G.R. No.

152168 December 10, 2004

HEIRS OF THE LATE SPOUSES AURELIO AND ESPERANZA BALITE; vs. RODRIGO N. LIM,

D E C I S I O N

PANGANIBAN, J.:

A deed of sale that allegedly states a price lower than the true consideration is nonetheless
binding between the parties and their successors in interest. Furthermore, a deed of sale in
which the parties clearly intended to transfer ownership of the property cannot be presumed to
be an equitable mortgage under Article 1602 of the Civil Code. Finally, an agreement that
purports to sell in metes and bounds a specific portion of an unpartitioned co-owned property is
not void; it shall effectively transfer the seller’s ideal share in the co-ownership.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February
11, 2002 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 65395. The decretal portion
of the Decision reads as follows:

"IN THE LIGHT OF ALL THE FOREGOING, the Decision of the Court a quo subject of the
appeal is hereby SET ASIDE AND REVERSED and another Decision is hereby rendered as
follows:

1. The "Deed of Absolute Sale" (Exhibit "A") is valid only insofar as the pro indiviso share of
Esperanza Balite over the property covered by Original Certificate of Title No. 10824 is
concerned;

2. The Register of Deeds is hereby ordered to cancel Transfer Certificate of Title No. 6683 and
to issue another over the entirety of the property covered by Original Certificate of Title No.
10824, upon the payment of the capital gains tax due, as provided for by law, (based on the
purchase price of the property in the amount of P1,000,000.00), with the following as co-owners,
over the property described therein:

a) Each of the [petitioners] over an undivided portion of 975 square meters;

b) The [respondent], with an undivided portion of 9,751 square meters.

3. The [respondent] is hereby ordered to pay to the [petitioners] the amount of P120,000.00,
within a period of five (5) months from the finality of the Decision of this Court;
4. In the event that the [respondent] refuses or fails to remit the said amount to the [petitioner]
within the period therefor, the rights and obligations of the parties shall be governed by Republic
6552 (Maceda Law)."3

The Facts

The CA summarized the facts in this manner:

"The spouses Aurelio x x x and Esperanza Balite were the owners of a parcel of land, located
[at] Poblacion (Barangay Molave), Catarman, Northern Samar, with an area of seventeen
thousand five hundred fifty-one (17,551) square meters, [and] covered by Original Certificate of
Title [OCT] No. 10824. When Aurelio died intestate [in 1985, his wife], Esperanza Balite, and
their children, x x x [petitioners] Antonio Balite, Flor Balite-Zamar, Visitacion Balite-Difuntorum,
Pedro Balite, Pablo Balite, Gaspar Balite, Cristeta (Tita) Balite and Aurelio Balite, Jr., inherited
the [subject] property and became co-owners thereof, with Esperanza x x x inheriting an
undivided [share] of [9,751] square meters.

"In the meantime, Esperanza x x x [became] ill and was in dire need of money for her hospital
expenses x x x. She, through her daughter, Cristeta, offered to sell to Rodrigo Lim, [her]
undivided share x x x for the price of P1,000,000.00. x x x Esperanza x x x and Rodrigo x x x
agreed that, under the "Deed of Absolute Sale", to be executed by Esperanza x x x over the
property, it will be made to appear that the purchase price of the property would be
P150,000.00, although the actual price agreed upon by them for the property was
P1,000,000.00.

"On April 16, 1996, Esperanza x x x executed a "Deed of Absolute Sale" in favor of Rodrigo N.
Lim over a portion of the property, covered by [OCT] No. 10824, with an area of 10,000 square
meters, for the price of P150,000.00 x x x.

[They] also executed, on the same day, a "Joint Affidavit" under which they declared that the
real price of the property was P1,000,000.00, payable to Esperanza x x x, by installments, as
follows:

1. P30,000.00 – upon signing today of the document of sale.

2. P170,000.00 – payable upon completion of the actual relocation survey of the land sold by a
Geodetic Engineer.

3. P200,000.00 – payable on or before May 15, 1996.

4. P200,000.00 – payable on or before July 15, 1996.

5. P200,000.00 – payable on or before September 15, 1996.

6. P200,000.00 – payable on or before December 15, 1996.

"Only Esperanza and two of her children, namely, Antonio x x x and Cristeta x x x, knew about
the said transaction. x x x Geodetic Engineer Bonifacio G. Tasic conducted a subdivision survey
of the property and prepared a "Sketch Plan" showing a portion of the property, identified as Lot
243 with an area of 10,000 square meters, under the name Rodrigo N. Lim.

"The "Sketch Plan" was signed by Rodrigo x x x and Esperanza. Thereafter, Rodrigo x x x took
actual possession of the property and introduced improvements thereon. He remitted to
Esperanza x x x and Cristeta x x x sums of money in partial payments of the x x x property for
which he signed "Receipts".

"Gaspar, Visitacion, Flor, Pedro and Aurelio, Jr. x x x learned of the sale, and on August 21,
1996, they wrote a letter to the Register of Deeds [RD] of Northern Samar, [saying] that they
[were] not x x x informed of the sale of a portion of the said property by their mother x x x nor did
they give their consent thereto, and requested the [RD] to:

"x x x hold in abeyance any processal or approval of any application for registration of title of
ownership in the name of the buyer of said lot, which has not yet been partitioned judicially or
extrajudicially, until the issue of the legality/validity of the above sale has been cleared."

"On August 24, 1996, Antonio x x x received from Rodrigo x x x, the amount of P30,000.00 in
partial payment of [the] property and signed a "Receipt" for the said amount, declaring therein
that "the remaining balance of P350,000.00 shall personally and directly be released to my
mother, Esperanza Balite, only." However, Rodrigo x x x drew and issued RCBC Check No.
309171, dated August 26, 1996, [payable] to the order of Antonio Balite in the amount of
P30,000.00 in partial payment of the property.

"On October 1, 1996, Esperanza x x x executed a "Special Power of Attorney" appointing her
son, Antonio, to collect and receive, from Rodrigo, the balance of the purchase price of the x x x
property and to sign the appropriate documents therefor.

"On October 23, 1996, Esperanza signed a letter addressed to Rodrigo informing the latter that
her children did not agree to the sale of the property to him and that she was withdrawing all her
commitments until the validity of the sale is finally resolved:

x x x x x x x x x

"On October 31, 1996, Esperanza died intestate and was survived by her aforenamed children.

"[Meanwhile], Rodrigo caused to be published, in the Samar Reporter, on November 14, 21 and
28, 1996, the aforesaid "Deed of Absolute Sale". Earlier, on November 21, 1996, Antonio
received the amount of P10,000.00 from Rodrigo for the payment of the estate tax due from the
estate of Esperanza.
"Also, the capital gains tax, in the amount of P14,506.25, based on the purchase price of
P150,000.00 appearing on the "Deed of Absolute Sale", was paid to the Bureau of Internal
Revenue which issued a "Certification" of said payments, on March 5, 1997, authorizing the
registration of the "Deed of Absolute Sale" x x x. However, the [RD] refused to issue a title over
the property to and under the name of Rodrigo unless and until the owner’s duplicate of OCT
No. 10824 was presented to [it]. Rodrigo filed a "Petition for Mandamus" against the RD with the
Regional Trial Court of Northern Samar (Rodrigo Lim versus Fernando Abella, Special Civil
Case No. 48). x x x. On June 13, 1997, the court issued an Order to the RD to cancel OCT No.
10824 and to issue a certificate of title over Lot 243 under the name of Rodrigo.

"On June 27, 1997, [petitioners] filed a complaint against Rodrigo with the Regional Trial Court
of Northern Samar, entitled and docketed as "Heirs of the Spouses Aurelio Balite, et al. versus
Rodrigo Lim, Civil Case No. 920, for "Annulment of Sale, Quieting of Title, Injunction and
Damages x x x, [the origin of the instant case.]

x x x x x x x x x

"The [petitioners] had a "Notice of Lis Pendens", dated June 23, 1997, annotated, on June 27,
1997, at the dorsal portion of OCT No. 10824.

"In the meantime, the RD cancelled, on July 10, 1997, OCT No. 10824 and issued Transfer
Certificate of Title [TCT] No. 6683 to and under the name of Rodrigo over Lot 243. The "Notice
of Lis Pendens" x x x was carried over in TCT No. 6683.

"Subsequently, Rodrigo secured a loan from the Rizal Commercial Banking Corporation in the
amount of P2,000,000.00 and executed a "Real Estate Mortgage" over the [subject] property as
security therefor.

"On motion of the [petitioners], they were granted x x x leave to file an "Amended Complaint"
impleading the bank as [additional] party-defendant. On November 26, 1997, [petitioners] filed
their "Amended Complaint".

The [respondent] opposed the "Amended Complaint" x x x contending that it was improper for
[petitioners] to join, in their complaint, an ordinary civil action for the nullification of the "Real
Estate Mortgage" executed by the respondent in favor of the Bank as the action of the
petitioners before the court was a special civil action.

"On March 30, 1998, the court issued an Order rejecting the "Amended Complaint" of the
petitioners on the grounds that: (a) the Bank cannot be impleaded as party-defendant under
Rule 63, Section 1 of the 1997 Rules of Civil Procedure; (b) the "Amended Complaint"
constituted a collateral attack on TCT No. 6683. The [petitioners] did not file any motion for the
reconsideration of the order of the court."4
The trial court dismissed the Complaint and ordered the cancellation of the lis pendens
annotated at the back of TCT No. 6683. It held that, pursuant to Article 493 of the Civil Code, a
co-owner has the right to sell his/her undivided share. The sale made by a co-owner is not
invalidated by the absence of the consent of the other co-owners. Hence, the sale by Esperanza
of the 10,000-square-meter portion of the property was valid; the excess from her undivided
share should be taken from the undivided shares of Cristeta and Antonio, who expressly agreed
to and benefited from the sale.

Ruling of the Court of Appeals

The CA held that the sale was valid and binding insofar as Esperanza Balite’s undivided share
of the property was concerned. It affirmed the trial court’s ruling that the lack of consent of the
co-owners did not nullify the sale. The buyer, respondent herein, became a co-owner of the
property to the extent of the pro indiviso share of the vendor, subject to the portion that may be
allotted to him upon the termination of the co-ownership. The appellate court disagreed with the
averment of petitioners that the registration of the sale and the issuance of TCT No. 6683 was
ineffective and that they became the owners of the share of Esperanza upon the latter’s death.

The CA likewise rejected petitioners’ claim that the sale was void allegedly because the actual
purchase price of the property was not stated in the Deed of Absolute Sale. It found that the true
and correct consideration for the sale was P1,000,000 as declared by Esperanza and
respondent in their Joint Affidavit. Applying Article 13535 of the Civil Code, it held that the falsity
of the price or consideration stated in the Deed did not render it void. The CA pointed out,
however, that the State retained the right to recover the capital gains tax based on the true price
of P1,000,000.

The appellate court rejected petitioners’ contention that, because of the allegedly
unconscionably low and inadequate consideration involved, the transaction covered by the
Deed was an equitable mortgage under Article 1602 of the Civil Code. Observing that the
argument had never been raised in the court a quo, it ruled that petitioners were proscribed from
making this claim, for the first time, on appeal.

The CA further held that the remaining liability of respondent was P120,000. It relied on the
Receipt dated August 24, 1996, which stated that his outstanding balance for the consideration
was P350,000. It deducted therefrom the amounts of P30,000 received by Antonio on August
27, 1996; and P200,000, which was the amount of the check dated September 15, 1996, issued
by respondent payable to Esperanza.

Finally, the appellate court noted that the mortgage over the property had been executed after
the filing of the Complaint. What petitioners should have filed was a supplemental complaint
instead of an amended complaint. Contrary to respondent’s argument, it also held that the bank
was not an indispensable party to the case; but was merely a proper party. Thus, there is no
necessity to implead it as party-defendant, although the court a quo had the option to do so.
And even if it were not impleaded, the appellate court ruled that the bank would still have been
bound by the outcome of the case, as the latter was a mortgagee pendente lite over real estate
that was covered by a certificate of title with an annotated lis pendens.

Hence, this Petition.6

Issues

In their Memorandum, petitioners present the following issues:

"A

"Whether or not the [CA] seriously erred in not deciding that the Deed of Absolute Sale dated
April 16, 1996 is null and void on the grounds that it is falsified; it has an unlawful cause; and it
is contrary to law and/or public policy.

"B

"Whether or not the [CA] gravely erred in not finding that the amount paid by [respondent] is
only three hundred twenty thousand (P320,000.00) pesos and that respondent’s claim that he
has paid one million pesos except P44,000.00 as balance, is fraudulent and false.

"C

"Whether or not the [CA] seriously erred in not deciding that at the time the Deed of Sale was
registered x x x on May 30, 1997, said Deed of Sale can no longer bind the property covered by
OCT No. 10824 because said land had already become the property of all the petitioners upon
the death of their mother on October 31, 1996 and therefore such registration is functus of[f]icio
involving a null and void document.

"D

"Whether or not the [CA] seriously erred in not ruling that petitioners’ amended complaint dated
November 27, 1997 was proper and admissible and deemed admitted to conform to evidence
presented.

"E

"Whether or not the [CA] seriously erred in not declaring that TCT No. T-6683 in the name of
Respondent Rodrigo N. Lim is null and void and all dealings involving the same are likewise null
and void and/or subject to the decision of the case at bar in view of the notice of lis pendens
annotated therein.

"F
"Even assuming but without admitting that the Deed of Sale is enforceable, the respondent
court seriously erred in not deciding that the consideration is unconscionably low and
inadequate and therefore the transaction between the executing parties constitutes an equitable
mortgage.

"G

"The [CA] greatly erred in not rendering judgment awarding damages and attorney’s fee[s] in
favor of petitioners among others."7

In sum, the issues raised by petitioners center on the following: 1) whether the Deed of Absolute
Sale is valid, and 2) whether there is still any sum for which respondent is liable.

The Court’s Ruling

The Petition has no merit.

First Issue:

Validity of the Sale

Petitioners contend that the Deed of Absolute Sale is null and void, because the undervalued
consideration indicated therein was intended for an unlawful purpose -- to avoid the payment of
higher capital gains taxes on the transaction. According to them, the appellate court’s reliance
on Article 1353 of the Civil Code was erroneous. They further contend that the Joint Affidavit is
not proof of a true and lawful cause, but an integral part of a scheme to evade paying lawful
taxes and registration fees to the government.

We have before us an example of a simulated contract. Article 1345 of the Civil Code provides
that the simulation of a contract may either be absolute or relative. In absolute simulation, there
is a colorable contract but without any substance, because the parties have no intention to be
bound by it. An absolutely simulated contract is void, and the parties may recover from each
other what they may have given under the "contract."8 On the other hand, if the parties state a
false cause in the contract to conceal their real agreement, such a contract is relatively
simulated. Here, the parties’ real agreement binds them.9

In the present case, the parties intended to be bound by the Contract, even if it did not reflect
the actual purchase price of the property. That the parties intended the agreement to produce
legal effect is revealed by the letter of Esperanza Balite to respondent dated October 23,
199610 and petitioners’ admission that there was a partial payment of P320,000 made on the
basis of the Deed of Absolute Sale. There was an intention to transfer the ownership of over
10,000 square meters of the property . Clear from the letter is the fact that the objections of her
children prompted Esperanza to unilaterally withdraw from the transaction.
Since the Deed of Absolute Sale was merely relatively simulated, it remains valid and
enforceable. All the essential requisites prescribed by law for the validity and perfection of
contracts are present. However, the parties shall be bound by their real agreement for a
consideration of P1,000,000 as reflected in their Joint Affidavit.11

The juridical nature of the Contract remained the same. What was concealed was merely the
actual price. Where the essential requisites are present and the simulation refers only to the
content or terms of the contract, the agreement is absolutely binding and enforceable12
between the parties and their successors in interest.

Petitioners cannot be permitted to unmake the Contract voluntarily entered into by their
predecessor, even if the stated consideration was included therein for an unlawful purpose.
"The binding force of a contract must be recognized as far as it is legally possible to do so."13
However, as properly held by the appellate court, the government has the right to collect the
proper taxes based on the correct purchase price.

Being onerous, the Contract had for its cause or consideration the price of P1,000,000. Both this
consideration as well as the subject matter of the contract -- Esperanza’s share in the property
covered by OCT No. 10824 -- are lawful. The motives of the contracting parties for lowering the
price of the sale -- in the present case, the reduction of capital gains tax liability -- should not be
confused with the consideration.14 Although illegal, the motives neither determine nor take the
place of the consideration. 15

Deed of Sale not an

Equitable Mortgage

Petitioner further posits that even assuming that the deed of sale is valid it should only be
deemed an equitable mortgage pursuant to Articles 1602 and 1604 of the Civil Code, because
the price was clearly inadequate. They add that the presence of only one of the circumstances
enumerated under Article 1602 would be sufficient to consider the Contract an equitable
mortgage. We disagree.

For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a
contract denominated as a contract of sale; and, two, their intention was to secure an existing
debt by way of mortgage.16

Indeed, the existence of any of the circumstances enumerated in Article 1602, not a
concurrence or an overwhelming number thereof, suffices to give rise to the presumption that a
contract purporting to be an absolute sale is actually an equitable mortgage.17 In the present
case, however, the Contract does not merely purport to be an absolute sale. The records and
the documentary evidence introduced by the parties indubitably show that the Contract is,
indeed, one of absolute sale. There is no clear and convincing evidence that the parties agreed
upon a mortgage of the subject property.
Furthermore, the voluntary, written and unconditional acceptance of contractual commitments
negates the theory of equitable mortgage. There is nothing doubtful about the terms of, or the
circumstances surrounding, the Deed of Sale that would call for the application of Article 1602.
The Joint Affidavit indisputably confirmed that the transaction between the parties was a sale.

When the words of a contract are clear and readily understandable, there is no room for
construction. Contracts are to be interpreted according to their literal meaning and should not be
interpreted beyond their obvious intendment.18 The contract is the law between the parties.

Notably, petitioners never raised as an issue before the trial court the fact that the document did
not express the true intent and agreement of the contracting parties. They raised mere
suppositions on the inadequacy of the price, in support of their argument that the Contract
should be considered as an equitable mortgage.

We find no basis to conclude that the purchase price of the property was grossly inadequate.
Petitioners did not present any witness to testify as to the market values of real estate in the
subject’s locale. They made their claim on the basis alone of the P2,000,000 loan that
respondent had been able to obtain from the Rizal Commercial Banking Corporation. This move
did not sufficiently show the alleged inadequacy of the purchase price. A mortgage is a mere
security for a loan. There was no showing that the property was the only security relied upon by
the bank; or that the borrowers had no credit worthiness, other than the property offered as
collateral.

Co-Ownership

The appellate court was correct in affirming the validity of the sale of the property insofar as the
pro indiviso share of Esperanza Balite was concerned.

Article 493 of the Civil Code19 gives the owner of an undivided interest in the property the right
to freely sell and dispose of such interest. The co-owner, however, has no right to sell or
alienate a specific or determinate part of the thing owned in common, because such right over
the thing is represented by an aliquot or ideal portion without any physical division. Nonetheless,
the mere fact that the deed purports to transfer a concrete portion does not per se render the
sale void.20 The sale is valid, but only with respect to the aliquot share of the selling co-owner.
Furthermore, the sale is subject to the results of the partition upon the termination of the co-
ownership.

Hence, the transaction between Esperanza Balite and respondent could be legally recognized
only in respect to the former’s pro indiviso share in the co-ownership. As a matter of fact, the
Deed of Absolute Sale executed between the parties expressly referred to the 10,000-square-
meter portion of the land sold to respondent as the share of Esperanza in the conjugal property.
Her clear intention was to sell merely her ideal or undivided share in it. No valid objection can be
made against that intent. Clearly then, the sale can be given effect to the extent of 9,751 square
meters, her ideal share in the property as found by both the trial and the appellate courts.
Transfer of Property

During her lifetime, Esperanza had already sold to respondent her share in the subject parcel;
hence her heirs could no longer inherit it. The property she had transferred or conveyed no
longer formed part of her estate to which her heirs may lay claim at the time of her death. The
transfer took effect on April 16, 1996 (the date the Deed of Absolute Sale was executed), and
not on May 30, 1997, when the Deed of Absolute Sale was registered. Thus, petitioners’ claim
that the property became theirs upon the death of their mother is untenable.

Second Issue:

Respondent’s Liability

Petitioners insist that the appellate court erred in holding that respondent’s outstanding liability
on the Deed of Sale was P120,000, when the Receipts on record show payments in the total
amount of P320,000 only. They argue that the August 24, 1996 Receipt, on which the appellate
court based its conclusion, was unreliable.

To begin with, this Court is not a trier of facts. 21 It is not its function to examine and determine
the weight of the evidence. Well-entrenched is the doctrine that only errors of law,22 and not of
facts, are reviewable by this Court in a petition for review on certiorari under Rule 45 of the
Revised Rules of Court. Philippine Airlines, Inc. v. Court of Appeals23 has held that factual
findings of the Court of Appeals are binding and conclusive upon the Supreme Court. These
findings may be reviewed24 only under exceptional circumstances such as, among others,
when the inference is manifestly mistaken;25 the judgment is based on a misapprehension of
facts;26 findings of the trial court contradict those of the CA;27 or the CA manifestly overlooked
certain relevant and undisputed facts that, if properly considered, would justify a different
conclusion.28

Although the factual findings of the two lower courts were not identical, we hold that in the
present case, the findings of the CA are in accord with the documents on record. The trial court
admitted in evidence the August 24, 1996 Receipt signed by Antonio Balite. Interestingly, he
was never presented in the lower court to dispute the veracity of the contents of that Receipt,
particularly the second paragraph that had categorically stated the outstanding balance of
respondent as of August 24, 1996, to be P350,000. Furthermore, the evidence shows that
subsequent payments of P30,000 and P200,000 were made by the latter. Thus, we affirm the
CA’s Decision holding that the remaining unpaid balance of the price was P120,000.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against the
petitioners.

SO ORDERED.
G.R. Nos. 75109-10 June 28, 1989

BIENVENIDA MACHOCA ARCADIO VDA. DE CRUZO

vs. HON. GLICERIO V. CARRIAGA, JR.,

REGALADO, J.:

This is an appeal from the order 1 of respondent Judge Glicerio V. Carriaga, Jr., dated February
26, 1986, dismissing petitioners' complaint in Special Civil Action No. OZ-0751 of the Regional
Trial Court, Branch XV, Ozamiz City, on the ground of res judicata.

Lot No. 1131 of the Misamis Cadastre, subject matter of this case, was originally registered in
the name of Gabina Machoca, as her paraphernal property, under Original Certificate of Title
No. 682. 2 Petitioners herein are the children of the late spouses Leonardo Arcadio and said
Gabina Machoca.

On February 4, 1954, Gabina Machoca mortgaged Lot No. 1131 for P 425.00 to private
respondent Franklin Ang and delivered to him her aforesaid certificate of title in connection
therewith.

On October 4, 1954, Gabina again borrowed an additional sum of P 175.00 from Ang as a result
of which her total obligation to the latter was in the sum of P 600.00. Petitioners claim that on
the same date, Ang caused the preparation of a deed of sale over the subject lot to which
document Gabina Machoca, being illiterate, affixed her thumb-mark in the belief that this second
instrument was similar to the deed of mortgage executed by her on February 4, 1954. When
Gabina went home, her children, herein petitioners, informed her that the second document was
not a deed of mortgage but a contract of sale.

On the following day, October 5, 1954, Gabina went back to Ang and demanded the reformation
of the aforesaid instrument. Franklin Ang, instead of reforming the instrument, prepared a deed
of agreements 3 which, by reason of its importance, is herein quoted in full:

City of Ozamiz

October 5, 1954

DEED OF AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

That I, FRANKLIN ANG, of legal age, married and with residence and postal address at Gango,
City of Ozamiz, Philippines, VENDEE in the Deed of Sale executed by the Vendor, GAVINA
MACHOCA, as recorded by Notary Public Manuel C. Manago in Doc. No. 284, Page No. 58,
Book No. 1, Series of 1954, hereby grants and obligates himself (sic) to resell the property
therein sold within a period of three (3) years from and after the date of the said instrument, for
the same price of SIX HUNDRED PESOS ( P 600.00 ), Philippine Currency, to the said
VENDOR: PROVIDED, however, That if the Vendor shall fail to exercise her right to redeem as
herein granted within the stipulated period, then this conveyance shall be deemed to be
absolute and irrevocable.

IN WITNESS WHEREOF, the party herein hereto have (sic) set his hands (sic) at Ozamiz City,
Philippines, on this 5th day of October, 1954.

(SGD) FRANKLIN ANG

Pursuant to the provisions of said deed of agreement, Gabina's right to repurchase the property
was to expire on October 4, 1957, that is, three years from October 4, 1954 when the deed of
sale was executed.

As early as June 10, 1955, however, Ang caused the registration of the deed of sale, resulting in
the subsequent cancellation of Original Certificate of Title No. 682 and the consequent issuance
of Transfer Certificate of Title No. T-161 for the same property in the name of Franklin Ang. 4

On June 24, 1963, no redemption having been made, Ang sold said Lot No. 1131 to herein
private respondent Melecio Suarez who then obtained Transfer Certificate of Title No. T-945
therefore in his name. 5 Gabina Machoca died on April 21, 1966 leaving herein petitioners as
her only heirs.

It appears that petitioners remained in possession of the disputed land until March 14, 1977
when herein private respondents Melecio Suarez and Pilar de los Reyes filed an action against
Pedro, Inocenta and Lazaro, all surnamed Pliego before the City Court of the City of Ozamiz,
docketed as Civil Case No. C-1 6 thereof, for unlawful detainer with damages. On July 21, 1978,
the city court rendered a decision 7 declaring the plaintiffs therein to be the real owners of Lot
No. 1131 and ordering the defendants to vacate the premises and pay the costs. 8 The appeal
from said decision by the defendants therein to the Court of Appeals in CA-G.R. No. 66511-R
was dismissed, which dismissal became final and executory, hence judgment was entered by
the Court of Appeals on July 10, 1981. 9 Consequently, a writ of execution and an order of
demolition 10 were issued by the city court on September 17, 1981 and October 12, 1983,
respectively, in Civil Case No. C-1

Disgressing backward in time from the foregoing incidents, the records reveal that during the
pendency of the aforesaid unlawful detainer case (Civil Case No. C-1), herein petitioners filed
on September 6, 1977 a petition for prohibition, Civil Case No. OZ-665 of the erstwhile Court of
First Instance of Mizamis Occidental, Branch II, Ozamiz City, against City Court Judge Ceferino
Ong and herein private respondents to restrain Judge Ong from further proceeding with the trial
in Civil Case No. C-1 for alleged lack of jurisdiction. The petition was dismissed on March 15,
1978 and no appeal was taken by said petitioners. 11

It further appears that likewise during the pendency of Civil Case No. C-1, petitioners filed a
complaint, dated June 7, 1977, with the same Court of First Instance, Branch II, at Ozamiz City,
involving Lot No. 1131 and docketed as Civil Case No. OZ-648, against Franklin Ang, Bonifacio
Longayan, Melecio Suarez and Pilar de los Reyes, for "removal of clouds of title and declaring
title of defendants as null and void or cancelled, or reconveyance and damages." 12 On
December 18, 1984, the complaint was dismissed for failure to prosecute. 13 Petitioners moved
for the reconsideration of the order but the motion was denied. A second motion for
reconsideration was likewise denied. 14 No appeal having been made, the order of dismissal
became final.

Finally, on December 14, 1985, the same petitioners filed Special Civil Case No. OZ-0751 with
the Regional Trial Court, Branch XV, Ozamiz City, for conventional redemption and damages
against herein private respondents over the same subject lot. Upon motion of the defendants
therein, 15 the complaint was dismissed by the court on February 26, 1986 on the ground of res
judicata. 16

Hence, this petition assailing said dismissal order.

The main substantive issue posed for resolution is whether or not the petitioners can still
exercise the right to redeem Lot No. 1131. A corollary issue is whether or not the private deed of
agreement has converted the deed of sale into an equitable mortgage.

Petitioners submit that the deed of sale, in relation to the deed of agreement executed on
October 4, 1954, should be considered as an equitable mortgage because (a) the petitioners
have been in continuous possession of the subject lot up to the present time; and (b) the price
of P 600.00 is unusually inadequate considering that the land is along the road going to the
airport of Ozamiz City, is only about three kilometers from the center of the city, and has an area
of 3,408 square meters. It is likewise contended that petitioners have the right to redeem the
property, there have been no foreclosure proceedings as yet, aside from the fact that private
respondent Ang acted in evident bad faith and with fraud when he obtained title to the lot in his
name prior to the expiration of the stipulated redemption period.

On the other hand, private respondents maintain that the action for conventional redemption
(Civil Case No. OZ-0751) is already barred by the order of dismissal rendered in the action for
removal of clouds on the title (Civil Case No. OZ-648), since both cases involved the same
subject matter and raised the same issues between the same parties; and, further, that
petitioners may no longer redeem the property for failure to exercise the right within the
stipulated period.

We shall first resolve the procedural objections, which auspiciously present the necessity to
clarify the doctrine of res judicata 17 and its implications.
The principle of res judicata in actions in personam is found in Section 49 (b) and (c), Rule 39 of
the Rules of Court which provides:

Sec. 49. Effect of judgments. The effect of a judgment or final order rendered by a court or
judge of the Philippines, having jurisdiction to pronounce the judgment or order, may be as
follows:

x x x

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to
any other matter that could have been raised in relation thereto, conclusive between the parties
and their successors in interest by title subsequent to the commencement of the action or
special proceeding, litigating for the same thing and under the same title and in the same
capacity;

(c) In any other litigation between the same parties or their successors in interest, that only is
deemed to have been adjudged in a former judgment which appears upon its face to have been
so adjudged, or which was actually and necessarily included therein or necessary thereto.

The doctrine of res judicata thus lays down two main rules which may be stated as follows: (1)
The judgment or decree of a court of competent jurisdiction on the merits concludes the parties
and their privies to the litigation and constitutes a bar to a new action or suit involving the same
cause of action either before the same or any other tribunal; and (2) Any right, fact, or matter in
issue directly adjudicated or necessarily involved in the determination of an action before a
competent court in which a judgment or decree is rendered on the merits is conclusively settled
by the judgment therein and cannot again be litigated between the parties and their privies
whether or not the claim or demand, purpose, or subject matter of the two suits is the same.
These two main rules mark the distinction between the principles governing the two typical
cases in which a judgment may operate as evidence. In speaking of these cases, the first
general rule above stated, and which corresponds to the aforequoted paragraph (b) of Section
49, is referred to as "bar by former judgment" while the second general rule, which is embodied
in paragraph (c) of the same section, is known as "conclusiveness of judgment. 18

Stated otherwise, when we speak of resjudicata in its concept as a "bar by former judgment,"
the judgment rendered in the first case is an absolute bar to the subsequent action since said
judgment is conclusive not only as to the matters offered and received to sustain that judgment
but also as to any other matter which might have been offered for that purpose and which could
have been adjudged therein. This is the concept in which the term res judicata is more
commonly and generally used and in which it is understood as the bar by prior judgment
constituting a ground for a motion to dismiss in civil cases. 19

On the other hand, the less familiar concept or less terminological usage of res judicata as a
rule on conclusiveness of judgment refers to the situation where the judgment in the prior action
operates as an estoppel only as to the matters actually determined therein or which were
necessarily included therein. Consequently, since other admissible and relevant matters which
the parties in the second action could properly offer are not concluded by the said judgment, the
same is not a bar to or a ground for dismissal of the second action.

At bottom, the other elements being virtually the same, the fundamental difference between the
rule of res judicata as a bar by former judgment and as merely a rule on the conclusiveness of
judgment is that, in the first, there is an identity in the cause of action in both cases involved
whereas, in the second, the cause of action in the first case is different from that in the second
case.

The diversity in results, in the instances where there is identity of cause of action in the two
cases and those wherein there is no such identity, is not a caprice of mere mechanistic
considerations or taxonomic niceties. In the latter situation, where the second case is based on
a cause of action different from the first, the constituent elements of the second cause of action,
the specie of proof necessary to establish the same, and the relief which may be granted in
such second action are consequently at variance with those obtaining or sought in the first
action. As a logical and rational consequence, therefore, only the findings in the first judgment
are conclusive and deemed established if raised in and for purposes of the second action which,
therefore, may proceed independently of the anterior case. However, where the same cause of
action is involved in both cases, the foregoing considerations cannot apply since discrete facts
and results would not generally arise from the same procedural and evidentiary foundations
which inhere in the same cause of action. Even if diverse reliefs should be awarded due to
contingencies in the results of proof, the judgment in the first action bars the second since the
defendant admittedly committed one and the same wrong for which he should not be twice tried
under the time-honored rule of non bis in idem.

Now, it has been a consistent rule, to cite just a few representative cases, 20 that the following
requisites must concur in order that a prior judgment may bar a subsequent action, viz: (1) the
former judgment or order must be final; (2) it must be a judgment or order on the merits, that is,
it was rendered after a consideration of the evidence or stipulations submitted by the parties at
the trial of the case; (3) it must have been rendered by a court having jurisdiction over the
subject matter and the parties; and (4) there must be, between the first and second actions,
identity of parties, of subject matter and of cause of action.

There is no question that the order of dismissal rendered in the prior action, Civil Case No. OZ-
648, had become final for failure of herein petitioners to appeal the same after their motions for
reconsideration were denied. Furthermore, while the dismissal was for failure to prosecute, it
had the effect of an adjudication on the merits, and operates as res judicata, 21 since the court
did not direct that the dismissal was without prejudice. 22

The fact remains that Civil Case No. OZ-648 for removal of clouds on title has, as parties, the
same set of plaintiffs and defendants as Special Civil Case No. OZ-0751 for conventional
redemption and damages, and both cases involve Lot No. 1131 only.
Petitioners submit, however, that res judicata will nevertheless not apply since there is no
identity of causes of action. It is their theory that since the issue of redemption was not raised in
Civil Case No. OZ-648, it is paragraph (c) of Section 49, Rule 39 that applies, that is, the rule on
conclusiveness of judgment, hence the dismissal of said former action does not constitute res
judicata to bar Special Civil Case No. OZ-0751. We find no merit in such submission.

Petitioners appear to labor under an erroneous conceptualization of what constitutes a cause of

action. They postulate that the causes of action in the cases involved are not identical, thus: "In
Civil Case C-1, the cause of action is physical possession. In Civil Case OZ-648, the cause of
action is removal of clouds of title. In Civil Case OZ-0751, the cause of action is conventional
redemption ...." 23

It is elementary that, in adjective law, a cause of action is the delict or the wrongful act or
omission committed by the defendant in violation of the primary rights of the plaintiff. 24 In all
these cases, petitioners have imputed to private respondents and their predecessor in interest
the same alleged wrongful act, that is, acts of evident bad faith and fraud which supposedly
divested petitioner's mother of her rights and title to the property in dispute. There is,
consequently, an identical cause of action claimed by petitioners in these cases.

A well-entrenched rule declares that a party cannot, by varying the form of action or adopting a
different method of presenting his case, escape the operation of the principle that one and the
same cause of action shall not be twice litigated. 25 In fact, authorities tend to widen rather than
to restrict the doctrine of res judicata on the ground that public interest, as well as private
interest, demand the ending of suits by requiring the parties to sue once and for all in the same
case all the special proceedings and remedies to which they are entitled. 26

In determining whether causes of action are identical so as to warrant application of the rule of
res judicata, the test most commonly stated is to ascertain whether the same evidence which is
necessary to sustain the second action would have been sufficient to authorize a recovery in the
first, 27 even if the forms or nature of the two actions be different. 28 If the same facts or
evidence would sustain both, the two actions are considered the same within the rule that the
judgment in the former is a bar to the subsequent action; otherwise it is not. It has been said
that this method is the best and most accurate test as to whether a former judgment is a bar in
subsequent proceedings between the same parties, and it has even been designated as
infallible. 29

In their motion to dismiss filed in Special Civil Case No. OZ-0751, private respondents made a
comparative analysis of the reliefs prayed for therein and those in Civil Case No. OZ-648 which
became the criterion in the court's order of dismissal. A perusal thereof reveals that both actions
seek to have the deed of agreement of October 5, 1954 considered as a mere equitable
mortgage and to have the titles issued in the name of private respondents declared null and
void on the ground of fraud. Although ostensibly of different forms, the inescapable conclusion is
that the parties are in effect litigating for the same thing and seeking the same relief, that is, to
recover possession and ownership of Lot No. 1131. It is of no moment that the later remedy is
for conventional redemption while the former case was for removal of clouds on the title, since
both actions are anchored on exactly the same cause of action, are based on identical facts,
and even claim the same relief. The present petition is, therefore, although presented in a
different form, barred by the former decision in the case for removal of clouds on the title.

We do not intend, however, to have the adjudication of this case go off purely on procedural
points. Even assuming that res judicata would not bar Special Civil Case No. OZ-0751, the
instant petition will nevertheless not prosper.

It must be remembered that after the execution of the deed of sale on October 4, 1954, a
second document was made wherein Franklin Ang undertook to resell the property, if Gabina
Machoca elects to redeem the same, within three years from the date of the deed of sale. With
respect, therefore, to the last transaction entered into by the parties, there were two documents
involved, one of which is the deed of sale and the other, the right to repurchase. However, We
find and so hold that there is no pacto de retro sale in this case, within the contemplation of the
Civil Code which provides:

Art. 1601. Conventional redemption shall take place when the vendor reserves the right to
repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and
other stipulations which may been agreed upon.

In Villarica, et al. vs. The Court of appeals, et al., 30 We had the occasion to interpret this
provision of law, to wit:

The right of repurchase is not a right granted the vendor by the vendee in a subsequent
instrument, but is a right reserved by the vendor in the same instrument of sale as one of the
stipulations of the contract. Once the instrument of absolute sale is executed, the vendor can no
longer reserve the right to repurchase, and any right thereafter granted the vendor by the
vendee in a separate instrument cannot be a right of repurchase but some other right like the
option to buy in the instant case.

We have similarly held in a prior case that an agreement to repurchase becomes a promise to
sell when made after an absolute sale because where the sale is made without such an
agreement, the purchaser acquires the thing sold absolutely. 31

Clearly, therefore, an option to buy or a promise to sell is different and distinct from the right of
repurchase which must be reserved by the vendor, by stipulation to that effect, in the contract of
sale.

Hence, there having been an absolute sale of the land, respondent Ang was acting well within
the ambit of his now inviolable right to register the land in his own name, notwithstanding the
unexpired stipulated period of redemption in the deed of agreement.
Granting, for the sake of argument, that the transaction actually involves a pacto de retro sale.
petitioners failure to exercise their right of redemption within the stipulated period dictates that
the instant petition must necessarily fail. The averment that petitioners were forestalled by
respondent Ang from redeeming the property appears to be a frivolous afterthought since the
former were not without recourse. There were several legal remedies available to them which, if
duly resorted to, could have worked favorably for their cause. As it is, their silent acquiescence
for an inexplicable length of time worked greatly to their disadvantage. Not only did petitioners
fail to repurchase the property within the stipulated period but they continued to sleep on their
rights even beyond the allowable statutory period for the enforcement of such right of
redemption. They are now barred by laches. Laches, in a general sense, is failure or neglect, for
an unreasonable and unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier; it is negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it. 32

Petitioners' feigned ignorance regarding the registration of the property in the name of
respondent spouses, even disregarding the constructive notice thereof to them under the law, is
belied by the fact that petitioner Inocenta Pliego and Pedro Pliego signed a written commitment
that "if Pilar Suarez will use their land for the construction of their house, we are ready and
agreed (sic) to transfer our house to another place." 33 This instrument was never refuted, aside
from the categorical admission of the petitioners during the trial of the ejectment case that
private respondents were already enjoying the fruits of the land since 1963. 34 If petitioners
were not disturbed in their possession until the ejectment case was filed, it could only have been
out of sheer generosity and tolerance of private respondent spouses.

Treading on the same supposition that there existed such a right to repurchase, petitioners
insist that the pacto de retro sale is, for all intents and purposes, an equitable mortage on the
pretext that they have been in continuous possession of the land from the time of the execution
of the document. This again is a result of the distorted notion that petitioners' possession is in
the concept of that of an owner. Petitioners cannot be credited with good faith in insinuating that
their mother, Gabina Machoca, was deceived into believing that the deed of agreement was a
mortgage contract similar to the first document she executed. As earlier explained, after the
second deed was executed and Gabina Machoca showed the same to herein petitioners, it was
the latter who advised her that the contract be reformed, as a consequence of which the
separate deed of agreement of October 5, 1954 was executed. It would be safe to conclude
then that petitioners had approved of and consented to the provisions of both contracts. It will
readily be noted that the deed of agreement specifically provided: "That if the Vendor shall fail to
exercise her right to redeem as herein granted within the stipulated period, then this
conveyance shall be deemed to be absolute and irrevocable." The contract, not being contrary
to law, morals and public policy, is binding and enforceable against Gabina Machoca and her
successors in interest. Petitioners cannot now be heard to claim otherwise after having been
remiss in their obligations. They are further estopped from asserting that the parties intended
differently, contrary to what the written contracts provide, in violation of the parol evidence rule.
Furthermore, the inadequacy of the price does not on that account alone support the conclusion
that the land was not sold to private respondent Ang, since the parties entered into a
conventional, and not a forced, sale of the property and both parties were in a position to form
an independent judgment of the transaction. 35 From the legal viewpoint, even if the property
was sold for a comparatively low price, but the seller did nothing about it for a number of years,
the contract of sale is not invalid. 36 Besides, in a contract of sale with right of repurchase, the
price is usually less than in absolute sales since in the former the vendor expects to reacquire or
redeem the property sold, 37 hence the inadequacy of the price is not an overriding determinant
to set aside the sale.38 The same rationale obtains where, as in this case, there was a separate
agreement to resell the property to the original vendor.

Anent the imputation of evident bad faith and fraud to respondent Ang for obtaining title to the
land in his own name prior to the expiration of the agreed period, the records do not yield the
requisite proof that he was so motivated or had deliberately resorted to fraudulent deception. In
the absence of concrete evidence of bad faith or fraud, neither of which can be presumed, We
cannot hold otherwise. Besides, it is of essence of a contract of sale with pacto de retro that the
vendee shall immediately acquire title to and possession of the land sold, subject only to the
vendor's right of redemption. With much more reason does this hold true where a deed of
absolute sale was merely complemented by a subsequently executed and separate agreement
of resale.

WHEREFORE, the order appealed from is hereby AFFIRMED. The temporary restraining order
issued pursuant to the resolution of August 3, 1987 is hereby LIFTED and SET ASIDE.

SO ORDERED