G.R. No.
112127 July 17, 1995 The appellate court also found that while the first condition mandated petitioner to utilize
CENTRAL PHILIPPINE UNIVERSITY, petitioner,
vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ,
REDAN LOPEZ AND REMARENE LOPEZ, respondents.
BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of
the Court of Appeals which reversed that of the Regional Trial Court of Iloilo City directing
petitioner to reconvey to private respondents the property donated to it by their
predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of
Trustees of the Central Philippine College (now Central Philippine University [CPU]),
executed a deed of donation in favor of the latter of a parcel of land identified as Lot No.
3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which
Transfer Certificate of Title No. T-3910-A was issued in the name of the donee CPU with the
following annotations copied from the deed of donation —
1. The land described shall be utilized by the CPU exclusively for the establishment and use
of a medical college with all its buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third party nor in any way
encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college shall be under
obligation to erect a cornerstone bearing that name. Any net income from the land or any of
its parks shall be put in a fund to be known as the "RAMON LOPEZ CAMPUS FUND" to be
used for improvements of said campus and erection of a building thereon.1
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an
action for annulment of donation, reconveyance and damages against CPU alleging that
since 1939 up to the time the action was filed the latter had not complied with the conditions
of the donation. Private respondents also argued that petitioner had in fact negotiated with
the National Housing Authority (NHA) to exchange the donated property with another land
owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the action had
prescribed; that it did not violate any of the conditions in the deed of donation because it
never used the donated property for any other purpose than that for which it was intended;
and, that it did not sell, transfer or convey it to any third party.
On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of
the donation and declared it null and void. The court a quo further directed petitioner to
execute a deed of the reconveyance of the property in favor of the heirs of the donor,
namely, private respondents herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the
annotations at the back of petitioner's certificate of title were resolutory conditions breach
of which should terminate the rights of the donee thus making the donation revocable.
the donated property for the establishment of a medical school, the donor did not fix a
period within which the condition must be fulfilled, hence, until a period was fixed for the
fulfillment of the condition, petitioner could not be considered as having failed to comply
with its part of the bargain. Thus, the appellate court rendered its decision reversing the
appealed decision and remanding the case to the court of origin for the determination of the
time within which petitioner should comply with the first condition annotated in the
certificate of title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted
annotations in the certificate of title of petitioner are onerous obligations and resolutory
conditions of the donation which must be fulfilled non-compliance of which would render
the donation revocable; (b) in holding that the issue of prescription does not deserve
"disquisition;" and, (c) in remanding the case to the trial court for the fixing of the period
within which petitioner would establish a medical college.2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the
deed of donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude
that his donation was onerous, one executed for a valuable consideration which is
considered the equivalent of the donation itself, e.g., when a donation imposes a burden
equivalent to the value of the donation. A gift of land to the City of Manila requiring the
latter to erect schools, construct a children's playground and open streets on the land was
considered an onerous donation.3 Similarly, where Don Ramon Lopez donated the subject
parcel of land to petitioner but imposed an obligation upon the latter to establish a medical
college thereon, the donation must be for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well
as the extinguishment or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition. Thus, when a person donates land to another
on the condition that the latter would build upon the land a school, the condition imposed
was not a condition precedent or a suspensive condition but a resolutory one. 4 It is not
correct to say that the schoolhouse had to be constructed before the donation became
effective, that is, before the donee could become the owner of the land, otherwise, it would
be invading the property rights of the donor. The donation had to be valid before the
fulfillment of the condition.5 If there was no fulfillment or compliance with the condition,
such as what obtains in the instant case, the donation may now be revoked and all rights
which the donee may have acquired under it shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private respondents is
unavailing.
The condition imposed by the donor, i.e., the building of a medical school upon the land
donated, depended upon the exclusive will of the donee as to when this condition shall be
fulfilled. When petitioner accepted the donation, it bound itself to comply with the condition
thereof. Since the time within which the condition should be fulfilled depended upon the
exclusive will of the petitioner, it has been held that its absolute acceptance and the
acknowledgment of its obligation provided in the deed of donation were sufficient to
prevent the statute of limitations from barring the action of private respondents upon the
original contract which was the deed of donation.6
Moreover, the time from which the cause of action accrued for the revocation of the
donation and recovery of the property donated cannot be specifically determined in the
instant case. A cause of action arises when that which should have been done is not done,
or that which should not have been done is done. 7 In cases where there is no special
provision for such computation, recourse must be had to the rule that the period must be
counted from the day on which the corresponding action could have been instituted. It is the
legal possibility of bringing the action which determines the starting point for the
computation of the period. In this case, the starting point begins with the expiration of a
reasonable period and opportunity for petitioner to fulfill what has been charged upon it by
the donor.
The period of time for the establishment of a medical college and the necessary buildings
and improvements on the property cannot be quantified in a specific number of years
because of the presence of several factors and circumstances involved in the erection of an
educational institution, such as government laws and regulations pertaining to education,
building requirements and property restrictions which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and circumstances it can
be inferred that a period was intended, the general rule provided in Art. 1197 of the Civil
Code applies, which provides that the courts may fix the duration thereof because the
fulfillment of the obligation itself cannot be demanded until after the court has fixed the
period for compliance therewith and such period has arrived.8
This general rule however cannot be applied considering the different set of circumstances
existing in the instant case. More than a reasonable period of fifty (50) years has already
been allowed petitioner to avail of the opportunity to comply with the condition even if it be
burdensome, to make the donation in its favor forever valid. But, unfortunately, it failed to
do so. Hence, there is no more need to fix the duration of a term of the obligation when such
procedure would be a mere technicality and formality and would serve no purpose than to
delay or lead to an unnecessary and expensive multiplication of suits. 9 Moreover, under Art.
1191 of the Civil Code, when one of the obligors cannot comply with what is incumbent upon
him, the obligee may seek rescission and the court shall decree the same unless there is just
cause authorizing the fixing of a period. In the absence of any just cause for the court to
determine the period of the compliance, there is no more obstacle for the court to decree
the rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts
referring to incidental circumstances of a gratuitous contract should be resolved in favor of
the least transmission of rights and interests. 10Records are clear and facts are undisputed
that since the execution of the deed of donation up to the time of filing of the instant action,
petitioner has failed to comply with its obligation as donee. Petitioner has slept on its
obligation for an unreasonable length of time. Hence, it is only just and equitable now to
declare the subject donation already ineffective and, for all purposes, revoked so that
petitioner as donee should now return the donated property to the heirs of the donor,
private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is
REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is
accordingly MODIFIED. Consequently, petitioner is directed to reconvey to private
respondents Lot No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer
Certificate of Title No. T-3910-A within thirty (30) days from the finality of this judgment.
Costs against petitioner.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Separate Opinions
DAVIDE, JR., J., dissenting:
I agree with the view in the majority opinion that the donation in question is onerous
considering the conditions imposed by the donor on the donee which created reciprocal
obligations upon both parties. Beyond that, I beg to disagree.
First of all, may I point out an inconsistency in the majority opinion's description of the
donation in question. In one part, it says that the donation in question is onerous. Thus, on
page 4 it states:
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the
deed of donation executed by Don Ramon Lopez, Sr., give us no alternative but to conclude
that his donation was onerous, one executed for a valuable consideration which is
considered the equivalent of the donation itself, e.g., when a donation imposes a burden
equivalent to the value of the donation . . . . (emphasis supplied)
Yet, in the last paragraph of page 8 it states that the donation is basically a gratuitous one.
The pertinent portion thereof reads:
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts
referring to incidental circumstances of a gratuitous contract should be resolved in favor of
the least transmission of rights and interest . . . (emphasis supplied)
Second, the discussion on conditional obligations is unnecessary. There is no conditional
obligation to speak of in this case. It seems that the "conditions" imposed by the donor and
as the word is used in the law of donations is confused with "conditions" as used in the law
of obligations. In his annotation of Article 764 of the Civil Code on Donations, Arturo M.
Tolentino, citing the well-known civilists such as Castan, Perez Gonzalez and Alguer, and
Colin & Capitant, states clearly the context within which the term "conditions" is used in the
law of donations, to wit:
The word "conditions" in this article does not refer to uncertain events on which the birth or
extinguishment of a juridical relation depends, but is used in the vulgar sense of obligations
or chargesimposed by the donor on the donee. It is used, not in its technical or strict legal
sense, but in its broadest sense.1 (emphasis supplied)
Clearly then, when the law and the deed of donation speaks of "conditions" of a donation,
what are referred to are actually the obligations, charges or burdens imposed by the donor
upon the donee and which would characterize the donation as onerous. In the present case,
the donation is, quite obviously, onerous, but it is more properly called a "modal donation."
A modal donation is one in which the donor imposes a prestation upon the donee. The
establishment of the medical college as the condition of the donation in the present case is
one such prestation.
The conditions imposed by the donor Don Ramon Lopez determines neither the existence
nor the extinguishment of the obligations of the donor and the donee with respect to the
donation. In fact, the conditions imposed by Don Ramon Lopez upon the donee are the very
obligations of the donation — to build the medical college and use the property for the
purposes specified in the deed of donation. It is very clear that those obligations are
unconditional, the fulfillment, performance, existence or extinguishment of which is not
dependent on any future or uncertain event or past and unknown event, as the Civil Code
would define a conditional obligation.2
Reliance on the case of Parks vs. Province of Tarlac3 as cited on page 5 of the majority opinion
is erroneous in so far as the latter stated that the condition in Parks is a resolutory one and
applied this to the present case. A more careful reading of this Court's decision would reveal
that nowhere did we say, whether explicitly or impliedly, that the donation in that case,
which also has a condition imposed to build a school and a public park upon the property
donated, is a resolutory condition.4 It is incorrect to say that the "conditions" of the donation
there or in the present case are resolutory conditions because, applying Article 1181 of the
Civil Code, that would mean that upon fulfillment of the conditions, the rights already
acquired will be extinguished. Obviously, that could not have been the intention of the
parties.
What the majority opinion probably had in mind was that the conditions are resolutory
because if they are notcomplied with, the rights of the donee as such will be extinguished
and the donation will be revoked. To my mind, though, it is more accurate to state that the
conditions here are not resolutory conditions but, for the reasons stated above,
are the obligations imposed by the donor.
Third, I cannot subscribe to the view that the provisions of Article 1197 cannot be applied
here. The conditions/obligations imposed by the donor herein are subject to a period. I draw
this conclusion based on our previous ruling which, although made almost 90 years ago, still
finds application in the present case. In Barretto vs. City of Manila,5 we said that when the
contract of donation, as the one involved therein, has no fixed period in which the condition
should be fulfilled, the provisions of what is now Article 1197 (then Article 1128) are
applicable and it is the duty of the court to fix a suitable time for its fulfillment. Indeed, from
the nature and circumstances of the conditions/obligations of the present donation, it can
be inferred that a period was contemplated by the donor. Don Ramon Lopez could not have
intended his property to remain idle for a long period of time when in fact, he specifically
burdened the donee with the obligation to set up a medical college therein and thus put his
property to good use. There is a need to fix the duration of the time within which the
conditions imposed are to be fulfilled.
It is also important to fix the duration or period for the performance of the
conditions/obligations in the donation in resolving the petitioner's claim that prescription
has already barred the present action. I disagree once more with the ruling of the majority
that the action of the petitioners is not barred by the statute of limitations. There is
misplaced reliance again on a previous decision of this Court in Osmeña vs. Rama.6 That case
does not speak of a deed of donation as erroneously quoted and cited by the majority
opinion. It speaks of a contract for a sum of money where the debtor herself imposed a
condition which will determine when she will fulfill her obligation to pay the creditor, thus,
making the fulfillment of her obligation dependent upon her will. What we have here,
however, is not a contract for a sum of money but a donation where the donee has not
imposed any conditions on the fulfillment of its obligations. Although it is admitted that the
fulfillment of the conditions/obligations of the present donation may be dependent on the
will of the donee as to when it will comply therewith, this did not arise out of a condition
which the donee itself imposed. It is believed that the donee was not meant to and does not
have absolute control over the time within which it will perform its obligations. It must still
do so within a reasonable time. What that reasonable time is, under the circumstances, for
the courts to determine. Thus, the mere fact that there is no time fixed as to when the
conditions of the donation are to be fulfilled does not ipso facto mean that the statute of
limitations will not apply anymore and the action to revoke the donation becomes
imprescriptible.
Admittedly, the donation now in question is an onerous donation and is governed by the law
on contracts (Article 733) and the case of Osmeña, being one involving a contract, may apply.
But we must not lose sight of the fact that it is still a donation for which this Court itself
applied the pertinent law to resolve situations such as this. That the action to revoke the
donation can still prescribe has been the pronouncement of this Court as early as 1926 in
the case of Parks which, on this point, finds relevance in this case. There, this Court said,
[that] this action [for the revocation of the donation] is prescriptible, there is no doubt. There
is no legal provision which excludes this class of action from the statute of limitations. And
not only this, the law itself recognizes the prescriptibility of the action for the revocation of
a donation, providing a special period of [four] years for the revocation by the subsequent
birth of children [Art. 646, now Art. 763], and . . . by reason of ingratitude. If no special period
is provided for the prescription of the action for revocation for noncompliance of the
conditions of the donation [Art. 647, now Art. 764], it is because in this respect the donation
is considered onerous and is governed by the law of contracts and the general rules of
prescription.7
More recently, in De Luna v. Abrigo,8 this Court reiterated the ruling in Parks and said that:
It is true that under Article 764 of the New Civil Code, actions for the revocation of a donation
must be brought within four (4) years from the non-compliance of the conditions of the
donation. However, it is Our opinion that said article does not apply to onerous donations in
view of the specific provision of Article 733 providing that onerous donations are governed
by the rules on contracts.
In the light of the above, the rules on contracts and the general rules on prescription and not
the rules on donations are applicable in the case at bar.
The law applied in both cases is Article 1144(1). It refers to the prescription of an action upon
a written contract, which is what the deed of an onerous donation is. The prescriptive period
is ten years from the time the cause of action accrues, and that is, from the expiration of the
time within which the donee must comply with the conditions/obligations of the donation.
As to when this exactly is remains to be determined, and that is for the courts to do as
reposed upon them by Article 1197.
For the reasons expressed above, I register my dissent. Accordingly, the decision of the Court
of Appeals must be upheld, except its ruling that the conditions of the donation are
resolutory.
Padilla, J., dissents
Separate Opinions
DAVIDE, JR., J., dissenting:
I agree with the view in the majority opinion that the donation in question is onerous
considering the conditions imposed by the donor on the donee which created reciprocal
obligations upon both parties. Beyond that, I beg to disagree.
First of all, may I point out an inconsistency in the majority opinion's description of the
donation in question. In one part, it says that the donation in question is onerous. Thus, on
page 4 it states:
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the
deed of donation executed by Don Ramon Lopez, Sr., give us no alternative but to conclude
that his donation was onerous, one executed for a valuable consideration which is
considered the equivalent of the donation itself, e.g., when a donation imposes a burden
equivalent to the value of the donation . . . . (emphasis supplied)
Yet, in the last paragraph of page 8 it states that the donation is basically a gratuitous one.
The pertinent portion thereof reads:
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts
referring to incidental circumstances of a gratuitous contract should be resolved in favor of
the least transmission of rights and interest . . . (emphasis supplied)
Second, the discussion on conditional obligations is unnecessary. There is no conditional
obligation to speak of in this case. It seems that the "conditions" imposed by the donor and
as the word is used in the law of donations is confused with "conditions" as used in the law
of obligations. In his annotation of Article 764 of the Civil Code on Donations, Arturo M.
Tolentino, citing the well-known civilists such as Castan, Perez Gonzalez and Alguer, and
Colin & Capitant, states clearly the context within which the term "conditions" is used in the
law of donations, to wit:
The word "conditions" in this article does not refer to uncertain events on which the birth or
extinguishment of a juridical relation depends, but is used in the vulgar sense of obligations
or chargesimposed by the donor on the donee. It is used, not in its technical or strict legal
sense, but in its broadest sense.1 (emphasis supplied)
Clearly then, when the law and the deed of donation speaks of "conditions" of a donation,
what are referred to are actually the obligations, charges or burdens imposed by the donor
upon the donee and which would characterize the donation as onerous. In the present case,
the donation is, quite obviously, onerous, but it is more properly called a "modal donation."
A modal donation is one in which the donor imposes a prestation upon the donee. The
establishment of the medical college as the condition of the donation in the present case is
one such prestation.
The conditions imposed by the donor Don Ramon Lopez determines neither the existence
nor the extinguishment of the obligations of the donor and the donee with respect to the
donation. In fact, the conditions imposed by Don Ramon Lopez upon the donee are the very
obligations of the donation — to build the medical college and use the property for the
purposes specified in the deed of donation. It is very clear that those obligations are
unconditional, the fulfillment, performance, existence or extinguishment of which is not
dependent on any future or uncertain event or past and unknown event, as the Civil Code
would define a conditional obligation.2
Reliance on the case of Parks vs. Province of Tarlac3 as cited on page 5 of the majority opinion
is erroneous in so far as the latter stated that the condition in Parks is a resolutory one and
applied this to the present case. A more careful reading of this Court's decision would reveal
that nowhere did we say, whether explicitly or impliedly, that the donation in that case,
which also has a condition imposed to build a school and a public park upon the property
donated, is a resolutory condition.4 It is incorrect to say that the "conditions" of the donation
there or in the present case are resolutory conditions because, applying Article 1181 of the
Civil Code, that would mean that upon fulfillment of the conditions, the rights already
acquired will be extinguished. Obviously, that could not have been the intention of the
parties.
What the majority opinion probably had in mind was that the conditions are resolutory
because if they are notcomplied with, the rights of the donee as such will be extinguished
and the donation will be revoked. To my mind, though, it is more accurate to state that the
conditions here are not resolutory conditions but, for the reasons stated above,
are the obligations imposed by the donor.
Third, I cannot subscribe to the view that the provisions of Article 1197 cannot be applied
here. The conditions/obligations imposed by the donor herein are subject to a period. I draw
this conclusion based on our previous ruling which, although made almost 90 years ago, still
finds application in the present case. In Barretto vs. City of Manila,5 we said that when the
contract of donation, as the one involved therein, has no fixed period in which the condition
should be fulfilled, the provisions of what is now Article 1197 (then Article 1128) are
applicable and it is the duty of the court to fix a suitable time for its fulfillment. Indeed, from
the nature and circumstances of the conditions/obligations of the present donation, it can
be inferred that a period was contemplated by the donor. Don Ramon Lopez could not have
intended his property to remain idle for a long period of time when in fact, he specifically
burdened the donee with the obligation to set up a medical college therein and thus put his
property to good use. There is a need to fix the duration of the time within which the
conditions imposed are to be fulfilled.
It is also important to fix the duration or period for the performance of the
conditions/obligations in the donation in resolving the petitioner's claim that prescription
has already barred the present action. I disagree once more with the ruling of the majority
that the action of the petitioners is not barred by the statute of limitations. There is time within which the donee must comply with the conditions/obligations of the donation.
misplaced reliance again on a previous decision of this Court in Osmeña vs. Rama.6 That case As to when this exactly is remains to be determined, and that is for the courts to do as
does not speak of a deed of donation as erroneously quoted and cited by the majority reposed upon them by Article 1197.
opinion. It speaks of a contract for a sum of money where the debtor herself imposed a For the reasons expressed above, I register my dissent. Accordingly, the decision of the Court
condition which will determine when she will fulfill her obligation to pay the creditor, thus, of Appeals must be upheld, except its ruling that the conditions of the donation are
making the fulfillment of her obligation dependent upon her will. What we have here, resolutory.
however, is not a contract for a sum of money but a donation where the donee has not
imposed any conditions on the fulfillment of its obligations. Although it is admitted that the
fulfillment of the conditions/obligations of the present donation may be dependent on the
will of the donee as to when it will comply therewith, this did not arise out of a condition
which the donee itself imposed. It is believed that the donee was not meant to and does not
have absolute control over the time within which it will perform its obligations. It must still
do so within a reasonable time. What that reasonable time is, under the circumstances, for
the courts to determine. Thus, the mere fact that there is no time fixed as to when the
conditions of the donation are to be fulfilled does not ipso facto mean that the statute of
limitations will not apply anymore and the action to revoke the donation becomes
imprescriptible.
Admittedly, the donation now in question is an onerous donation and is governed by the law
on contracts (Article 733) and the case of Osmeña, being one involving a contract, may apply.
But we must not lose sight of the fact that it is still a donation for which this Court itself
applied the pertinent law to resolve situations such as this. That the action to revoke the
donation can still prescribe has been the pronouncement of this Court as early as 1926 in
the case of Parks which, on this point, finds relevance in this case. There, this Court said,
[that] this action [for the revocation of the donation] is prescriptible, there is no doubt. There
is no legal provision which excludes this class of action from the statute of limitations. And
not only this, the law itself recognizes the prescriptibility of the action for the revocation of
a donation, providing a special period of [four] years for the revocation by the subsequent
birth of children [Art. 646, now Art. 763], and . . . by reason of ingratitude. If no special period
is provided for the prescription of the action for revocation for noncompliance of the
conditions of the donation [Art. 647, now Art. 764], it is because in this respect the donation
is considered onerous and is governed by the law of contracts and the general rules of
prescription.7
More recently, in De Luna v. Abrigo,8 this Court reiterated the ruling in Parks and said that:
It is true that under Article 764 of the New Civil Code, actions for the revocation of a donation
must be brought within four (4) years from the non-compliance of the conditions of the
donation. However, it is Our opinion that said article does not apply to onerous donations in
view of the specific provision of Article 733 providing that onerous donations are governed
by the rules on contracts.
In the light of the above, the rules on contracts and the general rules on prescription and not
the rules on donations are applicable in the case at bar.
The law applied in both cases is Article 1144(1). It refers to the prescription of an action upon
a written contract, which is what the deed of an onerous donation is. The prescriptive period
is ten years from the time the cause of action accrues, and that is, from the expiration of the
Catungal vs Rodriguez
Facts:
Agapita T. Catungal (Agapita) owned a parcel of land (Lot 10963) situated in the Barrio of
Talamban, Cebu City. Agapita, with the consent of her husband Jose, entered into a Contract
to Sell[6] with respondent Rodriguez which subsequently purportedly “upgraded” into a
Conditional Deed of Sale.Both the Contract to Sell and the Conditional Deed of Sale were
annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted
below:
1. price 25 Million pesos
2. downpayment 500 Thousand
3. balance shall be paid after the VENDEE have successfully negotiated, secured and
provided a Road Right of Way . If however said Road Right of Way could not be negotiated,
the VENDEE shall give notice to the VENDOR for them to reassess and solve the problem by
taking other options and should the situation ultimately prove futile, he shall take steps to
rescind or cancel the herein Conditional Deed of Sale.
He likewise alleged that he actively negotiated for the road right of way as stipulated in the
contract.[9]
On August 31, 1990 the spouses Catungal requested an advance of P5,000,000.00 on the
purchase price for personal reasons. Rodriquez allegedly refused on the ground that the
amount was substantial and was not due under the terms of their agreement. The
Catungal’s rescinded the contract.
Rodirguez filed a complaint against the Catungal’s for arbitrarily rescinding the contract. In
a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a)
under the contract it was complainant (Rodriguez) that had the option to rescind the sale;
(b) Rodriguez’s obligation to pay the balance of the purchase price arises only upon
successful negotiation of the road right of way; (c) he proved his diligent efforts to negotiate
the road right of way; (d) the spouses Catungal were guilty of misrepresentation which
defeated Rodriguez’s efforts to acquire the road right of way; and (e) the Catungals’
rescission of the contract had no basis and was in bad faith.
During the pendency of the case with the Court of Appeals, Agapita Catungal passed away
and thus, her husband, Jose, filed on February 17, 1999 a motion for Agapita’s substitution
by her surviving children.[46]
The Catungals alleged that the conditional deed of sale was void ab initio because it violates
the mutuality of contract in view of Article 1308 ncc. Petitioners rely on Article 1308 of
the Civil Code to support their conclusion regarding the claimed nullity of the
aforementioned provisions. Article 1308 states that “[t]he contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them.”
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor,
the conditional obligation shall be void. If it depends upon chance or upon the will of a third
person, the obligation shall take effect in conformity with the provisions of this Code.
Issue
W/N Conditional Deed of Sale violate the principle of mutuality of contracts under Article
1308 of the Civil Code?
Held:
No. In the past, this Court has distinguished between a condition imposed on the perfection
of a contract and a condition imposed merely on the performance of an obligation. While
failure to comply with the first condition results in the failure of a contract, failure to comply
with the second merely gives the other party the option to either refuse to proceed with the
sale or to waive the condition. This principle is evident in Article 1545 of the Civil Code on
sales, which provides in part:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract or
he may waive performance of the condition x x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance
of the purchase price when he has successfully negotiated and secured a road right of way,
is not a condition on the perfection of the contract nor on the validity of the entire contract
or its compliance as contemplated in Article 1308. It is a condition imposed only on
respondent’s obligation to pay the remainder of the purchase price. In our view and applying
Article 1182, such a condition is not purely potestative as petitioners contend. It is not
dependent on the sole will of the debtor but also on the will of third persons who own the
adjacent land and from whom the road right of way shall be negotiated.
The condition is a mixed condition which is allowed by Article 1182.
"potestative condition" is imposed not on the birth of the obligation but on its fulfillment,
only the condition is avoided, leaving unaffected the obligation itself.
With respect to petitioners’ argument that paragraph 5 of the Conditional Deed of Sale
likewise rendered the said contract void, we find no merit to this theory.
Reading paragraph 5 in its entirety will show that Rodriguez’s option to rescind the contract
is not absolute as it undeniably only limited to the contingency that Rodriguez shall not be
able to secure the road right of way. .
In sum, Rodriguez’s option to rescind the contract is not purely potestative but rather also
subject to the same mixed condition as his obligation to pay the balance of the purchase
price – i.e., the negotiation of a road right of way. In the event the condition is fulfilled (or
the negotiation is successful), Rodriguez must pay the balance of the purchase price. In the
event the condition is not fulfilled (or the negotiation fails), Rodriguez has the choice either
(a) to not proceed with the sale and demand return of his downpayment or (b) considering
that the condition was imposed for his benefit, to waive the condition and still pay the
purchase price despite the lack of road access. This is the most just interpretation of the
parties’ contract that gives effect to all its provisions.
In any event, even if we assume for the sake of argument that the grant to Rodriguez of an
option to rescind, in the manner provided for in the contract, is tantamount to a potestative
condition, not being a condition affecting the perfection of the contract, only the said
condition would be considered void and the rest of the contract will remain valid.
1992.If still warranted, Rodriguez is given a period of thirty (30) days from the finality of this
decision to negotiate a road right of way. In the event no road right of way is secured by
Rodriquez at the end of said period, the parties shall reassess and discuss other options as
stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this purpose, they are
given a period of thirty (30) days to agree on a course of action. Should the discussions of
the parties prove futile after the said thirty (30)-day period, immediately upon the expiration
of said period for discussion, Rodriguez may (a) exercise his option to rescind the contract
subject to the return of his downpayment, in accordance with the provisions of
paragraphs1(b) and 5 of the Conditional Deed of Sale or (b) waive the road right of way and
pay the balance of the deducted purchase price as determined in the RTC Decision dated
May 30,1992.

WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated January 30, 2001
of the Court of Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565
are AFFIRMED with the following MODIFICATION:

If still warranted, respondent Angel S. Rodriguez is given a period of thirty (30) days from the
finality of this Decision to negotiate a road right of way. In the event no road right of way is
secured by respondent at the end of said period, the parties shall reassess and discuss other
options as stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this purpose,
they are given a period of thirty (30) days to agree on a course of action. Should the
discussions of the parties prove futile after the said thirty (30)-day period, immediately upon
the expiration of said period for discussion, Rodriguez may (a) exercise his option to rescind
the contract, subject to the return of his downpayment, in accordance with the provisions
of paragraphs 1(b) and 5 of the Conditional Deed of Sale or (b) waive the road right of way
and pay the balance of the deducted purchase price as determined in the RTC Decision dated
May 30, 1992.

Notes:
If still warranted, Rodriguez is given a period of thirty (30) days from the finality of this
decision to negotiate a road right of way. In the event no road right of way is secured by
Rodriquez at the end of said period, the parties shall reassess and discuss other options as
stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this purpose, they are
given a period of thirty (30) days to agree on a course of action. Should the discussions of
the parties prove futile after the said thirty (30)-day period, immediately upon the expiration
of said period for discussion, Rodriguez may (a) exercise his option to rescind the contract,
subject to the return of his downpayment, in accordance with the provisions of paragraphs
1(b) and 5 of the Conditional Deed of Sale or (b) waive the road right of way and pay the
balance of the deducted purchase price as determined in the RTC Decision dated May 30,
G.R. No. 146839 March 23, 2011
ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL and ERLINDA
CATUNGAL-WESSEL, Petitioners,
vs.
ANGEL S. RODRIGUEZ, Respondent.
Before the Court is a Petition for Review on Certiorari, assailing the following issuances of
the Court of Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565: (a)
the August 8, 2000 Decision,1 which affirmed the Decision2 dated May 30, 1992 of the
Regional Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu in Civil Case No. 2365-L, and (b)
the January 30, 2001 Resolution,3 denying herein petitioners’ motion for reconsideration of
the August 8, 2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with Preliminary
Injunction/Restraining Order4filed on December 10, 1990 by herein respondent Angel S.
Rodriguez (Rodriguez), with the RTC, Branch 27, Lapu-lapu City, Cebu, docketed as Civil Case
No. 2365-L against the spouses Agapita and Jose Catungal (the spouses Catungal), the
parents of petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of
land (Lot 10963) with an area of 65,246 square meters, covered by Original Certificate of
Title (OCT) No. 1055 in her name situated in the Barrio of Talamban, Cebu City. The said
property was allegedly the exclusive paraphernal property of Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to
Sell6 with respondent Rodriguez. Subsequently, the Contract to Sell was purportedly
"upgraded" into a Conditional Deed of Sale7 dated July 26, 1990 between the same parties.
Both the Contract to Sell and the Conditional Deed of Sale were annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted
below:
1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS
(₱25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS (₱500,000.00) downpayment upon the signing of this
agreement, receipt of which sum is hereby acknowledged in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESOS
(₱24,500,000.00) shall be payable in five separate checks, made to the order of JOSE Ch.
CATUNGAL, the first check shall be for FOUR MILLION FIVE HUNDRED THOUSAND PESOS
(₱4,500,000.00) and the remaining balance to be paid in four checks in the amounts of FIVE
MILLION PESOS (₱5,000,000.00) each after the VENDEE have (sic) successfully negotiated,
secured and provided a Road Right of Way consisting of 12 meters in width cutting across
Lot 10884 up to the national road, either by widening the existing Road Right of Way or by
securing a new Road Right of Way of 12 meters in width. If however said Road Right of Way
could not be negotiated, the VENDEE shall give notice to the VENDOR for them to reassess
and solve the problem by taking other options and should the situation ultimately prove
futile, he shall take steps to rescind or cancel the herein Conditional Deed of Sale.
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility
of the VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne
solely by the VENDEE. He shall, however, be accorded with enough time necessary for the
success of his endeavor, granting him a free hand in negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL
DEED OF SALE to VENDEE, his heirs, successors and assigns, the real property described in
the Original Certificate of Title No. 105 x x x.
xxxx
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his
option to rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR
by way of a written notice relinquishing his rights over the property. The VENDEE shall then
be reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS (₱500,000.00)
representing the downpayment, interest free, payable but contingent upon the event that
the VENDOR shall have been able to sell the property to another party.8
In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the
necessary surveys and plans and through his efforts, the property was reclassified from
agricultural land into residential land which he claimed substantially increased the property’s
value. He likewise alleged that he actively negotiated for the road right of way as stipulated
in the contract.9
Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an
advance of ₱5,000,000.00 on the purchase price for personal reasons. Rodriquez allegedly
refused on the ground that the amount was substantial and was not due under the terms of
their agreement. Shortly after his refusal to pay the advance, he purportedly learned that
the Catungals were offering the property for sale to third parties.10
Thereafter, Rodriguez received letters dated October 22, 1990,11 October 24, 199012 and
October 29, 1990,13 all signed by Jose Catungal who was a lawyer, essentially demanding
that the former make up his mind about buying the land or exercising his "option" to buy
because the spouses Catungal allegedly received other offers and they needed money to pay
for personal obligations and for investing in other properties/business ventures. Should
Rodriguez fail to exercise his option to buy the land, the Catungals warned that they would
consider the contract cancelled and that they were free to look for other buyers.
In a letter dated November 4, 1990,14 Rodriguez registered his objections to what he termed
the Catungals’ unwarranted demands in view of the terms of the Conditional Deed of Sale
which allowed him sufficient time to negotiate a road right of way and granted him, the
vendee, the exclusive right to rescind the contract. Still, on November 15, 1990, Rodriguez
purportedly received a letter dated November 9, 199015 from Atty. Catungal, stating that the
contract had been cancelled and terminated.
Contending that the Catungals’ unilateral rescission of the Conditional Deed of Sale was
unjustified, arbitrary and unwarranted, Rodriquez prayed in his Complaint, that:
1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the
spouses Catungal], their employees, agents, representatives or other persons acting in their
behalf from offering the property subject of this case for sale to third persons; from
entertaining offers or proposals by third persons to purchase the said property; and, in
general, from performing acts in furtherance or implementation of defendants’ rescission of
their Conditional Deed of Sale with plaintiff [Rodriguez].
2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as
may be fixed by the court enjoining defendants and other persons acting in their behalf from
performing any of the acts mentioned in the next preceding paragraph.
3. After trial, a Decision be rendered:
a) Making the injunction permanent;
b) Condemning defendants to pay to plaintiff, jointly and solidarily:
Actual damages in the amount of ₱400,000.00 for their unlawful rescission of the Agreement
and their performance of acts in violation or disregard of the said Agreement;
Moral damages in the amount of ₱200,000.00;
Exemplary damages in the amount of ₱200,000.00; Expenses of litigation and attorney’s fees
in the amount of ₱100,000.00; and
Costs of suit.16
On December 12, 1990, the trial court issued a temporary restraining order and set the
application for a writ of preliminary injunction for hearing on December 21, 1990 with a
directive to the spouses Catungal to show cause within five days from notice why preliminary
injunction should not be granted. The trial court likewise ordered that summons be served
on them.17
Thereafter, the spouses Catungal filed their opposition18 to the issuance of a writ of
preliminary injunction and later filed a motion to dismiss19 on the ground of improper venue.
According to the Catungals, the subject property was located in Cebu City and thus, the
complaint should have been filed in Cebu City, not Lapu-lapu City. Rodriguez opposed the
motion to dismiss on the ground that his action was a personal action as its subject was
breach of a contract, the Conditional Deed of Sale, and not title to, or possession of real
property.20
In an Order dated January 17, 1991,21 the trial court denied the motion to dismiss and ruled
that the complaint involved a personal action, being merely for damages with a prayer for
injunction.
Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of
preliminary injunction upon posting by Rodriguez of a bond in the amount of ₱100,000.00
to answer for damages that the defendants may sustain by reason of the injunction.
On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim 22 alleging
that they had the right to rescind the contract in view of (1) Rodriguez’s failure to negotiate
the road right of way despite the lapse of several months since the signing of the contract,
and (2) his refusal to pay the additional amount of ₱5,000,000.00 asked by the Catungals,
which to them indicated his lack of funds to purchase the property. The Catungals likewise
contended that Rodriguez did not have an exclusive right to rescind the contract and that
the contract, being reciprocal, meant both parties had the right to rescind. 23 The spouses
Catungal further claimed that it was Rodriguez who was in breach of their agreement and
guilty of bad faith which justified their rescission of the contract. 24 By way of counterclaim,
the spouses Catungal prayed for actual and consequential damages in the form of unearned
interests from the balance (of the purchase price in the amount) of ₱24,500,000.00, moral
and exemplary damages in the amount of ₱2,000,000.00, attorney’s fees in the amount of
₱200,000.00 and costs of suits and litigation expenses in the amount of ₱10,000.00. 25 The
spouses Catungal prayed for the dismissal of the complaint and the grant of their
counterclaim.
The Catungals amended their Answer twice,26 retaining their basic allegations but amplifying
their charges of contractual breach and bad faith on the part of Rodriguez and adding the
argument that in view of Article 1191 of the Civil Code, the power to rescind reciprocal
obligations is granted by the law itself to both parties and does not need an express
stipulation to grant the same to the injured party. In the Second Amended Answer with
Counterclaim, the spouses Catungal added a prayer for the trial court to order the Register
of Deeds to cancel the annotations of the two contracts at the back of their OCT.27
On October 24, 1991, Rodriguez filed an Amended Complaint,28 adding allegations to the
effect that the Catungals were guilty of several misrepresentations which purportedly
induced Rodriguez to buy the property at the price of ₱25,000,000.00. Among others, it was
alleged that the spouses Catungal misrepresented that their Lot 10963 includes a flat portion
of land which later turned out to be a separate lot (Lot 10986) owned by Teodora Tudtud
who sold the same to one Antonio Pablo. The Catungals also allegedly misrepresented that
the road right of way will only traverse two lots owned by Anatolia Tudtud and her daughter
Sally who were their relatives and who had already agreed to sell a portion of the said lots
for the road right of way at a price of ₱550.00 per square meter. However, because of the
Catungals’ acts of offering the property to other buyers who offered to buy the road lots for
₱2,500.00 per square meter, the adjacent lot owners were no longer willing to sell the road
lots to Rodriguez at ₱550.00 per square meter but were asking for a price of ₱3,500.00 per
square meter. In other words, instead of assisting Rodriguez in his efforts to negotiate the
road right of way, the spouses Catungal allegedly intentionally and maliciously defeated
Rodriguez’s negotiations for a road right of way in order to justify rescission of the said
contract and enable them to offer the property to other buyers.
Despite requesting the trial court for an extension of time to file an amended Answer,29 the
Catungals did not file an amended Answer and instead filed an Urgent Motion to
Dismiss30 again invoking the ground of improper venue. In the meantime, for failure to file
an amended Answer within the period allowed, the trial court set the case for pre-trial on
December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court denied in open court the
Catungals’ Urgent Motion to Dismiss for violation of the rules and for being repetitious and
having been previously denied.31 However, Atty. Catungal refused to enter into pre-trial
which prompted the trial court to declare the defendants in default and to set the
presentation of the plaintiff’s evidence on February 14, 1992.32
On December 23, 1991, the Catungals filed a motion for reconsideration33 of the December
20, 1991 Order denying their Urgent Motion to Dismiss but the trial court denied
reconsideration in an Order dated February 3, 1992. 34Undeterred, the Catungals
subsequently filed a Motion to Lift and to Set Aside Order of Default35 but it was likewise
denied for being in violation of the rules and for being not meritorious. 36 On February 28,
1992, the Catungals filed a Petition for Certiorari and Prohibition37 with the Court of Appeals,
questioning the denial of their motion to dismiss and the order of default. This was docketed
as CA-G.R. SP No. 27565.
Meanwhile, Rodriguez proceeded to present his evidence before the trial court.
In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a)
under the contract it was complainant (Rodriguez) that had the option to rescind the sale;
(b) Rodriguez’s obligation to pay the balance of the purchase price arises only upon
successful negotiation of the road right of way; (c) he proved his diligent efforts to negotiate
the road right of way; (d) the spouses Catungal were guilty of misrepresentation which
defeated Rodriguez’s efforts to acquire the road right of way; and (e) the Catungals’
rescission of the contract had no basis and was in bad faith. Thus, the trial court made the
injunction permanent, ordered the Catungals to reduce the purchase price by the amount of
acquisition of Lot 10963 which they misrepresented was part of the property sold but was in
fact owned by a third party and ordered them to pay ₱100,000.00 as damages, ₱30,000.00
as attorney’s fees and costs.
The Catungals appealed the decision to the Court of Appeals, asserting the commission of
the following errors by the trial court in their appellants’ brief38 dated February 9, 1994:
I for Leave of Court to File Citation of Authorities43 and a Citation of Authorities.44 This would
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF
IMPROPER VENUE AND LACK OF JURISDICTION.
II
THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL
ACTION.
III
GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A
PERSONAL ACTION, THE COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN DEFAULT
DURING THE PRE-TRIAL WHEN AT THAT TIME THE DEFENDANTS HAD ALREADY FILED THEIR
ANSWER TO THE COMPLAINT.
IV
THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR LEGAL
STANDING IN COURT WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN DEFAULT
AND STILL ENTITLED TO NOTICES OF ALL FURTHER PROCEEDINGS ESPECIALLY AFTER THEY
HAD FILED THE MOTION TO LIFT THE ORDER OF DEFAULT.
V death of Jose Catungal.
THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION
RESTRAINING THE EXERCISE OF ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL
PROPERTY OUTSIDE OF THE COURT’S TERRITORIAL JURISDICTION AND INCLUDING PERSONS
WHO WERE NOT BROUGHT UNDER ITS JURISDICTION, THUS THE NULLITY OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM
CONTINUING WITH THE PROCEEDINGS IN THE CASE AND IN RENDERING DECISION THEREIN
IF ONLY FOR REASON OF COURTESY AND FAIRNESS BEING MANDATED AS DISPENSER OF
FAIR AND EQUAL JUSTICE TO ALL AND SUNDRY WITHOUT FEAR OR FAVOR IT HAVING BEEN
SERVED EARLIER WITH A COPY OF THE PETITION FOR CERTIORARI QUESTIONING ITS VENUE
AND JURISDICTION IN CA-G.R. NO. SP 27565 IN FACT NOTICES FOR THE FILING OF COMMENT
THERETO HAD ALREADY BEEN SENT OUT BY THE HONORABLE COURT OF APPEALS, SECOND
DIVISION, AND THE COURT A QUO WAS FURNISHED WITH COPY OF SAID NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND AGAINST
THE DEFENDANTS ON THE BASIS OF EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND
DEVOID OF TRUTH, TO BE STATED IN DETAIL IN THE DISCUSSION OF THIS PARTICULAR
ERROR, AND, THEREFORE, THE DECISION IS REVERSIBLE.39
On August 31, 1995, after being granted several extensions, Rodriguez filed his appellee’s
brief,40 essentially arguing the correctness of the trial court’s Decision regarding the
foregoing issues raised by the Catungals. Subsequently, the Catungals filed a Reply
Brief41 dated October 16, 1995.
From the filing of the appellants’ brief in 1994 up to the filing of the Reply Brief, the spouses
Catungal were represented by appellant Jose Catungal himself. However, a new counsel for
the Catungals, Atty. Jesus N. Borromeo (Atty. Borromeo), entered his appearance before the
Court of Appeals on September 2, 1997.42 On the same date, Atty. Borromeo filed a Motion
be followed by Atty. Borromeo’s filing of an Additional Citation of Authority and Second
Additional Citation of Authority both on November 17, 1997.45
During the pendency of the case with the Court of Appeals, Agapita Catungal passed away
and thus, her husband, Jose, filed on February 17, 1999 a motion for Agapita’s substitution
by her surviving children.46
On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-
G.R. CV No. 40627 and CA-G.R. SP No. 27565,47 affirming the trial court’s Decision.
In a Motion for Reconsideration dated August 21, 2000,48 counsel for the Catungals, Atty.
Borromeo, argued for the first time that paragraphs 1(b) and 549 of the Conditional Deed of
Sale, whether taken separately or jointly, violated the principle of mutuality of contracts
under Article 1308 of the Civil Code and thus, said contract was void ab initio. He adverted
to the cases mentioned in his various citations of authorities to support his argument of
nullity of the contract and his position that this issue may be raised for the first time on
appeal.
Meanwhile, a Second Motion for Substitution50 was filed by Atty. Borromeo in view of the
In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the
deceased Agapita and Jose Catungal by their surviving heirs and denied the motion for
reconsideration for lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the present petition
for review,51 which essentially argued that the Court of Appeals erred in not finding that
paragraphs 1(b) and/or 5 of the Conditional Deed of Sale, violated the principle of mutuality
of contracts under Article 1308 of the Civil Code. Thus, said contract was supposedly void ab
initio and the Catungals’ rescission thereof was superfluous.
In his Comment,52 Rodriguez highlighted that (a) petitioners were raising new matters that
cannot be passed upon on appeal; (b) the validity of the Conditional Deed of Sale was already
admitted and petitioners cannot be allowed to change theories on appeal; (c) the questioned
paragraphs of the Conditional Deed of Sale were valid; and (d) petitioners were the ones
who committed fraud and breach of contract and were not entitled to relief for not having
come to court with clean hands.
The Court gave due course to the Petition53 and the parties filed their respective
Memoranda.
The issues to be resolved in the case at bar can be summed into two questions:
I. Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for
the first time on appeal?
II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality
of contracts under Article 1308 of the Civil Code?
On petitioners’ change of theory
Petitioners claimed that the Court of Appeals should have reversed the trial courts’ Decision
on the ground of the alleged nullity of paragraphs 1(b) and 5 of the Conditional Deed of Sale
notwithstanding that the same was not raised as an error in their appellants’ brief. Citing
Catholic Bishop of Balanga v. Court of Appeals,54 petitioners argued in the Petition that this
case falls under the following exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is necessary in
arriving at a just decision and complete resolution of the case or to serve the interest of
justice or to avoid dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are
matters of record having some bearing on the issue submitted which the parties failed to
raise or which the lower court ignored;
(5) Matters not assigned as errors on appeal but closely related to an error assigned; and
(6) Matters not assigned as errors but upon which the determination of a question properly
assigned is dependent.55
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an error in the brief
nor failed to argue a material point on appeal that was raised in the trial court and supported
by the record. Neither is this a case where a party raised an error closely related to, nor
dependent on the resolution of, an error properly assigned in his brief. This is a situation
where a party completely changes his theory of the case on appeal and abandons his
previous assignment of errors in his brief, which plainly should not be allowed as anathema
to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines of battle
between the litigants and to indicate fairly the nature of the claims or defenses of both
parties.56 In Philippine National Construction Corporation v. Court of Appeals,57 we held that
"[w]hen a party adopts a certain theory in the trial court, he will not be permitted to change
his theory on appeal, for to permit him to do so would not only be unfair to the other party
but it would also be offensive to the basic rules of fair play, justice and due process."58
We have also previously ruled that "courts of justice have no jurisdiction or power to decide
a question not in issue. Thus, a judgment that goes beyond the issues and purports to
adjudicate something on which the court did not hear the parties, is not only irregular but
also extrajudicial and invalid. The rule rests on the fundamental tenets of fair play." 59
During the proceedings before the trial court, the spouses Catungal never claimed that the
provisions in the Conditional Deed of Sale, stipulating that the payment of the balance of the
purchase price was contingent upon the successful negotiation of a road right of way
(paragraph 1[b]) and granting Rodriguez the option to rescind (paragraph 5), were void for
allegedly making the fulfillment of the contract dependent solely on the will of Rodriguez.
On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer
(and its amended versions) that the payment of the purchase price was subject to the will of
Rodriguez but rather they claimed that paragraph 1(b) in relation to 1(c) only presupposed
a reasonable time be given to Rodriguez to negotiate the road right of way. However, it was
petitioners’ theory that more than sufficient time had already been given Rodriguez to
negotiate the road right of way. Consequently, Rodriguez’s refusal/failure to pay the balance
of the purchase price, upon demand, was allegedly indicative of lack of funds and a breach
of the contract on the part of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez’s option to rescind,
it was petitioners’ theory in the court a quo that notwithstanding such provision, they
retained the right to rescind the contract for Rodriguez’s breach of the same under Article
1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of
Sale in view of the questioned provisions was only in their Motion for Reconsideration of the
Court of Appeals’ Decision, affirming the trial court’s judgment. The previous filing of various
citations of authorities by Atty. Borromeo and the Court of Appeals’ resolutions noting such
citations were of no moment. The citations of authorities merely listed cases and their main
rulings without even any mention of their relevance to the present case or any prayer for
the Court of Appeals to consider them.1âwphi1 In sum, the Court of Appeals did not err in
disregarding the citations of authorities or in denying petitioners’ motion for reconsideration
of the assailed August 8, 2000 Decision in view of the proscription against changing legal
theories on appeal.
Ruling on the questioned provisions of the Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the procedural misstep
of petitioners, we still cannot uphold their belatedly proffered arguments.
At the outset, it should be noted that what the parties entered into is a Conditional Deed of
Sale, whereby the spouses Catungal agreed to sell and Rodriguez agreed to buy Lot 10963
conditioned on the payment of a certain price but the payment of the purchase price was
additionally made contingent on the successful negotiation of a road right of way. It is
elementary that "[i]n conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the
event which constitutes the condition."60
Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the
claimed nullity of the aforementioned provisions. Article 1308 states that "[t]he contract
must bind both contracting parties; its validity or compliance cannot be left to the will of one
of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor,
the conditional obligation shall be void. If it depends upon chance or upon the will of a third
person, the obligation shall take effect in conformity with the provisions of this Code.
In the past, this Court has distinguished between a condition imposed on the perfection of a
contract and a condition imposed merely on the performance of an obligation. While failure
to comply with the first condition results in the failure of a contract, failure to comply with
the second merely gives the other party the option to either refuse to proceed with the sale
or to waive the condition.61 This principle is evident in Article 1545 of the Civil Code on sales,
which provides in part:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with the contract or he may waive
performance of the condition x x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance
of the purchase price when he has successfully negotiated and secured a road right of way,
is not a condition on the perfection of the contract nor on the validity of the entire contract
or its compliance as contemplated in Article 1308. It is a condition imposed only on
respondent’s obligation to pay the remainder of the purchase price. In our view and applying
Article 1182, such a condition is not purely potestative as petitioners contend. It is not
dependent on the sole will of the debtor but also on the will of third persons who own the
adjacent land and from whom the road right of way shall be negotiated. In a manner of
speaking, such a condition is likewise dependent on chance as there is no guarantee that
respondent and the third party-landowners would come to an agreement regarding the road
right of way. This type of mixed condition is expressly allowed under Article 1182 of the Civil
Code.
Analogous to the present case is Romero v. Court of Appeals, 62 wherein the Court
interpreted the legal effect of a condition in a deed of sale that the balance of the purchase
price would be paid by the vendee when the vendor has successfully ejected the informal
settlers occupying the property. In Romero, we found that such a condition did not affect
the perfection of the contract but only imposed a condition on the fulfillment of the
obligation to pay the balance of the purchase price, to wit:
From the moment the contract is perfected, the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage and law. Under the agreement, private
respondent is obligated to evict the squatters on the property. The ejectment of the
squatters is a condition the operative act of which sets into motion the period of compliance
by petitioner of his own obligation, i.e., to pay the balance of the purchase price. Private
respondent's failure "to remove the squatters from the property" within the stipulated
period gives petitioner the right to either refuse to proceed with the agreement or waive
that condition in consonance with Article 1545 of the Civil Code. This option clearly belongs
to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private
respondent does not constitute a "potestative condition dependent solely on his will" that
might, otherwise, be void in accordance with Article 1182 of the Civil Code but a "mixed"
condition "dependent not on the will of the vendor alone but also of third persons like the
squatters and government agencies and personnel concerned." We must hasten to add,
however, that where the so-called "potestative condition" is imposed not on the birth of the
obligation but on its fulfillment, only the condition is avoided, leaving unaffected the
obligation itself.63 (Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this case, it was the
vendee (Rodriguez) that had the obligation to successfully negotiate and secure the road
right of way. However, in the decision of the trial court, which was affirmed by the Court of
Appeals, it was found that respondent Rodriguez diligently exerted efforts to secure the road
right of way but the spouses Catungal, in bad faith, contributed to the collapse of the
negotiations for said road right of way. To quote from the trial court’s decision:
It is therefore apparent that the vendee’s obligations (sic) to pay the balance of the purchase
price arises only when the road-right-of-way to the property shall have been successfully
negotiated, secured and provided. In other words, the obligation to pay the balance is
conditioned upon the acquisition of the road-right-of-way, in accordance with paragraph 2
of Article 1181 of the New Civil Code. Accordingly, "an obligation dependent upon a
suspensive condition cannot be demanded until after the condition takes place because it is
only after the fulfillment of the condition that the obligation arises." (Javier v[s] CA 183 SCRA)
Exhibits H, D, P, R, T, FF and JJ show that plaintiff [Rodriguez] indeed was diligent in his efforts
to negotiate for a road-right-of-way to the property. The written offers, proposals and
follow-up of his proposals show that plaintiff [Rodriguez] went all out in his efforts to
immediately acquire an access road to the property, even going to the extent of offering
₱3,000.00 per square meter for the road lots (Exh. Q) from the original ₱550.00 per sq.
meter. This Court also notes that defendant (sic) [the Catungals] made misrepresentation in
the negotiation they have entered into with plaintiff [Rodriguez]. (Exhs. F and G) The
misrepresentation of defendant (sic) [the Catungals] as to the third lot (Lot 10986) to be part
and parcel of the subject property [(]Lot 10963) contributed in defeating the plaintiff’s
[Rodriguez’s] effort in acquiring the road-right-of-way to the property. Defendants [the
Catungals] cannot now invoke the non-fulfillment of the condition in the contract as a ground
for rescission when defendants [the Catungals] themselves are guilty of preventing the
fulfillment of such condition.
From the foregoing, this Court is of the considered view that rescission of the conditional
deed of sale by the defendants is without any legal or factual basis.64 x x x. (Emphases
supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.
Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent
(for respondent’s obligation to pay the balance of the purchase price to arise) in itself partly
involves an obligation to do, i.e., the undertaking of respondent to negotiate and secure a
road right of way at his own expense.65 It does not escape our notice as well, that far from
disclaiming paragraph 1(b) as void, it was the Catungals’ contention before the trial court
that said provision should be read in relation to paragraph 1(c) which stated:
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility
of the VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne
solely by the VENDEE. He shall, however, be accorded with enough time necessary for the
success of his endeavor, granting him a free hand in negotiating for the passage.66 (Emphasis
supplied.)
The Catungals’ interpretation of the foregoing stipulation was that Rodriguez’s obligation to
negotiate and secure a road right of way was one with a period and that period, i.e., "enough
time" to negotiate, had already lapsed by the time they demanded the payment of
₱5,000,000.00 from respondent. Even assuming arguendo that the Catungals were correct
that the respondent’s obligation to negotiate a road right of way was one with an uncertain
period, their rescission of the Conditional Deed of Sale would still be unwarranted. Based on
their own theory, the Catungals had a remedy under Article 1197 of the Civil Code, which
mandates:
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances
it can be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the
debtor.
In every case, the courts shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the courts, the period cannot be
changed by them.
What the Catungals should have done was to first file an action in court to fix the period
within which Rodriguez should accomplish the successful negotiation of the road right of way
pursuant to the above quoted provision. Thus, the Catungals’ demand for Rodriguez to make
an additional payment of ₱5,000,000.00 was premature and Rodriguez’s failure to accede to
such demand did not justify the rescission of the contract.
With respect to petitioners’ argument that paragraph 5 of the Conditional Deed of Sale
likewise rendered the said contract void, we find no merit to this theory. Paragraph 5
provides:
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his
option to rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR
by way of a written notice relinquishing his rights over the property. The VENDEE shall then
be reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS (₱500,000.00)
representing the downpayment, interest free, payable but contingent upon the event that
the VENDOR shall have been able to sell the property to another party.67
Petitioners posited that the above stipulation was the "deadliest" provision in the
Conditional Deed of Sale for violating the principle of mutuality of contracts since it
purportedly rendered the contract subject to the will of respondent.
We do not agree.
It is petitioners’ strategy to insist that the Court examine the first sentence of paragraph 5
alone and resist a correlation of such sentence with other provisions of the contract.
Petitioners’ view, however, ignores a basic rule in the interpretation of contracts – that the
contract should be taken as a whole.
Article 1374 of the Civil Code provides that "[t]he 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." The same Code further sets down the rule that "[i]f some stipulation
of any contract should admit of several meanings, it shall be understood as bearing that
import which is most adequate to render it effectual."68
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument
where there are several provisions or particulars, such a construction is, if possible, to be
adopted as will give effect to all"69 and "for the proper construction of an instrument, the
circumstances under which it was made, including the situation of the subject thereof and
of the parties to it, may be shown, so that the judge may be placed in the position of those
whose language he is to interpret."70
Bearing in mind the aforementioned interpretative rules, we find that the first sentence of
paragraph 5 must be taken in relation with the rest of paragraph 5 and with the other
provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguez’s option to rescind the contract
is not absolute as it is subject to the requirement that there should be written notice to the
vendor and the vendor shall only return Rodriguez’s downpayment of ₱500,000.00, without
interest, when the vendor shall have been able to sell the property to another party. That
what is stipulated to be returned is only the downpayment of ₱500,000.00 in the event that
Rodriguez exercises his option to rescind is significant. To recall, paragraph 1(b) of the
contract clearly states that the installments on the balance of the purchase price shall only
be paid upon successful negotiation and procurement of a road right of way. It is clear from
such provision that the existence of a road right of way is a material consideration for
Rodriguez to purchase the property. Thus, prior to him being able to procure the road right
of way, by express stipulation in the contract, he is not bound to make additional payments
to the Catungals. It was further stipulated in paragraph 1(b) that: "[i]f however said road
right of way cannot be negotiated, the VENDEE shall give notice to the VENDOR for them to
reassess and solve the problem by taking other options and should the situation ultimately
prove futile, he [Rodriguez] shall take steps to rescind or [cancel] the herein Conditional
Deed of Sale." The intention of the parties for providing subsequently in paragraph 5 that
Rodriguez has the option to rescind the sale is undeniably only limited to the contingency
that Rodriguez shall not be able to secure the road right of way. Indeed, if the parties
intended to give Rodriguez the absolute option to rescind the sale at any time, the contract
would have provided for the return of all payments made by Rodriguez and not only the
downpayment. To our mind, the reason only the downpayment was stipulated to be
returned is that the vendee’s option to rescind can only be exercised in the event that no
road right of way is secured and, thus, the vendee has not made any additional payments,
other than his downpayment.
In sum, Rodriguez’s option to rescind the contract is not purely potestative but rather also
subject to the same mixed condition as his obligation to pay the balance of the purchase
price – i.e., the negotiation of a road right of way. In the event the condition is fulfilled (or
the negotiation is successful), Rodriguez must pay the balance of the purchase price. In the
event the condition is not fulfilled (or the negotiation fails), Rodriguez has the choice either
(a) to not proceed with the sale and demand return of his downpayment or (b) considering balance of the deducted purchase price as determined in the RTC Decision dated May 30,
that the condition was imposed for his benefit, to waive the condition and still pay the 1992.
purchase price despite the lack of road access. This is the most just interpretation of the WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated January 30, 2001
parties’ contract that gives effect to all its provisions. of the Court of Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565 are
In any event, even if we assume for the sake of argument that the grant to Rodriguez of an AFFIRMED with the following modification:
option to rescind, in the manner provided for in the contract, is tantamount to a potestative If still warranted, respondent Angel S. Rodriguez is given a period of thirty (30) days from the
condition, not being a condition affecting the perfection of the contract, only the said finality of this Decision to negotiate a road right of way. In the event no road right of way is
condition would be considered void and the rest of the contract will remain valid. In Romero, secured by respondent at the end of said period, the parties shall reassess and discuss other
the Court observed that "where the so-called ‘potestative condition’ is imposed not on the options as stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this purpose,
birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected they are given a period of thirty (30) days to agree on a course of action. Should the
the obligation itself."71 discussions of the parties prove futile after the said thirty (30)-day period, immediately upon
It cannot be gainsaid that "contracts have the force of law between the contracting parties the expiration of said period for discussion, Rodriguez may (a) exercise his option to rescind
and should be complied with in good faith."72 We have also previously ruled that "[b]eing the contract, subject to the return of his downpayment, in accordance with the provisions
the primary law between the parties, the contract governs the adjudication of their rights of paragraphs 1(b) and 5 of the Conditional Deed of Sale or (b) waive the road right of way
and obligations. A court has no alternative but to enforce the contractual stipulations in the and pay the balance of the deducted purchase price as determined in the RTC Decision dated
manner they have been agreed upon and written."73 We find no merit in petitioners’ May 30, 1992.
contention that their parents were merely "duped" into accepting the questioned provisions
in the Conditional Deed of Sale. We note that although the contract was between Agapita
Catungal and Rodriguez, Jose Catungal nonetheless signed thereon to signify his marital
consent to the same. We concur with the trial court’s finding that the spouses Catungals’
claim of being misled into signing the contract was contrary to human experience and
conventional wisdom since it was Jose Catungal who was a practicing lawyer while Rodriquez
was a non-lawyer.74 It can be reasonably presumed that Atty. Catungal and his wife reviewed
the provisions of the contract, understood and accepted its provisions before they affixed
their signatures thereon.
After thorough review of the records of this case, we have come to the conclusion that
petitioners failed to demonstrate that the Court of Appeals committed any reversible error
in deciding the present controversy. However, having made the observation that it was
desirable for the Catungals to file a separate action to fix the period for respondent
Rodriguez’s obligation to negotiate a road right of way, the Court finds it necessary to fix said
period in these proceedings. It is but equitable for us to make a determination of the issue
here to obviate further delay and in line with the judicial policy of avoiding multiplicity of
suits.
If still warranted, Rodriguez is given a period of thirty (30) days from the finality of this
decision to negotiate a road right of way. In the event no road right of way is secured by
Rodriquez at the end of said period, the parties shall reassess and discuss other options as
stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this purpose, they are
given a period of thirty (30) days to agree on a course of action. Should the discussions of
the parties prove futile after the said thirty (30)-day period, immediately upon the expiration
of said period for discussion, Rodriguez may (a) exercise his option to rescind the contract,
subject to the return of his downpayment, in accordance with the provisions of paragraphs
1(b) and 5 of the Conditional Deed of Sale or (b) waive the road right of way and pay the
G.R. No. 117009 October 11, 1995
SECURITY BANK & TRUST COMPANY and ROSITO C. MANHIT, petitioners,
vs.
COURT OF APPEALS and YSMAEL C. FERRER, respondents.
PADILLA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioners seek a review and
reversal of the decision * of respondent Court of Appeals in CA-G.R. CV No. 40450, entitled
"Ysmael C. Ferrer v. Security Bank and Trust Company, et. al." dated 31 August 1994, which
affirmed the decision ** of the Regional Trial Court, Branch 63, Makati in Civil Case No.
42712, a complaint for breach of contract with damages.
Private respondent Ysmael C. Ferrer was contracted by herein petitioners Security Bank and
Trust Company (SBTC) and Rosito C. Manhit to construct the building of SBTC in Davao City
for the price of P1,760,000.00. The contract dated 4 February 1980 provided that Ferrer
would finish the construction in two hundred (200) working days. Respondent Ferrer was
able to complete the construction of the building on 15 August 1980 (within the contracted
period) but he was compelled by a drastic increase in the cost of construction materials to
incur expenses of about P300,000.00 on top of the original cost. The additional expenses
were made known to petitioner SBTC thru its Vice-President Fely Sebastian and Supervising
Architect Rudy de la Rama as early as March 1980. Respondent Ferrer made timely demands
for payment of the increased cost. Said demands were supported by receipts, invoices,
payrolls and other documents proving the additional expenses.
In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an
architectural firm consulted by SBTC, verified Ferrer's claims for additional cost. A
recommendation was then made to settle Ferrer's claim but only for P200,000.00. SBTC,
instead of paying the recommended additional amount, denied ever authorizing payment of
any amount beyond the original contract price. SBTC likewise denied any liability for the
additional cost based on Article IX of the building contract which states:
If at any time prior to the completion of the work to be performed hereunder, increase in
prices of construction materials and/or labor shall supervene through no fault on the part of
the contractor whatsoever or any act of the government and its instrumentalities which
directly or indirectly affects the increase of the cost of the project, OWNER shall equitably
make the appropriate adjustment on mutual agreement of both parties.
Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court
ruled for Ferrer and ordered defendants SBTC and Rosito C. Manhit to pay:
a) P259,417.23 for the increase in price of labor and materials plus 12% interest thereon per
annumfrom 15 August 1980 until fully paid;
b) P24,000.00 as actual damages;
c) P20,000.00 as moral damages;
d) P20,000.00 as exemplary damages;
e) attorney's fees equivalent to 25% of the principal amount due; and
f) costs of suit.
On appeal, the Court of Appeals affirmed the trial court decision.
In the present petition for review, petitioners assign the following errors to the appellate
court:
. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY PREPONDERANCE OF EVIDENCE
SUFFICIENTLY PROVEN HIS CLAIM AGAINST THE DEFENDANTS-APPELLANTS.
. . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS PROVISION OF THE
CONSTRUCTION CONTRACT.
. . . IN DISREGARDING THE EXPRESS PROVISION OF THE CONSTRUCTION CONTRACT, THE
LOWER COURT VIOLATED DEFENDANTS-APPELLANTS' CONSTITUTIONAL GUARANTY OF NON
IMPAIRMENT OF THE OBLIGATION OF CONTRACT.1
Petitioners argue that under the aforequoted Article IX of the building contract, any increase
in the price of labor and/or materials resulting in an increase in construction cost above the
stipulated contract price will not automatically make petitioners liable to pay for such
increased cost, as any payment above the stipulated contract price has been made subject
to the condition that the "appropriate adjustment" will be made "upon mutual agreement
of both parties". It is contended that since there was no mutual agreement between the
parties, petitioners' obligation to pay amounts above the original contract price never
materialized.
Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the arguments
raised by petitioners. It is of note however that the pleadings filed with this Court by counsel
for Ferrer hardly refute the arguments raised by petitioners, as the contents of said pleadings
are mostly quoted portions of the decision of the Court of Appeals, devoid of adequate
discussion of the merits of respondent's case. The Court, to be sure, expects more diligence
and legal know-how from lawyers than what has been exhibited by counsel for respondent
in the present case. Under these circumstances, the Court had to review the entire records
of this case to evaluate the merits of the issues raised by the contending parties.
Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius incommodo debet
lecupletari (no man ought to be made rich out of another's injury) states:
Art. 22. Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just or
legal ground, shall return the same to him.
The above-quoted article is part of the chapter of the Civil Code on Human Relations, the
provisions of which were formulated as "basic principles to be observed for the rightful
relationship between human beings and for the stability of the social order, . . . designed to
indicate certain norms that spring from the fountain of good conscience, . . . guides for
human conduct [that] should run as golden threads through society to the end that law may
approach its supreme ideal which is the sway and dominance of justice." 2
In the present case, petitioners' arguments to support absence of liability for the cost of
construction beyond the original contract price are not persuasive.
Under the previously quoted Article IX of the construction contract, petitioners would make
the appropriate adjustment to the contract price in case the cost of the project increases
through no fault of the contractor (private respondent). Private respondent informed
petitioners of the drastic increase in construction cost as early as March 1980.
Petitioners in turn had the increased cost evaluated and audited. When private respondent
demanded payment of P259,417.23, petitioner bank's Vice-President Rosito C. Manhit and
the bank's architectural consultant were directed by the bank to verify and compute private
respondent's claims of increased cost. A recommendation was then made to settle private
respondent's claim for P200,000.00. Despite this recommendation and several demands
from private respondent, SBTC failed to make payment. It denied authorizing anyone to
make a settlement of private respondent's claim and likewise denied any liability, contending
that the absence of a mutual agreement made private respondent's demand premature and
baseless.
Petitioners' arguments are specious.
It is not denied that private respondent incurred additional expenses in constructing
petitioner bank's building due to a drastic and unexpected increase in construction cost. In
fact, petitioner bank admitted liability for increased cost when a recommendation was made
to settle private respondent's claim for P200,000.00. Private respondent's claim for the
increased amount was adequately proven during the trial by receipts, invoices and other
supporting documents.
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment
depends upon the sole will of the debtor. In the present case, the mutual agreement, the
absence of which petitioner bank relies upon to support its non-liability for the increased
construction cost, is in effect a condition dependent on petitioner bank's sole will, since
private respondent would naturally and logically give consent to such an agreement which
would allow him recovery of the increased cost.
Further, it cannot be denied that petitioner bank derived benefits when private respondent
completed the construction even at an increased cost.
Hence, to allow petitioner bank to acquire the constructed building at a price far below its
actual construction cost would undoubtedly constitute unjust enrichment for the bank to
the prejudice of private respondent. Such unjust enrichment, as previously discussed, is not
allowed by law.
Finally, with respect to the award of attorney's fees to respondent, the Court has previously
held that, "even with the presence of an agreement between the parties, the court may
nevertheless reduce attorney's fees though fixed in the contract when the amount thereof
appears to be unconscionable or unreasonable."3 As previously noted, the diligence and
legal know-how exhibited by counsel for private respondent hardly justify an award of 25%
of the principal amount due, which would be at least P60,000.00. Besides, the issues in this
case are far from complex and intricate. The award of attorney's fees is thus reduced to
P10,000.00.
WHEREFORE, with the above modification in respect of the amount of attorney's fees, the
appealed decision of the Court of Appeals in CA G.R. CV No. 40450 is AFFIRMED.
G.R. No. L-16109 October 2, 1922
M. D. TAYLOR, plaintiff-appellant,
vs.
UY TIENG PIAO and TAN LIUAN, doing business under the firm name and style of Tan Liuan
& Company,defendants.
Uy TIENG PIAO, defendant-appellant.
Cohn, Fisher and DeWitt and William C. Brady for plaintiff-appellant.
Gabriel La O for defendant-appellant Uy Tieng Piao.
Crossfield and O'Brien for Tan Liuan and Tan Liyan and Co.
STREET, J.:
This case comes by appeal from the Court of First Instance of the city of Manila, in a case
where the court awarded to the plaintiff the sum of P300, as damages for breach of contract.
The plaintiff appeals on the ground that the amount of damages awarded is inadequate;
while the defendant Uy Tieng Piao appeals on the ground that he is not liable at all. The
judgment having been heretofore affirmed by us in a brief opinion, we now avail ourselves
of the occasion of the filing of a motion to rehear by the attorneys for the plaintiff to modify
the judgment in a slight measure and to state more fully the reasons underlying our decision.
It appears that on December 12, 1918, the plaintiff contracted his services to Tan Liuan and
Co., as superintendent of an oil factory which the latter contemplated establishing in this
city. The period of the contract extended over two years from the date mentioned; and the
salary was to be at the rate of P600 per month during the first year and P700 per month
during the second, with electric light and water for domestic consumption, and a residence
to live in, or in lieu thereof P60 per month.
At the time this agreement was made the machinery for the contemplated factory had not
been acquired, though ten expellers had been ordered from the United States; and among
the stipulations inserted in the contract with the plaintiff was a provision to the following
effect:
It is understood and agreed that should the machinery to be installed in the said factory fail,
for any reason, to arrive in the city of Manila within a period of six months from date hereof,
this contract may be cancelled by the party of the second part at its option, such cancellation,
however, not to occur before the expiration of such six months.
The machinery above referred to did not arrive in the city of Manila within the six months
succeeding the making of the contract; nor was other equipment necessary for the
establishment of the factory at any time provided by the defendants. The reason for this
does not appear with certainty, but a preponderance of the evidence is to the effect that the
defendants, in the first months of 1919, seeing that the oil business no longer promised large
returns, either cancelled the order for the machinery from choice or were unable to supply
the capital necessary to finance the project. At any rate on June 28, 1919, availing themselves
in part of the option given in the clause above quoted, the defendants communicated in
writing to the plaintiff the fact that they had decided to rescind the contract, effective June
30th then current, upon which date he was discharged. The plaintiff thereupon instituted
this action to recover damages in the amount of P13,000, covering salary and perquisites
due and to become due under the contract.
The case for the plaintiff proceeds on the idea that the stipulation above quoted, giving to
the defendants the right to cancel the contract upon the contingency of the nonarrival of the
machinery in Manila within six months, must be understood as applicable only in those cases
where such nonarrival is due to causes not having their origin in the will or act of the
defendants, as delays caused by strikes or unfavorable conditions of transporting by land or
sea; and it is urged that the right to cancel cannot be admitted unless the defendants
affirmatively show that the failure of the machinery to arrive was due to causes of that
character, and that it did not have its origin in their own act or volition. In this connection
the plaintiff relies on article 1256 of the Civil Code, which is to the effect that the validity and
fulfillment of contracts cannot be left to the will of one of the contracting parties, and to
article 1119, which says that a condition shall be deemed fulfilled if the obligor intentially
impedes its fulfillment.
It will be noted that the language conferring the right of cancellation upon the defendants is
broad enough to cover any case of the nonarrival of the machinery, due to whatever cause;
and the stress in the expression "for any reason" should evidently fall upon the word "any."
It must follow of necessity that the defendants had the right to cancel the contract in the
contingency that occurred, unless some clear and sufficient reason can be adduced for
limiting the operation of the words conferring the right of cancellation. Upon this point it is
our opinion that the language used in the stipulation should be given effect in its ordinary
sense, without technicality or circumvention; and in this sense it is believed that the parties
to the contract must have understood it.
Article 1256 of the Civil Code in our opinion creates no impediment to the insertion in a
contract for personal service of a resolutory condition permitting the cancellation of the
contract by one of the parties. Such a stipulation, as can be readily seen, does not make
either the validity or the fulfillment of the contract dependent upon the will of the party to
whom is conceded the privilege of cancellation; for where the contracting parties have
agreed that such option shall exist, the exercise of the option is as much in the fulfillment of
the contract as any other act which may have been the subject of agreement. Indeed, the
cancellation of a contract in accordance with conditions agreed upon beforehands is
fulfillment.
In this connection, we note that the commentator Manresa has the following observation
with respect to article 1256 of the Civil Code. Says he: "It is entirely licit to leave fulfillment
to the will of either of the parties in the negative form of rescission, a case frequent in certain
contracts (the letting of service for hire, the supplying of electrical energy, etc.), for in such
supposed case neither is the article infringed, nor is there any lack of equality between the
persons contracting, since they remain with the same faculties in respect to fulfillment."
(Manresa, 2d ed., vol. 8, p. 610.) 1awph!l.net
Undoubtedly one of the consequences of this stipulation was that the employers were left
in a position where they could dominate the contingency, and the result was about the same
as if they had been given an unqualified option to dispense with the services of the plaintiff
at the end of six months. But this circumstance does not make the stipulation illegal.
The case of Hall vs. Hardaker (61 Fla., 267) cited by the appellant Taylor, though superficially
somewhat analogous, is not precisely in point. In that case one Hardaker had contracted to
render competent and efficient service as manager of a corporation, to which position it was
understood he was to be appointed. In the same contract it was stipulated that if "for any
reason" Hardaker should not be given that position, or if he should not be permitted to act
in that capacity for a stated period, certain things would be done by Hall. Upon being
installed in the position aforesaid, Hardaker failed to render efficient service and was
discharged. It was held that Hall was released from the obligation to do the things that he
had agreed to perform. Some of the judges appear to have thought that the case turned on
the meaning of the phrase "for any reason," and the familiar maxim was cited that no man
shall take advantage of his own wrong. The result of the case must have been the same from
whatever point of view, as there was an admitted failure on the part of Hardaker to render
competent service. In the present case there was no breach of contract by the defendants;
and the argument to the contrary apparently suffers from the logical defect of assuming the
very point at issue.
But it will be said that the question is not so much one concerning the legality of the clause
referred to as one concerning the interpretation of the resolutory clause as written, the idea
being that the court should adjust its interpretation of said clause to the supposed precepts
of article 1256, by restricting its operation exclusively to cases where the nonarrival of the
machinery may be due to extraneous causes not referable to the will or act of the
defendants. But even when the question is viewed in this aspect their result is the same,
because the argument for the restrictive interpretation evidently proceeds on the
assumption that the clause in question is illegal in so far as it purports to concede to the
defendants the broad right to cancel the contract upon nonarrival of the machinery due
to any cause; and the debate returns again to the point whether in a contract for the
prestation of service it is lawful for the parties to insert a provision giving to the employer
the power to cancel the contract in a contingency which may be dominated by himself. Upon
this point what has already been said must suffice.
As we view the case, there is nothing in article 1256 which makes it necessary for us to warp
the language used by the parties from its natural meaning and thereby in legal effect to
restrict the words "for any reason," as used in the contract, to mean "for any reason not
having its origin in the will or acts of the defendants." To impose this interpretation upon
those words would in our opinion constitute an unjustifiable invasion of the power of the
parties to establish the terms which they deem advisable, a right which is expressed in article
1255 of the Civil Code and constitutes one of the most fundamental conceptions of contract
right enshrined in the Code.
The view already expressed with regard to the legality and interpretation of the clause under
consideration disposes in a great measure of the argument of the appellant in so far as the
same is based on article 1119 of the Civil Code. This provision supposes a case where the
obligor intentionally impedes the fulfillment of a condition which would entitle the obligee
to exact performance from the obligor; and an assumption underlying the provision is that
the obligor prevents the obligee from performing some act which the obligee is entitled to
perform as a condition precedent to the exaction of what is due to him. Such an act must be
considered unwarranted and unlawful, involving per se a breach of the implied terms of the
contract. The article can have no application to an external contingency which, like that
involved in this case, is lawfully within the control of the obligor.
In Spanish jurisprudence a condition like that here under discussion is designated by
Manresa a facultative condition (vol. 8, p. 611), and we gather from his comment on articles
1115 and 1119 of the Civil Code that a condition, facultative as to the debtor, is obnoxious
to the first sentence contained in article 1115 and renders the whole obligation void (vol. 8,
p. 131). That statement is no doubt correct in the sense intended by the learned author, but
it must be remembered that he evidently has in mind the suspensive condition, such as is
contemplated in article 1115. Said article can have no application to the resolutory condition,
the validity of which is recognized in article 1113 of the Civil Code. In other words, a condition
at once facultative and resolutory may be valid even though the condition is made to depend
upon the will of the obligor.
If it were apparent, or could be demonstrated, that the defendants were under a positive
obligation to cause the machinery to arrive in Manila, they would of course be liable, in the
absence of affirmative proof showing that the nonarrival of the machinery was due to some
cause not having its origin in their own act or will. The contract, however, expresses no such
positive obligation, and its existence cannot be implied in the fact of stipulation, defining the
conditions under which the defendants can cancel the contract.
Our conclusion is that the Court of First Instance committed no error in rejecting the
plaintiff's claim in so far as damages are sought for the period subsequent to the expiration
of the first six months, but in assessing the damages due for the six-month period, the trial
judge evidently overlooked the item of P60, specified in the plaintiff's fourth assignment of
error, which represents commutation of house rent for the month of June, 1919. This
amount the plaintiff is clearly entitled to recover, in addition to the P300 awarded in the
court below.
We note that Uy Tieng Piao, who is sued as a partner with Tan Liuan, appealed from the
judgment holding him liable as a member of the firm of Tan Liuan and Co.; and it is insisted
in his behalf that he was not bound by the act of Tan Liuan as manager of Tan Liuan and Co.
in employing the plaintiff. Upon this we will merely say that the conclusion stated by the trial
court in the next to the last paragraph of the decision with respect to the liability of this
appellant in our opinion in conformity with the law and facts.
The judgment appealed from will be modified by declaring that the defendants shall pay to
the plaintiff the sum of P360, instead of P300, as allowed by the lower court, and as thus
modified the judgment will be affirmed with interest from November 4, 1919, as provided in
section 510 of the Code of Civil Procedure, and with costs. So ordered.
G.R. No. 107112 February 24, 1994
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO
II), respondents.
Ernesto P. Pangalangan for petitioners.
Luis General, Jr. for private respondent.
NOCON, J.:
The case of Reyes v. Caltex (Philippines), Inc.1 enunciated the doctrine that where a person
by his contract charges himself with an obligation possible to be performed, he must perform
it, unless its performance is rendered impossible by the act of God, by the law, or by the
other party, it being the rule that in case the party desires to be excused from performance
in the event of contingencies arising thereto, it is his duty to provide the basis therefor in his
contract.
With the enactment of the New Civil Code, a new provision was included therein, namely,
Article 1267 which provides:
When the service has become so difficult as to be manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole or in part.
In the report of the Code Commission, the rationale behind this innovation was explained,
thus:
The general rule is that impossibility of performance releases the obligor. However, it is
submitted that when the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the court should be authorized to release the obligor in whole
or in part. The intention of the parties should govern and if it appears that the service turns
out to be so difficult as to have been beyond their contemplation, it would be doing violence
to that intention to hold their contemplation, it would be doing violence to that intention to
hold the obligor still responsible.2
In other words, fair and square consideration underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of
Appeals of Article 1267 in favor of Camarines Sur II Electric Cooperative, Inc. in the case
before us. Stated differently, the former insists that the complaint should have been
dismissed for failure to state a cause of action.
The antecedent facts, as narrated by respondent Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as
well as long distance telephone service in Naga City while private respondent Camarines Sur
II Electric Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose
of operating an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners
in the operation of its telephone service the electric light posts of private respondent in Naga
City. In consideration therefor, petitioners agreed to install, free of charge, ten (10)
telephone connections for the use by private respondent in the following places:
(a) 3 units — The Main Office of (private respondent);
(b) 2 Units — The Warehouse of (private respondent);
(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion Pequeña;
(d) 1 Unit — The Residence of (private respondent's) President;
(e) 1 Unit — The Residence of (private respondent's) Acting General Manager; &
(f) 2 Units — To be determined by the General Manager.3
Said contract also provided:
(a) That the term or period of this contract shall be as long as the party of the first part has
need for the electric light posts of the party of the second part it being understood that this
contract shall terminate when for any reason whatsoever, the party of the second part is
forced to stop, abandoned [sic] its operation as a public service and it becomes necessary to
remove the electric lightpost; (sic)4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay,
then a member of the Board of Directors of private respondent and at the same time the
legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed on
January 2, 1989 with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against
petitioners for reformation of the contract with damages, on the ground that it is too one-
sided in favor of petitioners; that it is not in conformity with the guidelines of the National
Electrification Administration (NEA) which direct that the reasonable compensation for the
use of the posts is P10.00 per post, per month; that after eleven (11) years of petitioners'
use of the posts, the telephone cables strung by them thereon have become much heavier
with the increase in the volume of their subscribers, worsened by the fact that their linemen
bore holes through the posts at which points those posts were broken during typhoons; that
a post now costs as much as P2,630.00; so that justice and equity demand that the contract
be reformed to abolish the inequities thereon.
As second cause of action, private respondent alleged that starting with the year 1981,
petitioners have used 319 posts in the towns of Pili, Canaman, Magarao and Milaor,
Camarines Sur, all outside Naga City, without any contract with it; that at the rate of P10.00
per post, petitioners should pay private respondent for the use thereof the total amount of
P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to
pay private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing by
petitioners of the ten (10) telephone units which had caused it great inconvenience and
damages to the tune of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be dismissed
because (1) it does not sufficiently state a cause of action for reformation of contract; (2) it
is barred by prescription, the same having been filed more than ten (10) years after the
execution of the contract; and (3) it is barred by estoppel, since private respondent seeks to
enforce the contract in the same action. Petitioners further alleged that their utilization of
private respondent's posts could not have caused their deterioration because they have
already been in use for eleven (11) years; and that the value of their expenses for the ten
(10) telephone lines long enjoyed by private respondent free of charge are far in excess of
the amounts claimed by the latter for the use of the posts, so that if there was any inequity,
it was suffered by them.
Regarding the second cause of action, petitioners claimed that private respondent had asked
for telephone lines in areas outside Naga City for which its posts were used by them; and
that if petitioners had refused to comply with private respondent's demands for payment
for the use of the posts outside Naga City, it was probably because what is due to them from
private respondent is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their
telephone service had been categorized by the National Telecommunication Corporation
(NTC) as "very high" and of "superior quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared
that it was petitioner Maggay who prepared the contract; that the understanding between
private respondent and petitioners was that the latter would only use the posts in Naga City
because at that time, petitioners' capability was very limited and they had no expectation of
expansion because of legal squabbles within the company; that private respondent agreed
to allow petitioners to use its posts in Naga City because there were many subscribers
therein who could not be served by them because of lack of facilities; and that while the
telephone lines strung to the posts were very light in 1977, said posts have become heavily
loaded in 1989.
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance
Department, declared that the posts being used by petitioners totalled 1,403 as of April 17,
1989, 192 of which were in the towns of Pili, Canaman, and Magarao, all outside Naga City
(Exhs. "B" and "B-1"); that petitioners' cables strung to the posts in 1989 are much bigger
than those in November, 1977; that in 1987, almost 100 posts were destroyed by typhoon
Sisang: around 20 posts were located between Naga City and the town of Pili while the posts
in barangay Concepcion, Naga City were broken at the middle which had been bored by
petitioner's linemen to enable them to string bigger telephone lines; that while the cost per
post in 1977 was only from P700.00 to P1,000.00, their costs in 1989 went up from P1,500.00
to P2,000.00, depending on the size; that some lines that were strung to the posts did not
follow the minimum vertical clearance required by the National Building Code, so that there
were cases in 1988 where, because of the low clearance of the cables, passing trucks would
accidentally touch said cables causing the posts to fall and resulting in brown-outs until the
electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent
and Manager of Region V of NEA, declared that according to NEA guidelines in 1985 (Exh.
"C"), for the use by private telephone systems of electric cooperatives' posts, they should
pay a minimum monthly rental of P4.00 per post, and considering the escalation of prices
since 1985, electric cooperatives have been charging from P10.00 to P15.00 per post, which
is what petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private
respondent, testified on the poor service rendered by petitioner's telephone lines, like the
telephone in their Complaints Section which was usually out of order such that they could
not respond to the calls of their customers. In case of disruption of their telephone lines, it
would take two to three hours for petitioners to reactivate them notwithstanding their calls
on the emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of
Directors asked him to study the contract sometime during the latter part of 1982 or in 1983,
as it had appeared very disadvantageous to private respondent. Notwithstanding his
recommendation for the filing of a court action to reform the contract, the former general
managers of private respondent wanted to adopt a soft approach with petitioners about the
matter until the term of General Manager Henry Pascual who, after failing to settle the
matter amicably with petitioners, finally agreed for him to file the present action for
reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:
(1) It is true that he was a member of the Board of Directors of private respondent and at
the same time the lawyer of petitioner when the contract was executed, but Atty. Gaudioso
Tena, who was also a member of the Board of Directors of private respondent, was the one
who saw to it that the contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10) telephone units of
petitioners for as long as it wishes without paying anything therefor except for long distance
calls through PLDT out of which the latter get only 10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been strung to the posts,
which posts have remained erect up to the present;
(c) Petitioner's linemen have strung only small messenger wires to many of the posts and
they need only small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City
are according to standard and comparable to those of PLDT. The accidents mentioned by
private respondent involved trucks that were either overloaded or had loads that protruded
upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered
into the contract was that the coverage thereof would include the whole area serviced by
petitioners because at that time, they already had subscribers outside Naga City. Private
respondent, in fact, had asked for telephone connections outside Naga City for its officers
and employees residing there in addition to the ten (10) telephone units mentioned in the
contract. Petitioners have not been charging private respondent for the installation,
transfers and re-connections of said telephones so that naturally, they use the posts for
those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners' cable
installations to be in accordance with engineering standards and practice and comparable to
the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial court found, as
regards private respondent's first cause of action, that while the contract appeared to be fair
to both parties when it was entered into by them during the first year of private respondent's
operation and when its Board of Directors did not yet have any experience in that business,
it had become disadvantageous and unfair to private respondent because of subsequent
events and conditions, particularly the increase in the volume of the subscribers of
petitioners for more than ten (10) years without the corresponding increase in the number
of telephone connections to private respondent free of charge. The trial court concluded
that while in an action for reformation of contract, it cannot make another contract for the
parties, it can, however, for reasons of justice and equity, order that the contract be
reformed to abolish the inequities therein. Thus, said court ruled that the contract should be
reformed by ordering petitioners to pay private respondent compensation for the use of
their posts in Naga City, while private respondent should also be ordered to pay the monthly
bills for the use of the telephones also in Naga City. And taking into consideration the
guidelines of the NEA on the rental of posts by telephone companies and the increase in the
costs of such posts, the trial court opined that a monthly rental of P10.00 for each post of
private respondent used by petitioners is reasonable, which rental it should pay from the
filing of the complaint in this case on January 2, 1989. And in like manner, private respondent
should pay petitioners from the same date its monthly bills for the use and transfers of its
telephones in Naga City at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that the contract does
not mention anything about the use by petitioners of private respondent's posts outside
Naga City. Therefore, the trial court held that for reason of equity, the contract should be
reformed by including therein the provision that for the use of private respondent's posts
outside Naga City, petitioners should pay a monthly rental of P10.00 per post, the payment
to start on the date this case was filed, or on January 2, 1989, and private respondent should
also pay petitioners the monthly dues on its telephone connections located outside Naga
City beginning January, 1989.
And with respect to private respondent's third cause of action, the trial court found the claim
not sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July 20, 1990:
WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the
reformation of the agreement (Exh. A); ordering the defendants to pay plaintiff's electric
poles in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur
and in other places where defendant NATELCO uses plaintiff's electric poles, the sum of TEN
(P10.00) PESOS per plaintiff's pole, per month beginning January, 1989 and ordering also the
plaintiff to pay defendant NATELCO the monthly dues of all its telephones including those
installed at the residence of its officers, namely; Engr. Joventino Cruz, Engr. Antonio Borja,
Engr. Antonio Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January,
1989. Plaintiff's claim for attorney's fees and expenses of litigation and defendants'
counterclaim are both hereby ordered dismissed. Without pronouncement as to costs.
Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of
Appeals. In the decision dated May 28, 1992, respondent court affirmed the decision of the
trial court,5 but based on different grounds to wit: (1) that Article 1267 of the New Civil Code
is applicable and (2) that the contract was subject to a potestative condition which rendered
said condition void. The motion for reconsideration was denied in the resolution dated
September 10, 1992.6 Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent court:
1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for reformation of the contract in this case
commenced from the time it became disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily
because the contract does not involve the rendition of service or a personal prestation and
it is not for future service with future unusual change. Instead, the ruling in the case
of Occeña, et al. v. Jabson, etc., et al.,7 which interpreted the article, should be followed in
resolving this case. Besides, said article was never raised by the parties in their pleadings and
was never the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation of contract would lie
and may prosper, there must be sufficient allegations as well as proof that the contract in
question failed to express the true intention of the parties due to error or mistake, accident,
or fraud. Indeed, in embodying the equitable remedy of reformation of instruments in the
New Civil Code, the Code Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order that the true intention of the
contracting parties may be expressed. The courts by the reformation do not attempt to make
a new contract for the parties, but to make the instrument express their real agreement. The
rationale of the doctrine is that it would be unjust and inequitable to allow the enforcement
of a written instrument which does not reflect or disclose the real meeting of the minds of
the parties. The rigor of the legalistic rule that a written instrument should be the final and
inflexible criterion and measure of the rights and obligations of the contracting parties is
thus tempered to forestall the effects of mistake, fraud, inequitable conduct, or accident.
(pp. 55-56, Report of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that
where through mistake or accident on the part of either or both of the parties or mistake or
fraud on the part of the clerk or typist who prepared the instrument, the true intention of
the parties is not expressed therein, then the instrument may be reformed at the instance
of either party if there was mutual mistake on their part, or by the injured party if only he
was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there
was a mistake on its part or mutual mistake on the part of both parties when they entered
into the agreement Exh. "A", and that because of this mistake, said agreement failed to
express their true intention. Rather, plaintiff's evidence shows that said agreement was
prepared by Atty. Luciano Maggay, then a member of plaintiff's Board of Directors and its
legal counsel at that time, who was also the legal counsel for defendant-appellant, so that
as legal counsel for both companies and presumably with the interests of both companies in
mind when he prepared the aforesaid agreement, Atty. Maggay must have considered the
same fair and equitable to both sides, and this was affirmed by the lower court when it found
said contract to have been fair to both parties at the time of its execution. In fact, there were
no complaints on the part of both sides at the time of and after the execution of said
contract, and according to 73-year old Justino de Jesus, Vice President and General manager
of appellant at the time who signed the agreement Exh. "A" in its behalf and who was one
of the witnesses for the plaintiff (sic), both parties complied with said contract "from the
very beginning" (p. 5, tsn, April 17, 1989).
That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the
plaintiff with the expansion of the business of appellant and the increase in the volume of
its subscribers in Naga City and environs through the years, necessitating the stringing of
more and bigger telephone cable wires by appellant to plaintiff's electric posts without a
corresponding increase in the ten (10) telephone connections given by appellant to plaintiff
free of charge in the agreement Exh. "A" as consideration for its use of the latter's electric
posts in Naga City, appear, however, undisputed from the totality of the evidence on record
and the lower court so found. And it was for this reason that in the later (sic) part of 1982 or
1983 (or five or six years after the subject agreement was entered into by the parties),
plaintiff's Board of Directors already asked Atty. Luis General who had become their legal
counsel in 1982, to study said agreement which they believed had become disadvantageous
to their company and to make the proper recommendation, which study Atty. General did,
and thereafter, he already recommended to the Board the filing of a court action to reform
said contract, but no action was taken on Atty. General's recommendation because the
former general managers of plaintiff wanted to adopt a soft approach in discussing the
matter with appellant, until, during the term of General Manager Henry Pascual, the latter,
after failing to settle the problem with Atty. Luciano Maggay who had become the president
and general manager of appellant, already agreed for Atty. General's filing of the present
action. The fact that said contract has become inequitous or disadvantageous to plaintiff as
the years went by did not, however, give plaintiff a cause of action for reformation of said
contract, for the reasons already pointed out earlier. But this does not mean that plaintiff is
completely without a remedy, for we believe that the allegations of its complaint herein and
the evidence it has presented sufficiently make out a cause of action under Art. 1267 of the
New Civil Code for its release from the agreement in question.
xxx xxx xxx
The understanding of the parties when they entered into the Agreement Exh. "A" on
November 1, 1977 and the prevailing circumstances and conditions at the time, were
described by Dioscoro Ragragio, the President of plaintiff in 1977 and one of its two officials
who signed said agreement in its behalf, as follows:
Our understanding at that time is that we will allow NATELCO to utilize the posts of
CASURECO II only in the City of Naga because at that time the capability of NATELCO was
very limited, as a matter of fact we do [sic] not expect to be able to expand because of the
legal squabbles going on in the NATELCO. So, even at that time there were so many
subscribers in Naga City that cannot be served by the NATELCO, so as a mater of public
service we allowed them to sue (sic) our posts within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff
were very light and that very few telephone lines were attached to the posts of CASURECO
II in 1977, said posts have become "heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in the volume of
appellant's subscribers and the corresponding increase in the telephone cables and wires
strung by it to plaintiff's electric posts in Naga City for the more 10 years that the agreement
Exh. "A" of the parties has been in effect, there has been no corresponding increase in the
ten (10) telephone units connected by appellant free of charge to plaintiff's offices and other
places chosen by plaintiff's general manager which was the only consideration provided for
in said agreement for appellant's use of plaintiffs electric posts. Not only that, appellant even
started using plaintiff's electric posts outside Naga City although this was not provided for in
the agreement Exh. "A" as it extended and expanded its telephone services to towns outside
said city. Hence, while very few of plaintiff's electric posts were being used by appellant in
1977 and they were all in the City of Naga, the number of plaintiff's electric posts that
appellant was using in 1989 had jumped to 1,403,192 of which are outside Naga City (Exh.
"B"). Add to this the destruction of some of plaintiff's poles during typhoons like the strong
typhoon Sisang in 1987 because of the heavy telephone cables attached thereto, and the
escalation of the costs of electric poles from 1977 to 1989, and the conclusion is indeed
ineluctable that the agreement Exh. "A" has already become too one-sided in favor of
appellant to the great disadvantage of plaintiff, in short, the continued enforcement of said
contract has manifestly gone far beyond the contemplation of plaintiff, so much so that it
should now be released therefrom under Art. 1267 of the New Civil Code to avoid appellant's
unjust enrichment at its (plaintiff's) expense. As stated by Tolentino in his commentaries on
the Civil Code citing foreign civilist Ruggiero, "equity demands a certain economic equilibrium
between the prestation and the counter-prestation, and does not permit the unlimited
impoverishment of one party for the benefit of the other by the excessive rigidity of the
principle of the obligatory force of contracts (IV Tolentino, Civil Code of the Philippines, 1986
ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of the trial court, although based on a
different and wrong premise (i.e., reformation of contract), that from the date of the filing
of this case, appellant must pay for the use of plaintiff's electric posts in Naga City at the
reasonable monthly rental of P10.00 per post, while plaintiff should pay appellant for the
telephones in the same City that it was formerly using free of charge under the terms of the
agreement Exh. "A" at the same rate being paid by the general public. In affirming said ruling,
we are not making a new contract for the parties herein, but we find it necessary to do so in
order not to disrupt the basic and essential services being rendered by both parties herein
to the public and to avoid unjust enrichment by appellant at the expense of plaintiff, said
arrangement to continue only until such time as said parties can re-negotiate another
agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is reached and
executed by the parties, the aforesaid ruling of the lower court and affirmed by us shall cease
to exist and shall be substituted and superseded by their new agreement. . . ..8
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the
rationale behind this provision,9 the term "service" should be understood as referring to the
"performance" of the obligation. In the present case, the obligation of private respondent
consists in allowing petitioners to use its posts in Naga City, which is the service
contemplated in said article. Furthermore, a bare reading of this article reveals that it is not
a requirement thereunder that the contract be for future service with future unusual change.
According to Senator Arturo M. Tolentino,10 Article 1267 states in our law the doctrine of
unforseen events. This is said to be based on the discredited theory of rebus sic stantibus in
public international law; under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist the contract also ceases to
exist. Considering practical needs and the demands of equity and good faith, the
disappearance of the basis of a contract gives rise to a right to relief in favor of the party
prejudiced.
In a nutshell, private respondent in the Occeña case filed a complaint against petitioner
before the trial court praying for modification of the terms and conditions of the contract
that they entered into by fixing the proper shares that should pertain to them out of the
gross proceeds from the sales of subdivided lots. We ordered the dismissal of the complaint
therein for failure to state a sufficient cause of action. We rationalized that the Court of
Appeals misapplied Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision contract but that the court
"render judgment modifying the terms and conditions of the contract . . .
by fixing the proper shares that should pertain to the herein parties out of the gross
proceeds from the sales of subdivided lots of subject subdivision". The cited article (Article
1267) does not grant the courts (the) authority to remake, modify or revise the contract or
to fix the division of shares between the parties as contractually stipulated with the force of
law between the parties, so as to substitute its own terms for those covenanted by the
parties themselves. Respondent's complaint for modification of contract manifestly has no
basis in law and therefore states no cause of action. Under the particular allegations of
respondent's complaint and the circumstances therein averred, the courts cannot even in
equity grant the relief sought.11
The ruling in the Occeña case is not applicable because we agree with respondent court that
the allegations in private respondent's complaint and the evidence it has presented
sufficiently made out a cause of action under Article 1267. We, therefore, release the parties
from their correlative obligations under the contract. However, our disposition of the
present controversy does not end here. We have to take into account the possible
consequences of merely releasing the parties therefrom: petitioners will remove the
telephone wires/cables in the posts of private respondent, resulting in disruption of their
service to the public; while private respondent, in consonance with the contract12 will return
all the telephone units to petitioners, causing prejudice to its business. We shall not allow
such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay
private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman,
Magarao and Pili, Camarines Sur and in other places where petitioners use private
respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning January,
1989; and 2) private respondent to pay petitioner the monthly dues of all its telephones at
the same rate being paid by the public beginning January, 1989. The peculiar circumstances
of the present case, as distinguished further from the Occeña case, necessitates exercise of
our equity jurisdiction.13 By way of emphasis, we reiterate the rationalization of respondent
court that:
. . . In affirming said ruling, we are not making a new contract for the parties herein, but we
find it necessary to do so in order not to disrupt the basic and essential services being
rendered by both parties herein to the public and to avoid unjust enrichment by appellant
at the expense of plaintiff . . . .14
Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and
was never the subject of trial and evidence has been passed upon by respondent court in its
well reasoned resolution, which we hereunder quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil
Code to this case, we have changed its theory and decided the same on an issue not invoked
by plaintiff in the lower court. For basically, the main and pivotal issue in this case is whether
the continued enforcement of the contract Exh. "A" between the parties has, through the
years (since 1977), become too inequitous or disadvantageous to the plaintiff and too one-
sided in favor of defendant-appellant, so that a solution must be found to relieve plaintiff
from the continued operation of said agreement and to prevent defendant-appellant from
further unjustly enriching itself at plaintiff's expense. It is indeed unfortunate that defendant
had turned deaf ears to plaintiffs requests for renegotiation, constraining the latter to go to
court. But although plaintiff cannot, as we have held, correctly invoke reformation of
contract as a proper remedy (there having been no showing of a mistake or error in said
contract on the part of any of the parties so as to result in its failure to express their true
intent), this does not mean that plaintiff is absolutely without a remedy in order to relieve
itself from a contract that has gone far beyond its contemplation and has become so highly
inequitous and disadvantageous to it through the years because of the expansion of
defendant-appellant's business and the increase in the volume of its subscribers. And as it is
the duty of the Court to administer justice, it must do so in this case in the best way and
manner it can in the light of the proven facts and the law or laws applicable thereto.
It is settled that when the trial court decides a case in favor of a party on a certain ground,
the appellant court may uphold the decision below upon some other point which was
ignored or erroneously decided by the trial court (Garcia Valdez v. Tuazon, 40 Phil. 943;
Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the
appellate court has the discretion to consider an unassigned error that is closely related to
an error properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196).
It has also been held that the Supreme Court (and this Court as well) has the authority to
review matters, even if they are not assigned as errors in the appeal, if it is found that their
consideration is necessary in arriving at a just decision of the case (Saura Import & Export
Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA 143). For it is the material
allegations of fact in the complaint, not the legal conclusion made therein or the prayer, that
determines the relief to which the plaintiff is entitled, and the plaintiff is entitled to as much
relief as the facts warrant although that relief is not specifically prayed for in the complaint
(Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios,
77 Phil. 120). To quote an old but very illuminating decision of our Supreme Court through
the pen of American jurist Adam C. Carson:
"Under our system of pleading it is the duty of the courts to grant the relief to which the
parties are shown to be entitled by the allegations in their pleadings and the facts proven at
the trial, and the mere fact that they themselves misconstrue the legal effect of the facts
thus alleged and proven will not prevent the court from placing the just construction thereon
and adjudicating the issues accordingly." (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme
Court also held:
We rule that the respondent court did not commit any error in taking cognizance of the
aforesaid issues, although not raised before the trial court. The presence of strong
consideration of substantial justice has led this Court to relax the well-entrenched rule that,
except questions on jurisdiction, no question will be entertained on appeal unless it has been
raised in the court below and it is within the issues made by the parties in their pleadings
(Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice to show that this Court did not err in applying
Art. 1267 of the New Civil Code to this case. Defendant-appellant stresses that the
applicability of said provision is a question of fact, and that it should have been given the
opportunity to present evidence on said question. But defendant-appellant cannot honestly
and truthfully claim that it (did) not (have) the opportunity to present evidence on the issue
of whether the continued operation of the contract Exh. "A" has now become too one-sided
in its favor and too inequitous, unfair, and disadvantageous to plaintiff. As held in our
decision, the abundant and copious evidence presented by both parties in this case and
summarized in said decision established the following essential and vital facts which led us
to apply Art. 1267 of the New Civil Code to this case:
xxx xxx xxx 15
On the issue of prescription of private respondent's action for reformation of contract,
petitioners allege that respondent court's ruling that the right of action "arose only after said
contract had already become disadvantageous and unfair to it due to subsequent events and
conditions, which must be sometime during the latter part of 1982 or in 1983 . . ." 16 is
erroneous. In reformation of contracts, what is reformed is not the contract itself, but the
instrument embodying the contract. It follows that whether the contract is disadvantageous
or not is irrelevant to reformation and therefore, cannot be an element in the determination
of the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract
must be brought within ten (10) years from the time the right of action accrues. Clearly, the
ten (10) year period is to be reckoned from the time the right of action accrues which is not
necessarily the date of execution of the contract. As correctly ruled by respondent court,
private respondent's right of action arose "sometime during the latter part of 1982 or in 1983
when according to Atty. Luis General, Jr. . . ., he was asked by (private respondent's) Board
of Directors to study said contract as it already appeared disadvantageous to (private
respondent) (p. 31, tsn, May 8, 1989). (Private respondent's) cause of action to ask for
reformation of said contract should thus be considered to have arisen only in 1982 or 1983,
and from 1982 to January 2, 1989 when the complaint in this case was filed, ten (10) years
had not yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative about the
prestations of either party because petitioner's permission for free use of telephones is not
made to depend purely on their will, neither is private respondent's permission for free use
of its posts dependent purely on its will.
Apart from applying Article 1267, respondent court cited another legal remedy available to
private respondent under the allegations of its complaint and the preponderant evidence
presented by it:
. . . we believe that the provision in said agreement —
(a) That the term or period of this contract shall be as long as the party of the first
part [herein appellant] has need for the electric light posts of the party of the second part
[herein plaintiff] it being understood that this contract shall terminate when for any reason
whatsoever, the party of the second part is forced to stop, abandoned [sic] its operation as
a public service and it becomes necessary to remove the electric light post [sic]"; (Emphasis
supplied)
is invalid for being purely potestative on the part of appellant as it leaves the continued
effectivity of the aforesaid agreement to the latter's sole and exclusive will as long as plaintiff
is in operation. A similar provision in a contract of lease wherein the parties agreed that the
lessee could stay on the leased premises "for as long as the defendant needed the premises
and can meet and pay said increases" was recently held by the Supreme Court in Lim v. C.A.,
191 SCRA 150, citing the much earlier case of Encarnacion v. Baldomar, 77 Phil. 470, as invalid
for being "a purely potestative condition because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the lessee." Further held the High Court in
the Lim case:
The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice of the lessee between continuing the
payment of the rentals or not, completely depriving the owner of any say in the matter.
Mutuality does not obtain in such a contract of lease of no equality exists between the lessor
and the lessee since the life of the contract is dictated solely by the lessee.
The above can also be said of the agreement Exh. "A" between the parties in this case. There
is no mutuality and equality between them under the afore-quoted provision thereof since
the life and continuity of said agreement is made to depend as long as appellant needs
plaintiff's electric posts. And this is precisely why, since 1977 when said agreement was
executed and up to 1989 when this case was finally filed by plaintiff, it could do nothing to
be released from or terminate said agreement notwithstanding that its continued effectivity
has become very disadvantageous and inequitous to it due to the expansion and increase of
appellant's telephone services within Naga City and even outside the same, without a
corresponding increase in the ten (10) telephone units being used by plaintiff free of charge,
as well as the bad and inefficient service of said telephones to the prejudice and
inconvenience of plaintiff and its customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative condition is a condition,
the fulfillment of which depends upon the sole will of the debtor, in which case, the
conditional obligation is void. 19 Based on this definition, respondent court's finding that the
provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the first part
(petitioner) has need for the electric light posts of the party of the second part (private
respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the other conditions
in the same provision, to wit:
. . . it being understood that this contract shall terminate when for any reason whatsoever,
the party of the second part (private respondent) is forced to stop, abandoned (sic) its
operation as a public service and it becomes necessary to remove the electric light post (sic);
which are casual conditions since they depend on chance, hazard, or the will of a third
person. 20 In sum, the contract is subject to mixed conditions, that is, they depend partly on
the will of the debtor and partly on chance, hazard or the will of a third person, which do not
invalidate the aforementioned provision. 21 Nevertheless, in view of our discussions under
the first and second issues raised by petitioners, there is no reason to set aside the
questioned decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May
28, 1992 and its resolution dated September 10, 1992 are AFFIRMED.
G.R. No. 158361 April 10, 2013
INTERNATIONAL HOTEL CORPORATION, Petitioner,
vs.
FRANCISCO B. JOAQUIN, JR. and RAFAEL SUAREZ, Respondents.
DECISION
BERSAMIN, J.:
To avoid unjust enrichment to a party from resulting out of a substantially performed
contract, the principle of quantum meruit may be used to determine his compensation in
the absence of a written agreement for that purpose. The principle of quantum meruit
justifies the payment of the reasonable value of the services rendered by him.
The Case
Under review is the decision the Court of Appeals (CA) promulgated on November 8,
2002,1 disposing:
WHEREFORE, premises considered, the decision dated August 26, 1993 of the Regional Trial
Court, Branch 13, Manila in Civil Case No. R-82-2434 is AFFIRMED with Modification as to the
amounts awarded as follows: defendant-appellant IHC is ordered to pay plaintiff-appellant
Joaquin ₱700,000.00 and plaintiff-appellant Suarez ₱200,000.00, both to be paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a proposal to the Board
of Directors of the International Hotel Corporation (IHC) for him to render technical
assistance in securing a foreign loan for the construction of a hotel, to be guaranteed by the
Development Bank of the Philippines (DBP).2 The proposal encompassed nine phases,
namely: (1) the preparation of a new project study; (2) the settlement of the unregistered
mortgage prior to the submission of the application for guaranty for processing by DBP; (3)
the preparation of papers necessary to the application for guaranty; (4) the securing of a
foreign financier for the project; (5) the securing of the approval of the DBP Board of
Governors; (6) the actual follow up of the application with DBP3; (7) the overall coordination
in implementing the projections of the project study; (8) the preparation of the staff for
actual hotel operations; and (9) the actual hotel operations.4
The IHC Board of Directors approved phase one to phase six of the proposal during the
special board meeting on February 11, 1969, and earmarked ₱2,000,000.00 for the
project.5 Anent the financing, IHC applied with DBP for a foreign loan guaranty. DBP
processed the application,6 and approved it on October 24, 1969 subject to several
conditions.7
On July 11, 1969, shortly after submitting the application to DBP, Joaquin wrote to IHC to
request the payment of his fees in the amount of ₱500,000.00 for the services that he had
provided and would be providing to IHC in relation to the hotel project that were outside the
scope of the technical proposal. Joaquin intimated his amenability to receive shares of stock
instead of cash in view of IHC’s financial situation.8
On July 11, 1969, the stockholders of IHC met and granted Joaquin’s request, allowing the
payment for both Joaquin and Rafael Suarez for their services in implementing the proposal. 9
On June 20, 1970, Joaquin presented to the IHC Board of Directors the results of his
negotiations with potential foreign financiers. He narrowed the financiers to Roger Dunn &
Company and Materials Handling Corporation. He recommended that the Board of Directors
consider Materials Handling Corporation based on the more beneficial terms it had offered.
His recommendation was accepted.10
Negotiations with Materials Handling Corporation and, later on, with its principal, Barnes
International (Barnes), ensued. While the negotiations with Barnes were ongoing, Joaquin
and Jose Valero, the Executive Director of IHC, met with another financier, the Weston
International Corporation (Weston), to explore possible financing.11 When Barnes failed to
deliver the needed loan, IHC informed DBP that it would submit Weston for DBP’s
consideration.12As a result, DBP cancelled its previous guaranty through a letter dated
December 6, 1971.13
On December 13, 1971, IHC entered into an agreement with Weston, and communicated
this development to DBP on June 26, 1972. However, DBP denied the application for
guaranty for failure to comply with the conditions contained in its November 12, 1971
letter.14
Due to Joaquin’s failure to secure the needed loan, IHC, through its President Bautista,
canceled the 17,000 shares of stock previously issued to Joaquin and Suarez as payment for
their services. The latter requested a reconsideration of the cancellation, but their request
was rejected.
Consequently, Joaquin and Suarez commenced this action for specific performance,
annulment, damages and injunction by a complaint dated December 6, 1973 in the Regional
Trial Court in Manila (RTC), impleading IHC and the members of its Board of Directors,
namely, Felix Angelo Bautista, Sergio O. Rustia, Ephraim G. Gochangco, Mario B. Julian,
Benjamin J. Bautista, Basilio L. Lirag, Danilo R. Lacerna and Hermenegildo R. Reyes. 15 The
complaint alleged that the cancellation of the shares had been illegal, and had deprived them
of their right to participate in the meetings and elections held by IHC; that Barnes had been
recommended by IHC President Bautista, not by Joaquin; that they had failed to meet their
obligation because President Bautista and his son had intervened and negotiated with
Barnes instead of Weston; that DBP had canceled the guaranty because Barnes had failed to
release the loan; and that IHC had agreed to compensate their services with 17,000 shares
of the common stock plus cash of ₱1,000,000.00.16
IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B. Julian and Benjamin J.
Bautista, filed an answer claiming that the shares issued to Joaquin and Suarez as
compensation for their "past and future services" had been issued in violation of Section 16
of the Corporation Code; that Joaquin and Suarez had not provided a foreign financier
acceptable to DBP; and that they had already received ₱96,350.00 as payment for their
services.17
On their part, Lirag and Lacerna denied any knowledge of or participation in the cancellation
of the shares.18
Similarly, Gochangco and Reyes denied any knowledge of or participation in the cancellation
of the shares, and clarified that they were not directors of IHC.19 In the course of the
proceedings, Reyes died and was substituted by Consorcia P. Reyes, the administratrix of his
estate.20
Ruling of the RTC
Under its decision rendered on August 26, 1993, the RTC held IHC liable pursuant to the
second paragraph of Article 1284 of the Civil Code, disposing thusly:
WHEREFORE, in the light of the above facts, law and jurisprudence, the Court hereby orders
the defendant International Hotel Corporation to pay plaintiff Francisco B. Joaquin, the
amount of Two Hundred Thousand Pesos (₱200,000.00) and to pay plaintiff Rafael Suarez
the amount of Fifty Thousand Pesos (₱50,000.00); that the said defendant IHC likewise pay
the co-plaintiffs, attorney’s fees of ₱20,000.00, and costs of suit.
IT IS SO ORDERED.21
The RTC found that Joaquin and Suarez had failed to meet their obligations when IHC had
chosen to negotiate with Barnes rather than with Weston, the financier that Joaquin had
recommended; and that the cancellation of the shares of stock had been proper under
Section 68 of the Corporation Code, which allowed such transfer of shares to compensate
only past services, not future ones.
Ruling of the CA
Both parties appealed.22
Joaquin and Suarez assigned the following errors, to wit:
DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT PLAINTIFFS-APPELLANTS FULLY
PERFORMED ALL THAT WAS INCUMBENT UPON THEM, THE HONORABLE JUDGE ERRED IN
NOT ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING THE SHARES OF STOCK PREVIOUSLY
ISSUED TO PLAINTIFFS-APPELLANTS; AND
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO MILLION SEVEN HUNDRED PESOS (sic)
(₱2,700,000.00), INCLUDING INTEREST THEREON FROM 1973, REPRESENTING THE TOTAL
OBLIGATION DUE PLAINTIFFS-APPELLANTS.23
On the other hand, IHC attributed errors to the RTC, as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS HAVE NOTBEEN
COMPLETELY PAID FOR THEIR SERVICES, AND IN ORDERING THE DEFENDANT-APPELLANT TO
PAY TWO HUNDRED THOUSAND PESOS (₱200,000.00) AND FIFTY THOUSAND PESOS
(₱50,000.00) TO PLAINTIFFS-APPELLANTS FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ,
RESPECTIVELY.
II.
THE LOWER COURT ERRED IN AWARDING PLAINTIFFS-APPELLANTS ATTORNEY’S FEES AND
COSTS OF SUIT.24
In its questioned decision promulgated on November 8, 2002, the CA concurred with the
RTC, upholding IHC’s liability under Article 1186 of the Civil Code. It ruled that in the context
of Article 1234 of the Civil Code, Joaquin had substantially performed his obligations and had
become entitled to be paid for his services; and that the issuance of the shares of stock was
ultra vires for having been issued as consideration for future services.
Anent how much was due to Joaquin and Suarez, the CA explained thusly:
This Court does not subscribe to plaintiffs-appellants’ view that defendant-appellant IHC
agreed to pay them ₱2,000,000.00. Plaintiff-appellant Joaquin’s letter to defendant-appellee
F.A. Bautista, quoting defendant-appellant IHC’s board resolutions which supposedly
authorized the payment of such amount cannot be sustained. The resolutions are quite clear
and when taken together show that said amount was only the "estimated maximum
expenses" which defendant-appellant IHC expected to incur in accomplishing phases 1 to 6,
not exclusively to plaintiffs-appellants’ compensation.This conclusion finds support in an
unnumbered board resolution of defendant-appellant IHC dated July 11, 1969:
"Incidentally, it was also taken up the necessity of giving the Technical Group a portion of
the compensation that was authorized by this corporation in its Resolution of February 11,
1969 considering that the assistance so far given the corporation by said Technical Group in
continuing our project with the DBP and its request for guaranty for a foreign loan is 70%
completed leaving only some details which are now being processed. It is estimated that
₱400,000.00 worth of Common Stock would be reasonable for the present accomplishments
and to this effect, the President is authorized to issue the same in the name of the Technical
Group, as follows:
₱200,000.00 in common stock to Rafael Suarez, as associate in the Technical Group, and
₱200,000.00 in common stock to Francisco G. Joaquin, Jr., also a member of the Technical
Group.
It is apparent that not all of the ₱2,000,000.00 was allocated exclusively to compensate
plaintiffs-appellants. Rather, it was intended to fund the whole undertaking including their
compensation. On the same date, defendant-appellant IHC also authorized its president to
pay-appellant Joaquin ₱500,000.00 either in cash or in stock or both.
The amount awarded by the lower court was therefore less than what defendant-appellant
IHC agreed to pay plaintiffs-appellants. While this Court cannot decree that the cancelled
shares be restored, for they are without a doubt null and void, still and all, defendant-
appellant IHC cannot now put up its own ultra vires act as an excuse to escape obligation to
plaintiffs-appellants. Instead of shares of stock, defendant-appellant IHC is ordered to pay
plaintiff-appellant Joaquin a total of ₱700,000.00 and plaintiff-appellant Suarez ₱200,000.00,
both to be paid in cash.
Although the lower court failed to explain why it was granting the attorney’s fees, this Court
nonetheless finds its award proper given defendant-appellant IHC’s actions.25
Issues
In this appeal, the IHC raises as issues for our consideration and resolution the following:
I
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING COMPENSATION AND
EVEN MODIFYING THE PAYMENT TO HEREIN RESPONDENTS DESPITE NON-FULFILLMENT OF
THEIR OBLIGATION TO HEREIN PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING ATTORNEY’S FEES TO
RESPONDENTS26
IHC maintains that Article 1186 of the Civil Code was erroneously applied; that it had no
intention of preventing Joaquin from complying with his obligations when it adopted his
recommendation to negotiate with Barnes; that Article 1234 of the Civil Code applied only if
there was a merely slight deviation from the obligation, and the omission or defect was
technical and unimportant; that substantial compliance was unacceptable because the
foreign loan was material and was, in fact, the ultimate goal of its contract with Joaquin and
Suarez; that because the obligation was indivisible and subject to a suspensive condition,
Article 1181 of the Civil Code27 applied, under which a partial performance was equivalent
to non-performance; and that the award of attorney’s fees should be deleted for lack of legal
and factual bases.
On the part of respondents, only Joaquin filed a comment,28 arguing that the petition was
fatally defective for raising questions of fact; that the obligation was divisible and capable of
partial performance; and that the suspensive condition was deemed fulfilled through IHC’s
own actions.29
Ruling
We deny the petition for review on certiorari subject to the ensuing disquisitions.
1.
IHC raises questions of law
We first consider and resolve whether IHC’s petition improperly raised questions of fact.
A question of law exists when there is doubt as to what the law is on a certain state of facts,
but, in contrast, a question of fact exists when the doubt arises as to the truth or falsity of
the facts alleged. A question of law does not involve an examination of the probative value
of the evidence presented by the litigants or by any of them; the resolution of the issue must
rest solely on what the law provides on the given set of circumstances.30 When there is no
dispute as to the facts, the question of whether or not the conclusion drawn from the facts
is correct is a question of law.31
Considering that what IHC seeks to review is the CA’s application of the law on the facts
presented therein, there is no doubt that IHC raises questions of law. The basic issue posed
here is whether the conclusions drawn by the CA were correct under the pertinent laws.
2.
Article 1186 and Article 1234 of the Civil Code cannot be the source of IHC’s obligation to
pay respondents IHC argues that it should not be held liable because: (a) it was Joaquin who
had recommended Barnes; and (b) IHC’s negotiation with Barnes had been neither
intentional nor willfully intended to prevent Joaquin from complying with his obligations.
IHC’s argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents
its fulfillment.
This provision refers to the constructive fulfillment of a suspensive condition, 32 whose
application calls for two requisites, namely: (a) the intent of the obligor to prevent the
fulfillment of the condition, and (b) the actual prevention of the fulfillment. Mere intention
of the debtor to prevent the happening of the condition, or to place ineffective obstacles to
its compliance, without actually preventing the fulfillment, is insufficient.33
The error lies in the CA’s failure to determine IHC’s intent to pre-empt Joaquin from meeting
his obligations. The June 20, 1970 minutes of IHC’s special board meeting discloses that
Joaquin impressed upon the members of the Board that Materials Handling was offering
more favorable terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of Directors of the International Hotel
Corporation were present with the exception of Directors Benjamin J. Bautista and Sergio O.
Rustia who asked to be excused because of previous engagements. In that meeting, the
President called on Mr. Francisco G. Joaquin, Jr. to explain the different negotiations he had
conducted relative to obtaining the needed financing for the hotel project in keeping with
the authority given to him in a resolution approved by the Board of Directors.
Mr. Joaquin presently explained that he contacted several local and foreign financiers
through different brokers and after examining the different offers he narrowed down his
choice to two (2), to wit: the foreign financier recommended by George Wright of the Roger
Dunn & Company and the offer made by the Materials Handling Corporation.
After explaining the advantages and disadvantages to our corporation of the two (2) offers
specifically with regard to the terms and repayment of the loan and the rate of interest
requested by them, he concluded that the offer made by the Materials Handling Corporation
is much more advantageous because the terms and conditions of payment as well as the rate
of interest are much more reasonable and would be much less onerous to our corporation.
However, he explained that the corporation accepted, in principle, the offer of Roger Dunn,
per the corporation’s telegrams to Mr. Rudolph Meir of the Private Bank of Zurich,
Switzerland, and until such time as the corporation’s negotiations with Roger Dunn is
terminated, we are committed, on one way or the other, to their financing.
It was decided by the Directors that, should the negotiations with Roger Dunn materialize,
at the same time as the offer of Materials Handling Corporation, that the funds committed
by Roger Dunn may be diverted to other borrowers of the Development Bank of the
Philippines. With this condition, Director Joaquin showed the advantages of the offer of
Materials Handling Corporation. Mr. Joaquin also informed the corporation that, as of this
date, the bank confirmation of Roger Dunn & Company has not been received. In view of the
fact that the corporation is racing against time in securing its financing, he recommended
that the corporation entertain other offers.
After a brief exchange of views on the part of the Directors present and after hearing the
clarification and explanation made by Mr. C. M. Javier who was present and who represented
the Materials Handling Corporation, the Directors present approved unanimously the
recommendation of Mr. Joaquin to entertain the offer of Materials Handling Corporation.34
Evidently, IHC only relied on the opinion of its consultant in deciding to transact with
Materials Handling and, later on, with Barnes. In negotiating with Barnes, IHC had no
intention, willful or otherwise, to prevent Joaquin and Suarez from meeting their
undertaking. Such absence of any intention negated the basis for the CA’s reliance on Article
1186 of the Civil Code.
Nor do we agree with the CA’s upholding of IHC’s liability by virtue of Joaquin and Suarez’s
substantial performance. In so ruling, the CA applied Article 1234 of the Civil Code, which
states:
Article 1234. If the obligation has been substantially performed in good faith, the obligor
may recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits breaching the
contract35 after honestly and faithfully performing all the material elements thereof except
for some technical aspects that cause no serious harm to the obligee.36 IHC correctly submits
that the provision refers to an omission or deviation that is slight, or technical and
unimportant, and does not affect the real purpose of the contract.
Tolentino explains the character of the obligor’s breach under Article 1234 in the following
manner, to wit:
In order that there may be substantial performance of an obligation, there must have been
an attempt in good faith to perform, without any willful or intentional departure therefrom.
The deviation from the obligation must be slight, and the omission or defect must be
technical and unimportant, and must not pervade the whole or be so material that the object
which the parties intended to accomplish in a particular manner is not attained. The non-
performance of a material part of a contract will prevent the performance from amounting
to a substantial compliance.
The party claiming substantial performance must show that he has attempted in good faith
to perform his contract, but has through oversight, misunderstanding or any excusable
neglect failed to completely perform in certain negligible respects, for which the other party
may be adequately indemnified by an allowance and deduction from the contract price or
by an award of damages. But a party who knowingly and wilfully fails to perform his contract
in any respect, or omits to perform a material part of it, cannot be permitted, under the
protection of this rule, to compel the other party, and the trend of the more recent decisions
is to hold that the percentage of omitted or irregular performance may in and of itself be
sufficient to show that there had not been a substantial performance.37
By reason of the inconsequential nature of the breach or omission, the law deems the
performance as substantial, making it the obligee’s duty to pay.38 The compulsion of
payment is predicated on the substantial benefit derived by the obligee from the partial
performance. Although compelled to pay, the obligee is nonetheless entitled to an allowance
for the sum required to remedy omissions or defects and to complete the work agreed
upon.39
Conversely, the principle of substantial performance is inappropriate when the incomplete
performance constitutes a material breach of the contract. A contractual breach is material
if it will adversely affect the nature of the obligation that the obligor promised to deliver, the
benefits that the obligee expects to receive after full compliance, and the extent that the
non-performance defeated the purposes of the contract.40 Accordingly, for the principle
embodied in Article 1234 to apply, the failure of Joaquin and Suarez to comply with their
commitment should not defeat the ultimate purpose of the contract.
The primary objective of the parties in entering into the services agreement was to obtain a
foreign loan to finance the construction of IHC’s hotel project. This objective could be
inferred from IHC’s approval of phase 1 to phase 6 of the proposal. Phase 1 and phase 2,
respectively the preparation of a new project study and the settlement of the unregistered
mortgage, would pave the way for Joaquin and Suarez to render assistance to IHC in applying
for the DBP guaranty and thereafter to look for an able and willing foreign financial
institution acceptable to DBP. All the steps that Joaquin and Suarez undertook to accomplish
had a single objective – to secure a loan to fund the construction and eventual operations of
the hotel of IHC. In that regard, Joaquin himself admitted that his assistance was specifically
sought to seek financing for IHC’s hotel project.41
Needless to say, finding the foreign financier that DBP would guarantee was the essence of
the parties’ contract, so that the failure to completely satisfy such obligation could not be
characterized as slight and unimportant as to have resulted in Joaquin and Suarez’s
substantial performance that consequentially benefitted IHC. Whatever benefits IHC gained
from their services could only be minimal, and were even probably outweighed by whatever
losses IHC suffered from the delayed construction of its hotel. Consequently, Article 1234
did not apply.
3.
IHC is nonetheless liable to pay under the rule on constructive fulfillment of a mixed
conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the Civil Code, IHC
was liable based on the nature of the obligation.
Considering that the agreement between the parties was not circumscribed by a definite
period, its termination was subject to a condition – the happening of a future and uncertain
event.42 The prevailing rule in conditional obligations is that the acquisition of rights, as well
as the extinguishment or loss of those already acquired, shall depend upon the happening
of the event that constitutes the condition.43
To recall, both the RTC and the CA held that Joaquin and Suarez’s obligation was subject to
the suspensive condition of successfully securing a foreign loan guaranteed by DBP. IHC
agrees with both lower courts, and even argues that the obligation with a suspensive
condition did not arise when the event or occurrence did not happen. In that instance, partial
performance of the contract subject to the suspensive condition was tantamount to no
performance at all. As such, the respondents were not entitled to any compensation.
We have to disagree with IHC’s argument.
To secure a DBP-guaranteed foreign loan did not solely depend on the diligence or the sole
will of the respondents because it required the action and discretion of third persons – an
able and willing foreign financial institution to provide the needed funds, and the DBP Board
of Governors to guarantee the loan. Such third persons could not be legally compelled to act
in a manner favorable to IHC. There is no question that when the fulfillment of a condition is
dependent partly on the will of one of the contracting parties,44 or of the obligor, and partly
on chance, hazard or the will of a third person, the obligation is mixed.45 The existing rule in
a mixed conditional obligation is that when the condition was not fulfilled but the obligor did
all in his power to comply with the obligation, the condition should be deemed satisfied. 46
Considering that the respondents were able to secure an agreement with Weston, and
subsequently tried to reverse the prior cancellation of the guaranty by DBP, we rule that they
thereby constructively fulfilled their obligation.
4.
Quantum meruit should apply in the absence of an express agreement on the fees
The next issue to resolve is the amount of the fees that IHC should pay to Joaquin and Suarez.
Joaquin claimed that aside from the approved ₱2,000,000.00 fee to implement phase 1 to
phase 6, the IHC Board of Directors had approved an additional ₱500,000.00 as payment for
his services. The RTC declared that he and Suarez were entitled to ₱200,000.00 each, but the
CA revised the amounts to ₱700,000.00 for Joaquin and ₱200,000.00 for Suarez.
Anent the ₱2,000,000.00, the CA rightly concluded that the full amount of ₱2,000,000.00
could not be awarded to respondents because such amount was not allocated exclusively to
compensate respondents, but was intended to be the estimated maximum to fund the
expenses in undertaking phase 6 of the scope of services. Its conclusion was unquestionably
borne out by the minutes of the February 11, 1969 meeting, viz:
xxxx
II
The preparation of the necessary papers for the DBP including the preparation of the
application, the presentation of the mechanics of financing, the actual follow up with the
different departments of the DBP which includes the explanation of the feasibility studies up
to the approval of the loan, conditioned on the DBP’s acceptance of the project as feasible.
The estimated expenses for this particular phase would be contingent, i.e. upon DBP’s
approval of the plan now being studied and prepared, is somewhere around ₱2,000,000.00.
After a brief discussion on the matter, the Board on motion duly made and seconded,
unanimously adopted a resolution of the following tenor:
RESOLUTION NO. ______
(Series of 1969)
"RESOLVED, as it is hereby RESOLVED, that if the Reparations allocation and the plan being
negotiated with the DBP is realized the estimated maximum expenses of ₱2,000,000.00 for
this phase is hereby authorized subject to the sound discretion of the committee composed
of Justice Felix Angelo Bautista, Jose N. Valero and Ephraim G. Gochangco."47 (Emphasis
supplied)
Joaquin’s claim for the additional sum of ₱500,000.00 was similarly without factual and legal
bases. He had requested the payment of that amount to cover services rendered and still to
be rendered to IHC separately from those covered by the first six phases of the scope of
work. However, there is no reason to hold IHC liable for that amount due to his failure to
present sufficient proof of the services rendered towards that end. Furthermore, his July 11,
1969 letter revealed that the additional services that he had supposedly rendered were
identical to those enumerated in the technical proposal, thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista
President & Chairman of the Board
Gentlemen:
I have the honor to request this Body for its deliberation and action on the fees for my
services rendered and to be rendered to the hotel project and to the corporation. These fees
are separate from the fees you have approved in your previous Board Resolution, since my
fees are separate. I realize the position of the corporation at present, in that it is not in a
financial position to pay my services in cash, therefore, I am requesting this Body to consider
payment of my fees even in the form of shares of stock, as you have done to the other
technical men and for other services rendered to the corporation by other people.
Inasmuch as my fees are contingent on the successful implementation of this project, I
request that my fees be based on a percentage of the total project cost. The fees which I
consider reasonable for the services that I have rendered to the project up to the completion
of its construction is ₱500,000.00. I believe said amount is reasonable since this is
approximately only ¾ of 1% of the total project cost.
So far, I have accomplished Phases 1-5 of my report dated February 1, 1969 and which you
authorized us to do under Board Resolution of February 11, 1969. It is only Phase 6 which
now remains to be implemented. For my appointment as Consultant dated May 12, 1969
and the Board Resolution dated June 23, 1969 wherein I was appointed to the Technical
Committee, it now follows that I have been also authorized to implement part of Phases 7 &
8.
A brief summary of my accomplished work has been as follows:
1. I have revised and made the new Project Study of your hotel project, making it bankable
and feasible.
2. I have reduced the total cost of your project by approximately ₱24,735,000.00.
3. I have seen to it that a registered mortgage with the Reparations Commission did not
affect the application with the IBP for approval to processing.
4. I have prepared the application papers acceptable to the DBP by means of an advance
analysis and the presentation of the financial mechanics, which was accepted by the DBP.
5. I have presented the financial mechanics of the loan wherein the requirement of the DBP
for an additional ₱19,000,000.00 in equity from the corporation became unnecessary.
6. The explanation of the financial mechanics and the justification of this project was
instrumental in changing the original recommendation of the Investment Banking
Department of the DBP, which recommended disapproval of this application, to the present
recommendation of the Real Estate Department which is for the approval of this project for
proceeding.
7. I have submitted to you several offers already of foreign financiers which are in your files.
We are presently arranging the said financiers to confirm their funds to the DBP for our
project,
8. We have secured the approval of the DBP to process the loan application of this
corporation as per its letter July 2, 1969.
9. We have performed other services for the corporation which led to the cooperation and
understanding of the different factions of this corporation.
I have rendered services to your corporation for the past 6 months with no clear
understanding as to the compensation of my services. All I have drawn from the corporation
is the amount of ₱500.00 dated May 12, 1969 and personal payment advanced by Justice
Felix Angelo Bautista in the amount of ₱1,000.00.
I am, therefore, requesting this Body for their approval of my fees. I have shown my good
faith and willingness to render services to your corporation which is evidenced by my
continued services in the past 6 months as well as the accomplishments above mentioned. I It is notable that the confusion on the amounts of compensation arose from the parties’
believe that the final completion of this hotel, at least for the processing of the DBP up to inability to agree on the fees that respondents should receive. Considering the absence of
the completion of the construction, will take approximately another 2 ½ years. In view of the an agreement, and in view of respondents’ constructive fulfillment of their obligation, the
above, I again reiterate my request for your approval of my fees. When the corporation is in Court has to apply the principle of quantum meruit in determining how much was still due
a better financial position, I will request for a withdrawal of a monthly allowance, said and owing to respondents. Under the principle of quantum meruit, a contractor is allowed
amount to be determined by this Body. to recover the reasonable value of the services rendered despite the lack of a written
Very truly yours, contract.51 The measure of recovery under the principle should relate to the reasonable
(Sgd.) value of the services performed.52 The principle prevents undue enrichment based on the
Francisco G., Joaquin, Jr.48 equitable postulate that it is unjust for a person to retain any benefit without paying for it.
(Emphasis supplied) Being predicated on equity, the principle should only be applied if no express contract was
Joaquin could not even rest his claim on the approval by IHC’s Board of Directors. The entered into, and no specific statutory provision was applicable.53
approval apparently arose from the confusion between the supposedly separate services Under the established circumstances, we deem the total amount of ₱200,000.00 to be
that Joaquin had rendered and those to be done under the technical proposal. The minutes reasonable compensation for respondents’ services under the principle of quantum meruit.
of the July 11, 1969 board meeting (when the Board of Directors allowed the payment for Finally, we sustain IHC’s position that the grant of attorney’s fees lacked factual or legal basis.
Joaquin’s past services and for the 70% project completion by the technical group) showed Attorney’s fees are not awarded every time a party prevails in a suit because of the policy
as follows: that no premium should be placed on the right to litigate. There should be factual or legal
III support in the records before the award of such fees is sustained. It is not enough
The Third order of business is the compensation of Mr. Francisco G. Joaquin, Jr. for his justification for the award simply because respondents were compelled to protect their
services in the corporation. rights.54
After a brief discussion that ensued, upon motion duly made and seconded, the stockholders ACCORDINGLY, the Court DENIES the petition for review on certiorari; and AFFIRMS the
unanimously approved a resolution of the following tenor: decision of the Court of Appeals promulgated on November 8, 2002 in C.A.-G.R. No. 47094
RESOLUTION NO. ___ subject to the MODIFICATIONS that: (a) International Hotel Corporation is ordered to. pay
(Series of 1969) Francisco G. Joaquin, Jr. and Rafael Suarez ₱100,000.00 each as compensation for their
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a compensation in the amount of services, and (b) the award of ₱20,000.00 as attorney's fees is deleted.
Five Hundred Thousand (₱500,000.00) Pesos for his past services and services still to be
rendered in the future to the corporation up to the completion of the Project.1âwphi1 The
President is given full discretion to discuss with Mr. Joaquin the manner of payment of said
compensation, authorizing him to pay part in stock and part in cash."
Incidentally, it was also taken up the necessity of giving the Technical Group a portion of the
compensation that was authorized by this corporation in its Resolution of February 11, 1969
considering that the assistance so far given the corporation by said Technical Group in
continuing our project with the DBP and its request for guaranty for a foreign loan is 70%
completed leaving only some details which are now being processed. It is estimated that
₱400,000.00 worth of Common Stock would be reasonable for the present accomplishments
and to this effect, the President is authorized to issue the same in the name of the Technical
Group, as follows:
₱200,000.00 in Common Stock to Rafael Suarez, an associate in the Technical Group, and
₱200,000.00 in Common stock to Francisco G. Joaquin, Jr., also a member of the Technical
Group.49
Lastly, the amount purportedly included services still to be rendered that supposedly
extended until the completion of the construction of the hotel. It is basic, however, that in
obligations to do, there can be no payment unless the obligation has been completely
rendered.50
G.R. No. 192108 November 21, 2012
SPOUSES SOCRATES SY AND CELY SY, Petitioner,
vs.
ANDOK'S LITSON CORPORATION, Respondent.
DECISION
PEREZ, J.:
Assailed in this Petition for Review on Certiorari is the Decision1 of the Court of Appeals dated
20 January 2010 in CA-G.R. CV No. 91942, as well as the Resolution2 dated 29 April 2010,
denying the motion for reconsideration.
This is a case for rescission of contract filed by the lessee, now respondent, against the
lessors, now the petitioners.
Petitioner Cely Sy (Sy) is the registered owner of a 316 square-meter lot located at 1940 Felix
Huertas Street, Sta. Cruz, Manila. Respondent Andok’s Litson Corporation (Andok’s) is
engaged in the business of selling grilled chicken and pork with outlets all over the
Philippines. On 5 July 2005, Sy and Andok’s entered into a 5-year lease contract covering the
parcel of land owned by Sy. Monthly rental was fixed at P60,000.00, exclusive of taxes, for
the first 2 years and P66,000.00 for the third, fourth and fifth year with 10% escalation every
year beginning on the fourth year.3
Per contract, the lessee shall, upon signing the contract, pay four (4) months of advance
deposit amounting to P240,000.00 and a security deposit equivalent to four (4) months of
rental in the amount of P240,000.00. Accordingly, Andok’s issued a check to Sy for
P480,000.00.
Andok’s alleged that while in the process of applying for electrical connection on the
improvements to be constructed on Sy’s land, it was discovered that Sy has an unpaid Manila
Electric Company (MERALCO) bill amounting to P400,000.00. Andok’s presented a system-
generated statement from MERALCO.4 Andok’s further complained that construction for the
improvement it intended for the leased premises could not proceed because another tenant,
Mediapool, Inc. incurred delay in the construction of a billboard structure also within the
leased premises. In its letter dated 25 August 2005, Andok’s first informed Sy about the delay
in the construction of the billboard structure on a portion of its leased property. Three more
letters of the same tenor were sent to Sy but the demands fell on deaf ears. Consequently,
Andok’s suffered damages in the total amount of P627,000.00 which comprises the advance
rental and deposit, cost of money, mobilization cost for the construction of improvement
over leased premises, and unrealized income. The complaint for rescission was filed on 13
February 2008, three years after continued inaction on the request to have the billboard
construction expedited.
In her Answer, Sy stated that she has faithfully complied with all the terms and conditions of
the lease contract and denied incurring an outstanding electricity bill.5
On 14 April 2008, Andok’s filed a motion to set the case for pre-trial.
The Regional Trial Court of Manila (RTC) sent a Notice of Pre-trial Conference to the parties
on 28 April 2008 informing them that a pre-trial conference is set on 26 May 2008.
On 23 May 2008, an Urgent Motion to Reset Pre-Trial Conference was filed by Sy’s counsel
on the allegation that on the pre-trial date, he has to attend a hearing on another branch of
the RTC in Manila.
During the pre-trial conference, Sy and her counsel failed to appear. Sy’s urgent motion was
denied, and the RTC allowed Andok’s to present its evidence ex-parte.
No motion for reconsideration was filed on the trial court’s order allowing ex-parte
presentation of evidence. Thus, on the 2 June 2008 hearing, Andok’s presented ex-parte the
testimony of its General Manager, Teodoro Calaunan, detailing the breach of contract
committed by Sy.
On 24 July 2008, the trial court rendered a decision favoring Andok’s, to wit:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure,
judgment is hereby rendered in favor of the plaintiff, ordering the defendants to pay to the
plaintiff (1) P480,000.00 with legal rate of interest from March 11, 2006, (2) P1,350.00 for
the comprehensive insurance on the leased portion of the realty, and (3) P4,873.00 as
contractors tax.
For lack of merit, defendants’ counterclaim is hereby dismissed.6
On appeal, Sy decried deprivation of her right to present evidence resulting in a default
judgment against her. Sy denied that there was a breach on the lease contract.
On 20 January 2010, the Court of Appeals dismissed the appeal and affirmed the ruling of
the RTC.
The appellate court held that the trial court correctly allowed the presentation of evidence
ex-parte as there was no valid reason for the urgent motion for postponement of the pre-
trial filed by Sy. The appellate court found that Sy repeatedly failed to comply with her
obligation under the lease contract despite repeated demands. The appellate court awarded
damages for breach of contract.
After the denial of Sy’s motion for reconsideration, she filed the instant petition raising the
following grounds:
-A-
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS IN AFFIRMING THE TRIAL
COURT’S JUDGMENT FAILED TO NOTICE THAT THE DEFAULT JUDGMENT STRAYED FROM
JUDICIAL PRECEDENT AND POLICY, AND AMOUNTED TO AN INFRINGEMENT OF THE RIGHT
TO DUE PROCESS OF THE SPOUSES SY.
-B-
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS IN AFFIRMING THE TRIAL
COURT’S DEFAULT JUDGMENT FAILED TO APPRECIATE THAT THE RESPONDENT ITSELF
CONTRACTUALLY ASSUMED THE RISK OF DELAY, AND THUS ANY DELAY COULD NOT BE A
GROUND FOR THE RESOLUTION OR ANNULMENT OF THE CONTRACT OF LEASE.
-C-
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS ALLOWED A DEPARTURE
FROM JUDICIAL PRECEDENT WHEN IT SUSTAINED THE TRIAL COURT’S IMPOSITION OF LEGAL
INTEREST ON THE MONETARY AWARD IN RESPONDENT’S FAVOR.7
The affirmance by the Court of Appeals of the judgment of the trial court is correct.
Section 4, Rule 18 of the Rules of Court requires the parties and their counsel to appear at
pre-trial, thus:
Section 4. Appearance of parties. – It shall be the duty of the parties and their counsel to
appear at the pre-trial. The non-appearance of a party may be excused only if a valid cause
is shown therefor or if a representative shall appear in his behalf fully authorized in writing
to enter into an amicable settlement, to submit to alternative modes of dispute resolution,
and to enter into stipulations or admissions of facts and of documents.
Section 5 of the same rule states the consequences of failure to appear during pre-trial, thus:
Section 5. Effect of failure to appear. — The failure of the plaintiff to appear when so required
pursuant to the next preceding section shall be cause for dismissal of the action. The
dismissal shall be with prejudice, unless otherwise ordered by the court. A similar failure on
the part of the defendant shall be cause to allow the plaintiff to present his evidence ex-
parte and the court to render judgment on the basis thereof.
What constitutes a valid ground to excuse litigants and their counsels from appearing at the
pre-trial under Section 4, Rule 18 of the Rules of Court is subject to the sound discretion of
a judge.8 Such discretion was shown by the trial court, which was correct in putting into
effect the consequence of petitioners’ non-appearance at the pre-trial. While Sy filed an
Urgent Motion to Reset Pre-trial, she cannot assume that her motion would be automatically
granted. As found by the Court of Appeals, the denial of petitioners’ motion for
postponement is dictated by the motion itself:
A perusal of the Urgent Motion to Reset Pre-Trial Conference discloses that other than the
allegation that counsel will attend a hearing in another branch of the same court in Manila,
yet, it failed to substantiate its claim. It did not state the case number nor attach the Calendar
of Hearing or such other pertinent proof to appraise the court that indeed counsel was
predisposed.9
We cannot allow petitioners to argue that their right to due process has been infringed.
In The Philippine American Life & General Insurance Company v. Enario,10 we reiterated that
the essence of due process is to be found in the reasonable opportunity to be heard and to
submit any evidence one may have in support of one’s defense. Where the opportunity to
be heard, either through verbal arguments or pleadings, is accorded, and the party can
present its side or defend its interest in due course, there is no denial of procedural due
process.
We next deal with the central issue of rescission.
Article 1191 of the Civil Code provides that the power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is incumbent upon
him.
A lease contract is a reciprocal contract. By signing the lease agreement, the lessor grants
possession over his/her property to the lessee for a period of time in exchange for rental
payment.
Indeed, rescission is statutorily recognized in a contract of lease. Article 1659 of the Civil
Code provides:
Art. 1659. If the lessor or the lessee should not comply with the obligations set forth in
articles 1654 and 1657, the aggrieved party may ask for the rescission of the contract and
indemnification for damages, or only the latter, allowing the contract to remain in force.
Article 1659 outlines the remedies for non-compliance with the reciprocal obligations in a
lease contract, which obligations are cited in Articles 1654 and 1657:
Article 1654. The lessor is obliged:
(1) To deliver the thing which is the object of the contract in such a conditions as to render
it fit for the use intended;
(2) To make on the same during the lease all the necessary repairs in order to keep it suitable
for the use to which it has been devoted, unless there is a stipulation to the contrary;
(3) To maintain the lessee in the peaceful and adequate enjoyment of the lease for the entire
duration of the contract.
Article 1657. The lessee is obliged:
(1) To pay the price of the lease according to the terms stipulated;
(2) To use the thing leased as a diligent father of a family, devoting it to the use stipulated;
and in the absence of stipulation, to that which may be inferred from the nature of the thing
leased, according to the custom of the place;
(3) To pay the expenses for the deed of lease. (Boldfacing supplied).
The aggrieved party is given the option to the aggrieved party to ask for: (1) the rescission of
the contract; (2) rescission and indemnification for damages; or (3) only indemnification for
damages, allowing the contract to remain in force.11
While Andok’s had complied with all its obligations as a lessee, the lessor failed to render
the premises fit for the use intended and to maintain the lessee in the peaceful and adequate
enjoyment of the lease.
The case of CMS Investments and Management Corporation v. Intermediate Appellate
Court12 quoted Manresa’s comment on the lessor’s obligation to maintain the lessee in the
peaceful and adequate enjoyment of the lease for the entire duration of the contract, in this
wise:
The lessor must see that the enjoyment is not interrupted or disturbed, either by others' acts
x x x or by his own. By his own acts, because, being the person principally obligated by the
contract, he would openly violate it if, in going back on his agreement, he should attempt to
render ineffective in practice the right in the thing he had granted to the lessee; and by
others' acts, because he must guarantee the right he created, for he is obliged to give
warranty in the manner we have set forth in our commentary on article 1553, and, in this
sense, it is incumbent upon him to protect the lessee in the latters’ peaceful enjoyment.13
Andok’s paid a total of P480,000.00 as advance deposit for four (4) months and security
deposit equivalent to four (4) months. However, the construction of its outlet store was
hindered by two incidents — the unpaid MERALCO bills and the unfinished construction of a
billboard structure directly above the leased property.
Sy argues that per contract, Andok’s had assumed the risk of delay by allowing MediaPool,
Inc. to construct a billboard structure on a portion of the leased premises. We reproduce the
pertinent provision for brevity:
10. That the LESSEE shall allow persons who will construct, inspect, maintain and repair all 3. When the judgment of the court awarding a sum of money becomes final and executory,
billboard structures to be set up and constructed on the portion of the parcel of land the rate of legal interest, whatever the case falls under paragraph 1 or paragraph 2, above,
excluded from this contract, only upon approval of written request to LESSEE AND LESSOR shall be 12% per annum from such finality until its satisfaction, this interim period being
from the billboard LESSEE to avoid disruption of business operations of Andok’s Litson deemed to be by then an equivalent to a forbearance of credit.16
Corporation and its affiliates.14 Accordingly, legal interest at the rate of 6% per annum on the amounts awarded starts to
True, Andok’s agreed to allow MediaPool, Inc. to construct a billboard structure but it was run from 24 July 2008, when the trial court rendered judgment. From the time this judgment
conditioned on Andok’s and the lessor’s approval to avoid disruption of its business becomes final and executory, the interest rate shall be 12% per annum on the judgment
operation. Sy is thus cognizant of the fact that the said billboard structure construction might amount and the interest earned up to that date, until the judgment is wholly satisfied.
disrupt, as it already did, the intended construction of respondent’s outlet. It is thereby WHEREFORE, the petition is DENIED. The 20 January 2010 Decision of the Court of Appeals
understood that the construction of a billboard should be done within a period of time that in CA-G.R. CV No. 91942, affirming the 24 July 2008 Decision of the RTC, Branch 17, Manila,
is reasonable and sufficient so as not to disrupt the business operations of respondent. In is hereby AFFIRMED.
this case, Andok’s had agreed to several extensions for MediaPool, Inc. to finish its billboard
construction. It had sent a total of four (4) letters in a span of 8 months, all of which were
merely ignored. Indeed, the indifference demonstrated by Sy leaves no doubt that she has
reneged on her obligation.
Sy’s disregard of Andok’s repeated demands for the billboard lessee to finish the
construction is a violation of her obligation to maintain the lessee in peaceful and adequate
enjoyment of the lease. The delay in the construction had obviously caused disruption in
respondent’s business as it could not immediately commence its business operations despite
prompt payment of rent.1ªvvph!1
The attendant circumstances show substantial breach. The delay in the construction
prevented Andok’s from using the leased premises for its business outlet. On top of the
failure of Sy to address the delay in the billboard construction, she also failed to resolve or
explain the unpaid electricity bills. Sy resorted to a blanket denial without however
producing any proof that the said bill had been settled. These incidents refer to the
fundamentals of the contract for the lease of Sy’s premises. She failed to comply with the
obligations that have arisen upon Andok’s payment of the amount equivalent to eight
months of the monthly rentals.
Anent the imposition of legal interest, the Court of Appeals is correct in stating that the
award of damages was warranted under the facts of the case and the imposition of legal
interest was necessary consequence thereof. We find applicable the pertinent guidelines
provided in Eastern Shipping Lines, Inc. v. Court of Appeals,15 thus:
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims
or damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
G.R. No. 188661 April 11, 2012
ESTELITA VILLAMAR, Petitioner,
vs.
BALBINO MANGAOIL, Respondent.
DECISION
REYES, J.:
The Case
Before us is a petition for review on certiorari1 under Rule 45 of the Rules of Court filed by
Estelita Villamar (Villamar) to assail the Decision2 rendered by the Court of Appeals (CA) on
February 20, 2009 in CA-G.R. CV No. 86286, the dispositive portion of which reads:
WHEREFORE, the instant appeal is DISMISSED. The assailed decision is AFFIRMED in toto.
SO ORDERED.3
The resolution4 issued by the CA on July 8, 2009 denied the petitioner's motion for
reconsideration to the foregoing.
The ruling5 of Branch 23, Regional Trial Court (RTC) of Roxas, Isabela, which was affirmed by
the CA in the herein assailed decision and resolution, ordered the (1) rescission of the
contract of sale of real property entered into by Villamar and Balbino Mangaoil (Mangaoil);
and (2) return of the down payment made relative to the said contract.
Antecedents Facts
The CA aptly summarized as follows the facts of the case prior to the filing by Mangaoil of
the complaint6 for rescission of contract before the RTC:
Villamar is the registered owner of a 3.6080 hectares parcel of land [hereinafter referred as
the subject property] in San Francisco, Manuel, Isabela covered by Transfer Certificate of
Title (TCT) No. T-92958-A. On March 30, 1998, she entered into an Agreement with
Mangaoil for the purchase and sale of said parcel of land, under the following terms and
conditions:
"1. The price of the land is ONE HUNDRED AND EIGHTY THOUSAND (180,000.00) PESOS per
hectare but only the 3.5000 hec. shall be paid and the rest shall be given free, so that the
total purchase or selling price shall be [₱]630,000.00 only;
2. ONE HUNDRED EIGHTY FIVE THOUSAND (185,000.00) PESOS of the total price was
already received on March 27, 1998 for payment of the loan secured by the certificate of
title covering the land in favor of the Rural Bank of Cauayan, San Manuel Branch, San
Manuel, Isabela [Rural Bank of Cauayan], in order that the certificate of title thereof be
withdrawn and released from the said bank, and the rest shall be for the payment of the
mortgag[e]s in favor of Romeo Lacaden and Florante Parangan;
3. After the release of the certificate of title covering the land subject-matter of this
agreement, the necessary deed of absolute sale in favor of the PARTY OF THE SECOND PART
shall be executed and the transfer be immediately effected so that the latter can apply for a
loan from any lending institution using the corresponding certificate of title as collateral
therefor, and the proceeds of the loan, whatever be the amount, be given to the PARTY OF
THE FIRST PART;
4. Whatever balance left from the agreed purchase price of the land subject matter hereof
after deducting the proceed of the loan and the [₱]185,000.00 already received as above-
mentioned, the PARTY OF THE SECOND PART shall pay unto the PARTY OF THE FIRST PART
not later than June 30, 1998 and thereafter the parties shall be released of any obligations
for and against each other; xxx"
On April 1, 1998, the parties executed a Deed of Absolute Sale whereby Villamar (then
Estelita Bernabe) transferred the subject parcel of land to Mangaoil for and in consideration
of [₱]150,000.00.
In a letter dated September 18, 1998, Mangaoil informed Villamar that he was backing out
from the sale agreed upon giving as one of the reasons therefor:
"3. That the area is not yet fully cleared by incumbrances as there are tenants who are not
willing to vacate the land without giving them back the amount that they mortgaged the
land."
Mangaoil demanded refund of his [₱]185,000.00 down payment. Reiterating said demand in
another letter dated April 29, 1999, the same, however, was unheeded.7 x x x (Citations
omitted)
On January 28, 2002, the respondent filed before the RTC a complaint8 for rescission of
contract against the petitioner. In the said complaint, the respondent sought the return of
₱185,000.00 which he paid to the petitioner, payment of interests thereon to be computed
from March 27, 1998 until the suit's termination, and the award of damages, costs and
₱20,000.00 attorney's fees. The respondent's factual allegations were as follows:
5. That as could be gleaned the "Agreement" (Annex "A"), the plaintiff [Mangaoil] handed to
the defendant [Villamar] the sum of [₱]185,000.00 to be applied as follows; [₱]80,000 was
for the redemption of the land which was mortgaged to the Rural Bank of Cauayan, San
Manuel Branch, San Manuel, Isabela, to enable the plaintiff to get hold of the title and
register the sale x x x and [₱]105,000.00 was for the redemption of the said land from private
mortgages to enable plaintiff to posses[s] and cultivate the same;
6. That although the defendant had already long redeemed the said land from the said bank
and withdrawn TCT No. T-92958-A, she has failed and refused, despite repeated demands,
to hand over the said title to the plaintiff and still refuses and fails to do so;
7. That, also, the plaintiff could not physically, actually and materially posses[s] and cultivate
the said land because the private mortgage[e]s and/or present possessors refuse to vacate
the same;
xxxx
11. That on September 18, 1998, the plaintiff sent a letter to the defendant demanding a
return of the amount so advanced by him, but the latter ignored the same, x x x;
12. That, again, on April 29, 1999, the plaintiff sent to the defendant another demand letter
but the latter likewise ignored the same, x x x;
13. That, finally, the plaintiff notified the defendant by a notarial act of his desire and
intention to rescind the said contract of sale, xxx;
x x x x.9 (Citations omitted)
In the respondent’s answer to the complaint, she averred that she had complied with her
obligations to the respondent. Specifically, she claimed having caused the release of TCT No.
T-92958-A by the Rural Bank of Cauayan and its delivery to a certain "Atty. Pedro C. Antonio"
(Atty. Antonio). The petitioner alleged that Atty. Antonio was commissioned to facilitate the
transfer of the said title in the respondent's name. The petitioner likewise insisted that it was
the respondent who unceremoniously withdrew from their agreement for reasons only the
latter knew.
The Ruling of the RTC
On September 9, 2005, the RTC ordered the rescission of the agreement and the deed of
absolute sale executed between the respondent and the petitioner. The petitioner was, thus
directed to return to the respondent the sum of ₱185,000.00 which the latter tendered as
initial payment for the purchase of the subject property. The RTC ratiocinated that:
There is no dispute that the defendant sold the LAND to the plaintiff for [₱]630,000.00 with
down payment of [₱]185,000.00. There is no evidence presented if there were any other
partial payments made after the perfection of the contract of sale.
Article 1458 of the Civil Code provides:
"Art. 1458. By the contract of sale[,] one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay
therefore a price certain in money or its equivalent."
As such, in a contract of sale, the obligation of the vendee to pay the price is correlative of
the obligation of the vendor to deliver the thing sold. It created or established at the same
time, out of the same course, and which result in mutual relations of creditor and debtor
between the parties.
The claim of the plaintiff that the LAND has not been delivered to him was not refuted by
the defendant. Considering that defendant failed to deliver to him the certificate of title and
of the possession over the LAND to the plaintiff, the contract must be rescinded pursuant to
Article 1191 of the Civil Code which, in part, provides:
"Art. 1191. The power of rescind obligations is implied in reciprocal ones in case one of the
obligors should not comply with what is incumbent upon him."10
The petitioner filed before the CA an appeal to challenge the foregoing. She ascribed error
on the part of the RTC when the latter ruled that the agreement and deed of sale executed
by and between the parties can be rescinded as she failed to deliver to the respondent both
the subject property and the certificate of title covering the same.
The Ruling of the CA
On February 20, 2009, the CA rendered the now assailed decision dismissing the petitioner’s
appeal based on the following grounds:
Burden of proof is the duty of a party to prove the truth of his claim or defense, or any fact
in issue necessary to establish his claim or defense by the amount of evidence required by
law. In civil cases, the burden of proof is on the defendant if he alleges, in his answer, an
affirmative defense, which is not a denial of an essential ingredient in the plaintiff's cause of
action, but is one which, if established, will be a good defense – i.e., an "avoidance" of the
claim, which prima facie, the plaintiff already has because of the defendant's own
admissions in the pleadings.
Defendant-appellant Villamar's defense in this case was an affirmative defense. She did not
deny plaintiff-appellee’s allegation that she had an agreement with plaintiff-appellee for the
sale of the subject parcel of land. Neither did she deny that she was obliged under the
contract to deliver the certificate of title to plaintiff-appellee immediately after said
title/property was redeemed from the bank. What she rather claims is that she already
complied with her obligation to deliver the title to plaintiff-appellee when she delivered
the same to Atty. Antonio as it was plaintiff-appellee himself who engaged the services of
said lawyer to precisely work for the immediate transfer of said title in his name. Since,
however, this affirmative defense as alleged in defendant-appellant's answer was not
admitted by plaintiff-appellee, it then follows that it behooved the defendant-appellant to
prove her averments by preponderance of evidence.
Yet, a careful perusal of the record shows that the defendant-appellant failed to sufficiently
prove said affirmative defense. She failed to prove that in the first place, "Atty. Antonio"
existed to receive the title for and in behalf of plaintiff-appellee. Worse, the defendant-
appellant failed to prove that Atty. Antonio received said title "as allegedly agreed upon."
We likewise sustain the RTC's finding that defendant-appellant V[i]llamar failed to deliver
possession of the subject property to plaintiff-appellee Mangaoil. As correctly observed by
the RTC - "[t]he claim of the plaintiff that the land has not been delivered to him was not
refuted by the defendant." Not only that. On cross-examination, the defendant-appellant
gave Us insight on why no such delivery could be made, viz.:
"x x x x
Q: So, you were not able to deliver this property to Mr. Mangaoil just after you redeem
the property because of the presence of these two (2) persons, is it not?
xxx
A: Yes, sir.
Q: Forcing you to file the case against them and which according to you, you have won, is it
not?
A: Yes, sir.
Q: And now at present[,] you are in actual possession of the land?
A: Yes, sir. x x x"
With the foregoing judicial admission, the RTC could not have erred in finding that
defendant-[appellant] failed to deliver the possession of the property sold, to plaintiff-
appellee.
Neither can We agree with defendant-appellant in her argument that the execution of the
Deed of Absolute Sale by the parties is already equivalent to a valid and constructive
delivery of the property to plaintiff-appellee. Not only is it doctrinally settled that in a
contract of sale, the vendor is bound to transfer the ownership of, and to deliver the thing
that is the object of the sale, the way Article 1547 of the Civil Code is worded, viz.:
"Art. 1547. In a contract of sale, unless a contrary intention appears, there is:
(1) An implied warranty on the part of the seller that he has a right to sell the thing at the
time when the ownership is to pass, and that the buyer shall from that time have and enjoy
the legal and peaceful possession of the thing;
(2) An implied warranty that the thing shall be free from any hidden defaults or defects, or
any change or encumbrance not declared or known to the buyer.
x x x."
shows that actual, and not mere constructive delivery is warrantied by the seller to the
buyer. "(P)eaceful possession of the thing" sold can hardly be enjoyed in a mere
constructive delivery.
The obligation of defendant-appellant Villamar to transfer ownership and deliver possession
of the subject parcel of land was her correlative obligation to plaintiff-appellee in exchange
for the latter's purchase price thereof. Thus, if she fails to comply with what is incumbent
upon her, a correlative right to rescind such contract from plaintiff-appellee arises, pursuant
to Article 1191 of the Civil Code.11 x x x (Citations omitted)
The Issues
Aggrieved, the petitioner filed before us the instant petition and submits the following issues
for resolution:
I.
WHETHER THE FAILURE OF PETITIONER-SELLER TO DELIVER THE CERTIFICATE OF TITLE OVER
THE PROPERTY TO RESPONDENT-BUYER IS A BREACH OF OBLIGATION IN A CONTRACT OF
SALE OF REAL PROPERTY THAT WOULD WARRANT RESCISSION OF THE CONTRACT;
II.
WHETHER PETITIONER IS LIABLE FOR BREACH OF OBLIGATION IN A CONTRACT OF SALE FOR
FAILURE OF RESPONDENT[-]BUYER TO IMMEDIATELY TAKE ACTUAL POSSESSION OF THE
PROPERTY NOTWITHSTANDING THE ABSENCE OF ANY STIPULATION IN THE CONTRACT
PROVIDING FOR THE SAME;
III.
WHETHER THE EXECUTION OF A DEED OF SALE OF REAL PROPERTY IN THE PRESENT CASE IS
ALREADY EQUIVALENT TO A VALID AND CONSTRUCTIVE DELIVERY OF THE PROPERTY TO THE
BUYER;
IV.
WHETHER OR NOT THE CONTRACT OF SALE SUBJECT MATTER OF THIS CASE SHOULD BE
RESCINDED ON SLIGHT OR CASUAL BREACH;
V.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE RTC
ORDERING THE RESCISSION OF THE CONTRACT OF SALE[.]12
The Petitioner's Arguments
The petitioner avers that the CA, in ordering the rescission of the agreement and deed of
sale, which she entered into with the respondent, on the basis of her alleged failure to deliver
the certificate of title, effectively imposed upon her an extra duty which was neither
stipulated in the contract nor required by law. She argues that under Articles 1495 13 and
149614 of the New Civil Code (NCC), the obligation to deliver the thing sold is complied with
by a seller who executes in favor of a buyer an instrument of sale in a public document.
Citing Chua v. Court of Appeals,15 she claims that there is a distinction between transferring
a certificate of title in the buyer's name, on one hand, and transferring ownership over the
property sold, on the other. The latter can be accomplished by the seller's execution of an
instrument of sale in a public document. The recording of the sale with the Registry of Deeds
and the transfer of the certificate of title in the buyer's name are necessary only to bind third
parties to the transfer of ownership.16
The petitioner contends that in her case, she had already complied with her obligations
under the agreement and the law when she had caused the release of TCT No. T-92958-A
from the Rural Bank of Cauayan, paid individual mortgagees Romeo Lacaden (Lacaden) and
Florante Parangan (Paranga), and executed an absolute deed of sale in the respondent's
favor. She adds that before T-92958-A can be cancelled and a new one be issued in the
respondent's favor, the latter decided to withdraw from their agreement. She also points
out that in the letters seeking for an outright rescission of their agreement sent to her by the
respondent, not once did he demand for the delivery of TCT.
The petitioner insists that the respondent's change of heart was due to (1) the latter's
realization of the difficulty in determining the subject property's perimeter boundary; (2) his
doubt that the property he purchased would yield harvests in the amount he expected; and
(3) the presence of mortgagees who were not willing to give up possession without first
being paid the amounts due to them. The petitioner contends that the actual reasons for the
respondent's intent to rescind their agreement did not at all constitute a substantial breach
of her obligations.
The petitioner stresses that under Article 1498 of the NCC, when a sale is made through a
public instrument, its execution is equivalent to the delivery of the thing which is the
contract's object, unless in the deed, the contrary appears or can be inferred. Further,
in Power Commercial and Industrial Corporation v. CA,17 it was ruled that the failure of a
seller to eject lessees from the property he sold and to deliver actual and physical possession,
cannot be considered a substantial breach, when such failure was not stipulated as a
resolutory or suspensive condition in the contract and when the effects and consequences
of the said failure were not specified as well. The execution of a deed of sale operates as a
formal or symbolic delivery of the property sold and it already authorizes the buyer to use
the instrument as proof of ownership.18
The petitioner argues that in the case at bar, the agreement and the absolute deed of sale
contains no stipulation that she was obliged to actually and physically deliver the subject
property to the respondent. The respondent fully knew Lacaden's and Parangan's possession
of the subject property. When they agreed on the sale of the property, the respondent
consciously assumed the risk of not being able to take immediate physical possession on
account of Lacaden's and Parangan's presence therein.
The petitioner likewise laments that the CA allegedly misappreciated the evidence offered
before it when it declared that she failed to prove the existence of Atty. Antonio. For the
record, she emphasizes that the said lawyer prepared and notarized the agreement and deed
of absolute sale which were executed between the parties. He was also the petitioner’s
counsel in the proceedings before the RTC. Atty. Antonio was also the one asked by the
respondent to cease the transfer of the title over the subject property in the latter's name
and to return the money he paid in advance.
The Respondent's Contentions
In the respondent's comment,19 he seeks the dismissal of the instant petition. He invokes
Articles 1191 and 1458 to argue that when a seller fails to transfer the ownership and
possession of a property sold, the buyer is entitled to rescind the contract of sale. Further,
he contends that the execution of a deed of absolute sale does not necessarily amount to a
valid and constructive delivery. In Masallo v. Cesar,20 it was ruled that a person who does not
have actual possession of real property cannot transfer constructive possession by the
execution and delivery of a public document by which the title to the land is transferred.
In Addison v. Felix and Tioco,21 the Court was emphatic that symbolic delivery by the
execution of a public instrument is equivalent to actual delivery only when the thing sold is
subject to the control of the vendor.
Our Ruling
The instant petition is bereft of merit.
There is only a single issue for resolution in the instant petition, to wit, whether or not the
failure of the petitioner to deliver to the respondent both the physical possession of the
subject property and the certificate of title covering the same amount to a substantial breach
of the former's obligations to the latter constituting a valid cause to rescind the agreement
and deed of sale entered into by the parties.
We rule in the affirmative.
The RTC and the CA both found that the petitioner failed to comply with her obligations to
deliver to the respondent both the possession of the subject property and the certificate of
title covering the same.
Although Articles 1458, 1495 and 1498 of the NCC and case law do not generally require
the seller to deliver to the buyer the physical possession of the property subject of a
contract of sale and the certificate of title covering the same, the agreement entered into
by the petitioner and the respondent provides otherwise. However, the terms of the
agreement cannot be considered as violative of law, morals, good customs, public order,
or public policy, hence, valid.
Article 1458 of the NCC obliges the seller to transfer the ownership of and to deliver a
determinate thing to the buyer, who shall in turn pay therefor a price certain in money or its
equivalent. In addition thereto, Article 1495 of the NCC binds the seller to warrant the thing
which is the object of the sale. On the other hand, Article 1498 of the same code provides
that when the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if from the deed,
the contrary does not appear or cannot clearly be inferred.
In the case of Chua v. Court of Appeals,22 which was cited by the petitioner, it was ruled that
"when the deed of absolute sale is signed by the parties and notarized, then delivery of the
real property is deemed made by the seller to the buyer."23 The transfer of the certificate of
title in the name of the buyer is not necessary to confer ownership upon him.
In the case now under our consideration, item nos. 2 and 3 of the agreement entered into
by the petitioner and the respondent explicitly provide:
2. ONE HUNDRED EIGHTY FIVE THOUSAND (₱185,000.00) PESOS of the total price was
already received on March 27, 1998 for payment of the loan secured by the certificate of
title covering the land in favor of the Rural Bank of Cauayan, San Manuel Branch, San Manuel,
Isabela, in order that the certificate of title thereof be withdrawn and released from the said
bank, and the rest shall be for the payment of the mortgages in favor of Romeo Lacaden and
Florante Parangan;
3. After the release of the certificate of title covering the land subject-matter of this
agreement, the necessary deed of absolute sale in favor of the PARTY OF THE SECOND PART
shall be executed and the transfer be immediately effected so that the latter can apply for a
loan from any lending institution using the corresponding certificate of title as
collateral therefor, and the proceeds of the loan, whatever be the amount, be given to the
PARTY OF THE FIRST PART;24 (underlining supplied)
As can be gleaned from the agreement of the contending parties, the respondent initially
paid the petitioner ₱185,000.00 for the latter to pay the loan obtained from the Rural Bank
of Cauayan and to cause the release from the said bank of the certificate of title covering the
subject property. The rest of the amount shall be used to pay the mortgages over the subject
property which was executed in favor of Lacaden and Parangan. After the release of the TCT,
a deed of sale shall be executed and transfer shall be immediately effected so that the title
covering the subject property can be used as a collateral for a loan the respondent will apply
for, the proceeds of which shall be given to the petitioner.
Under Article 1306 of the NCC, the contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary
to law, morals, good customs, public order or public policy.
While Articles 1458 and 1495 of the NCC and the doctrine enunciated in the case of Chua do
not impose upon the petitioner the obligation to physically deliver to the respondent the
certificate of title covering the subject property or cause the transfer in the latter's name of
the said title, a stipulation requiring otherwise is not prohibited by law and cannot be
regarded as violative of morals, good customs, public order or public policy. Item no. 3 of the
agreement executed by the parties expressly states that "transfer [shall] be immediately
effected so that the latter can apply for a loan from any lending institution using the
corresponding certificate of title as collateral therefore." Item no. 3 is literal enough to mean
that there should be physical delivery of the TCT for how else can the respondent use it as a
collateral to obtain a loan if the title remains in the petitioner’s possession. We agree with
the RTC and the CA that the petitioner failed to prove that she delivered the TCT covering
the subject property to the respondent. What the petitioner attempted to establish was that
she gave the TCT to Atty. Antonio whom she alleged was commissioned to effect the transfer
of the title in the respondent's name. Although Atty. Antonio's existence is certain as he was
the petitioner’s counsel in the proceedings before the RTC, there was no proof that the
former indeed received the TCT or that he was commissioned to process the transfer of the
title in the respondent's name.
It is likewise the petitioner’s contention that pursuant to Article 1498 of the NCC, she had
already complied with her obligation to deliver the subject property upon her execution of
an absolute deed of sale in the respondent’s favor. The petitioner avers that she did not
undertake to eject the mortgagors Parangan and Lacaden, whose presence in the premises
of the subject property was known to the respondent.
We are not persuaded.
In the case of Power Commercial and Industrial Corporation25 cited by the petitioner, the
Court ruled that the failure of the seller to eject the squatters from the property sold cannot
be made a ground for rescission if the said ejectment was not stipulated as a condition in the
contract of sale, and when in the negotiation stage, the buyer's counsel himself undertook
to eject the illegal settlers.
The circumstances surrounding the case now under our consideration are different. In item
no. 2 of the agreement, it is stated that part of the ₱185,000.00 initially paid to the petitioner
shall be used to pay the mortgagors, Parangan and Lacaden. While the provision does not
expressly impose upon the petitioner the obligation to eject the said mortgagors, the
undertaking is necessarily implied. Cessation of occupancy of the subject property is logically
expected from the mortgagors upon payment by the petitioner of the amounts due to them.
We note that in the demand letter26 dated September 18, 1998, which was sent by the
respondent to the petitioner, the former lamented that "the area is not yet fully cleared of
incumbrances as there are tenants who are not willing to vacate the land without giving
them back the amount that they mortgaged the land." Further, in the proceedings before
the RTC conducted after the complaint for rescission was filed, the petitioner herself testified
that she won the ejectment suit against the mortgagors "only last year".27 The complaint was
filed on September 8, 2002 or more than four years from the execution of the parties'
agreement. This means that after the lapse of a considerable period of time from the
agreement's execution, the mortgagors remained in possession of the subject property.
Notwithstanding the absence of stipulations in the agreement and absolute deed of sale
entered into by Villamar and Mangaoil expressly indicating the consequences of the
former's failure to deliver the physical possession of the subject property and the
certificate of title covering the same, the latter is entitled to demand for the rescission of
their contract pursuant to Article 1191 of the NCC.
We note that the agreement entered into by the petitioner and the respondent only contains
three items specifying the parties' undertakings. In item no. 5, the parties consented "to
abide with all the terms and conditions set forth in this agreement and never violate the
same."28
Article 1191 of the NCC is clear that "the power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is incumbent upon him." The
respondent cannot be deprived of his right to demand for rescission in view of the
petitioner’s failure to abide with item nos. 2 and 3 of the agreement. This remains true
notwithstanding the absence of express stipulations in the agreement indicating the
consequences of breaches which the parties may commit. To hold otherwise would render
Article 1191 of the NCC as useless.
Article 1498 of the NCC generally considers the execution of a public instrument as
constructive delivery by the seller to the buyer of the property subject of a contract of sale.
The case at bar, however, falls among the exceptions to the foregoing rule since a mere
presumptive and not conclusive delivery is created as the respondent failed to take
material possession of the subject property.
Further, even if we were to assume for argument's sake that the agreement entered into by
the contending parties does not require the delivery of the physical possession of the subject
property from the mortgagors to the respondent, still, the petitioner's claim that her
execution of an absolute deed of sale was already sufficient as it already amounted to a
constructive delivery of the thing sold which Article 1498 of the NCC allows, cannot stand.
In Philippine Suburban Development Corporation v. The Auditor General,29 we held:
When the sale of real property is made in a public instrument, the execution thereof is
equivalent to the delivery of the thing object of the contract, if from the deed the contrary
does not appear or cannot clearly be inferred.1âwphi1
In other words, there is symbolic delivery of the property subject of the sale by the execution
of the public instrument, unless from the express terms of the instrument, or by clear
inference therefrom, this was not the intention of the parties. Such would be the case, for
instance, x x x where the vendor has no control over the thing sold at the moment of the
sale, and, therefore, its material delivery could not have been made.30 (Underlining supplied
and citations omitted)
Stated differently, as a general rule, the execution of a public instrument amounts to a
constructive delivery of the thing subject of a contract of sale. However, exceptions exist,
among which is when mere presumptive and not conclusive delivery is created in cases
where the buyer fails to take material possession of the subject of sale. A person who does
not have actual possession of the thing sold cannot transfer constructive possession by the
execution and delivery of a public instrument.
In the case at bar, the RTC and the CA found that the petitioner failed to deliver to the
respondent the possession of the subject property due to the continued presence and
occupation of Parangan and Lacaden. We find no ample reason to reverse the said findings.
Considered in the light of either the agreement entered into by the parties or the pertinent
provisions of law, the petitioner failed in her undertaking to deliver the subject property to
the respondent.
IN VIEW OF THE FOREGOING, the instant petition is DENIED. The February 20, 2009 Decision
and July 8, 2009 Resolution of the Court of Appeals, directing the rescission of the agreement
and absolute deed of sale entered into by Estelita Villamar and Balbino Mangaoil and the
return of the down payment made for the purchase of the subject property,
are AFFIRMED. However, pursuant to our ruling in Eastern Shipping Lines, Inc. v.
CA,31 an interest of 12% per annum is imposed on the sum of ₱185,000.00 to be returned to
Mangaoil to be computed from the date of finality of this Decision until full satisfaction
thereof.