G.R. No.

L-7003
January 18, 1912
MANUEL ORIA Y GONZALES vs. JOSE McMICKING
Facts: Gutierrez Hermanos sued Oria Hermanos & Co. for the recovery of P147,204.28.
In March, 1910 the plaintiff sued the same defendant for the recovery of P12,318.57.
Before the suits the members of the company of Oria Hermanos & Co., on account of the
expiration, dissolved their relations and entered into liquidation. Tomas Oria y Balbas, as
managing partner in liquidation, acting for himself and on behalf of his other coowners
Casimiro Oria y Balbas and Adolfo Fuster Robles, entered into a contract with the plaintiff
in this case, Manuel Orio Gonzales, which said contract was for the purpose of selling
and transferring to the plaintiff in this action all of the property of Oria Hermanos & Co.
Said instrument contained the following clauses:
In consideration of the sum of two hundred seventy-four thousand pesos (P274,000),
which the said Don Manuel Oria y Gonzales undertakes and engages to pay to the firm
of Oria Hermanos & Co, myself and the persons I represent, as partners in Oria
Hermanos & Co., which whom shall be paid in installments. I hereby sell to the said Don
Manuel Oria y Gonzales, his heirs and his assigns, all and every part of the property
mentioned in the fourth section hereof and more specially described in the general
inventory of Oria Hermosa & Co.; under the following mutual conditions:
(a) Don Manuel Oria y Gonzales engages and undertakes to pay and to settle the sum
agreed upon within a period of twelve (12) years, further engaging to pay each year a
sum of not less than ten thousand (10,000) pesos.
(b) After the first six (6) years of the period for the payment of the stipulated price, Don
Manuel Oria y Gonzales engages and undertakes to pay the interest at 3 per cent a year
on the price stipulated or the part thereof unpaid at such time; provided, that this is
mutual obligation and interest payable annually.
(c) Don Manuel Oria y Gonzales further engages to pay Don Tomas Oria, Don Casimiro
Oria and Don Adolfo Fuster during the time that they remain in the Philippines and do not
reside abroad, the sum of one hundred and fifty (150) pesos monthly.
(d) Don Manuel Oria y Gonzales engages and undertakes not to sell, alienate, transfer or
mortgage, either wholly or in part, the property hereby sold to him, without the written
authorization of Don Tomas Oria as liquidator of the firm of Oria Hermanos & Co.
(e) Don Manuel Oria y Gonzales engages to cede gratuitously in the dwelling-house in
the town of Laoag, hereby sold, the use of the same or the portion thereof that may be
necessary for Don Tomas Oria to establish provided, that this cession is made for a
period of only two (2) years.

( f ) Don Tomas Oria y Balbas and Don Adolfo Fuster engage and undertake to place
their personal services at the disposal of Don Manuel Oria y Gonzales in everything
relating to his instruction in the management and conduct of the property and business
hereby sold; maximum period of 12 months.
7. I, Manuel Oria y Gonzales, being informed of the foregoing action and contract
executed by Don Tomas Oria y Balbas, do on my part stipulated and agree: that I accept
the sale, cession and transfer hereby made by him in my favor and engage and
undertake to pay Oria Hermanos & Co., either in liquidation, or if necessary to the
partners of Oria Hermanos & Co., the price of said sale, cession and transfer, that is, the
sum of P274,000 within a period of 12 years, in the manner and under the conditions set
forth by him in the preceding section, and especially engaged not to sell, alienate,
transfer or mortgage the property involved in this sale which is specified in paragraph (d)
of the preceding section, without the previous written authorization of the vendor, Oria
Hermanos & Co., such property being so exempted as a guaranty for the payment of the
purchase price of this sale.
Among the goods transferred by this instrument was the steamship Serantes, which is
the subject of litigation.
Upon the trial judgment was found in favor of the defendant and against the plaintiff, and
the complaint was dismissed upon the merits with costs. From that judgment this appeal
is taken.
Rationale: The substantial question presented for our consideration is the validity of the
sale from Oria Hermanos & Co. to Manuel Oria y Gonzalez as against the creditors of
said company. It is the contention of Gutierrez Hermanos that said sale is fraudulent as
against the creditors of Oria Hermanos & Co., and that the transfer thereby
consummated of the steamship in question was void as to said creditors and as to
Gutierrez Hermanos in particular.
There is some contention on the part of the plaintiffs that aside from the property
included in the sale referred to, Oria Hermanos & Co. had sufficient other property to pay
the judgment of Gutierrez Hermanos. The trial court found, however, against the plaintiff
in this regard. A careful examination of the record fails to disclose any sufficient reason
for the reversal of the finding. While the evidence is somewhat conflicting, we are of the
opinion that there is sufficient to sustain the findings made.
In determining whether or not a certain conveyance is fraudulent the question in every
case is whether the conveyance was a bona fide transaction or a trick and contrivance to
defeat creditors, or whether it conserves to the debtor a special right. It is not sufficient
that it is founded on good consideration or is made with bona fide intent: it must have
both elements. If defective in either of these particulars, although good between the

parties, it is voidable as to creditors. The rule is universal both at law and in equity that
whatever fraud creates justice will destroy. The test as to whether or not a conveyance is
fraudulent is, does it prejudice the rights of creditors?
In the consideration of whether or not certain transfers were fraudulent, courts have laid
down certain rules by which the fraudulent character of the transaction may be
determined. The following are some of the circumstances attending sales which have
been dominated by the courts badges of fraud:
1. The fact that the consideration of the conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has been begun and while it is pending against
him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present
other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the property.

Facts: LIM issued two Metrobank checks that were dishonored for the reason "account
closed." Demands to make good the checks proved futile. As a consequence, a criminal
case for violation of Batas Pambansa Blg. 22 were filed by petitioner against LIM. In its
decision, the court a quo convicted LIM as charged.
It also appears that on 31 July 1990 LIM was convicted of estafa by the RTC of Quezon
City filed by a certain Victoria Suarez. This decision was affirmed by the Court of
Appeals. On appeal, however, this Court, acquitted LIM but held her civilly liable.
Meanwhile, on 2 July 1991, a Deed of Donation conveying the following parcels of land
and purportedly executed by LIM on 10 August 1989 in favor of her children, Linde, Ingrid
and Neil, was registered with the Office of the Register of Deeds of Cebu City.
Petitioner filed an accion pauliana against LIM and her children before Branch 18 of the
RTC of Cebu City to rescind the questioned Deed of Donation and to declare as null and
void the new transfer certificates of title issued for the lots covered by the questioned
Deed.
Rationale: We resolve these issues in the negative.

The case at bar presents every one of the badges of fraud above enumerated. Tested by
the inquiry, does the sale prejudice the rights of the creditors, the result is clear. The sale
in the form in which it was made leaves the creditors substantially without recourse. The
property of the company is gone, its income is gone, the business itself is likely to fail, the
property is being dissipated, and is depreciating in value. As a result, even if the claims of
the creditors should live twelve years and the creditors themselves wait that long, it more
than likely that nothing would be found to satisfy their claim at the end of the long wait.
Since the records shows that there was no property with which the judgment in question
could be paid, the defendants were obliged to resort to and levy upon the steamer in suit.
The court below was correct in finding the sale fraudulent and void as to Gutierrez
Hermanos in so far as was necessary to permit the collection of its judgment. As a
corollary, the court below found that the evidence failed to show that the plaintiff was the
owner or entitled to the possession of the steamer in question at the time of the levy and
sale complained of, or that he was damaged thereby. Defendant had the right to make
the levy and test the validity of the sale in that way, without first resorting to a direct
action to annul the sale. The creditor may attack the sale by ignoring it and seizing under
his execution the property, or any necessary portion thereof, which is the subject of the
sale.

G.R. No. 134685 November 19, 1999

MARIA ANTONIA SIGUAN vs. ROSA LIM, LINDE LIM, INGRID LIM and NEIL LIM

Art. 1381 of the Civil Code enumerates the contracts which are rescissible, and among
them are "those contracts undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them."
The action to rescind contracts in fraud of creditors is known as accion pauliana. For this
action to prosper, the following requisites must be present: (1) the plaintiff asking for
rescission has a credit prior to the alienation, although demandable later; (2) the debtor
has made a subsequent contract conveying a patrimonial benefit to a third person; (3)
the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is
fraudulent; (5) the third person who received the property conveyed, if it is by onerous
title, has been an accomplice in the fraud.
The general rule is that rescission requires the existence of creditors at the time of the
alleged fraudulent alienation, and this must be proved as one of the bases of the judicial
pronouncement setting aside the contract. 16 Without any prior existing debt, there can
neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the
accion pauliana must exist prior to the fraudulent alienation, the date of the judgment
enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is
merely declaratory, with retroactive effect to the date when the credit was constituted. In
the instant case, the alleged debt of LIM in favor of petitioner was incurred in August
1990, while the deed of donation was purportedly executed on 10 August 1989.

We are not convinced with the allegation of the petitioner that the questioned deed was
antedated to make it appear that it was made prior to petitioner's credit. Notably, that
deed is a public document, it having been acknowledged before a notary public. 18 As
such, it is evidence of the fact which gave rise to its execution and of its date, pursuant to
Section 23, Rule 132 of the Rules of Court.
Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration
of the contract of donation, still her action for rescission would not fare well because the
third requisite was not met. Under Article 1381 of the Civil Code, contracts entered into in
fraud of creditors may be rescinded only when the creditors cannot in any manner collect
the claims due them. Also, Article 1383 of the same Code provides that the action for
rescission is but a subsidiary remedy which cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. The term
"subsidiary remedy" has been defined as "the exhaustion of all remedies by the
prejudiced creditor to collect claims due him before rescission is resorted to." 19 It is,
therefore, "essential that the party asking for rescission prove that he has exhausted all
other legal means to obtain satisfaction of his claim. 20 Petitioner neither alleged nor
proved that she did so. On this score, her action for the rescission of the questioned
deed is not maintainable even if the fraud charged actually did exist."

Facts: David Raymundo owns of a parcel of land, together with the house and other
improvements located at Makati. George Raymundo (vendor) is David's father who
negotiated with plaintiffs Avelina and Mariano Velarde (vendee) for the sale of said
property, which was, however, under lease.
A Deed of Sale with Assumption of Mortgage was executed by defendant David
Raymundo infavor of plaintiff Avelina Velarde, with the following terms and conditions:
Consideration (P800,000.00)
On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the
consent of her husband, Mariano, executed an Undertaking: In the event I violate any of
the terms and conditions of the said Deed of Real Estate Mortgage, I hereby agree that
my downpayment of P800,000.00, plus all payments made with the Bank of the
Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A.
Raymundo, as and by way of liquidated damages, without necessity of notice or any
judicial declaration to that effect, and Mr. David A. Raymundo shall resume total and
complete ownership and possession of the property.
Failure to pay happened.

The fourth requisite for an accion pauliana to prosper is not present either.

Rationale: The Petition is partially meritorious.

Art. 1387, first paragraph, of the Civil Code provides: "All contracts by virtue of which the
debtor alienates property by gratuitous title are presumed to have been entered into in
fraud of creditors when the donor did not reserve sufficient property to pay all debts
contracted before the donation. Likewise, Article 759 of the same Code, second
paragraph, states that the donation is always presumed to be in fraud of creditors when
at the time thereof the donor did not reserve sufficient property to pay his debts prior to
the donation.

First Issue: Breach of Contract

For this presumption of fraud to apply, it must be established that the donor did not leave
adequate properties which creditors might have recourse for the collection of their credits
existing before the execution of the donation.

However, petitioners did not merely stop paying the mortgage obligations; they also failed
to pay the balance of the purchase price. Thus, on December 15, 1986, when petitioners
received notice of the bank's disapproval of their application to assume respondents'
mortgage, they should have paid the balance of the P1.8 million loan.

As earlier discussed, petitioner's alleged credit existed only a year after the deed of
donation was executed. She cannot, therefore, be said to have been prejudiced or
defrauded by such alienation.

G.R. No. 108346

July 11, 2001
VELARDE vs.COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE
RAYMUNDO

Petitioner aver that their nonpayment of private respondents' mortgage obligation did not
constitute a breach of contract, considering that their request to assume the obligation
had been disapproved by the mortgagee bank. Accordingly, payment of the monthly
amortizations ceased to be their obligation and, instead, it devolved upon private
respondents again.

Instead of doing so, petitioners sent a letter to private respondents offering to make such
payment only upon the fulfillment of certain conditions not originally agreed upon in the
contract of sale. Such conditional offer to pay cannot take the place of actual payment as
would discharge the obligation of a buyer under a contract of sale.
Private respondents had already performed their obligation through the execution of the
Deed of Sale, which effectively transferred ownership of the property to petitioner through

constructive delivery. Prior physical delivery or possession is not legally required, and the
execution of the Deed of Sale is deemed equivalent to delivery.
Second Issue: Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents was
not justified, inasmuch as the former had signified their willingness to pay the balance of
the purchase price only a little over a month from the time they were notified of the
disapproval of their application for assumption of mortgage. Petitioners also aver that the
breach of the contract was not substantial as would warrant a rescission. They cite
several cases in which this Court declared that rescission of a contract would not be
permitted for a slight or casual breach. Finally, they argue that they have substantially
performed their obligation in good faith, considering that they have already made the
initial payment of P800,000 and three (3) monthly mortgage payments.
In the present case, private respondents validly exercised their right to rescind the
contract, because of the failure of petitioners to comply with their obligation to pay the
balance of the purchase price. Indubitably, the latter violated the very essence of
reciprocity in the contract of sale, a violation that consequently gave rise to private
respondent's right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one
month after it became due; however, this was not equivalent to actual payment as would
constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay
was conditioned on the performance by private respondents of additional burdens that
had not been agreed upon in the original contract. Thus, it cannot be said that the breach
committed by petitioners was merely slight or casual as would preclude the exercise of
the right to rescind.
Misplaced is petitioners' reliance on the cases they cited, because the factual
circumstances in those cases are not analogous to those in the present one. In Song Fo
there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods
delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the
seller.
In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000
which was actually paid.
In Tan, the alleged breach was private respondent's delay of only a few days, which was
for the purpose of clearing the title to the property; there was no reference whatsoever to
the nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in
payment or an irregularity; such breach would not normally defeat the intention of the
parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance,
but they also imposed upon private respondents new obligations as preconditions to the
performance of their own obligation. In effect, the qualified offer to pay was a repudiation
of an existing obligation, which was legally due and demandable under the contract of
sale. Hence, private respondents were left with the legal option of seeking rescission to
protect their own interest.
Mutual Restitution: Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a
reciprocal obligation, not a violation of the terms and conditions of the mortgage contract.
Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the
contract does not apply. Instead, Civil Code provisions shall govern and regulate the
resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925
(totaling P874,150.00) advanced by petitioners should be returned by private
respondents, lest the latter unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out
only when the one who demands rescission can return whatever he may be obliged to
restore. To rescind is to declare a contract void at its inception and to put an end to it as
though it never was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore the parties to
their relative positions as if no contract has been made.

G.R. No. 191336

January 25, 2012
CRISANTA ALCARAZ MIGUEL vs. JERRY D. MONTANEZ
Facts:
(Montanez) secured a loan of One Hundred Forty-Three Thousand Eight Hundred SixtyFour Pesos (P143,864.00), payable in one (1) year from the petitioner. The respondent
gave as collateral therefor his house and lot.
Due to the respondents failure to pay the loan, the petitioner filed a complaint against the
respondent before the Lupong Tagapamayapa of Barangay San Jose, Rodriguez, Rizal.

The parties entered into a Kasunduang Pag-aayos wherein the respondent agreed to pay
his loan in installments in the amount of (P2,000.00) per month, and in the event the
house and lot given as collateral is sold, the respondent would settle the balance of the
loan in full. However, the respondent still failed to pay, and on December 13, 2004, the
Lupong Tagapamayapa issued a certification to file action in court in favor of the
petitioner.
After trial, on August 16, 2006, the MeTC rendered a Decision ordering defendant Jerry
D. Montanez to pay plaintiff.
On appeal to the Regional Trial Court (RTC) decision was affirmed.
CA: 2 issues, namely, (1) whether or not venue was improperly laid, and (2) whether or
not the Kasunduang Pag-aayos effectively novated the loan agreement. Petition is
hereby GRANTED. The appealed Decision dated March 14, 2007 of the Regional Trial
Court (RTC) of Makati City, Branch 146, is REVERSED and SET ASIDE. A new judgment
is entered dismissing respondents complaint for collection of sum of money, without
prejudice to her right to file the necessary action to enforce the Kasunduang Pag-aayos.
Rationale: Because the respondent failed to comply with the terms of the Kasunduang
Pag-aayos, said agreement is deemed rescinded pursuant to Article 2041 of the New
Civil Code and the petitioner can insist on his original demand. Perforce, the complaint
for collection of sum of money is the proper remedy.
It is true that an amicable settlement reached at the barangay conciliation proceedings,
like the Kasunduang Pag-aayos in this case, is binding between the contracting parties
and, upon its perfection, is immediately executory insofar as it is not contrary to law, good
morals, good customs, public order and public policy. This is in accord with the broad
precept of Article 2037 of the Civil Code, viz:
A compromise has upon the parties the effect and authority of res judicata; but there shall
be no execution except in compliance with a judicial compromise.
Being a by-product of mutual concessions and good faith of the parties, an amicable
settlement has the force and effect of res judicata even if not judicially approved. It
transcends being a mere contract binding only upon the parties thereto, and is akin to a
judgment that is subject to execution in accordance with the Rules.
It must be emphasized, however, that enforcement by execution of the amicable
settlement, either under the first or the second remedy, is only applicable if the
contracting parties have not repudiated such settlement within ten (10) days from the
date thereof in accordance with Section 416 of the Local Government Code. If the
amicable settlement is repudiated by one party, either expressly or impliedly, the other

party has two options, namely, to enforce the compromise in accordance with the Local
Government Code or Rules of Court as the case may be, or to consider it rescinded and
insist upon his original demand. This is in accord with Article 2041 of the Civil Code,
which qualifies the broad application of Article 2037, viz:
If one of the parties fails or refuses to abide by the compromise, the other party may
either enforce the compromise or regard it as rescinded and insist upon his original
demand.
In the case of Leonor v. Sycip, the Supreme Court (SC) had the occasion to explain this
provision of law. It ruled that Article 2041 does not require an action for rescission, and
the aggrieved party, by the breach of compromise agreement, may just consider it
already rescinded, to wit:
It is worthy of notice, in this connection, that, unlike Article 2039 of the same Code, which
speaks of "a cause of annulment or rescission of the compromise" and provides that "the
compromise may be annulled or rescinded" for the cause therein specified, thus
suggesting an action for annulment or rescission, said Article 2041 confers upon the
party concerned, not a "cause" for rescission, or the right to "demand" the rescission of a
compromise, but the authority, not only to "regard it as rescinded", but, also, to "insist
upon his original demand". The language of this Article 2041, particularly when
contrasted with that of Article 2039, denotes that no action for rescission is required in
said Article 2041, and that the party aggrieved by the breach of a compromise agreement
may, if he chooses, bring the suit contemplated or involved in his original demand, as if
there had never been any compromise agreement, without bringing an action for
rescission thereof. He need not seek a judicial declaration of rescission, for he may
"regard" the compromise agreement already "rescinded".22 (emphasis supplied)
As so well stated in the case of Chavez v. Court of Appeals,23 a party's non-compliance
with the amicable settlement paved the way for the application of Article 2041 under
which the other party may either enforce the compromise, following the procedure laid
out in the Revised Katarungang Pambarangay Law, or consider it as rescinded and insist
upon his original demand. To quote:
In the case at bar, the Revised Katarungang Pambarangay Law provides for a two-tiered
mode of enforcement of an amicable settlement, to wit: (a) by execution by the Punong
Barangay which is quasi-judicial and summary in nature on mere motion of the party
entitled thereto; and (b) an action in regular form, which remedy is judicial. However, the
mode of enforcement does not rule out the right of rescission under Art. 2041 of the Civil
Code. The availability of the right of rescission is apparent from the wording of Sec. 417
itself which provides that the amicable settlement "may" be enforced by execution by the
lupon within six (6) months from its date or by action in the appropriate city or municipal
court, if beyond that period. The use of the word "may" clearly makes the procedure

provided in the Revised Katarungang Pambarangay Law directory or merely optional in

nature.
Thus, although the "Kasunduan" executed by petitioner and respondent before the Office
of the Barangay Captain had the force and effect of a final judgment of a court,
petitioner's non-compliance paved the way for the application of Art. 2041 under which
respondent may either enforce the compromise, following the procedure laid out in the
Revised Katarungang Pambarangay Law, or regard it as rescinded and insist upon his
original demand. Respondent chose the latter option when he instituted Civil Case No.
5139-V-97 for recovery of unrealized profits and reimbursement of advance rentals,
moral and exemplary damages, and attorney's fees. Respondent was not limited to
claiming P150,000.00 because although he agreed to the amount in the "Kasunduan," it
is axiomatic that a compromise settlement is not an admission of liability but merely a
recognition that there is a dispute and an impending litigation which the parties hope to
prevent by making reciprocal concessions, adjusting their respective positions in the
hope of gaining balanced by the danger of losing. Under the "Kasunduan," respondent
was only required to execute a waiver of all possible claims arising from the lease
contract if petitioner fully complies with his obligations thereunder. It is undisputed that
herein petitioner did not.24 (emphasis supplied and citations omitted)
In the instant case, the respondent did not comply with the terms and conditions of the
Kasunduang Pag-aayos. Such non-compliance may be construed as repudiation
because it denotes that the respondent did not intend to be bound by the terms thereof,
thereby negating the very purpose for which it was executed. Perforce, the petitioner has
the option either to enforce the Kasunduang Pag-aayos, or to regard it as rescinded and
insist upon his original demand, in accordance with the provision of Article 2041 of the
Civil Code. Having instituted an action for collection of sum of money, the petitioner
obviously chose to rescind the Kasunduang Pag-aayos. As such, it is error on the part of
the CA to rule that enforcement by execution of said agreement is the appropriate
remedy under the circumstances.
Considering that the Kasunduang Pag-aayos is deemed rescinded by the noncompliance of the respondent of the terms thereof, remanding the case to the trial court
for the enforcement of said agreement is clearly unwarranted.

G.R. No. 182435

August 13, 2012
LILIA B. ADA vs. FLORANTE BA YLON
Facts:
This case involves the estate of spouses Florentino Maximina Elnas Baylon who died on
November 7, 1961 and May 5, 1974, respectively. At the time of their death, Spouses

Baylon were survived by their legitimate children, namely, Rita Baylon (Rita), Victoria
Baylon (Victoria), Dolores Baylon (Dolores), Panfila Gomez (Panfila), Ramon Baylon
(Ramon) and herein petitioner Lilia B. Ada (Lilia).
Dolores died intestate and without issue. Victoria was survived by her daughter, herein
petitioner Luz B. Adanza. Ramon died intestate and was survived by herein respondent
Florante Baylon (Florante), his child from his first marriage, as well as by petitioner Flora
Baylon, his second wife, and their legitimate children, namely, Ramon, Jr. and herein
petitioners Remo, Jose, Eric, Florentino and Ma. Ruby, all surnamed Baylon.
The petitioners filed with the RTC a Complaint for partition, accounting and damages
against Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during their
lifetime, owned 43 parcels of land all situated in Negros Oriental. After the death of
Spouses Baylon, they claimed that Rita took possession of the said parcels of land and
appropriated for herself the income from the same. Using the income produced by the
said parcels of land, Rita allegedly purchased two parcels of land, Lot No. 47096 and half
of Lot No. 4706,7 situated in Canda-uay, Dumaguete City. The petitioners averred that
Rita refused to effect a partition of the said parcels of land.
In their Answer, Florante, Rita and Panfila asserted that they and the petitioners coowned 229 out of the 43 parcels of land mentioned in the latters complaint, whereas Rita
actually owned 10 parcels of land out of the 43 parcels which the petitioners sought to
partition, while the remaining 11 parcels of land are separately owned by Petra Cafino
Adanza, Florante, Meliton Adalia, Consorcia Adanza, Lilia and Santiago Mendez. Further,
they claimed that Lot No. 4709 and half of Lot No. 4706 were acquired by Rita using her
own money. They denied that Rita appropriated solely for herself the income of the estate
of Spouses Baylon, and expressed no objection to the partition of the estate of Spouses
Baylon, but only with respect to the co-owned parcels of land.
During the pendency of the case, Rita, through a Deed of Donation conveyed Lot No.
4709 and half of Lot No. 4706 to Florante. Rita died intestate and without any issue.
Thereafter, learning of the said donation inter vivos in favor of Florante, the petitioners
filed a Supplemental Pleading praying that the said donation in favor of the respondent
be rescinded in accordance with Article 1381(4) of the Civil Code. They further alleged
that Rita was already sick and very weak when the said Deed of Donation was
supposedly executed and, thus, could not have validly given her consent thereto.
Florante and Panfila opposed the rescission of the said donation, asserting that Article
1381(4) of the Civil Code applies only when there is already a prior judicial decree on
who between the contending parties actually owned the properties under litigation.
Rationale: The petition is partly meritorious.

Main Issue: Propriety of Rescission

The petitioners assert that the CA erred in remanding the case to the RTC for the
determination of ownership of Lot No. 4709 and half of Lot No. 4706. They maintain that
the RTC aptly rescinded the said donation inter vivos of Lot No. 4709 and half of Lot No.
4706 pursuant to Article 1381(4) of the Civil Code.
In his Comment, Florante asserts that before the petitioners may file an action for
rescission, they must first obtain a favorable judicial ruling that Lot No. 4709 and half of
Lot No. 4706 actually belonged to the estate of Spouses Baylon. Until then, Florante
avers that an action for rescission would be premature.
Rescission is a remedy to address the damage or injury caused to the contracting parties
or third persons.
Rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure the reparation of damages caused to them by a contract, even if it
should be valid, by means of the restoration of things to their condition at the moment
prior to the celebration of said contract. It is a remedy to make ineffective a contract,
validly entered into and therefore obligatory under normal conditions, by reason of
external causes resulting in a pecuniary prejudice to one of the contracting parties or
their creditors.
Contracts which are rescissible are valid contracts having all the essential requisites of a
contract, but by reason of injury or damage caused to either of the parties therein or to
third persons are considered defective and, thus, may be rescinded.
The kinds of rescissible contracts, according to the reason for their susceptibility to
rescission, are the following: first, those which are rescissible because of lesion or
prejudice; second, those which are rescissible on account of fraud or bad faith; and third,
those which, by special provisions of law, are susceptible to rescission.
Contracts which refer to things subject of litigation is rescissible pursuant to Article
1381(4) of the Civil Code.
Contracts which are rescissible due to fraud or bad faith include those which involve
things under litigation, if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority. Thus, Article
1381(4) of the Civil Code provides:
Art. 1381. The following contracts are rescissible: (4) Those which refer to things under
litigation if they have been entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority.

The rescission of a contract under Article 1381(4) of the Civil Code only requires the
concurrence of the following: first, the defendant, during the pendency of the case, enters
into a contract which refers to the thing subject of litigation; and second, the said contract
was entered into without the knowledge and approval of the litigants or of a competent
judicial authority. As long as the foregoing requisites concur, it becomes the duty of the
court to order the rescission of the said contract.
The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith
among the parties to a case and/or any fraudulent act which they may commit with
respect to the thing subject of litigation.
When a thing is the subject of a judicial controversy, it should ultimately be bound by
whatever disposition the court shall render. The parties to the case are therefore
expected, in deference to the courts exercise of jurisdiction over the case, to refrain from
doing acts which would dissipate or debase the thing subject of the litigation or otherwise
render the impending decision therein ineffectual.
There is, then, a restriction on the disposition by the parties of the thing that is the subject
of the litigation. Article 1381(4) of the Civil Code requires that any contract entered into
by a defendant in a case which refers to things under litigation should be with the
knowledge and approval of the litigants or of a competent judicial authority.
Further, any disposition of the thing subject of litigation or any act which tends to render
inutile the courts impending disposition in such case, sans the knowledge and approval
of the litigants or of the court, is unmistakably and irrefutably indicative of bad faith. Such
acts undermine the authority of the court to lay down the respective rights of the parties
in a case relative to the thing subject of litigation and bind them to such determination.
It should be stressed, though, that the defendant in such a case is not absolutely
proscribed from entering into a contract which refer to things under litigation. If, for
instance, a defendant enters into a contract which conveys the thing under litigation
during the pendency of the case, the conveyance would be valid, there being no definite
disposition yet coming from the court with respect to the thing subject of litigation. After
all, notwithstanding that the subject thereof is a thing under litigation, such conveyance is
but merely an exercise of ownership.
This is true even if the defendant effected the conveyance without the knowledge and
approval of the litigants or of a competent judicial authority. The absence of such
knowledge or approval would not precipitate the invalidity of an otherwise valid contract.
Nevertheless, such contract, though considered valid, may be rescinded at the instance
of the other litigants pursuant to Article 1381(4) of the Civil Code.

Here, contrary to the CAs disposition, the RTC aptly ordered the rescission of the
donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. The
petitioners had sufficiently established the presence of the requisites for the rescission of
a contract pursuant to Article 1381(4) of the Civil Code. It is undisputed that, at the time
they were gratuitously conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are
among the properties that were the subject of the partition case then pending with the
RTC. It is also undisputed that Rita, then one of the defendants in the partition case with
the RTC, did not inform nor sought the approval from the petitioners or of the RTC with
regard to the donation inter vivos of the said parcels of land to Florante.
Although the gratuitous conveyance of the said parcels of land in favor of Florante was
valid, the donation inter vivos of the same being merely an exercise of ownership, Ritas
failure to inform and seek the approval of the petitioners or the RTC regarding the
conveyance gave the petitioners the right to have the said donation rescinded pursuant
to Article 1381(4) of the Civil Code.
Rescission under Article 1381(4) of the Civil Code is not preconditioned upon the judicial
determination as to the ownership of the thing subject of litigation.
In this regard, we also find the assertion that rescission may only be had after the RTC
had finally determined that the parcels of land belonged to the estate of Spouses Baylon
intrinsically amiss. The petitioners right to institute the action for rescission pursuant to
Article 1381(4) of the Civil Code is not preconditioned upon the RTCs determination as
to the ownership of the said parcels of land.
It bears stressing that the right to ask for the rescission of a contract under Article
1381(4) of the Civil Code is not contingent upon the final determination of the ownership
of the thing subject of litigation. The primordial purpose of Article 1381(4) of the Civil
Code is to secure the possible effectivity of the impending judgment by a court with
respect to the thing subject of litigation. It seeks to protect the binding effect of a courts
impending adjudication vis--vis the thing subject of litigation regardless of which among
the contending claims therein would subsequently be upheld. Accordingly, a definitive
judicial determination with respect to the thing subject of litigation is not a condition sine
qua non before the rescissory action contemplated under Article 1381(4) of the Civil
Code may be instituted.
Moreover, conceding that the right to bring the rescissory action pursuant to Article
1381(4) of the Civil Code is preconditioned upon a judicial determination with regard to
the thing subject litigation, this would only bring about the very predicament that the said
provision of law seeks to obviate. Assuming arguendo that a rescissory action under
Article 1381(4) of the Civil Code could only be instituted after the dispute with respect to
the thing subject of litigation is judicially determined, there is the possibility that the same
may had already been conveyed to third persons acting in good faith, rendering any

judicial determination with regard to the thing subject of litigation illusory. Surely, this
paradoxical eventuality is not what the law had envisioned.

G.R. No. 3246

February 9, 1907
CADWALLADER & COMPANY vs. SMITH, BELL & COMPANY
Facts:
In May 1902, the Pacific Export Lumber Company of Portland shipped (581) piles to the
defendant, Henry W. Peabody & Company, at Manila, on the sale of which before storage
the consignees were to receive a commission of one half of whatever sum was obtained
over $15 for each pile and 5 per cent of the price of the piles sold after storage. After the
arrival of the steamer, Peabody and Company wrote the agent of the Pacific Company at
Shanghai that for lack of a demand the piles would have to be sold at considerably less
than $15 apiece; whereupon the company's agent directed them to make the best
possible offer for the piles, in response to which on August 5 they telegraphed him an
offer of $12 apiece. It was accepted in consequence of which the defendant paid the
Pacific Company $6,972.
It afterwards appeared that on July 9 Peabody & Company had entered into negotiations
with the Insular Purchasing Agent for the sale for the piles at $20 a piece, resulting of
August 4 in the sale to the Government of two hundred and thirteen (213) piles at $19
each. More of them were afterwards sold to the Government at the same figure and the
remainder to other parties at carrying prices, the whole realizing to the defendants
$10,41.66, amounting to $3,445.66 above the amount paid by the defendant to the
plaintiff therefor. Thus it is clear that at the time when the agents were buying from their
principal these piles at $12 apiece on the strength of their representation that no better
price was obtainable, they had already sold a substantial part of them at $19. In these
transactions the defendant, Smith, Bell & Company, were associated with the
defendants, Henry W. Peabody & Company, who conducted the negotiations, and are
consequently accountable with them.
Rationale: It is plain that in concealing from their principal the negotiations with the
Government, resulting in a sale of the piles at 19 apiece and in misrepresenting the
condition of the market, the agents committed a breach of duty from which they should
benefit. The contract of sale to themselves thereby induced was founded on their fraud
and was subject to annulment by the aggrieved party. (Civil Code, articles 1265 and
1269.) Upon annulment the parties should be restored to their original position by mutual
restitution. (Article 1303 and 1306.) Therefore the defendants are not entitled to retain
their commission realized upon the piles included under the contract so annulled. In
respect of the 213 piles, which at the time of the making of this contract on August 5 they
had already sold under the original agency, their commission should be allowed.

the control either of a receiver or of the bank. The other signature to the instrument was
that of E. W. Wilson, General Manager of the Philippine National Bank.
G.R. No. L-25400
January 14, 1927
THE PHILIPPINE NATIONAL BANK vs. THE PHILIPPINE VEGETABLE OIL CO., INC.
Facts: Vegetable Oil Company, found itself in financial straits. It was in debt to the extent
of approximately P30,000,000. The Philippine National Bank was the largest creditor. The
Vegetable Oil Company owed the bank P17,000,000. Over P13,000,000 were due the
other creditors. The Philippine National Bank was secured principally by a real and
chattel mortgage for P3,500,000. Vegetable Oil Company executed another chattel
mortgage in favor of the bank on its vessels Tankerville and H. S. Everett to guarantee
the payment of sums not to exceed P4,000,000.
Bankruptcy was imminent. On January 1, 1921, Mr. Whitaker made his first offer to
pledge certain private properties to secure the creditors of the Oil Company. In February
of the same year, a creditors' meeting was held. At the instance of Mr. Whitaker but
inspired to such action by the bank, a receiver for the Vegetable Oil Company was
appointed by the Court of First Instance of Manila on March 11, 1921.
During the period when a receiver was in control of the property of the Vegetable Oil
Company, a number of events occurred. The first was the agreement the creditors
transferred to Mr. Whitaker a part of their claims against the Vegetable Oil Company in
consideration of the execution by Mr. Whitaker of a trust deed of his property. The
Philippine National Bank was not a direct party to the agreement although the officials of
the bank had full knowledge of its accomplishment and the general manager of the bank
placed his O. K. at the end of the final draft. The next move of the bank was to obtain a
new mortgage from the Vegetable Oil Company on February 20, 1922. Shortly thereafter,
on February 28, 1922, the receivership for the Vegetable Oil Company was terminated.
The bank suspended the operation of the Vegetable Oil Company in May, 1922, and
definitely closed the Oil Company's plant.
Philippine National Bank tried to foreclose its mortgage on the property of the Vegetable
Oil Company. The Vegetable Oil Company on its part countered. Phil. C. Whitaker
presented a complaint in intervention.
Rationale:
The mortgage, Exhibit A, was executed on February 20, 1922, by "Philippine Vegetable
Oil Co., Inc., By E. G. Abry, Secretary-Treasurer" "Philippine National Bank By E. W.
Wilson, General Manager." E. G. Abry, according to his testimony, was employed as
secretary-treasurer of the Vegetable Oil Company after a conference with Mr. Wilson and
continued in this position during the period when the Vegetable Oil Company was under

It has been said that the mortgage was executed on February 20, 1922. That is
undeniable. The allegation of the plaintiff's complaint is "That the defendant, on the 20th
day of February, 1922, duly executed to the plaintiff a mortgage." The mortgage in
question recites: "This mortgage, executed at the City of Manila, Philippine Islands, this
twentieth day of February, nineteen hundred and twenty-two." However, the mortgage
was not ratified before a notary public until March 8, 1922, and was not recorded in the
registry of property until March 21, 1922.
To add one more date, it will be recalled that the receivership ended on February 28,
1922. In other words, as partially interpretative of the situation, the mortgage was
executed by the Philippine National Bank, through its General Manager, and another
corporation before the termination of the receivership of the said corporation, but was not
acknowledged or recorded until after the termination of the receivership.
It must be evident to all that the Philippine National Bank could legally secure no new
mortgage by the accomplishment of documents between its officials and the officials of
the Vegetable Oil Company while the property of the latter company was in custodia
legis. The Vegetable Oil Company was then inhibited absolutely from giving a mortgage
on its property. The receiver was not a party to the mortgage. The court had not
authorized the receiver to consent to the execution of a new mortgage. Whether the court
could have done so is doubtful, but that it would have thus consented is hardly
debatable, considering that it would desire to protect the rights of all the creditors and not
the rights of one particular creditor. The legal conclusion is axiomatic.
To place emphasis on the outstanding facts, it must be repeated that the mortgage was
executed while a receiver was in charge of the Vegetable Oil Company. A mortgage
accomplished at such a time by the corporation under receivership and a creditor would
be a nullity. The mortgage was definitely perfected subsequent to the lifting of the
receivership pursuant to implied promises that the bank would continue to operate the
Vegetable Oil Company. It was then accomplished when the Philippine National Bank
was a dominating influence in the affairs of the Vegetable Oil Company. On the one hand
was the Philippine National Bank in person. On the other hand was the Philippine
National Bank by proxy. Under such circumstances, it would be unconscionable to allow
the bank, after the hands of the other creditors were tied, virtually to appropriate to itself
all the property of the Vegetable Oil Company.
Whether we consider the action taken as not expressing the free will of the Vegetable Oil
Company, or as disclosing undue influence on the part of the Philippine National Bank in
procuring the mortgage, or as constituting deceit under the civil law, or whether we go

still further and classify the facts as constructive fraud, the result is the same. The
mortgage is clearly voidable.
Separate Opinions:
AVANCEA: The insinuation made in the majority opinion of undue influence, deceit and
fraud on the part of the plaintiff as grounds for declaring this mortgage void, is absolutely
unsupported by the record. Supposing that undue influence, which is a general and
abstract conception, exists to some extent, it does not constitute a cause for annulment
of the contract so far as it affects the consent, unless the same amounts to violence, or
intimidation, or constitutes fraud, or produces substantial error on the part of the other
contracting party. (Art. 1265, Civil Code.) The mere intervention of the two
representatives of the plaintiff in the Board of Directors of the defendant and, on the other
hand, no act has been proved to have been executed by them in connection with the
mortgage which might be considered as undue influence. Neither has it been shown that
anything was done which might constitute a fraud on the part of the plaintiff in the
execution of this mortgage. Fraud is not presumed. The only thing which can be
considered in connection with this point is the supposed promise given to the defendant
to finance its operations. But, according to the majority opinion, there is no indication of
any act of the Board of Directors of the plaintiff corporation which might imply consent to
an agreement to give unlimited support to the defendant, nor ratification of any promise
to this effect made by the general manager. In order to annul a contract for fraud it must
have been committed by one of the contracting parties. (Art. 1269, Civil Code.) On the
other hand, the general manager of the plaintiff as also admitted in the majority decision,
only intimated generally that the plaintiff corporation would finance its operations.
The appellant's allegation that the mortgage affects him and the foreclose thereof would
injure him, does not give him the right to bring an action for annulment, but, for
rescission, if any, which is not the one brought herein. Commenting on this aspect of the
question, Manresa in vol. 8, p. 780, 2d ed., says: "Third persons need not bring an action
for annulment, as provided for in this article (1302, Civil Code)." The contract really
injures or it does not. If it does, whether or not the act or contract is valid or void, whether
or not it is valid or void, they cannot have any interest in the matter.
JOHNSON: A. Legality of the mortgage
First. That the mortgage in question was executed by the Philippine Vegetable Oil Co.,
Inc., to the Philippine National Bank and is a valid subsisting contract.
Second. That the statement that the mortgage was executed upon property in custodia
legis is not supported by the facts of record.

At the time said document became a mortgage, the property covered thereby was not in
custodia legis. It is true that at the time the document was signed on the 20th day of
February, 1922, the property was then in the hands of a receiver. At that time, however,
the said document was not a mortgage; it was nothing more nor less than an evidence of
indebtedness. It did not contain all the requisites of a mortgage. Two additional
requisites, under the law, were necessary: (a) It was not a public document at that time
and (b) it had not been registered in the registry of property, which is a prerequisite to its
becoming a mortgage (art. 1875, Civil Code). The property included in said document
passed out of the hands of the receiver on the 28th day of February, 1922, and back into
the hands of its owner, the Philippine Vegetable Oil Company, as its private property. The
document became a public document by acknowledgment before the notary public on
the 18th day of March, 1922. Even that act was not sufficient to make said document a
mortgage. It even then was only an evidence of an indebtedness existing between the
parties thereto. One thing more, under the law, was necessary in order to give said
document the dignity of a mortgage. Under the law, it had to be registered in order to
become a mortgage. The document was registered on the 21st day of March, 1922,
nearly a month after the property had ceased to be in custodia legis, and thus it became
a mortgage. At the same time said document became a mortgage the property was not in
custodia legis. Therefore the reason given in the majority opinion for pronouncing said
mortgage illegal and void fails, under the facts and the law. (Arts. 1857-1875, Civil Code.
Olivares vs. Hoskyn & Co., 2 Phil., 689; McMicking vs. Kimura, 12 Phil., 98; Susara vs.
Martinez, 17 Phil., 254; Lozano vs. Tan Suico, 23 Phil., 16; Borcelis vs. Golingco, 27
Phil., 560; Legarda and Prieto vs. Saleeby, 31 Phil., 590; Lim Julian vs. Lutero, G.R. No.
25235.1)
From the foregoing facts and the law it becomes clear that, that part of the majority
opinion which declares the mortgage null and void because it covered property in
custodia legis cannot be supported.
Third. I cannot give my conformity to that part of the majority opinion which charges that
said mortgage did not express the free will of the Philippine Vegetable Oil Co., Inc. The
Philippine Vegetable Oil Co. not only signed said mortgage voluntarily, before witnesses,
but nearly three weeks later ratified its due execution before a notary public. And not only
that, the Philippine Vegetable Oil Co., Inc., recognized the validity of said document, by
later, making payments thereon.
Fourth. Neither can I give my conformity to that part of the majority opinion which imputes
to the Philippine National Bank bad faith, undue influence, deceit and constructive fraud
in procuring the execution of said mortgage. The record clearly shows that the mortgage
was given to secure the payment of a preexisting indebtedness for a valuable
consideration. In addition to the fact that the Philippine Vegetable Oil Co. had recognized
the validity of said mortgage by making payments thereon, there is nothing in the record
which shows, in the slightest degree, that it had, prior to the commencement of the

present action, even intimated that the mortgage was illegal and void. It may be added
that the failure of the Philippine Vegetable Oil Co., Inc., to appeal is an additional proof of
its belief that the defense of illegality is not well founded.
In my opinion, the facts of record an the law applicable thereto fully support the
conclusions of the lower court that the mortgage had been legally executed, was a valid
subsisting contract of mortgage, and in ordering the foreclosure of the same. That part of
the judgment appealed from should therefore be affirmed.
STREET: Upon inspection of the prevailing opinion it will be seen that the last mortgage
executed by the defendant Philippine Vegetable Oil Company, Inc., in favor of the
Philippine National Bank, has been declared null and void by the court at the instance of
the intervenor, Phil. C. Whitaker, who is a principal stockholder in the defendant
company. It will be further observed that the nullity of this contract was originally asserted
in the answer of the corporation defendant, but this defense was disallowed by the trial
court in giving judgment in favor of the plaintiff for the foreclosure of the mortgage. From
this judgment the Philippine Vegetable Oil Company did not appeal; and the adjudication
of the validity of the mortgage thereby became conclusive as against the company. There
is nothing in the record to suggest that the abandonment of this defense by the
corporation itself and its failure to appeal from the judgment was due to anything else
than a fair exercise of the judgment of its officers and of the attorney who represented
the corporation in the lower court.

G.R. No. L-27343 February 28, 1979

MANUEL G. SINGSONG vs. ISABELA SAWMILL

Leon Garibay, Timoteo Tubungbanua and Margarita G. Saldajeno entered into a

"Memorandum Agreement".
Leon Garibay, Timoteo Tubungbanua and Margarita G. Saldajeno executed a document
entitled "Assignment of Rights with Chattel Mortgage".
That thereafter the defendants Leon Garibay and Timoteo Tubungbanua did not divide
the assets and properties of the "Isabela Sawmill" between them, but they continued the
business of said partnership under the same firm name "Isabela Sawmill".
Provincial Sheriff of Negros Occidental published two (2) notices that he would sell at
public auction on June 5, 1959 at Isabela, Negros Occidental certain trucks, tractors,
machinery, officeequipment and other things that were involved in Civil Case No. 5223 of
the Court of First Instance of Negros Occidental, entitled "Margarita G. Saldajeno vs.
Leon Garibay, et al.
Provincial Sheriff of Negros Occidental executed a Certificate of Sale in favor of the
defendant Margarita G. Saldajeno.
Margarita G. Saldajeno executed a deed of sale in favor of the Pan Oriental Lumber
Company transfering to the latter for the sum of P45,000.00 the trucks, tractors,
machinery, and other things that she had purchashed at a public auction.
Rationale: The contention of the appellant that the appleees cannot bring an action to
annul the chattel mortgage of the properties of the partnership executed by Leon Garibay
and Timoteo Tubungbanua in favor of Margarita G. Saldajeno has no merit.

Facts: Defendants Leon Garibay, Margarita G. Saldejeno, and Timoteo Tubungbanua

entered into a Contract of Partnership under the firm name "Isabela Sawmill".

As a rule, a contract cannot be assailed by one who is not a party thereto. However,
when a contract prejudices the rights of a third person, he may file an action to annul the
contract.

Plaintiff Oppen, Esteban, Inc. sold a Motor Truck and two Tractors to the partnership
Isabela Sawmill. In order to pay the said purcahse price, the said partnership agreed to
make arrangements with the International Harvester Company at Bacolod City so that
the latter would sell farm machinery to Oppen, Esteban, Inc. with the understanding that
the price was to be paid by the partnership.

This Court has held that a person, who is not a party obliged principally or subsidiarity
under a contract, may exercise an action for nullity of the contract if he is prejudiced in
his rights with respect to one of the contracting parties, and can show detriment which
would positively result to him from the contract in which he has no intervention.

That through the method of payment stipulated in the contract the International Harvester
Company has been paid a total of P19,211.11, leaving an unpaid balance of P1,288.89.
Spouses Cecilio Saldajeno and Margarita G. Saldajeno sued Isabela Sawmill, Leon
Garibay, and Timoteo Tubungbanua.

The plaintiffs-appellees were prejudiced in their rights by the execution of the chattel
mortgage over the properties of the partnership "Isabela Sawmill" in favopr of Margarita
G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua.
Hence, said appelees have a right to file the action to nullify the chattel mortgage in
question.

The portion of the decision appealed from ordering the appellants to pay attorney's fees
to the plaintiffs-appellees cannot be sustained. There is no showing that the appellants
displayed a wanton disregard of the rights of the plaintiffs. Indeed, the appellants
believed in good faith, albeit erroneously, that they are not liable to pay the claims.
The defendants-appellants have a right to be reimbursed whatever amounts they shall
pay the appellees by their co-defendants Leon Garibay and Timoteo Tubungbanua. In
the memorandum-agreement, Leon Garibay and Timoteo Tubungbaun undertook to
release Margarita G. Saldajeno from any obligation of "Isabela Sawmill" to third persons.

G.R. No. 154390, March 17, 2014

METROPOLITAN vs. PROSPERITY
Facts: In July 1984, Metropolitan (MFI) sought from Prosperity (PCRI) a loan in the
amount of P3,443,330.52, the balance of the cost of its boiler machine, to prevent its
repossession by the seller. PCRI was represented by Domingo Ang (Domingo) its
president, and his son Caleb, vicepresident. The parties knew each other because they
belonged to the same family association, the Lioc Kui Tong Fraternity.
Even before the signing of the mortgage and loan documents, PCRI released the P3.5
million loan to MFI. It found that the blank loan forms, consisting of the real estate
mortgage contract, promissory note, comprehensive surety agreement and disclosure
statement, which Domingo himself handed to Enrique, had no entries specifying the rate
of interest and schedules of amortization. On the same day, to reciprocate the gesture
of PCRI, Enrique, together with his wife Natividad Africa, vicepresident, and son
Edmundo signed the blank forms at their office at 685 Tandang Sora Avenue,
Novaliches, Quezon City. The signing was allegedly witnessed by Vicky, Ellen and Alice,
all surnamed Ang, without any PCRI representative present. Immediately thereafter,
Enrique and Vicky proceeded to the PCRI office at 1020 Soler St., Binondo.
Vicky further stated that it was agreed that once PCRI had chosen the lots to be covered
by the mortgage, the defendants would return the remaining titles to the plaintiffs.
Plaintiffs also secured an additional loan of about P199,000.00 to pay for real estate
taxes and other expenses. Significantly, Vicky testified that the plaintiffs delivered to
PCRI twentyfour (24) checks, bearing no dates and amounts, to cover the amortization
payments, all signed in blank by Enrique and Natividad.
In September 1984, the first amortization check bounced for insufficient fund due to MFIs
continuing business losses. It was then that the appellees allegedly learned that PCRI
had filled up the 24 blank checks with dates and amounts that reflected a 35% interest
rate per annum, instead of just 24%, and a twoyear repayment period, instead of 10
years. Vicky avers that her strong protest caused PCRI to desist from depositing the

other 23 checks, and that it was about this time that PCRI finally furnished MFI with its
copy of the promissory note and the disclosure statement.
On September 4, 1986, Enrique received a Notice of Sheriffs Sale dated August 29,
1986, announcing the auction of the seven lots on September 24, 1986 due to unpaid
indebtedness of P10.5 million.
MFI protested the foreclosure, and the auction was reset to October 6, 1986, then to
October 16, 1986, and finally October 27, 1986 after they assured PCRI that they had
found a serious buyer for three of the lots. In the meeting held on October 15, 1986 at
defendants office, the buyer, Winston Wang of Asia Cotton and his lawyer, Atty. Ismael
Andres were present. It was agreed to release the mortgage over TCT Nos. 317705,
317706, and 317707 upon payment of P3.5 million. Winston Wang would pay to MFI
P500,000.00 as downpayment, which MFI would in turn pay to PCRI as partial
settlement of the P3.5 million loan. Winston Wang was given 15 days from October 16,
1986 to pay the P500,000.00. Vicky claims that these agreements were made verbally,
although she kept notes and scribbles of them.
On January 19, 1987, Winston Wang confronted Vicky about their sale agreement and
PCRIs refusal to accept their P3 million payment, because according to Caleb, the three
lots had been foreclosed. Vicky was shocked, because the agreed 60day period to pay
the P3 million was to lapse on January 13, 1987 yet. Caleb himself put the particulars of
the P500,000.00 payment in the cash voucher as partial settlement of the loan.
At the auction sale on October 27, 1986, PCRI was the sole bidder for P6.5 million.
Vicky however also admitted that discussions continued on the agreement to release
three lots for P3.5 million. The reduction of interest rate and charges and the
condonation of the attorneys fees of P300,000.00 for the foreclosure proceedings were
also sought. Present in these conferences were Enrique and Vicky, Domingo and Caleb,
Winston Wang and his lawyer, Atty. Ismael Andres.
Upon defendants continued failure to honor their agreement, Atty. Ismael Andres
threatened to sue PCRI in a letter dated February 17, 1987 if they would not accept the
P3 million payment of his client. Atty. Andres also sent them similar letters dated May 15,
August 5 and 7, 1987, and after several more discussions, the defendants finally agreed
to accept the P3 million from Winston Wang, but under these conditions: a) MFI must
pay the P300,000.00 attorneys fees paid for the foreclosure proceedings and the
P190,000.00 for real estate taxes; b) PCRI shall issue the certificate of redemption over
the three lots; c) plaintiffs shall execute a Memorandum of Undertaking concerning their
right of way over the other properties, the lots being redeemed being situated along
Tandang Sora Street.

MFI paid to PCRI P490,000.00 as agreed, and likewise complied with the required
documentation. Winston Wang also paid the balance of P3 million for the three lots he
was buying. The discussion then turned to how the plaintiffs P3 million interest
arrearages would be settled, which they agreed to be payable over a period of one year,
from October 26, 1987 to October 26, 1988.
In October, 1988, however, plaintiffs were able to raise only P2 million. After a meeting at
defendants office, the period to pay was extended to October 26, 1989, but subject to
18% interest per annum, which Caleb however allegedly refused to put in writing.
Plaintiffs were later able to raise P3 million plus P540,000.00 representing the 18%
interest per annum. On October 26, 1989, Vicky and Enrique tendered the same to
Caleb at his office. Caleb however became furious, and now insisted that the interest
due since 1984 was already P7 million computed at 35% per annum.
On January 16, 1990 and again on March 5, 1990, PCRI sent the plaintiffs a letter
demanding that they vacate the four remaining lots. Caleb was also now asking for
P10.5 million. On March 19, 1990, Caleb executed an affidavit of nonredemption of
TCT Nos. 317699, 317702, 317703 and 317704. On June 7, 1990, S.G. del Rosario,
PCRIs vicepresident, wrote Vicky reiterating their demand to vacate the premises and
remove pieces of machinery, equipment and persons therein, which MFI eventually
heeded.
Rationale: The appeal has no merit.
The CA did not disregard the factual findings of the RTC:
Petitioners insist that respondents committed fraud when the officers of Metropolitan
were made to sign the deed of real estate mortgage in blank.
According to Article 1338 of the Civil Code, there is fraud when one of the contracting
parties, through insidious words or machinations, induces the other to enter into the
contract that, without the inducement, he would not have agreed to. Yet, fraud, to vitiate
consent, must be the causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract. In Samson v. Court of Appeals, causal fraud is
defined as a deception employed by one party prior to or simultaneous to the contract in
order to secure the consent of the other.
Fraud cannot be presumed but must be proved by clear and convincing evidence.
Whoever alleges fraud affecting a transaction must substantiate his allegation, because a
person is always presumed to take ordinary care of his concerns, and private
transactions are similarly presumed to have been fair and regular. To be remembered is
that mere allegation is definitely not evidence; hence, it must be proved by sufficient
evidence.

Did petitioners clearly and convincingly establish their allegation of fraud in the execution
of the deed of real estate mortgage?
Petitioners undeniably failed to adduce clear and convincing evidence against the
genuineness and authenticity of the deed. Instead, their actuations even demonstrated
that their transaction with respondents had been regular and at armslength, thereby
belying the intervention of fraud.
To start with, the evidence adduced by Vicky Ang, the lone witness for petitioners, tried to
cast doubt on the contents and due execution of the deed of real estate mortgage by
pointing to certain irregularities. But she could not be effective for the purpose because
she had not been among the signatories of the deed. The signatories were her late father
Enrique Ang, her mother Natividad Africa, and her brother Edmundo Ang, none of whom
came forward to testify against the deed, or otherwise to assail the genuineness and due
execution of the deed by any other means. They would have been in the better position
than Vicky Ang to substantiate the allegation of fraud if that was the case. Their silence
reflected the inanity of the allegation of fraud by Vicky Ang.
Secondly, petitioners freely and voluntarily surrendered to respondents the seven transfer
certificates of title (TCTs) of their lots. Such surrender of the TCTs evinced their intention
to offer the lots as collateral for the performance of their obligations contracted with
respondents. They thereby confirmed the genuineness and due execution of the deed of
real estate mortgage. Surely, they would not have surrendered the TCTs had their
intention been otherwise.
Thirdly, another circumstance belying the commission of fraud by respondents was
petitioners pleading with respondents for the resetting of foreclosure sale of the
properties after receiving the notice of the impending sale. As a result, the sale was reset
thrice. Had the mortgage and its foreclosure been unreasonable or fraudulent, petitioners
should have instead resolutely contested respondents move to foreclose.
Fourthly, even after their properties were eventually sold as the consequence of the
foreclosure, petitioners negotiated with respondents on the partial redemption of three of
the seven lots. They also took the trouble of finding a buyer (Mr. Winston Wang of Asia
Cotton) of some of the lots. Had the mortgage been fraudulent, they could have instead
instituted a complaint to nullify the real estate mortgage and the foreclosure sale.
And, lastly, Vicky Angs own letters to respondents had an apologetic tenor, and was
seeking leniency from them. Such tenor and tone of her communications were
antithetical to her allegation of having been the victim of their fraudulent acts.

These circumstances tended to indicate that fraud was not attendant during the
transactions between the parties. Verily, as between the duly executed real estate
mortgage and the unsubstantiated allegations of fraud, the Court affords greater weight
to the former.
Action to assail the mortgage already prescribed:
To resolve the issue of prescription, it is decisive to determine if the mortgage was void or
merely voidable.
It appears that the original stance of petitioners was that the deed of real estate
mortgage was voidable. In their complaint, they averred that the deed, albeit in printed
form, was incomplete in essential details, and that Metropolitan, through Enrique Ang as
its president, signed it in good faith and in absolute confidence.
Yet, petitioners now claim that the CA committed a reversible error in not holding that the
absence of consent made the deed of real estate mortgage void, not merely voidable. In
effect, they are now advancing that their consent was not merely vitiated by means of
fraud, but that there was complete absence of consent. Although they should be
estopped from raising this issue for the first time on appeal, the Court nonetheless opts
to consider it because its resolution is necessary to arrive at a just and complete
resolution of the case.
As the records show, petitioners really agreed to mortgage their properties as security for
their loan, and signed the deed of mortgage for the purpose. Thereafter, they delivered
the TCTs of the properties subject of the mortgage to respondents.
Consequently, petitioners contention of absence of consent had no firm moorings. It
remained unproved. To begin with, they neither alleged nor established that they had
been forced or coerced to enter into the mortgage. Also, they had freely and voluntarily
applied for the loan, executed the mortgage contract and turned over the TCTs of their
properties. And, lastly, contrary to their modified defense of absence of consent, Vicky
Angs testimony tended at best to prove the vitiation of their consent through insidious
words, machinations or misrepresentations amounting to fraud, which showed that the
contract was voidable. Where the consent was given through fraud, the contract was
voidable, not void ab initio. This is because a voidable or annullable contract is existent,
valid and binding, although it can be annulled due to want of capacity or because of the
vitiated consent of one of the parties.
With the contract being voidable, petitioners action to annul the real estate mortgage
already prescribed. Article 1390, in relation to Article 1391 of the Civil Code, provides that
if the consent of the contracting parties was obtained through fraud, the contract is
considered voidable and may be annulled within four years from the time of the discovery

of the fraud.31 The discovery of fraud is reckoned from the time the document was
registered in the Register of Deeds in view of the rule that registration was notice to the
whole world.32 Thus, because the mortgage involving the seven lots was registered on
September 5, 1984, they had until September 5, 1988 within which to assail the validity
of the mortgage. But their complaint was instituted in the RTC only on October 10,
1991.33 Hence, the action, being by then already prescribed, should be dismissed.

G.R. No. 12605

September 7, 1918
UY SOO LIM vs. BENITO TAN UNCHUAN
Facts: At the age of about thirteen Santiago Pastrano Uy Toco, a Chinese, came from
China to reside in the Philippine Islands. He was then unmarried. On August 2, 1882, he
married Candida Vivares, a Filipina. Of this marriage there were born two daughters,
Francisca and Concepcion. Francisca is a defendant in this suit and is the wife of the codefendant, Benito Tan Unchuan. At the time of this marriage, Santiago Pastrano
possessed very little property a tienda worth about two thousand pesos. The large
estate left by him at his death was acquired by him during his marriage with Candida
Vivares.
Santiago Pastrano returned to China were he remained for little less than a year. While
there he entered into illicit relations with a Chinese woman, Chan Quieg, also referred to
as Chan Ni Yu.
Santiago Pastrano returned to the Philippines. He never saw Chan Quieg again, but
received letters from her informing him that she had borne him a son, Uy Soo Lim, the
present plaintiff. He died without ever having seen Uy Soo Lim, but under the belief that
he was his only son, and it was in this belief that he dictated the provisions of his will.
On March 6, 1901, Santiago Pastrano died in Cebu, leaving a large estate. The persons
who survived him, were his wife, Candida Vivares, his daughters, Francisca Pastrano
and Concepcion Pastrano, Chan Quieg, and the plaintiff Uy Soo Lim.
By the terms of his will, Santiago Pastrano attempted to dispose of the greater part of his
estate in favor of the appellant, Uy Soo Lim. The will was duly probated in the Court of
First Instance of Cebu, and the defendant Benito Tan Unchuan, husband of the
defendant Francisca Pastrano, who was named in the will as executor. Basilio Uy
Bundan, one of the defendants herein and brother of Santiago Pastrano, was named by
the testator as guardian of Francisca Pastrano, Concepcion Pastrano, and Uy Soo Lim,
who were all three minors at the time of the death of the testator, and duly qualified as
such before the court on August 6, 1902.

Court of First Instance of Cebu, in the matter of the testamentary estate of Santiago
Pastrano issued an order requiring Benito Tan Unchuan, as executor of the testamentary
estate of Santiago Pastrano, to deliver to Basilio Uy Bundan, guardian of Francisca
Pastrano, Concepcion Pastrano, and Uy Soo Lim, the property to which they were
entitled under the will of said Santiago Pastrano. This order was complied with and the
administration of the testamentary estate declared closed.
Basilio Uy Bundan having received, as guardian of the minors Francisca Pastrano,
Concepcion Pastrano, and Uy Soo Lim, the property devised to them under the will of
said Santiago Pastrano, continued to administer the said property as guardian without
incident till October, 1910. The court issued an order on the guardian, Basilio Uy Bundan,
in which it was noted that Francisca Pastrano had reached majority, that Concepcion
Pastrano would reach her majority in a few months, and that Uy Soo Lim had married
and the guardian was therefore ordered to present a plan of distribution of the estate in
accordance with the dispositions of the will of Santiago Pastrano.
The guardian did not comply with this order at once, and, before the plan of the
distribution called for by this order could be presented, objections against carrying into
effect the provisions of the will were presented to this court.
On May 25, 1991, Candida Vivares presented, through her attorneys, a motion in the
matter of the testamentary estate of Santiago Pastrano in which she claimed the right as
the widow of the deceased to one-half of all the estate, and asked that the administration
of said estate reopened and the rights of the persons readjudged and determined
according to law. A motion of similar purport was filed by her in the matter of the
guardianship of Uy Soo Lim et al.
On June 5, 1911, Francisca Pastrano and Concepcion Pastrano filed, through their
attorneys, a motion in the guardianship of Uy Soo Lim et al., in which they opposed the
distribution of the estate of Santiago Pastrano in accordance with the terms of his will,
alleging that Uy Soo Lim was not entitled under the law to the amount of the estate
assigned him in the will, for the reason that the marriage alleged therein of Santiago
Pastrano with Chan Quieg, was null and void, and, furthermore, that Uy Soo Lim was not
a son, legitimate or illegitimate, of said Santiago Pastrano. They, therefore, asked for a
suspension of the distribution and a reopening of the matter of the testamentary estate of
Santiago Pastrano and that the rights of all persons in interest be readjudged and
determined according to law. Chan Quieg also appeared in the matter of the estate of
Santiago Pastrano on October 7, 1911, and asked that she be declared entitled to onehalf the estate on account of "having in the year 1892 in the city of Amoy, China, held
carnal relations with the deceased Santiago Pastrano, having lived maritally with him
during his stay in said city that year, which union, under the laws and customs of China,
constitutes all the forms of valid marriage in said jurisdiction."

About the end of October, 1911, or, perhaps the early part of November, an agreement
was reached between Choa Tek Hee and plaintiff, of the one part, and Tan Unchuan and
Del Rosario, an attorney of Cebu, representing the interest of Candida Vivares, Francisca
and Concepcion Pastrano, on the other, to submit the entire matter in dispute to the
judgment of three respectable Chinese merchants designated. The persons thus
designated were not, strictly speaking, arbitrators, but rather friendly advisers, since
there was no agreement that their findings should be binding on the parties. These
advisers came to the conclusion that the sum of P82,500 should be accepted by plaintiff
in full satisfaction and relinquishment of all his right, title, and interest in and to the estate
of the deceased Santiago Pastrano, and this recommendation was accepted by Choa
Tek Hee and plaintiff and by Tan Unchuan and Del Rosario. In accordance with this
agreement, plaintiff, on November 18, 1911, executed a deed by which he relinguished
and sold to Francisca Pastrano all his right, title, and interest in the estate of the
deceased Santiago Pastrano in consideration of P82,500, of which sum P10,000 was
received in cash and the balance was represented by six promissory notes payable to
Choa Tek Hee as attorney in fact for Uy Soo Lim, the first for P22,500 and the remaining
five for P10,000 each. This is the document known as plaintiff's Exhibit B, which plaintiff
is seeking to annul in the present action. Thereafter, on December 6, 1911, Candida
Vivares and Concepcion Pastrano, then of age, executed separate deeds by where they
relinquished and sold to Francisca Pastrano all their right, title, and interest in the estate
left by Santiago Pastrano.
On November 29, 1911, Chan Quieg, then temporarily in the port of Cebu, executed a
deed whereby she sold and relinquished to Francisca Pastrano all her right, title, and
interest in the estate of Santiago Pastrano. On December 4, 1911, Chan Quieg executed
a public document in which she gave her consent to the sale by Uy Soo Lim of his right
and interest in said estate "in case the same should be necessary by virtue of any legal
requirements of the laws of the Philippine Islands."
And finally, on December 4, 1911, Basilio Uy Bundan executed a public document in
which he declared that in spite of the statements in the will of Santiago Pastrano, said
testator was the owner of the entire business in Cebu known as Santiago Pastrano &
Co., and that Calixto Uy Conchio, the brother of testator and of said Basilio Uy Bundan,
did not, as declared in said will, own a three-quarter interest in said business, or any
interest at all therein, for which reason the said Basilio Uy Bundan renounced any
interest in said business which he might appear to have as brother and heir of said
Calixto Uy Conchio, who died without direct heirs in the ascending or descending line,
said renunciation of right being made in favor of Francisca Pastrano.
All the documents above mentioned having been duly presented to the lower court by
Pantaleon del Rosario acting as attorney of Francisca Pastrano, that court, on December
11, 1911, issued an order in the matter of the guardianship of Uy Soo Lim et al., by which
Francisca Pastrano was declared the sole owner of the property left by the deceased

Santiago Pastrano, and the guardian Basilio Uy Bundan was order to deliver the same to
Francisca Pastrano. On December 14, 1911, upon proof of compliance with said order,
the guardianship was closed and the guardians bond cancelled.
On August 24, 1914, the plaintiff and appellant, Uy Soo Lim, commenced the present
action in the Court of First Instance of Cebu, for the purpose of vacating the orders of the
lower court of December 11, 1911 and to rescind and annul the contract by which he had
sold and transferred to Francisca Pastrano his interest in the estate of Santiago
Pastrano.
Rationale: The complaint alleges as one of the reasons for setting aside plaintiffs sale of
his rights to Francisca Pastrano that defendants Benito Tan Unchuan and Basilio Uy
Bundan induced the plaintiff to execute the deed of cession by conspiring together to
exercise under influence upon the plaintiff, by taking advantage of his youth, passions,
and inexperience, by misrepresenting materials facts concerning the value of the
property and interest in questions, and by concealing others. The court below held that
appellant had not been induced by deceit, or undue influence to enter into the contract,
but did so deliberately with full knowledge of the facts, after mature deliberation and upon
the advice of capable counsel.
Some shadow of claim might be made on this issue if plaintiff, then a minor, had signed
the document without careful and competent advisers to direct him. He had however
three advisers. One of them was Choa Tek Hee, characterized by Judge Del Rosario as
a person of unusual ability. Whatever discord may have arisen subsequently between
plaintiff and Choa Tek Hee, there is no serious claim either in the complaint or based on
the evidence that Choa Tek Hee was a party to the supposed conspiracy against plaintiff,
and the Court does not doubt but what Choa Tek Hee exerted all his ability to procure for
plaintiff the best possible terms. But plaintiff from the very beginning until the end had the
benefit of the advice of two lawyers, Major Bishop to consult with in Manila, where the
document itself was signed, and Mr. Levering of Cebu, where most of the property was
situated, where the other parties in interest lived and where the litigation itself was
pending. To claim that plaintiff did not know what he was signing appears to the court to
be an impeachment of the intelligence which a reading of the testimony shows the
plaintiff to have possessed at the time in question. To claim that the two attorneys named
allowed their client to sign the document without being satisfied that he understood its
import and thereafter consented to the final decree issued by the court in Cebu based on
said sale, constitutes in the opinion of the court an untenable impeachment of the
conduct of two lawyers well and favorably known to the Bench and Bar of these Islands
as attorneys of ability and integrity.
In support of the claim that material facts were concealed and misrepresented by
defendants, special stress is laid on a memorandum furnished the "arbitrators" by Tan
Unchuan. This memorandum was shown to plaintiff's agent Choa Tek Hee and was a

general account of the property left by Santiago Pastrano's estate was credited with a
quarter interest in the business known as Santiago Pastrano & Co., his deceased brother
Calixto Uy Conchio being credited with only the remaining three-fourths, while as a
matter of fact it would appear that Santiago Pastrano was the owner of the entire interest
in said business and subsequently to the execution of the document in question by
plaintiff the entire interest in the business passed by decree of this court to Francisca
Pastrano who has purchased the interest of all the other heirs. But whatever may have
been the effect of the presentation of this memorandum, plaintiff is not shown to have
relied thereon. It was for the purpose among others of being informed as to the nature
and value of his interests and as to the weight that might be attached to the claims made
by persons with adverse interest that plaintiff employed a lawyer in Cebu where most of
the property (and the business known as Santiago Pastrano & Co.) was located and the
facts relating thereto accessible. Without better proof than has been presented the court
will not presume that a document circulated among the arbitrators, though seen by
plaintiff, influenced plaintiff in signing the deed of cession when he had employed
attorneys well able to revise and check up any statements, made in said memorandum.
Furthermore, the bill of sale itself specifically states that among the rights sold by plaintiff
is his interest in the business of Santiago Pastrano, whatever that might be, and
expressly states that the will erroneously stated that testator's interest was one quarter,
whereas in reality testator owned the entire business. The court finds under the evidence
that plaintiff understood this part of the bill of sale along with its other provisions and that
its import was explained to him by his attorneys before he signed it.
Without going further into all the evidence on this question, the court finds that not only
has plaintiff not sustained the burden of proving the fraud, imposition and deceit, which
the law never presumes, but that plaintiff in fact signed the deed of cession in question
without relying upon the statements and representations of the defendants as the motive
for signing the same; that before signing the same he understood the nature of said
document, its contents and its effect upon his interest, and that in signing the same he
was determined by the advice of his own agent Choa Tek Hee and upon the advice of his
two lawyers, who explained to him fully and to his complete understanding the nature,
contents and effect of said instrument.
Appellant vigorously assails these conclusions of the trial court, but the evidence is
amply sufficient to support the findings, and we find nothing in the record to indicate that
the trial court has failed to consider all the evidence adduced, or that the findings are
contrary to the weight of the testimony. Whenever there is a conflict in the evidence and
the conclusion to be reached must rest largely upon the relative credibility of the
witnesses, we rarely disturb the findings of the trial court, and we can see no reason for
doing so in this case. On the contrary, we are convinced that the weight of the evidence
strongly supports the findings, and that the court did not err in rejecting appellant's
contention that the contract is voidable upon the ground that his consent was obtained by

fraud or undue influence. We are particularly impressed by the fact that it is expressly
stated in the contract (Exhibit B) which plaintiff now seeks to repudiate that
notwithstanding the statement to the contrary in Pastrano's will, the latter was in fact the
sole owner of the business referred to in that document. Plaintiff therefore had full
information regarding the assets which composed the Pastrano's estate, and surrounded
as he was by skillful and competent advisers, we have no doubt that he was fully aware
of the value of those assets.
The trial court found that plaintiff was a minor at the time of the execution of the contract
in question, but that he not only failed to repudiate it promptly upon reaching his majority
but tacitly ratified it by disposing of the greater part of the proceeds after he became of
age and after he had full knowledge of the facts upon which he now seeks to disaffirm
the agreement.
By the terms of the contract by which appellant transferred to the appellee Francisca
Pastrano his interest in the Pastrano Estate he was paid P10,000 in cash, the balance of
the P82,500 being represented by six promissory notes dated November 18, 1911,
signed as maker by the defendant Tan Unchuan, the husband of the defendant Francisca
Pastrano. The first note was for P22,500 payable twelve days after date, and the other
five for P10,000 each, payable in six, twelve, eighteen, twenty-four and thirty months,
respectively. These notes were made payable to Choa Tek Hee, or order, as attorney in
fact for Uy Soo Lim.
Of these notes the first three, amounting to P42,500 were paid to Choa Tek Hee as they
fell due. It appears, however, that Choa Tek Hee failed to account to the satisfaction of
Uy Soo Lim for the money so received, whereupon the latter returned to Manila on
February 20, 1913, to seek an adjustment of his affairs with his attorney in fact.
Not being able amicably to adjust with Choa Tek Hee the matter of such moneys, Uy Soo
Lim filed suit against him in the Court of First Instance, Manila, asking that the power of
attorney be canceled, and for an accounting. This complaint is dated March 31, 1913,
and has attached thereto a copy of the will of Santiago Pastrano. It recites that plaintiff's
interest in the estate of Santiago Pastrano was reasonably worth P200,000; that this
interest had been liquidated and "reduced to a money basis," and that in consequence
money and choses in action had come into the hand of Choa Tek Hee amounting to
P83,000 more or less. There is also an allegation that the power of attorney was
executed while plaintiff was still a minor.
These allegations are important as showing that on March 31, 1913, plaintiff, while
claiming his interest in the estate of Santiago Pastrano was reasonably worth P200,000
knew such interest had been sold for P83,000, more or less, and also knew he was a
minor under Philippine laws at the time of such sale.

By his answer Choa Tek Hee laid claim to a considerable portion of the P42,500 collected
by him, for "services rendered," etc., his statement showing a cash balance of only
P2,867.94. This latter amount, upon petition of plaintiff, was ordered deposited with the
clerk of the court.
In the meantime Chas. E. Tenney had been appointed guardian ad litem of plaintiff, and
on May 12, 1913, filed a motion on behalf of plaintiff reciting that promissory note No. 4
for P10,000 (being one of the notes executed on account of plaintiff's bill of sale) would
fall due on May 18, 1913, and asking that Choa Tek Hee be directed to indorse it over to
the clerk of the court for collection. As the note was drawn in favor of Choa Tek Hee it
took some time to adjust the matter of payment, it being finally paid by Tan Unchuan to
the clerk of the court on October 24, 1913. The P10,000 due on note No. 5 was paid into
court on December 18, 1913, and the final P10,000, being note No. 6, was paid on May
23, 1914.
In the meantime, on October 8, 1913, Uy Soo Lim reached his majority under Philippine
laws, being then 21 years of age. On October 10, 1913, Chas. E. Tenney, his guardian ad
litem, filed a motion with the court reciting the fact of Uy Soo Lim's majority, stating that
the services of a guardian ad litem were no longer necessary.
The sum of P2,867.94 deposited by Choa Tek Hee was part of the proceeds accruing to
plaintiff under his bill of sale to Francisca Pastrano, as was also the P30,000, deposited
by Tan Unchuan in payment of promissory notes Nos. 4, 5, and 6, which notes accrued
subsequent to the filing of suit against Choa Tek Hee. The whole of this P30,000 was
paid into court upon demand of plaintiff, such payments being made after October 8,
1913, when plaintiff became of age.
On March 30, 1914, Uy Soo Lim secured judgment against Choa Tek Hee in the sum of
P31,511.993, with interest, which amount was in addition to the P32,867.94 deposited
with the court during the pendency of the proceedings. As heretofore noted, the final
promissory note for P10,000 was paid into court on May 23, 1914. On May 25, 1914, or
within two days after the final P10,000 due upon his bill of sale had been paid into court,
Uy Soo Lim filed suit in the Court of First Instance of Manila, to annul it on the ground of
minority, fraud, conspiracy, and deceit.
Before filing the suit to annul his contract plaintiff had already withdrawn from the
P32,867.94 deposited with the court, the sum of P9,517.20, of which amount the sum of
P7,550 was withdrawn after he reached his majority.
In filing his suit to annul the contract no offer was made by appellant to return to
Francisca Pastrano the consideration of such contract, or to hold, subject to her
disposition, the balance of P54,863.61 then on deposit with the court and represented by

the Choa Tek Hee judgment. On the contrary, he proceeded with the utmost celerity to
secure, spend and otherwise dispose of the last cent of such consideration.
On August 24, 1914, or more than ten months after plaintiff reached his majority, the
present suit was filed in the Court of First Instance of Cebu, the action brought in Manila
having been dismissed for lack of jurisdiction.
On March 29, 1915, this court affirmed on appeal the decision of the trial court awarding
Uy Soo Lim P31,511.93, with interest, in his suit against Choa Tek Hee.1 Appellant lost
no time in seeking to get possession of these additional funds. Execution was secured
against Choa Tek Hee on April 27, 1915, and by June 5, 1915, the whole of this judgment
was collected and converted to plaintiff's use except the sum of P7,200.
By the time the present action came to trial, therefore, the whole of this P64,377.81
the then available balance on hand derived from plaintiff's bill of sale had been
collected and converted by him save and except the sum of P7,200, still due upon the
judgment against Choa Tek Hee. As soon as the trial of this case was closed appellant
proceeded at once to realize this remaining remnant accruing from his bill of sale, by
transferring his interest therein to one Wee Thiam Tew, of Singapore.

And of the sum of P36,000 more or less which plaintiff has received and spent since filing
the present suit, P7,200 was received and spent after the trial of the present case before
this court had been closed; that is, after all the evidence had been presented and the
case submitted to the court for its final decision upon briefs to be filed. It was this
disposal by plaintiff of the lasts remains of the consideration price which was presented
to the court as additional evidence on the reopening of the trial.
It is important to note that this final P7,200 was disposed of by plaintiff on April 13, 1916,
or more than two and a half years after he reached his majority, and an equal time after
he knew all the facts now alleged by him to constitute fraud.
Uy Soo Lim became of age under Philippine laws on October 8, 1913. On March 31,
1913 (some months prior to reaching majority) he filed suit against Choa Tek Hee for an
accounting, wherein reference is had to this bill of sale and to the fact of minority. The
purpose of that action was to reduce to possession the consideration accruing to him
from his bill of sale.

As showing how and in what manner the P82,500 was realized by plaintiff, we quote as
follows from the findings of the trial court (B. E., pp. 109,110):

Knowing his legal rights, therefore, plaintiff should have been prompt to disaffirm his
contract upon reaching majority. This was not done. Instead, he deliberately permitted
defendants to continue making payments thereunder, and then, on May 25, 1914, when
the last cent upon such contract was collected, sought to avail himself of this ground of
rescission. This was almost eight months after he had attained his majority.

To recapitulate, plaintiff has secured and converted to his own use the entire amount of
P82,500 the consideration for which he executed the deed of cession he is now seeking
to annul.

The privilege granted minors of disaffirming their contracts upon reaching majority is
subject to prompt election in the matter. The court, in Hastings vs. Dollarhide (24 Cal.,
195, 212), states the principle thus:

Of this amount of P82,500, plaintiff, speaking in rough figures, has received and
converted to his own use:

The exemption of infants from liability on their contracts proceeds solely upon the
principle that such exemption is essential to their protection; and it is admitted that the
law of infancy should be so administered that result may, in all cases, be secured. But it
has not unfrequently happened that courts, in their anxiety to protect the rights of infants
in the matter of contracts made by them during non-age, have after they have become
adults, treated them to same extent as infants still, exempting them from the operation of
rules of law, not only of general obligation, but founded on essential justice. The strong
tendency of the modern decisions, however, is to limit the exemptions of infancy to the
principle upon which the disability proceeds.

About P20,000 before coming of age under the laws of the Philippine Islands.
About P62,500 since coming of age under the laws of the Philippine Islands.
Of the P62,500 received and spent by plaintiff since coming of age under our laws,
plaintiff has spent approximately about P7,500 before bringing suit to set aside his deed
of cession, and about P55,000 since filing his first action in Manila to set aside the deed
of cession.
And of this sum of about P55,000, about P36,000 were received and spent by plaintiff
after filing the present suit.

To the same effect Goodnow vs. Empire Lumber Company (31 Minn., 468; 47 Am. Rep.,
798) where the court, in discussing the question, said:
The rule holding certain contracts of an infant voidable (among them his conveyances of
real estate) and giving him the right to affirm or disaffirm after he arrives at majority, is for
the protection of minors, and so that they shall not be prejudiced by acts done or

obligations incurred at a time when they are not capable of determining what is for their
interest to do. For this purpose of protection the law gives them an opportunity, after they
have become capable of judging for themselves, to determine whether such acts or
obligations are beneficial or prejudicial to them, and whether they will abide by or avoid
them. If the right to affirm or disaffirm extends beyond an adequate opportunity to so
determine and to act on the result, it ceases to be a measure of protection, and
becomes, in the language of the court in Wallace vs. Lewis (4 Harr., 75, 80), "a
dangerous weapon of offense, instead of a defense." For we cannot assent to the reason
given in Boody vs. McKenney (23 Me., 517), (the only reason given by any of the cases
for the rule that long acquiescense is no proof of ratification), "that by his silent
acquiescence he occasions no injury to other persons, and secures no benefits or new
rights to himself. There is nothing to urge him as a duty to others to act speedily." The
existence of such an infirmity in one's title as the right of another at his pleasure to defeat
it, is necessarily prejudicial to it; and the longer it may continue, the more serious the
injury. Such a right is a continual menace to the title. Holding such a menace over the
title is of course an injury to the owner of it; one possessing such a right is bound in
justice and fairness toward the owner of the title to determine without unnecessary delay
whether he will exercise it. The right of a minor to disaffirm on coming of age, like the
right to disaffirm in any other case, should be exercised with some regard to the rights of
others with as much regard to those rights as is fairly consistent with due protection to
the interests of the minor.
In every other case of a right to disaffirm, the party holding it is required, out of regard to
the rights of those who may be affected by its exercise, to act upon it within a reasonable
time. There is no reason for allowing greater latitude where the right exists because of
infancy at the time of making the contract. A reasonable time after majority within which
to act is all that is essential to the infant's protection. That ten, fifteen, or twenty years, or
such other time as the law may give for bringing an action, is necessary as a matter of
protection to him is absurd. The only effect of giving more than a reasonable time is to
enable the mature man, not to correct what he did amiss in his infancy, but to speculate
on the events of the future a consequence entirely foreign to the purposes of the rule,
which is solely protection to the infant. Reason, justice to others, public policy (which is
not subserved by cherishing defective titles), and convenience, require the right of
disaffirmance to be acted upon within a reasonable time. What is a reasonable time will
depend on the circumstances of each particular case, and may be either for the court or
for the jury to decide. Where, as in this case, there is mere delay, with nothing to explain
or excuse it, or show its necessity, it will be for the court.
The above decisions (which could be multiplied indefinitely) are based upon justice and
sound sense, and have peculiar application to the case now before us. Here plaintiff not
only showed a personal knowledge of his rights under this contract prior to and at the
time of reaching majority, but he was surrounded by able advisers, legal and otherwise,
retained to protect his interests. As a result of his failure to disaffirm promptly on reaching

majority, he received a balance of P30,000 upon the contact, which amount certainly
would not have been paid if it had been known that he was about to attempt to repudiate
his agreement. This amount was not only collected by Uy Soo Lim after reaching
majority, but was effectually disposed of as rapidly as possible.
The record shows that of the P2,867.94 deposited in court by Choa Tek Hee, and the
P30,000 paid into court by Tan Unchuan, only P1,967.20 was withdrawn by plaintiff
before reaching majority. Seven thousand five hundred and fifty pesos was withdrawn
after he became of age and before filing suit to rescind. There was still uncollected the
P31,511.93, with interest represented by the Choa Tek Hee judgment. When plaintiff
reached majority, therefore, there was P62,412.67 of the original consideration available
for refund, and there still remained P55,000 when he filed his suit to rescind. This sum
could have been returned to Francisca Pastrano or held by the court for her account.
Positive statutory law, no less than uniform court decisions, require, as a condition
precedent to rescission of a contract on account of minority that the consideration
received be refunded. We cite and quote as follows:
ART. 1295 (Civil Code).
Rescission obliges the return of the things which were the
objects of the contract, with their fruits and the sum with interest; therefore it can only be
carried into effect when the person who may have claimed it can return that which, on his
part, he is bound to do.
ART. 1304 (Civil Code).
When the nullity arises from the incapacity of one of the
contracting parties, the incapacitated person is not obliged to make restitution, except to
the extent he has profited by the thing or by the sum he may have received.
ART. 1308 (Civil Code).
While one of the contracting parties does not return that
which he is obliged to deliver by virtue of the declaration of nullity, the other cannot be
compelled to fulfill, on his part, what is incumbent on him.
Not only should plaintiff have refunded all moneys in his possession upon filing his action
to rescind, but, by insisting upon receiving and spending such consideration after
reaching majority, knowing the rights conferred upon him by law, he must be held to have
forfeited any right to bring such action.
Article 1314, Civil Code, provides as follows:
The action for nullity of a contract shall also be extinguished when the thing which is the
object thereof should be lost by fraud or fault of the person having the right to bring the
action.

If the cause of the action should be the incapacity of any of the contracting parties, the
loss of the thing shall be no obstacle for the action to prevail, unless it has occurred by
fraud or fault on the part of the plaintiff after having acquired capacity.
Plaintiff has disposed of the whole of the P85,000 which was paid him in consideration of
the execution of the contract he is now seeking to annul. The record establishes beyond
peradventure of doubt that he is utterly without funds to reimburse this consideration. In
the Choa Tek Hee suit (Exhibit 10) there appears at folio 17 a motion by plaintiff, under
oath, wherein he recites as a ground for realizing certain of the moneys deposited under
this contract that he (plaintiff) has no funds with which to support himself except such as
may be advanced to him out of the moneys belonging to him which is now or may
hereafter be in the hands of the clerk of this court." Being without other funds, there was
the greater reason why this deposit, derived from the very contract sought to be
repudiated, should have been held intact to reimburse his vendee.
In note to Englebert vs. Pritchett reported in 26 L.R.A., 177, the various cases relating to
the necessity of returning the entire consideration in order to disaffirm infant's contracts
are correlated and discussed. We quote as follows:
The rule which comes the nearest to being general is that all consideration which
remains in the infant's possession upon his reaching majority or at the time of an
attempted disaffirmance in case he is still under age must be returned, but that
disaffirmance will not be defeated by inability to return what he has parted with prior to
such time.
He will not be permitted to regain what he parted with or refuse payment while still
possessed of what he received.
There have been many distinctions attempted such as between executory and executed
contacts, and between seeking relief at law and in equity, but with only a few exceptions
the rule as stated above has governed the decisions regardless of the facts relied on as
distinguishing facts. There is no substantial ground for a distinction as to the rule to be
applied, although there may be as to the manner of its application.

The rule is that the consideration must be restored. (Dickerson vs. Gordon, 24 N. Y. S.
R., 448.)
Whatever difference may exist in the authorities as to the obligation of the infant to return
the entire consideration received as a condition precedent to disaffirming the contract,
they are unanimous in holding that he must return such portion thereof as remains in his
possession when reaching majority.
As heretofore noted, a very considerable portion of the moneys called for by the contract
under consideration was collected and used by plaintiff after May 25, 1914, when he
definitely elected to disaffirm it by bringing suit to rescind.
A leading case on the general subject is that of Manning vs. Johnson (26 Ala., 446),
reported in 62 Am. Dec. 732, with an extensive footnote. Discussing the general subject
the court there lays down the following rule. (p. 733):
When we come to reason upon the proposition, however, it is surrounded with difficulty;
for if the infant can raise money to the whole value of his estate by a voidable sale or
mortgage and can only avoid the conveyance after refunding, he is furnished the means
of indulging habits of dissipation and prodigality, which in many instances would
doubtless result in squandering the whole of the proceeds, while the purchaser or
mortgagee would risk nothing, the land or estate of the infant so sold or mortgaged
furnishing adequate security. On the other hand to allow the infant to retain the
consideration and yet to repudiate or disaffirm the conveyance, would tempt as well as
enable him to practice frauds upon others. We think safe rule should furnish a check both
upon the infant and the party contracting with him. That rule we take to be this: If the
infant after he arrives at age is shown to be possessed of the consideration paid him,
whether it be property, money or choses in action, and either disposes of it so that he
cannot restore it, or retains it for an unreasonable length of time after attaining his
majority, this amounts to an affirmance of the contract. So likewise if it be shown that he
has the power to restore the thing that he received, he cannot be allowed to rescind
without first making restitution.