AUTONOMY OF CONTRACTS
GOLANGCO V. PCIB
SC ruled in fa vor of WGCC. The controvers y pi vots on the provision i n
the cons truction contra ct to as the defects liability period. The
provision provi ding for the defects liability period was not s hown as
contra ry to law, morals, good customs , publi c order or publi c policy.
By the na ture of the obliga tion in such contra ct, the provision limi ting
liability for defects and fi xing speci fi c gua ranty periods was not onl y
fai r and equi table; i t was also necessary.
The adoption of a 1-yea r gua rantee, as done by WGCC a nd PCIB, is
es tablished usage i n the PH for pri va te and govt. cons truction
contra cts. After the lapse of the period agreed upon therein, WGCC
ma y no longer be held a ccountable for wha tever defects , defi ciencies
or imperfecti ons tha t ma y be dis covered in the work executed by
WGCC.
CASTRO v. TAN
Defendats here entered into an a greement wi th Pet. Spouses Castro
denominated as Kasulatan ng Sanglaan ng Lupa at Bahay (Kasulatan)
to secure a loan of 30,000 they obtained from Spouses Castro. Under
the Kasula tan, Spouses Cas tro undertook to pa y the mortgage debt
wi thin 6 months wi th an i nteres t ra te of 5% per month or 60% per
annum.
SC: Nothing in Central Bank Ci rcula r No. 905 tha t grants lenders carte
blanche authority to raise interes t ra tes to levels whi ch will either
ensla ve thei r borrower or lead to a hemorrha ging of thei r assets .
While pa rties to a loan agreement ha ve wide lati tude to stipulate on
any i nterest ra te i n view of the Central Bank Ci rcula r whi ch suspended
the Usury La w ceiling on interes t, i t is worth s tressing tha t interes t
ra tes whenever unconscionable ma y s till be decla red illegal.
Sti pulati ons authorizi ng iniqui tous or uncons cionable interes ts a re
contra ry to morals i f not agains t the law.
Freedom of contra cts is not absolute; i t is understood to be subject to
reasonable legislati ve regulati on ai med a t the promotion of publi c
heal th, morals, safety and welfa re.
MALLARI v. PRUDENTIAL BANK
Spouses Mallari obtained from resp.bank a 300,000 l oan and was
subject to an interes t of 21% per annum, attorney’s fees equi valent to
15% and in case of defaul t, a penal ty of 12% p.a of the total due. Pet.
obtained a nother 1.7M loan with 23% interes t p.a etc.
SC: The 23% p.a a nd 12% penalty cha rge p.a a greed upon by peti tions
and resp. a re not unconscionable.
Pa rties are free to enter into a greements and sti pulate as to the terms
and condi tions of thei r contra ct, but such freedom is not absolute.
However, i f the s tipula tions in the contra ct a re valid, the pa rties
thereto a re bound to compl y wi th them, since such contra ct is the law
between the pa rties .
Here, the interes t ra te a greed upon by the pa rties was onl y 23% per
annum or less than 2% per month whi ch a re much lower than those
interes t ra tes agreed upon by the pa rties in the herein mentioned
cases (see full text); thus i t is not unconscionable.
HEIRS OF EK LIONG v. CASTILLO
Resp. entered i nto a Kasunduan a greei ng to sell the remaining 60,000
sha re in the land and in fa vor of Manuel for the sum of 180,000. La te r
(read full text) resp. refused to compl y wi th the Kasunduan. Issue here
is whether the Kasunduan should be gi ven effect?
SC:The Kasunduan is valid. The prohibi tion a pplies onl y during the
pendency of the sui t a nd generall y does not cover contra cts for
contingent fees where the transfer takes effect onl y after the finality
of a fa vorable judgment. The Agreement and the Kasunduan a re not
independent contra cts , wi th pa rties, objects and causes di fferent from
tha t of the other.
1
Obliga tions from contra cts ha ve the force of law between the
contra cting pa rties . When the terms of the contra ct a re clea r and
lea ve no doubt as to the intention of the pa rties , the literal meaning of
i ts s tipulation should govern. The Kasunduan contained a penal clause
whi ch provi ded that a pa rty who vi olates any of i ts provisions shall be
liable to pa y the a ggrieved pa rty a penal ty fi xed a t 50,000 etc. The
penalty clause generally subs ti tutes the indemni ty for da mages and
the pa yment of interes t i n case of noncompliance.
PNB v. CA and JAYME-FERNANDEZ
Remedios a nd Amado obtained a 50,000 l oan from PNB with 12%
interes t per annum. Their contra ct includes a clause whi ch allows PNB
to raise the ra te of i nteres t depending on the bank’s future policies .
So, PNB imposed subsequent raises to the appli cable ra te ranging
from the original 12% to 42% and a penal ty of 6% p.a.
SC: A credi tor cannot raise the ra te of interes t based solely on a
certain clause in the contra ct and without the consent of the debtor
as to the a mount and ra te of such increase.
It is basi c that there can be no contra ct in the absence of a greement
or of mutual assent of the pa rties.
In the case a t ba r, the escalation clause in the contra ct gi ves PNB an
unbridled ri ght to unilaterall y a nd upwardl y adjust the interes t on the
loan and such ri ght would negate the element of mutuality in
contracts.
P.D No. 1684 a nd C.B Ci rcula r No. 905 did not authori ze ei ther pa rty to
unilaterall y raise the interest ra te wi thout the other’s consent.
Contra ct changes mus t be made wi th the consent of the contra cting
pa rties . The minds of all pa rties mus t meet as to the proposed
modi fica tion, especiall y when i t a ffects and important aspect of the
agreement. In the case of loan contracts, i t caanot be gainsaid tha t
the ra te of interes t is alwa ys a vi tal component, for it can ma ke or
brea k a capi tal venture. Thus , any cha nge must be mutually agreed
upon, otherwise, i t is bereft of any binding effect.
No one recei vi ng a proposal to change a contra ct to which he is a pa rty
is obliged to answer the proposal, a nd his silence per se cannot be
construed as an a cceptance. In the case a t bench, the ci rcums tances
do not show that the pri va te respondents implici tl y a greed to the
proposed increases in interes t ra te whi ch by any s tanda rd were too
sudden and too s tiff.
ALLIED BANK v. CA
The phrase “may be renewed for a like term”.
The contra ct is not violative of the principle of Mutuality of Contra cts
because in the fi rst case, the lessee had a choi ce when the contra ct
was negotia ted whether or not to agree wi th this s tipula tion and so as
the lessor. If the lessee did not like the provision, he could reject i t but
he agreed so there was mutuality when the lessor and the lessee
negotia tesd the contra cts and they a greed.
The contra ct provi des the option to renew on the pa rt of the lessee,
so tha t ca n be enforced and there is also a li mita tion here because i t
sa ys “for a like term a t the opti on of the lessee”, meaning under the
terms and condi tions of the old contra ct.
The ri ght of renewal cons ti tutes a pa rt of the lessee’s interest in the
land and forms a subs tantial and integral pa rt of the a greement. The
fa ct that such option is binding onl y on the lessor and can be exercised
onl y by the lessee does not render i t void for lack of mutuality. After
all, the lessor is free to gi ve or not to gi ve the option to the lessee.
And, while the lessee has a ri ght to elect whether to continue wi th the
lease or not, once he exercises his option to continue and the lessor
a ccepts , both pa rties a re therea fter bound by the new lease
agreement.
FLOIRENDO JR. v. METROBANK
Pet.obtained 1M loan from resp. wi th a PN and an interes t of 15.446%
p.a and a penal ty cha rge of 18% p.s . The bank s ta rted imposing higher
interes t ra tes.
SC: The increases of interes t ra te unilaterall y imposed by resp.bank
without petitioner’s assent a re violative of the pri nciple of mutuality
of contra cts ordained in Art. 1308 of the Ci vil Code. Any contra ct
whi ch a ppea rs to be hea vil y weighed in fa vor of one of the pa rties so
as to lead to an uncons cionable resul t is void. Any stipulation
regarding the validity or compliance of the contract which is left
solely to the will of one of the parties is likewise invalid.
The provision in the promissory note authorizing res pondent bank to
increase, decrease or otherwise change from time to time the ra te of
interes t and/or bank cha rges "without advance notice" to petitioner,
"in the event of change in the interest ra te pres cribed by law or the
Moneta ry Boa rd of the Central Bank of the Philippines," does not give
respondent bank unrestrained freedom to charge any rate other
than that which was agreed upon. Here, the monthl y
upwa rd/downwa rd a djustment of interest ra te is left to the will of
respondent bank al one. It violates the essence of mutuali ty of the
contra ct. Si milarl y, contra ct changes must be made wi th the consent
of the contra cting pa rties. The minds of all the parties must meet as
to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contra cts , it ca nnot be
gainsaid tha t the ra te of interes t is alwa ys a vi tal component, for i t can
ma ke or break a capi tal venture. Thus , any change mus t
be mutually a greed upon, otherwise, it is bereft of any binding effect.
In this case, respondent bank sta rted to increase the agreed interes t
ra te of 15.446% per annum to 24.5% on Jul y 11, 1997 and every
month thereafter; 27% on Augus t 11, 1997; 26% on September 10,
1997; 33% on October 15, 1997; 26.5% on November 27, 1997; 27%
on December 1997; 29% on Janua ry 13, 1998; 30.244% on Februa ry 7,
1998; 24.49% on Ma rch 9, 1998; 22.9% on April 18, 1998; a nd 18% on
Ma y 21, 1998. Obvi ousl y, the rate increases are excessive and
arbitrary. It bea rs rei tera ting tha t respondent bank unilaterall y
increased the interes t ra te wi thout peti tioner’s knowledge and
consent.
The peti tioner negotia ted for the renewal of his l oan and he paid the
interests due. Respondent bank then could not claim that there was
no a ttempt on his pa rt to compl y wi th his obliga tion. Yet, respondent
bank has til y filed a peti tion to foreclose the mortgage to gain in taking
peti tioner’s pa rcels of land a t ba rgain pri ces . Obviously, respondent
bank acted in bad faith.
In sum, we find tha t the requisites for reformation of the mortga ge
contra ct and promissory note a re present in this case. There has been
meeting of minds of the pa rties upon these documents . However,
these documents do not express the pa rties ’ true a greement on
interes t ra tes . And the failure of these documents to express thei r
agreement on interes t ra tes was due to respondent ba nk’s inequi table
conduct. Henceforth, the SC GRANTED the petiti on. The interest he
paid in excess of 15.446% should be applied to the pa yment of the
pri ncipal obligati on.
JUICO v. CHINA BANK
The contra ct mus t bind both contra cting pa rties ; i ts validity or
compliance cannot be left to the will of one of them. Arti cle 1956 of
the Ci vil Code likewise ordains tha t "no interest shall be due unless i t
has been expressl y stipulated in wri ting."
Any contra ct whi ch appears to be hea vil y wei ghed in fa vor of one of
the pa rties so as to lead to an unconsci onable resul t is voi d. Any
s tipula tion rega rding the validi ty or compliance of the contra ct which
is left solel y to the will of one of the pa rties, is likewise, invalid
Es calation clauses refer to stipulations allowing an increase in the
interes t ra te agreed upon by the contra cting pa rties . This Court has
long recogni zed that there is nothing inherentl y wrong wi th escalation
clauses
2
Nevertheless, an escala tion clause "whi ch grants the credi tor an
unbridled right to a djus t the interes t independentl y and upwa rdl y,
completel y depri ving the debtor of the ri ght to assent to an i mporta nt
modi fica tion in the agreement" is void. A s tipula tion of such nature
vi olates the pri nciple of mutuality of contra cts . It is now settled tha t
an es calation clause is void where the creditor unilaterall y determines
and imposes an increase in the s tipula ted ra te of interest wi thout the
express conformi ty of the debtor. Such unbridled ri ght gi ven to
creditors to a djus t the i nterest independentl y and upwa rdl y would
completel y take awa y from the debtors the right to assent to an
important modifi ca tion in thei r agreement and would also nega te the
element of mutuali ty in thei r contra cts .
SC held tha t the escala tion clause he re is still void because i t grants
respondent the power to impose an increased ra te of i nterest wi thout
a wri tten noti ce to peti tioners a nd their wri tten consent.
Respondent’s monthl y telephone calls to petitioners advising them of
the prevailing interes t ra tes would not suffice. A detailed billing
s tatement based on the new imposed interes t with corresponding
computation of the total debt should ha ve been provi ded by the
respondent to enable peti tioners to ma ke an informed decision. An
appropria te form must also be signed by the peti tioners to indi ca te
thei r conformi ty to the new ra tes. Compliance wi th these requisites is
essential to preserve the mutuality of contra cts. For indeed, one-sided
impositions do not have the force of law between the parties,
because such impositions are not based on the parties’ essential
equality.
In the absence of consent on the pa rt of the peti tioners to the
modi fica tions in the interest ra tes, the adjus ted ra tes cannot bind
them. Hence, we consider as invalid the interes t rates in excess of
15%, the ra te charged for the fi rst yea r.
Based on the Augus t 29, 2000 demand letter of China Bank,
peti tioners ’ total principal obliga tion under the two promissory notes
whi ch they failed to settle is P10,355,000. However, due to China
Ba nk’s unila teral increases in the interes t ra tes from 15% to as hi gh as
24.50% and penalty cha rge of 1/10 of 1% per da y or 36.5% per a nnum
for the period November 4, 1999 to Februa ry 23, 2001, peti tioners ’
balance ballooned to P19,201,776.63. Note tha t the o ri ginal a mount
of principal loan al mos t doubled in onl y 16 months . The Court also
fi nds the penal ty cha rges i mposed excessi ve and a rbi tra ry, hence the
same is hereby reduced to 1% per month or 12% per annum.
PNB v. MANALO
The Spouses Manalo applied for an All-Purpose Credit Fa cility in the
amount of P1,000,000.00 wi th the PNB to finance the cons truction of
thei r house.September 20, 1996: the credi t fa cility was renewed
for P7,000,000.00. As a consequence, the pa rties executed a
Supplement to and Amendment of Exis ting Real Es ta te Mortga ge
whereby the property covered by TCT No. 171859 was added as
securi ty for the loan. It was agreed upon tha t the Spouses Manalo
would make monthl y pa yments on the interes t. However, PNB
claimed that thei r last recorded pa ymen t was made on December,
1997.
There was no mutuali ty of consent. The credi t agreement executed
s tipula ted tha t the loan woul d be subjected to interest a t a ra te
"determined by the Bank to be its prime rate plus applicable spread,
prevailing at the current month." This s tipula tion was ca rried over to
or adopted by the subsequent renewals of the credi t a greement. PNB
thereby a rroga ted unto i tsel f the s ole prerogati ve to determine and
increase the interes t ra tes imposed on the Spouses Manalo. Such a
unilateral determination of the interest rates contravened the
principle of m utuality of contracts em bodied in Article 1308 of the
Civil Code.
The Court has decla red tha t a contra ct where there is no mutuality
between the pa rties pa rtakes of the na ture of a contract of adhesion,
and a ny obs curi ty will be cons trued a gainst the party who prepared
the contra ct, the la tter being presumed the s tronger pa rty to the
agreement, a nd who caused the obscuri ty. PNB should then suffer the
consequences of i ts failure to s pecifi call y indi ca te the ra tes of interes t
in the credi t agreement.
PNB could not also jus tify the i ncreases i t ha d effected on the interes t
ra tes by ci ting the fa ct tha t the Spouses Manalo had paid the interes ts
wi thout protest, a nd had renewed the loan several times . A borrower
is not es topped from assailing the unilateral i ncrease in the interes t
ma de by the lender since no one who recei ves a proposal to change a
contra ct, to which he is a pa rty, is obliged to answer the same and said
pa rty’s silence cannot be construed as an a cceptance thereof.
Las tl y, the CA observed, and properl y s o, tha t the credit agreements
had explicitly provided tha t prior notice would be necessa ry before
PNB could increase the interest ra tes . In failing to noti fy the Spouses
Manalo before i mposing the increased ra tes of interes t, therefore,
PNB violated the sti pulations of the very contra ct tha t i t had prepared.
Hence, the va rying interes t ra tes imposed by PNB ha ve to be va cated
and decla red null and void,
JONSAY v. SOLID BANK
Moma rco, controlled and owned by the Spouses Jonsa y, is an
importer, manufa cturer and dis tributor of ani mal heal th and feedmill
products ca teri ng to ca ttle, hog and poul try producers . Moma rco
obtained loans of P40,000,000.00 and P20,000,000.00, respecti vel y,
from Solidbank. The s tipulated rate of interes t was 18.75% per
annum, along wi th an es calation clause tied to increases in pertinent
Central Bank-decla red interes t ra tes , by whi ch Solidbank was
eventuall y able to unila terally increase the interest cha rges up to
30% per annum.
SC: An es calation clause in a loan a greement granting the lending bank
authori ty to unilaterall y increase the i nterest ra te without prior notice
to and consent of the borrower is void.
Si milarl y, contract changes must be made with the consent of the
contracting parties. The minds of all the pa rties mus t meet as to the
proposed modifi ca tion, especially when i t a ffects an i mporta nt aspect
of the agreement. In the case of loan contra cts, i t ca nnot be gainsaid
tha t the ra te of interes t is alwa ys a vi tal component, for i t can make or
brea k a capi tal venture. Thus , any change mus t be mutually agreed
upon, otherwise, i t is bereft of any binding effect. We cannot
countenance peti tioner bank's pos turing tha t the escala tion clause a t
bench gi ves i t unbridled right to unila terally upwa rdl y adjus t the
interes t on pri va te respondents ' loan. Tha t would completel y take
awa y from pri va te respondents the ri ght to assent to an i mporta nt
modi fica tion in thei r a greement, and would nega te the element of
mutuali ty in contra cts .
The "unilateral determination and imposition" of increased
ra tes is "vi olati ve of the principle of mutuali ty of contra cts ordained in
Arti cle 1308 of the Ci vil Code ." One-sided impositions do not have the
force of law between the parties, beca use such i mposi tions a re not
based on the pa rties' essential equality. Al though es cala tion clauses
a re valid in maintaining fis cal stabili ty and retaining the value of
money on long-term contra cts , giving respondent an unbridled right
to adjus t the inte res t independentl y and upwa rdl y would completely
take away from petitioners the "right to assent to an important
modification in their agreement" a nd would also negate the element
of mutuality in their contracts. The clause ci ted ea rlier made the
fulfillment of the contra cts "dependent exclusi vel y upon the
uncontrolled will" of respondent a nd was therefore voi d. Besides, the
pro forma promissory notes ha ve the cha ra cter of a contra ct of
adhesion, "where the pa rties do not ba rgain on equal footing, the
weaker pa rty's [the debtor's] pa rtici pation being reduced to the
al terna ti ve 'to ta ke i t or lea ve it."'
RELATIVITY OF CONTRACTS
3
BALUYOT V. CA
STIPULATION POUR AUTRUI REQUISITES:
1) there must be a s tipula tion in fa vor of a 3 rd person
2) the s tipulation mus t be a pa rt, not the whole of the contra ct
3) the contra cting pa rties must ha ve clearl y and delibera tel y conferred
a fa vor upon a 3rd person, not a mere incidental benefit or interes t
rd
4) the 3 person mus t ha ve communi cated his acceptance to the
obligor before i ts revoca tion, a nd 5) nei ther of the contra cting pa rties
bea rs the legal representa tion or authoriza tion of the 3 rd pa rty.
INTEGRATED PACKAGING V. CA
Reci procal obliga tions a re to be performed simul taneousl y, so tha t the
performance of one is conditioned upon the simul taneous ful fillment
of the other.—The transacti on between the pa rties is a contra ct of
sale whereby pri va te respondent (seller) obliga tes i tself to deli ver
pri nting paper to peti tioner (buyer) whi ch, in turn, binds itself to pa y
therefore a sum of money or i ts equi valent (pri ce). Both pa rties
concede tha t the order a greement gi ves rise to reciprocal obliga tions
such tha t the obligati on of one is dependent upon the obliga tion of
the other. Thus , pri va te respondent underta kes to deli ver printing
paper of va rious quanti ties subject to peti tioner’s corresponding
obliga tion to pa y, on a ma ximum 90-da y credi t, for these ma terials.
Note that in the contra ct, peti tioner is not even requi red to make any
deposit, down pa yment or advance pa yment, hence, the undertaking
of pri va te respondent to deli ver the ma terials is condi tional upon
pa yment by peti tioner wi thin the pres cribed peri od. Clea rl y, peti tioner
did not fulfill i ts side of the contra ct as i ts last pa yment in Augus t 1981
could cover onl y ma terials covered by delivery i nvoi ces dated
September and October 1980.
Where a pa rty has not paid for the ma terials covered by deli very
invoi ces on time, the other pa rty has the ri ght to cease making further
deli veries .—In this case, as found a quo peti tioner’s evi dence failed to
es tablish tha t i t had paid for the printing paper covered by the deli very
invoi ces on ti me. Consequentl y, pri va te respondent has the right to
cease maki ng further deli very, hence the pri va te respondent did not
vi olate the order a greement. On the contrary, it was petitioner which
breached the agreement as it failed to pay on time the materials
delivered by private respondent. Respondent appellate court
correctl y ruled tha t pri va te respondent did not viola te the order
agreement.
Principle of Relativity; Words and Phrases ; The pri nciple of relati vi ty of
contra cts provi des that contra cts can onl y bind the pa rties who
entered into i t, and i t cannot fa vor or prejudi ce a thi rd person, even i f
he is awa re of such contra ct and has a cted with knowledge thereof.—
As correctl y held by the appellate court, pri va te respondent cannot be
held liable under the contra cts entered into by peti tioner wi th
Phila cor. Pri va te respondent is not a pa rty to said agreements . It is
also not a contract pour autrui. Aforesaid contra cts could not a ffect
thi rd persons like pri va te respondent because of the basic ci vil law
pri nciple of relati vi ty of contra cts whi ch provi des tha t contra cts can
onl y bind the pa rties who entered into i t, and i t cannot fa vor or
prejudi ce a thi rd person, even if he is awa re of such contra ct and has
a cted wi th knowledge thereof.
A&C MINIMART V. VILLAREAL
A contra ct cannot be binding upon and cannot be enforced by one
who is not pa rty to i t.—Contra cts produce a n effect as between the
pa rties who execute them. A contra ct cannot be binding upon and
cannot be enforced by one who is not pa rty to i t. Although the
respondents were adjudged to be entitled to rentals a ccrui ng from 2
Ma rch 1999, until the ti me the peti tioner va ca ted the premises, the
obliga tion to pa y rent was not deri ved from the Lease Contra ct dated
22 Ja nua ry 1998, but from a quasi-contra ct.
BORROMEO V. CA
Foreclosure of Mortga ge; Pa rties ; The ri ght of foreclosure ca nnot be
exercised agains t the mortgagor by any person other than the
creditor-mortga gee or i ts assigns .—In this case, peti tioners’ rights to
thei r property is res tri cted by the REM they executed over i t. Upon
thei r defaul t on the mortgage debt, the right to foreclose the property
would be ves ted upon the credi tor-mortga gee. Nevertheless, the right
of foreclosure cannot be exercised agains t the peti tioners by any
person other than the creditor-mortga gee or i ts assigns .
Sa me; Same; Contra cts ; Pri nciple of Rela ti vi ty of Contra cts ; Words and
Phrases ; The ci vil law pri nciple of rela ti vi ty of contra cts provides tha t
contra cts can onl y bind the pa rties who entered i nto i t, and it cannot
fa vor or prejudi ce a thi rd pers on, even i f he is awa re of such contra ct
and has a cted wi th knowledge thereof—since a contra ct ma y be
vi olated onl y by the parties thereto as a gainst ea ch other, a pa rty who
has not taken pa rt in it cannot sue for performance, unless he shows
tha t he has a real interes t a ffected thereby.—It is clea r tha t under
Arti cle 1311 of the Ci vil Code, contra cts ta ke effect onl y between the
pa rties who execute them. Where there is no pri vi ty of contra ct, there
is likewise no obliga tion or liability to speak a bout. The ci vil law
pri nciple of rela ti vi ty of contra cts provides tha t contra cts can onl y bind
the pa rties who entered into i t, and i t cannot fa vor or prejudi ce a third
person, even i f he is awa re of such contra ct and has a cted with
knowledge thereof. Since a contra ct ma y be viola ted onl y by the
pa rties thereto as agains t ea ch other, a pa rty who has not ta ken pa rt
in i t cannot sue for performance, unless he shows that he has a real
interes t affected thereby.
Sa me; Same; Same; Same; Corpora tion La w; The fa ct tha t a
corpora tion owns all of the stocks of a nother corpora tion, ta ken alone,
is not suffi cient to justi fy thei r being trea ted as one enti ty—any claim
or sui t of the pa rent corpora ti on cannot be pursued by the s ubsidiary
based solel y on the reason that the former owns the majori ty or even
the enti re s tock of the la tter.—Respondent, al though a wholl y-owned
subsidia ry of EPCIB, has an independent and sepa ra te juridi cal
personality from i ts pa rent compa ny. The fa ct tha t a corporati on owns
all of the s tocks of another corpora tion, taken alone, is not suffi cient
to justi fy thei r being trea ted as one entity. If used to perform
legi ti mate functi ons , a subsidia ry’s sepa ra te exis tence shall be
respected, and the liability of the pa rent corpora tion, as well as the
subsidia ry, s hall be confi ned to those a rising from thei r respecti ve
businesses. A corpora tion has a sepa ra te personali ty dis tinct from i ts
s tockholders and other corpora tions to whi ch i t ma y be conducted.
Any claim or suit of the pa rent corpora tion ca nnot be pursued by the
subsidia ry based solel y on the reason that the former owns the
ma jori ty or even the enti re s tock of the la tter. From a perusal of the
records , peti tioners did not enter i nto a Loan Agreement and REM
wi th respondent. Respondent, therefore, has no ri ght to forecl ose the
subject property even after defaul t, since this right can onl y be
claimed by the credi tor-mortgagor, EPCIB; and, consequentl y, the
extra judicial foreclosure of the REM by respondent would be in
vi olation of peti tioners ’ property ri ghts .
HEIRS OF LLENADO V. LLENADO
Contra cts ; Lease; Hei rs a re bound by the contra cts entered into by
thei r predecessors-in-interes t except when the ri ghts and obliga tions
therei n a re not trans missible by thei r na ture, by s tipula tion or by
provision of law; A contra ct of lease is generall y transmissible to the
hei rs of the lessor or lessee—i t invol ves a property ri ght and, as such,
the dea th of a pa rty does not excuse non-performance of the contra ct;
As a general rule, covenants to renew a lease a re not personal but will
run with the land.—Under Arti cle 1311 of the Ci vil Code, the hei rs a re
bound by the contra cts entered into by their predecessors-in-interes t
except when the ri ghts and obli gati ons therein a re not transmissible
4
by thei r nature, by s tipula tion or by provision of law. A contra ct of
lease is , therefore, generall y transmissible to the hei rs of the lessor or
lessee. It invol ves a property ri ght and, as such, the dea th of a pa rty
does not excuse non-performance of the contra ct. The ri ghts and
obliga tions pass to the hei rs of the deceased and the hei r of the
deceased lessor is bound to respect the peri od of the lease. The same
pri nciple applies to the option to renew the lease. As a general rule,
covenants to renew a lease a re not personal but will run with the land.
Consequentl y, the successors -in-i nterest of the lessee a re enti tled to
the benefi ts , while that of the lessor a re burdened wi th the duties and
obliga tions , whi ch said covenants conferred a nd imposed on the
ori ginal parties .
Sa me; Sa me; Options to Renew; While the option to renew is an
enforceable ri ght, i t mus t necessaril y be fi rs t exercised to be gi ven
effect.—It does not follow, however, tha t the lease subsis ted a t the
time of the sale of the subject lot on Janua ry 29, 1987. When Orlando
died on November 7, 1983, the lease contra ct was set to expi re 26
da ys la ter or on December 3, 1983, unless renewed by Orlando’s hei rs
for a nother four yea rs. While the option to renew is an enforceable
ri ght, it mus t necessaril y be fi rs t exercised to be gi ven effect.
Sa me; Sa me; Ri ght of Fi rs t Refusal ; Evidence; Pa rol Evi dence; A ri ght of
fi rs t refusal ma y be proved by pa rol evidence.—The ques tion as to
whether a ri ght of fi rs t refusal ma y be proved by pa role evidence has
been answered in the a ffi rma ti ve by this Court in Rosencor
Development Corpora tion v. Inquing (354 SCRA 119 [2001]): We ha ve
previousl y held tha t not all agreements “affecting land” mus t be put
into wri ting to a ttain enforceability. Thus , we ha ve held that the
setting up of bounda ries, the oral pa rti tion of real property, and a n
agreement creating a right of wa y a re not covered by the provisions of
the s tatute of fra uds . The reason simpl y is tha t these a greements a re
not among those enumerated in Arti cle 1403 of the New Ci vil Code. A
ri ght of fi rs t refusal is not a mong those lis ted as unenforceable under
the s ta tute of frauds. Furthermore, the applica tion of Arti cle 1403,
pa r. 2(e) of the New Ci vil Code presupposes the existence of a
perfected, albei t unwri tten, contra ct of sale. A right of fi rs t refusal,
such as the one invol ved in the ins tant case, is not by any means a
perfected contra ct of sale of real property. At bes t, i t is a contra ctual
grant, not of the sale of the real property invol ved, but of the ri ght of
fi rs t refusal over the property sought to be sold.
PNB V. DEE
Contracts; Principle of Relativity of Contracts; The basic principle of
relativity of contracts is that contracts can only bind the parties who
entered into it, and cannot favor or prejudice a third person, even if
he is aware of such contract and has acted with knowledge
thereof.—The petitioner is correct in a rguing tha t i t is not obliged to
perform any of the underta king of respondent PEPI and AFP-RSBS in
i ts transacti ons wi th Dee because i t is not a pri vy thereto. The basi c
pri nciple of relati vi ty of contra cts is tha t contra cts can onl y bind the
pa rties who entered into i t, and cannot fa vor or prejudi ce a third
person, even i f he is awa re of such contra ct and has a cted with
knowledge thereof. “Where there is no pri vi ty of contra ct, there is
likewise no obliga tion or liability to speak about.”
Sa me; Mortgages ; A mortgage is an a ccessory undertaking to secure
the fulfillment of a principal obli gation, and i t does not affect the
ownership of the property as it is nothing more than a lien thereon
serving as securi ty for a debt.—It must be s tressed tha t the mortga ge
contra ct between PEPI and the petitioner is merel y an a ccessory
contra ct to the principal three-yea r loan takeout from the peti tioner
by PEPI for i ts expansion project. It need not be belabored that “*a +
mortgage is an a ccessory undertaking to secure the fulfillment of a
pri ncipal obliga tion,” and i t does not affect the owners hip of the
property as i t is nothing more than a lien thereon servi ng as securi ty
for a debt.
Same; Contracts; Contract to Sell; Ownership; In a contra ct to sell ,
ownership is retained by the seller and is not to pass until full pa yment
of the purchase pri ce.—Note that at the time PEPI mortgaged the
property to the petitioner, the prevailing contract between
respondents PEPI and Dee was still the Contract to Sell, as Dee was
yet to full y pa y the purchase pri ce of the property. On this point, PEPI
was a cting full y well within its right when it mortga ged the property to
the peti tioner, for i n a contra ct to sell , ownership is retained by the
seller a nd is not to pass until full pa yment of the purchase pri ce. In
other words, a t the ti me of the mortga ge, PEPI was still the owner of
the property. Thus , in China Banking Corporati on v. Spouses Lozada ,
557 SCRA 177 (2008), the Court affi rmed the right of the
owner/developer to mortga ge the property s ubject of devel opment,
to wi t: “*P.D.+ No. 957 cannot totally prevent the owner or developer
from mortga ging the subdi vision lot or condominium uni t when the
ti tle thereto s till resides in the owner or developer a wai ting the full
pa yment of the purchase pri ce by the ins tallment buyer.” Moreover,
the mortgage bore the clea rance of the HLURB, in compliance with
Secti on 18 of P.D. No. 957, whi ch provi des that “*n+o mortga ge on any
unit or lot shall be made by the owner or developer wi thout pri or
wri tten approval of the [HLURB+.”
Sa me; Same; Same; A bank dealing wi th a property tha t is already
subject of a contra ct to sell and is protected by the provisions of P.D.
No. 957, is bound by the contra ct to sell .—Despi te the apparent
validi ty of the mortga ge between the peti tioner and PEPI, the former
is s till bound to respect the transactions between respondents PEPI
and Dee. The petiti oner was well awa re tha t the properties mortgaged
by PEPI were also the subject of exis ting contra cts to sell wi th other
buyers . While i t ma y be tha t the petitioner is protected by Act No.
3135, as amended, i t cannot claim a ny superior right as agains t the
ins tallment buyers . This is because the contra ct between the
respondents is protected by P.D. No. 957, a social justi ce measure
ena cted pri ma ril y to protect innocent lot buyers . Thus , in Luzon
Development Bank v. Enri quez, 639 SCRA 332 (2011), the Court
rei tera ted the rule that a bank dealing wi th a property tha t is already
subject of a contra ct to sell and is protected by the provisions of P.D.
No. 957, is bound by the contra ct to sell.
Sa me; Credi t Tra nsactions ; Extinguishment of Obligati ons ;
Transa ctions ; Da cion en Pa go; Da tion in pa yment extinguishes the
obliga tion to the extent of the value of the thing deli vered, ei ther as
agreed upon by the pa rties or as ma y be proved, unless the pa rties by
agreement — express or implied, or by their silence — consider the
thing as equi valent to the obliga tion, i n whi ch case the obliga tion is
totall y extinguished.—Da cion en pa go or da tion in pa yment is the
deli very and tra nsmission of ownership of a thing by the debtor to the
creditor as an a ccepted equi valent of the performance of the
obliga tion. It is a mode of extinguishing an exis ting obliga tion and
pa rtakes the na ture of sale as the creditor is reall y buyi ng the thing or
property of the debtor, the pa yment for whi ch is to be cha rged agains t
the debtor’s debt. Da tion in pa yment extinguishes the obli gation to
the extent of the value of the thing deli vered, ei ther as agreed upon
by the pa rties or as ma y be proved, unless the pa rties by agreement —
express or i mplied, or by thei r silence — consider the thing as
equi valent to the obligati on, in whi ch case the obli gati on is totall y
extinguished.
ROJALES V. DIME
Contracts; Relativity of Contracts; The basic principle of relativity of
contracts is that contracts can only bind the parties who entered into
it, and cannot favor or prejudice a third person, even if he is aware of
5
such contract and has acted with knowledge thereof.—We ha ve
consistentl y held tha t the pa rties to a contra ct a re the real pa rties-in-
interes t in an a ction upon i t. The basi c principle of rela ti vi ty of
contra cts is tha t contra cts ca n onl y bind the pa rties who entered into
i t, and cannot fa vor or prejudi ce a thi rd pers on, even i f he is a wa re of
such contra ct a nd has a cted wi th knowledge thereof. Hence, one who
is not a pa rty to a contra ct, and for whose benefi t i t was not expressl y
ma de, cannot maintain an a ction on i t. One cannot do so, even i f the
contra ct performed by the contra cting pa rties would incidentally inure
to one’s benefi t.
Unjust Enrichment; Unjus t enri chment exis ts when a person unjus tl y
retains a benefi t a t the loss of another, or when a person retains
money or property of another a gainst the fundamental principles of
jus ti ce, equi ty and good conscience.—Unjust enri chment exis ts when
a person unjustl y retains a benefi t a t the l oss of another, or when a
person retains money or property of another a gainst the fundamental
pri nciples of justi ce, equi ty and good cons cience. The preve ntion of
unjus t enri chment is a recogni zed publi c poli cy of the State, as
embodied in Arti cle 22 of the Ci vil Code whi ch provides tha t “*e+very
person who through an a ct of performance by another, or a ny other
means, a cqui res or comes i nto possession of so mething a t the
expense of the latter wi thout jus t or legal ground, shall return the
same to him.”
PERFECTION/STAGES/CONSENSUAL/REAL AND ESSENTIAL
REQUISITES OF CONTRACTS
JARDINE DAVIES V. CA
A contract is defined as "a juridi cal convention mani fested in legal
form, by vi rtue of which one or more persons bind themsel ves i n fa vor
of a nother or others, or reciprocally, to the fulfillment of a pres tation
to gi ve, to do, or not to do." There can be no contra ct unless the
following requisites concur:
(a ) consent of the contra cting pa rties ;
(b) object certain whi ch is the subject ma tter of the
contra ct; and,
(c) cause of the obliga tion whi ch is es tablished.
A contra ct binds both contra cting pa rties and has the force of law
between them.
Contra cts a re perfected by mere consent, upon the a cceptance by the
offeree of the offer made by the offeror. From tha t moment, the
pa rties a re bound not onl y to the ful fillment of wha t has been
expressly s tipulated but also to all the consequences whi ch, a ccording
to thei r na ture, ma y be in keeping wi th good faith, usage and law. To
produce a contra ct, the a cceptance mus t not qualify the terms of the
offer. However, the a cceptance ma y be express or i mplied. For a
contra ct to a rise, the a cceptance mus t be made known to the offeror.
Accordingl y, the a cceptance can be wi thdra wn or revoked before i t is
ma de known to the offeror.
In the instant case, there is no issue as rega rds the subject ma tter of
the contra ct and the cause of the obli gation . The controversy lies in
the consent - whether there was an a cceptance of the offer, and i f so,
if i t was communica ted, thereby perfecting the contra ct.
There was a perfected contra ct in this case and the a cceptance of the
offer was communi ca ted.
SOLER V. CA
A contra ct undergoes three stages:
(a ) Prepa ration, conception, or genera tion, whi ch is the peri od of
negotia tion and ba rgaining, ending a t the moment of agreement of
the pa rties ;
(b) Perfection or bi rth of the contra ct, whi ch is the moment when the
pa rties come to a gree on the terms of the contra ct; and
(c) Consummation or death, whi ch is the ful fillment or performance of
the terms a greed upon in the contra ct.
In the case a t ba r, there was a perfected oral contra ct. When Ms .
Lopez and peti tioner met in November 1986, and discussed the details
of the work, the fi rst s ta ge of the contra ct commenced. When they
agreed to the pa yment of the ten thousand pesos (P10,000.00) as
professional fees of peti tioner and that she should gi ve the designs
before the December 1986 boa rd meeti ng of the ba nk, the second
s tage of the contra ct proceeded, and when finall y peti tioner ga ve the
designs to Ms . Lopez, the contra ct was consummated. Peti tioner
believed tha t once she submi tted the designs she would be paid her
professional fees . Ms . Lopez assured peti tioner tha t she would be paid
It is fa miliar doctri ne tha t if a corpora tion knowingl y permi ts one of i ts
officers , or any other agent, to a ct wi thin the s cope of a n apparent
authori ty, i t holds him out to the public as possessing the power to do
those a cts ; and thus , the corpora tion will, as agains t a nyone who has
in good faith deal t wi th i t through such a gent, be es topped from
denying the agents authori ty. Also, peti tioner ma y be paid on the basis
of quantum meruit. It is essential for the proper opera tion of the
pri nciple tha t there is an a cceptance of the benefi ts (the designs were
used and were not returned) by one sought to be cha rged for the
servi ces rendered under ci rcumstances as reasonabl y to notify hi m
tha t the la wyer performing the task was expecting to be paid
compensation therefor. The doctri ne of quantum meruit is a devi ce to
prevent undue enri chment based on the equitable pos tula te that i t is
unjus t for a person to retain benefi t wi thout pa ying for i t.
PROVINCE OF CEBU V. MORALES
A contra ct of sale is a consensual contra ct tha t is perfected upon a
meeting of minds as to the object of the contra ct and i ts pri ce. Subject
to the provisions of the Sta tute of Frauds , a formal document is not
necessa ry for the sale transa ction to a cqui re binding effect. 24 For as
long as the essential elements of a contra ct of sale a re proved to exis t
in a gi ven transa ction, the contra ct is deemed perfected rega rdless of
the absence of a formal deed evi dencing the same.
Failure to pa y the balance of the purchase pri ce did not render the
sale inexis tent or invalid, but merel y ga ve rise to a ri ght in fa vor of the
vendor to ei ther demand speci fi c performance or rescission of the
contra ct of sale.25 It did not abolish the contra ct of sale or result in i ts
automa ti c invalida tion. The s tages of a contra ct of sale a re as follows :
(1) negotiati on, covering the period from the ti me the prospecti ve
contra cting pa rties indi ca te interes t in the contra ct to the ti me the
contra ct is perfected; (2) perfection, whi ch takes place upon the
concurrence of the essential elements of the sale whi ch a re the
meeting of the minds of the pa rties as to the object of the contra ct
and upon the pri ce ; and (3) consumma tion, which begins when the
pa rties perform thei r respecti ve undertakings under the contra ct of
sale, cul minati ng in the extinguishment thereof.27 In this case,
respondents ’ predecessor had undoubtedl y commenced performing
her obliga tion by ma king a down pa yment on the purchase pri ce.
Unfortuna tel y, however, she was not able to complete the pa yments
due to legal compli ca tions between petitioner and the ci ty.
Thus , the Ci ty of Cebu could no longer dispose of the lot in question
when i t was included as among those returned to peti tioner purs uant
to the compromise a greement in Ci vil Case No. 238-BC. The Ci ty of
Cebu had sold the property to Morales even though there remained a
balance on the purchase pri ce and a formal contra ct of sale had yet to
be executed. Incidentall y, the failure of respondents to pa y the
balance on the purchase pri ce and the non -execution of a formal
agreement was sufficientl y explained by the fa ct that the trial court, in
Ci vil Case No. 238-BC, issued a wri t of prelimina ry injunction enjoining
the ci ty from further disposing the dona ted lots . According to
respondents , there was confusion as to the ci rcumstances of pa yment
considering tha t both the ci ty and peti tioner had refused to accept
pa yment by vi rtue of the injunction.28 It appea rs tha t the pa rties
simpl y mistook Lot 646-A-3 as among those not yet sold by the ci ty.
6
The Ci ty of Cebu was no longer the owner of Lot 646-A-3 when i t
ceded the same to peti tioner under the compromise a greement in
Ci vil Case No. 238-BC. At tha t ti me, the ci ty merel y retained ri ghts as
an unpaid seller but had effecti vel y trans ferred owners hip of the l ot to
Morales. As successor-in-interes t of the ci ty, peti tioner could onl y
a cqui re ri ghts that i ts predecessor had over the lot. These ri ghts
include the ri ght to seek res cission or fulfillment of the terms of the
contra ct a nd the right to damages in ei ther case.
GARCIA V. THIO
A loan is a real contract, not consensual, and as such is perfected onl y
upon the deli very of the object of the contra ct. Upon deli very of the
object of the contra ct of loan (in this case the money recei ved by the
debtor when the checks were encashed) the debtor a cqui res
ownership of such money or loan proceeds and is bound to pa y the
creditor an equal amount. It is undispu ted that the checks were
deli vered to respondent. However, these checks were crossed and
pa ya ble not to the order of respondent but to the order of a certain
Ma rilou Santiago. Thus the main question to be ans wered is : who
borrowed money from peti tioner — respondent or Sa ntiago? Deli very
is the a ct by whi ch the res or substance thereof is placed wi thin the
a ctual or constructi ve possession or control of another. Al though
respondent di d not physi call y recei ve the proceeds of the checks ,
these ins truments were pla ced in her control and possession under an
a rrangement whereby she actually re -lent the amounts to Santiago.
PANGAN V. PERRERAS
There was a perfected contra ct between the pa rties since all the
essential requisi tes of a contra ct were present.
Arti cle 1318 of the Ci vil Code decla res tha t no contra ct exis ts unless
the following requisites concur:
(1) consent of the contra cting pa rties ;
(2) object certain whi ch is the subject matter of the contra ct; and
(3) cause of the obliga tion es tablished.
Si nce the object of the pa rties agreement invol ves properties co -
owned by Consuelo and her children, the peti tioners -hei rs insist tha t
thei r a pproval of the sale initia ted by thei r mother, Consuel o, was
essential to i ts perfection. Accordingl y, thei r refusal amounted to the
absence of the requi red element of consent.
Tha t a thing is sold without the consent of all the co -owners does not
invalida te the sale or render it void. Arti cle 493 of the Ci vil Code
recognizes the absolute right of a co-owner to freel y dispose of his pro
indi viso sha re as well as the fruits and other benefi ts a rising from tha t
sha re, independentl y of the other co-owners . Thus , when Consuelo
agreed to sell to the respondents the subject properties , wha t she in
fa ct sold was her undi vided interes t tha t, as quanti fied by the RTC,
consisted of one-half interes t, representing her conjugal share, and
one-si xth interes t, representing her heredi ta ry sha re. The peti tioners -
hei rs nevertheless a rgue tha t Consuelo’s consent was predi cated on
thei r consent to the sale, and tha t thei r disapproval resul ted in the
wi thdrawal of Consuelo’s consent. Yet, we find nothing in the pa rties ’
agreement or even conduct sa ve Consuelo’s self-serving testi mony
tha t would indi cate or from whi ch we can infer that Consuelo’s
consent depended on her children’s approval of the sale. The expli ci t
terms of the June 8, 1989 receipt provi de no occasion for any reading
tha t the a greement is subject to the petitioners-heirs fa vorable
consent to the sale.
The presence of Consuelo’s consent and, corollarily, the existence of
a perfected contract between the parties are further evidenced by
the payment and receipt of P20,000.00, a n ea rnes t money by the
contra cting pa rties common usage. The law on sales, specifi call y
Arti cle 1482 of the Ci vil Code, provides that whenever ea rnes t money
is gi ven in a contra ct of sale, i t s hall be considered as pa rt of the pri ce
and proof of the perfection of the contra ct. Al though the presumption
is not conclusi ve, as the pa rties ma y trea t the ea rnes t money
di fferentl y, there is nothing alleged in the present case tha t would gi ve
rise to a contra ry presumption. In cases where the Court rea ched a
conclusion contra ry to the presumption decla red in Arti cle 1482, we
found that the money i nitiall y paid was gi ven to gua rantee tha t the
buyer would not ba ck out from the sale, considering tha t the pa rties
to the sale ha ve yet to a rri ve a t a defini te agreement as to i ts terms
tha t is , a si tua tion where the contra ct has not yet been perfected.
These situati ons do not obtain in the present case, as nei ther of the
pa rties claimed that the P20,000.00 was gi ven merel y as gua rantee by
the respondents, as vendees, that they would not ba ck out from the
sale. As we ha ve pointed out, the terms of the parties ’ a greement a re
clea r and explici t; indeed, all the essential elements of a perfected
contract are present in this case. While the respondents required tha t
the occupants va ca te the subject properties prior to the pa yment of
the second i nstallment, the s tipula tion does not a ffect the perfection
of the contra ct, but onl y i ts execution. In sum, the case contains no
element, fa ctual or legal , tha t negates the exis tence of a perfected
contra ct between the pa rties.
DUARTE V. DURAN
Mi guel Duran offered to sell his laptop to Elena Dua rte for p15,000.
Si nce the la tter wasstill undecided when he made the offer, he left i t
wi th her and after two da ys , she agreed to the sale and ga ve 5, 000 as
down pa yment.
Issue in this case is W/N there was a perfected contra ct.
SC said yes . The absence of a wri tten contra ct of sale does not mean
otherwise. The parties are bound by it whether the contra ct is verbal
or i n wri ting because there is no form required. Respondent need onl y
show a preponderance of evidence whi ch he did by s ubmi tting his
affida vi t and that of his witness as well as the demand letter. Evidence
submi tted by respondent weighs more than petiti oner’s ba re denials.
The Sta tute of Frauds applies to executory and not completed,
executed or pa rtiall y executed contra cts. In this case, the contract of
sale has already been partially executed beca use the possession of
the laptop was already transferred to peti tioner and the partial
pa yments had been made by her.
ROBERN DEVELOPMENT V. PEOPLE’S LANDLESS
The issue in this case is whether there was a perfected contra ct of sale
between PELA and Al-Amanah, the resolution of which will decide
whether the sale of the lot to Robern should be sus tained or not.
The court held that no, there was no perfected contra ct of sale
between PELA and Al-Amanah.
A contra ct of sale is perfected a t the moment there is a meeting of
mi nds upon the thing whi ch is the object of the contra ct and upon the
pri ce. Thus, for a contract of sale to be valid, all of the following
essential elements must concur: "a) consent or meeting of the minds;
b) determinate subject matter; and c) price certain in m oney or its
equivalent." In the case a t bench, there is no controvers y anent the
determina te subject ma tter, i .e., the 2,000-s qua re meter lot. This
lea ves us to resol ve whether there was a concurrence of the
remaining elements.
As for the pri ce, fi xing it can never be left to the decision of onl y one
of the contra cting pa rties.50 "But a pri ce fi xed by one of the
contra cting pa rties , i f a ccepted by the other, gi ves rise to a perfected
sale."
As rega rds consent, "when there is merel y an offer by one pa rty
wi thout a cceptance of the other, there is no contra ct." 52 The decision
to a ccept a bidder’s proposal mus t be communica ted to the bidder. 53
However, a binding contra ct ma y exis t between the pa rties whose
mi nds ha ve met, al though they did not affi x thei r si gna tures to any
wri tten document,54 as a cceptance ma y be e xpressed or i mplied.55 It
7
"can be i nferred from the contemporaneous and subsequent a cts of
the contra cting parties ." Thus , we held:
x x x The rule is tha t except where a formal acceptance is
so requi red, although the a cceptance mus t be affi rmati vel y and clea rl y
ma de and mus t be evidenced by some a cts or conduct communi cated
to the offeror, i t ma y be made ei ther in a formal or an informal
ma nner, and ma y be shown by a cts , conduct, or words of the
a ccepting pa rty tha t clearl y mani fest a present i ntention or
determina tion to accept the offer to buy or sell . Thus , a cceptance ma y
be shown by the acts , conduct, or words of a pa rty recognizing the
exis tence of the contra ct of sale. There is no perfected contra ct of sale
between PELA and Al-Amanah for wa nt of consent a nd a greement on
the pri ce.When PELA Secreta ry Fl orida Ramos (Ramos ) tes tified, s he
referred to the Ma rch 18, 1993 letter whi ch PELA sent to Al-Amanah
as the document supposedl y embodying the perfected contra ct of
sale. However, we find tha t the Ma rch 18, 1993 letter referred to was
merel y an offer to buy.Neither ca n the note wri tten by the bank tha t
"subject offer has been a cknowledged/recei ved but processing to take
effect upon putting up of the pa rtial amount of P150,000.00 on or
before April 15, 1993" be cons trued as a cceptance of PELA’s offer to
buy. Taken a t fa ce value, the annotation simpl y means tha t the bank
merel y a cknowledged receipt of PELA’s letter-offer. Furthermore, by
‘processing,’ Al-Amanah onl y meant tha t i t will ‘a ct on the offer’, i .e., i t
s till has to eval uate whether PELA’s offer is a cceptable. Until and
unless Al-Amanah a ccepts , there is as yet no perfected contra ct of
sale. Notabl y here, the bank never si gnified i ts ‘approval’ or
‘a cceptance’ of the offer.
OPTION CONTRACT
VILLAMOR V. CA
The Deed of Option was a valid written a greement between the
pa rties . The law provides tha t when the terms of an a greement ha ve
been reduced to wri ting i t is to be considered as containing all such
terms, a nd therefore, there can be, between the pa rties and thei r
successors in interes t no evidence of thei r terms of the a greement,
other than the contents of the wri ting. (Section 7 Rule 130 Revised
Rules of Court)
A sale mus t be for a pri ce certain (Art. 1458). The respondent
appella te court failed to gi ve due considera tion to the evidence which
shows tha t the Villamor spouses bough an adja cent l ot from the
brother of Ma ca ria Reyes for onl y P18.00 per squa re me ter whi ch the
respondents Reyes did not rebut. Thus , expressed in terms of money,
the considera tion for the deed of option is the difference between the
purchase pri ce of the portion of the lot in 1971 (P70.00 per sq.m.) and
the prevailing reasonable pri ce of the same lot in 1971. Wha tever i t is ,
(P25.00 or P18.00) though not speci fi cally s ta ted in the deed of option,
was as certainable. Villamors allegedl y pa ying P52.00 per squa re meter
for the option ma y, as opined by the appellate court, be improbable
but improbabilities do not invalida te a contra ct freel y entered into by
the pa rties .
The "deed of option" entered into by the parties in this case had
unique features. Ordina ril y, a n opti onal contra ct is a pri vilege exis ting
in one person, for which he had paid a considera tion and which gi ves
hi m the ri ght to buy, for exa mple, certain merchandise or certain
specified property, from another person, if he chooses, a t any ti me
wi thin the agreed peri od a t a fi xed pri ce. The fi rs t pa rt of the deed
covered the s tate ment on the sale of the 300 squa re meter portion of
the l ot to Spouses Villamor a t the pri ce of P70.00 per squa re meter
"whi ch was higher than the a ctual reasonable prevailing value of the
lands in tha t place a t tha t ti me (of sale)." The second pa rt s ta ted tha t
the onl y reason why the Villamor spouses a greed to buy the said lot a t
a much higher pri ce is because the vendor (Reyes) also a greed to sell
to the Villamors the other hal f-portion of 300 square meters of the
land. Had the deed s topped there, there woul d be no dispute that the
deed is reall y an ordina ry deed of option gra nting the Villamors the
option to buy the remaining 300 s qua re meter-half portion of the lot
in considera tion for thei r ha vi ng a greed to buy the other half of the
land for a much hi gher pri ce. But, the "deed of option" went on and
s tated tha t the sale of the other half would be made "whenever the
need of such sale a rises, ei ther on our (Reyes ) pa rt or on the pa rt of
the Spouses Villamor. It appea rs that while the option to buy was
granted to the Villamors , the Reyes were likewise gra nted an option to
sell. In other words , it was not onl y the Villamors who were gra nted an
option to buy for whi ch they paid a considera tion. The Reyes as well
were granted an opti on to sell should the need for such sale on thei r
pa rt a rise.
The option offered by Reyes had been accepted by the Villamors, the
promise, in the same document. The a cceptance of an offer to sell for
a pri ce certain crea ted a bilateral contra ct to sell and buy and upon
a cceptance, the offer, ipso facto assumes obligati ons of a vendee.
Demandabili ti y ma y be exercised a t a ny ti me a fter the execution of
the deed.
Si nce there ma y be no valid contra ct wi thout a cause of consideration,
the promissory is not bound by his promise and ma y, a ccordingl y
wi thdraw i t. Pending notice of its withdrawal, his accepted promise
partakes, however, of the nature of an offer to sell which, if accepted,
results in a perfected contract of sale.
A contra ct of sale is , under Arti cle 1475 of the Ci vil Code, "perfected a t
the moment there is a meeting of minds upon the thing whi ch is the
object of the contra ct and upon the pri ce. From tha t moment, the
pa rties ma y reciprocall y dema nd perform of contra cts ." Since there
was , between the parties , a meeting of minds upon the object and the
pri ce, there was al ready a perfected contra ct of sale. Wha t was ,
however, left to be done was for ei ther pa rty to demand from the
other thei r respecti ve undertakings under the contra ct. It ma y be
demanded a t a ny time ei ther by the pri va te respondents , who ma y
compel the peti tioners to pa y for the property or the peti tioners, who
ma y compel the pri va te respondents to deliver the property.
However, the Deed of Option did not provide for the period within
whi ch the pa rties ma y demand the performance of thei r respecti ve
undertakings in the ins trument. The pa rties could not ha ve
contemplated tha t the deli very of the property a nd the pa yment
thereof could be made i ndefini tel y and render uncertain the s tatus of
the land. The failure of ei ther pa rties to demand performance of the
obliga tion of the other for a n unreasona ble length of ti me renders the
contra ct i neffecti ve.
Under Arti cle 1144 (1) of the Ci vil Code, a ctions upon wri tten contra ct
mus t be brought wi thin ten (10) yea rs . The Deed of Option was
executed on November 11, 1971. The a cceptance, as already
mentioned, was also a ccepted in the same ins trument. The complaint
in this case was filed by the peti tioners17 yea rs from the time of the
execution of the contra ct. Hence, the ri ght of a ction had pres cribed.
It is of judi cial notice that the pri ce of real esta te in Metro Manila is
continuousl y on the rise. To allow the Villamors to dema nd the
deli very of the property 17 yea rs after the execution of the deed a t
the pri ce of onl y P70.00 per squa re meter is inequi tous . For reasons
also of equi ty and i n considera tion of the fa ct tha t the Reyes ha ve no
other decent place to li ve, the Court, in the exercise of i ts equity
jurisdi ction is not inclined to gra nt petitioners' pra yer.
LIMSON V. CA
A mere CONTRACT OF OPTION, not of contra ct to sell. An option, as
used i n the la w of sales, is a continuing offer or contra ct by whi ch the
owner s ti pulates wi th a nother tha t the latter shall ha ve the ri ght to
buy the property a t a fi xed pri ce wi thin a ti me certain, or under, or i n
compliance wi th, certain terms and condi tions, or which gi ves to the
owner of the property the right to sell or demand a sale. It is also
sometimes called an "unaccepted offer." An opti on is not of i tself a
purchase, but merel y secures the pri vilege to buy. It is not a sale of
property but a sale of the ri ght to purchase. It is simpl y a contra ct by
8
whi ch the owner of property a grees wi th a nother person tha t he shall
ha ve the ri ght to buy his property a t a fi xed pri ce wi thin a certain ti me.
He does not sell his land; he does not then agree to sell i t; but he does
sell something, i .e., the ri ght or pri vilege to buy a t the election or
option of the other pa rty. Its distinguishing cha ra cteris ti c is tha t i t
imposes no binding obli gation on the pers on holding the option, aside
from the considera tion for the offer. Until a cceptance, it is not,
properl y speaking, a contra ct, and does not ves t, tra nsfer, or a gree to
trans fer, any ti tle to, or any interes t or ri ght i n the subject ma tter, but
is merel y a contra ct by whi ch the owner of the property gi ves the
optionee the right or pri vilege of a ccepting the offer and buyi ng the
property on certain terms .
On the other hand, a contra ct, li ke a contra ct to sell, i nvol ves the
meeting of mi nds between two persons whereby one binds hi mself,
wi th respect to the other, to gi ve s omethi ng or to render some
servi ce. Contra cts , in general , a re perfected by mere consent, whi ch is
ma nifes ted by the meeting of the offer and the a cceptance upon the
thing and the ca use whi ch are to consti tute the contra ct. The offer
must be certain and the acceptance absolute. Receipt readil y shows
tha t respondent spouses and peti tioner onl y entered into a contra ct of
option; a contra ct by which respondent spouses a greed with
peti tioner tha t the latter s hall ha ve the right to buy the formers
property a t a fi xed pri ce of P34.00 per s qua re meter within ten (10)
da ys from 31 Jul y 1978. The considera tion of P20,000.00 paid by
peti tioner to respondent spouses was referred to as "ea rnes t money."
EARNEST MONEY V. OPTION MONEY However, a ca reful exa mination
of the words used indi cates tha t the money is not ea rnes t money but
option money."Ea rnest money" and "option money" a re not the same
but distinguished thus : (a) ea rnes t money is pa rt of the purchase pri ce,
while option money is the money gi ven as a dis tinct considera tion for
an option contra ct; (b) ea rnest money is gi ven onl y where there is
al ready a sale, while opti on money a pplies to a sale not yet perfected;
and, (c) when ea rnest money is gi ven, the buyer is bound to pa y the
balance, while when the would-be buyer gi ves option money, he is not
requi red to buy, but ma y even forfei t it depending on the terms of the
option. Tha t the contra ct between the pa rties is one of option is
buttressed by the provision therein tha t s hould the tra nsaction of the
property not ma terialize wi thout faul t of peti tioner as buyer,
respondent Lorenzo de Vera obliga tes himself to return the full
amount of P20,000.00 "ea rnes t money" wi th option to buy or forfei t
the same on the faul t of peti tioner. It is further bolstered by the
provision therein tha t gua rantees petitioner tha t she or her
representati ve would be notified in case the subject property was sold
or encumbered to a thi rd pers on. Finally, the Receipt provided for a
peri od wi thin whi ch the option to buy was to be exercised, i.e., "within
ten (10) da ys " from 31 Jul y 1978. During the option peri od the
agreement was not converted i nto a bilateral promise to sell and to
buy where both respondent spouses a nd peti tioner were then
reciprocall y bound to compl y wi th thei r respecti ve underta kings as
peti tioner did not timel y, affi rmati vel y and clearl y a ccept the offer of
respondent spouses.
TAYAG V. LACSON
Option contract defined
An option is a contra ct by whi ch the owner of the property a grees
wi th another person tha t he shall ha ve the ri ght to buy his property a t
a fi xed pri ce wi thin a certain time or under, or in compliance with
certain terms and condi tions , or which gi ves to the owner of the
property the ri ght to sell or demand a sale. It imposes no binding
obliga tion on the person holding the option, aside from the
consideration for the offer. Until a ccepted, i t is not, properl y speaking,
trea ted as a contra ct. An option contract is a separate and distinct
contract from which the parties may enter into upon the conjunction
of the option.

Farmers had no right to grant Tayag the option/rig ht to buy the
property as they were merely tenants-In this case, the defendants -
tenants -subtenants , under the deeds of assignment, granted to the
peti tioner not onl y an option but the excl usive right to buy the
landholding. But the grantors were merel y the defendants -tenants ,
and not the respondents , the registered owners of the property. Not
being the regis tered owners of the property, the defendants -tenants
could not legall y grant to the peti tioner the option, much less the
"exclusi ve right" to buy the property.
Deeds of Assignment not valid; conditions stipulated did not arise-
The full pa yment of 50/sqm under Ta ya g and the fa rmers ’ ‘’option
contra cts’ were on the following condi tions :
- that the La csons would agree to sell thei r property
- that the deeds of assignment were subject to the approval of DAR
- tha t there was a prohi biti ve period wi thin whi ch the fa rmers were
able to sell thei r interest in the land
There is no showing in Ta ya g’s complaint tha t the fa rmers had agreed
to sell thei r property, and tha t the legal impedi ments to the
agreement no longer existed. They had yet to submi t the Deeds of
Assignment to the Depa rtment of Agra rian Reform whi ch, in turn, had
to a ct on and a pprove or disapprove the same. Unless the DAR
approves the deeds , Ta ya g has no right to enforce the same by asking
the trial court to fi x a period wi thin which to pa y.
ABALOS V. MACATANGAY
The a greement between Arturo and Gali cano is a mere grant of
pri vilege to purchase to Gali cano. The promise to sell is not binding to
Arturo for there was a ctuall y no considera tion distinct from the pri ce.
Be i t noted tha t the pa rties considered the P5k as a n ea rnest money to
be deducted from the purchase pri ce.
Assuming a rguendo tha t i t was a bila teral promise to buy a nd sell, the
same is s till not binding for Gali cano failed to render a pa yment of
legal tender. A check is not a legal tender.
Still assuming a rguendo, tha t the P5k was an ea rnes t money which
supposedl y perfected a contra ct of sale, the RMOA is s till not valid for
Es ther’s signa ture was not affi xed. The property is conjugal and under
the Famil y Code, the spouses’ consents a re requi red. Further, the
ea rnes t money here is not a ctuall y the ea rnes t money contemplated
under Arti cle 1482 under the Ci vil Code.
The subsequent agreement between Es ther and Galicano did not ra tify
the ea rlier transa ction between Arturo and Galicano. A void contra ct
can never be ra ti fied.
EULOGIO V. APELES
There is no dispute tha t wha t Enri co sought to enforce i n Ci vil Case No.
Q-99-36834 was his purported ri ght to a cqui re owners hip of the
subject property in the exercise of his option to purchase the sa me
under the Contra ct of Lease wi th Option to Purchase. He ulti ma tel y
wa nts to compel the spouses Apeles to already execute the Deed of
Sale over the subject property in his fa vor. An option is a contra ct by
whi ch the owner of the property agrees wi th a nother person tha t the
la tter shall ha ve the ri ght to buy the formers property a t a fi xed pri ce
wi thin a certain time. It is a condi tion offered or contra ct by whi ch the
owner s ti pulates wi th a nother tha t the latter shall ha ve the ri ght to
buy the property a t a fi xed pri ce wi thin a certai n time, or under, or i n
compliance wi th certain terms and condi tions ; or whi ch gi ves to the
owner of the property the ri ght to sell or dema nd a sale. An option is
not of itself a purchase, but merel y secures the pri vilege to buy. It is
not a sale of property but a sale of the ri ght to purchase. It is simpl y a
contra ct by whi ch the owner of the property agrees wi th another
person tha t he shall ha ve the ri ght to buy his property a t a fi xed pri ce
wi thin a certain time. He does not sell his land; he does not then a gree
to sell i t; but he does sell something, i .e., the ri ght or pri vilege to buy
9
a t the election or option of the other pa rty. Its distinguishing
cha ra cteris ti c is tha t i t imposes no bindi ng obliga tion on the person
holding the option, aside from the considera tion for the offer. For an
option contra ct to be valid and enforceable agains t the promissor,
there mus t be a sepa ra te and distinct considerati on tha t supports i t.
Wi thout considera tion tha t is sepa ra te and distinct from the purchase
pri ce, an option contra ct cannot be enforced; tha t holds true even i f
the unilateral promise is al ready a ccepted by the optionee.
CONSIDERATION. The consideration is the why of the contracts , the
essential reason whi ch moves the contra cting pa rties to enter into the
contra ct. This defini tion illustra tes tha t the consideration
contemplated to s upport an option contra ct need not be moneta ry.
Actual cash need not be exchanged for the option. However, by the
very na ture of an option contra ct, as defined in Arti cle 1479, the same
is an onerous contra ct for whi ch the considera tion mus t be something
of value, although its kind ma y va ry. The onl y considera tion agreed
upon by the pa rties in the said Contra ct is the supposed purchase
pri ce for the subject property in the a mount not e xceedi ng P1.5
Million, whi ch could not be deemed to be the same considera tion for
the option contra ct since the law and jurisprudence expli ci tl y di cta te
tha t for the option contra ct to be valid, i t must be supported by a
consideration separa te and dis tinct from the pri ce.
PHILIPPINE NATIONAL OIL V. KEPPEL HOLDINGS
(case digest ito kasi palagi gina mention ni Mam)
Keppel entered into a lease agreement wi th Luzon Stevedoring
Corpora tion s ta ting tha t the eleven hecta res of land loca ted in Bauan,
Ba tangas will be leased for the period of 25 yea rs for Php 2.1 million.
Tha t, at the option of Luzon Stevedori ng, the rental fee could be
converted to equi ty s ha res in Keppel . After the lapse of the lease
contra ct, Keppel was gi ven an option to purchase, with the pro vision
tha t the qualifi ca tion of a forei gn corpora tion to own properties in the
Philippines as provided for by law is a chieved. Unfortuna tel y, Keppel ’s
percentage of Filipino ownership was less than wha t the law provided
for. Therefore, the lease would not be renewed for another twenty
fi ve yea rs and there will be no option to purchase. Nevertheless, the
PNOC purchased the land from Luzon Stevedoring. When Keppel was
ready to purchase the land, however, PNOC refused hence the case
was filed.
ISSUE: Whether or not the option to purchase the land gi ven to Keppel
is valid and supported by a valuable considera tion?
HELD: An option contract is a contract where one person (the
offeror/promissor) grants to another person (the offeree/promisee)
the right or privilege to buy (or to sell) a determinate thing at a fixed
price, if he or she chooses to do so within an agreed period. As a
contra ct, it mus t necessaril y ha ve the essential elements of subject
ma tter, consent, and considera tion. Al though a n option contra ct is
deemed a prepa ratory contra ct to the pri ncipal contra ct of sale, i t is
sepa ra te and dis tinct therefrom, thus , i ts essential elements should
be dis tinguished from those of a sale. An opti on contra ct, the subject
ma tter is the right or pri vilege to bu y (or to sell) a determina te thing
for a pri ce certain, while in a sales contra ct, the subject ma tter is the
determina te thing i tself. The consent i n an option contra ct is the
a cceptance by the offeree of the offeror’s promise to sell (or to buy)
the determinate thing, i.e., the offeree agrees to hold the ri ght or
pri vilege to buy (or to sell) wi thin a s pecified period. This a cceptance
is different from the a cceptance of the offer itself whereby the offeree
asserts his or her right or pri vilege to buy (or to sell), whi ch consti tutes
as his or her consent to the sales contra ct. The considera tion in a n
option contra ct ma y be anythi ng of value, unlike in a sale where the
purchase pri ce mus t be in money or i ts equi valent. There is suffi cient
consideration for a promise if there is any benefi t to the offeree or any
detri ment to the offeror. For uni formi ty a nd consistency i n contra ct
interpreta tion, the better rule to follow is tha t the considera tion for
the option contra ct s hould be clea rl y speci fied as such in the option
contra ct or clause. Otherwise, the offeree mus t bea r the burden of
proving that a sepa ra te considera tion for the option contra ct exis ts .
Gi ven our finding tha t
the Agreement did not ca tegori call y refer to a ny considera tion to
support Keppel ’s option to buy and for Keppel ’s failure to present
evidence in this rega rd, we cannot uphold the exis tence of an option
contra ct in this case. The a bsence of a considera tion supporti ng the
option contra ct, however, does not invalida te an offer to buy (or
to sell ). An option unsupported by a separa te considera tion s tands as
an unaccepted offer to buy (or to sell) whi ch, when properl y a ccepted,
ripens into a contra ct to sell. Accordingl y, when an option to buy or to
sell is not supported by a considera tion sepa ra te from the purchase
pri ce, the option consti tutes as an offer to buy or to sell, whi ch ma y be
wi thdrawn by the offeror a t any ti me pri or to the communi cation of
the offeree’s a cceptance. When the offer is dul y a ccepted, a mutual
promise to buy and to sell under the fi rst pa ra graph of Arti cle 1479
of the Ci vil Code ensues and the pa rties’ respecti ve obliga tions
become reciprocall y demandable. Applied to the present case, we find
tha t the offer to buy the land was timel y a ccepted by Keppel.
DEFECTS OF THE WILL
FONTANA RESORT V. TAN
Whether or not peti tioners commi tted fraud or defaul ted on thei r
promises as would jus tify the annulment or rescission of thei r contra ct
of sale? There is fra ud when one pa rty is induced by the other to enter
into a contra ct, through and solel y because of the la tters insidious
words or ma china tions . But not all forms of fra ud ca n vi tia te consent.
Under Arti cle 1330, fraud refers to dolo causante or causal fraud, in
whi ch, prior to or simul taneous wi th the execution of a contra ct, one
pa rty secures the consent of the other by using deception, wi thout
whi ch such consent would not ha ve been gi ven. Simpl y s tated, the
fraud must be the determining cause of the contra ct, or mus t ha ve
caused the consent to be gi ven.
T]he general rule is tha t he who alleges fraud or mis take in a
transa ction mus t subs tantiate his allega tion as the presumption is tha t
a person takes ordina ry ca re for his concerns and tha t pri va te dealings
ha ve been entered into fai rl y and regula rl y. One who alleges defect or
la ck of valid consent to a contra ct by reason of fraud or undue
influence must es tablish by full, clear and convinci ng evidence such
specifi c a cts tha t vi tiated a pa rtys consent, otherwise, the la tters
presumed consent to the contra ct prevails.
In this case, respondents ha ve miserabl y failed to prove how
peti tioners employed fraud to induce respondents to buy FRCCI
sha res . It can onl y be expected tha t peti tioners presented the FLP and
the country cl ub in the mos t positi ve li ght in order to a ttra ct inves tor-
members . There is no showing tha t in thei r sales talk to respondents ,
peti tioners a ctuall y used insidious words or machina tions , wi thout
whi ch, respondents would not ha ve bought the FRCCI sha res
DELA CRUZ V. DELA CRUZ
For Arti cle 1332 to appl y, i t must fi rs t be convi ncingl y es tablished tha t
the illi tera te or disadvantaged pa rty could not read or unders tand the
language in whi ch the contra ct was wri tten or that the contra ct was
left unexplained to said pa rty. Peti tioners failed to dis cha rge this
burden.
The DAS da ted September 25, 1980 was dul y acknowledged before a
nota ry publi c. As a nota ri zed document, i t has in i ts fa vor the
presumption of regula rity a nd i t ca rries the evidentia ry weight
conferred upon i t wi th respect to i ts due executi on. It is admissible in
evidence wi thout further proof of i ts authenti ci ty and is enti tled to full
fai th and credi t upon i ts fa ce.
10
FELICIANO V. ZALDIVAR
On this point, Arti cle 1332 of the Ci vil Code is relevant: ART.1332.
When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the
person enforcing the contract must show that the terms thereof
have been fully explained to the former.
The principle tha t a pa rty is presumed to know the i mport of a
document to whi ch he a ffi xes his signa ture is modi fied by the
foregoing a rticle. Where a pa rty is unable to read or when the contra ct
is in a language not unders tood by the pa rty and mis take or fraud is
alleged, the obliga tion to show tha t the terms of the contra ct had
been fully explained to said pa rty who is unable to read or understand
the langua ge of the contra ct devol ves on the pa rty seeking to enforce
the contra ct to show tha t the other party full y unders tood the
contents of the document. If he fails to discharge this burden, the
presumption of mista ke, i f not, fraud, s tands unrebutted and
controlling.
Appl ying the foregoi ng princi ples, the presumption is tha t Remegia ,
considering her limi ted educa tional a ttainment, did not understand
the full i mport of the joint affida vi t of confi rma tion of sale and,
consequentl y, fraud or mis take attended i ts execution. The burden is
on respondents , the spouses Zaldi va r, to rebut this presumption. They
tried to discha rge this onus by presenting Atty. Fra ncisco Velez (la ter
RTC Judge) who nota rized the said document. Atty. Velez testi fied tha t
he "read and interpreted" the document to the affiants and he asked
them whether the contents were correct before requi ring them to
affi x thei r signa tures thereon. The ba re s ta tement of Atty. Velez tha t
he "read and i nterpreted" the document to the a ffiants a nd tha t he
asked them as to the correctness of i ts contents does not necessa ril y
es tablish tha t Remegia a ctually comprehended or unders tood the
import of the joint a ffida vi t of confi rma tion of sale. Nowhere is i t
s tated in the a ffida vi t i tsel f tha t i ts contents were full y explained to
Remegia i n the langua ge tha t she unders tood before she si gned the
same. Thus , to the mind of the Court, the presumpti on of fraud or
mis take a ttendi ng the execution of the joint affida vi t of confi rmation
of sale was not suffi cientl y overcome.
Moreover, the purported joint a ffida vi t of confi rma tion of sale failed
to s tate certain i mporta nt informa tion. For exa mple, i t did not
mention the considera tion or pri ce for the alleged sale by Remegia of
the subject lot to Ignacio Gil. Also, while i t sta ted tha t the subject lot
was conveyed by Igna cio Gil to Pio Dalman, i t did not sa y whether the
conveya nce was by sale, dona tion or any other mode of trans fer.
Fi nally, i t di d not also s ta te how the ownership of the subject lot was
trans ferred from Pi o Dalman to respondent Aurelio or respondents .
GEORG V. HOLY TRINITY COLLEGE
SIMULATION OF CONTRACTS
VILLEGAS V. RURAL BANK OF TANJAY
Peti tioners admi t tha t the loan (and mortgage) contra cts were made
to appea r as several suga r crop loans not exceeding P50,000.00 each
even if they were not just s o the respondent rural bank could grant
and approve the same pursuant to Republi c Act (R.A.) No. 720, the
Rural Banks Act. Peti tioners a ver tha t the suga r crop loans were
merel y simula ted contra cts a nd, therefore, wi thout any force and
effect.
Gi ven the fa ctual antecedents of this case, i t is obvi ous tha t the suga r
crop loa ns were RELATIVELY SI MULATED contra cts and that both
pa rties intended to be bound thereby. There a re two juridi cal a cts
invol ved in rela ti ve simula tion the os tensible a ct and the hidden a ct.
The ostensible a ct is the contra ct tha t the pa rties pretend to ha ve
executed while the hidden a ct is the true a greement between the
pa rties . To determine the enforceabili ty of the a ctual a greement
between the parties , we mus t discern whether the concealed or
hidden a ct is lawful and the essential requisites of a valid contra ct a re
present. In this case, the juridical acts which bind the parties are the
loan and mortgage contracts, i .e., peti tioners procurement of a loan
from respondent. Al though these loan and mortgage contra cts were
concealed and made to appear as suga r crop loans to make them fall
wi thin the purview of the Rural Banks Act, all the essential requisites
of a contra ct were present. However, the purpose thereof is illici t,
intended to ci rcumvent the Rural Ba nks Act requirement in the
procurement of loans . Consequentl y, while the pa rties intended to be
bound thereby, the agreement is void a nd inexis tent under Arti cle
1409 of the Ci vil Code.
In this case, clea rl y, both peti tioners and respondent a re in pa ri
deli cto, and nei ther should be a ccorded affi rma ti ve relief as agains t
the other.
VILACERAN V. DE GUZMAN
Article 1345 of the Civil Code provides that the simulation of a
contract may either be absolute or relative. In absolute si mulation,
there is a col orable contra ct but i t has no subs tance as the pa rties
ha ve no intention to be bound by i t. The main cha racteris ti c of an
absolute simula tion is tha t the appa rent contra ct is not reall y desired
or intended to produce legal effect or in any wa y alter the juridi cal
situa tion of the pa rties. As a resul t, an absolutel y simula ted or
fi cti tious contra ct is void, and the parties ma y recover from ea ch other
wha t they ma y ha ve gi ven under the contra ct. However, i f the pa rties
s tate a false cause in the contra ct to conceal thei r real agreement, the
contra ct is onl y relati vel y simulated and the pa rties a re s till bound by
thei r real a greement. Hence, where the essential requisites of a
contra ct a re present and the simulation refers onl y to the content or
terms of the contra ct, the agreement is absolutel y bindi ng and
enforceable between the pa rties and thei r successors in interest.
CABALU V. TABU
Not in conformi ty, both parties appealed to the CA. Peti tioners
contended that the RTC erred in decla ring void the Deed of Absolute
Sale, da ted Ma rch 5, 1975. They claimed tha t Domingo owned the
property, when it was sold to Laureano Cabalu, because he inheri ted i t
from his fa ther, Benjamin, who was one of the hei rs of Faus tina . Being
a co-owner of the property left by Benja min, Domingo could dispose
of the portion he owned, notwi ths tanding the will of Faus tina not
being proba ted.
Respondent spouses , on the other hand, asserted that the Deed of
Sale, dated Ma rch 5, 1975, was spurious and simulated as the
signa ture, PTR a nd the document number of the Nota ry Publi c were
di fferent from the la tter’s nota rized documents . They added tha t the
deed was without consent, Domingo being of unsound mind a t the
time of i ts execution. Further, they claimed tha t the RTC erred in
canceling TCT No. 266583 and insis ted that the same should be
res tored to i ts validi ty because Benjamin a nd Domingo were declared
hei rs of Faus tina.
It is well to note tha t both the RTC a nd the CA found tha t the evidence
es tablished that the Ma rch 5, 1975 Deed of Sale of Undi vided Pa rcel of
Land executed by Domingo in fa vor of La ureano Cabalu was a fi cti tious
and simula ted document.
As expounded by the CA, viz: Nevertheless, since there are
discrepancies in the signature of the notary public, his PTR and the
document number on the lower-most portion of the document, as well
as the said deed of sale being found only after the plaintiffs-appellants
were ejected by the defendants-appellants; that they were allegedly
not aware that the said property was bought by their father, and that
they never questioned the other half of the property not occupied by
them, it is apparent that the sale dated March 5, 1975 had the
earmarks of a simulated deed written all over it. The lower court did
not err in pronouncing that it be declared null and void.
11
Even on the assumption that the Ma rch 5, 1975 deed was not
simula ted, s till the sale cannot be deemed valid because, a t that ti me,
Domingo was not yet the owner of the property. There is no dispute
tha t the original and registered owner of the subject property covered
by TCT No. 16776, from whi ch the subject 9,000 square meter l ot
came from, was Faus tina , who during her lifeti me had executed a will,
da ted Jul y 27, 1939. In the said will, the name of Benjamin, fa ther of
Domingo, appea red as one of the hei rs. Thus, and as correctl y found
by the RTC, even i f Benja min died sometime in 1960, Domingo in 1975
could not yet validl y dispose of the whole or even a portion thereof for
the reason tha t he was not the s ole hei r of Benja min, as his mother
onl y died someti me in 1980.
Besides, under Arti cle 1347 of the Ci vil Code, "No contra ct ma y be
entered into upon future inheri tance except in cases expressl y
authorized by law." Pa ragraph 2 of Arti cle 1347, cha ra cteri zes a
contra ct entered into upon future i nheri tance as void. The law applies
when the following requisites concur:
(1) the succession has not yet been opened;
(2) the object of the contra ct forms pa rt of the i nheri tance; &
(3) the promissor has, wi th respect to the object, an expectancy of a
ri ght which is purel y heredi ta ry in na ture. Rega rding the deed of sale
covering the remaining 4,500 squa re meters of the subject property
executed in fa vor of Rena to Tabu, i t is evidentl y null and void. The
document itself, the Deed of Absolute Sale, dated October 8, 1996,
readil y shows tha t i t was executed on Augus t 4, 1996 more than two
months a fter the dea th of Domingo. Contra cting pa rties must be
juris ti c enti ties a t the time of the consumma tion of the contra ct.
Sta ted otherwise, to form a valid a nd legal a greement it is necessary
tha t there be a pa rty capable of contra cting and a pa rty capa ble of
being contra cted wi th. Hence, if any one pa rty to a supposed build a
hospital , could they s till afford to lend money to Ireneo? And i f Ireneo
needed money, why would he lend the ti tle to Spouses Inta c when he
hi mself could use i t to borrow money for his needs ? If Spouses Inta c
took ca re of him when he was terminall y ill, i t was not surprising for
Angelina to reciproca te as he took ca re of her since s he was three (3)
yea rs ol d until she got ma rried. Thei r ca ring a cts for him, while they
a re deemed servi ces of value, cannot be considered as consideration
for the subject property for lack of quanti fi cati on a nd the Filipino
cul ture of taking ca re of thei r elders .
Thus , the Court agrees wi th the courts below tha t the ques tioned
contra ct of sale was onl y for the purpose of lending the ti tle of the
property to Spouses Inta c to enable them to secure a loan. Thei r
a rrangement was onl y tempora ry and could not gi ve rise to a valid
sale. Where there is no considera tion, the sale is null and voi d ab
ini tio.
As heretofore shown, the contemporaneous and subsequent a cts of
both pa rties in this case, point to the fa ct that the i ntention of Ireneo
was just to lend the ti tle to the Spouses Inta c to enable them to
borrow money a nd put up a hospi tal in Sta . Cruz, La guna. Clea rl y, the
subject contra ct was absolutel y simulated and, therefore, void.
HEIRS OF INTAC V. CA
PHIL. BANKING CORP. V. DY
The peti tion is meri tori ous . At the outset, the Court ta kes note of the
fa ct tha t the CA Decision nullifying the ques tioned contra cts of sale
between Sps . Del gado a nd the Dys had become final and executory.
Accordingl y, the Peti tion-inIntervention filed by Arturo Dy, which
seeks to maintain the subject contra cts' validity, can no longer be
entertained. The cancellation of the Dys ' certi fi cates of ti tle over the
disputed properties and the issuance of new TCTs in fa vor of Cipriana
mus t therefore be upheld.
However, Philbank's mortgage ri ghts over the subject properties shall
be maintained. While i t is settled tha t a simula ted deed of sale is null
and void and therefore, does not convey any ri ght tha t could ripen
into a valid ti tle, it has been equall y ruled that, for reasons of publi c
policy, the subsequent nullifi ca tion of ti tle to a property is not a
ground to annul the contra ctual ri ght whi ch ma y ha ve been deri ved by
a purchaser, mortgagee or other transferee who a cted in good faith.
The as certainment of good faith or la ck of i t, and the determination of
whether due diligence and prudence were exercised or not, a re
questions of fa ct whi ch a re generall y i mproper in a peti tion for review
on certiora ri under Rule 45 of the Rules of Court (Rules) where onl y
questions of law ma y be raised. A recogni zed exception to the rule is
when there are conflicting findings of fa ct by the CA and the RTC, as in
this case.
Pri ma ril y, i t bea rs noti ng tha t the doctrine of "mortgagee in good
fai th" is based on the rule tha t all persons dealing wi th property
covered by a Torrens Certifi ca te of Title a re not required to go beyond
wha t appea rs on the fa ce of the ti tle. This is in deference to the publi c
interes t in upholding the indefeasibility of a certifi ca te of ti tle as
evidence of la wful owners hip of the land or of any encumbra nce
thereon. In the case of banks and other financial ins ti tutions, however,
grea ter ca re and due diligence a re requi red since they a re i mbued
wi th public interes t, failing whi ch renders the mortgagees in bad faith.
Thus , before approvi ng a loan applica tion, i t is a s tanda rd opera ting
pra cti ce for these ins titutions to conduct an ocula r inspection of the
property offered for mortgage and to verify the genuineness of the
ti tle to determine the real owner(s) thereof. The appa rent purpose of
an ocula r inspecti on is to protect the "true owner" of the property as
well as innocent thi rd pa rties wi th a right, interes t or claim thereon
from a usurper who ma y ha ve a cqui red a fraudulent certifi ca te of ti tle
thereto.
In this case, while Philbank failed to exercise grea ter ca re i n
conducting the ocula r inspection of the properties offered for
mortgage, i ts omission did not prejudi ce a ny innocent thi rd pa rties. In
pa rti cula r, the buyer did not pursue her ca use and abandoned her
claim on the property. On the other hand, Sps . Delgado were pa rties
to the simulated sale in fa vor of the Dys whi ch was intended to
mislead Philbank into granti ng the loan appli ca tion. Thus , no a mount
of diligence in the conduct of the ocula r inspection could ha ve led to
the discovery of the complici ty between the ostensible mortga gors
(the Dys ) and the true owners (Sps . Delgado).1â wphi 1 In fine, Philbank
can ha rdl y be deemed negligent under the premises since the ul tima te
cause of the mortgagors' (the Dys ') defecti ve ti tle was the simulated
sale to whi ch Sps. Del gado were pri vies.
Indeed, a finding of negligence mus t alwa ys be contextualized in line
wi th the a ttendant ci rcums tances of a pa rticular case. As a ptl y held i n
Philippine Na tional Bank v. Hei rs of Es tanislao Milita r, "the diligence
wi th which the law requi res the indi vidual or a corpora tion a t all times
to govern a pa rti cula r conduct va ries wi th the na ture of the situation
in whi ch one is pla ced, and the importance of the a ct whi ch is to be
performed."
Thus , without di minishing the ti me-honored princi ple tha t nothing
short of extraordina ry diligence is requi red of banks whose business is
impressed wi th publi c interes t, Philbank's inconsequential oversight
should not and cannot serve as a bastion for fraud and decei t. To be
sure, fraud comprises "anythi ng cal cula ted to decei ve, including all
a cts , omissions, and conceal ment invol ving a brea ch of legal duty or
equitable duty, trus t, or confidence jus tl y reposed, resul ting in dama ge
to a nother, or by which an undue and uncons cientious adva ntage is
taken of another."
In this light, the Dys' and Sps. Delgado's delibera te simula tion of the
sale intended to obtain loan proceeds from and to prejudice Philbank
clea rl y cons ti tutes fraudulent conduct. As s uch, Sps . Delgado cannot
now be allowed to deny the validity of the mortga ge executed by the
Dys i n fa vor of Philbank as to hold otherwise would effecti vel y
sanction thei r bla tant bad faith to Philbank's detriment Accordingl y, i n
the interes t of public poli cy, fai r dealing, good fai th a nd jus ti ce, the
Court a ccords Philbank the rights of a mortga gee in good fai th whose
12
lien to the securi ties posted mus t be respected and protected. In this
rega rd, Philbank is enti tled to ha ve i ts mortga ge ca rried over or
annotated on the ti tles of Cipriana Delgado over the said properties .
CLEMENTE V. CA
Civil Law; Contracts; Contract of Sale; A contract of sale is perfected
at the moment there is a meeting of the minds upon the thing that is
the object of the contract, and upon the price.—The Ci vil Code
defines a contra ct as a meeting of minds between two persons
whereby one binds hi mself, wi th respect to the other, to gi ve
something or to render some servi ce. Arti cle 1318 provides tha t there
is no contra ct unless the following requisites concur: (1) Consent of
the contra cting pa rties ; (2) Object certain whi ch is the subject ma tter
of the contra ct; and (3) Ca use of the obliga tion which is es tablished.
All these elements mus t be present to cons ti tute a valid contra ct; the
absence of one renders the contra ct void. As one of the essential
elements, consent when wanting makes the contra ct nonexistent.
Consent is mani fes ted by the meeting of the offer a nd the a cceptance
of the thing and the cause, whi ch a re to consti tute the contra ct. A
contra ct of sale is perfected a t the moment there is a meeting of the
mi nds upon the thing tha t is the object of the contra ct, and upon the
pri ce.
Same; Same; Simulation of Contracts; Simulation takes place when
the parties do not really want the contract they have executed to
produce the legal effects expressed by its wordings.—Si mulation
takes pla ce when the pa rties do not reall y want the contra ct they ha ve
executed to produce the legal effects expressed by i ts wordings .
Arti cle 1345 of the Ci vil Code provi des tha t the si mulation of a
contra ct ma y ei ther be absolute or relati ve. The former ta kes pla ce
when the pa rties do not intend to be bound a t all ; the latter, when the
pa rties conceal thei r true agreement. The case of Hei rs of Poli cronio
M. Ureta , Sr. v. Hei rs of Li bera to M. Ureta , 657 SCRA 555 (2011), is
ins tructi ve on the ma tter of absolute simula tion of contra cts , vi z.: In
absolute simulation, there is a colorable contra ct but i t has no
subs tance as the pa rties ha ve no intention to be bound by i t. The main
cha ra cteris ti c of an absolute simula tion is that the appa rent contra ct is
not reall y desired or intended to produce legal effect or i n any wa y
al ter the juridi cal situation of the pa rties . As a resul t, an abs olutel y
simula ted or ficti tious contra ct is void, and the pa rties ma y recover
from ea ch other wha t they ma y ha ve gi ven under the contra ct.
Same; Same; Same; Article 1471 of the Civil Code provides that “if
the price is simulated, the sale is void.”—Arti cle 1471 of the Ci vil
Code provides tha t “if the pri ce is simula ted, the sale is void.” Where a
deed of sale s ta tes tha t the purchase pri ce has been paid bu t in fa ct
has never been paid, the deed of sale is null and voi d for la ck of
consideration. Thus , although the contra cts sta te tha t the purchase
pri ce of P250,000.00 and P60,000.00 were paid by peti tioner to Adela
for the Properties , the evi dence shows that the contra ry is true,
because no money cha nged hands . Apa rt from her testi mony,
peti tioner did not present proof tha t she paid for the Properties.
REYES V. ASUNCION
Void Contracts, simulated contracts
Civil Law; Contracts; Si mula ted Contra cts ; Where a person, in order to
pla ce his property beyond the rea ch of his credi tors , simulates a
trans fer of i t to another, he does not reall y intend to di ves t himsel f of
his ti tle and control of the property; hence, the deed of transfer is but
a sha m.—La cking, therefore, in an absolutel y si mulated contra ct is
consent whi ch is essential to a valid and enforceable contra ct. Thus ,
where a person, in order to pla ce his property beyond the rea ch of his
creditors , simula tes a trans fer of i t to another, he does not reall y
intend to di vest himself of his ti tle and control of the property; hence,
the deed of transfer is but a sham. The pri ma ry considerati on in
determining the true nature of a contra ct is the intention of the
pa rties . If the words of a contra ct appea r to contra vene the evident
intention of the pa rties, the latter shall prevail . Such intention is
determined not onl y from the express terms of thei r agreement, but
also from the contemporaneous and subsequent acts of the pa rties.
Peti tioner insists tha t the s ubject contra ct is i n the na ture of a si mple
dona tion, and even assuming a rguendo tha t the same was meant to
be a remunera tory dona tion, i t is s till invalid because the donation
was not nota rized.
The subject contra ct in this case is seemingl y a remunera tory donation
as all the elements for such a re present. The CA explained:
A painsta king review of the contra ct reveals tha t it is a remunera tory
dona tion. Fi rs t, appellant expressed in the contra ct tha t "sa loob ng
sampling taon namin[g] pagsasama[,] naki ta na min na na ging ma tapa t
si ya sa kanyang obliga tions bilang ta ga pamahala [sic] ng aming
tubuhan a t sa mga [k]ontra tis ta at higi t sa lahat a y ma runong si ya
ma kisama sa aming mga kasama a t si ya [a y] mapagkakati walaan lalo
na sa pera . Clearl y, s he ga ve the subject land to appellee to
remunera te his ten (10) yea rs of fai thful servi ce to her. More
importantl y, appellant s ta ted tha t "napa gkasunduan namin na kami
ang bahala sa fi nances, sa kasunduan na kami ang magpapakabya w ng
tubo sa pangalan ko, hanggang gus to ko. This is a profi t sha ring
agreement where appellant finances the planting, ha rves ting and
milling of suga rcane on the subject land donated to appellee under
appellant's name. Unmis takabl y, i t is a charge or burden on the
dona tion.
However, as pointed out by the CA, the contra ct, as well as the
evidence presented duri ng the trial, a re silent as to the value of the
burden, hence, ins tead of the law on donati ons , the rules on contra ct
should govern the subject contra ct because the dona tion is onerous as
the burden is imposed upon the donee of a thing wi th an
undetermined value. Furthermore, the CA is also ri ght i n ruling tha t i t
is not necessary that the contra ct be in a public ins trument i f i t
invol ves immova ble property, properl y ci ting Pada -Kilario v. Court of
Appeals whi ch s ta tes tha t the requi rement of Arti cle 1358 of the Ci vil
Code tha t a cts whi ch ha ve for thei r object the crea tion, transmission,
modi fica tion or extinguishment of real ri ghts over i mmovable
property, mus t appea r in a public document, is onl y for convenience,
non-compliance wi th whi ch does not a ffect the validi ty or
enforceability of the a cts of the pa rties as a mong themselves
TANCHULING V. CANTELA
Civil Law; Contracts; Simulated Contracts; Simulation takes
place when the parties do not really want the contract they have
executed to produce the legal effects expressed by its wordings.
Simulation or vices of declaration may be either absolute or relative.—
“Si mula tion ta kes place when the pa rties do not really want the
contra ct they ha ve executed to produce the legal effects expressed by
i ts wordings. Simulation or vi ces of decla ra tion ma y be ei ther a bsolute
13
or rela ti ve.” Arti cle 1345 of the Ci vil Code distinguishes an absolute
simula tion from a rela ti ve one; while Arti cle 1346 dis cusses thei r
effects , as follows : Art. 1345. Si mulati on of a contra ct ma y be absolute
or rela ti ve. The former takes place when the pa rties do not intend to
be bound a t all ; the la tter when the parties conceal thei r true
agreement. Art. 1346. An a bsolutel y si mula ted or fi cti tious contra ct is
void. A rela ti ve simula tion, when i t does not prejudice a thi rd person
and is not i ntended for a ny purpose contra ry to law, morals, good
cus toms , publi c order or publi c poli cy binds the pa rties to thei r
agreement.
Same; Same; Same; The main characteristic of an absolute
simulation is that the apparent contract is not really desired or
intended to produce legal effect or in any way alter the juridical
situation of the parties.—In Heirs of Policronio M. Ureta, Sr. v. Heirs of
Liberato M. Ureta, 657 SCRA 555 (2011), the Court explained that “*i+n
absolute simulation, there is a colorable contra ct but i t has no
subs tance as the parties ha ve no intention to be bound by i t. The main
characteristic of an absolute simulation is that the apparent c ontract
is not really desired or intended to produce legal effect or in any way
alter the juridical situation of the parties. As a resul t, an abs olutel y
simula ted or ficti tious contra ct is void, and the pa rties ma y recover
from each other wha t they ma y ha ve gi ven under the contra ct.” In this
case, the Court agrees with the RTC tha t the subject deed was
absolutel y simula ted. The pa rties never intended to be bound by any
sale a greement. Ins tead, the subject deed was executed merel y as a
front to show the publi c tha t Sps . Tanchuling were the owners of the
properties in order to deter the group of John Merca do from illegall y
selling the same.
Same; Same; Same; Fraud; It is well-settled that fraud is never
presumed but must be proven by clear and convincing evidence by the
same party who alleges it.—The unda ted deed, whi ch serves as a
counter-agreement to, and whi ch was simul taneously executed with,
the subject deed, unmistakabl y evi nces absolute simulation. While
Cantela posi ts tha t he was tri cked into signing the unda ted deed as i t
was supposedl y surrepti tiousl y inserted by Sps . Tanchuling into the
copies of the subject deed a t the time of thei r signing, nothing, aside
from his self-serving assertions , support his a ccount. It is well-settled
tha t fra ud is never presumed but mus t be proven by clea r and
convincing evi dence by the same pa rty who alleges i t. Besides ,
Na va rro and Botero, who equall y wi tnessed the signing of the undated
deed, never testi fied on any i rregula rity. Notabl y, the fa ct that the
unda ted deed was not nota ri zed is rendered i rrelevant by Ca ntela’s
own admission of the document’s execution, whi ch, unless proven to
be fraudulent, mus t be presumed to be fai r and regular, as in all
pri va te transa ctions .
VICTORIA V. PIDLAOAN
The peti tioners a rgue tha t the deed of dona tion was simula ted and
tha t the pa rties entered i nto an equi table mortga ge. On the other
hand, the respondents deny the claim of equi table mortga ge and
a rgue tha t they validl y a cquired the property via sale. The RTC ruled
tha t there was dona tion but onl y as to half of the property. The CA
agreed with the respondents tha t the deed of dona tion was not
simula ted, rel yi ng on the presumption of regula ri ty of publi c
documents .
On the na ture of the tra nsaction between Elma and Normi ta , the
Court found tha t the deed of dona tion was simula ted and the pa rties'
real intent was to enter i nto a sale.
We fi rst dwell on the genuineness of the deed of dona tion. There a re
two types of simulated documents — absolute and rela ti ve. A
document is absolutel y simula ted when the pa rties ha ve no intent to
bind themselves a t all, while i t is rela ti vel y simulated when the pa rties
concealed thei r true a greement. The true na ture of a contra ct is
determined by the pa rties' intention, whi ch ca n be as certained from
thei r contemporaneous and subsequent a cts. In the present case,
Elma and Normita 's contemporaneous and subsequent a cts show tha t
they were about to ha ve the contra ct of sale nota ri zed but the nota ry
publi c ill-advised them to execute a deed of dona tion ins tead.
Following this a dvi ce, they returned the next da y to ha ve a deed of
dona tion nota ri zed. Clea rl y, Elma and Normita intended to enter into a
sale tha t would transfer the ownership of the subject ma tter of thei r
contra ct but disguised i t as a dona tion. Thus , the deed of donation
subsequentl y executed by them was onl y relati vel y simulated.
Considering that the deed of donati on was rela ti vel y simula ted, the
pa rties a re bound to thei r real agreement. The records show tha t the
pa rties intended to tra nsfer the owne rship of the property to Normi ta
by absolute sale. This intention is reflected in the un-nota rized
document enti tled "Panananto ng Pa gka tanggap ng
KahustuhangBa yad."
STA.FE REALTY V. SISON
Fa cts : Sta. Fe Realty Inc. (SFRI) a greed to sell to Jesus Sison a porti on of
land. SFRI executed a Deed of Sale over the subject property to
Vi ctoria Fabregas . Fabregas then executed a nother deed of sale in
fa vor of Sison for the same a mount. Sison caused the segregation of
the corresponding lot from the whole land a nd this was designa ted as
Lot 1-B-1 in the s ubdi vision plan. Sison took possession of the s ubject
property and introduced i mprovements thereon such as fencing the
property, putting a no trespassing sign, ba rbed wi res , and hedges of
bi g trees.
He also cons tructed a fishpond and a resort on the subject property.
Sison however was not able to register the sale and secure a ti tle in his
na me because peti tioners herein refused to pa y real ty ta xes and
capi tal gains ta x, as well as to turn over the owner’s copy of trans fer
certi fi cate of ti tle and the subdi vision plan. Sison was cons trained to
pa y the said ta xes to protect his interes t. Nevertheless, peti tioners
herei n s till refused to s urrender the mother ti tle a nd all pertinent
documents necessary for the transfer o f ti tle in Sison’s na me.
Meanwhile, SFRI caused the subdi vision of the enti re property. SFRI
sold Lot 1-B-3-C to Orosa .
Orosa was able to transfer the property i n his na me. Sison claimed
tha t this Lot 1-B-3-C is pra cti call y the same as his Lot 1- B-1 except for
the excess of 402 sq. m. Sison tried to settle a mi cabl y wi th the other
concerned parties but no a greement was rea ched. He then insti tuted
an a ction for reconveyance of property. Peti tioners herein denied tha t
they agreed to sell the property to Sison. They a verred tha t Sison
persua ded Fabregas to sell to hi m a portion of Lot 1-B i n exchange of
P700,000.00 and Sison will be the one to shoulder the capi tal gains
ta x. They contended tha t they merel y accommodated Sison’s reques t
to si gn another set of deeds over the subject property wi th a reduced
pri ce of P10,918.00 so tha t the capi tal gains ta x would be reduced.
They also asserted that Sison did not pa y the considera tion agreed
upon thus Fabregas res cinded the sale by sending a noti ce to Sison
who did not contes t the res cission of the sale. Orosa claimed that he is
a buyer in good faith as there was nothing annota ted in the ti tle which
would wa rn him of any lien or encumbrance or adverse claim on the
property. The RTC ruled in fa vor of Sison. On appeal , the CA affi rmed
the findings of the RTC but reduced the a wa rd of moral damages and
a ttorney’s fees .
14
Issue: Whether the deed of absolute sale by and between SFRI and
Fa bregas , as well as the deed of absol ute sale between Fabregas and
Sison a re valid and enforceable, thus enti tling Sison to reconveyance?
Held: Yes. The deeds a re valid and enforceable and Sison is entitled to
reconveya nce. Sison anchors his cause of a ction upon the two deeds
of sale and his possession and occupation of the s ubject property.
Peti tioners however counter that (1) the deeds of sale were simulated;
(2) Fa bregas had unilaterall y res cinded the sale; and (3) the subject
property is now registered in the hands of an innocent purchaser for
value. Peti tioners argue tha t the deeds were simulated beca use of i ts
alleged failure to reflect the true purchase pri ce of the sale whi ch is
P700,000.
They contend tha t there is an appa rent gross 56 disproportion
between the s tipula ted pri ce and the value of the subject property
whi ch demons tra tes that the deeds s ta ted false considera tion.
The Court finds that the deeds of sale were executed freely and
voluntarily. All the elements for a contract to be valid are present. A
perfected contra ct of absolute sale exis ts between SFRI and Fa bregas
and then Fabregas and Sison. There was meeting of the minds
between the pa rties when they a greed on the sale of a determina te
subject ma tter and the pri ce is certain. Gross inadequa cy of pri ce does
not affect the validi ty of a contra ct of sale unless i t signi fies a defect in
the consent or tha t the pa rties a ctuall y intended a dona tion or some
other contra ct. Inadequa cy of cause will not invalidate a contra ct
unless there has been fra ud, mis take, or undue influence. Fa bregas
failed to judi cially res cind the contra ct. The Court had al ready ruled
tha t in the absence of a s tipula tion, a party ca nnot unilaterall y and
extra judiciall y res cind a contra ct. A judicial or nota rial a ct is necessary
before a valid res cission can take pla ce. The pa rty entitled to rescind
should a ppl y to the court for a decree of res cission. The ri ght cannot
be exercised solel y on a pa rty’s own judgment that the other
committed a brea ch of the obli gation. The opera ti ve a ct which
produces the resolution of the contra ct is the decree of the court and
not the mere a ct of the vendor. The alleged notice of res cission tha t
Fa bregas sent to Sison declaring her intention to res cind the sale did
not operate to validl y res cind the contra ct because there is abs olutel y
no stipulation gi ving Fabregas the right to unila terally res cind the
contra ct in case of non-pa yment. Orosa cannot be considered a buyer
in good faith considering tha t Sison introduced improvements on the
property s uch as fencing i t, putting a no trespassing sign, ba rbed
wi res , and hedges of bi g trees . He also cons tructed a fishpond and a
resort on the subject property. Presence of these s tructures should
ha ve alerted Orosa to the possible flaw in the ti tle of SFRI
FORMS OF CONTRACTS
MARTINEZ V. CA
Fa cts :
Pri va te respondents Godofredo De la Pa z and his sister Ma nuela De la
Pa z entered into an oral contra ct with petitioner Rev. Fr. Dante
Ma rtinez, then Assistant pa rish priest of Ca banatuan Ci ty, for the sale
of Lot No. 1337-A-3 a t the Villa Fe Subdi vision in Cabana tuan Ci ty for
the sum of P15,000.00. At the time of the sale, the lot was still
registered in the name of Claudia De la Pa z, mother of pri va te
respondents , although the latter had al ready sold i t to pri va te
respondent Manuela de la Pa z by vi rtue of a Deed of Absolute Sale
da ted. He was assured by them tha t the lot belonged to Manuela De
la Pa z. It was a greed tha t peti tioner would gi ve a downpa yment of
P3,000.00 to pri va te respondents De la Pa z and tha t the balance
would be pa yable by ins tallment. After gi ving the
P3,000.00 downpa yment, peti tioner s ta rted the cons truction of a
house on the lot and began pa ying the real es tate ta xes on said
property.
In the meanti me, in a Deed of Absolute Sale wi th Right to Repurchase,
pri va te respondents De la Pa z sold three l ots wi th right to repurchase
the same wi thin one yea r to pri va te respondents spouses Reynaldo
and Susan Venera cion for the sum of P150,000.00. One of the lots sold
was the lot previousl y sold to peti tioner. Petiti oner dis covered tha t
the l ot he was occupying with his famil y had been sold to the spouses
Venera cion a fter recei ving a letter from pri va te respondent Reynaldo
Venera cion claiming ownership of the land and demanding tha t they
va ca te the property and remove thei r i mprovements
thereon.16 Peti tioner, in turn, demanded through counsel the
execution of the deed of sale from pri va te respondents De la Pa z and
informed Reynaldo Venera cion tha t he was the owner of the property
as he had previ ousl y purchased the same from pri va te respondents De
la Pa z.
ISSUE:
Whether or not pri va te respondents Venera cion a re buyers i n good
fai th of the lot in dispute as to make them the absolute owners
thereof in a ccordance with Art. 1544 of the Ci vil Code on double sale
of immovable property.
HELD:
No. The deed of sale executed by private respondents Godofredo
and Manuela De la Paz in favor of private respondents spouses
Reynaldo and Susan Veneracion is null and void.
In this case, the Court of Appeals based i ts ruling tha t pri va te
respondents Venera ci on a re the owners of the disputed lot on thei r
reliance on pri va te respondent Godofredo De la Pa z's assurance tha t
he woul d ta ke ca re of the ma tter concerning petitioner's occupancy of
the disputed l ot as cons ti tuting good fai th. This case, however,
invol ves double sale a nd, on this matter, Art. 1544 of the Ci vil Code
provides tha t where immovable property is the subject of a double
sale, ownership shall be trans ferred (1) to the person a cqui ring i t who
in good faith fi rs t recorded i t to the Regis try of Property; (2) in defaul t
thereof, to the person who in good faith was fi rs t in possession; and
(3) in defaul t thereof, to the person who presents the oldes t
ti tle.26 The requi rement of the law, where ti tle to the property is
recorded in the Regis ter of Deeds , is two-fold: a cquisi tion in good faith
and recording in good faith. To be enti tled to pri ori ty, the second
purchaser mus t not onl y prove prior recording of his ti tle but tha t he
a cted in good faith, i.e., wi thout knowledge or noti ce of a pri or sale to
another. The presence of good faith should be as certained from the
ci rcums tances surrounding the purchase of the land.
1. Wi th rega rd to the fi rst sale to pri va te respondents
Venera cion, pri va te respondent Reynaldo Venera cion
tes tified tha t on October 10, 1981, 18 da ys before the
execution of the fi rs t Deed of Sale with Ri ght to Repurchase,
he i nspected the premises and found i t va cant. 28 However,
this is belied by the testi mony of Engr. Felix D. Mi nor, then
building inspector of the Depa rtment of Publi c Works and
Hi ghwa ys , tha t he conducted on October 6, 1981 an ocula r
inspection of the lot in dispute in the performance of his
duties as a building inspector to moni tor the progress of the
construction of the building subject of the building permi t
issued in fa vor of peti tioner on April 23, 1981, and that he
found i t 100 % completed. In the absence of contra ry
evidence, he is to be presumed to ha ve regula rl y performed
his offi cial duty.Thus, as ea rl y as October, 1981, pri va te
respondents Venera cion al ready knew tha t there was
construction being made on the property they purchased.
2. Wi th rega rd to the second sale, whi ch is the true contra ct of
sale between the pa rties, i t should be noted that this Court
35
in several cases , has ruled that a purchaser who is awa re of
fa cts whi ch shoul d put a reasonable man upon his guard
cannot turn a blind eye and la ter claim tha t he a cted in good
15
fai th. Pri va te respondent Reynaldo himself a dmi tted during
the pre-trial conference in the MTC in Ci vil Case tha t
peti tioner was al ready in possession of the property i n
dispute a t the ti me the second Deed of Sale was executed
on June 1, 1983 a nd registered on Ma rch 4, 1984. He,
therefore, knew tha t there were al ready occupants on the
property as ea rl y as 1981. The fa ct that there a re persons ,
other than the vendors , in a ctual possession of the disputed
lot should ha ve put pri va te respondents on inquiry as to the
na ture of petiti oner's ri ght over the property. But he never
talked to petiti oner to veri fy the na ture of his ri ght. He
merel y relied on the assurance of pri va te respondent
Godofredo De la Paz, who was not even the owner of the lot
in question, tha t he would take ca re of the ma tter. This does
not meet the standa rd of good fai th.
3. The fi rst contra ct of sale between the pri va te respondents
shows tha t i t is in fa ct an equi table mortga ge. The requisites
for consideri ng a contra ct of sale with a right of repurchase
as an equi table mortgage a re (1) that the pa rties entered
into a contra ct denomina ted as a contra ct of sale and (2)
tha t their i ntention was to secure a n existing debt by wa y of
mortgage.A contra ct of sale wi th right to repurchase gi ves
rise to the presumption tha t i t is an equitable mortga ge in
any of the following cases: (1) when the pri ce of a sale wi th a
ri ght to repurchase is unusuall y inadequa te; (2) when the
vendor remains in possession as lessee or otherwise; (3)
when, upon or a fter the expi ra tion of the ri ght to
repurchase, a nother ins trument extending the peri od of
redemption or granting a new period is executed; (4) when
the purchaser retains for hi mself a part of the purchase
pri ce; (5) when the vendor binds hi mself to pa y the ta xes on
the thing s old; (6) i n any other case where i t ma y be fai rl y
inferred tha t the real intention of the pa rties is tha t the
transa ction shall secure the pa yment of a debt or the
performance of a ny other obliga tion.In case of doubt, a
contra ct purporti ng to be a sale wi th ri ght to repurchase
shall be cons trued as a n equi table mortgage. In this case, the
following ci rcums tances indi ca te tha t the pri va te
respondents intended the transacti on to be an equi table
mortgage and not a contra ct of sale: (1) Pri va te respondents
Venera cion never took a ctual possession of the three lots ;
(2) Pri va te respondents De la Pa z remained in possession of
the Melencio l ot whi ch was co-owned by them and where
they resided; (3) During the peri od between the fi rs t sale
and the second sale to pri va te respondents Venera cion, they
never made any effort to take possession of the properties ;
and (4) when the period of redempti on had expi red and
pri va te respondents Venera cion were informed by the De la
Pa zes tha t they a re offering the lots for sale to another
person for P200,000.00, they never objected. To the
contra ry, they offered to purchase the two l ots for
P180,000.00 when they found that a certain Mr. Tecson was
prepa red to purchase i t for the same a mount. Thus , i t is
clea r from these ci rcumstances tha t both pri va te
respondents never intended the fi rs t sale to be a contra ct of
sale, but merel y tha t of mortgage to secure a debt of
P150,000.00.
TEOCO V. METROBANK
The la w ma y requi re tha t certain transacti ons appea r i n publi c
ins truments , such as Arti cles 1358 a nd 1625 of the Ci vil Code, which
respecti vel y provi de:
Art. 1358. The following mus t appea r in a publi c document:
(1) Acts and contra cts whi ch ha ve for thei r object the creation,
trans mission, modi fica tion or extinguishment of real ri ghts over
immova ble property; sales of real property or of a n interes t therein
governed by Arti cles 1403, No. 2, and 1405;
(2) The cession, repudia tion or renunciation of heredi ta ry rights o r of
those of the conjugal pa rtnership of gains ;
(3) The power to adminis ter property, or any other power whi ch has
for i ts object an a ct appea ring or whi ch s hould a ppea r in a publi c
document, or should prejudi ce a third person;
(4) The cession of a ctions or ri ghts proceeding from a n a ct appea ring
in a publi c document.
All other contra cts where the amount invol ved exceeds fi ve hundred
pesos must appea r in wri ting, even a pri va te one. But sales of goods ,
cha ttels or things in a ction a re governed by Arti cles 1403, No. 2, and
1405.
Art. 1625. An assignment of a credi t, ri ght or a ction shall produce no
effect as agains t thi rd person, unless i t appea rs in a publi c instrument,
or the ins trument is recorded in the Registry of Property in case the
assignment invol ves real property. Would the exercise by the brothers
Teoco of the ri ght to redeem the properties in ques tion be precluded
by the fa ct tha t the assignment of right of redemption was not
contained i n a publi c document? We rule in the negati ve. Metrobank
never challenged the content, the due execution, or the genuineness
of the assignment of the ri ght of redemption. Consequentl y,
Metrobank is deemed to ha ve admi tted the same. Ha ving impliedl y
admitted the content of the assignment of the ri ght of redemption,
there is no necessity for a pri ma fa cie evi dence of the facts there
s tated.
In the same manner, si nce Metrobank has impliedl y a dmi tted the due
execution and genuineness of the assignment of the ri ght of
redemption, a pri va te document evi dencing the same is admissible in
evidence. True i t is tha t the Ci vil Code requi res certain transa ctions to
appea r i n publi c documents . However, the necessity of a public
document for contracts which transmit or extinguish real rights over
immovable property, as mandated by Article 1358 of the Civil Code,
is only for convenience; i t is not essential for validi ty or enforceability.
Thus , in Cenido v. Apacionado, this Court ruled that the onl y effect of
noncompliance wi th the provisions of Arti cle 1358 of the Ci vil Code is
tha t a pa rty to such a contra ct embodied in a pri va te document ma y
be compelled to execute a publi c document:
Article 1358 does not requi re the a ccomplishment of the a cts or
contra cts in a public ins trument in order to valida te the a ct or contra ct
but onl y to insure i ts effi cacy, s o that a fter the existence of said
contra ct has been a dmi tted, the pa rty bound ma y be compelled to
execute the proper document. This is clea r from Arti cle 1357:
Art. 1357. If the law requi res a document or other special form, as in
the a cts and contra cts enumera ted i n the following a rti cle (Arti cle
1358), the contra cting pa rties ma y compel ea ch other to observe tha t
form, once the contra ct has been perfected. This right ma y be
exercised simul taneousl y wi th the acti on upon the contra ct.
On the other hand, Arti cle 1625 of the Ci vil Code provi des tha t an
assignment of a credi t, ri ght or a ction shall produce no effect as
agains t thi rd person, unless it a ppea rs in a public i nstrument, or the
ins trument is recorded in the Regis try of Pro perty in case the
assignment i nvol ves real property.
In the case at bar, Metrobank would not be prejudi ced by the
assignment by the spouses Co of thei r ri ght of redempti on in fa vor of
the brothers Teoco. As conceded by Metrobank, the assignees , the
brothers Teoco, would merel y s tep into the shoes of the assignors , the
spouses Co. The brothers Teoco would ha ve to compl y with all the
requi rements imposed by law on the s pouses Co. Metrobank would
not lose any securi ty for the satis faction of any loan obtained from i t
by the spouses Co. In fa ct, the assignment would even prove to be
benefi cial to Metrobank, as i t can foreclose on the subject properties
16
anew, provided i t proves tha t the s ubsequent loans entered into by
the spouses Co a re covered by the mortgage contra ct.
SPILLE V. NICORP
SPA necessary if principal authorizes agent to sell real property.
The only evidence adduced to prove that the agent had authority to
sell the principal’s property was a General Power of Attorney which
merely authorized the agent to exercise administration and
supervision over the properties of the principal. It was contended
tha t there was no perfected contra ct to sell. Is the contention correct?
Why?
Held: Yes. The well-established rule is when a sale of a parcel of land
or any interest therein is through an agent, the authority of the latter
shall be in writing, otherwise the sale shall be void.
The authori ty of an a gent to execute a contra ct for the sale of real
es tate mus t be conferred in wri ting and mus t gi ve hi m speci fi c
authori ty, ei ther to conduct the general business of the principal or to
execute a binding contra ct containing terms and condi tions whi ch a re
in the contra ct he di d execute. A special power of attorney is
necessa ry to enter into a ny contra ct by whi ch the ownership of an
immova ble is trans mi tted or a cqui red ei ther gra tuitousl y or for a
valuable consideration. The express manda te requi red by la w to
enable an appointee of an a gency (couched) i n general terms to sell
mus t be one tha t expressl y mentions a sale or that incl udes a sale as a
necessa ry ingredient of the a ct mentioned. For the pri ncipal to confer
the ri ght upon an a gent to sell real es ta te, a power of attorney mus t so
express the powers of the a gent in clea r and unmis takable langua ge.
BITTE V. JONAS
REFORMATION OF INSTRUMENTS
BENTIR V. LEANDA
It is claimed by plainti ff tha t he and defendant Benti r entered into a
contra ct of lease of a pa rcel of land on Ma y 5, 1968 for a period of 20
yea rs (and renewed for an additional 4 yea rs therea fter) wi th the
verbal a greement tha t in case the lessor decides to sell the property
after the lease, she shall gi ve the plainti ff the ri ght to equal the offers
of other prospecti ve buyers . It was claimed that the lessor violated
this ri ght of fi rs t refusal of the plaintiff when she sureptiti ousl y (sic)
sold the land to co-defendant Pormida on Ma y 5, 1989 under a Deed
of Conditional Sale. Plaintiffs right was further vi olated when a fter
dis covery of the final sale, plainti ff ordered to equal the pri ce of co -
defendant Pormida was refused a nd a gain defenda nt Benti r
surreptiti ousl y executed a final deed of sale in fa vor of co -defendant
Pormida in December 11, 1991.
The defendant Benti r denies tha t she bound herself to gi ve the
plaintiff the ri ght of fi rs t refusal in case she sells the property. But
assuming for the sake of a rgument that such ri ght of fi rst refusal was
ma de, it is now contended tha t plaintiffs cause of a ction to reform the
contra ct to reflect such ri ght of fi rs t refusal, has al ready pres cribed
after 10 yea rs , counted from Ma y 5, 1988 when the contra ct of lease
incepted. Counsel for defendant ci ted Conde vs. Malaga, L-9405 Jul y
31, 1956 a nd Ramos vs. Court of Appeals, 180 SCRA 635, where the
Supreme Court held tha t the prescri pti ve period for reforma tion of a
wri tten contra ct is ten (10) yea rs under Arti cle 1144 of the Ci vil Code.
Issue: The core issue tha t meri ts our considera tion is whether the
complaint for reforma tion of ins trument has pres cribed.
Ruling:
The peti tion has meri t.
The right of reforma tion is necessa ril y an i nvasion or li mita tion of the
pa rol evi dence rule since, when a wri ting is reformed, the resul t is tha t
an oral agreement is by court decree made legall y
11
effecti ve. Consequentl y, the courts , as the a gencies authori zed by
law to exercise the power to reform an instrument, must necessa ril y
exercise tha t power spa ringl y and wi th great ca ution and zealous ca re.
Moreover, the remedy, being an extraordina ry one, mus t be subject to
limi ta tions as ma y be provided by law. Our law and jurisprudence set
such li mita tions, a mong whi ch is laches. A sui t for reforma tion of an
ins trument ma y be ba rred by lapse of ti me. The pres cripti ve period for
a ctions based upon a wri tten contra ct and for reforma tion of an
ins trument is ten (10) yea rs under Arti cle 1144 of the Ci vil
Code. 12 Pres cription is intended to suppress s tale and fraudulent
claims a rising from tra nsactions like the one at ba r whi ch fa cts had
become so obs cure from the lapse of ti me or defecti ve memory. 13 In
the case at bar, respondent corporation had ten (10) years from
1968, the time when the contract of lease was executed, to file an
action f or reformation. Sadly, it did so only on May 15, 1992 or
twenty-four (24) years after the cause of action accrued, hence, its
cause of action has become stale, hence, time-barred.
QUIROS, VILLEGAS VS ARJONA
On December 19, 1996, peti tioners ProcesoQui ros and Leona rda
Villegas filed wi th the offi ce of the ba ranga y captain of Labney, Sa n
Ja cinto, Pa ngasinan, a complaint for reco very of ownership and
possession of a pa rcel of land loca ted a t Labney, San Jacinto,
Pangasinan. Petiti oners sought to recover from thei r uncle Ma rcelo
Arjona, one of the respondents herein, thei r la wful sha re of the
inheri tance from thei r late gra ndmother Rosa Arjona Qui ros alias Doza .
On Janua ry 5, 1997, an a mi cable settlement was rea ched between the
pa rties . By reason thereof, respondent Arjona executed a document
denominated as "PAKNAAN".
On the same da te, a nother "PAKNAAN" was executed by Jose Banda .
Peti tioners filed a complaint wi th the Muni cipal Ci rcui t Trial Court with
pra yer for the issuance of a wri t of executi on of the compromise
agreement whi ch was denied because the s ubject property cannot be
determined with certainty.
The Regional Trial Court reversed the decision of the munici pal court
on appeal and ordered the issuance of the wri t of executi on.
17
Respondents appealed to the Court of Appeals, whi ch reversed the
decision of the Regional Trial Court a nd rei nsta ted the decision of the
Muni cipal Ci rcuit Trial Court.
Issue: The pi votal issue is the validi ty and enforceability of the
ami cable settlement between the pa rties and corollary to this ,
whether a wri t of execution ma y issue on the basis thereof. It is to
determine whether or not the Paknaan co nsti tutes a valid contra ct to
be enforced despi te the error in determining the subject property.
Ruling:
Peti tion is granted.
In denyi ng the issuance of the wri t of execution, the appellate court
ruled that the contra ct is null and void for i ts failure to des cribe with
certainty the object thereof. While we agree tha t no wri t of execution
ma y issue, we take exception to the appellate court’s reason for i ts
denial.
Si nce an ami cable settlement, whi ch pa rtakes of the na ture of a
contra ct, is subject to the same legal provisions providing for the
validi ty, enforcement, res cission or annul ment of ordina ry contra cts ,
there is a need to as certain whether the Paknaan i n question has
suffi cientl y complied wi th the requisites of validi ty i n a ccordance with
Arti cle 1318 of the Ci vil Code.
There is no ques tion that there was meeting of the minds between the
contra cting pa rties. In executing the Pa knaan, the respondent
undertook to convey 1 hecta re of land to peti tioners who a ccepted. It
appea rs tha t while the Paknaan was prepa red and signed by
respondent Arjona, peti tioners a cceded to the terms thereof by not
disputing i ts contents and a re i n fa ct now seeking i ts enforcement. The
object is a 1-hecta re pa rcel of land representing peti tioners ’
inheri tance from thei r deceased grandmother. The cause of the
contra ct is the deli very of peti tioners ’ sha re in the i nheri tance. The
inability of the muni cipal court to identi fy the exa ct loca tion of the
inheri ted property did not negate the principal object of the contra ct.
This is an error occasioned by the failure of the pa rties to des cribe the
subject property, whi ch is correctible by reformation and does not
indicate the absence of the principal object as to render the contract
void. It ca nnot be disputed that the object is dete rmi nable as to i ts
ki nd, i.e.1 hecta re of land as inheri tance, and can be determined
6
wi thout need of a new contra ct or agreement. Clea rl y, the Pa knaan
has all the ea rma rks of a valid contra ct.
In order tha t an a ction for reforma tion of ins trument as provided i n
Arti cle 1359 of the Ci vil Code ma y prosper, the following requisites
mus t concur: (1) there mus t ha ve been a meeting of the minds of the
pa rties to the contra ct; (2) the ins trument does not express the true
intention of the pa rties; a nd (3) the failure of the ins trument to
express the true intention of the pa rties is due to mis take, fraud,
inequitable conduct or a ccident.8
When the terms of a n a greement ha ve been reduced to wri ting, it is
considered as containing all the terms a greed upon and there can be,
between the pa rties and thei r successors in i nterest, no evidence of
such terms other than the contents of the wri tten a greement, except
when i t fails to express the true intent and agreement of the pa rties
thereto, in whi ch case, one of the pa rties ma y bring an a ction for the
reforma tion of the ins trument to the end tha t such true intention ma y
be expressed.
MARTIRES VS CHUA
Subject of the ins tant controvers y a re twenty-four memorial lots
loca ted a t the Hol y Cross Memorial Pa rk i n Ba ranga y Bagba g,
Novali ches , Quezon Ci ty. The property, more pa rti cula rl y descri bed as
"Lot: 24 lots , Block 213, Section: Plaza of Heri tage -Reg.," is covered by
Transfer Certifi ca te of Ti tle (TCT) No. 342914. Respondent, together
wi th her mother, Florencia R. Cala gos , own the disputed property.
Thei r co-owners hip is evi denced by a Deed of Sale and Certifi ca te of
Perpetual Ca re, denomina ted as Contra ct No. 31760, which was
executed on June 4, 1992.3
On December 18, 1995, respondent borrowed from petitioner spouses
the amount of ₱150,000.00. The l oan was secured by a real es ta te
mortgage over the abovementi oned property. Respondent committed
to pa y a monthl y interes t of 8% and a n addi tional 10% monthl y
interes t in case of defaul t.4
Respondent failed to full y settle her obliga tion.
Subsequentl y, wi thout foreclosure of the mortgage, ownership of the
subject l ots were trans ferred i n the na me of petiti oners via a Deed of
Transfer.5
On June 23, 1997, respondent filed wi th the Regional Trial Court (RTC)
of Quezon Ci ty a Complaint a gains t peti tioners , Ma nila Memorial Pa rk
Inc., the company whi ch owns the Hol y Cross Memorial Pa rk, a nd the
Regis ter of Deeds of Quezon Ci ty, pra ying for the annulment of the
contra ct of mortgage between her a nd petiti oners on the ground tha t
the interest ra tes i mposed a re unjus t and exorbi tant. Respondent also
sought a ccounting to determine her liability under the law. She
likewise pra yed tha t the Regis ter of Deeds of Quezon Ci ty and Manila
Memorial Pa rk, Inc. be di rected to reconvey the disputed p roperty to
her.6
On November 20, 1998, respondent moved for the a mendment of her
complaint to include the allega tion tha t she la ter discovered tha t
ownership of the subject lots was tra nsferred i n the name of
peti tioners by vi rtue of a forged Deed of Tra nsfer a nd Affi da vit of
Wa rranty. Respondent pra yed tha t the Deed of Tra nsfer a nd Affida vi t
of Wa rranty be a nnulled.7 In thei r Mani fes tation da ted Ja nua ry 25,
8
1999, peti tioners did not oppose respondent's motion. Trial ensued.
After trial, the RTC of Quezon Ci ty rendered a Decision in fa vor of
peti tioners .
On appeal , the CA affi rmed, wi th modifi ca tion.
The CA ruled tha t respondent volunta ril y entered into a contra ct of
loan and tha t the execution of the Deed of Trans fer is suffi cient
evidence of peti tioners ' a cquisition of ownership of the s ubject
property.
Respondent filed a Motion for Reconsidera tion.
The CA reconsidered i ts fi ndings and concluded tha t the Deed of
Transfer whi ch, on i ts fa ce, transfers ownership of the subject
property to petitioners , is, in fa ct, an equi table mortga ge. The CA held
tha t the true i ntention of respondent was merel y to provide securi ty
for her loan and not to tra nsfer owners hip of the property to
peti tioners .
18
Hence, this peti tion.
Issue: Wha t was the na ture of the a greement between the two
pa rties?
Ruling:
Peti tion is denied.
An equi table mortgage has been defined as one whi ch, al though
la cking in some formality, or form or words , or other requisites
demanded by a s tatute, nevertheless reveals the in tention of the
pa rties to cha rge real property as securi ty for a debt, there being no
impossibility nor anything contra ry to law in this intent.
One of the ci rcumstances provided for under Arti cle 1602 of the Ci vil
Code, where a contra ct shall be presumed to be an equi table
mortgage, is "where i t ma y be fai rl y inferred tha t the real intention of
the pa rties is tha t the tra nsaction shall secure the pa yment of a debt
or the performance of a ny other obliga tion." In the instant case, i t has
been established that the intent of both peti tioners and respondent is
tha t the subject property shall serve as securi ty for the latter's
obliga tion to the former. As correctl y pointed out by the CA, the
ci rcums tances surrounding the execution of the disputed Deed of
Transfer woul d show tha t the said document was executed to
ci rcumvent the terms of the origi nal a greement and depri ve
respondent of her mortga ged property wi thout the requisite
foreclosure.
Since the original transaction between the parties was a mortgage,
the subsequent assignment of ownership of the subject lots to
petitioners without the benefit of foreclosure proceedings, partakes
of the nature of a pactumcommissorium, a s provided for under
Arti cle 2088 of the Ci vil Code.
In the insta nt case, evi dence points to the fa ct that the sale of the
subject property, as proven by the disputed Deed of Transfer, was
simulated to cover up the automatic transfer of ownership in
petitioners' favor. While there was no stipulation in the mortgage
contract which provides for petitioners' automatic appropriation of
the subject mortgaged property in the event that respondent fails to
pay her obligation, the s ubsequent a cts of the pa rties and the
ci rcums tances surrounding such acts point to no other concl usion than
tha t peti tioners were empowered to a cqui re ownership of the
disputed property wi thout need of any foreclosure.
Hence, courts a re duty-bound to exercise caution i n the interpretation
and resolution of contra cts lest the lenders devour the borrowers like
vul tures do wi th thei r prey.34 Aside from this a forementioned reason,
the Court ca nnot fa thom why respondent would a gree to trans fer
ownership of the subject property, whose value is much hi gher than
her outs tanding obliga tion to peti tioners . Considering tha t the
disputed property was mortgaged to secure the pa yment of her
obliga tion, the mos t logi cal and pra cti cal thing tha t she could ha ve
done, if she is unable to pa y her debt, is to wait for i t to be foreclosed.
She s tands to lose less of the val ue of the subject property if the same
is forecl osed, ra ther than if the title thereto is di rectl y tra nsferred to
peti tioners . This is so because in foreclosure, unlike in the present
case where ownership of the property was assigned to peti tioners ,
respondent can s till claim the balance from the proceeds of the
foreclosure sale, i f there be any. In s uch a case, she could s till recover
a porti on of the value of the subject property ra ther than losing i t
completel y by assigning its ownership to peti tioners.
INTERPRETATION OF CONTRACTS
SECURITY BANK VS CA
On October 23, 1991, SBC a nd PISA entered into a Contra ct
of Securi ty Servi ces (CSS) [3] wherein PISA undertook to secure, guard,
and protect the personnel and property of SBC through the
deployment of qualified and properl y equipped gua rds in SBCs
premises and bra nches . Pa ra graph 9 of the CSS provides :
[PISA] shall be liable for any loss , dama ge or injury
suffered by [SBC], i ts offi cers , employees , clients ,
gues ts, visitors and other persons allowed entry
into [SBCs ] premises where such l oss, damage or
injury is due to the negligence or willful a ct of the
gua rds or representa ti ves of [PISA]. If such l oss,
da mage or injury is caused by a pa rty other than the
gua rds or representati ves of [PISA], [PISA] shall be
jointl y and severally liable wi th said party i f [PISA]
failed to exercise due [diligence] in preventing s uch
loss, da mage or injury. [4]
Pa ra graph 12 of the CSS also provides :
12. [SBC] obliges i tself to inform [PISA] in wri ting
through [the] Gua rd-in-Cha rge assigned to the
former, the existence of any loss or damage to
[SBCs ] properties wi thin Forty-Ei ght (48) hours a fter
i ts dis covery by [SBC]; otherwise, [SBC] shall be
considered to ha ve wai ved i ts ri ght to proceed
agains t [PISA] by reason of such loss or
da mage. Such written notice is not required i f
[PISA] took pa rt in the investi ga tion of the l oss or
da mage or in case the loss or damage is caused by
[PISAs] guard/s or representative/s, in which case
[SBC] may assert the claim for reimbursement at
any time.
On Ma rch 12, 1992, the Ta yta y Branch Office of SBC was
robbed PHP12,927,628.01. Among the suspects i n the robbery were
two regular securi ty gua rds of PISA. [6]
At the time, SBC Ta yta y Branch was covered by a Money,
Securi ties and Pa yroll Robbery Poli cy wi th Liberty Insura nce
Corpora tion (LIC), wherein the la tter endea vored to indemnify the
former a gainst loss of money, pa yroll and securi ties tha t ma y resul t
from robbery or a ny a ttempt thereof wi thin the premises of SBCs
Ta yta y Branch Offi ce, up to the maxi mum amount of
PHP9,900,000.00. [7] The insurance policy provided, however, tha t LIC
would not be liable i f the loss was caused by a ny dishonest, fraudulent
or cri minal a ct of SBC officers , employees or by i ts authorized
representati ve.
[8]
On June 23, 1992, SBC a nd PISA entered into a Pos t-Robbery
Agreement (PRA) whereby PISA paid PHP3,027,728.01, whi ch was the
di fference between the total amount los t and the ma xi mum a mount
insured.[9] PISA made the pa yment in the interes t of maintaining good
rela tions , without necessaril y admi tting i ts liability for the loss
suffered by SBC by reason of the Ta yta y robbery. [10]
Pa ra graph 5 of the PRA specifi call y s ta tes that PISAs pa yment
was subject to express terms and condi tions , one of whi ch was the
following:
19
(e) The parties hereto further agree tha t this
agreement and/or payment of the whole amount
of P3,027,728.01, shall not affect or prejudice,
directly or indirectly, whatever cause of action SBC
may have against PISA and whatever claim or
defense the latter may have against SBC, if the
maximum recoverable proceeds of the insurance
covering the loss suffered by SBC could not be
recovered from the insurer.
SBC filed a claim with LIC based on i ts exis ting i nsurance
policy. LIC denied the claim for indemni fica tion on August 5, 1992, on
the ground that the loss suffered by SBC fell under the general
exceptions to the poli cy, i n view of the alleged i nvol vement of PISAs
[12]
two securi ty gua rds .
In i ts letter da ted Augus t 28, 1992, SBC informed PISA of the
denial of the formers insurance claim with LIC and thereafter sought
indemni fica tion of the unrecovered amount of
PHP9,900,000.00.[13] PISA denied the claim.
Issue: Whether or not Pa ra graph 5 (e) is interpreted as requi ring final
judgment before i t ca n be enforced.
Ruling:
We grant the peti tion.
At the outset, i t should be noted tha t a t the hea rt of this controvers y
is the proper i nterpreta tion of pa ra graph 5(e) of the PRA, which
provides :
The pa rties hereto further a gree tha t this
agreement and/or pa yment of the whole amount of
P3,027,728.01, s hall not a ffect or prejudice, di re ctl y
or i ndi rectl y, wha tever ca use of a ction SBC ma y
ha ve a gainst PISA and wha tever claim or defense
the la tter ma y ha ve a gainst SBC, i f the ma ximum
recoverable proceeds of the insurance coveri ng the
loss suffered by SBC could not be recovered from
the insurer.
We hol d tha t reading the clause as requi ring a final
judgment is a s trained interpretation and contra ry to settled rules of
interpreta tion of contra cts . Pa ra graph 5(e) onl y requi res tha t the
proceeds could not be recovered from the insurer, and does not s ta te
tha t i t should be so decla red by a court, or even wi th finality. In
determining the signi fi cati on of terms, words a re presumed to ha ve
been used i n their pri ma ry a nd general a ccepta nce, and there was no
evidence presented to show tha t the words used si gnified a judicial
[29]
adjudica tion. Indeed, i f the pa rties had intended the non-recovery
to be through a judicial and fi nal adjudica tion, they should ha ve s tated
so. In its prima ry and general meaning, pa ragraph 5(e) would cover
LICs extra judicial denial of SBCs claim.
In sus taining PISA, the Court of Appeals relied on the
a rgument tha t pa ragra ph 5(e) of the PRA was intended to
benefi t PISA. The appella te court held tha t the phrase could not be
recovered from the insurer gi ves rise to doubt as to the intention of
the pa rties, as i t is ca pable of two interpreta tions : ei ther (1) the
insurer rejects the wri tten dema nd for indemni fi cation by the insured;
or (2) a court adjudges tha t the insurer is not liable under the policy.
The Court of Appeals then interpreted the antecedent ci rcums tances
pri or to the ins ti tution of Ci vil Case No. 92-3337 as manifes ting SBCs
agreement to suspend the filing of the sui t agains t PISA until after the
case a gainst LIC has been decisi vel y termina ted.
SBC exercised its ri ght of a ction a gainst PISA pursuant to pa ragraph
5(e) of the PRA. This interpretion is consistent with settled canons of
contract interpretation, has the import t hat would make SBCs right
of action effectual, and would yield the greatest reciprocity of
interests. Indeed, we a gree wi th SBC tha t PISAs interpreta tion of the
clause would lead to an effecti ve wai ver of SBCs ri ght of a ction,
because to await the judi cial determinati on of the LIC sui t ma y lead to
the pres cri ption of SBCs ri ght of action against PISA.
If some stipulations of any contract should admit of several
meanings, it shall be understood as bearing that import which is
most adequate to render it effectual.[34] The various stipulations of a
contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken
jointly. [35] When it is impossible to settle doubts by the rules
established in the preceding articles, and the doubts refer to
incidental circumstances of an onerous contract, the doubt shall be
settled in favor of the greatest reciprocity of interests.
Note:
Art. 1373, Art.1374, Art.1378 of the Ci vil Code.
FORTUNE MEDICARE VS AMORIN
Da vi d Robert U. Amorin (Amori n) was a ca rdholder/member of
Fortune Medi ca re, Inc. (Fortune Ca re), a corpora tion enga ged in
providing health maintenance servi ces to i ts members. The terms of
Amorin's medi cal covera ge were provided in a Corpora te Health
Progra m Contra ct4 (Heal th Ca re Contra ct) which was executed on
Janua ry 6, 2000 by Fortune Ca re and the House of Representa ti ves ,
where Amorin was a permanent employee.
While on va ca tion i n Honol ulu, Ha waii, Uni ted Sta tes of Ameri ca
(U.S.A.) i n Ma y 1999, Amorin underwent an emergency surgery,
specifi call y appendectomy, a t the St. Francis Medi cal Center, causing
hi m to incur professional and hospi taliza tion expenses of US$7,242.35
and US$1,777.79, respecti vel y. He a ttempted to recover from Fortune
Ca re the full a mount thereof upon his return to Manila , but the
company merel y approved a reimbursement of ₱12,151.36, a n
amount tha t was based on the a verage cos t of appendectomy, net of
medi ca re deduction, i f the procedure were performed in an a ccredited
hospital in Metro Manila. 5 Amorin recei ved under protes t the
approved amount, but asked for i ts adjustment to cover the total
amount of professional fees whi ch he had paid, and eighty percent
(80%) of the approved s tanda rd cha rges based on "Ameri can
s tanda rd", considering tha t the emergency procedure occurred in the
U.S.A. To support his claim, Amorin ci ted Section 3, Arti cle V on
Benefi ts and Coverages of the Heal th Ca re Contra ct, to wi t:
A. EMERGENCY CARE IN ACCREDITED HOSPITAL. Whether as
an in-pa tient or out-pa tient, the member shall be enti tled to
full covera ge under the benefits provisions of the Contra ct a t
any FortuneCa re a ccredited hospi tals subject onl y to the
perti nent provision of Arti cle VII (Excl usions/Limi ta tions )
hereof. For emergency ca re a ttended by non a ffiliated
physi cian (MSU), the member shall be reimbursed 80% of
the professional fee whi ch should ha ve been paid, had the
member been trea ted by an a ffiliated physi cian. The
a vailment of emergency ca re from an una ffiliated physi cian
shall not invalidate or diminish any clai m if i t shall be s hown
to ha ve been reasonabl y i mpossible to obtain such
emergency ca re from an affiliated physi cian.
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
1. Whether as a n in-pa tient or out-pa tient, FortuneCa re shall
rei mburse the total hospitaliza tion cost including the professional fee
(based on the total approved cha rges ) to a member who recei ves
emergency ca re in a non-a ccredi ted hospi tal . The above coverage
applies only to Emergency confinement within Philippine Territory.
However, if the emergency confinement occurs in a foreign territory,
Fortune Care will be obligated to reimburse or pay eighty (80%)
percent of the approved standard charges which shall cover the
hospitalization costs and professional fees. x x x6
Still , Fortune Ca re denied Amorin’s reques t, p rompting the la tter to
file a complaint7 for breach of contra ct wi th da mages wi th the
Regional Trial Court (RTC) of Ma kati Ci ty.
20
For i ts pa rt, Fortune Ca re a rgued that the Health Ca re Contra ct did not
cover hospi taliza tion costs and professional fees incurred in foreign
countries , as the contra ct’s opera tion was confined to Philippine
terri tory.8 Further, i t a rgued tha t i ts liability to Amorin was
extinguished upon the latter’s a cceptance from the company of the
amount of ₱12,151.36.
Issue: Whether or not the phrase “approved standa rd cha rges” is
interpreted as similar to those in the Philippines.
Ruling:
The peti tion is bereft of meri t.
The Court finds no cogent reason to disturb the CA’s finding tha t
Fortune Ca re’s liability to Amorin under the subject Health Ca re
Contra ct should be based on the expenses for hospi tal an d
professional fees which he a ctuall y incurred, and should not be limited
by the a mount tha t he would ha ve incurred had his emergency
trea tment been performed in an accredi ted hospi tal in the Philippines.
We emphasize tha t for purposes of determining the liability of a
heal th ca re provi der to i ts members , jurisprudence holds tha t a health
ca re a greement is in the na ture of non-li fe insurance, whi ch is
pri ma ril y a contra ct of indemnity. Once the member incurs hospi tal ,
medi cal or any other expense a rising from si ckness, injury or other
s tipula ted contingent, the heal th ca re provi der mus t pa y for the same
to the extent a greed upon under the contra ct.
Consistent wi th the foregoing, we rei tera ted in Blue Cross Health Ca re,
Inc. v. Spouses Oli va res 21:
In Philamca re Health Sys tems , Inc. v. CA, we ruled tha t a heal th ca re
agreement is in the na ture of a non-life insurance. It is an established
rule in insurance contracts that when their terms contain limitations
on liability, they should be construed strictly against the insurer.
These are contracts of adhesion the terms of which must be
interpreted and enforced stringently against the insurer which
prepared the contract. This doctrine is equally applicable to health
care agreements.
The word "s tanda rd" as used in the ci ted s tipula tion was va gue and
ambiguous , as it could be susceptible of di fferent meanings.
All told, i n the a bsence of any qualifying word tha t clea rl y li mi ted
Fortune Ca re's liability to cos ts tha t a re appli cable in the Philippines ,
the a mount pa yable by Fortune Ca re should not be li mited to the cos t
of trea tment in the Philippines , as to do so woul d resul t in the clea r
disadvanta ge of i ts member. If, as Fortune Ca re a rgued, the premium
and other cha rges in the Health Ca re Contra ct were merel y computed
on assumption and ris k under Philippine cos t and, tha t the Ameri can
cos t s tanda rd or any foreign country's cost was never considered, such
limi ta tions should ha ve been dis tinctl y speci fied and clea rl y reflected
in the extent of coverage whi ch the company volunta ril y assumed.
Settled is the rule that ambiguities in a contract are interpreted
against the party that caused the ambiguity. "Any ambiguity in a
contract whose terms are susceptible of different interpretations
must be read against the party who drafted it.
ST. RAPHAEL MONTESSORI SCHOOL, INC. VS BPI
Spouses Rolando a nd Josefina Anda ya (Sps. Andaya) a re the President
and Vi ce-President, respecti vel y, of St. Raphael Montessori , Inc. (St.
Raphael). From 1994 to 1998, the Spouses Anda ya obtained a loan for
themsel ves and on behal f of St. Raphael , from the Fa r Eas t Bank and
Trus t company, now Bank of Philippine Islands (BPI). As securi ty for
the l oan, they executed real esta te mortga ges 3 over a pa rcel of land
covered by Trans fer Certi fi cate of Title (TCT) No. T-45006.4 They,
however, defaul ted on thei r obliga tion and thus , BPI extra judi ciall y
foreclosed the mortgaged property.
A Certi fi cate of Sale 5 was then issued and annota ted a t the ba ck of TCT
No. 45006. When the mortga gors failed to redeem the s ubject
property, BPI executed an Affida vi t of Consolidati on 6 and TCT No. T-
1757407 was issued in i ts name. On Ma rch 15, 2005, upon peti tion by
8
BPI, the court a quo issued a Wri t of Possession ordering the sheri ff to
pla ce the subject property and all i ts improvements thereon, in
possession of the same.
The Spouses Anda ya asked for deferment of the implementa tion of
the wri t of possession and executed for themsel ves and on behalf of
St. Raphael an Undertaki ng wherein they: (i) acknowledged BPI's
ownership of the property; (ii) promised to va cate the premises and
remove all movables from the same on or before September 23, 2005;
(iii ) promised to voluntaril y a nd pea ce full y surrender the property i n
fa vor of the rightful owner BPI wi thout the necessi ty of any demand
on or before September 23, 2005; a nd (i v) pledged not to take
adva ntage of the a ccommoda tion extended to them to secure any
9
remedy from the courts . BPI, thus , deferred the implementa tion of
the wri t to September 23, 2005 and upon the lapse thereof even
extended for a nother 60 da ys or until November 23, 2005 the
implementa tion of the wri t.
The Spouses Anda ya , however, failed to va ca te the subject property.
They claimed that BPI no longer had a ri ght to possess the property
because the wri t of possession had al ready been i mplemented. St.
Ra phael further filed a Motion to Quash Wri t of Possession alleging
tha t i t was not a pa rty to the real es tate mortgages executed by
Spouses Anda ya. An Affida vi t of Thi rd -Pa rty Claim 10 was also filed
wherein St. Raphael claimed tha t the latter's building, while s tanding
on the s ubject property, was not included in the real es ta te
mortgages .
RTC ruled in fa vor of Montessori .
CA ruled in fa vor of BPI.
Issue: Whether a writ of possession that was issued ex-parte as a result
ofthe foreclosure of the mortgages executed by the Spouses Andaya on
the subject property can be enforced and utilized by BPI to oust St.
Raphael from the physical possession of its school buildings built on
the same subject property.
Ruling:
We rule in the a ffi rmati ve. Petition is denied.
The real estate mortgage agreement entered into by BPI and the
Spouses Andaya is the law between them. Suffice it to say that in all
of the real mortgage agreements 27 executed by BPI and the Spouses
Andaya in favor of St. Raphael, it was clearly and commonly
stipulated that the parties intend to include the im provements or
buildings erected or to be erected in the subject lot, to wit:
x xx the MORTGAGOR does hereby trans fer and convey by wa y of
mortgage unto to MORTGAGEE, i ts successors or assigns, the pa rcel of
land whi ch a re descri bed in the lis t inserted on the back of this
document and/or appended hereto, together with all the buildings
and improvements now existing or which may hereafter be erected
or constructed thereon, of whi ch the MORTGAGOR decla res tha t he/i t
is the absolute owner free from lien and encumbra nces. x x x 28
It is a cardinal rule in the interpretation of a contract that if its terms
are clear and leave no doubt on the intention of the contracting
parties, the literal meaning of its stipulation shall control. 29 In the
absence of proof that the parties intended otherwise, we will not
delve to interpret the terms of the contract which are unequivocal as
to the intention of the parties.
CENTURY PROPERTIES, INC. VSBABIANO
On October 2, 2002, Ba biano was hi red by CPI as Di rector of Sales , and
was eventually6 appointed as Vi ce President for Sales effecti ve
September 1, 2007. As CPFs Vi ce President for Sales, Babiano was
remunera ted wi th, inter alia, the following benefits : (a) monthl y salary
of P70,000.00; (b) allowance of P50,000.00; and (c) 0.5% overri de
7
commission for completed sales . His employment contra ct also
21
contained a "Confidentiality of Documents and Non -Compete
Clause"8 whi ch, a mong others , ba rred him from disclosing confidential
informa tion, and from working in any business enterprise tha t is in
di rect competi tion wi th CPI "while [he is] employed and for a peri od of
one yea r from date of resignati on or termina tion from [CPI]." Should
Ba biano brea ch a ny of the terms thereof, his "forms of compensation,
including commissions a nd incenti ves will be forfei ted."
After recei ving reports tha t Babiano provi ded a competi tor with
informa tion rega rding CPFs ma rketing s tra tegies, spread false
informa tion rega rding CPI and i ts projects , recrui ted CPI's personnel to
join the competi tor, a nd for being absent wi thout offi cial lea ve
(AWOL) for fi ve (5) da ys , CPI, through i ts Executi ve Vi ce President for
Ma rketing and Development, Jose Ma rco R. Antonio (Antoni o), sent
Ba biano a Noti ce to Explain 16 on Februa ry 23, 2009 di recting him to
explain why he should not be cha rged wi th disloyalty, confli ct of
interes t, and breach of trus t and confidence for his
a ctua tions .17chanrobleslaw
On February 25, 2009, Babiano tendered 18 his resigna tion and
revealed that he had been a ccepted as Vi ce President of Fi rst Global
BYO Development Corpora tion (Fi rs t Global), a competi tor of CPI. 19 On
Ma rch 3, 2009, Babiano was served a Noti ce of Termina tion 20 for: (a)
incurring AWOL; (b) viola ting the "Confidentiality of Documents and
Non-Compete Clause" when he joined a competi tor enterprise while
s till working for CPI and provi ded such competi tor enterprise
informa tion rega rding CPFs ma rketing s tra tegies; and (c) recruiting CPI
personnel to join a competi tor.
On August 8, 2011, respondents filed a complaint 23 for non-pa yment
of commissions and damages agains t CPI and Antonio before the
NLRC, docketed as NLRC Case No. NCR-08-12029-11, claiming tha t
thei r repeated demands for the pa yment and release of thei r
commissions remained unheeded.
Labor Arbi ter ruled in fa vor of CPI.
The NLRC reversed the Labor Arbiter’s Ruling.
The CA affi rmed the NLRC Ruling with modifi ca tion.
The CA held tha t Babiano properl y ins ti tuted his claim for unpaid
commissions before the labor tribunals as i t is a money claim a rising
from an employer-employee rela tionship wi th CPI. In this rela tion, the
CA opined tha t CPI cannot wi thhold such unpaid commissions on the
ground of Babiano's alleged brea ch of the "Confidentiality of
Documents and Non-Compete Clause" integra ted in the latter's
employment contra ct, considering that such clause referred to a cts
done a fter the cessa tion of the employer-employee relati onship or to
the "pos t-employment" relations of the parties . Thus , any such
supposed brea ch thereof is a ci vil la w dispute tha t is best resol ved by
the regula r courts and not by labor tribunals.
Issue: Whether or not the CA erred in limi ting the "Confidentiality of
Documents and Non-Compete Clause" onl y to a cts done a fter the
cessation of the employer-employee relationship or to the "pos t-
employment" relations of the pa rties thereby jus ti fying or not the
non-pa yment of commission to Babiano.
Ruling:
The petiti on is pa rtl y meri tori ous .
I.
Arti cle 1370 of the Ci vil Code provi des tha t "[i ]f the terms of a contra ct
a re clear and lea ve no doubt upon the intenti on of the contra cting
pa rties , the literal meaning of i ts s tipula tions shall
51
control ." In Norton Resources and Development Corporation v. All
Asia Bank Corporation,52 the Court had the opportunity to thoroughl y
dis cuss the said rule as follows :ChanRoblesVi rtualawlibra ry
The rule is that where the language of a contract is plain and
unambiguous, its meaning should be determined without reference
to extrinsic facts or aids. The i ntention of the pa rties mus t be
ga thered from tha t langua ge, and from tha t langua ge alone. Stated
differently, where the language of a written contract is clear and
unambiguous, the contract must be taken to mean that which, on its
face, it purports to mean, unless some good reason can be assigned
to show that the words should be understood in a different
sense. Courts cannot make for the pa rties better or more equi table
agreements than they themsel ves ha ve been sa tisfied to make, or
rewri te contra cts because they opera te ha rshl y or inequi tabl y as to
one of the pa rties , or al ter them for the benefi t of one pa rty and to
the detri ment of the other, or by cons truction, relieve one of the
pa rties from the terms whi ch he volunta ril y consented to, or impose
on him those whi ch he did not. 53 (Emphases and unders coring
supplied)
Thus , in the interpreta tion of contra cts , the Court mus t fi rs t determine
whether a provision or s tipula tion therein is a mbi guous . Absent any
ambigui ty, the provision on i ts fa ce will be read as i t is wri tten and
trea ted as the binding law of the pa rties to the contra ct. 54
In the case a t ba r, CPI prima ril y invoked the "Confidentiality of
Documents and Non-Compete Clause" found in Babiano's employment
contra ct55 to jus tify the forfeiture of his commissions, viz.:
Confidentiality of Documents and Non-Compete Clause
All records and documents of the company a nd all information
pertaining to i ts business or affairs or tha t of i ts affiliated companies
a re confidential a nd no unauthori zed dis closure or reproduction or the
same will be made by you a ny ti me during or after your employment.
And in order to ensure strict compliance herewith, you shall not
work for whats oever capacity, either as an em ployee, agent or
consultant with any person whose business is in direct com petition
with the company while you are employed and for a period of one
year from date of resignation or termination from the com pany.
Finally, if undersigned breaches any terms of this contract, forms of
compensation including commissions and incentives will be
forfeited.56 (Emphases and underscoring supplied)
Verily, the foregoing clause is not only clear and unambig uous in
stating that Babiano is barred to "work f or whatsoever capacity x xx
with any person whose business is in direct competition with [CPI]
while [he is] employed and for a period of one year from date of [his]
resignation or termination from the com pany," it also expressly
provided in no uncertain terms that should Babiano "[breach] any
term of [the employment contract], forms of compensation including
commissions and incentives will be forfeited." Here, the contra cting
pa rties - na mel y Babiano on one side, and CPI as represented by i ts
COO-Verti cal, John Vi ctor R. Antonio, and Di rector for Planning and
Controls, Jose Ca rl o R. Antonio, on the other -indisputabl y wanted the
said clause to be effecti ve even duri ng the exis tence of the employer-
employee rela tionship between Babiano and CPI, thereby indi ca ting
thei r i ntention to be bound by s uch clause by a ffi xing thei r respecti ve
signa tures to the employment contra ct. More signifi cantl y, as CPFs
Vi ce President for Sales , Babiano held a hi ghl y sensiti ve and
confidential mana gerial position as he "was tasked, among others , to
gua rantee the a chievement of agreed sales ta rgets for a project and to
ensure tha t his tea m has a qualified and competent manpower
22
resources by conducting recrui tment a cti vi ties, traini ng sessions , sales
rallies, moti va tional acti vi ties , and evalua tion progra ms ." 57 Hence, to
allow Babiano to freel y move to di rect competi tors duri ng a nd soon
after his employment wi th CPI would make the latter's trade secrets
vul nerable to exposure, especially in a highl y competiti ve ma rketing
envi ronment. As such, i t is onl y reasonable tha t CPI and Babiano a gree
on such s tipula tion in the la tter's employment contra ct in order to
58
afford a fai r and reasonable protection to CPI. Indubitably,
obligations arising from contracts, including em ployment contracts,
have the force of law between the contracting parties and should be
complied with in good faith.59 Corollary thereto, parties are bound
by the stipulations, clauses, terms, and conditions they have agreed
to, provided that these stipulations, clauses, terms, and conditions
are not contrary to law, morals, public order or public policy, 60 as in
this case.
Therefore, the CA erred in limiting the "Confidentiality of Documents
and Non-Compete Clause" only to acts done after the cessation of
the employer-employee relationship or to the "post-employment"
relations of the parties. As clearly stipulated, the parties wanted to
apply said clause during the pendency of Babiano's employment, and
CPI correctly invoked the same before the labor tribunals to resist
the former's claim for unpaid commissions on account of his breach
of the said clause while the employer-employee relationship
between them still subsisted. Hence, there is now a need to
determine whether or not Babiano brea ched said clause while
employed by CPI, whi ch would then resol ve the issue of his
enti tlement to his unpaid commissions.
A judi cious review of the records reveals tha t in his resignation
letter61 da ted Februa ry 25, 2009, Babiano ca tegori call y admi tted to
CPI Chai rma n Jose Antonio tha t on Februa ry 12, 2009, he sought
employment from Fi rs t Global , and fi ve (5) da ys later, was admitted
thereto as vi ce president. From the foregoing, i t is evidentl y clear tha t
when he sought and eventually a ccepted the said position wi th Fi rs t
Gl obal, he was still employed by CPI as he has not formall y resigned a t
tha t ti me. Irrefragabl y, this is a glari ng vi olation of the "Confidentiality
of Documents and Non-Compete Clause" i n his employment contra ct
wi th CPI, thus , jus tifyi ng the forfei ture of his unpaid commissions.
RODRIGUEZ VS. SIOSON
Someti me in 1997, the Muni cipality of Orani , Ba taan (Municipali ty)
purchased from Neri an a rea of about 1.7 hecta re of Lot 398, to be
used for the extension of the Muni cipali ty's public ma rket. Among
other things, i t was agreed tha t upon full pa yment of the purchase
pri ce, Neri will surrender the mother ti tle to the Muni cipality for
subdi vision of the property on the condi tion tha t Neri will equi tabl y
sha re in the expense thereof.
Lot 398 was subsequentl y subdi vided i nto 5 lots : Lot 398-A, Lot 398-B,
Lot 398-C, Lot 398-D, and Lot 398-E. Consequentl y, onl y Lots 398-A
and 398-B were left as the remaining portions over whi ch Neri
retained absolute ti tle. TCT Nos . T-209894 and T-209895 were then
respecti vel y issued over Lots 398-A and 398-B a nd were both
registered in the name of "Neridelos Reyes, married to
VioletaLacuata." The owner's dupli cate copies of TCT Nos . T-209894
and T-209895, however, were retained by the Muni cipality pending
Neri's pa yment of his sha re in the expenses incurred for the
subdi vision of Lot 398. These were placed under the cus tody of the
Muni cipal Treasurer, where they continue to remain. 7chanrobleslaw
Neri , however, alleged tha t then Municipal Ma yor Ma rio Zuñiga
sugges ted that he sell Lot 398-A to his aunt, peti tioner Thelma
Rodri guez (Thelma ). The Muni cipality would then expropria te the
same from Thel ma. Neri agreed to the suggestion.
After agreeing to the a mount of P1,243,000.00 as the selling pri ce,
Thelma , on Ma rch 20, 1997, issued a check for said amount pa yable to
Neri . When i t fell due, no suffi cient funds were a vailable to cover the
check. Consequentl y, i t was a greed tha t Thelma woul d pa y the
purchase pri ce in ins tallments from Ma rch 20, 1997 to September 4,
1997. Thel ma, however, was onl y able to pa y P442,293.50.
In 2002, Neri executed an affida vi t claiming tha t the owner's copies of
TCT No. T-209894 (covering Lot 398-A) and TCT No. T-209895
(coveri ng Lot 398-B) were los t, whi ch was annota ted on the original
copy of TCT No. T-209894 on Ma y 8, 2002.13 Two da ys a fter, or on Ma y
10, 2002, Neri caused the ca ncellation of Thelma 's a dverse
claim.14 Neri also caused the recons ti tution of new owner's copies of
TCT Nos . T-209894 and T-209895.15 Thereafter, new copies of TCT Nos .
T-209894 a nd T-209895 were issued, and Neri then sold Lot 398-A to
Spouses Jaime and ArmiSioson, Spouses Joan and Joseph Cama cho,
and Agnes Samonte (respondents) - in a deed of sale da ted November
27, 2002. A s pecial power of a ttorney was executed by Violetadelos
Reyes (Violeta) in fa vor of Neri for the purpose. Consequentl y, TCT No.
T-209894 was cancelled, and TCT No. T-226775 was thus issued in the
respondents ' names .
After Thelma lea rned of the second sale of Lot 398-A, she filed agains t
the respondents a complaint for the Decla ra tion of Nullity of the
Second Sale and TCT No. T-226775 on February 11, 2003, docketed
as Civil Case No. 7664. In support of her claim, Thelma once again
presented a deed of absolute sale executed by Neri in her fa vor. This
time, the deed of sale she presented was duly signed by her and Neri,
witnessed, notarized and dated April 10, 1997.
Issue: Whether or not the transacti on between Neri and Thelma was a
contra ct to sell or a contra ct of sale.
Ruling:
The contract between Thelma and Neri was a mere contract to sell.
"The real character of the contract is not the title given, but the
intention of the parties."34 In this case, there exis t two deeds of
absolute sale. Though identi call y worded, the fi rst contra ct was
unda ted, not nota rized, signed onl y by Neri , and was presented in Ci vil
Case No. 7394 for Injunction, 35 while the second deed was dated April
10, 1997, nota rized on September 5, 1997, si gned by both Neri and
Thelma , and was presented in Ci vil Case No. 7664 for Declara tion of
Nullity of Deed of Sale and Ti tle.
Despi te the denomina tion of thei r agreement as one of sale, the
circumstances tend to show that Neri agreed to sell the subject
property to Thelma on the condition that title and ownership would
pass or be transferred upon the full payment of the purchase price.
This is the very nature of a contract to sell, which isa "bilateral
contract whereby the pros pective seller, while expressly reserving
the ownership of the property des pite delivery thereof to the
prospective buyer, binds himself to sell the property exclusively to
the prospective buyer upon fulfillment of the condition agreed
upon, i.e., the full payment of the purchase price."38 As s ta ted by the
Court, the agreement to execute a deed of sale upon full pa yment of
the purchase pri ce "shows tha t the vendors reserved ti tle to the
subject property until full pa yment of the purchase pri ce.
PHILIPPINE NATIONAL BANK VS. ALONDAY
On September 26, 1974, the Spouses Benedicto and Azucena Alonda y
(Spouses Alonda y) obtained an agri cul tural loan of P28,000.00 from
the peti tioner a t i ts Digos , Da vao del Sur Branch, and secured the
obliga tion by cons ti tuting a real es tate mortgage on thei r pa rcel of
land si tua ted in Sta . Cruz, Da va o del Sur registered under Original
Certi fi ca te of Ti tle (OCT) No. P-3599 of the Registry of Deeds of Da vao
del Sur.1chanrobleslaw
On June 11, 1980, the Spouses Alonda y obtained a commercial loan
for P16,700.00 from the peti tioner's Da vao Ci ty Bra nch, and
consti tuted a real esta te mortgage over thei r 598 squa re meter
23
residential lot si tua ted i n Ulas, Da vao Ci ty regis tered under Trans fer
Certi fi ca te of Ti tle (TCT) No. T-66139 of the Regis try of Deeds of Da vao
Ci ty.
The Spouses Alonda y ma de pa rtial pa yments on the commercial loan,
whi ch they renewed on December 23, 1983 for the balance of
P15,950.00. The renewed commercial loan, although due on
December 25, 1984, was full y paid on Jul y 5, 1984. 3chanrobleslaw
On August 6, 1984, respondents Mercy and Alberto Al onda y, the
children of the Spouses Alonda y, demanded the release of the
mortgage over the property covered by TCT No. T-66139. The
peti tioner informed them, however, that the mortgage could not be
released because the agri cultural loa n had not yet been full y paid, and
tha t as the consequence of the failure to pa y, i t had foreclosed the
mortgage over the property covered by OCT No. P-3599 on Augus t 17,
1984.
It appea red tha t notwi ths tanding such forecl osure, a defi ciency
balance of P91,525.22 remained. 4 Hence, the peti tioner applied for
the extrajudi cial foreclosure of the mortga ge on the property covered
by TCT No. T-66139. A noti ce of extra -judi cial sale was issued on
Augus t 20, 1984, and the property covered by TCT No. T-66139 was
sold on September 28, 1984 to the peti tioner in the amount of
P29,900.00. Since the Alonda ys were unable to redeem the property,
the peti tioner consolida ted i ts ownership. La ter on, the property was
sold for P48,000.00 to one Felix Malmis on November 10,
5
1989. chanrobleslaw
According to the petitioner, the deed of mortga ge relating to the
property covered by TCT No. T-66139 i ncluded an "all-embra cing
clause" whereby the mortga ge secured not onl y the commercial loan
contra cted wi th i ts Da vao Ci ty Bra nch but also the ea rlier a gri cul tural
loan contra cted wi th i ts Digos Bra nch.
Issues : Whether or not the mortga ge secured not onl y the commercial
loan contra cted wi th i ts Da vao Ci ty Branch but also the ea rlier
agri cul tural loan contra cted wi th i ts Digos Bra nch.
Ruling:
The appeal la cks meri t.
The mortgage provision relied upon by appellant is known in Ameri can
jurisprudence as a "dra gnet" clause, whi ch is specifi call y phrased to
subsume all debts of pas t or future ori gin. Such clauses pursuant to
the pronouncement of the Supreme Court in DBP vs. Mirang mus t be
"ca refull y s crutinized and s tri ctl y construed." 12chanrobleslaw
The petitioner wrongl y insis ts that the CA, through the foregoing
ra tiocina tion, held tha t the all-embra cing or dra gnet clauses were
al together i nvalid as to prior obliga tions . Wha t the CA, al though
rei tera ting tha t the Court upheld the validity of using real es ta te
mortgages to secure future advancements , onl y thereby pointed out
tha t i t could not find simila r rulings as to mortgages executed to
secure prior loans .
There is no ques tion, indeed, tha t all-embra cing or dragnet clauses
ha ve been recognized as valid means to secure debts of both future
and past ori gins .13 Even so, we have likewise emphasized that such
clauses were an exceptional mode of securing obligations, and have
held that obligations could only be deemed secured by the mortgage
if they came fairly within the terms of the mortgage contract. 14 For
the all-embracing or dragnet clauses to secure future loans,
therefore, such loans must be sufficiently described in the mortgage
15
contract. If the requi rement could be i mposed on a future loan tha t
was uncertain to materialize, there is a grea ter reason tha t i t should
be a ppli cable to a past l oan, whi ch is al ready subsisting and known to
the pa rties .
The mere fact that the mortgage constituted on the property
covered by TCT No. T-66139 made no mention of the pre-existing
loan could only strongly indicate that each of the loans of the
Spouses Alonday had been treated separately by the parties
themselves, and this s ufficiently explained why the loans had been
secured by different mortgages.
To reiterate, in order for the all-embracing or dragnet clauses to
secure future and other loans, the loans thereby secured must be
sufficiently described in the mortgage contract. Considering tha t the
agri cul tural loan had been pre-exis ting when the mortgage was
consti tuted on the property covered by TCT No. T-66139, i t would
ha ve been easy for the petitioner to ha ve expressly incorpora ted the
reference to such a gri cul tural loan in the mortga ge contra ct covering
the commercial loan. But the peti tioner did not. Being the party that
had prepared the contract of m ortgage, its failure to do s o should be
construed that it did not at all contem plate the earlier loan when it
entered into the subsequent mortgage.

24