THIRD DIVISION

[G.R. No. 131622. November 27, 1998.]

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs. COURT OF
APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending
business under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; LOAN; INTEREST; STIPULATED INTEREST RATE OF 5.5%
PER MONTH CONSIDERED EXCESSIVE, INIQUITOUS, UNCONSCIONABLE AND EXORBITANT BUT NOT
USURIOUS; CASE AT BAR. — We agree with petitioners that the stipulated rate of interest at 5.5% per month on the
P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious"
because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has
expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now "legally
inexistent." cdasia
2. ID.; ID.; ID.; ID ; CENTRAL BANK CIRCULAR NO. 905 DID NOT REPEAL THE USURY LAW BUT MERELY
RENDERED IT INEFFECTIVE. — In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, the
Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Lawbut simply suspended the latter's
effectivity." Indeed, we have held that "a Central Bank Circular cannot repeal a law. Only a law can repeal another law." In
the recent case of Florendo vs. Court of Appeals, the Court reiterated the ruling that "by virtue of CB Circular No. 905, the
Usury Law has been rendered ineffective." "Usury has been legally non-existent in our jurisdiction. Interest can now be
charged as lender and borrower may agree upon."
3. ID.; ID.; ID.; ID.; RATE STIPULATED IN CASE AT BAR IS VOID; 12% INTEREST RATE PER ANNUM IS
CONSIDERED REASONABLE; COURT SHALL EQUITABLY REDUCE LIQUIDATED DAMAGES IF THEY ARE
UNCONSCIONABLE. — We find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law.
The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty
if they are iniquitous or unconscionable. Consequently, the Court of Appeals erred in upholding the stipulation of the parties.
Rather, we agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional 1% a
month penalty charge as liquidated damages may be more reasonable.

DECISION

PARDO, J p:

The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of Court, seeking
to set aside the decision of the Court of Appeals, 1 and its resolution denying reconsideration, 2 the dispositive portion of
which decision reads as follows: cdrep
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby
ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2% service charge
per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty
charges effective August 23, 1986, until the entire amount is fully paid.
"The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the imposition
of costs against the defendants.
SO ORDERED." 3
The Court required the respondents to comment on the petition, 4 which was filed on April 3, 1998, 5 and the
petitioners to reply thereto, which was filed on May 29, 1998. 6 We now resolve to give due course to the petition and decide
the case.

1
 The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and conclusive
on the parties herein, as the appeal is limited to questions of law, are as follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from
Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the name "Gonzales
Credit Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave only the amount of P47,000.00, to
the borrowers, as she retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount of P90,000.00,
payable in two months, at 6% interest per month. They executed a promissory note to evidence the loan, maturing on
January 19, 1986. They received only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of P300,000.00,
maturing in one month, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who
issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia
executed a promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However,
only the sum of P275,000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their previous
unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount of P60,000.00, bringing their
indebtedness to a total of P500,000.00, payable on August 23, 1986. They executed a promissory note, reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA
R. GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of
legal age, married to Danilo G. Gonzales, Jr., of Baliwag, Bulacan, the sum of PESOS . . . FIVE
HUNDRED THOUSAND . . . (P500,000.00) Philippine Currency with interest thereon at the rate of 5.5
PER CENT per month plus 2% service charge per annum from date hereof until fully paid according to
the amortization schedule contained herein. (Emphasis supplied)
"Payment will be made in full at the maturity date.
"Should I/We fail to pay my amortization or portion hereof when due, all the other installments
together with all interest accrued shall immediately be due and payable and I/WE hereby agree to pay
an additional amount equivalent to one per cent (1%) per month of the amount due and demandable as
penalty charges in the form of liquidated damages until fully paid; and the further sum of TWENTY FIVE
PER CENT (25%) thereof in full, without deductionsas Attorney's Fee whether actually incurred or not, of
the total amount due and demandable, exclusive of costs and judicial or extra judicial expenses.
(Emphasis supplied).
"I, WE further agree that in the event the present rate of interest on loan is increased by law or
the Central Bank of the Philippines, the holder shall have the option to apply and collect the increased
interest charges without notice although the original interest have already been collected wholly or
partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the amount of peso-
obligation under this agreement is based on the present value of the peso, and if there be any change in
the value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the peso-
obligation herein contracted shall be adjusted in accordance with the value of the peso then prevailing at
the time of the complete fulfillment of the obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals
of this note or extension of payments, reserving rights against each and all indorsers and all parties to
this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all
his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court." LLphil

2
 On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and penalties,
evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional
Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan including
interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he did not
obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the
sum of P500,000.00, and actually received the amount and benefited therefrom; that the loan was secured by a real estate
mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that the loan was the
transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel of real estate situated in
San Juan, Batangas; that the interest rate is excessive at 5.5% per month with additional service charge of 2% per annum,
and penalty charge of 1% per month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable,
illegal and excessive, and that substantial payments made were applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four promissory notes had
been duly proved, and ruled that although the Usury Law had been repealed, the interest charged by the plaintiffs on the
loans was unconscionable and "revolting to the conscience". Hence, the trial court applied "the provision of the New [Civil]
Code" that the "legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum." 7
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as
follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per
month as penalty, until the entire amount is paid in full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and
severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty
from November 19, 1985 until the whole amount is fully paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00
plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is
fully paid;
"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as
attorney's fees;
"5. All counterclaims are hereby dismissed.
"With costs against the defendants." 8
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of the
defendants, is the law that governs the parties. They further argued that Circular No. 416 of the Central Bank prescribing
the rate of interest for loans or forbearance of money, goods or credit at 12% per annum, applies only in the absence of a
stipulation on interest rate, but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become
'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower could
agree on any interest that may be charged on the loan". 9 The Court of Appeals further held that "the imposition of 'an
additional amount equivalent to 1% per month of the amount due and demandable as penalty charges in the form of
liquidated damages until fully paid' was allowed by law."10
Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the Regional Trial
Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby
ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service charge
per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty
charges effective August 24, 1986, until the entire amount is fully paid.

3
 "The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition
of costs against the defendants.
"SO ORDERED." 11
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated
November 25, 1997, the Court of Appeals denied the motion. 12
Hence, defendants interposed the present recourse via petition for review on certiorari. 13
We find the petition meritorious.
Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question presented is
whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that plaintiffs extended
to the defendants is usurious. In other words, is the Usury Law still effective, or has it been repealed by Central Bank Circular
No. 905, adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684? cdll
We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant. 13 However, we can not consider the rate "usurious" because this Court has
consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the
interest ceilings prescribed by the Usury Law 14 and that the Usury Law is now "legally inexistent". 15
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 16 the Court held that CB
Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity." Indeed,
we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal another law." 17 In the recent case
of Florendo vs. Court of Appeals 18 , the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has
been rendered ineffective". "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender
and borrower may agree upon." 19
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the
law. 20 The stipulation is void. 21 The courts shall reduce equitably liquidated damages, whether intended as an indemnity
or a penalty if they are iniquitous or unconscionable. 22
Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial
court that, under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as liquidated
damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated
on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING
the decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case
No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance.
SO ORDERED. prLL
Narvasa, C .J ., Romero, Kapunan and Purisima, JJ ., concur.
||| (Medel v. Court of Appeals, G.R. No. 131622, [November 27, 1998], 359 PHIL 820-831)

4
 EN BANC

[G.R. No. 189871. August 13, 2013.]

DARIO NACAR, petitioner, vs. GALLERY FRAMES and/or FELIPE BORDEY, JR., respondents.

DECISION

PERALTA, J p:

This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of the Court of
Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution 2 dated October 9, 2009 denying petitioner's motion for
reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National
Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as
NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner and found that he was
dismissed from employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay
in lieu of reinstatement in the amount of P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing
that complainant was dismissed from employment for a just or valid cause. All the more, it is clear from
the records that complainant was never afforded due process before he was terminated. As such, we are
perforce constrained to grant complainant's prayer for the payments of separation pay in lieu of
reinstatement to his former position, considering the strained relationship between the parties, and his
apparent reluctance to be reinstated, computed only up to promulgation of this decision as
follows: CcSTHI

SEPARATION PAY

Date Hired = August 1990

Rate = P198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
P198.00 x 26 days x 8 months = P41,184.00

BACKWAGES

Date Dismissed = January 24, 1997

Rate per day = P196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
P196.00/day x 12.36 mos. = P62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = P62,986.00
P198.00 x 26 days x 6.4 mos. = P32,947.20
——————
TOTAL = P95,933.76
========

5
 xxx xxx xxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of
constructive dismissal and are therefore, ordered:
1. To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (P62,986.56) Pesos representing his separation pay;
2. To pay jointly and severally the complainant the amount of nine (sic) five thousand nine
hundred thirty-three and 36/100 (P95,933.36) representing his backwages; and
3. All other claims are hereby dismissed for lack of merit.
SO ORDERED. 4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated February 29,
2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for reconsideration,
but it was denied. 6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued
a Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in a
Resolution dated May 8, 2001. 7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible
error on the part of the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27,
2002. 9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently
scheduled, but respondents failed to appear. 10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May 27,
2002. 11 Upon recomputation, the Computation and Examination Unit of the NLRC arrived at an updated amount in the
sum of P471,320.31. 12 DSCIEa
On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of P471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing, among
other things, that since the Labor Arbiter awarded separation pay of P62,986.56 and limited backwages of P95,933.36, no
more recomputation is required to be made of the said awards. They claimed that after the decision becomes final and
executory, the same cannot be altered or amended anymore. 14 On January 13, 2003, the Labor Arbiter issued an
Order 15 denying the motion. Thus, an Alias Writ of Execution 16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting the appeal
in favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and
executory. Consequently, another pre-execution conference was held, but respondents failed to appear on time. Meanwhile,
petitioner moved that an Alias Writ of Execution be issued to enforce the earlier recomputed judgment award in the sum of
P471,320.31. 18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where
the judgment award of petitioner was reassessed to be in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his backwages
and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was
due to petitioner in the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include the
appropriate interests. 19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the amount of
P11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it
was the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that the
separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount of
P158,919.92 that should be executed. Thus, since petitioner already received P147,560.19, he is only entitled to the balance
of P11,459.73.
6
 Petitioner then appealed before the NLRC, 21 which appeal was denied by the NLRC in its Resolution 22 dated
September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was likewise denied in the Resolution 23 dated
January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA opined that since petitioner
no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a belated
correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce the said
judgment. Consequently, it can no longer be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error: ScaATD
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED,
COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED
THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION
OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN
OPINION EXPRESSED IN THE BODY OF THE SAME DECISION. 26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiter's
decision, the same is not final until reinstatement is made or until finality of the decision, in case of an award of separation
pay. Petitioner maintains that considering that the October 15, 1998 decision of the Labor Arbiter did not become final and
executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries
on May 27, 2002, the reckoning point for the computation of the backwages and separation pay should be on May 27, 2002
and not when the decision of the Labor Arbiter was rendered on October 15, 1998. Further, petitioner posits that he is also
entitled to the payment of interest from the finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner
by the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said awards.
Respondents insist that since the decision clearly stated that the separation pay and backwages are "computed only up to
[the] promulgation of this decision," and considering that petitioner no longer appealed the decision, petitioner is only entitled
to the award as computed by the Labor Arbiter in the total amount of P158,919.92. Respondents added that it was only
during the execution proceedings that the petitioner questioned the award, long after the decision had become final and
executory. Respondents contend that to allow the further recomputation of the backwages to be awarded to petitioner at
this point of the proceedings would substantially vary the decision of the Labor Arbiter as it violates the rule on immutability
of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division), 27 wherein the issue submitted to the Court for resolution was the propriety of the computation of the awards
made, and whether this violated the principle of immutability of judgment. Like in the present case, it was a distinct feature
of the judgment of the Labor Arbiter in the above-cited case that the decision already provided for the computation of the
payable separation pay and backwages due and did not further order the computation of the monetary awards up to the
time of the finality of the judgment. Also in Session Delights, the dismissed employee failed to appeal the decision of the
labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the
labor arbiter's original computation of the awards made, pegged as of the time the decision was rendered
and confirmed with modification by a final CA decision, is legally proper. The question is posed, given
that the petitioner did not immediately pay the awards stated in the original labor arbiter's decision; it
delayed payment because it continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the
way the original labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed
with finality. This is the finding of the illegality of the dismissal and the awards of separation pay in lieu of
reinstatement, backwages, attorney's fees, and legal interests. TaISEH
The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the computation. This

7
 part, being merely a computation of what the first part of the decision established and declared, can, by
its nature, be re-computed. This is the part, too, that the petitioner now posits should no longer be re-
computed because the computation is already in the labor arbiter's decision that the CA had affirmed.
The public and private respondents, on the other hand, posit that a re-computation is necessary because
the relief in an illegal dismissal decision goes all the way up to reinstatement if reinstatement is to be
made, or up to the finality of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of the then
NLRC Rules of Procedure which requires that a computation be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far
as practicable, shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
decision. As we noted above, this implication is apparent from the terms of the computation itself, and no
question would have arisen had the parties terminated the case and implemented the decision at that
point.
However, the petitioner disagreed with the labor arbiter's findings on all counts — i.e., on the
finding of illegality as well as on all the consequent awards made. Hence, the petitioner appealed the
case to the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is final,
reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through
a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority in
affirming the payment of 13th month pay and indemnity, lapsed to finality and was subsequently returned
to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of
the original labor arbiter's decision, the implementing labor arbiter ordered the award re-computed; he
apparently read the figures originally ordered to be paid to be the computation due had the case been
terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-computed the award to
include the separation pay and the backwages due up to the finality of the CA decision that fully
terminated the case on the merits. Unfortunately, the labor arbiter's approved computation went beyond
the finality of the CA decision (July 29, 2003) and included as well the payment for awards the final CA
decision had deleted — specifically, the proportionate 13th month pay and the indemnity awards. Hence,
the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially
considered the labor arbiter's original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the illegal
dismissal, computed as of the time of the labor arbiter's original decision. 28 ESaITA
Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation as this step is a necessary consequence that flows from the
nature of the illegality of dismissal declared by the Labor Arbiter in that decision. 29 A recomputation (or an original
computation, if no previous computation has been made) is a part of the law — specifically, Article 279 of the Labor Code
and the established jurisprudence on this provision — that is read into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor Code. The
recomputation of the consequences of illegal dismissal upon execution of the decision does not constitute an alteration or
amendment of the final decision being implemented. The illegal dismissal ruling stands; only the computation of monetary
consequences of this dismissal is affected, and this is not a violation of the principle of immutability of final judgments. 30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal decision becomes
the reckoning point instead of the reinstatement that the law decrees. In allowing separation pay, the final decision effectively
declares that the employment relationship ended so that separation pay and backwages are to be computed up to that
point. 31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals, 32 the Court laid down the guidelines regarding the manner of computing legal interest, to wit:

8
 II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.
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.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 2 34 of Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799, 35 Series of 2013, effective July 1, 2013, the pertinent portion of which reads: AHcaDC
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 36 of the Manual of Regulations for
Banks and Sections 4305Q.1, 37 4305S.3 38 and 4303P.1 39 of the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments
shall no longer be twelve percent (12%) per annum — as reflected in the case of Eastern Shipping Lines 40 and Subsection
X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations
for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 — but will now be six percent
(6%) per annumeffective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied prospectively
and not retroactively. Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013.
Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board, 41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce Circulars
when it ruled that "the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of low priority such as consumer loans, as well as
such loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or
loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines 42 are accordingly modified to embodyBSP-MB Circular No. 799, as follows:

9
 I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows: HcSaTI
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
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.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R.
SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are ORDERED
to PAY petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002,
when the Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of service;
and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to June
30, 2013 and six percent (6%)per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and
due to petitioner in accordance with this Decision.
SO ORDERED. TSIaAc
Sereno, C.J., Carpio, Velasco, Jr., Leonardo-de Castro, Brion, Bersamin, Del Castillo, Abad, Villarama, Jr., Perez,
Mendoza, Reyes, Perlas-Bernabe andLeonen, JJ., concur.
||| (Nacar v. Gallery Frames, G.R. No. 189871, [August 13, 2013], 716 PHIL 267-283)

10
 FIRST DIVISION

[G.R. No. 144169. March 28, 2001.]

KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY STEVEN KHE, petitioners, vs.
COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI CITY and PHILAM
INSURANCE CO., INC., respondents.

DECISION

KAPUNAN, J p:

Before the Court is a Petition for Review on Certiorari under Rule 45, seeking to set aside the decision of the Court
of Appeals dated April 10, 2000 and its resolution dated July 11, 2000 denying the motion for reconsideration of the aforesaid
decision. The original complaint that is the subject matter of this case is an accion pauliana — an action filed by Philam
Insurance Company, Inc. (respondent Philam) to rescind or annul the donations made by petitioner Khe Hong Cheng
allegedly in fraud of creditors. The main issue for resolution is whether or not the action to rescind the donations has already
prescribed. While the first paragraph of Article 1389 of the Civil Code states: "The action to claim rescission must be
commenced within four years . . ." the question is, from which point or event does this prescriptive period commence to
run? EScIAa
The facts are as follows:
Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. It appears that on or about
October 4, 1985, the Philippine Agricultural Trading Corporation shipped on board the vessel M/V PRINCE ERIC, owned
by petitioner Khe Hong Cheng, 3,400 bags of copra at Masbate, Masbate, for delivery to Dipolog City, Zamboanga del
Norte. The said shipment of copra was covered by a marine insurance policy issued by American Home Insurance Company
(respondent Philam's assured). M/V PRINCE ERIC, however, sank somewhere between Negros Island and Northeastern
Mindanao, resulting in the total loss of the shipment. Because of the loss, the insurer, American Home, paid the amount of
P354,000.00 (the value of the copra) to the consignee.
Having been subrogated into the rights of the consignee, American Home instituted Civil Case No. 13357 in the
Regional Trial Court (RTC) of Makati, Branch 147 to recover the money paid to the consignee, based on breach of contract
of carriage. While the case was still pending, or on December 20, 1989, petitioner Khe Hong Cheng executed deeds of
donations of parcels of land in favor of his children, herein co-petitioners Sandra Joy and Ray Steven. The parcel of land
with an area of 1,000 square meters covered by Transfer Certificate of Title (TCT) No. T-3816 was donated to Ray Steven.
Petitioner Khe Hong Cheng likewise donated in favor of Sandra Joy two (2) parcels of land located in Butuan City, covered
by TCT No. RT-12838. On the basis of said deeds, TCT No. T-3816 was cancelled and in lieu thereof, TCT No. T-5072 was
issued in favor of Ray Steven and TCT No. RT-12838 was cancelled and in lieu thereof, TCT No. RT-21054 was issued in
the name of Sandra Joy.
The trial court rendered judgment against petitioner Khe Hong Cheng in Civil Case No. 13357 on December 29,
1993, four years after the donations were made and the TCTs were registered in the donees' names. The decretal portion
of the aforesaid decision reads:
"Wherefore, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff
and against the defendant, ordering the latter to pay the former:
1) the sum of P354,000.00 representing the amount paid by the plaintiff to the Philippine Agricultural
Trading Corporation with legal interest at 12% from the time of the filing of the complaint in this
case;
2) the sum of P50,000.00 as attorney's fees;
3) the costs. 1
After the said decision became final and executory, a writ of execution was forthwith, issued on September 14,
1995. Said writ of execution, however, was not served. An alias writ of execution was, thereafter, applied for and granted in
October 1996. Despite earnest efforts, the sheriff found no property under the name of Butuan Shipping Lines and/or
petitioner Khe Hong Cheng to levy or garnish for the satisfaction of the trial court's decision. When the sheriff, accompanied
by counsel of respondent Philam, went to Butuan City on January 17, 1997, to enforce the alias writ of execution, they
11
discovered that petitioner Khe Hong Cheng no longer had any property and that he had conveyed the subject properties to
his children.
On February 25, 1997, respondent Philam filed a complaint with the Regional Trial Court of Makati City, Branch
147, for the rescission of the deeds of donation executed by petitioner Khe Hong Cheng in favor of his children and for the
nullification of their titles (Civil Case No. 97-415). Respondent Philam alleged, inter alia, that petitioner Khe Hong Cheng
executed the aforesaid deeds in fraud of his creditors, including respondent Philam. 2
Petitioners subsequently filed their answer to the complaint a quo. They moved for its dismissal on the ground that
the action had already prescribed. They posited that the registration of the deeds of donation on December 27, 1989
constituted constructive notice and since the complaint a quo was filed only on February 25, 1997, or more than four (4)
years after said registration, the action was already barred by prescription. 3
Acting thereon, the trial court denied the motion to dismiss. It held that respondent Philam's complaint had not yet
prescribed. According to the trial court, the prescriptive period began to run only from December 29, 1993, the date of the
decision of the trial court in Civil Case No. 13357. 4
On appeal by petitioners, the CA affirmed the trial court's decision in favor of respondent Philam. The CA declared
that the action to rescind the donations had not yet prescribed. Citing Articles 1381 and 1383 of the Civil Code, the CA
basically ruled that the four year period to institute the action for rescission began to run only in January 1997, and not when
the decision in the civil case became final and executory on December 29, 1993. The CA reckoned the accrual of respondent
Philam's cause of action on January 1997, the time when it first learned that the judgment award could not be satisfied
because the judgment creditor, petitioner Khe Hong Cheng, had no more properties in his name. Prior thereto, respondent
Philam had not yet exhausted all legal means for the satisfaction of the decision in its favor, as prescribed under Article
1383 of the Civil Code. 5
The Court of Appeals thus denied the petition for certiorari filed before it, and held that the trial court did not commit
any error in denying petitioners' motion to dismiss. Their motion for reconsideration was likewise dismissed in the appellate
court's resolution dated July 11, 2000.
Petitioners now assail the aforesaid decision and resolution of the CA alleging that:
I
PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN GRAVE ABUSE OF DISCRETION WHEN
IT DENIED THE PETITION TO DISMISS THE CASE BASED ON THE GROUND OF
PRESCRIPTION. cHSIAC
II
PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
PRESCRIPTION BEGINS TO RUN WHEN IN JANUARY 1997 THE SHERIFF WENT TO BUTUAN CITY
IN SEARCH OF PROPERTIES OF PETITIONER FELIX KHE CHENG TO SATISFY THE JUDGMENT
IN CIVIL CASE NO. 13357 AND FOUND OUT THAT AS EARLY AS DEC. 20, 1989, PETITIONERS KHE
CHENG EXECUTED THE DEEDS OF DONATIONS IN FAVOR OF HIS CO-PETITIONERS THAT THE
ACTION FOR RESCISSION ACCRUED BECAUSE PRESCRIPTION BEGAN TO RUN WHEN THESE
DONATIONS WERE REGISTERED WITH THE REGISTER OF DEEDS IN DECEMBER 1989, AND
WHEN THE COMPLAINT WAS FILED ONLY IN FEBRUARY 1997, MORE THAN FOUR YEARS HAVE
ALREADY LAPSED AND THEREFORE, IT HAS ALREADY PRESCRIBED. 6
Essentially, the issue for resolution posed by petitioners is this: When did the four (4) year prescriptive period as
provided for in Article 1389 of the Civil Code for respondent Philam to file its action for rescission of the subject deeds of
donation commence to run?
The petition is without merit.
Article 1389 of the Civil Code simply provides that, "The action to claim rescission must be commenced within four
years." Since this provision of law is silent as to when the prescriptive period would commence, the general rule, i.e, from
the moment the cause of action accrues, therefore, applies. Article 1150 of the Civil Code is particularly instructive:
ARTICLE 1150. The time for prescription for all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they may be brought.
Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action which determines the
starting point for the computation of the prescriptive period for the action. 7 Article 1383 of the Civil Code provides as follows:
ARTICLE 1383. An action for rescission is subsidiary; it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation for the same.

12
 It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed of only after all
other legal remedies have been exhausted and have been proven futile. For an accion pauliana to accrue, the following
requisites must concur:
1) That the plaintiff asking for rescission, has a credit prior to the alienation, although demandable
later; 2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third
person; 3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by rescission
of the conveyance to the third person; 4) That the act being impugned is fraudulent; 5) That the third
person who received the property conveyed, if by onerous title, has been an accomplice in the
fraud. 8 (Emphasis ours)
We quote with approval the following disquisition of the CA on the matter:
An accion pauliana accrues only when the creditor discovers that he has no other legal remedy
for the satisfaction of his claim against the debtor other than an accion pauliana. The accion pauliana is
an action of a last resort. For as long as the creditor still has a remedy at law for the enforcement of his
claim against the debtor, the creditor will not have any cause of action against the creditor for rescission
of the contracts entered into by and between the debtor and another person or persons. Indeed, an accion
pauliana presupposes a judgment and the issuance by the trial court of a writ of execution for the
satisfaction of the judgment and the failure of the Sheriff to enforce and satisfy the judgment of the court.
It presupposes that the creditor has exhausted the property of the debtor. The date of the decision of the
trial court against the debtor is immaterial. What is important is that the credit of the plaintiff antedates
that of the fraudulent alienation by the debtor of his property. After all, the decision of the trial court against
the debtor will retroact to the time when the debtor became indebted to the creditor. 9
Petitioners, however, maintain that the cause of action of respondent Philam against them for the rescission of the
deeds of donation accrued as early as December 27, 1989, when petitioner Khe Hong Cheng registered the subject
conveyances with the Register of Deeds. Respondent Philam allegedly had constructive knowledge of the execution of said
deeds under Section 52 of Presidential Decree No. 1529, quoted infra, as follows:
SECTION 52. Constructive knowledge upon registration. — Every conveyance, mortgage, lease,
lien, attachment, order, judgment, instrument or entry affecting registered land shall, if registered, filed or
entered in the Office of the Register of Deeds for the province or city where the land to which it relates
lies, be constructive notice to all persons from the time of such registering, filing, or entering. THAICD
Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is misplaced, for in no
way does this imply that the specific provisions of the former may be all together ignored. To count the four year prescriptive
period to rescind an allegedly fraudulent contract from the date of registration of the conveyance with the Register of Deeds,
as alleged by the petitioners, would run counter to Article 1383 of the Civil Code as well as settled jurisprudence. It would
likewise violate the third requisite to file an action for rescission of an allegedly fraudulent conveyance of property, i.e., the
creditor has no other legal remedy to satisfy his claim.
An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial court of a writ of
execution for the satisfaction of the judgment, and 3) the failure of the sheriff to enforce and satisfy the judgment of the
court. It requires that the creditor has exhausted the property of the debtor. The date of the decision of the trial court is
immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his
property. After all, the decision of the trial court against the debtor will retroact to the time when the debtor became indebted
to the creditor.
Tolentino, a noted civilist, explained:
". . . [T]herefore, credits with suspensive term or condition are excluded, because the accion
pauliana presupposes a judgment and unsatisfied execution, which cannot exist when the debt is not yet
demandable at the time the rescissory action is brought. Rescission is a subsidiary action, which
presupposes that the creditor has exhausted the property of the debtor which is impossible in credits
which cannot be enforced because of a suspensive term or condition.
While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory with retroactive effect to the date when the credit
was constituted." 10
These principles were reiterated by the Court when it explained the requisites of an accion pauliana in greater detail,
to wit:

13
 "The following successive measures must be taken by a creditor before he may bring an action
for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor through levying by
attachment and execution upon all the property of the debtor, except such as are exempt from execution;
(2) exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria);
and (3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion
pauliana). Without availing of the first and second remedies, i.e., exhausting the properties of the debtor
or subrogating themselves in Francisco Bareg's transmissible rights and actions. petitioners simply
undertook the third measure and filed an action for annulment of sale. This cannot be
done." 11 (Emphasis ours)
In the same case, the Court also quoted the rationale of the CA when it upheld the dismissal of the accion
pauliana on the basis of lack of cause of action:
"In this case, plaintiff's appellants had not even commenced an action against defendants-
appellees Bareng for the collection of the alleged indebtedness. Plaintiffs-appellants had not even tried
to exhaust the property of defendants-appellees Bareng. Plaintiffs-appellants, in seeking the rescission
of the contracts of sale entered into between defendants-appellees, failed to show and prove that
defendants-appellees Bareng had no other property, either at the time of the sale or at the time this action
was filed, out of which they could have collected this (sic) debts." (Emphasis ours)
Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng had executed
the deeds of donation in favor of his children, the complaint against Butuan Shipping Lines and/or petitioner Khe Hong
Cheng was still pending before the trial court. Respondent Philam had no inkling, at the time, that the trial court's judgment
would be in its favor and further, that such judgment would not be satisfied due to the deeds of donation executed by
petitioner Khe Hong Cheng during the pendency of the case. Had respondent Philam filed his complaint on December 27,
1989, such complaint would have been dismissed for being premature. Not only were all other legal remedies for the
enforcement of respondent Philam's claims not yet exhausted at the time the deeds of donation were executed and
registered. Respondent Philam would also not have been able to prove then that petitioner Khe Hong Cheng had no more
property other than those covered by the subject deeds to satisfy a favorable judgment by the trial court. DCAHcT
It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he had reserved
to himself property sufficient to answer for his debts contracted prior to this date:
"That the DONOR further states, for the same purpose as expressed in the next preceding
paragraph, that this donation is not made with the object of defrauding his creditors having reserved to
himself property sufficient to answer his debts contracted prior to this date". 12
As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by petitioner Khe
Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City to attach the properties of petitioner
Khe Hong Cheng. There they found that he no longer had any properties in his name. It was only then that respondent
Philam's action for rescission of the deeds of donation accrued because then it could be said that respondent Philam had
exhausted all legal means to satisfy the trial court's judgment in its favor. Since respondent Philam filed its complaint
for accion pauliana against petitioners on February 25, 1997, barely a month from its discovery that petitioner Khe Hong
Cheng had no other property to satisfy the judgment award against him, its action for rescission of the subject deeds clearly
had not yet prescribed.
A final point. Petitioners now belatedly raise on appeal the defense of improper venue claiming that respondent
Philam's complaint is a real action and should have been filed with the RTC of Butuan City since the property subject matter
of the donations are located therein. Suffice it to say that petitioners are already deemed to have waived their right to
question the venue of the instant case. Improper venue should be objected to as follows 1) in a motion to dismiss filed within
the time but before the filing of the answer; 13 or 2) in the answer as an affirmative defense over which, in the discretion of
the court, a preliminary hearing may be held as if a motion to dismiss had been filed. 14 Having failed to either file a motion
to dismiss on the ground of improper of venue or include the same as an affirmative defense in their answer, petitioners are
deemed to have their right to object to improper venue.
WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit.
SO ORDERED.
Davide, Jr., C.J., Pardo and Ynares-Santiago, JJ., concur.
Puno, J., is on official leave.
||| (Khe Hong Cheng v. Court of Appeals, G.R. No. 144169, [March 28, 2001], 407 PHIL 1058-1072)

14
 FIRST DIVISION

[G.R. No. 134685. November 19, 1999.]

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

Florido & Associates for petitioner.

Zosa & Quijano Law Offices for respondents.

SYNOPSIS

Respondent Rosa was charged by petitioner with two counts of violation of Batas Pambansa Blg. 22 for issuing
checks, in the total amount of P541,668, dishonored by the bank for the reason of "account closed." The conviction was
affirmed by the Court of Appeals and is now pending review with this Court. Petitioner, thereafter filed action
pauliana against respondent Rosa to rescind, the notarized deed of donation over 4 parcels of land Rosa executed in favor
of her three children, the other respondents. Petitioner claimed that there was fraudulent transfer leaving no sufficient
properties to pay her obligations with her and that the deed of donation was not antedated. During the hearing of the case,
petitioner presented evidence on Rosa's civil liability to one Victoria Suarez in the amount of P169,000. For her defense,
Rosa denied liability and the alleged antedating of the deed. The trial court rendered judgment in favor of petitioner, ordered
the rescission of the contract and declared the titles in the name of Rosa's children null and void. On appeal, the Court of
Appeals reversed the trial court and dismissed the action pauliana. It ruled that the deed of donation was not fraudulent
transfer as respondent debtor Rosa still owns 4 parcels of land sufficient to cover her debts to petitioner, that the notarized
deed of donation, a public document in the absence of convincing evidence that the notary and the parties antedated the
instrument, is evidence of the fact that gave rise to its execution and of the date thereof. Petitioner's motion for
reconsideration having been denied she resorted to this recourse.
The Supreme Court held that contracts undertaken in fraud of creditors are rescissible when the latter cannot in
any other manner collect the claims due them; that rescission is but a subsidiary remedy which cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for the same. In the case at bar, respondent
Rosa has 4 other real properties, hence, the presumption of fraud will not come into play; and that a party cannot invoke
the credit of others to justify rescission of the deed of donation.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF COURT OF APPEALS GENERALLY CONCLUSIVE

ON APPEAL; EXCEPTION. — The rule is well settled that the jurisdiction of this Court in cases brought before it from the
Court of Appeals via Rule 45 of the Rules of Court is limited to reviewing errors of law. Findings of fact of the latter court are
conclusive, except in a number of instances. In the case at bar, one of the recognized exceptions warranting a review by
this Court of the factual findings of the Court of Appeals exists, to wit, the factual findings and conclusions of the lower court
and Court of Appeals are conflicting, especially on the issue of whether the Deed of Donation in question was in fraud of
creditors. HTIEaS
2. ID.; ACTIONS; ACCION PAULIANA; REQUISITE FOR ACTION TO PROSPER. — The action to rescind
contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following requisites must be
present: (1) the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; (2) the debtor
has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy
to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the property conveyed, if it
is by onerous title, has been an accomplice in the fraud.
3. ID.; ID.; ID.; CREDIT MUST EXIST PRIOR TO FRAUDULENT ALIENATION. — The general rule is that
rescission requires the existence of creditors at the time of the alleged fraudulent alienation, and this must be proved as
one of the bases of the judicial pronouncement setting aside the contract. Without any prior existing debt, there can neither
be injury nor fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the fraudulent
alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is
merely declaratory, with retroactive effect to the date when the credit was constituted.

15
 4. ID.; ID.; ID.; ID.; ALLEGED ANTEDATING OF DOCUMENT NOT PROVED BY LATE REGISTRATION OF
ACKNOWLEDGED DOCUMENT. — In the instant case, the alleged debt of LIM in favor of petitioner was incurred in August
1990, while the deed of donation was purportedly executed on 10 August 1989. We are not convinced with the allegation
of the petitioner that the questioned deed was antedated to make it appear that it was made prior to petitioner's credit.
Notably, that deed is a public document, it having been acknowledged before a notary public. As such, it is evidence of the
fact which gave rise to its execution and of its date, pursuant to Section 23, Rule 132 of the Rules of Court. In the present
case, the fact that the questioned Deed was registered only on 2 July 1991 is not enough to overcome the presumption as
to the truthfulness of the statement of the date in the questioned deed, which is 10 August 1989. Petitioner's claim against
LIM was constituted only in August 1990, or a year after the questioned alienation. Thus, the first two requisites for the
rescission of contracts are absent.
5. ID.; ID.; ID.; CREDITOR CANNOT IN ANY MANNER COLLECT CLAIM. — Even assuming arguendo that
petitioner became a creditor of LIM prior to the celebration of the contract of donation, still her action for rescission would
not fare well because the third requisite was not met. Under Article 1381 of the Civil Code, contracts entered into in fraud
of creditors may be rescinded only when the creditors cannot in any manner collect the claims due them. Also, Article 1383
of the same Code provides that the action for rescission is but a subsidiary remedy which cannot be instituted except when
the party suffering damage has no other legal means to obtain reparation for the same. The term "subsidiary remedy" has
been defined as "the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission is
resorted to." It is, therefore, "essential that the party asking for rescission prove that he has exhausted all other legal means
to obtain satisfaction of his claim. Petitioner neither alleged nor proved that she did so. On this score, her action for the
rescission of the questioned deed is not maintainable even if the fraud charged actually did exist.
6. ID.; ID.; ID.; DEBTOR DID NOT RESERVE SUFFICIENT PROPERTY TO PAY DEBT PRIOR TO DONATION.
— The fourth requisite for an accion paulianato prosper is not present either. Article 1387, first paragraph, of the Civil Code
provides: "All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered
into in fraud of creditors when the donor did not reserve sufficient property to pay all debts contracted before the donation."
Likewise, Article 759 of the same Code, second paragraph, states that the donation is always presumed to be in fraud of
creditors when at the time thereof the donor did not reserve sufficient property to pay his debts prior to the donation. For
this presumption of fraud to apply, it must be established that the donor did not leave adequate properties which creditors
might have recourse for the collection of their credits existing before the execution of the donation. As earlier discussed,
petitioner's alleged credit existed only a year after the deed of donation was executed. She cannot, therefore, be said to
have been prejudiced or defrauded by such alienation.
7. ID.; ID.; ID.; BADGES OF FRAUD. — Nevertheless, a creditor need not depend solely upon the presumption laid
down in Articles 759 and 1387 of the Civil Code. Under the third paragraph of Article 1387, the design to defraud may be
proved in any other manner recognized by the law of evidence. Thus in the consideration of whether certain transfers are
fraudulent, the Court has laid down specific rules by which the character of the transaction may be determined. The following
have been denominated by the Court as badges of fraud: (1) The fact that the consideration of the conveyance is fictitious
or is inadequate; (2) A transfer made by a debtor after suit has begun and while it is pending against him; (3) A sale upon
credit by an insolvent debtor; (4) Evidence of large indebtedness or complete insolvency; (5) The transfer of all or nearly all
of his property by a debtor, especially when he is insolvent or greatly embarrassed financially; (6) The fact that the transfer
is made between father and son, when there are present other of the above circumstances; and (7) The failure of the vendee
to take exclusive possession of all the property. The above enumeration, however, is not an exclusive list. The
circumstances evidencing fraud are as varied as the men who perpetrate the fraud in each case. This Court has therefore
declined to define it, reserving the liberty to deal with it under whatever form it may present itself.
8. ID.; ID.; ID.; RESCISSION SHALL ONLY BE TO EXTENT OF CREDITOR'S UNSATISFIED CREDIT. — It should
be noted that the complainant in that case, Victoria Suarez, albeit a creditor prior to the questioned alienation, is not a party
to this accion pauliana. Article 1384 of the Civil Code provides that rescission shall only be to the extent necessary to cover
the damages caused. Under this Article, only the creditor who brought the action for rescission can benefit from the
rescission; those who are strangers to the action cannot benefit from its effects. And the revocation is only to the extent of
the plaintiff creditors unsatisfied credit; as to the excess, the alienation is maintained. Thus, petitioner cannot invoke the
credit of Suarez to justify rescission of the subject deed of donation.
9. CIVIL LAW; DAMAGES; MORAL DAMAGES, ATTORNEY'S FEES AND EXPENSES OF LITIGATION; AWARD
DELETED FOR WANT OF BASIS IN FACT, LAW OR EQUITY. — Now on the propriety of the trial court's awards of moral
damages, attorney's fees and expenses of litigation in favor of the petitioner. We have pored over the records and found no
factual or legal basis therefor. The trial court made these awards in the dispositive portion of its decision without stating,
however, any justification for the same in the ratio decidendi. Hence, the Court of Appeals correctly deleted these awards
for want of basis in fact, law or equity.

DECISION

16
DAVIDE, JR., C.J p:

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

17
the notary public and the parties did antedate it. Since LIM's indebtedness to petitioner was incurred in August 1990, or a
year after the execution of the Deed of Donation, the first requirement for accion pauliana was not met.
Anent petitioner's contention that assuming that the Deed of Donation was not antedated it was nevertheless in
fraud of creditors because Victoria Suarez became LIM's creditor on 8 October 1987, the Court of Appeals found the same
untenable, for the rule is basic that the fraud must prejudice the creditor seeking the rescission. cdll
Her motion for reconsideration having been denied, petitioner came to this Court and submits the following issue:
WHETHER OR NOT THE DEED OF DONATION, EXH. 1, WAS ENTERED INTO IN FRAUD OF [THE]
CREDITORS OF RESPONDENT ROSA [LIM].
Petitioner argues that the finding of the Court of Appeals that the Deed of Donation was not in fraud of creditors is
contrary to well-settled jurisprudence laid down by this Court as early as 1912 in the case of Oria v. McMicking, 8 which
enumerated the various circumstances indicating the existence of fraud in a transaction. She reiterates her arguments
below, and adds that another fact found by the trial court and admitted by the parties but untouched by the Court of Appeals
is the existence of a prior final judgment against LIM in Criminal Case No. Q-89-2216 declaring Victoria Suarez as LIM's
judgment creditor before the execution of the Deed of Donation.
Petitioner further argues that the Court of Appeals incorrectly applied or interpreted Section 23, 9 Rule 132 of
the Rules of Court, in holding that "being a public document, the said deed of donation is evidence of the fact which gave
rise to its execution and of the date of the latter." Said provision should be read with Section 30 10 of the same Rule which
provides that notarial documents are prima facie evidence of their execution, not "of the facts which gave rise to their
execution and of the date of the latter."
Finally, petitioner avers that the Court of Appeals overlooked Article 759 of the New Civil Code, which provides:
"The donation is always presumed to be in fraud of creditors when at the time of the execution thereof the donor did not
reserve sufficient property to pay his debts prior to the donation." In this case, LIM made no reservation of sufficient property
to pay her creditors prior to the execution of the Deed of Donation.
On the other hand, respondents argue that (a) having agreed on the law and requisites of accion pauliana, petitioner
cannot take shelter under a different law; (b) petitioner cannot invoke the credit of Victoria Suarez, who is not a party to this
case, to support her accion pauliana; (c) the Court of Appeals correctly applied or interpreted Section 23 of Rule 132 of
the Rules of Court; (d) petitioner failed to present convincing evidence that the Deed of Donation was antedated and
executed in fraud of petitioner; and (e) the Court of Appeals correctly struck down the awards of damages, attorney's fees
and expenses of litigation because there is no factual basis therefor in the body of the trial court's decision.
The primordial issue for resolution is whether the questioned Deed of Donation was made in fraud of petitioner and,
therefore, rescissible. A corollary issue is whether the awards of damages, attorney's fees and expenses of litigation are
proper.
We resolve these issues in the negative.
The rule is well settled that the jurisdiction of this Court in cases brought before it from the Court of Appeals via
Rule 45 of the Rules of Court is limited to reviewing errors of law. Findings of fact of the latter court are conclusive, except
in a number of instances. 11 In the case at bar, one of the recognized exceptions warranting a review by this Court of the
factual findings of the Court of Appeals exists, to wit, the factual findings and conclusions of the lower court and Court of
Appeals are conflicting, especially on the issue of whether the Deed of Donation in question was in fraud of creditors.
Article 1381 of the Civil Code enumerates the contracts which are rescissible, and among them are "those contracts
undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them."
The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the
following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, 12 although
demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the
creditor has no other legal remedy to satisfy his claim; 13 (4) the act being impugned is fraudulent; 14 (5) the third person
who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. 15
The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent alienation,
and this must be proved as one of the bases of the judicial pronouncement setting aside the contract. 16 Without any prior
existing debt, there can neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the accion
pauliana must exist prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment
be subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the credit was constituted.17
In the instant case, the alleged debt of LIM in favor of petitioner was incurred in August 1990, while the deed of
donation was purportedly executed on 10 August 1989.

18
 We are not convinced with the allegation of the petitioner that the questioned deed was antedated to make it appear
that it was made prior to petitioner's credit. Notably, that deed is a public document, it having been acknowledged before a
notary public. 18 As such, it is evidence of the fact which gave rise to its execution and of its date, pursuant to Section 23,
Rule 132 of the Rules of Court.
Petitioner's contention that the public documents referred to in said Section 23 are only those entries in public
records made in the performance of a duty by a public officer does not hold water. Section 23 reads:
SEC. 23. Public documents as evidence. — Documents consisting of entries in public records
made in the performance of a duty by a public officer are prima facie evidence of the facts therein
stated. All other public documents are evidence, even against a third person, of the fact which gave rise
to their execution and of the date of the latter. (Emphasis supplied).
The phrase "all other public documents" in the second sentence of Section 23 means those public documents other
than the entries in public records made in the performance of a duty by a public officer. And these include notarial
documents, like the subject deed of donation. Section 19, Rule 132 of theRules of Court provides:
SEC. 19. Classes of documents. — For the purpose of their presentation in evidence, documents
are either public or private.
Public documents are:
(a) . . .
(b) Documents acknowledged before a notary public except last wills and testaments. . . .
It bears repeating that notarial documents, except last wills and testaments, are public documents and are evidence
of the facts that gave rise to their execution and of their date.
In the present case, the fact that the questioned Deed was registered only on 2 July 1991 is not enough to overcome
the presumption as to the truthfulness of the statement of the date in the questioned deed, which is 10 August 1989.
Petitioner's claim against LIM was constituted only in August 1990, or a year after the questioned alienation. Thus, the first
two requisites for the rescission of contracts are absent.
Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration of the contract of donation,
still her action for rescission would not fare well because the third requisite was not met. Under Article 1381 of the Civil
Code, contracts entered into in fraud of creditors may be rescinded only when the creditors cannot in any manner collect
the claims due them. Also, Article 1383 of the same Code provides that the action for rescission is but a subsidiary remedy
which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the
same. The term "subsidiary remedy" has been defined as "the exhaustion of all remedies by the prejudiced creditor to collect
claims due him before rescission is resorted to." 19 It is, therefore, essential that the party asking for rescission prove that
he has exhausted all other legal means to obtain satisfaction of his claim. 20 Petitioner neither alleged nor proved that she
did so. On this score, her action for the rescission of the questioned deed is not maintainable even if the fraud charged
actually did exist." 21
The fourth requisite for an accion pauliana to prosper is not present either.
Article 1387, first paragraph, of the Civil Code provides: "All contracts by virtue of which the debtor alienates property
by gratuitous title are presumed to have been entered into in fraud of creditors when the donor did not reserve sufficient
property to pay all debts contracted before the donation. Likewise, Article 759 of the same Code, second paragraph, states
that the donation is always presumed to be in fraud of creditors when at the time thereof the donor did not reserve sufficient
property to pay his debts prior to the donation. prcd
For this presumption of fraud to apply, it must be established that the donor did not leave adequate properties which
creditors might have recourse for the collection of their credits existing before the execution of the donation.
As earlier discussed, petitioner's alleged credit existed only a year after the deed of donation was executed. She
cannot, therefore, be said to have been prejudiced or defrauded by such alienation. Besides, the evidence disclose that as
of 10 August 1989, when the deed of donation was executed, LIM had the following properties:
(1) A parcel of land containing an area of 220 square meters, together with the house constructed
thereon, situated in Sto. Niño Village, Mandaue City, Cebu, registered in the name of Rosa Lim
and covered by TCT No. 19706; 22
(2) A parcel of land located in Benros Subdivision, Lawa-an, Talisay, Cebu; 23
(3) A parcel of land containing an area of 2.152 hectares, with coconut trees thereon, situated at Hindag-
an, St. Bernard, Southern Leyte, and covered by Tax Declaration No. 13572. 24

19
 (4) A parcel of land containing an area of 3.6 hectares, with coconut trees thereon, situated at Hindag-
an, St. Bernard, Southern Leyte, and covered by Tax Declaration No. 13571. 25
During her cross-examination, LIM declared that the house and lot mentioned in no. 1 was bought by her in the
amount of about P800,000 to P900,000.26 Thus:
ATTY. FLORIDO:
Q These properties at the Sto. Niño Village, how much did you acquire this property?
A Including the residential house P800,000.00 to P900,000.00.
Q How about the lot which includes the house. How much was the price in the Deed of Sale of the house
and lot at Sto. Niño Violage [sic]?
A I forgot.
Q How much did you pay for it?
A That is P800,000.00 to P900,000.00.
Petitioner did not adduce any evidence that the price of said property was lower. Anent the property in no. 2, LIM testified
that she sold it in 1990. 27 As to the properties in nos. 3 and 4, the total market value stated in the tax declarations dated
23 November 1993 was P56,871.60. Aside from these tax declarations, petitioner did not present evidence that would
indicate the actual market value of said properties. It was not, therefore, sufficiently established that the properties left
behind by LIM were not sufficient to cover her debts existing before the donation was made. Hence, the presumption of
fraud will not come into play.
Nevertheless, a creditor need not depend solely upon the presumption laid down in Articles 759 and 1387 of the
Civil Code. Under the third paragraph of Article 1387, the design to defraud may be proved in any other manner recognized
by the law of evidence. Thus in the consideration of whether certain transfers are fraudulent, the Court has laid down specific
rules by which the character of the transaction may be determined. The following have been denominated by the Court as
badges of fraud:
(1) The fact that the consideration of the conveyance is fictitious or is inadequate;
(2) A transfer made by a debtor after suit has begun and while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially;
(6) The fact that the transfer is made between father and son, when there are present other of the above
circumstances; and
(7) The failure of the vendee to take exclusive possession of all the property. 28
The above enumeration, however, is not an exclusive list. The circumstances evidencing fraud are as varied as the
men who perpetrate the fraud in each case. This Court has therefore declined to define it, reserving the liberty to deal with
it under whatever form it may present itself. 29
Petitioner failed to discharge the burden of proving any of the circumstances enumerated above or any other
circumstance from which fraud can be inferred. Accordingly, since the four requirements for the rescission of a gratuitous
contract are not present in this case, petitioner's action must fail.
In her further attempt to support her action for rescission, petitioner brings to our attention the 31 July 1990
Decision 30 of the RTC of Quezon City, Branch 92, in Criminal Case No. Q-89-2216. LIM was therein held guilty of estafa
and was ordered to pay complainant Victoria Suarez the sum of P169,000 for the obligation LIM incurred on 8 October
1987. This decision was affirmed by the Court of Appeals. Upon appeal, however, this Court acquitted LIM of estafa but
held her civilly liable for P169,000 as actual damages.
It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor prior to the questioned
alienation, is not a party to this accion pauliana. Article 1384 of the Civil Code provides that rescission shall only be to the
extent necessary to cover the damages caused. Under this Article, only the creditor who brought the action for rescission
can benefit from the rescission; those who are strangers to the action cannot benefit from its effects. 31 And the revocation
is only to the extent of the plaintiff creditor's unsatisfied credit; as to the excess, the alienation is maintained. 32 Thus,
petitioner cannot invoke the credit of Suarez to justify rescission of the subject deed of donation.
20
 Now on the propriety of the trial court's awards of moral damages, attorney's fees and expenses of litigation in favor
of the petitioner. We have pored over the records and found no factual or legal basis therefor. The trial court made these
awards in the dispositive portion of its decision without stating, however, any justification for the same in the ratio decidendi.
Hence, the Court of Appeals correctly deleted these awards for want of basis in fact, law or equity.
WHEREFORE, the petition is hereby DISMISSED and the challenged decision of the Court of Appeals in CA-G.R.
CV. No. 50091 is AFFIRMED in toto. cda
No pronouncement as to costs.
SO ORDERED.
Puno, Kapunan, Pardo and Ynares-Santiago, JJ., concur.
||| (Siguan v. Lim, G.R. No. 134685, [November 19, 1999], 376 PHIL 840-857)

21
 THIRD DIVISION

[G.R. No. 191178. March 13, 2013.]

ANCHOR SAVINGS BANK (FORMERLY ANCHOR FINANCE AND INVESTMENT

CORPORATION), petitioner, vs. HENRY H. FURIGAY, GELINDA C. FURIGAY, HERRIETTE
C. FURIGAY and HEGEM C. FURIGAY, respondents.

DECISION

MENDOZA, J p:

This concerns a petition for review on certiorari filed by petitioner Anchor Savings Bank (ASB) under Rule 45 of
the 1997 Rules of Civil Procedure, assailing the May 28, 2009 Decision 1 and the January 22, 2010 Resolution 2 of the
Court of Appeals (CA), in CA-G.R. CV No. 90123, dismissing the appeal. 3
The assailed resolution denied the separate motions for reconsideration of both parties.
The Facts
On April 21, 1999, ASB filed a verified complaint for sum of money and damages with application for replevin against
Ciudad Transport Services, Inc.(CTS), its president, respondent Henry H. Furigay; his wife, respondent Gelinda C. Furigay;
and a "John Doe." The case was docketed as Civil Case No. 99-865 and raffled to Branch 143 of the Regional Trial Court
of Makati City (RTC). 4
On November 7, 2003, the RTC rendered its Decision 5 in favor of ASB, the dispositive portion of which
reads: DTAcIa
WHEREFORE, judgment is hereby rendered in favor of plaintiff Anchor Savings Bank ordering
defendants Ciudad Transport Services, Inc., Henry H.Furigay and Genilda C. Furigay to pay the
following:
1) The amount of Eight Million Six Hundred Ninety Five Thousand Two Hundred Two
pesos and Fifty Nine centavos (Php8,695,202.59) as PRINCIPAL OBLIGATION as of 12 April
1999;
2) An INTEREST of Twelve per cent (12%) per annum until fully paid;
3) PENALTY CHARGE of Twelve per cent (12%) per annum until fully paid;
4) LIQUIDATED DAMAGES of Ten (10%) per cent of the total amount due;
5) One Hundred Thousand pesos as reasonable ATTORNEY'S FEES;
6) Costs of suit.
SO ORDERED. 6
While Civil Case No. 99-865 was pending, respondent spouses donated their registered properties in Alaminos,
Pangasinan, to their minor children, respondents Hegem G. Furigay and Herriette C. Furigay. As a result, Transfer
Certificate of Title (TCT) Nos. 21743, 7 21742, 8 21741, 9 and 21740 10 were issued in the names of Hegem and
Herriette Furigay.
Claiming that the donation of these properties was made in fraud of creditors, ASB filed a Complaint for Rescission
of Deed of Donation, Title and Damages 11 against the respondent spouses and their children. The case was docketed as
Civil Case No. A-3040 and raffled to Branch 55 of the RTC of Alaminos, Pangasinan. In its Complaint, ASB made the
following allegations:
xxx xxx xxx
4. That Ciudad Transport Services, Inc., Henry H. Furigay and Gelinda C. Furigay obtained a
loan from Anchor Savings Bank and subsequently the former defaulted from their loan obligation which
prompted Anchor Savings Bank to file the case entitled "Anchor Savings Bank vs. Ciudad Transport

22
 Services, Inc., Henry H. Furigay and Gelinda C. Furigay" lodged before Makati City Regional Trial
Court Branch 143 and docketed as Civil Case No. 99-865. On 7 November 2003 the Honorable Court in
the aforesaid case issued a Decision the dispositive portion of which reads as follows:
xxx xxx xxx
5. That defendants Sps. Henry H. Furigay and Gelinda C. Furigay are the registered owners of
various real properties located at the Province of Pangasinan covered by Transfer Certificate of Title Nos.
19721, 21678, 21679, and 21682. . . . HCEcAa
6. That on 8 March 2001 defendants Sps. Henry H. Furigay and Gelinda C. Furigay executed a
Deed of Donation in favor of their children herein defendants Hegem C. Furigay and Herriette
C. Furigay donating to them all of the above-mentioned properties. Hence, the following titles were issued
under their names to wit: Transfer Certificate of Title Nos. 21743, 21742, 21741, and 21740. . . .
7. That the donation made by defendants Sps. Henry H. Furigay and Gelinda C. Furigay were
done with the intention to defraud its creditors particularly Anchor Savings Bank. Said transfer or
conveyance is the one contemplated by Article 1387 of the New Civil Code, which reads:
xxx xxx xxx
8. . . . In the instant case, Sps. Furigay donated the properties at the time there was a pending
case against them. . . . . In the instant case, the Sps.Furigay donated the properties to their son and
daughter. Moreover, the transfer or donation was executed in 2001 when both donees Hegem
C. Furigayand Herriette C. Furigay are minors.
9. Clearly, the Donation made by defendants Sps. Furigay was intended to deprive plaintiff
Anchor Savings Bank from going after the subject properties to answer for their due and demandable
obligation with the Bank. The donation being undertaken in fraud of creditors then the same may be
rescinded pursuant to Article 1381 of the New Civil Code. The said provision provides that:
xxx xxx xxx
Consequently, Transfer Certificate of Title Nos. 21743, 21742, 21741, and 21740 issued under
the names of defendants Herriette C. Furigay and Hegem C. Furigay should likewise be cancelled and
reverted to the names of co-defendants Henry and Gelinda Furigay.
10. That because of the fraud perpetrated by defendants, plaintiff suffered the following
damages. HCTaAS
11. Plaintiff suffered actual and compensatory damages as a result of the filing of the case the
bank has spent a lot of man-hours of its employees and officers re-evaluating the account of defendant
Sps. Furigay. Such man-hour when converted into monetary consideration represents the salaries and
per diems of its employees particularly the CI/Appraiser, Head Office Lawyer and Bank Auditor;
12. Said claim likewise represents administrative expenses such as transportation expenses,
reproduction of documents, and courier expenses among others;
13. Defendants should be made to pay plaintiff Anchor Savings Bank the amount of PESOS:
ONE MILLION (P1,000,000.00) as moral damages for the damage it caused to the latter's business
goodwill and reputation; aDATHC
14. By way of example for the public and to deter others from the malicious filing of
baseless (sic) suit, defendants should be ordered to pay [plaintiff] the amount of PESOS: TWO
HUNDRED THOUSAND (P200,000.00) as exemplary damages.
15. Attorneys fees equivalent to twenty-five percent (25%) of the total amount that can be
collected from defendant;
1[6]. Defendants should also be held liable to pay for the cost of suit. 12
Instead of filing an answer, respondents sought the dismissal of the complaint, principally arguing that the RTC
failed to acquire jurisdiction over their persons as well as over the subject matter in view of the failure of the ASB to serve
the summons properly and to pay the necessary legal fees. DTSaHI
RTC Resolutions
On September 29, 2006, the RTC issued an Order 13 denying the motion to dismiss. Respondents sought
reconsideration of the Order adding that the ASB's action for rescission had already prescribed.

23
 Upon filing of ASB's opposition to the motion for reconsideration, on February 27, 2007, the RTC reconsidered its
earlier pronouncement and dismissed the complaint for failure of ASB to pay the correct docket fees and for prescription. 14
RTC explained that the service of summons by publication made by ASB was valid because respondents'
whereabouts could not have been ascertained with exactitude and because Section 14, Rule 14 of the Rules of Court did
not distinguish what kind of action it would apply.
On the issue of lack of jurisdiction over the subject matter of the case, the RTC ruled that the complaint was actually
a real action as it affected title to or possession of real property. Accordingly, the basis for determining the correct docket
fees was the fair market value of the real property under litigation as stated in its current tax declaration or its current zonal
valuation, whichever was higher. Considering that ASB did not state the current tax declaration or current zonal valuation
of the real properties involved, as well as the amount of actual damages and attorney's fees it prayed for, the trial court was
of the view that ASB purposely evaded the payment of the correct filing fees.
On the issue of prescription, the RTC ruled that the action for rescission had already prescribed. It stated that an
action for rescission grounded on fraud should be filed within four (4) years from the discovery of fraud. ASB filed the action
for rescission only on October 14, 2005 or after four (4) years from the time the Deed of Donation was registered in the
Register of Deeds of Alaminos, Pangasinan, on April 4, 2001. The four-year prescriptive period should be reckoned from
the date of registration of the deed of donation and not from the date of the actual discovery of the registration of the deeds
of donation because registration is considered notice to the whole world. Thus, the RTC disposed: IEHaSc
WHEREFORE, premises considered, the Order dated September 29, 2006 is hereby
reconsidered and set aside, in lieu thereof, the instant complaint is hereby ordered dismissed on the
account of lack of jurisdiction over the subject matter of the case for failure of the plaintiff to pay the
correct docket fees upon its institution attended by bad faith and on the ground of prescription.
SO ORDERED. 15
ASB sought reconsideration, but to no avail. 16
Ruling of the CA
On appeal, the CA agreed with ASB that its complaint should not have been dismissed on the ground that it failed
to pay the correct docket fees. It stated that the lack of specific amount of actual damages and attorney's fees in ASB's
complaint did not, by itself, amount to evident bad faith. The CA noted that ASB had previously manifested before the trial
court that it was willing to pay additional docket fees should the same be found insufficient. CDHaET
On the issue of prescription, however, the CA saw things differently. Considering the subsidiary nature of an action
for rescission, the CA found that the action of ASB had not yet prescribed, but was premature. The CA noted that ASB failed
to allege in its complaint that it had resorted to all legal remedies to obtain satisfaction of its claim. The CA wrote:
After a thorough examination of the foregoing precepts and the facts engirding this case, this
court opines that plaintiff-appellant's action for rescission has not yet prescribed for it must be emphasized
that it has not even accrued in the first place. To stress, an action for rescission or accion
pauliana accrues only if all five requisites are present, to wit:
1) That the plaintiff asking for rescission, has a credit prior to the alienation, although demandable
later;
2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third
person;
3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by rescission
of the conveyance to the third person;
4) That the act being impugned is fraudulent; and
5) That the third person who received the property conveyed, if by onerous title, has been an
accomplice in the fraud. SIaHDA
In the instant case, the plaintiff-appellant failed to satisfy the third requirement considering that
it did not allege in its complaint that it has resorted to all legal remedies to obtain satisfaction of his claim.
It did not even point out in its complaint if the decision in Civil Case No. 99-865 has already become final
and executory and whether the execution thereof yielded negative result in satisfying its claims. Even the
skip tracing allegedly done by the plaintiff-appellant to locate the properties of the defendant-appellees
was not mentioned. And although the skip tracing reports were subsequently presented by the plaintiff-
appellant, such reports are not sufficient to satisfy the third requirement. First, they are not prepared and
executed by the sheriff, and second, they do not demonstrate that the sheriff failed to enforce and satisfy

24
 the judgment of the court and that the plaintiff-appellant has exhausted the property of the defendant-
appellees. Perforce, the action for rescission filed by the plaintiff-appellant is dismissible. 17
As stated at the outset, both parties sought reconsideration but were rebuffed.
Issue
Hence, this recourse of ASB to the Court, presenting the lone issue of:
WHETHER OR NOT THE COURT OF APPEALS, IN CA G.R. CV NO 90123, HAS DECIDED A
QUESTION OF SUBSTANCE, NOT HERETOFORE DETERMINED BY THE SUPREME COURT, OR
HAS DECIDED IT IN A WAY PROBABLY NOT IN ACCORDANCE WITH LAW OR THE APPLICABLE
DECISIONS OF THE SUPREME COURT, WHEN IT RENDERED THE DECISION DATED 28 MAY
2009, AND RESOLUTION DATED 22 JANUARY 2010, IN FINDING THAT PETITIONER FAILED TO
PROVE THAT IT HAS RESORTED TO ALL LEGAL REMEDIES TO OBTAIN SATISFACTION OF ITS
CLAIM, WITHOUT GIVING PETITIONER THE OPPORTUNITY TO BE HEARD OR THE CHANCE TO
PRESENT EVIDENCE TO SUPPORT ITS ACTION, THEREBY DEPRIVING THE LATTER OF THE
RIGHT TO DUE PROCESS. 18
ASB argues that, considering that its action was still in its preliminary stages, the CA erred in dismissing its action
on the ground that it failed to allege in its complaint the fact that it had resorted to all other legal remedies to satisfy its claim,
because it is a matter that need not be alleged in its complaint, but, rather, to be proved during trial. It asserts that its action
is not yet barred by prescription, insisting that the reckoning point of the four (4)-year prescriptive period should be counted
from September 2005, when it discovered the fraudulent donation made by respondent spouses.
The basic issue in this case is whether the CA was correct in dismissing ASB's complaint on the ground that the
action against respondents was premature. CSTDIE
Ruling of the Court
The Court finds the petition bereft of merit.
Section 1 of Rule 2 of the Revised Rules of Court requires that every ordinary civil action must be based on a cause
of action. Section 2 of the same rule defines a cause of action as an act or omission by which a party violates the right of
another. In order that one may claim to have a cause of action, the following elements must concur: (1) a right in favor of
the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named
defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant in violation of the
right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff for which the latter may maintain
an action for recovery of damages or other appropriate relief. 19 In other words, "a cause of action arises when that should
have been done is not done, or that which should not have been done is done." 20
In Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., 21 it was held that "before an action can
properly be commenced, all the essential elements of the cause of action must be in existence, that is, the cause of action
must be complete. All valid conditions precedent to the institution of the particular action, whether prescribed by statute,
fixed by agreement of the parties or implied by law must be performed or complied with before commencing the action,
unless the conduct of the adverse party has been such as to prevent or waive performance or excuse non-performance of
the condition."
Moreover, it is not enough that a party has, in effect, a cause of action. The rules of procedure require that the
complaint must contain a concise statement of the ultimate or essential facts constituting the plaintiff's cause of action. "The
test of the sufficiency of the facts alleged in the complaint is whether or not, admitting the facts alleged, the court can render
a valid judgment upon the same in accordance with the prayer of plaintiff." 22 The focus is on the sufficiency, not the
veracity, of the material allegations. Failure to make a sufficient allegation of a cause of action in the complaint warrants its
dismissal.23 HTIEaS
In relation to an action for rescission, it should be noted that the remedy of rescission is subsidiary in nature; it
cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the
same. 24 Article 1177 of the New Civil Code provides:
The creditors, after having pursued the property in possession of the debtor to satisfy their claims,
may exercise all the rights and bring all the actions of the latter for the same purpose, save those which
are inherent in his person; they may also impugn the actions which the debtor may have done to defraud
them. (Emphasis added)
Consequently, following the subsidiary nature of the remedy of rescission, a creditor would have a cause of action
to bring an action for rescission, if it is alleged that the following successive measures have already been taken: (1) exhaust
the properties of the debtor through levying by attachment and execution upon all the property of the debtor, except such

25
as are exempt by law from execution; (2) exercise all the rights and actions of the debtor, save those personal to him (accion
subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana). 25
With respect to an accion pauliana, it is required that the ultimate facts constituting the following requisites must all
be alleged in the complaint, viz.:
1) That the plaintiff asking for rescission, has credit prior to the alienation, although demandable later;
2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person;
3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by rescission of the
conveyance to the third person; ACcHIa
4) That act being impugned is fraudulent; and
5) That the third person who received the property conveyed, if by onerous title, has been an accomplice
in the fraud. 26
A cursory reading of the allegations of ASB's complaint would show that it failed to allege the ultimate facts
constituting its cause of action and the prerequisites that must be complied before the same may be instituted. ASB, without
availing of the first and second remedies, that is, exhausting the properties of CTS, Henry H. Furigay and Genilda
C. Furigay or their transmissible rights and actions, simply undertook the third measure and filed an action for annulment of
the donation. This cannot be done. The Court hereby quotes with approval the thorough discourse of the CA on this
score: 27
To answer the issue of prescription, the case of Khe Hong Cheng vs. Court of Appeals (G.R.
No. 144169, March 28, 2001) is pertinent. In said case, Philam filed an action for collection against Khe
Hong Cheng. While the case was still pending, or on December 20, 1989, Khe Hong Cheng, executed
deeds of donations over parcels of land in favor of his children, and on December 27, 1989, said deeds
were registered. Thereafter, new titles were issued in the names of Khe Hong Cheng's children. Then,
the decision became final and executory. But upon enforcement of writ of execution, Philam found out
that Khe Hong Cheng no longer had any property in his name. Thus, on February 25, 1997, Philam filed
an action for rescission of the deeds of donation against Khe Hong Cheng alleging that such was made
in fraud of creditors. However, Khe Hong Cheng moved for the dismissal of the action averring that it has
already prescribed since the four-year prescriptive period for filing an action for rescission pursuant to
Article 1389 of the Civil Code commenced to run from the time the deeds of donation were registered on
December 27, 1989. Khe Hong Cheng averred that registration amounts to constructive notice and since
the complaint was filed only on February 25, 1997, or more than four (4) years after said registration, the
action was already barred by prescription. The trial court ruled that the complaint had not yet prescribed
since the prescriptive period began to run only from December 29, 1993, the date of the decision of the
trial court. Such decision was affirmed by this court but reckoned the accrual of Philam's cause of action
in January 1997, the time when it first learned that the judgment award could not be satisfied because
the judgment creditor, Khe Hong Cheng, had no more properties in his name. Hence, the case reached
the Supreme Court which ruled that the action for rescission has not yet prescribed, ratiocinating as
follows: ISTCHE
"Essentially, the issue for resolution posed by petitioners is this: When did the four (4)
year prescriptive period as provided for in Article 1389 of the Civil Code for respondent Philam to
file its action for rescission of the subject deeds of donation commence to run?
The petition is without merit.
Article 1389 of the Civil Code simply provides that, 'The action to claim rescission must
be commenced within four years.' Since this provision of law is silent as to when the prescriptive
period would commence, the general rule, i.e., from the moment the cause of action accrues,
therefore, applies. Article 1150 of the Civil Code is particularly instructive:
ARTICLE 1150. The time for prescription for all kinds of actions, when there is
no special provision which ordains otherwise, shall be counted from the day they may be
brought.
Indeed, this Court enunciated the principle that it is the legal possibility of bringing the
action which determines the starting point for the computation of the prescriptive period for the
action. Article 1383 of the Civil Code provides as follows:

26
 ARTICLE 1383. An action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to obtain reparation
for the same.
It is thus apparent that an action to rescind or an accion pauliana must be of last resort,
availed of only after all other legal remedies have been exhausted and have been proven futile.
For an accion pauliana to accrue, the following requisites must concur: EDATSC
1) That the plaintiff asking for rescission, has a credit prior to the alienation,
although demandable later; 2) That the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; 3) That the creditor has no other
legal remedy to satisfy his claim, but would benefit by rescission of the
conveyance to the third person; 4) That the act being impugned is fraudulent; 5) That
the third person who received the property conveyed, if by onerous title, has been an
accomplice in the fraud.
We quote with approval the following disquisition of the CA on the matter: CcAIDa
An accion pauliana accrues only when the creditor discovers that he has no
other legal remedy for the satisfaction of his claim against the debtor other than an accion
pauliana. The accion pauliana is an action of a last resort. For as long as the creditor still
has a remedy at law for the enforcement of his claim against the debtor, the creditor will
not have any cause of action against the creditor for rescission of the contracts entered
into by and between the debtor and another person or persons. Indeed, an accion
pauliana presupposes a judgment and the issuance by the trial court of a writ of
execution for the satisfaction of the judgment and the failure of the Sheriff to enforce and
satisfy the judgment of the court. It presupposes that the creditor has exhausted the
property of the debtor. The date of the decision of the trial court against the debtor is
immaterial. What is important is that the credit of the plaintiff antedates that of the
fraudulent alienation by the debtor of his property. After all, the decision of the trial court
against the debtor will retroact to the time when the debtor became indebted to the
creditor.
Petitioners, however, maintain that the cause of action of respondent Philam against
them for the rescission of the deeds of donation accrued as early as December 27, 1989, when
petitioner Khe Hong Cheng registered the subject conveyances with the Register of Deeds.
Respondent Philam allegedly had constructive knowledge of the execution of said deeds under
Section 52 of Presidential Decree No. 1529, quoted infra, as follows:
SECTION 52. Constructive knowledge upon registration. — Every conveyance,
mortgage, lease, lien, attachment, order, judgment, instrument or entry affecting
registered land shall, if registered, filed or entered in the Office of the Register of Deeds
for the province or city where the land to which it relates lies, be constructive notice to all
persons from the time of such registering, filing, or entering.
Petitioners argument that the Civil Code must yield to the Mortgage and Registration
Laws is misplaced, for in no way does this imply that the specific provisions of the
former may be all together ignored. To count the four year prescriptive period to rescind
an allegedly fraudulent contract from the date of registration of the conveyance with
the Register of Deeds, as alleged by the petitioners, would run counter to Article 1383
of the Civil Code as well as settled jurisprudence. It would likewise violate the third
requisite to file an action for rescission of an allegedly fraudulent conveyance of
property, i.e., the creditor has no other legal remedy to satisfy his claim. aCHDST
An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by
the trial court of a writ of execution for the satisfaction of the judgment, and 3) the failure of the
sheriff to enforce and satisfy the judgment of the court. It requires that the creditor has exhausted
the property of the debtor. The date of the decision of the trial court is immaterial. What is
important is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor
of his property. After all, the decision of the trial court against the debtor will retroact to the time
when the debtor became indebted to the creditor.
xxx xxx xxx
Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe
Hong Cheng had executed the deeds of donation in favor of his children, the complaint against
27
 Butuan Shipping Lines and/or petitioner Khe Hong Cheng was still pending before the trial court.
Respondent Philam had no inkling, at the time, that the trial court's judgment would be in its favor
and further, that such judgment would not be satisfied due to the deeds of donation executed by
petitioner Khe Hong Cheng during the pendency of the case. Had respondent Philam filed his
complaint on December 27, 1989, such complaint would have been dismissed for being
premature. Not only were all other legal remedies for the enforcement of respondent Philam's
claims not yet exhausted at the time the deeds of donation were executed and registered.
Respondent Philam would also not have been able to prove then that petitioner Khe Hong Cheng
had no more property other than those covered by the subject deeds to satisfy a favorable
judgment by the trial court. AEcTCD
xxx xxx xxx
As mentioned earlier, respondent Philam only learned about the unlawful conveyances
made by petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff
to Butuan City to attach the properties of petitioner Khe Hong Cheng. There they found that he
no longer had any properties in his name. It was only then that respondent Philam's action for
rescission of the deeds of donation accrued because then it could be said that respondent Philam
had exhausted all legal means to satisfy the trial court's judgment in its favor. Since respondent
Philam filed its complaint for accion pauliana against petitioners on February 25, 1997, barely a
month from its discovery that petitioner Khe Hong Cheng had no other property to satisfy the
judgment award against him, its action for rescission of the subject deeds clearly had not yet
prescribed."
From the foregoing, it is clear that the four-year prescriptive period commences to run neither
from the date of the registration of the deed sought to be rescinded nor from the date the trial court
rendered its decision but from the day it has become clear that there are no other legal remedies by
which the creditor can satisfy his claims. [Emphases in the original] cSITDa
In all, it is incorrect for ASB to argue that a complaint need not allege all the elements constituting its cause of action
since it would simply adduce proof of the same during trial. "Nothing is more settled than the rule that in a motion to dismiss
for failure to state a cause of action, the inquiry is into the sufficiency, not the veracity, of the material allegations." 28 The
inquiry is confined to the four corners of the complaint, and no other. 29 Unfortunately for ASB, the Court finds the allegations
of its complaint insufficient in establishing its cause of action and in apprising the respondents of the same so that they
could defend themselves intelligently and effectively pursuant to their right to due process. It is a rule of universal application
that courts of justice are constituted to adjudicate substantive rights. While courts should consider public policy and
necessity in putting an end to litigations speedily they must nevertheless harmonize such necessity with the fundamental
right of litigants to due process.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Leonardo-de Castro, * Peralta, ** Abad and Leonen, JJ., concur.
||| (Anchor Savings Bank v. Furigay, G.R. No. 191178, [March 13, 2013], 706 PHIL 378-396)

28
 EN BANC

[G.R. No. L-11827. July 31, 1961.]

FERNANDO A. GAITE, plaintiff-appellee, vs. ISABELO FONACIER, GEORGE KRAKOWER, LARAP

MINES & SMELTING CO., INC., SEGUNDINA VIVAS, FRANCISCO DANTE, PACIFICO ESCANDOR
and FERNANDO TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia Antonio Barredo and Pedro Guevarra for defendants-appellants.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; CONDITIONAL OBLIGATIONS; EFFICACY SUBORDINATED TO THE

HAPPENING OF A FUTURE AND UNCERTAIN EVENT. — What characterizes a conditional obligation is the fact that
its efficacy or obligatory force is subordinated to the happening of a future and uncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the conditional obligation had never existed.
2. SALES; COMMUTATIVE AND ONEROUS NATURE OF CONTRACT OF SALES; CONTINGENT
CHARACTER OF OBLIGATION MUST CLEARLY APPEAR. — A contract of sale is normally commutative and onerous:
not only does each of the parties assume a correlative obligation, but each party anticipates performance by the other
from the very start. Although the obligation of one party can be lawfully subordinated to an uncertain event, so that the
other understands that he assumes the risk of receiving nothing for what he gives, it is not in the usual course of
business to do so; hence, the contingent character of the obligation must clearly appear.
3. ID.; ID.; HOW DOUBT IN THE INTENTION OF PARTIES IS RESOLVED. — Sale is essentially onerous,
and if there is doubt whether the parties intended a suspensive condition or a suspensive period for the payment of the
agreed price, the doubt shall be settled in favor of the greatest reciprocity of interests, which will obtain if the buyer's
obligation is deemed to be actually existing, with only its maturity postponed or deferred.

DECISION

REYES, J.B.L., J p:

This appeal comes to us directly from the Court of First Instance because the claims involved aggregate more
than P200,000.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a representative
capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in the municipality of Jose Panganiban,
province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952 (Exhibit "3"), Fonacier constituted and appointed plaintiff-
appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into a contract with any individual or juridical
person for the exploration and development of the mining claims aforementioned on a royalty basis of not less than
P0.50 per ton of ore that might be extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment
(Record on Appeal, pp. 17-19) conveying the development and exploitation of said mining claims unto the Larap Iron
Mines, a single proprietorship owned solely by and belonging to him, on the same royalty basis provided for in Exhibit
"3". Thereafter Gaite embarked upon the development and exploitation of the mining claims in question, opening and
paving roads within and outside their boundaries, making other improvements and installing facilities therein for use in
the development of the mines, and in time extracted therefrom what he claimed and estimated to be approximately
24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to Gaite to exploit
and develop the mining claims in question, and Gaite assented thereto subject to certain conditions. As a result, a
document entitled "Revocation of Power of Attorney and Contract" was executed on December 8, 1954 (Exhibit "A"),
wherein Gaite transferred to Fonacier, for the consideration of P20,000, plus 10% of the royalties that Fonacier would
receive from the mining claims, all his rights and interests on all the roads, improvements, and facilities in or outside
29
said claims, the right to use the business name "Larap Iron Mines" and its goodwill, and all the records and documents
relative to the mines. In the same document, Gaitetransferred to Fonacier all his rights and interests over the "24,000
tons of iron ore, more or less" that the former had already extracted from the mineral claims, in consideration of the sum
of P75,000, P10,000, of which was paid upon the signing of the agreement, and
"b. The balance of SIXTY-FIVE "THOUSAND PESOS (P65,000) will be paid from and out of the first letter
of credit covering the first shipment of iron ores and or the first amount derived from the local sale of iron
ore made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or successors in interests."
To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a surety
bond; and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself
(Fonacier) as principal and the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina
Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that
when this bond was presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract",
Exhibit "A", on December 8, 1954, he refused to sign said Exhibit "A" unless another bond underwritten by a bonding
company was put up by defendants to secure the payment of the P65,000 balance of the price of the iron ore in the
stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954 (Exhibit "B"), was executed by
the same parties to the first bond Exhibit "A-I", with the Far Eastern Surety and Insurance Co. as additional surety, but
it provided that the liability of the surety company would attach only when there had been an actual sale of iron ore by
the Larap Mines & Smelting Co. for an amount of not less than P65,000, and that, furthermore, the liability of said
surety company would automatically expire on December 8, 1955. Both bonds were attached to the "Revocation of
Power of Attorney and Contract", Exhibit "A" and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two executed and
signed the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining
Operation", ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit,
and explore the mining claims in question, together with the improvements therein and the use of the name "Larap Iron
Mines" and its goodwill, in consideration of certain royalties. Fonacier likewise transferred, in the same document, the
complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap Mines & Smelting
Co., in consideration for the signing by the company and its stockholders of the surety bonds delivered by Fonacier
to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety and
Insurance Company, no sale of the approximately 24,000 tons of iron ore had been made by the Larap Mines & Smelting
Co., Inc., nor had the 65,000 balance of the price of said ore been paid to Gaite by Fonacier and his sureties.
Whereupon, Gaite demanded from Fonacier and his sureties payment of said amount, on the theory that they had lost
every right to make use of the period given them when their bond, Exhibit "B", automatically expired (Exhibits "C" to "C-
24"). And when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed the present complaint
against them in the Court of First Instance of Manila (Civil Case No. 29310) for the payment of the P65,000 balance of
the price of the ore, consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon
by Gaite was subject to a condition that the amount of P65,000 would be payable out of the first letter of credit covering
the first shipment of iron ore and/or the first amount derived from the local sale of the iron ore by the Larap Mines &
Smelting Co., Inc.; that up to the time of the filing of the complaint, no sale of the iron ore had been made, hence the
condition had not yet been fulfilled; and that consequently, the obligation was not yet due and demandable. Defendant
Fonacier also contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was actually
delivered, and counterclaimed for more than P200,000 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000 became due and
demandable when the defendants failed to renew the surety bond underwritten by the Far Eastern Surety and Insurance
Co., Inc. (Exhibit "B") which expired on December 8, 1955, and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were actually in
existence in the mining claims when these parties executed the "Revocation of Power of Attorney and Contract", Exhibit
"A."
On the first question, the lower court held that the obligation of defendants to pay plaintiff the P65,000 balance
of the price of the approximately 24,000 tons of iron ore was one with a term: i.e., that it would be paid upon the sale of
sufficient iron ore by defendants, such sale to be effected within one year or before December 8, 1955; that the giving
of security was a condition precedent to Gaite's giving of credit to defendants; and that as the latter failed to put up a
good and sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on December 8, 1955,
the obligation became due and demandable under Article 1198 of the New Civil Code.

30
 As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000 tons of the
iron ore at the mining claims in question at the time of the execution of the contract Exhibit "A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him, jointly and
severally, P65,000 with interest at 6% per annum from December 9, 1965 until full payment, plus costs. From this
judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for resolution: a motion to
declare the appellants Larap Mines & Smelting Co., Inc. and George Krakower in contempt, filed by appellant Fonacier,
and two motions to dismiss the appeal as having become academic and a motion for new trial and/or to take judicial
notice of certain documents, filed by appellee Gaite. The motion for contempt is unmeritorious because the main
allegation therein that the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is "property in litigation", has not been substantiated; and, even if true, does not make these
appellants guilty of contempt, because what is under litigation in this appeal is appellee Gaite's right to the payment of
the balance of the price of the ore, and not the iron ore itself. As for the several motions presented by appellee Gaite, it
is unnecessary to resolve these motions in view of the result that we have reached in this case, which we shall hereafter
discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee Gaite the
P65,000 (balance of the price of the iron ore in question) is one with a period or term and not one with a suspensive
condition, and that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of iron ore sold
by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit "A":
"7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his rights and
interests over the 24,000 tons of iron ore, more or less, above-referred to together with all his rights and
interests to operate the mine in consideration of the sum of SEVENTY-FIVE THOUSAND PESOS
(P75,000) which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000) will be paid upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will be paid from and out of the first letter
of credit covering first shipment of iron ores and/or the first amount derived from the local sale of iron ore
made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or successors in interest."
We find the court below to be legally correct in holding that the shipment or local sale of the iron ore is not a
condition precedent (or suspensive) to the payment of the balance of P65,000, but was only a suspensive period or
term. What characterizes a conditional obligation is the fact that its efficacy or obligatory force (as distinguished from its
demandability) is subordinated to the happening of a future and uncertain event; so that if the suspensive condition
does not take place, the parties would stand as if the conditional obligation had never existed. That the parties to the
contract Exhibit "A" did not intend any such state of things to prevail is supported by several circumstances:
1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of Sixty-Five
Thousand Pesos (P65,000) will be paid out of the first letter of credit covering the first shipment of iron ore . . ." etc.
There is no uncertainty that the payment will have to be made sooner or later; what is undetermined is merely the exact
date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay is
recognized; only its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one of the parties assume a
correlative obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the price), but
each party anticipates performance by the other from the very start. While in a sale the obligation of one party can be
lawfully subordinated to an uncertain event, so that the other understands that he assumes the risk of receiving nothing
for what he gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the usual course of business
to do so; hence, the contingent character of the obligation must clearly appear. Nothing is found in the record to evidence
that Gaite desired or assumed to run the risk of losing his rights over the ore without getting paid for it, or that Fonacier
understood that Gaite assumed any such risk. This is proved by the fact that Gaiteinsisted on a bond to guarantee
payment of the P65,000, and not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and the company's
stockholders, but also on one by a surety company; and the fact that appellants did put up such bonds indicates that
they admitted the definite existence of their obligation to pay the balance of P65,000.

31
 3) To subordinate the obligation to pay the remaining P65,000 to the sale or shipment of the ore as a condition
precedent, would be tantamount to leaving the payment at the discretion of the debtor, for the sale or shipment could
not be made unless the appellants took steps to sell the ore.
Appellants would thus be able to postpone payment indefinitely. The desirability of avoiding such a construction of the
contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the parties intended a suspensive
condition or a suspensive period (dies ad quem) for the payment of the P65,000, the rules of interpretation would incline
the scales in favor of "the greatest reciprocity of interests", since sale is essentially onerous. The Civil Code of the
Philippines, Article 1378, paragraph 1, in fine, provides:
"if the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests."
and there can be no question that greater reciprocity obtains if the buyer's obligation is deemed to be actually existing,
with only its maturity (due date) postponed or deferred, than if such obligation were viewed as non-existent or not
binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an
aleatory contract where the transferor,Gaite, would assume the risk of not being paid at all; and that the previous sale
or shipment of the ore was not a suspensive condition for the payment of the balance of the agreed price, but was
intended merely to fix the future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have the right
to insist that Gaite should wait for the sale or shipment of the ore before receiving payment; or, in other words, whether
or not they are entitled to take full advantage of the period granted them for making the payment.
We agree with the court below that the appellants have forfeited the right to compel Gaite to wait for the sale of
the ore before receiving payment of the balance of P65,000, because of their failure to renew the bond of the Far
Eastern Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding company's
undertaking on December 8, 1955 substantially reduced the security of the vendor's rights as creditor for the unpaid
P65,000, a security that Gaite considered essential and upon which he had insisted when he executed the deed of sale
of the ore to Fonacier (Exhibit "A"). The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil
Code of the Philippines:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or securities which he has promised.
(3) When by his own acts he has impaired said guaranties or securities after their establishment, and
when through fortuitous event they disappear, unless he immediately gives new ones equally
satisfactory."
Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the
securities given to the creditor (appelleeGaite), unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full
knowledge that on its face it would automatically expire within one year was a waiver of its renewal after the expiration
date. No such waiver could have been intended, for Gaite stood to lose and had nothing to gain thereby; and if there
was any, it could be rationally explained only if the appellants had agreed to sell the ore and pay Gaitebefore the surety
company's bond expired on December 8, 1955. But in the latter case the defendants- appellants' obligation to pay
became absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A."
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding payment
and instituting this action one year from and after the contract (Exhibit "A") was executed, either because the appellant
debtors had impaired the securities originally given and thereby forfeited any further time within which to pay; or because
the term of payment was originally of no more than one year, and the balance of P65,000 became due and payable
thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of iron ore in
the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there had been a short-delivery as claimed
by appellants, they are entitled to the payment of damages, we must, at the outset, stress two things: first, that this is a
case of a sale of a specific mass of fungible goods for a single price or a lump sum, the quantity of "24,000 tons of iron
ore, more or less", stated in the contract Exhibit "A", being a mere estimate by the parties of the total tonnage weight of
the mass; and second, that the evidence shows that neither of the parties had actually measured or weighed the mass,
so that they both tried to arrive at the total quantity by making an estimate of the volume thereof in cubic meters and
then multiplying it by the estimated weight per ton of each cubic meter.

32
 The sale between the parties is a sale of a specific mass of iron ore because no provision was made in their
contract for the measuring or weighing of the ore sold in order to complete or perfect the sale, nor was the price of
P75,000 agreed upon by the parties based upon any such measurement (see Art. 1480, second par., New Civil Code).
The subject-matter of the sale is, therefore, a determinate object, the mass, and not the actual number of units or tons
contained therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer all of the ore
found in the mass, notwithstanding that the quantity delivered is less than the amount estimated by them (Mobile
Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of the Luisiana Civil
Code). There is no charge in this case that Gaite did not deliver to appellants all the ore found in the stockpiles in the
mining claims in question; Gaite had, therefore, complied with his promise to deliver, and appellants in turn are bound
to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite mass, but
approximately 24,000 tons of ore, so that any substantial difference in this quantity promised and the quantity delivered
would entitle the buyers to recover damages for the short-delivery, was there really a short- delivery in this case?
We think not. As already stated, neither of the parties had actually measured or weighed the whole mass of ore
cubic meter by cubic meter, or ton by ton. Both parties predicate their respective claims only upon an estimated number
of cubic meters of ore multiplied by the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that he sold to
Fonacier, while appellants contend that by actual measurement, their witness Cipriano Manlañgit found the total volume
of ore in the stockpiles to be only 6,609 cubic meters. As to the average weight in tons per cubic meter, the parties are
again in disagreement, with appellants claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while
appellee Gaite claims that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of iron ore in
this case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a
government pensionado to the States and a mining engineering graduate of the Universities of Nevada and California,
with almost 22 years of experience in the Bureau of Mines. This witness placed the tonnage factor of every cubic meter
of iron ore at between 3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds
to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and "FF- 1") by engineer Nemesio
Gamatero, who was sent by the Bureau of Mines to the mining claims involved at the request of appellant Krakower,
precisely to make an official estimate of the amount of iron ore in Gaite'sstockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by appellants' witness
Cipriano Manlañgit is correct, if we multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the product is
21,809.7 tons, which is not very far from the estimate of 24,000 tons made by appellee Gaite, considering that actual
weighing of each unit of the mass was practically impossible, so that a reasonable percentage of error should be allowed
anyone making an estimate of the exact quantity in tons found in the mass. It must not be forgotten that the contract
Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (cf. Pine River Logging & Improvement Co. vs.
U. S., 186 U.S. 279, 46, L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the payment of damages,
nor could Gaite have been guilty of any fraud in making any misrepresentation to appellants as to the total quantity of
ore in the stockpiles of the mining claims in question, as charged by appellants since Gaite's estimate appears to be
substantially correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs against
appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.
||| (Gaite v. Fonacier, G.R. No. L-11827, [July 31, 1961], 112 PHIL 720-733)

33
 THIRD DIVISION

[G.R. No. 131784. September 16, 1999.]

FELIX L. GONZALES, petitioner, vs. THE HEIRS OF THOMAS and PAULA CRUZ, herein
represented by ELENA C. TALENS, respondents.

Felix L. Gonzales for and in his behalf.

Felix B. Lerio for private respondents.

SYNOPSIS

On December 1, 1983, Paula Ano Cruz, together with the respondents, entered into a contract of lease/purchase
with the petitioner, of a half-portion ofa parcel of land containing an area of 12 hectares, more or less, and an accretion of 2
hectares more or less, situated in Rodriguez town, Province of Rizal, and covered by Transfer Certificate of Title 12111.
Petitioner paid the P2,500.00 per hectare or P15,000.00 annual rental on the half portion of the property covered by said
title in accordance with the second provision of the contract of lease purchase and thereafter took possession of the
property installing Jesus Sambrano as his caretaker. Petitioner did not, however, exercise his option to purchase the
property immediately after the expiration of the one-year lease on November 30, 1984, but remained in possession of the
property without paying the purchase price provided in the contract and without paying any further rentals thereon. Due to
this non-payment, demand letters were sent to petitioner demanding him to vacate the premises, but the petitioner refused
to vacate and continued possession thereof. Alleging breach of the provisions of the contract of Lease/Purchase, the
respondents filed a complaint for recovery of possession of the property with damages. After the termination of the pre-trial
conference, the trial court proceeded to hear the case on the merits and thereafter, rendered a decision declaring that the
respondents cannot terminate the contract of lease due to their failure to notify the petitioner in due time of their intention to
that effect. Nor can they rescind the contract of purchase considering that there was a condition precedent which the
respondents failed to fulfill. The Court of Appeals reversed the decision of the trial court and ruled that the transfer of title in
the appellee's name cannot be interpreted as a condition precedent to the payment of the agreed purchase price because
such interpretation not only run counter to the explicit provisionsof the contract but also was contrary to the normal
course of things anent the sale of real property. Hence, the petition.
The Court found the petition meritorious. The Court ruled that the respondents cannot rescind the contract because
they have not caused the transferof the TCT to their names, which is a condition precedent to petitioner's obligations.
Particularly, the ninth provision was intended to ensure that respondents would have a valid title over the specific portion
they were selling to petitioner. Only after the title is assured may the obligation to buy the land and to pay the sums stated
in the contract be enforced within the period stipulated. Verily, the petitioner's obligation to purchase has not yet ripened
and cannot be enforced until and unless respondents can prove their title to the property subject of the contract. Accordingly,
the petition was granted and the appealed decision was reversed and set aside.

SYLLABUS

1. CIVIL LAW; SALES; ONE CAN SELL ONLY WHAT ONE OWNS OR IS AUTHORIZED TO SELL, AND THE
BUYER CAN ACQUIRE NO MORE THAN WHAT THE SELLER CAN TRANSFER LEGALLY; CASE AT BAR. — It is a
well-settled principle in law that no one can give what one does not have — nemo dat quod non habet. Accordingly, one
can sell only what one owns or is authorized to sell, and the buyer can acquire no more than what the seller can transfer
legally. Because the property remained registered in the names of their predecessors-in-interest, private respondents could
validly sell only their undivided interest in the estate of Severo Cruz, the extent of which was however not shown in the
records. There being no partition of the estate thus far, there was no guarantee as to how much and which portion would
be adjudicated to respondents.
2. ID.; ID.; IN A CONTRACT OF SALE, TITLE TO THE PROPERTY PASSES TO THE VENDEE UPON
DELIVERY OF THING SOLD; CASE AT BAR. — In a contract of sale, the title to the property passes to the vendee upon
the delivery of the thing sold. In this case, the respondent could not deliver ownership or title to a specific portion of the yet
undivided property. True, they could have intended to sell their hereditary interest, but in the context of the
Contract ofLease/Purchase, the parties under paragraph nine wanted the specific portion of the land to be segregated,
identified and specifically titled. Hence, by the said Contract, the respondents as sellers were given a maximum of four

34
years within which to acquire a separate TCT in their names, preparatory to the execution of the deed of sale and the
payment of the agreed price in the manner described in paragraph nine. DHESca
3. ID.; OBLIGATIONS AND CONTRACTS; CONDITION DEFINED; WHEN THE CONSENT OF A PARTY TO A
CONTRACT IS GIVEN SUBJECT TO THE FULFILLMENT OF A SUSPENSIVE CONDITION, THE CONTRACT IS NOT
PERFECTED UNLESS THAT CONDITION IS FIRST COMPLIED WITH; CASE AT BAR. —Condition has been defined as
"every future and uncertain event upon which an obligation or provision is made to depend. It is a future and uncertain event
upon which the acquisition or resolution of rights is made to depend by those who execute the juridical act." Without it, the
sale of the property under the Contract cannot be perfected, and petitioner cannot be obliged to purchase the property.
"When the consent of a party to a contract is given subject to the fulfillment of a suspensive condition, the contract is not
perfected unless that condition is first complied with."
4. ID.; ID.; WHEN THE OBLIGATION ASSUMED BY A PARTY IS EXPRESSLY SUBJECTED TO A CONDITION,
THE OBLIGATION CANNOT BE ENFORCED AGAINST HIM UNLESS THE CONDITION IS COMPLIED WITH; CASE AT
BAR. — The Court has held that "[w]hen the obligation assumed by a party to a contract is expressly subjected to a condition,
the obligation cannot be enforced against him unless the condition is complied with." Furthermore, "[t]he obligatory force of a
conditional obligation is subordinated to the happening of a future and uncertain event, so that if that event does not take
place, the parties would stand as if the conditional obligation had never existed." In this case, the obligation of the petitioner
to buy the land cannot be enforced unless respondents comply with the suspensive condition that they acquire first a
separate and distinct TCT in their names. The suspensive condition not having been fulfilled, then the obligation of the
petitioner to purchase the land has not arisen.
5. ID.; ID.; THERE CAN BE NO RESCISSION OF AN OBLIGATION AS YET NON-EXISTENT, BECAUSE THE
SUSPENSIVE CONDITION HAS NOT HAPPENED; CASE AT BAR. — Respondents cannot rescind the contract, because
they have not caused the transfer of the TCT to their names, which is a condition precedent to petitioner's obligation. This
Court has held that "there can be no rescission (or more properly, resolution) of an obligation as yet non-existent, because
the suspensive condition has not happened."

DECISION

PANGANIBAN, J p:

If a stipulation in a contract admits of several meanings, it shall be understood as bearing that import most adequate
to render it effectual. An obligation cannot be enforced unless the plaintiff has fulfilled the condition upon which it is premised.
Hence, an obligation to purchase cannot be implemented unless and until the sellers have shown their title to the specific
portion of the property being sold. cda
The Case
Before us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision 1 of the Court of Appeals 2 in
CA GR-CV No. 303754, which disposed as follows:
"WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby REVERSED.
The appellee FELIX GONZALES is hereby ordered to surrender possession of the property covered by
the Contract of Lease/Purchase to the appellants, Heirs of Thomas and Paula Cruz, and to pay to the
appellants the following amounts:
1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants shall have
recovered possession of the property subject of the Contract of Lease/Purchase;
2. P15,000.00 as attorney's fees; and
3. Costs of suit." 3
On the other hand, the trial court 4 Decision, 5 which was reversed by the CA, ruled as follows:
"WHEREFORE, premises considered, this Court hereby renders judgment in favor of the
defendant, Felix Gonzales, and against the plaintiffs, as follows:
(1) Ordering the dismissal of the case;
(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral damages and the other
sum of P10,000.00 as and for attorney's fees; and

35
 (3) To pay the costs." 6
The Facts
We hereby reproduce, unedited, the Court of Appeals' summary of the facts of this case as follows:
"On December 1, 1983, Paula Año Cruz together with the plaintiffs heirs of Thomas and Paula
Cruz, namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A. Cruz, Irenea C. Victoria, Leticia C. Salvador
and Elena C. Talens, entered into a Contract of Lease/Purchase with the defendant, Felix L. Gonzales,
the sole proprietor and manager of Felgon Farms, of a half-portion of a 'parcel of land containing an
area of 12 hectares, more or less, and an accretion of 2 hectares, more or less, situated in Rodriguez
Town, Province of Rizal' and covered by Transfer Certificate of Title No. 12111 (Exhibit A, p. 157,
Records). The contract of Lease/Purchase contains the following provisions:
'1. The terms of this Contract is for a period of one year upon the signing thereof. After the
period of this Contract, the LESSEE shall purchase the property on the agreeable
price of One Million Pesos (P1,000,000.00) payable within Two (2) Years period with an
interest of 12% per annum subject to the devalued amount of the Philippine Peso,
according to the following schedule of payment:
Upon the execution of the Deed of Sale 50% — and thereafter 25% every six (6) months thereafter, payable within
the first ten (10) days of the beginning of each period of six (6) months.
'2. The LESSEE shall pay by way of annual rental an amount equivalent to Two Thousand Five
Hundred (P2,500.00) Pesos per hectare, upon the signing of this contract on Dec. 1,
1983.
xxx xxx xxx
'9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and
distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable
period of time which shall not in any case exceed four (4) years, after which a new
Contract shall be executed by the herein parties which shall be the same in all respects
with this Contract of Lease/Purchase insofar as the terms and conditions are concerned.
xxx xxx xxx
(Exhibits A, A-1; pp. 157-158. Records)'
"The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00 annual rental on the
half-portion of the property covered by Transfer Certificate of Title No. 12111 in accordance with the
second provision of the Contract of Lease/Purchase (p. 12, TSN, September 14, 1989) and thereafter
took possession of the property, installing thereon the defendant Jesus Sambrano as his caretaker (pp.
16-17, 27, TSN, December 12, 1989). The defendant Gonzales did not, however, exercise his option to
purchase the property immediately after the expiration of the one-year lease on November 30, 1984 (pp.
19-20, TSN, September 14, 1989). He remained in possession of the property without paying the
purchase price provided for in the Contract ofLease/Purchase (Ibid.) and without paying any further
rentals thereon (p. 36, TSN, November 7, 1989). LLjur
"A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales informing
him of the lessors' decision to rescind the Contractof Lease/Purchase due to a breach thereof committed
by the defendant (Exhibit C; p. 162, Records). The letter also served as a demand on the defendant to
vacate the premises within 10 days from receipt of said letter (Ibid.).
"The defendant Gonzales refused to vacate the property and continued possession thereof (p. 2,
Record). The matter was therefore brought before the barangay captain of San Isidro, but owing to the
defendant's refusal to appear before the barangay, a certification allowing the case to be brought to Court
was issued on March 18, 1987 (Exhibit E; p. 165, Records).
"The lessor, Paula Año Cruz died the following day, March 19, 1987 (p. 9, TSN, September 14,
1989).
"A final demand letter to vacate the premises was sent by the remaining lessors who are also
the heirs of the deceased lessor Paula Año Cruz, through their counsel on August 24, 1987 which the
defendant Gonzales received but did not heed (Exhibits D and D-1; pp. 163-164, Records).
"The property subject of the Contract of Lease/Purchase is currently the subject of an Extra-
Judicial Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the property remains in the

36
name of the plaintiffs' predecessors-in-interest, Bernardina Calixto and Severo Cruz (Exhibit B; p. 160,
Records).
"Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a
complaint for recovery of possession of the property — subject of the contract with damages, both moral
and compensatory and attorney's fees and litigation expenses (p. 3, Records).
"Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of only
P50,000.00 of the P500,000.00 agreed down payment on the purchase price of P1,000,000.00, the
defendant Gonzales filed his answer on November 23, 1987 praying for a dismissal of the complaint filed
against him and an award of moral, exemplary and actual damages, as well as litigation expenses (pp.
19-22, Records).
"The defendant Sambrano was, upon motion, declared in default for failure to file an answer
despite valid service of summons (p. 30, Records).
"The parties limited the issues to be resolved to:
(1) Whether or not paragraph 9 of the contract is a condition precedent before the defendant is
to pay the down payment;
(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and
(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262, Records)
"After the termination of the pre-trial conference, the trial court proceeded to hear the case on the
merits and arrived at its appealed decision based on the following findings and conclusions:
'Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a
Transfer Certificate of Title in the name of the lessee within 4 years before a new contract is to
be entered into under the same terms and conditions as the original Contract of Lease/Purchase.
Thus, before a deed of Sale can be entered into between the plaintiffs and the defendant, the
plaintiffs have to obtain the Transfer Certificate of Title in favor of the defendant. Article
1181 of the New Civil Code states that: 'In 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.' When the obligation assumed by a party
to a contract is expressly subjected to a condition, the obligation cannot be enforced against him
unless the condition is complied with (Wise & Co. vs. Kelly, 37 Phil. 695; PNB vs. Philippine Trust
Co., 68 Phil. 48). LLjur
'The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for in
the contract, does not entitle them to rescind the contract[.] Article 1191 of the New Civil Code
states 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 injured party may choose
between the fulfillment of the obligation, with the payment ofdamages in either case. He may
seek rescission, even after he has chosen fulfillment, if the latter should become impossible . . .
.' The power to rescind is given to the injured party. Where the plaintiff is the party who did not
perform, he is not entitled to insist upon the performance of the contract by the defendant or
recover damages by reason of his own breach (Mateos vs. Lopez, 6 Phil. 206; Borque vs. Yu
Chipco, 14 Phil. 95). An action for specific performance of a contract is an equitable proceeding,
and he who seeks to enforce it must himself be fair and reasonable, and do equity (Seva vs.
Berwin, 48 Phil. 581). In this case, plaintiffs failed to comply with the conditions precedent after
2-1/2 years from the execution of the contract so as to entitle them to rescind the contract.
Although the contract stated that the same be done within 4 years from execution, still, the
defendant has to be assured that the land subject of the case will be transferred in his name
without any encumbrances, as the Extra-Judicial Partition dated July 17, 1989 was being
processed, and continues to be in process to this date. The failure to secure the Transfer
Certificate of Title in favor of the defendant entitles not the plaintiffs but, rather, the defendant to
either rescind or to ask for specific performances.
'Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New
Civil Code states that:
If at the end of the contract the lessee should continue enjoying the thing leased
for fifteen days with the acquies[c]ence of the lessor and unless a notice to the contrary
by either party has previously been given, it is understood that there is an implied new

37
 lease, not for the period of the original contract, but for the time established in Articles
1682 and 1687. The other terms of the original contract shall be revived.
'Article 1682 of the New Civil Code states that:
The lease of a piece of rural land, when its duration has not been fixed, is
understood to have been made for all the time necessary for the gathering of the fruits
which the whole estate leased may yield in one year, or which it may yield once, although
two or more years may have to elapse for the purpose.
'The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial
demand on July 2, 1986. The contract was entered into on December 1, 1983. The demand was
thus made more than a year and a half from the expiry date of the original lease considering that
there was no payment made for the second year of the lease. If one has to consider the fact that
the defendant was given the option to purchase the property after two years, then, the lease
would presumably run for at least two years. If that is so, then, the demand was made seven
months after the expiration of the two-year lease. Still, this demand by the plaintiffs will come
under the implied new lease of Articles 1682 and 1670 so that the plaintiffs are not entitled to
terminate the Contract of Lease.
'In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to notify
the defendant in due time of their intention to that effect. Nor can they rescind the
Contract of Purchase in view of the fact that there is a condition precedent which the plaintiffs
have not fulfilled. It is the defendant now who has the option to either rescind or demand the
performance of the contract. Moreover, according to Article 1654 of the New Civil Code, the
lessor is obliged to deliver the thing which is the object of the contract in such condition as to
render it fit for the use intended. Considering that the lessors-plaintiffs have not delivered the
property in whole over the protest of the defendant, the latter suffered damages therefor.' (p. 4-
6, Decision; pp. 262-264, Records)
"Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of having
committed the following errors:
I
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS
COULD NOT VALIDLY RESCIND AND TERMINATE THE LEASE/PURCHASE CONTRACT
(EXHIBIT 'A') AND THEREAFTER TO TAKE POSSESSION OF THE LAND IN QUESTION AND
EJECT THEREFROM DEFENDANTS-APPELLEES.
II
THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS PLEADED AND
PRAYED FOR BY PLAINTIFFS-APPELLANTS IN THEIR COMPLAINT. (p. 42, Rollo)
"The case was submitted for decision without the appellee's brief as per the Court's resolution
dated July 8, 1992 (p. 71, Rollo)." cdrep
Ruling of the Court of Appeals
The Court of Appeals reversed the trial court in this wise:
"The trial court, in its decision interpreted the ninth provision of the Contract of Lease/Purchase
to mean that before the appellee exercises his option to purchase the property by paying the 50% plus
interest on the P1,000,000.00 purchase price, the appellants must first transfer the title to the property in
the appellee's name. The Court finds this interpretation of the provision strained if not altogether absurd.
The transfer of title to the property in the appellee's name cannot be interpreted as a condition precedent
to the payment of the agreed purchase price because such interpretation not only runs counter [to] the
explicit provisions of the contract but also is contrary to the normal course of things anent the sale of real
properties. The terms of the contract [are] explicit and require no interpretation. Upon the expiration of the
lease, the lessee shall purchase the property. Besides, the normal course ofthings anent the sale of real
properties dictates that there must first be payment of the agreed purchase price before transfer of title
to the vendee's name can be made.
"This was precisely what the appellants and Paula Año Cruz had in mind when they had the ninth
provision incorporated in the Contract ofLease/Purchase. They had asked for a period of 4 years from
the time they receive the downpayment of 50% within which to have [the] title to the property transferred

38
 in the name of the appellee. The reason for this four (4) year period is [that] title to the property still
remains in the name of the original owners, the predecessors-in-interest of the herein appellants and
[transferring] the title to their names and eventually to the lessee-purchaser, appellee herein, would take
quite some time.
"The appellee wanted to have the title to the property transferred in his name first before he
exercises his option to purchase allegedly in accordance with the ninth provision of the contract. But the
ninth provision does not give him this right. A reading of the contract in its entirety shows that the 4 year
period asked for by the appellants within which to have title to the property transferred in the appellee's
name will only start to run when the appellee exercises his option to purchase. Since the appellee never
exercised his option to purchase, then appellee is not entitled to have the title to the property transferred
in his name."
Attributing reversible errors to the appellate court, petitioner elevated the case to this Court. 7
The Issues
In his Memorandum, 8 petitioner submits the "following main issues":
"I. Whether or not the Court of Appeals has gravely erred and committed grave
abuse of discretion in the interpretation of [the] law between the parties.
"II. Whether or not the Court of Appeals committed serious mistakes in the finding of facts which
resulted [in] departing from the usual course ofjudicial proceedings."
For these issues to be resolved, petitioner asks this Court to answer the following questions:
"1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase Contract and that [in]
paragraph No. 9 thereof?
"2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before petitioner could exercise
his option to buy the property?
"3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?"
In fine, the resolution of this case depends upon the proper interpretation of paragraph nine of the Contract.
The Court's Ruling
The Petition is meritorious.
Main Issue:
Interpretation of Paragraph Nine
In its first paragraph, the disputed agreement provides that petitioner shall lease the property for one year, after
which he "shall purchase" it. Paragraph nine, on the other hand, requires herein respondents to obtain a separate and
distinct Transfer Certificate of Title (TCT) over the property, viz.:
"9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and
distinct T.C.T. over the lease portion to the LESSEE within a reasonable period of time which shall not in
any case exceed four (4) years, after which a new Contract shall be executed by the herein parties which
shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions
are concerned."
Alleging that petitioner has not purchased the property after the lapse of one year, respondents seek to rescind the
Contract and to recover the property. Petitioner, on the other hand, argues that he could not be compelled to purchase the
property, because respondents have not complied with paragraph nine, which obligates them to obtain a separate and
distinct title in their names. He contends that paragraph nine was a condition precedent to the purchase of the property. cdll
To be sure, this paragraph — and the entire agreement, for that matter — is not a model of how a contract should
be worded. It is an invitation to a litigation, as in fact the parties had to go all to way up to this Court to plead for a
resolution of their conflict which is rooted in their failure to express themselves clearly. Small wonder, even the two lower
courts gave contradictory understanding of this provision, thereby necessitating the intervention of the highest court of the
land.
Both the trial court and the Court of Appeals (CA) interpreted this provision to mean that the respondents had
obliged themselves to obtain a TCT in the name of petitioner-lessee. The trial court held that this obligation was a condition
precedent to petitioner's purchase of the property. Since respondents had not performed their obligation, they could not

39
compel petitioner to buy the parcel of land. The CA took the opposite view, holding that the property should be purchased
first before respondents may be obliged to obtain a TCT in the name of petitioner-lessee-buyer.
As earlier noted, petitioner disagrees with the interpretation of the two courts and maintains that respondents were
obligated to procure a TCT in their names before he could be obliged to purchase the property in question.
Basic is the rule in the interpretation of contracts that if some stipulation therein should admit of several meanings,
it shall be understood as bearing that import most adequate to render it effectual. 9 Considering the antecedents of the
ownership of the disputed lot, it appears that petitioner's interpretation renders clause nine most effectual.
The record shows that at the time the contract was executed, the land in question was still registered in the
name of Bernardina Calixto and Severo Cruz, respondents' predecessors-in-interest. There is no showing whether
respondents were the only heirs of Severo Cruz or whether the other half of the land in the name of Bernardina Calixto was
adjudicated to them by any means. In fact, they admit that extrajudicial proceedings were still ongoing. Hence, when the
Contract of Lease/Purchase was executed, there was no assurance that the respondents were indeed the owners of the
specific portion of the lot that petitioner wanted to buy, and if so, in what concept and to what extent.
Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct TCT in their
names. This was necessary to enable them to show their ownership of the stipulated portion of the land and their
concomitant right to dispose of it. Absent any title in their names, they could not have sold the disputed parcel of land.
It is a well-settled principle in law that no one can give what one does not have — nemo dat quod non habet.
Accordingly, one can sell only what one owns or is authorized to sell, and the buyer can acquire no more than what the
seller can transfer legally. 10
Because the property remained registered in the names of their predecessors-in-interest, private respondents could
validly sell only their undivided interest in the estate of Severo Cruz, the extent of which was however not shown in the
records. There being no partition of the estate thus far, there was no guarantee as to how much and which portion would
be adjudicated to respondents.
In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold. 11 In this
case, the respondent could not deliver ownership or title to a specific portion of the yet undivided property. True, they could
have intended to sell their hereditary interest, but in the context of the Contract of Lease/Purchase, the parties under
paragraph nine wanted the specific portion of the land to be segregated, identified and specifically titled. Hence, by the said
Contract, the respondents as sellers were given a maximum of four years within which to acquire a separate TCT in their
names, preparatory to the execution of the deed of sale and the payment of the agreed price in the manner described in
paragraph nine. prLL
This interpretation is bolstered by the P50,000 petitioner advanced to respondents in order to help them expedite
the transfer of the TCT to their names. Ineluctably, the intention of the parties was to have the title transferred first to
respondents' names as a condition for the completion of the purchase.
In holding that clause nine was not a condition precedent to the purchase of the property, the CA relied on a literal
interpretation to the effect that the TCT should be obtained in the name of the petitioner-vendee. It reasoned that the title
could be transferred to the name of the buyer only after the completion of the purchase. Thus, petitioner should first
purchase the property before respondents could be obliged to transfer the TCT to his name.
We disagree. The literal interpretation not only ignores the factual backdrop of the case; it also utilizes a faulty
parsing of paragraph nine, which should purportedly read as follows: "The lessors . . . shall undertake to obtain a separate
and distinct TCT . . . to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years . .
. ." Read in its entirety, however, paragraph nine does not say that the TCT should be obtained in the name of the lessee.
In fact, paragraph nine requires respondents to obtain a "TCT over the herein leased portion to the LESSEE," thereby
showing that the crucial phrase "to the LESSEE" adverts to "the leased portion" and not to the name which should appear
in the new TCT.
Furthermore, the CA interpretation ignores the other part of paragraph nine, stating that after a separate TCT had
been obtained, "a new contract shall be executed by the herein parties which shall be the same in all respects with this
Contract of Lease/Purchase insofar as the terms and conditions are concerned."
If, as the CA held, petitioner should purchase the property first before the title can be transferred to his name, why
should there be a waiting period offour years before the parties can execute the new contract evidencing the sale? Why
should the petitioner still be required to pay rentals after it purchases and pays for the property? The Contract could not
have envisioned this absurd scenario.
Clearly, the appellate court's literal interpretation of the first portion of paragraph nine renders the latter portion
thereof ineffectual. In other words, that portion can only mean that the respondents should first obtain a TCT in their names,
after which petitioner is given time to purchase and pay for the property.
40
 Respondents insist that "the obligation of petitioner to buy the disputed land immediately after the termination of the
one year lease period is explicit."12 However, it is more reasonable to state that the first paragraph was effectively modified
by the ninth. To repeat, petitioner can be compelled to perform his obligation under the first paragraph, only after
respondents have complied with the ninth. Unless and until respondents have done so, the first paragraph cannot be
enforced against petitioner.
In sum, we hold that the ninth provision was intended to ensure that respondents would have a valid title over the
specific portion they were selling to petitioner. Only after the title is assured may the obligation to buy the land and to pay
the sums stated in the Contract be enforced within the period stipulated. Verily, the petitioner's obligation to purchase has
not yet ripened and cannot be enforced until and unless respondents can prove their title to the property subject of the
Contract.
Secondary Issues:
Ninth Clause Was a Condition Precedent
Because the ninth clause required respondents to obtain a separate and distinct TCT in their names and not in the
name of petitioner, it logically follows that such undertaking was a condition precedent to the latter's obligation to purchase
and pay for the land. Put differently, petitioner's obligation to purchase the land is a conditional one and is governed
by Article 1181 of the Civil Code. 13
Condition has been defined as "every future and uncertain event upon which an obligation or provision is made to
depend. It is a future and uncertain event upon which the acquisition or resolution of rights is made to depend by those who
execute the juridical act." 14 Without it, the sale of the property under the Contract cannot be perfected, and petitioner
cannot be obliged to purchase the property. "When the consent of a party to a contract is given subject to the fulfillment of a
suspensive condition, the contract is not perfected unless that condition is first complied with." 15
The Court has held that "[w]hen the obligation assumed by a party to a contract is expressly subjected to a condition,
the obligation cannot be enforced against him unless the condition is complied with." 16 Furthermore, "[t]he obligatory
force of a conditional obligation is subordinated to the happening of a future and uncertain event, so that if that event does
not take place, the parties would stand as if the conditional obligation had never existed." 17
In this case, the obligation of the petitioner to buy the land cannot be enforced unless respondents comply with the
suspensive condition that they acquire first a separate and distinct TCT in their names. The suspensive condition not having
been fulfilled, then the obligation of the petitioner to purchase the land has not arisen. LLpr
Respondents Cannot Rescind the Contract
In the same vein, respondents cannot rescind the contract, because they have not caused the transfer of the TCT
to their names, which is a condition precedent to petitioner's obligation. This Court has held that "there can be no rescission
(or more properly, resolution) of an obligation as yet non-existent, because the suspensive condition has not happened." 18
Since the reversal of the CA Decision is inevitable, the trial court's judgment should be reinstated. However, we find
no sufficient factual or legal justifications for the awards of moral damages and attorney's fees.
WHEREFORE, the petition is GRANTED and the appealed Decision is REVERSED and SET ASIDE. The
Decision of the trial court is REINSTATED, but the award of moral damages and attorney's fees is DELETED for
lack of basis. No costs.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., took no part; did not participate in deliberations (in PHILJA on official business).
||| (Gonzales v. Heirs of Cruz, G.R. No. 131784, [September 16, 1999], 373 PHIL 368-386)

41
 FIRST DIVISION

[G.R. No. 141851. January 16, 2002.]

DIRECT FUNDERS HOLDINGS CORPORATION, petitioner, vs. JUDGE CELSO D. LAVIÑA,

PRESIDING JUDGE OF RTC-Pasig City, Branch 71 and KAMBIAK Y. CHAN, JR., respondents.

Pedro N. Tanchuling, Romulo Mabanta Buenaventura Sayoc & Delos Angeles and Ermitaño Sangco Manzano &
Associates for petitioner.
Decano Law Offices for private respondent.
SYNOPSIS
Petitioner corporation filed an action for annulment of documents, reconveyance, recovery of possession,
damages with application for the issuance of a writ of preliminary mandatory injunction and temporary restraining
order against private respondent Kambiak Y. Chan. During the summary hearing of the application for a temporary
restraining order, the only document presented by respondent was a conditional sale agreement. Respondent Judge
issued the questioned order granting the issuance of a writ of preliminary injunction who likewise denied petitioner's
motion to dismiss and supplemental motion to dismiss and a very urgent motion for reconsideration. Petitioner
appealed to the Court of Appeals. The appellate court promulgated a decision dismissing the petition ruling that the
trial court had jurisdiction to issue the injunction that did not interfere with the writ of possession of a coordinate court.
Petitioner moved for reconsideration, but was denied. Hence, the present petition. aSTECI
The Supreme Court reversed and set aside the decision of the Court of Appeals. The Court found the
conditional sale agreement officious and ineffectual because it was not consummated and was not registered and
duly annotated on the Transfer Certificate of Title (No. 12357) covering the subject property. The agreement was also
executed eight (8) years after the execution of the real estate mortgage over the subject property. The Court also
noted that the conditions of the conditional agreement were not fulfilled, hence, respondent's claim to the subject
property became ineffective under Article 1181 of the Civil Code. On the other hand, the Court found petitioner's claim
to the subject property well substantiated and, therefore, has a better right to the possession of the property.

SYLLABUS

REMEDIAL LAW; PRELIMINARY INJUNCTION; CONDITIONAL SALE AGREEMENT IS OFFICIOUS AND

INEFFECTUAL; INSUFFICIENT TO JUSTIFY AVAILMENT OF THE REMEDY; CASE AT BAR. — The conditional sale
agreement was the only document that the respondent presented during the summary hearing of the application for a
temporary restraining order before the Regional Trial Court, Branch 71, Pasig City. We find that the conditional sale
agreement is officious and ineffectual. First, it was not consummated. Second, it was not registered and duly annotated on
the Transfer Certificate of Title (No. 12357) covering the subject property. Third, it was executed about eight (8) years after
the execution of the real estate mortgage over the subject property.

DECISION

PARDO, J p:

The Case
The petition at bar 1 seeks to review the decision 2 of the Court of Appeals 3 dismissing the petition assailing the
ruling of the trial court issuing a writ of preliminary injunction that restrained a writ of possession issued by a coordinate
court. 4
The Facts
The facts, as found by the Court of Appeals, are as follows:
"It is alleged by the petitioner that the respondent Judge issued the writ of preliminary injunction,
despite clear and express prayer in the Amended Complaint (Rollo, p. 23) that private respondent

42
 Kambiak Y. Chan, Jr. sought the issuance of a writ of preliminary mandatory injunction. This is again
despite the fact this error was brought to respondent Judge's attention denied the Motion for
Reconsideration on May 29, 1998 justifying the issuance thereof due to petitioner's alleged
misappreciation of facts and reliefs sought for.
"Culled from the records of the case, the action a quo is for annulment of documents,
reconveyance, recovery of possession, damages with application for the issuance of a writ of preliminary
mandatory injunction and temporary restraining order.
"During the hearing for the issuance of temporary restraining order, it was made clear to the
respondent Judge that the property in question was occupied by the petitioner by virtue of a writ of
possession issued by the Regional Trial Court of Pasig, Branch 157 in LRC Case No. R-5475 in a petition
for the issuance of writ of possession thereof way back on October 23, 1997 (Rollo, p. 22). Despite the
lawful order of a coordinate and co-equal court, the respondent Judge, presiding Regional Trial Court of
Pasig, Branch 71, issued the questioned orders to restore possession to private respondent Chan,
alleging an obviously grave abuse of discretion, tantamount to lack of jurisdiction (Rollo, p. 38).
"On the same date on December 8, 1997, the temporary restraining order (TRO) was issued, the
Court Sheriff IV Cresencio Rabello, Jr. implemented the TRO and submitted the Return on December 9,
1997 (Rollo, p. 39).
"Then, on January 21, 1998, the respondent Judge issued the questioned order granting the
issuance of a writ of preliminary injunction (Rollo, p. 14) who subsequently denied the petitioner's motion
to dismiss and supplemental motion to dismiss and the very urgent motion for reconsideration on
February 16, 1998.
"On May 29, 1998, the motion for inhibition and the motion to dissolve the writ of preliminary
injunction were also denied (Rollo, p. 18)." 5
On August 5, 1998, petitioner filed with the Court of Appeals a petition for certiorari and prohibition assailing the
trial court's issuance of a writ of preliminary injunction. 6
On September 28, 1999, the Court of Appeals promulgated a decision dismissing the petition ruling that the trial
court had jurisdiction to issue the injunction that did not interfere with the writ of possession of a coordinate court. 7
On October 19, 1999, petitioner filed with the Court of Appeals a motion for reconsideration of the decision. 8
On February 2, 2000, the Court of Appeals denied petitioner's motion stating that the arguments advanced were
"mere reiteration and restatements of those contained in their pleadings . . .. " 9
Hence, this appeal. 10
The Issue
The issue raised is whether the Court of Appeals erred in affirming the trial court's ruling issuing a writ of injunction
restraining a writ of possession in another case to place respondent back in possession of the subject property.
In other words, the issue is who between petitioner and respondent Kambiak Y. Chan, Jr. has a better right to the
possession of the subject property?
The Court's Ruling
We resolve the issue in favor of petitioner.
The conditional sale agreement was the only document that the respondent presented during the summary hearing
of the application for a temporary restraining order before the Regional Trial Court, Branch 71, Pasig City. 11
We find that the conditional sale agreement is officious and ineffectual. First, it was not consummated. Second, it
was not registered and duly annotated on the Transfer Certificate of Title (No. 12357) covering the subject property. Third,
it was executed about eight (8) years after the execution of the real estate mortgage over the subject property.
To emphasize, the mortgagee (United Savings Bank) did not give its consent to the change of debtor. It is
fundamental axiom in the law on contracts that a person not a party to an agreement cannot be affected thereby. Worse,
not only was the conditional sale agreement executed without the consent of the mortgagee-creditor, United Savings Bank,
the same was also a material breach of the stipulations of the real estate mortgage over the subject property. The real
estate mortgage, in part, provides:
"(j) The MORTGAGOR shall neither lease the mortgaged property/ies, nor sell or dispose of the
same in any manner, without the written consent of the MORTGAGEE. However, if notwithstanding this

43
 stipulation and during the existence of this mortgage, the property/ies herein mortgaged, or any portion
thereof, is/are leased or sold, . . .. It shall also be incumbent upon the MORTGAGOR to make it a condition
of the sale or alienation that the vendee, or any other party in whose favor the alienation is made, shall
recognize as first lien the existing mortgage or encumbrance in favor of the MORTGAGEE, as well as
any new modified mortgage covering the same properties to be executed by said MORTGAGOR in favor
of the MORTGAGEE, and shall thereafter agree, promise and bind himself to recognize and respect any
extension of the terms of the original mortgage granted by the MORTGAGEE in favor of the
MORTGAGOR and such extended mortgage shall be considered as prior to such encumbrance as the
original mortgage. It is also further understood that should the MORTGAGOR sell, transfer or in any
manner alienate or encumber the mortgaged property/ies in violation of this agreement, he/she shall be
liable for damages to the MORTGAGEE." 12
The conditions of the conditional sale agreement were not fulfilled, hence, respondent's claim to the subject property
was as heretofore stated ineffectual. Article 1181 of the Civil Code reads:
"Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishments or
loss of those already acquired, shall depend upon the happening of the event which constitutes the
condition."
On the other hand, petitioner's right to the subject property is based on the following:
1. The real estate mortgage constituted by the Sps. Espino duly registered and annotated on TCT No.
12357 covering the subject property.
2. The Deed of Assignment dated 15 January 1997 executed by UCPB Savings Bank (formerly United
Savings Bank) whereby it conveyed its rights as mortgagee in favor of the petitioner.
3. The Deed of Assignment of Rights of Redemption dated 15 January 1997, executed by the Sps. Espino
wherein they assigned their right of redemption over the subject property to UCPB Savings Bank
and the latter's successors-in-interest.
4. The Certificate of Sale dated 29 May 1997 executed by the sheriff, the affidavit of consolidation of
ownership dated July 1997 (denominated as Doc. No. 490; Page No. 99, Book No. CLVII, Series
of 1997 in the Notarial Books of Erlinda B. Espejo, Notary Public for Quezon City) and TCT No.
8559-R subsequently issued to Petitioner.
5. The Order dated 23 October 1997 of Branch 157, RTC, Pasig City (LRC No. R-5475) and the Turn-
over/Delivery of Possession of the sheriff in the said LRC case.
In Soriano v. Bautista, 13 the Deed of Real Estate Mortgage dated May 30, 1956 executed by the mortgagors
contained a stipulation giving the mortgagee the option to purchase the land subject of the mortgage on any date within the
2-year period of the mortgage. The mortgagee subsequently decided to buy the land pursuant to this stipulation. We ruled:
"Appellants contend that, being mortgagors, they cannot be deprived of the right to redeem the
mortgaged property, because such right is inherent in and inseparable from this kind of contract. The
premise of the contention is not entirely accurate. While the transaction is undoubtedly a mortgage and
contains the customary stipulation concerning redemption, it carries the added special provision
aforequoted, which renders the mortgagors' right to redeem defeasible at the election of the mortgages.
There is nothing illegal or immoral in this. It is simply an option to buy, sanctioned by Article 1479 of the
Civil Code, which states: "A promise to buy and sell a determinate thing for a price certain is binding upon
the promisor if the promise is supported by a consideration distinct from the price." 14
In view of all of the foregoing, it is inexorable to conclude that petitioner, not the respondent, has a better right to
the possession of subject property.
The Judgment
WHEREFORE, the Court hereby REVERSES the decision of the Court of Appeals 15 and the order denying
reconsideration.
In lieu thereof, the Court renders judgment dismissing the case below, Civil Case No. 66554 of the Regional Trial
Court, Branch 71, Pasig City, including the counterclaims. cSICHD
No costs.
SO ORDERED.

44
 THIRD DIVISION

[G.R. No. 103577. October 7, 1996.]

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C.

GONZALES (for herself and on behalf of Floraida C. Tupper, as attorney-in-fact), CIELITO A.
CORONEL, FLORAIDA A. ALMONTE, and CATALINA BALAIS MABANAG, petitioners, vs. THE
COURT OF APPEALS, CONCEPCION D. ALCARAZ and RAMONA PATRICIA ALCARAZ, assisted
by GLORIA F. NOEL as attorney-in-fact, respondents.

Leven S. Puno for petitioners.

Perpetuo G. Paner for private respondents.

SYLLABUS

1. CIVIL LAW; SALES; ESSENTIAL ELEMENTS THEREOF. — Sale, by its very nature, is a consensual contract
because it is perfected by mere consent. The essential elements of a contract of sale are the following: a) consent or meeting
of the minds, that is, consent to transfer ownership in exchange for the price; b) determinate subject matter; and c) price
certain in money or its equivalent. DCScaT
2. ID.; ID.; CONTRACT TO SELL DISTINGUISHED FROM CONDITIONAL CONTRACT OF SALE. — Under this
definition, a Contract to Sell may not be considered as a Contract of Sale because the first essential element is lacking. In
a contract to sell, the prospective seller explicitly reserves the transfer of title to the prospective buyer, meaning, the
prospective seller does not as yet agree or consent to transfer ownership of the property subject of the contract to sell until
the happening of an event, which for present purposes we shall take as the full payment of the purchase price. What the
seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the
purchase price is delivered to him. . . . In a contract to sell, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, ownership will not automatically transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract
of absolute sale. A contract to sell as defined hereinabove, may not even be considered as a conditional contract of sale
where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition,
because in a conditional contract of sale, the first element of consent is present, although it is conditioned upon the
happening of a contingent event which may or may not occur. If the suspensive condition is not fulfilled, the perfection of
the contract of sale is completely abated (cf. Homesite and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]).
However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that if there had already been
previous delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by
operation of law without any further act having to be performed by the seller.
3. ID.; ID.; ID.; SALE OF SUBJECT PROPERTY TO A THIRD PERSON; EFFECTS THEREOF. — It is essential
to distinguish between a contract to sell and a conditional contract of sale specially in cases where the subject property is
sold by the owner not to the party the seller contracted with, but to a third person, as in the case at bench. In a contract to
sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive
condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the
prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the
property will transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but the latter,
of course, may be sued for damages by the intending buyer. In a conditional contract of sale, however, upon the fulfillment
of the suspensive condition, the sale becomes absolute and this will definitely affect the seller's title thereto. In fact, if there
had been previous delivery of the subject property, the seller's ownership or title to the property is automatically transferred
to the buyer such that, the seller will no longer have any title to transfer to any third person. Applying Article 1544 of the
Civil Code, such second buyer of the property who may have had actual or constructive knowledge of such defect, cannot
be a registrant in good faith. Such second buyer cannot defeat the first buyer's title. In case a title is issued to the seco nd
buyer, the first buyer may seek reconveyance of the property subject of the sale.
4. ID.; ID.; CONTRACT OF SALE; INTERPRETATION OF WORDS USED THEREIN SHOULD BE GIVEN
ORDINARY MEANING; CASE AT BENCH. — It is a canon in the interpretation of contracts that the words used therein
should be given their natural and ordinary meaning unless a technical meaning was intended (Tan vs. Court of Appeals,
212 SCRA 586 [1992]). Thus, . . . When the "Receipt of Down Payment" is considered in its entirety, it becomes more
manifest that there was a clear intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate
of title was still in the name of petitioner's father, they could not fully effect such transfer although the buyer was then willing

45
and able to immediately pay the purchase price. Therefore, petitioners-sellers undertook upon receipt of the down payment
from private respondent Ramona P. Alcaraz, to cause the issuance of a new certificate of title in their names from that of
their father, after which, they promised to present said title, now in their names, to the latter and to execute the deed of
absolute sale whereupon, the latter shall, in turn, pay the entire balance of the purchase price. The agreement could not
have been a contract to sell because the sellers herein made no express reservation of ownership or title to the subject
parcel of land. Furthermore, the circumstance which prevented the parties from entering into an absolute contract of sale
pertained to the sellers themselves (the certificate of title was not in their names) and not the full payment of the purchase
price. Under the established facts and circumstances of the case, the Court may safely presume that, had the certificate of
title been in the names of petitioners-sellers at that time, there would have been no reason why an absolute contract of sale
could not have been executed and consummated right there and then.
5. ID.; ID.; ID.; WHEN RECIPROCAL OBLIGATIONS OF SELLER AND BUYER AROSE IN CASE AT BENCH. —
On January 19, 1985, as evidenced by the document denominated as "Receipt of Down Payment" (Exh. "A", Exh. "1"), the
parties entered into a contract of sale subject only to the suspensive condition that the sellers shall effect the issuance of
new certificate of title from that of their father's name to their names. . . . On February 6, 1985, this condition was fulfilled
(Exh. "D"; Exh. "4"). We therefore, hold that, in accordance with Article 1187 . . . the rights and obligations of the parties
with respect to the perfected contract of sale became mutually due and demandable as of the time of fulfillment or
occurrence of the suspensive condition on February 6, 1985. As of that point in time, reciprocal obligations of both seller
and buyer arose, that is, . . . petitioners, as sellers, were obliged to present the transfer certificate of title already in their
names to private respondent Ramona P. Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while
the buyer on her part, was obliged to forthwith pay the balance of the purchase price amounting to P1,190,000.00.
6. ID.; WILLS AND SUCCESSION; RIGHTS THERETO TRANSMITTED FROM MOMENT OF DECEDENT'S
DEATH; CASE AT BENCH. — Petitioners also argue there could be no perfected contract on January 19, 1985 because
they were then not yet the absolute owners of the inherited property. We cannot sustain this argument. Article 774 of the
Civil Code defines succession as a mode of transferring ownership as follows: Art. 774. Succession is a mode of acquisition
by virtue of which the property, rights and obligations to the extent and value of the inheritance of a person are transmitted
through his death to another or others by his will or by operation of law. Petitioners-sellers in the case at bar being the sons
and daughters of the decedent Constancio P. Coronel are compulsory heirs who were called to succession by operation of
law. Thus, at the point their father drew his last breath, petitioners stepped into his shoes insofar as the subject property is
concerned, such that any rights or obligations pertaining thereto became binding and enforceable upon them. It is expressly
provided that rights to the succession are transmitted from the moment of death of the decedent (Article 777, Civil
Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
7. ID.; SALES; CONTRACT OF SALE; ESTOPPEL; PETITIONERS PRECLUDED FROM DENYING OWNERSHIP
OF SUBJECT PROPERTY AT TIME OF SALE; CASE AT BENCH. — Aside from this, petitioners are precluded from raising
their supposed lack of capacity to enter into an agreement at that time and they cannot be allowed to now take a posture
contrary to that which they took when they entered into the agreement with private respondent Ramona P. Alcaraz. . . .
Having represented themselves as the true owners of the subject property at the time of sale, petitioners cannot claim now
that they were not yet the absolute owners thereof at that time.
8. ID.; ID.; ID.; RESCISSION; PHYSICAL ABSENCE OF BUYER NOT A GROUND THEREFOR IN CASE AT
BENCH. — Petitioners also contend that although there was in fact a perfected contract of sale between them and Ramona
P. Alcaraz, the latter breached her reciprocal obligation when she rendered impossible the consummation thereof by going
to the United States of America, without leaving her address, telephone number, and Special Power of Attorney (Paragraphs
14 and 15, Answer with Compulsory Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so
petitioners conclude, they were correct in unilaterally rescinding the contract of sale. We do not agree with petitioners that
there was a valid rescission of the contract of sale in the instant case. We note that these supposed grounds for petitioners'
rescission, are mere allegations found only in their responsive pleadings, which by express provision of the rules, are
deemed controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are
absolutely bereft of any supporting evidence to substantiate petitioners' allegations. We had stressed time and again that
allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan, 2
SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376 [1947]). Even
assuming arguendo that Ramona P. Alcaraz was in the United States of America on February 6, 1985, we cannot justify
petitioners-sellers' act of unilaterally and extrajudicially rescinding the contract of sale, there being no express stipulation
authorizing the sellers to extrajudicially rescind the contract of sale. (cf Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs.
Vda. de Leon, 132 SCRA 722 [1984]). Moreover, petitioners are estopped from raising the alleged absence of Ramona P.
Alcaraz because although the evidence on record shows that the sale was in the name of Ramona P. Alcaraz as the buyer,
the sellers had been dealing with Concepcion D. Alcaraz, Ramona's mother, who had acted for and in behalf of her daughter,
if not also in her own behalf. Indeed, the down payment was made by Concepcion D. Alcaraz with her own personal check
(Exh. "B"; Exh. "2") for and in behalf of Ramona P. Alcaraz. There is no evidence showing that petitioners ever questioned
Concepcion's authority to represent Ramona P. Alcaraz when they accepted her personal check. Neither did they raise any
objection as regards payment being effected by a third person. Accordingly, as far as petitioners are concerned, the physical
absence of Ramona P. Alcaraz is not a ground to rescind the contract of sale.
46
 9. ID.; ID.; ID.; ID.; ID.; BUYER NOT CONSIDERED IN DEFAULT IN CASE AT BENCH. — Corollarily, Ramona P.
Alcaraz cannot even be deemed to be in default, insofar as her obligation to pay the full purchase price is concerned.
Petitioners who are precluded from setting up the defense of the physical absence of Ramona P. Alcaraz as above-
explained offered no proof whatsoever to show that they actually presented the new transfer certificate of title in their names
and signified their willingness and readiness to execute the deed of absolute sale in accordance with their agreement.
Ramona's corresponding obligation to pay the balance of the purchase price in the amount of P1,190,000.00 (as buyer)
never became due and demandable and, therefore, she cannot be deemed to have been in default. Article 1169 of the Civil
Code defines when a party in a contract involving reciprocal obligations may be considered in default, . . . There is thus
neither factual nor legal basis to rescind the contract of sale between petitioners and respondents.
10. ID.; ID.; DOUBLE SALE; WHEN SECOND BUYER IS ENTITLED TO TITLE OR OWNERSHIP OF PROPERTY.
— With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a case of double sale
where Article 1544 of the Civil Code will apply. . . . The record of the case shows that the Deed of Absolute Sale dated April
25, 1985 as proof of the second contract of sale was registered with the Registry of Deeds of Quezon City giving rise to the
issuance of a new certificate of title in the name of Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of
Article 1544 shall apply. The above-cited provision on double sale presumes title or ownership to pass to the first buyer, the
exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the first buyer, and (b) should there
be no inscription by either of the two buyers, when the second buyer, in good faith, acquires possession of the property
ahead of the first buyer. Unless, the second buyer satisfies these requirements, title or ownership will not transfer to him to
the prejudice of the first buyer.
11. ID.; ID.; ID.; ID.; CASE AT BENCH. — Petitioners point out that the notice of lis pendens in the case at bar was
annotated on the title of the subject property only on February 22, 1985, whereas, the second sale between petitioners
Coronels and petitioner. Mabanag was supposedly perfected prior thereto or on February 18, 1985. The idea conveyed is
that at the time petitioner Mabanag, the second buyer, bought the property under a clean title, she was unaware of any
adverse claim or previous sale, for which reason she is a buyer in good faith. We are not persuaded by such argument. In
a case of double sale, what finds relevance and materiality is not whether or not the second buyer was a buyer in good faith
but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect in
the title of the property sold. As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good
faith, registered the sale entered into on February 18, 1985 because as early as February 22, 1985, a notice of lis
pendens had been annotated on the transfer certificate of title in the names of petitioners, whereas petitioner Mabanag
registered the said sale sometime in April, 1985. At the time of registration, therefore, petitioner Mabanag knew that the
same property had already been previously sold to private respondents, or, at least, she was charged with knowledge that
a previous buyer is claiming title to the same property. Petitioner Mabanag cannot close her eyes to the defect in petitioners'
title to the property at the time of the registration of the property. CAScIH

DECISION

MELO, J p:

The petition before us has its roots in a complaint for specific performance to compel herein petitioners (except the
last named, Catalina Balais Mabanag) to consummate the sale of a parcel of land with its improvements located along
Roosevelt Avenue in Quezon City entered into by the parties sometime in January 1985 for the price of P1,240,000.00
The undisputed facts of the case were summarized by respondent court in this wise:
On January 19, 1985, defendants-appellants Romulo Coronel, et al. (hereinafter referred to as
Coronels) executed a document entitled "Receipt of Down Payment" (Exh. "A") in favor of plaintiff
Ramona Patricia Alcaraz (hereinafter referred to as Ramona) which is reproduced hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 — Total amount
50,000.00 — Down payment
—————————————
P1,190,000.00 — Balance

47
 Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 119627 of the
Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.
We bind ourselves to effect the transfer in our names from our deceased father, Constancio
P. Coronel, the transfer certificate of title immediately upon receipt of the down payment above-stated.
On our presentation of the TCT already in our name, We will immediately execute the deed of
absolute sale of said property and Miss Ramona Patricia Alcaraz shall immediately pay the balance of
the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:
1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution of
the document aforestated;
2. The Coronels will cause the transfer in their names of the title of the property registered in the
name of their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos down payment;
3. Upon the transfer in their names of the subject property, the Coronels will execute the deed of
absolute sale in favor of Ramona and the latter will pay the former the whole balance of One Million One
Hundred Ninety Thousand (P1,190,000.00) Pesos.
On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter
referred to as Concepcion), mother of Ramona, paid the down payment of Fifty Thousand (P50,000.00)
Pesos (Exh. "B", Exh. "2").
On February 6, 1985, the property originally registered in the name of the Coronels' father was
transferred in their names under TCT No. 327043 (Exh. "D"; Exh. "4")
On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to intervenor-
appellant Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million Five Hundred Eighty
Thousand (P1,580,000.00) Pesos after the latter has paid Three Hundred Thousand (P300,000.00)
Pesos (Exhs. "F-3"; Exh. "6-C")
For this reason, Coronels canceled and rescinded the contract (Exh. "A") with Ramona by
depositing the down payment paid by Concepcion in the bank in trust for Ramona Patricia Alcaraz.
On February 22, 1985, Concepcion, et al., filed a complaint for specific performance against the
Coronels and caused the annotation of a notice of lis pendens at the back of TCT No. 327403 (Exh. "E";
Exh. "5").
On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same
property with the Registry of Deeds of Quezon City (Exh. "F"; Exh. "6").
On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in
favor of Catalina (Exh. "G"; Exh. "7").
On June 5, 1985, a new title over the subject property was issued in the name of Catalina under
TCT No. 351582 (Exh. "H"; Exh. "8").
(Rollo, pp. 134-136)
In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the parties agreed to submit
the case for decision solely on the basis of documentary exhibits. Thus, plaintiffs therein (now private respondents) proffered
their documentary evidence accordingly marked as Exhibits "A" through "J", inclusive of their corresponding submarkings.
Adopting these same exhibits as their own, then defendants (now petitioners) accordingly offered and marked them as
Exhibits "1" through "10", likewise inclusive of their corresponding submarkings. Upon motion of the parties, the trial court
gave them thirty (30) days within which to simultaneously submit their respective memoranda, and an additional 15 days
within which to submit their corresponding comment or reply thereto, after which, the case would be deemed submitted for
resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was then temporarily
detailed to preside over Branch 82 of the RTC of Quezon City. On March 1, 1989, judgment was handed down by Judge
Roura from his regular bench at Macabebe, Pampanga for the Quezon City branch, disposing as follows:
WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to
execute in favor of plaintiffs a deed of absolute sale covering that parcel of land embraced in and covered

48
 by Transfer Certificate of Title No. 327403 (now TCT No. 331582) of the Registry of Deeds for Quezon
City, together with all the improvements existing thereon free from all liens and encumbrances, and once
accomplished, to immediately deliver the said document of sale to plaintiffs and upon receipt thereof, the
plaintiffs are ordered to pay defendants the whole balance of the purchase price amounting to
P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the Registry of Deeds for Quezon City
in the name of intervenor is hereby canceled and declared to be without force and effect. Defendants and
intervenor and all other persons claiming under them are hereby ordered to vacate the subject property
and deliver possession thereof to plaintiffs. Plaintiffs' claim for damages and attorney's fees, as well as
the counterclaims of defendants and intervenors are hereby dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City, March 1, 1989.
(Rollo, p. 106)
A motion for reconsideration was filed by petitioners before the new presiding judge of the Quezon City RTC but
the same was denied by Judge Estrella T. Estrada, thusly:
The prayer contained in the instant motion, i.e., to annul the decision and to render anew decision
by the undersigned Presiding Judge should be denied for the following reasons: (1) The instant case
became submitted for decision as of April 14, 1988 when the parties terminated the presentation of their
respective documentary evidence and when the Presiding Judge at that time was Judge Reynaldo Roura.
The fact that they were allowed to file memoranda at some future date did not change the fact that the
hearing of the case was terminated before Judge Roura and therefore the same should be submitted to
him for decision; (2) When the defendants and intervenor did not object to the authority of Judge Reynaldo
Roura to decide the case prior to the rendition of the decision, when they met for the first time before the
undersigned Presiding Judge at the hearing of a pending incident in Civil Case No. Q-46145 on November
11, 1988, they were deemed to have acquiesced thereto and they are now estopped from questioning
said authority of Judge Roura after they received the decision in question which happens to be adverse
to them; (3) While it is true that Judge Reynaldo Roura was merely a Judge-on-detail at this Branch of
the Court, he was in all respects the Presiding Judge with full authority to act on any pending incident
submitted before this Court during his incumbency. When he returned to his Official Station at Macabebe,
Pampanga, he did not lose his authority to decide or resolve such cases submitted to him for decision or
resolution because he continued as Judge of the Regional Trial Court and is of co-equal rank with the
undersigned Presiding Judge. The standing rule and supported by jurisprudence is that a Judge to whom
a case is submitted for decision has the authority to decide the case notwithstanding his transfer to
another branch or region of the same court (Sec. 9, Rule 135, Rule of Court).
Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989 rendered
in the instant case, resolution of which now pertains to the undersigned Presiding Judge, after a
meticulous examination of the documentary evidence presented by the parties, she is convinced that the
Decision of March 1, 1989 is supported by evidence and, therefore, should not be disturbed.
IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision and
Render Anew Decision by the Incumbent Presiding Judge" dated March 20, 1989 is hereby DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Rollo, pp. 108-109)
Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals (Buena, Gonzaga-
Reyes, Abad Santos (P), JJ.) rendered its decision fully agreeing with the trial court.
Hence, the instant petition which was filed on March 5, 1992. The last pleading, private respondents' Reply
Memorandum, was filed on September 15, 1993. The case was, however, re-raffled to undersigned ponente only on August
28, 1996, due to the voluntary inhibition of the Justice to whom the case was last assigned.
While we deem it necessary to introduce certain refinements in the disquisition of respondent court in the affirmance
of the trial court's decision, we definitely find the instant petition bereft of merit.
The heart of the controversy which is the ultimate key in the resolution of the other issues in the case at bar is the
precise determination of the legal significance of the document entitled "Receipt of Down Payment" which was offered in

49
evidence by both parties. There is no dispute as to the fact that said document embodied the binding contract between
Ramona Patricia Alcaraz on the one hand, and the heirs of Constancio P. Coronel on the other, pertaining to a particular
house and lot covered by TCT No. 119627, as defined in Article 1305 of the Civil Code of the Philippines which reads as
follows:
Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service.
While, it is the position of private respondents that the "Receipt of Down Payment" embodied a perfected contract
of sale, which perforce, they seek to enforce by means of an action for specific performance, petitioners on their part insist
that what the document signified was a mere executory contract to sell, subject to certain suspensive conditions, and
because of the absence of Ramona P. Alcaraz, who left for the United States of America, said contract could not possibly
ripen into a contract of absolute sale.
Plainly, such variance in the contending parties' contentions is brought about by the way each interprets the terms
and/or conditions set forth in said private instrument. Withal, based on whatever relevant and admissible evidence may be
available on record, this Court, as were the courts below, is now called upon to adjudge what the real intent of the parties
was at the time the said document was executed.
The Civil Code defines a contract of sale, thus:
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 therefor a price certain in money or
its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The essential elements
of a contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the first essential
element is lacking. In a contract to sell, the prospective seller explicitly reserves the transfer of title to the prospective buyer,
meaning, the prospective seller does not as yet agree or consent to transfer ownership of the property subject of the contract
to sell until the happening of an event, which for present purposes we shall take as the full payment of the purchase price.
What the seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of
the purchase price is delivered to him. In other words the full payment of the purchase price partakes of a suspensive
condition, the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the
prospective seller without further remedies by the prospective buyer. InRoque vs. Lapuz (96 SCRA 741 [1980]), this Court
had occasion to rule:
Hence, We hold that the contract between the petitioner and the respondent was a contract to
sell where the ownership or title is retained by the seller and is not to pass until the full payment of the
price, such payment being a positive suspensive condition and failure of which is not a breach, casual or
serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring
binding force.
Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the purchase price,
the prospective seller's obligation to sell the subject property by entering into a contract of sale with the prospective buyer
becomes demandable as provided in Article 1479 of the Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while expressly
reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the
said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the
purchase price.
A contract to sell as defined hereinabove, may not even be considered as a conditional contract of sale where the
seller may likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition, because in
a conditional contract of sale, the first element of consent is present, although it is conditioned upon the happening of a
50
contingent event which may or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract of
sale is completely abated (cf. Homesite and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]). However, if the
suspensive condition is fulfilled, the contract of sale is thereby perfected, such that if there had already been previous
delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by operation
of law without any further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the purchase price,
ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The
prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.
It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where
the subject property is sold by the owner not to the party the seller contracted with, but to a third person, as in the case at
bench. In a contract to sell, there being no previous sale of the property, a third person buying such property despite the
fulfillment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a
buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale
in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-seller's
title per se, but the latter, of course, may be sued for damages by the intending buyer.
In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale becomes
absolute and this will definitely affect the seller's title thereto. In fact, if there had been previous delivery of the subject
property, the seller's ownership or title to the property is automatically transferred to the buyer such that, the seller will no
longer have any title to transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the
property who may have had actual or constructive knowledge of such defect in the seller's title, or at least was charged with
the obligation to discover such defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyer's
title. In case a title is issued to the second buyer, the first buyer may seek reconveyance of the property subject of the sale.
With the above postulates as guidelines, we now proceed to the task of deciphering the real nature of the contract
entered into by petitioners and private respondents.
It is a canon in the interpretation of contracts that the words used therein should be given their natural and ordinary
meaning unless a technical meaning was intended (Tan vs. Court of Appeals, 212 SCRA 586 [1992]). Thus, when
petitioners declared in the said "Receipt of Down Payment" that they —
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 1199627 of the
Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the natural and ordinary idea conveyed
is that they sold their property.
When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that there was a clear
intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate of title was still in the name of
petitioner's father, they could not fully effect such transfer although the buyer was then willing and able to immediately pay
the purchase price. Therefore, petitioners-sellers undertook upon receipt of the down payment from private respondent
Ramona P. Alcaraz, to cause the issuance of a new certificate of title in their names from that of their father, after which,
they promised to present said title, now in their names, to the latter and to execute the deed of absolute sale whereupon,
the latter shall, in turn, pay the entire balance of the purchase price.
The agreement could not have been a contract to sell because the sellers herein made no express reservation of
ownership or title to the subject parcel of land. Furthermore, the circumstance which prevented the parties from entering
into an absolute contract of sale pertained to the sellers themselves (the certificate of title was not in their names) and not
the full payment of the purchase price. Under the established facts and circumstances of the case, the Court may safely
presume that, had the certificate of title been in the names of petitioners-sellers at that time, there would have been no
reason why an absolute contract of sale could not have been executed and consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell the property to
private respondent upon the fulfillment of the suspensive condition. On the contrary, having already agreed to sell the
subject property, they undertook to have the certificate of title changed to their names and immediately thereafter, to execute
the written deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance by the buyer with
certain terms and conditions, promised to sell the property to the latter. What may be perceived from the respective
undertakings of the parties to the contract is that petitioners had already agreed to sell the house and lot they inherited from
their father, completely willing to transfer full ownership of the subject house and lot to the buyer if the documents were then
in order. It just so happened, however, that the transfer certificate of title was then still in the name of their father. It was
more expedient to first effect the change in the certificate of title so as to bear their names. That is why they undertook to

51
cause the issuance of a new transfer of the certificate of title in their names upon receipt of the down payment in the amount
of P50,000.00. As soon as the new certificate of title is issued in their names, petitioners were committed to immediately
execute the deed of absolute sale. Only then will the obligation of the buyer to pay the remainder of the purchase price
arise.
There is no doubt that unlike in a contract to sell which is most commonly entered into so as to protect the seller
against a buyer who intends to buy the property in installment by withholding ownership over the property until the buyer
effects full payment therefor, in the contract entered into in the case at bar, the sellers were the ones who were unable to
enter into a contract of absolute sale by reason of the fact that the certificate of title to the property was still in the name of
their father. It was the sellers in this case who, as it were, had the impediment which prevented, so to speak, the execution
of a contract of absolute sale.
What is clearly established by the plain language of the subject document is that when the said "Receipt of Down
Payment" was prepared and signed by petitioners Romulo A. Coronel, et al., the parties had agreed to a conditional contract
of sale, consummation of which is subject only to the successful transfer of the certificate of title from the name of petitioners'
father, Constancio P. Coronel to their names.
The Court significantly notes that this suspensive condition was, in fact, fulfilled on February 6, 1985 (Exh. "D"; Exh.
"4"). Thus, on said date, the conditional contract of sale between petitioners and private respondent Ramona P. Alcaraz
became obligatory, the only act required for the consummation thereof being the delivery of the property by means of the
execution of the deed of absolute sale in a public instrument, which petitioners unequivocally committed themselves to do
as evidenced by the "Receipt of Down Payment."
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at bench. Thus,
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions
of the law governing the form of contracts.
Art. 1181. In 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.
Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners' names
was fulfilled on February 6, 1985, the respective obligations of the parties under the contract of sale became mutually
demandable, that is, petitioners, as sellers, were obliged to present the transfer certificate of title already in their names to
private respondent Ramona P. Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while the buyer
on her part, was obliged to forthwith pay the balance of the purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively admitted
that:
3. The petitioners-sellers Coronel bound themselves "to effect the transfer in our names from our
deceased father Constancio P. Coronel, the transfer certificate of title immediately upon receipt of the
downpayment above-stated." The sale was still subject to this suspensive condition. (Emphasis supplied.)
(Rollo, p. 16)
Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive condition.
Only, they contend, continuing in the same paragraph, that:
. . . Had petitioners-sellers not complied with this condition of first transferring the title to the
property under their names, there could be no perfected contract of sale. (Emphasis supplied.)
(Ibid.)
not aware that they have set their own trap for themselves, for Article 1186 of the Civil Code expressly provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.
Besides, it should be stressed and emphasized that what is more controlling these mere hypothetical arguments
is the fact that the condition herein referred to was actually and indisputably fulfilled on February 6, 1985, when a new title
was issued in the names of petitioners as evidenced by TCT No. 327403 (Exh. "D"; Exh. "4").
The inevitable conclusion is that on January 19, 1985, as evidenced by the document denominated as "Receipt of
Down Payment" (Exh. "A"; Exh. "1"), the parties entered into a contract of sale subject only to the suspensive condition that

52
the sellers shall effect the issuance of new certificate of title from that of their father's name to their names and that, on
February 6, 1985, this condition was fulfilled (Exh. "D"; Exh "4").
We, therefore, hold that, in accordance with Article 1187 which pertinently provides —
Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled, shall
retroact to the day of the constitution of the obligation . . .
In obligations to do or not to do, the courts shall determine, in each case, the retroactive effect of
the condition that has been complied with.
the rights and obligations of the parties with respect to the perfected contract of sale became mutually due and
demandable as of the time of fulfillment or occurrence of the suspensive condition on February 6, 1985. As of that
point in time, reciprocal obligations of both seller and buyer arose.
Petitioners also argue there could be no perfected contract on January 19, 1985 because they were then not yet
the absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and
obligations to the extent and value of the inheritance of a person are transmitted through his death to
another or others by his will or by operation of law.
Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P. Coronel are
compulsory heirs who were called to succession by operation of law. Thus, at the point their father drew his last breath,
petitioners stepped into his shoes insofar as the subject property is concerned, such that any rights or obligations pertaining
thereto became binding and enforceable upon them. It is expressly provided that rights to the succession are transmitted
from the moment of death of the decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
Be it also noted that petitioners' claim that succession may not be declared unless the creditors have been paid is
rendered moot by the fact that they were able to effect the transfer of the title to the property from the decedent's name to
their names on February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter into an agreement at
that time and they cannot be allowed to now take a posture contrary to that which they took when they entered into the
agreement with private respondent Ramona P. Alcaraz. The Civil Code expressly states that:
Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.
Having represented themselves as the true owners of the subject property at the time of sale, petitioners cannot claim
now that they were not yet the absolute owners thereof at that time.
Petitioners also contend that although there was in fact a perfected contract of sale between them and Ramona P.
Alcaraz, the latter breached her reciprocal obligation when she rendered impossible the consummation thereof by going to
the United States of America, without leaving her address, telephone number, and Special Power of Attorney (Paragraphs
14 and 15, Answer with Compulsory Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so
petitioners conclude, they were correct in unilaterally rescinding the contract of sale.
We do not agree with petitioners that there was a valid rescission of the contract of sale in the instant case. We
note that these supposed grounds for petitioners' rescission, are mere allegations found only in their responsive pleadings,
which by express provision of the rules, are deemed controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6,
Revised Rules of Court). The records are absolutely bereft of any supporting evidence to substantiate petitioners'
allegations. We have stressed time and again that allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng
Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan, 2 SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca vs. De
Vera, 79 Phil. 376 [1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on February 6, 1985, we
cannot justify petitioners-sellers' act of unilaterally and extrajudicially rescinding the contract of sale, there being no express
stipulation authorizing the sellers to extrajudicially rescind the contract of sale. (cf Dignos vs. CA, 158 SCRA 375
[1988]; Taguba vs. Vda. de Leon, 132 SCRA 722 [1984]).
Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because although the
evidence on record shows that the sale was in the name of Ramona P. Alcaraz as the buyer, the sellers had been dealing
with Concepcion D. Alcaraz, Ramona's mother, who had acted for and in behalf of her daughter, if not also in her own

53
behalf. Indeed, the down payment was made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh. "2")
for and in behalf of Ramona P. Alcaraz. There is no evidence showing that petitioners ever questioned Concepcion's
authority to represent Ramona P. Alcaraz when they accepted her personal check. Neither did they raise any objection as
regards payment being effected by a third person. Accordingly, as far as petitioners are concerned, the physical absence
of Ramona P. Alcaraz is not a ground to rescind the contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation to pay the full
purchase price is concerned. Petitioners who are precluded from setting up the defense of the physical absence of Ramona
P. Alcaraz as above-explained offered no proof whatsoever to show that they actually presented the new transfer certificate
of title in their names and signified their willingness and readiness to execute the deed of absolute sale in accordance with
their agreement. Ramona's corresponding obligation to pay the balance of the purchase price in the amount of
P1,190,000.00 (as buyer) never became due and demandable and, therefore, she cannot be deemed to have been in
default.
Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations may be considered
in default, to wit:
Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
xxx xxx xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfill
his obligation, delay by the other begins. (Emphasis supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale between petitioners and respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a case of double
sale where Article 1544 of the Civil Code will apply, to wit:
Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it who in
good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was
first in the possession; and, in the absence thereof to the person who presents the oldest title, provided
there is good faith.
The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the second contract
of sale was registered with the Registry of Deeds of Quezon City giving rise to the issuance of a new certificate of title in
the name of Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to the first buyer, the exceptions
being: (a) when the second buyer, in good faith, registers the sale ahead of the first buyer, and (b) should there be no
inscription by either of the two buyers, when the second buyer, in good faith, acquires possession of the property ahead of
the first buyer. Unless, the second buyer satisfies these requirements, title or ownership will not transfer to him to the
prejudice of the first buyer.
In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished member of the
Court, Justice Jose C. Vitug, explains:
The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge
by the first buyer of the second sale cannot defeat the first buyer's rights except when the second buyer
first registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33). Conversely,
knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register,
since knowledge taints his registration with bad faith (see alsoAstorga vs. Court of Appeals, G.R. No.
58530, 26 December 1984). In Cruz vs. Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it was
held that it is essential, to merit the protection of Art. 1544, second paragraph, that the second realty
buyer must act in good faith in registering his deed of sale (citingCarbonell vs. Court of Appeals, 69 SCRA
99, Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).

54
 Petitioners point out that the notice of lis pendens in the case at bar was annotated on the title of the subject property
only on February 22, 1985, whereas, the second sale between petitioners Coronels and petitioner Mabanag was supposedly
perfected prior thereto or on February 18, 1985. The idea conveyed is that at the time petitioner Mabanag, the second
buyer, bought the property under a clean title, she was unaware of any adverse claim or previous sale, for which reason
she is a buyer in good faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not whether or not the second buyer was a buyer
in good faith but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of
any defect in the title of the property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith, registered the
sale entered into on February 18, 1985 because as early as February 22, 1985, a notice of lis pendens had been annotated
on the transfer certificate of title in the names of petitioners, whereas petitioner Mabanag registered the said sale sometime
in April, 1985. At the time of registration, therefore, petitioner Mabanag knew that the same property had already been
previously sold to private respondents, or, at least, she was charged with knowledge that a previous buyer is claiming title
to the same property. Petitioner Mabanag cannot close her eyes to the defect in petitioners' title to the property at the time
of the registration of the property.
This Court had occasions to rule that:
If a vendee in a double sale registers the sale after he has acquired knowledge that there was a
previous sale of the same property to a third party or that another person claims said property in a
previous sale, the registration will constitute a registration in bad faith and will not confer upon him any
right. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; citing Palarca vs. Director of Land, 43
Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz, perfected on February 6,
1985, prior to that between petitioners and Catalina B. Mabanag on February 18, 1985, was correctly upheld by both the
courts below.
Although there may be ample indications that there was in fact an agency between Ramona as principal and
Concepcion, her mother, as agent insofar as the subject contract of sale is concerned, the issue of whether or not
Concepcion was also acting in her own behalf as a co-buyer is not squarely raised in the instant petition, nor in such
assumption disputed between mother and daughter. Thus, We will not touch this issue and no longer disturb the lower
courts' ruling on this point.
WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed judgment
AFFIRMED.
SO ORDERED.
Narvasa, C .J ., Davide, Jr. and Francisco, JJ ., concur.
Panganiban, J ., took no part.
||| (Coronel v. Court of Appeals, G.R. No. 103577, [October 7, 1996], 331 PHIL 294-323)

55
 EN BANC

[G.R. No. 24190. July 13, 1926.]

GEORGE L. PARKS, plaintiff-appellant, vs. TARLAC, MUNICIPALITY OF TARLAC, CONCEPCION

CIRER, and JAMES HILL, her husband,defendants-appellees.

Jos. N. Wolfson for appellant.

Provincial Fiscal Lopez de Jesus for the Province and Municipality of Tarlac.

SYLLABUS

1. IMMOVABLE PROPERTY; CONDITIONAL DONATION, CONDITION PRECEDENT. — The characteristic

of condition. precedent is that the acquisition of the right is not effected while said condition is not complied with or is
not deemed complied with. Meanwhile nothing is acquired and there is only an expectancy of right. Consequently, when
a condition is imposed, the compliance of which cannot be effected except when the right is deemed acquired, such
condition cannot be a condition precedent.
2. ID.; ID.; ACTION FOR REVOCATION; PRESCRIPTION. — The action for the revocation of a donation is not
excluded 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 five years for the revocation by the subsequent birth of children
(art. 646, Civil Code), and one year for the revocation 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, Civil Code), it is
because, in this respect, the donation is considered onerous and is governed by the law or contracts and the general
rules of prescription. Under the laws in force (sec. 43, Code of Civ. Proc.) the period of prescription of this class; of
action is ten years.

DECISION

AVANCEÑA, C.J p:

On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No. 2 referred to in the
complaint, donated it perpetually to the municipality of Tarlac, Province of Tarlac, under certain conditions specified in
the public document in which they made this donation. The donation was accepted by Mr. Santiago de Jesus in the
same document on behalf of the municipal council of Tarlac of which he was the municipal president. The parcel thus
donated was later registered in the name of the donee, the municipality of Tarlac. On January 15, 1921, Concepcion
Cirer and James Hill sold this parcel to the herein plaintiff George L. Parks. On August 24, 1923, the municipality of
Tarlac transferred the parcel to the Province of Tarlac which, by reason of this transfer, applied for and obtained the
registration thereof in its name, the corresponding certificate of title having been issued to it.

The plaintiff, George L. Parks, alleging that the conditions of the donation had not been complied with and
invoking the sale of this parcel of land made by Concepcion Cirer and James Hill in his favor, brought this action against
the Province of Tarlac, the municipality of Tarlac, Concepcion Cirer and James Hill and prayed that he be declared the
absolute owner entitled to the possession of this parcel, that the transfer of the same by the municipality of Tarlac to
the Province of Tarlac be annulled, and the transfer certificate issued to the Province of Tarlac cancelled.
The lower court dismissed the complaint.
The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this parcel made by Concepcion
Cirer and James Hill in his favor on January 15, 1921, but that sale cannot have any effect. This parcel having been
donated by Concepcion Cirer and James Hill to the municipality of Tarlac, which donation was accepted by the latter,
the title to the property was transferred to the municipality of Tarlac. It is true that the donation might have been revoked
for the causes, if any provided by the law, but the fact is that it was not revoked when Concepcion Cirer and James Hill
made the sale of this parcel to the plaintiff. Even supposing that causes existed for the revocation of this donation, still,
it was necessary, in order to consider it revoked, either that the revocation had been consented to by the donee, the
municipality of Tarlac, or that it had been judicially decreed. None of these circumstances existed when Concepcion

56
 Cirer and James Hill sold this parcel to the plaintiff. Consequently, when the sale was made Concepcion Cirer and
James Hill were no longer the owners of this parcel and could dot have sold it to the plaintiff, nor could the latter have
acquired it from them.
But the appellant contends that a condition precedent having been imposed in the donation and the same not
having been complied with, the donation never became effective. We find no merit in this contention. The appellant
refers to the condition imposed that one of the parcels donated was to be used absolutely and exclusively for the
erection of a central school and the other for a public park, the work to commence in both cases within the period of six
months from the date of the ratification by the parties of the document evidencing the donation. It is true that this
condition has not been complied with. The allegation, however, that it is a condition precedent is erroneous. The
characteristic of a condition precedent is that the acquisition of the right is not effected while said condition is not
complied with or is not deemed complied with. Meanwhile nothing is acquired and there is only an expectancy of right.
Consequently, when a condition is imposed, the compliance of which cannot be effected except then the right is deemed
acquired, such condition cannot a condition precedent. In the present case the condition that a public school be erected
and a public park made of the donated land, work on the same to commence within six months from the date of the
ratification of the donation by the parties, could not be complied with except after giving effect to the donation. The
donee could not do any work on the donated land if the donation had not really been effected, because it would be an
invasion of another's title, for the land would have continued to belong to the donor so long as the condition imposed
was not complied with.
The appellant also contends that, in any event, the condition not having been complied with, even supposing
that it was not a condition precedent but subsequent, the non-compliance thereof is sufficient cause for the revocation
of the donation. This is correct. But the period for bringing an action for the revocation of the donation has prescribed.
That this action 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 five years for the revocation by the subsequent birth of children (art. 646,
Civil Code), and one year for their revocation 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, Civil Code), 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. Under the laws in force (sec. 43, Code of Civ. Proc.), the period of prescription of this class of action is ten
years. The action for the revocation of the donation for this cause arose on April 19, 1911, that is, six months after the
ratification of the instrument of donation of October 18, 1910. The complaint in this action was presented July 5, 1924,
more than ten years after this cause accrued.
By virtue of the foregoing, the judgment appealed from is affirmed with the costs against the appellant. So
ordered.
Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.
||| (Parks v. Tarlac, G.R. No. 24190, [July 13, 1926], 49 PHIL 142-146)

57
 FIRST DIVISION

[G.R. No. 112127. July 17, 1995.]

CENTRAL PHILIPPINE UNIVERSITY, petitioner, vs. COURT OF APPEALS, REMEDIOS FRANCO,

FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND REMARENE
LOPEZ, respondents.

Juanito M. Acanto for petitioner.

Santos B. Aguadera for private respondents.

SYLLABUS

1. CIVIL LAW; PROPERTY; MODES OF ACQUIRING OWNERSHIP; DONATION; CONSIDERED ONEROUS

WHEN EXECUTED FOR A VALUABLE CONSIDERATION WHICH IS CONSIDERED THE EQUIVALENT OF THE
DONATION. — A clear perusal of the condition 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. 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.
2. ID.; ID.; ID.; ID.; MAY BE REVOKED FOR NON-FULFILLMENT OR NON-COMPLIANCE OF THE CONDITIONS
SET FORTH THEREIN; CASE AT BAR. — 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. 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. 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.
3. ID.; ID.; ID.; ID.; DONEE'S ACCEPTANCE AND ACKNOWLEDGMENT OF ITS OBLIGATION PROVIDED IN
THE DEED, SUFFICIENT TO PREVENT THE STATUTE OF LIMITATION FROM BARRING THE ACTION OF DONOR
UPON THE ORIGINAL CONTRACT. — 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.
4. ID.; ID.; ID.; ID.; IN CASE OF REVOCATION, 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. — 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. 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.
5. ID.; ID.; ID.; ID.; GENERALLY, WHEN THE OBLIGATION DOES NOT FIX A PERIOD BUT FROM ITS NATURE
AND CIRCUMSTANCES IT CAN BE INFERRED THAT A PERIOD WAS INTENDED, COURT MAY FIX THE PERIOD FOR
COMPLIANCE. — 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

58
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.
6. ID.; ID.; ID.; ID.; WHEN OBLIGOR CANNOT COMPLY WITH WHAT IS INCUMBENT UPON HIM, THE OBLIGEE
MAY SEEK RESCISSION; EXCEPTION. — 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. 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.
7. ID.; ID.; ID.; ID.; IN CASE OF GRATUITOUS DONATION DOUBTS SHOULD BE RESOLVED IN FAVOR OF
THE LEAST TRANSMISSION OF RIGHTS AND INTERESTS. — 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. Records 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.
DAVIDE, JR., J, dissenting opinion:
1. CIVIL LAW; PROPERTY, MODES OF ACQUIRING OWNERSHIP; DONATION; IN LAW OF DONATION,
"CONDITIONS" REFERS TO OBLIGATION OR CHARGES IMPOSED BY THE DONOR ON THE DONEE. — 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 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 it is used in the vulgar sense of obligations or charges imposed by the donor on the donee. It is used, not in
its technical or strict legal sense, but in its broadest sense. (Italics 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.
2. ID.; ID.; ID.; ID.; WHEN NO FIXED PERIOD IN WHICH THE CONDITION SHOULD BE FULFILLED, IT IS THE
DUTY OF THE COURT TO FIX A SUITABLE TIME FOR ITS FULFILLMENT. — J. Davide, Jr., 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 Barreto vs. City of Manila, 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.
3. ID.; ID.; ID.; ID.; MERE FACT THAT THERE IS NO TIME FIXED AS TO WHEN THE CONDITION THEREOF
ARE TO BE FULFILLED DOES NOT IPSO FACTOMEAN THAT THE STATUTE OF LIMITATION WILL NOT APPLY. —
There is misplaced reliance again on a previous decision of this Court in Osmeña vs. Rama. 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.

59
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.
4. ID.; ID.; ID.; ID.; ACTION TO REVOKE THEREOF PRESCRIBES IN FOUR (4) YEARS. — More recently, in De
Luna vs. Abrigo, 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.

DECISION

BELLOSILLO, J p:

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 cornerstones 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, privates 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 prescribe; that it did not
violate any of the conditions in the deed of donation because it never used the donated properly 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 11991, the trial court held that petitioner failed to comply with the conditions of the donation and declared
it null and void. The court a quofurther directed petitioner to execute a deed of 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 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 appellate court also found that while the first condition mandated petitioner to utilize 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

60
 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 alleged 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 this 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. 4It 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 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 acknowledgement 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 government
laws and regulations pertaining to education, building requirements and property restrictions which are beyond the control
of the donee. LibLex
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 that 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
interest. 10 Records are clear and facts are undisputed that since the execution of the deed of donation up to the time

61
 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 in 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: LLpr
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 . . . (Italics 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 contractshould be resolved in favor of the least transmission of
rights and interest . . . (Italics 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 world 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 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 charges imposed by the
donor on the donee. It is used, not in its technical or strict legal sense, but in its broadest sense. 1(Italics
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 Tarlac 3 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 on 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

62
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 not complied 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 Articles 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 on 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 1962 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 Lune 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 noncompliance 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 provisions 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 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.

63
 For the reasons expressed above, I register my dissent. According, the decision of the Court of Appeals must be
upheld, except its ruling that the conditions of the donation are resolutory.
Padilla, J ., concurs.
||| (Central Philippine University v. Court of Appeals, G.R. No. 112127, [July 17, 1995], 316 PHIL 616-634)

64
 SECOND DIVISION

[G.R. No. 126444. December 4, 1998.]

ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA, DEMETRIO QUIJADA,

ELIUTERIA QUIJADA, EULALIO QUIJADA, and WARLITO QUIJADA, petitioners, vs. COURT OF
APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN, ALBERTO ASIS, SEGUNDINO RAS,
ERNESTO GOLORAN, CELSO ABISO, FERNANDO BAUTISTA, ANTONIO MACASERO, and
NESTOR MAGUINSAY, respondents.

SYLLABUS

1. CIVIL LAW; DONATION; DONATION WITH A RESOLUTORY CONDITION; IF PERFECTED, DONEE

BECOMES THE OWNER OF THE PROPERTY DONATED NOTWITHSTANDING THE CONDITION IMPOSED. — When
the Municipality's acceptance of the donation was made known to the donor, the former became the new owner of the
donated property — donation being a mode of acquiring and transmitting ownership — notwithstanding the condition
imposed by the donee. The donation is perfected once the acceptance by the donee is made known to the donor.
Accordingly, ownership is immediately transferred to the latter and that ownership will only revert to the donor if the
resolutory condition is not fulfilled. aSATHE
2. ID.; ID.; ID.; NON-FULFILLMENT THEREOF, WHEN BROUGHT TO THE KNOWLEDGE OF THE DONOR
AUTOMATICALLY REVERTS OWNERSHIP OF THE PROPERTY DONATED AS PROVIDED. — Since no period was
imposed by the donor on when must comply with the condition, the latter remains the owner so long as he has tried to
comply with the condition within a reasonable period. Such period, however, became irrelevant herein when the donee-
Municipality manifested through a resolution that it cannot comply with the condition of building a school and the same was
made known to the donor. Only then — when the non-fulfillment of the resolutory condition was brought to the donor's
knowledge — that ownership of the donated property reverted to the donor as provided in the automatic reversion clause
of the deed of donation.
3. ID.; ID.; ID.; DONOR'S INCHOATE INTEREST IN THE DONATED PROPERTY MAY BE THE SUBJECT OF
CONTRACTS INCLUDING A CONTRACT OF SALE. — The donor may have an inchoate interest in the donated property
during the time that ownership of the land has not reverted to her. Such inchoate interest may be the subject of contracts
including a contract of sale.
4. ID.; LACHES; IS NEGLIGENCE OR OMISSION TO ASSERT A RIGHT WITHIN A REASONABLE TIME GIVING
RISE TO A PRESUMPTION THAT THE PARTY ENTITLED TO ASSERT IT EITHER HAS ABANDONED OR DECLINED
TO ASSERT IT; CASE AT BAR. — As to laches, petitioner's action is not yet barred thereby. Laches presupposes failure
or neglect for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should
have been done earlier; "it is negligence or omission to assert a right within a reasonable time, thus, giving rise to a
presumption that the party entitled to assert it either has abandoned or declined to assert it." Petitioners' cause of action to
quiet title commenced only when the property reverted to the donor and/or his successors-in-interest in 1987. Certainly,
when the suit was initiated the following year, it cannot be said that petitioners had slept on their rights for a long time. The
1960's sales made by Trinidad Quijada cannot be the reckoning point as to when petitioners' cause of action arose. They
had no interest over the property at the time except under the deed of donation to which private respondents were not privy.
Moreover, petitioners had previously filed an ejectment suit against private respondents only that it did not prosper on a
technicality.
5. ID.; SALE; A CONSENSUAL CONTRACT PERFECTED BY MERE CONSENT; OWNERSHIP BY THE SELLER
OF THE THING SOLD IS NOT AN ELEMENT OF PERFECTION. — Sale, being a consensual contract, is perfecting by
mere consent, which is manifested the moment there is a meeting of the minds as to the offer and acceptance thereof on
three (3) elements; subject matter, price and terms of payment of the price. Ownership by the seller on the thing sold at the
time of the perfection of the contract of sale is not an element for its perfection. What the law requires is that the seller has
the right to transfer ownership at the time the thing sold is delivered. Perfection per se does not transfer ownership which
occurs upon the actual or constructive delivery of the thing sold. A perfected contract of sale cannot be challenged on the
ground of non-ownership on the part of the seller at the time of its perfection: hence, the sale is still valid.
6. ID.; ID,; CONSUMMATION THEREOF OCCURS UPON THE CONSTRUCTIVE OR ACTUAL DELIVERY OF
THE SUBJECT MATTER TO THE BUYER; CASE AT BAR. — The consummation, however, of the perfected contract is
another matter. It occurs upon the constructive or actual delivery of the subject matter to the buyer when the seller of her
successors-in-interest subsequently acquires ownership thereof. Such circumstance happened in this case when petitioners
— who are Trinidad Quijada's heirs and successors-in-interest — became the owners of the subject property upon the

65
reversion of the ownership of the land to them. Consequently, ownership is transferred to respondent Mondejar and those
who claim their right from him. Article 1434 of the New Civil Code supports the ruling that the seller's "title passes by
operation of law to the buyer." This rule applies not only when the subject matter of the contract of sale is goods, but also
to other kinds of property, including real property. CADHcI
7. ID.; DONATION; DONOR MAY IMPOSE ONLY REASONABLE AND JUST CONDITIONS THEREON. —
Nowhere in Article 1409 (4) is it provided that the properties of a municipality, whether it be those for public use or its
patrimonial property are outside the commerce of men. Besides, the lots in this case were conditionally owned by the
municipality. To rule that the donated properties are outside the commerce of men would render nugatory the unchallenged
reasonableness and justness of the condition which the donor has the right to impose as owner thereof. Moreover, the
objects referred to as outsides the commerce of men are those which cannot be appropriated, such as the open seas and
the heavenly bodies.
8. ID.; DAMAGES; ATTORNEY'S FEES, LITIGATION EXPENSES AND MORAL DAMAGES CANNOT BE
RECOVERED IN THE CASE AT BAR. — With respect to the trial court's award of attorney's fees, litigation expenses and
moral damages, there is neither factual nor legal basis thereof. Attorney's fees and expenses of litigation cannot, following
the general rule in Article 2208 of the New Civil Code, be recovered in this case, there being no stipulation to that effect and
the case does not fall under any of the exceptions. It cannot be said that private respondents had compelled petitioners to
litigate with third persons. Neither can it be ruled that the former acted in "gross and evident bad faith" in refusing to satisfy
the latter's claims considering that private respondents were under an honest belief that they have legal right over the
property by virtue of the deed of sale. Moral damages cannot likewise be justified as one of the circumstances enumerated
under Article 2219 and 2220 of the New Civil Code concur in this case. CITaSA

DECISION

MARTINEZ, J p:

Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private respondents for quieting of title,
recovery of possession and ownership of parcels of land with claim for attorney's fees and damages. The suit was premised
on the following facts found by the Court of Appeals, which is materially the same as that found by the trial court: prcd
"Plaintiffs-appellees (petitioners) are the children of the late Trinidad Corvera Vda. de Quijada.
Trinidad was one of the heirs of the late Pedro Corvera and inherited from the latter the two-hectare
parcel of land subject of the case, situated in the barrio of San Agustin, Talacogon, Agusan del Sur. On
April 5, 1956, Trinidad Quijada together with her sisters Leonila Corvera Vda. de Sequeña and Paz
Corvera Cabiltes and brother Epapiadito Corvera executed a conditional deed of donation (Exh. C) of the
two-hectare parcel of land subject of the case in favor of the Municipality of Talacogon, the condition
being that the parcel of land shall be used solely and exclusively as part of the campus of the proposed
provincial high school in Talacogon. Apparently, Trinidad remained in possession of the parcel of land
despite the donation. On July 29, 1962, Trinidad sold one (1) hectare of the subject parcel of land to
defendant-appellant Regalado Mondejar (Exh. 1). Subsequently, Trinidad verbally sold the remaining one
(1) hectare to defendant-appellant (respondent) Regalado Mondejar without the benefit of a written deed
of sale and evidenced solely by receipts of payment. In 1980, the heirs of Trinidad, who at that time was
already dead, filed a complaint for forcible entry (Exh. E) against defendant-appellant (respondent)
Regalado Mondejar, which complaint was, however, dismissed for failure to prosecute (Exh. F). In 1987,
the proposed provincial high school having failed to materialize, the Sangguniang Bayan of the
municipality of Talacogon enacted a resolution reverting the two (2) hectares of land donated back to the
donors (Exh. D). In the meantime, defendant-appellant (respondent) Regalado Mondejar sold portions of
the land to defendants-appellants (respondents) Fernando Bautista (Exh. 5), Rodolfo Goloran (Exh. 6),
Efren Guden (Exh. 7) and Ernesto Goloran (Exh. 8).
"On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-appellants
(respondents). In the complaint, plaintiffs-appellees (petitioners) alleged that their deceased mother never
sold, conveyed, transferred or disposed of the property in question to any person or entity much less to
Regalado Mondejar save the donation made to the Municipality of Talacogon in 1956; that at the time of
the alleged sale to Regalado Mondejar by Trinidad Quijada, the land still belongs to the Municipality of
Talacogon, hence, the supposed sale is null and void.
"Defendants-appellants (respondents), on the other hand, in their answer claimed that the land
in dispute was sold to Regalado Mondejar, the one (1) hectare on July 29, 1962, and the remaining one

66
 (1) hectare on installment basis until fully paid. As affirmative and/or special defense, defendants-
appellants (respondents) alleged that plaintiffs' action is barred by laches or has prescribed. cdphil
"The court a quo rendered judgment in favor of plaintiffs-appellees (petitioners): firstly because
'Trinidad Quijada had no legal title or right to sell the land to defendant Mondejar in 1962, 1966, 1967 and
1968, the same not being hers to dispose of because ownership belongs to the Municipality of Talacogon'
(Decision, p. 4; Rollo, p. 39) and, secondly, that the deed of sale executed by Trinidad Quijada in favor
of Mondejar did not carry with it the conformity and acquiescence of her children, more so that she was
already 63 years old at the time, and a widow (Decision, p. 6; Rollo, p. 41)." 1
The dispositive portion of the trial court's decision reads:
"WHEREFORE, viewed from the above perceptions, the scale of justice having tilted in favor of
the plaintiffs, judgment is, as it is hereby rendered:
1). ordering the Defendants to return and vacate the two (2) hectares of land to Plaintiffs as
described in Tax Declaration No. 1209 in the name of Trinidad Quijada;
2) ordering any person acting in Defendants' behalf to vacate and restore the peaceful
possession of the land in question to Plaintiffs;
3) ordering the cancellation of the Deed of Sale executed by the late Trinidad Quijada in favor of
Defendant Regalado Mondejar as well as the Deeds of Sale/Relinquishments executed
by Mondejar in favor of the other Defendants;
4) ordering Defendants to remove their improvements constructed on the questioned lot;
5) ordering the Defendants to pay Plaintiffs, jointly and severally, the amount of P10,000.00
representing attorney's fees;
6) ordering Defendants to pays the amount of P8,000.00 as expenses of litigation; and
7) ordering Defendants to pay the sum of P30,000.00 representing moral damages.
SO ORDERED." 2
On appeal, the Court of Appeals reversed and set aside the judgment a quo 3 ruling that the sale made by Trinidad
Quijada to respondent Mondejar was valid as the former retained an inchoate interest on the lots by virtue of the automatic
reversion clause in the deed of donation. 4 Thereafter, petitioners filed a motion for reconsideration. When the CA denied
their motion, 5 petitioners instituted a petition for review to this Court arguing principally that the sale of the subject property
made by Trinidad Quijada to respondent Mondejar is void, considering that at that time, ownership was already transferred
to the Municipality of Talacogon. On the contrary, private respondents contend that the sale was valid, that they are buyers
in good faith, and that petitioners' case is barred by laches. 6
We affirm the decision of the respondent court. cdlex
The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters 7 was subject to the condition
that the donated property shall be "used solely and exclusively as a part of the campus of the proposed Provincial High
School in Talacogon." 8 The donation further provides that should "the proposed Provincial High School be discontinued or
if the same shall be opened but for some reason or another, the same may in the future be closed" the donated property
shall automatically revert to the donor. 9 Such condition, not being contrary to law, morals, good customs, public order or
public policy was validly imposed in the donation. 10
When the Municipality's acceptance of the donation was made known to the donor, the former became the new
owner of the donated property — donation being a mode of acquiring and transmitting ownership 11 — notwithstanding the
condition imposed by the donee. The donation is perfected once the acceptance by the donee is made known to the
donor. 12 Accordingly, ownership is immediately transferred to the latter and that ownership will only revert to the donor if
the resolutory condition is not fulfilled.
In this case, that resolutory condition is the construction of the school. It has been ruled that when a person donates
land to another on the condition that the latter would build upon the land a school, the condition imposed is not a condition
precedent or a suspensive condition but a resolutory one. 13 Thus, at the time of the sales made in 1962 towards 1968, the
alleged seller (Trinidad) could not have sold the lots since she had earlier transferred ownership thereof by virtue of the
deed of donation. So long as the resolutory condition subsists and is capable of fulfillment, the donation remains effective
and the donee continues to be the owner subject only to the rights of the donor or his successors-in-interest under the deed
of donation. Since no period was imposed by the donor on when must the donee comply with the condition, the latter
remains the owner so long as he has tried to comply with the condition within a reasonable period. Such period, however,
became irrelevant herein when the donee-Municipality manifested through a resolution that it cannot comply with the
67
condition of building a school and the same was made known to the donor. Only then — when the non-fulfillment of the
resolutory condition was brought to the donor's knowledge — that ownership of the donated property reverted to the donor
as provided in the automatic reversion clause of the deed of donation.
The donor may have an inchoate interest in the donated property during the time that ownership of the land has not
reverted to her. Such inchoate interest may be the subject of contracts including a contract of sale. In this case, however,
what the donor sold was the land itself which she no longer owns. It would have been different if the donor-seller sold her
interests over the property under the deed of donation which is subject to the possibility of reversion of ownership arising
from the non-fulfillment of the resolutory condition.
As to laches, petitioners' action is not yet barred thereby. Laches presupposes failure or neglect for an unreasonable
and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier; 14 "it
is negligence or omission to assert a right within a reasonable time, thus, giving rise to a presumption that the party entitled
to assert it either has abandoned or declined to assert it." 15 Its essential elements of: prLL
a.) Conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation
complained of;
b.) Delay in asserting complainant's right after he had knowledge of the defendant's conduct and after he
has an opportunity to sue;
c.) Lack of knowledge or notice on the part of the defendant that the complainant would assert the right
on which he bases his suit; and,
d.) Injury or prejudice to the defendant in the event relief is accorded to the complainant." 16
are absent in this case. Petitioners' cause of action to quiet title commenced only when the property reverted to the
donor and/or his successors-in-interest in 1987. Certainly, when the suit was initiated the following year, it cannot be
said that petitioners had slept on their rights for a long time. The 1960's sales made by Trinidad Quijada cannot be the
reckoning point as to when petitioners' cause of action arose. They had no interest over the property at that time
except under the deed of donation to which private respondents were not privy. Moreover, petitioners had previously
filed an ejectment suit against private respondents only that it did not prosper on a technicality.
Be that at it may, there is one thing which militates against the claim of petitioners. Sale, being a consensual
contract, is perfected by mere consent, which is manifested the moment there is a meeting of the minds 17 as to the offer
and acceptance thereof on three (3) elements: subject matter, price and terms of payment of the price. 18 Ownership by
the seller on the thing sold at the time of the perfection of the contract of sale is not an element for its perfection. What the
law requires is that the seller has the right to transfer ownership at the time the thing sold is delivered. 19 Perfection per
se does not transfer ownership which occurs upon the actual or constructive delivery of the thing sold. 20 A perfected
contract of sale cannot be challenged on the ground of non-ownership on the part of the seller at the time of its perfection;
hence, the sale is still valid.
The consummation, however, of the perfected contract is another matter. It occurs upon the constructive or actual
delivery of the subject matter to the buyer when the seller or her successors-in-interest subsequently acquires ownership
thereof. Such circumstance happened in this case when petitioners — who are Trinidad Quijada's heirs and successors-in-
interest — became the owners of the subject property upon the reversion of the ownership of the land to them.
Consequently, ownership is transferred to respondent Mondejar and those who claim their right from him. Article 1434 of
the New Civil Code supports the ruling that the seller's "title passes by operation of law to the buyer." 21 This rule applies
not only when the subject matter of the contract of sale is goods,22 but also to other kinds of property, including real
property. 23
There is also no merit in petitioners' contention that since the lots were owned by the municipality at the time of the
sale, they were outside the commerce of men under Article 1409 (4) of the NCC; 24 thus, the contract involving the same
is inexistent and void from the beginning. However, nowhere in Article 1409 (4) is it provided that the properties of a
municipality, whether it be those for public use or its patrimonial property 25 are outside the commerce of men. Besides,
the lots in this case were conditionally owned by the municipality. To rule that the donated properties are outside the
commerce of men would render nugatory the unchallenged reasonableness and justness of the condition which the donor
has the right to impose as owner thereof. Moreover, the objects referred to as outsides the commerce of man are those
which cannot be appropriated, such as the open seas and the heavenly bodies. cdtai
With respect to the trial court's award of attorney's fees, litigation expenses and moral damages, there is neither
factual nor legal basis thereof. Attorney's fees and expenses of litigation cannot, following the general rule in Article 2208
of the New Civil Code, be recovered in this case, there being no stipulation to that effect and the case does not fall under
any of the exceptions. 26 It cannot be said that private respondents had compelled petitioners to litigate with third persons.
Neither can it be ruled that the former acted in "gross and evident bad faith" in refusing to satisfy the latter's claims
considering that private respondents were under an honest belief that they have a legal right over the property by virtue of

68
the deed of sale. Moral damages cannot likewise be justified as none of the circumstances enumerated under Articles
2219 27 and 2220 28 of the New Civil Code concur in this case.
WHEREFORE, by virtue of the foregoing, the assailed decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Melo, Puno and Mendoza JJ ., concur. cda
||| (Quijada v. Court of Appeals, G.R. No. 126444, [December 4, 1998], 360 PHIL 81-94)

69
 SECOND DIVISION

[G.R. No. 87047. October 31, 1990.]

FRANCISCO LAO LIM, petitioner, vs. COURT OF APPEALS and BENITO VILLAVICENCIO
DY, respondents.

Gener E . Asuncion for petitioner.

Natividad T . Perez for private respondent.

DECISION

REGALADO, J p:

Respondent Court of Appeals having affirmed in toto on June 30, 1988 in CA-G.R. SP No. 13925 1 the decision of the
Regional Trial Court of Manila, Branch XLVI, in Civil Case No. 8742719, entitled "Francisco Lao Lim vs. Benito
Villavicencio Dy," petitioner seeks the reversal of such affirmance in the instant petition.
The records show that private respondent entered into a contract of lease with petitioner for a period of three (3) years,
that is, from 1976 to 1979. After the stipulated term expired, private respondent refused to vacate the premises, hence,
petitioner filed an ejectment suit against the former in the City Court of Manila, docketed therein as Civil Case No.
051063-CV. The case was terminated by a judicially approved compromise agreement of the parties providing in part:
"3. That the term of the lease shall be renewed every three years retroacting from October 1979 to
October 1982; after which the abovenamed rental shall be raised automatically by 20% every three
years for as long as defendant needed the premises and can meet and pay the said increases, the
defendant to give notice of his intent to renew sixty (60) days before the expiration of the term;" 2
By reason of said compromise agreement the lease continued from 1979 to 1982, then from 1982 to 1985. On April 17,
1985, petitioner advised private respondent that he would no longer renew the contract effective October,
1985. 3 However, on August 5, 1985, private respondent informed petitioner in writing of his intention to renew the
contract of lease for another term, commencing November, 1985 to October, 1988. 4 In reply to said letter, petitioner
advised private respondent that he did not agree to a renewal of the lease contract upon its expiration in October, 1985. 5
On January 15, 1986, because of private respondent's refusal to vacate the premises, petitioner filed another ejectment
suit, this time with the Metropolitan Trial Court of Manila in Civil Case No. 114659-CV. In its decision of September 24,
1987, said court dismissed the complaint on the grounds that (1) the lease contract has not expired, being a continuous
one the period whereof depended upon the lessee's need for the premises and his ability to pay the rents; and (2) the
compromise agreement entered into in the aforesaid Civil Case No. 051063-CV constitutes res judicata to the case before
it. 6
Petitioner appealed to the Regional Trial Court of Manila which, in its decision of January 28, 1988 in Civil Case No.
8742719, affirmed the decision of the lower court. 7
As stated at the outset, respondent Court of Appeals affirmed in full said decision of the Regional Trial Court and held that
(1) the stipulation in the compromise agreement which, in its formulation, allows the lessee to stay on the premises as
long as he needs it and can pay rents is valid, being a resolutory condition and, therefore, beyond the ambit of Article
1308 of the Civil Code; and (2) that a compromise has the effect of res judicata. 8
Petitioner's motion for reconsideration having been denied by respondent Court of Appeals, this present petition is now
before us. We find the same to be meritorious.
Contrary to the ruling of respondent court, the disputed stipulation "for as long as the defendant needed the premises and
can meet and pay said increases" is a purely potestative condition because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the lessee. It is likewise a suspensive condition because the renewal of
the lease, which gives rise to a new lease, depends upon said condition. It should be noted that a renewal constitutes a
new contract of lease although with the same terms and conditions as those in the expired lease. It should also not be
overlooked that said condition is not resolutory in nature because it is not a condition that terminates the lease contract.

70
The lease contract is for a definite period of three (3) years upon the expiration of which the lease automatically
terminates. prcd
The invalidity of a condition in a lease contract similar to the one at bar has been resolved in Encarnacion vs. Baldomar,
et al., 9 where we ruled that in an action for ejectment, the defense interposed by the lessees that the contract of lease
authorized them to continue occupying the premises as long as they paid the rents is untenable, because it would leave to
the lessees the sole power to determine whether the lease should continue or not. As stated therein, "(i)f this defense
were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the
owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue, the
lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of
stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3d
ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100.)"
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 and no equality exists between the lessor and
the lessee since the life of the contract is dictated solely by the lessee. Cdpr
The interpretation made by respondent court cannot, therefore, be upheld. Paragraph 3 of the compromise agreement,
read and interpreted in its entirety, is actually to the effect that the last portion thereof, which gives the private respondent
sixty (60) days before the expiration of the term the right to give notice of his intent to renew, is subject to the first portion
of said paragraph that "the term of the lease shall be renewed every three (3) years," thereby requiring the mutual
agreement of the parties. The use of the word "renew" and the designation of the period of three (3) years clearly confirm
that the contract of lease is limited to a specific period and that it is not a continuing lease. The stipulation provides for a
renewal of the lease every three (3) years; there could not be a renewal if said lease did not expire, otherwise there is
nothing to renew.
Resultantly, the contract of lease should be and is hereby construed as providing for a definite period of three (3) years
and that the automatic increase of the rentals by twenty percent (20%) will take effect only if the parties decide to renew
the lease. A contrary interpretation will result in a situation where the continuation and effectivity of the contract will
depend only upon the will of the lessee, in violation of Article 1308 of the Civil Code and the aforesaid doctrine
in Encarnacion. The compromise agreement should be understood as bearing that import which is most adequate to
render it effectual. 10 Where the instrument is susceptible of two interpretations, one which will make it invalid and illegal
and another which will make it valid and legal, the latter interpretation should be adopted. 11
Moreover, perpetual leases are not favored in law, nor are covenants for continued renewals tending to create a
perpetuity, and the rule of construction is well settled that a covenant for renewal or for an additional term should not be
held to create a right to repeated grants in perpetuity, unless by plain and unambiguous terms the parties have expressed
such intention. 12 A lease will not be construed to create a right to perpetual renewals unless the language employed
indicates clearly and unambiguously that it was the intention and purpose of the parties to do so. 13 A portion in a lease
giving the lessee and his assignee the right to perpetual renewals is not favored by the courts, and a lease will be
construed as not making such a provision unless it does so clearly. 14
As we have further emphasized:
"It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease must
be deemed to have been agreed upon for the benefit of both parties, absent language showing that the
term was deliberately set for the benefit of the lessee or lessor alone. We are not aware of any
presumption in law that the term of a lease is designed for the benefit of the lessee
alone. Koh and Cruz in effect rested upon such a presumption. But that presumption cannot reasonably
be indulged in casually in an era of rapid economic change, marked by, among other things, volatile
costs of living and fluctuations in the value of the domestic currency. The longer the period the more
clearly unreasonable such a presumption would be. In an age like that we live in, very specific language
is necessary to show an intent to grant a unilateral faculty to extend or renew a contract of lease to the
lessee alone, or to the lessor alone for that matter. We hold that the above-quoted rulings in Koh
v. Ongsiaco and Cruz v. Alberto should be and are overruled." 15
In addition, even assuming that the clause "for as long as the defendant needed the premises and can meet and pay, said
increases" gives private respondent an option to renew the lease, the same will be construed as providing for but one
renewal or extension and, therefore, was satisfied when the lease was renewed in 1982 for another three (3) years. A
general covenant to renew is satisfied by one renewal and will not be construed to confer the right to more than one
renewal unless provision is clearly and expressly made for further renewals. 16 Leases which may have been intended to
be renewable in perpetuity will nevertheless be construed as importing but one renewal if there is any uncertainty in that
regard. 17

71
The case of Buccat vs. Dispo, et al., 18 relied upon by respondent court, to support its holding that respondent lessee can
legally stay on the premises for as long as he needs it and can pay the rents, is not in point. In said case, the lease
contract provides for an indefinite period since it merely stipulates "(t)hat the lease contract shall remain in full force and
effect as long as the land will serve the purpose for which it is intended as a school site of the National Business Institute,
but the rentals now stipulated shall be subject to review every after ten (10) years by mutual agreement of the parties."
This is in clear contrast to the case at bar wherein, to repeat, the lease is fixed at a period of three (3) years although
subject to renewal upon agreement of the parties, and the clause "for as long as defendant needs the premises and can
meet and pay the rents" is not an independent stipulation but is controlled by said fixed term and the option for renewal
upon agreement of both parties.
On the second issue, we agree with petitioner that respondent court erred in holding that the action for ejectment is barred
by res judicata. While it is true that a compromise agreement has the effect of res judicata, this doctrine does not apply in
the present case. It is elementary that for a judgment to be a bar to a subsequent case, (1) it must be a final judgment, (2)
the court which rendered it had jurisdiction over the subject matter and the parties, (3) it must be a judgment on the
merits, and (4) there must be identity between the two cases as to parties, subject matter and cause of action. 19
In the case at bar, the fourth requisite is lacking. Although there is identity of parties, there is no identity of subject matter
and cause of action. The subject matter in the first ejectment case is the original lease contract while the subject matter in
the case at bar is the lease created under the terms provided in the subsequent compromise agreement. The lease
executed in 1978 is one thing; the lease constituted in 1982 by the compromise agreement is another. LLjur
There is also no identity, in the causes of action. The test generally applied to determine the identity of causes of action is
to consider the identity of facts essential to their maintenance, or whether the same evidence would sustain both causes
of action. 20 In the case at bar, the delict or the wrong in the first case is different from that in the second, and the
evidence that will support and establish the cause of action in the former will not suffice to support and establish that in
the latter.
In the first ejectment case, the cause of action was private respondent's refusal to comply with the lease contract which
expired on December 31, 1978. In the present case, the cause of action is a similar refusal but with respect to the lease
which expired in October, 1985 under the compromise agreement. While the compromise agreement may be res
judicata as far as the cause of action and issues in the first ejectment case is concerned, any cause of action that arises
from the application or violation of the compromise agreement cannot be said to have been settled in said first case. The
compromise agreement was meant to settle, as it did only settle, the first case. It did not, as it could not, cover any cause
of action that might arise thereafter, like the present case which was founded on the expiration of the lease in 1985, which
necessarily requires a different set of evidence. The fact that the compromise agreement was judicially approved does not
foreclose any cause of action arising from a violation of the terms thereof. cdrep
WHEREFORE, the decision of respondent Court of Appeals is REVERSED and SET ASIDE. Private respondent is
hereby ordered to immediately vacate and return the possession of the leased premises subject of the present action to
petitioner and to pay the monthly rentals due thereon in accordance with the compromise agreement until he shall have
actually vacated the same. This judgment is immediately executory.
SO ORDERED.
Melencio-Herrera , Paras, Padilla and Sarmiento, JJ., concur.
||| (Lim v. Court of Appeals, G.R. No. 87047, [October 31, 1990], 269 PHIL 155-165)

72
 SECOND DIVISION

[G.R. No. 181045. July 2, 2014.]

SPOUSES EDUARDO and LYDIA SILOS, petitioners, vs. PHILIPPINE NATIONAL

BANK, respondent.

DECISION

DEL CASTILLO, J p:

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important
component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect. Moreover,
the Court cannot consider a stipulation granting a party the option to prepay the loan if said party is not agreeable to the
arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a contract which grants one party the
right to choose whether to continue with or withdraw from the agreement if it discovers that what the other party has been
doing all along is improper or illegal. ADEHTS
This Petition for Review on Certiorari 1 questions the May 8, 2007 Decision 2 of the Court of Appeals (CA) in CA-
G.R. CV No. 79650, which affirmed with modifications the February 28, 2003 Decision 3 and the June 4, 2003 Order 4 of
the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a
department store and buying and selling of ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a banking
corporation organized and existing under Philippine laws.
To secure a one-year revolving credit line of P150,000.00 obtained from PNB, petitioners constituted in August
1987 a Real Estate Mortgage 5 over a 370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title No.
(TCT) T-14250. In July 1988, the credit line was increased to P1.8 million and the mortgage was correspondingly increased
to P1.8 million. 6 And in July 1989, a Supplement to the Existing Real Estate Mortgage 7 was executed to cover the same
credit line, which was increased to P2.5 million, and additional security was given in the form of a 134-square meter lot
covered by TCT T-16208. In addition, petitioners issued eight Promissory Notes 8 and signed a Credit
Agreement. 9 This July 1989 Credit Agreement contained a stipulation on interest which provides as follows: EHScCA
1.03.Interest (a) The Loan shall be subject to interest at the rate of 19.5% per annum.
Interest shall be payable in advance every one hundred twenty days at the rate prevailing at the time of
the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the shifting from the
floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has imposed
on the Loan interest at a rate per annum, which is equal to the Bank's spread over the current floating
interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating interest rate at any time depending on
whatever policy it may adopt in the future. 10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or reduce
interest rates "within the limits allowed by law or by the Monetary Board." 11 The Real Estate Mortgage agreement provided
the same right to increase or reduce interest rates "at any time depending on whatever policy PNB may adopt in the
future." 12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 — 19.5%;
2. 2nd Promissory Note dated November 22, 1989 — 23%;
3. 3rd Promissory Note dated March 21, 1990 — 22%;
4. 4th Promissory Note dated July 19, 1990 — 24%;

73
 5. 5th Promissory Note dated December 17, 1990 — 28%;
6. 6th Promissory Note dated February 14, 1991 — 32%;
7. 7th Promissory Note dated March 1, 1991 — 30%; and
8. 8th Promissory Note dated July 11, 1991 — 24%. 13
In August 1991, an Amendment to Credit Agreement 14 was executed by the parties, with the following stipulation
regarding interest:
1.03.Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment thereof at the
rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect
as of the date of each Availment. 15 (Emphases supplied) SAHIaD
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes,
which petitioners settled — except the last (the note covering the principal) — at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 — 26%;
2. 10th Promissory Note dated March 19, 1992 — 25%;
3. 11th Promissory Note dated July 11, 1992 — 23%;
4. 12th Promissory Note dated November 10, 1992 — 21%;
5. 13th Promissory Note dated March 15, 1993 — 21%;
6. 14th Promissory Note dated July 12, 1993 — 17.5%;
7. 15th Promissory Note dated November 17, 1993 — 21%;
8. 16th Promissory Note dated March 28, 1994 — 21%;
9. 17th Promissory Note dated July 13, 1994 — 21%;
10. 18th Promissory Note dated November 16, 1994 — 16%;
11. 19th Promissory Note dated April 10, 1995 — 21%;
12. 20th Promissory Note dated July 19, 1995 — 18.5%;
13. 21st Promissory Note dated December 18, 1995 — 18.75%;
14. 22nd Promissory Note dated April 22, 1996 — 18.5%;
15. 23rd Promissory Note dated July 22, 1996 — 18.5%;
16. 24th Promissory Note dated November 25, 1996 — 18%;
17. 25th Promissory Note dated May 30, 1997 — 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 — 25%. 16
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time
without notice, raise within the limits allowed by law . . . ." 17 On the other hand, the 18th up to the 26th promissory notes
— including PN 9707237, which is the 26th promissory note — carried the following provision:
. . . For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank's overall cost of funds. I/We hereby agree that in the event I/we are
not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to
prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest
Setting Date. 18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the promissory notes,
religiously paying the interests without objection or fail. But in 1997, petitioners faltered when the interest rates soared due
to the Asian financial crisis. Petitioners' sole outstanding promissory note for P2.5 million — PN 9707237 executed in July
1997 and due 120 days later or on October 28, 1997 — became past due, and despite repeated demands, petitioners failed
to make good on the note.
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 Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as follows:
Without need for notice or demand, failure to pay this note or any installment thereon, when due,
shall constitute default and in such cases or in case of garnishment, receivership or bankruptcy or suit of
any kind filed against me/us by the Bank, the outstanding principal of this note, at the option of the Bank
and without prior notice of demand, shall immediately become due and payable and shall be subject to
a penalty charge of twenty four percent (24%) per annum based on the defaulted principal amount.
. . . 19 (Emphasis supplied)
PNB prepared a Statement of Account 20 as of October 12, 1998, detailing the amount due and demandable from
petitioners in the total amount of P3,620,541.60, broken down as follows:

Principal P2,500,000.00
Interest 538,874.94
Penalties 581,666.66
–––––––––––––
Total P3,620,541.60
============
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage, and on
January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for the amount of P4,324,172.96. 21 The sheriff's
certificate of sale was registered on March 11, 1999. SDIaCT
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking annulment of the
foreclosure sale and an accounting of the PNB credit. Petitioners theorized that after the first promissory note where they
agreed to pay 19.5% interest, the succeeding stipulations for the payment of interest in their loan agreements with PNB —
which allegedly left to the latter the sole will to determine the interest rate — became null and void. Petitioners added that
because the interest rates were fixed by respondent without their prior consent or agreement, these rates are void, and as
a result, petitioners should only be made liable for interest at the legal rate of 12%. They claimed further that they overpaid
interests on the credit, and concluded that due to this overpayment of steep interest charges, their debt should now be
deemed paid, and the foreclosure and sale of TCTs T-14250 and T-16208 became unnecessary and wrongful. As for the
imposed penalty of P581,666.66, petitioners alleged that since the Real Estate Mortgage and the Supplement thereto did
not include penalties as part of the secured amount, the same should be excluded from the foreclosure amount or bid price,
even if such penalties are provided for in the final Promissory Note, or PN 9707237. 22
In addition, petitioners sought to be reimbursed an alleged overpayment of P848,285.00 made during the period
August 21, 1991 to March 5, 1998, resulting from respondent's imposition of the alleged illegal and steep interest rates.
They also prayed to be awarded P200,000.00 by way of attorney's fees.23
In its Answer, 24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that without
prior notice, PNB may modify interest rates depending on future policy adopted by it; and that the imposition of penalties
was agreed upon in the Credit Agreement. It added that the imposition of penalties is supported by the all-inclusive clause
in the Real Estate Mortgage agreement which provides that the mortgage shall stand as security for any and all other
obligations of whatever kind and nature owing to respondent, which thus includes penalties imposed upon default or non-
payment of the principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of P3,484,287.00; 25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter. 26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to Credit Agreement,
Real Estate Mortgage and the Supplement thereto were all prepared by respondent PNB and were presented to her and
her husband Eduardo only for signature; that she was told by PNB that the latter alone would determine the interest rate;
that as to the Amendment to Credit Agreement, she was told that PNB would fill up the interest rate portion thereof; that at
the time the parties executed the said Credit Agreement, she was not informed about the applicable spread that PNB would
impose on her account; that the interest rate portion of all Promissory Notes she and Eduardo issued were always left in
blank when they executed them, with respondent's mere assurance that it would be the one to enter or indicate thereon the
prevailing interest rate at the time of availment; and that they agreed to such arrangement. She further testified that the two
Real Estate Mortgage agreements she signed did not stipulate the payment of penalties; that she and Eduardo consulted
with a lawyer, and were told that PNB's actions were improper, and so on March 20, 2000, they wrote to the latter seeking
a recomputation of their outstanding obligation; and when PNB did not oblige, they instituted Civil Case No. 5975. 27

75
 On cross-examination, Lydia testified that she has been in business for 20 years; that she also borrowed from other
individuals and another bank; that it was only with banks that she was asked to sign loan documents with no indicated
interest rate; that she did not bother to read the terms of the loan documents which she signed; and that she received
several PNB statements of account detailing their outstanding obligations, but she did not complain; that she assumed
instead that what was written therein is correct. 28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, stated on
cross-examination that as a practice, the determination of the prime rates of interest was the responsibility solely of PNB's
Treasury Department which is based in Manila; that these prime rates were simply communicated to all PNB branches for
implementation; that there are a multitude of considerations which determine the interest rate, such as the cost of money,
foreign currency values, PNB's spread, bank administrative costs, profitability, and the practice in the banking industry; that
in every repricing of each loan availment, the borrower has the right to question the rates, but that this was not done by the
petitioners; and that anything that is not found in the Promissory Note may be supplemented by the Credit Agreement. 29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975. 30 It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating interest rate
at any time depending on whatever policy it may adopt in the future, it likewise allows for the
decrease at any time of the same. Thus, such stipulation authorizing both the increase and
decrease of interest rates as may be applicable is valid, 31 as was held in Consolidated Bank
and Trust Corporation (SOLIDBANK) v. Court of Appeals; 32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made
dependent on prevailing rates upon which to peg such variable interest rates; 33
3. The Promissory Note, as the principal contract evidencing petitioners' loan, prevails over the Credit
Agreement and the Real Estate Mortgage. As such, the rate of interest, penalties and attorney's
fees stipulated in the Promissory Note prevail over those mentioned in the Credit Agreement and
the Real Estate Mortgage agreements; 34 aTSEcA
4. Roughly, PNB's computation of the total amount of petitioners' obligation is correct; 35
5. Because the loan was admittedly due and demandable, the foreclosure was regularly made; 36
6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied to the
principal, interest and penalties.37
The dispositive portion of the trial court's Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and
against the petitioners by DISMISSING the latter's petition.
Costs against the petitioners.
SO ORDERED. 38
Petitioners moved for reconsideration. In an Order 39 dated June 4, 2003, the trial court granted only a modification
in the award of attorney's fees, reducing the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner the
excess in attorney's fees in the amount of P356,589.90, viz.:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged
by the respondent as well as the extra-judicial foreclosure proceedings and the Certificate of Sale.
However, respondent is directed to refund to the petitioner the amount of P356,589.90 representing the
excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED. 40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified
Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby AFFIRMED with
MODIFICATIONS, to wit:

76
 1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for
PN. No. 9707237 should be 12% per annum;
2. [T]hat the attorney's fees of 10% is valid and binding; and IDEHCa
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of
P377,505.99 which is the difference between the total amount due [PNB] and the amount of its bid price.
SO ORDERED. 41
On the other hand, respondent did not appeal the June 4, 2003 Order of the trial court which reduced its award of
attorney's fees. It simply raised the issue in its appellee's brief in the CA, and included a prayer for the reversal of said
Order.
In effect, the CA limited petitioners' appeal to the following issues:
1) Whether . . . the interest rates on petitioners' outstanding obligation were unilaterally and arbitrarily
imposed by PNB;
2) Whether . . . the penalty charges were secured by the real estate mortgage; and
3) Whether . . . the extrajudicial foreclosure and sale are valid. 42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a total of
P3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997, over and above the P2.5 million principal
obligation. And this is exclusive of payments for insurance premiums, documentary stamp taxes, and penalty. All the while,
petitioners did not complain nor object to the imposition of interest; they in fact paid the same religiously and without fail for
seven years. The appellate court ruled that petitioners are thus estopped from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly applied an interest
rate of 25.72% instead of the agreed 25%; thus it overcharged petitioners, and the latter paid, an excess of P736.56 in
interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage agreements contemplated
the inclusion of the PN 9707237-stipulated 24% penalty in the amount to be secured by the mortgaged property, thus —
For and in consideration of certain loans, overdrafts and other credit accommodations obtained
from the MORTGAGEE and to secure the payment of the same and those others that the
MORTGAGEE may extend to the MORTGAGOR, including interest and expenses, and other
obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect, principal
or secondary, as appearing in the accounts, books and records of the MORTGAGEE, the MORTGAGOR
does hereby transfer and convey by way of mortgage unto the MORTGAGEE . . . 43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by the mortgagor to the
mortgagee" and should thus be added to the amount secured by the mortgages. 44
The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs T-14250 and T-
16208, which came as a necessary result of petitioners' failure to pay the outstanding obligation upon demand. 45 The CA
saw fit to increase the trial court's award of 1% to 10%, finding the latter rate to be reasonable and citing the Real Estate
Mortgage agreement which authorized the collection of the higher rate. 46 SaCIAE
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus, which is the difference between PNB's bid
price of P4,324,172.96 and petitioners' total computed obligation as of January 14, 1999, or the date of the auction sale, in
the amount of P3,946,667.87. 47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT NULLIFYING THE
INTEREST RATE PROVISION IN THE CREDIT AGREEMENT DATED JULY 24, 1989 . . . AND
IN THE AMENDMENT TO CREDIT AGREEMENT DATED AUGUST 21, 1991 . . . WHICH LEFT
TO THE SOLE UNILATERAL DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL
FIXING OF INTEREST RATE AND ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO
LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V.
COURT OF APPEALS, G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY TO PUBLIC
77
 POLICY AND PUBLIC INTEREST, AND IN APPLYING THE PRINCIPLE OF ESTOPPEL
ARISING FROM THE ALLEGED DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR]
PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN NOT
DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY INTEREST EXCEPT THE LEGAL
RATE FROM DATE OF DEMAND, AND IN NOT APPLYING THE EXCESS OVER THE LEGAL
RATE OF THE ADMITTED PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN THE
ADMITTED TOTAL AMOUNT OF P3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF
P2,500,000.[00] LEAVING AN OVERPAYMENT OF P984,287.00 REFUNDABLE BY
RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES ARE
INCLUDED IN THE SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES
ARE MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE MORTGAGE AS A SECURED
AMOUNT AND THEREFORE THE AMOUNT OF PENALTIES SHOULD HAVE BEEN EXCLUDED
FROM [THE] FORECLOSURE AMOUNT. IHEDAT
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT, WHICH
REDUCED THE ATTORNEY'S FEES OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE
. . . EXTRAJUDICIAL FORECLOSURE TO ONLY 1%, AND [AWARDING] 10% ATTORNEY'S
FEES. 48
Petitioners' Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to Credit Agreement
should be declared null and void, for they relegated to PNB the sole power to fix interest rates based on arbitrary criteria or
factors such as bank policy, profitability, cost of money, foreign currency values, and bank administrative costs; spaces for
interest rates in the two Credit Agreements and the promissory notes were left blank for PNB to unilaterally fill, and their
consent or agreement to the interest rates imposed thereafter was not obtained; the interest rate, which consists of the
prime rate plus the bank spread, is determined not by agreement of the parties but by PNB's Treasury Department in Manila.
Petitioners conclude that by this method of fixing the interest rates, the principle of mutuality of contracts is violated, and
public policy as well as Circular 905 49 of the then Central Bank had been breached.
Petitioners question the CA's application of the principle of estoppel, saying that no estoppel can proceed from an
illegal act. Though they failed to timely question the imposition of the alleged illegal interest rates and continued to pay the
loan on the basis of these rates, they cannot be deemed to have acquiesced, and hence could recover what they erroneously
paid. 50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed extinguished as of
July 1997; moreover, it would appear that they even made an overpayment to the bank in the amount of P984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor specify, as part of the
secured amount, the penalty of 24% authorized in PN 9707237, such amount of P581,666.66 could not be made answerable
by or collected from the mortgages covering TCTs T-14250 and T-16208. Claiming support from Philippine Bank of
Communications [PBCom] v. Court of Appeals, 51 petitioners insist that the phrase "and other obligations owing by the
mortgagor to the mortgagee" 52 in the mortgage agreements cannot embrace the P581,666.66 penalty, because, as held
in the PBCom case, "[a] penalty charge does not belong to the species of obligations enumerated in the mortgage, hence,
the said contract cannot be understood to secure the penalty"; 53 while the mortgages are the accessory contracts, what
items are secured may only be determined from the provisions of the mortgage contracts, and not from the Credit Agreement
or the promissory notes.
Finally, petitioners submit that the trial court's award of 1% attorney's fees should be maintained, given that in
foreclosures, a lawyer's work consists merely in the preparation and filing of the petition, and involves minimal study. 54 To
allow the imposition of a staggering P396,211.00 for such work would be contrary to equity. Petitioners state that the purpose
of attorney's fees in cases of this nature "is not to give respondent a larger compensation for the loan than the law already
allows, but to protect it against any future loss or damage by being compelled to retain counsel . . . to institute judicial
proceedings for the collection of its credit." 55 And because the instant case involves a simple extrajudicial foreclosure,
attorney's fees may be equitably tempered.
Respondent's Arguments

78
 For its part, respondent disputes petitioners' claim that interest rates were unilaterally fixed by it, taking relief in the
CA pronouncement that petitioners are deemed estopped by their failure to question the imposed rates and their continued
payment thereof without opposition. It adds that because the Credit Agreement and promissory notes contained both an
escalation clause and a de-escalation clause, it may not be said that the bank violated the principle of mutuality. Besides,
the increase or decrease in interest rates have been mutually agreed upon by the parties, as shown by petitioners'
continuous payment without protest. Respondent adds that the alleged unilateral imposition of interest rates is not a proper
subject for review by the Court because the issue was never raised in the lower court.
As for petitioners' claim that interest rates imposed by it are null and void for the reasons that 1) the Credit
Agreements and the promissory notes were signed in blank; 2) interest rates were at short periods; 3) no interest rates
could be charged where no agreement on interest rates was made in writing; 4) PNB fixed interest rates on the basis of
arbitrary policies and standards left to its choosing; and 5) interest rates based on prime rate plus applicable spread are
indeterminate and arbitrary — PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank — Respondent
claims that this issue was never raised in the lower court. Besides, documentary evidence
prevails over testimonial evidence; Lydia Silos' testimony in this regard is self-serving,
unsupported and uncorroborated, and for being the lone evidence on this issue. The fact remains
that these documents are in proper form, presumed regular, and endure, against arbitrary claims
by Silos — who is an experienced business person — that she signed questionable loan
documents whose provisions for interest rates were left blank, and yet she continued to pay the
interests without protest for a number of years. 56
b. That interest rates were at short periods — Respondent argues that the law which governs and
prohibits changes in interest rates made more than once every twelve months has been
removed 57 with the issuance of Presidential Decree No. 858. 58
c. That no interest rates could be charged where no agreement on interest rates was made in writing in
violation of Article 1956 of the Civil Code, which provides that no interest shall be due unless it
has been expressly stipulated in writing — Respondent insists that the stipulated 25% per
annum as embodied in PN 9707237 should be imposed during the interim, or the period after the
loan became due and while it remains unpaid, and not the legal interest of 12% as claimed by
petitioners. 59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing —
According to respondent, interest rates were fixed taking into consideration increases or
decreases as provided by law or by the Monetary Board, the bank's overall costs of funds, and
upon agreement of the parties. 60
e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary — On
this score, respondent submits there are various factors that influence interest rates, from political
events to economic developments, etc.; the cost of money, profitability and foreign currency
transactions may not be discounted. 61 ATHCac
On the issue of penalties, respondent reiterates the trial court's finding that during pre-trial, petitioners admitted that
the Statement of Account as of October 12, 1998 — which detailed and included penalty charges as part of the total
outstanding obligation owing to the bank — was correct. Respondent justifies the imposition and collection of a penalty as
a normal banking practice, and the standard rate per annum for all commercial banks, at the time, was 24%. Respondent
adds that the purpose of the penalty or a penal clause for that matter is to ensure the performance of the obligation and
substitute for damages and the payment of interest in the event of non-compliance. 62 And the promissory note — being
the principal agreement as opposed to the mortgage, which is a mere accessory — should prevail. This being the case, its
inclusion as part of the secured amount in the mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting consolidation of its
ownership over TCTs T-14250 and T-16208; that petitioners filed Civil Case No. 5975 ostensibly to question the foreclosure
and sale of properties covered by TCTs T-14250 and T-16208 in a desperate move to retain ownership over these
properties, because they failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046, 63 where the propriety of the CA's
ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN 9707237
should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of P377,505.99 which is the
difference between the total amount due to PNB and the amount of its bid price.

79
 Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-examine or re-evaluate evidence
adduced by the parties in the proceedings below. The rule admits of certain well-recognized exceptions, though, as when
the lower courts' findings are not supported by the evidence on record or are based on a misapprehension of facts, or when
certain relevant and undisputed facts were manifestly overlooked that, if properly considered, would justify a different
conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Court's First Division denying respondent's
petition in G.R. No. 181046, due to late filing, failure to attach the required affidavit of service of the petition on the trial court
and the petitioners, and submission of a defective verification and certification of non-forum shopping. On June 25, 2008,
the Court issued another Resolution denying with finality respondent's motion for reconsideration of the March 5, 2008
Resolution. And on August 15, 2008, entry of judgment was made. This thus settles the issues, as above-stated, covering
a) the interest rate — or 12% per annum — that applies upon expiration of the first 30 days interest period provided under
PN 9707237, and b) the CA's decree that PNB should reimburse petitioner the excess in the bid price of P377,505.09.
It appears that respondent's practice, more than once proscribed by the Court, has been carried over once more to
the petitioners. In a number of decided cases, the Court struck down provisions in credit documents issued by PNB to, or
required of, its borrowers which allow the bank to increase or decrease interest rates "within the limits allowed by law at any
time depending on whatever policy it may adopt in the future." Thus, in Philippine National Bank v. Court of Appeals, 64 such
stipulation and similar ones were declared in violation of Article 1308 65 of the Civil Code.In a second case, Philippine
National Bank v. Court of Appeals, 66 the very same stipulations found in the credit agreement and the promissory notes
prepared and issued by the respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that —
(a) The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the future;
Provided, that the interest rate on this accommodation shall be correspondingly decreased in the
event that the applicable maximum interest is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of
the increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that —
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation
secured by this mortgage as well as the interest on the amount which may have been advanced
by the MORTGAGEE, in accordance with the provision hereof, shall be subject during the life
of this contract to such an increase within the rate allowed by law, as the Board of
Directors of the MORTGAGEE may prescribe for its debtors.
xxx xxx xxx
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause
contained in their credit agreement which provides, as follows: TDaAHS
The Bank reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future and provided, that, the
interest rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase
or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further
amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to
read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be increased in
the event that the applicable maximum rate of interest is increased by law or by the
Monetary Board; Provided, That such stipulation shall be valid only if there is also a
80
 stipulation in the agreement that the rate of interest agreed upon shall be reduced in the
event that the applicable maximum rate of interest is reduced by law or by the Monetary
Board; Provided further, That the adjustment in the rate of interest agreed upon shall
take effect on or after the effectivity of the increase or decrease in the maximum rate of
interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the
maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the Monetary
Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges. — The rate of interest, including
commissions, premiums, fees and other charges, on any loan, or forbearance of any
money, goods or credits, regardless of maturity and whether secured or unsecured, shall
not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of
money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously
stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and
circular did not authorize either party to unilaterally raise the interest rate without the other's
consent.
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done under duress or by a person of
unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan.
That would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.
In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —
. . . The unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void . . . . Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave the PNB a license (although in
fact there was none) to increase the interest rate at will during the term of the loan, that license
would have been null and void for being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the weaker party's (the debtor) participation
being reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect against abuse and
imposition. 67(Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals, 68 the Court invalidated the very same provisions
in the respondent's prepared Credit Agreement, declaring thus:

81
 The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties; and (2)
that there must be mutuality between the parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated
by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been
expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate
provision of the credit agreement signed between the parties is that petitioners were bound
merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and
3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21% rate stipulated in the interest provision. Any doubt about this
is in fact readily resolved by a careful reading of the credit agreement because the same plainly
uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate. . . .
xxx xxx xxx
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent
bank in contravention to the tenor of their credit agreement. That an increase in interest rates from 18%
to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal (P7,735,004.66)
which was applied to interest alone. By the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00
over and above those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above, not only
[are] the increases of the interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon which the increases are
anchored. TcDAHS
xxx xxx xxx
In the face of the unequivocal interest rate provisions in the credit agreement and in the law
requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral and
progressive increases imposed by respondent PNB were null and void. Their effect was to increase the
total obligation on an eighteen million peso loan to an amount way over three times that which was
originally granted to the borrowers. That these increases, occasioned by crafty manipulations in the
interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur business
cannot be disputed. 69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals, 70 the above doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER
of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN
THOUSAND ONLY (P15,000.00), Philippine Currency, together with interest thereon at the rate of
12% per annum until paid, which interest rate the Bank may at any time without notice, raise within
the limits allowed by law, and I/we also agree to pay jointly and severally ___ % per annum penalty
charge, by way of liquidated damages should this note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition
that any and/or all extensions hereof that will leave any portion of the amount still unpaid after 730 days

82
shall automatically convert the outstanding balance into a medium or long-term obligation as the case
may be and give the Bank the right to charge the interest rates prescribed under its policies from
the date the account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract which
provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the interest
on the amount which may have been advanced by the MORTGAGEE, in accordance with the provision
hereof, shall be subject during the life of this contract to such an increase within the rate allowed
by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
xxx xxx xxx
To begin with, PNB's argument rests on a misapprehension of the import of the appellate court's
ruling. The Court of Appeals nullified the interest rate increases not because the promissory note did not
comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of such provision
made the clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v.
Navarro that although P.D. No. 1684 is not to be retroactively applied to loans granted before its
effectivity, there must nevertheless be a de-escalation clause to mitigate the one-sidedness of the
escalation clause. Indeed because of concern for the unequal status of borrowers vis-a-vis the banks,
our cases after Banco Filipino have fashioned the rule that any increase in the rate of interest made
pursuant to an escalation clause must be the result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized
PNB to increase the stipulated interest per annum"within the limits allowed by law at any time
depending on whatever policy [PNB] may adopt in the future; Provided, that the interest rate on
this note shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in accordance with
the provisions hereof, shall be subject during the life of this contract to such an increase within
the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to
41% and then to 48%. This Court declared the increases unilaterally imposed by [PNB] to be in
violation of the principle of mutuality as embodied in Art. 1308 of the Civil Code, which provides that
"[t]he contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them." As the Court explained:
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one
of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming
that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the principle of mutuality essential in contracts.
It would have invested the loan agreement with the character of a contract of adhesion, where the parties
do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the
alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract
is a veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition. aEIADT
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit
agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future: Provided, that the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable maximum
interest is reduced by law or by the Monetary Board. . . .

83
 As in the first case, PNB successively increased the stipulated interest so that what was originally
12% per annum became, after only two years, 42%. In declaring the increases invalid, we held:
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would
completely take away from private respondents the right to assent to an important modification in their
agreement, and would negate the element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant
to a similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the
said circular could possibly be read as granting respondent bank carte blanche authority to raise
interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their
assets.
In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents' assent to the increases can not be implied
from their lack of response to the letters sent by PNB, informing them of the increases. For as stated in
one case, no one receiving a proposal to change a contract is obliged to answer the
proposal. 71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v. Philippine
National Bank, 72 thus —
Courts have the authority to strike down or to modify provisions in promissory notes that grant
the lenders unrestrained power to increase interest rates, penalties and other charges at the latter's sole
discretion and without giving prior notice to and securing the consent of the borrowers. This unilateral
authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of
borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or
unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and
other charges not revealed in disclosure statements issued by banks, even if stipulated in the
promissory notes, cannot be given effect under theTruth in Lending Act. 73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, 74 the above pronouncements
were reiterated to debunk PNB's repeated reliance on its invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme-Fernandez and the 1996 case
of PNB v. CA and Spouses Basco. Taking no heed of these rulings, the escalation clause PNB used
in the present case to justify the increased interest rates is no different from the escalation clause assailed
in the 1996 PNB case; in both, the interest rates were increased from the agreed 12% per annum rate to
42%. . . .
xxx xxx xxx
On the strength of this ruling, PNB's argument — that the spouses Rocamora's failure to
contest the increased interest rates that were purportedly reflected in the statements of account
and the demand letters sent by the bank amounted to their implied acceptance of the increase —
should likewise fail.
Evidently, PNB's failure to secure the spouses Rocamora's consent to the increased interest
rates prompted the lower courts to declare excessive and illegal the interest rates imposed. To go around
this lower court finding, PNB alleges that the P206,297.47 deficiency claim was computed using only the
original 12% per annum interest rate. We find this unlikely. Our examination of PNB's own ledgers,
included in the records of the case, clearly indicates that PNB imposed interest rates higher than the
agreed 12% per annum rate. This confirmatory finding, albeit based solely on ledgers found in the
records, reinforces the application in this case of the rule that findings of the RTC, when affirmed by the
CA, are binding upon this Court. 75 (Emphases supplied) HSaIDc
Verily, all these cases, including the present one, involve identical or similar provisions found in respondent's credit
agreements and promissory notes. Thus, the July 1989 Credit Agreement executed by petitioners and respondent contained
the following stipulation on interest:
1.03.Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest
shall be payable in advance every one hundred twenty days at the rate prevailing at the time of the
renewal.

84
 (b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the shifting from the
floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has imposed
on the Loan interest at a rate per annum which is equal to the Bank's spread over the current floating
interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating interest rate at any time depending on
whatever policy it may adopt in the future. 76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the right to increase or reduce interest
rates "within the limits allowed by law or the Monetary Board" 77 and the Real Estate Mortgage agreement included the
same right to increase or reduce interest rates "at any time depending on whatever policy PNB may adopt in the
future." 78
On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in blank, and
respondent later on entered their corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 — 19.5%;
2nd Promissory Note dated November 22, 1989 — 23%;
3rd Promissory Note dated March 21,1990 — 22%;
4th Promissory Note dated July 19, 1990 — 24%;
5th Promissory Note dated December 17, 1990 — 28%;
6th Promissory Note dated February 14, 1991 — 32%;
7th Promissory Note dated March 1, 1991 — 30%; and
8th Promissory Note dated July 11, 1991 — 24%. 79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following stipulation regarding
interest:
1.03.Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment thereof at the
rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect
as of the date of each Availment. 80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and signed the following promissory notes
in blank, for the respondent to later on enter the corresponding interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 — 26%;
10th Promissory Note dated March 19, 1992 — 25%;
11th Promissory Note dated July 11, 1992 — 23%;
12th Promissory Note dated November 10, 1992 — 21%;
13th Promissory Note dated March 15, 1993 — 21%;
14th Promissory Note dated July 12, 1993 — 17.5%;
15th Promissory Note dated November 17, 1993 — 21%;
16th Promissory Note dated March 28, 1994 — 21%;
17th Promissory Note dated July 13, 1994 — 21%;
18th Promissory Note dated November 16, 1994 — 16%;
19th Promissory Note dated April 10, 1995 — 21%;
20th Promissory Note dated July 19, 1995 — 18.5%;
21st Promissory Note dated December 18, 1995 — 18.75%;
22nd Promissory Note dated April 22, 1996 — 18.5%;
23rd Promissory Note dated July 22, 1996 — 18.5%;
24th Promissory Note dated November 25, 1996 — 18%;
25th Promissory Note dated May 30, 1997 — 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 — 25%. 81

85
 The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time
without notice, raise within the limits allowed by law . . . ." 82 On the other hand, the 18th up to the 26th promissory notes
— which includes PN 9707237 — carried the following provision:
. . . For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank's overall cost of funds. I/We hereby agree that in the event I/we are
not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to
prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest
Setting Date. 83 (Emphasis supplied) CSHEAI
These stipulations must be once more invalidated, as was done in previous cases. The common denominator in
these cases is the lack of agreement of the parties to the imposed interest rates. For this case, this lack of consent by the
petitioners has been made obvious by the fact that they signed the promissory notes in blank for the respondent to fill. We
find credible the testimony of Lydia in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch
Manager Aspa admitted that interest rates were fixed solely by its Treasury Department in Manila, which were then simply
communicated to all PNB branches for implementation. If this were the case, then this would explain why petitioners had to
sign the promissory notes in blank, since the imposable interest rates have yet to be determined and fixed by respondent's
Treasury Department in Manila.
Moreover, in Aspa's enumeration of the factors that determine the interest rates PNB fixes — such as cost of money,
foreign currency values, bank administrative costs, profitability, and considerations which affect the banking industry — it
can be seen that considerations which affect PNB's borrowers are ignored. A borrower's current financial state, his feedback
or opinions, the nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his business
or borrowing, etc. — these are not factors which influence the fixing of interest rates to be imposed on him. Clearly,
respondent's method of fixing interest rates based on one-sided, indeterminate, and subjective criteria such as profitability,
cost of money, bank costs, etc. is arbitrary for there is no fixed standard or margin above or below these considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to said
stipulation:
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions; or
the rate of interest and charges which other banks or financial institutions charge or offer
to charge for similar accommodations; and/or the resulting profitability to the
LENDER after due consideration of all dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB
alone as the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each of the
following considerations: (1) the prevailing financial and monetary condition; (2) the rate of interest and
charges which other banks or financial institutions charge or offer to charge for similar accommodations;
and/or (3) the resulting profitability to the LENDER (UCPB) after due consideration of all dealings with
the BORROWER (the spouses Beluso). Again, as in the case of the interest rate provision, there is
no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB
as to the interest to be imposed, as both options violate the principle of mutuality of
contracts. 84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates,
must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed
modification, especially when it affects an important aspect of the agreement. In the case of loan agreements, the rate of
interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed
upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer provide that the parties
shall agree upon the interest rate to be fixed; -instead, they are worded in such a way that the borrower shall agree
to whatever interest rate respondent fixes. In credit agreements covered by the above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in the future: Provided, that, the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate
86
 agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest
rate. 85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from the floating
interest rate system to the fixed interest rate system, or vice versa. Where the Bank has imposed on the
Loan interest at a rate per annum, which is equal to the Bank's spread over the current floating interest
rate, the Borrower hereby agreesthat the Bank may, without need of notice to the Borrower, increase
or decrease its spread over the floating interest rate at any time depending on whatever policy it may
adopt in the future. 86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03.Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment
from date of each Availment up to but not including the date of full payment thereof at the rate per
annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the date
of each Availment. 87 (Emphasis supplied) TDcHCa
Plainly, with the present credit agreement, the element of consent or agreement by the borrower is now completely
lacking, which makes respondent's unlawful act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for "[e]stoppel cannot be
predicated on an illegal act. As between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited
by law or is against public policy." 88 It appears that by its acts, respondent violated the Truth in Lending Act, or Republic
Act No. 3765, which was enacted "to protect . . . citizens from a lack of awareness of the true cost of credit to the user by
using a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national
economy." 89 The law "gives a detailed enumeration of the specific information required to be disclosed, among which are
the interest and other charges incident to the extension of credit." 90 Section 4 thereof provides that a disclosure statement
must be furnished prior to the consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in
accordance with rules and regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.
Under Section 4 (6), "finance charge" represents the amount to be paid by the debtor incident to the extension of
credit such as interest or discounts, collection fees, credit investigation fees, attorney's fees, and other service charges. The
total finance charge represents the difference between (1) the aggregate consideration (down payment plus installments)
on the part of the debtor, and (2) the sum of the cash price and non-finance charges. 91
By requiring the petitioners to sign the credit documents and the promissory notes in blank, and then unilaterally
filling them up later on, respondent violated the Truth in Lending Act, and was remiss in its disclosure obligations. In one
case, which the Court finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation of the transaction:
87
 SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed
as a simple annual rate on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the
true cost thereof, proceeding from the experience that banks are able to conceal such true cost
by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount,
and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the
true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate
their options in arriving at business decisions. Upholding UCPB's claim of substantial compliance
would defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of
credit will too often not be able to reverse the ill effects of an already consummated business
decision.
In addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB. As earlier discussed, the
interest rate provision therein does not sufficiently indicate with particularity the interest rate to
be applied to the loan covered by said promissory notes. 92 (Emphases supplied)
However, the one-year period within which an action for violation of the Truth in Lending Act may be filed evidently
prescribed long ago, or sometime in 2001, one year after petitioners received the March 2000 demand letter which contained
the illegal charges. TDCaSE
The fact that petitioners later received several statements of account detailing its outstanding obligations does not
cure respondent's breach. To repeat, the belated discovery of the true cost of credit does not reverse the ill effects of an
already consummated business decision. 93 Neither may the statements be considered proposals sent to secure the
petitioners' conformity; they were sent after the imposition and application of the interest rate, and not before. And even if it
were to be presumed that these are proposals or offers, there was no acceptance by petitioners. "No one receiving a
proposal to modify a loan contract, especially regarding interest, is obliged to answer the proposal." 94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest rates, but
actually accompanied by provisions written in fine print that allow lenders to later on increase or decrease interest rates
unilaterally, without the consent of the borrower, and depending on complex and subjective factors. Because they have
been lured into these contracts by initially low interest rates, borrowers get caught and stuck in the web of subsequent steep
rates and penalties, surcharges and the like. Being ordinary individuals or entities, they naturally dread legal complications
and cannot afford court litigation; they succumb to whatever charges the lenders impose. At the very least, borrowers should
be charged rightly; but then again this is not possible in a one-sided credit system where the temptation to abuse is strong
and the willingness to rectify is made weak by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to respondent's argument that in every repricing of
petitioners' loan availment, they are given the right to question the interest rates imposed. The import of respondent's line
of reasoning cannot be other than that if one out of every hundred borrowers questions respondent's practice of unilaterally
fixing interest rates, then only the loan arrangement with that lone complaining borrower will enjoy the benefit of review or
re-negotiation; as to the 99 others, the questionable practice will continue unchecked, and respondent will continue to reap
the profits from such unscrupulous practice. The Court can no more condone a view so perverse. This is exactly what the
Court meant in the immediately preceding cited case when it said that "the belated discovery of the true cost of credit does
not reverse the ill effects of an already consummated business decision;" 95 as to the 99 borrowers who did not or could
not complain, the illegal act shall have become a fait accompli — to their detriment, they havealready suffered the
oppressive rates.

88
 Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances,
irrelevant; we have a situation where the petitioners do not stand on equal footing with the respondent. It is doubtful that
any borrower who finds himself in petitioners' position would dare question respondent's power to arbitrarily modify interest
rates at any time. In the second place, on what basis could any borrower question such power, when the criteria or standards
— which are really one-sided, arbitrary and subjective — for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th promissory
notes, petitioners are granted the option to prepay the loan or credit facility without penalty within 10 calendar days from the
Interest Setting Date if they are not agreeable to the interest rate fixed. It has been shown that the promissory notes are
executed and signed in blank, meaning that by the time petitioners learn of the interest rate, they are already bound to pay
it because they have already pre-signed the note where the rate is subsequently entered. Besides, premium may not be
placed upon a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw from
the agreement if it discovers that what the other party has been doing all along is improper or illegal.
Thus said, respondent's arguments relative to the credit documents — that documentary evidence prevails over
testimonial evidence; that the credit documents are in proper form, presumed regular, and endure, against arbitrary claims
by petitioners, experienced business persons that they are, they signed questionable loan documents whose provisions for
interest rates were left blank, and yet they continued to pay the interests without protest for a number of years — deserve
no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan
is subject to the original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at
the rate of 12% per annum. This is the uniform ruling adopted in previous cases, including those cited here. 96 The interests
paid by petitioners should be applied first to the payment of the stipulated or legal and unpaid interest, as the case may be,
and later, to the capital or principal. 97 Respondent should then refund the excess amount of interest that it has illegally
imposed upon petitioners; "[t]he amount to be refunded refers to that paid by petitioners when they had no obligation to do
so." 98 Thus, the parties' original agreement stipulated the payment of 19.5% interest; however, this rate was intended to
apply only to the first promissory note which expired on November 21, 1989 and was paid by petitioners; it was not intended
to apply to the whole duration of the loan. Subsequent higher interest rates have been declared illegal; but because only
the rates are found to be improper, the obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per
annum. However, the 12% interest shall apply only until June 30, 2013. Starting July 1, 2013, the prevailing rate of interest
shall be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames 99 and Bangko Sentral ng Pilipinas-Monetary
Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, when due, shall
constitute default, and a penalty charge of 24% per annum based on the defaulted principal amount shall be imposed.
Petitioners claim that this penalty should be excluded from the foreclosure amount or bid price because the Real Estate
Mortgage and the Supplement thereto did not specifically include it as part of the secured amount. Respondent justifies its
inclusion in the secured amount, saying that the purpose of the penalty or a penal clause is to ensure the performance of
the obligation and substitute for damages and the payment of interest in the event of non-compliance. 100 Respondent
adds that the imposition and collection of a penalty is a normal banking practice, and the standard rate per annum for all
commercial banks, at the time, was 24%. Its inclusion as part of the secured amount in the mortgage agreements is thus
valid and necessary. TcCSIa
The Court sustains petitioners' view that the penalty may not be included as part of the secured amount. Having
found the credit agreements and promissory notes to be tainted, we must accord the same treatment to the mortgages.
After all, "[a] mortgage and a note secured by it are deemed parts of one transaction and are construed together." 101 Being
so tainted and having the attributes of a contract of adhesion as the principal credit documents, we must construe the
mortgage contracts strictly, and against the party who drafted it. An examination of the mortgage agreements reveals that
nowhere is it stated that penalties are to be included in the secured amount. Construing this silence strictly against the
respondent, the Court can only conclude that the parties did not intend to include the penalty allowed under PN 9707237
as part of the secured amount. Given its resources, respondent could have — if it truly wanted to — conveniently prepared
and executed an amended mortgage agreement with the petitioners, thereby including penalties in the amount to be secured
by the encumbered properties. Yet it did not.
With regard to attorney's fees, it was plain error for the CA to have passed upon the issue since it was not raised
by the petitioners in their appeal; it was the respondent that improperly brought it up in its appellee's brief, when it should
have interposed an appeal, since the trial court's Decision on this issue is adverse to it. It is an elementary principle in the
subject of appeals that an appellee who does not himself appeal cannot obtain from the appellate court any affirmative relief
other than those granted in the decision of the court below.
. . . [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make
counter assignments of error in ordinary actions, when the purpose is merely to defend himself against
an appeal in which errors are alleged to have been committed by the trial court both in the appreciation
of facts and in the interpretation of the law, in order to sustain the judgment in his favor but not when
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 his purpose is to seek modification or reversal of the judgment, in which case it is necessary for him to
have excepted to and appealed from the judgment. 102
Since petitioners did not raise the issue of reduction of attorney's fees, the CA possessed no authority to pass upon
it at the instance of respondent. The ruling of the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties — to the respondent as creditor and to the
petitioners who are entitled to a refund as a consequence of overpayment considering that they paid more by way of interest
charges than the 12% per annum 103 herein allowed — the case should be remanded to the lower court for proper
accounting and computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an interest
rate of only 12% per annum. 104 Thus, interest payment made in excess of 12% on the 2nd
promissory note shall immediately be applied to the principal, and the principal shall be
accordingly reduced. The reduced principal shall then be subjected to the 12% 105 interest on
the 3rd promissory note, and the excess over 12% interest payment on the 3rd promissory note
shall again be applied to the principal, which shall again be reduced accordingly. The reduced
principal shall then be subjected to the 12% interest on the 4th promissory note, and the excess
over 12% interest payment on the 4th promissory note shall again be applied to the principal,
which shall again be reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to conclude if petitioners
a) still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE PAYMENTS OVER
AND ABOVE THEIR TOTAL OBLIGATION (principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per
annum interest from October 28, 1997 until January 14, 1999, which is the date of the auction
sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum penaltyfrom August 14,
1997 until January 14, 1999. But from this total penalty, the petitioners' previous payment of
penalties in the amount of P202,000.00 made on January 27, 1998 106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory award
of 1% attorney's fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney's fees (6.) shall be
DEDUCTED from the bid price of P4,324,172.96. The penalties (5.) are not included because
they are not included in the secured amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total of the outstanding balance (3.), interest (4.), and
1% attorney's fees (6.)] shall be DELIVERED TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners made
an OVERPAYMENT, the interest (4.), penalties (5.), and the award of 1% attorney's fees (6.)
shall be DEDUCTED from the overpayment. There is no outstanding balance/obligation precisely
because petitioners have paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1% attorney's
fees (6.), the excess shall be RETURNED to the petitioners, with legal interest, under the principle
of solutio indebiti; 107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1% attorney's
fees (6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND
SALE; aSAHCE
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney's fees (6.) exceed petitioners'
overpayment, then the excess shall be DEDUCTED from the bid price of P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum total of the interest (4.) and 1% attorney's fees (6.)]
shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The outstanding
penalties, if any, shall be collected by other means.

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 From the above, it will be seen that if, after proper accounting, it turns out that the petitioners made payments
exceeding what they actually owe by way of principal, interest, and attorney's fees, then the mortgaged properties need not
answer for any outstanding secured amount, because there is not any; quite the contrary, respondent must refund the
excess to petitioners. In such case, the extrajudicial foreclosure and sale of the properties shall be declared null and void
for obvious lack of basis, the case being one of solutio indebiti instead. If, on the other hand, it turns out that petitioners'
overpayments in interests do not exceed their total obligation, then the respondent may consolidate its ownership over the
properties, since the period for redemption has expired. Its only obligation will be to return the difference between its bid
price (P4,324,172.96) and petitioners' total obligation outstanding — except penalties — after applying the latter's
overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the Court of Appeals
in CA-G.R. CV No. 79650 is ANNULLEDand SET ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are DECLARED
NULL AND VOID, and such notes shall instead be subject to interest at the rate of twelve percent
(12%) per annum up to June 30, 2013, and starting July 1, 2013, six percent (6%) per annum until
full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED from the amounts
secured by the real estate mortgages;
3. The trial court's award of one per cent (1%) attorney's fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo, Aklan for the
computation of overpayments made by petitioners spouses Eduardo and Lydia Silos to
respondent Philippine National Bank, taking into consideration the foregoing dispositions, and
applying the procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the validity of the extrajudicial
foreclosure and sale, declaring the same null and void in case of overpayment and ordering the
release and return of Transfer Certificates of Title Nos. T-14250 and TCT T-16208 to petitioners,
or ordering the delivery to the petitioners of the difference between the bid price and the total
remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title to
Transfer Certificates of Title Nos. T-14250 and T-16208 until all the steps in the procedure above
set forth have been taken and applied; TaSEHD
7. The reimbursement of the excess in the bid price of P377,505.99, which respondent Philippine National
Bank is ordered to reimburse petitioners, should be HELD IN ABEYANCE until the true amount
owing to or owed by the parties as against each other is determined;
8. Considering that this case has been pending for such a long time and that further proceedings, albeit
uncomplicated, are required, the trial court is ORDERED to proceed with dispatch.
SO ORDERED.
Carpio, Leonardo-de Castro, Perez and Perlas-Bernabe, JJ., concur.
||| (Spouses Silos v. Philippine National Bank, G.R. No. 181045, [July 2, 2014], 738 PHIL 156-206)

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 SECOND DIVISION

[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.

SYLLABUS

1. CIVIL LAW; OBLIGATION AND CONTRACTS; RULE WHERE A PERSON BY HIS CONTRACT CHARGES
HIMSELF WITH AN OBLIGATION POSSIBLE TO BE PERFORMED. — The case of Reyes v. Caltex (Philippines),
Inc. 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 the obligor still responsible." In other words, fair and square consideration
underscores the legal precept therein.
2. ID.; ID.; "SERVICE" UNDER ART. 1267 REFERS TO THE PERFORMANCE OF AN OBLIGATION; CASE AT
BAR. — 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 Occeña, et al. v. Jabson, etc, et al., (G.R. No. L-44349, October 29, 1976, 73 SCRA 637)
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. Article 1267 speaks of "service" which has become so
difficult. Taking into consideration the rationale behind this provision, 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, Article 1267 states in our law the doctrine of unforeseen 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.
3. ID.; ID.; POTESTATIVE CONDITION; MEANING THEREOF; APPLICATION IN CASE AT BAR. — 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. 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 an y
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. 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.
4. ID.; PRESCRIPTION OF ACTIONS; RULE ON WRITTEN CONTRACT. — 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
the 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). (Private respondent's) cause of action to ask for reformation of said contract should thus be considered to

92
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."

DECISION

NOCON, J p:

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. LibLex
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 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. prLL
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
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.

93
 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. prLL
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 post 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 outsideNaga 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. LLphil
(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 petitioners' 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.
94
 (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. LLpr
(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts have
remained erect up to present;
(c) Petitioners' 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 fortelephone 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. cdll
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:

95
 "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, Maragao 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." llcd
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 Occeña, et al. v. Jabson, etc, et al., 7which 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. cdphil
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

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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 iniquitous 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 telephonecable 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 iniquitous 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. LibLex
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 matter 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 plaintiff's 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

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 the excessive rigidity of the principle of the obligatory force of contracts (IV Tolentino, Civil Code of the
Philippines, 1986 ed., pp. 247-248). LexLib
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 unforeseen 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 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 essential service to the public; while private respondent, in consonance with the contract 12 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: cdll
". . . 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:

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 "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 iniquitous
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 plaintiff's 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 highly iniquitous 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. cdphil
It is settled that when the trial court decides a case in favor of a party on a certain ground, the
appellate 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 effects 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 iniquitous, 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: Cdpr
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

99
contract. It follows that whether the contract is disadvantageous or not 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 the 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. llcd
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 plaintiffs 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: llcd
'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 iniquitous 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) . . ." LLjur
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);"

100
 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.
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Puno, JJ ., concur.
||| (Naga Telephone Co., Inc. v. Court of Appeals, G.R. No. 107112, [February 24, 1994], 300 PHIL 367-389)

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