SECOND DIVISION

[G.R. No. 140182. April 12, 2005.]

TANAY RECREATION CENTER AND DEVELOPMENT CORP., petitioner, vs.

CATALINA MATIENZO FAUSTO + and ANUNCIACION FAUSTO
PACUNAYEN, respondents.

DECISION

AUSTRIA-MARTINEZ, J p:

Petitioner Tanay Recreation Center and Development Corp. (TRCDC) is the lessee of a 3,090-square meter
property located in Sitio Gayas, Tanay, Rizal, owned by Catalina Matienzo Fausto, 1 under a Contract of Lease
executed on August 1, 1971. On this property stands the Tanay Coliseum Cockpit operated by petitioner. The lease
contract provided for a 20-year term, subject to renewal within sixty days prior to its expiration. The contract also
provided that should Fausto decide to sell the property, petitioner shall have the "priority right" to purchase the same. 2
On June 17, 1991, petitioner wrote Fausto informing her of its intention to renew the lease. 3 However, it
was Fausto's daughter, respondent Anunciacion F. Pacunayen, who replied, asking that petitioner remove the
improvements built thereon, as she is now the absolute owner of the property. 4 It appears that Fausto had earlier sold
the property to Pacunayen on August 8, 1990, for the sum of P10,000.00 under a "Kasulatan ng Bilihan Patuluyan ng
Lupa," 5 and title has already been transferred in her name under Transfer Certificate of Title (TCT) No. M-35468. 6
Despite efforts, the matter was not resolved. Hence, on September 4, 1991, petitioner filed an Amended
Complaint for Annulment of Deed of Sale, Specific Performance with Damages, and Injunction, docketed as Civil
Case No. 372-M. 7
In her Answer, respondent claimed that petitioner is estopped from assailing the validity of the deed of sale
as the latter acknowledged her ownership when it merely asked for a renewal of the lease. According to respondent,
when they met to discuss the matter, petitioner did not demand for the exercise of its option to purchase the property,
and it even asked for grace period to vacate the premises. 8
After trial on the merits, the Regional Trial Court of Morong, Rizal (Branch 78), rendered judgment extending
the period of the lease for another seven years from August 1, 1991 at a monthly rental of P10,000.00, and dismissed
petitioner's claim for damages. 9
On appeal, docketed as CA-G.R. CV No. 43770, the Court of Appeals (CA) affirmed with modifications the
trial court's judgment per its Decision dated June 14, 1999. 10 The dispositive portion of the decision reads:
WHEREFORE, the appealed decision is AFFIRMED AND ACCORDINGLY
MODIFIED AS DISCUSSED.
Furthermore, we resolved:
1.0. That TRCDC VACATE the leased premises immediately;
2.0. To GRANT the motion of Pacunayen to allow her to withdraw the amount of
P320,000.00, deposited according to records, with this court.
3.0. To order TRCDC to MAKE THE NECESSARY ACCOUNTING regarding the
amounts it had already deposited (for unpaid rentals for the extended period of seven [7] years of
 the contract of lease). In case it had not yet completed its deposit, to immediately pay the
remaining balance to Pacunayen.
4.0. To order TRCDC to PAY the amount of P10,000.00 as monthly rental, with regard
to its continued stay in the leased premises even after the expiration of the extended period of
seven (7) years, computed from August 1, 1998, until it finally vacates therefrom.
SO ORDERED. 11
In arriving at the assailed decision, the CA acknowledged the priority right of TRCDC to purchase the
property in question. However, the CA interpreted such right to mean that it shall be applicable only in case the
property is sold to strangers and not to Fausto's relative. The CA stated that "(T)o interpret it otherwise as to
comprehend all sales including those made to relatives and to the compulsory heirs of the seller at that would be an
absurdity," and "her (Fausto's) only motive for such transfer was precisely one of preserving the property within her
bloodline and that someone administer the property." 12 The CA also ruled that petitioner already acknowledged the
transfer of ownership and is deemed to have waived its right to purchase the property. 13 The CA even further went
on to rule that even if the sale is annulled, petitioner could not achieve anything because the property will be eventually
transferred to Pacunayen after Fausto's death. 14
Petitioner filed a motion for reconsideration but it was denied per Resolution dated September 14, 1999. 15
Dissatisfied, petitioner elevated the case to this Court on petition for review on certiorari, raising the
following grounds:
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE
ERROR IN HOLDING THAT THE CONTRACTUAL STIPULATION GIVING PETITIONER
THE PRIORITY RIGHT TO PURCHASE THE LEASED PREMISES SHALL ONLY APPLY
IF THE LESSOR DECIDES TO SELL THE SAME TO STRANGERS; EHDCAI
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE
ERROR IN HOLDING THAT PETITIONER'S PRIORITY RIGHT TO PURCHASE THE
LEASED PREMISES IS INCONSEQUENTIAL. 16
The principal bone of contention in this case refers to petitioner's priority right to purchase, also referred to
as the right of first refusal.
Petitioner's right of first refusal in this case is expressly provided for in the notarized "Contract of Lease"
dated August 1, 1971, between Fausto and petitioner, to wit:
7. That should the LESSOR decide to sell the leased premises, the LESSEE shall have
the priority right to purchase the same; 17
When a lease contract contains a right of first refusal, the lessor is under a legal duty to the lessee not to sell
to anybody at any price until after he has made an offer to sell to the latter at a certain price and the lessee has failed
to accept it. The lessee has a right that the lessor's first offer shall be in his favor.18 Petitioner's right of first refusal is
an integral and indivisible part of the contract of lease and is inseparable from the whole contract. The consideration
for the lease includes the consideration for the right of first refusal 19 and is built into the reciprocal obligations of the
parties.
It was erroneous for the CA to rule that the right of first refusal does not apply when the property is sold to
Fausto's relative. 20 When the terms of an agreement have been reduced to writing, it is considered as containing all
the terms agreed upon. As such, there can be, between the parties and their successors in interest, no evidence of such
terms other than the contents of the written agreement, except when it fails to express the true intent and agreement
of the parties. 21 In this case, the wording of the stipulation giving petitioner the right of first refusal is plain and
unambiguous, and leaves no room for interpretation. It simply means that should Fausto decide to sell the leased
property during the term of the lease, such sale should first be offered to petitioner. The stipulation does not provide
for the qualification that such right may be exercised only when the sale is made to strangers or persons other than
Fausto's kin. Thus, under the terms of petitioner's right of first refusal, Fausto has the legal duty to petitioner not to
sell the property to anybody, even her relatives, at any price until after she has made an offer to sell to petitioner at a
certain price and said offer was rejected by petitioner. Pursuant to their contract, it was essential that Fausto should
have first offered the property to petitioner before she sold it to respondent. It was only after petitioner failed to
exercise its right of first priority could Fausto then lawfully sell the property to respondent.
The rule is that a sale made in violation of a right of first refusal is valid. However, it may be rescinded, or,
as in this case, may be the subject of an action for specific performance. 22 In Riviera Filipina, Inc. vs. Court of
Appeals, 23 the Court discussed the concept and interpretation of the right of first refusal and the consequences of a
breach thereof, to wit:
. . . It all started in 1992 with Guzman, Bocaling & Co. v. Bonnevie where the Court
held that a lease with a proviso granting the lessee the right of first priority "all things and
conditions being equal" meant that there should be identity of the terms and conditions to be
offered to the lessee and all other prospective buyers, with the lessee to enjoy the right of first
priority. A deed of sale executed in favor of a third party who cannot be deemed a purchaser in
good faith, and which is in violation of a right of first refusal granted to the lessee is not voidable
under the Statute of Frauds but rescissible under Articles 1380 to 1381 (3) of the New Civil Code.
Subsequently in 1994, in the case of Ang Yu Asuncion v. Court of Appeals, the Court en
banc departed from the doctrine laid down in Guzman, Bocaling & Co. v. Bonnevie and refused
to rescind a contract of sale which violated the right of first refusal. The Court held that the so-
called "right of first refusal" cannot be deemed a perfected contract of sale under Article 1458 of
the New Civil Code and, as such, a breach thereof decreed under a final judgment does not entitle
the aggrieved party to a writ of execution of the judgment but to an action for damages in a proper
forum for the purpose.
In the 1996 case of Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., the
Court en banc reverted back to the doctrine in Guzman Bocaling & Co. v. Bonnevie stating that
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.
Thereafter in 1997, in Parañaque Kings Enterprises, Inc. v. Court of Appeals, the Court
affirmed the nature of and the concomitant rights and obligations of parties under a right of first
refusal. The Court, summarizing the rulings in Guzman, Bocaling & Co. v.
Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., held that in order
to have full compliance with the contractual right granting petitioner the first option to purchase,
the sale of the properties for the price for which they were finally sold to a third person should
have likewise been first offered to the former. Further, there should be identity of terms and
conditions to be offered to the buyer holding a right of first refusal if such right is not to be
rendered illusory. Lastly, the basis of the right of first refusal must be the current offer to sell of
the seller or offer to purchase of any prospective buyer. DACcIH

The prevailing doctrine therefore, is that a right of first refusal means identity of terms and conditions to be
offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first
refusal of another person, while valid, is rescissible. 24
It was also incorrect for the CA to rule that it would be useless to annul the sale between Fausto and
respondent because the property would still remain with respondent after the death of her mother by virtue of
succession, as in fact, Fausto died in March 1996, and the property now belongs to respondent, being Fausto's heir. 25
For one, Fausto was bound by the terms and conditions of the lease contract. Under the right of first refusal
clause, she was obligated to offer the property first to petitioner before selling it to anybody else. When she sold the
property to respondent without offering it to petitioner, the sale while valid is rescissible so that petitioner may exercise
its option under the contract.
With the death of Fausto, whatever rights and obligations she had over the property, including her obligation
under the lease contract, were transmitted to her heirs by way of succession, a mode of acquiring the property, rights
and obligation of the decedent to the extent of the value of the inheritance of the heirs. Article 1311 of the Civil Code
provides:
ART. 1311. Contracts take effect only between the parties, their assigns and heirs, except
in case where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the
property he received from the decedent.
A lease contract is not essentially personal in character. 26 Thus, the rights and obligations therein are
transmissible to the heirs. The general rule is that heirs are bound by contracts entered into by their predecessors-in-
interest except when the rights and obligations arising therefrom are not transmissible by (1) their nature, (2)
stipulation or (3) provision of law. 27
In this case, the nature of the rights and obligations are, by their nature, transmissible. There is also neither
contractual stipulation nor provision of law that makes the rights and obligations under the lease contract
intransmissible. The lease contract between petitioner and Fausto is a property right, which is a right that passed on to
respondent and the other heirs, if any, upon the death of Fausto.
In DKC Holdings Corporation vs. Court of Appeals, 28 the Court held that the Contract of Lease with Option
to Buy entered into by the late Encarnacion Bartolome with DKC Holdings Corporation was binding upon her sole
heir, Victor, even after her demise and it subsists even after her death. The Court ruled that:
. . . Indeed, being an heir of Encarnacion, there is privity of interest between him and his
deceased mother. He only succeeds to what rights his mother had and what is valid and
binding against her is also valid and binding as against him. This is clear from Parañaque
Kings Enterprises vs. Court of Appeals, where this Court rejected a similar defense —
With respect to the contention of respondent Raymundo that he is not privy to
the lease contract, not being the lessor nor the lessee referred to therein, he could thus
not have violated its provisions, but he is nevertheless a proper party. Clearly, he stepped
into the shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed
all the obligations of the lessor under the lease contract. Moreover, he received benefits
in the form of rental payments. Furthermore, the complaint, as well as the petition,
prayed for the annulment of the sale of the properties to him. Both pleadings also alleged
collusion between him and respondent Santos which defeated the exercise by petitioner
of its right of first refusal.
In order then to accord complete relief to petitioner, respondent Raymundo was
a necessary, if not indispensable, party to the case. A favorable judgment for the
petitioner will necessarily affect the rights of respondent Raymundo as the buyer of the
property over which petitioner would like to assert its right of first option to
buy. 29 (Emphasis supplied)
Likewise in this case, the contract of lease, with all its concomitant provisions, continues even after Fausto's
death and her heirs merely stepped into her shoes. 30 Respondent, as an heir of Fausto, is therefore bound to fulfill all
its terms and conditions.
There is no personal act required from Fausto such that respondent cannot perform it. Fausto's obligation to
deliver possession of the property to petitioner upon the exercise by the latter of its right of first refusal may be
performed by respondent and the other heirs, if any. Similarly, nonperformance is not excused by the death of the
party when the other party has a property interest in the subject matter of the contract. 31
The CA likewise found that petitioner acknowledged the legitimacy of the sale to respondent and it is now
barred from exercising its right of first refusal. According to the appellate court:
Second, when TRCDC, in a letter to Fausto, signified its intention to renew the lease
contract, it was Pacunayen who answered the letter on June 19, 1991. In that letter Pacunayen
demanded that TRCDC vacate the leased premises within sixty (60) days and informed it of her
ownership of the leased premises. The pertinent portion of the letter reads:
 Furtherly, please be advised that the land is no longer under the absolute
ownership of my mother and the undersigned is now the real and absolute owner of the
land.
Instead of raising a howl over the contents of the letter, as would be its expected and
natural reaction under the circumstances, TRCDC surprisingly kept silent about the whole thing.
As we mentioned in the factual antecedents of this case, it even invited Pacunayen to its special
board meeting particularly to discuss with her the renewal of the lease contract. Again, during that
meeting, TRCDC did not mention anything that could be construed as challenging Pacunayen's
ownership of the leased premises. Neither did TRCDC assert its priority right to purchase the
same against Pacunayen. 32
The essential elements of estoppel are: (1) conduct of a party amounting to false representation or
concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and
inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation, that this
conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the
real facts. 33
The records are bereft of any proposition that petitioner waived its right of first refusal under the contract
such that it is now estopped from exercising the same. In a letter dated June 17, 1991, petitioner wrote to Fausto asking
for a renewal of the term of lease. 34 Petitioner cannot be faulted for merely seeking a renewal of the lease contract
because obviously, it was working on the assumption that title to the property is still in Fausto's name and the latter
has the sole authority to decide on the fate of the property. Instead, it was respondent who replied, advising petitioner
to remove all the improvements on the property, as the lease is to expire on the 1st of August 1991. Respondent also
informed petitioner that her mother has already sold the property to her. 35In order to resolve the matter, a meeting
was called among petitioner's stockholders, including respondent, on July 27, 1991, where petitioner, again, proposed
that the lease be renewed. Respondent, however, declined. While petitioner may have sought the renewal of the lease,
it cannot be construed as a relinquishment of its right of first refusal. Estoppel must be intentional and unequivocal. 36
Also, in the excerpts from the minutes of the special meeting, it was further stated that the possibility of a
sale was likewise considered. 37 But respondent also refused to sell the land, while the improvements, "if for sale
shall be subject for appraisal." 38 After respondent refused to sell the land, it was then that petitioner filed the
complaint for annulment of sale, specific performance and damages. 39 Petitioner's acts of seeking all possible
avenues for the amenable resolution of the conflict do not amount to an intentional and unequivocal abandonment of
its right of first refusal. CITaSA
Respondent was well aware of petitioner's right to priority of sale, and that the sale made to her by her mother
was merely for her to be able to take charge of the latter's affairs. As admitted by respondent in her Appellee's Brief
filed before the CA, viz.:
After June 19, 1991, TRCDC invited Pacunayen to meeting with the officers of the
corporation. . . . In the same meeting, Pacunayen's attention was called to the provision of the
Contract of Lease had by her mother with TRCDC, particularly paragraph 7 thereof, which
states:
7. That should the lessor decide to sell the leased premises, the LESSEE shall
have the priority right to purchase the same.
Of course, in the meeting she had with the officers of TRCDC, Pacunayen explained that
the sale made in her favor by her mother was just a formality so that she may have the proper
representation with TRCDC in the absence of her parents, more so that her father had already
passed away, and there was no malice in her mine (sic) and that of her mother, or any intention
on their part to deceive TRCDC. All these notwithstanding, and for her to show their good faith
in dealing with TRCDC, Pacunayen started the ground work to reconvey ownership over the
whole land, now covered by Transfer Certificare (sic) of Title No. M-259, to and in the name of
her mother (Fausto), but the latter was becoming sickly, old and weak, and they found no time to
do it as early as they wanted to. 40 (Emphasis supplied)
 Given the foregoing, the "Kasulatan ng Bilihan Patuluyan ng Lupa" dated August 8, 1990 between Fausto
and respondent must be rescinded.Considering, however, that Fausto already died on March 16, 1996, during the
pendency of this case with the CA, her heirs should have been substituted as respondents in this case. Considering
further that the Court cannot declare respondent Pacunayen as the sole heir, as it is not the proper forum for that
purpose, the right of petitioner may only be enforced against the heirs of the deceased Catalina Matienzo Fausto,
represented by respondent Pacunayen.
In Parañaque Kings Enterprises, Inc. vs. Court of Appeals, 41 it was ruled that the basis of the right of the
first refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer. It is only after
the grantee fails to exercise its right of first priority under the same terms and within the period contemplated, could
the owner validly offer to sell the property to a third person, again, under the same terms as offered to the grantee. The
circumstances of this case, however, dictate the application of a different ruling. An offer of the property to petitioner
under identical terms and conditions of the offer previously given to respondent Pacunayen would be inequitable. The
subject property was sold in 1990 to respondent Pacunayen for a measly sum of P10,000.00. Obviously, the value is
in a small amount because the sale was between a mother and daughter. As admitted by said respondent, "the sale
made in her favor by her mother was just a formality so that she may have the proper representation with TRCDC in
the absence of her parents. . . " 42Consequently, the offer to be made to petitioner in this case should be under
reasonable terms and conditions, taking into account the fair market value of the property at the time it was sold to
respondent.
In its complaint, petitioner prayed for the cancellation of TCT No. M-35468 in the name of respondent
Pacunayen, 43 which was issued by the Register of Deeds of Morong on February 7, 1991. 44 Under ordinary
circumstances, this would be the logical effect of the rescission of the "Kasulatan ng Bilihan Patuluyan ng Lupa"
between the deceased Fausto and respondent Pacunayen. However, the circumstances in this case are not ordinary.
The buyer of the subject property is the seller's own daughter. If and when the title (TCT No. M-35468) in respondent
Pacunayen's name is cancelled and reinstated in Fausto's name, and thereafter negotiations between petitioner and
respondent Pacunayen for the purchase of the subject property break down, then the subject property will again revert
to respondent Pacunayen as she appears to be one of Fausto's heirs. This would certainly be a winding route to traverse.
Sound reason therefore dictates that title should remain in the name of respondent Pacunayen, for and in behalf of the
other heirs, if any, to be cancelled only when petitioner successfully exercises its right of first refusal and purchases
the subject property.
Petitioner further seeks the award of the following damages in its favor: (1) P100,000.00 as actual damages;
(2) P1,100,000.00 as compensation for lost goodwill or reputation; (3) P100,000.00 as moral damages; (4)
P100,000.00 as exemplary damages; (5) P50,000.00 as attorney's fees; (6) P1,000.00 appearance fee per hearing; and
(7) the costs of suit. 45
According to petitioner, respondent's act in fencing the property led to the closure of the Tanay Coliseum
Cockpit and petitioner was unable to conduct cockfights and generate income of not less than P100,000.00 until the
end of September 1991, aside from the expected rentals from the cockpit space lessees in the amount of P11,000.00. 46
Under Article 2199 of the Civil Code, it is provided that:
Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved. Such
compensation is referred to as actual or compensatory damages. (Emphasis supplied)
The rule is that actual or compensatory damages cannot be presumed, but must be proved with reasonable
degree of certainty. A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of
damages, but must depend upon competent proof that they have been suffered by the injured party and on the best
obtainable evidence of the actual amount thereof. It must point out specific facts, which could afford a basis for
measuring whatever compensatory or actual damages are borne. 47
In the present case, there is no question that the Tanay Coliseum Cockpit was closed for two months and
TRCDC did not gain any income during said period. But there is nothing on record to substantiate petitioner's claim
that it was bound to lose some P111,000.00 from such closure. TRCDC's president, Ambrosio Sacramento, testified
that they suffered income losses with the closure of the cockpit from August 2, 1991 until it re-opened on October 20,
1991. 48Mr. Sacramento, however, cannot state with certainty the amount of such unrealized income. 49 Meanwhile,
TRCDC's accountant, Merle Cruz, stated that based on the corporation's financial statement for the years 1990 and
1991, 50 they derived the amount of P120,000.00 as annual income from rent. 51 From said financial statement, it is
safe to presume that TRCDC generated a monthly income of P10,000.00 a month (P120,000.00 annual income divided
by 12 months). At best therefore, whatever actual damages that petitioner suffered from the cockpit's closure for a
period of two months can be reasonably summed up only to P20,000.00. SEHaTC
Such award of damages shall earn interest at the legal rate of six percent (6%) per annum, which shall be
computed from the time of the filing of the Complaint on August 22, 1991, until the finality of this decision. After the
present decision becomes final and executory, the rate of interest shall increase to twelve percent (12%) per annum
from such finality until its satisfaction, this interim period being deemed to be equivalent to a forbearance of
credit. 52 This is in accord with the guidelines laid down by the Court in Eastern Shipping Lines, Inc. vs. Court of
Appeals, 53 regarding the manner of computing legal interest, viz.:
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it
is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 54
Petitioner also claims the amount of P1,100,000.00 as compensation for lost goodwill or reputation. It alleged
that "with the unjust and wrongful conduct of the defendants as above-described, plaintiff stands to lose its goodwill
and reputation established for the past 20 years." 55
An award of damages for loss of goodwill or reputation falls under actual or compensatory damages as
provided in Article 2205 of the Civil Code, to wit:
Art. 2205. Damages may be recovered:
(1) For loss or impairment of earning capacity in cases of temporary or permanent
personal injury;
(2) For injury to the plaintiff's business standing or commercial credit.
Even if it is not recoverable as compensatory damages, it may still be awarded in the concept of temperate
or moderate damages. 56 In arriving at a reasonable level of temperate damages to be awarded, trial courts are guided
by the ruling that:
. . . There are cases where from the nature of the case, definite proof of pecuniary loss
cannot be offered, although the court is convinced that there has been such loss. For instance,
injury to one's commercial credit or to the goodwill of a business firm is often hard to show
certainty in terms of money. Should damages be denied for that reason? The judge should be
 empowered to calculate moderate damages in such cases, rather than that the plaintiff should
suffer, without redress from the defendant's wrongful act. (Araneta v. Bank of America, 40 SCRA
144, 145) 57
In this case, aside from the nebulous allegation of petitioner in its amended complaint, there is no evidence
on record, whether testimonial or documentary, to adequately support such claim. Hence, it must be denied.

Petitioner's claim for moral damages must likewise be denied. The award of moral damages cannot be granted
in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has
no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can
be experienced only by one having a nervous system. 58 Petitioner being a corporation, 59 the claim for moral
damages must be denied.
With regard to the claim for exemplary damages, it is a requisite in the grant thereof that the act of the
offender must be accompanied by bad faith or done in wanton, fraudulent or malevolent manner. 60 Moreover, where
a party is not entitled to actual or moral damages, an award of exemplary damages is likewise baseless. 61 In this case,
petitioner failed to show that respondent acted in bad faith, or in wanton, fraudulent or malevolent manner.
Petitioner likewise claims the amount of P50,000.00 as attorney's fees, the sum of P1,000.00 for every
appearance of its counsel, plus costs of suit. It is well settled that no premium should be placed on the right to litigate
and not every winning party is entitled to an automatic grant of attorney's fees. The party must show that he falls under
one of the instances enumerated in Article 2208 of the Civil Code. In this case, since petitioner was compelled to
engage the services of a lawyer and incurred expenses to protect its interest and right over the subject property, the
award of attorney's fees is proper. However there are certain standards in fixing attorney's fees, to wit: (1) the amount
and the character of the services rendered; (2) labor, time and trouble involved; (3) the nature and importance of the
litigation and business in which the services were rendered; (4) the responsibility imposed; (5) the amount of money
and the value of the property affected by the controversy or involved in the employment; (6) the skill and the
experience called for in the performance of the services; (7) the professional character and the social standing of the
attorney; and (8) the results secured, it being a recognized rule that an attorney may properly charge a much larger fee
when it is contingent than when it is not. 62 Considering the foregoing, the award of P10,000.00 as attorney's fees,
including the costs of suit, is reasonable under the circumstances. DHSACT
WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. The Court of Appeals' Decision
dated June 14, 1999 in CA-G.R. CV No. 43770 is MODIFIED as follows:
(1) the "Kasulatan ng Bilihan Patuluyan ng Lupa" dated August 8, 1990 between
Catalina Matienzo Fausto and respondent Anunciacion Fausto Pacunayen is hereby deemed
rescinded;
(2) The Heirs of the deceased Catalina Matienzo Fausto who are hereby deemed
substituted as respondents, represented by respondent Anunciacion Fausto Pacunayen, are
ORDERED to recognize the obligation of Catalina Matienzo Fausto under the Contract of Lease
with respect to the priority right of petitioner Tanay Recreation Center and Development Corp. to
purchase the subject property under reasonable terms and conditions;
(3) Transfer Certificate of Title No. M-35468 shall remain in the name of respondent
Anunciacion Fausto Pacunayen, which shall be cancelled in the event petitioner successfully
purchases the subject property;
(4) Respondent is ORDERED to pay petitioner Tanay Recreation Center and
Development Corporation the amount of Twenty Thousand Pesos (P20,000.00) as actual
damages, plus interest thereon at the legal rate of six percent (6%) per annum from the filing of
the Complaint until the finality of this Decision. After this Decision becomes final and executory,
the applicable rate shall be twelve percent (12%) per annum until its satisfaction; and,
(5) Respondent is ORDERED to pay petitioner the amount of Ten Thousand Pesos
(P10,000.00) as attorney's fees, and to pay the costs of suit.
 (6) Let the case be remanded to the Regional Trial Court, Morong, Rizal (Branch 78) for
further proceedings on the determination of the "reasonable terms and conditions" of the offer to
sell by respondents to petitioner, without prejudice to possible mediation between the parties.
The rest of the unaffected dispositive portion of the Court of Appeals' Decision is AFFIRMED.
SO ORDERED.
||| (Tanay Recreation Center & Development Corp. v. Fausto, G.R. No. 140182, [April 12, 2005], 495 PHIL 400-
421)
 SECOND DIVISION

[G.R. No. 117355. April 5, 2002.]

RIVIERA FILIPINA, INC., petitioner, vs. COURT OF APPEALS, JUAN L. REYES, (now
deceased), substituted by his heirs, namely, Estefania B. Reyes, Juanita R. de la Rosa, Juan
B. Reyes, Jr. and Fidel B. Reyes, PHILIPPINE CYPRESS CONSTRUCTION &
DEVELOPMENT CORPORATION, CORNHILL TRADING CORPORATION and
URBAN DEVELOPMENT BANK, respondents.

Fortunato Gupit, Jr. for petitioner.

Ireneo Santos Juan and Mendoza Lacson Mison & Garcia for private respondents.
Guerrero Ortega Aquino and Roque Law Offices for respondent Urban Bank.

SYNOPSIS

On November 23, 1982, respondent Juan L. Reyes executed a Contract of Lease with Right of First
Refusal with Riviera Filipina, Inc. involving a parcel of land located along EDSA, Quezon City. Subsequently,
the said land was extrajudicially foreclosed by Prudential Bank. To redeem the subject property, Reyes offered
to sell the subject property to Riviera, through its President Vicente C. Angeles, but there was a disagreement as
to the price. On December 4, 1988, Reyes offered the subject property to Rolando P. Traballo, President of
Cypress Construction & Development Corporation. The following day, Traballo bargained for P5,300.00 per
square meter. Reyes accepted the same. However, since Traballo did not have the amount at that moment,
Reyes told him to look for a partner for that purpose. In January 1989, Reyes decided to approach anew Riviera
but the latter insisted on his offer of P5,000 only. In February 1989, Cypress and its partner, Cornhill Trading
Corporation, were able to come up with the amount sufficient to cover the redemption money, with which
Reyes paid to the Prudential Bank. Thereafter, Riviera claimed that its right of first refusal under the lease
contract was violated, thus, it filed a suit to compel Reyes, Cypress, Cornhill and Urban Development Bank to
transfer the disputed title of the land in its favor upon payment of the price paid by Cypress and Cornhill. After
trial, the court a quo dismissed the complaint as well as the counterclaims and cross-claims. On appeal, the
appellate court affirmed the decision of the trial court in its entirety. Hence, this petition.
The Court ruled that nary a howl of protest or shout of defiance spewed forth from Riviera's lips, as it
was, but a seemingly whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated
December 5, 1989 that Riviera had lost its right of first refusal. Riviera cannot now be heard that had it been
informed of the offer of Five Thousand Three Hundred Pesos (P5,300) of Cypress and Cornhill it would have
matched said price. Its stubborn approach in its negotiations with Reyes showed crystal clear that there was
never any need to disclose such information and doing so would be just a futile effort on the part of Reyes.
Reyes was under no obligation to disclose the same. Pursuant to Article 1339 of the New Civil Code, silence or
concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless
according to good faith and the usages of commerce the communication should be made.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; DISTINCTIONS BETWEEN RULE 45 AND RULE 65. —
The distinctions between Rule 45 and 65 are far and wide, the most notable of which is that errors of jurisdiction are
best reviewed in a special civil action for certiorari under Rule 65, while errors of judgment are correctible only by
appeal in a petition for review under Rule 45. The rationale for the distinction is simple. When a court exercises its
jurisdiction an error committed while so engaged does not deprive it of the jurisdiction being exercised when the error
is committed. If it did, every error committed by a court would deprive it of its jurisdiction and every erroneous
judgment would be a void judgment. This cannot be allowed. The administration of justice would not countenance
such a rule. Thus, an error of judgment that the court may commit in the exercise of its jurisdiction is not correctible
through the original special civil action of certiorari. Appeal from a final disposition of the Court of Appeals, as in
the case at bar, is by way of a petition for review under Rule 45. DTESIA
2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; LEASE; RIGHT OF FIRST REFUSAL; THERE
MUST BE IDENTITY OF TERMS AND CONDITIONS TO BE OFFERED TO THE LESSEE AND ALL OTHER
PROSPECTIVE BUYERS. — [I]n 1997, in Parañaque Kings Enterprises, Inc. v. Court of Appeals, the Court affirmed
the nature of and the concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing
the rulings in Guzman, Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater,
Inc., held that in order to have full compliance with the contractual right granting petitioner the first option to purchase,
the sale of the properties for the price for which they were finally sold to a third person should have likewise been first
offered to the former. Further, there should be identity of terms and conditions to be offered to the buyer holding a
right of first refusal if such right is not to be rendered illusory. Lastly, the basis of the right of first refusal must be the
current offer to sell of the seller or offer to purchase of any prospective buyer. Thus, the prevailing doctrine is that a
right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers
and a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible.
3. STATUTORY CONSTRUCTION; LAWS ARE INTERPRETED IN THE CONTEXT OF THE
PECULIAR FACTUAL SITUATION OF EACH PROCEEDING. — [W]e must remember that general propositions
do not decide specific cases. Rather, laws are interpreted in the context of the peculiar factual situation of each
proceeding. Each case has its own flesh and blood and cannot be ruled upon on the basis of isolated clinical classroom
principles. Analysis and construction should not be limited to the words used in the contract, as they may not accurately
reflect the parties' true intent. The court must read a contract as the average person would read it and should not give
it a strained or forced construction.
4. ID.; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF CONTRACTS; INTENTION OF
THE PARTIES SHALL BE ACCORDED PRIMORDIAL CONSIDERATION. — [T]he cardinal rule in the
interpretation of contracts that the intention of the parties shall be accorded primordial consideration and in case of
doubt, their contemporaneous and subsequent acts shall be principally considered. Where the parties to a contract have
given it a practical construction by their conduct as by acts in partial performance, such construction may be considered
by the court in construing the contract, determining its meaning and ascertaining the mutual intention of the parties at
the time for contracting. The parties' practical construction of their contract has been characterized as a clue or index
to, or as evidence of, their intention or meaning and as an important, significant, convincing, persuasive, or influential
factor in determining the proper construction of the contract. cHSIAC
5. ID.; ID.; LEASE; RIGHT OF FIRST REFUSAL; PROPERLY COMPLIED WITH BY LESSOR IN
CASE AT BAR. — As clearly shown by the records and transcripts of the case, the actions of the parties to the contract
of lease, Reyes and Riviera, shaped their understanding and interpretation of the lease provision "right of first refusal"
to mean simply that should the lessor Reyes decide to sell the leased property during the term of the lease, such sale
should first be offered to the lessee Riviera. And that is what exactly ensued between Reyes and Riviera, a series of
negotiations on the price per square meter of the subject property with neither party, especially Riviera, unwilling to
budge from his offer, as evidenced by the exchange of letters between the two contenders. It can clearly be discerned
from Riviera's letters dated December 2, 1988 and February 4, 1989 that Riviera was so intractable in its position and
took obvious advantage of the knowledge of the time element in its negotiations with Reyes as the redemption period
of the subject foreclosed property drew near. Riviera strongly exhibited a "take-it or leave-it" attitude in its negotiations
with Reyes. It quoted its "fixed and final" price as Five Thousand Pesos (P5,000.00) and not any peso more. It voiced
out that it had other properties to consider so Reyes should decide and make known its decision "within fifteen days."
Riviera, in its letter dated February 4, 1989, admittedly, even downgraded its offer when Reyes offered anew the
property to it, such that whatever amount Reyes initially receives from Riviera would absolutely be insufficient to pay
off the redemption price of the subject property. Naturally, Reyes had to disagree with Riviera's highly
disadvantageous offer.
6. ID.; ID.; FRAUD; NOT CONSTITUTED BY SILENCE OR CONCEALMENT UNLESS THERE IS A
SPECIAL DUTY TO DISCLOSE CERTAIN FACTS. — Nary a howl of protest or shout of defiance spewed forth
from Riviera's lips, as it was, but a seemingly whimper of acceptance when the counsel of Reyes strongly expressed
in a letter dated December 5, 1989 that Riviera had lost its right of first refusal. Riviera cannot now be heard that had
it been informed of the offer of Five Thousand Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would
have matched said price. Its stubborn approach in its negotiations with Reyes showed crystal-clear that there was never
any need to disclose such information and doing so would be just a futile effort on the part of Reyes. Reyes was under
no obligation to disclose the same. Pursuant to Article 1339 of the New Civil Code, silence or concealment, by itself,
does not constitute fraud unless there is a special duty to disclose certain facts, or unless according to good faith and
the usages of commerce the communication should be made. We apply the general rule in the case at bar since Riviera
failed to convincingly show that either of the exceptions are relevant to the case at bar.
7. ID.; ID.; COURT HAS NO RIGHT TO MAKE NEW CONTRACTS FOR THE PARTIES OR IGNORE,
THOSE ALREADY MADE BY THEM. — In sum, the Court finds that in the interpretation of the right of first refusal
as understood by the parties herein, the question as to what is to be included therein or what is meant by the same, as
in all other provisions of the contract, is for the parties and not for the court to determine, and this question may not
be resolved by what the parties might have provided had they thought about it, which is evident from Riviera claims,
or by what the court might conclude regarding abstract fairness. The Court would be rewriting the contract of Reyes
and Riviera under the guise of construction were we to interpret the right of first refusal as Riviera propounds it,
despite a contrary construction as exhibited by its actions. A court, even the Supreme Court, has no right to make new
contracts for the parties or ignore those already made by them, simply to avoid seeming hardships. Neither abstract
justice nor the rule of liberal construction justifies the creation of a contract for the parties which they did not make
themselves or the imposition upon one party to a contract of an obligation not assumed. cTECHI
8. REMEDIAL LAW; CIVIL PROCEDURE; PARTIES TO CIVIL ACTIONS; FAILURE OF COUNSEL
TO COMPLY WITH HIS DUTY TO INFORM THE COURT OF THE DEATH OF HIS CLIENT WILL NOT
INVALIDATE THE PROCEEDINGS; CASE AT BAR. — Section 16 and 17 of Rule 3 of the Revised Rules of Court,
upon which Riviera anchors its argument, has already been amended by the 1997 Rules of Civil Procedure. Even
applying the old Rules, the failure of a counsel to comply with his duty under Section 16 of Rule 3 of the Revised
Rules of Court, to inform the court of the death of his client and no substitution of such is effected, will not invalidate
the proceedings and the judgment thereon if the action survives the death of such party, as this case does, since the
death of Reyes did not extinguish his civil personality. The appellate court was well within its jurisdiction to proceed
as it did with the case since the death of a party is not subject to its judicial notice. Needless to stress, the purpose
behind the rule on substitution of parties is the protection of the right of every party to due process. This purpose has
been adequately met in this case since both parties argued their respective positions through their pleadings in the trial
court and the appellate court. Besides, the Court has already acquired jurisdiction over the heirs of Reyes by voluntarily
submitting themselves to our jurisdiction.

DECISION

DE LEON, JR., J p:

Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals 2 dated June 6, 1994
in CA-G.R. CV No. 26513 affirming the Decision 3 dated March 20, 1990 of the Regional Trial Court of Quezon
City, Branch 89 dismissing Civil Case No. Q-89-3371.
Civil Case No. Q-89-3371 is a suit instituted by Riviera Filipina, Inc. (Riviera) on August 31, 1989 4 to
compel the defendants therein Juan L. Reyes, now deceased, Philippine Cypress Construction & Development
Corporation (Cypress), Cornhill Trading Corporation (Cornhill) and Urban Development Bank to transfer the title
covering a 1,018 square meter parcel of land located along EDSA, Quezon City for alleged violation of Riviera's right
of first refusal.
It appears that on November 23, 1982, respondent Juan L. Reyes (Reyes, for brevity) executed a Contract of
Lease with Riviera. The ten-year (10) renewable lease of Riviera, which started on August 1, 1982, involved a 1,018
square meter parcel of land located along Edsa, Quezon City, covered and described in Transfer Certificate of Title
No. 186326 of the Registry of Deeds of Quezon City in the name of Juan L. Reyes. 5
The said parcel of land was subject of a Real Estate Mortgage executed by Reyes in favor of Prudential Bank.
Since the loan with Prudential Bank remained unpaid upon maturity, the mortgagee bank extrajudicially foreclosed
the mortgage thereon. At the public auction sale, the mortgagee bank emerged as the highest bidder. The redemption
period was set to expire on March 7, 1989. Realizing that he could not possibly raise in time the money needed to
redeem the subject property, Reyes decided to sell the same. 6
Since paragraph 11 of the lease contract expressly provided that the "LESSEE shall have the right of first
refusal should the LESSOR decide to sell the property during the term of the lease," 7 Reyes offered to sell the subject
property to Riviera, through its President Vicente C. Angeles, for Five Thousand Pesos (P5,000.00) per square meter.
However, Angeles bargained for Three Thousand Five Hundred Pesos (P3,500.00) per square meter. Since Reyes was
not amenable to the said price and insisted on Five Thousand Pesos (P5,000.00) per square meter, Angeles requested
Reyes to allow him to consult the other members of the Board of Directors of Riviera. 8
Seven (7) months later, or sometime in October 1988, Angeles communicated with Reyes Riviera's offer to
purchase the subject property for Four Thousand Pesos (P4,000.00) per square meter. However, Reyes did not accept
the offer. This time he asked for Six Thousand Pesos (P6,000.00) per square meter since the value of the property in
the area had appreciated in view of the plans of Araneta to develop the vicinity. 9
In a letter dated November 2, 1988, Atty. Irineo S. Juan, acting as counsel for Reyes, informed Riviera that
Reyes was selling the subject property for Six Thousand Pesos (P6,000.00) per square meter, net of capital gains and
transfer taxes, registration fees, notarial fees and all other attendant charges. He further stated therein that:
In this connection, conformably to the provisions stipulated in Paragraph/Item No. 11 of
your CONTRACT OF LEASE (Doc. No. 365, Page No. 63, Book No. X, Series of 1982, of the
Notarial Registry of Notary Public Leovillo S. Agustin), notice is served upon your goodselves
for you to exercise "the right of first refusal" in the sale of said property, for which purpose you
are hereby given a period of ten (10) days from your receipt hereof within which to thus purchase
the same under the terms and conditions aforestated, and failing which you shall be deemed to
have thereby waived such pre-emptive right and my client shall thereafter be absolutely free to
sell the subject property to interested buyers. 10
To answer the foregoing letter and confirm their telephone conversation on the matter, Riviera sent a letter
dated November 22, 1988 to Atty. Juan, counsel for Reyes, expressing Riviera's interest to purchase the subject
property and that Riviera is already negotiating with Reyes which will take a couple of days to formalize. 11 Riviera
increased its offer to Five Thousand Pesos (P5,000.00) per square meter but Reyes did not accede to said price as it
was still lower than his quoted price of Six Thousand Pesos (P6,000.00) per square meter. 12 Angeles asked Reyes to
give him until the end of November 1988 for Riviera's final decision.
In a letter dated December 2, 1988, Angeles wrote Reyes confirming Riviera's intent to purchase the subject
property for the fixed and final 13 price of Five Thousand Pesos (P5,000.00) per square meter, complete payment
within sixty (60) to ninety (90) days which "offer is what we feel should be the market price of your property." Angeles
asked that the decision of Reyes and his written reply to the offer be given within fifteen (15) days since there are also
other properties being offered to them at the moment. 14
In response to the foregoing letter, Atty. Juan sent a letter to Riviera dated December 5, 1988 informing
Riviera that Riviera's offer is not acceptable to his client. He further expressed, "let it be made clear that, much as it
is the earnest desire of my client to really give you the preference to purchase the subject property, you have
unfortunately failed to take advantage of such opportunity and thus lost your right of first refusal in sale of said
property." 15
Meanwhile, on December 4, 1988, Reyes confided to Rolando P. Traballo, a close family friend and President
of Cypress, his predicament about the nearing expiry date of the redemption period of the foreclosed mortgaged
property with Prudential Bank, the money for which he could not raise on time thereby offering the subject property
to him for Six Thousand Pesos (P6,000.00) per square meter. Traballo expressed interest in buying the said property,
told Reyes that he will study the matter and suggested for them to meet the next day. 16
They met the next day, December 5, 1988, at which time Traballo bargained for Five Thousand Three
Hundred Pesos (P5,300.00) per square meter. After considering the reasons cited by Traballo for his quoted price,
Reyes accepted the same. However, since Traballo did not have the amount with which to pay Reyes, he told the latter
that he will look for a partner for that purpose. 17 Reyes told Traballo that he had already afforded Riviera its right of
first refusal but they cannot agree because Riviera's final offer was for Five Thousand Pesos (P5,000.00) per square
meter. 18
Sometime in January 1989, apprehensive of the impending expiration in March 1989 of the redemption
period of the foreclosed mortgaged property with Prudential Bank and the deal between Reyes and Traballo was not
yet formally concluded, Reyes decided to approach anew Riviera. For this purpose, he requested his nephew, Atty.
Estanislao Alinea, to approach Angeles and find out if the latter was still interested in buying the subject property and
ask him to raise his offer for the purchase of the said property a little higher. As instructed, Atty. Alinea met with
Angeles and asked the latter to increase his offer of Five Thousand Pesos. (P5,000.00) per square meter but Angeles
said that his offer is Five Thousand Pesos (P5,000.00) per square meter. 19
Following the meeting, Angeles sent a letter dated February 4, 1989 to Reyes, through Atty. Alinea, that his
offer is Five Thousand Pesos (P5,000.00) per square meter payment of which would be fifty percent (50%) down
within thirty (30) days upon submission of certain documents in three (3) days, the balance payable in five (5) years
in equal monthly installments at twelve percent (12%) interest in diminishing balance. 20 With the terms of this second
offer, Angeles admittedly downgraded the previous offer of Riviera on December 2, 1988. 21
Atty. Alinea conveyed to Reyes Riviera's offer of Five Thousand Pesos (P5,000.00) per square meter but
Reyes did not agree. Consequently, Atty. Alinea contacted again Angeles and asked him if he can increase his price.
Angeles, however, said he cannot add anymore. 22 Reyes did not expressly offer his subject property to Riviera at the
price of Five Thousand Three Hundred Pesos (P5,300.00) per square meter. 23
Sometime in February 1989, Cypress and its partner in the venture, Cornhill Trading Corporation, were able
to come up with the amount sufficient to cover the redemption money, with which Reyes paid to the Prudential Bank
to redeem the subject property. 24 On May 1, 1989, a Deed of Absolute Sale covering the subject property was
executed by Reyes in favor of Cypress and Cornhill for the consideration of Five Million Three Hundred Ninety-Five
Thousand Four Hundred Pesos (P5,395,400.00). 25 On the same date, Cypress and Cornhill mortgaged the subject
property to Urban Development Bank for Three Million Pesos (P3,000,000.00). 26
Thereafter, Riviera sought from Reyes, Cypress and Cornhill a resale of the subject property to it claiming
that its right of first refusal under the lease contract was violated. After several unsuccessful attempts, 27 Riviera filed
the suit to compel Reyes, Cypress, Cornhill and Urban Development Bank to transfer the disputed title to the land in
favor of Riviera upon its payment of the price paid by Cypress and Cornhill.
Following trial on the merits, the trial court dismissed the complaint of Riviera as well as the counterclaims
and cross-claims of the other parties. 28 It ruled that the defendants therein did not violate Riviera's right of first
refusal, ratiocinating in this wise:
Resolving the first issue, this Court takes note that since the beginning of the negotiation
between the plaintiff and defendant Reyes for the purchase of the property, in question, the
plaintiff was firm and steadfast in its position, expressed in writing by its President Vicente
Angeles, that it was not willing to buy the said property higher than P5,000.00, per square meter,
which was far lower than the asking price of defendant Reyes for P6,000.00, per square meter,
undoubtedly, because, in its perception, it would be difficult for other parties to buy the property,
at a higher price than what it was offering, since it is in occupation of the property, as lessee, the
term of which was to expire after about four (4) years more.
On the other hand, it was obvious, upon the basis of the last ditch effort of defendant
Reyes, thru his nephew, Atty. Alinea, to have the plaintiff buy the property, in question, that he
was willing to sell the said property at a price less than P6,000.00 and a little higher than
P5,000.00, per square meter, precisely, because Atty. Alinea, in behalf of his uncle, defendant
Reyes, sought plaintiff's Angeles and asked him to raise his price a little higher, indicating thereby
the willingness of defendant Reyes to sell said property at less than his offer of P6,000.00, per
square meter.
This being the case, it can hardly be validly said by the plaintiff that he was deprived of
his right of first refusal to buy the subject property at a price of P5,300.00, per square meter which
is the amount defendants Cypress/Cornhill bought the said property from defendant Reyes. For,
it was again given such an opportunity to exercise its right of first refusal by defendant Reyes had
 it only signified its willingness to increase a little higher its purchase price above P5,000.00, per
square meter, when its President, Angeles, was asked by Atty. Alinea to do so, instead of
adamantly sticking to its offer of only P5,000.00 per square meter, by reason of which, therefore,
the plaintiff had lost, for the second time, its right of first refusal, even if defendant Reyes did not
expressly offer to sell to it the subject land at P5,300.00, per square meter, considering that by the
plea of Atty. Alinea, in behalf of defendant Reyes, for it to increase its price a little, the plaintiff
is to be considered as having forfeited again its right of first refusal, it having refused to budged
from its regid (sic) offer to buy the subject property at no more than P5,000.00, per square meter.
As such, this Court holds that it was no longer necessary for the defendant Reyes to
expressly and categorically offer to the plaintiff the subject property at P5,300.00, per square
meter, in order that he can comply with his obligation to give first refusal to the plaintiff as
stipulated in the Contract of Lease, the plaintiff having had already lost its right of first refusal, at
the first instance, by refusing to buy the said property at P6,000.00, per square meter, which was
the asking price of defendant Reyes, since to do so would be a useless ceremony and would only
be an exercise in futility, considering the firm and unbending position of the plaintiff, which
defendant Reyes already knew, that the plaintiff, at any event, was not amenable to increasing its
price at over P5,000.00, per square meter.
Dissatisfied with the decision of the trial court, both parties appealed to the Court of Appeals. 29 However,
the appellate court, through its Special Seventh Division, rendered a Decision dated June 6, 1994 which affirmed the
decision of the trial court in its entirety. 30 In sustaining the decision of the trial court, the Court of Appeals adopted
the above-quoted ratiocination of the trial court and further added:
To put things in its proper perspective in accordance with the peculiar attendant
circumstances herein, particular stress should be given to RIVIERA's uncompromising counter
offer of only P5,000.00 per square meter on all the occasions when REYES offered the subject
property to it. RIVIERA, in its letter to REYES dated December 2, 1988 (Exhibit "D", p.
68, Rollo) justified its rigid offer by saying that "the above offer is what we feel should be the
market price of your property." If that be the case, We are convinced, the same manner that
REYES was, that RIVIERA was unwilling to increase its counter offer at any present or future
time. RIVIERA's unilateral valuation of the subject property thus binds him, it cannot now be
heard to claim that it could have upped its offer had it been informed of CYPRESS' and
CORNHILL'S offer of P5,000.00 (sic) per square meter. Defendants CYPRESS and CORNHILL
were therefore right in saying that:
On the basic assumption that RIVIERA really meant what it said in its
letter, DR. REYES could not be faulted for believing that RIVIERA was
definitely NOT WILLING TO PAY MORE THAN P5,000.00 PER SQUARE
METER ON HIS PROPERTY. The fault lies with the deceptive and insincere
words of RIVIERA. Injustice (sic) and equity, RIVIERA must be deemed in
estoppel in now belatedly asserting that it would have been willing to pay a price
higher than P5,000.00 . . . ." (Defendants-Appellees Cypress' and Cornhill's Brief,
p. 8)
For this reason, no adverse inference can be drawn from REYES' failure to disclose to
RIVIERA the intervening counter-offer of CYPRESS and CORNHILL.
It would have been far different had REYES' non-disclosure of CYPRESS' and
CORNHILL's counter-offer to RIVIERA resulted in the sale of the subject property at equal or
less than RIVIERA's offer; in which case, REYES would have been rightly accused of cunningly
circumventing RIVIERA's right of first refusal. But the incontrovertible antecedents obtaining
here clearly reveal REYES' earnest efforts in respecting RIVIERA's contractual right to initially
purchase the subject property. Not only once — but twice — did REYES approach RIVIERA,
the last one being the most telling indication of REYES' sincerest intention in RIVIERA
eventually purchasing the subject property if only the latter would increase a little its offer of
P5,000.00 per square meter. And to this REYES was desperately willing to accede to despite the
financial quandary he was then in as the expiration of the redemption period drew closer and
 closer, and despite the better offer of CYPRESS and CORNHILL. REYES unquestionably had
displayed good faith. Can the same be said of RIVIERA? We do not think so. It appears that
RIVIERA all along was trying to push REYES' back against the wall, for RIVIERA was well-
aware of REYES' precarious financial needs at that time, and by clinging to its offer, REYES
might eventually succumb to its offer out of sheer desperation. RIVIERA was, to be frank,
whimsically exercising its contractual right to the prejudice of REYES who had commendably
given RIVIERA extra leeway in exercising it. And to this We say that no amount of jurisprudence
RIVIERA might avail of for the purpose of construing the right of first refusal, however
enlightening and persuasive they may be, will cover-up for its arrogant exercise of its right as can
be gleaned from the factual premises. Equity in this case tilts in favor of defendants REYES,
CYPRESS and CORNHILL that the consummated sale between them concerning the subject
property be given this Court's imprimatur, for if RIVIERA lost its opportunity to acquire it, it has
only itself to blame. For after all, REYES' fundamental and intrinsic right of ownership which
necessarily carries with it the exclusive right to dispose of it to whoever he pleases, must
ultimately prevail over RIVIERA's right of first refusal which it unscrupulously tried to exercise.
From this decision, Riviera filed a motion for reconsideration, 31 but the appellate court denied the same in a
Resolution dated September 22, 1994. 32
Hence, Riviera interposed the instant petition anchored on the following errors: 33
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN RULING
THAT PETITIONER RIVIERA FILIPINA, INC. ALREADY LOST ITS RIGHT OF FIRST
REFUSAL.
II
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN NOT
FINDING THAT IT WAS THE PETITIONER, NOT RESPONDENT JUAN L. REYES,
WHICH HAD BEEN THOROUGHLY DECEIVED BY THE LATTER OUT OF ITS RIGHTS
TO ITS CONTINUING PREJUDICE.
III
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN
DENYING RECONSIDERATION.
IV
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN
DECIDING PETITIONER'S APPEAL AT A TIME WHEN THE PRINCIPAL APPELLEE IS
ALLEGEDLY DEAD AND NO PROPER SUBSTITUTION OF THE ALLEGED DECEASED
PARTY HAS BEEN MADE; HENCE, THE DECISION OF THE COURT OF APPEALS AND
ITS RESOLUTION DENYING RECONSIDERATION, IS NULL AND VOID.
At the outset, we note that, while Riviera alleges that the Court of Appeals committed grave abuse of
discretion amounting to lack or excess of jurisdiction, the instant petition is, as it should be, treated as a petition for
review under Rule 45 and not as a special civil action for certiorari under Rule 65 of the Revised Rules of Court, now
the 1997 Rules of Civil Procedure.
The distinctions between Rule 45 and 65 are far and wide, the most notable of which is that errors of
jurisdiction are best reviewed in a special civil action for certiorari under Rule 65, while errors of judgment are
correctable only by appeal in a petition for review under Rule 45. 34 The rationale for the distinction is simple. When
a court exercises its jurisdiction an error committed while so engaged does not deprive it of the jurisdiction being
exercised when the error is committed. If it did, every error committed by a court would deprive it of its jurisdiction
and every erroneous judgment would be a void judgment. This cannot be allowed. The administration of justice would
not countenance such a rule. Thus, an error of judgment that the court may commit in the exercise of its jurisdiction
is not correctable through the original special civil action of certiorari. 35 Appeal from a final disposition of the Court
of Appeals, as in the case at bar, is by way of a petition for review under Rule 45. 36
In the petition at bar, Riviera posits the view that its right of first refusal was totally disregarded or violated
by Reyes by the latter's sale of the subject property to Cypress and Cornhill. It contends that the right of first refusal
principally amounts to a right to match in the sense that it needs another offer for the right to be exercised.
The concept and interpretation of the right of first refusal and the consequences of a breach thereof evolved
in Philippine juristic sphere only within the last decade. It all started in 1992 with Guzman, Bocaling & Co. v.
Bonnevie 37 where the Court held that a lease with a proviso granting the lessee the right of first priority "all things
and conditions being equal" meant that there should be identity of the terms and conditions to be offered to the lessee
and all other prospective buyers, with the lessee to enjoy the right of first priority. A deed of sale executed in favor of
a third party who cannot be deemed a purchaser in good faith, and which is in violation of a right of first refusal
granted to the lessee is not voidable under the Statute of Frauds but rescissible under Articles 1380 to 1381 (3) of the
New Civil Code.
Subsequently in 1994, in the case of Ang Yu Asuncion v. Court of Appeals, 38 the Court en banc departed
from the doctrine laid down in Guzman, Bocaling & Co. v. Bonnevie and refused to rescind a contract of sale which
violated the right of first refusal. The Court held that the so-called "right of first refusal" cannot be deemed a perfected
contract of sale under Article 1458 of the New Civil Code and, as such, a breach thereof decreed under a final judgment
does not entitle the aggrieved party to a writ of execution of the judgment but to an action for damages in a proper
forum for the purpose.
In the 1996 case of Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 39 the Court en
banc reverted back to the doctrine in Guzman Bocaling & Co. v. Bonnevie stating that 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.
Thereafter in 1997, in Parañaque Kings Enterprises, Inc. v. Court of Appeals, 40 the Court affirmed the
nature of and the concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing
the rulings in Guzman, Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater,
Inc., held that in order to have full compliance with the contractual right granting petitioner the first option to purchase,
the sale of the properties for the price for which they were finally sold to a third person should have likewise been first
offered to the former. Further, there should be identity of terms and conditions to be offered to the buyer holding a
right of first refusal if such right is not to be rendered illusory. Lastly, the basis of the right of first refusal must be the
current offer to sell of the seller or offer to purchase of any prospective buyer.
Thus, the prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered
to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first refusal
of another person, while valid, is rescissible.
However, we must remember that general propositions do not decide specific cases. Rather, laws are
interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood
and cannot be ruled upon on the basis of isolated clinical classroom principles. 41 Analysis and construction should
not be limited to the words used in the contract, as they may not accurately reflect the parties' true intent. 42 The court
must read a contract as the average person would read it and should not give it a strained or forced construction. 43
In the case at bar, the Court finds relevant and significant the cardinal rule in the interpretation of contracts
that the intention of the parties shall be accorded primordial consideration and in case of doubt, their contemporaneous
and subsequent acts shall be principally considered. 44 Where the parties to a contract have given it a practical
construction by their conduct as by acts in partial performance, such construction may be considered by the court in
construing the contract, determining its meaning and ascertaining the mutual intention of the parties at the time for
contracting. The parties' practical construction of their contract has been characterized as a clue or index to, or as
evidence of, their intention or meaning and as an important, significant, convincing, persuasive, or influential factor
in determining the proper construction of the contract. 45
 An examination of the attendant particulars of the case do not persuade us to uphold Riviera's view. As clearly
shown by the records and transcripts of the case, the actions of the parties to the contract of lease, Reyes and Riviera,
shaped their understanding and interpretation of the lease provision "right of first refusal" to mean simply that should
the lessor Reyes decide to sell the leased property during the term of the lease, such sale should first be offered to the
lessee Riviera. And that is what exactly ensued between Reyes and Riviera, a series of negotiations on the price per
square meter of the subject property with neither party, especially Riviera, unwilling to budge from his offer, as
evidenced by the exchange of letters between the two contenders.
It can clearly be discerned from Riviera's letters dated December 2, 1988 and February 4, 1989 that Riviera
was so intractable in its position and took obvious advantage of the knowledge of the time element in its negotiations
with Reyes as the redemption period of the subject foreclosed property drew near. Riviera strongly exhibited a "take-
it or leave-it" attitude in its negotiations with Reyes. It quoted its "fixed and final" price as Five Thousand Pesos
(P5,000.00) and not any peso more. It voiced out that it had other properties to consider so Reyes should decide and
make known its decision "within fifteen days." Riviera, in its letter dated February 4, 1989, admittedly, even
downgraded its offer when Reyes offered anew the property to it, such that whatever amount Reyes initially receives
from Riviera would absolutely be insufficient to pay off the redemption price of the subject property. Naturally, Reyes
had to disagree with Riviera's highly disadvantageous offer.
Nary a howl of protest or shout of defiance spewed forth from Riviera's lips, as it were, but a seemingly
whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989 that Riviera
had lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five Thousand
Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have matched said price. Its stubborn approach in
its negotiations with Reyes showed crystal-clear that there was never any need to disclose such information and doing
so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Pursuant
to Article 1339 46 of the New Civil Code, silence or concealment, by itself, does not constitute fraud, unless there is
a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the
communication should be made. 47 We apply the general rule in the case at bar since Riviera failed to convincingly
show that either of the exceptions are relevant to the case at bar.
In sum, the Court finds that in the interpretation of the right of first refusal as understood by the parties herein,
the question as to what is to be included therein or what is meant by the same, as in all other provisions of the contract,
is for the parties and not for the court to determine, and this question may not be resolved by what the parties might
have provided had they thought about it, which is evident from Riviera claims, or by what the court might conclude
regarding abstract fairness. 48
The Court would be rewriting the contract of Reyes and Riviera under the guise of construction were we to
interpret the right of first refusal as Riviera propounds it, despite a contrary construction as exhibited by its actions. A
court, even the Supreme Court, has no right to make new contracts for the parties or ignore those already made by
them, simply to avoid seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the
creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract
of an obligation not assumed. 49
On the last error attributed to the Court of Appeals which is the effect on the jurisdiction of the appellate
court of the non-substitution of Reyes, who died during the pendency of the appeal, the Court notes that when Riviera
filed its petition with this Court and assigned this error, it later filed on October 27, 1994 a Manifestation 50 with the
Court of Appeals stating that it has discovered that Reyes is already dead, in view of which the appellate court issued
a Resolution dated December 16, 1994 which noted the manifestation of Riviera and directed the counsel of Reyes to
submit a copy of the latter's death certificate and to file the proper motion for substitution of party. 51 Complying
therewith, the necessary motion for substitution of deceased Reyes, who died on January 7, 1994, was filed by the
heirs, namely, Estefania B. Reyes, Juanita R. de la Rosa, Juan B. Reyes, Jr. and Fidel B. Reyes. 52 Acting on the
motion for substitution, the Court of Appeals granted the same. 53
Notwithstanding the foregoing, Section 16 54 and 17 55 of Rule 3 of the Revised Rules of Court, upon which
Riviera anchors its argument, has already been amended by the 1997 Rules of Civil Procedure. 56 Even applying the
old Rules, the failure of a counsel to comply with his duty under Section 16 of Rule 3 of the Revised Rules of Court,
to inform the court of the death of his client and no substitution of such is effected, will not invalidate the proceedings
and the judgment thereon if the action survives the death of such party, 57 as this case does, since the death of Reyes
did not extinguish his civil personality. The appellate court was well within its jurisdiction to proceed as it did with
the case since the death of a party is not subject to its judicial notice. Needless to stress, the purpose behind the rule
on substitution of parties is the protection of the right of every party to due process. This purpose has been adequately
met in this case since both parties argued their respective positions through their pleadings in the trial court and the
appellate court. Besides, the Court has already acquired jurisdiction over the heirs of Reyes by voluntarily submitting
themselves to our jurisdiction. 58
In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in
its challenged Decision.
WHEREFORE, the instant petition is hereby DENIED, and the Decision of the Court of Appeals dated June
6, 1994 in CA-G.R. CV No. 26513 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
||| (Riviera Filipina, Inc. v. Court of Appeals, G.R. No. 117355, [April 5, 2002], 430 PHIL 8-31)
 SECOND DIVISION

[G.R. No. 139523. May 26, 2005.]

SPS. FELIPE AND LETICIA CANNU, petitioners, vs. SPS. GIL AND FERNANDINA
GALANG AND NATIONAL HOME MORTGAGE FINANCE
CORPORATION, respondents.

DECISION

CHICO-NAZARIO, J p:

Before Us is a Petition for Review on Certiorari which seeks to set aside the decision 1 of the Court of
Appeals dated 30 September 1998 which affirmed with modification the decision of Branch 135 of the Regional Trial
Court (RTC) of Makati City, dismissing the complaint for Specific Performance and Damages filed by petitioners,
and its Resolution 2 dated 22 July 1999 denying petitioners' motion for reconsideration.
A complaint 3 for Specific Performance and Damages was filed by petitioners-spouses Felipe and Leticia
Cannu against respondents-spouses Gil and Fernandina Galang and the National Home Mortgage Finance Corporation
(NHMFC) before Branch 135 of the RTC of Makati, on 24 June 1993. The case was docketed as Civil Case No. 93-
2069.
The facts that gave rise to the aforesaid complaint are as follows:
Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings & Loan Association
for P173,800.00 to purchase a house and lot located at Pulang Lupa, Las Piñas, with an area of 150 square meters
covered by Transfer Certificate of Title (TCT) No. T-8505 in the names of respondents-spouses. To secure payment,
a real estate mortgage was constituted on the said house and lot in favor of Fortune Savings & Loan Association. In
early 1990, NHMFC purchased the mortgage loan of respondents-spouses from Fortune Savings & Loan Association
for P173,800.00.
Respondent Fernandina Galang authorized 4 her attorney-in-fact, Adelina R. Timbang, to sell the subject
house and lot.
Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the balance of the
mortgage obligations with the NHMFC and with CERF Realty 5 (the Developer of the property). cEDIAa
Of the P120,000.00, the following payments were made by petitioners:
Date Amount Paid

July 19, 1990 P40,000.00 6

March 13, 1991 15,000.00 7

April 6, 1991 15,000.00 8

November 28, 1991 5,000.00 9

Total P75,000.00

Thus, leaving a balance of P45,000.00.

 A Deed of Sale with Assumption of Mortgage Obligation 10 dated 20 August 1990 was made and entered
into by and between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and Felipe Cannu (vendees)
over the house and lot in question which contains, inter alia, the following:
NOW, THEREFORE, for and in consideration of the sum of TWO HUNDRED FIFTY
THOUSAND PESOS (P250,000.00), Philippine Currency, receipt of which is hereby
acknowledged by the Vendors and the assumption of the mortgage obligation, the Vendors hereby
sell, cede and transfer unto the Vendees, their heirs, assigns and successor in interest the above-
described property together with the existing improvement thereon.
It is a special condition of this contract that the Vendees shall assume and continue with
the payment of the amortization with the National Home Mortgage Finance Corporation Inc. in
the outstanding balance of P_______________, as of __________ and shall comply with and
abide by the terms and conditions of the mortgage document dated Feb. 27, 1989 and identified
as Doc. No. 82, Page 18, Book VII, S. of 1989 of Notary Public for Quezon City Marites Sto.
Tomas Alonzo, as if the Vendees are the original signatories.
Petitioners immediately took possession and occupied the house and lot.
Petitioners made the following payments to the NHMFC:
Date Amount Receipt No.

July 9, 1990 P14,312.47 D-503986 11

March 12, 1991 8,000.00 D-729478 12

February 4, 1992 10,000.00 D-999127 13

March 31, 1993 6,000.00 E-563749 14

April 19, 1993 10,000.00 E-582432 15

April 27, 1993 7,000.00 E-618326 16

P55,312.47

Petitioners paid the "equity" or second mortgage to CERF Realty. 17

Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of P45,000.00 or in
the alternative to vacate the property in question, petitioners refused to do so.
In a letter 18 dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T. Arzaga, Vice President,
Fund Management Group of the NHMFC, that the ownership rights over the land covered by TCT No. T-8505 in the
names of respondents-spouses had been ceded and transferred to her and her husband per Deed of Sale with
Assumption of Mortgage, and that they were obligated to assume the mortgage and pay the remaining unpaid loan
balance. Petitioners' formal assumption of mortgage was not approved by the NHMFC. 19
Because the Cannus failed to fully comply with their obligations, respondent Fernandina Galang, on 21 May
1993, paid P233,957.64 as full payment of her remaining mortgage loan with NHMFC. 20
Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting that the subject
property had already been sold to them. Consequently, the NHMFC held in abeyance the release of said TCT. TSHIDa
Thereupon, a Complaint for Specific Performance and Damages was filed asking, among other things, that
petitioners (plaintiffs therein) be declared the owners of the property involved subject to reimbursements of the amount
made by respondents-spouses (defendants therein) in preterminating the mortgage loan with NHMFC.
 Respondent NHMFC filed its Answer. 21 It claimed that petitioners have no cause of action against it because
they have not submitted the formal requirements to be considered assignees and successors-in-interest of the property
under litigation.
In their Answer, 22 respondents-spouses alleged that because of petitioners-spouses' failure to fully pay the
consideration and to update the monthly amortizations with the NHMFC, they paid in full the existing obligations
with NHMFC as an initial step in the rescission and annulment of the Deed of Sale with Assumption of Mortgage. In
their counterclaim, they maintain that the acts of petitioners in not fully complying with their obligations give rise to
rescission of the Deed of Sale with Assumption of Mortgage with the corresponding damages.
After trial, the lower court rendered its decision ratiocinating:
On the basis of the evidence on record, testimonial and documentary, this Court is of the
view that plaintiffs have no cause of action either against the spouses Galang or the NHMFC.
Plaintiffs have admitted on record they failed to pay the amount of P45,000.00 the balance due to
the Galangs in consideration of the Deed of Sale With Assumption of Mortgage Obligation (Exhs.
"C" and "3"). Consequently, this is a breach of contract and evidently a failure to comply with
obligation arising from contracts. . . In this case, NHMFC has not been duly informed due to lack
of formal requirements to acknowledge plaintiffs as legal assignees, or legitimate transferees and,
therefore, successors-in-interest to the property, plaintiffs should have no legal personality to
claim any right to the same property. 23
The decretal portion of the decision reads:
Premises considered, the foregoing complaint has not been proven even by
preponderance of evidence, and, as such, plaintiffs have no cause of action against the defendants
herein. The above-entitled case is ordered dismissed for lack of merit.
Judgment is hereby rendered by way of counterclaim, in favor of defendants and against
plaintiffs, to wit:
1. Ordering the Deed of Sale With Assumption of Mortgage Obligation (Exhs. "C" and
"3") rescinded and hereby declared the same as nullified without prejudice for defendants-spouses
Galang to return the partial payments made by plaintiffs; and the plaintiffs are ordered, on the
other hand, to return the physical and legal possession of the subject property to spouses Galang
by way of mutual restitution; SIDEaA
2. To pay defendants spouses Galang and NHMFC, each the amount of P10,000.00 as
litigation expenses, jointly and severally;
3. To pay attorney's fees to defendants in the amount of P20,000.00, jointly and
severally; and
4. The costs of suit.
5. No moral and exemplary damages awarded. 24
A Motion for Reconsideration 25 was filed, but same was denied. Petitioners appealed the decision of the
RTC to the Court of Appeals. On 30 September 1998, the Court of Appeals disposed of the appeal as follows:
Obligations arising from contract have the force of law between the contracting parties
and should be complied in good faith. The terms of a written contract are binding on the parties
thereto.
Plaintiffs-appellants therefore are under obligation to pay defendants-appellees spouses
Galang the sum of P250,000.00, and to assume the mortgage.
Records show that upon the execution of the Contract of Sale or on July 19, 1990
plaintiffs-appellants paid defendants-appellees spouses Galang the amount of only P40,000.00.
 The next payment was made by plaintiffs-appellants on March 13, 1991 or eight (8)
months after the execution of the contract. Plaintiffs-appellants paid the amount of P5,000.00.
The next payment was made on April 6, 1991 for P15,000.00 and on November 28, 1991,
for another P15,000.00.
From 1991 until the present, no other payments were made by plaintiffs-appellants to
defendants-appellees spouses Galang.
Out of the P250,000.00 purchase price which was supposed to be paid on the day of the
execution of contract in July, 1990 plaintiffs-appellants have paid, in the span of eight (8) years,
from 1990 to present, the amount of only P75,000.00. Plaintiffs-appellants should have paid the
P250,000.00 at the time of the execution of contract in 1990. Eight (8) years have already lapsed
and plaintiffs-appellants have not yet complied with their obligation.
We consider this breach to be substantial.
The tender made by plaintiffs-appellants after the filing of this case, of the Managerial
Check in the amount of P278,957.00 dated January 24, 1994 cannot be considered as an effective
mode of payment.

Performance or payment may be effected not by tender of payment alone but by both
tender and consignation. It is consignation which is essential in order to extinguish plaintiffs-
appellants obligation to pay the balance of the purchase price.
In addition, plaintiffs-appellants failed to comply with their obligation to pay the
monthly amortizations due on the mortgage. SDIACc
In the span of three (3) years from 1990 to 1993, plaintiffs-appellants made only six
payments. The payments made by plaintiffs-appellants are not even sufficient to answer for the
arrearages, interests and penalty charges.
On account of these circumstances, the rescission of the Contract of Sale is warranted
and justified.
xxx xxx xxx
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with
modification. Defendants-appellees spouses Galang are hereby ordered to return the partial
payments made by plaintiff-appellants in the amount of P135,000.00.
No pronouncement as to cost. 26
The motion for reconsideration 27 filed by petitioners was denied by the Court of Appeals in a
Resolution 28 dated 22 July 1999.
Hence, this Petition for Certiorari.
Petitioners raise the following assignment of errors:
1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT
PETITIONERS' BREACH OF THE OBLIGATION WAS SUBSTANTIAL.
2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN EFFECT IT HELD
THAT THERE WAS NO SUBSTANTIAL COMPLIANCE WITH THE OBLIGATION TO
PAY THE MONTHLY AMORTIZATION WITH NHMFC.
3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO
CONSIDER THE OTHER FACTS AND CIRCUMSTANCES THAT MILITATE AGAINST
RESCISSION.
 4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO
CONSIDER THAT THE ACTION FOR RESCISSION IS SUBSIDIARY. 29
Before discussing the errors allegedly committed by the Court of Appeals, it must be stated a priori that the
latter made a misappreciation of evidence regarding the consideration of the property in litigation when it relied solely
on the Deed of Sale with Assumption of Mortgage executed by the respondents-spouses Galang and petitioners-
spouses Cannu.
As above-quoted, the consideration for the house and lot stated in the Deed of Sale with Assumption of
Mortgage is P250,000.00, plus the assumption of the balance of the mortgage loan with NHMFC. However, after
going over the record of the case, more particularly the Answer of respondents-spouses, the evidence shows the
consideration therefor is P120,000.00, plus the payment of the outstanding loan mortgage with NHMFC, and of the
"equity" or second mortgage with CERF Realty (Developer of the property). 30
Nowhere in the complaint and answer of the petitioners-spouses Cannu and respondents-spouses Galang
shows that the consideration is "P250,000.00." In fact, what is clear is that of the P120,000.00 to be paid to the latter,
only P75,000.00 was paid to Adelina Timbang, the spouses Galang's attorney-in-fact. This debunks the provision in
the Deed of Sale with Assumption of Mortgage that the amount of P250,000.00 has been received by
petitioners. SEAHID
Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the true intent and agreement
of the parties regarding its consideration, the same should not be fully relied upon. The foregoing facts lead us to hold
that the case on hand falls within one of the recognized exceptions to the parole evidence rule. Under the Rules of
Court, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue
in his pleading, among others, its failure to express the true intent and agreement of the parties thereto. 31
In the case at bar, when respondents-spouses enumerated in their Answer the terms and conditions for the
sale of the property under litigation, which is different from that stated in the Deed of Sale with Assumption with
Mortgage, they already put in issue the matter of consideration. Since there is a difference as to what the true
consideration is, this Court has admitted evidence aliunde to explain such inconsistency. Thus, the Court has looked
into the pleadings and testimonies of the parties to thresh out the discrepancy and to clarify the intent of the parties.
As regards the computation 32 of petitioners as to the breakdown of the P250,000.00 consideration, we find
the same to be self-serving and unsupported by evidence.
On the first assigned error, petitioners argue that the Court erred when it ruled that their breach of the
obligation was substantial.
Settled is the rule that rescission or, more accurately, resolution, 33 of a party to an obligation under Article
1191 34 is predicated on a breach of faith by the other party that violates the reciprocity between them. 35 Article
1191 reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission, even after
he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had only for
such breaches that are substantial and fundamental as to defeat the object of the parties in making the
agreement. 36 The question of whether a breach of contract is substantial depends upon the attending
circumstances 37 and not merely on the percentage of the amount not paid.
In the case at bar, we find petitioners' failure to pay the remaining balance of P45,000.00 to be substantial.
Even assuming arguendo that only said amount was left out of the supposed consideration of P250,000.00, or eighteen
(18%) percent thereof, this percentage is still substantial. Taken together with the fact that the last payment made was
on 28 November 1991, eighteen months before the respondent Fernandina Galang paid the outstanding balance of the
mortgage loan with NHMFC, the intention of petitioners to renege on their obligation is utterly clear. ECSHAD
Citing Massive Construction, Inc. v. Intermediate Appellate Court, 38 petitioners ask that they be granted
additional time to complete their obligation. Under the facts of the case, to give petitioners additional time to comply
with their obligation will be putting premium on their blatant non-compliance of their obligation. They had all the
time to do what was required of them (i.e., pay the P45,000.00 balance and to properly assume the mortgage loan with
the NHMFC), but still they failed to comply. Despite demands for them to pay the balance, no payments were made. 39
The fact that petitioners tendered a Manager's Check to respondents-spouses Galang in the amount of
P278,957.00 seven months after the filing of this case is of no moment. Tender of payment does not by itself produce
legal payment, unless it is completed by consignation. 40 Their failure to fulfill their obligation gave the respondents-
spouses Galang the right to rescission.
Anent the second assigned error, we find that petitioners were not religious in paying the amortization with
the NHMFC. As admitted by them, in the span of three years from 1990 to 1993, their payments covered only thirty
months. 41 This, indeed, constitutes another breach or violation of the Deed of Sale with Assumption of Mortgage.
On top of this, there was no formal assumption of the mortgage obligation with NHMFC because of the lack of
approval by the NHMFC 42 on account of petitioners' non-submission of requirements in order to be considered as
assignees/successors-in-interest over the property covered by the mortgage obligation. 43
On the third assigned error, petitioners claim there was no clear evidence to show that respondents-spouses
Galang demanded from them a strict and/or faithful compliance of the Deed of Sale with Assumption of Mortgage.
We do not agree.
There is sufficient evidence showing that demands were made from petitioners to comply with their
obligation. Adelina R. Timbang, attorney-in-fact of respondents-spouses, per instruction of respondent Fernandina
Galang, made constant follow-ups after the last payment made on 28 November 1991, but petitioners did not
pay. 44 Respondent Fernandina Galang stated in her Answer 45 that upon her arrival from America in October 1992,
she demanded from petitioners the complete compliance of their obligation by paying the full amount of the
consideration (P120,000.00) or in the alternative to vacate the property in question, but still, petitioners refused to
fulfill their obligations under the Deed of Sale with Assumption of Mortgage. Sometime in March 1993, due to the
fact that full payment has not been paid and that the monthly amortizations with the NHMFC have not been fully
updated, she made her intentions clear with petitioner Leticia Cannu that she will rescind or annul the Deed of Sale
with Assumption of Mortgage.
We likewise rule that there was no waiver on the part of petitioners to demand the rescission of the Deed of
Sale with Assumption of Mortgage. The fact that respondents-spouses accepted, through their attorney-in-fact,
payments in installments does not constitute waiver on their part to exercise their right to rescind the Deed of Sale
with Assumption of Mortgage. Adelina Timbang merely accepted the installment payments as an accommodation to
petitioners since they kept on promising they would pay. However, after the lapse of considerable time (18 months
from last payment) and the purchase price was not yet fully paid, respondents-spouses exercised their right of
rescission when they paid the outstanding balance of the mortgage loan with NHMFC. It was only after petitioners
stopped paying that respondents-spouses moved to exercise their right of rescission. AEaSTC

Petitioners cite the case of Angeles v. Calasanz 46 to support their claim that respondents-spouses waived
their right to rescind. We cannot apply this case since it is not on all fours with the case before us. First, in Angeles,
the breach was only slight and casual which is not true in the case before us. Second, in Angeles, the buyer had already
paid more than the principal obligation, while in the instant case, the buyers (petitioners) did not pay P45,000.00 of
the P120,000.00 they were obligated to pay.
We find petitioners' statement that there is no evidence of prejudice or damage to justify rescission in favor
of respondents-spouses to be unfounded. The damage suffered by respondents-spouses is the effect of petitioners'
failure to fully comply with their obligation, that is, their failure to pay the remaining P45,000.00 and to update the
amortizations on the mortgage loan with the NHMFC. Petitioners have in their possession the property under litigation.
Having parted with their house and lot, respondents-spouses should be fully compensated for it, not only monetarily,
but also as to the terms and conditions agreed upon by the parties. This did not happen in the case before us.
Citing Seva v. Berwin & Co., Inc., 47 petitioners argue that no rescission should be decreed because there is
no evidence on record that respondent Fernandina Galang is ready, willing and able to comply with her own obligation
to restore to them the total payments they made. They added that no allegation to that effect is contained in
respondents-spouses' Answer.
We find this argument to be misleading.
First, the facts obtaining in Seva case do not fall squarely with the case on hand. In the former, the failure of
one party to perform his obligation was the fault of the other party, while in the case on hand, failure on the part of
petitioners to perform their obligation was due to their own fault.
Second, what is stated in the book of Justice Edgardo L. Paras is "[i]t (referring to the right to rescind or
resolve) can be demanded only if the plaintiff is ready, willing and able to comply with his own obligation, and the
other is not." In other words, if one party has complied or fulfilled his obligation, and the other has not, then the former
can exercise his right to rescind. In this case, respondents-spouses complied with their obligation when they gave the
possession of the property in question to petitioners. Thus, they have the right to ask for the rescission of the Deed of
Sale with Assumption of Mortgage.
On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code, maintain that the Court
of Appeals erred when it failed to consider that the action for rescission is subsidiary.
Their reliance on Article 1383 is misplaced.
The subsidiary character of the action for rescission applies to contracts enumerated in Article 1381 48 of the
Civil Code. The contract involved in the case before us is not one of those mentioned therein. The provision that
applies in the case at bar is Article 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v. Court of
Appeals, 49 rescission under Article 1191 was distinguished from rescission under Article 1381. Justice J.B.L. Reyes
said:
. . . The rescission on account of breach of stipulations is not predicated on injury to
economic interests of the party plaintiff but on the breach of faith by the defendant, that violates
the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations by the defendant. This rescission is a principal
action retaliatory in character, it being unjust that a party be held bound to fulfill his promises
when the other violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non est
fides servanda." Hence, the reparation of damages for the breach is purely secondary. ScAIaT
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause
of action is subordinated to the existence of that prejudice, because it is the raison d être as well
as the measure of the right to rescind. Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and
1384. But the operation of these two articles is limited to the cases of rescission
for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply to
cases under Article 1191.
From the foregoing, it is clear that rescission ("resolution" in the Old Civil Code) under Article 1191 is a
principal action, while rescission under Article 1383 is a subsidiary action. The former is based on breach by the other
party that violates the reciprocity between the parties, while the latter is not.
In the case at bar, the reciprocity between the parties was violated when petitioners failed to fully pay the
balance of P45,000.00 to respondents-spouses and their failure to update their amortizations with the NHMFC.
Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the right to unilaterally
rescind the sale under the Deed of Sale with Assumption of Mortgage, they should have first asked the court for the
rescission thereof before they fully paid the outstanding balance of the mortgage loan with the NHMFC. They claim
that such payment is a unilateral act of rescission which violates existing jurisprudence.
In Tan v. Court of Appeals, 50 this court said:
. . . [T]he power to rescind obligations is implied in reciprocal ones in case one of the
obligors should not comply with what is incumbent upon him is clear from a reading of the Civil
Code provisions. However, it is equally settled that, in the absence of a stipulation to the contrary,
this power must be invoked judicially; it cannot be exercised solely on a party's own judgment
that the other has committed a breach of the obligation. Where there is nothing in the contract
empowering the petitioner to rescind it without resort to the courts, the petitioner's action in
unilaterally terminating the contract in this case is unjustified.
It is evident that the contract under consideration does not contain a provision authorizing its extrajudicial
rescission in case one of the parties fails to comply with what is incumbent upon him. This being the case, respondents-
spouses should have asked for judicial intervention to obtain a judicial declaration of rescission. Be that as it may, and
considering that respondents-spouses' Answer (with affirmative defenses) with Counterclaim seeks for the rescission
of the Deed of Sale with Assumption of Mortgage, it behooves the court to settle the matter once and for all than to
have the case re-litigated again on an issue already heard on the merits and which this court has already taken
cognizance of. Having found that petitioners seriously breached the contract, we, therefore, declare the same is
rescinded in favor of respondents-spouses. aCSDIc
As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with Assumption of
Mortgage, it is the duty of the court to require the parties to surrender whatever they may have received from the other.
The parties should be restored to their original situation. 51
The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of the P120,000.00
agreed upon. They also made payments to NHMFC amounting to P55,312.47. As to the petitioners' alleged payment
to CERF Realty of P46,616.70, except for petitioner Leticia Cannu's bare allegation, we find the same not to be
supported by competent evidence. As a general rule, one who pleads payment has the burden of proving
it. 52 However, since it has been admitted in respondents-spouses' Answer that petitioners shall assume the second
mortgage with CERF Realty in the amount of P35,000.00, and that Adelina Timbang, respondents-spouses' very own
witness, testified 53 that same has been paid, it is but proper to return this amount to petitioners. The three amounts
total P165,312.47 — the sum to be returned to petitioners.
WHEREFORE, premises considered, the decision of the Court of Appeals is hereby AFFIRMED with
MODIFICATION. Spouses Gil and Fernandina Galang are hereby ordered to return the partial payments made by
petitioners in the amount of P165,312.47. With costs.
SO ORDERED.
||| (Spouses Cannu v. Spouses Galang, G.R. No. 139523, [May 26, 2005], 498 PHIL 128-147)
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-62943 July 14, 1986

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE
NATIONAL BANK, respondents.

Juan J. Diaz and Cesar T. Basa for respondent PNB.

San Juan, Africa, Gonzales & San Agustin Law Offices for respondent PCIB.

GUTIERREZ, JR., J.:

This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court of Appeals, now
Intermediate Appellate Court which reversed the decision of the Court of First Instance of Manila, Branch XL, and
dismissed the plaintiff's complaint, the third party complaint, as well as the defendant's counterclaim.

The background facts which led to the filing of the instant petition are summarized in the decision of the respondent
Court of Appeals:

Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a

government owned and controlled corporation created under Republic Act No. 6234 as the
successor-in- interest of the defunct NWSA. The Philippine National Bank (PNB for short), on the
other hand, is the depository bank of MWSS and its predecessor-in-interest NWSA. Among the
several accounts of NWSA with PNB is NWSA Account No. 6, otherwise known as Account No.
381-777 and which is presently allocated No. 010-500281. The authorized signature for said
Account No. 6 were those of MWSS treasurer Jose Sanchez, its auditor Pedro Aguilar, and its
acting General Manager Victor L. Recio. Their respective specimen signatures were submitted by
the MWSS to and on file with the PNB. By special arrangement with the PNB, the MWSS used
personalized checks in drawing from this account. These checks were printed for MWSS by its
printer, F. Mesina Enterprises, located at 1775 Rizal Extension, Caloocan City.

During the months of March, April and May 1969, twenty-three (23) checks were prepared,
processed, issued and released by NWSA, all of which were paid and cleared by PNB and debited
by PNB against NWSA Account No. 6, to wit:

Check No. Date Payee Amount Date Paid

By PNB

1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69

Estrella
2. 59548 3-31-69 Natividad 2,848.86 4-23 69

Rosario

3. 59547 3-31-69 Pangilinan 195.00 Unreleased

Enterprises

4. 59549 3-31-69 Natividad 3,239.88 4-23-69

Rosario

5. 59552 4-1-69 Villarama 987.59 5-6-69

& Sons

6. 59554 4-1-69 Gascom 6,057.60 4-16 69

Engineering

7. 59558 4-2-69 The Evening 112.00 Unreleased

News

8. 59544 3-27-69 Progressive 18,391.20 4-18 69

Const.

9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69

Int. Inc.

10. 59568 4-7-69 Roberto 800.00 4-22-69

Marsan

11. 59570 4-7-69 Paz Andres 200.00 4-22-69

12. 59574 4-8-69 Florentino 100,000.00 4-11-69

Santos

13. 59578 4-8-69 Mla. Daily 95.00 Unreleased

Bulletin

14. 59580 4-8-69 Phil. Herald 100.00 5-9-69

15. 59582 4-8-69 Galauran 7,729.09 5-6-69

& Pilar

16. 59581 4-8-69 Manila 110.00 5-12 69

Chronicle

17. 59588 4-8-69 Treago 21,583.00 4-11 69

Tunnel

18. 59587 4-8-69 Delfin 120,000.00 4-11-69

Santiago

19. 59589 4-10-69 Deogracias 1,257.49 4-16 69

Estrella

20. 59594 4-14-69 Philam Ac- 33.03 4-29 69

cident Inc.

21. 59577 4-8-69 Esla 9,429.78 4-29 69

22. 59601 4-16-69 Justino 20,000.00 4-18-69

Torres

23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69

Inc. --------------------

P 320,636.26

During the same months of March, April and May 1969, twenty-three (23) checks bearing the
same numbers as the aforementioned NWSA checks were likewise paid and cleared by PNB and
debited against NWSA Account No. 6, to wit:

Check Date Payee Amount Date Paid

No. Issued By PNB

1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69

2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69

3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69

4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69

5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69

6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69

7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69

8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza

9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69

10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69

11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69

12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69

13.59578 4-10-69 Antonio 93,950.00 4-29-69

Mendoza

14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69

15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69

16.59581 4-8-69 Antonio 176,580.00 5-6-69

Mendoza

17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69

18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69

19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69

20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69

21.59577 4-14-69 Antonio 260,000.00 5-16-69

Mendoza

22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69

23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69

---------------

P3,457,903.00

The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and Antonio
Mendoza in their respective current accounts with the Philippine Commercial and Industrial Bank
(PCIB) and Philippine Bank of Commerce (PBC) in the months of March, April and May 1969.
Thru the Central Bank Clearing, these checks were presented for payment by PBC and PCIB to
the defendant PNB, and paid, also in the months of March, April and May 1969. At the time of
 their presentation to PNB these checks bear the standard indorsement which reads 'all prior
indorsement and/or lack of endorsement guaranteed.'

Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo Sison
and Antonio Mendoza were all fictitious persons. The respective balances in their current account
with the PBC and/or PCIB stood as follows: Raul Dizon P3,455.00 as of April 30, 1969; Antonio
Mendoza P18,182.00 as of May 23, 1969; and Arturo Sison Pl,398.92 as of June 30, 1969.

On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate restoration to its
Account No. 6, of the total sum of P3,457,903.00 corresponding to the total amount of these
twenty-three (23) checks claimed by NWSA to be forged and/or spurious checks. "In view of the
refusal of PNB to credit back to Account No. 6 the said total sum of P3,457,903.00 MWSS filed
the instant complaint on November 10, 1972 before the Court of First Instance of Manila and
docketed thereat as Civil Case No. 88950.

In its answer, PNB contended among others, that the checks in question were regular on its face in
all respects, including the genuineness of the signatures of authorized NWSA signing officers and
there was nothing on its face that could have aroused any suspicion as to its genuineness and due
execution and; that NWSA was guilty of negligence which was the proximate cause of the loss.

PNB also filed a third party complaint against the negotiating banks PBC and PCIB on the ground
that they failed to ascertain the Identity of the payees and their title to the checks which were
deposited in the respective new accounts of the payees with them.

xxx xxx xxx

On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS. The
dispositive portion of the decision reads:

WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in accordance

with Section 23 of the Negotiable Instruments Law, the Court hereby renders judgment in favor of
the plaintiff Metropolitan Waterworks and Sewerage System (MWSS) by ordering the defendant
Philippine National Bank (PNB) to restore the total sum of THREE MILLION FOUR HUNDRED
FIFTY SEVEN THOUSAND NINE HUNDRED THREE PESOS (P3,457,903.00) to plaintiff's
Account No. 6, otherwise known as Account No. 010-50030-3, with legal interest thereon
computed from the date of the filing of the complaint and until as restored in the said Account No.
6.

On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders judgment
in favor of the third party defendants Philippine Bank of Commerce (PBC) and Philippine
Commercial and Industrial Bank (PCIB) by dismissing the Third Party Complaint.

The counterclaims of the third party defendants are likewise dismissed for lack of evidence.

No pronouncement as to costs.

As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila and rendered
judgment in favor of the respondent Philippine National Bank.

A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a resolution dated
January 3, 1983.

The petitioner now raises the following assignments of errors for the grant of this petition:
 I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED,
THE DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THE
NEGOTIABLE INSTRUMENTS LAW.

II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN ACCEPTING

THE SPURIOUS CHECKS DESPITE THE OBVIOUS IRREGULARITY OF TWO SETS OF
CHECKS BEARING IdENTICAL NUMBER BEING ENCASHED WITHIN DAYS OF EACH
OTHER.

III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING
CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE AS
AGAINST THE ALLEGED DRAWEE.

The appellate court applied Section 24 of the Negotiable Instruments Law which provides:

Every negotiable instrument is deemed prima facie to have been issued for valuable consideration
and every person whose signature appears thereon to have become a party thereto for value.

The petitioner submits that the above provision does not apply to the facts of the instant case because the questioned
checks were not those of the MWSS and neither were they drawn by its authorized signatories. The petitioner states
that granting that Section 24 of the Negotiable Instruments Law is applicable, the same creates only a prima facie
presumption which was overcome by the following documents, to wit: (1) the NBI Report of November 2, 1970; (2)
the NBI Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74891; (4) the Memorandum of Mr.
Juan Dino, 3rd Assistant Auditor of the respondent drawee bank addressed to the Chief Auditor of the petitioner; (5)
the admission of the respondent bank's counsel in open court that the National Bureau of Investigation found the
signature on the twenty-three (23) checks in question to be forgeries; and (6) the admission of the respondent bank's
witness, Mr. Faustino Mesina, Jr. that the checks in question were not printed by his printing press. The petitioner
contends that since the signatures of the checks were forgeries, the respondent drawee bank must bear the loss under
the rulings of this Court.

A bank is bound to know the signatures of its customers; and if it pays a forged check it must be
considered as making the payment out of its obligation funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was forged.

xxx xxx xxx

The signatures to the checks being forged, under Section 23 of the Negotiable Instruments Law
they are not a charge against plaintiff nor are the checks of any value to the defendant.

It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of
the Philippine Islands in honoring and cashing the two forged checks. (San Carlos Milling Co. v.
Bank of the P. I., 59 Phil. 59)

It is admitted that the Philippine National Bank cashed the check upon a forged signature, and
placed the money to the credit of Maasim, who was the forger. That the Philippine National Bank
then endorsed the chock and forwarded it to the Shanghai Bank by whom it was paid. The
Philippine National Bank had no license or authority to pay the money to Maasim or anyone else
upon a forged signature. It was its legal duty to know that Malicor's endorsement was genuine
before cashing the check. Its remedy is against Maasim to whom it paid the money. (Great Eastern
Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678).

We have carefully reviewed the documents cited by the petitioner. There is no express and categorical finding in
these documents that the twenty-three (23) questioned checks were indeed signed by persons other than the
authorized MWSS signatories. On the contrary, the findings of the National Bureau of Investigation in its Report
dated November 2, 1970 show that the MWSS fraud was an "inside job" and that the petitioner's delay in the
reconciliation of bank statements and the laxity and loose records control in the printing of its personalized checks
facilitated the fraud. Likewise, the questioned Documents Report No. 159-1074 dated November 21, 1974 of the
National Bureau of Investigation does not declare or prove that the signatures appearing on the questioned checks
are forgeries. The report merely mentions the alleged differences in the type face, checkwriting, and printing
characteristics appearing in the standard or submitted models and the questioned typewritings. The NBI Chemistry
Report No. C-74-891 merely describes the inks and pens used in writing the alleged forged signatures.

It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its allegations of
forgery. These reports did not touch on the inherent qualities of the signatures which are indispensable in the
determination of the existence of forgery. There must be conclusive findings that there is a variance in the inherent
characteristics of the signatures and that they were written by two or more different persons.

Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It must be
established by clear, positive, and convincing evidence. This was not done in the present case.

The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59) and Great Eastern
Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the petitioner are inapplicable in this
case because the forgeries in those cases were either clearly established or admitted while in the instant case, the
allegations of forgery were not clearly established during trial.

Considering the absence of sufficient security in the printing of the checks coupled with the very close similarities
between the genuine signatures and the alleged forgeries, the twenty-three (23) checks in question could have been
presented to the petitioner's signatories without their knowing that they were bogus checks. Indeed, the cashier of
the petitioner whose signatures were allegedly forged was unable to ten the difference between the allegedly forged
signature and his own genuine signature. On the other hand, the MWSS officials admitted that these checks could
easily be passed on as genuine.

The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the drawee Philippine National Bank to
Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969 cites an instance where even the
concerned NWSA officials could not ten the differences between the genuine checks and the alleged forged checks.

At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his office at the
Cashier's Dept. where Messrs. Jose M. Sanchez, treasurer of NAWASA and Romeo Oliva of the
same office were present. Upon my arrival I observed the NAWASA officials questioning the
issue of the NAWASA checks appearing in their own list, xerox copy attached.

For verification purposes, therefore, the checks were taken from our file. To everybody there
present namely VIP Maramag, the two abovementioned NAWASA officials, AVP, Buhain, Asst.
Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez and L. Lechuga, both C/A
bookkeepers, no one was able to point out any difference on the signatures of the NAWASA
officials appearing on the checks compared to their official signatures on file. In fact 3 checks, one
of those under question, were presented to the NAWASA treasurer for verification but he could
not point out which was his genuine signature. After intent comparison, he pointed on the
questioned check as bearing his correct signature.

xxx xxx xxx

Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law which provides that:

SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made without
authority of the person whose signature it purports to be, it is wholly inoperative, and no right to
 retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto can be acquired through or under such signature unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority.

because it was guilty of negligence not only before the questioned checks were negotiated but even after the same
had already been negotiated. (See Republic v. Equitable Banking Corporation, 10 SCRA 8) The records show that at
the time the twenty-three (23) checks were prepared, negotiated, and encashed, the petitioner was using its own
personalized checks, instead of the official PNB Commercial blank checks. In the exercise of this special privilege,
however, the petitioner failed to provide the needed security measures. That there was gross negligence in the
printing of its personalized checks is shown by the following uncontroverted facts, to wit:

(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the safekeeping and
disposition of excess forms, check vouchers, and safety papers;

(2) The petitioner failed to retrieve from its printer all spoiled check forms;

(3) The petitioner failed to provide any control regarding the paper used in the printing of said checks;

(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek writing, and print
used by its printer in the printing of its checks and of the inks and pens used in signing the same; and

(5) The petitioner failed to send a representative to the printing office during the printing of said checks.

This gross negligence of the petitioner is very evident from the sworn statement dated June 19, 1969 of Faustino
Mesina, Jr., the owner of the printing press which printed the petitioner's personalized checks:

xxx xxx xxx

7. Q: Do you have any business transaction with the National Waterworks and
Sewerage Authority (NAWASA)?

A: Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms
such as NAWASA Check

xxx xxx xxx

15. Q: Were you given any ingtruction by the NAWASA in connection with the
printing of these check vouchers?

A: There is none, sir. No instruction whatsoever was given to me.

16. Q: Were you not advised as to what kind of paper would be used in the
check vouchers?

A: Only as per sample, sir.

xxx xxx xxx

20. Q: Where did you buy this Hammermill Safety check paper?

A: From Tan Chiong, a paper dealer with store located at Juan Luna, Binondo,
Manila. (In front of the Metropolitan Bank).
xxx xxx xxx

24. Q: Were all these check vouchers printed by you submitted to NAWASA?

A: Not all, sir. Because we have to make reservations or allowances for

spoilage.

25. Q: Out of these vouchers printed by you, how many were spoiled and how
many were the excess printed check vouchers?

A: Approximately four hundred (400) sheets, sir. I cannot determine the

proportion of the excess and spoiled because the final act of perforating these
check vouchers has not yet been done and spoilage can only be determined after
this final act of printing.

26. Q: What did you do with these excess check vouchers?

A: I keep it under lock and key in my firing cabinet.

xxx xxx xxx

28. Q: Were you not instructed by the NAWASA authorities to bum these
excess check vouchers?

A: No, sir. I was not instructed.

29. Q: What do you intend to do with these excess printed check vouchers?

A: I intend to use them for future orders from the

xxx xxx xxx

32. Q: In the process of printing the check vouchers ordered by the NAWASA,
how many sheets were actually spoiled?

A: I cannot approximate, sir. But there are spoilage in the process of printing
and perforating.

33. Q: What did you do with these spoilages?

A: Spoiled printed materials are usually thrown out, in the garbage can.

34. Q: Was there any representative of the NAWASA to supervise the printing
or watch the printing of these check vouchers?

A: None, sir.

xxx xxx xxx

39. Q: During the period of printing after the days work, what measures do you
undertake to safeguard the mold and other paraphernalia used in the printing of
these particular orders of NAWASA?
 A: Inasmuch as I have an employee who sleeps in the printing shop and at the
same time do the guarding, we just leave the mold attached to the machine and
the other finished or unfinished work check vouchers are left in the rack so that
the work could be continued the following day.

The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus—

xxx xxx xxx

60. We observed also that there is some laxity and loose control in the printing
of NAWASA cheeks. We gathered from MESINA ENTERPRISES, the printing
firm that undertook the printing of the check vouchers of NAWASA that
NAWASA had no representative at the printing press during the process of the
printing and no particular security measure instructions adopted to safeguard the
interest of the government in connection with printing of this accountable form.

Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in question was the
failure of the petitioner to reconcile the bank statements with its own records.

It is accepted banking procedure for the depository bank to furnish its depositors bank statements and debt and credit
memos through the mail. The records show that the petitioner requested the respondent drawee bank to discontinue
the practice of mailing the bank statements, but instead to deliver the same to a certain Mr. Emiliano Zaporteza. For
reasons known only to Mr. Zaporteza however, he was unreasonably delayed in taking prompt deliveries of the said
bank statements and credit and debit memos. As a consequence, Mr. Zaporteza failed to reconcile the bank
statements with the petitioner's records. If Mr. Zaporteza had not been remiss in his duty of taking the bank
statements and reconciling them with the petitioner's records, the fraudulent encashments of the first checks should
have been discovered, and further frauds prevented. This negligence was, therefore, the proximate cause of the
failure to discover the fraud. Thus,

When a person opens a checking account with a bank, he is given blank checks which he may fill
out and use whenever he wishes. Each time he issues a check, he should also fill out the check
stub to which the check is usually attached. This stub, if properly kept, will contain the number of
the check, the date of its issue, the name of the payee and the amount thereof. The drawer would
therefore have a complete record of the checks he issues. It is the custom of banks to send to its
depositors a monthly statement of the status of their accounts, together with all the cancelled
checks which have been cashed by their respective holders. If the depositor has filled out his check
stubs properly, a comparison between them and the cancelled checks will reveal any forged check
not taken from his checkbook. It is the duty of a depositor to carefully examine the bank's
statement, his cancelled checks, his check stubs and other pertinent records within a reasonable
time, and to report any errors without unreasonable delay. If his negligence should cause the bank
to honor a forged check or prevent it from recovering the amount it may have already paid on such
check, he cannot later complain should the bank refuse to recredit his account with the amount of
such check. (First Nat. Bank of Richmond v. Richmond Electric Co., 106 Va. 347, 56 SE 152, 7
LRA, NS 744 [1907]. See also Leather Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657
[1886]; Deer Island Fish and Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So. 116
[1933]). Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, 1971,
pp. 267-268).

This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by the National
Bureau of Investigation in its report dated November 2, 1970:

58. One factor which facilitate this fraud was the delay in the reconciliation of bank (PNB)
statements with the NAWASA bank accounts. x x x. Had the NAWASA representative come to
the PNB early for the statements and had the bank been advised promptly of the reported bogus
 check, the negotiation of practically all of the remaining checks on May, 1969, totalling
P2,224,736.00 could have been prevented.

The records likewise show that the petitioner failed to provide appropriate security measures over its own records
thereby laying confidential records open to unauthorized persons. The petitioner's own Fact Finding Committee, in
its report submitted to their General manager underscored this laxity of records control. It observed that the "office
of Mr. Ongtengco (Cashier No. VI of the Treasury Department at the NAWASA) is quite open to any person known
to him or his staff members and that the check writer is merely on top of his table."

When confronted with this report at the Anti-Fraud Action Section of the National Bureau of Investigation. Mr.
Ongtengco could only state that:

A. Generally my order is not to allow anybody to enter my office. Only

authorized persons are allowed to enter my office. There are some cases,
however, where some persons enter my office because they are following up
their checks. Maybe, these persons may have been authorized by Mr. Pantig.
Most of the people entering my office are changing checks as allowed by the
Resolution of the Board of Directors of the NAWASA and the Treasurer. The
check writer was never placed on my table. There is a place for the check write
which is also under lock and key.

Q. Is Mr. Pantig authorized to allow unauthorized persons to enter your office?

A. No, sir.

Q. Why are you tolerating Mr. Pantig admitting unauthorized persons in your
office?

A. I do not want to embarrass Mr. Pantig. Most of the people following up

checks are employees of the NAWASA.

Q. Was the authority given by the Board of Directors and the approval by the
Treasurer for employees, and other persons to encash their checks carry with it
their authority to enter your office?

A. No, sir.

xxx xxx xxx

Q. From the answers that you have given to us we observed that actually there is
laxity and poor control on your part with regards to the preparations of check
payments inasmuch as you allow unauthorized persons to follow up their
vouchers inside your office which may leakout confidential informations or your
books of account. After being apprised of all the shortcomings in your office, as
head of the Cashiers' Office of the Treasury Department what remedial measures
do you intend to undertake?

A. Time and again the Treasurer has been calling our attention not to allow
interested persons to hand carry their voucher checks and we are trying our best
and if I can do it to follow the instructions to the letter, I will do it but
unfortunately the persons who are allowed to enter my office are my co-
employees and persons who have connections with our higher ups and I can not
 possibly antagonize them. Rest assured that even though that everybody will get
hurt, I win do my best not to allow unauthorized persons to enter my office.

xxx xxx xxx

Q. Is it not possible inasmuch as your office is in charge of the posting of check

payments in your books that leakage of payments to the banks came from your
office?

A. I am not aware of it but it only takes us a couple of minutes to process the

checks. And there are cases wherein every information about the checks may be
obtained from the Accounting Department, Auditing Department, or the Office
of the General Manager.

Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation concluded in its Report
dated November 2, 1970 that the fraudulent encashment of the twenty-three (23)cheeks in question was an "inside
job". Thus-

We have all the reasons to believe that this fraudulent act was an inside job or one pulled with
inside connivance at NAWASA. As pointed earlier in this report, the serial numbers of these
checks in question conform with the numbers in current use of NAWASA, aside from the fact that
these fraudulent checks were found to be of the same kind and design as that of NAWASA's own
checks. While knowledge as to such facts may be obtained through the possession of a NAWASA
check of current issue, an outsider without information from the inside can not possibly pinpoint
which of NAWASA's various accounts has sufficient balance to cover all these fraudulent checks.
None of these checks, it should be noted, was dishonored for insufficiency of funds. . .

Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's gross
negligence, it is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law.

Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National Bank that was the
proximate cause of the loss. The petitioner relies on our ruling in Philippine National Bank v. Court of Appeals (25
SCRA 693) that.

Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB had found
nothing wrong with the check and would honor the same, and by actually paying its amount to the
PCIB, the PNB induced the latter, not only to believe that the check was genuine and good in
every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the
primary or proximate cause of the loss, and, hence, may not recover from the PCIB.

The argument has no merit. The records show that the respondent drawee bank, had taken the necessary measures in
the detection of forged checks and the prevention of their fraudulent encashment. In fact, long before the
encashment of the twenty-three (23) checks in question, the respondent Bank had issued constant reminders to all
Current Account Bookkeepers informing them of the activities of forgery syndicates. The Memorandum of the
Assistant Vice-President and Chief Accountant of the Philippine National Bank dated February 17, 1966 reads in
part:

SUBJECT: ACTIVITIES OF FORGERY SYNDICATE

From reliable information we have gathered that personalized checks of current account depositors
are now the target of the forgery syndicate. To protect the interest of the bank, you are hereby
enjoined to be more careful in examining said checks especially those coming from the clearing,
mails and window transactions. As a reminder please be guided with the following:
 1. Signatures of drawers should be properly scrutinized and compared with those we have on file.

2. The serial numbers of the checks should be compared with the serial numbers registered with
the Cashier's Dept.

3. The texture of the paper used and the printing of the checks should be compared with the
sample we have on file with the Cashier's Dept.

4. Checks bearing several indorsements should be given a special attention.

5. Alteration in amount both in figures and words should be carefully examined even if signed by
the drawer.

6. Checks issued in substantial amounts particularly by depositors who do not usually issue checks
in big amounts should be brought to the attention of the drawer by telephone or any fastest means
of communication for purposes of confirmation.

and your attention is also invited to keep abreast of previous circulars and memo instructions
issued to bookkeepers.

We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of the checks
because the printing of the petitioner's personalized checks was not done under the supervision and control of the
Bank. There is no evidence on record indicating that because of this private printing the petitioner furnished the
respondent Bank with samples of checks, pens, and inks or took other precautionary measures with the PNB to
safeguard its interests.

Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the fraudulent
encashment of its checks.

WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The decision of the
respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.
 THIRD DIVISION

[G.R. Nos. 151373-74. November 17, 2005.]

DEPARTMENT OF HEALTH, petitioner, vs. C.V. CANCHELA & ASSOCIATES,

ARCHITECTS (CVCAA), IN ASSOCIATION WITH MCS ENGINEERS CO., AND A.O.
MANSUETO IV — ELECTRICAL ENGINEERING SERVICES, AND LUIS ALINA,
SHERIFF IV, RTC, MANILA, respondents.

DECISION

CARPIO-MORALES, J p:

The Department of Health assails, via petition for review on certiorari, 1 the consolidated June 28, 2000
decision of the Court of Appeals affirming that of the Sole Arbitrator of the Construction Industry Arbitration
Commission (CIAC) 2 which granted the monetary claim of herein private respondents.
The following facts are not undisputed.
Petitioner entered into three Owner-Consultant Agreements (Agreements) with private respondents
covering infrastructure projects for the Baguio General Hospital and Medical Center (Baguio Project), the
Batangas Regional Hospital (Batangas Project) and the Corazon L. Montelibano Memorial Regional Hospital in
Bacolod City (Bacolod Project).
The first Agreement 3 dated October 7, 1996 was signed by Dr. Jesus del Prado, Chief of Hospital of the
Baguio General Hospital and Medical Center; the second, 4 dated October 8, 1996, by Dr. Vicente Gahol, Chief
of Hospital of the Batangas Regional Hospital; and the third, 5 dated October 7, 1996, by Dr. Lourdes Espina,
Officer-in-Charge of the Bacolod Regional Hospital.
The Agreements, which contained almost identical language, required the preparation by private
respondents of the following documents: detailed architectural and engineering design plans; technical
specifications and detailed estimates of cost of construction of the hospital, including the preparation of bid
documents and requirements; and construction supervision until completion of hand-over and issuance of final
certificate.
Work on the projects was generally divided into: architectural and engineering (A & E) services, and
construction supervision (CS).
The Agreements contained a common provision stating that private respondents' consultancy or
professional fees would be 7.5% of the project fund allocation, broken down into detailed architectural and
engineering services (6%), and full-time construction supervision (1.5%). 6
Thus, in the first Agreement involving the Baguio Project, petitioner agreed to pay private respondents
a professional fee in the amount of P1,444,875.00 or 7.5% of the project fund allocation of P19,265,000.00. 7
In the second agreement involving the Batangas Project, petitioner agreed to pay private respondents a
professional fee of P1,318,020.00 or 7.5% of the project fund allocation of P17,575,000.00. 8
In the third agreement, petitioner agreed to pay private respondents the amount of P890,549.00 which is
equivalent to 7.5% of the P11,875,000.00 fund allocated for the Bacolod Project. 9
While the Agreements were witnessed by the respective chief accountants of the hospitals and were duly
approved by the Secretary of Health, 10 the former did not issue corresponding certificates of availability of funds
to cover the professional or consultancy fees. 11
 Petitioner, acting through its representative Architect Ma. Rebecca M. Peñafiel, by separate letters 12 to
the respective chiefs of hospitals, all dated October 15, 1996, confirmed its acceptance of private respondents'
complete Contract or Bid Documents including the A & E Design Plans and Technical Specifications and the
Detailed Cost Estimates for each project, and accordingly recommended the payment of 7.5% of the project
allocation to private respondents as consultancy fees in accordance with the Agreements. 13 In the same letters,
petitioner advised that private respondents' performance of full-time construction supervision services shall
commence upon issuance of the Notices to Proceed to the winning contractors. cHCIEA
Before the Notices to Proceed could be issued to the winning contractors, however, petitioner amended
the three Agreements on December 10, 1996 by deleting from private respondents' scope of work the item "full-
time construction supervision" and replacing it with "periodic visits," thus:
1.5 Periodic Visits
The CONSULTANT shall make periodic visits to the project site to familiarize himself
with the general progress and quality of the work and to determine whether, the work is
proceeding in accordance with the Contract Documents. During such project site visits and on the
basis of his observations he shall report to the OWNER defects and deficiencies noted in the work
of contractors and shall condemn work found failing to conform to the Contract Documents. 14
The Amendment to each of the three Agreements was likewise duly witnessed and signed by the
hospitals' respective chief accountants and approved by the Secretary of Health. Just the same, no certifications
of availability of funds for the purpose were issued. 15
Full-time construction supervision having been excluded from private respondents' scope of work, their
professional fee was correspondingly reduced from 7.5% of the project fund allocation to 6% of the project
contract cost, payable as follows:
5.2 Payment Schedule
a. Upon the completion and submission of the Contract Documents, SEVENTY percent
(70%) of the fee will be made computed upon estimatedproject construction cost;
b. Upon fifty percent completion of the construction of the project, the payment shall
be adjusted and made so that it will amount to a sum equivalent to EIGHTY percent
(80%) of the fee, computed upon the Project Contract Cost
c. Upon completion and final acceptance of the project, the remaining balance will be paid
computed on the Project Contract Cost.
d. The payments arising from this Agreement, as amended shall be subject to the usual
accounting and auditing rules and regulations. 16(Emphasis supplied)
During the construction of the projects, various deficiencies in the performance of the agreed scope of
private respondents' work were allegedly discovered 17 which were not, however, communicated to private
respondents. 18 Due to such deficiencies, petitioner withheld payment of the consultancy fees due to private
respondents. And petitioner did not return the documents, plans, specifications and estimates submitted by private
respondents.
As despite written demands for payment, 19 petitioner continued to withhold payment of their
professional fees, private respondents appealed, by letter dated August 29, 1997, to then Department of Health
Secretary Carmencita C. Reodica, they stating that their appeal was "purposely done as our ultimate administrative
remedy before resorting to arbitration under E.O. 1008."
In a demand letter (undated) for payment addressed to Secretary Reodica and the chiefs of hospital
concerned, private respondents expressed their intention to resort to arbitration in accordance with Article 12 of
each of the Agreements. 20
Still later, private respondents sent another letter dated February 19, 1998 to Secretary Reodica stating
that it would be submitting the dispute to the CIAC.
 The demands for payment remained unheeded, prompting private respondents to file on September 21,
1998 with the CIAC their request for adjudication of their claim for payment of professional fees, escalation costs,
attorney's fees and costs of arbitration. The case was docketed as CIAC Case No. 31-98.
Acting on private respondents' petition, the CIAC appointed a Sole Arbitrator, Atty. Custodio O. Parlade,
from a list of three nominees to preside over the arbitration proceedings. 21
In its Answer dated January 21, 1999, 22 petitioner alleged, inter alia, that payment was withheld
because the hospitals concerned were not satisfied with the performance of private respondents who did not fulfill
the terms and conditions of the contracts; withholding of payment is sanctioned by Section 8.2 of the NEDA
Board Approval Guidelines on the Procurement of Consultancy Services for government projects (Implementing
Rules and Regulations) which provides:
To guarantee the faithful performance of the consultant under Contract, the final
payment shall be withheld until after a Certificate of Completion indicating satisfactory
completion of the Consultancy Services shall have been issued by the concerned government
agency. (Emphasis supplied);
the delay in the implementation of the project, as well as the payment of fees, is not due to the fault of the
hospitals but to private respondents' failure to rectify its unsatisfactory work; and the consultancy fees shall be
on a per project basis and at 6% of the project contract cost.
In the parties' "Terms of Reference," 23 the following facts were stipulated, inter alia:
4. The A & E services were completed, and the Contract Documents (CD) submitted by Claimant,
on 15 October 1996 for the Consultancy Contracts for:
4.1 Baguio Project, with CD accepted/approved by Respondent for Project Fund
Allocation (PFA) or Project Construction Cost (PCC) of P19,719,376;
4.2 Batangas Project, with CD accepted/approved by Respondent for PFA/PCC of
P20,373,565;
4.3 Bacolod Project, with CD accepted/approved by Respondent for PFA/PCC of
P20,118,940."
5. Claimants allege that they are entitled to 6% for A & E Fees, as follows, for:
5.1 the Consultancy Contract for Baguio Project in the amount of P1,183,163;
5.2 the Consultancy Contract for Batangas Project in the amount of P1,222,414; and
5.3 the Consultancy Contract for Bacolod Project in the amount of P1,207,136.
The Respondent, however, maintains that the 6% payment must be based upon the actual
project contract cost of each building which is defined as the cost of the winning bid price of the
contractor which performed the work. (Italics supplied)
And defined as issues were as follows:
1. Did the Claimants complete their work under the contract on time so as to entitle them to their
claims for A & E fees for:
[a] Baguio Project P1,183,163.00

[b] Batangas Project 1,222,414.00

[c] Bacolod Project 1,207,136.00

––––––––––––

Total P3,612,713.00
1.1 Was the work of the Claimants satisfactory so as to entitle them to their claims?
 1.2 How should the "project cost" be defined:
a. Should it be based on the detailed cost estimate for A & E services as
provided in the bid documents; or
b. Should it be based on the actual contract cost for each building?
2. Was the payment of the claims of the Claimant so delayed so as to entitle the Claimants to
interest? If so, by how much, and what rate of interest should be applied?
3. Was the implementation of the project delayed so as to entitle the Claimants to escalation? If
so, how much?
4. Are the Claimants entitled to their claims for attorney's fees and cost of arbitration?
After the presentation of evidence and submission of memoranda by the parties, the Sole Arbitrator
rendered a decision of March 30, 1999, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, award is hereby made in favor of the claimants
sentencing the respondent to pay the claimants the amount of P3,492,713 for A & E services
performed and completed for and accepted by DOH. This amount shall earn interest at 6% per
annum from the date of this award until this decision becomes final. Thereafter, the principal and
the interest accrued as of such time shall earn interest at 12% per annum.
The claim for escalation is denied. No award as to attorney's fees and costs.
SO ORDERED. 24
Petitioner elevated the case to the Court of Appeals via petition for review under Rule 43 of the Rules
of Court, docketed as CA-G.R. No. 52538, 25citing the following grounds in support thereof: (a) the CIAC has
no jurisdiction to hear and decide Case No. 31-98; (b) the Sole Arbitrator acted with grave abuse of discretion
amounting to lack or excess of jurisdiction when, despite absence of factual and legal basis, he awarded to private
respondents the monetary award of P3,492,713 for A & E services, with interest at 6% per annum from the date
of award until the decision becomes final, and at 12% on the principal and accrued interest thereafter; and (c) the
Sole Arbitrator exceeded his powers and was partial to petitioner.
By Resolution of May 19, 1999, the Court of Appeals dismissed the petition for having been filed out of
time. 26
Meanwhile, on May 31, 1999, the Sole Arbitrator, acting on private respondents' Motion for Execution
which was filed soon after his decision as promulgated, directed the issuance of a writ of execution. 27
On June 10, 1999, the Office of the Solicitor General (OSG), counsel for petitioner, filed a Motion for
Reconsideration of the Court of Appeals' Resolution dated May 19, 1999 28 which was, by Resolution of June
29, 1999, denied, the appellate court noting that no Motion for Extension to file petition for review was received
prior to the filing of the petition for review. 29
Petitioner subsequently filed on July 8, 1999 through the OSG, another petition before the Court of
Appeals under Rule 65 of the Rules of Court with urgent prayer for the issuance of a Temporary Restraining
Order and/or a Writ of Preliminary Injunction, docketed as CA-G.R. No. 53632, 30 assailing the Sole Arbitrator's
Order dated May 31, 1999 directing the issuance of a writ of execution of the March 30, 1999 decision, as well
as the Writ of Execution and the Order denying petitioner's motion for reconsideration of the Order dated May
31, 1999, upon the following grounds: the petition questioning the Sole Arbitrator's decision subject of the
assailed order dated May 31, 1999 was still pending with the Court of Appeals; the CIAC has no jurisdiction to
hear and decide Case No. 31-98; and "government funds and properties may not be seized under writs of execution
or garnishment to satisfy such judgments," following Commissioner of Public Highways v. San
Diego 31 and Republic v. Villasor. 32
On July 16, 1999, the OSG filed a Motion for Reconsideration of the appellate court's Resolution of June
29, 1999 but it was, by Resolution of June 29, 1999, denied.
 By Resolution issued on July 20, 1999, the Court of Appeals required private respondents to comment
on petitioner's second petition. 33 On even date, the OSG filed a motion for the issuance of a temporary restraining
order and/or writ of preliminary injunction 34 to restrain the enforcement of the writ of execution, which motion
was, by Resolution of July 23, 1999, granted.
On July 27, 1999, the Court of Appeals issued a resolution in the first petition granting petitioner's
Motion for Reconsideration and accordingly reinstating said first petition. By the same Resolution, private
respondents were directed to file their comment 35 thereon.
The two petitions were later consolidated on motion of the OSG.
Following the filing by private respondents of their Comments on the two petitions, the Court of Appeals,
by the assailed consolidated decision dated June 20, 2000, affirmed the decision of the Sole Arbitrator, it finding
that the CIAC, which has original and exclusive jurisdiction over the dispute pursuant to Executive Order No.
1008, 36 did not commit grave abuse of discretion amounting to lack or excess of jurisdiction in the promulgation
of its assailed decision, the same being well-supported by evidence and it containing a just interpretation and
application of the provisions of the consultancy agreements. 37
The Court of Appeals having denied petitioner's Motion for Reconsideration 38 for being "barren of
merit," 39 petitioner now comes before this Court on petition for review by certiorari under Rule 45 on the
following assigned errors: EHDCAI
I
THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE CLAIMS FILED
BY RESPONDENT C.V. CANCHELA WERE PREMATURE
II
THE COURT OF APPEALS ERRED IN HOLDING THAT THE MONETARY
AWARD BY RESPONDENT ARBITRATOR WAS IN ACCORD WITH THE TENOR OF THE
AGREEMENT AS THERE WAS NO BASIS AT ALL FOR THE AWARD THEREOF
Petitioner asserts that the claims of private respondents are premature as they failed to obtain the decision
of the Secretary of Health prior to arbitration, a mandatory requirement under Article 12 of the Agreements. 40
But even granting that the claims were ripe for arbitration, petitioner asserts that the CIAC should have
dismissed the petition on the ground that the State is immune from suits, the Agreements, being to promote the
health and well-being of the citizens, having been entered into pursuant to the State's sovereign and governmental
power.
With respect to the monetary award, petitioner contends that private respondents are only entitled to the
A & E services it rendered in the amount of P2,749,960.40 which is 6% of the total cost of the project, taking into
account the deletion of the provision on construction supervision; and no interest on the principal is due as it did
not incur any delay and the Agreements contained no express stipulation on interest.
Private respondents, on the other hand, counter that, as correctly held by the Court of Appeals and the
Sole Arbitrator, they did not fail in their duty to go through the mode of settling their claims for payment as
stipulated in the Agreements and that the records clearly establish the factual and legal bases for the award in
their favor.
In compliance with the Resolution 41 of this Court requiring the parties to submit their respective
memoranda, petitioner filed its Memorandum 42raising for the very first time the argument that the Agreements
are void from the beginning for failure to include therein a certification of availability of funds which is required
under existing law. As such, petitioner concludes that the consultancy fees cannot be based on the project fund
allocation but on the basis of the reasonable value or on the principle of quantum meruit.
Petitioner thus additionally prays that the Sole Arbitrator's Decision be nullified.
As reflected above, the failure of the respective chief accountants to issue a certification of availability
of funds for respondents' services subject of the Agreements was not raised before the CIAC or the Court of
Appeals. It is settled that an issue which was neither averred in the complaint nor raised during the trial cannot be
raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice and due
process, 43 save on exceptional circumstances. 44 The paramount and overriding public policy is that no money
shall be paid out of the Treasury except upon an appropriation made by law. 45 That public funds are involved in
the present controversy thus justifies a relaxation of technical rules of procedure in order to serve the demands of
substantial justice. 46
An inquiry into the fundamental issue of nullity of the Agreements is then warranted to determine if
petitioner duly observed the constitutional prescription for the prevention and disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of public funds and properties. 47
Proceeding from the foregoing consideration, the Court finds merit in the petition.
The Agreements, it bears noting, expressly stated that payments arising therefrom shall be "subject to
the usual accounting and auditing rules and regulations." 48 Being government contracts, they are governed and
regulated by special laws, failure to comply with which renders them void.
P.D. 1445 (The Auditing Code of the Philippines) provides that no contract involving the expenditure of
public funds shall be entered into unless there is an appropriation therefor 49 and unless the proper accounting
official of the agency concerned shall have certified to the officer entering into the obligation that funds have
been duly appropriated for the purpose and that the amount necessary to cover the proposed contract for the
current fiscal year is available for expenditure on account thereof, subject to verification by the auditor concerned.
The certificate signed by the proper accounting official and the auditor who verified it shall be attached to and
become an integral part of the proposed contract. 50 Any contract entered into contrary to the foregoing
requirements is void. 51

E.O. 292 (The Administrative Code of 1987) provides too that no funds shall be disbursed
without first securing the certification of a government agency's chief accountant or head of the accounting unit
as to the availability of funds. 52 The issuance of such certification is thus a condition sine qua nonto entering
into any contract or incurring any obligation that may be chargeable against the authorized allotment in any
department, office or agency. Unless the certification is issued, the contract can not be considered final or
binding. 53
The formalities expressly required by the Auditing Code of the Philippines and The Administrative Code
of 1987 not having been complied with, the subject three Agreements are null and void from the very beginning.
The signatures of the chief accountants as instrumental witnesses do not constitute substantial compliance with
the explicit requirements of said Codes. As Melchor v. Commission on Audit 54 teaches, the certification, not the
accountant's signature as contract witness, is "the basic and more important validating document," and "the more
reliable indicium of fund availability," notwithstanding paragraph 2 of Letter of Instructions No. 968 55 (LOI No.
968) which considers the signature of the chief accountant as itself constituting a certification that funds are
indeed available. 56 For LOI No. 968, being an administrative issuance, must yield to the explicit provisions
of The Auditing Code of the Philippines and Revised Administrative Code of 1987. 57
Even if each of the Agreements did not incorporate the provision calling for compliance with the above-
said Codes, the provisions thereof, as well as those of the 1987 Constitution and LOI No. 968, must be deemed
to form part of, and co-exist with, the Agreements. Applicable peremptory provisions of law of this nature,
affecting as they do public policy or impressed as they are with public interest, are held to be written into the
contract. 58
The illegality of the subject Agreements proceeds, it bears emphasis, from an express declaration or
prohibition by law, 59 not from any intrinsic illegality. As such, the Agreements are not illegal per se 60 and the
party claiming thereunder may recover what had been paid or delivered. 61
The Court thus finds that private respondents are entitled to be compensated for the services they actually
performed for the benefit of petitioner, as shown by petitioner's acceptance and use 62 of the complete Contract
or Bid Documents including the A & E Design Plans and Technical Specifications and the Detailed Cost Estimates
for each project that private respondents promptly submitted, as in fact petitioner itself recommends that private
respondents be paid therefor.
The compensation must, however, exclude services for "periodic visits" which the records irrefutably
show not to have been rendered.
 With respect to the stipulation in each of the Agreements that private respondents' professional fees
would be 7.5% of the project fund allocation, which was amended to 6% of the project contract cost, the same
patently contravenes Section 525 of the Government Accounting and Auditing (GAA) Manual directing that fees
for architectural, engineering design, and similar professional services should be fixed in monetary or peso
amounts, instead of as percentage of the project cost.
Section 525 of GAA Manual provides:
Sec. 525. Contract fees for architectural, engineering design, and similar professional
services. — Professional fees for architectural, engineering design and similar professional
services shall be stipulated in the contract in fixed monetary or peso amounts instead of as
percentage of the project cost. Professional fees in terms of percent of the project cost
is inconsistent with our national goal of economy in fiscal operations because the percentage fee
motivates the architect or designer to design a project so as to maximize its cost since his fees will
be computed as a direct proportion to the resulting cost (COA Cir. 82-191, July 5, 1982).
(Emphasis and italics supplied)
Thus, on top of the chief accountants' unexplained failure to issue the requisite certificates of availability
of funds 63 and the unjustified omission of the chiefs of hospital to secure such certification before even entering
into the Agreements with private respondents, these officers failed to heed the guidelines embodied in above-
quoted Section 525 of the GAA Manual. The records do not show any explanation for these lapses.
Paragraph 2 of LOI 968 provides:
2. It shall be the responsibility of the Chief Accountant to verify the availability of
funds, as duly evidenced by programmed appropriations released by the Ministry of the Budget
and received by the agency, from which such contract shall be ultimately payable. (Emphasis
supplied)
And Book VI, Chapter 5, Section 40 of the Revised Administrative Code of 1987 provides:
SECTION 40. Certification of Availability of Funds. — No funds shall be disbursed,
and no expenditures or obligations chargeable against any authorized allotment shall be incurred
or authorized in any department, office or agency without first securing the certification of its
Chief Accountant or head of accounting unit as to the availability of funds and the allotment to
which the expenditure or obligation may be properly charged.
No obligation shall be certified to accounts payable unless the obligation is founded
on a valid claim that is properly supported by sufficient evidence and unless there is proper
authority for its incurrence. . . . (Emphasis supplied)
As the immediately-quoted provisions of law mandate, the issuance of a certification that funds are
available is a legal duty imposed on the chief accountant or the head of the accounting unit. And ascertainment
that such certification exists prior to entering into any government contract or incurring any obligation chargeable
against public funds is a responsibility which devolves on the officer concerned.
For their failure to discharge their duties under the law, The Revised Administrative Code of
1987 provides that the officer or officers entering into the contract shall be liable to the Government or other
contracting party for any consequent damage to the same extent as if the transaction had been wholly between
private parties. 64
On the other hand, COA Circular No. 76-34 65 directs the COA to call the attention of management,
within five days from receipt of a copy of the contract, any defects or deficiencies therein and to suggest corrective
measures as appropriate and warranted to facilitate the processing of the claim upon presentation. The records do
not show that COA complied with said directive. It was thus negligent. 66
The Court believes, however, that declaring the individual officers of petitioner who entered into the
Agreements personally liable for the unpaid professional fees due to private respondents would be highly unjust,
the government having already received and accepted the benefits of the services rendered. En passant, it is,
however, non sequitor to let these officers go scot-free from their negligence.
 Since the questioned Agreements are null and void for want of the requisite covering certificates of
appropriation, the teachings in Eslao v. Commission on Audit 67 and in Royal Trust Construction v. Commission
on Audit 68 must be heeded.
In Eslao, this Court, directed payment to the contractor on a quantum meruit basis despite the failure to
undertake a public bidding, it holding that "to deny payment to the contractor of the two buildings which are
almost fully completed and presently occupied by the university would be to allow the government to unjustly
enrich itself at the expense of another."
In Royal Trust, this Court, in the interest of substantial justice and equity, allowed payment to the
contractor on a quantum meruit basis despite the absence of a written contract and a covering appropriation.
In the case at bar then, the nullity of the herein Agreements notwithstanding, the ends of substantial
justice and equity will be better served if payment to private respondents for their consultancy services is allowed
on a quantum meruit basis. AEcTCD
The measure of recovery under the principle of quantum meruit should relate to the reasonable value of
the services performed, 69 taking into account the standard of practice in the profession, the architectural and
engineering skills of private respondents, and their professional expertise and standing. 70
Respecting petitioner's argument that the State is immune from suit, the same deserves scant
consideration. To sustain the argument would not only perpetuate a grave injustice on private respondents who
performed their services in good faith and were given the run-around for over eight years, but would sanction as
well unjust enrichment on the part of the State.
Such conduct by petitioner and its officers, in addition, derogates against the salutary policies enunciated
in Presidential Decree No. 1746 "CREATING THE CONSTRUCTION INDUSTRY AUTHORITY OF THE
PHILIPPINES (CIAP)" 71 and E.O. 1008 "CONSTRUCTION INDUSTRY ARBITRATION LAW." 72 As
expressed therein, these statutes contain provisions for the promotion of the healthy partnership between the
government and the private sector and encourage the optimum development and growth of the local construction
industry.
As EPG Construction Company v. Vigilar 73 holds, "this Court — as the staunch guardian of the
citizens' rights and welfare — cannot sanction an injustice so patent on its face, and allow itself to be an instrument
in the perpetration thereof. Justice and equity sternly demand that the State's cloak of invincibility against suit be
shred in this particular instance, and that petitioners-contractors be duly compensated — on the basis of quantum
meruit — for construction done on the public works housing project." 74

In light of the foregoing discussions, addressing the question of jurisdiction and other collateral issues
raised in the petition is rendered unnecessary.
WHEREFORE, the petition is GRANTED. The Owner-Consultant Agreements entered into between
petitioner Department of Health, through the respective chiefs of hospitals, and private respondents are declared
null and void ab initio.
The assailed consolidated decision of the Court of Appeals dated June 28, 2000 and its Resolution dated
November 23, 2001 in CA-G.R. SP Nos. 52538 and 53632 are REVERSED AND SET ASIDE.
The Commission on Audit is hereby directed to determine and ascertain with dispatch, on a quantum
meruit basis, the total compensation due to private respondents for the performance of consultancy services and
to allow payment thereof upon the completion of said determination.
SO ORDERED.
||| (Department of Health v. C.V. Canchela & Associates, G.R. Nos. 151373-74, [November 17, 2005], 511 PHIL
654-681)
 THIRD DIVISION

[G.R. No. 153201. January 26, 2005.]

JOSE MENCHAVEZ, JUAN MENCHAVEZ JR.,SIMEON MENCHAVEZ, RODOLFO

MENCHAVEZ, CESAR MENCHAVEZ, REYNALDO, MENCHAVEZ, ALMA
MENCHAVEZ, ELMA MENCHAVEZ, CHARITO M. MAGA, FE M. POTOT,
THELMA M. REROMA, MYRNA M. YBAÑEZ, and SARAH M.
VILLABER, petitioners,vs.FLORENTINO TEVES JR., respondent.

DECISION

PANGANIBAN, J p:

A void contract is deemed legally nonexistent. It produces no legal effect. As a general rule, courts leave
parties to such a contract as they are, because they are in pari delicto or equally at fault. Neither party is entitled to
legal protection.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing the February 28, 2001
Decision 2 and the April 16, 2002 Resolution 3 of the Court of Appeals (CA) in CA-GR CV No. 51144. The
challenged Decision disposed as follows:
"WHEREFORE, the assailed decision is hereby MODIFIED, as follows:
"1. Ordering [petitioners] to jointly and severally pay the [respondent] the amount of
P128,074.40 as actual damages, and P50,000.00 as liquidated damages;
"2. Dismissing the third party complaint against the third party defendants;
"3. Upholding the counterclaims of the third party defendants against the [petitioners.
Petitioners] are hereby required to pay [the] third party defendants the sum of P30,000.00 as moral
damages for the clearly unfounded suit;
"4. Requiring the [petitioners] to reimburse the third party defendants the sum of
P10,000.00 in the concept of attorney's fees and appearance fees of P300.00 per appearance;
"5. Requiring the [petitioners] to reimburse the third party defendants the sum of
P10,000.00 as exemplary damages pro bono publico and litigation expenses including costs, in
the sum of P5,000.00." 4
The assailed Resolution denied petitioners' Motion for Reconsideration. IEHScT
The Facts
On February 28, 1986, a "Contract of Lease" was executed by Jose S. Menchavez, Juan S. Menchavez
Sr.,Juan S. Menchavez Jr.,Rodolfo Menchavez, Simeon Menchavez, Reynaldo Menchavez, Cesar Menchavez, Charito
M. Maga, Fe M. Potot, Thelma R. Reroma, Myrna Ybañez, Sonia S. Menchavez, Sarah Villaver, Alma S. Menchavez,
and Elma S. Menchavez, as lessors; and Florentino Teves Jr. as lessee. The pertinent portions of the Contract are
herein reproduced as follows:
"WHEREAS, the LESSORS are the absolute and lawful co-owners of that area covered
by FISHPOND APPLICATION No. VI-1076 of Juan Menchavez, Sr.,filed on September 20,
1972, at Fisheries Regional Office No. VII, Cebu City covering an area of 10.0 hectares more or
less located at Tabuelan, Cebu;
 xxx xxx xxx
"NOW, THEREFORE, for and in consideration of the mutual covenant and stipulations
hereinafter set forth, the LESSORS and the LESSEE have agreed and hereby agree as follows:
"1. The TERM of this LEASE is FIVE (5) YEARS, from and after the execution of this
Contract of Lease, renewable at the OPTION of the LESSORS;
"2. The LESSEE agrees to pay the LESSORS at the residence of JUAN MENCHAVEZ
SR.,one of the LESSORS herein, the sum of FORTY THOUSAND PESOS (P40,000.00)
Philippine Currency, annually ...;
"3. The LESSORS hereby warrant that the above-described parcel of land is fit and good
for the intended use as FISHPOND;
"4. The LESSORS hereby warrant and assure to maintain the LESSEE in the peaceful
and adequate enjoyment of the lease for the entire duration of the contract;
"5. The LESSORS hereby further warrant that the LESSEE can and shall enjoy the
intended use of the leased premises as FISHPOND FOR THE ENTIRE DURATION OF THE
CONTRACT;
"6. The LESSORS hereby warrant that the above-premises is free from all liens and
encumbrances, and shall protect the LESSEE of his right of lease over the said premises from any
and all claims whatsoever;
"7. Any violation of the terms and conditions herein provided, more particularly the
warranties above-mentioned, the parties of this Contract responsible thereof shall pay liquidated
damages in the amount of not less than P50,000.00 to the offended party of this Contract; in case
the LESSORS violated therefor, they bound themselves jointly and severally liable to the
LESSEE;"
xxx xxx xxx. 5
On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo Cabigon demolished the fishpond
dikes constructed by respondent and delivered possession of the subject property to other parties. 6 As a result, he
filed a Complaint for damages with application for preliminary attachment against petitioners. In his Complaint, he
alleged that the lessors had violated their Contract of Lease, specifically the peaceful and adequate enjoyment of the
property for the entire duration of the Contract. He claimed P157,184.40 as consequential damages for the demolition
of the fishpond dikes, P395,390.00 as unearned income, and an amount not less than P100,000.00 for rentals paid. 7
Respondent further asserted that the lessors had withheld from him the findings of the trial court in Civil
Case No. 510-T, entitled "Eufracia Colongan and Paulino Pamplona v. Juan Menchavez Sr. and Sevillana S.
Menchavez." In that case involving the same property, subject of the lease, the Menchavez spouses were ordered to
remove the dikes illegally constructed and to pay damages and attorney's fees. 8
Petitioners filed a Third Party Complaint against Benny and Elizabeth Allego, Albino Laput, Adrinico Che
and Charlemagne Arendain Jr., as agents of Eufracia Colongan and Paulino Pamplona. The third-party defendants
maintained that the Complaint filed against them was unfounded. As agents of their elderly parents, they could not be
sued in their personal capacity. Thus, they asserted their own counterclaims. 9
After trial on the merits, the RTC ruled thus:
"[The court must resolve the issues one by one.] As to the question of whether the
contract of lease between Teves and the [petitioners] is valid, we must look into the present law
on the matter of fishponds. And this is Pres. Decree No. 704 which provides in Sec. 24:
'Lease of fishponds-Public lands available for fishpond development including
those earmarked for family-size fishponds and not yet leased prior to November 9, 1972
shall be leased only to qualified persons, associations, cooperatives or corporations,
subject to the following conditions. DEcITS
 '1. The lease shall be for a period of twenty five years (25),renewable for
another twenty five years;
'2. Fifty percent of the area leased shall be developed and be producing in
commercial scale within three years and the remaining portion shall be developed and
be producing in commercial scale within five years; both periods begin from the
execution of the lease contract;
'3. All areas not fully developed within five years from the date of the execution
of the lease contract shall automatically revert to the public domain for disposition of the
bureau; provided that a lessee who failed to develop the area or any portion thereof shall
not be permitted to reapply for said area or any portion thereof or any public land under
this decree; and/or any portion thereof or any public land under this decree;
'4. No portion of the leased area shall be subleased.'
The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution) states:
'Sec. 2. — All lands of the public domain, waters, minerals, coal, petroleum and
other mineral oils, all forces of potential energy,fisheries,forests, or timber, wild life,
flora and fauna and other natural resources are owned by the state.
'Sec. 3. — Lands of the public domain are classified into agricultural, forest or
timber, mineral lands and national parks. Agricultural lands of the public domain may
be further classified by law according to the uses to which they may be devoted.
Alienable lands of the public domain shall be limited to agricultural lands ....'
"As a consequence of these provisions, and the declared public policy of the State under
the Regalian Doctrine, the lease contract between Florentino Teves, Jr. and Juan Menchavez Sr.
and his family is a patent nullity. Being a patent nullity, [petitioners] could not give any rights to
Florentino Teves, Jr. under the principle: 'NEMO DAT QUOD NON HABET' — meaning ONE
CANNOT GIVE WHAT HE DOES NOT HAVE, considering that this property in litigation
belongs to the State and not to [petitioners].Therefore, the first issue is resolved in the negative,
as the court declares the contract of lease as invalid and void ab-initio.
"On the issue of whether [respondent] and [petitioners] are guilty of mutual fraud, the
court rules that the [respondent] and [petitioners] are in pari-delicto.As a consequence of this, the
court must leave them where they are found. ....
xxx xxx xxx
“....Why? Because the defendants ought to have known that they cannot lease what does
not belong to them for as a matter of fact, they themselves are still applying for a lease of the same
property under litigation from the government. DISTcH
"On the other hand, Florentino Teves, being fully aware that [petitioners were] not yet
the owner[s],had assumed the risks and under the principle ofVOLENTI NON FIT INJURIA
NEQUES DOLUS — He who voluntarily assumes a risk, does not suffer damage[s] thereby. As
a consequence, when Teves leased the fishpond area from [petitioners] — who were mere holders
or possessors thereof, he took the risk that it may turn out later that his application for lease may
not be approved.
"Unfortunately however, even granting that the lease of [petitioners] and [their]
application in 1972 were to be approved, still [they] could not sublease the same.In view therefore
of these, the parties must be left in the same situation in which the court finds them, under the
principle IN PARI DELICTO NON ORITOR ACTIO,meaning[:] Where both are at fault, no one
can found a claim.
 "On the third issue of whether the third party defendants are liable for demolishing the
dikes pursuant to a writ of execution issued by the lower court[,t]his must be resolved in the
negative, that the third party defendants are not liable. First, because the third party defendants
are mere agents of Eufracia Colongan and Eufenio Pamplona, who are the ones who should be
made liable if at all, and considering that the demolition was pursuant to an order of the court to
restore the prevailing party in that Civil Case 510-T, entitled: Eufracia Colongan v. Menchavez.
"After the court has ruled that the contract of lease is null and void ab-initio,there is no
right of the [respondent] to protect and therefore[,] there is no basis for questioning the Sheriff's
authority to demolish the dikes in order to restore the prevailing party, under the
principle VIDETUR NEMO QUISQUAM ID CAPERE QUOD EI NECESSE EST ALII
RESTITUERE — He will not be considered as using force who exercise his rights and proceeds
by the force of law.
"WHEREFORE, in view of all foregoing [evidence] and considerations, this court
hereby renders judgment as follows:
"1. Dismissing the ...complaint by the [respondent] against the [petitioners];
"2. Dismissing the third party complaint against the third party defendants;
"3. Upholding the counterclaims of the third party defendants against the [petitioners.
The petitioners] are hereby required to pay third party defendants the sum of P30,000.00 as moral
damages for this clearly unfounded suit;
"4. Requiring the [petitioners] to reimburse the third party defendants the sum of
P10,000.00 in the concept of attorney's fees and appearance fees of P300.00 per appearance;
"5. Requiring the [petitioners] to pay to the third party defendants the sum of P10,000.00
as exemplary damages probono publico and litigation expenses including costs, in the sum of
P5,000.00." 10 (Underscoring in the original)
Respondent elevated the case to the Court of Appeals, where it was docketed as CA-GR CV No.
51144. aIcHSC
Ruling of the Court of Appeals
The CA disagreed with the RTC's finding that petitioners and respondent were in pari delicto. It contended
that while there was negligence on the part of respondent for failing to verify the ownership of the subject property,
there was no evidence that he had knowledge of petitioners' lack of ownership. 11 It held as follows:
"....Contrary to the findings of the lower court, it was not duly proven and established
that Teves had actual knowledge of the fact that [petitioners] merely usurped the property they
leased to him. What Teves admitted was that he did not ask for any additional document other
than those shown to him, one of which was the fishpond application. In fact, [Teves] consistently
claimed that he did not bother to ask the latter for their title to the property because he relied on
their representation that they are the lawful owners of the fishpond they are holding for lease.
(TSN, July 11, 1991, pp. 8-11)" 12
The CA ruled that respondent could recover actual damages in the amount of P128,074.40. Citing Article
1356 13 of the Civil Code, it further awarded liquidated damages in the amount of P50,000, notwithstanding the nullity
of the Contract. 14
Hence, this Petition. 15
The Issues
Petitioners raise the following issues for our consideration:
"1. The Court of Appeals disregarded the evidence, the law and jurisprudence when it
modified the trial court's decision when it ruled in effect that the trial court erred in holding that
 the respondent and petitioners are in pari delicto,and the courts must leave them where they are
found;
"2. The Court of Appeals disregarded the evidence, the law and jurisprudence in
modifying the decision of the trial court and ruled in effect that the Regional Trial Court erred in
dismissing the respondent's Complaint." 16
The Court's Ruling
The Petition has merit.
Main Issue:
Were the Parties in Pari Delicto?
The Court shall discuss the two issues simultaneously.
In Pari Delicto Rule
on Void Contracts
The parties do not dispute the finding of the trial and the appellate courts that the Contract of Lease was
void. 17 Indeed, the RTC correctly held that it was the State, not petitioners, that owned the fishpond. The 1987
Constitution specifically declares that all lands of the public domain, waters, fisheriesand other natural resources
belong to the State. 18 Included here are fishponds, which may not be alienated but only leased. 19 Possession thereof,
no matter how long, cannot ripen into ownership. 20
Being merely applicants for the lease of the fishponds, petitioners had no transferable right over them. And
even if the State were to grant their application, the law expressly disallowed sublease of the fishponds to
respondent. 21 Void are all contracts in which the cause, object or purpose is contrary to law, public order or public
policy. 22
A void contract is equivalent to nothing; it produces no civil effect. 23 It does not create, modify or extinguish
a juridical relation. 24 Parties to a void agreement cannot expect the aid of the law; the courts leave them as they are,
because they are deemed in pari delicto or "in equal fault." 25 To this rule, however, there are exceptions that permit
the return of that which may have been given under a void contract. 26 One of the exceptions is found in Article 1412
of the Civil Code, which states:
"Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
"(1) When the fault is on the part of both contracting parties, neither may recover what
he has given by virtue of the contract, or demand the performance of the other's undertaking;
"(2) When only one of the contracting parties is at fault, he cannot recover what he has
given by reason of the contract, or ask for the fulfillment of what has been promised him. The
other, who is not at fault, may demand the return of what he has given without any obligation to
comply with his promise." EADSIa
On this premise, respondent contends that he can recover from petitioners, because he is an innocent party to
the Contract of Lease. 27 Petitioners allegedly induced him to enter into it through serious misrepresentation. 28
Finding of In Pari Delicto:
A Question of Fact
The issue of whether respondent was at fault or whether the parties were in pari delicto is a question of fact
not normally taken up in a petition for review on certiorari under Rule 45 of the Rules of Court. 29 The present case,
however, falls under two recognized exceptions to this rule. 30 This Court is compelled to review the facts, since the
CA's factual findings are (1) contrary to those of the trial court; 31 and (2) premised on an absence of evidence, a
presumption that is contradicted by the evidence on record. 32
Unquestionably, petitioners leased out a property that did not belong to them, one that they had no authority
to sublease. The trial court correctly observed that petitioners still had a pending lease application with the State at the
time they entered into the Contract with respondent. 33
 Respondent, on the other hand, claims that petitioners misled him into executing the Contract. 34 He insists
that he relied on their assertions regarding their ownership of the property. His own evidence, however, rebuts his
contention that he did not know that they lacked ownership. At the very least, he had notice of their doubtful ownership
of the fishpond.
Respondent himself admitted that he was aware that the petitioners' lease application for the fishpond had
not yet been approved. 35 Thus, he knowingly entered into the Contract with the risk that the application might be
disapproved. Noteworthy is the fact that the existence of a fishpond lease application necessarily contradicts a claim
of ownership. That respondent did not know of petitioners' lack of ownership is therefore incredible.
The evidence of respondent himself shows that he negotiated the lease of the fishpond with both Juan
Menchavez Sr. and Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge Esparagoza. 36 His counsel's presence
during the negotiations, prior to the parties' meeting of minds, further debunks his claim of lack of knowledge. Lawyers
are expected to know that fishponds belong to the State and are inalienable. It was reasonably expected of the counsel
herein to advise his client regarding the matter of ownership.
Indeed, the evidence presented by respondent demonstrates the contradictory claims of petitioners regarding
their alleged ownership of the fishpond. On the one hand, they claimed ownership and, on the other, they assured him
that their fishpond lease application would be approved. 37 This circumstance should have been sufficient to place
him on notice. It should have compelled him to determine their right over the fishpond, including their right to lease
it.
The Contract itself stated that the area was still covered by a fishpond application. 38 Nonetheless, although
petitioners declared in the Contract that they co-owned the property, their erroneous declaration should not be used
against them. A cursory examination of the Contract suggests that it was drafted to favor the lessee. It can readily be
presumed that it was he or his counsel who prepared it — a matter supported by petitioners' evidence. 39 The
ambiguity should therefore be resolved against him, being the one who primarily caused it. 40
The CA erred in finding that petitioners had failed to prove actual knowledge of respondent of the ownership
status of the property that had been leased to him. On the contrary, as the party alleging the fact, it was he who had
the burden of proving — through a preponderance of evidence 41 — that they misled him regarding the ownership of
the fishpond. His evidence fails to support this contention. Instead, it reveals his fault in entering into a void Contract.
As both parties are equally at fault, neither may recover against the other. 42

Liquidated Damages
Not Proper
The CA erred in awarding liquidated damages, notwithstanding its finding that the Contract of Lease was
void. Even if it was assumed that respondent was entitled to reimbursement as provided under paragraph 1 of Article
1412 of the Civil Code, the award of liquidated damages was contrary to established legal principles. HIcTDE
Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of a breach
thereof. 43 Liquidated damages are identical to penalty insofar as legal results are concerned. 44 Intended to ensure
the performance of the principal obligation, such damages are accessory and subsidiary obligations. 45 In the present
case, it was stipulated that the party responsible for the violation of the terms, conditions and warranties of the Contract
would pay not less than P50,000 as liquidated damages. Since the principal obligation was void, there was no contract
that could have been breached by petitioners; thus, the stipulation on liquidated damages was inexistent. The nullity
of the principal obligation carried with it the nullity of the accessory obligation of liquidated damages. 46
As explained earlier, the applicable law in the present factual milieu is Article 1412 of the Civil Code. This
law merely allows innocent parties to recover what they have given without any obligation to comply with their
prestation. No damages may be recovered on the basis of a void contract; being nonexistent, the agreement produces
no juridical tie between the parties involved. Since there is no contract, the injured party may only recover through
other sources of obligations such as a law or a quasi-contract. 47 A party recovering through these other sources of
obligations may not claim liquidated damages, which is an obligation arising from a contract.
WHEREFORE, the Petition is GRANTED and the assailed Decision and Resolution SET ASIDE. The
Decision of the trial court is hereby REINSTATED.
 No pronouncement as to costs. SATDEI
SO ORDERED.
||| (Menchavez v. Teves, Jr., G.R. No. 153201, [January 26, 2005], 490 PHIL 268-285)
 SECOND DIVISION

[G.R. No. 136031. January 4, 2002.]

JEFFERSON LIM, petitioner, vs. QUEENSLAND TOKYO COMMODITIES,

INC., respondent.

Zosa & Quijano Law offices for petitioner.

Bustos Villafuerte & Associates Law Offices for private respondent.

SYNOPSIS

Queensland Tokyo Commodities, Inc. is a duly licensed broker engaged in the trading of commodities futures
with full membership at the Manila Futures Exchange, Inc. Upon suggestion of Benjamin Shia, a market analyst and
trader of Queensland, Jefferson Lim decided to invest with a marginal deposit of US$5,000 in manager's check on the
foreign exchange market. Lim signed the Customer's Agreement. To accommodate Lim's request to trade right away,
Queensland advanced P125,000 from its own funds while waiting for the manager's check to clear since they dealt in
pesos only. He was then allowed to trade. During the first day of trading, Lim made a profit. However, during the
second day, they lost. Meanwhile, Queensland learned that it would take 17 days to clear the manager's check. Upon
management's request, Shia returned the manager's check to Lim and it was replaced by an unindorsed traveler's check.
The traveler's check was deposited with Citibank but it was refused since it was not duly signed by Lim. Queensland
returned the traveler's check to Lim for his signature but he did not return it to Queensland. Thereafter, Lim refused
to settle his account with Queensland. Resultantly, Queensland filed a complaint for collection of sum of money
against Lim. The trial court dismissed the complaint. But it was reversed by the Court of Appeals. Lim filed the instant
recourse alleging, among others, that the appellate court committed error in holding that petitioner is estopped in
questioning the validity of the Customer's Agreement.
The Court ruled that clearly, by his own acts, petitioner was estopped from impugning the validity of the
Customer's Agreement. For a party to a contract cannot deny the validity thereof after enjoying its benefits without
outrage to one's sense of justice and fairness. It appeared that petitioner's reason for backing out of the agreement is
that he began sustaining losses from the trade. However, this alone is insufficient to nullify the contract or disregard
its legal effects. By its very nature it is already a perfected, if not a consummated contract. Courts have no power to
relieve parties from obligations voluntarily assumed, simply because their contracts turned out to be disastrous or
unwise investments. Thus, the instant petition was denied.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; DOCTRINE OF ESTOPPEL; ELEMENTS. — The

essential elements of estoppel are: (1) conduct of a party amounting to false representation or concealment of material
facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those
which the party subsequently attempts to assert; (2) intent, or at least expectation, that this conduct shall be acted upon
by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the real facts.
2. ID.; ID.; ID.; PARTY TO A CONTRACT CANNOT DENY THE VALIDITY THEREOF AFTER
ENJOYING ITS BENEFITS. — [P]etitioner already availed himself of the benefits of the Customer's Agreement
whose validity he now impugns. As found by the CA, even before petitioner's initial marginal deposit (in the form of
the PCI manager's check dated October 22, 1992) was converted into cash, he already started trading on October 22,
1992, thereby making a net profit of P6,845.57. On October 23, he continued availing of said agreement, although this
time incurred a "floating loss" of P44,645. While he claimed he had not authorized respondent to trade on those dates,
this claim is belied by his signature affixed in the order forms, marked as Exhibits "G", "G-1" to "G-13". Clearly, by
his own acts, petitioner is estopped from impugning the validity of the Customer's Agreement. For a party to a contract
cannot deny the validity thereof after enjoying its benefits without outrage to one's sense of justice and fairness.
3. ID.; ID.; COURTS HAVE NO POWER TO RELIEVE PARTIES FROM OBLIGATIONS
VOLUNTARILY ASSUMED. — It appears that petitioner's reason to back out of the agreement is that he began
sustaining losses from the trade. However, this alone is insufficient to nullify the contract or disregard its legal effects.
By its very nature it is already a perfected, if not a consummated, contract. Courts have no power to relieve parties
from obligations voluntarily assumed, simply because their contracts turned out to be disastrous or unwise
investments. Notably, in the Customer's Agreement, petitioner has been forewarned of the high risk involved in the
foreign currency investment as stated in the "Risk Disclosure Statement," located in the same box where petitioner
signed.
4. CIVIL LAW; HUMAN RELATIONS; HE WHO COMES TO COURT MUST COME WITH CLEAN
HANDS; APPLICABLE IN CASE AT BAR. — Petitioner himself was responsible for the issuance of the US$5,000
manager's check. It was he who failed to replace the manager's check with cash. He authorized Shia to start trading
even before the US$5,000 check had cleared. He could not, in fairness to the other party concerned, now invoke his
own misdeeds to exculpate himself, conformably with the basic principle in law that he who comes to court must
come with clean hands.
5. MERCANTILE LAW; GUIDELINES FOR SPOT/FUTURES CURRENCY TRADING; NOT
VIOLATED SINCE PETITIONER AGREED TO THE CONVERSION OF HIS DOLLAR DEPOSIT TO PESOS.
— [W]e also find that respondent did not violate paragraph 14 of the Guidelines for Spot/Futures Currency Trading,
which provides; "14. DEPOSITS & PAYMENTS — All deposits, payments and repayments, etc. will be in Philippine
Currency. When a deposit with the company is not in cash or bank draft, such deposit will not take effect in the account
concerned until it has been confirmed NEGOTIABLE for payment by authorized management personnel."
Respondent claims it informed petitioner of its policy not to accept dollar investment. For this reason, it converted the
petitioner's US$5,000 manager's check to pesos (P125,000) out of respondent's own funds to accommodate petitioner's
request to trade right away. On record, it appears that petitioner agreed to the conversion of his dollar deposit to pesos.
6. CIVIL LAW; OBLIGATIONS AND CONTRACTS; DOCTRINE OF ESTOPPEL; PETITIONER IS
BARRED FROM QUESTIONING THEIR ARRANGEMENT FOR FAILURE TO SEASONABLY OBJECT AND
BY FIXING SIGNATURE TO THE NOTICE OF DEPOSIT. — [R]espondent advanced petitioner's marginal deposit
of P125,000 out of its own funds while waiting for the US$5,000 manager's check to clear, relying on the good credit
standing of petitioner. Contrary to petitioner's averment now, respondent had advanced his margin deposit with his
approval. Nowhere in the "Guidelines" adverted to by petitioner was such an arrangement prohibited. Note that the
advance was made with petitioner's consent, as indicated by his signature, Exhibit "E-1", affixed in the deposit notice,
Exhibit "E", sent to him by respondent. By his failure to seasonably object to this arrangement and by affixing his
signature to the notice of deposit, petitioner is barred from questioning said arrangement now. HAaDTE
7. REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; ISSUES CANNOT BE RAISED FOR THE FIRST
TIME THEREON. — [P]etitioner faults the appellate court for not taking judicial notice of the cease and desist order
against the Manila International Futures Exchange Commission and all commodity traders including respondent.
However, we find that this issue was first raised only in petitioner's motion for reconsideration of the Court of Appeals'
decision. It was never raised in the Memorandum filed by petitioner before the trial court. Hence, this Court cannot
now, for the first time on appeal, pass upon this issue. For an issue cannot be raised for the first time on appeal. It must
be raised seasonably in the proceedings before the lower court. Questions raised on appeal must be within the issues
framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal.

DECISION

QUISUMBING, J p:
 Before us is a petition for review assailing the June 25, 1998, decision 1 of the Court of Appeals in CA-G.R.
CV No. 46495 which reversed and set aside the decision of the Regional Trial Court of Cebu, Branch 24, dismissing
the complaint by respondent for a sum of money as well as petitioner's counterclaim.
Private respondent Queensland Tokyo Commodities, Incorporated (Queensland, for brevity) is a duly
licensed broker engaged in the trading of commodities futures with full membership and with a floor trading right at
the Manila Futures Exchange, Inc.. 2
Sometime in 1992, Benjamin Shia, a market analyst and trader of Queensland, was introduced to petitioner
Jefferson Lim by Marissa Bontia, 3 one of his employees. Marissa's father was a former employee of Lim's father. 4
Shia suggested that Lim invest in the Foreign Exchange Market, trading U.S. dollar against the Japanese yen,
British pound, Deutsche Mark and Swiss Franc.
Before investing, Lim requested Shia for proof that the foreign exchange was really lucrative. They conducted
mock tradings without money involved. As the mock trading showed profitability, Lim decided to invest with a
marginal deposit of US$5,000 in manager's check. The marginal deposit represented the advance capital for his future
tradings. It was made to apply to any authorized future transactions, and answered for any trading account against
which the deposit was made, for any loss of whatever nature, and for all obligations, which the investor would incur
with the broker. 5
Because respondent Queensland dealt in pesos only, it had to convert US$5,000 in manager's check to pesos,
amounting to P125,000 since the exchange rate at that time was P25 to US$1.00. To accommodate petitioner's request
to trade right away, it advanced the P125,000 from its own funds while waiting for the manager's check to clear.
Thereafter, a deposit notice in the amount of P125,000 was issued to Queensland, marked as Exhibit "E". This was
sent to Lim who received it as indicated by his signature marked as Exhibit "E-1". Then, Lim signed the Customer's
Agreement, marked as Exhibit "F", which provides as follows:
25. Upon signing of this Agreement, I shall deposit an initial margin either by personal
check, manager's check or cash. In the case of the first, I shall not be permitted to trade until the
check has been cleared by my bank and credited to your account. In respect of margin calls or
additional deposits required, I shall likewise pay them either by personal check, manager's check
or cash. In the event my personal check is dishonored, the company has the right without call or
notice to settle/close my trading account against which the deposit was made. In such event, any
loss of whatever nature shall be borne by me and I shall settle such loss upon demand together
with interest and reasonable cost of collection. However, in the event such liquidation gives rise
to a profit then such amount shall be credited to the Company. The above notwithstanding, I am
not relieved of any legal responsibility as a result of my check being dishonored by my bank. 6
Petitioner Lim was then allowed to trade with respondent company which was coursed through Shia by virtue
of the blank order forms, marked as Exhibits "G", "G-1" to "G-13", 7 all signed by Lim. Respondent furnished Lim
with the daily market report and statements of transactions as evidenced by the receiving forms, marked as Exhibits
"J", "J-1" to "J-4", 8 some of which were received by Lim.
During the first day of trading or on October 22, 1992, Lim made a net profit of P6,845.57. 9 Shia went to
the office of Lim and informed him about it. He was elated. He agreed to continue trading. During the second day of
trading or on October 23, 1992, they lost P44,465. 10
Meanwhile, on October 22, 1992, respondent learned that it would take seventeen (17) days to clear the
manager's check given by petitioner. Hence, on October 23, 1992, at about 11:00 A.M., upon management's request,
Shia returned the check to petitioner who informed Shia that petitioner would rather replace the manager's check with
a traveler's check. 11 Considering that it was 12:00 noon already, petitioner requested Shia to come back at 2:00 P.M..
Shia went with petitioner to the bank to purchase a traveler's check at the PCI Bank, Juan Luna Branch at 2:00 P.M..
Shia noticed that the traveler's check was not indorsed but Lim told Shia that Queensland could sign the indorsee
portion. 12 Because Shia trusted the latter's good credit rating, and out of ignorance, he brought the check back to the
office unsigned. 13 Inasmuch as that was a busy Friday, the check was kept in the drawer of respondent's consultant.
Later, the traveler's check was deposited with Citibank. 14
 On October 26, 1992, Shia informed petitioner that they incurred a floating loss of P44,695 15 on October
23, 1992. He told petitioner that they could still recover their losses. He could unlock the floating loss on Friday. By
unlocking the floating loss, the loss on a particular day is minimized.
On October 27, 1992, Citibank informed respondent that the traveler's check could not be cleared unless it
was duly signed by Lim, the original purchaser of the traveler's check. A Miss Arajo, from the accounting staff of
Queensland, returned the check to Lim for his signature, but the latter, aware of his P44,465 loss, demanded for a
liquidation of his account and said he would get back what was left of his investment. 16 Meanwhile, Lim signed only
one portion of the traveler's check, leaving the other half blank. He then kept it. 17 Arajo went back to the office
without it.
Respondent asked Shia to talk to petitioner for a settlement of his account but petitioner refused to talk with
Shia. Shia made follow-ups for more than a week beginning October 27, 1992. Because petitioner disregarded this
request, respondent was compelled to engage the services of a lawyer, who sent a demand letter 18 to petitioner. This
letter went unheeded. Thus, respondent filed a complaint 19 against petitioner, docketed as Civil Case No. CEB-
13737, for collection of a sum of money.
On April 22, 1994, the trial court rendered its decision, thus:
WHEREFORE, in view of all the foregoing, the complaint is dismissed without
pronouncement as to costs. The defendant's counterclaim is likewise dismissed.
SO ORDERED. 20
On appeal by Queensland, the Court of Appeals reversed and set aside the trial court's decision, with the
following fallo:
WHEREFORE, the decision appealed from is hereby REVERSED AND SET ASIDE,
and another one is entered ordering appellee [Jefferson Lim] to pay appellant the sum of
P125,000.00, with interest at the legal rate until the whole amount is fully paid, P10,000.00 as
attorney's fees, and costs. 21
Petitioner herein filed a motion for reconsideration before the Court of Appeals, which was denied in a
resolution dated October 6, 1998. 22
Dissatisfied, petitioner filed the instant recourse alleging that the appellate court committed errors:
I. . . . IN REVERSING THE DECISION OF THE RTC WHICH DISMISSED RESPONDENT'S
COMPLAINT;
II. . . . IN HOLDING THAT THE PETITIONER IS ESTOPPED IN QUESTIONING THE
VALIDITY OF THE CUSTOMER'S AGREEMENT AND FROM DENYING THE
EFFECTS OF HIS CONDUCT;
III. . . . IN NOT TAKING JUDICIAL NOTICE OF THE LETTER OF RESPONDENT THAT
THE SEC HAS ISSUED A CEASE AND DESIST ORDER AGAINST THE MANILA
INTERNATIONAL FUTURES EXCHANGE COMMISSION AND ALL
COMMODITY TRADERS INCLUDING THE RESPONDENT.
Despite the petitioner's formulation of alleged errors, we find that the main issue is whether or not the
appellate court erred in holding that petitioner is estopped from questioning the validity of the Customer's Agreement
that he signed.
The essential elements of estoppel are: (1) conduct of a party amounting to false representation or
concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and
inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation, that this
conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the
real facts. 23
Here, it is uncontested that petitioner had in fact signed the Customer's Agreement in the morning of October
22, 1992, 24 knowing fully well the nature of the contract he was entering into. The Customer's Agreement was duly
notarized and as a public document it is evidence of the fact, which gave rise to its execution and of the date of the
latter. 25 Next, petitioner paid his investment deposit to respondent in the form of a manager's check in the amount of
US$5,000 as evidenced by PCI Bank Manager's Check No. 69007, dated October 22, 1992. 26 All these
are indicia that petitioner treated the Customer's Agreement as a valid and binding contract.
Moreover, we agree that, on petitioner's part, there was misrepresentation of facts. He replaced the manager's
check with an unendorsed traveler's check, instead of cash, while assuring Shia that respondent Queensland could sign
the indorsee portion thereof. 27 As it turned out, Citibank informed respondent that only the original purchaser (i.e. the
petitioner) could sign said check. When the check was returned to petitioner for his signature, he refused to sign. Then,
as petitioner himself admitted in his Memorandum, 28 he used the traveler's check for his travel expenses. 29
More significantly, petitioner already availed himself of the benefits of the Customer's Agreement whose
validity he now impugns. As found by the CA, even before petitioner's initial marginal deposit (in the form of the PCI
manager's check dated October 22, 1992) 30 was converted into cash, he already started trading on October 22, 1992,
thereby making a net profit of P6,845.57. On October 23, he continued availing of said agreement, although this time
he incurred a "floating loss" of P44,645. 31 While he claimed he had not authorized respondent to trade on those dates,
this claim is belied by his signature affixed in the order forms, marked as Exhibits "G", "G-1" to "G-13". 32
Clearly, by his own acts, petitioner is estopped from impugning the validity of the Customer's Agreement.
For a party to a contract cannot deny the validity thereof after enjoying its benefits without outrage to one's sense of
justice and fairness.
It appears that petitioner's reason to back out of the agreement is that he began sustaining losses from the
trade. However, this alone is insufficient to nullify the contract or disregard its legal effects. By its very nature it is
already a perfected, if not a consummated, contract. Courts have no power to relieve parties from obligations
voluntarily assumed, simply because their contracts turned out to be disastrous or unwise investments. 33 Notably, in
the Customer's Agreement, petitioner has been forewarned of the high risk involved in the foreign currency investment
as stated in the "Risk Disclosure Statement," 34located in the same box where petitioner signed.
Further, petitioner contends that the Customer's Agreement was rendered nugatory because: (1) the marginal
deposit he gave was in dollars and (2) respondent allowed him to trade even before the US$5,000 manager's check
was cleared. This contention is disingenuous to say the least, but hardly meritorious.
Petitioner himself was responsible for the issuance of the US$5,000 manager's check. It was he who failed
to replace the manager's check with cash. He authorized Shia to start trading even before the US$5,000 check had
cleared. He could not, in fairness to the other party concerned, now invoke his own misdeeds to exculpate himself,
conformably with the basic principle in law that he who comes to court must come with clean hands.
Contrary to petitioner's contention, we also find that respondent did not violate paragraph 14 of the
Guidelines for Spot/Futures Currency Trading, which provides:
14. DEPOSITS & PAYMENTS
All deposits, payments and repayments, etc. will be in Philippine Currency. When a
deposit with the Company is not in cash or bank draft, such deposit will not take effect in the
account concerned until it has been confirmed NEGOTIABLE for payment by authorized
management personnel. 35
Respondent claims it informed petitioner of its policy not to accept dollar investment. For this reason, it
converted the petitioner's US$5,000 manager's check to pesos (P125,000) out of respondent's own funds to
accommodate petitioner's request to trade right away. 36 On record, it appears that petitioner agreed to the conversion
of his dollar deposit to pesos. 37
Neither is there merit in petitioner's contention that respondent violated the Customer's Agreement by
allowing him to trade even if his manager's check was not yet cleared, as he had no margin deposit as required by the
Customer's Agreement, viz:
5. Margin Receipt
 A Margin Receipt issued by the Company shall only be for the purpose of acknowledging
receipt of an amount as margin deposit for Spot/Futures Currency Trading. All checks received
for the purpose of margin deposits have to be cleared through such bank account as may be
opened by the Company before any order can be accepted. 38
But as stated earlier, respondent advanced petitioner's marginal deposit of P125,000 out of its own funds
while waiting for the US$5,000 manager's check to clear, relying on the good credit standing of petitioner. Contrary
to petitioner's averment now, respondent had advanced his margin deposit with his approval. Nowhere in the
"Guidelines" adverted to by petitioner was such an arrangement prohibited. Note that the advance was made with
petitioner's consent, as indicated by his signature, Exhibit "E-1", 39 affixed in the deposit notice, Exhibit "E", 40 sent
to him by respondent. By his failure to seasonably object to this arrangement and by affixing his signature to the notice
of deposit, petitioner is barred from questioning said arrangement now.
Anent the last assigned error, petitioner faults the appellate court for not taking judicial notice of the cease
and desist order against the Manila International Futures Exchange Commission and all commodity traders including
respondent. However, we find that this issue was first raised only in petitioner's motion for reconsideration of the
Court of Appeals' decision. It was never raised in the Memorandum 41 filed by petitioner before the trial court. Hence,
this Court cannot now, for the first time on appeal, pass upon this issue. For an issue cannot be raised for the first time
on appeal. It must be raised seasonably in the proceedings before the lower court. Questions raised on appeal must be
within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the
first time on appeal. 42
WHEREFORE, the instant petition is DENIED for lack of merit. The decision of the Court of Appeals dated
June 25, 1998, in CA-G.R. CV No. 46495 is AFFIRMED. Costs against petitioner. HCaDIS
SO ORDERED.
||| (Lim v. Queensland Tokyo Commodities, Inc., G.R. No. 136031, [January 4, 2002], 424 PHIL 35-48)
 FIRST DIVISION

[G.R. No. 156437. March 1, 2004.]

NATIONAL HOUSING AUTHORITY, petitioner, vs. GRACE BAPTIST CHURCH and

the COURT OF APPEALS, respondents.

DECISION

YNARES-SANTIAGO, J p:

This is a petition for review under Rule 45 of the Rules of Court, seeking to reverse the Decision of the Court
of Appeals dated February 26, 2001, 1 and its Resolution dated November 8, 2002, 2 which modified the decision of
the Regional Trial Court of Quezon City, Branch 90, dated February 25, 1997. 3
On June 13, 1986, respondent Grace Baptist Church (hereinafter, the Church) wrote a letter to petitioner
National Housing Authority (NHA), manifesting its interest in acquiring Lots 4 and 17 of the General Mariano Alvarez
Resettlement Project in Cavite. 4 In its letter-reply dated July 9, 1986, petitioner informed respondent:
In reference to your request letter dated 13 June 1986, regarding your application for
Lots 4 and 17, Block C-3-CL, we are glad to inform you that your request was granted and you
may now visit our Project Office at General Mariano Alvarez for processing of your application
to purchase said lots.
We hereby advise you also that prior to approval of such application and in accordance
with our existing policies and guidelines, your other accounts with us shall be maintained in good
standing. 5
Respondent entered into possession of the lots and introduced improvements thereon. 6
On February 22, 1991, the NHA's Board of Directors passed Resolution No. 2126, approving the sale of the
subject lots to respondent Church at the price of P700.00 per square meter, or a total price of P430,500.00. 7 The
Church was duly informed of this Resolution through a letter sent by the NHA. 8
On April 8, 1991, the Church tendered to the NHA a manager’s check in the amount of P55,350.00,
purportedly in full payment of the subject properties.9 The Church insisted that this was the price quoted to them by
the NHA Field Office, as shown by an unsigned piece of paper with a handwritten computation scribbled
thereon. 10 Petitioner NHA returned the check, stating that the amount was insufficient considering that the price of
the properties have changed. The Church made several demands on the NHA to accept their tender of payment, but
the latter refused. Thus, the Church instituted a complaint for specific performance and damages against the NHA
with the Regional Trial Court of Quezon City, 11 where it was docketed as Civil Case No. Q-91-9148.
On February 25, 1997, the trial court rendered its decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering the defendant to reimburse to the plaintiff the amount of P4,290.00
representing the overpayment made for Lots 1, 2, 3, 18, 19 and 20;
2. Declaring that there was no perfected contract of sale with respect to Lots 4 and 17
and ordering the plaintiff to return possession of the property to the defendant and to pay the latter
 reasonable rental for the use of the property at P200.00 per month computed from the time it took
possession thereof until finally vacated. Costs against defendant.
SO ORDERED. 12
On appeal, the Court of Appeals, affirmed the trial court’s finding that there was indeed no contract of sale
between the parties. However, petitioner was ordered to execute the sale of the lots to Grace Baptist Church at the
price of P700.00 per square meter, with 6% interest per annum from March 1991. The dispositive portion of the Court
of Appeals’ decision, dated February 26, 2001, reads:
WHEREFORE, the appealed Decision is hereby AFFIRMED with the
MODIFICATION that defendant-appellee NHA is hereby ordered to sell to plaintiff-appellant
Grace Baptist Church Lots 4 and 17 at the price of P700.00 per square meter, or a total cost
P430,000.00 with 6% interest per annum from March, 1991 until full payment in cash.
SO ORDERED. 13
The appellate court ruled that the NHA's Resolution No. 2126, which earlier approved the sale of the subject
lots to Grace Baptist Church at the price of P700.00 per square meter, has not been revoked at any time and was
therefore still in effect. As a result, the NHA was estopped from fixing a different price for the subject properties.
Considering further that the Church had been occupying the subject lots and even introduced improvements thereon,
the Court of Appeals ruled that, in the interest of equity, it should be allowed to purchase the subject properties. 14
Petitioner NHA filed a Motion for Reconsideration which was denied in a Resolution dated November 8,
2002. Hence, the instant petition for review on the sole issue of: Can the NHA be compelled to sell the subject lots to
Grace Baptist Church in the absence of any perfected contract of sale between the parties?
Petitioner submits that the Court cannot compel it to sell the subject property to Grace Baptist Church without
violating its freedom to contract. 15Moreover, it contends that equity should be applied only in the absence of any law
governing the relationship between the parties, and that the law on sales and the law on contracts in general apply to
the present case. 16
We find merit in petitioner’s submission.
Petitioner NHA is not estopped from selling the subject lots at a price equal to their fair market value, even
if it failed to expressly revoke Resolution No. 2126. It is, after all, hornbook law that the principle of estoppel does
not operate against the Government for the act of its agents, 17 or, as in this case, their inaction. HTcDEa
On the application of equity, it appears that the crux of the controversy involves the characterization of equity
in the context of contract law. Preliminarily, we reiterate that this Court, while aware of its equity jurisdiction, is first
and foremost, a court of law. While equity might tilt on the side of one party, the same cannot be enforced so as to
overrule positive provisions of law in favor of the other. 18 Thus, before we can pass upon the propriety of an
application of equitable principles in the case at bar, we must first determine whether or not positive provisions of law
govern.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising
therefrom have the force of law between the parties and should be complied with in good faith. 19 However, it must
be understood that contracts are not the only source of law that govern the rights and obligations between the
parties. More specifically, no contractual stipulation may contradict law, morals, good customs, public order or public
policy. 20Verily, the mere inexistence of a contract, which would ordinarily serve as the law between the parties, does
not automatically authorize disposing of a controversy based on equitable principles alone. Notwithstanding the
absence of a perfected contract between the parties, their relationship may be governed by other existing laws which
provide for their reciprocal rights and obligations.
It must be remembered that contracts in which the Government is a party are subject to the same rules of
contract law which govern the validity and sufficiency of contract between individuals. All the essential elements and
characteristics of a contract in general must be present in order to create a binding and enforceable Government
contract. 21
 It appearing that there is no dispute that this case involves an unperfected contract, the Civil Law principles
governing contracts should apply. In Vda. de Urbano v. Government Service Insurance System, 22 it was ruled that a
qualified acceptance constitutes a counter-offer as expressly stated by Article 1319 of the Civil Code. In said case,
petitioners offered to redeem mortgaged property and requested for an extension of the period of redemption.
However, the offer was not accepted by the GSIS. Instead, it made a counter-offer, which petitioners did not accept.
Petitioners again offer to pay the redemption price on staggered basis. In deciding said case, it was held that when
there is absolutely no acceptance of an offer or if the offer is expressly rejected, there is no meeting of the minds.
Since petitioners’ offer was denied twice by GSIS, it was held that there was clearly no meeting of the minds and,
thus, no perfected contract. All that is established was a counter-offer. 23
In the case at bar, the offer of the NHA to sell the subject property, as embodied in Resolution No. 2126, was
similarly not accepted by the respondent.24 Thus, the alleged contract involved in this case should be more accurately
denominated as inexistent. There being no concurrence of the offer and acceptance, it did not pass the stage of
generation to the point of perfection. 25 As such, it is without force and effect from the very beginning or from its
incipiency, as if it had never been entered into, and hence, cannot be validated either by lapse of time or
ratification. 26 Equity can not give validity to a void contract, 27 and this rule should apply with equal force to
inexistent contracts.
We note from the records, however, that the Church, despite knowledge that its intended contract of sale with
the NHA had not been perfected, proceeded to introduce improvements on the disputed land. On the other hand, the
NHA knowingly granted the Church temporary use of the subject properties and did not prevent the Church from
making improvements thereon. Thus, the Church and the NHA, who both acted in bad faith, shall be treated as if they
were both in good faith. 28 In this connection, Article 448 of the Civil Code provides:
The owner of the land on which anything has been built, sown or planted in good faith,
shall have the right to appropriate as his own the works, sowing or planting, after payment of the
indemnity provided for in articles 546 and 548, or to oblige the one who built or planted to pay
the price of the land, and the one who sowed, the proper rent. However, the builder or planter
cannot be obliged to buy the land and if its value is considerably more than that of the building or
trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to
appropriate the building or trees after proper indemnity. The parties shall agree upon the terms of
the lease and in case of disagreement, the court shall fix the terms thereof.

Pursuant to our ruling in Depra v. Dumlao, 29 there is a need to remand this case to the trial court, which
shall conduct the appropriate proceedings to assess the respective values of the improvements and of the land, as well
as the amounts of reasonable rentals and indemnity, fix the terms of the lease if the parties so agree, and to determine
other matters necessary for the proper application of Article 448, in relation to Articles 546 and 548, of the Civil Code.
WHEREFORE, in view of the foregoing, the petition is GRANTED. The Court of Appeals' Decision dated
February 26, 2001 and Resolution dated November 8, 2002 are REVERSED and SET ASIDE. The Decision of the
Regional Trial Court of Quezon City-Branch 90, dated February 25, 1997, is REINSTATED. This case is
REMANDED to the Regional Trial Court of Quezon City, Branch 90, for further proceedings consistent with Articles
448 and 546 of the Civil Code.
No costs.
SO ORDERED.
||| (National Housing Authority v. Grace Baptist Church, G.R. No. 156437, [March 1, 2004], 468 PHIL 266-276)