Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 201167

February 27, 2013

GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO, LOURDES G. ORTIGA,

GEORGE GO, and VICENTE GO, Petitioners,
vs.
SPOUSES EUGENIO and ANGELINA FAJARDO, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is
the July 22, 2011 Decision 1and February 29, 2012 Resolution 2 of the Court of Appeals
(CA) in CA-G.R. SP No. 112981, which affirmed with modification the August 27, 2009
Decision3 of the Office of the President (OP).
The Facts
On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo (Sps.
Fajardo) entered into a Contract to Sell 4 (contract) with petitioner-corporation Gotesco
Properties, Inc. (GPI) for the purchase of a 100-square meter lot identified as Lot No.
13, Block No.6, Phase No. IV of Evergreen Executive Village, a subdivision project
owned and developed by GPI located at Deparo Road, Novaliches, Caloocan City. The
subject lot is a portion of a bigger lot covered by Transfer Certificate of Title (TCT) No.
2442205 (mother title).
Under the contract, Sps. Fajardo undertook to pay the purchase price of P126,000.00
within a 10-year period, including interest at the rate of nine percent (9%) per annum.
GPI, on the other hand, agreed to execute a final deed of sale (deed) in favor of Sps.
Fajardo upon full payment of the stipulated consideration. However, despite its full
payment of the purchase price on January 17, 2000 6 and subsequent demands,7 GPI
failed to execute the deed and to deliver the title and physical possession of the subject
lot. Thus, on May 3, 2006, Sps. Fajardo filed before the Housing and Land Use
Regulatory Board-Expanded National Capital Region Field Office (HLURBENCRFO) a
complaint8 for specific performance or rescission of contract with damages against GPI
and the members of its Board of Directors namely, Jose C. Go, Evelyn Go, Lourdes G.
Ortiga, George Go, and Vicente Go (individual petitioners), docketed as HLURB Case
No. REM-050306-13319.

Sps. Fajardo averred that GPI violated Section 20 9 of Presidential Decree No. 957 10 (PD
957) due to its failure to construct and provide water facilities, improvements,
infrastructures and other forms of development including water supply and lighting
facilities for the subdivision project. They also alleged that GPI failed to provide
boundary marks for each lot and that the mother title including the subject lot had no
technical description and was even levied upon by the Bangko Sentral ng Pilipinas
(BSP) without their knowledge. They thus prayed that GPI be ordered to execute the
deed, to deliver the corresponding certificate of title and the physical possession of the
subject lot within a reasonable period, and to develop Evergreen Executive Village; or in
the alternative, to cancel and/or rescind the contract and refund the total payments
made plus legal interest starting January 2000.
For their part, petitioners maintained that at the time of the execution of the contract,
Sps. Fajardo were actually aware that GPI's certificate of title had no technical
description inscribed on it. Nonetheless, the title to the subject lot was free from any
liens or encumbrances.11 Petitioners claimed that the failure to deliver the title to Sps.
Fajardo was beyond their control 12 because while GPI's petition for inscription of
technical description (LRC Case No. 4211) was favorably granted 13 by the Regional Trial
Court of Caloocan City, Branch 131 (RTC-Caloocan), the same was reversed 14 by the
CA; this caused the delay in the subdivision of the property into individual lots with
individual titles. Given the foregoing incidents, petitioners thus argued that Article 1191
of the Civil Code (Code) the provision on which Sps. Fajardo anchor their right of
rescission remained inapplicable since they were actually willing to comply with their
obligation but were only prevented from doing so due to circumstances beyond their
control. Separately, petitioners pointed out that BSP's adverse claim/levy which was
annotated long after the execution of the contract had already been settled.
The Ruling of the HLURB-ENCRFO
On February 9, 2007, the HLURB-ENCRFO issued a Decision 15 in favor of Sps.
Fajardo, holding that GPIs obligation to execute the corresponding deed and to deliver
the transfer certificate of title and possession of the subject lot arose and thus became
due and demandable at the time Sps. Fajardo had fully paid the purchase price for the
subject lot. Consequently, GPIs failure to meet the said obligation constituted a
substantial breach of the contract which perforce warranted its rescission. In this regard,
Sps. Fajardo were given the option to recover the money they paid to GPI in the amount
of P168,728.83, plus legal interest reckoned from date of extra-judicial demand in
September 2002 until fully paid. Petitioners were likewise held jointly and solidarily liable
for the payment of moral and exemplary damages, attorney's fees and the costs of suit.
The Ruling of the HLURB Board of Commissioners
On appeal, the HLURB Board of Commissioners affirmed the above ruling in its August
3, 2007 Decision,16finding that the failure to execute the deed and to deliver the title to
Sps. Fajardo amounted to a violation of Section 25 of PD 957 which therefore,
warranted the refund of payments in favor of Sps. Fajardo.

The Ruling of the OP

On further appeal, the OP affirmed the HLURB rulings in its August 27, 2009
Decision.17 In so doing, it emphasized the mandatory tenor of Section 25 of PD 957
which requires the delivery of title to the buyer upon full payment and found that GPI
unjustifiably failed to comply with the same.
The Ruling of the CA
On petition for review, the CA affirmed the above rulings with modification, fixing the
amount to be refunded to Sps. Fajardo at the prevailing market value of the
property18 pursuant to the ruling in Solid Homes v. Tan (Solid Homes).19
The Petition
Petitioners insist that Sps. Fajardo have no right to rescind the contract considering that
GPI's inability to comply therewith was due to reasons beyond its control and thus,
should not be held liable to refund the payments they had received. Further, since the
individual petitioners never participated in the acts complained of nor found to have
acted in bad faith, they should not be held liable to pay damages and attorney's fees.
The Court's Ruling
The petition is partly meritorious.
A. Sps. Fajardos right to rescind
It is settled that in a contract to sell, the seller's obligation to deliver the corresponding
certificates of title is simultaneous and reciprocal to the buyer's full payment of the
purchase price.20 In this relation, Section 25 of PD 957, which regulates the subject
transaction, imposes on the subdivision owner or developer the obligation to cause the
transfer of the corresponding certificate of title to the buyer upon full payment, to wit:
Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or
unit to the buyer upon full payment of the lot or unit. No fee, except those required
for the registration of the deed of sale in the Registry of Deeds, shall be collected for the
issuance of such title. In the event a mortgage over the lot or unit is outstanding at the
time of the issuance of the title to the buyer, the owner or developer shall redeem the
mortgage or the corresponding portion thereof within six months from such issuance in
order that the title over any fully paid lot or unit may be secured and delivered to the
buyer in accordance herewith. (Emphasis supplied.)
In the present case, Sps. Fajardo claim that GPI breached the contract due to its failure
to execute the deed of sale and to deliver the title and possession over the subject lot,
notwithstanding the full payment of the purchase price made by Sps. Fajardo on
January 17, 200021 as well as the latters demand for GPI to comply with the

aforementioned obligations per the letter22 dated September 16, 2002. For its part,
petitioners proffer that GPI could not have committed any breach of contract considering
that its purported non-compliance was largely impelled by circumstances beyond its
control i.e., the legal proceedings concerning the subdivision of the property into
individual lots. Hence, absent any substantial breach, Sps. Fajardo had no right to
rescind the contract.
The Court does not find merit in petitioners contention.
A perusal of the records shows that GPI acquired the subject property on March 10,
1992 through a Deed of Partition and Exchange 23 executed between it and Andres
Pacheco (Andres), the former registered owner of the property. GPI was issued TCT
No. 244220 on March 16, 1992 but the same did not bear any technical
description.24 However, no plausible explanation was advanced by the petitioners as to
why the petition for inscription (docketed as LRC Case No. 4211) dated January 6,
2000,25 was filed only after almost eight (8) years from the acquisition of the subject
property.
Neither did petitioners sufficiently explain why GPI took no positive action to cause the
immediate filing of a new petition for inscription within a reasonable time from notice of
the July 15, 2003 CA Decision which dismissed GPIs earlier petition based on technical
defects, this notwithstanding Sps. Fajardo's full payment of the purchase price and prior
demand for delivery of title. GPI filed the petition before the RTC-Caloocan, Branch 122
(docketed as LRC Case No. C-5026) only on November 23, 2006,26 following receipt of
the letter27 dated February 10, 2006 and the filing of the complaint on May 3, 2006,
alternatively seeking refund of payments. While the court a quo decided the latter
petition for inscription in its favor,28 there is no showing that the same had attained
finality or that the approved technical description had in fact been annotated on TCT No.
244220, or even that the subdivision plan had already been approved.
Moreover, despite petitioners allegation 29 that the claim of BSP had been settled, there
appears to be no cancellation of the annotations 30 in GPIs favor. Clearly, the long delay
in the performance of GPI's obligation from date of demand on September 16, 2002 was
unreasonable and unjustified. It cannot therefore be denied that GPI substantially
breached its contract to sell with Sps. Fajardo which thereby accords the latter the right
to rescind the same pursuant to Article 1191 of the Code, viz:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
B. Effects of rescission
At this juncture, it is noteworthy to point out that rescission does not merely terminate
the contract and release the parties from further obligations to each other, but abrogates
the contract from its inception and restores the parties to their original positions as if no
contract has been made.31 Consequently, mutual restitution, which entails the return of
the benefits that each party may have received as a result of the contract, is thus
required.32To be sure, it has been settled that the effects of rescission as provided for in
Article 1385 of the Code are equally applicable to cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article
1191.1wphi1 This means bringing the parties back to their original status prior to the
inception of the contract. Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object of the contract
are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the
loss.
This Court has consistently ruled that this provision applies to rescission under
Article 1191:
Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates
the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest," the Court finds no justification to sustain
petitioners position that said Article 1385 does not apply to rescission under Article
1191. x x x33 (Emphasis supplied; citations omitted.)
In this light, it cannot be denied that only GPI benefited from the contract, having
received full payment of the contract price plus interests as early as January 17, 2000,
while Sps. Fajardo remained prejudiced by the persisting non-delivery of the subject lot
despite full payment. As a necessary consequence, considering the propriety of the
rescission as earlier discussed, Sps. Fajardo must be able to recover the price of the
property pegged at its prevailing market value consistent with the Courts
pronouncement in Solid Homes,34 viz:

Indeed, there would be unjust enrichment if respondents Solid Homes, Inc. & Purita
Soliven are made to pay only the purchase price plus interest. It is definite that the value
of the subject property already escalated after almost two decades from the time the
petitioner paid for it. Equity and justice dictate that the injured party should be paid
the market value of the lot, otherwise, respondents Solid Homes, Inc. & Purita
Soliven would enrich themselves at the expense of herein lot owners when they
sell the same lot at the present market value. Surely, such a situation should not be
countenanced for to do so would be contrary to reason and therefore, unconscionable.
Over time, courts have recognized with almost pedantic adherence that what is
inconvenient or contrary to reason is not allowed in law. (Emphasis supplied.)
On this score, it is apt to mention that it is the intent of PD 957 to protect the buyer
against unscrupulous developers, operators and/or sellers who reneged on their
obligations.35 Thus, in order to achieve this purpose, equity and justice dictate that the
injured party should be afforded full recompense and as such, be allowed to recover the
prevailing market value of the undelivered lot which had been fully paid for.1wphi1
C. Moral and exemplary damages, attorneys fees and costs of suit
Furthermore, the Court finds that there is proper legal basis to accord moral and
exemplary damages and attorney's fees, including costs of suit. Verily, GPIs unjustified
failure to comply with its obligations as above-discussed caused Sps. Fajardo serious
anxiety, mental anguish and sleepless nights, thereby justifying the award of moral
damages. In the same vein, the payment of exemplary damages remains in order so as
to prevent similarly minded subdivision developers to commit the same transgression.
And finally, considering that Sps. Fajardo were constrained to engage the services of
counsel to file this suit, the award of attorneys fees must be likewise sustained.
D. Liability of individual Petitioners
However, the Court finds no basis to hold individual petitioners solidarily liable with
petitioner GPI for the payment of damages in favor of Sps. Fajardo since it was not
shown that they acted maliciously or dealt with the latter in bad faith. Settled 1s the rule
that in the absence of malice and bad faith, as in this case, officers of the corporation
cannot be made personally liable for liabilities of the corporation which, by legal fiction,
has a personality separate and distinct from its officers, stockholders, and members. 36
WHEREFORE, the assailed July 22, 2011 Decision and February 29, 2012 Resolution
of the Court of Appeals in CA-G.R. SP No. 112981 are hereby AFFIRMED WITH
MODIFICATION, absolving individual petitioners Jose C. Go, Evelyn Go, Lourdes G.
Ortiga, George Go, and Vicente Go from personal liability towards respondent-spouses
Eugenio and Angelina Fajardo.
SO ORDERED.

Footnotes
9

Sec. 20. Time of Completion. Every owner or developer shall construct and
provide the facilities, improvements, infrastructures and other forms of
development, including water supply and lighting facilities, which are offered and
indicated in the approved subdivision or condominium plans, brochures,
prospectus, printed matters, letters or in any form of advertisement, within one
year from the date of the issuance of the license for the subdivision or
condominium project or such other period of time as may be fixed by the
Authority.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188986

March 20, 2013

GALILEO A. MAGLASANG, doing business under the name GL Enterprises, Petitioner,

vs.
NORTHWESTERN INC., UNIVERSITY, Respondent.
DECISION
SERENO, CJ.:
Before this Court is a Rule 45 Petition, seeking a review of the 27 July 2009 Court of Appeals (CA)
Decision in CA-G.R. CV No. 88989, 1 which modified the Regional Trial Court (RTC) Decision of 8
January 2007 in Civil Case No. Q-04-53660. 2 The CA held that petitioner substantially breached its
contracts with respondent for the installation of an integrated bridge system (IBS).
The antecedent .facts are as follows:3
On 10 June 2004, respondent Northwestern University (Northwestern), an educational institution
offering maritime-related courses, engaged the services of a Quezon City-based firm, petitioner GL
Enterprises, to install a new IBS in Laoag City. The installation of an IBS, used as the students
training laboratory, was required by the Commission on Higher Education (CHED) before a school
could offer maritime transportation programs.4
Since its IBS was already obsolete, respondent required petitioner to supply and install specific
components in order to form the most modern IBS that would be acceptable to CHED and would be

compliant with the standards of the International Maritime Organization (IMO). For this purpose, the
parties executed two contracts.
The first contract partly reads:5
That in consideration of the payment herein mentioned to be made by the First Party (defendant),
the Second Party agrees to furnish, supply, install and integrate the most modern INTEGRATED
BRIDGE SYSTEM located at Northwestern University MOCK BOAT in accordance with the general
conditions, plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
INTEGRATED BRIDGE SYSTEM
A. 2-RADAR SYSTEM
B. OVERHEAD CONSOLE MONITORING SYSTEM
C. ENGINE TELEGRAPH SYSTEM
D. ENGINE CONTROL SYSTEM
E. WEATHER CONTROL SYSTEM
F. ECDIS SYSTEM
G. STEERING WHEEL SYSTEM
H. BRIDGE CONSOLE

TOTAL COST:
LESS:
OLD
EQUIPMENT TRADE-IN VALUE

Php 3,800,000.00
MARITIME
1,000,000.00

DISCOUNT

100,000.00

PROJECT COST (MATERIALS & INSTALLATION)

PhP 2,700,000.00

(Emphasis in the original)

The second contract essentially contains the same terms and conditions as follows: 6
That in consideration of the payment herein mentioned to be made by the First Party (defendant),
the Second Party agrees to furnish, supply, install & integrate the most modern INTEGRATED
BRIDGE SYSTEM located at Northwestern University MOCK BOAT in accordance with the general
conditions, plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:

1. ARPA RADAR SIMULATION ROOM

xxxx
2. GMDSS SIMULATION ROOM
xxxx
TOTAL
(Emphasis in the original)

COST:

PhP

270,000.00

Common to both contracts are the following provisions: (1) the IBS and its components must be
compliant with the IMO and CHED standard and with manuals for simulators/major equipment; (2)
the contracts may be terminated if one party commits a substantial breach of its undertaking; and (3)
any dispute under the agreement shall first be settled mutually between the parties, and if settlement
is not obtained, resort shall be sought in the courts of law.
Subsequently, Northwestern paid P1 million as down payment to GL Enterprises. The former then
assumed possession of Northwesterns old IBS as trade-in payment for its service. Thus, the
balance of the contract price remained at P1.97 million.7
Two months after the execution of the contracts, GL Enterprises technicians delivered various
materials to the project site. However, when they started installing the components, respondent
halted the operations. GL Enterprises then asked for an explanation. 8
Northwestern justified the work stoppage upon its finding that the delivered equipment were
substandard.9 It explained further that GL Enterprises violated the terms and conditions of the
contracts, since the delivered components (1) were old; (2) did not have instruction manuals and
warranty certificates; (3) contained indications of being reconditioned machines; and (4) did not meet
the IMO and CHED standards. Thus, Northwestern demanded compliance with the agreement and
suggested that GL Enterprises meet with the formers representatives to iron out the situation.
Instead of heeding this suggestion, GL Enterprises filed on 8 September 2004 a Complaint 10 for
breach of contract and prayed for the following sums: P1.97 million, representing the amount that it
would have earned, had Northwestern not stopped it from performing its tasks under the two
contracts; at least P100,000 as moral damages; at least P100,000 by way of exemplary damages; at
least P100,000 as attorneys fees and litigation expenses; and cost of suit. Petitioner alleged that
Northwestern breached the contracts by ordering the work stoppage and thus preventing the
installation of the materials for the IBS.
Northwestern denied the allegation. In its defense, it asserted that since the equipment delivered
were not in accordance with the specifications provided by the contracts, all succeeding works would
be futile and would entail unnecessary expenses. Hence, it prayed for the rescission of the contracts
and made a compulsory counterclaim for actual, moral, and exemplary damages, and attorneys
fees.
The RTC held both parties at fault. It found that Northwestern unduly halted the operations, even if
the contracts called for a completed project to be evaluated by the CHED. In turn, the breach
committed by GL Enterprises consisted of the delivery of substandard equipment that were not
compliant with IMO and CHED standards as required by the agreement.

Invoking the equitable principle that "each party must bear its own loss," the trial court treated the
contracts as impossible of performance without the fault of either party or as having been dissolved
by mutual consent. Consequently, it ordered mutual restitution, which would thereby restore the
parties to their original positions as follows:11
Accordingly, plaintiff is hereby ordered to restore to the defendant all the equipment obtained by
reason of the First Contract and refund the downpayment of P1,000,000.00 to the defendant; and for
the defendant to return to the plaintiff the equipment and materials it withheld by reason of the noncontinuance of the installation and integration project. In the event that restoration of the old
equipment taken from defendant's premises is no longer possible, plaintiff is hereby ordered to pay
the appraised value of defendant's old equipment atP1,000,000.00. Likewise, in the event that
restoration of the equipment and materials delivered by the plaintiff to the defendant is no longer
possible, defendant is hereby ordered to pay its appraised value at P1,027,480.00.
Moreover, plaintiff is likewise ordered to restore and return all the equipment obtained by reason of
the Second Contract, or if restoration or return is not possible, plaintiff is ordered to pay the value
thereof to the defendant.
SO ORDERED.
Aggrieved, both parties appealed to the CA. With each of them pointing a finger at the other party as
the violator of the contracts, the appellate court ultimately determined that GL Enterprises was the
one guilty of substantial breach and liable for attorneys fees.
The CA appreciated that since the parties essentially sought to have an IBS compliant with the
CHED and IMO standards, it was GL Enterprises delivery of defective equipment that materially and
substantially breached the contracts. Although the contracts contemplated a completed project to be
evaluated by CHED, Northwestern could not just sit idly by when it was apparent that the
components delivered were substandard.
The CA held that Northwestern only exercised ordinary prudence to prevent the inevitable rejection
of the IBS delivered by GL Enterprises. Likewise, the appellate court disregarded petitioners excuse
that the equipment delivered might not have been the components intended to be installed, for it
would be contrary to human experience to deliver equipment from Quezon City to Laoag City with no
intention to use it.
This time, applying Article 1191 of the Civil Code, the CA declared the rescission of the contracts. It
then proceeded to affirm the RTCs order of mutual restitution. Additionally, the appellate court
granted P50,000 to Northwestern by way of attorneys fees.
Before this Court, petitioner rehashes all the arguments he had raised in the courts a quo. 12 He
maintains his prayer for actual damages equivalent to the amount that he would have earned, had
respondent not stopped him from performing his tasks under the two contracts; moral and exemplary
damages; attorneys fees; litigation expenses; and cost of suit.
Hence, the pertinent issue to be resolved in the instant appeal is whether the CA gravely erred in (1)
finding substantial breach on the part of GL Enterprises; (2) refusing petitioners claims for damages,
and (3) awarding attorneys fees to Northwestern.
RULING OF THE COURT

Substantial Breaches of the Contracts

Although the RTC and the CA concurred in ordering restitution, the courts a quo, however, differed
on the basis thereof. The RTC applied the equitable principle of mutual fault, while the CA applied
Article 1191 on rescission.
The power to rescind the obligations of the injured party is implied in reciprocal obligations, such as
in this case. On this score, the CA correctly applied Article 1191, which provides thus:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
The two contracts require no less than substantial breach before they can be rescinded. Since the
contracts do not provide for a definition of substantial breach that would terminate the rights and
obligations of the parties, we apply the definition found in our jurisprudence.
This Court defined in Cannu v. Galang13 that substantial, unlike slight or casual breaches of contract,
are fundamental breaches that defeat the object of the parties in entering into an agreement, since
the law is not concerned with trifles.14
The question of whether a breach of contract is substantial depends upon the attending
circumstances.15
In the case at bar, the parties explicitly agreed that the materials to be delivered must be compliant
with the CHED and IMO standards and must be complete with manuals. Aside from these clear
provisions in the contracts, the courts a quo similarly found that the intent of the parties was to
replace the old IBS in order to obtain CHED accreditation for Northwesterns maritime-related
courses.
According to CHED Memorandum Order (CMO) No. 10, Series of 1999, as amended by CMO No.
13, Series of 2005, any simulator used for simulator-based training shall be capable of simulating the
operating capabilities of the shipboard equipment concerned. The simulation must be achieved at a
level of physical realism appropriate for training objectives; include the capabilities, limitations and
possible errors of such equipment; and provide an interface through which a trainee can interact with
the equipment, and the simulated environment.
Given these conditions, it was thus incumbent upon GL Enterprises to supply the components that
would create an IBS that would effectively facilitate the learning of the students.
However, GL Enterprises miserably failed in meeting its responsibility. As contained in the findings of
the CA and the RTC, petitioner supplied substandard equipment when it delivered components that
(1) were old; (2) did not have instruction manuals and warranty certificates; (3) bore indications of
being reconditioned machines; and, all told, (4) might not have met the IMO and CHED standards.

Highlighting the defects of the delivered materials, the CA quoted respondents testimonial evidence
as follows:16
Q: In particular which of these equipment of CHED requirements were not complied with?
A: The Radar Ma'am, because they delivered only 10-inch PPI, that is the monitor of the Radar. That
is 16-inch and the gyrocompass with two (2) repeaters and the history card. The gyrocompass there is no marker, there is no model, there is no serial number, no gimbal, no gyroscope and a bulb
to work it properly to point the true North because it is very important to the Cadets to learn where is
the true North being indicated by the Master Gyrocompass.
xxxx
Q: Mr. Witness, one of the defects you noted down in this history card is that the master
gyrocompass had no gimbals, gyroscope and balls and was replaced with an ordinary electric motor.
So what is the Implication of this?
A: Because those gimbals, balls and the gyroscope it let the gyrocompass to work so it will point the
true North but they being replaced with the ordinary motor used for toys so it will not indicate the true
North.
Q: So what happens if it will not indicate the true North?
A: It is very big problem for my cadets because they must, to learn into school where is the true
North and what is that equipment to be used on board.
Q: One of the defects is that the steering wheel was that of an ordinary automobile. And what is the
implication of this?
A: Because. on board Maam, we are using the real steering wheel and the cadets will be implicated
if they will notice that the ship have the same steering wheel as the car so it is not advisable for
them.
Q:. And another one is that the gyrocompass repeater was only refurbished and it has no serial
number. What is wrong with that?
A: It should be original Maam because this gyro repeater, it must to repeat also the true North being
indicated by the Master Gyro Compass so it will not work properly, I dont know it will work properly.
(Underscoring supplied)
Evidently, the materials delivered were less likely to pass the CHED standards, because the
navigation system to be installed might not accurately point to the true north; and the steering wheel
delivered was one that came from an automobile, instead of one used in ships. Logically, by no
stretch of the imagination could these form part of the most modern IBS compliant with the IMO and
CHED standards.
Even in the instant appeal, GL Enterprises does not refute that the equipment it delivered was
substandard. However, it reiterates its rejected excuse that Northwestern should have made an
assessment only after the completion of the IBS. 17 Thus, petitioner stresses that it was Northwestern
that breached the agreement when the latter halted the installation of the materials for the IBS, even
if the parties had contemplated a completed project to be evaluated by CHED. However, as aptly

considered by the CA, respondent could not just "sit still and wait for such day that its accreditation
may not be granted by CHED due to the apparent substandard equipment installed in the bridge
system."18 The appellate court correctly emphasized that, by that time, both parties would have
incurred more costs for nothing.
Additionally, GL Enterprises reasons that, based on the contracts, the materials that were hauled all
the way from Quezon City to Laoag City under the custody of the four designated installers might not
have been the components to be used. 19 Without belaboring the point, we affirm the conclusion of
the CA and the RTC that the excuse is untenable for being contrary to human experience. 20
Given that petitioner, without justification, supplied substandard components for the new IBS, it is
thus clear that its violation was not merely incidental, but directly related to the essence of the
agreement pertaining to the installation of an IBS compliant with the CHED and IMO standards.
Consequently, the CA correctly found substantial breach on the part of petitioner.
In contrast, Northwesterns breach, if any, was characterized by the appellate court as slight or
casual.21 By way of negative definition, a breach is considered casual if it does not fundamentally
defeat the object of the parties in entering into an agreement. Furthermore, for there to be a breach
to begin with, there must be a "failure, without legal excuse, to perform any promise which forms the
whole or part of the contract."22
Here, as discussed, the stoppage of the installation was justified. The action of Northwestern
constituted a legal excuse to prevent the highly possible rejection of the IBS. Hence, just as the CA
concluded, we find that Northwestern exercised ordinary prudence to avert a possible wastage of
time, effort, resources and also of theP2.9 million representing the value of the new IBS.
Actual Damages, Moral and Exemplary Damages, and Attorney's Fees
As between the parties, substantial breach can clearly be attributed to GL
Enterprises. Consequently, it is not the injured party who can claim damages under Article 1170 of
the Civil Code. For this reason, we concur in the result of the CA's Decision denying petitioner actual
damages in the form of lost earnings, as well as moral and exemplary damages.
1wphi1

With respect to attorney's fees, Article 2208 of the Civil Code allows the grant thereof when the court
deems it just and equitable that attorney's fees should be recovered. An award of attorney's fees is
proper if one was forced to litigate and incur expenses to protect one's rights and interest by reason
of an unjustified act or omission on the part of the party from whom the award is sought. 23
Since we affirm the CA's finding that it was not Northwestern but GL Enterprises that breached the
contracts without justification, it follows that the appellate court correctly awarded attorneys fees to
respondent. Notably, this litigation could have altogether been avoided if petitioner heeded
respondent's suggestion to amicably settle; or, better yet, if in the first place petitioner delivered the
right materials as required by the contracts.
IN VIEW THEREOF, the assailed 27 July 2009 Decision of the Court of Appeals in CA-G.R. CV No.
88989 is hereby AFFIRMED.
SO ORDERED.

SECOND DIVISION
G.R. No. 189145, December 04, 2013
OPTIMUM DEVELOPMENT BANK, Petitioner, v. SPOUSES BENIGNO V.
JOVELLANOS AND LOURDES R. JOVELLANOS, Respondents.
DECISION
PERLASBERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 29, 2009
and Resolution3dated August 10, 2009 of the Court of Appeals (CA) in CAG.R. SP No.
104487 which reversed the Decision 4 dated December 27, 2007 of the Regional Trial
Court of Caloocan City, Branch 128 (RTC) in Civil Case No. C21867 that, in turn,
affirmed the Decision5 dated June 8, 2007 of the Metropolitan Trial Court, Branch 53 of
that same city (MeTC) in Civil Case No. 0628830 ordering respondentsspouses
Benigno and Lourdes Jovellanos (Sps. Jovellanos) to, inter alia, vacate the premises of
the property subject of this case.
The Facts
On April 26, 2005, Sps. Jovellanos entered into a Contract to Sell 6 with Palmera Homes,
Inc. (Palmera Homes) for the purchase of a residential house and lot situated in Block 3,
Lot 14, Villa Alegria Subdivision, Caloocan City (subject property) for a total
consideration of P1,015,000.00. Pursuant to the contract, Sps. Jovellanos took
possession of the subject property upon a down payment of P91,500.00, undertaking to
pay the remaining balance of the contract price in equal monthly installments of
P13,107.00 for a period of 10 years starting June 12, 2005. 7
\On August 22, 2006, Palmera Homes assigned all its rights, title and interest in the
Contract to Sell in favor of petitioner Optimum Development Bank (Optimum) through a
Deed of Assignment of even date.8
On April 10, 2006, Optimum issued a Notice of Delinquency and Cancellation of
Contract to Sell9 for Sps. Jovellanoss failure to pay their monthly installments despite
several written and verbal notices. 10 In a final Demand Letter dated May 25,
2006,11 Optimum required Sps. Jovellanos to vacate and deliver possession of the
subject property within seven (7) days which, however, remained unheeded. Hence,
Optimum filed, on November 3, 2006, a complaint for unlawful detainer 12 before the
MeTC, docketed as Civil Case No. 0628830.
Despite having been served with summons, together with a copy of the
complaint,13 Sps. Jovellanos failed to file their answer within the prescribed
reglementary period, thus prompting Optimum to move for the rendition of

judgment.14 Thereafter, Sps. Jovellanos filed their opposition with motion to admit
answer, questioning the jurisdiction of the court, among others. Further, they filed a
Motion to Reopen and Set the Case for Preliminary Conference, which the MeTC
denied.
The MeTC Ruling
In a Decision15 dated June 8, 2007, the MeTC ordered Sps. Jovellanos to vacate the
subject property and pay Optimum reasonable compensation in the amount of
P5,000.00 for its use and occupation until possession has been surrendered. It held that
Sps. Jovellanoss possession of the said property was by virtue of a Contract to Sell
which had already been cancelled for nonpayment of the stipulated monthly
installment payments. As such, their rights of possession over the subject property
necessarily terminated or expired and hence, their continued possession thereof
constitute[d] unlawful detainer.16
Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that Optimum counsel
made them believe that a compromise agreement was being prepared, thus their
decision not to engage the services of counsel and their concomitant failure to file an
answer.17 They also assailed the jurisdiction of the MeTC, claiming that the case did not
merely involve the issue of physical possession but rather, questions arising from their
rights under a contract to sell which is a matter that is incapable of pecuniary estimation
and, therefore, within the jurisdiction of the RTC. 18
The RTC Ruling
In a Decision19 dated December 27, 2007, the RTC affirmed the MeTCs judgment,
holding that the latter did not err in refusing to admit Sps. Jovellanoss belatedly filed
answer considering the mandatory period for its filing. It also affirmed the MeTCs
finding that the action does not involve the rights of the respective parties under the
contract but merely the recovery of possession by Optimum of the subject property after
the spouses default.20
Aggrieved, Sps. Jovellanos moved for reconsideration which was, however, denied in a
Resolution21dated June 27, 2008. Hence, the petition before the CA reiterating that the
RTC erred in affirming the decision of the MeTC with respect to: (a) the nonadmission
of their answer to the complaint; and (b) the jurisdiction of the MeTC over the complaint
for unlawful detainer.22
The CA Ruling
In an Amended Decision23 dated May 29, 2009, the CA reversed and set aside the
RTCs decision, ruling to dismiss the complaint for lack of jurisdiction. It found that the
controversy does not only involve the issue of possession but also the validity of the
cancellation of the Contract to Sell and the determination of the rights of the parties
thereunder as well as the governing law, among others, Republic Act No. (RA)
6552.24 Accordingly, it concluded that the subject matter is one which is incapable of

pecuniary estimation and thus, within the jurisdiction of the RTC. 25cralawred
Undaunted, Optimum moved for reconsideration which was denied in a
Resolution26 dated August 10, 2009. Hence, the instant petition, submitting that the case
is one for unlawful detainer, which falls within the exclusive original jurisdiction of the
municipal trial courts, and not a case incapable of pecuniary estimation cognizable
solely by the regional trial courts.
The Courts Ruling
The petition is meritorious.
What is determinative of the nature of the action and the court with jurisdiction over it
are the allegations in the complaint and the character of the relief sought, not the
defenses set up in an answer.27 A complaint sufficiently alleges a cause of action for
unlawful detainer if it recites that: (a) initially, possession of the property by the
defendant was by contract with or by tolerance of the plaintiff; (b) eventually, such
possession became illegal upon notice by plaintiff to defendant of the termination of the
latters right of possession; (c) thereafter, defendant remained in possession of the
property and deprived plaintiff of the enjoyment thereof; and (d) within one year from the
last demand on defendant to vacate the property, plaintiff instituted the complaint for
ejectment.28 Corollarily, the only issue to be resolved in an unlawful detainer case is
physical or material possession of the property involved, independent of any claim of
ownership by any of the parties involved.29
In its complaint, Optimum alleged that it was by virtue of the April 26, 2005 Contract to
Sell that Sps. Jovellanos were allowed to take possession of the subject property.
However, since the latter failed to pay the stipulated monthly installments,
notwithstanding several written and verbal notices made upon them, it cancelled the
said contract as per the Notice of Delinquency and Cancellation dated April 10, 2006.
When Sps. Jovellanos refused to vacate the subject property despite repeated
demands, Optimum instituted the present action for unlawful detainer on November 3,
2006, or within one year from the final demand made on May 25, 2006.
While the RTC upheld the MeTCs ruling in favor of Optimum, the CA, on the other
hand, declared that the MeTC had no jurisdiction over the complaint for unlawful
detainer, reasoning that the case involves a matter which is incapable of pecuniary
estimation i.e., the validity of the cancellation of the Contract to Sell and the
determination of the rights of the parties under the contract and law and hence, within
the jurisdiction of the RTC.
The Court disagrees.
Metropolitan Trial Courts are conditionally vested with authority to resolve the
question of ownership raised as an incident in an ejectment case where the
determination is essential to a complete adjudication of the issue of
possession.30 Concomitant to the ejectment courts authority to look into the claim of

ownership for purposes of resolving the issue of possession is its authority to

interpret the contract or agreement upon which the claim is premised. Thus, in the case
of Oronce v. CA,31 wherein the litigants opposing claims for possession was hinged on
whether their written agreement reflected the intention to enter into a sale or merely an
equitable mortgage, the Court affirmed the propriety of the ejectment courts
examination of the terms of the agreement in question by holding that,
becausemetropolitan trial courts are authorized to look into the ownership of the
property in controversy in ejectment cases, it behooved MTC Branch 41 to examine
the bases for petitioners claim of ownership that entailed interpretation of the Deed of
Sale with Assumption of Mortgage. 32 Also, in Union Bank of the Philippines v. Maunlad
Homes, Inc.33 (Union Bank), citing Sps. Refugia v. CA,34 the Court declared that MeTCs
have authority to interpret contracts in unlawful detainer cases, viz.:35
The authority granted to the MeTC to preliminarily resolve the issue of ownership
to determine the issue of possession ultimately allows it to interpret and enforce
the contract or agreement between the plaintiff and the defendant.To deny the
MeTC jurisdiction over a complaint merely because the issue of possession requires the
interpretation of a contract will effectively rule out unlawful detainer as a remedy. As
stated, in an action for unlawful detainer, the defendants right to possess the property
may be by virtue of a contract, express or implied; corollarily, the termination of the
defendants right to possess would be governed by the terms of the same
contract.Interpretation of the contract between the plaintiff and the defendant is
inevitable because it is the contract that initially granted the defendant the right
to possess the property; it is this same contract that the plaintiff subsequently
claims was violated or extinguished, terminating the defendants right to
possess. We ruled in Sps. Refugia v. CA that where the resolution of the issue of
possession hinges on a determination of the validity and interpretation of the document
of title or any other contract on which the claim of possession is premised, the inferior
court may likewise pass upon these issues.
The MeTCs ruling on the rights of the parties based on its interpretation of their contract
is, of course, not conclusive, but is merely provisional and is binding only with
respect to the issue of possession. (Emphases supplied; citations omitted)
In the case at bar, the unlawful detainer suit filed by Optimum against Sps. Jovellanos
for illegally withholding possession of the subject property is similarly premised upon the
cancellation or termination of the Contract to Sell between them. Indeed, it was well
within the jurisdiction of the MeTC to consider the terms of the parties agreement in
order to ultimately determine the factual bases of Optimums possessory claims over
the subject property. Proceeding accordingly, the MeTC held that Sps. Jovellanoss
nonpayment of the installments due had rendered the Contract to Sell without force
and effect, thus depriving the latter of their right to possess the property subject of said
contract.36 The foregoing disposition aptly squares with existing jurisprudence. As the
Court similarly held in the Union Bank case, the sellers cancellation of the contract to
sell necessarily extinguished the buyers right of possession over the property that was
the subject of the terminated agreement. 37 Verily, in a contract to sell, the prospective

seller binds himself to sell the property subject of the agreement exclusively to the
prospective buyer upon fulfillment of the condition agreed upon which is the full
payment of the purchase price but reserving to himself the ownership of the subject
property despite delivery thereof to the prospective buyer.38 The full payment of the
purchase price in a contract to sell is a suspensive condition, the nonfulfillment of
which prevents the prospective sellers obligation to convey title from becoming
effective,39 as in this case.
Further, it is significant to note that given that the Contract to Sell in this case is one
which has for its object real property to be sold on an installment basis, the said contract
is especially governed by and thus, must be examined under the provisions of RA
6552, or the Realty Installment Buyer Protection Act, which provides for the rights of
the buyer in case of his default in the payment of succeeding installments. Breaking
down the provisions of the law, the Court, in the case of Rillo v. CA,40 explained the
mechanics of cancellation under RA 6552 which are based mainly on the amount of
installments already paid by the buyer under the subject contract, to wit: 41
Given the nature of the contract of the parties, the respondent court correctly applied
Republic Act No. 6552. Known as the Maceda Law, R.A. No. 6552 recognizes in
conditional sales of all kinds of real estate (industrial, commercial, residential) the right
of the seller to cancel the contract upon nonpayment of an installment by the buyer,
which is simply an event that prevents the obligation of the vendor to convey title from
acquiring binding force. It also provides the right of the buyer on installments in case he
defaults in the payment of succeeding installments, viz.:
(1) Where he has paid at least two years of installments,
(a) To pay, without additional interest, the unpaid installments due within the total grace
period earned by him, which is hereby fixed at the rate of one month grace period for
every one year of installment payments made: Provided, That this right shall be
exercised by the buyer only once in every five years of the life of the contract and its
extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender
value of the payments on the property equivalent to fifty per cent of the total payments
made and, after five years of installments, an additional five per cent every year but not
to exceed ninety per cent of the total payments made: Provided, That the actual
cancellation of the contract shall take place after cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash surrender
value to the buyer.
Down payments, deposits or options on the contract shall be included in the
computation of the total number of installments made.
(2) Where he has paid less than two years in installments,

Sec. 4. x x x the seller shall give the buyer a grace period of not less than sixty
days from the date the installment became due. If the buyer fails to pay the
installments due at the expiration of the grace period, the seller may cancel the
contract after thirty days from receipt by the buyer of the notice of cancellation or
the demand for rescission of the contract by a notarial act. (Emphasis and
underscoring supplied)
Pertinently, since Sps. Jovellanos failed to pay their stipulated monthly installments as
found by the MeTC, the Court examines Optimums compliance with Section 4 of RA
6552, as abovequoted and highlighted, which is the provision applicable to buyers who
have paid less than two (2) yearsworth of installments. Essentially, the said provision
provides for three (3) requisites before the seller may actually cancel the subject
contract: first, the seller shall give the buyer a 60day grace period to be reckoned
from the date the installment became due; second, the seller must give the buyer
a notice of cancellation/demand for rescission by notarial act if the buyer fails to
pay the installments due at the expiration of the said grace period; and third, the seller
may actually cancel the contract only after thirty (30) days from the buyers receipt of
the said notice of cancellation/demand for rescission by notarial act.
In the present case, the 60day grace period automatically operated 42 in favor of the
buyers, Sps. Jovellanos, and took effect from the time that the maturity dates of the
installment payments lapsed. With the said grace period having expired bereft of any
installment payment on the part of Sps. Jovellanos, 43Optimum then issued a notarized
Notice of Delinquency and Cancellation of Contract on April 10, 2006. Finally, in
proceeding with the actual cancellation of the contract to sell, Optimum gave Sps.
Jovellanos an additional thirty (30) days within which to settle their arrears and reinstate
the contract, or sell or assign their rights to another.44 It was only after the expiration of
the thirty day (30) period did Optimum treat the contract to sell as effectively cancelled
making as it did a final demand upon Sps. Jovellanos to vacate the subject property
only on May 25, 2006.
Thus, based on the foregoing, the Court finds that there was a valid and effective
cancellation of the Contract to Sell in accordance with Section 4 of RA 6552 and since
Sps. Jovellanos had already lost their right to retain possession of the subject property
as a consequence of such cancellation, their refusal to vacate and turn over possession
to Optimum makes out a valid case for unlawful detainer as properly adjudged by the
MeTC.
WHEREFORE, the petition is GRANTED. The Decision dated May 29, 2009 and
Resolution dated August 10, 2009 of the Court of Appeals in CAG.R. SP No. 104487
are SET ASIDE. The Decision dated June 8, 2007 of the Metropolitan Trial Court,
Branch 53, Caloocan City in Civil Case No. 0628830 is hereby REINSTATED.
SO ORDERED.

Footnote:
(2) Exclusive original jurisdiction over cases of forcible entry and unlawful detainer:
Provided, That when, in such cases, the defendant raises the questions of ownership in
his pleadings and the question of possession cannot be resolved without deciding the
issue of ownership, the issue of ownership shall be resolved only to determine the issue
of
possession;
x
x
x
42

The automatic operation of the aforesaid grace period in favor of Sps. Jovellanos is in
accord with Bricktown Devt. Corp. v. Amor Tierra Devt. Corp. (G.R. No. 112182,
December 12, 1994, 239 SCRA 126, 131132) wherein the Court held that:
A grace period is a right, not an obligation, of the debtor. When unconditionally
conferred, such as in this case, the grace period is effective without further need
of demand either calling for the payment of the obligation or for honoring the
right. The grace period must not be likened to an obligation, the nonpayment of which,
under Article 1169 of the Civil Code, would generally still require judicial or extrajudicial
demand
before
default
can
be
said
to
arise.
Verily, in the case at bench, the sixtyday grace period under the terms of the
contracts to sell became ipso facto operative from the moment the due payments
were not met at their stated maturities. On this score, the provisions of Article 1169 of
the Civil Code would find no relevance whatsoever. (Emphases supplied; citations
omitted)
43

Records disclose that Sps. Jovellanos had only paid the P91,500.00 downpayment
and not the equal monthly installments due on the Contract to Sell for the remaining
balance, the first of which started on June 12, 2005. (See Contract to Sell, rollo, p. 45;
see CA Decision, id. at 172; see RTC Decision, id. at 108; see MeTC Decision, id. at
7374.) Records also disclose that Sps. Jovellanos did not, in any of its pleadings
attached thereto, claim that they have paid any monthly installment due on the Contract
to Sell outside from the P91,500.00 downpayment. (See DefendantsAppellants
Appeal Memorandum dated August 1, 2007, id. at 7778; Memorandum for Petitioners
dated December 21, 2008, id. at 151152.)
44

Section 5 of RA 6552 states:

Sec. 5. Under Sections 3 and 4, the buyer shall have the right to sell his rights or assign
the same to another person or to reinstate the contract by updating the account during
the grace period and before actual cancellation of the contract. The deed of sale or
assignment shall be done by notarial act.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 185798

January 13, 2014

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC., Petitioners,

vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents.
DECISION
PEREZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules .of
Civil Procedure assailing the Decision1 of the Court of Appeals in CA-G.R. SP No.
100450 which affirmed the Decision of the Office of the President in O.P. Case No. 06F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park
Place Tower while co-petitioner Fil-Estate Network, Inc. is its authorized marketing
agent. Respondent Spouses Conrado and Maria Victoria Ronquillo purchased from
petitioners an 82-square meter condominium unit at Central Park Place Tower in
Mandaluyong City for a pre-selling contract price of FIVE MILLION ONE HUNDRED
SEVENTY-FOUR THOUSAND ONLY (P5,174,000.00). On 29 August 1997,
respondents executed and signed a Reservation Application Agreement wherein they
deposited P200,000.00 as reservation fee. As agreed upon, respondents paid the full
downpayment of P1,552,200.00 and had been paying the P63,363.33 monthly
amortizations until September 1998.
Upon learning that construction works had stopped, respondents likewise stopped
paying their monthly amortization. Claiming to have paid a total of P2,198,949.96 to
petitioners, respondents through two (2) successive letters, demanded a full refund of
their payment with interest. When their demands went unheeded, respondents were
constrained to file a Complaint for Refund and Damages before the Housing and Land
Use Regulatory Board (HLURB). Respondents prayed for reimbursement/refund
of P2,198,949.96 representing the total amortization payments, P200,000.00 as and by
way of moral damages, attorneys fees and other litigation expenses.

On 21 October 2000, the HLURB issued an Order of Default against petitioners for
failing to file their Answer within the reglementary period despite service of summons. 2
Petitioners filed a motion to lift order of default and attached their position paper
attributing the delay in construction to the 1997 Asian financial crisis. Petitioners denied
committing fraud or misrepresentation which could entitle respondents to an award of
moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered
judgment ordering petitioners to jointly and severally pay respondents the following
amount:
a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT THOUSAND
NINE HUNDRED FORTY NINE PESOS & 96/100 (P2,198,949.96) with interest
thereon at twelve percent (12%) per annum to be computed from the time of the
complainants demand for refund on October 08, 1998 until fully paid,
b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as moral damages,
c) FIFTY THOUSAND PESOS (P50,000.00) as attorneys fees,
d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS (P10,000.00) payable to
this Office fifteen (15) days upon receipt of this decision, for violation of Section
20 in relation to Section 38 of PD 957. 3
The Arbiter considered petitioners failure to develop the condominium project as a
substantial breach of their obligation which entitles respondents to seek for rescission
with payment of damages. The Arbiter also stated that mere economic hardship is not
an excuse for contractual and legal delay.
Petitioners appealed the Arbiters Decision through a petition for review pursuant to
Rule XII of the 1996 Rules of Procedure of HLURB. On 17 February 2005, the Board of
Commissioners of the HLURB denied 4 the petition and affirmed the Arbiters Decision.
The HLURB reiterated that the depreciation of the peso as a result of the Asian financial
crisis is not a fortuitous event which will exempt petitioners from the performance of
their contractual obligation.
Petitioners filed a motion for reconsideration but it was denied 5 on 8 May 2006.
Thereafter, petitioners filed a Notice of Appeal with the Office of the President. On 18
April 2007, petitioners appeal was dismissed 6 by the Office of the President for lack of
merit. Petitioners moved for a reconsideration but their motion was denied 7 on 26 July
2007.

Petitioners sought relief from the Court of Appeals through a petition for review under
Rule 43 containing the same arguments they raised before the HLURB and the Office of
the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE
DECISION OF THE HONORABLE HOUSING AND LAND USE REGULATORY BOARD
AND ORDERING PETITIONERS-APPELLANTS TO REFUND RESPONDENTSAPPELLEES THE SUM OF P2,198,949.96 WITH 12% INTEREST FROM 8 OCTOBER
1998 UNTIL FULLY PAID, CONSIDERING THAT THE COMPLAINT STATES NO
CAUSE OF ACTION AGAINST PETITIONERS-APPELLANTS.
II.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE
DECISION OF THE OFFICE BELOW ORDERING PETITIONERS-APPELLANTS TO
PAY RESPONDENTS-APPELLEES THE SUM OF P100,000.00 AS MORAL DAMAGES
AND P50,000.00 AS ATTORNEYS FEES CONSIDERING THE ABSENCE OF ANY
FACTUAL OR LEGAL BASIS THEREFOR.
III.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE
DECISION OF THE HOUSING AND LAND USE REGULATORY BOARD ORDERING
PETITIONERS-APPELLANTS TO PAY P10,000.00 AS ADMINISTRATIVE FINE IN THE
ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH FINDING.8
On 30 July 2008, the Court of Appeals denied the petition for review for lack of merit.
The appellate court echoed the HLURB Arbiters ruling that "a buyer for a
condominium/subdivision unit/lot unit which has not been developed in accordance with
the approved condominium/subdivision plan within the time limit for complying with said
developmental requirement may opt for reimbursement under Section 20 in relation to
Section 23 of Presidential Decree (P.D.) 957 x x x." 9 The appellate court supported the
HLURB Arbiters conclusion, which was affirmed by the HLURB Board of Commission
and the Office of the President, that petitioners failure to develop the condominium
project is tantamount to a substantial breach which warrants a refund of the total
amount paid, including interest. The appellate court pointed out that petitioners failed to
prove that the Asian financial crisis constitutes a fortuitous event which could excuse
them from the performance of their contractual and statutory obligations. The appellate
court also affirmed the award of moral damages in light of petitioners unjustified refusal
to satisfy respondents claim and the legality of the administrative fine, as provided in
Section 20 of Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a Resolution 10 dated 11
December 2008 by the Court of Appeals.

Aggrieved, petitioners filed the instant petition advancing substantially the same
grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO THE
DECISION OF THE OFFICE OF THE PRESIDENT WHICH SUSTAINED RESCISSION
AND REFUND IN FAVOR OF THE RESPONDENTS DESPITE LACK OF CAUSE OF
ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE LIABLE
UNDER THE PREMISES, THE HONORABLE COURT OF APPEALS ERRED WHEN IT
AFFIRMED THE HUGE AMOUNT OF INTEREST OF TWELVE PERCENT (12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED IN
TOTO THE DECISION OF THE OFFICE OF THE PRESIDENT INCLUDING THE
PAYMENT OF P100,000.00 AS MORAL DAMAGES, P50,000.00 AS ATTORNEYS
FEES AND P10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY
FACTUAL OR LEGAL BASIS TO SUPPORT SUCH CONCLUSIONS.11
Petitioners insist that the complaint states no cause of action because they allegedly
have not committed any act of misrepresentation amounting to bad faith which could
entitle respondents to a refund. Petitioners claim that there was a mere delay in the
completion of the project and that they only resorted to "suspension and reformatting as
a testament to their commitment to their buyers." Petitioners attribute the delay to the
1997 Asian financial crisis that befell the real estate industry. Invoking Article 1174 of the
New Civil Code, petitioners maintain that they cannot be held liable for a fortuitous
event.
Petitioners contest the payment of a huge amount of interest on account of suspension
of development on a project. They liken their situation to a bank which this Court, in
Overseas Bank v. Court of Appeals, 12 adjudged as not liable to pay interest on deposits
during the period that its operations are ordered suspended by the Monetary Board of
the Central Bank.
Lastly, petitioners aver that they should not be ordered to pay moral damages because
they never intended to cause delay, and again blamed the Asian economic crisis as the
direct, proximate and only cause of their failure to complete the project. Petitioners
submit that moral damages should not be awarded unless so stipulated except under
the instances enumerated in Article 2208 of the New Civil Code. Lastly, petitioners
refuse to pay the administrative fine because the delay in the project was caused not by

their own deceptive intent to defraud their buyers, but due to unforeseen circumstances
beyond their control.
Three issues are presented for our resolution: 1) whether or not the Asian financial crisis
constitute a fortuitous event which would justify delay by petitioners in the performance
of their contractual obligation; 2) assuming that petitioners are liable, whether or not
12% interest was correctly imposed on the judgment award, and 3) whether the award
of moral damages, attorneys fees and administrative fine was proper.
It is apparent that these issues were repeatedly raised by petitioners in all the legal fora.
The rulings were consistent that first, the Asian financial crisis is not a fortuitous event
that would excuse petitioners from performing their contractual obligation; second, as a
result of the breach committed by petitioners, respondents are entitled to rescind the
contract and to be refunded the amount of amortizations paid including interest and
damages; and third, petitioners are likewise obligated to pay attorneys fees and the
administrative fine.
This petition did not present any justification for us to deviate from the rulings of the
HLURB, the Office of the President and the Court of Appeals.
Indeed, the non-performance of petitioners obligation entitles respondents to rescission
under Article 1191 of the New Civil Code which states:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale
of condominiums, which provides:
Section 23. Non-Forfeiture of Payments.1wphi1 No installment payment made by a
buyer in a subdivision or condominium project for the lot or unit he contracted to buy
shall be forfeited in favor of the owner or developer when the buyer, after due notice to
the owner or developer, desists from further payment due to the failure of the owner or
developer to develop the subdivision or condominium project according to the approved
plans and within the time limit for complying with the same. Such buyer may, at his
option, be reimbursed the total amount paid including amortization interests but
excluding delinquency interests, with interest thereon at the legal rate. (Emphasis
supplied).
Conformably with these provisions of law, respondents are entitled to rescind the
contract and demand reimbursement for the payments they had made to petitioners.

Notably, the issues had already been settled by the Court in the case of Fil-Estate
Properties, Inc. v. Spouses Go 13 promulgated on 17 August 2007, where the Court
stated that the Asian financial crisis is not an instance of caso fortuito. Bearing the same
factual milieu as the instant case, G.R. No. 165164 involves the same company, FilEstate, albeit about a different condominium property. The company likewise reneged
on its obligation to respondents therein by failing to develop the condominium project
despite substantial payment of the contract price. Fil-Estate advanced the same
argument that the 1997 Asian financial crisis is a fortuitous event which justifies the
delay of the construction project. First off, the Court classified the issue as a question of
fact which may not be raised in a petition for review considering that there was no
variance in the factual findings of the HLURB, the Office of the President and the Court
of Appeals. Second, the Court cited the previous rulings of Asian Construction and
Development Corporation v. Philippine Commercial International Bank 14 and Mondragon
Leisure and Resorts Corporation v. Court of Appeals 15 holding that the 1997 Asian
financial crisis did not constitute a valid justification to renege on obligations. The Court
expounded:
Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and
beyond the control of a business corporation. It is unfortunate that petitioner apparently
met with considerable difficulty e.g. increase cost of materials and labor, even before
the scheduled commencement of its real estate project as early as 1995. However, a
real estate enterprise engaged in the pre-selling of condominium units is concededly a
master in projections on commodities and currency movements and business risks. The
fluctuating movement of the Philippine peso in the foreign exchange market is an
everyday occurrence, and fluctuations in currency exchange rates happen everyday,
thus, not an instance of caso fortuito. 16
The aforementioned decision becomes a precedent to future cases in which the facts
are substantially the same, as in this case. The principle of stare decisis, which means
adherence to judicial precedents, applies.
In said case, the Court ordered the refund of the total amortizations paid by respondents
plus 6% legal interest computed from the date of demand. The Court also awarded
attorneys fees. We follow that ruling in the case before us.
The resulting modification of the award of legal interest is, also, in line with our recent
ruling in Nacar v. Gallery Frames, 17 embodying the amendment introduced by the
Bangko Sentral ng Pilipinas Monetary Board in BSP-MB Circular No. 799 which pegged
the interest rate at 6% regardless of the source of obligation.
We likewise affirm the award of attorneys fees because respondents were forced to
litigate for 14 years and incur expenses to protect their rights and interest by reason of
the unjustified act on the part of petitioners. 18 The imposition of P10,000.00
administrative fine is correct pursuant to Section 38 of Presidential Decree No. 957
which reads:

Section 38. Administrative Fines. The Authority may prescribe and impose fines not
exceeding ten thousand pesos for violations of the provisions of this Decree or of any
rule or regulation thereunder. Fines shall be payable to the Authority and enforceable
through writs of execution in accordance with the provisions of the Rules of Court.
Finally, we sustain the award of moral damages. In order that moral damages may be
awarded in breach of contract cases, the defendant must have acted in bad faith, must
be found guilty of gross negligence amounting to bad faith, or must have acted in
wanton disregard of contractual obligations. 19 The Arbiter found petitioners to have
acted in bad faith when they breached their contract, when they failed to address
respondents grievances and when they adamantly refused to refund respondents'
payment.
In fine, we find no reversible error on the merits in the impugned Court of Appeals'
Decision and Resolution.
WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is
AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT
(6%) on the amount due computed from the time of respondents' demand for refund on
8 October 1998.
SO ORDERED.

THIRD DIVISION
G.R. No. 179518, November 11, 2014
BANK OF THE PHILIPPINE ISLANDS, Petitioner, v. VICENTE VICTOR C. SANCHEZ,
HEIRS OF KENNETH NEREO SANCHEZ, REPRESENTED BY FELISA GARCIA YAP,
AND HEIRS OF IMELDA C. VDA. DE SANCHEZ, REPRESENTED BY VICENTE
VICTOR C. SANCHEZ, Respondents.
DECISION
VELASCO JR., J.:
The Case
These are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of
Court assailing the November 6, 2006 Decision 1 and August 31, 2007 Resolution of the
Court of Appeals in CA-G.R. No. 83236 entitled Vicente Victor C. Sanchez, Heirs of

Kenneth Nereo Sanchez represented by Felisa Garcia Yap, and Heirs of Imelda C. Vda.
de Sanchez represented by Vicente Victor C. Sanchez v. Jesus V. Garcia and
Transamerican Sales and Exposition, Inc. The assailed Decision affirmed with
modification the Decision dated July 14, 2004 of the Regional Trial Court, Branch 89 in
Quezon City, in Civil Case No. Q-90-4690.
The Facts
The

facts

of

the

case

are

as

follows:

Vicente Victor C. Sanchez (Vicente), Kenneth Nereo Sanchez and Imelda C. Vda. De
Sanchez owned a parcel of land located at No. 10 Panay Avenue, Quezon City
consisting of 900 square meters. The property was registered under Transfer Certificate
of Title No. (TCT) 156254 of the Registry of Deeds of Quezon City (the Subject
Property).2
On October 10, 1988, Jesus V. Garcia (Garcia), doing business under the name
TransAmerican Sales and Exposition, Inc. (TSEI), wrote a letter 3 to Vicente offering to
buy the Subject Property for One Million Eight Hundred Thousand Pesos (P1,800,000)
under the following terms and conditions:chanroblesvirtuallawlibrary
Following are my basic terms and conditions in buying the above-mentioned property:
1. P50,000.00 - Reservation/earnest money to be paid upon execution of
reservation agreement
2. P1,750,000.00 - To be paid to seller as soon as all pertinent sales documents,
including a Deed of Absolute Sale are prepared and executed in my favor.
3. As per standard practice, the capital gain [sic] tax, documentary stamps, brokers
commission of 5% and Deed of Sale documents shall be in the account of the
Seller.
4. Registration expenses and transfer tax shall be my obligations [sic]. 4
The offer was good for only seven (7) days. The period elapsed with the parties failing
to
come
to
an
agreement.
Sometime in the third week of October 1988, Felisa Yap (Yap), the widow of Kenneth
Nereo Sanchez, and Garcia had a meeting at the Quezon City Sports Club wherein the
parties agreed to the sale of the subject property under the following terms and
conditions:
1.7.1. Garcia shall buy the property for P1.850 million payable in cash immediately after
the
occupants
thereof
shall
have
vacated
the
property.
1.7.2. Garcia shall immediately pay (the) amount of P50,000.00 creditable against the
total
purchase.

1.7.3. Garcia shall take care of all documentation necessary for the transfer of the title in
his favor, including the reconstitution of the original title x x x and the extrajudicial
settlement of the property, considering that, as stated, the title is still registered in the
names of plaintiff Sanchez, the late Kenneth Nereo Sanchez and the late Imelda C.
Vda. De Sanchez. For this purpose, the original owners copy of Transfer Certificate of
Title, the copy of the application for the reconstitution of title of the property, and copies
of receipts of real estate taxes were to be entrusted to defendant Garcia;
1.7.4. Garcia shall cause the demolition of the old house standing on the property and
shall sell the scrap materials thereof for not less than P50,000.00. All proceeds to be
realized on account of said demolition shall be turned over to the [Sanchezes]. 5
Pursuant to this agreement, Yap turned over to Garcia the original owners copy of TCT
156254, the copy of the filed Application for Restitution of Title to the property, and
copies of all receipts for the payment of real estate taxes on the property, while Garcia
paid
Yap
?50,000
as
earnest
money.6
Afterwards, Yap required the occupants of the subject property to vacate the same.
Immediately after it was vacated, Garcia, without Yaps knowledge and consent, took
possession of the lot and installed his own caretaker thereon with strict instructions not
to allow anyone to enter the property. Yap later learned that Garcia had also demolished
the house on the property and advertised the construction and sale of TransAmerican
Townhouse V thereon. The foregoing developments notwithstanding and despite
numerous demands, Garcia failed to pay the balance of the purchase price as agreed
upon.7
Then, on December 5, 1988, Yap was informed that the checks representing the
purchase price of the subject property were ready but that Vicente must pick up his
checks personally. On December 8, 1988, Vicente came to Manila from Laguna and
proceeded to Garcias office to get the checks. However, out of the six (6) checks that
were presented to them, four (4) of them were post-dated, further delaying their overdue
payment.8 In order to properly document such check payments, the parties executed an
Agreement dated December 8, 1988,9 paragraphs 3 to 8 of which relevantly provide:
3. That the total consideration of sale of the rights, interest, participation and title of the
First (Yap) and Second (Vicente) Parties of the aforestated parcel of land to the Third
Party (Garcia) shall be One Million Eight Hundred Fifty Thousand Pesos
(P1,850,000.00),
Philippine
Currency,
payable
in
check,
as
follows:chanroblesvirtuallawlibrary
a) RBC Check No. 290258 to be drawn in favor of Felisa G. Yap and dated December 8,
1988
for
the
sum
of
P250,000.00;
b) RBC Check No. 290257 to be drawn in favor of Vicente Victor Sanchez and dated
December
8,
1988
for
the
sum
of
P250,000.00;
c) RBC Check No. 290261 to be drawn in favor of Felisa G. Yap and dated December

14,

1988

for

the

sum

of

P250,000.00;

d) RBC Check No. 290260 to be drawn in favor of Vicente Victor Sanchez and dated
December
14,
1988
for
the
sum
of
P250,000.00;
e) RBC Check No. 290263 to be drawn in favor of Felisa G. Yap and dated December
22,
1988
for
the
sum
of
P400,000.00;
and
f) RBC Check No. 290262 to be drawn in favor of Vicente Victor Sanchez and dated
December 22, 1988 for the sum of P400,000.00.
4. That the parties hereto agree that once the aforestated checks are honored by the
bank and encashed by the payees thereof, the First and Second Parties shall execute
an EXTRA-JUDICIAL SETTLEMENT OF ESTATE WITH SALE distributing and dividing
among themselves the aforestated parcel of land and conveying in the said instrument
all their rights, interest, share, title and participation in the said property to the Third
Party
for
the
consideration
stated
in
the
preceding
paragraph.
5. That once the aforestated EXTRA-JUDICIAL SETTLEMENT OF ESTATE WITH
SALE is executed, the First and Second Parties shall immediately deliver the said
document to the Third Party who, on the strength of the same, shall reconstitute the
burned Title of the aforesaid Transfer Certificate of Title No. 156254, copy attached, in
the Registry of Deed of Quezon City and thereafter effect the transfer and registration of
the said property in his name; it being understood however that all necessary expenses
necessary for such reconstitution of title, transfer and registration, shall be borne by the
Third Party while the inheritance tax, capital gains tax and documentary stamps
required to be paid therefor shall be borne by the First and Second Parties, but in no
case
shall
it
exceed
the
combined
amount
of
P____________.
6. That it is agreed by the parties hereof that if at any time one of the aforestated
checks is dishonored by the bank, the First and Second Parties may opt to rescind this
contract and that in the event of rescission, the First and Second Parties shall forfeit the
earnest money of P50,000.00 and retain or withhold the amount representing the value
of damage effected by way of demolition by the Third Party on the property standing
and situated on the aforestated parcel of land, which value shall not exceed the sum of
P290,000 -- depreciated cost of the building therein and that whatever then remain as
proceeds of the aforestated checks shall be returned to the Third Party.
7. It is also agreed that after the delivery of the EXTRA-JUDICIAL SETTLEMENT OF
ESTATE WITH SALE by the First and Second Parties after the encashment of the last
check, the Third Party shall also pay the balance of the demolition proceeds in the
amount
of
P20,000.00.
8. That after the delivery of the EXTRA-JUDICIAL SETTLEMENT OF ESTATE WITH
SALE to the Third Party, the First and Second Parties shall, except those stipulated
above, then have only the remaining obligation to deliver to the Third Party any

document in their possession or what they can lawfully and validly execute in
accordance with their rights as aforestated and/or shown in the aforementioned title. 10
Subsequently, the first four (4) checks were deposited with no issue. However, the last
two (2) checks, amounting to P400,000 each, were dishonored for the reason of DAIF
or
drawn
against
insufficient
funds. 11
Thus, Yap wrote a letter dated December 26, 1988 12 to Garcia informing him that the
two (2) checks were dishonored and asking that the checks be replaced within five (5)
days from receipt of the letter. Such request was left unheeded.
On January 10, 1989, Yap informed Garcia in a letter 13 that she and Vicente were
rescinding the Agreement while demanding the return of the original owners copy of
TCT 156254. This prompted Garcia to offer two (2) managers checks in the aggregate
amount of P300,000 which Yap flatly refused, reiterating the rescission of their
Agreement and demanding for the return of all documents entrusted to Garcia through a
January
21,
1989
letter.14
However, in a letter dated January 27, 1989, 15 Garcias counsel, Atty. Francisco Beato,
Jr. (Beato), informed Yap that they (Garcia, Vicente and Yap) had an agreement that the
?800,000 balance of the purchase price was due to be paid by Garcia only upon Yap
and Vicentes payment of the realty, inheritance and capital gains taxes due on the
transfer of the property. Thus, Garcia effectively refused to return the documents and to
vacate
the
subject
property.
Yap referred Beatos letter to her own counsel, Atty. Julian S. Yap, who wrote back in a
letter dated February 16, 1989, refuting the claim of Garcia that the P800,000 was not
yet due and reiterating their decision to rescind the Agreement and demanding that
Garcia vacate the property and return the documents that were surrendered to him by
Yap.16
In the meantime, on February 19, 1989, Yap and Vicente discovered that Garcia posted
an advertisement in the classified ads of the Manila Bulletin offering to sell units at the
TransAmerican
Townhouse
V
situated
at
the
subject
property.17
Thus, on February 27, 1989, Atty. Yap wrote the Housing and Land Use Regulatory
Board (HLURB) informing the latter of the existing public advertisement of TSEI offering
for sale townhouses illegally constructed on the subject property and urging the HLURB
to cancel any existing permit or license to sell the said townhouse units or to deny any
application
therefor.18
On March 17, 1989, the HLURB issued a Cease and Desist Order 19 (CDO) enjoining
TSEI and Garcia from further developing and selling the townhouses. In the said order,
Commissioner Amado B. Celoria of the HLURB certified that respondents Garcia and
TSEI have not been issued any permit by said Board for the townhouse Project on the
subject lot. Respondents Garcia and TSEI were directed to immediately stop from

further developing the project. Additionally, such cease and desist order as well as
warnings to possible buyers of the townhouses were published with the Philippine Daily
Inquirer on April 16, 1989, and with the Manila Bulletin on April 19, 1989. 20 On May 5,
1989, the HLURB issued another letter to TSEI reiterating its previous directive for it to
cease and desist from selling the townhouse units. 21 In compliance, Garcia and TSEI
stopped construction of the townhouses units on March 30, 1989. 22
In a delayed response to the CDO, TSEI wrote a letter to the HLURB alleging that only
ground leveling works were being undertaken on the project. This was rebuffed by the
HLURB in a letter dated May 8, 1989 23 stating that ocular inspections of the project
revealed that 2nd floor construction on the townhouses were already being undertaken.
Thus, the HLURB ordered TSEI to explain in writing why administrative sanctions
should not be meted out against it and reiterating its earlier cease and desist order.
Undeterred, TSEI continued its construction and selling activities for the townhouses.
Thus, the HLURB issued an Order dated June 1, 1989 24 fining TSEI in the amount of
P10,000.
To further protect their interests, Yap and Vicente also inquired from the City Building
Official of Quezon City, whether a building permit had been issued for the construction
on the Subject Property. In a letter dated March 14, 1989, the office found that the
construction on the subject property was indeed illegal and at its 5% initial
stage.25 Additionally, Yap also wrote a letter dated April 3, 1989 26 to the Register of
Deeds in Quezon City informing it that TCT 156254 was no longer in their possession
and requesting that the office clear the matter with them first before acting on any
transaction
pertaining
to
the
subject
property.
In the meantime, the HLURB issued another letter dated June 22, 1989 27 denying
TSEIs proposed compromise penalty of P2,500 and directing TSEI to pay the P10,000
fine. And on June 23, 1989, it issued another letter 28 to TSEI refuting the latters claim
that they were not selling townhouses by citing advertisements of TransAmerican
Townhouse V units at No. 10, Panay Avenue in the Philippine Daily Inquirer (PDI) and
the
Manila
Bulletin
(MB).
Then, on August 21, 1989, Yap filed a formal complaint 29 with the Office of the City
Building Official of Quezon City. The complaint was set for hearing on August 30, 1989
with an order for Garcia and TSEI to produce their building permit. 30 However, both
Garcia
and
TSEI
failed
to
attend
the
said
hearing.
Thereafter, on February 15, 1990, Yap and Vicente, in his own behalf and representing
the heirs of Imelda C. Vda. De Sanchez, filed before the Regional Trial Court (RTC) in
Quezon City, Branch 89 a Complaint dated February 14, 1990 31 for the rescission of
contract, restitution and damages with prayer for TRO/preliminary injunction against
TSEI
and
Garcia,
docketed
as
Civil
Case
No.
Q-90-4690.
Meanwhile, Garcia managed to cause the cancellation of TCT 156254 and its
replacement with TCT 383697 in the name of TSEI. 32 TCT 383697, however, bore the

date of issuance as June 9, 1988, way before the parties agreed on the sale sometime
in October 1988. Garcia apparently used TCT 383697 to entice several buyers to buy
the townhouse units being constructed by TSEI on the subject lot. Claiming to have
bought townhouse units sometime in early 1989, the following intervened in the instant
case: the spouses Jose and Visitacion Caminas (Caminas), Reynaldo V. Maniwang
(Maniwang), Generoso C. Tulagan (Tulagan), Varied Traders Concept, Inc. (VTCI), and
Arturo
Marquez
(Marquez).
The records reveal that on January 31, 1989, TSEI sold to Tulagan a 52-square meter
portion of TCT 156254 and the townhouse unit that was going to be built upon it for the
amount of P800,000 as evidenced by a Conditional Deed of Sale of even date. 33 Later,
Tulagan bought another unit from TSEI this time for P600,000 as shown by a Contract
to Sell dated February 21, 1989. 34 Then, Maniwang bought a unit from TSEI for
P700,000 through an Absolute Deed of Sale dated February 22, 1989. 35 Later, Marquez
purchased a townhouse unit from TSEI for P800,000 in a Contract to Sell dated March
13, 1989.36 Afterwards, TSEI sold to Caminas a townhouse unit for P650,000 through
an Absolute Deed of Sale dated March 21, 1989. 37 Thereafter, VTCI bought three (3)
townhouses from TSEI for P700,000 each in three (3) separate Absolute Deeds of Sale
all dated October 30, 1989. 38 TSEI left the townhouse units unfinished, leaving these
intervenors
to
finish
their
townhouses
by
themselves.
Notably, except for the Absolute Deeds of Sale executed between TSEI and VTCI, all
the other intervenors contracts conveying townhouses in their favor identified their
purchased lots as covered by TCT 156254 (the title of the Sanchezes). As culled from
the
transcripts,
the
intervenors
Caminas, 39Maniwang,40 Tulagan,41 and
42
Marquez asserted that they were all shown TCT 383697 in the name of TSEI but
nevertheless signed their respective contracts with TSEI indicating the subject property
as covered by TCT 156254. Subsequently, they all got a photocopy of TCT 383697 and
verified the same with the Registry of Deeds of Quezon City, which confirmed that the
title was clean. On the other hand, only the Absolute Deed of Sale in favor of VTCI,
dated October 30, 1987, reflected that the property sold was covered by TCT 383697. 43
Far East Bank and Trust Company (FEBTC) entered into a Loan Agreement 44 dated
May 22, 1989 with TSEI secured by a Real Estate Mortgage over TCT 156254. FEBTC
later merged with the Bank of the Philippine Islands (BPI) with the latter as the surviving
bank. Garcia purportedly explained to FEBTC that the parties were still in the process of
transferring the title. Afterwards, Garcia submitted a copy of TCT 383697 in TSEIs
name. Upon default, FEBTC (now BPI) foreclosed the subject lot and had the
Foreclosure Certificate of Sale annotated on TCT 383697.
The Ruling of the Regional Trial Court
On July 14, 2004, the RTC rendered a Decision in favor of the Sanchezes as plaintiffs,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:

1. Declaring the legality and validity of the Extrajudicial Rescission effected by the
plaintiffs on the Contract to Sell on the subject property, covered by TCT No. 156254 in
their names;
2. Ordering the defendants and all persons acting on their behalf to return to the
plaintiffs the Owners Copy of TCT No. 156254, including all the documents entrusted to
them in consideration of their Contract to Sell;
3. Ordering defendants and all persons, including the intervenors and all persons
claiming rights under them to return and surrender to the plaintiffs the peaceful
possession of the subject property covered by TCT No. 156254 located at No. 10 Panay
Avenue, Quezon City;
4. Ordering the defendants jointly and severally to pay the plaintiffs the sum of One
Hundred Thousand (P100,000.00) Pesos, Philippine Currency as and by way of
attorneys fees;
5. Ordering the defendants jointly and severally to pay the plaintiffs the sum of Two
Hundred Thousand (P200,000.00) Pesos, Philippine Currency as and by way of moral
damages;
6. Ordering the defendants jointly and severally to pay the plaintiffs the sum of Two
Hundred Thousand (P200,000.00) Pesos, Philippine Currency as and by way of
exemplary damages to serve as correction or example for the public good;
7. Ordering the defendants jointly and severally to pay the plaintiffs the sum of Two
Hundred Ninety Thousand (P290,000.00) Pesos, representing the depreciated cost of
the plaintiffs demolished building per their Agreement (Exhibit D);
8. Dismissing defendants counterclaim as well as intervenors counterclaims/complaints
and answers in intervention against the plaintiffs;
9. Ordering the plaintiffs to return to the defendants, after deducting the damages herein
awarded, the remaining amount on the sum paid by the defendants on the subject
property;
10. Dismissing the counterclaim of plaintiffs against all intervenors;
11. Ordering the defendants to return to intervenors, Jose and Visitacion Caminas,
Reynaldo Maniwang, Generoso Gener Tulagan, and VTCI, and Arturo Marquez, the
following sum to wit:
1.

CAMINAS

2.

MANIWANG

3.

TULAGAN
3.1

- P650,000.00 (Absolute Deed of Sale dated 14 March

1989);
- P700,000.00 (Absolute Deed of Sale dated 22 February
1989);
- P1.4 Million, representing the following:
P600,000.00 (Contract To Sell dated 21 February 1989);

3.2
4.

VTCI
4.1
4.2
4.3

5.
6.

MARQUEZ
BPI

P800,000.00 (Conditional Deed of Sale dated 31

January 1989);
- P2.1 Million, representing the following:
P700,000.00 (Absolute Deed of Sale dated 30 October
1989 Lot 1-K);
P700,000.00 (Absolute Deed of Sale dated 30 October
1989 Lot 1-I);
P700,000.00 (Absolute Deed of Sale dated 30 October
1989 Lot 1-F);
- P600,000.00 (Contract To Sell dated 8 March 1989);
- Declaring the intervention of the Bank without merit.

respectively, representing the full and/or partial purchase price of their respective units,
all with six (6) percent interest per annum counted from the time of their filing of their
intervention of judicial demand, and twelve (12) percent per annum upon the finality of
this decision.
With costs against defendants
SO ORDERED.45
The RTC declared that the Sanchezes have the right to rescind the Agreement they
entered into with Garcia and TSEI under proviso no. 6 46 of the Agreement. In fact, the
RTC enunciated that because the Agreement is in the nature of a contract to sell, the
ownership over the subject property remained with the Sanchezes as the suspensive
conditionthat the check payments shall be honoredwas not complied with. Thus,
the RTC concluded that there was not even any need for rescission in this case.
Moreover, the RTC found that TSEI and Garcia were builders in bad faith as the
Sanchezes never consented to the construction of the townhouses. Furthermore, the
presentation by Garcia and TSEI to the intervenors of TCT 383697 in TSEIs name
sufficiently shows their bad faith. Anent the rights of intervenors, the RTC found the
Sanchezes to have a better right over the subject property considering that the
transactions between Garcia/TSEI and the intervenors suffered from several
irregularities, which they, the intervenors, in bad faith, ignored.
The Ruling of the Court of Appeals
Upon appeal by the intervenors-appellants, the CA rendered, on November 6, 2006, the
assailed Decision affirming the RTC Decision with modifications, the decretal portion of
which reads:
WHEREFORE, the judgment appealed from is hereby AFFIRMED with
MODIFICATIONS in that (1) the Register of Deeds of Quezon City is hereby directed to
cancel the Transfer Certificate of Title No. 383697 in the name of TransAmerican Sales
and Exposition, Inc. and to reinstate Transfer Certificate of Title No. 156254 in the name
of the [sic] Kenneth Nereo Sanchez, Vicente Victor Sanchez and Imelda C. Vda. de
Sanchez in its original status prior to the claim of the intervenors-appellants; and (2) the
plaintiffs and the defendants are ordered to follow the provisions of Article 448 of the

Civil Code of the Philippines as regards the improvements constructed on the subject
property. The questioned decision is affirmed in all other respects.
SO ORDERED.47
Thus, the CA ordered the cancellation of TCT 383697 in TSEIs name and the
reinstatement of TCT 156254 in the names of the Sanchezes. However, the appellate
court found the Sanchezes equally in bad faith with TSEI and Garcia, and gave the
Sanchezes the option either to appropriate the townhouses by paying for them or to
oblige TSEI and Garcia to pay the price of the land, unless the subject lots value is
considerably more than that of the structures built thereon in which case TSEI and
Garcia would have to pay the Sanchezes reasonable rent for the use of the subject
property.
Hence, these petitions under Rule 45 separately interposed by the intervenors.
The Issues
In G.R. No. 179518, BPI raises the following issues:
V.
Grounds for this Appeal
A. The Court of Appeals erred in decreeing the rescission of the Agreement
between plaintiffs Sanchez, et al. and defendants TSE and Garcia.
i.

Sanchez, et al. had no intention of rescinding their Agreement.

ii.

Rescission cannot take place because the property was already acquired
by third person who acted in good faith.

iii.

Sanchez, et al. should bear all the losses arising from their own
negligence.

B. The Court of Appeals erred in ordering the annulment of TCT No. 383697 in a
collateral action.
C. The Court of Appeals erred in ordering the annulment of TCT No. 383697
notwithstanding that it had no jurisdiction to do so, since such relief was never
prayed for in the complaint.
D. The Court of Appeals erred in decreeing rescission, notwithstanding that it would
result in the unjust enrichment of plaintiffs Sanchez, et al., at the expense of BPI.

E. Assuming that Article 448 of the Civil Code is applicable, the Court of Appeals
erred in not ruling that BPI already acquired the rights of defendants under the
said article.48
In G.R. No. 179835, Tulagan, the heirs of Marquez and VTCI raise the following issue:
Whether or not the herein petitioners, as buyers and possessors of their respective units
that were constructed by respondent Garcia in the subject property, are entitled, to the
same benefit granted to the latter (who was subsequently declared by the Court of
Appeals as a builder in good faith of the improvements he introduced in the subject
property), under the provision of Article 448 of the Civil Code of the Philippines. 49
While in G.R. No. 179954, Maniwang raises the following issues:
Grounds for the Petition
With all due respect, the Honorable Court of Appeals failed to apply the pertinent
provisions of law and utterly failed to consider prevailing jurisprudence when it totally
disregarded the perfected Contract of Sale under the nomenclature Contract to Sell
entered into by respondents and defendants prior to the Agreement entered into by
them.
With all due respect, the Honorable Court of Appeals utterly neglected to apply pertinent
provisions of the Civil Code and prevailing jurisprudence on the matter when it affirmed
the trial courts decision granting the respondents prayer for rescission.
With all due respect, it is respectfully submitted that the Honorable Court of Appeals
erred in not finding that petitioner Reynaldo Maniwang is an innocent purchaser in good
faith, thus resulting in the total disregard of his rights over the subject property when it
applied to the instant case the provisions of Article 448 of the Civil Code of the
Philippines.50
The essential common issues presented by intervenors-petitioners are: first, whether
the parties all acted in bad faith; second, whether there was a valid rescission of the
Agreement between the Sanchezes and TSEI/Garcia; and third, whether TCT 383697 in
the name of TSEI may be cancelled.
The Courts Ruling
The petitions in these consolidated cases must be denied.
The Sanchezes are not guilty of negligence
Petitioners would lay the blame on the Sanchezes and argue that there was negligence
on the latters part when they turned over the owners original duplicate copy of TCT
156254 despite receiving only the P50,000 earnest money, which led to the fraudulent

transfer of title over the subject lot by Garcia and the issuance of TCT 383697 in the
name of TSEI. They also argue that the Sanchezes were also negligent for
surrendering possession of the subject property to Garcia and TSEI, and for failing to
stop the construction of the townhouses on the subject property.
It must be stated that the CA already ruled that the issue of the Sanchezes negligence
was never raised at the pre-trial. As such, it can no longer be raised on appeal.
Nevertheless, even if such issue were to be passed upon, the Sanchezes cannot be
considered negligent, much less in bad faith.
As explained by the CA:
It must be noted that defendant Garcia committed himself that, upon full payment of the
purchase price, he would personally undertake the preparation and execution of the
Extrajudicial Settlement with Sale as well as the reconstitution of the original copy of
TCT No. 156254 on file with the Register of Deeds of Quezon City. Thus, it was
inevitably for plaintiff-appellant/appellee Felisa Yap to surrender to defendant Garcia the
owners duplicate copy of the aforesaid title as well as the other documents pertinent for
such documentation and reconstitution. To Our mind, this does not constitute
negligence on the part of the plaintiffs-appellants/appellees as the surrender was purely
to comply with and in pursuance to their earlier agreement with the defendants.
As regards the alleged relinquishment of possession of the subject property, We also do
not find any negligence on the part of the plaintiffs-appellants/appellees. The records
would disclose that the plaintiffs-appellants/appellees did not voluntarily surrender
possession thereof to defendants. On the contrary, it was defendant Garcia who took
possession of the subject property, without plaintiffs-appellants/appellees knowledge,
posted his own caretaker therein with strict instructions not to allow anyone to enter the
same. The latter also caused the demolition of the old house standing thereon and
advertised the same for sale by placing a large billboard in front of the subject property.
In fact, had it not been for persistent efforts of plaintiffs-appellants/appellees, the
Agreement which eventually protected the latters rights over the subject property, could
not have been executed.51
Negligence is the omission of that diligence required by the nature of the obligation and
corresponds to the circumstances of the persons, of the time and of the place. 52 The
Sanchezes could not be found negligent as they relied upon the assurances of Garcia
after their oral agreement to sell was negotiated. The Sanchezes trusted Garcia and
entrusted to himper their oral agreementthe owners original duplicate of TCT
156254 in order to facilitate the documentation required under the terms of agreement
for the sale of the subject lot. It must be pointed out that the parties in this case were not
dealing on equal terms. The Sanchezes had insufficient knowledge in the legalities of
transacting with real estate. This is evidenced by the fact that they already considered
an oral agreement for the sale of real property as sufficient. Had they been
knowledgeable in such matters, they would have known that such oral agreement is
unenforceable and instead sought the production of a written agreement. Moreover, the
facts show that the Sanchezes did not simply surrender possession of the property to

TSEI and Garcia, but that such possession was taken from them without their consent.
The Sanchezes did not act in bad faith
Contrary to the finding of the CA, the Sanchezes cannot be considered to be in bad faith
for failing to file an action for injunction against the construction of the townhouses on
the subject property. The CA stated:
x x x However, it appears that plaintiffs/appellants/appellees did not take any step to
forestall the continued construction of the townhouses. The records do no [sic] show
that the plaintiffs/appellants/appellees filed any case for injunction to at least restrain the
defendants from continuing with the construction. Conversely, they allowed the same to
continue despite the fact that they were not as yet fully paid of the purchase price on the
subject property and no contract of sale has been executed by them in defendants
favor. Under these circumstances, the provision of Article 453 of the Civil Code should
have been applied by the trial court. 53
Such

ruling

is

erroneous.

Article 453 of the Civil Code relevantly states:

Article 453. If there was bad faith, not only on the part of the person who built, planted
or sowed on the land of another, but also on the part of the owner of such land, the
rights of one and the other shall be the same as though both had acted in good faith.
It is understood that there is bad faith on the part of the landowner whenever the
act was done with his knowledge and without opposition on his part. (emphasis
supplied)
The second paragraph of the provision clearly reads that a landowner is considered in
bad faith if he does not oppose the unauthorized construction thereon despite
knowledge of the same. It does not, however, state what form such opposition should
take. The fact of the matter is that the Sanchezes did take action to oppose the
construction on their property by writing the HLURB and the City Building Official of
Quezon City. As a result, the HLURB issued two (2) Cease and Desist Orders and
several directives against Garcia/TSEI which, however, were left unheeded.
In addition, the Sanchezes could not be faulted for not having been able to enjoin the
sale of the townhouses by Garcia and TSEI to the intervenors Sps. Caminas,
Maniwang, Tulagan, and Marquez who bought their townhouse units during the same
period that the Sanchezes were demanding the full payment of the subject lot and were
exercising their right of extrajudicial rescission of the Agreement. As the intervenors
asserted having bought the townhouse units in early 1989, it can be seen that the preselling was done almost immediately after the Sanchezes and Garcia/TSEI agreed on
the terms of the sale of the subject lot, or shortly after Garcia and TSEI had taken over
the property and demolished the old house built thereon. In either case, the pre-selling
already commenced and was continuing when the two postdated checks amounting to

the remaining balance of P800,000 bounced. And when the Sanchezes informed Garcia
and TSEI that they were rescinding the Agreement in early 1989, the intervenors
apparently were already in the process of closing their deals with TSEI for the purchase
of
townhouse
units.
As to the transactions between FEBTC and Garcia/TSEI and that between VTCI and
Garcia/TSEI, it is suffice to state that the Sanchezes, despite the actions they
undertook,
were
not
aware
of
the
said
dealings.
Garcia,
intervenors
Garcia

and

TSEI,
acted
TSEI

BPI,
in
acted

and
bad
in

the
faith
faith

bad

The Court agrees with both the RTC and the CA that Garcia and/or TSEI are builders in
bad faith. They knew for a fact that the property still belonged to the Sanchezes and yet
proceeded to build the townhouses not just without the authority of the landowners, but
also against their will. Thus, the CA wrote:
Anent the improvements constructed on the subject property, the defendants were
undoubtedly builders in bad faith. As borne out by the evidence, the defendants took
possession of the subject property and constructed the 20-unit townhouses thereon
without prior consent of the plaintiffs-appellants/appellees. On top of this, defendant
Garcia was aware that the defendants have not as yet fully paid the purchase price
thereof and therefore are not yet owner/s of the subject property. In fact, no contract of
sale over the subject property has been executed by the plaintiffs/appellants/appellees
in defendants favor.54 x x x
The

next

The
Intervenors
Tulagan,

query:

and

are

the

intervenors

Court
Sps.
Marquez

Prevailing
jurisprudence
rules:chanroblesvirtuallawlibrary

reveals

purchasers

in

rules
Caminas,
acted
in
the

following

good

faith?

otherwise.
Maniwang,
bad
faith
established

1. Well settled is the rule that all persons dealing with property covered by a torrens
certificate of title are not required to go beyond what appears on the face of the
title. When there is nothing on the certificate of title to indicate any cloud or vice
in the ownership of the property, or any encumbrance thereon, the purchaser is
not required to explore further than what the torrens title upon its face indicates in
quest for any hidden defect or inchoate right that may subsequently defeat his
right thereto.55
2. This rule, however, admits of an exception as where the purchaser or
mortgagee has knowledge of a defect or lack of title in the vendor, or that

he was aware of sufficient facts to induce a reasonably prudent man to

inquire into the status of the property in litigation.56 (emphasis supplied)
3. Likewise, one who buys property with full knowledge of the flaws and defects in
the title of the vendor is enough proof of his bad faith and estopped from claiming
that he acquired the property in good faith against the owners. 57
4. To prove good faith, the following conditions must be present: (a) the seller is the
registered owner of the land; (b) the owner is in possession thereof; and (3) at
the time of the sale, the buyer was not aware of any claim or interest of some
other person in the property, or of any defect or restriction in the title of the seller
or in his capacity to convey title to the property. All these conditions must be
present, otherwise, the buyer is under obligation to exercise extraordinary
diligence by scrutinizing the certificates of title and examining all factual
circumstances to enable him to ascertain the sellers title and capacity to transfer
any interest in the property.58
The factual milieu of the case reveals that intervenors are buyers in bad faith for the
following
reasons,
viz:
Firstly, they admitted that they executed either contracts of sale or contracts to sell
indicating that the lot is covered by TCT No. 156254 registered under the name of the
respondent Sanchezes. While the established rule is that persons dealing with property
covered by a Torrens certificate of title are not required to go beyond what appears on
the face of the title, intervenors cannot seek haven from such doctrine as the title of the
lot does not pertain to the vendor (Garcia or TSEI) they dealt with. The fact that the lot
being sold to them belonged to persons other than TSEI or Garcia should have driven
the intervenors, as prudence would dictate, to investigate the true status of the
property. They should have gone to the Register of Deeds of Quezon City (RD) to verify
if in fact TCT No. 156254 had already been cancelled and a new title has been issued to
TSEI or Garcia. They should have asked for the deed of absolute sale filed and
registered with the RD to find out if the Sanchezes indeed sold the lot in question to
TSEI. They could have verified from the primary entry book of said office if the deed of
absolute sale from the Sanchezes in favor of TSEI was registered in said book, which,
under the Property Registration Decree (PD No. 1529), is considered as an effective
and legal notice to third persons and the whole world of such transfer. Evidently, the
intervenors
failed
to
do
so.
Secondly, the intervenors know, based on the contract of sale or contract to sell, that
the property is registered under TCT No. 156254 in the name of the Sanchezes. As
such, they should have insisted that they talk to the Sanchezes before executing said
conveyances. Had they done so, they would have known that the Sanchezes have not
executed a written deed of absolute sale in favor of TSEI for the latters failure to pay
the consideration in full. Having failed to ferret out the truth from the Sanchezes,
intervenors cannot be considered innocent purchasers for failure to exercise utmost

caution and extra diligence in determining the true owner of the property.
Thirdly, the intervenors should have been suspicious of the explanation of Garcia that
TCT No. 383697, reflecting TSEI as the owner of the property, has been burned and
that he is in the process of reconstituting the title. Before signing the contract of sale or
contract to sell, they should have asked Garcia where the reconstitution case has been
filed or is pending and proceeded to verify with the said court the status of the
reconstitution. Had they done so, they would have known that neither Garcia nor TSEI
had a deed of absolute sale executed in their favor over the lot in question. The truth of
the matter is that it is the duplicate certificate of title of TCT No. 156254 that has been
lost or misplaced, and is being sought to be reconstituted, not TCT No. 383697. Had
intervenors been prudent enough to verify with the court the status of the alleged TCT
No. 383697, they would have known that Garcia planned to deceive them in the sale of
the
subject
property.
Fourthly, the intervenors knew that they were buying a townhouse over a subdivision lot
from TSEI and Garcia. Such being the case, they should have verified with the HLURB
whether said project is registered with said housing agency and if a license to sell has
been issued to TSEI or Garcia. Had they made such an inquiry, they would have known
that instead of a permit for the project and a license to sell the property, a cease and
desist order was issued by the HLURB precisely to enjoin TSEI and Garcia from selling
said property to the public. Similarly, they could have inquired from the City Building
Official of Quezon City if a building permit was issued to TSEI and Garcia for the
construction of the townhouses, which would have yielded the same negative result.
VCTI
acted
in
bad
faith
As compared to the other purchasers, the Deeds of Absolute Sale of intervenor VTCI
cited TCT 383697 in the name of VTCI and not TCT 156254. Nevertheless, the Court
finds that respondent VTCI is a purchaser in bad faith for the following reasons:
Firstly, respondent VTCI has not shown that it verified with the RD if the alleged TCT
383697 of respondent TSEI is valid and genuine. It did not present any certified true
copy of said TCT 383697 to demonstrate that based on the RDs records, said title
exists and that it is genuine and valid. It should be remembered that the duplicate
certificate of TCT 156254 was lost and subject of reconstitution. Yet respondents Garcia
and TSEI were not able to show that it was already reconstituted. In addition, there was
no deed of absolute sale executed by the Sanchezes in favor of TSEI as the latter failed
to pay the last two (2) installments and subsequently, the agreement to sell was
rescinded by the Sanchezes for non-payment. There being no deed of absolute sale,
there is, consequently, no ground for the RD to cancel TCT No. 156254 and
subsequently issue TCT 383697 in the name of TSEI. This goes to show that TCT
383697 of TSEI appears to be spurious and a fake title. This is buttressed by the fact
that the date of the issuance of TCT 383697 is June 9, l988, pre-dating the execution of
the Agreement between the Sanchezes and TSEI on December 8, l988. With the failure
of VTCI to exert earnest efforts to verify the authenticity of TCT 383697, then it is not a
purchaser
in
good
faith.

Secondly, Garcia and TSEI stopped the construction of the townhouses on March 30,
1989 pursuant to the CDO of the HLURB. Thus, the townhouses were not fully finished
and completed. Yet on December 27, 1989 (date of notarization), VTCI entered into
three (3) Deeds of Absolute sale over three (3) townhouses on three (3) lots covered by
TCT 383697 and despite the non-completion of the townhouses, it still fully paid the
uniform price of P700,000 for the townhouse on each of the 3 lots 1 st lot with an area
of 52.5 square meters; 2 nd lot with an area of 72.5 square meters; and 3rd lot with an
area of 42.5 square meters. The price of P700,000 was even applied to all lots even if
ordinarily a bigger lot will commend a higher price. These are doubtful transactions
since a man of average intellect will not fully pay the price of a townhouse which has not
yet been completed. The alleged purchases are not in accord with the normal business
practice and common behavior of an ordinary human being. These circumstances sway
the Court to believe that said alleged conveyances are not genuine and that VTCI is not
a
purchaser
in
good
faith.
Thirdly, with the CDO and the warnings to the public and prospective buyers published
in the Philippine Daily Inquirer on April 16, 1989 and in the Manila Bulletin on April 19,
2014, VTCI should have been aware of the irregularities in the proposed sale of
townhouses by Garcia and TSEI. The failure of VTCI to heed the warnings and
prohibition to buy said townhouses tends to show that said respondent is not a
purchaser
in
good
faith.
Fourthly, with the issuance of the CDO by the HLURB and the notices in the major
dailies, VTCI should have inquired with the said HLURB if Garcia and TSEI have a
permit to sell the townhouses. Had it done so, it would have discovered that the project,
as it lacks the necessary permits, is unauthorized and that the title over the townhouses
is
questionable.
Fifthly, a buyer of a townhouse will ordinarily visit the project site and look at and
investigate the lot, the title and the townhouses being sold. If it inspected the site of the
construction project, it would have known from the other purchasers that the project has
no permit from the HLURB and that construction has been stopped because of the
CDO. Had VTCI done the inspection and investigation, then it would not have entered
into the deeds of absolute sale with Garcia and TSEI. Thus, respondent VTCI cannot be
considered
as
a
purchaser
in
good
faith.
From the foregoing, the fact that all the intervenors turned a blind eye to the flaws and
defects in the ownership of TSEI over the property and miserably failed to undertake
measures required of a reasonably prudent man to investigate the title of the pseudo
owner and the legality of the townhouse project constitutes bad faith for which there is
no
available
relief
under
the
law.
BPI
cannot
be
considered
a
mortgagee
in
good
faith
Even as the intervenors have been found to be in bad faith, BPI, the successor of

FEBTC, cannot be considered a mortgagee in good faith, considering the glaring

anomalies in the loan transaction between TSEI and FEBTC. This can be gleaned from
several
undisputed
factual
circumstances:
Firstly, when Garcia gave TCT 156254 to FEBTC for the processing of a loan secured
by a mortgage, it indubitably showed that Garcia/TSEI did not yet own the subject
property as said title was in the name of the Sanchezes. But FEBTC did not require
Garcia/TSEI to submit a Special Power of Attorney (SPA) in their favor authorizing them
to
mortgage
the
subject
property
covered
by
TCT
156254.
Secondly, considering that Garcia/TSEI were already selling the townhouse units to the
public as early as January 1989, FEBTC was also remiss in not requiring Garcia/TSEI
to submit a written approval from the HLURB for the mortgage of the subject property
where the townhouse units were being constructed as required under Sec. 18 59 of
Presidential
Decree
No.
(PD)
957. 60
Thirdly, considering further that Garcia presented the Agreement between the
Sanchezes and Garcia/TSEI as basis for ownership of the subject property covered by
TCT 156254, FEBTC was remiss in neither ascertaining whether the full payment of
the ?1.8 million covered by six (6) checks in view of the proviso number 6 of the
Agreement nor requiring the presentment of the EXTRA-JUDICIAL SETTLEMENT OF
ESTATE WITH SALE from the Sanchezes in favor of Garcia/TSEI.
Fourthly, FEBTC was again negligent in not scrutinizing the TCT 383697 considering
that the title has the purported issuance date of June 9, 1988 way before the December
Agreement was executed and when the loan was negotiated. More, the purported
issuance of TCT 383697 was made more than six (6) months before Garcia/TSEI
approached the bank for the loan. Thus, FEBTC should have been placed on guard as
to why Garcia/TSEI initially gave it TCT 156254 in the name of the Sanchezes when
TCTC 383697 was purportedly already issued and in Garcias possession way before
the bank loan was negotiated. Again, FEBTC did not exercise the due diligence
required
of
banks.
Fifthly, the Court notes that FEBTC released portions of the loan proceeds in April even
before it approved the loan secured by a real estate mortgage on May 22, 1989. And
more anomalous is the fact that FEBTC had TCT 383697 verified for its veracity and
genuineness way after it approved the loan to Garcia/TSEI. The Certification61 from the
Register of Deeds was issued only on June 13, 1989 upon the request of Garcia.
Verily, given the foregoing anomalies, the general rule that a mortgagee need not look
beyond the title does not apply to banks and other financial institutions as greater care
and due diligence are required of them, 62 and FEBTC should have exercised the
appropriate due diligence review and made the requisite inquiries about the subject
property which was offered to secure the loan applied for by Garcia/TSEI under a real
estate mortgage. FEBTC (now BPI) was negligent and cannot be considered as a
mortgagee
in
good
faith.

The
faith
and
Rescission
barred

effects
to

of
the

of
by

intervenors,
the
the

attributing
BPI,

Agreement
subsequent

was

bad
TSEI,
Garcia
not
transfer

Article 1191 of the Civil Code states that rescission is available to a party in a reciprocal
obligation where one party fails to comply therewith:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the
fixing
of
a
period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
(emphasis supplied)
Article 1385 of the Civil Code does provide that rescission shall not take place if the
subject matter of the prior agreement is already in the hands of a third party who did not
act in bad faith, to wit:
Article 1385. Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can return whatever he may
be
obliged
to
restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad
faith.
In this case, indemnity for damages may be demanded from the person causing the
loss. (emphasis added)
In the extant case, the failure of TSEI to pay the consideration for the sale of the subject
property entitled the Sanchezes to rescind the Agreement. And in view of the finding
that the intervenors acted in bad faith in purchasing the property, the subsequent
transfer
in
their
favor
did
not
and
cannot
bar
rescission.
The
under

Sanchezes
the

are
Arts.

to

elect
449-450

their
of

option
the

New

Civil

Code

Moreover, bad faith on the part of TSEI, Garcia and the intervenors leads to the
application of Articles 449-450 of the New Civil Code, which provide:
Article 449. He who builds, plants or sows in bad faith on the land of another, loses what
is
built,
planted
or
sown
without
right
to
indemnity.
Article 450. The owner of the land on which anything has been built, planted or sown in
bad faith may demand the demolition of the work, or that the planting or sowing be
removed, in order to replace things in their former condition at the expense of the
person who built, planted or sowed; or he may compel the builder or planter to pay the
price of the land, and the sower the proper rent.
Consequently, the Sanchezes have the following options: (1) acquire the property with
the townhouses and other buildings and improvements that may be thereon without
indemnifying TSEI or the intervenors; 63 (2) demand from TSEI or the intervenors to
demolish what has been built on the property at the expense of TSEI or the intervenors;
or (3) ask the intervenors to pay the price of the land. 64 As such, the Sanchezes must
choose from among these options within thirty (30) days from finality of this Decision.
Should the Sanchezes opt to ask from the intervenors the value of the land, the case
shall be remanded to the RTC for the sole purpose of determining the fair market value
of the lot at the time the same were taken from the Sanchezes in 1988.
If the Sanchezes decide to appropriate the townhouses, other structures and
improvements as their own pursuant to Article 449 of the Civil Code, then the
intervenors-purchasers Caminas, Maniwang, Tulagan, Marquez and VCTI shall be
ordered to vacate said premises within a reasonable time from notice of the finality of
the decision by the Sanchezes. They have a right to recover their investment in the
townhouses from Garcia and TSEI. If the Sanchezes do not want to make use of the
townhouses and improvements on the subject lot, then the purchasers can be ordered
to demolish said townhouses or if they dont demolish the same within a reasonable
time, then it can be demolished at their expense. On the 3rd option, if the Sanchezes do
not want to appropriate the townhouses or have the same demolished, then they can
ask that the townhouse purchasers pay to them the fair market value of the respective
areas allotted to their respective townhouses subject of their deeds of sale.
The

suit

is

not

collateral

attack

on

TSEIs

title

Finally, BPI argues that the CA erred in ordering the cancellation of TCT 383697
considering that Section 48 of Presidential Decree No. 1529, or the Property
Registration Decree, states that a Torrens certificate of title cannot be cancelled except
in a direct attack thereon. The provision reads:
Section 48. Certificate not subject to collateral attack. A certificate of title shall not be
subject to collateral attack. It cannot be altered, modified, or canceled except in a direct
proceeding in accordance with law.

In Sarmiento v. Court of Appeals,65 the Court differentiated a direct and a collateral

attack in this wise:chanroblesvirtuallawlibrary
An action is deemed an attack on a title when the object of the action or proceeding is to
nullify the title, and thus challenge the judgment pursuant to which the title was decreed.
The attack is direct when the object of the action is to annul or set aside such judgment,
or enjoin its enforcement. On the other hand, the attack is indirect or collateral when, in
an action to obtain a different relief, an attack on the judgment is nevertheless made as
an incident thereof.
In the instant case, contrary to the contention of BPI, although the case was originally
an action for rescission, it became a direct attack on TCT 383697. To be sure, there is
no indication that when the Sanchezes filed their complaint with the RTC they already
knew of the existence of TCT 383697. However, when they were confronted with the
title through the filing of the various Answers of the intervenors, the Sanchezes directly
stated that the title was a fake. Thus, in their Answer with Counterclaims to Complaint in
Intervention filed by Varied Traders Concept, Inc. dated April 2, 1991, paragraph 2.1.
thereof states:
2.1. Like the rest of the intervenors herein, VTCI is claiming rights under a forged deed
and a fake or absolutely void title. There was never any Deed of Absolute Sale between
plaintiffs and defendants. Much less was there any valid land title issued to defendants.
Whatever deeds defendants may have shown VTCI are definitely fakes or foregeries,
hence, null and void. Thus, no rights to plaintiffs property ever passed to VTCI. 66
An identical paragraph is also contained in the Sanchezes Answer with Counterclaims
to Intervention filed by Far East Bank and Trust Company and Supplement to Complaint
dated January 11, 1993.67 Thus, the complaint filed by the Sanchezes later became a
direct attack against TCT 383697 and the CA correctly ordered the cancellation thereof.
WHEREFORE, the instant petitions are DENIED. The assailed November 6, 2006
Decision of the Court of Appeals in CA-G.R. CV No. 83236 is
hereby AFFIRMED with MODIFICATION. The dispositive portion of the RTC Decision
in Civil Case No. Q-90-4690, as affirmed by the CA, is hereby modified to read:
WHEREFORE,

judgment

is

hereby

rendered

as

follows:

1. Directing the Register of Deeds of Quezon City to cancel Transfer Certificate of Title
No. 383697 in the name of TransAmerican Sales and Exposition, Inc. and to reinstate
Transfer Certificate of Title No. 156254 in the name of the [sic] Kenneth Nereo Sanchez,
Vicente Victor Sanchez and Imelda C. Vda. de Sanchez in its original status prior to the
claim of the intervenors-appellants without need to pay any registration fee, transfer tax,
documentary stamp tax and other expenses in relation to transfer of title.
2. Granting to the Sanchezes the right to inform the Regional Trial Court of Quezon City,
Branch 89 in Civil Case No. Q-90-4690 within thirty (30) days from date of finality of
decision whether or not they will appropriate the townhouses and improvements on the
lot covered by TCT No. 156254 as their own without need to pay indemnity therefor

pursuant

to

Article

449

of

the

Civil

Code.

In such a case, the intervenors and all their successors-in-interest shall vacate the
subject property and surrender possession thereof to the Sanchezes within Thirty (30)
Days
from
notice
of
their
decision.
If the Sanchezes opt for the second option, the defendants or intervenors shall demolish
the townhouses and all other improvements on the property at their own expense within
ninety (90) days from notice of the Sanchezes decision. If they fail to do so, the
Sanchezes can have the same demolished and the expenses of demolition shall be
charged to the intervenors on a pro rata basis based on the respective areas of their
townhouses.
Finally, if the Sanchezes choose the third option, the case shall be remanded to the
RTC to determine the fair market value of the land at the time of the taking thereof in
1988 and the intervenors-townhouse owners shall pay such value to the Sanchezes
within Thirty (30) days from the finality of the determination of the RTC of such fair
market
value;
3. Declaring the legality and validity of the Extrajudicial Rescission effected by the
plaintiffs on the Contract to Sell on the subject property, covered by TCT No. 156254 in
their
names;
4. Ordering the defendants and all persons acting on their behalf to return to the
plaintiffs the Owners Copy of TCT No. 156254, including all the documents entrusted to
them
in
consideration
of
their
Contract
to
Sell;
5. Ordering defendants and all persons, including the intervenors and all persons
claiming rights under them to return and surrender to the plaintiffs the peaceful
possession of the subject property covered by TCT No. 156254 located at No. 10 Panay
Avenue, Quezon City in the event plaintiffs Sanchezes decide to appropriate the
townhouses and improvements for their own without need of payment of indemnity;
6. Ordering the defendants jointly and severally to pay the plaintiffs the sum of One
Hundred Thousand (P100,000.00) Pesos, Philippine Currency as and by way of
attorneys
fees;
7. Ordering the defendants jointly and severally to pay the plaintiffs the sum of Two
Hundred Thousand (P200,000.00) Pesos, Philippine Currency as and by way of moral
damages;
8. Ordering the defendants jointly and severally to pay the plaintiffs the sum of Two
Hundred Thousand (P200,000.00) Pesos, Philippine Currency as and by way of
exemplary damages to serve as correction or example for the public good;
9. Ordering the defendants jointly and severally to pay the plaintiffs the sum of Two

Hundred Ninety Thousand (P290,000.00) Pesos, representing the depreciated cost of

the plaintiffs demolished building per their Agreement (Exhibit D);
10.
Dismissing
defendants
counterclaim
as
well
as
intervenors
counterclaims/complaints and answers in intervention against the plaintiffs;
11. Ordering the plaintiffs to return to the defendants, after deducting the damages
herein awarded, the remaining amount on the sum paid by the defendants on the
subject
property;
12. Dismissing the counterclaim of plaintiffs against all intervenors except as awarded
to
the
former
in
this
Decision;
13. Ordering the defendants jointly and severally to return to intervenors, Jose and
Visitacion Caminas, Reynaldo Maniwang, Generoso Gener Tulagan, and VTCI, and
Arturo Marquez, the following sum to wit:
1.

CAMINAS

- P650,000.00 (Absolute Deed of Sale dated 14 March

1989);
2. MANIWANG
- P700,000.00 (Absolute Deed of Sale dated 22 February
1989);
3. TULAGAN
- P1.4 Million, representing the following:
3.1
P600,000.00 (Contract To Sell dated 21 February 1989);
3.2
P800,000.00 (Conditional Deed of Sale dated 31
January 1989);
4. VTCI
- P2.1 Million, representing the following:
4.1
P700,000.00 (Absolute Deed of Sale dated 30 October
1989 Lot 1-K);
4.2
P700,000.00 (Absolute Deed of Sale dated 30 October
1989 Lot 1-I);
4.3
P700,000.00 (Absolute Deed of Sale dated 30 October
1989 Lot 1-F);
5. MARQUEZ
- P600,000.00 (Contract To Sell dated 8 March 1989);
6. BPI
- Declaring the intervention of the Bank without merit.
respectively, representing the full and/or partial purchase price of their respective units,
all with six (6) percent interest per annum counted from the time of their filing of their
intervention
of
judicial
demand
until
fully
paid.
With costs against defendants.
SO
Peralta, Villarama, Jr. Reyes, and Jardeleza, JJ., concur.
Endnotes:

ORDERED.

46

Id.

at

118-119,

which

states

as

follows:

6. That it is agreed by the parties hereof that if at any time one of the aforestated
checks is dishonored by the bank, the First and Second Parties may opt to rescind this
contract
and
that
in
the
event
of
rescission
x
x
x.
59

SEC. 18. Mortgages. No mortgage of any unit or lot shall be made by the owner or
developer without prior written approval of the [HLURB]. Such approval shall not be
granted unless it is shown that the proceeds of the mortgage loan shall be used for the
development of the condominium or subdivision project x x x. The loan value of each lot
or unit covered by the mortgage shall be determined and the buyer thereof, if any, shall
be notified before the release of the loan. The buyer may, at his option, pay his
installment for the lot or unit directly to the mortgagee who shall apply the payments to
the corresponding mortgage indebtedness secured by the particular lot or unit being
paid
for
x
x
x.
(emphasis
supplied)