G.R. No.

L-29155 May 13, 1970

UNIVERSAL FOOD CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N.
FRANCISCO, respondents.

Wigberto E. Taada for petitioner.

Teofilo Mendoza for respondents.

CASTRO, J.:

Petition for certiorari by the Universal Food Corporation against the decision of the Court of
Appeals of February 13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano
V. Francisco, plaintiffs-appellants vs. Universal Food Corporation, defendant-appellee), the
dispositive portion of which reads as follows: "WHEREFORE the appealed decision is
hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and
defendant is hereby ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce
trademark and formula subject-matter of Exhibit A, and to pay him his monthly salary of
P300.00 from December 1, 1960, until the return to him of said trademark and formula, plus
attorney's fees in the amount of P500.00, with costs against defendant." 1

On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the
Court of First Instance of Manila, against, the Universal Food Corporation, an action for
rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed the court to
adjudge the defendant as without any right to the use of the Mafran trademark and formula,
and order the latter to restore to them the said right of user; to order the defendant to pay
Magdalo V. Francisco, Sr. his unpaid salary from December 1, 1960, as well as damages in
the sum of P40,000, and to pay the costs of suit. 1

On February 28, the defendant filed its answer containing admissions and denials.
Paragraph 3 thereof "admits the allegations contained in paragraph 3 of plaintiffs' complaint."
The answer further alleged that the defendant had complied with all the terms and conditions
of the Bill of Assignment and, consequently, the plaintiffs are not entitled to rescission
thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from the service as
permanent chief chemist of the corporation as he is still its chief chemist; and, by way of
special defenses, that the aforesaid plaintiff is estopped from questioning 1) the contents and
due execution of the Bill of Assignment, 2) the corporate acts of the petitioner, particularly the
resolution adopted by its board of directors at the special meeting held on October 14, 1960,
to suspend operations to avoid further losses due to increase in the prices of raw materials,
since the same plaintiff was present when that resolution was adopted and even took part in
the consideration thereof, 3) the actuations of its president and general manager in enforcing
and implementing the said resolution, 4) the fact that the same plaintiff was negligent in the
performance of his duties as chief chemist of the corporation, and 5) the further fact that the
said plaintiff was delinquent in the payment of his subscribed shares of stock with the
corporation. The defendant corporation prayed for the dismissal of the complaint, and asked
for P750 as attorney's fees and P5,000 in exemplary or corrective damages.
On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the
defendant's claim for damages and attorney's fees, with costs against the former, who
promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court
rendered the judgment now the subject of the present recourse.

The Court of Appeals arrived at the following "uncontroverted" findings of fact:

That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or

invented a formula for the manufacture of a food seasoning (sauce) derived
from banana fruits popularly known as MAFRAN sauce; that the manufacture
of this product was used in commercial scale in 1942, and in the same year
plaintiff registered his trademark in his name as owner and inventor with the
Bureau of Patents; that due to lack of sufficient capital to finance the
expansion of the business, in 1960, said plaintiff secured the financial
assistance of Tirso T. Reyes who, after a series of negotiations, formed with
others defendant Universal Food Corporation eventually leading to the
execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A
or 1).

Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V.

Francisco, Sr. was appointed Chief Chemist with a salary of P300.00 a
month, and plaintiff Victoriano V. Francisco was appointed auditor and
superintendent with a salary of P250.00 a month. Since the start of the
operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when
preparing the secret materials inside the laboratory, never allowed anyone,
not even his own son, or the President and General Manager Tirso T. Reyes,
of defendant, to enter the laboratory in order to keep the formula secret to
himself. However, said plaintiff expressed a willingness to give the formula to
defendant provided that the same should be placed or kept inside a safe to
be opened only when he is already incapacitated to perform his duties as
Chief Chemist, but defendant never acquired a safe for that purpose. On July
26, 1960, President and General Manager Tirso T. Reyes wrote plaintiff
requesting him to permit one or two members of his family to observe the
preparation of the 'Mafran Sauce' (Exhibit C), but said request was denied by
plaintiff. In spite of such denial, Tirso T. Reyes did not compel or force plaintiff
to accede to said request. Thereafter, however, due to the alleged scarcity
and high prices of raw materials, on November 28, 1960, Secretary-
Treasurer Ciriaco L. de Guzman of defendant issued a Memorandum (Exhibit
B), duly approved by the President and General Manager Tirso T. Reyes that
only Supervisor Ricardo Francisco should be retained in the factory and that
the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the
time being until the corporation should resume its operation. Some five (5)
days later, that is, on December 3, 1960, President and General Manager
Tirso T. Reyes, issued a memorandom to Victoriano Francisco ordering him
to report to the factory and produce "Mafran Sauce" at the rate of not less
than 100 cases a day so as to cope with the orders of the corporation's
various distributors and dealers, and with instructions to take only the
necessary daily employees without employing permanent employees (Exhibit
B). Again, on December 6, 1961, another memorandum was issued by the
same President and General Manager instructing the Assistant Chief
Chemist Ricardo Francisco, to recall all daily employees who are connected
in the production of Mafran Sauce and also some additional daily employees
for the production of Porky Pops (Exhibit B-1). On December 29, 1960,
 another memorandum was issued by the President and General Manager
instructing Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as
Acting Superintendent, to produce Mafran Sauce and Porky Pops in full
swing starting January 2, 1961 with further instructions to hire daily laborers
in order to cope with the full blast protection (Exhibit S-2). Plaintiff Magdalo V.
Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00
a month only until his services were terminated on November 30, 1960. On
January 9 and 16, 1961, defendant, acting thru its President and General
Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a buyer
of the corporation including its trademarks, formula and assets at a price of
not less than P300,000.00 (Exhibits D and D-1). Due to these successive
memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled back to
work, the latter filed the present action on February 14, 1961. About a month
afterwards, in a letter dated March 20, 1961, defendant, thru its President
and General Manager, requested said plaintiff to report for duty (Exhibit 3),
but the latter declined the request because the present action was already
filed in court (Exhibit J).

1. The petitioner's first contention is that the respondents are not entitled to rescission. It is
argued that under article 1191 of the new Civil Code, the right to rescind a reciprocal
obligation is not absolute and can be demanded only if one is ready, willing and able to
comply with his own obligation and the other is not; that under article 1169 of the same
Code, in reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him; that in this case
the trial court found that the respondents not only have failed to show that the petitioner has
been guilty of default in performing its contractual obligations, "but the record sufficiently
reveals the fact that it was the plaintiff Magdalo V. Francisco who had been remiss in the
compliance of his contractual obligation to cede and transfer to the defendant the formula for
Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the
lower court, 'the record is replete with the various attempt made by the defendant (herein
petitioner) to secure the said formula from Magdalo V. Francisco to no avail; and that upon
the foregoing findings, the respondent Court of Appeals unjustly concluded that the private
respondents are entitled to rescind the Bill of Assignment.

The threshold question is whether by virtue of the terms of the Bill of Assignment the
respondent Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the
formula for Mafran sauce. 2

The Bill of Assignment sets forth the following terms and conditions:

THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and
exclusive owner of the MAFRAN trade-mark and the formula for MAFRAN
SAUCE;

THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of
the net annual profit which the PARTY OF THE Second Part [Universal Food
Corporation] may realize by and/or out of its production of MAFRAN SAUCE
and other food products and from other business which the Party of the
Second Part may engage in as defined in its Articles of Incorporation, and
which its Board of Directors shall determine and declare, said Party of the
First Part hereby assign, transfer, and convey all its property rights and
interest over said Mafran trademark and formula for MAFRAN SAUCE unto
the Party of the Second Part;

THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual
net profit which the Party of the Second Part obligates itself to pay unto the
Party of the First Part as founder and as owner of the MAFRAN trademark
and formula for MAFRAN SAUCE, shall be paid at every end of the Fiscal
Year after the proper accounting and inventories has been undertaken by the
Party of the Second Part and after a competent auditor designated by the
Board of Directors shall have duly examined and audited its books of
accounts and shall have certified as to the correctness of its Financial
Statement;

THAT it is hereby understood that the Party of the First Part, to improve the
quality of the products of the Party of the First Part and to increase its
production, shall endeavor or undertake such research, study, experiments
and testing, to invent or cause to invent additional formula or formulas, the
property rights and interest thereon shall likewise be assigned, transferred,
and conveyed unto the Party of the Second Part in consideration of the
foregoing premises, covenants and stipulations:

THAT in the operation and management of the Party of the First Part, the
Party of the First Part shall be entitled to the following Participation:

(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-

President and Chief Chemist of the Party of the Second Part, which
appointments are permanent in character and Mr. VICTORIANO V.
FRANCISCO shall be appointed Auditor thereof and in the event that the
Treasurer or any officer who may have the custody of the funds, assets and
other properties of the Party of the Second Part comes from the Party of the
First Part, then the Auditor shall not be appointed from the latter; furthermore
should the Auditor be appointed from the Party representing the majority
shares of the Party of the Second Part, then the Treasurer shall be appointed
from the Party of the First Part;

(b) THAT in case of death or other disabilities they should become

incapacitated to discharge the duties of their respective position, then, their
shares or assigns and who may have necessary qualifications shall be
preferred to succeed them;

(c) That the Party of the First Part shall always be entitled to at least two (2)
membership in the Board of Directors of the Party of the Second Part;

(d) THAT in the manufacture of MAFRAN SAUCE and other food products by
the Party of the Second Part, the Chief Chemist shall have and shall exercise
absolute control and supervision over the laboratory assistants and
personnel and in the purchase and safekeeping of the Chemicals and other
mixtures used in the preparation of said products;

THAT this assignment, transfer and conveyance is absolute and irrevocable

in no case shall the PARTY OF THE First Part ask, demand or sue for the
surrender of its rights and interest over said MAFRAN trademark and mafran
 formula, except when a dissolution of the Party of the Second Part, voluntary
or otherwise, eventually arises, in which case then the property rights and
interests over said trademark and formula shall automatically revert the Party
of the First Part.

Certain provisions of the Bill of Assignment would seem to support the petitioner's position
that the respondent patentee, Magdalo V. Francisco, Sr. ceded and transferred to the
petitioner corporation the formula for Mafran sauce. Thus, the last part of the second
paragraph recites that the respondent patentee "assign, transfer and convey all its property
rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the
Party of the Second Part," and the last paragraph states that such "assignment, transfer and
conveyance is absolute and irrevocable (and) in no case shall the PARTY OF THE First Part
ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark
and mafran formula."

However, a perceptive analysis of the entire instrument and the language employed
therein 3 would lead one to the conclusion that what was actually ceded and transferred was only
the use of the Mafran sauce formula. This was the precise intention of the parties, 4 as we shall
presently show.

Firstly, one of the principal considerations of the Bill of Assignment is the payment of
"royalty of TWO (2%) PER CENTUM of the net annual profit" which the petitioner corporation
may realize by and/or out of its production of Mafran sauce and other food products, etc. The
word "royalty," when employed in connection with a license under a patent, means the
compensation paid for the use of a patented invention.

'Royalty,' when used in connection with a license under a patent, means the
compensation paid by the licensee to the licensor for the use of the licensor's
patented invention." (Hazeltine Corporation vs. Zenith Radio Corporation,
100 F. 2d 10, 16.) 5

Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its
unauthorized proliferation, it is provided in paragraph 5-(a) of the Bill that the respondent
patentee was to be appointed "chief chemist ... permanent in character," and that in case of
his "death or other disabilities," then his "heirs or assigns who may have necessary
qualifications shall be preferred to succeed" him as such chief chemist. It is further provided
in paragraph 5-(d) that the same respondent shall have and shall exercise absolute control
and supervision over the laboratory assistants and personnel and over the purchase and
safekeeping of the chemicals and other mixtures used in the preparation of the said product.
All these provisions of the Bill of Assignment clearly show that the intention of the respondent
patentee at the time of its execution was to part, not with the formula for Mafran sauce, but
only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the
invention. 6

Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner
corporation eventually take place, "the property rights and interests over said trademark and
formula shall automatically revert to the respondent patentee. This must be so, because
there could be no reversion of the trademark and formula in this case, if, as contended by
the petitioner, the respondent patentee assigned, ceded and transferred the trademark and
formula and not merely the right to use it for then such assignment passes the property
in such patent right to the petitioner corporation to which it is ceded, which, on the
corporation becoming insolvent, will become part of the property in the hands of the receiver
thereof. 7

Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and
transferred by virtue of the Bill of Assignment is the "use of the formula" (and not the formula
itself). This incontrovertible fact is admitted without equivocation in paragraph 3 of the
petitioner's answer. Hence, it does "not require proof and cannot be contradicted." 8 The last
part of paragraph 3 of the complaint and paragraph 3 of the answer are reproduced below for
ready reference:

3. ... and due to these privileges, the plaintiff in return assigned to said
corporation his interest and rights over the said trademark and formula so
that the defendant corporation could use the formula in the preparation and
manufacture of the mafran sauce, and the trade name for the marketing of
said project, as appearing in said contract ....

3. Defendant admits the allegations contained in paragraph 3 of plaintiff's

complaint.

Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran
sauce formula by the respondent patentee.

Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance
should be interpreted to effect "the least transmission of right," 9 and is there a better example
of least transmission of rights than allowing or permitting only the use, without transfer of
ownership, of the formula for Mafran sauce.

The foregoing reasons support the conclusion of the Court of Appeals 10 that what was
actually ceded and transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of
the petitioner corporation was only the use of the formula. Properly speaking, the Bill of
Assignment vested in the petitioner corporation no title to the formula. Without basis, therefore, is
the observation of the lower court that the respondent patentee "had been remiss in the
compliance of his contractual obligation to cede and transfer to the defendant the formula for
Mafran sauce."

2. The next fundamental question for resolution is whether the respondent Magdalo V.
Francisco, Sr. was dismissed from his position as chief chemist of the corporation without
justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment which in part
provides that his appointment is "permanent in character."

The petitioner submits that there is nothing in the successive memoranda issued by the
corporate officers of the petitioner, marked exhibits B, B-1 and B-2, from which can be
implied that the respondent patentee was being dismissed from his position as chief chemist
of the corporation. The fact, continues the petitioner, is that at a special meeting of the board
of directors of the corporation held on October 14, 1960, when the board decided to suspend
operations of the factory for two to four months and to retain only a skeletal force to avoid
further losses, the two private respondents were present, and the respondent patentee was
even designated as the acting superintendent, and assigned the mission of explaining to the
personnel of the factory why the corporation was stopping operations temporarily and laying
off personnel. The petitioner further submits that exhibit B indicates that the salary of the
respondent patentee would not be paid only during the time that the petitioner corporation
was idle, and that he could draw his salary as soon as the corporation resumed operations.
The clear import of this exhibit was allegedly entirely disregarded by the respondent Court of
Appeals, which concluded that since the petitioner resumed partial production of Mafran
sauce without notifying the said respondent formally, the latter had been dismissed as chief
chemist, without considering that the petitioner had to resume partial operations only to fill its
pending orders, and that the respondents were duly notified of that decision, that is, that
exhibit B-1 was addressed to Ricardo Francisco, and this was made known to the
respondent Victoriano V. Francisco. Besides, the records will show that the respondent
patentee had knowledge of the resumption of production by the corporation, but in spite of
such knowledge he did not report for work.

The petitioner further submits that if the respondent patentee really had unqualified interest
in propagating the product he claimed he so dearly loved, certainly he would not have waited
for a formal notification but would have immediately reported for work, considering that he
was then and still is a member of the corporation's board of directors, and insofar as the
petitioner is concerned, he is still its chief chemist; and because Ricardo Francisco is a son
of the respondent patentee to whom had been entrusted the performance of the duties of
chief chemist, while the respondent Victoriano V. Francisco is his brother, the respondent
patentee could not feign ignorance of the resumption of operations.

The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco,
and is dated December 29, 1960, the records will show that the petitioner was set to resume
full capacity production only sometime in March or April, 1961, and the respondent patentee
cannot deny that in the very same month when the petitioner was set to resume full
production, he received a copy of the resolution of its board of directors, directing him to
report immediately for duty; that exhibit H, of a later vintage as it is dated February 1, 1961,
clearly shows that Ricardo Francisco was merely the acting chemist, and this was the
situation on February 1, 1961, thirteen days before the filing of the present action for
rescission. The designation of Ricardo Francisco as the chief chemist carried no weight
because the president and general manager of the corporation had no power to make the
designation without the consent of the corporation's board of directors. The fact of the matter
is that although the respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H as
chief chemist, this same exhibit clearly indicates that Ricardo Francisco was merely the
acting chemist as he was the one assisting his father.

In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On
November 28, 1960 the secretary-treasurer of the corporation issued a memorandum (exh.
B), duly approved by its president and general manager, directing that only Ricardo
Francisco be retained in the factory and that the salary of respondent patentee, as chief
chemist, be stopped for the time being until the corporation resumed operations. This
measure was taken allegedly because of the scarcity and high prices of raw materials. Five
days later, however, or on December 3, the president and general manager issued a
memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to report to the factory
and to produce Mafran sauce at the rate of no less than 100 cases a day to cope with the
orders of the various distributors and dealers of the corporation, and instructing him to take
only the necessary daily employees without employing permanent ones. Then on December
6, the same president and general manager issued yet another memorandum (exh. B-2),
instructing Ricardo Francisco, as assistant chief chemist, to recall all daily employees
connected with the production of Mafran sauce and to hire additional daily employees for the
production of Porky Pops. Twenty-three days afterwards, or on December 29, the same
president and general manager issued still another memorandum (exh. S-2), directing
"Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to
produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961, with the
further instruction to hire daily laborers in order to cope with the full blast production. And
finally, at the hearing held on October 24, 1961, the same president and general manager
admitted that "I consider that the two months we paid him (referring to respondent Magdalo
V. Francisco, Sr.) is the separation pay."

The facts narrated in the preceding paragraph were the prevailing milieu on February 14,
1961 when the complaint for rescission of the Bill of Assignment was filed. They clearly prove
that the petitioner, acting through its corporate officers, 11 schemed and maneuvered to ease
out, separate and dismiss the said respondent from the service as permanent chief chemist,
in flagrant violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month
after the institution of the action for rescission, the petitioner corporation, thru its president
and general manager, requested the respondent patentee to report for duty (exh. 3), is of no
consequence. As the Court of Appeals correctly observed, such request was a "recall to
placate said plaintiff."

3. We now come to the question of rescission of the Bill of Assignment. In this connection,
we quote for ready reference the following articles of the new Civil Code governing
rescission of contracts:

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 of the
Mortgage Law.

ART. 1383. The action for rescission is subsidiary; it cannot be instituted

except when the party suffering damage has no other legal means to obtain
reparation for the same.

ART. 1384. Rescission shall be only to the extent necessary to cover the
damages caused.

At the moment, we shall concern ourselves with the first two paragraphs of 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
fulfillment and rescission of the obligation, with payment of damages in either case.

In this case before us, there is no controversy that the provisions of the Bill of Assignment
are reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically
paragraph 5-(a) and (b), by terminating the services of the respondent patentee Magdalo V.
Francisco, Sr., without lawful and justifiable cause.

Upon the factual milieu, is rescission of the Bill of Assignment proper?

The general rule is that rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental breach as would defeat the very
object of the parties in making the agreement. 12 The question of whether a breach of a contract
is substantial depends upon the attendant circumstances. 13 The petitioner contends that
rescission of the Bill of Assignment should be denied, because under article 1383, rescission is a
subsidiary remedy which cannot be instituted except when the party suffering damage has no
other legal means to obtain reparation for the same. However, in this case the dismissal of the
respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation
is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without any
fault or negligence on his part. Thus, apart from the legal principle that the option to demand
performance or ask for rescission of a contract belongs to the injured party, 14 the fact remains
that the respondents-appellees had no alternative but to file the present action for rescission and
damages. It is to be emphasized that the respondent patentee would not have agreed to the other
terms of the Bill of Assignment were it not for the basic commitment of the petitioner corporation
to appoint him as its Second Vice-President and Chief Chemist on a permanent basis; that in the
manufacture of Mafran sauce and other food products he would have "absolute control and
supervision over the laboratory assistants and personnel and in the purchase and safeguarding of
said products;" and that only by all these measures could the respondent patentee preserve
effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and, in the
process afford and secure for himself a lifetime job and steady income. The salient provisions of
the Bill of Assignment, namely, the transfer to the corporation of only the use of the formula; the
appointment of the respondent patentee as Second Vice-President and chief chemist on a
permanent status; the obligation of the said respondent patentee to continue research on the
patent to improve the quality of the products of the corporation; the need of absolute control and
supervision over the laboratory assistants and personnel and in the purchase and safekeeping of
the chemicals and other mixtures used in the preparation of said product all these provisions of
the Bill of Assignment are so interdependent that violation of one would result in virtual
nullification of the rest.

4. The petitioner further contends that it was error for the Court of Appeals to hold that the
respondent patentee is entitled to payment of his monthly salary of P300 from December 1,
1960, until the return to him of the Mafran trademark and formula, arguing that under articles
1191, the right to specific performance is not conjunctive with the right to rescind a reciprocal
contract; that a plaintiff cannot ask for both remedies; that the appellate court awarded the
respondents both remedies as it held that the respondents are entitled to rescind the Bill of
Assignment and also that the respondent patentee is entitled to his salary aforesaid; that this
is a gross error of law, when it is considered that such holding would make the petitioner
liable to pay respondent patentee's salary from December 1, 1960 to "kingdom come," as the
said holding requires the petitioner to make payment until it returns the formula which, the
appellate court itself found, the corporation never had; that, moreover, the fact is that the
said respondent patentee refused to go back to work, notwithstanding the call for him to
return which negates his right to be paid his back salaries for services which he had not
rendered; and that if the said respondent is entitled to be paid any back salary, the same
should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961
the petitioner had already formally called him back to work.

The above contention is without merit. Reading once more the Bill of Assignment in its
entirety and the particular provisions in their proper setting, we hold that the contract placed
the use of the formula for Mafran sauce with the petitioner, subject to defined limitations. One
of the considerations for the transfer of the use thereof was the undertaking on the part of
the petitioner corporation to employ the respondent patentee as the Second Vice-President
and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or
other disabilities supervened. Under these circumstances, the petitioner corporation could
not escape liability to pay the private respondent patentee his agreed monthly salary, as long
as the use, as well as the right to use, the formula for Mafran sauce remained with the
corporation.

5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation
to return to the respondents the trademark and formula for Mafran sauce, when both the
decision of the appellate court and that of the lower court state that the corporation is not
aware nor is in possession of the formula for Mafran sauce, and the respondent patentee
admittedly never gave the same to the corporation. According to the petitioner these findings
would render it impossible to carry out the order to return the formula to the respondent
patentee. The petitioner's predicament is understandable. Article 1385 of the new Civil Code
provides that rescission creates the obligation to return the things which were the object of
the contract. But that as it may, it is a logical inference from the appellate court's decision
that what was meant to be returned to the respondent patentee is not the formula itself, but
only its use and the right to such use. Thus, the respondents in their complaint for rescission
specifically and particularly pray, among others, that the petitioner corporation be adjudged
as "without any right to use said trademark and formula."

ACCORDINGLY, conformably with the observations we have above made, the judgment of
the Court of Appeals is modified to read as follows: "Wherefore the appealed decision is
reversed. The Bill of Assignment (Exhibit A) is hereby rescinded, and the defendant
corporation is ordered to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right
to the use of his Mafran sauce trademark and formula, subject-matter of the Bill of
Assignment, and to this end the defendant corporation and all its assigns and successors
are hereby permanently enjoined, effective immediately, from using in any manner the said
Mafran sauce trademark and formula. The defendant corporation shall also pay to Magdalo
V. Francisco, Sr. his monthly salary of P300 from December 1, 1960, until the date of finality
of this judgment, inclusive, the total amount due to him to earn legal interest from the date of
the finality of this judgment until it shall have been fully paid, plus attorney's fees in the
amount of P500, with costs against the defendant corporation." As thus modified, the said
judgment is affirmed, with costs against the petitioner corporation.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur.

Teehankee J., took no part.

G.R. No. L-7003 January 18, 1912

MANUEL ORIA Y GONZALES, plaintiff-appellant,

vs.
JOSE McMICKING, as sheriff of the city of Manila,
GUTIERREZ HERMANOS, MIGUEL GUTIERREZ DE CELIS, DANIEL PEREZ, and
LEOPOLDO CRIADO, defendants-appellees.

Chicote & Miranda for appellant.

Eduardo Gutierrez Repide for appellees.

MORELAND, J.:

These are the facts:

In the month of August, 1909, Gutierrez Hermanos brought an action Oria Hermanos & Co.
for the recovery of P147,204.28; that action is known as No. 7289 in the Court of First
Instance of Manila. In March, 1910 the plaintiff began another action against the same
defendant for the recovery of P12,318.57; this case was known as No. 7719 in said court.
Subsequent to the beginning of the above actions, and on or about the 30th day of April,
1910, the members of the company of Oria Hermanos & Co., on account of the expiration of
the time stated in their agreement of copartnership, dissolved their relations and entered into
liquidation. On the first day of June, 1910, Tomas Oria y Balbas, as managing partner in
liquidation, acting for himself and on behalf of his other coowners Casimiro Oria y Balbas
and Adolfo Fuster Robles, entered into a contract with the plaintiff in this case, Manuel Orio
Gonzales, which said contract was for the purpose of selling and transferring to the plaintiff in
this action all of the property of which the said Oria Hermanos & Co. was owner. Said
instrument contained the following clauses:

5. I, Tomas Oria y Balbas, do further state declare that I have agreed with the other party
hereto, Don Manuel Oria Gonzales, to sell all the property I have mentioned, which is
specified more in detail in the general inventory of Orio Hermanos & Co., for the price and
under the conditions hereinafter expressed; and in order to carry into effect such agreement
made by me with the said Don Manuel Orio Gonzales, in my own right and also in
representation of my partners, Don Casimiro Oria and Don Adolfo Fuster, I do hereby
stipulate and agree:

6. As managing partner and liquidator of Oria Hermanos & Co., and further in my own right
and in the name and representation of Don Casimiro Oria y Balbas and Don Adolfo Fuster y
Robles, personally and as partners in Oria Hermanos & Co., in consideration of the sum of
two hundred seventy-four thousand pesos (P274,000), which the said Don Manuel Oria y
Gonzales undertakes and engages to pay to the firm of Oria Hermanos & Co., in liquidation,
or to us the parties hereto, myself and the persons I represent, as partners in Oria Hermanos
& Co., which whom shall be paid in installments, in the manner and under the conditions
hereinafter set forth. I hereby sell, cede and transfer absolutely and forever to the said Don
Manuel Oria y Gonzales, his heirs and his assigns, all and every part of the property
mentioned in the fourth section hereof and more specially described in the general inventory
of Oria Hermosa & Co.; under the following mutual conditions:
 (a) Don Manuel Oria y Gonzales engages and undertakes to pay and to settle the
sum agreed upon for this sale, cession and transfer within a period of twelve (12)
years, further engaging and undertaking to pay each year a sum of not less than ten
thousand (10,000) pesos and at the end of the said period to settle the balance of
said price.

(b) After the first six (6) years of the period for the payment of the stipulated price,
that is, during the last six years of said period, Don Manuel Oria y Gonzales engages
and undertakes to pay the interest at 3 per cent a year on the price stipulated or the
part thereof unpaid at such time; provided, that this is mutual obligation and interest
payable annually.

(c) Don Manuel Oria y Gonzales further engages and undertakes to pay Don Tomas
Oria, Don Casimiro Oria and Don Adolfo Fuster during the time that they remain in
the Philippines and do not reside abroad, the sum of one hundred and fifty (150)
pesos monthly; which obligation shall be understood to be contracted individually
with each of the said parties; and the amounts so paid to each and all of them shall
be charged to the account of Oria Hermanos & Co., in liquidation, in discharge of the
stipulated consideration and the installments thereof and interest thereon when due.

(d) Don Manuel Oria y Gonzales engages and undertakes not to sell, alienate,
transfer or mortgage, either wholly or in part, the property hereby sold to him, without
the written authorization of Don Tomas Oria as liquidator of the firm of Oria
Hermanos & Co., so long as the consideration of this sale is not fully satisfied, to
guarantee which this restriction is imposed: provided, that this restriction applies only
to the vessels, real estate and branch stores in the towns mentioned in the fourth
section of this instrument, not to the rest of the property.

(e) Don Manuel Oria y Gonzales engages and undertakes to cede gratuitously in the
dwelling-house in the town of Laoag, hereby sold, the use of the same or the portion
thereof that may be necessary for Don Tomas Oria to establish therein the liquidation
office of Oria Hermanos & Co.; provided, that this cession is made for a period of
only two (2) years.

( f ) Don Tomas Oria y Balbas and Don Adolfo Fuster engage and undertake to place
their personal services at the disposal of Don Manuel Oria y Gonzales in everything
relating to his instruction in the management and conduct of the property and
business hereby sold; provided, that this obligation and promise shall be binding
upon Don Adolfo Fuster only for the time he may reside in the Philippines and upon
both parties only for a maximum period of 12 months.

7. I, Manuel Oria y Gonzales, being informed of the foregoing action and contract executed
by Don Tomas Oria y Balbas, do on my part stipulated and agree: that I accept the sale,
cession and transfer hereby made by him in my favor and engage and undertake to pay Oria
Hermanos & Co., either in liquidation, or if necessary to the partners of Oria Hermanos &
Co., the price of said sale, cession and transfer, that is, the sum of P274,000 within a period
of 12 years, in the manner and under the conditions set forth by him in the preceding section,
and especially engaged not to sell, alienate, transfer or mortgage the property involved in
this sale which is specified in paragraph (d) of the preceding section, without the previous
written authorization of the vendor, Oria Hermanos & Co., such property being so exempted
as a guaranty for the payment of the purchase price of this sale.
Among the goods transferred by this instrument was the steamship Serantes, which is the
subject of litigation.

On the 17th day of September, 1910, case No. 7719, above referred to, was resolved by the
Court of First Instance in favor of Gutierrez Hermanos and against Oria Hermanos & Co. for
the sum demanded in the complaint. The cause was appealed to the Supreme Court and,
the judgment therein having been affirmed,1 execution was issued thereon and placed in the
hands of the sheriff of Manila. The sheriff immediately demanded that Tomas Oria y Balbas,
as liquidator of the firm of Oria Hermanos & Co. make payment of the said judgment, to
which he replied that there were no funds with which to pay the same. Thereupon the sheriff
levied upon the said steamer Serantes, took possession of the same, and announced it for
sale at public auction on the 21st day of October, 19110. On the 18th day of October, 190,
three days before the sale, the plaintiff in this action presented to the sheriff a written
statement claiming to be the owner of the said steamship, and to have the right of
possession of the same by reason of the sale to him by Oria Hermanos & Co. of all of the
property belonging to said company, including the said steamer Serantes, a shown by the
instrument above referred to the quoted. The sheriff thereupon required Gutierrez Hermanos
to present a bond for his protection, which having been done, the sheriff proceeded to the
sale of the steamship. At the sale Gutierrez Hermanos became the purchaser, said company
being the highest bidder, and the sum which it paid being the highest sum bidden for the
same.

On the 19th day of October, 191, the plaintiff began the present action, which has for its
object, as shown by the prayer of the complaint: First, the issuance of a preliminary
injunction to prevent the sale of the steamship; and, second, the declaration that the plaintiff
is the owner of said steamship and is entitled to the possession of the same, and that the
defendant be required to restore the same to the plaintiff and to pay P10,000 damages for its
detention.

Upon the trial judgment was found in favor of the defendant and against the plaintiff, and the
complaint was dismissed upon the merits with costs. From that judgment this appeal is
taken.

The substantial question presented for our consideration is the validity of the sale from Oria
Hermanos & Co. to Manuel Oria y Gonzalez as against the creditors of said company. It is
the contention of Gutierrez Hermanos that said sale is fraudulent as against the creditors of
Oria Hermanos & Co., and that the transfer thereby consummated of the steamship in
question was void as to said creditors and as to Gutierrez Hermanos in particular.

There is some contention on the part of the plaintiffs that aside from the property included in
the sale referred to, Oria Hermanos & Co. had sufficient other property to pay the judgment
of Gutierrez Hermanos. The trial court found, however, against the plaintiff in this regard. A
careful examination of the record fails to disclose any sufficient reason for the reversal of the
finding. While the evidence is somewhat conflicting, we are of the opinion that there is
sufficient to sustain the findings made.

In determining whether or not the sale in question was fraudulent as against creditors, these
facts must be kept in mind:

1. At the time of said sale the value of the assets of Oria Hermanos & Co., as stated
by the partners themselves, was P274,000.
 2. That at the time of said sale actions were pending against said company by one
single creditor for sums aggregating in amount nearly P160,000.

3. The vendee of said sale was a son of Tomas Oria y Balbas and a nephew of the
other two persons heretofore mentioned which said three brothers together
constituted all of the members of said company.

4. Nothing of value seems to have been delivered by the plaintiff in consideration of

said sale and no security whatsoever was given for the payments therein provided
for.

5. The plaintiff is a young man twenty-five years of age. There is no pretense

whatsoever that he owned any property or had any business at the time of the sale.
On the contrary it appears without contradiction that, when the sale took place, he
was merely a student without assets and without gainful occupation.

6. Plaintiff, at the time of the sale, was fully aware of the two suits that have already
been begun against the company whose assets he was purchasing and well knew
that if said suits should terminate in favor of the plaintiffs therein the judgments in
which they terminated would have to be paid out of the property which he was then
taking over or they would not be paid at all.

7. Under all the circumstances the sale in question was, so far as the creditors were
concerned, without consideration. To turn over a business worth P274,000 to an
"impecunious and vocationless youth" who knew absolutely nothing about the
business he received, and whose adaptability to the management of that business
was entirely unknown, without a penny being paid down, without any security
whatsoever, is a proceeding so unusual, so devoid of care and caution, and so
wholly outside of the well defined lines of ordinary business transactions, as to startle
any person interested in the concern.

8. It is certain that the members of the company of Oria Hermanos & Co. would
never have made a similar contract or executed a similar instrument with a stranger.

9. The prohibition in the contract against the sale of certain portions of the property
by the plaintiff offers no protection whatever to the creditors. Such prohibitions is not
security. The parties who made the original transfer can waive and release it at
pleasure. Such restrictions is of no value to the creditors of the company. They can
not utilize it for the reduction of their claims or in any other beneficial ways.

In determining whether or not a certain conveyance is fraudulent the question in every case
is whether the conveyance was a bona fide transaction or a trick and contrivance to defeat
creditors, or whether it conserves to the debtor a special right. It is not sufficient that it is
founded on good consideration or is made with bona fide intent: it must have both elements.
If defective in either of these particulars, although good between the parties, it is voidable as
to creditors. The rule is universal both at law and in equity that whatever fraud creates justice
will destroy. The test as to whether or not a conveyance is fraudulent is, does it prejudice the
rights of creditors?

In the consideration of whether or not certain transfers were fraudulent, courts have laid
down certain rules by which the fraudulent character of the transaction may be determined.
The following are some of the circumstances attending sales which have been dominated by
the courts badges of fraud:

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has been begun and while it is pending
against him.

3. A sale upon credit by an insolvent debtor.

4. Evidence of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.

6. The fact that the transfer is made between father and son, when there are present
other of the above circumstances.

7. The failure of the vendee to take exclusive possession of all the property.

The case at bar presents every one of the badges of fraud above enumerated. Tested by the
inquiry, does the sale prejudice the rights of the creditors, the result is clear. The sale in the
form in which it was made leaves the creditors substantially without recourse. The property
of the company is gone, its income is gone, the business itself is likely to fail, the property is
being dissipated, and is depreciating in value. As a result, even if the claims of the creditors
should live twelve years and the creditors themselves wait that long, it more than likely that
nothing would be found to satisfy their claim at the end of the long wait.
(Regalado vs. Luchsinger & Co., 5 Phil. Rep., 625; art. 1297, Civil Code, par. 1; Manresa's
Commentaries, vol. 8, pp. 713-719.)

Since the records shows that there was no property with which the judgment in question
could be paid, the defendants were obliged to resort to and levy upon the steamer in suit.
The court below was correct in finding the sale fraudulent and void as to Gutierrez
Hermanos in so far as was necessary to permit the collection of its judgment. As a corollary,
the court below found that the evidence failed to show that the plaintiff was the owner or
entitled to the possession of the steamer in question at the time of the levy and sale
complained of, or that he was damaged thereby. Defendant had the right to make the levy
and test the validity of the sale in that way, without first resorting to a direct action to annul
the sale. The creditor may attack the sale by ignoring it and seizing under his execution the
property, or any necessary portion thereof, which is the subject of the sale.

For these reasons the judgment is affirmed, without special finding as to costs. So ordered.

Arellano, C.J., Torres, Mapa, Johnson, Carson and Trent, JJ., concur.
 [G.R. No. 134685. November 19, 1999]

MARIA ANTONIA SIGUAN, petitioner, vs. ROSA LIM, LINDE LIM,

INGRID LIM and NEIL LIM, respondents.

DECISION
DAVIDE, JR., C.J.:

May the Deed of Donation executed by respondent Rosa Lim (hereafter LIM) in
favor of her children be rescinded for being in fraud of her alleged creditor, petitioner
Maria Antonia Siguan? This is the pivotal issue to be resolved in this petition for review
on certiorari under Rule 45 of the Revised Rules of Court.
The relevant facts, as borne out of the records, are as follows:
On 25 and 26 August 1990, LIM issued two Metrobank checks in the sums
of P300,000 and P241,668, respectively, payable to cash. Upon presentment by petitioner
with the drawee bank, the checks were dishonored for the reason account closed.
Demands to make good the checks proved futile. As a consequence, a criminal case for
violation of Batas Pambansa Blg. 22, docketed as Criminal Cases Nos. 22127-28, were
filed by petitioner against LIM with Branch 23 of the Regional Trial Court (RTC) of
Cebu City. In its decision[1] dated 29 December 1992, the court a quo convicted LIM as
charged. The case is pending before this Court for review and docketed as G.R. No.
134685.
It also appears that on 31 July 1990 LIM was convicted of estafa by the RTC of
Quezon City in Criminal Case No. Q-89-2216 [2] filed by a certain Victoria Suarez. This
decision was affirmed by the Court of Appeals.On appeal, however, this Court, in a
decision[3] promulgated on 7 April 1997, acquitted LIM but held her civilly liable in the
amount of P169,000, as actual damages, plus legal interest.
Meanwhile, on 2 July 1991, a Deed of Donation [4] conveying the following parcels of
land and purportedly executed by LIM on 10 August 1989 in favor of her children, Linde,
Ingrid and Neil, was registered with the Office of the Register of Deeds of Cebu City:
(1) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 563 sq.
m. and covered by TCT No. 93433;
(2) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 600 sq.
m. and covered by TCT No. 93434;
 (3) a parcel of land situated at Cebu City containing an area of 368 sq. m. and covered
by TCT No. 87019; and
(4) a parcel of land situated at Cebu City, Cebu containing an area of 511 sq. m. and
covered by TCT No. 87020.
New transfer certificates of title were thereafter issued in the names of the donees.[5]
On 23 June 1993, petitioner filed an accion pauliana against LIM and her children
before Branch 18 of the RTC of Cebu City to rescind the questioned Deed of Donation
and to declare as null and void the new transfer certificates of title issued for the lots
covered by the questioned Deed. The complaint was docketed as Civil Case No. CEB-
14181. Petitioner claimed therein that sometime in July 1991, LIM, through a Deed of
Donation, fraudulently transferred all her real property to her children in bad faith and in
fraud of creditors, including her; that LIM conspired and confederated with her children
in antedating the questioned Deed of Donation, to petitioners and other creditors
prejudice; and that LIM, at the time of the fraudulent conveyance, left no sufficient
properties to pay her obligations.
On the other hand, LIM denied any liability to petitioner. She claimed that her
convictions in Criminal Cases Nos. 22127-28 were erroneous, which was the reason why
she appealed said decision to the Court of Appeals. As regards the questioned Deed of
Donation, she maintained that it was not antedated but was made in good faith at a time
when she had sufficient property. Finally, she alleged that the Deed of Donation was
registered only on 2 July 1991 because she was seriously ill.
In its decision of 31 December 1994,[6] the trial court ordered the rescission of the
questioned deed of donation; (2) declared null and void the transfer certificates of title
issued in the names of private respondents Linde, Ingrid and Neil Lim; (3) ordered the
Register of Deeds of Cebu City to cancel said titles and to reinstate the previous titles in
the name of Rosa Lim; and (4) directed the LIMs to pay the petitioner, jointly and
severally, the sum of P10,000 as moral damages; P10,000 as attorneys fees; and P5,000
as expenses of litigation.
On appeal, the Court of Appeals, in a decision [7] promulgated on 20 February 1998,
reversed the decision of the trial court and dismissed petitioners accion pauliana. It held
that two of the requisites for filing an accion pauliana were absent, namely, (1) there
must be a credit existing prior to the celebration of the contract; and (2) there must be a
fraud, or at least the intent to commit fraud, to the prejudice of the creditor seeking the
rescission.
According to the Court of Appeals, the Deed of Donation, which was executed and
acknowledged before a notary public, appears on its face to have been executed on 10
August 1989. Under Section 23 of Rule 132 of the Rules of Court, the questioned Deed,
being a public document, is evidence of the fact which gave rise to its execution and of
the date thereof. No antedating of the Deed of Donation was made, there being no
convincing evidence on record to indicate that the notary public and the parties did
antedate it. Since LIMs indebtedness to petitioner was incurred in August 1990, or a year
after the execution of the Deed of Donation, the first requirement for accion
pauliana was not met.
 Anent petitioners contention that assuming that the Deed of Donation was not
antedated it was nevertheless in fraud of creditors because Victoria Suarez became LIMs
creditor on 8 October 1987, the Court of Appeals found the same untenable, for the rule is
basic that the fraud must prejudice the creditor seeking the rescission.
Her motion for reconsideration having been denied, petitioner came to this Court and
submits the following issue:

WHETHERORNOTTHEDEEDOFDONATION,EXH.1,WAS
ENTEREDINTOINFRAUDOF[THE]CREDITORSOF
RESPONDENTROSA[LIM].

Petitioner argues that the finding of the Court of Appeals that the Deed of Donation
was not in fraud of creditors is contrary to well-settled jurisprudence laid down by this
Court as early as 1912 in the case of Oria v. McMicking,[8] which enumerated the various
circumstances indicating the existence of fraud in a transaction. She reiterates her
arguments below, and adds that another fact found by the trial court and admitted by the
parties but untouched by the Court of Appeals is the existence of a prior final judgment
against LIM in Criminal Case No. Q-89-2216 declaring Victoria Suarez as LIMs
judgment creditor before the execution of the Deed of Donation.
Petitioner further argues that the Court of Appeals incorrectly applied or interpreted
Section 23,[9] Rule 132 of the Rules of Court, in holding that being a public document, the
said deed of donation is evidence of the fact which gave rise to its execution and of the
date of the latter. Said provision should be read with Section 30[10] of the same Rule which
provides that notarial documents are prima facie evidence of their execution, not of the
facts which gave rise to their execution and of the date of the latter.
Finally, petitioner avers that the Court of Appeals overlooked Article 759 of the New
Civil Code, which provides: The donation is always presumed to be in fraud of creditors
when at the time of the execution thereof the donor did not reserve sufficient property to
pay his debts prior to the donation. In this case, LIM made no reservation of sufficient
property to pay her creditors prior to the execution of the Deed of Donation.
On the other hand, respondents argue that (a) having agreed on the law and requisites
of accion pauliana, petitioner cannot take shelter under a different law; (b) petitioner
cannot invoke the credit of Victoria Suarez, who is not a party to this case, to support
her accion pauliana; (c) the Court of Appeals correctly applied or interpreted Section 23
of Rule 132 of the Rules of Court; (d) petitioner failed to present convincing evidence
that the Deed of Donation was antedated and executed in fraud of petitioner; and (e) the
Court of Appeals correctly struck down the awards of damages, attorneys fees and
expenses of litigation because there is no factual basis therefor in the body of the trial
courts decision.
The primordial issue for resolution is whether the questioned Deed of Donation was
made in fraud of petitioner and, therefore, rescissible. A corollary issue is whether the
awards of damages, attorneys fees and expenses of litigation are proper.
We resolve these issues in the negative.
 The rule is well settled that the jurisdiction of this Court in cases brought before it
from the Court of Appeals via Rule 45 of the Rules of Court is limited to reviewing errors
of law. Findings of fact of the latter court are conclusive, except in a number of instances.
[11]
In the case at bar, one of the recognized exceptions warranting a review by this Court
of the factual findings of the Court of Appeals exists, to wit, the factual findings and
conclusions of the lower court and Court of Appeals are conflicting, especially on the
issue of whether the Deed of Donation in question was in fraud of creditors.
Article 1381 of the Civil Code enumerates the contracts which are rescissible, and
among them are those contracts undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them.
The action to rescind contracts in fraud of creditors is known as accion pauliana. For
this action to prosper, the following requisites must be present: (1) the plaintiff asking for
rescission has a credit prior to the alienation, [12] although demandable later; (2) the debtor
has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the
creditor has no other legal remedy to satisfy his claim; [13] (4) the act being impugned is
fraudulent;[14] (5) the third person who received the property conveyed, if it is by onerous
title, has been an accomplice in the fraud.[15]
The general rule is that rescission requires the existence of creditors at the time of the
alleged fraudulent alienation, and this must be proved as one of the bases of the judicial
pronouncement setting aside the contract.[16] Without any prior existing debt, there can
neither be injury nor fraud. While it is necessary that the credit of the plaintiff in
the accion pauliana must exist prior to the fraudulent alienation, the date of the judgment
enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is
merely declaratory, with retroactive effect to the date when the credit was constituted.[17]
In the instant case, the alleged debt of LIM in favor of petitioner was incurred in
August 1990, while the deed of donation was purportedly executed on 10 August 1989.
We are not convinced with the allegation of the petitioner that the questioned deed
was antedated to make it appear that it was made prior to petitioners credit. Notably, that
deed is a public document, it having been acknowledged before a notary public.[18] As
such, it is evidence of the fact which gave rise to its execution and of its date, pursuant to
Section 23, Rule 132 of the Rules of Court.
Petitioners contention that the public documents referred to in said Section 23 are
only those entries in public records made in the performance of a duty by a public officer
does not hold water. Section 23 reads:

SEC.23.Publicdocumentsasevidence.Documentsconsistingofentriesin
publicrecordsmadeintheperformanceofadutybyapublicofficerareprima
facieevidenceofthefactsthereinstated.Allotherpublicdocumentsare
evidence,evenagainstathirdperson,ofthefactwhichgaverisetotheir
executionandofthedateofthelatter.(Emphasissupplied).
 The phrase all other public documents in the second sentence of Section 23 means
those public documents other than the entries in public records made in the performance
of a duty by a public officer. And these include notarial documents, like the subject deed
of donation. Section 19, Rule 132 of the Rules of Court provides:

SEC.19.Classesofdocuments.Forthepurposeoftheirpresentationin
evidence,documentsareeitherpublicorprivate.

Publicdocumentsare:

(a)...

(b)Documentsacknowledgedbeforeanotarypublicexceptlastwillsand
testaments....

It bears repeating that notarial documents, except last wills and testaments, are public
documents and are evidence of the facts that gave rise to their execution and of their date.
In the present case, the fact that the questioned Deed was registered only on 2 July
1991 is not enough to overcome the presumption as to the truthfulness of the statement of
the date in the questioned deed, which is 10 August 1989. Petitioners claim against LIM
was constituted only in August 1990, or a year after the questioned alienation. Thus, the
first two requisites for the rescission of contracts are absent.
Even assuming arguendo that petitioner became a creditor of LIM prior to the
celebration of the contract of donation, still her action for rescission would not fare well
because the third requisite was not met. Under Article 1381 of the Civil Code, contracts
entered into in fraud of creditors may be rescinded only when the creditors cannot in any
manner collect the claims due them. Also, Article 1383 of the same Code provides that
the action for rescission is but a subsidiary remedy which cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for the
same. The term subsidiary remedy has been defined as the exhaustion of all remedies by
the prejudiced creditor to collect claims due him before rescission is resorted to. [19] It is,
therefore, essential that the party asking for rescission prove that he has exhausted all
other legal means to obtain satisfaction of his claim. [20] Petitioner neither alleged nor
proved that she did so. On this score, her action for the rescission of the questioned deed
is not maintainable even if the fraud charged actually did exist.[21]
The fourth requisite for an accion pauliana to prosper is not present either.
Article 1387, first paragraph, of the Civil Code provides: All contracts by virtue of
which the debtor alienates property by gratuitous title are presumed to have been entered
into in fraud of creditors when the donor did not reserve sufficient property to pay all
debts contracted before the donation. Likewise, Article 759 of the same Code, second
paragraph, states that the donation is always presumed to be in fraud of creditors when at
the time thereof the donor did not reserve sufficient property to pay his debts prior to the
donation.
 For this presumption of fraud to apply, it must be established that the donor did not
leave adequate properties which creditors might have recourse for the collection of their
credits existing before the execution of the donation.
As earlier discussed, petitioners alleged credit existed only a year after the deed of
donation was executed. She cannot, therefore, be said to have been prejudiced or
defrauded by such alienation. Besides, the evidence disclose that as of 10 August 1989,
when the deed of donation was executed, LIM had the following properties:
(1) A parcel of land containing an area of 220 square meters, together with the
house constructed thereon, situated in Sto. Nio Village, Mandaue City, Cebu,
registered in the name of Rosa Lim and covered by TCT No. 19706;[22]
(2) A parcel of land located in Benros Subdivision, Lawa-an, Talisay, Cebu;[23]
(3) A parcel of land containing an area of 2.152 hectares, with coconut trees
thereon, situated at Hindag-an, St. Bernard, Southern Leyte, and covered by
Tax Declaration No. 13572.[24]
(4) A parcel of land containing an area of 3.6 hectares, with coconut trees
thereon, situated at Hindag-an, St. Bernard, Southern Leyte, and covered by
Tax Declaration No. 13571.[25]
During her cross-examination, LIM declared that the house and lot mentioned in no.
1 was bought by her in the amount of about P800,000 to P900,000.[26] Thus:
ATTY. FLORIDO:
Q These properties at the Sto. Nio Village, how much did you acquire this property?
A Including the residential house P800,000.00 to P900,000.00.
Q How about the lot which includes the house. How much was the price in the Deed of Sale of
the house and lot at Sto. Nio Violage [sic]?
A I forgot.
Q How much did you pay for it?
A That is P800,000.00 to P900,000.00.
Petitioner did not adduce any evidence that the price of said property was
lower. Anent the property in no. 2, LIM testified that she sold it in 1990. [27] As to the
properties in nos. 3 and 4, the total market value stated in the tax declarations dated 23
November 1993 was P56,871.60. Aside from these tax declarations, petitioner did not
present evidence that would indicate the actual market value of said properties. It was
not, therefore, sufficiently established that the properties left behind by LIM were not
sufficient to cover her debts existing before the donation was made. Hence, the
presumption of fraud will not come into play.
Nevertheless, a creditor need not depend solely upon the presumption laid down in
Articles 759 and 1387 of the Civil Code. Under the third paragraph of Article 1387, the
design to defraud may be proved in any other manner recognized by the law of
evidence. Thus in the consideration of whether certain transfers are fraudulent, the Court
has laid down specific rules by which the character of the transaction may be
determined. The following have been denominated by the Court as badges of fraud:
(1) The fact that the consideration of the conveyance is fictitious or is inadequate;
(2) A transfer made by a debtor after suit has begun and while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially;
(6) The fact that the transfer is made between father and son, when there are present
other of the above circumstances; and
(7) The failure of the vendee to take exclusive possession of all the property.[28]
The above enumeration, however, is not an exclusive list. The circumstances
evidencing fraud are as varied as the men who perpetrate the fraud in each case. This
Court has therefore declined to define it, reserving the liberty to deal with it under
whatever form it may present itself.[29]
Petitioner failed to discharge the burden of proving any of the circumstances
enumerated above or any other circumstance from which fraud can be
inferred. Accordingly, since the four requirements for the rescission of a gratuitous
contract are not present in this case, petitioners action must fail.
In her further attempt to support her action for rescission, petitioner brings to our
attention the 31 July 1990 Decision[30] of the RTC of Quezon City, Branch 92, in Criminal
Case No. Q-89-2216. LIM was therein held guilty of estafa and was ordered to pay
complainant Victoria Suarez the sum of P169,000 for the obligation LIM incurred on 8
October 1987. This decision was affirmed by the Court of Appeals. Upon appeal,
however, this Court acquitted LIM of estafa but held her civilly liable for P169,000 as
actual damages.
It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor
prior to the questioned alienation, is not a party to this accion pauliana. Article 1384 of
the Civil Code provides that rescission shall only be to the extent necessary to cover the
damages caused. Under this Article, only the creditor who brought the action for
rescission can benefit from the rescission; those who are strangers to the action cannot
benefit from its effects.[31] And the revocation is only to the extent of the plaintiff creditors
unsatisfied credit; as to the excess, the alienation is maintained. [32] Thus, petitioner cannot
invoke the credit of Suarez to justify rescission of the subject deed of donation.
Now on the propriety of the trial courts awards of moral damages, attorneys fees and
expenses of litigation in favor of the petitioner. We have pored over the records and found
no factual or legal basis therefor. The trial court made these awards in the dispositive
portion of its decision without stating, however, any justification for the same in the ratio
decidendi. Hence, the Court of Appeals correctly deleted these awards for want of basis
in fact, law or equity.
 WHEREFORE, the petition is hereby DISMISSED and the challenged decision of
the Court of Appeals in CA-G.R. CV. No. 50091 is AFFIRMED in toto.
No pronouncement as to costs.
SO ORDERED.
Puno, Kapunan, Pardo, and Ynares-Santiago, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

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

MANUEL G. SINGSONG, JOSE BELZUNCE, AGUSTIN E. TONSAY, JOSE L. ESPINOS,

BACOLOD SOUTHERN LUMBER YARD, and OPPEN, ESTEBAN, INC., plaintiffs-
appellees,
vs.
ISABELA SAWMILL, MARGARITA G. SALDAJENO and her husband CECILIO
SALDAJENO LEON GARIBAY, TIMOTEO TUBUNGBANUA, and THE PROVINCIAL
SHERIFF OF NEGROS OCCIDENTAL, defendants, MARGARITA G. SALDAJENO and
her husband CECILIO SALDAJENO, defendants-appellants.

FERNANDEZ, J.:

This is an appeal to the Court of Appeals from the judgment of the Court of First Instance of
Negros Occidental in Civil Cage No. 5343, entitled "Manuel G. Singson, et all vs. Isabela
Sawmill, et al.,", the dispositive portion of which reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, it is hereby held. (1)

that the contract, Appendix "F", of the Partial Stipulation of Facts, Exh. "A",
has not created a chattel mortgage lien on the machineries and other chattels
mentioned therein, all of which are property of the defendant partnership
"Isabela Sawmill", (2) that the plaintiffs, as creditors of the defendant
partnership, have a preferred right over the assets of the said partnership
and over the proceeds of their sale at public auction, superior to the right of
the defendant Margarita G. Saldajeno, as creditor of the partners Leon
Garibay and Timoteo Tubungbanua; (3) that the defendant Isabela Sawmill' is
indebted to the plaintiff Oppen, Esteban, Inc. in the amount of P1,288.89,
with legal interest thereon from the filing of the complaint on June 5, 1959; (4)
that the same defendant is indebted to the plaintiff Manuel G. Singsong in the
total amount of P5,723.50, with interest thereon at the rate of 1 % per month
from May 6, 1959, (the date of the statements of account, Exhs. "L" and "M"),
and 25% of the total indebtedness at the time of payment, for attorneys' fees,
both interest and attorneys fees being stipulated in Exhs. "I" to "17", inclusive;
(5) that the same defendant is indebted to the plaintiff Agustin E. Tonsay in
the amount of P933.73, with legal interest thereon from the filing of the
complaint on June 5, 1959; (6) that the same defendant is indebted to the
plaintiff Jose L. Espinos in the amount of P1,579.44, with legal interest
thereon from the filing of the complaint on June 5, 1959; (7) that the same
defendant is indebted to the plaintiff Bacolod Southern Lumber Yard in the
amount of Pl,048.78, with legal interest thereon from the filing of the
complaint on June 5, 1959; (8) that the same defendant is indebted to the
plaintiff Jose Belzunce in the amount of P2,052.10, with legal interest thereon
from the filing of the complaint on June 5. 1959; (9) that the defendant
Margarita G. Saldajeno, having purchased at public auction the assets of the
 defendant partnership over which the plaintiffs have a preferred right, and
having sold said assets for P 45,000.00, is bound to pay to each of the
plaintiffs the respective amounts for which the defendant partnership is held
indebted to, them, as above indicated and she is hereby ordered to pay the
said amounts, plus attorneys fees equivalent to 25% of the judgment in favor
of the plaintiff Manuel G. Singson, as stipulated in Exhs. "I" "to I-17",
inclusive, and 20% of the respective judgments in favor of the other plaintiffs,
pursuant to. Art. 2208, pars. (5) and (11), of the Civil Code of the Philippines;
(10) The defendants Leon Garibay and Timoteo Tibungbanua are hereby
ordered to pay to the plaintiffs the respective amounts adjudged in their favor
in the event that said plaintiffs cannot recover them from the defendant
Margarita G. Saldajeno and the surety on the bond that she has filed for the
lifting of the injunction ordered by this court upon the commencement of this
case.

The cross-claim cf the defendant Margarita G. Saldajeno against the

defendants Leon Garibay arid Timoteo Tubungbanua is hereby discussed
Margarita G. Saldajeno shall pay the costs.

SO ORDERED. 1

In a resolution promulgated on February 3, 1967, the Court of Appeals certified the records
of this case to the Supreme Court "considering that the resolution of this appeal involves
purely questions or question of law over which this Court has no jurisdiction ... 2

On June 5. 1959, Manuel G. Singsong, Jose Belzunce, Agustin E. Tonsay, Jose L. Espinos,
Bacolod Southern Lumber Yard, and Oppen, Esteban, Inc. filed in the Court of first Instance
of Negros Occidental, Branch I, against "Isabela Sawmill", Margarita G. Saldajeno and her
husband Cecilio Saldajeno, Leon Garibay, Timoteo Tubungbanua and the Provincial Sheriff
of Negros Occidental a complaint the prayer of which reads:

WHEREFORE, the plaintiffs respectfully pray:

(1) That a writ of preliminary injunction be issued restraining the defendant

Provincial Sheriff of Negros Occidental from proceeding with the sales at
public auction that he advertised in two notices issued by him on May 18,
1959 in connection with Civil Case No. 5223 of this Honorable Court, until
further orders of this Court; and to make said injunction permanent after
hearing on the merits:

(2) That after hearing, the defendant partnership be ordered; to pay to the
plaintiff Manuel G. Singson the sum of P3,723.50 plus 1% monthly interest
thereon and 25% attorney's fees, and costs; to pay to the plaintiff
JoseBelzunce the sum of P2,052.10, plus 6% annual interest thereon and
25% for attorney's fees, and costs;to pay to the plaintiff Agustin E. Tonsay the
sum of P993.73 plus 6% annual interest thereon and 25% attorney's fees,
and costs; to pay to the plaintiff Bacolod Southern Lumber Yard the sum of
P1,048.78, plus 6% annual interest thereon and 25% attorney's fees, and
costs; and to pay to the plaintiff Oppen, Esteban, Inc. the sum of P1,350.89,
plus 6% annual interest thereon and 25% attorney's fees and costs:
 (3) That the so-called Chattel Mortgage executed by the defendant Leon
Garibay and Timoteo Tubungbanua in favor of the defendant Margarita G.
Saldajeno on May 26, 1958 be declared null and void being in fraud of
creditors of the defendant partnership and without valuable consideration
insofar as the said defendant is concerned:

(4) That the Honorable Court order the sale of public auction of the assets of
the defendnat partnership in case the latter fails to pay the judgment that the
plaintiffs may recover in the action, with instructions that the proceeds of the
sale b e applied in payment of said judgment before any part of saod
proceeds is paid to the defendant Margarita G. Saldajeno;

(5) That the defendant Leon Garibay, Timoteo Tubungbanua, and Margarita
G. Saldajeno be declared jointly liable to the plaintifs for whatever deficiency
may remain unpaid after the proceeds of the sale of the assets of the
defendnt partnership are supplied in payment of the judgment that said
plaintiffs may recover in this action;

(6) The plaintiffs further pray for all other remedies to which the Honorable
Court will find them entitled to, with costs to the defendants.

Bacolod City, June 4, 1959. 3

The action was docketed as Civil Case No. 5343 of said court.

In their amended answer, the defendants Margarita G. Saldajeno and her husband, Cecilio
Saldajeno, alleged the following special and affirmative defenses:

xxx xxx xxx

2. That the defendant Isabela Sawmill has been dissolved by virtue of an

action entitled "In the matter of: Dissolution of Isabela Sawmill as partnership,
etc. Margarita G. Saldajeno et al. vs. Isabela Sawmill, et al., Civil Case No.
4787, Court of First Instance of Negros Occidental;

3. That as a result of the said dissolution and the decision of the Court of First
Instance of Negros Occidental in the aforesaid case, the other defendants
herein Messrs. Leon Garibay and Timoteo Tubungbanua became the
successors-in-interest to the said defunct partnership and have bound
themselves to answere for any and all obligations of the defunct partnership
to its creditors and third persons;

4. That to secure the performance of the obligations of the other defendants

Leon Garibay and Timoteo Tubungbanua to the answering defendant herein,
the former have constituted a chattel mortgage over the properties mentioned
in the annexes to that instrument entitled "Assignment of Rights with Chattel
Mortgage" entered into on May 26, 1968 and duly registered in the Register
of Deeds of Negros Occidental on the same date:

5. That all the plaintiffs herein, with the exceptionof the plaintiff Oppen,
Esteban, Inc. are creditors of Messrs. Leon Garibay and Timoteo
 Tubungbanua and not of the defunct Isabela Sawmill and as such they have
no cause of action against answering defendant herein and the defendant
Isabela Sawmill;

6. That all the plaintiffs herein, except for the plaintiff Oppen, Esteban, Inc.
granted cash advances, gasoline, crude oil, motor oil, grease, rice and nipa
to the defendants Leon Garibay and Timoteo Tubungbanua with the
knowledge and notice that the Isabela Sawmill as a former partnership of
defendants Margarita G. Isabela Sawmill as a former partnership of
defendants Margarita G. Saldajeno, Leon Garibay and Timoteo
Tubungbanua, has already been dissolved;

7. That this Honorable Court has no jurisdictionover the claims of the plaintiffs
Oppen, Esteban, Inc., Agustin R. Tonsay, Jose L. Espinos, and the Bacolod
Southern Lumber Yard, it appearing that the amounts sought to be recovered
by them in this action is less than P2,000.00 each, exclusive of interests;

8. That in so far as the claims of these alleged creditors plaintiffs are

concerned, there is a misjoinder of parties because this is not a class suit,
and therefore this Honorable Court cannot take jurisdictionof the claims for
payment;

9. That the claims of plaintiffs-creditors, except Oppen, Esteban, Inc. go

beyond the limit mentioned inthe statute of frauds, Art. 1403 of the Civil
Code, and are therefor unenforceable, even assuming that there were such
credits and claims;

10. That this Honorable Court has no jurisdiction in this case for it is well
settled in law and in jurisprudence that a court of first instance has no power
or jurisdiction to annul judgments or decrees of a coordinate court because
other function devolves upon the proper appellate court; (Lacuna, et al. vs.
Ofilada, et al., G.R. No. L-13548, September 30, 1959; Cabigao vs. del
Rosario, 44 Phil. 182; PNB vs. Javellana, 49 O.G. No. 1, p.124), as it
appears from the complaint in this case to annul the decision of this same
court, but of another branch (Branch II, Judge Querubin presiding). 4

Said defendants interposed a cross-claim against the defendsants Leon Garibay and
Timoteo Tubungbanua praying "that in the event that judgment be rendered ordering
defendant cross claimant to pay to the plaintiffs the amount claimed in the latter's complaint,
that the cross claimant whatever amount is paid by the latter to the plaintiff in accordance to
the said judgment. ... 5

After trial, judgment was rendered in favor of the plaintiffs and against the defendants.

The defendants, Margarita G. Saldajeno and her husband Cecilio Saldajeno, appealed to the
Court of Appeals assigning the following errors:

THE COURT A QUO ERRED IN ASSUMING JURISDICTION OVER THE

CASE.
II

THE COURT A QUO ERRED IN HOLDING THAT THE ISSUE WITH

REFERENCE TO THE WITHDRAWAL OF DEFENDANT-APPELLANT
MARGARITA G. SALDAJENO FROM THE PARTNERSHIP "SABELA
SAWMILL" WAS WHETHER OR NOT SUCH WITHDRAWAL CAUSED THE
"COMPLETE DISAPPEARANCE" OR "EXTINCTION" OF SAID
PARTNERSHIP.

III

THE COURT A QUO ERRED IN OT HOLDING THAT THE WITHDRAWAL

OF DEFENDANT-APPELLANT MARGARITA G. SALDAJENO AS A
PARTNER THEREIN DISSOLVED THE PARTNERSHIP "ISABELA
SAWMILL" (FORMED ON JAN. 30, 1951 AMONG LEON GARIBAY,
TIMOTEO TUBUNGBANUA AND SAID MARGARITA G. SALDAJENO).

IV

THE COURT A QUO ERRED IN ISSUING THE WRIT OF PRELIMINARY

INJUNCTION.

THE COURT A QUO ERRED IN HOLDING THAT THE CHATTEL

MORTGAGE DATED MAY 26, 1958, WHICH CONSTITUTED THE
JUDGMENT IN CIVIL CASE NO. 4797 AND WHICH WAS FORECLOSED IN
CIVIL CASE NO. 5223 (BOTH OF THE COURT OF FIRST INSTANCE OF
NEGROS OCCIDENTAL) WAS NULL AND VOID.

VI

THE COURT A QUO ERRED IN HOLDING THAT THE CHATTLES

ACQUIRED BY DEFENDANT-APPELLANT MARGARITA G. SALDAJENO IN
THE FORECLOSURE SALE IN CIVIL CASE NO. 5223 CONSTITUTED 'ALL
THE ASSETS OF THE DEFENDNAT PARTNERSHIP.

VII

THE COURT A QUO ERRED IN HOLDING THAT DEFENDANT-

APPELLANT MARGARITA G. SALDAJENO BECAME PRIMARILY LIABLE
TO THE PLAINTFFS-APPELLEES FOR HAVING ACQUIRED THE
MORTGAGED CHATTLES IN THE FORECLOSURE SALE CONDUCTED IN
CONNECTION WITH CIVIL CASE NO. 5223.

VIII

THE COURT A QUO ERRED IN HOLDING DEFENDANT-APPELLANT

MARGARITA G. SALDAJENO LIABLE FOR THE OBLIGATIONS OF
MESSRS. LEON GARIBAY AND TIMOTEO TUBUNGBANUA, INCURRED
BY THE LATTER AS PARTNERS IN THE NEW 'ISABELA SAWMILL', AFTER
 THE DISSOLUTION OF THE OLD PARTNERSHIP IN WHICH SAID
MARGARITA G. SALDAJENO WAS A PARTNER.

IX

THE COURT A QUO ERRED IN HOLDING DEFENDANT-APPELLANT

MARGARITA G. SALDAJENO LIABLE TO THE PLAINTIFFS-APPELLEES
FOR ATTORNEY'S FEES.

THE COURT A QUO ERRED IN NOT DISMISSING THE COMPLAINT OF

THE PLAINTIFFS-APPELLEES.

XI

THE COURT A QUO ERRED IN DISMISSING THE CROSS-CLAIM OF

DEFENDANT-APPELLANT MARGARITA G. SALDAJENO AGAINST
CROSS-DEFENDANTS LEON GARIBAY AND TIMOTEO TUBUNGBANUA. 6

The facts, as found by the trial court, are:

At the commencement of the hearing of the case on the merits the plaintiffs
and the defendant Cecilio and Margarita g. Saldajeno submittee a Partial
Stipulation of Facts that was marked as Exh. "A". Said stipulation reads as
folows:

1. That on January 30, 1951 the defendants Leon Garibay,

Margarita G. Saldejeno, and Timoteo Tubungbanua entered
into a Contract of Partnership under the firm name "Isabela
Sawmill", a copy of which is hereto attached Appendix "A".

2. That on February 3, 1956 the plaintiff Oppen, Esteban, Inc.

sold a Motor Truck and two Tractors to the partnership
Isabela Sawmill for the sum of P20,500.00. In order to pay the
said purcahse price, the said partnership agreed to make
arrangements with the International Harvester Company at
Bacolod City so that the latter would sell farm machinery to
Oppen, Esteban, Inc. with the understanding that the price
was to be paid by the partnership. A copy of the
corresponding contract of sle is attached hereto as Appendix
"B".

3. That through the method of payment stipulated in the

contract marked as Appendix "B" herein, the International
Harvester Company has been paid a total of P19,211.11,
leaving an unpaid balance of P1,288.89 as shown in the
statements hereto attached as Appendices "C", "C-1", and "C-
2".
4. That on April 25, 1958 Civil Case No. 4797 was filed by the
spouses Cecilio Saldajeno and Margarita G. Saldajeno
against the Isabela Sawmill, Leon Garibay, and Timoteo
Tubungbanua, a copy of which Complaint is attached as
Appendix 'D'.

5. That on April 27, 1958 the defendants LeonGaribay,

Timoteo Tubungbanua and Margarita G. Saldajeno entered
into a "Memorandum Agreement", a copy of which is hereto
attached as Appendix 'E' in Civil Case 4797 of the Court of
First Instance of Negros Occidental.

6. That on May 26, 1958 the defendants Leon Garibay,

Timoteo Tubungbanua and Margarita G. Saldajeno executed
a document entitled "Assignment of Rights with Chattel
Mortgage", a copy of which documents and its Annexes "A" to
"A-5" forming a part of the record of the above mentioned
Civil Case No. 4797, which deed was referred to in the
Decision of the Court ofFirst Instance of Negros Occidental in
Civil Case No. 4797 dated May 29, 1958, a copy of which is
hereto attached as Appendix "F" and "F-1" respectively.

7. That thereafter the defendants Leon Garibay and Timoteo

Tubungbanua did not divide the assets and properties of the
"Isabela Sawmill" between them, but they continued the
business of said partnership under the same firm name
"Isabela Sawmill".

8. That on May 18, 1959 the Provincial Sheriff of Negros

Occidental published two (2) notices that he would sell at
public auction on June 5, 1959 at Isabela, Negros Occidental
certain trucks, tractors, machinery, officeequipment and other
things that were involved in Civil Case No. 5223 of the Court
of First Instance of Negros Occidental, entitled "Margarita G.
Saldajeno vs. Leon Garibay, et al." See Appendices "G" and
"G-1".

9. That on October 15, 1969 the Provincial Sheriff of Negros

Occidental executed a Certificate ofSale in favor of the
defendant Margarita G. Saldajeno, as a result of the sale
conducted by him on October 14 and 15, 1959 for the
enforcement of the judgment rendered in Civil Case No. 5223
of the Court of First Instance of Negros Occidental, a certified
copy of which certificte of sale is hereto attached as Appendix
"H".

10. That on October 20, 1959 the defendant Margarita G.

Saldajeno executed a deed of sale in favor of the Pan
Oriental Lumber Company transfering to the latter for the sum
of P45,000.00 the trucks, tractors, machinery, and other
things that she had purchashed at a public auction referred to
 in the foregoing paragraph, a certified true copy of which
Deed of Sale is hereto attached as Appendix "I".

11. The plaintiffs and the defendants Cecilio Saldajeno and

Margarita G. Saldajeno reserve the right to present additional
evidence at the hearing of this case.

Forming parts of the above copied stipulation are documents that were
marked as Appendices "A", "B", "C", "C-1", "C-2", "D", "E", "F", "F-1", "G", "G-
1", "H", and "I".

The plaintiffs and the defendants Cecilio and Margarita G. Saldajeno

presented additional evidence, mostly documentary, while the cross-
defendants did not present any evidence. The case hardly involves quetions
of fact at all, but only questions of law.

The fact that the defendnat 'Isabela Sawmill' is indebted to theplaintiff Oppen,
Esteban, Inc. in the amount of P1,288.89 as the unpaid balance of an
obligation of P20,500.00 contracted on February 3, 10956 is expressly
admitted in paragraph 2 and 3 of the Stipulation, Exh. "A" and its Appendices
"B", "C", "C-1", and "C-2".

The plaintiff Agustin E. Tonssay proved by his own testimony and his Exhs.
"B" to"G" that from October 6, 1958 to November 8, 1958 he advanced a total
of P4,200.00 to the defendant 'Isabela Sawmill'. Agaist the said advances
said defendant delivered to Tonsay P3,266.27 worth of lumber, leavng an
unpaid balance of P933.73, which balance was confirmed on May 15, 1959
by the defendant Leon Garibay, as Manager of the defendant partnership.

The plaintiff Manuel G. Singsong proved by his own testimony and by his
Exhs. "J" to "L" that from May 25, 1988 to January 13, 1959 he sold on credit
to the defendnat "Isabela Sawmill" rice and bran, on account of which
business transaction there remains an unpaid balance of P3,580.50. The
same plaintiff also proved that the partnership ownes him the sum of P143.00
for nipa shingles bought from him on credit and unpaid for.

The plaintiff Jose L. Espinos proved through the testimony of his witness
Cayetano Palmares and his Exhs. "N" to "O-3" that he owns the "Guia
Lumber Yard", that on October 11, 1958 said lumber yard advanced the sum
of P2,500.00 to the defendant "Isabela Sawmill", that against the said cash
advance, the defendant partnership delivered to Guia Lumber Yard P920.56
worth of lumber, leaving an outstanding balance of P1,579.44.

The plaintiff Bacolod Southern Lumber Yard proved through the testimony of
the witness Cayetano Palmares an its Exhs. "P" to "Q-1" that on October 11,
1958 said plaintiff advanced the sum of P1,500.00 to the defendsant 'Isabela
Sawmill', that against the said cash advance, the defendant partnership
delivered to the said plaintiff on November 19, 1958 P377.72 worth of lumber,
and P73.54 worth of lumber on January 27, 1959, leaving an outstanding
balance of P1,048.78.
 The plaintiff Jose Balzunce proved through the testimony of Leon Garibay
whom he called as his witness, and through the Exhs. "R" to "E" that from
September 14, 1958 to November 27, 1958 he sold to the defedant "Isabela
Sawmill" gasoline, motor fuel, and lubricating oils, and that on account of said
transactions, the defendant partnersip ownes him an unpaid balance of
P2,052.10.

Appendix "H" of the stipulation Exh. "A" shows that on October 13 and 14,
1959 the Provincial Sheriff sold to the defendant Margrita G. Saldajeno for
P38,040.00 the assets of the defendsant "Isabela Sawmill" which the
defendants Leon G. Garibay and Timoteo Tubungbanua had mortgaged to
her, and said purchase price was applied to the judgment that she has
obtained against he said mortgagors in Civil Case No. 5223 of this Court.

Appendix "I" of the same stipulation Exh. "A" shows that on October 20, 1959
the defendant Margarita G. Saldajeno sold to the PAN ORIENTAL LUMBER
COMPANY for P45,000.00 part of the said properties that she had bought at
public aucton one week before.

xxx xxx xxx 7

It is contended by the appellants that the Court of First Instance of Negros Occidental had no
jurisdiction over Civil Case No. 5343 because the plaintiffs Oppen, Esteban, Inc., Agustin R.
Tonsay, Jose L. Espinos and the Bacolod Southern Lumber Yard sought to collect sums of
moeny, the biggest amount of which was less than P2,000.00 and, therefore, within the
jurisdiction of the municipal court.

This contention is devoid of merit because all the plaintiffs also asked for the nullity of the
assignment of right with chattel mortgage entered into by and between Margarita G.
Saldajeno and her former partners Leon Garibay and Timoteo Tubungbanua. This cause of
action is not capable of pecuniary estimation and falls under the jurisdiction of the Court of
First Instnace. Where the basic issue is something more than the right to recover a sum of
money and where the money claim is purely incidental to or a consequence of the principal
relief sought, the action is as a case where the subject of the litigation is not capable of
pecuniary estimation and is cognizable exclusively by the Court of First Instance.

The jurisdiction of all courts in the Philippines, in so far as the authority thereof depends
upon the nature of litigation, is defined in the amended Judiciary Act, pursuant to which
courts of first instance shall have exclusive original jurisdiction over any case the subject
matter of which is not capable of pecuniary estimation. An action for the annulment of a
judgment and an order of a court of justice belongs to th category. 8

In determining whether an action is one the subject matter of which is not capable of
pecuniary estimation this Court has adopted the criterion of first ascertaining the nature of
the principal action or remedy sought. If it is primarily for the recovery of a sum of money, the
cliam is considered capable of pecuniary estimation, and whether jurisdiciton is in the
municipal courts or in the courts of first instance would depend on the amount of the claim.
However, where the basic issue is something other than the right to recover a sum of money,
where the money claim is purely incidental to, or a consequence of, the principal relief
sought, this Court has considered such actions as cases where the subject ogf the litigation
may not be estimated in terms of money, and are cognizable exclusively by courts of first
instance.
In Andres Lapitan vs. SCANDIA, Inc., et al., 9 this Court held:

Actions for specific performance of contracts have been expressly

prounounced to be exclusively cognizable by courts of first instance: De
Jesus vs. Judge Garcia, L-26816, February 28, 1967; Manufacturers'
Distributors, Inc. vs. Yu Siu Liong, L-21285, April 29, 1966. And no cogent
reason appears, and none is here advanced by the parties, why an actin for
rescission (or resolution) should be differently treated, a "rescission" being a
counterpart, so to speak, of "specific performance'. In both cases, the court
would certainly have to undertake an investigation into facts that would justify
one act of the other. No award for damages may be had in an action for
resicssion without first conducting an inquiry into matters which would justify
the setting aside of a contract, in the same manner that courts of first
instance would have to make findings of fact and law in actions not capable
of pecuniary estimnation espressly held to be so by this Court, arising from
issues like those arised in Arroz v. Alojado, et al., L-22153, March 31, 1967
(the legality or illegality of the conveyance sought for and the determination
of the validity of the money deposit made); De Ursua v. Pelayo, L-13285,
April 18, 1950 (validity of a judgment); Bunayog v. Tunas, L-12707,
December 23, 1959 (validity of a mortgage); Baito v. Sarmiento, L-13105,
August 25, 1960 (the relations of the parties, the right to support created by
the relation, etc., in actions for support); De Rivera, et al. v. Halili, L-15159,
September 30, 1963 (the validity or nullity of documents upon which claims
are predicated). Issues of the same nature may be raised by a party against
whom an action for rescission has been brought, or by the plaintiff himself. It
is, therefore, difficult to see why a prayer for damages in an action for
rescission should be taken as the basis for concluding such action for
resiccison should be taken as the basis for concluding such action as one
cpable of pecuniary estimation - a prayer which must be included in the main
action if plaintiff is to be compensated for what he may have suffered as a
result of the breach committed by defendant, and not later on precluded from
recovering damages by the rule against splitting a cause of action and
discouraging multiplicitly of suits.

The foregoing doctrine was reiterated in The Good Development Corporation vs.
Tutaan, 10 where this Court held:

On the issue of which court has jurisdiction, the case of SENO vs.
Pastolante, et al., is in point. It was ruled therein that although the purposes
of an action is to recover an amount plus interest which comes within the
original jurisidction of the Justice of the Peace Court, yet when said action
involves the foreclosure of a chattel mortgage covering personal properties
valued at more than P2,000, (now P10,000.00) the action should be instituted
before the Court of First Instance.

In the instanct, case, the action is to recover the amount of P1,520.00 plus
interest and costs, and involves the foreclosure of a chattel mortgage of
personal properties valued at P15,340.00, so that it is clearly within the
competence of the respondent court to try and resolve.

In the light of the foregoing recent rulings, the Court of First Instance of Negros Occidental
did no err in exercising jurisidction over Civil Case No. 5343.
The appellants also contend that the chattel mortgage may no longer be annulled because it
had been judicially approved in Civil Case No. 4797 of the Court of First Instance of Negros
Occidental and said chattel mortgage had been ordered foreclosed in Civil Case No. 5223 of
the same court.

On the question of whether a court may nullify a final judgment of another court of co-equal,
concurrent and coordinate jusridiction, this Court originally ruled that:

A court has no power to interfere with the judgments or decrees of a court of

concurrent or coordinate jurisdiction having equal power to grant the relief
sought by the injunction.

The various branches of the Court of First Instance of Manila are in a sense
coordinate courts and cannot be allowed to interfere with each others'
judgments or decrees. 11

The foregoing doctrine was reiterated in a 1953 case 12 where this Court said:

The rule which prohibits a Judge from intertering with the actuations of the
Judge of another branch of the same court is not infringed when the Judge
who modifies or annuls the order isued by the other Judge acts in the same
case and belongs to the same court (Eleazar vs. Zandueta, 48 Phil. 193. But
the rule is infringed when the Judge of a branch of the court issues a writ of
preliminary injunction in a case to enjoint the sheriff from carrying out an
order by execution issued in another case by the Judge of another branch of
the same court. (Cabigao and Izquierdo vs. Del Rosario et al., 44 Phil. 182).

This ruling was maintained in 1967. In Mas vs. Dumaraog, 13 the judgment sought to be
annulled was rendered by the Court of First Instance of Iloilo and the action for annullment was
filed with the Court of First Instance of Antique, both courts belonging to the same Judicial
District. This Court held that:

The power to open, modify or vacant a judgment is not only possessed by

but restricted to the court in which the judgment was rendered.

The reason of this Court was:

Pursuant to the policy of judicial stability, the judgment of a court of

competent jurisdiction may not be interfered with by any court concurrrent
jurisdiction.

Again, in 1967 this Court ruled that the jurisdiction to annul a judgement of a branch of the
court of First Instance belongs solely to the very same branch which rendered the
judgement. 14

Two years later, the same doctrine was laid down in the Sterling Investment case. 15

In December 1971, however, this court re-examined and reversed its earlier doctrine on the
matter. In Dupla v. Court of Appeals, 16 this Tribunal, speaking through Mr. Justice Villamor
declared:
 ... the underlying philosophy expressed in the Dumara-og case, the policy of
judicial stability, to the end that the judgment of a court of competent
jurisdiction may not be interfered with by any court of concurrent jurisdiction
may not be interfered with by any court of concurrent jurisdiciton, this Court
feels that this is as good an occasion as any to re-examine the doctrine laid
down ...

In an action to annul the judgment of a court, the plaintiff's cause of action

springs from the alleged nullity of the judgment based on one ground or
another, particularly fraud, which fact affords the plaintiff a right to judicial
interference in his behalf. In such a suit the cause of action is entirely
different from that in the actgion which grave rise to the judgment sought to
be annulled, for a direct attack against a final and executory judgment is not
a incidental to, but is the main object of the proceeding. The cause of action
in the two cases being distinct and separate from each other, there is no
plausible reason why the venue of the action to annul the judgment should
necessarily follow the venue of the previous action ...

The present doctrine which postulate that one court or one branch of a court
may not annul the judgment of another court or branch, not only opens the
door to a violation of Section 2 of Rule 4, (of the Rules of Court) but also limit
the opportunity for the application of said rule.

Our conclusion must therefore be that a court of first instance or a branch

thereof has the authority and jurisdiction to take cognizance of, and to act in,
suit to annul final and executory judgment or order rendered by another court
of first instance or by another branch of the same court...

In February 1974 this Court reiterated the ruling in the Dulap case. 17

In the light of the latest ruling of the Supreme Court, there is no doubt that one branch of the
Court of First Instance of Negros Occidental can take cognizance of an action to nullify a
final judgment of the other two branches of the same court.

It is true that the dissolution of a partnership is caused by any partner ceasing to be

associated in the carrying on of the business. 18 However, on dissolution, the partnershop is not
terminated but continuous until the winding up to the business. 19

The remaining partners did not terminate the business of the partnership "Isabela Sawmill".
Instead of winding up the business of the partnership, they continued the business still in the
name of said partnership. It is expressly stipulated in the memorandum-agreement that the
remaining partners had constituted themselves as the partnership entity, the "Isabela
Sawmill". 20

There was no liquidation of the assets of the partnership. The remaining partners, Leon
Garibay and Timoteo Tubungbanua, continued doing the business of the partnership in the
name of "Isabela Sawmill". They used the properties of said partnership.

The properties mortgaged to Margarita G. Saldajeno by the remaining partners, Leon

Garibay and Timoteo Tubungbanua, belonged to the partnership "Isabela Sawmill." The
appellant, Margarita G. Saldajeno, was correctly held liable by the trial court because she
purchased at public auction the properties of the partnership which were mortgaged to her.
It does not appear that the withdrawal of Margarita G. Saldajeno from the partnership was
published in the newspapers. The appellees and the public in general had a right to expect
that whatever, credit they extended to Leon Garibay and Timoteo Tubungbanua doing the
business in the name of the partnership "Isabela Sawmill" could be enforced against the
proeprties of said partnership. The judicial foreclosure of the chattel mortgage executed in
favor of Margarita G. Saldajeno did not relieve her from liability to the creditors of the
partnership.

The appellant, margrita G. Saldajeno, cannot complain. She is partly to blame for not
insisting on the liquidaiton of the assets of the partnership. She even agreed to let Leon
Garibay and Timoteo Tubungbanua continue doing the business of the partnership "Isabela
Sawmill" by entering into the memorandum-agreement with them.

Although it may be presumed that Margarita G. Saldajeno had action in good faith, the
appellees aslo acted in good faith in extending credit to the partnership. Where one of two
innocent persons must suffer, that person who gave occasion for the damages to be caused
must bear the consequences. Had Margarita G. Saldajeno not entered into the
memorandum-agreement allowing Leon Garibay and Timoteo Tubungbanua to continue
doing the business of the aprtnership, the applees would not have been misled into thinking
that they were still dealing with the partnership "Isabela Sawmill". Under the facts, it is of no
moment that technically speaking the partnership "Isabela Sawmill" was dissolved by the
withdrawal therefrom of Margarita G. Saldajeno. The partnership was not terminated and it
continued doping business through the two remaining partners.

The contention of the appellant that the appleees cannot bring an action to annul the chattel
mortgage of the propertiesof the partnership executed by Leon Garibay and Timoteo
Tubungbanua in favor of Margarita G. Saldajeno has no merit.

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

This Court has held that a person, who is not a party obliged principally or subsidiarily under
a contract, may exercised an action for nullity of the contract if he is prejudiced in his rights
with respect to one of the contracting parties, and can show detriment which would positively
result to him from the contract in which he has no intervention. 21

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

The portion of the decision appealed from ordering the appellants to pay attorney's fees to
the plaintiffs-appellees cannot be sustained. There is no showing that the appellants
displayed a wanton disregard of the rights of the plaintiffs. Indeed, the appellants believed in
good faith, albeit erroneously, that they are not liable to pay the claims.

The defendants-appellants have a right to be reimbursed whatever amounts they shall pay
the appellees by their co-defendants Leon Garibay and Timoteo Tubungbanua. In the
memorandum-agreement, Leon Garibay and Timoteo Tubungbaun undertook to release
Margarita G. Saldajeno from any obligation of "Isabela Sawmill" to third persons. 22
WHEREFORE, the decision appealed from is hereby affirmed with the elimination of the
portion ordering appellants to pay attorney's fees and with the modification that the
defendsants, Leon Garibay and Timoteo Tubungbanua, should reimburse the defendants-
appellants, Margarita G. Saldajeno and her husband Cecilio Saldajeno, whatever they shall
pay to the plaintiffs-appellees, without pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Guerrero, De Castro and Melencio-Herrera, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 3246 February 9, 1907

CADWALLADER & COMPANY, plaintiff-appellant,

vs.
SMITH, BELL & COMPANY and HENRY W. PEABODY & COMPANY, defendants-
appellees.

Thomas E. Kepner for appellant.

Kinney, Odlin & Lawrence for appellees.

TRACEY, J.:

In this action the plaintiff, as assignee of the Pacific Export Lumber Company, sues for
$3,486, United States currency, the differences between the amount turned over to the
company on account of a cargo of cedar piles consigned to the defendants as its agents and
afterwards bought by them, and the amount actually received by them on the subsequent
sale thereof. The defendant were allowed by the court below a counterclaim of $6,993.80,
United States currency, from which was deducted $2,063.16 for the plaintiffs claim, leaving a
balance in favor of the defendants of $4,930.64, for the equipment of which, to wit, 9,861.28
pesos, judgment was entered. The defendants have not appealed. The plaintiff took several
exceptions, but on the argument its counsel stated that its contention was confined to the
allowance by the trial court of the commissions of the defendant on selling the piling.

In May 1902, the Pacific Export Lumber Company of Portland shipped upon the
steamer Quito five hundred and eighty-one (581) piles to the defendant, Henry W. Peabody
& Company, at Manila, on the sale of which before storage the consignees were to receive a
commission of one half of whatever sum was obtained over $15 for each pile and 5 per cent
of the price of the piles sold after storage. After the arrival of the steamer on August 2,
Peabody and Company wrote the agent of the Pacific Company at Shanghai that for lack of
a demand the piles would have to be sold at considerably less than $15 apiece; whereupon
the company's agent directed them to make the best possible offer for the piles, in response
to which on August 5 they telegraphed him an offer of $12 apiece. It was accepted by him on
August 6, in consequence of which the defendant paid the Pacific Company $6,972.

It afterwards appeared that on July 9 Peabody & Company had entered into negotiations
with the Insular Purchasing Agent for the sale for the piles at $20 a piece, resulting of August
4 in the sale to the Government of two hundred and thirteen (213) piles at $19 each. More of
them were afterwards sold to the Government at the same figure and the remainder to other
parties at carrying prices, the whole realizing to the defendants $10,41.66, amounting to
$3,445.66 above the amount paid by the defendant to the plaintiff therefor. Thus it is clear
that at the time when the agents were buying from their principal these piles at $12 apiece
on the strength of their representation that no better price was obtainable, they had already
sold a substantial part of them at $19. In these transactions the defendant, Smith, Bell &
Company, were associated with the defendants, Henry W. Peabody & Company, who
conducted the negotiations, and are consequently accountable with them.

It is plaint that in concealing from their principal the negotiations with the Government,
resulting in a sale of the piles at 19 a piece and in misrepresenting the condition of the
market, the agents committed a breach of duty from which they should benefit. The contract
of sale to themselves thereby induced was founded on their fraud and was subject to
annulment by the aggrieved party. (Civil Code, articles 1265 and 1269.) Upon annulment the
parties should be restored to their original position by mutual restitution. (Article 1303 and
1306.) Therefore the defendants are not entitled to retain their commission realized upon the
piles included under the contract so annulled. In respect of the 213 piles, which at the time of
the making of this contract on August 5 they had already sold under the original agency, their
commission should be allowed.

The court below found the net amount due from the defendants to the plaintiff for
the Quito piles, after deducting the expense of landing the same and $543.10 commission,
was $1,760.88, on which it allowed interest at the rate of 6 per cent from March 1, 1903. This
amount should be increased by the addition thereto of the amount of the commission
disallowed, to wit, $331.17 giving $2,092.05. Interest computed on this sum to the date of the
entry of judgment below amounts to $359.77, which added to the principal sum makes
$2,241.82, the amount of plaintiff's claim, which is to be deducted from defendants'
counterclaim of $6,993.80, leaving a balance of $4,541.98, equivalent to 9,083.96 pesos, the
amount for which judgment below should have been entered in favor of the defendants.

Let the judgment of the Court of First Instance be modified accordingly, without costs to
either party.

After expiration of twenty days let judgment be entered in accordance herewith and ten days
thereafter the record remanded to the court below for proper action. So ordered.

Arellano, C.J., Torres, Mapa, Carson and Willard, JJ., concur.

 THIRD DIVISION

[G.R. No. 108346. July 11, 2001]

Spouses MARIANO Z. VELARDE and AVELINA D.

VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A.
RAYMUNDO and GEORGE RAYMUNDO, respondents.

DECISION
PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price

in the manner prescribed by the contract, entitles the injured party to rescind the
obligation. Rescission abrogates the contract from its inception and requires a
mutual restitution of benefits received.
The Case

Before us is a Petition for Review on Certiorari [1] questioning the

Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 32991 dated
October 9, 1992, as well as its Resolution [3] dated December 29, 1992 denying
petitioners motion for reconsideration.[4]

The dispositive portion of the assailed Decision reads:

WHEREFORE,theOrderdatedMay15,1991isherebyANNULLEDandSET
ASIDEandtheDecisiondatedNovember14,1990dismissingthe[C]omplaint
isREINSTATED.Thebondspostedbyplaintiffsappelleesanddefendants
appellantsareherebyRELEASED.[5]
The Facts

The factual antecedents of the case, as found by the CA, are as follows:

xxx.DavidRaymundo[hereinprivaterespondent]istheabsoluteand
registeredownerofaparcelofland,togetherwiththehouseandother
improvementsthereon,locatedat1918KamiasSt.,DasmariasVillage,Makati
andcoveredbyTCTNo.142177.DefendantGeorgeRaymundo[hereinprivate
respondent]isDavidsfatherwhonegotiatedwithplaintiffsAvelinaand
MarianoVelarde[hereinpetitioners]forthesaleofsaidproperty,whichwas,
however,underlease(Exh.6,p.232,RecordofCivilCaseNo.15952).

OnAugust8,1986,aDeedofSalewithAssumptionofMortgage(Exh.A;
Exh.1,pp.1112,Record)wasexecutedbydefendantDavidRaymundo,as
vendor,infavorofplaintiffAvelinaVelarde,asvendee,withthefollowing
termsandconditions:

xxxxxxxxx

ThatforandinconsiderationoftheamountofEIGHTHUNDRED
THOUSANDPESOS(P800,000.00),Philippinecurrency,receiptofwhichin
fullisherebyacknowledgedbytheVENDORfromtheVENDEE,tohisentire
andcompletesatisfaction,bythesepresentstheVENDORherebySELLS,
CEDES,TRANSFERS,CONVEYSANDDELIVERS,freelyandvoluntarily,
withfullwarrantyofalegalandvalidtitleasprovidedbylaw,untothe
VENDEE,herheirs,successorsandassigns,theparceloflandmentionedand
describedabove,togetherwiththehouseandotherimprovementsthereon.

Thattheaforesaidparcelofland,togetherwiththehouseandother
improvementsthereon,weremortgagedbytheVENDORtotheBANKOF
THEPHILIPPINEISLANDS,Makati,MetroManila,tosecurethepaymentof
aloanofONEMILLIONEIGHTHUNDREDTHOUSANDPESOS
(P1,800,000.00),Philippinecurrency,asevidencedbyaRealEstateMortgage
signedandexecutedbytheVENDORinfavorofthesaidBankofthe
PhilippineIslands,on______andwhichRealEstateMortgagewasratified
beforeNotaryPublicforMakati,_______,asDoc.No.____,PageNo.___,
BookNo.___,Seriesof1986ofhisNotarialRegister.

Thataspartoftheconsiderationofthissale,theVENDEEherebyassumesto
paythemortgageobligationsonthepropertyhereinsoldintheamountofONE
MILLIONEIGHTHUNDREDTHOUSANDPESOS(P1,800,000.00),
Philippinecurrency,infavorofBankofthePhilippineIslands,inthenameof
theVENDOR,andfurtheragreestostrictlyandfaithfullycomplywithallthe
termsandconditionsappearingintheRealEstateMortgagesignedand
executedbytheVENDORinfavorofBPI,includinginterestsandother
chargesforlatepaymentleviedbytheBank,asifthesamewereoriginally
signedandexecutedbytheVENDEE.

Itisfurtheragreedandunderstoodbythepartieshereinthatthecapitalgains
taxanddocumentarystampsonthesaleshallbefortheaccountofthe
VENDOR;whereas,theregistrationfeesandtransfertaxthereonshallbefor
theaccountoftheVENDEE.(Exh.A,pp.1112,Record).

Onthesamedate,andaspartoftheabovedocument,plaintiffAvelina
Velarde,withtheconsentofherhusband,Mariano,executedanUndertaking
(Exh.C,pp.1314,Record),thepertinentportionsofwhichread,asfollows:

xxxxxxxxx

Whereas,asperDeedofSalewithAssumptionofMortgage,IpaidMr.David
A.RaymundothesumofEIGHTHUNDREDTHOUSANDPESOS
(P800,000.00),Philippinecurrency,andassumethemortgageobligationson
thepropertywiththeBankofthePhilippineIslandsintheamountofONE
MILLIONEIGHTHUNDREDTHOUSANDPESOS(P1,800,000.00),
Philippinecurrency,inaccordancewiththetermsandconditionsoftheDeedof
RealEstateMortgagedated_________,signedandexecutedbyMr.DavidA.
RaymundowiththesaidBank,acknowledgedbeforeNotaryPublicforMakati,
_____,asDoc.No.___,PageNo.___,BookNo.__,Seriesof1986ofhis
NotarialRegister.

WHEREAS,whilemyapplicationfortheassumptionofthemortgage
obligationsonthepropertyisnotyetapprovedbythemortgageeBank,Ihave
agreedtopaythemortgageobligationsonthepropertywiththeBankinthe
nameofMr.DavidA.Raymundo,inaccordancewiththetermsandconditions
ofthesaidDeedofRealEstateMortgage,includingallinterestsandother
chargesforlatepayment.

WHEREAS,thisundertakingisbeingexecutedinfavorofMr.DavidA.
Raymundo,forpurposesofattestingandconfirmingourprivateunderstanding
concerningthesaidmortgageobligationstobeassumed.

NOW,THEREFORE,forandinconsiderationoftheforegoingpremises,and
theassumptionofthemortgageobligationsofONEMILLIONEIGHT
HUNDREDTHOUSANDPESOS(P1,800,000.00),Philippinecurrency,with
theBankofthePhilippineislands,I,Mrs.AvelinaD.Velarde,withtheconsent
ofmyhusband,MarianoZ.Velarde,doherebybindandobligatemyself,my
heirs,successorsandassigns,tostrictlyandfaithfullycomplywiththe
followingtermsandconditions:

1.Thatuntilsuchtimeasmyassumptionofthemortgageobligationsonthe
propertypurchasedisapprovedbythemortgageebank,theBankofthe
PhilippineIslands,Ishallcontinuetopaythesaidloaninaccordancewiththe
termsandconditionsoftheDeedofRealEstateMortgageinthenameofMr.
DavidA.Raymundo,theoriginalMortgagor.

2.That,intheeventIviolateanyofthetermsandconditionsofthesaidDeed
ofRealEstateMortgage,IherebyagreethatmydownpaymentofP800,000.00,
plusallpaymentsmadewiththeBankofthePhilippineIslandsonthe
mortgageloan,shallbeforfeitedinfavorofMr.DavidA.Raymundo,asand
bywayofliquidateddamages,withoutnecessityofnoticeoranyjudicial
declarationtothateffect,andMr.DavidARaymundoshallresumetotaland
completeownershipandpossessionofthepropertysoldbywayofDeedof
SalewithAssumptionofMortgage,andthesameshallbedeemed
automaticallycancelledandbeofnofurtherforceoreffect,inthesamemanner
asif(the)samehadneverbeenexecutedorenteredinto.

3.ThatIamexecutingthisUndertakingforpurposesofbindingmyself,my
heirs,successorsandassigns,tostrictlyandfaithfullycomplywiththeterms
andconditionsofthemortgageobligationswiththeBankofthePhilippine
Islands,andthecovenants,stipulationsandprovisionsofthisUndertaking.

That,DavidA.Raymundo,thevendorofthepropertymentionedandidentified
above,[does]herebyconfirmandagreetotheundertakingsoftheVendee
pertinenttotheassumptionofthemortgageobligationsbytheVendeewiththe
BankofthePhilippineIslands.(Exh.C,pp.1314,Record).

ThisundertakingwassignedbyAvelinaandMarianoVelardeandDavid
Raymundo.

ItappearsthatthenegotiatedtermsforthepaymentofthebalanceofP1.8
millionwasfromtheproceedsofaloanthatplaintiffsweretosecurefroma
bankwithdefendantshelp.Defendantshadastandingapprovedcreditlinewith
theBankofthePhilippineIslands(BPI).Thepartiesagreedtoavailofthis,
subjecttoBPIsapprovalofanapplicationforassumptionofmortgageby
plaintiffs.PendingBPIsapprovalo[f]theapplication,plaintiffswereto
continuepayingthemonthlyinterestsoftheloansecuredbyarealestate
mortgage.

Pursuanttosaidagreements,plaintiffspaidBPIthemonthlyinterestonthe
loansecuredbytheaforementionedmortgageforthree(3)monthsasfollows:
September19,1986atP27,225.00;October20,1986atP23,000.00;and
November19,1986atP23,925.00(Exh.E,H&J,pp.15,17and18,Record).

OnDecember15,1986,plaintiffswereadvisedthattheApplicationfor
AssumptionofMortgagewithBPIwasnotapproved(Exh.J,p.133,
Record).Thispromptedplaintiffsnottomakeanyfurtherpayment.

OnJanuary5,1987,defendants,thrucounsel,wroteplaintiffsinformingthe
latterthattheirnonpaymenttothemortgagebankconstitute[d]non
performanceoftheirobligation(Exh.3,p.220,Record).

InaLetterdatedJanuary7,1987,plaintiffs,thrucounsel,responded,as
follows:

Thisistoadviseyou,therefore,thatourclientiswillingtopaythebalancein
cashnotlaterthanJanuary21,1987provided:(a)youdeliveractualpossession
ofthepropertytohernotlaterthanJanuary15,1987forherimmediate
occupancy;(b)youcausethereleaseoftitleandmortgagefromtheBankof
P.I.andmakethetitleavailableandfreefromanyliensandencumbrances;and
(c)youexecuteanabsolutedeedofsaleinherfavorfreefromanyliensor
encumbrancesnotlaterthanJanuary21,1987.(Exhs.K,4,p.223,Record).

OnJanuary8,1987,defendantssentplaintiffsanotarialnoticeofcancellation/rescission
oftheintendedsaleofthesubjectpropertyallegedlyduetothelattersfailuretocomply
withthetermsandconditionsoftheDeedofSalewithAssumptionofMortgageandthe
Undertaking(Exh.5,pp.225226,Record).[6]

Consequently, petitioners filed on February 9, 1987 a Complaint against

private respondents for specific performance, nullity of cancellation, writ of
possession and damages. This was docketed as Civil Case No. 15952 at the
Regional Trial Court of Makati, Branch 149. The case was tried and heard by
then Judge Consuelo Ynares-Santiago (now an associate justice of this Court),
who dismissed the Complaint in a Decision dated November 14, 1990.
[7]
Thereafter, petitioners filed a Motion for Reconsideration. [8]
 Meanwhile, then Judge Ynares-Santiago was promoted to the Court of
Appeals and Judge Salvador S. A. Abad Santos was assigned to the sala she
vacated. In an Order dated May 15, 1991, [9] Judge Abad Santos granted
petitioners Motion for Reconsideration and directed the parties to proceed with
the sale. He instructed petitioners to pay the balance of P1.8 million to private
respondents who, in turn, were ordered to execute a deed of absolute sale and to
surrender possession of the disputed property to petitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and reinstated then Judge
Ynares-Santiagos earlier Decision dismissing petitioners Complaint. Upholding
the validity of the rescission made by private respondents, the CA explained its
ruling in this wise:

IntheDeedofSalewithAssumptionofMortgage,itwasstipulatedthataspart
oftheconsiderationofthissale,theVENDEE(Velarde)wouldassumetopay
themortgageobligationonthesubjectpropertyintheamountofP1.8million
infavorofBPIinthenameoftheVendor(Raymundo).Sincethepricetobe
paidbytheVendeeVelardeincludesthedownpaymentofP800,000.00andthe
balanceofP1.8million,andthebalanceofP1.8millioncannotbepaidincash,
VendeeVelarde,aspartoftheconsiderationofthesale,hadtoassumethe
mortgageobligationonthesubjectproperty.Inotherwords,theassumptionof
themortgageobligationispartoftheobligationofVelarde,asvendee,under
thecontract.Velardefurtheragreedtostrictlyandfaithfullycomplywithallthe
termsandconditionsappearingintheRealEstateMortgagesignedand
executedbytheVENDORinfavorofBPIxxxasifthesamewereoriginally
signedandexecutedbytheVendee.(p.2,thereof,p.12,Record).Thiswas
reiteratedbyVelardeinthedocumententitledUndertakingwhereinthelatter
agreedtocontinuepayingsaidloaninaccordancewiththetermsand
conditionsoftheDeedofRealEstateMortgageinthenameof
Raymundo.Moreover,itwasstipulatedthatintheeventofviolationby
Velardeofanytermsandconditionsofsaiddeedofrealestatemortgage,the
downpaymentofP800,000.00plusallpaymentsmadewithBPIorthe
mortgageloanwouldbeforfeitedandthe[D]eedof[S]alewith[A]ssumption
of[M]ortgagewouldtherebybecancelledautomaticallyandofnoforceand
effect(pars.2&3,thereof,pp.1314,Record).
Fromthese2documents,itisthereforeclearthatpartoftheconsiderationof
thesalewastheassumptionbyVelardeofthemortgageobligationof
RaymundointheamountofP1.8million.ThiswouldmeanthatVelardehadto
makepaymentstoBPIunderthe[D]eedof[R]eal[E]state[M]ortgageinthe
nameofRaymundo.TheapplicationwithBPIfortheapprovalofthe
assumptionofmortgagewouldmeanthat,incaseofapproval,paymentofthe
mortgageobligationwillnowbeinthenameofVelarde.Andintheeventsaid
applicationisdisapproved,Velardehadtopayinfull.Thisisallegedand
admittedinParagraph5oftheComplaint.MarianoVelardelikewiseadmitted
thisfactduringthehearingonSeptember15,1997(p.47,t.s.n.,September15,
1987;seealsopp.1626,t.s.n.,October8,1989).Thisbeingthecase,thenon
paymentofthemortgageobligationwouldresultinaviolationofthe
contract.And,uponVelardesfailuretopaytheagreedprice,the[n]Raymundo
maychooseeitheroftwo(2)actions(1)demandfulfillmentofthecontract,or
(2)demanditsrescission(Article1191,CivilCode).

ThedisapprovalbyBPIoftheapplicationforassumptionofmortgagecannot
beusedasanexcuseforVelardesnonpaymentofthebalanceofthepurchase
price.Asborneoutbytheevidence,VelardehadtopayinfullincaseofBPIs
disapprovaloftheapplicationforassumptionofmortgage.WhatVelarde
shouldhavedonewastopaythebalanceofP1.8million.Instead,Velardesent
RaymundoaletterdatedJanuary7,1987(Exh.K,4)whichwasstronglygiven
weightbythelowercourtinreversingthedecisionrenderedbythenJudge
YnaresSantiago.Insaidletter,Velarderegisteredtheirwillingnesstopaythe
balanceincashbutenumerated3newconditionswhich,tothemindofthis
Court,wouldconstituteanewundertakingornewagreementwhichissubject
totheconsentorapprovalofRaymundo.These3conditionswerenotamong
thosepreviouslyagreeduponbyVelardeandRaymundo.Thesearemereoffers
or,atmost,anattempttonovate.Butthenagain,therecanbenonovation
becausetherewasnoagreementofallthepartiestothenewcontract(Garcia,
Jr.vs.CourtofAppeals,191SCRA493).

Itwaslikewiseagreedthatincaseofviolationofthemortgageobligation,the
DeedofSalewithAssumptionofMortgagewouldbedeemedautomatically
cancelledandofnofurtherforceandeffect,asifthesamehadneverbeen
executedorenteredinto.Whileitistruethatevenifthecontractexpressly
providedforautomaticrescissionuponfailuretopaytheprice,thevendeemay
stillpay,hemaydosoonlyforaslongasnodemandforrescissionofthe
contracthasbeenmadeuponhimeitherjudiciallyorbyanotarialact(Article
1592,CivilCode).Inthecaseatbar,RaymundosentVelardeanotarialnotice
datedJanuary8,1987ofcancellation/rescissionofthecontractduetothe
lattersfailuretocomplywiththeirobligation.Therescissionwasjustifiedin
viewofVelardesfailuretopaytheprice(balance)whichissubstantialand
fundamentalastodefeattheobjectofthepartiesinmakingtheagreement.As
advertedtoabove,theagreementofthepartiesinvolvedareciprocalobligation
whereintheobligationofoneisaresolutoryconditionoftheobligationofthe
other,thenonfulfillmentofwhichentitlestheotherpartytorescindthe
contract(Songcuanvs.IAC,191SCRA28).Thus,thenonpaymentofthe
mortgageobligationbyappelleesVelardewouldcreatearighttodemand
paymentortorescindthecontract,ortocriminalprosecution(EdcaPublishing
&DistributionCorporationvs.Santos,184SCRA614).Uponappelleesfailure,
therefore,topaythebalance,thecontractwasproperlyrescinded(Ruizvs.
IAC,184SCRA720).Consequently,appelleesVelardehavingviolatedthe
contract,theyhavelosttheirrighttoitsenforcementandhence,cannotavailof
theactionforspecificperformance(Voysawvs.InterphilPromotions,Inc.,148
SCRA635).[10]

Hence, this appeal.[11]

The Issues

Petitioners, in their Memorandum, [12] interpose the following assignment of

errors:
I.

TheCourtofAppealserredinholdingthatthenonpaymentofthe
mortgageobligationresultedinabreachofthecontract.

II.

TheCourtofAppealserredinholdingthattherescission(resolution)ofthe
contractbyprivaterespondentswasjustified.

III.

TheCourtofAppealserredinholdingthatpetitionersJanuary7,1987
lettergavethreenewconditionsconstitutingmereoffersoranattemptto
novatenecessitatinganewagreementbetweentheparties.
The Courts Ruling
 The Petition is partially meritorious.
First Issue:

Breach of Contract

Petitioners aver that their nonpayment of private respondents mortgage

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

However, petitioners did not merely stop paying the mortgage obligations;
they also failed to pay the balance of the purchase price. As admitted by both
parties, their agreement mandated that petitioners should pay the purchase price
balance of P1.8 million to private respondents in case the request to assume the
mortgage would be disapproved. Thus, on December 15, 1986, when
petitioners received notice of the banks disapproval of their application to
assume respondents mortgage, they should have paid the balance of the P1.8
million loan.

Instead of doing so, petitioners sent a letter to private respondents offering

to make such payment only upon the fulfillment of certain conditions not
originally agreed upon in the contract of sale. Such conditional offer to pay
cannot take the place of actual payment as would discharge the obligation of a
buyer under a contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of

and deliver a determinate thing, and the buyer to pay therefor a price certain in
money or its equivalent.[13] Private respondents had already performed their
obligation through the execution of the Deed of Sale, which effectively
transferred ownership of the property to petitioner through constructive
delivery. Prior physical delivery or possession is not legally required, and the
execution of the Deed of Sale is deemed equivalent to delivery.[14]

Petitioners, on the other hand, did not perform their correlative obligation
of paying the contract price in the manner agreed upon. Worse, they wanted
private respondents to perform obligations beyond those stipulated in the
contract before fulfilling their own obligation to pay the full purchase price.
Second Issue
 Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private

respondents was not justified, inasmuch as the former had signified their
willingness to pay the balance of the purchase price only a little over a month
from the time they were notified of the disapproval of their application for
assumption of mortgage. Petitioners also aver that the breach of the contract
was not substantial as would warrant a rescission. They cite several cases[15] in
which this Court declared that rescission of a contract would not be permitted
for a slight or casual breach. Finally, they argue that they have substantially
performed their obligation in good faith, considering that they have already
made the initial payment of P800,000 and three (3) monthly mortgage
payments.

As pointed out earlier, the breach committed by petitioners was not so

much their nonpayment of the mortgage obligations, as their nonperformance
of their reciprocal obligation to pay the purchase price under the contract of
sale. Private respondents right to rescind the contract finds basis in Article 1191
of the Civil Code, which explicitly provides as follows:

Art.1191.Thepowertorescindobligationsisimpliedinreciprocalones,in
caseoneoftheobligorsshouldnotcomplywithwhatisincumbentuponhim.

Theinjuredpartymaychoosebetweenfulfillmentandtherescissionofthe
obligation,withthepaymentofdamagesineithercase.Hemayalsoseek
rescissionevenafterhehaschosenfulfillment,ifthelattershouldbecome
impossible.

The right of rescission of a party to an obligation under Article 1191 of the

Civil Code is predicated on a breach of faith by the other party who violates the
reciprocity between them.[16] The breach contemplated in the said provision is
the obligors failure to comply with an existing obligation. [17] When the obligor
cannot comply with what is incumbent upon it, the obligee may seek rescission
and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission. [18]

In the present case, private respondents validly exercised their right to

rescind the contract, because of the failure of petitioners to comply with their
obligation to pay the balance of the purchase price. Indubitably, the latter
violated the very essence of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondents right to rescind the same in
accordance with law.
 True, petitioners expressed their willingness to pay the balance of the
purchase price one month after it became due; however, this was not equivalent
to actual payment as would constitute a faithful compliance of their reciprocal
obligation. Moreover, the offer to pay was conditioned on the performance by
private respondents of additional burdens that had not been agreed upon in the
original contract. Thus, it cannot be said that the breach committed by
petitioners was merely slight or casual as would preclude the exercise of the
right to rescind.

Misplaced is petitioners reliance on the cases [19] they cited because the
factual circumstances in those cases are not analogous to those in the present
one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20)
days to pay for the goods delivered. Moreover, the buyers offer to pay was
unconditional and was accepted by the seller. In Zepeda, the breach involved a
mere one-week delay in paying the balance of P1,000, which was actually
paid. In Tan, the alleged breach was private respondents delay of only a few
days, which was for the purpose of clearing the title to the property; there was
no reference whatsoever to the nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight
delay in payment or an irregularity; such breach would not normally defeat the
intention of the parties to the contract. Here, petitioners not only failed to pay
the P1.8 million balance, but they also imposed upon private respondents new
obligations as preconditions to the performance of their own obligation. In
effect, the qualified offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract of sale. Hence,
private respondents were left with the legal option of seeking rescission to
protect their own interest.
Mutual Restitution

Required in Rescission

As discussed earlier, the breach committed by petitioners was the

nonperformance of a reciprocal obligation, not a violation of the terms and
conditions of the mortgage contract. Therefore, the automatic rescission and
forfeiture of payment clauses stipulated in the contract does not apply. Instead,
Civil Code provisions shall govern and regulate the resolution of this
controversy.

Considering that the rescission of the contract is based on Article 1191 of

the Civil Code, mutual restitution is required to bring back the parties to their
original situation prior to the inception of the contract.Accordingly, the initial
payment of P800,000 and the corresponding mortgage payments in the amounts
of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly
enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can
be carried out only when the one who demands rescission can return whatever
he may be obliged to restore.[20] To rescind is to declare a contract void at its
inception and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each other, but to
abrogate it from the beginning and restore the parties to their relative positions
as if no contract has been made.[21]
Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary

to discuss the third issue raised by petitioners. Suffice it to say that the three
conditions appearing on the January 7, 1987 letter of petitioners to private
respondents were not part of the original contract. By that time, it was already
incumbent upon the former to pay the balance of the sale price. They had no
right to demand preconditions to the fulfillment of their obligation, which had
become due.

WHEREFORE, the assailed Decision is hereby AFFIRMED with

the MODIFICATION that private respondents are ordered to return to
petitioners the amount of P874,150, which the latter paid as a consequence of
the rescinded contract, with legal interest thereon from January 8, 1987, the
date of rescission. No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, and Sandoval-Gutierrez, JJ., concur.

Gonzaga-Reyes, J., on leave.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 12605 September 7, 1918

UY SOO LIM, plaintiff-appellant,

vs.
BENITO TAN UNCHUAN, FRANCISCA PASTRANO and BASILIO
CEFRANO UY BUNDAN, defendants-appellees.

Gibbs, McDonough & Johnson for appellant.

Williams, Ferrier & Sycip and Pantaleon E. del Rosario for appellees.

FISHER, J.:

This is an appeal by plaintiff upon the law and the facts, from a judgment of the
Court of First Instance of Cebu, dismissing on the merits his action for the
annulment of a contract by the terms of which he sold to the defendant Francisca
Pastrano all his interest in the estate of the late Santiago Pastrano Uy Toco.

The material facts as found by the trial court, whose findings are fully supported
by the evidence, are that at the age of about thirteen Santiago Pastrano Uy Toco,
a Chinese, came from China to reside in the Philippine Islands. He was then
unmarried. On August 2, 1882, he married Candida Vivares, a Filipina woman, at
Mambajao, in the province of Cagayan de Misamis. Of this marriage there were
born two daughters, Francisca and Concepcion. Francisca is a defendant in this
suit and is the wife of the co-defendant, Benito Tan Unchuan. At the time of this
marriage, Santiago Pastrano possessed very little property a tienda worth
about two thousand pesos. The large estate left by him at his death was acquired
by him during his marriage with Candida Vivares.

In 1891, Santiago Pastrano, who had resided continuously in the Philippines

since he came to the Islands at the age of 13, returned to China were he remained
for little less than a year. While there he entered into illicit relations with a
Chinese woman, Chan Quieg, also referred to as Chan Ni Yu.
After staying a little less than a year in China, Santiago Pastrano returned to the
Philippines where he remained till his death in Cebu, in March, 1901. He never
saw Chan Quieg again, but received letters from her informing him that she had
borne him a son, Uy Soo Lim, the present plaintiff. He died without ever having
seen Uy Soo Lim, but under the belief that he was his only son, and it was in this
belief that he dictated the provisions of his will.

On March 6, 1901, Santiago Pastrano died in Cebu, leaving a large estate. The
persons who survived him, and then or afterward laid claim to an interest in the
estate, were his wife, Candida Vivares, his daughters, Francisca Pastrano and
Concepcion Pastrano, Chan Quieg, and the plaintiff Uy Soo Lim.

By the terms of his will, Santiago Pastrano attempted to dispose of the greater
part of his estate in favor of the appellant, Uy Soo Lim. The will was duly
probated in the Court of First Instance of Cebu, and the defendant Benito Tan
Unchuan, husband of the defendant Francisca Pastrano, who was named in the
will as executor, duly qualified as such on May 13, 1902. Basilio Uy Bundan, one
of the defendants herein and brother of Santiago Pastrano, was named by the
testator as guardian of Francisca Pastrano, Concepcion Pastrano, and Uy Soo
Lim, who were all three minors at the time of the death of the testator, and duly
qualified as such before the court on August 6, 1902.

On October 21, 1904 the Court of First Instance of Cebu, in the matter of the
testamentary estate of Santiago Pastrano, deceased, issued an order requiring
Benito Tan Unchuan, as executor of the testamentary estate of Santiago Pastrano,
to deliver to Basilio Uy Bundan, guardian of Francisca Pastrano, Concepcion
Pastrano, and Uy Soo Lim, the property to which they were entitled under the
will of said Santiago Pastrano. This order was complied with and the
administration of the testamentary estate declared closed.

Basilio Uy Bundan having received, as guardian of the minors Francisca

Pastrano, Concepcion Pastrano, and Uy Soo Lim, the property devised to them
under the will of said Santiago Pastrano, continued to administer the said
property as guardian without incident of note till October, 1910. On October 18,
1910, the court, in the matter of the aforesaid guardianship, issued an order on
the guardian, Basilio Uy Bundan, in which it was noted that Francisca Pastrano
had reached majority, that Concepcion Pastrano would reach her majority in a
few months, and that Uy Soo Lim had married and the guardian was therefore
ordered to present a plan of distribution of the estate in accordance with the
dispositions of the will of Santiago Pastrano.

The guardian did not comply with this order at once, and, before the plan of the
distribution called for by this order could be presented, objections against
carrying into effect the provisions of the will were presented to this court.

On May 25, 1991, Candida Vivares presented, through her attorneys, a motion in
the matter of the testamentary estate of Santiago Pastrano in which she claimed
the right as the widow of the deceased to one-half of all the estate, and asked that
the administration of said estate reopened and the rights of the persons
readjudged and determined according to law. A motion of similar purport was
filed by her in the matter of the guardianship of Uy Soo Lim et al.

On June 5, 1911, Francisca Pastrano and Concepcion Pastrano filed, through their
attorneys, a motion in the guardianship of Uy Soo Lim et al., in which they
opposed the distribution of the estate of Santiago Pastrano in accordance with the
terms of his will, alleging that Uy Soo Lim was not entitled under the law to the
amount of the estate assigned him in the will, for the reason that the marriage
alleged therein of Santiago Pastrano with Chan Quieg, was null and void, and,
furthermore, that Uy Soo Lim was not a son, legitimate or illegitimate, of said
Santiago Pastrano. They, therefore, asked for a suspension of the distribution and
a reopening of the matter of the testamentary estate of Santiago Pastrano and
that the rights of all persons in interest be readjudged and determined according
to law. Chan Quieg also appeared in the matter of the estate of Santiago Pastrano
on October 7, 1911, and asked that she be declared entitled to one-half the estate
on account of "having in the year 1892 in the city of Amoy, China, held carnal
relations with the deceased Santiago Pastrano, having lived maritally with him
during his stay in said city that year, which union, under the laws and customs of
China, constitutes all the forms of valid marriage in said jurisdiction."

The effect of all these motions was to put in question the right of Uy Soo Lim to
seven-ninths of the property as left him by Santiago Pastrano in his will and even
to put in question his right to receive anything at all. If Uy Soo Lim was merely an
illegitimate son of Santiago Pastrano not legitimated and incapable of being
legitimated or of being given the status of an acknowledged natural son, and if
Candida Vivares was the lawful wife of Santiago Pastrano and Francisca and
Concepcion are the lawful issue of that marriage, then the utmost that Uy Soo
Lim could have taken under the will of Santiago Pastrano, according to the
contention of Pastrano's widow and daughters, would have been the third of
Santiago Pastrano's one-half interest in the community estate subject to the
testator's disposition, or one-sixth of the entire estate, instead of the seven-ninths
bequeathed him by said will.

Uy Soo Lim, had married in China in 1910. He was aware of the fact that he was
heir to a large fortune in the Philippine Islands under the terms of the will of
Santiago Pastrano, having already drawn from the estate for his personal use
P26,800. Before Candida Vivares, Francisca Pastrano, Concepcion Pastrano, and
his own supposed mother Chan Quieg had formally impeached before the court
his right to seven-ninths of the property described in the will of Santiago
Pastrano, he was fully aware of the preparations being made to reduce his
interest to nothing or to a small fraction of that conferred by the will. If was for
the express purpose of frustrating these efforts that Uy Soo Lim left China and
arrived in Manila on March 13, 1911, about two months more or less before the
first formal protest made in court attacking the rights conferred on Uy Soo Lim
under the will.
Before setting out for Manila Uy Soo Lim employed as his agent and advise one
Choa Tek Hee, a resident merchant of Manila, then on a visit to China. Plaintiff
came to Manila on March 13, 1911, and resided in the house of Choa Tek Hee till
his departure in November, 1911. Choa Tek Hee was then in China, but came to
Manila in time to aid plaintiff executed a power of attorney in favor of Choa Tek
Hee to represent him in the pending negotiations. He also secured the services of
two attorneys, Major Bishop to represent him in Manila and Levering, of Cebu, to
represent him in Cebu.

About the end of October, 1911, or, perhaps the early part of November, an
agreement was reached between Choa Tek Hee and plaintiff, of the one part, and
Tan Unchuan and Del Rosario, an attorney of Cebu, representing the interest of
Candida Vivares, Francisca and Concepcion Pastrano, on the other, to submit the
entire matter in dispute to the judgment of three respectable Chinese merchants
designated. The persons thus designated were not, strictly speaking, arbitrators,
but rather friendly advisers, since there was no agreement that their findings
should be binding on the parties. These advisers came to the conclusion that the
sum of P82,500 should be accepted by plaintiff in full satisfaction and
relinquishment of all his right, title, and interest in and to the estate of the
deceased Santiago Pastrano, and this recommendation was accepted by Choa Tek
Hee and plaintiff and by Tan Unchuan and Del Rosario. In accordance with this
agreement, plaintiff, on November 18, 1911, executed a deed by which he
relinguished and sold to Francisca Pastrano all his right, title, and interest in the
estate of the deceased Santiago Pastrano in consideration of P82,500, of which
sum P10,000 was received in cash and the balance was represented by six
promissory notes payable to Choa Tek Hee as attorney in fact for Uy Soo Lim, the
first for P22,500 and the remaining five for P10,000 each. This is the document
known as plaintiff's Exhibit B, which plaintiff is seeking to annul in the present
action. Thereafter, on December 6, 1911, Candida Vivares and Concepcion
Pastrano, then of age, executed separate deeds by where they relinquished and
sold to Francisca Pastrano all their right, title, and interest in the estate left by
Santiago Pastrano.

On November 29, 1911, Chan Quieg, then temporarily in the port of Cebu,
executed a deed whereby she sold and relinquished to Francisca Pastrano all her
right, title, and interest in the estate of Santiago Pastrano. On December 4, 1911,
Chan Quieg executed a public document in which she gave her consent to the sale
by Uy Soo Lim of his right and interest in said estate "in case the same should be
necessary by virtue of any legal requirements of the laws of the Philippine
Islands."

And finally, on December 4, 1911, Basilio Uy Bundan executed a public document

in which he declared that in spite of the statements in the will of Santiago
Pastrano, said testator was the owner of the entire business in Cebu known as
Santiago Pastrano & Co., and that Calixto Uy Conchio, the brother of testator and
of said Basilio Uy Bundan, did not, as declared in said will, own a three-quarter
interest in said business, or any interest at all therein, for which reason the said
Basilio Uy Bundan renounced any interest in said business which he might
appear to have as brother and heir of said Calixto Uy Conchio, who died without
direct heirs in the ascending or descending line, said renunciation of right being
made in favor of Francisca Pastrano.

All the documents above mentioned having been duly presented to the lower
court by Pantaleon del Rosario acting as attorney of Francisca Pastrano, that
court, on December 11, 1911, issued an order in the matter of the guardianship of
Uy Soo Lim et al., by which Francisca Pastrano was declared the sole owner of the
property left by the deceased Santiago Pastrano, and the guardian Basilio Uy
Bundan was order to deliver the same to Francisca Pastrano. On December 14,
1911, upon proof of compliance with said order, the guardianship was closed and
the guardians bond cancelled.

On August 24, 1914, the plaintiff and appellant, Uy Soo Lim, commenced the
present action in the Court of First Instance of Cebu, for the purpose of vacating
the orders of the lower court of December 11, 1911 and to rescind and annul the
contract by which he had sold and transferred to Francisca Pastrano his interest
in the estate of Santiago Pastrano.

The complaint alleges as one of the reasons for setting aside plaintiffs sale of his
rights to Francisca Pastrano that defendants Benito Tan Unchuan and Basilio Uy
Bundan induced the plaintiff to execute the deed of cession by conspiring
together to exercise under influence upon the plaintiff, by taking advantage of his
youth, passions, and inexperience, by misrepresenting materials facts concerning
the value of the property and interest in questions, and by concealing others. The
court below held that appellant had not been induced by deceit, or undue
influence to enter into the contract, but did so deliberately with full knowledge of
the facts, after mature deliberation and upon the advice of capable counsel. This
ruling of the court is assigned by appellant as error. Upon this branch of the case
the trial judge said:

The plaintiff testified before the court and a careful reading of the verbal
and documentary evidence furnishes a fair idea of the general
characteristics of the plaintiff. That he is a spendthrift and unable to make
a wise use of money is quite evident. But it is equally evident that the
plaintiff now is and at the same time of executing the bill of sale was a
youth of more than ordinary intelligence, with a keen appreciation and
understanding of all the elements of strength and weakness in his case that
could only have been bettered by a study of the law as a profession. As a
witness be displayed uncommon ability in avoiding a direct answer to
inconvenient questions and in professing lack of memory in other points.
It is true that this testimony was given some three years, more or less, after
signing the document of cession, but the court has no reason to believe
that the plaintiff's evident intelligence, not to say cunning, was appreciably
less then than now. The court upon review of the evidence finds that
plaintiff when he signed the document was in possession of all the
essential facts bearing upon his interest in the estate and had an intelligent
comprehension of the nature of the deed of cession, its contents and its
effect upon his interests.

Some shadow of claim might be made on this issue if plaintiff, then a

minor, had signed the document without careful and competent advisers
to direct him. He had however three advisers. One of them was Choa Tek
Hee, characterized by Judge Del Rosario as a person of unusual ability.
Whatever discord may have arisen subsequently between plaintiff and
Choa Tek Hee, there is no serious claim either in the complaint or based
on the evidence that Choa Tek Hee was a party to the supposed conspiracy
against plaintiff, and the Court does not doubt but what Choa Tek Hee
exerted all his ability to procure for plaintiff the best possible terms. But
plaintiff from the very beginning until the end had the benefit of the advice
of two lawyers, Major Bishop to consult with in Manila, where the
document itself was signed, and Mr. Levering of Cebu, where most of the
property was situated, where the other parties in interest lived and where
the litigation itself was pending. To claim that plaintiff did not know what
he was signing appears to the court to be an impeachment of the
intelligence which a reading of the testimony shows the plaintiff to have
possessed at the time in question. To claim that the two attorneys named
allowed their client to sign the document without being satisfied that he
understood its import and thereafter consented to the final decree issued
by the court in Cebu based on said sale, constitutes in the opinion of the
court an untenable impeachment of the conduct of two lawyers well and
favorably known to the Bench and Bar of these Islands as attorneys of
ability and integrity.

In support of the claim that material facts were concealed and

misrepresented by defendants, special stress is laid on a memorandum
furnished the "arbitrators" by Tan Unchuan. This memorandum was
shown to plaintiff's agent Choa Tek Hee and was a general account of the
property left by Santiago Pastrano's estate was credited with a quarter
interest in the business known as Santiago Pastrano & Co., his deceased
brother Calixto Uy Conchio being credited with only the remaining three-
fourths, while as a matter of fact it would appear that Santiago Pastrano
was the owner of the entire interest in said business and subsequently to
the execution of the document in question by plaintiff the entire interest in
the business passed by decree of this court to Francisca Pastrano who has
purchased the interest of all the other heirs. But whatever may have been
the effect of the presentation of this memorandum, plaintiff is not shown
to have relied thereon. It was for the purpose among others of being
informed as to the nature and value of his interests and as to the weight
that might be attached to the claims made by persons with adverse interest
that plaintiff employed a lawyer in Cebu where most of the property (and
the business known as Santiago Pastrano & Co.) was located and the facts
relating thereto accessible. Without better proof than has been presented
 the court will not presume that a document circulated among the
arbitrators, though seen by plaintiff, influenced plaintiff in signing the
deed of cession when he had employed attorneys well able to revise and
check up any statements, made in said memorandum.

Furthermore, the bill of sale itself specifically states that among the rights
sold by plaintiff is his interest in the business of Santiago Pastrano,
whatever that might be, and expressly states that the will erroneously
stated that testator's interest was one quarter, whereas in reality testator
owned the entire business. The court finds under the evidence that
plaintiff understood this part of the bill of sale along with its other
provisions and that its import was explained to him by his attorneys before
he signed it.

Without going further into all the evidence on this question, the court
finds that not only has plaintiff not sustained the burden of proving the
fraud, imposition and deceit, which the law never presumes, but that
plaintiff in fact signed the deed of cession in question without relying upon
the statements and representations of the defendants as the motive for
signing the same; that before signing the same he understood the nature of
said document, its contents and its effect upon his interest, and that in
signing the same he was determined by the advice of his own agent Choa
Tek Hee and upon the advice of his two lawyers, who explained to him
fully and to his complete understanding the nature, contents and effect of
said instrument.

Appellant vigorously assails these conclusions of the trial court, but the evidence
is amply sufficient to support the findings, and we find nothing in the record to
indicate that the trial court has failed to consider all the evidence adduced, or that
the findings are contrary to the weight of the testimony. Whenever there is a
conflict in the evidence and the conclusion to be reached must rest largely upon
the relative credibility of the witnesses, we rarely disturb the findings of the trial
court, and we can see no reason for doing so in this case. On the contrary, we are
convinced that the weight of the evidence strongly supports the findings, and that
the court did not err in rejecting appellant's contention that the contract is
voidable upon the ground that his consent was obtained by fraud or undue
influence. We are particularly impressed by the fact that it is expressly stated in
the contract (Exhibit B) which plaintiff now seeks to repudiate that
notwithstanding the statement to the contrary in Pastrano's will, the latter was in
fact the sole owner of the business referred to in that document. Plaintiff
therefore had full information regarding the assets which composed the
Pastrano's estate, and surrounded as he was by skillful and competent advisers,
we have no doubt that he was fully aware of the value of those assets.

The trial court found that plaintiff was a minor at the time of the execution of the
contract in question, but that he not only failed to repudiate it promptly upon
reaching his majority but tacitly ratified it by disposing of the greater part of the
proceeds after he became of age and after he had full knowledge of the facts upon
which he now seeks to disaffirm the agreement.

By the terms of the contract by which appellant transferred to the appellee

Francisca Pastrano his interest in the Pastrano Estate he was paid P10,000 in
cash, the balance of the P82,500 being represented by six promissory notes dated
November 18, 1911, signed as maker by the defendant Tan Unchuan, the husband
of the defendant Francisca Pastrano. The first note was for P22,500 payable
twelve days after date, and the other five for P10,000 each, payable in six, twelve,
eighteen, twenty-four and thirty months, respectively. These notes were made
payable to Choa Tek Hee, or order, as attorney in fact for Uy Soo Lim.

Of these notes the first three, amounting to P42,500 were paid to Choa Tek Hee
as they fell due. It appears, however, that Choa Tek Hee failed to account to the
satisfaction of Uy Soo Lim for the money so received, whereupon the latter
returned to Manila on February 20, 1913, to seek an adjustment of his affairs with
his attorney in fact.

Uy Soo Lim, upon his arrival in Manila, sent the following cable to Tan Unchuan
at Cebu:

I revoke power to Teck Hee. Don't pay him any more money. Please
forward account payments to him Urgent, Address P. O. 1360.

(Sgd.) UY SOO LIM.

This cable, sent to forestall further payment to Choa Tek Hee, evidences a clear
and convincing knowledge by plaintiff both of the conditions of the bill of sale
and his rights thereunder.

Not being able amicably to adjust with Choa Tek Hee the matter of such moneys,
Uy Soo Lim filed suit against him in the Court of First Instance, Manila, asking
that the power of attorney be canceled, and for an accounting. This complaint is
dated March 31, 1913, and has attached thereto a copy of the will of Santiago
Pastrano. It recites that plaintiff's interest in the estate of Santiago Pastrano was
reasonably worth P200,000; that this interest had been liquidated and "reduced
to a money basis," and that in consequence money and choses in action had come
into the hand of Choa Tek Hee amounting to P83,000 more or less. There is also
an allegation that the power of attorney was executed while plaintiff was still a
minor.

These allegations are important as showing that on March 31, 1913, plaintiff,
while claiming his interest in the estate of Santiago Pastrano was reasonably
worth P200,000 knew such interest had been sold for P83,000, more or less, and
also knew he was a minor under Philippine laws at the time of such sale.

By his answer Choa Tek Hee laid claim to a considerable portion of the P42,500
collected by him, for "services rendered," etc., his statement showing a cash
balance of only P2,867.94. This latter amount, upon petition of plaintiff, was
ordered deposited with the clerk of the court.

In the meantime Chas. E. Tenney had been appointed guardian ad litem of

plaintiff, and on May 12, 1913, filed a motion on behalf of plaintiff reciting that
promissory note No. 4 for P10,000 (being one of the notes executed on account of
plaintiff's bill of sale) would fall due on May 18, 1913, and asking that Choa Tek
Hee be directed to indorse it over to the clerk of the court for collection. As the
note was drawn in favor of Choa Tek Hee it took some time to adjust the matter
of payment, it being finally paid by Tan Unchuan to the clerk of the court on
October 24, 1913. The P10,000 due on note No. 5 was paid into court on
December 18, 1913, and the final P10,000, being note No. 6, was paid on May 23,
1914.

In the meantime, on October 8, 1913, Uy Soo Lim reached his majority under
Philippine laws, being then 21 years of age. On October 10, 1913, Chas. E. Tenney,
his guardian ad litem, filed a motion with the court reciting the fact of Uy Soo
Lim's majority, stating that the services of a guardian ad litem were no longer
necessary.

The sum of P2,867.94 deposited by Choa Tek Hee was part of the proceeds
accruing to plaintiff under his bill of sale to Francisca Pastrano, as was also the
P30,000, deposited by Tan Unchuan in payment of promissory notes Nos. 4, 5,
and 6, which notes accrued subsequent to the filing of suit against Choa Tek Hee.
The whole of this P30,000 was paid into court upon demand of plaintiff, such
payments being made after October 8, 1913, when plaintiff became of age.

On March 30, 1914, Uy Soo Lim secured judgment against Choa Tek Hee in the
sum of P31,511.993, with interest, which amount was in addition to the
P32,867.94 deposited with the court during the pendency of the proceedings. As
heretofore noted, the final promissory note for P10,000 was paid into court on
May 23, 1914. On May 25, 1914, or within two days after the final P10,000 due
upon his bill of sale had been paid into court, Uy Soo Lim filed suit in the Court of
First Instance of Manila, to annul it on the ground of minority, fraud, conspiracy,
and deceit.

Before filing the suit to annul his contract plaintiff had already withdrawn from
the P32,867.94 deposited with the court, the sum of P9,517.20, of which amount
the sum of P7,550 was withdrawn after he reached his majority.

In filing his suit to annul the contract no offer was made by appellant to return to
Francisca Pastrano the consideration of such contract, or to hold, subject to her
disposition, the balance of P54,863.61 then on deposit with the court and
represented by the Choa Tek Hee judgment. On the contrary, he proceeded with
the utmost celerity to secure, spend and otherwise dispose of the last cent of such
consideration.
On August 24, 1914, or more than ten months after plaintiff reached his majority,
the present suit was filed in the Court of First Instance of Cebu, the action
brought in Manila having been dismissed for lack of jurisdiction.

On March 29, 1915, this court affirmed on appeal the decision of the trial court
awarding Uy Soo Lim P31,511.93, with interest, in his suit against Choa Tek
Hee.1 Appellant lost no time in seeking to get possession of these additional
funds. Execution was secured against Choa Tek Hee on April 27, 1915, and by
June 5, 1915, the whole of this judgment was collected and converted to plaintiff's
use except the sum of P7,200.

By the time the present action came to trial, therefore, the whole of this
P64,377.81 the then available balance on hand derived from plaintiff's bill of
sale had been collected and converted by him save and except the sum of
P7,200, still due upon the judgment against Choa Tek Hee. As soon as the trial of
this case was closed appellant proceeded at once to realize this remaining
remnant accruing from his bill of sale, by transferring his interest therein to one
Wee Thiam Tew, of Singapore.

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

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

Of this amount of P82,500, plaintiff, speaking in rough figures, has

received and converted to his own use:

About P20,000 before coming of age under the laws of the Philippine
Islands.

About P62,500 since coming of age under the laws of the Philippine
Islands.

Of the P62,500 received and spent by plaintiff since coming of age under
our laws, plaintiff has spent approximately about P7,500 before bringing
suit to set aside his deed of cession, and about P55,000 since filing his first
action in Manila to set aside the deed of cession.

And of this sum of about P55,000, about P36,000 were received and spent
by plaintiff after filing the present suit.

And of the sum of P36,000 more or less which plaintiff has received and
spent since filing the present suit, P7,200 was received and spent after the
trial of the present case before this court had been closed; that is, after all
the evidence had been presented and the case submitted to the court for its
final decision upon briefs to be filed. It was this disposal by plaintiff of the
 lasts remains of the consideration price which was presented to the court
as additional evidence on the reopening of the trial.

It is important to note that this final P7,200 was disposed of by plaintiff on April
13, 1916, or more than two and a half years after he reached his majority, and an
equal time after he knew all the facts now alleged by him to constitute fraud.

Uy Soo Lim became of age under Philippine laws on October 8, 1913. On March
31, 1913 (some months prior to reaching majority) he filed suit against Choa Tek
Hee for an accounting, wherein reference is had to this bill of sale and to the fact
of minority. The purpose of that action was to reduce to possession the
consideration accruing to him from his bill of sale.

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

The privilege granted minors of disaffirming their contracts upon reaching

majority is subject to prompt election in the matter. The court, in
Hastings vs. Dollarhide (24 Cal., 195, 212), states the principle thus:

The exemption of infants from liability on their contracts

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

To the same effect Goodnow vs. Empire Lumber Company (31 Minn., 468; 47
Am. Rep., 798) where the court, in discussing the question, said:

The rule holding certain contracts of an infant voidable (among them his
conveyances of real estate) and giving him the right to affirm or disaffirm
after he arrives at majority, is for the protection of minors, and so that they
shall not be prejudiced by acts done or obligations incurred at a time when
they are not capable of determining what is for their interest to do. For this
purpose of protection the law gives them an opportunity, after they have
become capable of judging for themselves, to determine whether such acts
or obligations are beneficial or prejudicial to them, and whether they will
abide by or avoid them. If the right to affirm or disaffirm extends
 beyond an adequate opportunity to so determine and to act on the result,
it ceases to be a measure of protection, and becomes, in the language of
the court in Wallace vs. Lewis (4 Harr., 75, 80), "a dangerous weapon of
offense, instead of a defense." For we cannot assent to the reason given in
Boody vs. McKenney (23 Me., 517), (the only reason given by any of the
cases for the rule that long acquiescense is no proof of ratification), "that
by his silent acquiescence he occasions no injury to other persons, and
secures no benefits or new rights to himself. There is nothing to urge him
as a duty to others to act speedily." The existence of such an infirmity in
one's title as the right of another at his pleasure to defeat it, is necessarily
prejudicial to it; and the longer it may continue, the more serious the
injury. Such a right is a continual menace to the title. Holding such a
menace over the title is of course an injury to the owner of it; one
possessing such a right is bound in justice and fairness toward the owner
of the title to determine without unnecessary delay whether he will
exercise it. The right of a minor to disaffirm on coming of age, like the
right to disaffirm in any other case, should be exercised with some regard
to the rights of others with as much regard to those rights as is fairly
consistent with due protection to the interests of the minor.

In every other case of a right to disaffirm, the party holding it is required,

out of regard to the rights of those who may be affected by its exercise, to
act upon it within a reasonable time. There is no reason for allowing
greater latitude where the right exists because of infancy at the time of
making the contract. A reasonable time after majority within which to act
is all that is essential to the infant's protection. That ten, fifteen, or twenty
years, or such other time as the law may give for bringing an action, is
necessary as a matter of protection to him is absurd. The only effect of
giving more than a reasonable time is to enable the mature man, not to
correct what he did amiss in his infancy, but to speculate on the events of
the future a consequence entirely foreign to the purposes of the rule,
which is solely protection to the infant. Reason, justice to others, public
policy (which is not subserved by cherishing defective titles), and
convenience, require the right of disaffirmance to be acted upon within a
reasonable time. What is a reasonable time will depend on the
circumstances of each particular case, and may be either for the court or
for the jury to decide. Where, as in this case, there is mere delay, with
nothing to explain or excuse it, or show its necessity, it will be for the
court.

The above decisions (which could be multiplied indefinitely) are based upon
justice and sound sense, and have peculiar application to the case now before us.
Here plaintiff not only showed a personal knowledge of his rights under this
contract prior to and at the time of reaching majority, but he was surrounded by
able advisers, legal and otherwise, retained to protect his interests. As a result of
his failure to disaffirm promptly on reaching majority, he received a balance of
P30,000 upon the contact, which amount certainly would not have been paid if it
had been known that he was about to attempt to repudiate his agreement. This
amount was not only collected by Uy Soo Lim after reaching majority, but
was effectually disposed of as rapidly as possible.

The record shows that of the P2,867.94 deposited in court by Choa Tek Hee, and
the P30,000 paid into court by Tan Unchuan, only P1,967.20 was withdrawn by
plaintiff before reaching majority. Seven thousand five hundred and fifty pesos
was withdrawn after he became of age and before filing suit to rescind. There was
still uncollected the P31,511.93, with interest represented by the Choa Tek Hee
judgment. When plaintiff reached majority, therefore, there was P62,412.67 of
the original consideration available for refund, and there still remained P55,000
when he filed his suit to rescind. This sum could have been returned to Francisca
Pastrano or held by the court for her account.

Positive statutory law, no less than uniform court decisions, require, as a

condition precedent to rescission of a contract on account of minority that the
consideration received be refunded. We cite and quote as follows:

ART. 1295 (Civil Code). Rescission obliges the return of the things which
were the objects of the contract, with their fruits and the sum with
interest; therefore it can only be carried into effect when the person who
may have claimed it can return that which, on his part, he is bound to do.

ART. 1304 (Civil Code). When the nullity arises from the incapacity of one
of the contracting parties, the incapacitated person is not obliged to make
restitution, except to the extent he has profited by the thing or by the sum
he may have received.

ART. 1308 (Civil Code). While one of the contracting parties does not
return that which he is obliged to deliver by virtue of the declaration of
nullity, the other cannot be compelled to fulfill, on his part, what is
incumbent on him.

Not only should plaintiff have refunded all moneys in his possession upon filing
his action to rescind, but, by insisting upon receiving and spending such
consideration after reaching majority, knowing the rights conferred upon him by
law, he must be held to have forfeited any right to bring such action.

Article 1314, Civil Code, provides as follows:

The action for nullity of a contract shall also be extinguished when the
thing which is the object thereof should be lost by fraud or fault of the
person having the right to bring the action.

If the cause of the action should be the incapacity of any of the contracting
parties, the loss of the thing shall be no obstacle for the action to prevail,
unless it has occurred by fraud or fault on the part of the plaintiff after
having acquired capacity.
Plaintiff has disposed of the whole of the P85,000 which was paid him in
consideration of the execution of the contract he is now seeking to annul. The
record establishes beyond peradventure of doubt that he is utterly without funds
to reimburse this consideration. In the Choa Tek Hee suit (Exhibit 10) there
appears at folio 17 a motion by plaintiff, under oath, wherein he recites as a
ground for realizing certain of the moneys deposited under this contract that he
(plaintiff) has no funds with which to support himself except such as may be
advanced to him out of the moneys belonging to him which is now or may
hereafter be in the hands of the clerk of this court." Being without other funds,
there was the greater reason why this deposit, derived from the very contract
sought to be repudiated, should have been held intact to reimburse his vendee.

In note to Englebert vs. Pritchett reported in 26 L.R.A., 177, the various cases
relating to the necessity of returning the entire consideration in order to disaffirm
infant's contracts are correlated and discussed. We quote as follows:

The rule which comes the nearest to being general is that all consideration
which remains in the infant's possession upon his reaching majority or at
the time of an attempted disaffirmance in case he is still under age must be
returned, but that disaffirmance will not be defeated by inability to return
what he has parted with prior to such time.

He will not be permitted to regain what he parted with or refuse payment

while still possessed of what he received.

There have been many distinctions attempted such as between executory

and executed contacts, and between seeking relief at law and in equity, but
with only a few exceptions the rule as stated above has governed the
decisions regardless of the facts relied on as distinguishing facts. There is
no substantial ground for a distinction as to the rule to be applied,
although there may be as to the manner of its application.

The rule is that the consideration must be restored.

(Dickerson vs. Gordon, 24 N. Y. S. R., 448.)

Whatever difference may exist in the authorities as to the obligation of the infant
to return the entire consideration received as a condition precedent to
disaffirming the contract, they are unanimous in holding that he must return
such portion thereof as remains in his possession when reaching majority.

As heretofore noted, a very considerable portion of the moneys called for by the
contract under consideration was collected and used by plaintiff after May 25,
1914, when he definitely elected to disaffirm it by bringing suit to rescind.

A leading case on the general subject is that of Manning vs. Johnson (26 Ala.,
446), reported in 62 Am. Dec. 732, with an extensive footnote. Discussing the
general subject the court there lays down the following rule. (p. 733):
 When we come to reason upon the proposition, however, it is surrounded
with difficulty; for if the infant can raise money to the whole value of his
estate by a voidable sale or mortgage and can only avoid the conveyance
after refunding, he is furnished the means of indulging habits of
dissipation and prodigality, which in many instances would doubtless
result in squandering the whole of the proceeds, while the purchaser or
mortgagee would risk nothing, the land or estate of the infant so sold or
mortgaged furnishing adequate security. On the other hand to allow the
infant to retain the consideration and yet to repudiate or disaffirm the
conveyance, would tempt as well as enable him to practice frauds upon
others. We think safe rule should furnish a check both upon the infant and
the party contracting with him. That rule we take to be this: If the infant
after he arrives at age is shown to be possessed of the consideration paid
him, whether it be property, money or choses in action, and either
disposes of it so that he cannot restore it, or retains it for an unreasonable
length of time after attaining his majority, this amounts to an affirmance
of the contract. So likewise if it be shown that he has the power to restore
the thing that he received, he cannot be allowed to rescind without first
making restitution.

Certainly the rule as above stated is far and equitable.

Appellant argues that the notes of Tan Unchuan were accepted in payment of the
consideration moving from Francisca Pastrano and that therefore the fact that
some of these notes were collected after he reached his majority is of no
importance. We cannot accept this view. Even had the whole of the payment been
made in cash at the time of the execution of the contract, if it had been shown
that all or part of that money or its proceeds was still in the possession of
appellant when he attained his majority, it would have been incumbent upon him
to make restitution, as far as was then possible, upon coming of age. The
important fact is not the time when he received the money, but the time when
he disposed of it.

The contract involved herein is an executed contract. When plaintiff reached

majority there was P62,412.67 in esse, and, when suit was filed, the sum of
P55,000. The "offer to account" in paragraph 20 of the complaint, "if such
accounting should be necessary," is not the tender or offer to produce or pay,
which the law makes a condition precedent to demanding equitable relief.
Certainly it cannot be so construed in the present case, where it is conclusively
shown that plaintiff after reaching majority and after filing his action to annul,
that he had "no other funds." If plaintiff had succeeded in having the contract set
aside it would have left him in the same position as that in which he stood when it
was executed that is to say, he would have been compelled to face the
contention that he was lawfully entitled to little or nothing. Had he made
restitution of all the money which came into his hands after he attained his
majority, a decision in favor of the claims of the widow and legitimate daughters
of Santiago Pastrano would not have been a wholly barren victory for them. By
consuming the last centavo of the proceeds of the contract plaintiff placed himself
in a position where he was bound to enjoy the most advantageous position
whatever might be the outcome of the litigation. To give countenance to such
conduct would be to encourage deliberate bad faith.

On the assumption, therefore, that plaintiff might have had a right to rescind this
contract on the ground of minority, his action fails.

(1) Because, with a full knowledge of his rights in the premises, he failed to
disaffirm his contract within a reasonable time after reaching majority; and

(2) Because he not only failed to tender, or offer to produce and pay the
consideration in esse when he reached majority, and when he filed his action, but
proceeded, after such events, to demand, collect and dispose of such
consideration when according to his own statement under oath he had no other
funds with which to make reimbursement.

It is argued on behalf of appellee that it having been shown that appellant is a

Chinese subject or citizen, and that under the law of China he was of age when he
executed the contract here in dispute his contractual capacity must be
determined by his national law (estatuti personal). The conclusion we have
reached upon the assumption most favorable to appellant, the he was a minor at
the time of the execution of the contract makes it unnecessary for us to decide
this question or to consider the effect of the marriage of appellant before
attaining the age of twenty-one upon his contractual capacity.

For the reasons stated we are of the opinion that the judgment of the trial court is
without error, and it is, therefore, affirmed, with the costs of both instances. So
ordered.

Arellano, C.J., Torres, Street, Malcolm and Avancea, JJ., concur.