to be an agent for his beds and to collect a commission on sales. However,
according to the defendant's evidence, it was Mariano Lopez Santos, a director of the corporation, who EN BANC
prepared Exhibit A. But, even supposing that Ernesto Vidal has stated the truth, his statement as to what
was his idea in contracting with the plaintiff is of no importance, inasmuch as the agreements contained in
Exhibit A which he claims to have drafted, constitute, as we have said, a contract of purchase and sale, and
not one of commercial agency. This only means that Ernesto Vidal was mistaken in his classification of the G.R. No. L-25926 February 27, 1970
contract. But it must be understood that a contract is what the law defines it to be, and not what it is called
by the contracting parties. COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
The plaintiff also endeavored to prove that the defendant had returned beds that it could not sell; that, CIRILO D. CONSTANTINO AND COURT OF TAX APPEALS, respondents.
without previous notice, it forwarded to the defendant the beds that it wanted; and that the defendant
received its commission for the beds sold by the plaintiff directly to persons in Iloilo. But all this, at the Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
most only shows that, on the part of both of them, there was mutual tolerance in the performance of the Special Attorney Gamaliel H. Mantolino for petitioner.
contract in disregard of its terms; and it gives no right to have the contract considered, not as the parties
stipulated it, but as they performed it. Only the acts of the contracting parties, subsequent to, and in Ross, Salcedo, Del Rosario, Bito and Misa for respondent Cirilo D. Constantino.
connection with, the execution of the contract, must be considered for the purpose of interpreting the
contract, when such interpretation is necessary, but not when, as in the instant case, its essential agreements
are clearly set forth and plainly show that the contract belongs to a certain kind and not to another.
Furthermore, the return made was of certain brass beds, and was not effected in exchange for the price paid REYES, J.B.L., J.:
for them, but was for other beds of another kind; and for the letter Exhibit L-1, requested the plaintiff's
prior consent with respect to said beds, which shows that it was not considered that the defendant had a
right, by virtue of the contract, to make this return. As regards the shipment of beds without previous
notice, it is insinuated in the record that these brass beds were precisely the ones so shipped, and that, for
Appeal from the decision of the Court of Tax Appeals, in its CTA Case No. 1016, holding that the
respondent, Cirilo D. Constantino, is not a commercial broker, as defined by Section 194(t) of the National
Internal Revenue Code, providing as follows:
"Commercial broker" includes all persons, other than importers, manufacturers, producers, or bona fide
employees, who, for compensation or profit, sell or bring about sales or purchases of merchandise for other
persons or bring proposed buyers and sellers together, or negotiate freights or other business for owners of
vessels or other means of transportation, or for the shippers, or consignors or consignees of freight carried
by vessels or other means of transportation. The term includes commission merchants.
and declaring him not liable to pay the commercial broker's percentage tax.
Petitioner Commissioner of Internal Revenue assessed against and demanded from respondent Constantino
the commercial broker's percentage tax of 6% on his gross compensation for 1956, as dealer or distributor
of the products of International Harvester, Macleod, Inc. (IHM for short). The tax was computed as
follows:
Total discount for 1956 P38,390.40
6% broker's percentage tax due thereon 2,303.4
25% surcharge 575.85
Compromise penalty 100.00
Total amount due and collection P2,979.25
Constantino protested the assessment on the ground that he is not a commercial broker. On his protest
being overruled, he filed a petition for review with the Court of Tax Appeals, which, after trial, found for
him. Upon his reversal by the tax court, the revenue Commissioner interposed the present appeal.
The issue here is whether the relationship between IHM and the respondent is one of principal and agent, as
maintained by the Commissioner, or one of vendor and vendee, as maintained by the respondent taxpayer.
Respondent Cirilo D. Constantino is a businessman with a business establishment in San Pablo City known
as "C. C. Motor Service", where he stores, displays and sells trucks, machineries, equipment, spare parts
and accessories shipped to him by International Harvester, Macleod, Inc., (formerly International Harvester
Company of the Philippines) in accordance with their "Dealer Sales and Service Agreement", Exhibit "A",
designating the said respondent as exclusive dealer of the products of the company within a prescribed
territory. According to respondent's counsel, who is also the legal counsel and secretary of the company,
the company sells its products through its dealers for purposes of economy and that since it may not be
allowed to retail under the retail trade law, it sells by wholesale to its dealers (T.s.n., pages 49, 52-53).
In classifying himself as an independent merchant instead of a commercial broker, respondent Constantino
cites the following facts: that under the "Dealer Sales and Service Agreement" that he signed with IHM he
may buy, on cash basis or credit terms, IHM products, such as trucks, tractors, other types of machinery
and equipment and spare parts and accessories for Resale to his customers within his designated territory;
that under a "Schedule of Discounts and Terms", Exhibit "B", he is granted trade discounts of 16% for
trucks, tractors and other heavy equipment and 30% for service parts; that he is also given a cash discount
of 5% under certain conditions; that the terms and conditions on his credit purchases are governed by a
"Retail Financing Agreement", Exhibit "C"; that he may purchase service parts on open credit account or
on a 30-day term; and that he sold service parts to his customers on cash basis (T.s.n., pages 9-10). He
states that his purchases of heavy equipment are commenced by his filing with the company a "Dealer
Order for Goods", Exhibit "G" (BIR Record, page 153, after Exhibit "B", as the numbering of pages is
inverted); if on credit, he executes a chattel mortgage in favor of IHM Exhibit "L"; and, if he sells to his
customer on credit, he requires said customer to execute also a chattel mortgage in his favor and he
(respondent Constantino) then executes an "Indenture of Assignment", Exhibit "M-I," in favor of IHM.
Constantino also cites the fact that his purchases are covered by IHM's sales invoices, and when he re-sells
he issues his own sales invoice; that delivery of his purchases from IHM are accepted by him "ex-bodega"
in Manila, after which he services the heavy equipment at his establishment in San Pablo before delivery to
his customer (T.s.n., page 26) ; that has credit purchases of trucks and other heavy equipment are insured
by IHM and, in case, of loss, the insurance proceeds belong to both in proportion to their interests, but the
premiums are for his own account; that he insures himself the goods that he purchases on cash basis; and
that at the end of each calendar year he includes in the inventory that he submits to the Bureau of Internal
Revenue unsold stocks that he had purchased from IHM.
Without considering the forms and documents that petitioner Commissioner of Internal Revenue alluded to
in his brief (forms and documents that were only annexed to his memorandum submitted to the tax court
and not formally offered in evidence) but considering the entirety of respondent Constantino's own
evidence, this Court is of the opinion that, for taxation purposes, he is not an independent merchant but an
agent of IHM or a commercial broker, as defined by the tax code, selling or bringing about sales and
purchases of IHM's merchandise. A casual examination of respondent's evidence may give the impression
that this relationship with the company is that of vendor and vendee, but a closer look into the actual legal
effect of the terms and conditions embodied, rather than the names of the contracts used or the
terminologies employed, in the chain of documents 1 shows that the relation between the company and the
respondent is one of principal and agent.
From his own evidence and statement of facts, if Constantino wishes to "buy" from IHM, either on "cash
basis" or on credit, he files a "Dealer Order for Goods", Exhibit "G". He failed to state or notice, however,
the condition in the said order, which is in small print, that:
the title of the goods delivered under this order shall remain in International Harvester Company of the
Philippines until the full purchase price shall have been paid in cash or acceptable security. Upon receipt of
the subject equipment, the undersigned agrees to execute a chattel mortgage or other security instrument
covering the goods ordered herein to secure the payment therefor, and prior to full payment of the purchase
price, the undersigned shall have no right to sell or dispose of any goodsdelivered under this order except in
the ordinary course of retail trade for their reasonable value, and upon the express condition that before
delivery to a Purchaser, the undersigned shall secure from the Purchaser full settlement, and the proceeds of
such resale, whether in cash, property or an obligation of the Purchaser, shall be considered the property of
International Harvester Company of the Philippines, and shall be held in trust for the Company and subject
to its order. (Emphasis supplied)
In plain language, the effect of the afore-quoted condition is that the title to goods sold by the Dealer to his
"customer" passes directly to the latter from IHM and that the price of such goods, even if previously
shipped to the dealer upon his order, belongs to IHM not to the dealer, who merely collects and holds the
proceeds in trust. Hence, in the "Dealer Order for Goods", the dealer does not make purchase orders; he
merely orders for shipment to himself the goods specified therein. And while in the "Dealer Sales and
Service Agreement" the contractual provisions on orders for goods refer or use terms like "purchase",
"obligation to sell" and "obligation to buy", the said Dealer Sales and Service Agreement expressly binds
the dealer, when ordering goods, to place his orders "upon forms furnished by the Company" (Exhibit "A",
page 4), and the form furnished is the "Dealer Order for Goods", with the clause previously quoted.
Where the transaction between Constantino and his customer is on credit, Constantino requires his
customer to execute a chattel mortgage in his favor but then he must assign in favor of IHM, by an
"Indenture of Assignment", all his rights, interest and participation in the goods theretofore mortgaged to
himself for the same amount. When the goods are delivered by IHM to the dealer, the dealer does not
acquire ownership of the goods upon such delivery; and when the dealer "sells" the goods to his customer,
the customer does not acquire ownership thereof upon such "sale", because the "Dealer Order for Goods"
expressly stipulates that "title of the goods delivered under this order shall remain until the purchase price
shall have been paid ... ." And the fact that the customer is made to execute a chattel mortgage does not
make him the owner, because when the goods were "sold" to him by the dealer the latter did not own the
goods. That the dealer should issue his own sales invoice to the customer is neither a means of acquiring
ownership nor is it proof of ownership.
In the "Retail Financing Agreement" that the dealer enters into with the company, when he "buys" goods on
credit for "resale" to customers, the dealer does not "buy" with his own funds, as the agreement
expressly prohibits him from advancing the down payment and any installment to his customer, and when
he "sells" to his customer, the "retail contract" a well as the customer's credit is subject to approval by the
company (Exhibit "C", page 3, paragraph 4). The effect of such an arrangement is that it is the very
customer who buys on credit because the purchase money comes from him, not the dealer, and the credit
that is financed is the credit of the customer, not that of the dealer.
If the transaction is on "cash basis", a procedure similar to transactions on credit is followed; the dealer
orders specific goods for shipment to himself by filing the "Dealer Order for Goods"; if his order is
accepted by the company, the company ships the goods and issues a delivery receipt (Exhibit "D"), not a
cash invoice, as the respondent contends in his brief. Under such a delivery receipt, the goods are termed
"Sold to Mr. Cirilo D. Constantino" for "Cash"; but the same receipt also indicates that it is for the
supposed vendee's "order", obviously referring to the "Dealer Order for Goods", and that the shipment is
"Due and payable first day of month following shipment". It is, therefore, clear that even when the
company ships the goods to the dealer on a supposed "cash basis" it is payable in cash but it does not prove
that cash or money was paid ... payment is not yet due cash or money was paid — payment is not yet due
— and that the company shipped the goods but retained ownership of the same, in accordance with the
"order."
Since the company retained ownership of the goods, even as it delivered possession unto the dealer for
resale to customers, the price and terms of which were subject to the company's control, the relationship
between the company and the dealer is one of agency, tested under the following criterion:
The difficulty in distinguishing between contracts of sale and the creation of an agency to sell has led to the
establishment of rules by the application of which this difficulty may be solved. The decisions say the
transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer
puts the transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor
for the agreed price, and not merely as an agent who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property,
but as the property of the principal, who remains the owner and has the right to control sales, fix the price,
and terms, demand and receive the proceeds less the agent's commission upon sales made. 1 Mechem on
Sales, Sec. 43; 1 Mechem on Agency, Sec. 48; Williston on Sales, 1; Tiedeman on Sales, 1. (Salisbury v.
Brooks, 94 SE 117, 118-119)
It is contended that the respondent is not an agent of IHM because their "Dealer Sales and Service
Agreement" expressly provide that he "is not the Company's agent in any respect ... ", but the control by the
company of the resale made (or agreed upon to be made) by the dealer is so pervasive as to exclude the idea
of the latter being an independent merchant. The extent of his dependence upon and control by the
company is shown in the provisions of the "Dealer Sales, and Service Agreement":
An order for goods by the dealer "shall not be considered as accepted until written acceptance ... is given to
the Dealer, or delivery has been made to the Dealer ... ." "Prices, discounts and terms ... shall be those
established by the Company ..." which are "subject to change at any time without notice." Places of
delivery "shall be those established by the Company ..." and the dealer "will accept delivery at points of
delivery selected by the Company and pay all transportation charges thereon ... ." "Prior to full payment of
the purchase price to the Company, the Dealer shall have no right to sell or dispose of any goods ... without
first securing the written approval of the Company." At any reasonable time, the company may enter the
dealer's premises "to examine his books and records ... ." The dealer is bound "to provide and maintain
adequate physical facilities acceptable to the Company ... ." He it agrees to maintain accounting records",
"to furnish monthly operating statements" and "a complete detailed financial statement." He "Shall properly
store and care for all goods purchased ... and protect the same from injury or damage from any cause." The
quantity of goods alloted to the dealer "shall be determined solely by the Company." "The dealer agrees, in
reselling goods ... to enter into a Sales Contract with each customer on one of the current printed blank
forms furnished by the Company for that purpose and to give no different or additional allowances,
warranties or guaranties on behalf of the Company beyond those included in the Sales Contract." The
agreement "may be terminated at any time by either party without cause ..." and since "this is a personal
agreement, it shall automatically terminate upon the death of the Dealer." The agreement involves "mutual
confidence and trust, and it may not be assigned by either party." Now, to insure "the faithful performance
on the Dealer's part of the conditions of this agreement," the dealer is required to put up a bond, which is in
the amount of P30,000.00.
As respondent is not an independent merchant, but an agent, the discount of 16% that he receives is not a
"trade discount" but a compensation or profit for selling or bringing about sales or purchases of
merchandise for the company.
The assessment made by petitioner Commissioner of Internal Revenue against respondent Constantino does
not include the 30% discount that the respondent is entitled to or benefited from his sales of service parts;
even so, the sales of or transactions on service parts is covered by stipulations between the company and
the respondent different from those on heavy machineries or big items; for these reasons, it is unnecessary
to pass upon the taxability of said 30% discount.
FOR THE FOREGOING REASONS, the appealed decision is hereby reversed, and another one entered
affirming the assessment and ordering the respondent to pay the same, with costs against the respondent.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and Villamor, JJ.,
concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20871 April 30, 1971
KER & CO., LTD., petitioner,
vs.
JOSE B. LINGAD, as Acting Commissioner of Internal Revenue, respondent.
Ross, Selph and Carrascoso for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Atty. Balbino
Gatdula, Jr. for respondent.
FERNANDO, J.:
Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals, holding it liable
as a commercial broker under Section 194 (t) of the National Internal Revenue Code. Its plea,
notwithstanding the vigorous effort of its counsel, is not sufficiently persuasive. An obstacle, well-nigh
insuperable stands in the way. The decision under review conforms to and is in accordance with the
controlling doctrine announced in the recent case of Commissioner of Internal Revenue v.
Constantino.1 The decisive test, as therein set forth, is the retention of the ownership of the goods delivered
to the possession of the dealer, like herein petitioner, for resale to customers, the price and terms remaining
subject to the control of the firm consigning such goods. The facts, as found by respondent Court, to which
we defer, unmistakably indicate that such a situation does exist. The juridical consequences must inevitably
follow. We affirm.
It was shown that petitioner was assessed by the then Commissioner of Internal Revenue Melecio R.
Domingo the sum of P20,272.33 as the commercial broker's percentage tax, surcharge, and compromise
penalty for the period from July 1, 1949 to December 31, 1953. There was a request on the part of
petitioner for the cancellation of such assessment, which request was turned down. As a result, it filed a
petition for review with the Court of Tax Appeals. In its answer, the then Commissioner Domingo
maintained his stand that petitioner should be taxed in such amount as a commercial broker. In the decision
now under review, promulgated on October 19, 1962, the Court of Tax Appeals held petitioner taxable
except as to the compromise penalty of P500.00, the amount due from it being fixed at P19,772.33.
Such liability arose from a contract of petitioner with the United States Rubber International, the former
being referred to as the Distributor and the latter specifically designated as the Company. The contract was
to apply to transactions between the former and petitioner, as Distributor, from July 1, 1948 to continue in
force until terminated by either party giving to the other sixty days' notice.2 The shipments would cover
products "for consumption in Cebu, Bohol, Leyte, Samar, Jolo, Negros Oriental, and Mindanao except [the]
province of Davao", petitioner, as Distributor, being precluded from disposing such products elsewhere
than in the above places unless written consent would first be obtained from the Company. 3 Petitioner, as
Distributor, is required to exert every effort to have the shipment of the products in the maximum quantity
and to promote in every way the sale thereof.4 The prices, discounts, terms of payment, terms of delivery
and other conditions of sale were subject to change in the discretion of the Company. 5
Then came this crucial stipulation: "The Company shall from time to time consign to the Distributor and
the Distributor will receive, accept and/or hold upon consignment the products specified under the terms of
this agreement in such quantities as in the judgment of the Company may be necessary for the successful
solicitation and maintenance of business in the territory, and the Distributor agrees that responsibility for
the final sole of all goods delivered shall rest with him. All goods on consignment shall remain the property
of the Company until sold by the Distributor to the purchaser or purchasers, but all sales made by the
Distributor shall be in his name, in which the sale price of all goods sold less the discount given to the
Distributor by the Company in accordance with the provision of paragraph 13 of this agreement, whether or
not such sale price shall have been collected by the Distributor from the purchaser or purchasers, shall
immediately be paid and remitted by the Distributor to the Company. It is further agreed that this
agreement does not constitute Distributor the agent or legal representative 4 of the Company for any
purpose whatsoever. Distributor is not granted any right or authority to assume or to create any obligation
or responsibility, express or implied, in behalf of or in the name of the Company, or to bind the Company
in any manner or thing whatsoever."6
All specifications for the goods ordered were subject to acceptance by the Company with petitioner, as
Distributor, required to accept such goods shipped as well as to clear the same through customs and to
arrange for delivery in its warehouse in Cebu City. Moreover, orders are to be filled in whole or in part
from the stocks carried by the Company's neighboring branches, subsidiaries or other sources of Company's
brands.7 Shipments were to be invoiced at prices to be agreed upon, with the customs duties being paid by
petitioner, as Distributor, for account of the Company.8 Moreover, all resale prices, lists, discounts and
general terms and conditions of local resale were to be subject to the approval of the Company and to
change from time to time in its discretion.9 The dealer, as Distributor, is allowed a discount of ten percent
on the net amount of sales of merchandise made under such agreement. 10 On a date to be determined by
the Company, the petitioner, as Distributor, was required to report to it data showing in detail all sales
during the month immediately preceding, specifying therein the quantities, sizes and types together with
such information as may be required for accounting purposes, with the Company rendering an invoice on
sales as described to be dated as of the date of inventory and sales report. As Distributor, petitioner had to
make payment on such invoice or invoices on due date with the Company being privileged at its option to
terminate and cancel the agreement forthwith upon the failure to comply with this obligation. 11 The
Company, at its own expense, was to keep the consigned stock fully insured against loss or damage by fire
or as a result of fire, the policy of such insurance to be payable to it in the event of loss. Petitioner, as
Distributor, assumed full responsibility with reference to the stock and its safety at all times; and upon
request of the Company at any time, it was to render inventory of the existing stock which could be subject
to change. 12 There was furthermore this equally tell-tale covenant: "Upon the termination or any
cancellation of this agreement all goods held on consignment shall be held by the Distributor for the
account of the Company, without expense to the Company, until such time as provision can be made by the
Company for disposition." 13
The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus created is one of
vendor and vendee or of broker and principal. Not that there would have been the slightest doubt were it
not for the categorical denial in the contract that petitioner was not constituted as "the agent or legal
representative of the Company for any purpose whatsoever." It would be, however, to impart to such an
express disclaimer a meaning it should not possess to ignore what is manifestly the role assigned to
petitioner considering the instrument as a whole. That would be to lose sight altogether of what has been
agreed upon. The Court of Tax Appeals was not misled in the language of the decision now on appeal:
"That the petitioner Ker & Co., Ltd. is, by contractual stipulation, an agent of U.S. Rubber International is
borne out by the facts that petitioner can dispose of the products of the Company only to certain persons or
entities and within stipulated limits, unless excepted by the contract or by the Rubber Company (Par. 2);
that it merely receives, accepts and/or holds upon consignment the products, which remain properties of the
latter company (Par. 8); that every effort shall be made by petitioner to promote in every way the sale of the
products (Par. 3); that sales made by petitioner are subject to approval by the company (Par. 12); that on
dates determined by the rubber company, petitioner shall render a detailed report showing sales during the
month (Par. 14); that the rubber company shall invoice the sales as of the dates of inventory and sales
report (Par. 14); that the rubber company agrees to keep the consigned goods fully insured under insurance
policies payable to it in case of loss (Par. 15); that upon request of the rubber company at any time,
petitioner shall render an inventory of the existing stock which may be checked by an authorized
representative of the former (Par. 15); and that upon termination or cancellation of the Agreement, all
goods held on consignment shall be held by petitioner for the account of the rubber company until their
disposition is provided for by the latter (Par. 19). All these circumstances are irreconcilably antagonistic to
the idea of an independent merchant." 14 Hence its conclusion: "However, upon analysis of the contract, as
a whole, together with the actual conduct of the parties in respect thereto, we have arrived at the conclusion
that the relationship between them is one of brokerage or agency." 15 We find ourselves in agreement,
notwithstanding the able brief filed on behalf of petitioner by its counsel. As noted at the outset, we cannot
heed petitioner's plea for reversal.
1. According to the National Internal Revenue Code, a commercial broker "includes all persons, other than
importers, manufacturers, producers, or bona fide employees, who, for compensation or profit, sell or bring
about sales or purchases of merchandise for other persons or bring proposed buyers and sellers together, or
negotiate freights or other business for owners of vessels or other means of transportation, or for the
shippers, or consignors or consignees of freight carried by vessels or other means of transportation. The
term includes commission merchants." 16 The controlling decision as to the test to be followed as to who
falls within the above definition of a commercial broker is that of Commissioner of Internal Revenue v.
Constantino. 17 In the language of Justice J. B. L. Reyes, who penned the opinion: "Since the company
retained ownership of the goods, even as it delivered possession unto the dealer for resale to customers, the
price and terms of which were subject to the company's control, the relationship between the company and
the dealer is one of agency, ... ." 18 An excerpt from Salisbury v. Brooks 19 cited in support of such a view
follows: " 'The difficulty in distinguishing between contracts of sale and the creation of an agency to sell
has led to the establishment of rules by the application of which this difficulty may be solved. The
decisions say the transfer of title or agreement to transfer it for a price paid or promised is the essence of
sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the
transferor as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of
a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his
property, but as the property of the principal, who remains the owner and has the right to control sales, fix
the price, and terms, demand and receive the proceeds less the agent's commission upon sales made.'
" 20 The opinion relied on the work of Mechem on Sales as well as Mechem on Agency. Williston and
Tiedman both of whom wrote treatises on Sales, were likewise referred to.
Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or appreciate the
necessity or presence of these mutual requirements and obligations on any theory other than that of a
contract of agency. Salisbury was to furnish the mill and put the timber owned by him into a marketable
condition in the form of lumber; Brooks was to furnish the funds necessary for that purpose, sell the
manufactured product, and account therefor to Salisbury upon the specific terms of the agreement, less the
compensation fixed by the parties in lieu of interest on the money advanced and for services as agent.
These requirements and stipulations are in tent with any other conception of the contract. If it constitutes an
agreement to sell, they are meaningless. But they cannot be ignored. They were placed there for some
purpose, doubtless as the result of definite antecedent negotiations therefore, consummated by the final
written expression of the agreement." 21 Hence the Constantino opinion could categorically affirm that the
mere disclaimer in a contract that an entity like petitioner is not "the agent or legal representative for any
purpose whatsoever" does not suffice to yield the conclusion that it is an independent merchant if the
control over the goods for resale of the goods consigned is pervasive in character. The Court of Tax
Appeals decision now under review pays fealty to such an applicable doctrine.
2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax Appeals. Neither
did such Court fail to appreciate in its true significance the act and conduct pursued in the implementation
of the contract by both the United States Rubber International and petitioner, as was contended in the
second assignment of error. Petitioner ought to have been aware that there was no need for such an inquiry.
The terms of the contract, as noted, speak quite clearly. There is lacking that degree of ambiguity sufficient
to give rise to serious doubt as to what was contemplated by the parties. A reading thereof discloses that the
relationship arising therefrom was not one of seller and purchaser. If it were thus intended, then it would
not have included covenants which in their totality would negate the concept of a firm acquiring as vendee
goods from another. Instead, the stipulations were so worded as to lead to no other conclusion than that the
control by the United States Rubber International over the goods in question is, in the language of the
Constantino opinion, "pervasive". The insistence on a relationship opposed to that apparent from the
language employed might even yield the impression that such a mode of construction was resorted to in
order that the applicability of a taxing statute might be rendered nugatory. Certainly, such a result is to be
avoided.
Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals which has
developed an expertise in view of its function being limited solely to the interpretation of revenue laws, this
Court is not prepared to substitute its own judgment unless a grave abuse of discretion is manifest. It would
be to frustrate the objective for which administrative tribunals are created if the judiciary, absent such a
showing, is to ignore their appraisal on a matter that forms the staple of their specialized competence.
While it is to be admitted that counsel for petitioner did scrutinize with care the decision under review with
a view to exposing what was considered its flaws, it cannot be said that there was such a failure to apply
what the law commands as to call for its reversal. Instead, what cannot be denied is that the Court of Tax
Appeals reached a result to which the Court in the recent Constantino decision gave the imprimatur of its
approval.
WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With costs against
petitioner.
Concepcion C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.
SECOND DIVISION
[G.R. No. 155043. September 30, 2004]
ARTURO R. ABALOS, petitioner, vs. DR. GALICANO S. MACATANGAY, JR., respondent.
DECISION
TINGA, J.:
The instant petition seeks a reversal of the Decision of the Court of Appeals in CA-G.R. CV No. 48355
entitled Dr. Galicano S. Macatangay, Jr. v. Arturo R. Abalos and Esther Palisoc-Abalos, promulgated on
March 14, 2002. The appellate court reversed the trial courts decision which dismissed the action for
specific performance filed by respondent, and ordered petitioner and his wife to execute in favor of herein
respondent a deed of sale over the subject property.
Spouses Arturo and Esther Abalos are the registered owners of a parcel of land with improvements located
at Azucena St., Makati City consisting of about three hundred twenty-seven (327) square meters, covered
by Transfer Certificate of Title (TCT) No. 145316 of the Registry of Deeds of Makati.
Armed with a Special Power of Attorney dated June 2, 1988, purportedly issued by his wife, Arturo
executed a Receipt and Memorandum of Agreement (RMOA) dated October 17, 1989, in favor of
respondent, bindinghimself to sell to respondent the subject property and not to offer the same to any other
party within thirty (30) days from date. Arturo acknowledged receipt of a check from respondent in the
amount of Five Thousand Pesos (P5,000.00), representing earnest money for the subject property, the
amount of which would be deducted from the purchase price of One Million Three Hundred Three
Hundred Thousand Pesos (P1,300,000.00).Further, the RMOA stated that full payment would be effected
as soon as possession of the property shall have been turned over to respondent.
Subsequently, Arturos wife, Esther, executed a Special Power of Attorney dated October 25, 1989,
appointing her sister, Bernadette Ramos, to act for and in her behalf relative to the transfer of the property
to respondent. Ostensibly, a marital squabble was brewing between Arturo and Esther at the time and to
protect his interest, respondent caused the annotation of his adverse claim on the title of the spouses to the
property on November 14, 1989.
On November 16, 1989, respondent sent a letter to Arturo and Esther informing them of his readiness and
willingness to pay the full amount of the purchase price. The letter contained a demand upon the spouses to
comply with their obligation to turn over possession of the property to him. On the same date, Esther,
through her attorney-in-fact, executed in favor of respondent, a Contract to Sell the property to the extent of
her conjugal interest therein for the sum of six hundred fifty thousand pesos (P650,000.00) less the sum
already received by her and Arturo. Esther agreed to surrender possession of the property to respondent
within twenty (20) days from November 16, 1989, while the latter promised to pay the balance of the
purchase price in the amount of one million two hundred ninety thousand pesos (P1,290,000.00) after being
placed in possession of the property. Esther also obligated herself to execute and deliver to respondent a
deed of absolute sale upon full payment.
In a letter dated December 7, 1989, respondent informed the spouses that he had set aside the amount of
One Million Two Hundred Ninety Thousand Pesos (P1,290,000.00) as evidenced by Citibank Check No.
278107 as full payment of the purchase price. He reiterated his demand upon them to comply with their
obligation to turn over possession of the property. Arturo and Esther failed to deliver the property which
prompted respondent to cause the annotation of another adverse claim on TCT No. 145316. On January 12,
1990, respondent filed a complaint for specific performance with damages against petitioners. Arturo filed
his answer to the complaint while his wife was declared in default.
The Regional Trial Court (RTC) dismissed the complaint for specific performance. It ruled that the Special
Power of Attorney (SPA) ostensibly issued by Esther in favor of Arturo was void as it was falsified. Hence,
the court concluded that the SPA could not have authorized Arturo to sell the property to respondent. The
trial court also noted that the check issued by respondent to cover the earnest money was dishonored due to
insufficiency of funds and while it was replaced with another check by respondent, there is no showing that
the second check was issued as payment for the earnest money on the property.
On appeal taken by respondent, the Court of Appeals reversed the decision of the trial court. It ruled that
the SPA in favor of Arturo, assuming that it was void, cannot affect the transaction between Esther and
respondent. The appellate court ratiocinated that it was by virtue of the SPA executed by Esther, in favor of
her sister, that the sale of the property to respondent was effected. On the other hand, the appellate court
considered the RMOA executed by Arturo in favor of respondent valid to effect the sale of Arturos
conjugal share in the property.
Dissatisfied with the appellate courts disposition of the case, petitioner seeks a reversal of its decision
alleging that:
I.
The Court of Appeals committed serious and manifest error when it decided on the appeal without
affording petitioner his right to due process.
II.
The Court of Appeals committed serious and manifest error in reversing and setting aside the findings of
fact by the trial court.
III.
The Court of Appeals erred in ruling that a contract to sell is a contract of sale, and in ordering petitioner to
execute a registrable form of deed of sale over the property in favor of respondent.[1]
Petitioner contends that he was not personally served with copies of summons, pleadings, and processes in
the appeal proceedings nor was he given an opportunity to submit an appellees brief. He alleges that his
counsel was in the United States from 1994 to June 2000, and he never received any news or
communication from him after the proceedings in the trial court were terminated. Petitioner submits that he
was denied due process because he was not informed of the appeal proceedings, nor given the chance to
have legal representation before the appellate court.
We are not convinced. The essence of due process is an opportunity to be heard. Petitioners failure to
participate in the appeal proceedings is not due to a cause imputable to the appellate court but because of
petitioners own neglect in ascertaining the status of his case. Petitioners counsel is equally negligent in
failing to inform his client about the recent developments in the appeal proceedings. Settled is the rule that
a party is bound by the conduct, negligence and mistakes of his counsel.[2] Thus, petitioners plea of denial
of due process is downright baseless.
Petitioner also blames the appellate court for setting aside the factual findings of the trial court and argues
that factual findings of the trial court are given much weight and respect when supported by substantial
evidence. He asserts that the sale between him and respondent is void for lack of consent because the SPA
purportedly executed by his wife Esther is a forgery and therefore, he could not have validly sold the
subject property to respondent.
Next, petitioner theorizes that the RMOA he executed in favor of respondent was not perfected because the
check representing the earnest money was dishonored. He adds that there is no evidence on record that the
second check issued by respondent was intended to replace the first check representing payment of earnest
money.
Respondent admits that the subject property is co-owned by petitioner and his wife, but he objects to the
allegations in the petition bearing a relation to the supposed date of the marriage of the vendors. He
contends that the alleged date of marriage between petitioner and his wife is a new factual issue which was
not raised nor established in the court a quo. Respondent claims that there is no basis to annul the sale
freely and voluntarily entered into by the husband and the wife.
The focal issue in the instant petition is whether petitioner may be compelled to convey the property to
respondent under the terms of the RMOA and the Contract to Sell. At bottom, the resolution of the issue
entails the ascertainment of the contractual nature of the two documents and the status of the contracts
contained therein.
Contracts, in general, require the presence of three essential elements: (1) consent of the contracting parties;
(2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is
established.[3]
Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical
relation.[4] In a contract of sale, the seller must consent to transfer ownership in exchange for the price, the
subject matter must be determinate, and the price must be certain in money or its equivalent.[5] Being
essentially consensual, a contract of sale is perfected at the moment there is a meeting of the minds upon
the thing which is the object of the contract and upon the price.[6] However, ownership of the thing sold
shall not be transferred to the vendee until actual or constructive delivery of the property.[7]
On the other hand, an accepted unilateral promise which specifies the thing to be sold and the price to be
paid, when coupled with a valuable consideration distinct and separate from the price, is what may properly
be termed a perfected contract of option.[8] An option merely grants a privilege to buy or sell within an
agreed time and at a determined price. It is separate and distinct from that which the parties may enter into
upon the consummation of the option.[9] A perfected contract of option does not result in the perfection or
consummation of the sale; only when the option is exercised may a sale be perfected. [10] The option must,
however, be supported by a consideration distinct from the price. [11]
Perusing the RMOA, it signifies a unilateral offer of Arturo to sell the property to respondent for a price
certain within a period of thirty days. The RMOA does not impose upon respondent an obligation to buy
petitioners property, as in fact it does not even bear his signature thereon. It is quite clear that after the lapse
of the thirty-day period, without respondent having exercised his option, Arturo is free to sell the property
to another. This shows that the intent of Arturo is merely to grant respondent the privilege to buy the
property within the period therein stated. There is nothing in the RMOA which indicates that Arturo agreed
therein to transfer ownership of the land which is an essential element in a contract of sale. Unfortunately,
the option is not binding upon the promissory since it is not supported by a consideration distinct from the
price.[12]
As a rule, the holder of the option, after accepting the promise and before he exercises his option, is not
bound to buy. He is free either to buy or not to buy later. In Sanchez v. Rigos[13] we ruled that in an
accepted unilateral promise to sell, the promissor is not bound by his promise and may, accordingly,
withdraw it, since there may be no valid contract without a cause or consideration. Pending notice of its
withdrawal, his accepted promise partakes of the nature of an offer to sell which, if acceded or consented
to, results in a perfected contract of sale.
Even conceding for the nonce that respondent had accepted the offer within the period stated and, as a
consequence, a bilateral contract of purchase and sale was perfected, the outcome would be the same. To
benefit from such situation, respondent would have to pay or at least make a valid tender of payment of the
price for only then could he exact compliance with the undertaking of the other party. [14] This respondent
failed to do. By his own admission, he merely informed respondent spouses of his readiness and
willingness to pay. The fact that he had set aside a check in the amount of One Million Two Hundred
Ninety Thousand Pesos (P1,290,000.00) representing the balance of the purchase price could not help his
cause. Settled is the rule that tender of payment must be made in legal tender. A check is not legal tender,
and therefore cannot constitute a valid tender of payment. [15] Not having made a valid tender of payment,
respondents action for specific performance must fail.
With regard to the payment of Five Thousand Pesos (P5,000.00), the Court is of the view that the amount is
not earnest money as the term is understood in Article 1482 which signifies proof of the perfection of the
contract of sale, but merely a guarantee that respondent is really interested to buy the property. It is not the
giving of earnest money, but the proof of the concurrence of all the essential elements of the contract of
sale which establishes the existence of a perfected sale.[16] No reservation of ownership on the part of
Arturo is necessary since, as previously stated, he has never agreed to transfer ownership of the property to
respondent.
Granting for the sake of argument that the RMOA is a contract of sale, the same would still be void not
only for want of consideration and absence of respondents signature thereon, but also for lack of Esthers
conformity thereto. Quite glaring is the absence of the signature of Esther in the RMOA, which proves that
she did not give her consent to the transaction initiated by Arturo. The husband cannot alienate any real
property of the conjugal partnership without the wifes consent. [17]
However, it was the Contract to Sell executed by Esther through her attorney-in-fact which the Court of
Appeals made full use of. Holding that the contract is valid, the appellate court explained that while Esther
did not authorize Arturo to sell the property, her execution of the SPA authorizing her sister to sell the land
to respondent clearly shows her intention to convey her interest in favor of respondent. In effect, the court
declared that the lack of Esthers consent to the sale made by Arturo was cured by her subsequent
conveyance of her interest in the property through her attorney-in-fact.
We do not share the ruling.
The nullity of the RMOA as a contract of sale emanates not only from lack of Esthers consent thereto but
also from want of consideration and absence of respondents signature thereon. Such nullity cannot be
obliterated by Esthers subsequent confirmation of the putative transaction as expressed in the Contract to
Sell. Under the law, a void contract cannot be ratified[18] and the action or defense for the declaration of the
inexistence of a contract does not prescribe.[19] A void contract produces no effect either against or in favor
of anyoneit cannot create, modify or extinguish the juridical relation to which it refers.[20]
True, in the Contract to Sell, Esther made reference to the earlier RMOA executed by Arturo in favor of
respondent. However, the RMOA which Arturo signed is different from the deed which Esther executed
through her attorney-in-fact. For one, the first is sought to be enforced as a contract of sale while the second
is purportedly a contract to sell only. For another, the terms and conditions as to the issuance of title and
delivery of possession are divergent.
The congruence of the wills of the spouses is essential for the valid disposition of conjugal property. Where
the conveyance is contained in the same document which bears the conformity of both husband and wife,
there could be no question on the validity of the transaction. But when there are two documents on which
the signatures of the spouses separately appear, textual concordance of the documents is indispensable.
Hence, in this case where the wifes putative consent to the sale of conjugal property appears in a separate
document which does not, however, contain the same terms and conditions as in the first document signed
by the husband, a valid transaction could not have arisen.
Quite a bit of elucidation on the conjugal partnership of gains is in order.
Arturo and Esther appear to have been married before the effectivity of the Family Code. There being no
indication that they have adopted a different property regime, their property relations would automatically
be governed by the regime of conjugal partnership of gains.[21]
The subject land which had been admittedly acquired during the marriage of the spouses forms part of their
conjugal partnership.[22]
Under the Civil Code, the husband is the administrator of the conjugal partnership. This right is clearly
granted to him by law.[23] More, the husband is the sole administrator. The wife is not entitled as of right to
joint administration.[24]
The husband, even if he is statutorily designated as administrator of the conjugal partnership, cannot validly
alienate or encumber any real property of the conjugal partnership without the wifes consent.[25] Similarly,
the wife cannot dispose of any property belonging to the conjugal partnership without the conformity of the
husband. The law is explicit that the wife cannot bind the conjugal partnership without the husbands
consent, except in cases provided by law.[26]
More significantly, it has been held that prior to the liquidation of the conjugal partnership, the interest of
each spouse in the conjugal assets is inchoate, a mere expectancy, which constitutes neither a legal nor an
equitable estate, and does not ripen into title until it appears that there are assets in the community as a
result of the liquidation and settlement. The interest of each spouse is limited to the net remainder
or remanente liquido (haber ganancial) resulting from the liquidation of the affairs of the partnership after
its dissolution.[27] Thus, the right of the husband or wife to one-half of the conjugal assets does not vest
until the dissolution and liquidation of the conjugal partnership, or after dissolution of the marriage, when it
is finally determined that, after settlement of conjugal obligations, there are net assets left which can be
divided between the spouses or their respective heirs.[28]
In not a few cases, we ruled that the sale by the husband of property belonging to the conjugal partnership
without the consent of the wife when there is no showing that the latter is incapacitated is void ab
initiobecause it is in contravention of the mandatory requirements of Article 166 of the Civil Code. [29] Since
Article 166 of the Civil Code requires the consent of the wife before the husband may alienate or encumber
any real property of the conjugal partnership, it follows that acts or transactions executed against this
mandatory provision are void except when the law itself authorizes their validity.[30]
Quite recently, in San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,[31] we ruled that
neither spouse could alienate in favor of another, his or her interest in the partnership or in any property
belonging to it, or ask for partition of the properties before the partnership itself had been legally
dissolved. Nonetheless, alienation of the share of each spouse in the conjugal partnership could be had after
separation of property of the spouses during the marriage had been judicially decreed, upon their petition
for any of the causes specified in Article 191[32] of the Civil Code in relation to Article 214[33] thereof.
As an exception, the husband may dispose of conjugal property without the wifes consent if such sale is
necessary to answer for conjugal liabilities mentioned in Articles 161 and 162 of the Civil
Code.[34] In Tinitigan v. Tinitigan, Sr.,[35] the Court ruled that the husband may sell property belonging to
the conjugal partnership even without the consent of the wife if the sale is necessary to answer for a big
conjugal liability which might endanger the familys economic standing. This is one instance where the
wifes consent is not required and, impliedly, no judicial intervention is necessary.
Significantly, the Family Code has introduced some changes particularly on the aspect of the administration
of the conjugal partnership. The new law provides that the administration of the conjugal partnership is
now a joint undertaking of the husband and the wife. In the event that one spouse is incapacitated or
otherwise unable to participate in the administration of the conjugal partnership, the other spouse may
assume sole powers of administration. However, the power of administration does not include the power to
dispose or encumber property belonging to the conjugal partnership.[36] In all instances, the present law
specifically requires the written consent of the other spouse, or authority of the court for the disposition or
encumbrance of conjugal partnership property without which, the disposition or encumbrance shall be
void.[37]
Inescapably, herein petitioners action for specific performance must fail. Even on the supposition that the
parties only disposed of their respective shares in the property, the sale, assuming that it exists, is still void
for as previously stated, the right of the husband or the wife to one-half of the conjugal assets does not vest
until the liquidation of the conjugal partnership. Nemo dat qui non habet. No one can give what he has not.
WHEREFORE, the appealed Decision is hereby REVERSED and SET ASIDE. The complaint in Civil
Case No. 90-106 of the Regional Trial Court of Makati is ordered DISMISSED. No pronouncement as to
costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-25494 June 14, 1972
NICOLAS SANCHEZ, plaintiff-appellee,
vs.
SEVERINA RIGOS, defendant-appellant.
Santiago F. Bautista for plaintiff-appellee.
Jesus G. Villamar for defendant-appellant.
CONCEPCION, C.J.:p
Appeal from a decision of the Court of First Instance of Nueva Ecija to the Court of Appeals, which
certified the case to Us, upon the ground that it involves a question purely of law.
The record shows that, on April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed
an instrument entitled "Option to Purchase," whereby Mrs. Rigos "agreed, promised and committed ... to
sell" to Sanchez the sum of P1,510.00, a parcel of land situated in the barrios of Abar and Sibot,
municipality of San Jose, province of Nueva Ecija, and more particularly described in Transfer Certificate
of Title No. NT-12528 of said province, within two (2) years from said date with the understanding that
said option shall be deemed "terminated and elapsed," if "Sanchez shall fail to exercise his right to buy the
property" within the stipulated period. Inasmuch as several tenders of payment of the sum of Pl,510.00,
made by Sanchez within said period, were rejected by Mrs. Rigos, on March 12, 1963, the former deposited
said amount with the Court of First Instance of Nueva Ecija and commenced against the latter the present
action, for specific performance and damages.
After the filing of defendant's answer — admitting some allegations of the complaint, denying other
allegations thereof, and alleging, as special defense, that the contract between the parties "is a unilateral
promise to sell, and the same being unsupported by any valuable consideration, by force of the New Civil
Code, is null and void" — on February 11, 1964, both parties, assisted by their respective counsel, jointly
moved for a judgment on the pleadings. Accordingly, on February 28, 1964, the lower court rendered
judgment for Sanchez, ordering Mrs. Rigos to accept the sum judicially consigned by him and to execute,
in his favor, the requisite deed of conveyance. Mrs. Rigos was, likewise, sentenced to pay P200.00, as
attorney's fees, and other costs. Hence, this appeal by Mrs. Rigos.
This case admittedly hinges on the proper application of Article 1479 of our Civil Code, which provides:
ART. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration distinct from the price.
In his complaint, plaintiff alleges that, by virtue of the option under consideration, "defendant agreed and
committed to sell" and "the plaintiff agreed and committed to buy" the land described in the option, copy of
which was annexed to said pleading as Annex A thereof and is quoted on the margin. 1 Hence, plaintiff
maintains that the promise contained in the contract is "reciprocally demandable," pursuant to the first
paragraph of said Article 1479. Although defendant had really "agreed, promised and committed" herself to
sell the land to the plaintiff, it is not true that the latter had, in turn, "agreed and committed himself " to buy
said property. Said Annex A does not bear out plaintiff's allegation to this effect. What is more, since
Annex A has been made "an integral part" of his complaint, the provisions of said instrument form part
"and parcel"2 of said pleading.
The option did not impose upon plaintiff the obligation to purchase defendant's property. Annex A is not a
"contract to buy and sell." It merely granted plaintiff an "option" to buy. And both parties so understood it,
as indicated by the caption, "Option to Purchase," given by them to said instrument. Under the provisions
thereof, the defendant "agreed, promised and committed" herself to sell the land therein described to the
plaintiff for P1,510.00, but there is nothing in the contract to indicate that her aforementioned agreement,
promise and undertaking is supported by a consideration "distinct from the price" stipulated for the sale of
the land.
Relying upon Article 1354 of our Civil Code, the lower court presumed the existence of said consideration,
and this would seem to be the main factor that influenced its decision in plaintiff's favor. It should be noted,
however, that:
(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to
"sales" in particular, and, more specifically, to "an accepted unilateral promise to buy or to sell." In other
words, Article 1479 is controlling in the case at bar.
(2) In order that said unilateral promise may be "binding upon the promisor, Article 1479 requires the
concurrence of a condition, namely, that the promise be "supported by a consideration distinct from the
price." Accordingly, the promisee can not compel the promisor to comply with the promise, unless the
former establishes the existence of said distinct consideration. In other words, the promisee has the burden
of proving such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint.
(3) Upon the other hand, defendant explicitly averred in her answer, and pleaded as a special defense, the
absence of said consideration for her promise to sell and, by joining in the petition for a judgment on the
pleadings, plaintiff has impliedly admitted the truth of said averment in defendant's answer. Indeed as early
as March 14, 1908, it had been held, in Bauermann v. Casas,3 that:
One who prays for judgment on the pleadings without offering proof as to the truth of his own allegations,
and without giving the opposing party an opportunity to introduce evidence, must be understood to admit
the truth of all the material and relevant allegations of the opposing party, and to rest his motion for
judgment on those allegations taken together with such of his own as are admitted in the pleadings. (La
Yebana Company vs. Sevilla, 9 Phil. 210). (Emphasis supplied.)
This view was reiterated in Evangelista v. De la Rosa4 and Mercy's Incorporated v. Herminia Verde.5
Squarely in point is Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co.,6 from which We
quote:
The main contention of appellant is that the option granted to appellee to sell to it barge No. 10 for the sum
of P30,000 under the terms stated above has no legal effect because it is not supported by any consideration
and in support thereof it invokes article 1479 of the new Civil Code. The article provides:
"ART. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or sell a determinate thing for a price certain is binding upon the
promisor if the promise is supported by a consideration distinct from the price."
On the other hand, Appellee contends that, even granting that the "offer of option" is not supported by any
consideration, that option became binding on appellant when the appellee gave notice to it of its
acceptance, and that having accepted it within the period of option, the offer can no longer be withdrawn
and in any event such withdrawal is ineffective. In support this contention, appellee invokes article 1324 of
the Civil Code which provides:
"ART. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn any time before acceptance by communicating such withdrawal, except when the option is
founded upon consideration as something paid or promised."
There is no question that under article 1479 of the new Civil Code "an option to sell," or "a promise to buy
or to sell," as used in said article, to be valid must be "supported by a consideration distinct from the price."
This is clearly inferred from the context of said article that a unilateral promise to buy or to sell, even if
accepted, is only binding if supported by consideration. In other words, "an accepted unilateral promise can
only have a binding effect if supported by a consideration which means that the option can still be
withdrawn, even if accepted, if the same is not supported by any consideration. It is not disputed that the
option is without consideration. It can therefore be withdrawn notwithstanding the acceptance of it by
appellee.
It is true that under article 1324 of the new Civil Code, the general rule regarding offer and acceptance is
that, when the offerer gives to the offeree a certain period to accept, "the offer may be withdrawn at any
time before acceptance" except when the option is founded upon consideration, but this general rule must
be interpreted as modified by the provision of article 1479 above referred to, which applies to "a promise to
buy and sell" specifically. As already stated, this rule requires that a promise to sell to be valid must be
supported by a consideration distinct from the price.
We are not oblivious of the existence of American authorities which hold that an offer, once accepted,
cannot be withdrawn, regardless of whether it is supported or not by a consideration (12 Am. Jur. 528).
These authorities, we note, uphold the general rule applicable to offer and acceptance as contained in our
new Civil Code. But we are prevented from applying them in view of the specific provision embodied in
article 1479. While under the "offer of option" in question appellant has assumed a clear obligation to sell
its barge to appellee and the option has been exercised in accordance with its terms, and there appears to be
no valid or justifiable reason for appellant to withdraw its offer, this Court cannot adopt a different attitude clear, and it is not so, insofar as said two (2) articles are concerned. What is more, the reference, in both the
because the law on the matter is clear. Our imperative duty is to apply it unless modified by Congress. second paragraph of Art. 1479 and Art. 1324, to an option or promise supported by or founded upon a
consideration, strongly suggests that the two (2) provisions intended to enforce or implement the same
However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian Tek,8 decided later principle.
that Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co.,9 saw no distinction between
Articles 1324 and 1479 of the Civil Code and applied the former where a unilateral promise to sell similar Upon mature deliberation, the Court is of the considered opinion that it should, as it hereby reiterates the
to the one sued upon here was involved, treating such promise as an option which, although not binding as doctrine laid down in the Atkins, Kroll & Co. case, and that, insofar as inconsistent therewith, the view
a contract in itself for lack of a separate consideration, nevertheless generated a bilateral contract of adhered to in the Southwestern Sugar & Molasses Co. case should be deemed abandoned or modified.
purchase and sale upon acceptance. Speaking through Associate Justice, later Chief Justice, Cesar Bengzon,
this Court said: WHEREFORE, the decision appealed from is hereby affirmed, with costs against defendant-appellant
Severina Rigos. It is so ordered.
Furthermore, an option is unilateral: a promise to sell at the price fixed whenever the offeree should decide
to exercise his option within the specified time. After accepting the promise and before he exercises his Reyes, J.B.L., Makalintal, Zaldivar, Teehankee, Barredo and Makasiar, JJ., concur.
option, the holder of the option is not bound to buy. He is free either to buy or not to buy later. In this case,
however, upon accepting herein petitioner's offer a bilateral promise to sell and to buy ensued, and the Castro, J., took no part.
respondent ipso facto assumed the obligation of a purchaser. He did not just get the right subsequently to
buy or not to buy. It was not a mere option then; it was a bilateral contract of sale. Republic of the Philippines
SUPREME COURT
Lastly, even supposing that Exh. A granted an option which is not binding for lack of consideration, the Manila
authorities hold that:
EN BANC
"If the option is given without a consideration, it is a mere offer of a contract of sale, which is not binding
until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of
sale, even though the option was not supported by a sufficient consideration. ... . (77 Corpus Juris
Secundum, p. 652. See also 27 Ruling Case Law 339 and cases cited.) G.R. No. 106063 November 21, 1996

"It can be taken for granted, as contended by the defendant, that the option contract was not valid for lack EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN,
of consideration. But it was, at least, an offer to sell, which was accepted by letter, and of the acceptance INC., petitioners,
the offerer had knowledge before said offer was withdrawn. The concurrence of both acts — the offer and vs.
the acceptance — could at all events have generated a contract, if none there was before (arts. 1254 and MAYFAIR THEATER, INC., respondent.
1262 of the Civil Code)." (Zayco vs. Serra, 44 Phil. 331.)

In other words, since there may be no valid contract without a cause or consideration, the promisor is not
bound by his promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted HERMOSISIMA, JR., J.:
promise partakes, however, of the nature of an offer to sell which, if accepted, results in a perfected
contract of sale. Before us is a petition for review of the decision1 of the Court of
2
Appeals involving questions in the resolution of which the respondent appellate court analyzed and
This view has the advantage of avoiding a conflict between Articles 1324 — on the general principles on interpreted particular provisions of our laws on contracts and sales. In its assailed decision, the respondent
contracts — and 1479 — on sales — of the Civil Code, in line with the cardinal rule of statutory court reversed the trial court3 which, in dismissing the complaint for specific performance with damages
construction that, in construing different provisions of one and the same law or code, such interpretation and annulment of contract,4 found the option clause in the lease contracts entered into by private respondent
should be favored as will reconcile or harmonize said provisions and avoid a conflict between the same. Mayfair Theater, Inc. (hereafter, Mayfair) and petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo)
Indeed, the presumption is that, in the process of drafting the Code, its author has maintained a consistent to be impossible of performance and unsupported by a consideration and the subsequent sale of the subject
philosophy or position. Moreover, the decision in Southwestern Sugar & Molasses Co. v. Atlantic Gulf & property to petitioner Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been made
Pacific Co., 10 holding that Art. 1324 is modified by Art. 1479 of the Civil Code, in effect, considers the without any breach of or prejudice to, the said lease contracts.5
latter as an exception to the former, and exceptions are not favored, unless the intention to the contrary is
We reproduce below the facts as narrated by the respondent court, which narration, we note, is almost
verbatim the basis of the statement of facts as rendered by the petitioners in their pleadings:
Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon located at Claro
M Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of Deeds of
Manila.
On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's lease of a portion of
Carmelo's property particularly described, to wit:
A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue,
Manila, with a floor area of 1,610 square meters.
THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M. Recto Avenue,
Manila, with a floor area of 150 square meters.
for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair thereafter
constructed on the leased property a movie house known as "Maxim Theatre."
Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with Carmelo for the
lease of another portion of Carmelo's property, to wit:
A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue,
Manila, with a floor area of 1,064 square meters.
THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the two-storey
building situated at C.M. Recto Avenue, Manila, with a floor area of 300 square meters and bearing street
numbers 1871 and 1875,
for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair put up another movie
house known as "Miramar Theatre" on this leased property.
Both contracts of lease provides (sic) identically worded paragraph 8, which reads:
That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive
option to purchase the same.
In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is
bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale hereof that the
purchaser shall recognize this lease and be bound by all the terms and conditions thereof.
Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair,
through a telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property.
Mr. Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the whole property for US Dollars
1,200,000, and Mr. Pascal asked Mr. Yang if the latter was willing to buy the property for Six to Seven
Million Pesos.
Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974, Mayfair replied
through a letter stating as follows:
It appears that on August 19, 1974 your Mr. Henry Pascal informed our client's Mr. Henry Yang through
the telephone that your company desires to sell your above-mentioned C.M. Recto Avenue property.
Under your company's two lease contracts with our client, it is uniformly provided:
8. That if the LESSOR should desire to sell the leased premises the LESSEE shall be given 30-days
exclusive option to purchase the same. In the event, however, that the leased premises is sold to someone
other than the LESSEE, the LESSOR is bound and obligated, as it is (sic) herebinds (sic) and obligates
itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by
all the terms and conditions hereof (sic).
Carmelo did not reply to this letter.
On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express interest in acquiring
not only the leased premises but "the entire building and other improvements if the price is reasonable.
However, both Carmelo and Equatorial questioned the authenticity of the second letter.
Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and building, which
included the leased premises housing the "Maxim" and "Miramar" theatres, to Equatorial by virtue of a
Deed of Absolute Sale, for the total sum of P11,300,000.00.
In September 1978, Mayfair instituted the action a quo for specific performance and annulment of the sale
of the leased premises to Equatorial. In its Answer, Carmelo alleged as special and affirmative defense (a)
that it had informed Mayfair of its desire to sell the entire C.M. Recto Avenue property and offered the
same to Mayfair, but the latter answered that it was interested only in buying the areas under lease, which
was impossible since the property was not a condominium; and (b) that the option to purchase invoked by
Mayfair is null and void for lack of consideration. Equatorial, in its Answer, pleaded as special and
affirmative defense that the option is void for lack of consideration (sic) and is unenforceable by reason of
its impossibility of performance because the leased premises could not be sold separately from the other
portions of the land and building. It counterclaimed for cancellation of the contracts of lease, and for
increase of rentals in view of alleged supervening extraordinary devaluation of the currency. Equatorial
likewise cross-claimed against co-defendant Carmelo for indemnification in respect of Mayfair's claims.
During the pre-trial conference held on January 23, 1979, the parties stipulated on the following:
1. That there was a deed of sale of the contested premises by the defendant Carmelo . . . in favor of
defendant Equatorial . . .;
2. That in both contracts of lease there appear (sic) the stipulation granting the plaintiff exclusive option to
purchase the leased premises should the lessor desire to sell the same (admitted subject to the contention
that the stipulation is null and void);
3. That the two buildings erected on this land are not of the condominium plan;
4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of the contracts of lease constitute
the consideration for the plaintiff's occupancy of the leased premises, subject of the same contracts of lease,
Exhibits A and B;
xxx xxx xxx
6. That there was no consideration specified in the option to buy embodied in the contract;
7. That Carmelo & Bauermann owned the land and the two buildings erected thereon;
8. That the leased premises constitute only the portions actually occupied by the theaters; and
9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is the land and the two
buildings erected thereon.
xxx xxx xxx
After assessing the evidence, the court a quo rendered the appealed decision, the decretal portion of which
reads as follows:
WHEREFORE, judgment is hereby rendered:
(1) Dismissing the complaint with costs against the plaintiff;
(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by way of attorney's fees on its
counterclaim;
(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month as reasonable
compensation for the use of areas not covered by the contract (sic) of lease from July 31, 1979 until
plaintiff vacates said area (sic) plus legal interest from July 31, 1978; P70,000 00 per month as reasonable
compensation for the use of the premises covered by the contracts (sic) of lease dated (June 1, 1967 from
June 1, 1987 until plaintiff vacates the premises plus legal interest from June 1, 1987; P55,000.00 per
month as reasonable compensation for the use of the premises covered by the contract of lease dated March
31, 1969 from March 30, 1989 until plaintiff vacates the premises plus legal interest from March 30, 1989;
and P40,000.00 as attorney's fees;
(4) Dismissing defendant Equatorial's crossclaim against defendant Carmelo & Bauermann.
The contracts of lease dated June 1, 1967 and March 31, 1969 are declared expired and all persons claiming
rights under these contracts are directed to vacate the premises.6
The trial court adjudged the identically worded paragraph 8 found in both aforecited lease contracts to be
an option clause which however cannot be deemed to be binding on Carmelo because of lack of distinct
consideration therefor.
The court a quo ratiocinated:
Significantly, during the pre-trial, it was admitted by the parties that the option in the contract of lease is
not supported by a separate consideration. Without a consideration, the option is therefore not binding on
defendant Carmelo & Bauermann to sell the C.M. Recto property to the former. The option invoked by the
plaintiff appears in the contracts of lease . . . in effect there is no option, on the ground that there is no
consideration. Article 1352 of the Civil Code, provides:
Contracts without cause or with unlawful cause, produce no effect whatever. The cause is unlawful if it is
contrary to law, morals, good custom, public order or public policy.
Contracts therefore without consideration produce no effect whatsoever. Article 1324 provides:
When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal, except when the option is founded upon
consideration, as something paid or promised.
in relation with Article 1479 of the same Code:
A promise to buy and sell a determine thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determine thing for a price certain is binding upon the
promissor if the promise is supported by a consideration distinct from the price.
The plaintiff cannot compel defendant Carmelo to comply with the promise unless the former establishes
the existence of a distinct consideration. In other words, the promisee has the burden of proving the
consideration. The consideration cannot be presumed as in Article 1354:
Although the cause is not stated in the contract, it is presumed that it exists and is lawful unless the debtor
proves the contrary.
where consideration is legally presumed to exists. Article 1354 applies to contracts in general, whereas
when it comes to an option it is governed particularly and more specifically by Article 1479 whereby the
promisee has the burden of proving the existence of consideration distinct from the price. Thus, in the case
of Sanchez vs. Rigor, 45 SCRA 368, 372-373, the Court said:
(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to
sales in particular, and, more specifically, to an accepted unilateral promise to buy or to sell. In other
words, Article 1479 is controlling in the case at bar.
(2) In order that said unilateral promise may be binding upon the promissor, Article 1479 requires the
concurrence of a condition, namely, that the promise be supported by a consideration distinct from the
price.
Accordingly, the promisee cannot compel the promissor to comply with the promise, unless the former
establishes the existence of said distinct consideration. In other words, the promisee has the burden of
proving such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint. 7
It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M. Recto property to
the former.
Mayfair taking exception to the decision of the trial court, the battleground shifted to the respondent Court
of Appeals. Respondent appellate court reversed the court a quo and rendered judgment:
1. Reversing and setting aside the appealed Decision;
2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to Equatorial the amount of
P11,300,000.00 within fifteen (15) days from notice of this Decision, and ordering Equatorial Realty
Development, Inc. to accept such payment;
3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development, Inc. to execute the
deeds and documents necessary for the issuance and transfer of ownership to Mayfair of the lot registered
under TCT Nos. 17350, 118612, 60936, and 52571; and
4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as adjudged, declaring the
Deed of Absolute Sale between the defendants-appellants Carmelo & Bauermann, Inc. and Equatorial
Realty Development, Inc. as valid and binding upon all the parties. 8
Rereading the law on the matter of sales and option contracts, respondent Court of Appeals differentiated
between Article 1324 and Article 1479 of the Civil Code, analyzed their application to the facts of this
case, and concluded that since paragraph 8 of the two lease contracts does not state a fixed price for the
purchase of the leased premises, which is an essential element for a contract of sale to be perfected, what
paragraph 8 is, must be a right of first refusal and not an option contract. It explicated:
Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second paragraph, of the Civil
Code.
Article 1324 speaks of an "offer" made by an offeror which the offeree may or may not accept within a
certain period. Under this article, the offer may be withdrawn by the offeror before the expiration of the
period and while the offeree has not yet accepted the offer. However, the offer cannot be withdrawn by the
offeror within the period if a consideration has been promised or given by the offeree in exchange for the
privilege of being given that period within which to accept the offer. The consideration is distinct from the
price which is part of the offer. The contract that arises is known as option. In the case of Beaumont
vs. Prieto, 41 Phil. 670, the Supreme court, citing Bouvier, defined an option as follows: "A contract by
virtue of which A, in consideration of the payment of a certain sum to B, acquires the privilege of buying
from or selling to B, certain securities or properties within a limited time at a specified price," (pp. 686-7).
Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral promise to buy
or to sell a determinate thing for a price within (which) is binding upon the promisee if the promise is
supported by a consideration distinct from the price." That "unilateral promise to buy or to sell a
determinate thing for a price certain" is called an offer. An "offer", in laws, is a proposal to enter into a
contract (Rosenstock vs. Burke, 46 Phil. 217). To constitute a legal offer, the proposal must be certain as to
the object, the price and other essential terms of the contract (Art. 1319, Civil Code).
Based on the foregoing discussion, it is evident that the provision granting Mayfair "30-days exclusive
option to purchase" the leased premises is NOT AN OPTION in the context of Arts. 1324 and 1479, second
paragraph, of the Civil Code. Although the provision is certain as to the object (the sale of the leased
premises) the price for which the object is to be sold is not stated in the provision Otherwise stated, the
questioned stipulation is not by itself, an "option" or the "offer to sell" because the clause does not specify
the price for the subject property.
Although the provision giving Mayfair "30-days exclusive option to purchase" cannot be legally
categorized as an option, it is, nevertheless, a valid and binding stipulation. What the trial court failed to
appreciate was the intention of the parties behind the questioned proviso.
xxx xxx xxx
The provision in question is not of the pro-forma type customarily found in a contract of lease. Even
appellees have recognized that the stipulation was incorporated in the two Contracts of Lease at the
initiative and behest of Mayfair. Evidently, the stipulation was intended to benefit and protect Mayfair in its
rights as lessee in case Carmelo should decide, during the term of the lease, to sell the leased property. This
intention of the parties is achieved in two ways in accordance with the stipulation. The first is by giving
Mayfair "30-days exclusive option to purchase" the leased property. The second is, in case Mayfair would
opt not to purchase the leased property, "that the purchaser (the new owner of the leased property) shall
recognize the lease and be bound by all the terms and conditions thereof."
In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation giving Mayfair "30-
days exclusive option to purchase the (leased premises)," was meant to provide Mayfair the opportunity to
purchase and acquire the leased property in the event that Carmelo should decide to dispose of the property.
In order to realize this intention, the implicit obligation of Carmelo once it had decided to sell the leased
property, was not only to notify Mayfair of such decision to sell the property, but, more importantly, to
make an offer to sell the leased premises to Mayfair, giving the latter a fair and reasonable opportunity to
accept or reject the offer, before offering to sell or selling the leased property to third parties. The right
vested in Mayfair is analogous to the right of first refusal, which means that Carmelo should have offered
the sale of the leased premises to Mayfair before offering it to other parties, or, if Carmelo should receive
any offer from third parties to purchase the leased premises, then Carmelo must first give Mayfair the
opportunity to match that offer.
In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal when he made the
telephone call to Mr. Yang in 1974. Mr. Pascal thus testified:
Q Can you tell this Honorable Court how you made the offer to Mr. Henry Yang by telephone?
A I have an offer from another party to buy the property and having the offer we decided to make an offer
to Henry Yang on a first-refusal basis. (TSN November 8, 1983, p. 12.).
and on cross-examination:
Q When you called Mr. Yang on August 1974 can you remember exactly what you have told him in
connection with that matter, Mr. Pascal?
A More or less, I told him that I received an offer from another party to buy the property and I was offering
him first choice of the enter property. (TSN, November 29, 1983, p. 18).
We rule, therefore, that the foregoing interpretation best renders effectual the intention of the parties.9
Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the requirement of
distinct consideration indispensable in an option contract, has no application, respondent appellate court
also addressed the claim of Carmelo and Equatorial that assuming arguendo that the option is valid and
effective, it is impossible of performance because it covered only the leased premises and not the entire
Claro M. Recto property, while Carmelo's offer to sell pertained to the entire property in question. The
Court of Appeals ruled as to this issue in this wise:
We are not persuaded by the contentions of the defendants-appellees. It is to be noted that the Deed of
Absolute Sale between Carmelo and Equatorial covering the whole Claro M. Recto property, made
reference to four titles: TCT Nos. 17350, 118612, 60936 and 52571. Based on the information submitted by
Mayfair in its appellant's Brief (pp. 5 and 46) which has not been controverted by the appellees, and which
We, therefore, take judicial notice of the two theaters stand on the parcels of land covered by TCT No.
17350 with an area of 622.10 sq. m and TCT No. 118612 with an area of 2,100.10 sq. m. The existence of
four separate parcels of land covering the whole Recto property demonstrates the legal and physical
possibility that each parcel of land, together with the buildings and improvements thereof, could have been
sold independently of the other parcels.
At the time both parties executed the contracts, they were aware of the physical and structural conditions of
the buildings on which the theaters were to be constructed in relation to the remainder of the whole Recto
property. The peculiar language of the stipulation would tend to limit Mayfair's right under paragraph 8 of
the Contract of Lease to the acquisition of the leased areas only. Indeed, what is being contemplated by the
questioned stipulation is a departure from the customary situation wherein the buildings and improvements
are included in and form part of the sale of the subjacent land. Although this situation is not common,
especially considering the non-condominium nature of the buildings, the sale would be valid and capable of
being performed. A sale limited to the leased premises only, if hypothetically assumed, would have brought
into operation the provisions of co-ownership under which Mayfair would have become the exclusive
owner of the leased premises and at the same time a co-owner with Carmelo of the subjacent land in
proportion to Mayfair's interest over the premises sold to it.10
Carmelo and Equatorial now comes before us questioning the correctness and legal basis for the decision of
respondent Court of Appeals on the basis of the following assigned errors:
I
THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION CLAUSE IN
THE CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL PROVISO. IN DOING
SO THE COURT OF APPEALS DISREGARDED THE CONTRACTS OF LEASE WHICH CLEARLY
AND UNEQUIVOCALLY PROVIDE FOR AN OPTION, AND THE ADMISSION OF THE PARTIES
OF SUCH OPTION IN THEIR STIPULATION OF FACTS.
II
WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS ERRED IN
DIRECTING EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN (18) YEARS AFTER
MAYFAIR FAILED TO EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST REFUSAL
ASSUMING IT WAS ONE) WHEN THE CONTRACTS LIMITED THE EXERCISE OF SUCH OPTION
TO 30 DAYS FROM NOTICE.
III
THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED IMPLEMENTATION OF
ITS DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF
THAT WAS NOT EVEN PRAYED FOR IN THE COMPLAINT.
IV
THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE ASSIGNMENT OF
APPEALED CASES WHEN IT ALLOWED THE SAME DIVISION XII, PARTICULARLY JUSTICE
MANUEL HERRERA, TO RESOLVE ALL THE MOTIONS IN THE "COMPLETION PROCESS" AND
TO STILL RESOLVE THE MERITS OF THE CASE IN THE "DECISION STAGE".11
We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case
in the Court of Appeals. Suffice it to say that in our Resolution,12 dated December 9, 1992, we already took
note of this matter and set out the proper applicable procedure to be the following:
On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote a letter-
complaint to this Court alleging certain irregularities and infractions committed by certain lawyers, and
Justices of the Court of Appeals and of this Court in connection with case CA-G.R. CV No. 32918 (now
G.R. No. 106063). This partakes of the nature of an administrative complaint for misconduct against
members of the judiciary. While the letter-complaint arose as an incident in case CA-G.R. CV No. 32918
(now G.R. No. 106063), the disposition thereof should be separate and independent from Case G.R. No.
106063. However, for purposes of receiving the requisite pleadings necessary in disposing of the
administrative complaint, this Division shall continue to have control of the case. Upon completion thereof,
the same shall be referred to the Court En Banc for proper disposition.13
This court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo and
Equatorial, to be an independent and separate subject for an administrative complaint based on misconduct
by the lawyers and justices implicated therein, it is the correct, prudent and consistent course of action not
to pre-empt the administrative proceedings to be undertaken respecting the said irregularities. Certainly, a
discussion thereupon by us in this case would entail a finding on the merits as to the real nature of the
questioned procedures and the true intentions and motives of the players therein.
In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of paragraph 8 stipulated in
the two contracts of lease between Carmelo and Mayfair in the face of conflicting findings by the trial court
and the Court of Appeals; and (2) to determine the rights and obligations of Carmelo and Mayfair, as well
as Equatorial, in the aftermath of the sale by Carmelo of the entire Claro M. Recto property to Equatorial.
Both contracts of lease in question provide the identically worded paragraph 8, which reads:
That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive
option to purchase the same.
In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is
bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the
purchaser shall recognize this lease and be bound by all the terms and conditions thereof. 14
We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a
right of first refusal in favor of Mayfair. It is not an option clause or an option contract. It is a contract of a
right of first refusal.
As early as 1916, in the case of Beaumont vs. Prieto,15 unequivocal was our characterization of an option
contract as one necessarily involving the choice granted to another for a distinct and separate consideration
as to whether or not to purchase a determinate thing at a predetermined fixed price.
It is unquestionable that, by means of the document Exhibit E, to wit, the letter of December 4, 1911,
quoted at the beginning of this decision, the defendant Valdes granted to the plaintiff Borck the right to
purchase the Nagtajan Hacienda belonging to Benito Legarda, during the period of three months and for its
assessed valuation, a grant which necessarily implied the offer or obligation on the part of the defendant
Valdes to sell to Borck the said hacienda during the period and for the price mentioned . . . There was,
therefore, a meeting of minds on the part of the one and the other, with regard to the stipulations made in
the said document. But it is not shown that there was any cause or consideration for that agreement, and
this omission is a bar which precludes our holding that the stipulations contained in Exhibit E is a contract
of option, for, . . . there can be no contract without the requisite, among others, of the cause for the
obligation to be established.
In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the following language:
A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the
privilege of buying from, or selling to B, certain securities or properties within a limited time at a specified
price. (Story vs. Salamon, 71 N.Y., 420.)
From vol. 6, page 5001, of the work "Words and Phrases," citing the case of Ide vs. Leiser (24 Pac., 695; 10
Mont., 5; 24 Am. St. Rep., 17) the following quotation has been taken:
An agreement in writing to give a person the option to purchase lands within a given time at a named
price is neither a sale nor an agreement to sell. It is simply a contract by which the owner of property
agrees with another person that he shall have the right to buy his property at a fixed price within a certain
time. He does not sell his land; he does not then agree to sell it; but he does sell something; that is, the right
or privilege to buy at the election or option of the other party. The second party gets in praesenti, not lands,
nor an agreement that he shall have lands, but he does get something of value; that is, the right to call for
and receive lands if he elects. The owner parts with his right to sell his lands, except to the second party, for
a limited period. The second party receives this right, or, rather, from his point of view, he receives the
right to elect to buy.
But the two definitions above cited refer to the contract of option, or, what amounts to the same thing, to
the case where there was cause or consideration for the obligation, the subject of the agreement made by
the parties; while in the case at bar there was no such cause or consideration. 16 (Emphasis ours.)
The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract,
in order to be valid and enforceable, must, among other things, indicate the definite price at which the
person granting the option, is willing to sell.
Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per
square meter upon failure to make the purchase within the time specified; 17 in one other case we freed the
landowner from her promise to sell her land if the prospective buyer could raise P4,500.00 in three weeks
because such option was not supported by a distinct consideration;18 in the same vein in yet one other case,
we also invalidated an instrument entitled, "Option to Purchase" a parcel of land for the sum of P1,510.00
because of lack of consideration;19 and as an exception to the doctrine enumerated in the two preceding
cases, in another case, we ruled that the option to buy the leased premises for P12,000.00 as stipulated in
the lease contract, is not without consideration for in reciprocal contracts, like lease, the obligation or
promise of each party is the consideration for that of the other. 20 In all these cases, the selling price of the
object thereof is always predetermined and specified in the option clause in the contract or in the separate
deed of option. We elucidated, thus, in the very recent case of Ang Yu Asuncion vs. Court of Appeals21 that:
. . . In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is
perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer
ownership of a thing or right to another, called the buyer, over which the latter agrees. Article 1458 of the
Civil Code provides:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its
equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the
ownership of the thing sold in retained until the fulfillment of a positive suspensive condition (normally,
the full payment of the purchase price), the breach of the condition will prevent the obligation to convey
title from acquiring an obligatory force. . . .
An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is
fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted.
An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled
with a valuable consideration distinct and separate from the price, is what may properly be termed a
perfected contract of option. This contract is legally binding, and in sales, it conforms with the second
paragraph of Article 1479 of the Civil Code, viz:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the
promisor if the promise is supported by a consideration distinct from the price. (1451a).
Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the
option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply
with their respective undertakings.
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion)
is merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere
invitations to make offers or only as proposals. These relations, until a contract is perfected, are not
considered binding commitments. Thus, at any time prior to the perfection of the contract, either
negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is
effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree
learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the offeree within
which to accept the offer, the following rules generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has
the right to withdraw the offer before its acceptance, or if an acceptance has been made, before the offeror's
coming to know of such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code;
see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral
promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf,
97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135 SCRA 409;
Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or
arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which ordains
that "every person must, in the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith."
(2) If the period has a separate consideration, a contract of "option" deemed perfected, and it would be a
breach of that contract to withdraw the offer during the agreed period. The option, however, is an
independent contract by itself; and it is to be distinguished from the projected main agreement (subject
matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the
offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for
specific performance on the proposed contract ("object" of the option) since it has failed to reach its own
stage of perfection. The optioner-offeror, however, renders himself liable for damages for breach of the
opinion. . .
In the light of the foregoing disquisition and in view of the wording of the questioned provision in the two
lease contracts involved in the instant case, we so hold that no option to purchase in contemplation of the
second paragraph of Article 1479 of the Civil Code, has been granted to Mayfair under the said lease
contracts.
Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to
Mayfair and is not an option contract. It also correctly reasoned that as such, the requirement of a separate
consideration for the option, has no applicability in the instant case.
There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts which
would bring them into the ambit of the usual offer or option requiring an independent consideration.
An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It
is a separate and distinct contract from that which the parties may enter into upon the consummation of the
option. It must be supported by consideration.22 In the instant case, the right of first refusal is an integral
part of the contracts of lease. The consideration is built into the reciprocal obligations of the parties.
To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is governed by
Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and sell would render in
effectual or "inutile" the provisions on right of first refusal so commonly inserted in leases of real estate
nowadays. The Court of Appeals is correct in stating that Paragraph 8 was incorporated into the contracts
of lease for the benefit of Mayfair which wanted to be assured that it shall be given the first crack or the
first option to buy the property at the price which Carmelo is willing to accept. It is not also correct to say
that there is no consideration in an agreement of right of first refusal. The stipulation is part and parcel of
the entire contract of lease. The consideration for the lease includes the consideration for the right of first
refusal. Thus, Mayfair is in effect stating that it consents to lease the premises and to pay the price agreed
upon provided the lessor also consents that, should it sell the leased property, then, Mayfair shall be given
the right to match the offered purchase price and to buy the property at that price. As stated in Vda. De
Quirino vs. Palarca,23 in reciprocal contract, the obligation or promise of each party is the consideration for
that of the other.
The respondent Court of Appeals was correct in ascertaining the true nature of the aforecited paragraph 8 to
be that of a contractual grant of the right of first refusal to Mayfair.
We shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair and
Equatorial.
The different facts and circumstances in this case call for an amplification of the precedent in Ang Yu
Asuncion vs. Court of Appeals.24
First and foremost is that the petitioners acted in bad faith to render Paragraph 8 "inutile".
What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have the
right of first refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelo did
recognize this right of Mayfair, for it informed the latter of its intention to sell the said property in 1974.
There was an exchange of letters evidencing the offer and counter-offers made by both parties. Carmelo,
however, did not pursue the exercise to its logical end. While it initially recognized Mayfair's right of first
refusal, Carmelo violated such right when without affording its negotiations with Mayfair the full process
to ripen to at least an interface of a definite offer and a possible corresponding acceptance within the "30-
day exclusive option" time granted Mayfair, Carmelo abandoned negotiations, kept a low profile for some
time, and then sold, without prior notice to Mayfair, the entire Claro M Recto property to Equatorial.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question
rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial was
aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As such,
Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies.
. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a
contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons,
like creditors. The status of creditors could be validly accorded the Bonnevies for they had substantial
interests that were prejudiced by the sale of the subject property to the petitioner without recognizing their
right of first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by
means of the restoration of things to their condition at the moment prior to the celebration of said contract.
It is a relief allowed for the protection of one of the contracting parties and even third persons from all
injury and damage the contract may cause, or to protect some incompatible and preferent right created by
the contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary
damage to someone that justifies its invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the
action for its rescission where it is shown that such third person is in lawful possession of the subject of the
contract and that he did not act in bad faith. However, this rule is not applicable in the case before us
because the petitioner is not considered a third party in relation to the Contract of Sale nor may its
possession of the subject property be regarded as acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot
be deemed a purchaser in good faith for the record shows that it categorically admitted it was aware of the
lease in favor of the Bonnevies, who were actually occupying the subject property at the time it was sold to
it. Although the Contract of Lease was not annotated on the transfer certificate of title in the name of the
late Jose Reynoso and Africa Reynoso, the petitioner cannot deny actual knowledge of such lease which
was equivalent to and indeed more binding than presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another without notice that some
other person has a right to or interest in such property and pays a full and fair price for the same at the time
of such purchase or before he has notice of the claim or interest of some other person in the property. Good
faith connotes an honest intention to abstain from taking unconscientious advantage of another. Tested by
these principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease
of the property by the Bonnevies and such knowledge should have cautioned it to look deeper into the
agreement to determine if it involved stipulations that would prejudice its own interests.
The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease.
Assuming this to be true, we nevertheless agree with the observation of the respondent court that:
If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par. 20 on
priority right given to the Bonnevies, it had only itself to blame. Having known that the property it was
buying was under lease, it behooved it as a prudent person to have required Reynoso or the broker to show
to it the Contract of Lease in which Par. 20 is contained.25
Petitioners assert the alleged impossibility of performance because the entire property is indivisible
property. It was petitioner Carmelo which fixed the limits of the property it was leasing out. Common sense
and fairness dictate that instead of nullifying the agreement on that basis, the stipulation should be given
effect by including the indivisible appurtenances in the sale of the dominant portion under the right of first
refusal. A valid and legal contract where the ascendant or the more important of the two parties is the
landowner should be given effect, if possible, instead of being nullified on a selfish pretext posited by the
owner. Following the arguments of petitioners and the participation of the owner in the attempt to strip
Mayfair of its rights, the right of first refusal should include not only the property specified in the contracts
of lease but also the appurtenant portions sold to Equatorial which are claimed by petitioners to be
indivisible. Carmelo acted in bad faith when it sold the entire property to Equatorial without informing
Mayfair, a clear violation of Mayfair's rights. While there was a series of exchanges of letters evidencing
the offer and counter-offers between the parties, Carmelo abandoned the negotiations without giving
Mayfair full opportunity to negotiate within the 30-day period.
Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be
authorized to exercise its right of first refusal under the contract to include the entirety of the indivisible
property. The boundaries of the property sold should be the boundaries of the offer under the right of first
refusal. As to the remedy to enforce Mayfair's right, the Court disagrees to a certain extent with the
concluding part of the dissenting opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion
vs.Court of Appeals should be modified, if not amplified under the peculiar facts of this case.
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad
faith, since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In
fact, as correctly observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the
contract of lease prior to the sale. Equatorial's knowledge of the stipulations therein should have cautioned
it to look further into the agreement to determine if it involved stipulations that would prejudice its own
interests.
Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside
or rescinded. All of these matters are now before us and so there should be no piecemeal determination of
this case and leave festering sores to deteriorate into endless litigation. The facts of the case and
considerations of justice and equity require that we order rescission here and now. Rescission is a relief
allowed for the protection of one of the contracting parties and even third persons from all injury and
damage the contract may cause or to protect some incompatible and preferred right by the contract. 26 The
sale of the subject real property by Carmelo to Equatorial should now be rescinded considering that
Mayfair, which had substantial interest over the subject property, was prejudiced by the sale of the subject
property to Equatorial without Carmelo conferring to Mayfair every opportunity to negotiate within the 30-
day stipulated period.27
This Court has always been against multiplicity of suits where all remedies according to the facts and the
law can be included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which
Mayfair could have purchased the property is, therefore, fixed. It can neither be more nor less. There is no
dispute over it. The damages which Mayfair suffered are in terms of actual injury and lost opportunities.
The fairest solution would be to allow Mayfair to exercise its right of first refusal at the price which it was
entitled to accept or reject which is P11,300,000.00. This is clear from the records.
To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the
latter of the disputed property would be unjust and unkind to Mayfair because it is once more compelled to
litigate to enforce its right. It is not proper to give it an empty or vacuous victory in this case. From the
viewpoint of Carmelo, it is like asking a fish if it would accept the choice of being thrown back into the
river. Why should Carmelo be rewarded for and allowed to profit from, its wrongdoing? Prices of real
estate have skyrocketed. After having sold the property for P11,300,000.00, why should it be given another
chance to sell it at an increased price?
Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to
execute because a contract over the right of first refusal belongs to a class of preparatory juridical relations
governed not by the law on contracts but by the codal provisions on human relations. This may apply here
if the contract is limited to the buying and selling of the real property. However, the obligation of Carmelo
to first offer the property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal
which created the obligation. It should be enforced according to the law on contracts instead of the
panoramic and indefinite rule on human relations. The latter remedy encourages multiplicity of suits.
There is something to execute and that is for Carmelo to comply with its obligation to the property under
the right of the first refusal according to the terms at which they should have been offered then to Mayfair,
at the price when that offer should have been made. Also, Mayfair has to accept the offer. This juridical
relation is not amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be executed
according to their terms.
On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind
that both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract
entered into with Mayfair. It sold the property to Equatorial with purpose and intend to withhold any notice
or knowledge of the sale coming to the attention of Mayfair. All the circumstances point to a calculated and
contrived plan of non-compliance with the agreement of first refusal.
On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and
full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and
Equatorial took unconscientious advantage of Mayfair.
Neither may Carmelo and Equatorial avail of considerations based on equity which might warrant the grant
of interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for
the property. It has used the P11,300,000.00 all these years earning income or interest from the amount.
Equatorial, on the other hand, has received rents and otherwise profited from the use of the property turned
over to it by Carmelo. In fact, during all the years that this controversy was being litigated, Mayfair paid
rentals regularly to the buyer who had an inferior right to purchase the property. Mayfair is under no
obligation to pay any interests arising from this judgment to either Carmelo or Equatorial.
WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-
G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial
Realty Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo
& Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The
latter is directed to execute the deeds and documents necessary to return ownership to Carmelo and
Bauermann of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the
aforesaid lots for P11,300,000.00.
SO ORDERED.
Regalado, Davide, Jr., Bellosillo, Melo, Puno, Kapunan, Mendoza and Francisco, JJ., concur.
Narvasa, C.J., took no part.
EN BANC
[G.R. No. 130722. December 9, 1999]
SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE HOUSE
AUTO SUPPLY, INC., petitioners, vs. L & R CORPORATION, VICENTE COLOYAN in his
capacity as Acting Registrar of the Register of Deeds of Quezon City thru Deputy Sheriff ROBERTO
R. GARCIA, respondents.
DECISION
YNARES-SANTIAGO, J.:
May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first
obtaining the consent of the mortgagee and that, otherwise, the sale made without the mortgagees consent
shall be invalid; and (b) for a right of first refusal in favor of the mortgagee?
The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the
aggregate sum of P400,000.00; P200,000.00 of which was obtained on August 6, 1974 and the remaining
P200,000.00 obtained on March 27, 1978. The loans were secured by a mortgage[1] constituted by the
spouses upon their two parcels of land and the improvements thereon located in Cubao, Quezon City
covered by Transfer Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square
meters, respectively. The mortgage was duly registered with the Register of Deeds of Quezon City.
On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the
parcels of land they had previously mortgaged to L & R Corporation for the sum of P430,000.00. [2] The
sale was annotated at the back of the respective certificates of title of the properties. [3]
Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation
initiated extrajudicial foreclosure proceedings with the Ex-Oficio Sheriff of Quezon City. On July 23, 1980,
the mortgaged properties were sold at public auction to L & R Corporation as the only bidder for the
amount of P221,624.58.[4] When L & R Corporation presented its corresponding Certificate of Sale issued
by Deputy Sheriff Roberto B. Garcia, to the Quezon City Register of Deeds for registration on August 15,
1980, it learned for the first time of the prior sale of the properties made by the spouses Litonjua to
PWHAS upon seeing the inscription at the back of the certificates of title. Thus, on August 20, 1980, it
wrote a letter[5] to the Register of Deeds of Quezon City requesting for the cancellation of the annotation
regarding the sale to PWHAS. L & R Corporation invoked a provision in its mortgage contract with the
spouses Litonjua stating that the mortgagees prior written consent was necessary in case of subsequent
encumbrance or alienation of the subject properties. Thus, it argued that since the sale to PWHAS was
made without its prior written consent, the same should not have been registered and/or annotated.
On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of the spouses
Litonjua, tendered payment of the full redemption price to L & R Corporation in the form of China Bank
Managers Check No. HOF-M O12623 in the amount of P238,468.04.[6] See Exhibits G & 2, Letter of
PWHAS to L & R Corporation, id.6 L & R Corporation, however, refused to accept the payment, hence,
PWHAS was compelled to redeem the mortgaged properties through the Ex-Oficio Sheriff of Quezon
City.On March 31, 1981, it tendered payment of the redemption price to the Deputy Sheriff through China
Bank Managers Check No. HOF-O14750 in the amount of P240,798.94.[7] The check was deposited with
the Branch Clerk of Court who issued Receipt No. 7522484[8]for the full redemption price of the mortgaged
properties. Accordingly, the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses
Litonjua dated March 31, 1981.[9]
In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment by PWHAS of
the full redemption price and advised it that it can claim the payment upon surrender of its owners duplicate
certificates of title.[10]
On April 2, 1981, the spouses Litonjua presented for registration the Certificate of Redemption issued in
their favor to the Register of Deeds of Quezon City. The Certificate also informed L & R Corporation of
the fact of redemption and directed the latter to surrender the owners duplicate certificates of title within
five days.[11]
On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of Deeds,
stating: (1) that the sale of the mortgaged properties to PWHAS was without its consent, in contravention
of paragraphs 8 and 9 of their Deed of Real Estate Mortgage; and (2) that it was not the spouses Litonjua,
but PWHAS, who was seeking to redeem the foreclosed properties, when under Articles 1236 and 1237 of
the New Civil Code, the latter had no legal personality or capacity to redeem the same. [12]
On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of Deeds to
annotate their Certificate of Redemption as an adverse claim on the titles of the subject properties on
account of the refusal of L & R Corporation to surrender the owners duplicate copies of the titles to the
subject properties. With the refusal of the Register of Deeds to annotate their Certificate of Redemption, the
Litonjua spouses filed a Petition[13] on July 17, 1981 against L & R Corporation for the surrender of the
owners duplicate of Transfer Certificates of Title No. 197232 and 197233 before the then Court of First
Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of
Consolidation of Ownership.[14] Thereafter, on August 20, 1981, the Register of Deeds cancelled Transfer
Certificates of Title No. 197232 and 197233 and in lieu thereof, issued Transfer Certificates of Title No.
280054[15] and 28055[16] in favor of L & R Corporation, free of any lien or encumbrance.
With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the
subject parcels of land that being the new owner, the rental payments should be made to them, and that new
lease contracts will be executed with interested tenants before the end of August, 1981.[17] Upon learning of
this incident from their tenants, the spouses Litonjua filed an adverse claim[18] and a notice of lis
pendens[19] with the Register of Deeds. In the process, they learned that the prior sale of the properties in
favor of PWHAS was not annotated on the titles issued to L & R.
A complaint for Quieting of Title, Annulment of Title and Damages with preliminary injunction was filed
by the spouses Litonjua and PWHAS against herein respondents before the then Court of First Instance of
Quezon City, Branch 9, docketed as Civil Case No. Q-33362.[20] On February 10, 1987, the lower court
rendered its Decision[21] dismissing the Complaint upon its finding that the sale between the spouses
Litonjua and PWHAS was null and void and unenforceable against L & R Corporation and that the
redemption made was also null and void.
On appeal, the decision of the trial court was set aside by the Court of Appeals in its Decision dated June
22, 1994,[22] on the ground that the sale made to PWHAS as well as the redemption effected by the spouses
Litonjua were valid.However, the same was subsequently reconsidered and set aside in an Amended
Decision dated September 11, 1997.[23]
Hence, the instant Petition on the following issues:
(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and enforceable;
(2) whether or not the sale of the mortgaged properties by the spouses Litonjua to PWHAS, without the
knowledge and consent of L & R Corporation, is valid and enforceable;
(3) whether or not PWHAS had the right to redeem the foreclosed properties on the account of the spouses
Litonjua; and
(4) whether or not there was a valid redemption.
Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows
"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other manner encumber the
real property/properties subject of this mortgage without the prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties subject of this mortgage, the
MORTGAGEE shall be duly notified thereof by the MORTGAGORS, and should the MORTGAGEE be
interested to purchase the same, the latter shall be given priority over all the other prospective buyers; [24]
There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the mortgaged
properties to PWHAS without the prior written consent of L & R Corporation and without giving the latter
notice of such sale nor priority over PWHAS.
Re: Validity of prohibition against subsequent sale of mortgaged property without prior written consent of mortgagee and validity of subsequent sale to
PWHAS
Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130 of
the New Civil Code which provides that (A) stipulation forbidding the owner from alienating the
immovable mortgaged shall be void.
In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo, [25] a stipulation prohibiting the
mortgagor from entering into second or subsequent mortgages was held valid. This is clearly not the same
as that contained in paragraph 8 of the subject Deed of Real Estate Mortgage which also forbids any
subsequent sale without the written consent of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance
Corporation,[26] the case of Philippine Industrial Co., supra, was erroneously cited to have held that the
prohibition in a mortgage contract against the encumbrance, sale or disposal of the property mortgaged
without the consent of the mortgagee is valid. No similar prohibition forbidding the owner of mortgaged
property from (subsequently) mortgaging the immovable mortgaged is found in our laws, making the ruling
in Philippine Industrial Co., supra, perfectly valid. On the other hand, to extend such a ruling to include
subsequent sales or alienation runs counter not only to Philippine Industrial Co., itself, but also to Article
2130 of the New Civil Code.
Meanwhile in De la Paz v. Macondray & Co., Inc.,[27] it was held that while an agreement of such nature
does not nullify the subsequent sale made by the mortgagor, the mortgagee is authorized to bring the
foreclosure suit against the mortgagor without the necessity of either notifying the purchaser or including
him as a defendant. At the same time, the purchaser of the mortgaged property was deemed not to have lost
his equitable right of redemption.
In Bonnevie v. Court of Appeals,[28] where a similar provision appeared in the subject contract of mortgage,
the petitioners therein, to whom the mortgaged property were sold without the written consent of the
mortgagee, were held as without the right to redeem the said property. No consent having been secured
from the mortgagee to the sale with assumption of mortgage by petitioners therein, the latter were not
validly substituted as debtors. It was further held that since their rights were never recorded, the mortgagee
was charged with the obligation to recognize the right of redemption only of the original mortgagors-
vendors. Without discussing the validity of the stipulation in question, the same was, in effect, upheld.
Again, in Cruz v. Court of Appeals,[29] while a similar provision was recognized and applied, no discussion
as to its validity was made since the same was not raised as an issue.
On the other hand, in Tambunting v. Rehabilitation Finance Corporation,[30] the validity of a similar
provision was specifically raised and discussed and found as invalid. It was there ratiocinated that --
To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting, married
to Antonio L. Tambunting, does contain a provision that the property mortgaged shall not be x x x the
subject of any new or subsequent contracts of agreements, saving and excepting those having connection
with the first mortgage with the RFC, without first securing the written permission and consent of the
MORTGAGEE. But the provision can only be construed as directed against subsequent mortgages or
encumbrances, not to an alienation of the immovable itself. For while covenants prohibiting the owner from
constituting a later mortgage over property registered under the Torrens Act have been held to be legally
permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-342; Bank of the Philippines
v. Ty Camco Sobrino, 57 Phil. 801), stipulations forbidding the owner from alienating the immovable
mortgaged are expressly declared void by law (Art. 2130, Civil Code). It is clear that the stipulation against
subsequent agreements above mentioned had not been breached by the assignment by the Escuetas (to the
Hernandezes) of their right of redemption in connection with the mortgage constituted in favor of the
R.F.C. The assignment was not a subsequent mortgage or encumbrance, licitly comprehended by the
prohibitory stipulation, but was actually a sale or conveyance of all their rights in the encumbered real
property in truth, an alienation of the immovable which could not lawfully be forbidden. Moreover, since
the subject of the assignment to the Hernandezes had connection with the first assignment with the R.F.C.,
it did not fall within, but was explicitly excepted from, the prohibitory stipulation in question. Finally, it
should not be forgotten that since the Tambuntings, in their own deed of conditional sale with the R.F.C.,
had accepted without demur the provision that said contract could be revoked within one (1) year from
September 16, 1955 at the option of the RFC, as vendor, should the former owner (Escueta) exercise his
right to redeem the property; and that the redemption of the property within said period by the former
owner or his successor-in-interest would render their instrument of conditional sale automatically null and
void and without effect, they cannot now assume a position inconsistent with said provision. (underscoring,
Ours)
Earlier, in PNB v. Mallorca,[31] it was reiterated that a real mortgage is merely an encumbrance; it does not
extinguish the title of the debtor, whose right to dispose a principal attribute of ownership is not thereby
lost. Thus, a mortgagor had every right to sell his mortgaged property, which right the mortgagee cannot
oppose.
In upholding the validity of the stipulation in question, the amended Decision relied on the cases of Cruz v.
Court of Appeals, supra, and Medida v. Court of Appeals.[32] According to the Court of Appeals, said cases,
are not only more recent that that of Tambunting, supra, but are also more applicable to the issue at bar.
We are not convinced.
As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of
Appeals, supra, no discussion as to its validity was made since the same was not raised as an issue. Thus, it
cannot be said that the specific pronouncement in the Tambunting case that such a stipulation can only be
construed as against subsequent mortgages or encumbrances but not to an alienation of the immovable
itself, which is prohibited under Article 2130, was abandoned thereby. On the other hand, the facts in the
case of Medida v. Court of Appeals, are different from those in the present case for what was in issue in the
said case was a second mortgage over a foreclosed property during the period of redemption.Thus, the
ruling in Medida quoted in the Amended Decision that what is delimited is not the mortgagors jus
dispodendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may
correspondingly be restricted, actually refers to the fact that the only rights which a mortgagor can legally
transfer, cede and convey after the foreclosure of his properties are the right to redeem the land, and the
possession use and enjoyment of the same during the period of redemption. It has no connection or
reference to the right of a mortgagor to sell his mortgaged property without the required consent of the
mortgagee. To be sure, there is absolutely nothing in Medida that upholds the validity of the stipulation in
controversy.
Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged
property without the consent of the mortgagee is concerned, therefore, the ruling in the Tambunting case is
still the controlling law.Indeed, we are fully in accord with the pronouncement therein that such a
stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its
Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage contains
no absolute prohibition against the sale of the property mortgaged but only requires the mortgagor to obtain
the prior written consent of the mortgagee before any such sale, Article 2130 is not violated thereby. This
observation takes a narrow and technical view of the stipulation in question without taking into
consideration the end result of requiring such prior written consent. True, the provision does not absolutely
prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it
nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole
prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee can simply
withhold its consent and thereby, prevent the mortgagor from selling the property. This creates an
unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his
mortgaged property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of
Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New Civil Code.
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the
parties. Accordingly, the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior
written consent of L & R Corporation, is valid.
Re: Validity of redemption effected by PWHAS on the account of the spouses Litonjua
Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua
is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged properties to
PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account of such
sale and was in effect, their successor-in-interest. As such, it had the right to redeem the property
foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that
x x x. The acquisition by the Hernandezes of the Escuetas rights over the property carried with it the
assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the
mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the
Escuetas shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts would and
could be enforced against the property subject of the assignment.Stated otherwise, the Hernandezes, by the
assignment, obtained the right to remove the burdens on the property subject thereof by paying the
obligations thereby secured; that is to say, they had the right of redemption as regards the first mortgage, to
be exercised within the time and in the manner prescribed by law and the mortgage deed; and as regards the
second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of
redemption.
The redemption of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself
which gives not only the mortgagor-debtor the right to redeem, but also his successors-in-interest. As
vendee of the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses Litonjua.
Re: Validity of redemption made
It is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after the
date of registration of the foreclosure sale, well within the one year period of redemption.
Re: Validity and enforceability of stipulation granting the mortgagee the right of first refusal
While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent
insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants upon L & R Corporation the right of
first refusal over the mortgaged property in the event the mortgagor decides to sell the same. We see
nothing wrong in this provision. The right of first refusal has long been recognized as valid in our
jurisdiction. The consideration for the loan-mortgage includes the consideration for the right of first
refusal. L & R Corporation is in effect stating that it consents to lend out money to the spouses Litonjua
provided that in case they decide to sell the property mortgaged to it, then L & R Corporation shall be given
the right to match the offered purchase price and to buy the property at that price. Thus, while the spouses
Litonjua had every right to sell their mortgaged property to PWHAS without securing the prior written
consent of L & R Corporation, it had the obligation under paragraph 9, which is a perfectly valid provision,
to notify the latter of their intention to sell the property and give it priority over other buyers. It is only
upon failure of L & R Corporation to exercise its right of first refusal could the spouses Litonjua validly
sell the subject properties to others, under the same terms and conditions offered to L & R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R Corporations contractual right of
first refusal? On this score, we agree with the Amended Decision of the Court of Appeals that the sale
made to PWHAS is rescissible. The case of Guzman, Bocaling & Co v. Bonnevie[33] is instructive on this
point
The respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under
Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly
accorded the Bonnevies for they had substantial interests that were prejudiced by the sale of the subject
property to the petitioner without recognizing their right of first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by
means of the restoration of things to their condition at the moment prior to the celebration of said
contract. It is a relief allowed for one of the contracting parties and even third persons from all injury and
damage the contract may cause, or to protect some incompatible and preferential right created by the
contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage
to someone that justifies its invalidation for reasons of equity. (underscoring, Ours)
It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation
over the subject properties since the Deed of Real Estate Mortgage containing such a provision was duly
registered with the Register of Deeds. As such, PWHAS is presumed to have been notified thereof by
registration, which equates to notice to the whole world.
period should have been accepted as valid by L & R Corporation.However, while the sale is, indeed, valid,
the same is rescissible because it ignored L & R Corporations right of first refusal.
Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the
original status quo, with no sale having been made, they should now be allowed to redeem the subject
properties, the period of redemption having been suspended during the period of litigation. In effect, the
spouses Litonjua want to retain ownership of the same. We cannot, however, sanction this belated reversal
of the spouses Litonjuas decision to sell. To do so would afford them undue advantage on account of the
appreciation of the value of the subject properties in the intervening years when they precisely were the
ones who violated and ignored the right of first refusal of L & R Corporation over the same.Moreover, it
must be stressed that in rescinding the sale made to PWHAS, the purpose is to uphold and enforce the right
of first refusal of L & R Corporation.
WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following
MODIFICATIONS:
(a) Ordering the rescission of the sale of the mortgaged properties between petitioners spouses Reynaldo
and Erlinda Litonjua and Philippine White House Auto Supply, Inc. and ordering said spouses to return to
Philippine White House Auto Supply, Inc. the purchase price of P430,000.00;
(c) Disallowing, due to the rescission of the sale made in its favor, the redemption made by Philippine
White House Auto Supply, Inc. and ordering Quezon City Sheriff Roberto Garcia to return to it the
redemption check of P240,798.94;
(d) Allowing respondent L & R Corporation to retain its consolidated titles to the foreclosed properties but
ordering it to pay to the Litonjua spouses the additional sum of P189,201.96 representing the difference
from the purchase price of P430,000.00 in the rescinded sale;
(e) Deleting the awards for moral and exemplary damages and attorneys fees to the respondents.
No pronouncement as to costs.

We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on SO ORDERED.
equal terms as PWHAS. Indeed, in its Answer to the Complaint filed, L & R Corporation expressed that it
was ready, willing and able to purchase the subject properties at the same purchase price of P430,000.00, Bellosillo, Melo, Puno, Kapunan, Panganiban, Quisumbing, Purisima, Pardo, Buena, Gonzaga-
and was agreeable to pay the difference between such purchase price and the redemption price of Reyes, and De Leon, Jr., JJ., concur.
P249,918.77, computed as of August 13, 1981, the expiration of the one-year period to redeem. That it did
not duly exercised its right of first refusal at the opportune time cannot be taken against it, precisely Vitug, J., see concurring and dissenting.
because it was not notified by the spouses Litonjua of their intention to sell the subject property and
thereby, to give it priority over other buyers. Davide, Jr., C.J., and Mendoza, J., joins J. Vitug in his concurring and dissenting opinion.

All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, the Republic of the Philippines
sale between the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R SUPREME COURT
Corporations prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem Manila
and its tender of the redemption price, as successor-in-interest of the spouses Litonjua, within the one-year
SECOND DIVISION
G.R. No. 103338 January 4, 1994
FEDERICO SERRA, petitioner,
vs.
THE HON. COURT OF APPEALS AND RIZAL COMMERCIAL BANKING
CORPORATION, respondents.
Andres R. Amante, Jr. for petitioner.
R.C. Domingo, Jr. & Associates for private respondent.
NOCON, J.:
A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted
unilateral promise to buy and sell a determinate thing for a price certain is binding upon the promisor if the
promise is supported by a consideration distinct from the price. (Article 1479, New Civil Code) The first is
the mutual promise and each has the right to demand from the other the fulfillment of the obligation. While
the second is merely an offer of one to another, which if accepted, would create an obligation to the offeror
to make good his promise, provided the acceptance is supported by a consideration distinct from the price.
Disputed in the present case is the efficacy of a "Contract of Lease with Option to Buy", entered into
between petitioner Federico Serra and private respondent Rizal Commercial Banking Corporation.
(RCBC).
Petitioner is the owner of a 374 square meter parcel of land located at Quezon St., Masbate, Masbate.
Sometime in 1975, respondent bank, in its desire to put up a branch in Masbate, Masbate, negotiated with
petitioner for the purchase of the then unregistered property. On May 20, 1975, a contract of LEASE WITH
OPTION TO BUY was instead forged by the parties, the pertinent portion of which reads:
1. The LESSOR leases unto the LESSEE, an the LESSEE hereby accepts in lease, the parcel of land
described in the first WHEREAS clause, to have and to hold the same for a period of twenty-five (25) years
commencing from June 1, 1975 to June 1, 2000. The LESSEE, however, shall have the option to purchase
said parcel of land within a period of ten (10) years from the date of the signing of this Contract at a price
not greater than TWO HUNDRED TEN PESOS (P210.00) per square meter. For this purpose, the
LESSOR undertakes, within such ten-year period, to register said parcel of land under the TORRENS
SYSTEM and all expenses appurtenant thereto shall be for his sole account.
If, for any reason, said parcel of land is not registered under the TORRENS SYSTEM within the
aforementioned ten-year period, the LESSEE shall have the right, upon termination of the lease to be paid
by the LESSOR the market value of the building and improvements constructed on said parcel of land.
The LESSEE is hereby appointed attorney-in-fact for the LESSOR to register said parcel of land under the
TORRENS SYSTEM in case the LESSOR, for any reason, fails to comply with his obligation to effect said
registration within reasonable time after the signing of this Agreement, and all expenses appurtenant to
such registration shall be charged by the LESSEE against the rentals due to the LESSOR.
2. During the period of the lease, the LESSEE covenants to pay the LESSOR, at the latter's residence, a
monthly rental of SEVEN HUNDRED PESOS (P700.00), Philippine Currency, payable in advance on or
before the fifth (5th) day of every calendar month, provided that the rentals for the first four (4) months
shall be paid by the LESSEE in advance upon the signing of this Contract.
3. The LESSEE is hereby authorized to construct as its sole expense a building and such other
improvements on said parcel of land, which it may need in pursuance of its business and/or operations;
provided, that if for any reason the LESSEE shall fail to exercise its option mentioned in paragraph (1)
above in case the parcel of land is registered under the TORRENS SYSTEM within the ten-year period
mentioned therein, said building and/or improvements, shall become the property of the LESSOR after the
expiration of the 25-year lease period without the right of reimbursement on the part of the LESSEE. The
authority herein granted does not, however, extend to the making or allowing any unlawful, improper or
offensive used of the leased premises, or any use thereof, other than banking and office purposes. The
maintenance and upkeep of such building, structure and improvements shall likewise be for the sole
account of the LESSEE. 1
The foregoing agreement was subscribed before Notary Public Romeo F. Natividad.
Pursuant to said contract, a building and other improvements were constructed on the land which housed
the branch office of RCBC in Masbate, Masbate. Within three years from the signing of the contract,
petitioner complied with his part of the agreement by having the property registered and
placed under the TORRENS SYSTEM, for which Original Certificate of Title No. 0-232 was issued by the
Register of Deeds of the Province of Masbate.
Petitioner alleges that as soon as he had the property registered, he kept on pursuing the manager of the
branch to effect the sale of the lot as per their agreement. It was not until September 4, 1984, however,
when the respondent bank decided to exercise its option and informed petitioner, through a letter, 2 of its
intention to buy the property at the agreed price of not greater than P210.00 per square meter or a total of
P78,430.00. But much to the surprise of the respondent, petitioner replied that he is no longer selling the
property.3
Hence, on March 14, 1985, a complaint for specific performance and damages were filed by respondent
against petitioner. In the complaint, respondent alleged that during the negotiations it made clear to
petitioner that it intends to stay permanently on property once its branch office is opened unless the
exigencies of the business requires otherwise. Aside from its prayer for specific performance, it likewise
asked for an award of P50,000.00 for attorney's fees P100,000.00 as exemplary damages and the cost of the
suit.4
A special and affirmative defenses, petitioner contended:
1. That the contract having been prepared and drawn by RCBC, it took undue advantage on him when it set
in lopsided terms.
2. That the option was not supported by any consideration distinct from the price and hence not binding
upon him.
3. That as a condition for the validity and/or efficacy of the option, it should have been exercised within the
reasonable time after the registration of the land under the Torrens System; that its delayed action on the
option have forfeited whatever its claim to the same.
4. That extraordinary inflation supervened resulting in the unusual decrease in the purchasing power of the
currency that could not reasonably be forseen or was manifestly beyond the contemplation of the parties at
the time of the establishment of the obligation, thus, rendering the terms of the contract unenforceable,
inequitable and to the undue enrichment of RCBC. 5
and as counterclaim petitioner alleged that:
1. The rental of P700.00 has become unrealistic and unreasonable, that justice and equity will require its
adjustment.
2. By the institution of the complaint he suffered moral damages which may be assessed at P100,000.00
and award of attorney's fee of P25,000.00 and exemplary damages at P100,000.00. 6
Initially, after trial on the merits, the court dismissed the complaint. Although it found the contract to be
valid, the court nonetheless ruled that the option to buy in unenforceable because it lacked a consideration
distinct from the price and RCBC did not exercise its option within reasonable time. The prayer for
readjustment of rental was denied, as well as that for moral and exemplary damages. 7
Nevertheless, upon motion for reconsideration of respondent, the court in the order of January 9, 1989,
reversed itself, the dispositive portion reads:
WHEREFORE, the Court reconsiders its decision dated June 6, 1988, and hereby renders judgment as
follows:
1. The defendant is hereby ordered to execute and deliver the proper deed of sale in favor of plaintiff
selling, transferring and
conveying the property covered by and described in the Original Certificate of Title 0-232 of the Registry
of Deeds of Masbate for the sum of Seventy Eight Thousand Five Hundred Forty Pesos (P78,540,00),
Philippine Currency;
2. Defendant is ordered to pay plaintiff the sum of Five Thousand (P5,000.00) Pesos as attorney's fees;
3. The counter claim of defendant is hereby dismissed; and
4. Defendants shall pay the costs of suit.8
In a decision promulgated on September 19, 1991,9 the Court of Appeals affirmed the findings of the trial
court that:
1. The contract is valid and that the parties perfectly understood the contents thereof;
2. The option is supported by a distinct and separate consideration as embodied in the agreement;
3. There is no basis in granting an adjustment in rental.
Assailing the judgment of the appellate court, petitioner would like us to consider mainly the following:
1. The disputed contract is a contract of adhesion.
2. There was no consideration to support the option, distinct from the price, hence the option cannot be
exercised.
3. Respondent court gravely abused its discretion in not granting currency adjustment on the already eroded
value of the stipulated rentals for twenty-five years.
The petition is devoid of merit.
There is no dispute that the contract is valid and existing between the parties, as found by both the trial
court and the appellate court. Neither do we find the terms of the contract unfairly lopsided to have it
ignored.
A contract of adhesion is one wherein a party, usually a corporation, prepares the stipulations in the
contract, while the other party merely affixes his signature or his "adhesion" thereto. These types of
contracts are as binding as ordinary contracts. Because in reality, the party who adheres to the contract is
free to reject it entirely. Although, this Court will not hesitate to rule out blind adherence to terms where
facts and circumstances will show that it is basically one-sided. 10
We do not find the situation in the present case to be inequitable. Petitioner is a highly educated man, who,
at the time of the trial was already a CPA-Lawyer, and when he entered into the contract, was already a
CPA, holding a respectable position with the Metropolitan Manila Commission. It is evident that a man of
his stature should have been more cautious in transactions he enters into, particularly where it concerns
valuable properties. He is amply equipped to drive a hard bargain if he would be so minded to.
Petitioner contends that the doctrines laid down in the cases of
Atkins Kroll v. Cua Hian Tek, 11 Sanchez v. Rigos, 12 and Vda. de Quirino v. Palarca 13 were misapplied in
the present case, because 1) the option given to the respondent bank was not supported by a consideration
distinct from the price; and 2) that the stipulated price of "not greater than P210.00 per square meter" is not
certain or definite.
Article 1324 of the Civil Code provides that when an offeror has allowed the offeree a certain period to
accept, the offer maybe withdrawn at anytime before acceptance by communicating such withdrawal,
except when the option is founded upon consideration, as something paid or promised. On the other hand,
Article 1479 of the Code provides that an accepted unilateral promise to buy and sell a determinate
thing for a price certain is binding upon the promisor if the promise is supported by a consideration
distinct from the price.
In a unilateral promise to sell, where the debtor fails to withdraw the promise before the acceptance by the
creditor, the transaction becomes a bilateral contract to sell and to buy, because upon acceptance by the
creditor of the offer to sell by the debtor, there is already a meeting of the minds of the parties as to the
thing which is determinate and the price which is certain. 14 In which case, the parties may then reciprocally
demand performance.
Jurisprudence has taught us that an optional contract is a privilege existing only in one party — the buyer.
For a separate consideration paid, he is given the right to decide to purchase or not, a certain merchandise
or property, at any time within the agreed period, at a fixed price. This being his prerogative, he may not be
compelled to exercise the option to buy before the time
expires. 15
On the other hand, what may be regarded as a consideration separate from the price is discussed in the case
of Vda. de Quirino v. Palarca 16 wherein the facts are almost on all fours with the case at bar. The said case
also involved a lease contract with option to buy where we had occasion to say that "the consideration for
the lessor's obligation to sell the leased premises to the lessee, should he choose to exercise his option to
purchase the same, is the obligation of the lessee to sell to the lessor the building and/or improvements
constructed and/or made by the former, if he fails to exercise his option to buy leased premises." 17
In the present case, the consideration is even more onerous on the part of the lessee since it entails
transferring of the building and/or improvements on the property to petitioner, should respondent bank fail
to exercise its option within the period stipulated. 18
The bugging question then is whether the price "not greater than TWO HUNDRED PESOS" is certain or
definite. A price is considered certain if it is so with reference to another thing certain or when the
determination thereof is left to the judgment of a specified person or persons. 19 And generally, gross
inadequacy of price does not affect a contract of sale. 20
Contracts are to be construed according to the sense and meaning of the terms which the parties themselves
have used. In the present dispute, there is evidence to show that the intention of the parties is to peg the
price at P210 per square meter. This was confirmed by petitioner himself in his testimony, as follows:
Q. Will you please tell this Court what was the offer?
A. It was an offer to buy the property that I have in Quezon City (sic).
Q. And did they give you a specific amount?
xxx xxx xxx
A. Well, there was an offer to buy the property at P210 per square meters (sic).
Q. And that was in what year?
A . 1975, sir.
Q. And did you accept the offer?
A. Yes, sir. 21
Moreover, by his subsequent acts of having the land titled under the Torrens System, and in pursuing the
bank manager to effect the sale immediately, means that he understood perfectly the terms of the contract.
He even had the same property mortgaged to the respondent bank sometime in 1979, without the slightest
hint of wanting to abandon his offer to sell the property at the agreed price of P210 per square meter. 22
Finally, we agree with the courts a quo that there is no basis, legal or factual, in adjusting the amount of the
rent. The contract is the law between the parties and if there is indeed reason to adjust the rent, the parties
could by themselves negotiate for the amendment of the contract. Neither could we consider the decline of
the purchasing power of the Philippine peso from 1983 to the time of the commencement of the present
case in 1985, to be so great as to result in an extraordinary inflation. Extraordinary inflation exists when
there in an unimaginable increase or decrease of the purchasing power of the Philippine currency, or
fluctuation in the value of pesos manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation. 23
Premises considered, we find that the contract of "LEASE WITH OPTION TO BUY" between petitioner
and respondent bank is valid, effective and enforceable, the price being certain and that there was
consideration distinct from the price to support the option given to the lessee.
WHEREFORE, this petition is hereby DISMISSED, and the decision of the appellate court is hereby
AFFIRMED.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.