REFORMATION CASES

[G.R. No. L-8060. September 28, 1955.] PAULINO GARCIA, plaintiff-appellant, vs. MARIA BISAYA, ET AL., defendants-appellees.

Francisco P. Madlangbayan for appellant. Augusto L. Valencia for appellees.

SYLLABUS 1.CONTRACTS; REFORMATION OF INSTRUMENT; PRESCRIPTION. An action to correct an alleged mistake in a deed of sale covering a piece of land, prescribes in ten years counted from the day it could have been instituted. There being nothing in the pleadings to show that the error was discovered more than ten years before the present action was filed the action should not have been dismissed as having already prescribed before the factual basis for prescription had been established and clarified by evidence. 2.PLEADING AND PRACTICE; REFORMATION OF INSTRUMENT; ALLEGATION THAT INSTRUMENT DOES NOT EXPRESS INTENTION OF PARTIES, ESSENTIAL. Appellant's complaint states no cause of action, for it fails to allege that the instrument to be reformed does not express the real agreement or intention of the parties. Such allegation is essential since the object sought in an action for reformation is to make an instrument conform to be real agreement or intention of the parties. It is not the function of the remedy to make a new agreement, but to establish and perpetuate the true existing one. DECISION REYES, A., J :
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On May 20, 1952, plaintiff filed a complaint against the defendants in the Court of First Instance of Oriental Mindoro, alleging that on November 12,

1938, defendants executed in favor of plaintiff a deed of sale covering a parcel of land therein described; that the said land "was erroneously designated by the parties in the deed of sale as an unregistered land (not registered under Act 496, nor under the Spanish Mortgage Law) when in truth and in fact said land is a portion of a big mass of land registered under Original Certificate of Title No. 6579 in the Office of the Register of Deeds of Oriental Mindoro"; that despite persistent demand from plaintiff to have the error corrected, defendants have refused to do so. Plaintiff, therefore, prayed for judgment ordering defendants to make the aforesaid correction in the deed of sale. Answering the complaint, defendants denied having executed the alleged deed of sale and pleaded prescription as a defense. Traversing the plea of prescription, plaintiff alleged, among other things, that he "was without knowledge of the error sought to be corrected at the time the deed of sale was executed and for many years thereafter," having discovered the said error "only recently". Without trial on the merits and merely upon motion, the lower court dismissed the case on the ground that plaintiff's action had already prescribed. From this order plaintiff has appealed directly to this Court. Both appellant and appellees apparently regard the present action as one for the reformation of an instrument under Chapter 4, Title II, Book IV of the new Civil Code. Specifically, the object sought is the correction of an alleged mistake in a deed of sale covering a piece of land. The action being upon a written contract, it should prescribe in ten years counted from the day it could have been instituted. Obviously, appellant could not have instituted his action to correct an error in a deed until that error was discovered. There being nothing in the pleadings to show that the error was discovered more than ten years before the present action was filed on May 20, 1952, while, on the other hand, there is allegation that the error was discovered "only recently", we think the action should not have been dismissed as having already prescribed before the factual basis for prescription had been established and clarified by evidence. We note, however, that appellant's complaint states no cause of action, for it fails to allege that the instrument to the reformed does not express the real agreement or intention of the parties. Such allegation is essential since the object sought in an action for reformation is to make an instrument conform to the real agreement or intention of the parties. (Art. 1359, new Civil Code; 23 R. C. L., par. 2.) But the complaint does not even allege what the real agreement or intention was. How then is the court to know that the correction sought will make the instrument conform to what was agreed or

intended by the parties? It is not the function of the remedy of reformation to make a new agreement, but to establish and perpetuate the true existing one. (23 R. C. L., par. 4, p. 311.) Moreover, courts do not reform instruments merely for the sake of reforming them, but only to enable some party to assert right under them as reformed. (23 R. C. L., par. 2). If the instrument in the present case is reformed by making it state that the land therein conveyed is already covered by a Torrens certificate of title, what right will the appellant, as vendee, be able to assert under the reformed instrument when according to himself or his counsel states in his brief said title is in the name of Torcuata Sandoval, obviously a person other than the vendor? Would not the sale to him then be ineffective, considering that he would be in the position of one who knowingly purchased property not belonging to the vendor? Perhaps appellant's real grievance is that he has been led to enter into the contract of sale through fraud or misrepresentation on the part of the vendor or in the mistaken belief that, as stated in the deed, the property he was buying was unregistered land. But if that be the case, article 1359 of the new Civil Code expressly provides that "the proper remedy is not reformation of the instrument but annulment of the contract." Appellant's complaint, however, does not ask for the annulment of the deed; neither does it contain allegations essential to an action for that purpose. In view of the foregoing, the order of dismissal must be as it is hereby affirmed, not because appellant's action has already prescribed, but because his complaint states no cause of action. Without pronouncement as to costs.

[G.R. No. 128991. April 12, 2000.] YOLANDA ROSELLO-BENTIR, SAMUEL PORMIDA and CHARITO PORMIDA, petitioners, vs. HONORABLE MATEO M. LEANDA, in his capacity as Presiding Judge of RTC, Tacloban City, Branch 8, and LEYTE GULF TRADERS, INC., respondents.

Antonio R. Bautista & Partners and Eduardo M. Polistico for petitioners. B. C. Lawsin for private respondent.

SYNOPSIS Respondent Leyte Gulf Traders, Inc., entered into a contract of lease of a parcel of land with petitioner Yolanda Rosello-Bentir for a period of twenty years starting May 5, 1968. The said lease was later extended for another four years or until May 31, 1992. On May 5, 1989, petitioner Bentir sold the leased premises to petitioner spouses Samuel Pormida and Charito Pormida. Respondent corporation questioned the sale alleging that it has a right of first refusal. Hence, it filed a case seeking for the reformation of the expired contract of lease by claiming that its lawyers inadvertently omitted to incorporate in the contract of lease executed in 1968, the verbal agreement or understanding between the parties that in the event petitioner Bentir leases or sells the lot after the expiration of the lease, respondent corporation has the right to equal the highest offer. In due time, petitioners filed their answer alleging, among others, that the respondent corporation is guilty of laches for not bringing the case for reformation of the lease contract within the prescriptive period of ten years from its execution. On December 15, 1995, the Regional Trial Court, Branch 7, of Tacloban City, issued an order dismissing the complaint on the ground that the action had already prescribed. Respondent corporation filed a motion for reconsideration. Considering that the Judge was reassigned to the RTC, Malolos, Bulacan, the case was re-raffled and assigned to respondent Judge who in turn, issued an order reversing the order of dismissal, which was affirmed by the Court of Appeals. Hence, this petition. The Court ruled that a suit for reformation of an instrument may be barred by lapse of time. The prescriptive period for actions based upon a written contract and for reformation of an instrument is ten (10) years under Article 1144 of the Civil Code. Prescription is intended to suppress stale and fraudulent claims arising from transactions like the one at bar which facts had become so obscure from the lapse of time or defective memory. In the case at bar, respondent corporation had ten (10) years from 1968, the time when the contract of lease was executed, to file an action for reformation. Sadly, it did so only on May 15, 1992 or twenty-four (24) years after the cause of action accrued, hence, its cause of action had become stale, or become time-barred. Moreover, under Section 1, Rule 64 of the New Rules of Court, an action for the reformation of an instrument is instituted as a special civil action for declaratory relief. Since the purpose of an action for declaratory relief is to secure an authoritative statement of the rights and obligations of the parties for their guidance in the enforcement thereof, or compliance therewith, and not to settle issues arising from an alleged breach thereof, it may be entertained only before

the breach or violation of the law or contract to which it refers. Here, respondent corporation brought the present action for reformation after an alleged breach or violation of the contract was already committed by petitioner Bentir. Consequently, the remedy of reformation no longer lies. SYLLABUS 1.REMEDIAL LAW; CIVIL PROCEDURE; ACTIONS; REFORMATION OF INSTRUMENT; ELUCIDATED. Reformation of an instrument is that remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. It is predicated on the equitable maxim that equity treats as done that which ought to be done. The rationale of the doctrine is that it would be unjust and unequitable to allow enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. However, an action for reformation must be brought within the period prescribed by law, otherwise, it will be barred by the mere lapse of time. 2.ID.; ID.; ID.; ID.; GROUNDED ON PRINCIPLES OF EQUITY; LIMITATION OF THE PAROL EVIDENCE RULE. The remedy of reformation of an instrument is grounded on the principle of equity where, in order to express the true intention of the contracting parties, an instrument already executed is allowed by law to be reformed. The right of reformation is necessarily an invasion or limitation of the parol evidence rule since, when a writing is reformed, the result is that an oral agreement is by court decree made legally effective. Consequently, the courts, as the agencies authorized by law to exercise the power to reform an instrument, must necessarily exercise that power sparingly and with great caution and zealous care. 3.ID.; ID.; ID.; ID.; MAY BE BARRED BY LAPSE OF TIME; CASE AT BAR. The remedy, being an extraordinary one, must be subject to limitations as may be provided by law. Our law and jurisprudence set such limitations, among which is laches. A suit for reformation of an instrument may be barred by lapse of time. The prescriptive period for actions based upon a written contract and for reformation of an instrument is ten (10) years under Article 1144 of the Civil Code. Prescription is intended to suppress stale and fraudulent claims arising from transactions like the one at bar which facts had become so obscure from the lapse of time or defective memory. In the case at bar, respondent corporation had ten (10) years from 1968, the time when the contract of lease was executed, to file an action for reformation. Sadly, it did so only on May 15,

1992 or twenty-four (24) years after the cause of action accrued, hence, its cause of action has become stale, hence, time-barred. 4.ID.; ID.; ID.; ID.; SHOULD BE FILED BEFORE THE BREACH OR VIOLATION OF THE LAW OR CONTRACT TO WHICH IT REFERS. Under Section 1, Rule 64 of the New Rules of Court, an action for the reformation of an instrument is instituted as a special civil action for declaratory relief. Since the purpose of an action for declaratory relief is to secure an authoritative statement of the rights and obligations of the parties for their guidance in the enforcement thereof, or compliance therewith, and not to settle issues arising from an alleged breach thereof, it may be entertained only before the breach or violation of the law or contract to which it refers. Here, respondent corporation brought the present action for reformation after an alleged breach or violation of the contract was already committed by petitioner Bentir. Consequently, the remedy of reformation no longer lies.
IcSHTA

5.CIVIL LAW; OBLIGATIONS AND CONTRACTS; IMPLIED NEW LEASE; NOT APPLICABLE IN CASE AT BAR. First, if, according to respondent corporation, there was an agreement between the parties to extend the lease contract for four (4) years after the original contract expired in 1988, then Art. 1670 would not apply as this provision speaks of an implied new lease (tacita reconduccion) where at the end of the contract, the lessee continues to enjoy the thing leased "with the acquiescence of the lessor," so that the duration of the lease is "not for the period of the original contract, but for the time established in Articles 1682 and 1687." In other words, if the extended period of lease was expressly agreed upon by the parties, then the term should be exactly what the parties stipulated, not more, not less. Second, even if the supposed 4-year extended lease be considered as an implied new lease under Art. 1670, "the other terms of the original contract" contemplated in said provision are only those terms which are germane to the lessee's right of continued enjoyment of the property leased . The prescriptive period of ten (10) years provided for in Art. 1144 applies by operation of law, not by the will of the parties. Therefore, the right of action for reformation accrued from the date of execution of the contract of lease in 1968. DECISION KAPUNAN, J :
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Reformation of an instrument is that remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. 1 It is predicated on the equitable maxim that equity treats as done that which ought to be done. 2 Therationale of the doctrine is that it would be unjust and unequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. 3 However, an action for reformation must be brought within the period prescribed by law, otherwise, it will be barred by the mere lapse of time. The issue in this case is whether or not the complaint for reformation filed by respondent Leyte Gulf Traders, Inc. has prescribed and in the negative, whether or not it is entitled to the remedy of reformation sought.
dctai

On May 15, 1992, respondent Leyte Gulf Traders, Inc. (herein referred to as respondent corporation) filed a complaint for reformation of instrument, specific performance, annulment of conditional sale and damages with prayer for writ of injunction against petitioners Yolanda Rosello-Bentir and the spouses Samuel and Charito Pormida. The case was docketed as Civil Case No. 92-05-88 and raffled to Judge Pedro S. Espina, RTC, Tacloban City, Branch 7. Respondent corporation alleged that it entered into a contract of lease of a parcel of land with petitioner Bentir for a period of twenty (20) years starting May 5, 1968. According to respondent corporation, the lease was extended for another four (4) years or until May 31, 1992. On May 5, 1989, petitioner Bentir sold the leased premises to petitioner spouses Samuel Pormada and Charito Pormada. Respondent corporation questioned the sale alleging that it had a right of first refusal. Rebuffed, it filed Civil Case No. 92-05-88 seeking the reformation of the expired contract of lease on the ground that its lawyer inadvertently omitted to incorporate in the contract of lease executed in 1968, the verbal agreement or understanding between the parties that in the event petitioner Bentir leases or sells the lot after the expiration of the lease, respondent corporation has the right to equal the highest offer.

In due time, petitioners filed their answer alleging that the inadvertence of the lawyer who prepared the lease contract is not a ground for reformation. They further contended that respondent corporation is guilty of laches for not bringing the case for reformation of the lease contract within the prescriptive period of ten (10) years from its execution.

Respondent corporation then filed its reply and on November 18, 1992, filed a motion to admit amended complaint. Said motion was granted by the lower court. 4 Thereafter, petitioners filed a motion to dismiss reiterating that the complaint should be dismissed on the ground of prescription. On December 15, 1995, the trial court through Judge Pedro S. Espina issued an order dismissing the complaint premised on its finding that the action for reformation had already prescribed. The order reads:
ORDER Resolved here is the defendants MOTION TO DISMISS PLAINTIFFS complaint on ground of prescription of action. It is claimed by plaintiff that he and defendant Bentir entered into a contract of lease of a parcel of land on May 5, 1968 for a period of 20 years (and renewed for an additional 4 years thereafter) with the verbal agreement that in case the lessor decides to sell the property after the lease, she shall give the plaintiff the right to equal the offers of other prospective buyers. It was claimed that the lessor violated this right of first refusal of the plaintiff when she sureptitiously (sic) sold the land to co-defendant Pormida on May 5, 1989 under a Deed of Conditional Sale. Plaintiffs right was further violated when after discovery of the final sale, plaintiff ordered to equal the price of co-defendant Pormida was refused and again defendant Bentir surreptitiously executed a final deed of sale in favor of co-defendant Pormida in December 11, 1991. The defendant Bentir denies that she bound herself to give the plaintiff the right of first refusal in case she sells the property. But assuming for the sake of argument that such right of first refusal was made, it is now contended that plaintiffs cause of action to reform the contract to reflect such right of first refusal, has already prescribed after 10 years, counted from May 5, 1988 when the contract of lease incepted. Counsel for defendant cited Conde vs. Malaga, L-9405 July 31, 1956 and Ramos vs. Court of Appeals, 180 SCRA 635, where the Supreme Court held that the prescriptive period for reformation of a written contract is ten (10) years under Article 1144 of the Civil Code. This Court sustains the position of the defendants that this action for reformation of contract has prescribed and hereby orders the dismissal of the case.

SO ORDERED.

On December 29, 1995, respondent corporation filed a motion for reconsideration of the order dismissing the complaint. On January 11, 1996, respondent corporation filed an urgent ex-parte motion for issuance of an order directing the petitioners, or their representatives or agents to refrain from taking possession of the land in question. Considering that Judge Pedro S. Espina, to whom the case was raffled for resolution, was assigned to the RTC, Malolos, Bulacan, Branch 19, Judge Roberto A. Navidad was designated in his place. On March 28, 1996, upon motion of herein petitioners, Judge Navidad inhibited himself from hearing the case. Consequently, the case was re-raffled and assigned to RTC, Tacloban City, Branch 8, presided by herein respondent judge Mateo M. Leanda. On May 10, 1996, respondent judge issued an order reversing the order of dismissal on the grounds that the action for reformation had not yet prescribed and the dismissal was "premature and precipitate", denying respondent corporation of its right to procedural due process. The order reads:
ORDER Stated briefly, the principal objectives of the twin motions submitted by the plaintiffs, for resolution are: (1)for the reconsideration of the Order of 15 December 1995 of the Court (RTC, Br. 7), dismissing this case, on the sole ground of prescription of one (1) of the five (5) causes of action of plaintiff in its complaint for "reformation" of a contract of lease; and, (2)for issuance by this Court of an Order prohibiting the defendants and their privies-in-interest, from taking possession of the leased premises, until a final court order issues for their exercise of dominical or possessory right thereto. The records of this case reveal that co-defendant BENTER (Yolanda) and plaintiff Leyte Gulf Traders Incorporation, represented by Chairman Benito Ang, entered into a contract of lease of a parcel of land,

denominated as Lot No. 878-D, located at Sagkahan District, Tacloban City, on 05 May 1968, for a period of twenty (20) years, (later renewed for an additional two (2) years). Included in said covenant of lease is the verbal understanding and agreement between the contracting parties, that when the defendant (as lessor) will sell the subject property, the plaintiff as (lessee) has the "right of first refusal", that is, the right to equal the offer of any other prospective third-party buyer. This agreement (sic) is made apparent by paragraph 4 of the lease agreement stating: "4.IMPROVEMENT. The lessee shall have the right to erect on the leased premises any building or structure that it may desire without the consent or approval of the Lessor . . . provided that any improvements existing at the termination of the lease shall remain as the property of the Lessor without right to reimbursement to the Lessee of the cost or value thereof." That the foregoing provision has been included in the lease agreement if only to convince the defendant-lessor that plaintiff desired a priority right to acquire the property (ibid) by purchase, upon expiration of the effectivity of the deed of lease.
cda

In the course of the interplay of several procedural moves of the parties herein, the defendants filed their motion to admit their amended answer to plaintiffs amended complaint. Correspondingly, the plaintiff filed its opposition to said motion. The former court branch admitted the amended answer, to which order of admission, the plaintiff seasonably filed its motion for reconsideration. But, before the said motion for reconsideration was acted upon by the court, the latter issued an Order on 15 December 1995, DISMISSING this case on the lone ground of prescription of the cause of action of plaintiffs complaint on "reformation" of the lease contract, without anymore considering the remaining cause of action, viz.: (a) on Specific Performance; (b) an Annulment of Sale and Title; (c) on Issuance of a Writ of Injunction, and (d) on Damages. With due respect to the judicial opinion of the Honorable Presiding Judge of Branch 7 of this Court, the undersigned, to whom this case was raffled to after the inhibition of Judge Roberto Navidad, as acting magistrate of Branch 7, feels not necessary any more to discuss at length that even the cause of action for "reformation" has not, as yet, prescribed.

To the mind of this Court, the dismissal order adverted to above, was obviously premature and precipitate, thus resulting denial upon the right of plaintiff that procedural due process. The other remaining four (4) causes of action of the complaint must have been deliberated upon before that court acted hastily in dismissing this case. WHEREFORE, in the interest of substantial justice, the Order of the court, (Branch 7, RTC) dismissing this case, is hereby ordered RECONSIDERED and SET ASIDE. Let, therefore, the motion of plaintiff to reconsider the Order admitting the amended answer and the Motion to Dismiss this case (ibid), be set for hearing on May 24, 1996, at 8:30 oclock in the morning. Service of notices must be effected upon parties and counsel as early as possible before said scheduled date. Concomitantly, the defendants and their privies-in-interest or agents, are hereby STERNLY WARNED not to enter, in the meantime, the litigated premises, before a final court order issues granting them dominical as well as possessory right thereto. To the motion or petition for contempt, filed by plaintiff, thru Atty. Bartolome C. Lawsin, the defendants may, if they so desire, file their answer or rejoinder thereto, before the said petition will be set for hearing. The latter are given ten (10) days to do so, from the date of their receipt of a copy of this Order. SO ORDERED.
6

On June 10, 1996, respondent judge issued an order for status quo ante, enjoining petitioners to desist from occupying the property. 7 Aggrieved, petitioners herein filed a petition for certiorari to the Court of Appeals seeking the annulment of the order of respondent court with prayer for issuance of a writ of preliminary injunction and temporary restraining order to restrain respondent judge from further hearing the case and to direct respondent corporation to desist from further possessing the litigated premises and to turn over possession to petitioners. On January 17, 1997, the Court of Appeals, after finding no error in the questioned order nor grave abuse of discretion on the part of the trial court that would amount to lack, or in excess of jurisdiction, denied the petition and

affirmed the questioned order. 8 A reconsideration of said decision was, likewise, denied on April 16, 1997. 9 Thus, the instant petition for review based on the following assigned errors, viz:
6.01THE COURT OF APPEALS ERRED IN HOLDING THAT AN ACTION FOR REFORMATION IS PROPER AND JUSTIFIED UNDER THE CIRCUMSTANCES OF THE PRESENT CASE; 6.02THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACTION FOR REFORMATION HAS NOT YET PRESCRIBED; 6.03THE COURT OF APPEALS ERRED IN HOLDING THAT AN OPTION TO BUY IN A CONTRACT OF LEASE IS REVIVED FROM THE IMPLIED RENEWAL OF SUCH LEASE; AND, 6.04THE COURT OF APPEALS ERRED IN HOLDING THAT A STATUS QUO ANTE ORDER IS NOT AN INJUNCTIVE RELIEF THAT SHOULD COMPLY WITH THE PROVISIONS OF RULE 58 OF THE RULES OF COURT. 10

The petition has merit. The core issue that merits our consideration is whether the complaint for reformation of instrument has prescribed. The remedy of reformation of an instrument is grounded on the principle of equity where, in order to express the true intention of the contracting parties, an instrument already executed is allowed by law to be reformed. The right of reformation is necessarily an invasion or limitation of the parol evidence rule since, when a writing is reformed, the result is that an oral agreement is by court decree made legally effective. 11 Consequently, the courts, as the agencies authorized by law to exercise the power to reform an instrument, must necessarily exercise that power sparingly and with great caution and zealous care. Moreover, the remedy, being an extraordinary one, must be subject to limitations as may be provided by law. Our law and jurisprudence set such limitations, among which is laches. A suit for reformation of an instrument may be barred by lapse of time. The prescriptive period for actions based upon a written contract and for reformation of an instrument is ten (10) years under Article 1144 of the Civil Code. 12 Prescription is intended to suppress stale and fraudulent claims arising from transactions like the one at bar which facts had

become so obscure from the lapse of time or defective memory. 13 In the case at bar, respondent corporation had ten (10) years from 1968, the time when the contract of lease was executed, to file an action for reformation. Sadly, it did so only on May 15, 1992 or twenty-four (24) years after the cause of action accrued, hence, its cause of action has become stale, hence, time-barred. In holding that the action for reformation has not prescribed, the Court of Appeals upheld the ruling of the Regional Trial Court that the 10-year prescriptive period should be reckoned not from the execution of the contract of lease in 1968, but from the date of the alleged 4-year extension of the lease contract after it expired in 1988. Consequently, when the action for reformation of instrument was filed in 1992 it was within ten (10) years from the extended period of the lease. Private respondent theorized, and the Court of Appeals agreed, that the extended period of lease was an "implied new lease" within the contemplation of Article 1670 of the Civil Code, 14 under which provision, the other terms of the original contract were deemed revived in the implied new lease. We do not agree. First, if, according to respondent corporation, there was an agreement between the parties to extend the lease contract for four (4) years after the original contract expired in 1988, then Art. 1670 would not apply as this provision speaks of an implied new lease (tacita reconduccion) where at the end of the contract, the lessee continues to enjoy the thing leased "with the acquiescence of the lessor", so that the duration of the lease is "not for the period of the original contract, but for the time established in Article 1682 and 1687." In other words, if the extended period of lease was expressly agreed upon by the parties, then the term should be exactly what the parties stipulated, not more, not less. Second, even if the supposed 4-year extended lease be considered as an implied new lease under Art. 1670, "the other terms of the original contract" contemplated in said provision are only those terms which are

germane to the lessees right of continued enjoyment of the property leased. 15 The prescriptive period of ten (10) years provided for in Art.

1144 16 applies by operation of law, not by the will of the parties. Therefore, the right of action for reformation accrued from the date of execution of the contract of lease in 1968. Even if we were to assume for the sake of argument that the instant action for reformation is not time-barred, respondent corporations action will still not prosper.Under Section 1, Rule 64 of the New Rules of Court, 17 an action for the reformation of an instrument is instituted as a special civil action for declaratory relief. Since the purpose of an action for declaratory relief is to secure an

authoritative statement of the rights and obligations of the parties for their guidance in the enforcement thereof, or compliance therewith, and not to settle issues arising from an alleged breach thereof, it may be entertained only before the breach or violation of the law or contract to which it refers. 18 Here, respondent corporation brought the present action for reformation after an alleged breach or violation of the contract was already committed by petitioner Bentir. Consequently, the remedy of reformation no longer lies. We no longer find it necessary to discuss the other issues raised considering that the same are predicated upon our affirmative resolution on the issue of the prescription of the action for reformation. WHEREFORE, the petition is hereby GRANTED. The Decision of the Court of Appeals dated January 17, 1997 is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Tacloban City, Branch 7, dated December 15, 1995 dismissing the action for reformation is REINSTATED.
LLpr

SO ORDERED.

[G.R. No. L-22487. May 21, 1969.] ASUNCION ATILANO, CRISTINA ATILANO, ROSARIO ATILANO, assisted by their respective husbands, HILARIO ROMANO, FELIPE BERNARDO, and MAXIMO LACANDALO, ISABEL ATILANO and GREGORIO ATILANO, plaintiffsappellees, vs. LADISLAO ATILANO and GREGORIO M. ATILANO, defendants-appellants.

Climaco & Azcarraga for plaintiff-appellee. T. de los Santos for defendants-appellants.

SYLLABUS 1.CIVIL LAW; CONTRACTS; SALE; REAL INTENTION OF PARTIES PREVAIL. Where the object of the sale, as intended and understood by the parties, was that specific portion where the vendee was already residing, where he reconstructed his house at the end of the war, and where his heirs continued to

reside thereafter: namely, lot No. 535-A; and that its designation as lot No. 535E in the deed of sale was a simple mistake in the drafting of the document, the mistake did not vitiate the consent of the parties, or affect the validity and binding effect of the contract between them. The New Civil Code provides a remedy for such a situation by means of reformation of the instrument. In this case, however, the deed of sale executed in 1920 need no longer be reformed. The parties have retained possession of their respective properties conformably to the real intention of the parties to that sale, and all they should do is to execute mutual deeds of conveyance. 2.ID.; ID.; REFORMATION OF INSTRUMENT; REMEDY WHEN THE TRUE INTENTION OF THE PARTIES IS NOT EXPRESSED THEREIN. The remedy of reformation of the instrument, provided for by the New Civil Code, is available when, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement by reason of mistake, fraud, inequitable conduct or accident. DECISION MAKALINTAL, J :
p

In 1916 Eulogio Atilano I acquired, by purchase from one Gerardo Villanueva, lot No. 535 of the then municipality of Zamboanga cadastre. The vendee thereafter obtained transfer certificate of title No. 1134 in his name. In 1920 he had the land subdivided into five parts, identified as lots Nos. 535-A, 535-B, 535-C, 535-D and 535-E, respectively. On May 18 of the same year, after the subdivision had been effected, Eulogio Atilano I, for the sum of P150.00, executed a deed of sale covering lot No. 535-E in favor of his brother Eulogio Atilano II, who thereupon obtained transfer certificate of title No. 3129 in his name. Three other portions, namely, lots Nos. 535-B, 535-C and 535-D, were likewise sold to other persons, the original owner, Eulogio Atilano I, retaining for himself only the remaining portion of the land, presumably covered by the title to lot No. 535-A. Upon his death the title to this lot passed to Ladislao Atilano, defendant in this case, in whose name the corresponding certificate (No. T-5056) was issued. On December 6, 1952, Eulogio Atilano II having become a widower upon the death of his wife Luisa Bautista, he and his children obtained transfer certificate of title No. 4889 over lot No. 535-E in their names as co-owners. Then, on July 16, 1959, desiring to put an end to the co-ownership, they had the land

resurveyed so that it could properly be subdivided; and it was then discovered that the land they were actually occupying on the strength of the deed of sale executed in 1920 was lot No. 535-A and not lot 535-E, as referred to in the deed, while the land which remained in the possession of the vendor, Eulogio Atilano I, and which passed to his successor, defendant Ladislao Atilano was lot No. 535-E and not lot No. 535-A. On January 25, 960, the heirs of Eulogio Atilano II, who was by then also deceased, filed the present action in the Court of First Instance of Zamboanga, alleging,inter alia, that they had offered to surrender to the defendants the possession of lot No. 535-A and demanded in return the possession of lot No. 535-E, but that the defendants had refused to accept the exchange. The plaintiffs' insistence is quite understandable, since lot No. 535-E has an area of 2,612 square meters as compared to the 1,808 square-meter area of lot No. 535-A. In their answer to the complaint the defendants alleged that the reference to lot No. 535-E in the deed of sale of May 18, 1920 was an involuntary error; that the intention of the parties to that sale was to convey the lot correctly identified as lot No. 535-A; that since 1916, when he acquired the entirety of lot No. 535, and up to the time of his death, Eulogio Atilano I had been possessing and had his house on the portion designated as lot No. 535-E, after which he was succeeded in such possession by the defendants herein; and that as a matter of fact Eulogio Atilano I even increased the area under his possession when on June 11, 1920 he bought a portion of an adjoining lot, No. 536, from its owner Fruto del Carpio. On the basis of the foregoing allegations the defendants interposed a counterclaim, praying that the plaintiffs be ordered to execute in their favor the corresponding deed of transfer with respect to Lot No. 535-E. The trial court rendered judgment for the plaintiffs on the sole ground that since the property was registered under the Land Registration Act the defendants could not acquire it through prescription. There can be, of course, no dispute as to the correctness of this legal proposition; but the defendants, aside from alleging adverse possession in their answer and counterclaim, also alleged error in the deed of sale of May 18, 1920, thus: "Eulogio Atilano 1,o, por equivocacin o errr involuntario, cedio y traspaso a su hermano Eulogio Atilano 2.do el lote No. 535-E en vez del Lote No. 535-A." The logic and common sense of the situation lean heavily in favor of the defendants' contention. When one sells or buys real propertya piece of land, for exampleone sells or buys the property as he sees it, in its actual setting

and by its physical metes and bounds, and not by the mere lot number assigned to it in the certificate of title. In the particular case before us, the portion correctly referred to as lot No. 535-A was already in the possession of the vendee, Eulogio Atilano II, who had constructed his residence therein, even before the sale in his favor; indeed, even before the subdivision of the entire lot No. 535 at the instance of its owner, Eulogio Atilano I. In like manner the latter had his house on the portion correctly identified, after the subdivision, as lot No. 535-E, even adding to the area thereof by purchasing a portion of an adjoining property belonging to a different owner. The two brothers continued in possession of the respective portions for the rest of their lives, obviously ignorant of the initial mistake in the designation of the lot subject of the 1920 sale until 1959, when the mistake was discovered for the first time. The real issue here is not adverse possession, but the real intention of the parties to that sale. From all the facts and circumstances we are convinced that the object thereof, as intended and understood by the parties, was that specific portion where the vendee was then already residing, where he reconstructed his house at the end of the war, and where his heirs, the plaintiffs herein, continued to reside thereafter: namely, lot No. 535-A; and that its designation as lot No. 535-E in the deed of sale was a simple mistake in the drafting of the document. The mistake did not vitiate the consent of the parties, or affect the validity and binding effect of the contract between them. The new Civil Code provides a remedy for such a situation by means of reformation of the instrument. This remedy is available when, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement by reason of mistake, fraud, inequitable conduct or accident (Art. 1359, et seq.). In this case, the deed of sale executed in 1920 need no longer be reformed. The parties have retained possession of their respective properties conformably to the real intention of the parties to that sale, and all they should do is to execute mutual deed of conveyance. WHEREFORE, the judgment appealed from is reversed. The plaintiffs are ordered to execute a deed of conveyance of lot No. 535-E in favor of the defendants, and the latter, in turn, are ordered to execute a similar document, covering lot No. 535-A, in favor of the plaintiffs. Costs against the latter.

[G.R. No. 133643. June 6, 2002.]

RITA SARMING, RUFINO SARMING, MANUEL SARMING, LEONORA VDA. DE LOY, ERLINDA DARMING, NICANDRA SARMING, MANSUETA SARMING, ARTURO CORSAME, FELY CORSAME, FEDERICO CORSAME, ISABELITA CORSAME, NORMA CORSAME, CESAR CORSAME, RUDY CORSAME, ROBERTA CORSAME, ARTEMIO CORSAME, ELPIDIO CORSAME, ENRIQUITA CORSAME, and GUADALUPE CORSAME TAN, petitioners, vs. CRESENCIO DY, LUDIVINA DY-CHAN, TRINIDAD FLORES, LUISA FLORES, SATURNINA ORGANISTA, REMEDIOS ORGANISTA, OFELIA ORGANISTA, LYDIA ORGANISTA, ZOSIMO ORGANISTA, DOMISIANO FLORES, FLORITA FLORES, EDUARDO FLORES, BENIGNA FLORES, ANGELINA FLORES, MARCIAL FLORES, and MARIO FLORES, respondents.

Marlon P. Ontal for petitioners. Riodil D. Montebon for respondents.

SYNOPSIS The parties herein were the successors-in-interest of the original parties involved in the case. It originated from a complaint for reformation of instrument against Silveria Flores. Jose, Venancio, and Silveria were heirs to two parcels of land, Lots No. 5734 and 4163. Lot No 5734 was subdivided into three equal parts distributed among the three siblings, while Lot No. 4163, which was registered solely in the name of Silveria Flores, was actually subdivided between Silveria and Jose. The grandchildren of Jose who were then the owners of one half portion of Lot 4163 decided to sell their share to Alejandra Delfino with the knowledge and permission of Silveria. However, Silveria mistakenly delivered the Original Certificate of Title of Lot No. 5734, instead of Lot No. 4163. The Deed of Sale referred to Lot No. 5734 as the land sold. Upon discovery of the error, Alejandra paid the necessary fees so that the title to Lot No. 4163 could be released to Silveria, who promised to turn over the same for the reformation of the deed of sale. However, despite repeated demands Silveria failed to deliver the title, which prompted Alejandra to file a complaint against Silveria for reformation of the deed of sale with damages. In her answer, Silveria denied that error was made and claimed that the buyers illegally occupied Lot No. 4163 and prayed that she be declared the sole owner of the lot and placed in possession thereof. The case lasted for several years in the trial court due to

substitution of parties. But the trial court made earnest efforts for the parties to amicably settle the matter among themselves to no avail. Then in 1992, the trial court finally decided in favor of the respondents herein, successors-in-interest of Alejandra, thereby ordering the reformation of the deed of sale and correction of the corresponding documents affected. The court noted that Alejandra had been occupying one-half portion of Lot No. 4163 since the purchase thereof and it was the one pointed to her by the vendors. Petitioners appealed the decision to the Court of Appeals, which affirmed the ruling of the trial court. Hence, this petition for review that assailed the decision of the Court of Appeals. The Supreme Court affirmed the decision of the Court of Appeals. The Court found no reason to disturb the findings of the trial court, which was affirmed by the Court of Appeals. The Court found that the designation of the lot in the deed of sale as Lot 5734 was a mistake in the preparation of the document. Thus, it concurred in the conclusion reached by the court a quo that reformation of the instrument was proper.
ECcaDT

SYLLABUS 1.REMEDIAL LAW; ACTIONS; CAUSE OF ACTION; ONLY THE ALLEGATIONS IN THE COMPLAINT MAY PROPERLY BE CONSIDERED IN ASCERTAINING THE EXISTENCE THEREOF; APPLICATION IN CASE AT BAR. Worth stressing, the existence of a cause of action is net determined by one's involvement in a contract. Participation in a contract is not an element to determine the existence of a cause of action. The rule is that only the allegations in the complaint may properly be considered in ascertaining the existence of a cause of action. Lack of cause of action must appear on the face of the complaint and its existence may be determined only by the allegations of the complaint. Consideration of other facts is proscribed and any attempt to prove extraneous circumstances is not allowed. The test of sufficiency of the facts found in a complaint as constituting a cause of action is whether or not, admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the prayer in the complaint. An examination of the complaint shows herein respondents, as plaintiffs in the trial court, are entitled to the relief of reformation of instrument if the following factual allegations of respondents are deemed admitted, to wit: (1) that Silveria is a co-owner of Lots No. 5734 and 4163, in different shares; (2) that the heirs of Jose, her co-owner in Lot No. 4163, offered to sell to her their one-half share but she declined for lack of money; (3) that said share was later sold to Alejandra; (4) that Silveria was asked to deliver the title of Lot No. 4163 but instead she delivered the title of Lot No. 5734; (5) that after the sale,

Alejandra occupied one-half portion of Lot No. 4163 while Lot No. 5734 was still in the possession of Venancio and the heirs of Maxima and Silveria; (6) that it was only when Alejandra was about to buy the adjacent lot that she realized that what was indicated in the Settlement of Estate and Sale was Lot No. 5734 and not 4163. In sum, we find that the original plaintiffs in the trial court alleged sufficient facts in the complaint that properly constituted a cause of action against the defendants. 2.CIVIL LAW; CONTRACTS; REFORMATION OF INSTRUMENTS; CONSTRUED. Reformation is that remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties. As provided in Article 1359 of the Civil Code: Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract. 3.ID.; ID.; ID.; REQUISITES WHEN ACTION THEREFOR MAY PROSPER; PRESENT IN CASE AT BAR. An action for reformation of instrument under this provision of law may prosper only upon the concurrence of the following requisites: (1) there must have been a meeting of the minds of the parties to the contact; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident. All of these requisites, in our view, are present in this case. There was a meeting of the minds between the parties to the contract but the deed did not express the true intention of the parties due to mistake in the designation of the lot subject of the deed. There is no dispute as to the intention of the parties to sell the land to Alejandra Delfino but there was a mistake as to the designation of the lot intended to be sold as stated in the Settlement of Estate and Sale. 4.REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS OF THE TRIAL COURT, ENTITLED TO UTMOST RESPECT ESPECIALLY WHEN AFFIRMED BY THE APPELLATE COURT; PRESENT IN CASE AT BAR. As consistently held, factual findings of the trial court, especially when affirmed by the appellate court, are binding upon this Court and entitled to utmost respect. Considering these findings, we see no reason to disturb the trial court's finding, affirmed by the Court of Appeals, that the object of the contract of sale, as intended and

understood by the parties, was Lot 4163 covered by OCT 3129-A which Alejandra, and now her heirs, have been occupying. The designation of the lot in the deed of sale as Lot 5734, covered by OCT 4918-A, was a mistake in the preparation of the document. Thus, we concur in the conclusion reached by the courts a quo that reformation of the instrument is proper. DECISION QUISUMBING, J :
p

This petition for review assails the decision 1 dated September 23, 1997 of the Court of Appeals in CA-G.R. CV No. 39401, which affirmed the decision 2 of the Regional Trial Court, Branch 41 in Negros Oriental, Dumaguete City and the resolution 3 dated April 21, 1998 denying petitioners' motion for reconsideration. The facts as culled from records are as follows: Petitioners are the successors-in-interest of original defendant Silveria Flores, while respondents Cresencio Dy and Ludivina Dy-Chan are the successors-ininterest of the original plaintiff Alejandra Delfino, the buyer of one of the lots subject of this case. They were joined in this petition by the successors-ininterest of Isabel, Juan, Hilario, Ruperto, Tomasa, and Luisa and Trinidad themselves, all surnamed Flores, who were also the original plaintiffs in the lower court. They are the descendants of Venancio 4 and Jose 5 , the brothers of the original defendant Silveria Flores. In their complaint for reformation of instrument against Silveria Flores, the original plaintiffs alleged that they, with the exception of Alejandra Delfino, are the heirs of Valentina Unto Flores, who owned, among others, Lot 5734, covered by OCT 4918-A; and Lot 4163, covered by OCT 3129-A, both located at Dumaguete City. After the death of Valentina Unto Flores, her three children, namely: Jose, Venancio, and Silveria, took possession of Lot 5734 with each occupying a onethird portion. Upon their death, their children and grandchildren took possession of their respective shares. The other parcel, Lot 4163 which is solely registered under the name of Silveria, was sub-divided between Silveria and Jose. Two rows of coconut trees planted in the middle of this lot serves as boundary line.

In January 1956, Luisa, Trinidad, Ruperto and Tomasa, grandchildren of Jose and now owners of one-half of Lot 4163, entered into a contract with plaintiff Alejandra Delfino, for the sale of one-half share of Lot 4163 after offering the same to their co-owner, Silveria, who declined for lack of money. Silveria did not object to the sale of said portion to Alejandra Delfino. Before preparing the document of sale, the late Atty. Deogracias Pinili, Alejandra's lawyer, called Silveria and the heirs of Venancio to a conference where Silveria declared that she owned half of the lot while the other half belonged to the vendors; and that she was selling her three coconut trees found in the half portion offered to Alejandra Delfino for P15. When Pinili asked for the title of the land, Silveria Flores, through her daughter, Cristita Corsame, delivered Original Certificate of Title No. 4918-A, covering Lot No. 5734, and not the correct title covering Lot 4163. At that time, the parties knew the location of Lot 4163 but not the OCT Number corresponding to said lot. Believing that OCT No. 4918-A was the correct title corresponding to Lot 4163, Pinili prepared a notarized Settlement of Estate and Sale (hereinafter "deed") duly signed by the parties on January 19, 1956. As a result, OCT No. 4918-A was cancelled and in lieu thereof, TCT No. 5078 was issued in the names of Silveria Flores and Alejandra Delfino, with one-half share each. Silveria Flores was present during the preparation and signing of the deed and she stated that the title presented covered Lot No. 4163. Alejandra Delfino immediately took possession and introduced improvements on the purchased lot, which was actually one-half of Lot 4163 instead of Lot 5734 as designated in the deed. Two years later, when Alejandra Delfino purchased the adjoining portion of the lot she had been occupying, she discovered that what was designated in the deed, Lot 5734, was the wrong lot. She sought the assistance of Pinili who approached Silveria and together they inquired from the Registry of Deeds about the status of Lot 4163. They found out that OCT No. 3129-A covering Lot 4163 was still on file. Alejandra Delfino paid the necessary fees so that the title to Lot 4163 could be released to Silveria Flores, who promised to turn it over to Pinili for the reformation of the deed of sale. However, despite repeated demands, Silveria did not do so, prompting Alejandra and the vendors to file a complaint against Silveria for reformation of the deed of sale with damages before the

Regional Trial Court of Negros Oriental, Branch 41, docketed as Civil Case No. 3457. In her answer, Silveria Flores claimed that she was the sole owner of Lot 4163 as shown by OCT No. 3129-A and consequently, respondents had no right to sell the lot. According to her, the contract of sale clearly stated that the property being sold was Lot 5734, not Lot 4163. She also claimed that respondents illegally took possession of one-half of Lot 4163. She thus prayed that she be declared the sole owner of Lot 4163 and be immediately placed in possession thereof. She also asked for compensatory, moral, and exemplary damages and attorney's fees. The case lasted for several years in the trial court due to several substitutions of parties. The complaint was amended several times. Moreover, the records had to be reconstituted when the building where they were kept was razed by fire. But, earnest efforts for the parties to amicably settle the matters among themselves were made by the trial court to no avail. On September 29, 1992, the trial court found in favor of herein respondents, who were the plaintiffs below, decreeing as follows:
CaHcET

WHEREFORE, this Court finds the preponderance of evidence in favor of the plaintiffs and veritably against the defendants and, as such, renders judgment accordingly, thereby ORDERING the defendants, the heirs of the deceased-defendant SILVERIA FLORES and her successors-ininterest the following: 1)To enter into the reformation of the subject contract or execute a mutual conveyance of sale, by making the one-half (1/2) eastern portion of Lot 4163, the subject of the document of sale, in favor of plaintiff, the late Alejandra Delfino or her heirs and/or successors-in-interest; 2)To sign a document ceding to the heirs of the heirs of Maxima Flores and Venancio Flores the excess of her one-third (1/3) share; and further ordering the heirs of the late Alejandra Delfino to correspondingly sign a document for the return of the one-half (1/2) portion of Lot 5734 to the original registered owners, in exchange thereby; 3)To pay to the heirs of the late plaintiff Alejandra Delfino, the sum of P5,000.00 as actual damages and the sum of P10,000.00 as moral damages; 4)To pay P2,000.00 as attorney's fees plus the costs of this suit.

SO ORDERED.

According to the trial court, the claims of herein respondents were anchored on valid grounds. It noted that Alejandra had been occupying one-half portion of Lot 4163 since 1956 and it was the one pointed to her by the vendors. Citing the case of Atilano vs. Atilano 7 , it ruled that when one sells or buys real property, he sells or buys the said property as is shown to her and as he sees it, at its actual setting and by its physical metes and bounds, not by the mere lot number assigned to it in the certificate of title. Thus, it concluded that from the facts and circumstances of the case, it is clear that the object of the sale, as understood by the parties, was that portion "Y" of Lot 4163 and that its designation as Lot 5734 in the document of sale was a simple mistake in the drafting of the document, which mistake, however, did not vitiate the consent of the parties or affect the validity and the binding effect of the contract between them. Hence, the remedy of reformation of instrument is proper. 8 Petitioners appealed the decision to the Court of Appeals, which affirmed the ruling of the trial court as follows:
WHEREFORE, the appealed decision is hereby AFFIRMED. Costs against defendants-appellants. SO ORDERED.
9

In affirming the decision of the trial court, the Court of Appeals agreed that the real intention of the parties was for the sale of Lot 4163 which Alejandra Delfino had been occupying, and the designation of Lot 5734 in the deed was a mistake in the preparation of the document. It noted that Silveria Flores did not object when Alejandra Delfino took possession of one-half portion of Lot 4163 immediately after the sale, considering that it was Silveria's son, Michael Corsame, who developed the area purchased by Alejandra. 10 Aggrieved but undeterred, the successors-in-interest of defendant Silveria Flores seasonably filed their petition for review under Rule 45 of the Rules of Court. They assail the decision of the Court of Appeals on the following grounds:
1.THE COURT OF APPEALS COMMITTED AN ERROR IN LAW WHEN IT FAILED TO ORDER THE DISMISSAL OF CIVIL CASE NO. 3457 FOR LACK OF CAUSE OF ACTION. 2.THE COURT OF APPEALS AND THE TRIAL COURT COMMITTED A REVERSIBLE ERROR IN LAW AND JURISPRUDENCE WHEN IT

FAILED TO RULE THAT, BASED ON THE UNDISPUTED EVIDENCE ON RECORD AND THE SETTLEMENT OF ESTATE AND SALE ITSELF, THE PLAINTIFFS HAVE NO CAUSE OF ACTION AGAINST SILVERIA FLORES BECAUSE SHE DID NOT SELL HER LAND TO ALEJANDRA DELFINO. HENCE SILVERIA FLORES CANNOT BE BOUND NOR PREJUDICED BY THE CONTRACT OF SALE ENTERED BY ALEJANDRA DELFINO AND HER CO-PLAINTIFFS (CAPITOL

INSURANCE & SURETY CO INC. V. CENTRAL AZUCARERA DEL DAVAO, 221 SCRA 98; OZAETA V. CA, 228 SCRA 350).

3.THE COURT OF APPEALS AND THE TRIAL COURT COMMITTED A REVERSIBLE ERROR WHEN IT FAILED TO PRONOUNCE THAT SILVERIA FLORES WHO IS NOT A PARTY TO THE CONTRACT OF SALE INVOLVING LOT NO. 5734 COVERED BY OCT NO. 4918-A CANNOT BE LEGALLY COMPELLED BY ALEJANDRA DELFINO THRU AN ACTION FOR REFORMATION OF CONTRACT TO EXECUTE A "CONVEYANCE OF SALE" INVOLVING LOT NO. 4163 COVERED BY OCT NO. 3129-A OWNED AND REGISTERED SOLELY IN THE NAME OF SILVERIA FLORES.
ADSTCI

4.THE COURT OF APPEALS AND THE TRIAL COURT GROSSLY MISAPPREHENDED THE FACTS WHEN IT RULED THAT THE OBJECT OF THE CONTRACT OF SALE WAS LOT NO. 4163 COVERED BY OCT NO. 3129-A, DESPITE THE UNASSAILABLE FACT THAT THE OBJECT OF THE SETTLEMENT AND SUBJECT OF THE CONTRACT OF SALE WAS LOT NO. 5734 COVERED BY OCT NO. 4918-A. 5.THE COURT OF APPEALS AND THE TRIAL COURT GROSSLY MISAPPREHENDED THE FACTS IN NOT UPHOLDING THAT THERE WAS NO MISTAKE IN THE DRAFTING OF THE DOCUMENT AS WELL AS IN THE OBJECT OF THE SETTLEMENT OF ESTATE AND SALE BECAUSE THE DOCUMENT WAS PREPARED BY ATTY. DEOGRACIAS PINILI, THE LAWYER OF ALEJANDRA DELFINO. 6.THE COURT OF APPEALS AND THE TRIAL COURT GROSSLY MISAPPREHENDED THE FACTS WHEN IT RULED THAT THE GRANDCHILDREN OF JOSE FLORES ARE OWNERS AND COULD SELL THE ONE-HALF (1/2) PORTION OF LOT NO. 4163 TO ALEJANDRA DELFINO DESPITE THE INCONTROVERTIBLE EVIDENCE THAT LOT NO. 4163 COVERED BY OCT NO. 3129-A IS REGISTERED AND SOLELY OWNED BY SILVERIA FLORES WHO IS PAYING THE REAL PROPERTY TAXES.

7.THE COURT OF APPEALS AND THE TRIAL COURT COMMITTED A REVERSIBLE ERROR IN LAW WHEN IT DISREGARDED ARTICLE 1370 OF THE CIVIL CODE OF THE PHILIPPINES AND PERTINENT JURISPRUDENCE RELEVANT TO THIS CASE EVEN IF THE TERMS OF THE SETTLEMENT OF ESTATE AND SALE ARE CLEAR AND LEAVE NO DOUBT ON THE INTENTION OF THE CONTRACTING PARTIES. 8.THE COURT OF APPEALS AND THE TRIAL COURT GRAVELY ERRED IN DISREGARDING SETTLED JURISPRUDENCE THAT A PUBLIC DOCUMENT EXECUTED AND ATTESTED THROUGH THE INTERVENTION OF A NOTARY PUBLIC IS EVIDENCE OF THE FACTS IN CLEAR, UNEQUIVOCAL MANNER AND TO CONTRADICT IT THERE MUST BE CLEAR AND CONVINCING EVIDENCE NOT MERELY PREPONDERANT EVIDENCE (GEVERO VS. INTERMEDIATE APPELLATE COURT, G.R. NO. 77029, AUGUST 30, 1990;ZAMBO V. COURT OF APPEALS, 224 SCRA 855; REBULDEDA V. IAC, 155 SCRA 520; CHILIANCHIN V. COQUINCO, 84 PHIL. 714; CENTENERA V. GARCIA PALICIO, 29 PHIL. 470). 9.THE COURT OF APPEALS AND THE TRIAL COURT COMMITTED A REVERSIBLE ERROR WHEN IT SUBSTITUTED, REVISED AND MODIFIED THE AGREEMENT OF THE PARTIES DESPITE THE ABSENCE OF FRAUD, MISTAKE, INEQUITABLE CONDUCT OR ACCIDENT.

10.THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN LAW WHEN IT FAILED TO RULE ON THE ISSUE OF WHETHER THE TRIAL COURT GRAVELY ERRED IN ORDERING THE HEIRS OF SILVERIA FLORES TO PAY ACTUAL AND MORAL DAMAGES AS WELL AS ATTORNEY'S FEES TO THE HEIRS OF ALEJANDRA DELFINO. 11

After careful consideration, we find the following relevant issues for our resolution: (1) whether or not there is a cause of action for reformation of instrument against Silveria Flores, and consequently the petitioners; (2) whether or not reformation of the subject deed is proper by reason of mistake in designating the correct lot number; and (3) whether or not the heirs of Alejandra Delfino are entitled to actual and moral damages including attorney's fees.

In seeking the reversal of the appellate court's decision, the heirs of Silveria Flores, herein petitioners, ascribe to the appellate court several errors: first, the Court of Appeals committed error in failing to appreciate that there is no cause of action against Silveria as she was never a party to the contract of sale; second, the appellate court erred in giving probative value to the biased testimony of Trinidad Flores to the effect that Lot No. 4163 was subdivided into two, one-half of which is occupied by her and her siblings; and third, the appellate court erred in not considering the fact that Silveria is the only registered owner of Lot 4163. Petitioners submit that the evidence adduced is insufficient to sustain a decision in respondents' favor. Respondents, for their part, maintain that the present petition is pro forma as it does not raise any new matter worth considering. They also assert that the arguments and issues raised by petitioners have been more than adequately and exhaustively discussed by the trial court as well as the Court of Appeals. 12 On the first issue, petitioners contend that there is no cause of action against them and their predecessor-in-interest, Silveria Flores, because she and they were not parties to the contract sought to be reformed. However, a close perusal of the deed would show that Silveria Flores was a party to the contract. She is not only the seller of the coconut trees worth P15 but she was also one of the heirs entitled to the estate of Venancio and Maxima, one of the heirs of Jose Flores. Her name did not appear as one of the sellers of onehalf lot to Alejandra Delfino because she never sold her share. What was sold was the one-half share of Jose Flores, as represented by his heirs. It is also established that it was Silveria Flores herself who delivered the subject lot to the vendee Alejandra Delfino. Said the lower court:
The truth of the matter, is that what the plaintiffs-vendors really intended to sell and what Alejandra Delfino intended to buy, of which both of the parties agreed to be the subject of the transaction, was actually that parcel of land, with two rows of coconut trees as the dividing line, and which lot is known as Lot 4163. This lot, on the western portion, was the very portion which was pointed to and delivered to Alejandra Delfino by the original defendant Silveria Flores and her two children, together with the vendors on January 19, 1956. When the title to the said property was delivered to the notary public, for the preparation of the document of sale, the title that was delivered was for Lot 5734. So, the document, that was executed, was done by reason of mistake, inequitable conduct and accident, because the said document did not express the true and real agreement and intention of

the contracting parties. What was made to appear in the said document was the sale of the one-half portion of another lot. Lot 5734, when in truth and in fact, the subject property sold was Lot 4163. 13 (Underscoring and emphasis supplied.)

Through her actions, Silveria Flores had made the parties to the deed believe that the lot intended to be the object of the contract was the same lot described in the deed. Thus, by mistake or accident, as well as inequitable conduct, neither she nor her successors-in-interest could deny involvement in the transaction that resulted in a deed that now ought to be reformed. Worth stressing, the existence of a cause of action is not determined by one's involvement in a contract. Participation in a contract is not an element to determine the existence of a cause of action. The rule is that only the allegations in the complaint may properly be considered in ascertaining the existence of a cause of action. Lack of cause of action must appear on the face of the complaint and its existence may be determined only by the allegations of the complaint. Consideration of other facts is proscribed and any attempt to prove extraneous circumstances is not allowed. 14 The test of sufficiency of the facts found in a complaint as constituting a cause of action is whether or not, admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the prayer in the complaint. 15 An examination of the complaint 16 shows herein respondents, as plaintiffs in the trial court, are entitled to the relief of reformation of instrument if the following factual allegations of respondents are deemed admitted, to wit: (1) that Silveria is a co-owner of Lots No. 5734 and 4163, in different shares; (2) that the heirs of Jose, her co-owner in Lot No. 4163, offered to sell to her their one-half share but she declined for lack of money; (3) that said share was later sold to Alejandra; (4) that Silveria was asked to deliver the title of Lot No. 4163 but instead she delivered the title of Lot No. 5734; (5) that after the sale, Alejandra occupied one-half portion of Lot No. 4163 while Lot No. 5734 was still in the possession of Venancio and the heirs of Maxima and Silveria; (6) that it was only when Alejandra was about to buy the adjacent lot that she realized that what was indicated in the Settlement of Estate and Sale was Lot No. 5734 and not 4163. In sum, we find that the original plaintiffs in the trial court alleged sufficient facts in the complaint that properly constituted a cause of action against the defendants. On the second issue, petitioners contend respondents failed to show, specifically, a cause of action for the reformation of the instrument in question. Reformation is that remedy in equity by means of which a written instrument is made or

construed so as to express or conform to the real intention of the parties. provided in Article 1359 of the Civil Code:
Art. 1359.When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract.
DEIHAa

17 As

An action for reformation of instrument under this provision of law may prosper only upon the concurrence of the following requisites: (1) there must have been a meeting of the minds of the parties to the contract; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident. 18 All of these requisites, in our view, are present in this case. There was a meeting of the minds between the parties to the contract but the deed did not express the true intention of the parties due to mistake in the designation of the lot subject of the deed. There is no dispute as to the intention of the parties to sell the land to Alejandra Delfino but there was a mistake as to the designation of the lot intended to be sold as stated in the Settlement of Estate and Sale. While intentions involve a state of mind which may sometimes be difficult to decipher, subsequent and contemporaneous acts of the parties as well as the evidentiary facts as proved and admitted can be reflective of one's intention. The totality of the evidence clearly indicates that what was intended to be sold to Alejandra Delfino was Lot 4163 and not Lot 5734. As found by both courts below, there are enough bases to support such conclusion. We particularly note that one of the stipulated facts during the pre-trial is that one-half of Lot 4163 is in the possession of plaintiff Alejandra Delfino "since 1956 up to the present." 19 Now, why would Alejandra occupy and possess one-half of said lot if it was not the parcel of land which was the object of the sale to her? Besides, as found by the Court of Appeals, if it were true that Silveria Flores was the sole owner of Lot 4163, then she should have objected when Alejandra Delfino took possession of one-half thereof immediately after the sale. Additionally, we find no cogent reason to depart from the conclusion of both the Court of Appeals and

the trial court, based on the evidence on record, that Silveria Flores owns only one-half of Lot 4163. The other half belongs to her brother Jose, represented now by his grandchildren successors-in-interest. As such, the latter could rightfully sell the land to Alejandra Delfino. Furthermore, on record, it has been shown that a spot investigation conducted by a duly licensed surveyor revealed that Lot 4163 is subdivided into two portions, one belonging to Silveria Flores and the other to the heirs of Jose Flores. 20 As found by the trial court, if indeed it was Lot 5734 that was sold, then Silveria Flores was occupying more than her share of the inherited lot. Thus:
. . . That, with respect to Lot No. 5734 and Lot No. 4292, in an on-thespot investigation, made by a licensed surveyor, Mr. Rilthe Dorado, his findings thereon show that Silveria Flores is in possession on the western portion of Lot 5734, with an area of more than one-half and, to be exact, with an area of 2,462, in spite of the fact that she is the registered owner only of a one-third (1/3) share; and admitting, for the sake of argument, that it was the one-half portion, of Lot 5734, that was sold, why should Silveria Flores possess more than 2,190 square meters, which is the 1/2 of Lot 5734, Isabel Flores, the daughter of Venancio Flores is possessing the middle portion, with an area of only 884 square meters; and Trinidad Flores Nodado, in representation of her aunt, Maxima Flores, is possessing an area of 1,034 sq. m. 21

As a matter of fact, the trial court also found that in spite of her title over Lot 4163, Silveria recognized the right of Jose's grandchildren over one-half portion of the property. 22 The trial court gave credence to the testimony of Trinidad Flores, one of the grandchildren, who testified as follows:
Q:During the lifetime of Jose and Silveria when they were possessing Lot 4163, did they subdivide it because they were possessing it in common? A:They subdivided it into two halves. xxx xxx xxx Q:And after Jose and Silveria subdivided Lot 4163, they possessed their respective shares of Lot 4163?

A:Yes. xxx xxx xxx Q:Now you said that you are the heirs of Jose and Roman Flores (father and son) and so when they died this portion of Lot 4163 devolved on you, did you ever take possession of Lot 4163? A:Yes, we, the brothers and sisters immediately took possession of it.
23

On cross-examination, Trinidad sufficiently explained why the title to Lot No. 4163 is in the name of Silveria Flores alone. Thus:
Q:Now, this Lot No. 4163, do you know if this lot is also titled? A:Yes, it was titled, only in the name of Silveria Flores because my aunt was not able to go with her; only my aunt was alone at that time. 24 xxx xxx xxx Q:And as you have stated earlier, that what you are intending to sell was Lot 4163 to plaintiff Alejandra Delfino, and during this time that you sold this intended lot 4163, you were not aware this particular lot 4163 was titled exclusively in the name of Silveria Flores, is that correct? A:I knew already that the said lot was already titled, but it was titled only in the name of Silveria Flores because she was the only one who went there to have it titled in her name. And at the time of the sale of the lot, we demanded for the title from Silveria Flores, and what she delivered was the 5734 (sic). 25

Petitioners now claim that the foregoing testimony of Trinidad Flores was biased. But we note that the appellate court sustained the trial court's reliance on her testimony, which both found to be credible. As consistently held, factual findings of the trial court, especially when affirmed by the appellate court, are binding upon this Court 26 and entitled to utmost respect. 27 Considering these findings, we see no reason to disturb the trial court's finding, affirmed by the Court of Appeals, that the object of the contract of sale, as intended and understood by the parties, was Lot 4163 covered by OCT 3129-A which Alejandra, and now her heirs, have been occupying. The designation of the lot in the deed of sale as Lot 5734, covered by OCT 4918-A, was a mistake in the preparation of the

document. Thus, we concur in the conclusion reached by the courts a quo that reformation of the instrument is proper. However, on the matter of damages, the award of actual damages in the amount of P5,000 lacks evidentiary support. Actual damages if not supported by the evidence on record cannot be granted. 28 Moral damages for P10,000 was also improperly awarded, absent a specific finding and pronouncement from the trial court that petitioners acted in bad faith or with malice. However, the award of attorney's fees for P2,000 is justified under Article 2208(2) of the Civil Code, 29 in view of the trial court's finding that the unjustified refusal of petitioners to reform or to correct the document of sale compelled respondents to litigate to protect their interest. WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39401 is AFFIRMED with MODIFICATION. It is hereby ordered that the document entitled Settlement of Estate and Sale be reformed by changing the phrase "Lot 5734" to "Lot 4163" found in the sixth paragraph of the deed, thereby ceding in favor of respondents one-half portion of Lot 4163 instead of Lot 5734. The award to respondents of attorney's fees in the amount of P2,000 is affirmed. However, the award of actual damages in the amount of P5,000 and of moral damages in the amount of P10,000 are both SET ASIDE. No pronouncement as to costs.

INTERPRETATION CASES

[G.R. No. L-22962. September 28, 1972.] PILAR N. BORROMEO, MARIA B. PUTONG, FEDERICO V. BORROMEO, JOSE BORROMEO, CONSUELO B. MORALES and CANUTO V. BORROMEO, JR., petitioners, vs. COURT OF APPEALS and JOSE A. VILLAMOR, (Deceased) Substituted by FELISA VILLAMOR, ROSARIO V. LIAO LAMCO, MANUEL VILLAMOR, AMPARO V. COTTON, MIGUEL VILLAMOR and CARMENCITA VILLAMOR, respondents.

Filiberto Leonardo for petitioners. Ramon Duterte for private respondents.

SYLLABUS 1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF PHRASE "TO PAY HIS INDEBTEDNESS EVEN AFTER THE LAPSE OF TEN YEARS." The phrase "to pay his indebtedness even after the lapse of ten years" embodied in a promissory note executed on November 29, 1933, means that only after the lapse of ten years from said date could the demand be made for the payment of the obligation. The first ten years after November 29, 1933 should not be counted in determining when the action of creditor, now represented by Petitioner could be filed. From the joint record on appeal, it is undoubted that the complaint was filed on January 7, 1953. If the first ten-year period was to be excluded, the creditor had until November 29, 1953 to start judicial proceedings. After deducting the first ten year period which expired on November 29, 1943, there was the additional period of still another ten years. Nor could there be any legal objection to the complaint by the creditor Borromeo of January 7, 1953 embodying not merely the fixing of the period within which the debtor Villamor was to pay but likewise the collection of the amount that until then was not paid. An action combining both features did receive the imprimatur of the approval of the Court. 2.ID.; ID.; INTERPRETATION OF CONTRACTS; RULE. It is a fundamental principle in the interpretation of contracts that while ordinarily the literal sense of the words employed is to be followed, such is not the case where they "appear to be contrary to the evident intention of the contracting parties," which "intention shall prevail." DECISION FERNANDO, J :
p

The point pressed on us by private respondents, 1 in this petition for review of a decision of the Court of Appeals in the interpretation of a stipulation which admittedly is not free from ambiguity, there being a mention of a waiver of the defense of prescription, is not calculated to elicit undue judicial sympathy. For if

accorded acceptance, a creditor, now represented by his heirs, 2 who, following the warm and generous impulse of friendship, came to the rescue of a debtor from a serious predicament of his own making would be barred from recovering the money loaned. Thus the promptings of charity, unfortunately not often persuasive enough, would be discredited. It is unfortunate then that respondent Court of Appeals did not see it that way. For its decision to be upheld would be to subject the law to such a scathing indictment. A careful study of the relevant facts in the light of applicable doctrines calls for the reversal of its decision. The facts as found by the Court of Appeals follow: "Before the year 1933, defendant [Jose A. Villamor] was a distributor of lumber belonging to Mr. Miller who was the agent of the Insular Lumber Company in Cebu City. Defendant being a friend and former classmate of plaintiff [Canuto O. Borromeo] used to borrow from the latter certain amounts from time to time. On one occasion with some pressing obligation to settle with Mr. Miller, defendant borrowed from plaintiff a large sum of money for which he mortgaged his land and house in Cebu City. Mr. Miller filed civil action against the defendant and attached his properties including those mortgaged to plaintiff, inasmuch as the deed of mortgage in favor of plaintiff could not be registered because not properly drawn up. Plaintiff then pressed the defendant for settlement of his obligation, but defendant instead offered to execute a document' promising to pay his indebtedness even after the lapse of ten years. Liquidation was made and defendant was found to be indebted to plaintiff in the sum of P7,220.00, for which defendant signed a promissory note therefor on November 29, 1933 with interest at the rate of 12% per annum, agreeing to pay 'as soon as I have money'. The note further stipulates that defendant 'hereby relinquish, renounce, or otherwise waive my rights to the prescriptions established by our Code of Civil Procedure for the collection or recovery of the above sum of P7,220.00 . . . at any time even after the lapse of ten years from the date of this instrument'. After the execution of the document, plaintiff limited himself to verbally requesting defendant to settle his indebtedness from time to time. Plaintiff did not file any complaint against the defendant within ten years from the execution of the document as there was no property registered in defendant's name, who furthermore assured him that he could collect even after the lapse of ten years. After the last war, plaintiff made various oral demands, but defendants failed to settle his account, hence the present complaint for collection." 3 It was then noted in the decision under review that the Court of First Instance of Cebu did sentence the original defendant, the deceased Jose A. Villamor, to pay Canuto O. Borromeo, now represented by petitioners, the sum of P7,220.00 within ninety days from the date of the receipt of such decision with interest at the rate of 12% per annum from the expiration of such ninety-day period. That was the

judgment reversed by the Court of Appeals in its decision of March 7, 1964, now the subject of this petition for review. The legal basis was the lack of validity of the stipulation amounting to a waiver in line with the principle "that a person cannot renounce future prescription." 4 The rather summary and curt disposition of the crucial legal question of respondent Court in its five-page decision, regrettably rising not too-far-above the superficial level of analysis hardly commends itself for approval. In the first place, there appeared to be undue reliance on certain words employed in the written instrument executed by the parties to the total disregard of their intention. That was to pay undue homage to verbalism. That was to ignore the warning of Frankfurter against succumbing to the vice of literalism in the interpretation of language whether found in a constitution, a statute, or a contract. Then, too, in effect it would nullify what ought to have been evident by a perusal that is not too-cursory, namely, that the creditor moved by ties of friendship was more than willing to give the debtor the utmost latitude as to when his admittedly scanty resources will allow him to pay. He was not renouncing any right; he was just being considerate, perhaps excessively so. Under the view of respondent Court, however, what had been agreed upon was in effect voided. That was to run counter to the well-settled maxim that between two possible interpretations, that which saves rather than destroys is to be preferred. What vitiates most the appealed decision, however, is that it would amount not to just negating an agreement duly entered into but would put a premium on conduct that is hardly fair and could be characterized as duplicitous. Certainly, it would reflect on debtor apparently bent all the while on repudiating his obligation. Thus he would be permitted to repay an act of kindness with base ingratitude. Since as will hereafter be shown, there is, on the contrary, the appropriate construction of the wording that found its way in the document, one which has all the earmarks of validity and at the same time is in consonance with the demands of justice and morality, the decision on appeal, as was noted at the outset, must be reversed. 1.The facts rightly understood argue for the reversal of the decision arrived at by respondent Court of Appeals. Even before the event that gave rise to the loan in question, the debtor, the late Jose A. Villamor, being a friend and a. former classmate, used to borrow from time to time various sums of money from the creditor, the late Canuto O. Borromeo. Then faced with the need to settle a pressing obligation with a certain Miller, he did borrow from the latter sometime in 1933 what respondent Court called "a large sum of money for which he mortgaged his land and house in Cebu City." 5 It was noted that this Miller did file a suit against him, attaching his properties including those he did mortgage

to the late Borromeo, there being no valid objection to such a step as the aforesaid mortgage, not being properly drawn up, could not be registered. Mention was then made of the late Borromeo in his lifetime seeking the satisfaction of the sum due with Villamor unable to pay, but executing a document promising "to pay his indebtedness even after the lapse of ten years." 6 It is with such a background that the words employed in the instrument of November 29, 1933 should be viewed. There is nothing implausible in the view that such language renouncing the debtor's right to the prescription established by the Code of Civil Procedure should be given the meaning, as noted in the preceding sentence of the decision of respondent Court, that the debtor could be trusted to pay even after the termination of the ten-year prescriptive period. For as was also made clear therein, there had been since then verbal requests on the part of the creditor made to the debtor for the settlement of such a loan. Nor was the Court of Appeals unaware that such indeed was within the contemplation of the parties as shown by this sentence in its decision: "Plaintiff did not file any complaint against the defendant within ten years from the execution of the document as there was no property registered in defendant's name who furthermore assured him that he could collect even after the lapse of ten years." 7 2.There is much to be said then for the contention of petitioners that the reference to the prescriptive period is susceptible to the construction that only after the lapse thereof could the demand be made for the payment of the obligation. Whatever be the obscurity occasioned by the words is illumined when the light arising from the relationship of close friendship between the parties as well as the unsuccessful effort to execute a mortgage, taken in connection with the various oral demands made, is thrown on them. Obviously, it did not suffice for the respondent Court of Appeals. It preferred to reach a conclusion which for it was necessitated by the strict letter of the law unsigned by any spirit of good morals and justice, which should not be alien to legal norms. Even from the standpoint of what for some is strict legalism, the decision arrived at by the Court of Appeals calls for disapproval. It is a fundamental principle in the interpretation of contracts that while ordinarily the literal sense of the words employed is to be followed, such is not the case where they "appear to be contrary to the evident intention of the contracting parties," which "intention shall prevail." 8 Such a codal provision has been given full force and effect since the leading case of Reyes v. Limjap, 9 a 1910 decision. Justice Torres, who penned the above decision, had occasion to reiterate such a principle when he spoke for the Court in De la Vega v. Ballilos 10 thus: "The contract entered into by the contracting parties which has produced between them rights and obligations is in fact one of antichresis, for article 1281 of the Civil Code

prescribes among other things that if the words should appear to conflict with the evident intent of the contracting parties, the intent shall prevail." 11 In Abella v. Gonzaga, 12 this Court through the then Justice Villamor, gave force to such codal provision when he made clear that the inevitable conclusion arrived at was "that although in the contract Exhibit A the usual words 'lease,' 'lessee,' and 'lessor' were employed, that is no obstacle to holding, as we do hereby hold, that said contract was a sale on installments, for such was the evident intention of the parties in entering into said contract." 13 Only lately in Nielson and Company v. Lepanto Consolidated Mining Company, 14 this Court, with Justice Zaldivar, as ponente, after stressing the primordial rule that in the construction and interpretation of a document, the intention of the parties must be bought, went on to state: "This is the basic rule in the interpretation of contracts because all other rules are but ancillary to the ascertainment of the meaning intended by the parties. And once this intention has been ascertained it becomes an integral part of the contract as though it had been originally-expressed therein in unequivocal terms . . ." 15 While not directly in point, what was said by Justice Labrador in Tumaneng v. Abad 16 is relevant: "There is no question that the terms of the contract are not clear on the period of redemption. But the intent of the parties thereto is the law between them, and it must be ascertained and enforced." 17 Nor is it to be forgotten, following what was first announced in Velasquez v. Teodoro 18 that "previous, simultaneous and subsequent acts of the parties are properly cognizable indicia of their true intention." 19

There is another fundamental rule in the interpretation of contracts specifically referred to in Kasilag v. Rodriguez, 20 as "not less important" 21 than other principles which "is to the effect that the terms, clauses and conditions contrary to law, morals and public order should be separated from the valid and legal contract when such separation can be made because they are independent of the valid contract which expresses the will of the contracting parties. Manresa, commenting on article 1255 of the Civil Code and stating the rule of separation just mentioned, gives his views as follows: 'On the supposition that the various pacts, clauses, or conditions are valid, no difficulty is presented; but should they be void, the question is as to what extent they may produce the nullity of the principal obligation. Under the view that such features of the obligation are added to it and do not go to its essence, a criterion based upon the stability of juridical relations should tend to consider the nullity as confined to the clause or pact suffering therefrom, except in cases where the latter, by an established connection or by manifest intention of the parties, is inseparable from the principal obligation, and is a condition, juridically speaking, of that the nullity of

which it would also occasion.' . . . The same view prevails in the Anglo-American law as condensed in the following words: 'Where an agreement founded on a legal consideration contains several promises, or a promise to do several things, and a part only of the things to be done are illegal, the promises which can be separated, or the promise, so far as it can be separated, from the illegality, may be valid. The rule is that a lawful promise made for a lawful consideration is not invalid merely because an unlawful promise was made at the same time and for the same consideration, and this rule applies, although the invalidity is due to violation of a statutory provision, unless the statute expressly or by necessary implication declares the entire contract void. . . ." 22 Nor is it to be forgotten that as early as Compania Agricola Ultramar v. Reyes, 23 decided in 1904, the then Chief Justice Arellano in a concurring opinion explicitly declared: "It is true that contracts are not what the parties may see fit to call them, but what they really are as determined by the principles of law." 24 Such a doctrine has been subsequently adhered to since then. As was rephrased by Justice Recto in Aquino v. Deala: 25 "The validity of these agreements, however, is one thing, while the juridical qualification of the contract resulting therefrom is very distinctively another." 26 In a recent decision, Shell Company of the Phils., Ltd. vs. Firemen's Insurance Co. of Newark, 27 this Court, through Justice Padilla, reaffirmed the doctrine thus: "To determine the nature of a contract courts do not have or are not bound to rely upon the name or title given it by the contracting parties, should there be a controversy as to what they really had intended to enter into, but the way the contracting parties do or perform their respective obligations, stipulated or agreed upon may be shown and inquired into, and should such performance conflict with the name or title given the contract by the parties, the former must prevail over the latter." 28 Is it not rather evident that since even the denomination of the entire contract itself is not conclusively determined by what the parties call it but by the law, a stipulation found therein should likewise be impressed with the characterization the law places upon it? What emerges in the light of all the principles set forth above is that the first ten years after November 29, 1933 should not be counted in determining when the action of creditor, now represented by petitioners, could be filed. From the joint record on appeal, it is undoubted that the complaint was filed on January 7, 1953. If the first ten year period was to be excluded, the creditor had until November 29, 1953 to start judicial proceedings. After deducting the first tenyear period which expired on November 29, 1943, there was the additional period of still another ten years. 29 Nor could there be any legal objection to the complaint by the creditor Borromeo of January 7, 1953 embodying not merely

the fixing of the period within which the debtor Villamor was to pay but likewise the collection of the amount that until then was not paid. An action combining both features did receive the imprimatur of the approval of this Court. As was clearly set forth in Tiglao v. The Manila Railroad Company: 30 "There is something to defendant's contention that in previous cases this Court has held that the duration of the term should be fixed in a separate action for that express purpose. But we think the lower court has given good reasons for not adhering to technicalities in its desire to do substantial justice." 31 The justification became even more apparent in the latter portion of the opinion of Justice Alex Reyes for this Court: "We may add that defendant does not claim that if a separate action were instituted to fix the duration of the term of its obligation, it could present better proofs than those already adduced in the present case. Such separate action would, therefore, be a mere formality and would serve no purpose other than to delay." 32 There is no legal obstacle then to the action for collection filed by the creditor. Moreover, the judgment of the lower court, reversed by the respondent Court of Appeals, ordering the payment of the amount due is in accordance with law. 3.There is something more to be said about the stress in the Tiglao decision on the sound reasons for not adhering to technicalities in this Court's desire to do substantial justice. The then Justice, now Chief Justice, Concepcion expressed a similar thought in emphasizing that in the determination of the rights of the contracting parties "the interest of justice and equity be not ignored." 33 This is a principle that dates back to the earliest years of this Court. The then Chief Justice Bengzon in Arrieta v. Bellos, 34 invoked equity. Mention has been made of "practical and substantial justice," 35 "[no] sacrifice of the substantial rights of a litigant in the altar of sophisticated technicalities with impairment of the sacred principles of justice", 36 "to afford substantial justice", 37 and "what equity demands." 38 There has been disapproval when the result reached is "neither fair, nor equitable." 39 What is to be avoided is an interpretation that "may work injustice rather than promote justice." 40 What appears to be most obvious is that the decision of respondent Court of Appeals under review offended most grievously against the above fundamental postulate that underlies all systems of law. WHEREFORE, the decision of respondent Court of Appeals of March 7, 1964 is reversed, thus giving full force and effect to the decision of the lower court of November 15, 1956. With costs against private respondents.

[G.R. No. 46623. December 7, 1939.] MARCIAL KASILAG, petitioner, vs. RAFAELA RODRIGUEZ, URBANO ROQUE, SEVERO MAPILISAN and IGNACIO DEL ROSARIO,respondents.

Luis M. Kasilag; for petitioner.

Fortunato de Leon; for respondents. SYLLABUS 1.CONTRACTS, INTERPRETATION; MORTGAGE OF IMPROVEMENTS UPON LAND ACQUIRED AS HOMESTEAD. The cardinal rule in the interpretation of contracts is to the effect that the intention of the contracting parties should always prevail because their will has the force of law between them. Article 1281 of the Civil Code consecrates this rule and provides, further, that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations shall be followed; and if the words appear to be contrary to the evident intention of the contracting parties, the intention shall prevail. The contract set out in Exhibit 1' should be interpreted in accordance with these rules. As the terms thereof are clear and leave no room for doubt, it should be interpreted according to the literal meaning of its clauses. The words used by the contracting parties in Exhibit 1 clearly show that they intended to enter into the principal contract of loan in the amount of P1,000, with interest at 12 per cent per annum, and into the accessory contract of mortgage of the improvements on the land acquired as homestead, the parties having, moreover, agreed upon the pacts and conditions stated in the deed. In other words, the parties entered into a contract of mortgage of the improvements on the land acquired as homestead, to secure the payment of the indebtedness for P1,000 and the stipulated interest thereon. 2.ID.; ID.; ID.; ANTICHRESIS. Another fundamental rule in the interpretation of contracts, not less important than those indicated is to the effect that the terms, clauses and conditions contrary to law, morals and public order should be separated from the valid and legal contract when such separation can be made because they are independent of the valid contract which expresses the will of the contracting parties. Addressing ourselves now to the contract entered into by the parties, set out in Exhibit 1, we stated that

the principal contract is that of loan and the accessory that of mortgage of the improvements upon the land acquired as a homestead. There is no question that the first of these contracts is valid as it is not against the law. The second, or the mortgage of the improvements, is expressly authorized by section 116 of Act No. 2874, as amended by section 23 of Act No. 3517. It will be recalled that by clause VIII of Exhibit 1 the parties agreed that should E. A. fail to redeem the mortgage within the stipulated period of four and a half years, by paying the loan together with interest, she would execute in favor of the petitioner an absolute deed of sale of the land for P1,000, including the interest stipulated and owing. This stipulation was verbally modified by the same parties after the expiration of one year, in the sense that the petitioner would take possession of the land and would benefit by the fruits thereof on condition that he would condone the payment of interest upon the loan and he would attend to the payment of the land tax. These pacts made by the parties independently, were calculated to alter the mortgage contract clearly entered into, converting the latter into a contract of antichresis (article 1881 of the Civil Code). The contract of antichresis, being a real incumbrance burdening the land, is illegal and void because it is condemned by section 116 of Act No. 2874, as amended, but the clauses regarding the contract of antichresis being independent and separable from the contract of mortgage, can be eliminated, thereby leaving the latter in being because it is legal and valid. 3.ID.; ID.; ID.; ID.; POSSESSION IN GOOD FAITH. It is a fact that the petitioner is not conversant with the laws because he is not a lawyer. In accepting the mortgage of the improvements he proceeded on the wellgrounded belief that he was not violating the prohibition regarding the alienation of the land. In taking possession thereof and in consenting to receive its fruits, he did not know, as clearly as a jurist does, that the possession and enjoyment of the fruits are attributes of the contract of antichresis and that the latter, as a lien, was prohibited by section 116. These considerations again bring us to the conclusion that, as to the petitioner, his ignorance of the provisions of section 116 is excusable and may, therefore, be the basis of his good faith. We do not give much importance to the change of the tax declaration, which consisted in making the petitioner appear as the owner of the land, because such an act may only be considered as a sequel to the change of possession and enjoyment of the fruits by the petitioner, about which we have stated that the petitioner's ignorance of the law is possible and excusable. We, therefore, hold that the petitioner acted in good faith in taking possession of the land and enjoying its fruits.

4.ID.; ID.; ID.; ID.; ID. The petitioner being a possessor in good faith within the meaning of article 433 of the Civil Code and having introduced the improvements upon the land as such, the provisions of article 361 of the same Code are applicable; wherefore, the respondents are entitled to have the improvements and plants upon indemnifying the petitioner the value thereof which we fix at P3,000, as appraised by the trial court; or the respondents may elect to compel the petitioner to have the land by paying its market value to be fixed by the court of origin. DECISION IMPERIAL, J :
p

This is an appeal taken by the defendant-petitioner from the decision of the Court of Appeals which modified that rendered by the Court of First Instance of Bataan in civil case No. 1504 of said court and held: that the contract, Exhibit "1" is entirely null and void and without effect; that the plaintiffs-respondents, then appellants, are the owners of the disputed land, with its improvements, in common ownership with their brother Gavino Rodriguez, hence, they are entitled to the possession thereof; that the defendant-petitioner should yield possession of the land in their favor, with all the improvements thereon and free from any lien; that the plaintiffsrespondents jointly and severally pay to the defendant-petitioner the sum of P1,000 with interest at 6 per cent per annum from the date of the decision; and absolved the plaintiffs-respondents from the cross-complaint relative to the value of the improvements claimed by the defendant-petitioner. The appealed decision also ordered the registrar of deeds of Bataan to cancel certificate of title No. 325, in the name of the deceased Emiliana Ambrosio and to issue in lieu thereof another certificate of title in favor of the plaintiffsrespondents and their brother Gavino Rodriguez, as undivided owners in equal parts, free of all liens and incumbrances except those expressly provided by law, without special pronouncement as to the costs. The respondents, children and heirs of the deceased Emiliana Ambrosio, commenced the aforesaid civil case to the end that they recover from the petitioner the possession of the land and its improvements granted by way of homestead to Emiliana Ambrosio under patent No. 16074 issued on January 11, 1931, with certificate of title No. 325 issued by the registrar of deeds of Bataan on June 27, 1931 in her favor, under section 122 of Act. No. 496, which land was surveyed and identified in the cadastre of the

municipality of Limay, Province of Bataan, as lot No. 285; that the petitioner pay to them the sum of P650 being the approximate value of the fruits which he received from the land; that the petitioner sign all the necessary documents to transfer the land and its possession to the respondents; that the petitioner be restrained, during the pendency of the case, from conveying or encumbering the land and its improvements; that the registrar of deeds of Bataan cancel certificate of title No. 325 and issue in lieu thereof another in favor of the respondents, and that the petitioner pay the costs of suit. The petitioner denied in his answer all the material allegations of the complaint and by way of special defense alleged that he was in possession of the land and that he was receiving the fruits thereof by virtue of a mortgage contract, entered into between him and the deceased Emiliana Ambrosio on May 16, 1932, which was duly ratified by a notary public; and in counterclaim asked that the respondents pay him the sum of P1,000 with 12 per cent interest per annum which the deceased owed him and that, should the respondents be declared to have a better right to the possession of the land, that they be sentenced to pay him the sum of P5,000 as value of all the improvements which he introduced upon the land. On May 16, 1932 Emiliana Ambrosio, in life, and the petitioner executed the following public deed: "This agreement, made and entered into this 16th day of May, 1932, by and between Emiliana Ambrosio, Filipino, of legal age, widow and resident of Limay, Bataan, P. I., hereinafter called the party of the first part, and Marcial Kasilag, Filipino, of legal age, married to Asuncion Roces, and resident at 312 Perdigon Street, Manila, P. I., hereinafter called party of the second part.
"WITNESSETH: That the parties hereto hereby covenant and agree to and with each other as follows: "ARTICLE I.That the party of the first part is the absolute registered owner of a parcel of land in the barrio of Alagan, municipality of Limay, Province of Bataan, her title thereto being evidenced by homestead certificate of title No. 325 issued by the bureau of Lands on June 11, 1931, said land being lot No. 285 of the Limay Cadastre, General Land Registration Office Cadastral Record No. 1054, bounded and described as follows: "Beginning at point marked 1 on plan E-57394, N. 84 32' W. 614.82 m. from B. B. M. No. 3, thence N. 66 35' E. 307.15 m. to point "2"; S. 5 07' W. to point "5"; 6 10' E. 104.26 m. to point "4"; S. 82 17' W. to point "5"; S. 28 63' W. 72.26 m. to point "6"; N. 71 09' W. to point "7"; N. 1 42' E. 173.72 m. to point 1, point of beginning,

"Containing an area of 6.7540 hectares. "Points 1, 2, 6 and 7, B. L.; points 3, 4 and 5, stakes; points 4, 5 and 6 on bank of Alagan River. "Bounded on the North, by property claimed by Maria Ambrocio; on the East, by Road; on the South, by Alagan River and property claimed by Maxima de la Cruz; and on the West, by property claimed by Jose del Rosario. "Bearing true. Declination 0 51' E. "Surveyed under authority of sections 12-22, Act No. 2874 and in accordance with existing regulations of the Bureau of Lands, by Mamerto Jacinto, public land surveyor, on July 8, 1927 and approved on February 25, 1931. "ARTICLE II.That the improvements on the above described land consist of the following: "Four (4) mango trees, fruit bearing: one hundred ten (110) hills of bamboo trees; one (1) tamarind and six (6) bonga trees. "ARTICLE III.That the assessed value of the land is P940 and the assessed value of the improvements is P860, as evidenced by tax declaration No. 3531 of the municipality of Limay, Bataan. "ARTICLE IV.That for and in consideration of the sum of one thousand pesos (P1,000) Philippine currency, paid by the party of second part to the party of the first part, receipt whereof is hereby acknowledged, the party of the first part hereby encumbers and hypothecates, by way of mortgage, only the improvements described in Articles II and III hereof, of which improvements the party of the first part is the absolute owner. "ARTICLE V.That the condition of said mortgage is such that if the party of the first part shall well and truly pay, or cause to be paid to the party of the second part, his heirs, assigns, or executors, on or before the 16th day of November, 1936, or four and one-half (41) years after date of the execution of this instrument, the aforesaid sum of one thousand pesos (P1,000) with interest at 12 Per cent per annum, then said mortgage shall be and become null and void; otherwise the same shall be and shall remain in full force and effect, and subject to foreclosure in the manner and form provided by law for the amount due thereunder, with costs and also attorney's fees in the event of such foreclosure. "ARTICLE VI.That the party of the first part shall pay all taxes and assessments which are or may become due on the above described land and improvements during the term of this agreement

"ARTICLE VII.That within thirty (30) days after date of execution of this agreement, the party of the first part shall file a motion before the Court of First Instance at Balanga, Bataan, P. I., requesting cancellation of Homestead Certificate of Title No. 325 referred to in Article I hereof and the issuance, in lieu thereof, of a certificate of title under the provisions of Land Registration Act No. 496, as amended by Act 3901. "ARTICLE VIII.It is further agreed that if upon the expiration of the period of time (4) years stipulated in this mortgage, the mortgagor should fail to redeem this mortgage, she would execute a deed of absolute sale of the property herein described for the same amount as this mortgage, including all unpaid interests at the rate of 12 per cent per annum, in favor of the mortgagee. "ARTICLE IX.That in the event the contemplated motion under Article VII hereof is not approved by the Court, the foregoing contract of sale shall automatically become null and void, and the mortgage stipulated under Article IV and V shall remain in full force and effect. "In testimony whereof, the parties hereto have hereunto set their hands the day and year first hereinbefore written. ( Sgd. ) "MARCIAL KASILAG ( Sgd. ) EMILIANA AMBROSIO "Signed in the presence of: ( Sgd. ) "ILLEGIBLE ( Sgd. ) GAVINO RODRIGUEZ

PHILIPPINE ISLANDS} BALANGA, BATAAN} ss.

"Before me this day personally appeared Emiliana Ambrosio without cedula by reason of her sex, to me known and known to me to be the person who signed the foregoing instrument, and acknowledged to me that she executed the same as her free and voluntary act and deed. "I hereby certify that this instrument consists of three (3) pages including this page of the acknowledgment and that each page thereof is signed by the parties to the instrument and the witnesses in their

presence and in the presence of each other, and that the land treated in this instrument consists of only one parcel. "In witness whereof I have hereunto set my hand and affixed my notarial seal, this 16th day of May, 1932.

(Sgd.) "NICOLAS NAVARRO

Notary Public

My commission expires December 31, 1933

"DOC. NO. 178 Page 36 of my register Book NO. IV"

One year after the execution of the aforequoted deed, that is, in 1933, it came to pass that Emiliana Ambrosio was unable to pay the stipulated interest as well as the tax on the land and its improvements. For this reason, she and the petitioner entered into another verbal contract whereby she conveyed to the latter the possession of the land on condition that the latter would not collect the interest on the loan, would attend to the payment of the land tax, would benefit by the fruits of the land, and would introduce improvements thereon. By virtue of this verbal contract, the petitioner entered upon the possession of the land, gathered the products thereof, did not collect the interest on the loan, introduced improvements upon the land valued at P5,000, according to him and on May 22, 1934 the tax declaration was transferred in his name and on March 6, 1936 the assessed value of the land was in- creased from P1,020 to P2,180. After an analysis of the conditions of Exhibit "1" the Court of Appeals came to the conclusion and so held that the contract entered into by and between the parties, set out in the said public deed, was one of absolute purchase and sale of the land and its improvements. And upon this ruling it

held null and void and without legal effect the entire Exhibit 1 as well as the subsequent verbal contract entered into between the parties, ordering, however, the respondents to pay to the petitioner, jointly and severally, the loan of P1,000, with legal interest at 6 per cent per annum from the date of the decision. In this first assignment of error the petitioner contends that the Court of appeals violated the law in holding that Exhibit 1 is an absolute deed of sale of the land and its improvements and that it is void and without any legal effect. The cardinal rule in the interpretation of contracts is to the effect that the intention of the contracting parties should always prevail because their will has the force of law between them. Article 1281 of the Civil Code consecrates this rule and provides, that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations shall be followed; and if the words appear to be contrary to the evident intention of the contracting parties, the intention shall prevail. The contract set out in Exhibit I should be interpreted in accordance with these rules. As the terms thereof are clear and leave no room for doubt, it should be interpreted according to the literal meaning of its clauses. The words used by the contracting parties in Exhibit 1 clearly show that they intended to enter into the principal contract of loan in the amount of P1,000, with interest at 12 per cent per annum, and into the accessory contract of mortgage of the improvements on the land acquired as homesteads the parties having, moreover, agreed upon the pacts and conditions stated in the deed. In other words, the parties entered into a contract of mortgage of the improvements on the land acquired as homestead, to secure the payment of the indebtedness for P1,000 and the stipulated interest thereon. In clause V the parties stipulated that Emiliana Ambrosio was to pay, within four and a half years, or until November 16, 1936, the debt with interest thereon, in which event the mortgage would not have any effect; in clause VI the parties agreed that the tax on the land and its improvements, during the existence of the mortgage, should be paid by the owner of the land; in clause VII it was covenanted that within thirty days from the date of the contract, the owner of the land would file a motion in the Court of First Instance of Bataan asking that certificate of title No. 325 be cancelled and that in lieu thereof another be issued under the provisions of the Land Registration Act, No. 496, as amended by Act No. 3901; in clause VIII the parties agreed that should Emiliana Ambrosio fail to redeem the mortgage within the stipulated period of four years and a half, she would execute an absolute deed of sale of the land in favor of the mortgagee, the petitioner, for the same amount of the loan of P1,000 including unpaid interest; and in clause IX it was stipulated that in

case the motion to be presented under clause VII should be disapproved by the Court of First Instance of Bataan, the contract of sale would automatically become void and the mortgage would subsist in all its force. Another fundamental rule in the interpretation of contracts, not less important than those indicated, is to the effect that the terms, clauses and conditions contrary to law, morals and public order should be separated from the valid and legal contract when such separation can be made because they are independent of the valid contract which expresses the will of the contracting parties. Manresa, commenting on article 1255 of the Civil Code and stating the rule of separation just mentioned, gives his views as follows:
"On the supposition that the various pacts, clauses or conditions are valid, no difficulty is presented; but should they be void, the question is as to what extent they may produce the nullity of the principal obligation. Under the view that such features of the obligation are added to it and do not go to its essence, a criterion based upon the stability of juridical relations should tend to consider the nullity as confined to the clause or pact suffering therefrom, except in case where the latter, by an established connection or by manifest intention of the parties, is inseparable from the principal obligation, and is a condition, juridically speaking, of that the nullity of which it would also occasion." ( Manresa, Commentaries on the Civil Code, Volume 8, p. 575.)

The same view prevails in the Anglo-American law, as condensed in the following words:
"Where an agreement founded on a legal consideration contains several promises, or a promise to do several things, and a part only of the things to be done are illegal, the promises which can be separated, or the promise, so far as it can be separated, from the illegality, may be valid. The rule is that a lawful promise made for a lawful consideration is not invalid merely because an unlawful promise was made at the same time and for the same consideration, and this rule applies, although the invalidity is due to violation of a statutory provision, unless the statute expressly or by necessary implication declares the entire contract void. . . " (13 C. J., par. 470, p. 512; New York Cent. etc. R. Co. v. Gray, 239 U. S., 583; 60 Law. ed., 451; U. S. v. Moran, 97 U. S., 413, 24 Law. ed., 1017: U. S. v. Ilodson, 10 Wall, 395; 19 Law ed. 937; Gelpcke v. Dubuque, 1 Wall. 175, 17 Law. ed., 520; U. S. v. Bradly, 10 Pet. 343, 9 Law. ed., 448; Borland v. Prindle, 144 Fed. 713; Western Union Tel. Co. v. Kansas Pac. R. Co., 4 Fed., 284; Northern Pac. R. Co. v. U. S., 15 Ct. Cl., 428.)

Addressing ourselves now to the contract entered into by the parties, set out in Exhibit 1, we stated that the principal contract is that of loan and the accessory that of mortgage of the improvements upon the land acquired as a homestead. There is no question that the first of these contracts is valid as it is not against the law. The second, or the mortgage of the improvements, is expressly authorized by section 116 of Act No. 2874, as amended by section 23 of Act No. 3517, reading:
"SEC. 116.Except in favor of the Government or any of its branches, units, or institutions, or legally constituted banking corporations, lands acquired under the free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the approval of the application and for a term of five years from and after the date of issuance of the patent or grant, nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of said period; but the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations, or corporations."

It will be recalled that by clause VIII of Exhibit 1 the parties agreed that should Emiliana Ambrosio fail to redeem the mortgage within the stipulated period of four and a half years, by paying the loan together with interest, she would execute in favor of the petitioner an absolute deed of sale of the land for P1,000, including the interest stipulated and owing. This stipulation was verbally modified by the same parties after the expiration of one year, in the sense that the petitioner would take possession of the land and would benefit by the fruits thereof on condition that he would condone the payment of interest upon the loan and he would attend to the payment of the land tax. These pacts made by the parties independently were calculated to alter the mortgage contract clearly entered into, converting the latter into a contract of antichresis. (Article 1881 of the Civil Code.) The contract of antichresis, being a real encumbrance burdening the land, is illegal and void because it is condemned by section 116 of Act No. 2874, as amended, but the clauses regarding the contract of antichresis, being independent of and separable from the contract of mortgage, can be eliminated, thereby leaving the latter in being because it is legal and valid. The foregoing considerations bring us to the conclusion that the first assignment of error is well-founded and that error was committed in holding that the contract entered into between the parties was one of absolute sale of the land and its improvements and that Exhibit 1 is null and void. In the second assignment of error the petitioner contends that the Court of Appeals erred in holding that he is guilty of violating the Public Land

Act because he entered into the contract, Exhibit 1. The assigned error is vague and not specific. If it attempts to show that the said document is valid in its entirety, it is not well-founded because we have already said that certain pacts thereof are illegal because they are prohibited by section 116 of Act No. 2874, as amended. In the third assignment of error the petitioner insists that his testimony, as to the verbal agreement entered into between him and Emiliana Ambrosio, should have been accepted by the Court of Appeals; and in the fourth and last assignment of error the same petitioner contends that the Court of Appeals erred in holding that he acted in bad faith in taking possession of the land and in taking advantage of the fruits thereof, resulting in the denial of his right to be reimbursed for the value of the improvements introduced by him. We have seen that subsequent to the execution of the contract, Exhibit 1, the parties entered into another verbal contract whereby the petitioner was authorized to take possession of the land, to receive the fruits thereof and to introduce improvements thereon, provided that he would renounce the payment of stipulated interest and he would assume payment of the land tax. The possession by the petitioner and his receipt of the fruits of the land, considered as integral elements of the contract of antichresis, are illegal and void agreements because, as already stated, the contract of antichresis is a lien and as such is expressly prohibited by section 116 of Act No. 2874, as amended. The Court of Appeals held that the petitioner acted in bad faith in taking possession of the land because he knew that the contract he made with Emiliana Ambrosio was an absolute deed of sale and, further, that the latter could not sell the land because it is prohibited by section 116. The Civil Code does not expressly define what is meant by bad faith, but section 433 provides that "Every person who is unaware of any flaw in his title, or in the manner of its acquisition, by which it is invalidated, shall be deemed a possessor in good faith"; and provides, further, that "Possessors aware of such flaw are deemed possessors in bad faith." Article 1950 of the same Code, covered by Chapter II relative to prescription of ownership and other real rights, provides, in turn, that "Good faith on the part of the possessor consists in his belief that the person from whom he received the thing was the owner of the same, and could transmit the title thereto." We do not have before us a case of prescription of ownership, hence, the last article is not squarely in point. In resume, it may be stated that a person is deemed a possessor in bad faith when he knows that there is a flaw in his title or in the manner of its acquisition, by which it is invalidated.

Borrowing the language of Article 433, the question to be answered is whether the petitioner should be deemed a possessor in good faith because he was unaware of any flaw in his title or in the manner of its acquisition by which it is invalidated. It will be noted that ignorance of the flaw is the keynote of the rule. From the facts found established by the Court of Appeals we can neither deduce nor presume that the petitioner was aware of a flaw in his title or in the manner of its acquisition, aside from the prohibition contained in section 116. This being the case, the question is whether good faith may be premised upon ignorance of the laws. Manresa, commenting on article 434 in connection with the preceding article, sustains the affirmative. He says:
"We do not believe that in real life there are not many cases of good faith founded upon an error of law. When the acquisition appears in a public document, the capacity of the parties has already been passed upon by competent authority, and even established by appeals taken from final judgments and administrative remedies against the qualification of registrars, and the possibility of error is remote under such circumstances; but, unfortunately, private documents and even verbal agreements far exceed public documents in number, and while no one should be ignorant of the law, the truth is that even we who are called upon to know and apply it fall into error not infrequently. However, a clear, manifest, and truly unexcusable ignorance is one thing, to which undoubtedly refers article 2, and another and different thing is possible and excusable error arising from complex legal principles and from the interpretation of conflicting doctrines. "But even ignorance of the law may be based upon an error of fact, or better still, ignorance of a fact is possible as to the capacity to transmit and as to the intervention of certain persons, compliance with certain formalities and appreciation of certain acts, and an error of law is possible in the interpretation of doubtful doctrines." (Manresa, Commentaries on the Spanish Civil Code. Volume IV, pp. 100, 101 and 102.)

According to this author, gross and inexeusable ignorance of the law may not be the basis of good faith, but possible, excusable ignorance may be such basis. It is a fact that the petitioner is not conversant with the laws because he is not a lawyer. In accepting the mortgage of the improvements he proceeded on the well-grounded belief that he was not violating the prohibition regarding the alienation of the land. In taking possession thereof and in consenting to receive its fruits, he did not know, as clearly as a jurist does, that the possession and enjoyment of the fruits are attributes of the contract of antichresis and that the latter, as a lien, was prohibited by section

116. These considerations again bring us to the conclusion that, as to the petitioner, his ignorance of the provisions of section 116 is excusable and may, therefore, be the basis of his good faith. We do not give much importance to the change of the tax declaration, which consisted in making the petitioner appear as the owner of the land, because such an act may only be considered as a sequel to the change of possession and enjoyment of the fruits by the petitioner, to about which we have stated that the petitioner's ignorance of the law is possible and excusable. We, therefore, hold that the petitioner acted in good faith in taking possession of the land and enjoying its fruits. The petitioner being a possessor in good faith within the meaning of article 433 of the Civil Code and having introduced the improvements upon the land as such, the provisions of article 361 of the same Code are applicable; wherefore, the respondents are entitled to have the improvements and plants upon indemnifying the petitioner the value thereof which we fix at P3,000, as appraised by the trial court; or the respondents may elect to compel the petitioner to have the land by paying its market value to be fixed by the court of origin. The respondents also prayed in their complaint that the petitioner be compelled to pay them the sum of P650, being the approximate value of the fruits obtained by the petitioner from the land. The Court of Appeals affirmed the judgment of the trial court denying the claim or indemnity for damages, being of the same opinion as the trial court that the respondents have not established such damages. Under the verbal contract between the petitioner and the deceased Emiliana Ambrosio, during the latter's lifetime, the former would take possession of the land and would receive the fruits of the mortgaged improvements on condition that he would no longer collect the stipulated interest and that he would attend to the payment of the land tax. This agreement, at bottom, is tantamount to the stipulation that the petitioner should apply the value of the fruits of the land to the payment of stipulated interest on the loan of P1,000 which is, in turn, another of the elements characterizing the contract of antichresis under article 1881 of the Civil Code. It was not possible for the parties to stipulate further that the value of the fruits be also applied to the payment of the capital, because the truth was that nothing remained after paying the interest at 12% per annum. This interest, at the rate fixed, amounted to P120 per annum, whereas the market value of the fruits obtainable from the land hardly reached said amount in view of the fact that the assessed value of said improvements was, according to the decision, P860. To this should be added the fact that, under the verbal

agreement, from the value of the fruits had to be taken a certain amount to pay the annual land tax. We mention these data here to show that the petitioner is also not bound to render an accounting of the value of the fruits of the mortgaged improvements for the reason stated that said value hardly covers the interest earned by the secured indebtedness. For all the foregoing considerations, the appealed decision is reversed, and we hereby adjudge: (1) that the contract of mortgage of the improvements, set out in Exhibit 1, is valid and binding (2) that the contract of antichresis agreed upon verbally by the parties is a real incumbrance which burdens the land and, as such, is null and without effect; (3) that the petitioner is a possessor in good faith; (4) that the respondents may elect to have the improvements introduced by the petitioner by paying the latter the value thereof, P3,000, or to compel the petitioner to buy and have the land where the improvements or plants are found, by paying them its market value to be fixed by the court of origin, upon hearing the parties; (5) that the respondents have a right to the possession of the land and to enjoy the mortgaged improvements; and (6) that the respondents may redeem the mortgage of the improvements by paying to the petitioner within three months the amount of P1,000, without interest, as that stipulated is set off by the value of the fruits of the mortgaged improvements which the petitioner received; and in default thereof the petitioner may ask for the public sale of said improvements for the purpose of applying the proceeds thereof to the payment of his said credit. Without special pronouncement as to the costs in all instances. So ordered