8.

IV INTERETATION OF CONTRACTS

9.
RITA SARMING, RUFINO SARMING, MANUEL SARMING, LEONORA VDA. DE LOY,
xxxx petitioners, vs. CRESENCIO DY, LUDIVINA DY-CHAN, xxxx, respondents.
10.

DECISION
QUISUMBING, J.:
The facts as culled from records are as follows:

11.
1.

2.

3.

4.

5.

6.

7.

Petitioners are the successors-in-interest of original defendant Silveria Flores,

while respondents Cresencio Dy and Ludivina Dy-Chan are the successors-ininterest of the original plaintiff Alejandra Delfino, the buyer of one of the lots
subject of this case.
They were joined in this petition by the successors-in-interest of Isabel, Juan,
Hilario, Ruperto, Tomasa, and Luisa and Trinidad themselves, all surnamed
Flores, who were also the original plaintiffs in the lower court. They are the
descendants of Venancio[4]and Jose[5]the brothers of the original defendant
Silveria Flores.
In their complaint for reformation of instrument against Silveria Flores, the
original plaintiffs alleged that they, with the exception of Alejandra Delfino, are the
heirs of Valentina Unto Flores, who owned, among others, Lot 5734, covered by
OCT 4918-A; and Lot 4163, covered by OCT 3129-A, both located at Dumaguete
City.
After the death of Valentina Unto Flores, her three children, namely: Jose,
Venancio, and Silveria, took possession of Lot 5734 with each occupying a onethird portion.Upon their death, their children and grandchildren took possession
of their respective shares. The other parcel, Lot 4163 which is solely registered
under the name of Silveria, was sub-divided between Silveria and Jose. Two
rows of coconut trees planted in the middle of this lot serves as boundary line.
In January 1956, Luisa, Trinidad, Ruperto and Tomasa, grandchildren of Jose
and now owners of one-half of Lot 4163, entered into a contract with plaintiff
Alejandra Delfino, for the sale of one-half share of Lot 4163 after offering the
same to their co-owner, Silveria, who declined for lack of money. Silveria did not
object to the sale of said portion to Alejandra Delfino.
Before preparing the document of sale, the late Atty. Deogracias Pinili, Alejandras
lawyer, called Silveria and the heirs of Venancio to a conference where Silveria
declared that she owned half of the lot while the other half belonged to the
vendors; and that she was selling her three coconut trees found in the half
portion offered to Alejandra Delfino for P15. When Pinili asked for the title of the
land, Silveria Flores, through her daughter, Cristita Corsame, delivered Original
Certificate of Title No. 4918-A, covering Lot No. 5734, and not the correct title
covering Lot 4163. At that time, the parties knew the location of Lot 4163 but not
the OCT Number corresponding to said lot.
Believing that OCT No. 4918-A was the correct title corresponding to Lot 4163,
Pinili prepared a notarized Settlement of Estate and Sale (hereinafter deed) duly
signed by the parties on January 19, 1956. As a result, OCT No. 4918-A was
cancelled and in lieu thereof, TCT No. 5078 was issued in the names of Silveria
Flores and Alejandra Delfino, with one-half share each. Silveria Flores was
present during the preparation and signing of the deed and she stated that the
title presented covered Lot No. 4163.

12.

13.

Alejandra Delfino immediately took possession and introduced improvements on

the purchased lot, which was actually one-half of Lot 4163 instead of Lot 5734 as
designated in the deed.
Two years later, when Alejandra Delfino purchased the adjoining portion of the lot
she had been occupying, she discovered that what was designated in the deed,
Lot 5734, was the wrong lot. She sought the assistance of Pinili who approached
Silveria and together they inquired from the Registry of Deeds about the status of
Lot 4163.
They found out that OCT No. 3129-A covering Lot 4163 was still on
file. Alejandra Delfino paid the necessary fees so that the title to Lot 4163 could
be released to Silveria Flores, who promised to turn it over to Pinili for the
reformation of the deed of sale. However, despite repeated demands, Silveria did
not do so, prompting Alejandra and the vendors to file a complaint against
Silveria for reformation of the deed of sale with damages before the Regional
Trial Court of Negros Oriental, Branch 41, docketed as Civil Case No. 3457.
In her answer, Silveria Flores claimed that she was the sole owner of Lot 4163 as
shown by OCT No. 3129-A and consequently, respondents had no right to sell
the lot.According to her, the contract of sale clearly stated that the property being
sold was Lot 5734, not Lot 4163. She also claimed that respondents illegally took
possession of one-half of Lot 4163. She thus prayed that she be declared the
sole owner of Lot 4163 and be immediately placed in possession thereof. She
also asked for compensatory, moral, and exemplary damages and attorneys
fees.
The case lasted for several years in the trial court due to several substitutions of
parties. The complaint was amended several times. Moreover, the records had to
be reconstituted when the building where they were kept was razed by fire. But,
earnest efforts for the parties to amicably settle the matters among themselves
were made by the trial court to no avail.
TRIAL COURT found in favor of herein respondents, who were the plaintiffs
below, decreeing as follows: Trial Court found preponderance of evidence in
favor of the plaintiffs and against the defendants.ORDERING the defendants, the
heirs of the deceased-defendant SILVERIA FLORES and her successors-ininterest the following:

To enter into the reformation of the subject contract or execute a mutual

conveyance of sale, by making the one-half (1/2) eastern portion of Lot
4163, the subject of the document of sale, in favor of plaintiff, the late
Alejandra Delfino or her heirs and/or successors-in-interest;

To sign a document ceding to the heirs of the heirs of Maxima Flores and
Venancio Flores the excess of her one-third (1/3) share; and further ordering
the heirs of the late Alejandra Delfino to correspondingly sign a document
for the return of the one-half (1/2) portion of Lot 5734 to the original
registered owners, in exchange thereby;

To pay to the heirs of the late plaintiff Alejandra Delfino, the sum
of P5,000.00 as actual damages and the sum of P10,000.00 as moral
damages;

14. COURT OF APPEALS affirmed the decision of the trial court, the Court of Appeals
agreed that the real intention of the parties was for the sale of Lot 4163 which Alejandra Delfino
had been occupying, and the designation of Lot 5734 in the deed was a mistake in the
preparation of the document. It noted that Silveria Flores did not object when Alejandra Delfino
took possession of one-half portion of Lot 4163 immediately after the sale, considering that it
was Silverias son, Michael Corsame, who developed the area purchased by Alejandra [
ISSUE:

1.
2.
3.

Whether or not there is a cause of action for reformation of instrument against

Silveria Flores, and consequently the petitioners; THERE IS A CAUSE OF
ACTION
Whether or not reformation of the subject deed is proper by reason of mistake in
designating the correct lot number; REFORMATION IS VALID
Whether or not the heirs of Alejandra Delfino are entitled to actual and moral
damages including attorneys fees. NO ACTUAL AND NO MORAL DAMAGES

FIRST ISSUE: On the first issue, petitioners contend that there is no cause of action
against them and their predecessor-in-interest, Silveria Flores, because she and they were not
parties to the contract sought to be reformed.
However, a close perusal of the deed would show that Silveria Flores was a party to the
contract. She is not only the seller of the coconut trees worth P15 but she was also one of the
heirs entitled to the estate of Venancio and Maxima, one of the heirs of Jose Flores. Her name
did not appear as one of the sellers of one-half lot to Alejandra Delfino because she never sold
her share. What was sold was the one-half share of Jose Flores, as represented by his heirs. It
is also established that it was Silveria Flores herself who delivered the subject lot to the vendee
Alejandra Delfino. Said the lower court:
The truth of the matter, is that what the plaintiffs-vendors really intended to sell and what
Alejandra Delfino intended to buy, of which both of the parties agreed to be the subject of the
transaction, was actually that parcel of land, with two rows of coconut trees as the dividing line,
and which lot is known as Lot 4163. This lot, on the western portion, was the very portion which
was pointed to and delivered to Alejandra Delfino by the original defendant Silveria Flores and
her two children, together with the vendors on January 19, 1956. When the title to the said
property was delivered to the notary public, for the preparation of the document of sale, the title
that was delivered was for Lot 5734. So, the document, that was executed, was done by reason
of mistake, inequitable conduct and accident, because the said document did not express the
true and real agreement and intention of the contracting parties. What was made to appear in
the said document was the sale of the one-half portion of another lot. Lot 5734, when in truth
and in fact, the subject property sold was Lot 4163.[13] (Underscoring and italics supplied.)
Through her actions, Silveria Flores had made the parties to the deed believe that the lot
intended to be the object of the contract was the same lot described in the deed.Thus, by
mistake or accident, as well as inequitable conduct, neither she nor her successors-in-interest
could deny involvement in the transaction that resulted in a deed that now ought to be reformed.
Worth stressing, the existence of a cause of action is not determined by ones involvement
in a contract. Participation in a contract is not an element to determine the existence of a cause
of action. The rule is that only the allegations in the complaint may properly be considered in
ascertaining the existence of a cause of action. Lack of cause of action must appear on the face
of the complaint and its existence may be determined only by the allegations of the
complaint. Consideration of other facts is proscribed and any attempt to prove extraneous
circumstances is not allowed.[14]

The test of sufficiency of the facts found in a complaint as constituting a cause of action is
whether or not, admitting the facts alleged, the court can render a valid judgment upon the same
in accordance with the prayer in the complaint.[15] An examination of the complaint[16] shows
herein respondents, as plaintiffs in the trial court, are entitled to the relief of reformation of
instrument if the following factual allegations of respondents are deemed admitted, to wit: (1)
that Silveria is a co-owner of Lots No. 5734 and 4163, in different shares; (2) that the heirs of
Jose, her co-owner in Lot No. 4163, offered to sell to her their one-half share but she declined
for lack of money; (3) that said share was later sold to Alejandra; (4) that Silveria was asked to
deliver the title of Lot No. 4163 but instead she delivered the title of Lot No. 5734; (5) that after
the sale, Alejandra occupied one-half portion of Lot No. 4163 while Lot No. 5734 was still in the
possession of Venancio and the heirs of Maxima and Silveria; (6) that it was only when Alejandra
was about to buy the adjacent lot that she realized that what was indicated in the Settlement of
Estate and Sale was Lot No. 5734 and not 4163. In sum, we find that the original plaintiffs in the
trial court alleged sufficient facts in the complaint that properly constituted a cause of action
against the defendants.
SECOND ISSUE: petitioners contend respondents failed to show, specifically, a cause of
action for the reformation of the instrument in question. Reformation is that remedy in equity by
means of which a written instrument is made or construed so as to express or conform to the
real intention of the parties As provided in Article 1359 of the Civil Code:
Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true
intention is not expressed in the instrument purporting to embody the agreement by reason of
mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of
the instrument to the end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract.
An action for reformation of instrument under this provision of law may prosper only upon
the concurrence of the following requisites: (1) there must have been a meeting of the minds of
the parties to the contact; (2) the instrument does not express the true intention of the parties;
and (3) the failure of the instrument to express the true intention of the parties is due to mistake,
fraud, inequitable conduct or accident.
All of these requisites, in our view, are present in this case. There was a meeting of the
minds between the parties to the contract but the deed did not express the true intention of the
parties due to mistake in the designation of the lot subject of the deed. There is no dispute as to
the intention of the parties to sell the land to Alejandra Delfino but there was a mistake as to the
designation of the lot intended to be sold as stated in the Settlement of Estate and Sale.
While intentions involve a state of mind which may sometimes be difficult to decipher,
subsequent and contemporaneous acts of the parties as well as the evidentiary facts as proved
and admitted can be reflective of ones intention. The totality of the evidence clearly indicates
that what was intended to be sold to Alejandra Delfino was Lot 4163 and not Lot 5734. As found
by both courts below, there are enough bases to support such conclusion. We particularly note
that one of the stipulated facts during the pre-trial is that one-half of Lot 4163 is in the
possession of plaintiff Alejandra Delfino since 1956 up to the present.[19] Now, why would
Alejandra occupy and possess one-half of said lot if it was not the parcel of land which was the
object of the sale to her? Besides, as found by the Court of Appeals, if it were true that Silveria
Flores was the sole owner of Lot 4163, then she should have objected when Alejandra Delfino

took possession of one-half thereof immediately after the sale. Additionally, we find no cogent
reason to depart from the conclusion of both the Court of Appeals and the trial court, based on
the evidence on record, that Silveria Flores owns only one-half of Lot 4163. The other half
belongs to her brother Jose, represented now by his grandchildren successors-in-interest. As
such, the latter could rightfully sell the land to Alejandra Delfino.
Furthermore, on record, it has been shown that a spot investigation conducted by a duly
licensed surveyor revealed that Lot 4163 is subdivided into two portions, one belonging to
Silveria Flores and the other to the heirs of Jose Flores.[20] As found by the trial court, if indeed
it was Lot 5734 that was sold, then Silveria Flores was occupying more than her share of the
inherited lot. Thus:
x x x That, with respect to Lot No. 5734 and Lot No. 4292, in an on-the-spot investigation, made
by a licensed surveyor, Mr. Rilthe Dorado, his findings thereon show that Silveria Flores is in
possession on the western portion of Lot 5734, with an area of more than one-half and, to be
exact, with an area of 2,462, in spite of the fact that she is the registered owner only of a onethird (1/3) share; and admitting, for the sake of argument, that it was the one-half portion, of Lot
5734, that was sold, why should Silveria Flores possess more than 2,190 square meters, which
is the 1/2 of Lot 5734, Isabel Flores, the daughter of Venancio Flores is possessing the middle
portion, with an area of only 884 square meters; and Trinidad Flores Nodado, in representation
of her aunt, Maxima Flores, is possessing an area of 1,034 sq. m.[21] (OMMITTED) THE
TESTIMONY PART
Petitioners now claim that the foregoing testimony of Trinidad Flores was biased. But we
note that the appellate court sustained the trial courts reliance on her testimony, which both
found to be credible. As consistently held, factual findings of the trial court, especially when
affirmed by the appellate court, are binding upon this Court[26] and entitled to utmost respect.
[27] Considering these findings, we see no reason to disturb the trial courts finding, affirmed by
the Court of Appeals, that the object of the contract of sale, as intended and understood by the
parties, was Lot 4163 covered by OCT 3129-A which Alejandra, and now her heirs, have been
occupying. The designation of the lot in the deed of sale as Lot 5734, covered by OCT 4918-A,
was a mistake in the preparation of the document. Thus, we concur in the conclusion reached by
the courts a quo that reformation of the instrument is proper.

The trial court's Decision ruled in favor of petitioners Spouses Bonifacio and Lucia Paras
(plaintiffs before the Regional Trial Court) in their action for breach of contract with damages
against respondent Kimwa Construction and Development Corporation (Kimwa).
FACTS:
1.

2.

3.

4.

NO ACTUAL AND NO MORAL DAMAGES:

However, on the matter of damages, the award of actual damages in the amount of P5,000 lacks
evidentiary support. Actual damages if not supported by the evidence on record cannot be
granted.[28] Moral damages for P10,000 was also improperly awarded, absent a specific finding
and pronouncement from the trial court that petitioners acted in bad faith or with
malice. However, the award of attorneys fees for P2,000 is justified under Article 2208(2) of the
Civil Code,[29] in view of the trial courts finding that the unjustified refusal of petitioners to reform
or to correct the document of sale compelled respondents to litigate to

2. SPOUSES BONIFACIO AND LUCIA PARAS v. KIMWA CONSTRUCTION AND

DEVELOPMENT CORPORATION
G. R. No. 171601
April 08, 2015
LEONEN, J.
Nature of the action: Petition for Review on Certiorari1 under Rule 45 praying that the assailed
CA Decision and Resolution be reversed and set aside, and that the RTC Decision be reinstated

5.

6.

7.

Lucia Paras (Lucia) was a "concessionaire of a sand and gravel permit at Kabulihan,
Toledo City[.]"9 Kimwa is a "construction firm that sells concrete aggregates to
contractors and haulers in Cebu.
On December 6, 1994, Lucia and Kimwa entered into a contract denominated
"Agreement for Supply of Aggregates" (Agreement) where 40,000 cubic meters of
aggregates were "allotted"11 by Lucia as supplier to Kimwa.12 Kimwa was to pick up
the allotted aggregates at Lucia's permitted area in Toledo City 13 at P240.00 per
truckload.14
The entirety of this Agreement reads: AGREEMENT FOR SUPPLY OF
AGGREGATES: This Agreement made and entered into by and between: LUCIA
PARAS, of legal age, Filipino, married and resident of Poblacion, Toledo City, Province
of Cebu, hereinafter referred to as the SUPPLIER -andKIMWA CONSTRUCTION AND DEVELOPMENT CORP., a corporation duly
organized and existing under the laws of the Philippines with office address at
Subangdaku, Mandaue City, hereinafter represented by its President MRS.
CORAZON Y. LUA, of legal age, Filipino and a resident of Subangdaku, Mandaue
City[,] hereinafter referred to as the CONTRACTOR; That the SUPPLIER is [sic]
Special Permittee of (Rechanelling Block # VI of Sapang Daco River along Barangay
Ilihan) located at Toledo City under the terms and conditions:
a. That the aggregates is [sic] to be picked-up by the CONTRACTOR at the
SUPPLIER [sic] permitted area at the rate of TWO HUNDRED FORTY
(P240.00) PESOS per truck load;
b. That the volume allotted by the SUPPLIER to the CONTRACTOR is limited
to 40,000 cu.m.;
c. That the said Aggregates is [sic] for the exclusive use of the Contractor;
d. That the terms of payment is Fifteen (15) days after the receipt of billing;
e. That there is [sic] no modification, amendment, assignment or transfer of
this Agreement after acceptance shall be binding upon the SUPPLIER
unless agreed to in writing by and between the CONTRACTOR and
SUPPLIER.
Pursuant to the Agreement, Kimwa hauled 10,000 cubic meters of aggregates.
Sometime after this, however, Kimwa stopped hauling aggregates. Claiming that in so
doing, Kimwa violated the Agreement, Lucia, oined by her husband, Bonifacio, filed
the Complaint17 for breach of contract with damages that is now subject of this
Petition.
In their Complaint, Spouses Paras alleged that sometime in December 1994, Lucia
was approached by Kimwa expressing its interest to purchase gravel and sand from
her.18 Kimwa allegedly asked that it be "assured"19 of 40,000 cubic meters worth of
aggregates.20 Lucia countered that her concession area was due to be rechanneled on
May 15, 1995, when her Special Permit expires.21 Thus, she emphasized that she
would be willing to enter into a contract with Kimwa "provided the forty thousand cubic
meter[s] w[ould] be withdrawn or completely extracted and hauled before 15 May
1995[.]"22 Kimwa then assured Lucia that it would take only two to three months for it
to completely haul the 40,000 cubic meters of aggregates.23 Convinced of Kimwa's
assurances, Lucia and Kimwa entered into the Agreement.2
Spouses Paras added that within a few days, Kimwa was able to extract and haul
10,000 cubic meters of aggregates. However, after extracting and hauling this
quantity, Kimwa allegedly transferred to the concession area of a certain Mrs.
Remedios dela Torre in violation of their Agreement. They then addressed demand
letters to Kimwa. As these went unheeded, Spouses Paras filed their Complaint.25
In its Answer,26 Kimwa alleged that it never committed to obtain 40,000 cubic meters of
aggregates from Lucia. It argued that the controversial quantity of 40,000 cubic meters

8.

9.

represented only an upper limit or the maximum quantity that it could haul.27 It likewise
claimed that it neither made any commitment to haul 40,000 cubic meters of
aggregates before May 15, 1995 nor represented that the hauling of this quantity
could be completed in two to three months.28 It denied that the hauling of 10,000 cubic
meters of aggregates was completed in a matter of days and countered that it took
weeks to do so. It also denied transferring to the concession area of a certain Mrs.
Remedios dela Torre. Kimwa asserted that the Agreement articulated the parties' true
intent that 40,000 cubic meters was a maximum limit and that May 15, 1995 was
never set as a deadline. Invoking the Parol Evidence Rule, it insisted that Spouses
Paras were barred from introducing evidence which would show that the parties had
agreed differently.30
Regional Trial Court rendered the Decision in favor of Spouses Paras. The trial court
noted that the Agreement stipulated that the allotted aggregates were set aside
exclusively for Kimwa. It reasoned that it was contrary to human experience for Kimwa
to have entered into an Agreement with Lucia without verifying the latter's authority as
a concessionaire.31 Considering that the Special Permit32granted to Lucia (petitioners'
Exhibit "A" before the trial court) clearly indicated that her authority was good for only
six (6) months from November 14, 1994, the trial court noted that Kimwa must have
been aware that the 40,000 cubic meters of aggregates allotted to it must necessarily
be hauled by May 15, 1995. As it failed to do so, it was liable to Spouses Paras for the
total sum of P720,000.00, the value of the 30,000 cubic-meters of aggregates that
Kimwa did not haul, in addition to attorney's fees and costs of suit. 33
On appeal, the Court of Appeals reversed the Regional Trial Court's Decision. It
faulted the trial court for basing its findings on evidence presented which were
supposedly in violation of the Parol Evidence Rule. It noted that the Agreement was
clear that Kimwa was under no obligation to haul 40,000 cubic meters of aggregates
by May 15, 1995. In a subsequent Resolution, the Court of Appeals denied
reconsideration to Spouses Paras. Hence, this Petition was filed.

ISSUE: Whether respondent Kimwa Construction and Development Corporation is liable

to petitioners Spouses Paras for (admittedly) failing to haul 30,000 cubic meters of
aggregates from petitioner Lucia Paras' permitted area by May 15, 1995?
(To resolve this, it is necessary to determine whether petitioners Spouses Paras were able to
establish that respondent Kimwa was obliged to haul a total of 40,000 cubic meters of
aggregates on or before May 15, 1995.)
RULING: YES. We reverse the Decision of the Court of Appeals and reinstate that of the
Regional Trial Court. Respondent Kimwa is liable for failing to haul the remainder of the
quantity which it was obliged to acquire from petitioner Lucia Paras.
Rule 130, Section 9 of the Revised Rules on Evidence provides for the Parol Evidence Rule, the
rule on admissibility of documentary evidence when the terms of an agreement have been
reduced into writing: Section 9. Evidence of written agreements. When the terms of an
agreement have been reduced to writing, it is considered as containing all the terms agreed
upon and there can be, between the parties and their successors in interest, no evidence of
such terms other than the contents of the written agreement. However, a party may present
evidence to modify, explain or add to the terms of written agreement if he puts in issue in his
pleading:
(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;
(b) The failure of the written agreement to express the true intent and agreement of the parties
thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their successors in interest after
the execution of the written agreement.

The term "agreement" includes wills.

Per this rule, reduction to written form, regardless of the formalities observed,36 "forbids any
addition to, or contradiction of, the terms of a written agreement by testimony or other evidence
purporting to show that different terms were agreed upon by the parties, varying the purport of
the written contract."37
This rule is animated by a perceived wisdom in deferring to the contracting parties' articulated
intent. In choosing to reduce their agreement into writing, they are deemed to have done so
meticulously and carefully, employing specific frequently, even technical language as are
appropriate to their context. From an evidentiary standpoint, this is also because "oral
testimony . . . coming' from a party who has an interest in the outcome of the case, depending
exclusively on human memory, is not as reliable as written or documentary evidence. Spoken
words could be notoriously unreliable unlike a written contract which speaks of a uniform
language."
This, however, is merely a general rule. Provided that a party puts in issue in its pleading any of
the four (4) items enumerated in the second paragraph of Rule 130, Section 9, "a party may
present evidence to modify, explain or add to the terms of the agreement[.]"41 Raising any of
these items as an issue in a pleading such that it falls under the exception is not limited to the
party initiating an action.
Apart from pleading these exceptions, it is equally imperative that the parol evidence sought to
be introduced points to the conclusion proposed by the party presenting it. That is, it must be
relevant, tending to "induce belief in [the] existence"44 of the flaw, true intent, or subsequent
extraneous terms averred by the party seeking to introduce parol evidence.
In sum, two (2) things must be established for parol evidence to be admitted: first, that the
existence of any of the four (4) exceptions has been put in issue in a party's pleading or has not
been objected to by the adverse party; and second, that the parol evidence sought to be
presented serves to form the basis of the conclusion proposed by the presenting party.
Here, the Court of Appeals found fault in the Regional Trial Court for basing its findings "on the
basis ofevidence presented in violation of the parol evidence rule. It proceeded to fault
petitioners Spouses Paras for showing "no proof of [respondent Kimwa's] obligation." Then, it
stated that "[t]he stipulations in the agreement between the parties leave no room for
interpretation.
The Court of Appeals is in serious error. At the onset, two (2) flaws in the the Court of Appeals'
reasoning must be emphasized. First, it is inconsistent to say, on one hand, that the trial court
erred on the basis of "evidence presented"48 (albeit supposedly in violation of the Parol Evidence
Rule), and, on the other, that petitioners Spouses Paras showed "no proof."49 Second, without
even accounting for the exceptions provided by Rule 130, Section 9, the Court of Appeals
immediately concluded that whatever evidence petitioners Spouses Paras presented was in
violation of the Parol Evidence Rule.
Contrary to the Court of Appeal's conclusion, petitioners Spouses Paras pleaded in the
Complaint they filed before the trial court a mistake or imperfection in the Agreement, as
well as the Agreement's failure to express the true intent of the parties. Further,
respondent Kimwa, through its Answer, also responded to petitioners Spouses Paras'
pleading of these issues. This is, thus, an exceptional case allowing admission of parol
evidence. It is true that petitioners Spouses Paras' Complaint does not specifically state words
and phrases such as "mistake," "imperfection," or "failure to express the true intent of the
parties." Nevertheless, it is evident that the crux of petitioners Spouses Paras' Complaint is
their assertion that the Agreement "entered into on 6 December 1994 or
thereabouts"51 was founded on the parties' supposed understanding that the quantity of
aggregates allotted in favor of respondent Kimwa must be hauled by May 15, 1995, lest
such hauling be rendered impossible by the rechanneling of petitioner Lucia Paras'
permitted area. This assertion is the very foundation of petitioners' having come to court

for relief.
Proof of how petitioners Spouses Paras successfully pleaded and put this in issue in their
Complaint is how respondent Kimwa felt it necessary to respond to it or address it in its Answer.
Considering how the Agreement's mistake, imperfection, or supposed failure to express the
parties' true intent was successfully put in issue in petitioners Spouses Paras' Complaint (and
even responded to by respondent Kimwa in its Answer), this case falls under the exceptions
provided by Rule 130, Section 9 of the Revised Rules on Evidence. Accordingly, the
testimonial and documentary parol evidence sought to be introduced by petitioners Spouses
Paras, which attest to these supposed flaws and what they aver to have been the parties' true
intent, may be admitted and considered.
(As to the Special Permit: Having been admittedly furnished a copy of this Special Permit,
respondent Kimwa was well aware that a total of only about 40,000 cubic meters of aggregates
may be extracted by petitioner Lucia from the permitted area, and that petitioner Lucia Paras'
operations cannot extend beyond May 15, 1995, when the Special Permit expires.The Special
Permit's condition that a total of only about 40,000 cubic meters of aggregates may be extracted
by petitioner Lucia Paras from the permitted area lends credence to the position that the
aggregates "allotted" to respondent Kimwa was in consideration of its corresponding
commitment to haul all 40,000 cubic meters.)
The Petition is GRANTED. RTC Decision is REINSTATED.

DEFECTIVE CONTRACT; RESCISSIBLE CONTRACTS

3. G.R. No. 182435

August 13, 2012

LILIA B. ADA, LUZ B. ADANZA, FLORA C. BA YLON, REMO BA YLON, JOSE BA YLON,
ERIC BA YLON, FLORENTINO BA YLON, and MA. RUBY BA YLON, Petitioners,
vs.
FLORANTE BA YLON, Respondent.
The Antecedent Facts
1. This case involves the estate of spouses Florentino Baylon and Maximina Elnas Baylon
(Spouses Baylon) who died on November 7, 1961 and May 5, 1974, respectively. 3 At the time of
their death, Spouses Baylon were survived by their legitimate children, namely, Rita Baylon
(Rita), Victoria Baylon (Victoria), Dolores Baylon (Dolores), Panfila Gomez (Panfila), Ramon
Baylon (Ramon) and herein petitioner Lilia B. Ada (Lilia).
2. Dolores died intestate and without issue on August 4, 1976. Victoria died on November 11,
1981 and was survived by her daughter, herein petitioner Luz B. Adanza. Ramon died intestate
on July 8, 1989 and was survived by herein respondent Florante Baylon (Florante), his child
from his first marriage, as well as by petitioner Flora Baylon, his second wife, and their legitimate
children, namely, Ramon, Jr. and herein petitioners Remo, Jose, Eric, Florentino and Ma. Ruby,
all surnamed Baylon.
3. On July 3, 1996, the petitioners filed with the RTC a Complaint 4 for partition, accounting and
damages against Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during
their lifetime, owned 43 parcels of land 5 all situated in Negros Oriental. After the death of
Spouses Baylon, they claimed that Rita took possession of the said parcels of land and

appropriated for herself the income from the same. Using the income produced by the said
parcels of land, Rita allegedly purchased two parcels of land, Lot No. 4709 6 and half of Lot No.
4706,7 situated in Canda-uay, Dumaguete City. The petitioners averred that Rita refused to effect
a partition of the said parcels of land.
4. In their Answer,8 Florante, Rita and Panfila asserted that they and the petitioners co-owned
229 out of the 43 parcels of land mentioned in the latters complaint, whereas Rita actually
owned 10 parcels of land10 out of the 43 parcels which the petitioners sought to partition, while
the remaining 11 parcels of land are separately owned by Petra Cafino
Adanza,11 Florante,12 Meliton
Adalia,13 Consorcia
Adanza,14 Lilia15 and
Santiago
16
Mendez. Further, they claimed that Lot No. 4709 and half of Lot No. 4706 were acquired by
Rita using her own money. They denied that Rita appropriated solely for herself the income of
the estate of Spouses Baylon, and expressed no objection to the partition of the estate of
Spouses Baylon, but only with respect to the co-owned parcels of land.
5. During the pendency of the case, Rita, through a Deed of Donation dated July 6, 1997,
conveyed Lot No. 4709 and half of Lot No. 4706 to Florante. On July 16, 2000, Rita died
intestate and without any issue. Thereafter, learning of the said donation inter vivos in favor of
Florante, the petitioners filed a Supplemental Pleading 17 dated February 6, 2002, praying that
the said donation in favor of the respondent be rescinded in accordance with Article 1381(4) of
the Civil Code. They further alleged that Rita was already sick and very weak when the said
Deed of Donation was supposedly executed and, thus, could not have validly given her consent
thereto.
6. Florante and Panfila opposed the rescission of the said donation, asserting that Article
1381(4) of the Civil Code applies only when there is already a prior judicial decree on who
between the contending parties actually owned the properties under litigation.18
7. The RTC Decision rendered decisions
(1) declaring the existence of co-ownership over parcels nos. 1, 2, 3, 5, 7, 10, 13, 14,
16, 17, 18, 26, 29, 30, 33, 34, 35, 36, 40 and 41 described in the complaint;
(2) directing that the above mentioned parcels of land be partitioned among the heirs
of Florentino Baylon and Maximina Baylon;
(3) declaring a co-ownership on the properties of Rita Baylon namely parcels no[s]. 6,
11, 12, 20, 24, 27, 31, 32, 39 and 42 and directing that it shall be partitioned among
her heirs who are the plaintiffs and defendant in this case;
(4) declaring the donation inter vivos rescinded without prejudice to the share of
Florante Baylon to the estate of Rita Baylon and directing that parcels nos. 1 and 2
paragraph V of the complaint be included in the division of the property as of Rita
Baylon among her heirs, the parties in this case;
(5) excluding from the co-ownership parcels nos. 20, 21, 22, 9, 43, 4, 8, 19 and 37.
The RTC held that the death of Rita during the pendency of the case, having died intestate and
without any issue, had rendered the issue of ownership insofar as parcels of land which she
claims as her own moot since the parties below are the heirs to her estate. Thus, the RTC
regarded Rita as the owner of the said 10 parcels of land and, accordingly, directed that the
same be partitioned among her heirs. Nevertheless, the RTC rescinded the donation inter vivos

of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. In rescinding the said donation
inter vivos, the RTC explained that:
However, with respect to lot nos. 4709 and 4706 which [Rita] had conveyed to Florante
Baylon by way of donation inter vivos, the plaintiffs in their supplemental pleadings (sic)
assailed the same to be rescissible on the ground that it was entered into by the
defendant Rita Baylon without the knowledge and approval of the litigants [or] of
competent judicial authority. The subject parcels of lands are involved in the case for which
plaintiffs have asked the Court to partition the same among the heirs of Florentino Baylon and
Maximina Elnas.
Clearly, the donation inter vivos in favor of Florante Baylon was executed to prejudice the
plaintiffs right to succeed to the estate of Rita Baylon in case of death considering that as
testified by Florante Baylon, Rita Baylon was very weak and he tried to give her vitamins x x x.
The donation inter vivos executed by Rita Baylon in favor of Florante Baylon is
rescissible for the reason that it refers to the parcels of land in litigation x x x without the
knowledge and approval of the plaintiffs or of this Court. However, the rescission shall
not affect the share of Florante Baylon to the estate of Rita Baylon.21
8. The CA Decision REVERSEDand SET ASIDE insofar as they decreed the rescission of the
Deed of Donation
The CA held that before the petitioners may file an action for rescission, they must first obtain a
favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the
estate of Spouses Baylon and not to Rita. Until then, the CA asserted, an action for rescission is
premature. Further, the CA ruled that the petitioners action for rescission cannot be joined with
their action for partition, accounting and damages through a mere
Issue: Whether or not the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor
of Florante may only be rescinded if there is already a judicial determination that the same
actually belonged to the estate of Spouses Baylon?
Rescission under Article 1381(4) of the Civil Code is not preconditioned upon the judicial
determination as to the ownership of the thing subject of litigation.

matters in controversy and litigation between the parties involving one subject matter, and to
expedite the disposition of litigation at minimum cost. The provision should be construed so as to
avoid such multiplicity, where possible, without prejudice to the rights of the litigants. 30
Nevertheless, while parties to an action may assert in one pleading, in the alternative or
otherwise, as many causes of action as they may have against an opposing party, such joinder
of causes of action is subject to the condition, inter alia, that the joinder shall not include special
civil actions governed by special rules.31
Here, there was a misjoinder of causes of action. The action for partition filed by the petitioners
could not be joined with the action for the rescission of the said donation inter vivos in favor of
Florante. Lest it be overlooked, an action for partition is a special civil action governed by Rule
69 of the Rules of Court while an action for rescission is an ordinary civil action governed by the
ordinary rules of civil procedure. The variance in the procedure in the special civil action of
partition and in the ordinary civil action of rescission precludes their joinder in one complaint or
their being tried in a single proceeding to avoid confusion in determining what rules shall govern
the conduct of the proceedings as well as in the determination of the presence of requisite
elements of each particular cause of action.32
Main Issue: Propriety of Rescission
After having threshed out the procedural matters, we now proceed to adjudicate the substantial
issue presented by the instant petition.
The petitioners assert that the CA erred in remanding the case to the RTC for the determination
of ownership of Lot No. 4709 and half of Lot No. 4706. They maintain that the RTC aptly
rescinded the said donation inter vivos of Lot No. 4709 and half of Lot No. 4706 pursuant to
Article 1381(4) of the Civil Code.
In his Comment,40 Florante asserts that before the petitioners may file an action for rescission,
they must first obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706
actually belonged to the estate of Spouses Baylon. Until then, Florante avers that an action for
rescission would be premature.
The petitioners contentions are well-taken.

Held/Rationale:
PROCEDURAL MATTERS
The actions of partition and
rescission cannot be joined in a
single action.
By a joinder of actions, or more properly, a joinder of causes of action is meant the uniting of two
or more demands or rights of action in one action, the statement of more than one cause of
action in a declaration. It is the union of two or more civil causes of action, each of which could
be made the basis of a separate suit, in the same complaint, declaration or petition. A plaintiff
may under certain circumstances join several distinct demands, controversies or rights of action
in one declaration, complaint or petition.29
The objectives of the rule or provision are to avoid a multiplicity of suits where the same parties
and subject matter are to be dealt with by effecting in one action a complete determination of all

The resolution of the instant dispute is fundamentally contingent upon a determination of

whether the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante
may be rescinded pursuant to Article 1381(4) of the Civil Code on the ground that the same was
made during the pendency of the action for partition with the RTC.
Rescission is a remedy to address
the damage or injury caused to the
contracting parties or third
persons.
Rescission is a remedy granted by law to the contracting parties and even to third persons, to
secure the reparation of damages caused to them by a contract, even if it should be valid, by
means of the restoration of things to their condition at the moment prior to the celebration of said
contract.41 It is a remedy to make ineffective a contract, validly entered into and therefore
obligatory under normal conditions, by reason of external causes resulting in a pecuniary
prejudice to one of the contracting parties or their creditors.42

Contracts which are rescissible are valid contracts having all the essential requisites of a
contract, but by reason of injury or damage caused to either of the parties therein or to third
persons are considered defective and, thus, may be rescinded.
The kinds of rescissible contracts, according to the reason for their susceptibility to rescission,
are the following: first, those which are rescissible because of lesion or prejudice; 43 second,
those which are rescissible on account of fraud or bad faith; 44 and third, those which, by special
provisions of law,45 are susceptible to rescission.46
Contracts which refer to things
subject of litigation is rescissible
pursuant to Article 1381(4) of the
Civil Code.
Contracts which are rescissible due to fraud or bad faith include those which involve things
under litigation, if they have been entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority. Thus, Article 1381(4) of the Civil Code
provides:
Art. 1381. The following contracts are rescissible:
xxxx
(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority.
The rescission of a contract under Article 1381(4) of the Civil Code only requires the
concurrence of the following: first, the defendant, during the pendency of the case, enters into a
contract which refers to the thing subject of litigation; and second, the said contract was entered
into without the knowledge and approval of the litigants or of a competent judicial authority. As
long as the foregoing requisites concur, it becomes the duty of the court to order the rescission
of the said contract.
The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith among
the parties to a case and/or any fraudulent act which they may commit with respect to the thing
subject of litigation.
When a thing is the subject of a judicial controversy, it should ultimately be bound by whatever
disposition the court shall render. The parties to the case are therefore expected, in deference to
the courts exercise of jurisdiction over the case, to refrain from doing acts which would dissipate
or debase the thing subject of the litigation or otherwise render the impending decision therein
ineffectual.
There is, then, a restriction on the disposition by the parties of the thing that is the subject of the
litigation. Article 1381(4) of the Civil Code requires that any contract entered into by a defendant
in a case which refers to things under litigation should be with the knowledge and approval of
the litigants or of a competent judicial authority.
Further, any disposition of the thing subject of litigation or any act which tends to render inutile
the courts impending disposition in such case, sans the knowledge and approval of the litigants
or of the court, is unmistakably and irrefutably indicative of bad faith. Such acts undermine the

authority of the court to lay down the respective rights of the parties in a case relative to the
thing subject of litigation and bind them to such determination.
It should be stressed, though, that the defendant in such a case is not absolutely proscribed
from entering into a contract which refer to things under litigation. If, for instance, a defendant
enters into a contract which conveys the thing under litigation during the pendency of the case,
the conveyance would be valid, there being no definite disposition yet coming from the court with
respect to the thing subject of litigation. After all, notwithstanding that the subject thereof is a
thing under litigation, such conveyance is but merely an exercise of ownership.
This is true even if the defendant effected the conveyance without the knowledge and approval
of the litigants or of a competent judicial authority. The absence of such knowledge or approval
would not precipitate the invalidity of an otherwise valid contract. Nevertheless, such contract,
though considered valid, may be rescinded at the instance of the other litigants pursuant to
Article 1381(4) of the Civil Code.
Here, contrary to the CAs disposition, the RTC aptly ordered the rescission of the donation inter
vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. The petitioners had
sufficiently established the presence of the requisites for the rescission of a contract pursuant to
Article 1381(4) of the Civil Code. It is undisputed that, at the time they were gratuitously
conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are among the properties that were the
subject of the partition case then pending with the RTC. It is also undisputed that Rita, then one
of the defendants in the partition case with the RTC, did not inform nor sought the approval from
the petitioners or of the RTC with regard to the donation inter vivos of the said parcels of land to
Florante.
Although the gratuitous conveyance of the said parcels of land in favor of Florante was valid, the
donation inter vivos of the same being merely an exercise of ownership, Ritas failure to inform
and seek the approval of the petitioners or the RTC regarding the conveyance gave the
petitioners the right to have the said donation rescinded pursuant to Article 1381(4) of the Civil
Code.
Rescission under Article 1381(4) of
the Civil Code is not preconditioned
upon the judicial determination as
to the ownership of the thing
subject of litigation.
In this regard, we also find the assertion that rescission may only be had after the RTC had
finally determined that the parcels of land belonged to the estate of Spouses Baylon intrinsically
amiss. The petitioners right to institute the action for rescission pursuant to Article 1381(4) of the
Civil Code is not preconditioned upon the RTCs determination as to the ownership of the said
parcels of land.
It bears stressing that the right to ask for the rescission of a contract under Article 1381(4) of the
Civil Code is not contingent upon the final determination of the ownership of the thing subject of
litigation. The primordial purpose of Article 1381(4) of the Civil Code is to secure the possible
effectivity of the impending judgment by a court with respect to the thing subject of litigation. It
seeks to protect the binding effect of a courts impending adjudication vis--vis the thing subject
of litigation regardless of which among the contending claims therein would subsequently be
upheld. Accordingly, a definitive judicial determination with respect to the thing subject of
litigation is not a condition sine qua non before the rescissory action contemplated under Article
1381(4) of the Civil Code may be instituted.

Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of
the Civil Code is preconditioned upon a judicial determination with regard to the thing subject
litigation, this would only bring about the very predicament that the said provision of law seeks to
obviate. Assuming arguendo that a rescissory action under Article 1381(4) of the Civil Code
could only be instituted after the dispute with respect to the thing subject of litigation is judicially
determined, there is the possibility that the same may had already been conveyed to third
persons acting in good faith, rendering any judicial determination with regard to the thing subject
of litigation illusory. Surely, this paradoxical eventuality is not what the law had envisioned.

decreed the rescission of the Deed of Donation dated July 6, 1997 is hereby REINSTATED. The
case is REMANDED to the trial court for the determination of the ownership of Lot No. 4709 and
half of Lot No. 4706 in accordance with this Decision.

Even if the donation inter vivos is

validly rescinded, a determination
as to the ownership of the subject
parcels of land is still necessary.

4. METROPOLITAN FABRICS, INC. AND ENRIQUE ANG, Petitioners, v. PROSPERITY

CREDIT RESOURCES INC., DOMINGO ANG AND CALEB ANG, Respondents.
G.R. No. 154390,
March 17, 2014
BERSAMIN, J.
DOCTRINE: The genuineness and due execution of a deed of real estate mortgage that has
been acknowledged before a notary public are presumed. Any allegation of fraud and forgery
against the deed must be established by clear and competent evidence.

Having established that the RTC had aptly ordered the rescission of the said donation inter vivos
in favor of Florante, the issue that has to be resolved by this Court is whether there is still a need
to determine the ownership of Lot No. 4709 and half of Lot No. 4706.
In opting not to make a determination as to the ownership of Lot No. 4709 and half of Lot No.
4706, the RTC reasoned that the parties in the proceedings before it constitute not only the
surviving heirs of Spouses Baylon but the surviving heirs of Rita as well. As intimated earlier,
Rita died intestate during the pendency of the proceedings with the RTC without any issue,
leaving the parties in the proceedings before the RTC as her surviving heirs. Thus, the RTC
insinuated, a definitive determination as to the ownership of the said parcels of land is
unnecessary since, in any case, the said parcels of land would ultimately be adjudicated to the
parties in the proceedings before it.

SO ORDERED.

FACTS:
1.

2.

We do not agree.
Admittedly, whoever may be adjudicated as the owner of Lot No. 4709 and half of Lot No. 4706,
be it Rita or Spouses Baylon, the same would ultimately be transmitted to the parties in the
proceedings before the RTC as they are the only surviving heirs of both Spouses Baylon and
Rita. However, the RTC failed to realize that a definitive adjudication as to the ownership of Lot
No. 4709 and half of Lot No. 4706 is essential in this case as it affects the authority of the RTC
to direct the partition of the said parcels of land. Simply put, the RTC cannot properly direct the
partition of Lot No. 4709 and half of Lot No. 4706 until and unless it determines that the said
parcels of land indeed form part of the estate of Spouses Baylon.
It should be stressed that the partition proceedings before the RTC only covers the properties
co-owned by the parties therein in their respective capacity as the surviving heirs of Spouses
Baylon. Hence, the authority of the RTC to issue an order of partition in the proceedings before it
only affects those properties which actually belonged to the estate of Spouses Baylon.

3.

4.

In this regard, if Lot No. 4709 and half of Lot No. 4706, as unwaveringly claimed by Florante, are
indeed exclusively owned by Rita, then the said parcels of land may not be partitioned
simultaneously with the other properties subject of the partition case before the RTC. In such
case, although the parties in the case before the RTC are still co-owners of the said parcels of
land, the RTC would not have the authority to direct the partition of the said parcels of land as
the proceedings before it is only concerned with the estate of Spouses Baylon.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is PARTIALLY
GRANTED. The Decision dated October 26, 2007 issued by the Court of Appeals in CA-G.R. CV
No. 01746 is MODIFIED in that the Decision dated October 20, 2005 issued by the Regional
Trial Court, Tanjay City, Negros Oriental, Branch 43 in Civil Case No. 11657, insofar as it

5.

Metropolitan Fabrics, Incorporated, a family corporation, owned a 5.8 hectare

industrial compound at No. 685 Tandang Sora Avenue, Novaliches, Quezon City
which was covered by TCT No. 241597. Pursuant to a P2 million, 10year 14% per
annum loan agreement with Manphil Investment Corporation (Manphil) dated April 6,
1983, the said lot was subdivided into 11 lots, with Manphil retaining four lots as
mortgage security. The other seven lots, now covered by TCT Nos. 317699 and
317702 to 317707, were released to MFI.
In July 1984, MFI sought from PCRI a loan in the amount of P3,443,330.52, the
balance of the cost of its boiler machine, to prevent its repossession by the seller.
PCRI, also a familyowned corporation licensed since 1980 to engage in money
lending, was represented by Domingo Ang (Domingo) its president, and his son
Caleb, vicepresident. The parties knew each other because they belonged to the
same family association, the Lioc Kui Tong Fraternity.
The decision noted that on the basis only of his interview with Enrique, feedback from
the stockholders and the Chinese community, as well as information given by his own
father Domingo, and without further checking on the background of Enrique and his
business and requiring him to submit a company profile and a feasibility study of MFI,
Caleb recommended the approval of the P3.44 million with an interest ranging from
24% to 26% per annum and a term of between five and ten years (Decision, p. 5).
According to the court, it sufficed for Caleb that Enrique was a wellrespected
Chinese businessman, that he was the president of their Chinese family association,
and that he had other personal businesses aside from MFI, such as the Africa Trading.
The court gave credence to the uncorroborated lone testimony of Enriques daughter
Vicky that on August 3, 1984, even before the signing of the mortgage and loan
documents, PCRI released the P3.5 million loan to MFI. It found that the blank loan
forms, consisting of the real estate mortgage contract, promissory note,
comprehensive surety agreement and disclosure statement, which Domingo himself
handed to Enrique, had no entries specifying the rate of interest and schedules of
amortization. On the same day, to reciprocate the gesture of PCRI, Enrique, together
with his wife Natividad Africa, vicepresident, and son Edmundo signed the blank
forms at their office at 685 Tandang Sora Avenue, Novaliches, Quezon City. The
signing was allegedly witnessed by Vicky, Ellen and Alice, all surnamed Ang, without
any PCRI representative present. Immediately thereafter, Enrique and Vicky
proceeded to the PCRI office at 1020 Soler St., Binondo.
The court a quo also accepted Vickys account that it was in order to return the trust of
Domingo and Caleb and their gesture of the early release of the loan that Enrique
and Vicky entrusted to them their seven (7) titles, with an aggregate area of 3.3665
hectares, to wit: TCT Nos. 317699, 317702, 317703, 317704, 317705, 317706 and
1317707. She testified that they left it to defendants to choose from among the 7 titles

those which would be sufficient to secure the P3.5 million. She also admitted,
however, that they had an appraisal report dated June, 1984 of the said properties
made by the Integrated Appraisal Corporation which put the value of four (4) of the
said properties at P6.8 million, now the subject of the action for reconveyance, while
the aggregate value of all seven lots was P11 million.
a. Vicky further stated that it was agreed that once PCRI had chosen the lots
to be covered by the mortgage, the defendants would return the remaining
titles to the plaintiffs. Plaintiffs also secured an additional loan of about
P199,000.00 to pay for real estate taxes and other expenses. Significantly,
Vicky testified that the plaintiffs delivered to PCRI twentyfour (24) checks,
bearing no dates and amounts, to cover the amortization payments, all
signed in blank by Enrique and Natividad. In September 1984, the first
amortization check bounced for insufficient fund due to MFIs continuing
business losses. It was then that the appellees allegedly learned that PCRI
had filled up the 24 blank checks with dates and amounts that reflected a
35% interest rate per annum, instead of just 24%, and a twoyear
repayment period, instead of 10 years. Vicky avers that her strong protest
caused PCRI to desist from depositing the other 23 checks (TSN, April 21,
1998, p. 15), and that it was about this time that PCRI finally furnished MFI
with its copy of the promissory note and the disclosure statement.
b. Vicky asserted that plaintiffsappellees found the terms reflected in the loan
documents to be prohibitive, burdensome and unconscionable, and that had
they known them when they took out the loan on August 3, 1984, they could
either have (1) negotiated/bargained or (2) rejected the terms of the loan
and withdrawn the loan application. Plaintiffs thereafter repeatedly asked
the defendants to return the rest of the titles in excess of the required
collateral to which defendants allegedly routinely responded that their
committee was still studying the matter. Vicky even added that Caleb
assured Vicky that PCRI would also lower the rate of interest to conform to
prevailing commercial rate. Meanwhile, due to losses plaintiffs business
operations stopped.
c. Vicky also testified that talks were held in earnest in 1985 between Domingo
and Enrique as well as between Vicky and Caleb concerning the possible
offsetting of the loan by ceding some of their properties to PCRI. On
February 28, 1986, Vicky wrote to defendants, referring to a meeting held
on February 11, 1986 and reiterating her request for the offsetting. The
letter stated that since August, 1985, she had been asking for the offsetting
of their properties against the loan. Caleb had sought a report on the fair
market value of the seven lots. Also, he sought the assignment to PCRI of
the rentals payable of plaintiffs tenant, Bethlehem Knitting Company up to
1987. Vicky admitted that plaintiffs furnished Caleb on March 11, 1986 a
copy of the 1984 Appraisal Report prepared by the Integrated Appraisal
Corporation for the offsetting agreement.
d. PCRIs account statement dated February 12, 1986 showed that MFIs total
loan obligation amounted to P4,167,472.71 (Exh. G). The March 25, 1986
statement from PCRI, however, showed that all seven (7) titles were placed
as collateral for their P3.5 million loan. MFI maintained that per their
appraisal report, four of the properties were already worth P6.5 million while
the three other lots were valued around P4.6 million.
e. Vicky also claimed that Domingo and Caleb tried to appease the plaintiffs by
assuring them that they would return the rest of the titles anytime they
would need them, and that they could use them to secure another loan from
them or from another financing company. They would also reconsider the
35% interest rate, but when the discussion shifted to the offsetting of the
properties to pay the loan, the defendants standard answer was that they
were still awaiting the feedback of their committee.
f.
On September 4, 1986, Enrique received a Notice of Sheriffs Sale dated
August 29, 1986, announcing the auction of the seven lots on September

24, 1986 due to unpaid indebtedness of P10.5 million. After Vicky explained
to her father Enrique in Chinese that the defendants were auctioning all
their seven lots, he became frantic, was unable to take his lunch, and
remained silent the whole afternoon. Later that night he fell ill and became
delirious. His blood pressure shot up to 200/100 and he was rushed to the
Metropolitan Hospital where he fell into a coma and stayed in the intensive
care unit for four (4) days. Vicky claimed that during moments of
consciousness, her father would mutter the names of Domingo and Caleb
and that they were unprofessional and dishonest people. He was
discharged after 6 days.
g. Vicky insisted that prior to the auction notice, they never received any
statement or demand letter from the defendants to pay P10.5 million, nor
did the defendants inform them of the intended foreclosure. The last
statement they received was dated February 12, 1986, and showed amount
due of only P4,167,472.71. Vicky recalled that from June 1, 1986 to July
1986, they held several meetings to discuss the options available to them to
repay their loan, such as the offsetting of their rent collectibles and
properties to cover the amortizations and the loan balance.
6. MFI protested the foreclosure, and the auction was reset to October 6, 1986, then to
October 16, 1986, and finally October 27, 1986 after they assured PCRI that they had
found a serious buyer for three of the lots. In the meeting held on October 15, 1986 at
defendants office, the buyer, Winston Wang of Asia Cotton and his lawyer, Atty. Ismael
Andres were present. It was agreed to release the mortgage over TCT Nos. 317705,
317706, and 317707 upon payment of P3.5 million. Winston Wang would pay to MFI
P500,000.00 as downpayment, which MFI would in turn pay to PCRI as partial
settlement of the P3.5 million loan. Winston Wang was given 15 days from October
16, 1986 to pay the P500,000.00. Vicky claims that these agreements were made
verbally, although she kept notes and scribbles of them.
7. On January 19, 1987, Winston Wang confronted Vicky about their sale agreement and
PCRIs refusal to accept their P3 million payment, because according to Caleb, the
three lots had been foreclosed. Vicky was shocked, because the agreed 60day
period to pay the P3 million was to lapse on January 13, 1987 yet. Caleb himself put
the particulars of the P500,000.00 payment in the cash voucher as partial settlement
of the loan.
8. At the auction sale on October 27, 1986, PCRI was the sole bidder for P6.5 million.
Vicky however also admitted that discussions continued on the agreement to release
three lots for P3.5 million. The reduction of interest rate and charges and the
condonation of the attorneys fees of P300,000.00 for the foreclosure proceedings
were also sought. Present in these conferences were Enrique and Vicky, Domingo
and Caleb, Winston Wang and his lawyer, Atty. Ismael Andres.
9. Upon defendants continued failure to honor their agreement, Atty. Ismael Andres
threatened to sue PCRI in a letter dated February 17, 1987 if they would not accept
the P3 million payment of his client. Atty. Andres also sent them similar letters dated
May 15, August 5 and 7, 1987, and after several more discussions, the defendants
finally agreed to accept the P3 million from Winston Wang, but under these
conditions: a) MFI must pay the P300,000.00 attorneys fees paid for the foreclosure
proceedings and the P190,000.00 for real estate taxes; b) PCRI shall issue the
certificate of redemption over the three lots; c) plaintiffs shall execute a Memorandum
of Undertaking concerning their right of way over the other properties, the lots being
redeemed being situated along Tandang Sora Street.
10. Vicky also testified that although Wang would pay directly to Caleb, the plaintiffs
pursued the transaction because of PCRIs promised to release the four (4) other
remaining properties after the payment of P3.5 million loan principal as well as the
interest in arrears computed at P3 million, or a total of P6.5 (TSN, January 10, 1996,
p. 11).
11. MFI paid to PCRI P490,000.00 as agreed, and likewise complied with the required
documentation. Winston Wang also paid the balance of P3 million for the three lots he
was buying. The discussion then turned to how the plaintiffs P3 million interest

12.

13.

14.

15.

16.

17.

18.

arrearages would be settled, which they agreed to be payable over a period of one
year, from October 26, 1987 to October 26, 1988.
In October, 1988, however, plaintiffs were able to raise only P2 million. After a meeting
at defendants office, the period to pay was extended to October 26, 1989, but subject
to 18% interest per annum, which Caleb however allegedly refused to put in writing.
Plaintiffs were later able to raise P3 million plus P540,000.00 representing the 18%
interest per annum. On October 26, 1989, Vicky and Enrique tendered the same to
Caleb at his office. Caleb however became furious, and now insisted that the interest
due since 1984 was already P7 million computed at 35% per annum.
On January 16, 1990 and again on March 5, 1990, PCRI sent the plaintiffs a letter
demanding that they vacate the four remaining lots. Caleb was also now asking for
P10.5 million. On March 19, 1990, Caleb executed an affidavit of nonredemption of
TCT Nos. 317699, 317702, 317703 and 317704. On June 7, 1990, S.G. del Rosario,
PCRIs vicepresident, wrote Vicky reiterating their demand to vacate the premises
and remove pieces of machinery, equipment and persons therein, which MFI
eventually heeded.
Vicky also testified that the news of plaintiffs predicament spread around the Chinese
community and brought the family great humiliation. Enriques health deteriorated
rapidly and he was hospitalized. On October 9, 1991, they filed the case below.
Meanwhile, Enrique died on November 15, 1993 after one year and one month at the
Metropolitan Hospital. The family spent P300,000 P400,000 for his funeral and
burial expenses.
Plaintiffs now insist that P1 million in moral damages was not enough for the
humiliation they suffered before the Chinese community, considering that Enrique was
then the president of the Lioc Kui Tong Fraternity while Domingo and Caleb were
members thereof. Plaintiffs were also deprived of the rental income of P10,000.00 per
month and the 10% rental increases from 1987 to present of their said properties.
In arguing that the 35% interest rate imposed by PCRI was exorbitant and without
their consent, the plaintiffs cited the promissory note and amortization schedule in
their loan agreement with Manphil dated April 6, 1983 and with IBAA on April 21, 1983
which both showed a rate of interest of only 14% and a tenyear term with two years
grace period.
Ruling of the RTC: rendered its decision in favor of petitioners, disposing: Declaring
the real estate mortgage and the subsequent foreclosure made by the defendants on
the plaintiffs properties covered by Transfer Certificate of Title Nos. 317699, 317702,
317703, 317704 of the Register of Deeds of Quezon City null and void and the titles
issued in favor of the defendants canceled and ordered reconveyed to the plaintiffs;
The defendants are hereby ordered solidarily liable to pay plaintiff, Metropolitan
Fabrics, Inc. and the family of Enrique Ang the following: P1,000,000.00 for moral
damages; The amount of P10,000.00 per month with an interest of 10% per annum
from January 1987 up to the time that the plaintiffs take repossession of the said
parcels of land as actual damages; 100,000.00 for attorneys fees; and Costs of suit.
Judgment of the CA: reversing and setting aside the decision of the RTC, and
dismissing the complaint and the counterclaim upon the following ratiocination.
a. We find no clear and convincing evidence, nor even preponderant evidence,
to defeat the presumption of regularity of the mortgage contract and
promissory note. The plaintiffs relied mainly on the lone testimony of Vicky
Ang Gapido, certainly a biased witness, who was not even a signatory to the
questioned documents. There was no proof that she was an officer of MFI
back in 1984. She appeared on the scene only in 1986.
b. Absent proof that Vicky Ang was a responsible officer of MFI at the time of
the execution of the mortgage documents and was in fact present when the
loan was negotiated and the documents were executed, Vicky Ang cannot
be considered a competent witness.
c. Even Vickys letters to PCRI were clearly conciliatory and recognized their
loan obligation. One could not divine a tone of protest against the socalled
continuing fraud committed against her family. Viewed from the common
experience of mankind, it was simply incredible that appellants and

appellees would enter into a mortgage contract for P3.5 million where the
material terms were indefinite and left to the sole discretion of the lender, all
protestations of trust and the socalled Chinese way of doing business
notwithstanding. It was incredible that the appellees, longtime
businessmen, would sign a promissory note and a real estate mortgage
contract in blank. It was incredible that MFI would issue 24 blank checks for
the monthly amortizations, and this without even knowing that the interest
rate applied was 35% per annum. One needs only note that the signing of
the loan documents and the release of the loan were done on the same day,
which then strongly connotes simultaneous consensual and reciprocal acts
where both parties were present. We note that the MOA for the accessory
loan for P199,072.255 made on December 06, 1984 to pay the real estate
taxes and registration fees clearly carried an interest rate of 35%, not 24%
as claimed by appellees. The delay in the execution of the mortgage
contract was because the real estate taxes had yet to be paid.
d.

It was incredible too that MFI would have entrusted all seven titles to PCRI
and yet also borrowed P199,072.255 for registration fee of the deed of
mortgage for all seven titles if they did not know that these seven titles were
covered by the mortgage. That this was part of the Chinese way of doing
business was also not established as a custom in the manner provided by
Article 12 of the Civil Code. This claimed custom is easily negated by the
execution of the nowcontested mortgage documents as well as the
comprehensive surety agreement.

e.

The above discussion notwithstanding, the trial courts conclusion that the
defendants were patently guilty of predatory lending practices and
iniquitous conduct, may not be far off the truth at all, considering the
excessive penalties and charges imposed for missed amortizations. It is of
common knowledge that the country was in the grip of tumultuous political
uncertainties when the mortgage contract was executed in August 1984,
owing to the unsolved assassination of Senator Benigno S. Aquino, Jr. But
while interest rates shot up to unfamiliar heights, it is also known that after
the 1986 EDSA revolution, things settled down, and interest rates receded
to levels obtaining before August 21, 1983. Defendants would therefore be
hard put to justify continuing to charge 35% interest after February 1986
We conclude that due to estoppel and prescription of the action to annul the
mortgage contract, the complaint for annulment of title and reconveyance
should be dismissed. On the other hand, we find no basis to award to
defendantsappellants P1,000,000 in moral damages and P500,000 in
attorneys fees, even as we must dismiss their counterclaim for deficiency
judgment of P107,876,171.82 for being unconscionably excessive,
unreasonable and iniquitous.

f.

ISSUES:
1. Whether or not the CA disregarded the factual findings of the RTC? NO.
2. Whether or not the action to assail the mortgage had already prescribed. YES.
RULING: The appeal has no merit.
1. The CA did not disregard the factual findings of the RTC
It is settled that the appellate court will not disturb the factual findings of the lower court unless
there is a showing that the trial court overlooked, misunderstood or misapplied some fact or
circumstance of weight and substance that would have affected the result of the case. 11 Indeed,
the trial courts findings are always presumed correct. Nonetheless, the CA is not precluded from
making its own determination and appreciation of facts if it considers the conclusions arrived at
by the trial court not borne out by the evidence, or if substantial facts bearing upon the result of

the case were overlooked, misunderstood or misapplied.12 As an appellate court, the CA is not
necessarily bound by the conclusions of the trial court, but holds the exclusive authority to
review the assessment of the credibility of witnesses and the weighing of conflicting evidence.13

A
Q

In view of the conflicting findings and appreciation of facts by the RTC and the CA, we have to
revisit the evidence of the parties.

A
Q
A

Petitioners insist that respondents committed fraud when the officers of Metropolitan were made
to sign the deed of real estate mortgage in blank.
According to Article 1338 of the Civil Code, there is fraud when one of the contracting parties,
through insidious words or machinations, induces the other to enter into the contract that,
without the inducement, he would not have agreed to. Yet, fraud, to vitiate consent, must be the
causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of
the contract.14 InSamson v. Court of Appeals,15 causal fraud is defined as a deception employed
by one party prior to or simultaneous to the contract in order to secure the consent of the
other.16
Fraud cannot be presumed but must be proved by clear and convincing evidence.17 Whoever
alleges fraud affecting a transaction must substantiate his allegation, because a person is
always presumed to take ordinary care of his concerns, and private transactions are similarly
presumed to have been fair and regular.18 To be remembered is that mere allegation is definitely
not evidence; hence, it must be proved by sufficient evidence.19
Did petitioners clearly and convincingly establish their allegation of fraud in the
execution of the deed of real estate mortgage?
The contested deed of real estate mortgage was a public document by virtue of its being
acknowledged before notary public Atty. Noemi Ferrer.20 As a notarized document, the deed
carried the evidentiary weight conferred upon it with respect to its due execution,21 and had in its
favor the presumption of regularity.22 Hence, it was admissible in evidence without further proof
of its authenticity, and was entitled to full faith and credit upon its face.23 To rebut its authenticity
and genuineness, the contrary evidence must be clear, convincing and more than merely
preponderant; otherwise, the deed should be upheld.24
Petitioners undeniably failed to adduce clear and convincing evidence against the genuineness
and authenticity of the deed. Instead, their actuations even demonstrated that their transaction
with respondents had been regular and at armslength, thereby belying the intervention of fraud.
To start with, the evidence adduced by Vicky Ang, the lone witness for petitioners, tried to cast
doubt on the contents and due execution of the deed of real estate mortgage by pointing to
certain irregularities. But she could not be effective for the purpose because she had not been
among the signatories of the deed. The signatories were her late father Enrique Ang, her mother
Natividad Africa, and her brother Edmundo Ang, none of whom came forward to testify against
the deed, or otherwise to assail the genuineness and due execution of the deed by any other
means. They would have been in the better position than Vicky Ang to substantiate the
allegation of fraud if that was the case. Their silence reflected the inanity of the allegation of
fraud by Vicky Ang.
It does seem that the three signatories did not join Vicky Ang in impugning the authenticity and
genuineness of the deed of real estate mortgage. As Vicky Ang admitted during her cross
examination, she had no evidence to show that the signatories ever assailed the deed, to
wit:chanRoblesvirtualLawlibrary
Q
The signatory to this document, one of the signatory to this document is Enrique Ang,
will you be able to show us a letter personally prepared and signed by Enrique Ang
during his lifetime from 1984 assailing the validity of this document?
A
From 1984?
Q
Up to the present.

A
Q

I cannot recall actually, but if you will permit me I will try to look at the files.
But now, you do not have in your possession a letter personally prepared and signed
by Enrique Ang and duly received by Prosperity, you will still look for it, is that correct, if
it still exists?
As I said I still have to go over the files because it has been eleven (11) years ago.
Can you state definitely that there is such a document as to this point in time?
Because there were documents, there were letters, there were correspondences also
signed by Enrique Ang, prepared and signed by Enrique Ang, its just that I still have to
look for it.
Another signatory here in this Promissory Note and Real Estate Mortgage is Edmundo
Ang will you be able to show us a letter signed by him and received by Prosperity in
which he assailed the validity of this document?
I cannot recall.
How about Natividad Africa, who is also a signatory to this document, will you be able
to produce a letter signed by her assailing the validity of this document duly received
by Prosperity?
I cannot recall.25

Secondly, petitioners freely and voluntarily surrendered to respondents the seven transfer
certificates of title (TCTs) of their lots. Such surrender of the TCTs evinced their intention to offer
the lots as collateral for the performance of their obligations contracted with respondents. They
thereby confirmed the genuineness and due execution of the deed of real estate mortgage.
Surely, they would not have surrendered the TCTs had their intention been otherwise.
Thirdly, another circumstance belying the commission of fraud by respondents was petitioners
pleading with respondents for the resetting of foreclosure sale of the properties after receiving
the notice of the impending sale. As a result, the sale was reset thrice. Had the mortgage and its
foreclosure been unreasonable or fraudulent, petitioners should have instead resolutely
contested respondents move to foreclose.
Fourthly, even after their properties were eventually sold as the consequence of the foreclosure,
petitioners negotiated with respondents on the partial redemption of three of the seven lots. They
also took the trouble of finding a buyer (Mr. Winston Wang of Asia Cotton) of some of the lots.
Had the mortgage been fraudulent, they could have instead instituted a complaint to nullify the
real estate mortgage and the foreclosure sale.
And, lastly, Vicky Angs own letters to respondents had an apologetic tenor, and was seeking
leniency from them. Such tenor and tone of her communications were antithetical to her
allegation of having been the victim of their fraudulent acts.
These circumstances tended to indicate that fraud was not attendant during the transactions
between the parties. Verily, as between the duly executed real estate mortgage and the
unsubstantiated allegations of fraud, the Court affords greater weight to the former.
2.

Action to assail the mortgage already prescribed

The next issue to address is whether the action to assail the real estate mortgage already
prescribed.
To resolve the issue of prescription, it is decisive to determine if the mortgage was void or
merely voidable.
It appears that the original stance of petitioners was that the deed of real estate mortgage was
voidable. In their complaint, they averred that the deed, albeit in printed form, was incomplete in
essential details, and that Metropolitan, through Enrique Ang as its president, signed it in good
faith and in absolute confidence.26 They confirmed their original stance in their pretrial
brief,27 wherein they raised the following issues, to wit:chanRoblesvirtualLawlibrary

1.

2.

Whether or not the mortgage and foreclosure of the subject four (4) parcels of land
should be declared null and void; and
Whether or not defendants should be held liable to pay damages and attorneys fees
to plaintiffs, and for how much?28

Yet, petitioners now claim that the CA committed a reversible error in not holding that the
absence of consent made the deed of real estate mortgage void, not merely voidable. In effect,
they are now advancing that their consent was not merely vitiated by means of fraud, but that
there was complete absence of consent. Although they should be estopped from raising this
issue for the first time on appeal, the Court nonetheless opts to consider it because its resolution
is necessary to arrive at a just and complete resolution of the case.
As the records show, petitioners really agreed to mortgage their properties as security for their
loan, and signed the deed of mortgage for the purpose. Thereafter, they delivered the TCTs of
the properties subject of the mortgage to respondents.
Consequently, petitioners contention of absence of consent had no firm moorings. It remained
unproved. To begin with, they neither alleged nor established that they had been forced or
coerced to enter into the mortgage. Also, they had freely and voluntarily applied for the loan,
executed the mortgage contract and turned over the TCTs of their properties. And, lastly,
contrary to their modified defense of absence of consent, Vicky Angs testimony tended at best
to prove the vitiation of their consent through insidious words, machinations or
misrepresentations amounting to fraud, which showed that the contract was voidable. Where
the consent was given through fraud, the contract was voidable, not void ab initio.29 This is
because a voidable or annullable contract is existent, valid and binding, although it can be
annulled due to want of capacity or because of the vitiated consent of one of the parties.30
With the contract being voidable, petitioners action to annul the real estate mortgage already
prescribed. Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent
of the contracting parties was obtained through fraud, the contract is considered voidable and
may be annulled within four years from the time of the discovery of the fraud.31 The discovery of
fraud is reckoned from the time the document was registered in the Register of Deeds in view of
the rule that registration was notice to the whole world. 32 Thus, because the mortgage involving
the seven lots was registered on September 5, 1984, they had until September 5, 1988 within
which to assail the validity of the mortgage. But their complaint was instituted in the RTC only on
October 10, 1991.33 Hence, the action, being by then already prescribed, should be dismissed.
The Court DENIES the petition for review on certiorari ; AFFIRMS the decision promulgated by
the Court of Appeals on July 23, 2002; and ORDERS petitioners to pay the costs of suit.

The factual and procedural antecedents of the case are as follows:

1.Herein petitioner is a corporation engaged in the building and development of condominium

units. Sometime in 1995, it started the construction of a condominium project called Central Park
Condominium Building located along Jorge St., Pasay City. However, printed advertisements
were made indicating therein that the said project was to be built in Makati City.3

2. In December 1995, respondent, agreed to buy a unit from the above project by paying a
reservation fee and, thereafter, downpayment and monthly installments. On June 18, 1996,
respondent and the representatives of petitioner executed a Contract to Sell.In the said
Contract, it was indicated that the condominium project is located in Pasay City.

3. More than two years after the execution of the Contract to Sell, respondent, through her
counsel, wrote petitioner a letter dated October 30, 1998 demanding the return of P422,500.00,
representing the payments she made, on the ground that she subsequently discovered that the
condominium project was being built in Pasay City and not in Makati City as indicated in its
printed advertisements.

4. However, instead of answering respondent's letter, petitioner sent her a written

communication dated November 30, 1998 informing her that her unit is ready for inspection and
occupancy should she decide to move in.

5. Treating the letter as a form of denial of her demand for the return of the sum she had paid to
petitioner, respondent filed a complaint with the Expanded National Capital Region Field Office
(ENCRFO) of the Housing and Land Use Regulatory Board (HLURB) seeking the annulment of
her contract with petitioner, the return of her payments, and damages.

RATIFICATION
5. G.R. No. 196182

September 1, 2014

ECE REALTY AND DEVELOPMENT INC., Petitioner,

vs.
RACHEL G. MANDAP, Respondent.

6. On September 30, 2005, the ENCRFO dismissed respondent's complaint for lack of merit and
directedthe parties to resume the fulfillment of the terms and conditions of their sales contract.
The ENCRFO held that respondent "failed to show or substantiate the legal grounds that consist
of a fraudulent or malicious dealing with her by the [petitioner], such as, the latter's employment
of insidious words or machinations which induced or entrapped her into the contract and which,
without them, would not have encouraged her to buy the unit.

DECISION
PERALTA, J.:

7. Respondent filed a petition for review with the HLURB Board of Commissioners questioning
the decision of the ENCRFO. On April 25, 2006, the HLURB Board of Commissioners rendered

judgment dismissing respondent's complaint and affirming the decision of the ENCRFO. 9 Giving
credence to the Contract to Sell executed by petitioner and respondent, the Board of
Commissioners held that when the parties reduced their contract in writing, their rights and
duties must befound in their contract and neither party can place a greater obligation than what
the contract provides.

8. Aggrieved, respondent filed an appeal with the Office of the President. On June 21, 2007, the
Office of the President dismissed respondent's appeal and affirmed in totothe decision of the
HLURB Board of Commissioners.10 Respondent filed a Motion for Reconsideration, 11 but the
Office of the President denied it in a Resolution12 dated August 29, 2007.

9. Respondent then filed a petition for review with the CA.13

On July 21, 2010, the CA promulgated its assailed Decision, the dispositive portion of which
reads, thus:

voidable, it should be serious and should not have been employed by both contracting parties."
Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts,
it must fulfill two conditions.
First, the fraud must be dolo causanteor it must be fraud in obtaining the consent of the party. 16
This is referred to as causal fraud. The deceit must be serious. The fraud is serious when it is
sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive
a prudent person cannot be a ground for nullity. 17 The circumstances of each case should be
considered, taking into account the personal conditions of the victim.18
Second, the fraud must be proven by clear and convincing evidence and not merely by a
preponderance thereof.19
In the present case, this Court finds that petitioner is guilty of false representation of a fact . This
is evidenced by its printed advertisements indicating that its subject condominium project is
located in Makati City when, in fact, it is in Pasay City. The Court agrees with the Housing and
Land Use Arbiter, the HLURB Board ofCommissioners, and the Office of the President, in
condemning petitioner's deplorable act of making misrepresentations in its advertisementsand in
issuing a stern warning that a repetition of this act shall bedealt with more severely.

WHEREFORE, premises considered, We hereby REVERSEand SET ASIDEthe Decision x x x

the contract between Rachel G. Mandap and ECE Realty is hereby ANNULLED.

Consequently, ECE Realty is ordered to return the total amountof P422,500.00 representing
payments made by Rachel G. Mandap on reservation fee, [downpayment] and monthly
installments on the condominium unit, with legal interest thereon at twelve percent (12%) per
annumfrom the date of filing of action until fully paid. The CA held that petitioner employed fraud
and machinations to induce respondent to enter into a contract with it. The CA also expressed
doubt on the due execution of the Contract to Sell between the parties.
ISSUES:
Whether petitioner was guilty of fraud and if so, whether such fraud is sufficient ground to nullify
its contract with respondent?
HELD: GUILTY OF FALSE REPRESENTATION BUT IT IS NOT SUFFICIENT TO NULLIFY
THE CONTRACT
RATIONALE:
Article 1338 of the Civil Code provides that "[t]here is fraud when through insidious words or
machinationsof one of the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to."
In addition, under Article 1390 of the same Code, a contract is voidable or annullable "where the
consent is vitiated by mistake, violence, intimidation, undue influence or fraud."

Also, Article 1344 of the same Code provides that "[i]n order that fraud may make a contract

However, insofar as the present case is concerned, the Court agrees with the Housing and Land
Use Arbiter, the HLURB Board of Commissioners, and the Office of the President, that the
misrepresentation made by petitioner in its advertisements does not constitute causal fraud
which would have been a valid basis in annulling the Contract to Sell between petitioner and
respondent.

In his decision, the Housing and Land Use Arbiter found that respondent failed to show that "the
essential and/or moving factor that led the [respondent] to give her consent and agree to buy the
unit was precisely the project's advantageous or uniquelocation in Makati [City] to the
exclusion of other places or cityx x x." Both the HLURB Board of Commissioners and the Office
of the President affirmed the finding of the Arbiter and unanimously held that respondent failed to
prove that the location of the said project was the causal consideration or the principal
inducement which led her into buyingher unit in the said condominium project. The Court finds
no cogent reason to depart from the foregoing findings and conclusion of the above agencies.
Indeed, evidence shows that respondent proceeded to sign the Contract to Sell despite
information contained therein that the condominium is located in Pasay City. This only means
that she still agreed to buy the subject property regardless of the fact that it is located in a place
different from what she was originally informed. If she had a problem with the property's location,
she should not havesigned the Contract to Sell and, instead, immediately raised this issue with
petitioner. But she did not. As correctly observed by the Office of the President, it took
respondent more than two years from the execution of the Contract to Sell to demand the return
of the amount she paid on the ground that she was misled into believing that the subject
property islocated in Makati City. In the meantime, she continued to make payments.
The Court is not persuaded by the ruling of the CA which expresses doubt on the due execution
of the Contractto Sell. The fact remains that the said Contract to Sell was notarized. Itis settled
that absent any clear and convincing proof to the contrary, a notarized document enjoys the

presumption of regularity and is conclusive as to the truthfulness of its contents. 20 Neither does
the Court agree thatthe presumption of regularity accorded to the notarized Contract to Sell was
overcome by evidence to the contrary. Respondent's allegation that she signed the said Contract
to Sell with several blank spaces, and which allegedly did not indicate the location of the
condominium, was not supported by proof. The basic rule is that mere allegation is not evidence
and is not equivalent to proof.21 In addition, the fact that respondent made several payments
prior to the execution of the subject Contract to Sell is not the kind of evidence needed to
overcome such presumption of regularity.
With respect to the foregoing discussions, the Court quotes with approval the disquisition of the
Office of the President on the credibility of the claims of petitioner and respondent, to wit:
xxxx
We give credence to the version of [petitioner] ECE Realty considering that there is no cogent
reason why this Office could not rely on the truth and veracity of the notarized Contract to Sell.
"Being a notarized document, it had in its favorthe presumption of regularity, and to overcome
the same, there must be evidence that is clear, convincing and more than merely preponderant;
otherwise, the document should be upheld. [Respondent] Mandap failed to overcome this
presumption.
The contention that Mandap signed the Contract to Sell in-blank, and [that] it was ECE Realty
that supplied the details on it is remarkably threadbare for no evidence was submitted to support
such claim in all the proceedings before the ENCRFO and the Board of Commissioners. It is
only now that Mandap has belatedly submitted the Affidavit of Lorenzo G. Tipon. This cannot be
done without running afoul with the well-settled principle barring a party from introducing fresh
defenses and facts at the appellate stage. Moreover, the infirmity of affidavits as evidence is a
matter of judicial experience. It issettled that no undue importance shall be given to a sworn
statement or affidavit as a piece of evidence because being taken ex parte, an affidavit is almost
always incomplete and inaccurate. Thus, absent, as here, of (sic) any controverting evidence, it
is reasonable to presume that Mandap knew the contents of the Contract to Sell which was
executed with legal formalities. The ruling in Bernardo vs. Court of Appeals is enlightening in this
wise:
x x x. The rule that one who signs a contract is presumed to know its contentshas been applied
even to contract of illiterate persons on the ground that if such persons are unable to read, they
are negligent if they fail to have the contract read to them. If a person cannot read the
instrument, it is as much his duty to procure some reliable persons to read and explain it tohim,
before he signs it, as it would be to read it before he signed it if he were able to do so and his
failure to obtain a reading and explanation of it is such gross negligence as will estop him from
avoiding it on the ground that he was ignorant of its contents.22
In any case, even assuming that petitioners misrepresentation consists of fraud which could bea
ground for annulling their Contract to Sell, respondent's act of affixing her signatureto the said
Contract, after having acquired knowledge of the property's actual location, can be construed as
an implied ratification thereof.
Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:
Art. 1393. Ratification may be effected expressly or tacitly.1wphi1 It is understood that there is
a tacit ratification if, with knowledge of the reason which renders the contract voidable and such

reason having ceased, the person who has a right to invoke it should execute an act which
necessarily implies an intention to waive his right.
Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom.23
Under Article 1392 of the Civil Code, "ratification extinguishes the action to annul a voidable
contract." In addition, Article 1396 of the same Code provides that "[r]atification cleanses the
contract from all its defects from the moment it was constituted."
Hence, based on the foregoing, the findings and conclusions of the Housing and Land Use
Arbiter, the HLURB Board of Commissioners and the Office of the President, should be
sustained.

WHEREFORE, the instant petition is GRANTED. The Decision and Resolution of the Court of
Appeals, dated July 21, 2010 and March 15, 2011, respectively, are REVERSEDand SET
ASIDE. The September 30, 2005 Decision of the Expanded National Capital Region Field Office
of the Housing and Land Use Regulatory Board, which dismisses respondent's complaint and
directs petitioner and respondent to resume the fulfillment of their sales contract, is
REINSTATED.
SO ORDERED.

6. THE ROMAN CATHOLIC CHURCH, represented

by the Archbishop of Caceres,
Petitioner,
- versus REGINO PANTE,
Respondent.

G.R. No. 174118

Present:
CARPIO, J., Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.
Promulgated:
April 11, 2012

x--------------------------------------------------------------------------------------------------------------x

BRION, J.:
1.

2.

3.

4.

5.

The Church, represented by the Archbishop of Caceres, owned a 32-square meter lot
that measured 2x16 meters located in Barangay Dinaga, Canaman, Camarines Sur.
[5]
On September 25, 1992, the Church contracted with respondent Regino Pante for
the sale of the lot (thru a Contract to Sell and to Buy [6]) on the belief that the latter was
an actual occupant of the lot. The contract between them fixed the purchase price
at P11,200.00, with the initial P1,120.00 payable as down payment, and the remaining
balance payable in three years or until September 25, 1995.
On June 28, 1994, the Church sold in favor of the spouses Nestor and Fidela Rubi
(spouses Rubi) a 215-square meter lot that included the lot previously sold to
Pante. The spouses Rubi asserted their ownership by erecting a concrete fence over
the lot sold to Pante, effectively blocking Pante and his familys access from their
family home to the municipal road. As no settlement could be reached between the
parties, Pante instituted with the RTC an action to annul the sale between the Church
and the spouses Rubi, insofar as it included the lot previously sold to him.
The Church filed its answer with a counterclaim, seeking the annulment of its contract
with Pante. The Church alleged that its consent to the contract was obtained by
fraud when Pante, in bad faith, misrepresented that he had been an actual occupant
of the lot sold to him, when in truth, he was merely using the 32-square meter lot as a
passageway from his house to the town proper. It contended that it was its policy to
sell its lots only to actual occupants. Since the spouses Rubi and their predecessorsin-interest have long been occupying the 215-square meter lot that included the 32square meter lot sold to Pante, the Church claimed that the spouses Rubi were the
rightful buyers.
In a decision dated July 30, 1999, [9] the RTC ruled in favor of the Church, finding that
the Churchs consent to the sale was secured through Pantes misrepresentation that
he was an occupant of the 32-square meter lot. Contrary to his claim, Pante was only
using the lot as a passageway; the Churchs policy, however, was to sell its lots only to
those who actually occupy and reside thereon. As the Churchs consent was secured
through its mistaken belief that Pante was a qualified occupant, the RTC annulled the
contract between the Church and Pante, pursuant to Article 1390 of the Civil Code. [10]
The RTC further noted that full payment of the purchase price was made only on
September 23, 1995, when Pante consigned the balance of P10,905.00 with the RTC,
after the Church refused to accept the tendered amount. It considered the three-year
delay in completing the payment fatal to Pantes claim over the subject lot; it ruled that
if Pante had been prompt in paying the price, then the Church would have been
estopped from selling the lot to the spouses Rubi. In light of Pantes delay and his
admission that the subject lot had been actually occupied by the spouses Rubis
predecessors, the RTC upheld the sale in favor of the spouses Rubi.
Pante appealed the RTCs decision with the CA. In a decision dated May 18, 2006,
[11]
the CA granted Pantes appeal and reversed the RTCs ruling. The CA characterized
the contract between Pante and the Church as a contract of sale, since the Church
made no express reservation of ownership until full payment of the price is made. In
fact, the contract gave the Church the right to repurchase in case Pante fails to pay
the installments within the grace period provided; the CA ruled that the right to
repurchase is unnecessary if ownership has not already been transferred to the buyer.
Even assuming that the contract had been a contract to sell, the CA declared that
Pante fulfilled the condition precedent when he consigned the balance within the
three-year period allowed under the parties agreement; upon full payment, Pante fully
complied with the terms of his contract with the Church. After recognizing the validity
of the sale to Pante and noting the subsequent sale to the spouses Rubi, the CA
proceeded to apply the rules on double sales in Article 1544 of the Civil Code: Article
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. [Emphasis ours.] Since neither of the two sales was registered, the CA upheld
the full effectiveness of the sale in favor of Pante who first possessed the lot by using
it as a passageway since 1963.
The Church filed the present petition for review on certiorari under Rule 45 of the
Rules of Court to contest the CAs ruling. THE PETITION: The Church contends that
the sale of the lot to Pante is voidable under Article 1390 of the Civil Code, which
states: Article 1390. The following contracts are voidable or annullable, even though
there may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent
to a contract;
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper action in
court. They are susceptible of ratification. [Emphasis ours.] For the Church,
the presence of fraud and misrepresentation that would suffice to annul the
sale is the primary issue that the tribunals below should have
resolved. Instead, the CA opted to characterize the contract between the
Church and Pante, considered it as a contract of sale, and, after such
characterization, proceeded to resolve the case in Pantes favor. The
Church objects to this approach, on the principal argument that there could
not have been a contract at all considering that its consent had been
vitiated.
ISSUE: Whether or not there was misrepresentation that existed which vitiated the sellers
consent, therefore invalidates the contract? NO.
RULING: The Court resolves to deny the petition.
No misrepresentation existed vitiating the sellers
consent and invalidating the contract
Consent is an essential requisite of contracts [12] as it pertains to the meeting of the
offer and the acceptance upon the thing and the cause which constitute the contract. [13] To create
a valid contract, the meeting of the minds must be free, voluntary, willful and with a reasonable
understanding of the various obligations the parties assumed for themselves. [14] Where consent,
however, is given through mistake, violence, intimidation, undue influence, or fraud, the contract
is deemed voidable.[15] However, not every mistake renders a contract voidable.The Civil Code
clarifies the nature of mistake that vitiates consent:
Article 1331. In order that mistake may invalidate consent, it
should refer to the substance of the thing which is the object of the contract,
or to those conditions which have principally moved one or both parties to
enter into the contract.
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or qualifications
have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.
[Emphasis ours.]
For mistake as to the qualification of one of the parties to vitiate consent, two requisites must
concur:

1.
2.

the mistake must be either with regard to the identity or with regard to the qualification
of one of the contracting parties; and
the identity or qualification must have been the principal consideration for the
celebration of the contract.[16]

In the present case, the Church contends that its consent to sell the lot was given on the
mistaken impression arising from Pantes fraudulent misrepresentation that he had been the
actual occupant of the lot. Willful misrepresentation existed because of its policy to sell its lands
only to their actual occupants or residents. Thus, it considers the buyers actual occupancy or
residence over the subject lot a qualification necessary to induce it to sell the lot.
Whether the facts, established during trial, support this contention shall determine if
the contract between the Church and Pante should be annulled. In the process of weighing the
evidentiary value of these established facts, the courts should consider both the parties
objectives and the subjective aspects of the transaction, specifically, the parties circumstances
their condition, relationship, and other attributes and their conduct at the time of and subsequent
to the contract. These considerations will show what influence the alleged error exerted on the
parties and their intelligent, free, and voluntary consent to the contract. [17]
Contrary to the Churchs contention, the actual occupancy or residency of a buyer over
the land does not appear to be a necessary qualification that the Church requires before it could
sell its land. Had this been indeed its policy, then neither Pante nor the spouses Rubi would
qualify as buyers of the 32-square meter lot, as none of them actually occupied or resided on the
lot. We note in this regard that the lot was only a 2x16-meter strip of rural land used as a
passageway from Pantes house to the municipal road.
We find well-taken Pantes argument that, given the size of the lot, it could serve no
other purpose than as a mere passageway; it is unthinkable to consider that a 2x16-meter strip
of land could be mistaken as anyones residence. In fact, the spouses Rubi were in possession
of the adjacent lot, but they never asserted possession over the 2x16-meter lot when the 1994
sale was made in their favor; it was only then that they constructed the concrete fence blocking
the passageway.
We find it unlikely that Pante could successfully misrepresent himself as the actual occupant of
the lot; this was a fact that the Church (which has a parish chapel in the same barangaywhere
the lot was located) could easily verify had it conducted an ocular inspection of its own property.
The surrounding circumstances actually indicate that the Church was aware that Pante was
using the lot merely as a passageway.
The above view is supported by the sketch plan, [18] attached to the contract executed
by the Church and Pante, which clearly labeled the 2x16-meter lot as a RIGHT OF WAY; below
these words was written the name of Mr. Regino Pante. Asked during cross-examination where
the sketch plan came from, Pante answered that it was from the Archbishops Palace; neither the
Church nor the spouses Rubi contradicted this statement.[19]
The records further reveal that the sales of the Churchs lots were made after a series
of conferences with the occupants of the lots. [20] The then parish priest of Canaman, Fr.
Marcaida, was apparently aware that Pante was not an actual occupant, but nonetheless,
he allowed the sale of the lot to Pante, subject to the approval of the Archdioceses
Oeconomous. Relying on Fr. Marcaidas recommendation and finding nothing objectionable, Fr.
Ragay (the Archdioceses Oeconomous) approved the sale to Pante.
The above facts, in our view, establish that there could not have been a deliberate,
willful, or fraudulent act committed by Pante that misled the Church into giving its
consent to the sale of the subject lot in his favor. That Pante was not an actual occupant of
the lot he purchased was a fact that the Church either ignored or waived as a requirement. In
any case, the Church was by no means led to believe or do so by Pantes act; there had been
no vitiation of the Churchs consent to the sale of the lot to Pante.

From another perspective, any finding of bad faith, if one is to be made, should be
imputed to the Church. Without securing a court ruling on the validity of its contract with Pante,
the Church sold the subject property to the spouses Rubi. Article 1390 of the Civil Code declares
that voidable contracts are binding, unless annulled by a proper court action. From the time the
sale to Pante was made and up until it sold the subject property to the spouses Rubi, the Church
made no move to reject the contract with Pante; it did not even return the down payment he
paid. The Churchs bad faith in selling the lot to Rubi without annulling its contract with Pante
negates its claim for damages.
In the absence of any vitiation of consent, the contract between the Church and Pante
stands valid and existing. Any delay by Pante in paying the full price could not nullify the
contract, since (as correctly observed by the CA) it was a contract of sale. By its terms, the
contract did not provide a stipulation that the Church retained ownership until full payment of the
price.[21] The right to repurchase given to the Church in case Pante fails to pay within the grace
period provided[22] would have been unnecessary had ownership not already passed to Pante.
The rule on double sales
The sale of the lot to Pante and later to the spouses Rubi resulted in a double sale
that called for the application of the rules in Article 1544 of the Civil Code: Article 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. [Emphasis ours.]
As neither Pante nor the spouses Rubi registered the sale in their favor, the question now is
who, between the two, was first in possession of the property in good faith.
Jurisprudence has interpreted possession in Article 1544 of the Civil Code to mean both actual
physical delivery and constructive delivery.[23] Under either mode of delivery, the facts show that
Pante was the first to acquire possession of the lot.
Actual delivery of a thing sold occurs when it is placed under the control and possession of the
vendee.[24] Pante claimed that he had been using the lot as a passageway, with the Churchs
permission, since 1963. After purchasing the lot in 1992, he continued using it as a passageway
until he was prevented by the spouses Rubis concrete fence over the lot in 1994. Pantes use of
the lot as a passageway after the 1992 sale in his favor was a clear assertion of his right of
ownership that preceded the spouses Rubis claim of ownership.Pante also stated that he had
placed electric connections and water pipes on the lot, even before he purchased it in 1992, and
the existence of these connections and pipes was known to the spouses Rubi. [25] Thus, any
assertion of possession over the lot by the spouses Rubi (e.g., the construction of a concrete
fence) would be considered as made in bad faith because works had already existed on the lot
indicating possession by another. [A] buyer of real property in the possession of persons other
than the seller must be wary and should investigate the rights of those in possession. Without
such inquiry, the buyer can hardly be regarded as a buyer in good faith and cannot have any
right over the property."[26]
Delivery of a thing sold may also be made constructively. Article 1498 of the Civil Code states
that: Article 1498. When the sale is made through a public instrument, the execution
thereof shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear or cannot clearly be inferred.
Under this provision, the sale in favor of Pante would have to be upheld since the contract
executed between the Church and Pante was duly notarized, converting the deed into a public
instrument.[27] In Navera v. Court of Appeals,[28] the Court ruled that: [A]fter the sale of a realty by

means of a public instrument, the vendor, who resells it to another, does not transmit anything to
the second vendee, and if the latter, by virtue of this second sale, takes material possession of
the thing, he does it as mere detainer, and it would be unjust to protect this detention against the
rights of the thing lawfully acquired by the first vendee.Thus, under either mode of delivery,
Pante acquired prior possession of the lot.
We DENY the petition for review on certiorari, and AFFIRM the decision of the Court of Appeals
dated May 18, 2006, and its resolution dated August 11, 2006, issued in CA-G.R.-CV No. 65069.
Costs against the Roman Catholic Church.
7. IGLESIA FILIPINA INDEPENDIENTE, Petitioner,
vs.
HEIRS of BERNARDINO TAEZA, Respondents.

After the expiration of Rev. Macario Ga's term of office as Supreme Bishop of the IFI on May 8,
1981, Bishop Abdias dela Cruz was elected as the Supreme Bishop. Thereafter, an action for the
declaration of nullity of the elections was filed by Rev. Ga, with the Securities and Exchange
Commission (SEC).

5. In 1987, while the case with the SEC is (sic) still pending, the plaintiff-appellee IFI,
represented by Supreme Bishop Rev. Soliman F. Ganno, filed a complaint for annulment of the
sale of the subject parcels of land against Rev. Ga and the defendant Bernardino Taeza, which
was docketed as Civil Case No. 3747. The case was filed with the Regional Trial Court of
Tuguegarao, Cagayan, Branch III, which in its order dated December 10, 1987, dismissed the
said case without prejudice, for the reason that the issue as to whom of the Supreme Bishops
could sue for the church had not yet been resolved by the SEC.

DECISION
PERALTA, J.:

FACTS

1. The plaintiff-appellee Iglesia Filipina Independiente (IFI, for brevity), a duly registered religious
corporation, was the owner of a parcel of land described as Lot 3653, containing an area of
31,038 square meters, situated at Ruyu (now Leonarda), Tuguegarao, Cagayan, and covered by
Original Certificate of Title No. P-8698. The said lot is subdivided as follows: Lot Nos. 3653-A,
3653-B, 3653-C, and 3653-D.
Between 1973 and 1974, the plaintiff-appellee, through its then Supreme Bishop Rev. Macario
Ga, sold Lot 3653-D, with an area of 15,000 square meters, to one Bienvenido de Guzman.
2. On February 5, 1976, Lot Nos. 3653-A and 3653-B, with a total area of 10,000 square meters,
were likewise sold by Rev. Macario Ga, in his capacity as the Supreme Bishop of the plaintiffappellee, to the defendant Bernardino Taeza, for the amount of P100,000.00, through
installment, with mortgage to secure the payment of the balance. Subsequently, the defendant
allegedly completed the payments.

3. In 1977, a complaint for the annulment of the February 5, 1976 Deed of Sale with Mortgage
was filed by the Parish Council of Tuguegarao, Cagayan, represented by Froilan Calagui and
Dante Santos, the President and the Secretary, respectively, of the Laymen's Committee, with
the then Court of First Instance of Tuguegarao, Cagayan, against their Supreme Bishop Macario
Ga and the defendant Bernardino Taeza.

6. On February 11, 1988, the Securities and Exchange Commission issued an order resolving
the leadership issue of the IFI against Rev. Macario Ga.
Meanwhile, the defendant Bernardino Taeza registered the subject parcels of land.
Consequently, Transfer Certificate of Title Nos. T-77995 and T-77994 were issued in his name.
7. The defendant then occupied a portion of the land. The plaintiff-appellee allegedly demanded
the defendant to vacate the said land which he failed to do.
In January 1990, a complaint for annulment of sale was again filed by the plaintiff-appellee IFI,
this time through Supreme Bishop Most Rev. Tito Pasco, against the defendant-appellant, with
the Regional Trial Court of Tuguegarao City, Branch 3.

8. TRIAL COURT:On November 6, 2001, the court a quo rendered judgment in favor of the
plaintiff-appellee.It held that the deed of sale executed by and between Rev. Ga and the
defendant-appellant is null and void.
The dispositive portion of the Decision of Regional Trial Court of Tuguegarao City
9. CA ruled that petitioner, being a corporation sole, validly transferred ownership over the land
in question through its Supreme Bishop, who was at the time the administrator of all properties
and the official representative of the church. It further held that "[t]he authority of the then
Supreme Bishop Rev. Ga to enter into a contract and represent the plaintiff-appellee cannot be
assailed, as there are no provisions in its constitution and canons giving the said authority to any
other person or entity."

ISSUE:

4. The said complaint was, however, subsequently dismissed on the ground that the plaintiffs
therein lacked the personality to file the case.

Whether then Supreme Bishop Rev. Ga is authorized to enter into a contract of sale in behalf of
petitioner?

Petitioner maintains that there was no consent to the contract of sale as Supreme Bishop Rev.
Ga had no authority to give such consent. It emphasized that Article IV (a) of their Canons
provides that "All real properties of the Church located or situated in such parish can be
disposed of only with the approval and conformity of the laymen's committee, the parish priest,
the Diocesan Bishop, with sanction of the Supreme Council, and finally with the approval of the
Supreme Bishop, as administrator of all the temporalities of the Church." It is alleged that the
sale of the property in question was done without the required approval and conformity of the
entities mentioned in the Canons; hence, petitioner argues that the sale was null and void.

In the alternative, petitioner contends that if the contract is not declared null and void, it should
nevertheless be found unenforceable, as the approval and conformity of the other entities in
their church was not obtained, as required by their Canons.
Section 113 of the Corporation Code of the Philippines provides that:

Sec. 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold
real estate and personal property for its church, charitable, benevolent or educational purposes,
and may receive bequests or gifts for such purposes. Such corporation may mortgage or sell
real property held by it upon obtaining an order for that purpose from the Court of First Instance
of the province where the property is situated; x x x Provided, That in cases where the rules,
regulations and discipline of the religious denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal property, such rules, regulations and discipline
shall control, and the intervention of the courts shall not be necessary.

Pursuant to the foregoing, petitioner provided in Article IV (a) of its Constitution and Canons of
the Philippine Independent Church,9 that "[a]ll real properties of the Church located or situated
in such parish can be disposed of only with the approval and conformity of the laymen's
committee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and
finally with the approval of the Supreme Bishop, as administrator of all the temporalities of the
Church."

Evidently, under petitioner's Canons, any sale of real property requires not just the consent of
the Supreme Bishop but also the concurrence of the laymen's committee, the parish priest, and
the Diocesan Bishop, as sanctioned by the Supreme Council. However, petitioner's Canons do
not specify in what form the conformity of the other church entities should be made known. Thus,
as petitioner's witness stated, in practice, such consent or approval may be assumed as a
matter of fact, unless some opposition is expressed.

Closely analogous cases of unenforceable contracts are those where a person signs a deed of
extrajudicial partition in behalf of co-heirs without the latter's authority;15 where a mother as
judicial guardian of her minor children, executes a deed of extrajudicial partition wherein she
favors one child by giving him more than his share of the estate to the prejudice of her other
children;16 and where a person, holding a special power of attorney, sells a property of his
principal that is not included in said special power of attorney.

In the present case, however, respondents' predecessor-in-interest, Bernardino Taeza,

had already obtained a transfer certificate of title in his name over the property in
question. Since the person supposedly transferring ownership was not authorized to do
so, the property had evidently been acquired by mistake. In Vda. de Esconde v. Court of
Appeals, the Court affirmed the trial court's ruling that the applicable provision of law in
such cases is Article 1456 of the Civil Code which states that "[i]f property is acquired
through mistake or fraud, the person obtaining it is, by force of law, considered a trustee
of an implied trust for the benefit of the person from whom the property comes." Thus, in
Aznar Brothers Realty Company v. Aying, citing Vda. de Esconde,20 the Court clarified the
concept of trust involved in said provision, to wit:

Construing this provision of the Civil Code, in Philippine National Bank v. Court of Appeals, the
Court stated:
A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in a
typical trust, confidence is reposed in one person who is named a trustee for the benefit of
another who is called the cestui que trust, respecting property which is held by the trustee for the
benefit of the cestui que trust. A constructive trust, unlike an express trust, does not emanate
from, or generate a fiduciary relation. While in an express trust, a beneficiary and a trustee are
linked by confidential or fiduciary relations, in a constructive trust, there is neither a promise nor
any fiduciary relation to speak of and the so-called trustee neither accepts any trust nor intends
holding the property for the beneficiary.

The concept of constructive trusts was further elucidated in the same case, as follows:
. . . implied trusts are those which, without being expressed, are deducible from the nature of the
transaction as matters of intent or which are superinduced on the transaction by operation of law
as matters of equity, independently of the particular intention of the parties. In turn, implied trusts
are either resulting or constructive trusts. These two are differentiated from each other as
follows:
Resulting trusts are based on the equitable doctrine that valuable consideration and not legal
title determines the equitable title or interest and are presumed always to have been
contemplated by the parties. They arise from the nature of circumstances of the consideration
involved in a transaction whereby one person thereby becomes invested with legal title but is
obligated in equity to hold his legal title for the benefit of another.

On the other hand, constructive trusts are created by the construction of equity in order to satisfy
the demands of justice and prevent unjust enrichment. They arise contrary to intention against
one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property
which he ought not, in equity and good conscience, to hold. (Italics supplied)

A constructive trust having been constituted by law between respondents as trustees and
petitioner as beneficiary of the subject property, may respondents acquire ownership over the
said property? The Court held in the same case of Aznar,21 that unlike in express trusts and
resulting implied trusts where a trustee cannot acquire by prescription any property entrusted to
him unless he repudiates the trust, in constructive implied trusts, the trustee may acquire the
property through prescription even if he does not repudiate the relationship. It is then incumbent
upon the beneficiary to bring an action for reconveyance before prescription bars the same.

Clearly, therefore, petitioner's complaint was filed well within the prescriptive period stated
above, and it is only just that the subject property be returned to its rightful owner.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals, dated June 30,
2006, and its Resolution dated August 23, 2007, are REVERSED and SET ASIDE. A new
judgment is hereby entered:
(1) DECLARING petitioner Iglesia Filipina Independiente as the RIGHTFUL OWNER of the lots
covered by Transfer Certificates of Title Nos. T-77994 and T-77995;
(2) ORDERING respondents to execute a deed reconveying the aforementioned lots to
petitioner;
(3) ORDERING respondents and successors-in-interest to vacate the subject premises and
surrender the same to petitioner; and

In Aznar,22 the Court explained the basis for the prescriptive period, to wit:
(4) Respondents to PAY costs of suit.
x x x under the present Civil Code, we find that just as an implied or constructive trust is an
offspring of the law (Art. 1456, Civil Code), so is the corresponding obligation to reconvey the
property and the title thereto in favor of the true owner. In this context, and vis--vis prescription,
Article 1144 of the Civil Code is applicable.
Article 1144. The following actions must be brought within ten years from the time the right of
action accrues:

SO ORDERED.
VOID CONTRACTS
ANASTACIO TINGALAN, substituted by his heirs, namely: ROMEO L. TINGALAN,
ELPEDIO L. TINGALAN, JOHNNY L. TINGALAN and LAURETA T. DELA CERNA, Petitioners,

(1) Upon a written contract;

vs.
(2) Upon an obligation created by law;
SPOUSES RONALDO and WINONA MELLIZA, Respondents.
(3) Upon a judgment.
DECISION
xxx

xxx

xxx
VILLARAMA, JR., J.:

An action for reconveyance based on an implied or constructive trust must perforce prescribe in
ten years and not otherwise. A long line of decisions of this Court, and of very recent vintage at
that, illustrates this rule. Undoubtedly, it is now well-settled that an action for reconveyance
based on an implied or constructive trust prescribes in ten years from the issuance of the
Torrens title over the property.
It has also been ruled that the ten-year prescriptive period begins to run from the date of
registration of the deed or the date of the issuance of the certificate of title over the property, x x
x.

Here, the present action was filed on January 19, 1990,24 while the transfer certificates of title
over the subject lots were issued to respondents' predecessor-in-interest, Bernardino Taeza,
only on February 7, 1990.

1. The original owner in fee simple of the subject property was petitioner Anastacio 4 - a member
of the Bukidnon Tribe. His ownership is evidenced by OCT No. P-8757 Free Patent No. (X-4)
2195 and Tax Declaration No. 13-021-5522 over a five-hectare 5 property located in Dalwangan,
Malaybalay City, Bukidnon. The free patent was issued under his name on October 4, 1976.

2. In a Deed of Absolute Sale (Deed) dated March 28, 1977, petitioner Anastacio sold the
subject property to respondent-spouses. Since then, respondent-spouses have been in actual,
exclusive, peaceful, uninterrupted and adverse possession of the subject property.

3. The Owner's Duplicate Certificate of Title and Tax Declaration were also issued under the

names of respondent-spouses who paid for the transfer and real property taxes pertaining to the
property in question.

4.Around 23 years later, or on June 7, 2000, one Elena Tunanan (Elena) filed an adverse claim
over the subject property. Petitioner Anastacio countered and demanded that respondentspouses vacate the property, but the latter refused claiming ownership over the same as
supported by the Deed executed between them and petitioner Anastacio on March 28, 1977.
Petitioner Anastacio then filed a complaint before the Office of the Barangay Captain but the
summons were unheeded by respondent-spouses.

5.On October 22, 2001, Anastacio filed Civil Case No. 3120-01 with the court a quo for Quieting
of Title and Recovery of Possession against respondent-spouses and Elena. In the complaint,
petitioner Anastacio claimed that he remains to be the owner of the subject property as his title
under OCT No. P-8757 has never been cancelled and that the sale was null and void since the
Deed was executed within the five-year prohibitory period under the Public Land Act, as
amended. The Deed was also written in the English language which, allegedly, he could neither
speak nor understand. He further averred that being a member of a cultural minority, the Deed
should have been approved by the Chairman of the Commission on National Integration under
Sections 120 and 124 of Republic Act No. 3872,6 as amended.

6. Respondent-spouses countered that in view of the Deed dated March 28, 1977, the Owner's
Duplicate Certificate of Title and Tax Declaration were issued under their names and they have
been in actual, exclusive and uninterrupted possession of the subject property since the
execution of the Deed.

7. They further posited the following allegations: that the Certificate to File Action was legally
flawed because petitioner Anastacio did not pay the docket fees; that the petition was defective
because it did not indicate the assessed value of the subject property which is important in the
determination of the jurisdiction of the trial court; and, that the action was barred by prescription.

8. To counter respondent-spouses' assertion, petitioners maintained that notwithstanding the

delivery of the title to and transfer of possession over the subject property to respondentspouses, these circumstances could not have validated the sale because the Deed was
executed within the five-year prohibitory period under the Public Land Act, as amended, making
it void ab initio.

The trial court upheld the validity of the sale despite the Deed being executed within the fiveyear prohibitory period because "the sale executed by petitioner to the respondent is not the kind
of violation as contemplated in accordance of (sic) Sec[tion] 18 of [the] Public Land Act" as the
transfer was not yet completed by the issuance of a new certificate of title under the name of
respondent-spouses.8
On the issue on the validity of the Deed due to petitioner Anastacio's alleged inability to
understand its stipulations which are written in English, the trial court held that being a notarized
document, the Deed enjoys the presumption of regularity. The trial court also observed that
Anastacio voluntarily sold the subject property as evidenced by the Affidavit of Non-Tenancy and
the Certification/Receipt for the amount of Six Thousand Pesos (P6,000.00).

10. COURT OF APPEALS affirmed the decision of the trial court in toto xxx
.
The appellate court held that the case was barred by laches due to the 24-year delay of
petitioner Anastacio in filing the petition. The CA considered such delay as unconscionable and
prejudicial to the rights of third persons who relied on his inaction as the original patentee of the
subject property, viz.:
After a careful analysis of the facts and circumstances of the case, as borne out by the
evidence, this Court finds the four elements mentioned to be present in the case at bar. First,
Anastacio sold the land which was covered by a free patent title dated March 28, 1977 and the
sale was made knowingly in violation of the Public Land Act. Second, from the date of the sale
on March 28, 1977, Anastacio, the patentee could have instituted the action to annul the sale
and regain the possession and ownership of the land. But notwithstanding the invalidity of the
sale, patentee Anastacio, who knew of the invalidity and has had all the opportunity to institute
an action for the annulment of the sale as a matter of law, did not bother at all to file a suit to
annul the sale or to recover the land. Not until 24 years later. Third, the Spouses Melliza who are
the vendees never expected or believed that Anastacio would bring an action to annul the sale
and recover the land. The fact that the vendees told Anastacio that he could repurchase his
property within the five (5)[-]year period from the execution of the deed of sale but instead of
repurchasing it, Anastacio gave the title to the Spouses seven years after the execution of the
deed of sale in 1977 and did not bother them since then and fourth, it would be unjust and
inequitable to still permit appellant to recover his property after that long, unexplained inaction.
The long period of time more or less 24 years from the execution of the sale, had allowed the
Spouses to invest considerable amount of money, time, and effort in developing and
transforming the questioned property into a beautiful orchard, aside from the residential house,
poultry, barn and other plantations made by the Spouses.10
The heirs of Anastacio, as substitutes, moved for reconsideration of the CA Decision on July 19,
2010. The appellate court denied the motion in its Resolution dated January 12, 2011, viz.:

9. On December 8, 2008, the TRIAL COURT dismissed the case for lack of cause of action and
ordered the Register of Deeds to cancel OCT No. P-8757 and the corresponding tax declaration
over the subject property, viz.:

ISSUE:

recognized or confirmed, actually or presumptively, and cause the reversion of the property and
its improvements to the State.13
Whether or not the deed of sale was void? (Appellant anastacio tingalan and his successors in
interest, are now barred by laches from asserting their rights over the subject property, after
failing to exercise their rights for an unreasonable length of time).

The contract of sale entered into between petitioner Anastacio and respondent-spouses on
March 28, 1977 is null and void from inception for being contrary to law and public policy. As a
void contract - it is imprescriptible and not susceptible of ratification.

The foregoing provision of law unambiguously classifies the subject contract of sale executed on
March 28, 1977 as unlawful and null and void ab initio for being in violation of Section 118, i.e.,
entered into within the five-year prohibitory period. This provision of law is clear and explicit and
a contract which purports to alienate, transfer, convey or encumber any homestead within the
prohibitory period is void from its execution.14 The Court has held in a number of cases that such
provision of law is Mandatory15 with the purpose of promoting a specific public policy to preserve
and keep in the family of the patentee that portion of the public land which the State has
gratuitously given to them.16

The law is clear under Section 118 of the Public Land Act, as amended, that unless made in
favor of the government or any of its branches, units or institutions, lands acquired under free
patent or homestead provisions shall not be subject to any form of encumbrance for a term of
five years from and after the date of issuance of the patent or grant, viz.:

In view of this clause in the Deed, both courts a quo construed the contract as a conditional sale
with the following legal effects, viz.:

HELD: VOID

As the Deed of Sale was considered conditional and there was no complete conveyance or
transfer that occurred, the five (5)-year prohibitory period is not applicable in this instant case.
SEC. 118. Except in favor of the Government or any of its branches, units, or institutions, or
legally constituted banking corporations, lands acquired under free patent or homestead
provisions shall not be subject to encumbrance or alienation from the date of the approval of the
application and for a term of five years from and after the date of issuance of the patent or grant,
nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of
said period; but the improvements or crops on the land may be mortgaged or pledged to
qualified persons, associations, or corporations.
No alienation, transfer, or conveyance of any homestead after five years and before twenty-five
years after issuance of title shall be valid without the approval of the Secretary of Agriculture and
Natural Resources, which approval shall not be denied except on constitutional and legal
grounds.

Following Section 118, the subject land could not have been validly alienated or encumbered on
March 28, 1977 which was way within five years from the date of the issuance of the free patent
under the name of petitioner Anastacio on October 4, 1976.

The Deed of Sale is but a preliminary step for the issuance of a new certificate of title which is
the final step to accomplish registration.
To effect the land sold, the presentation of the Deed of Sale and its entry in the day book must
be done with the surrender of the owner's certificate of title. It is the Deed of Sale that is
registered in respondent's favor and the Transfer Certificate of Title subsequently obtained over
the property which has superior right thereon. x x x

In the instant case, such did not happen, with the name still intact of the petitioner there was no
complete transfer yet of the ownership or conveyance hence the sale executed by petitioner to
the respondent is not the kind of violation as contemplated in accordance of (sic) Sec. 118 of
[the] Public Land Act.19

We do not agree.
The legal consequences of such sale - clearly made within the prohibitory period - are stated
under Section 124 of the Public Land Act, as amended, viz.:

SEC. 124. Any acquisition, conveyance, alienation, transfer, or other contract made or executed
in violation of any of the provisions of sections one hundred and eighteen, one hundred and
twenty, one hundred and twenty-one, one hundred and twenty-two, and one hundred and
twenty-three of this Act shall be unlawful and null and void from its execution and shall produce
the effect of annulling and cancelling the grant, title, patent, or permit originally issued,

The subject property was clearly encumbered within the mandatory five-year prohibitory period
in flagrant violation of the Public Land Act, as amended. The inclusion of the afore-quoted clause
in the Deed did not operate to effectively exclude the subject sale from the mandatory
prohibition. Petitioner Anastacio and respondent-spouses knew that the sale of the subject land
was prohibited by law in 1977, and the conditional clause in the Deed was included in order to
circumvent the legal prohibition of the sale. Both parties knew that the "permission" of the
Secretary of Agriculture and Natural Resources could not have been legally procured within the

prohibitory period, and the expected failure of herein respondent-spouses to get such
permission would make the contract binding on October 4, 1981 -or after the five-year
prohibition. (OMMITED THE TESTIMONY)

It is clear as day that during the period of the five-year prohibition, the scheme devised by
petitioner Anastacio and respondent-spouses had resulted in practically depriving the grantees herein petitioner Anastacio and his heirs - that piece of land that the government had
gratuitously given to them, giving rise to a situation which is the exact antithesis of the primordial
aim of our free patent and homestead provisions under the Public Land Act, as amended.
Our ruling in the case of Manzano, et al. v. Ocampo, et al. 21 is both pertinent and informative,
viz.:
The law prohibiting any transfer or alienation of homestead land within five years from the
issuance of the patent does not distinguish between executory and consummated sales; and it
would hardly be in keeping with the primordial aim of this prohibition to preserve and keep in the
family of the homesteader the piece of land that the state had gratuitously given to them, to hold
valid a homestead sale actually perfected during the period of prohibition but with the execution
of the formal deed of conveyance and the delivery of possession of the land sold to the buyer
deferred until after the expiration of the prohibitory period, purposely to circumvent the very law
that prohibits and declares invalid such transaction to protect the homesteader and his family. To
hold valid such arrangements would be to throw the door wide open to all possible fraudulent
subterfuges and schemes that persons interested in land given to homesteaders may devise to
circumvent and defeat the legal provision prohibiting their alienation within five years from the
issuance of the homesteader's patent.
We, therefore, hold that the sale in question is illegal and void for having been made within five
years from the date of Manzano's patent, in violation of section 118 of the Public Land Law. x x
x22

A void contract produces no legal effect whatsoever in accordance with the principle "quad
nullum est nullum producit effectum." 23 It could not transfer title to the subject property and
there could be no basis for the issuance of a title from petitioner Anastacio's name to the
names of respondent-spouses. It is not susceptible of ratification and the action for the
declaration of its absolute nullity is imprescriptible.24 It was therefore error for both courts a
quo to rule that "[p]etitioner's failure to act on such considerable time has already barred him by
estoppel and laches."25 We quote the pertinent portion of the appellate court's assailed decision
where it discussed its basis for ruling that !aches exists in the case at bar:

property wherein the Spouses Melliza assumed that Anastacio Tingalan had already given up
his right to recover back the property within five (5) years from the conveyance and being the
owner, they cultivated and made improvements to the subject property. Appellant Anastacio who
was not in possession of the property, asserted his claim 24 years after the appellees were
already in possession and acquired the subject property; such delay is unconscionable and
would prejudice the rights of third parties who placed reliance on the inaction of Anastacio, the
original patentee.26

We disagree.
The subject contract of sale, being null and void from inception, did not pass any rights
over the property from petitioner Anastacio to respondent-spouses.1wphi1 Since
petitioner Anastacio never lost ownership over the land in question, there was no need
for him or his heirs to repurchase the same from respondent-spouses. With nothing to
repurchase, laches could operate to bar petitioner and his heirs from asserting their
rights to the property.

Following the declaration that the contract of sale over the subject property is void for being in
violation of Section 118 of the Public Land Act, as amended, jurisprudence dictates that the
subject land be returned to the heirs of petitioner Anastacio. In the 1986 case of Arsenal v.
Intermediate Appellate Court,27 we ruled, viz.:
x x x in cases where the homestead has been the subject of void conveyances, the law still
regards the original owner as the rightful owner subject to escheat proceedings by the State. In
the Menil and M[ajnzano cases earlier cited, this Court awarded the land back to the original
owner notwithstanding the fact that he was equally guilty with the vendee in circumventing the
law. This is so because this Court has consistently held that ''the pari delicto doctrine may not be
invoked in a case of this kind since it would run counter to an avowed fundamental policy of the
State, that the forfeiture of a homestead is a matter between the State and the grantee or his
heirs, and that until the State had taken steps to annul the grant and asserts title to the
homestead the purchaser is, as against the vendor or his heirs, no more entitled to keep the
land than any intruder." x x x

The Court made the same ruling on the issue of ownership in the earlier cited case of Manzano
in 1961, including a disposition that the buyer therein is entitled to a reimbursement of the
purchase price plus interest, viz.:

x x x Appellees in their brief admitted that deceased appellant can repurchase the property at
the same price within the five (5)[-]year period from the execution of the deed of sale.
x x x In the case at bar, Anastacio Tingalan, the original patentee could have repurchased back
(sic) his property or if not an action to recover back his property but it did not.
Instead, appellant Anastacio waited for more than 24 years to institute this case. It was only on
October 22, 2001 or 24 years after that petitioner-appellant initiated an action to recover his

x x x Being void from its inception, the approval thereof by the Undersecretary of Agriculture and
Natural Resources after the lapse of five years from Manzano 's patent did not legalize the sale
x x x. The result is that the homestead in question must be returned to Manzano's heirs,
petitioners herein, who are, in turn, bound to restore to appellee Ocampo the sum of P3,000.00
received by Manzano as the price thereof x x x. The fruits of the land should equitably
compensate the interest on the price.28

Prior to Manzano, we made a similar ruling in the case of De las Santos v. Roman Catholic
Church of Midsayap29 that "[ u ]pon annulment of the sale, the purchaser's claim is reduced to
the purchase price and its interest."

2.

We shall apply the same rule in the case at bar.

WHEREFORE, IN VIEW OF THE FOREGOING, the Decision and Resolution of the Court of
Appeals dated June 23, 2010 and January 12, 2011, respectively, in CA-G.R. CV No. 01874MIN are REVERSED and SET ASIDE. A new judgment is hereby entered:
1. Declaring NULL AND VOID the sale of the subject parcel of land situated at Dalwangan,
Malaybalay City covered by OCT No. P-8757 Free Patent No. (X-4) 2195 with an area of five (5)
hectares covered by Tax Declaration No. 13-021-5522;
2. Ordering respondent-spouses, their heirs, assigns, or representatives, to RESTORE the heirs
of petitioner Anastacio actual and physical possession of the subject property;

3.

3. Ordering respondent-spouses, their heirs, assigns, or representatives, to RETURN AND

DELIVER to the heirs of petitioner Anastacio two documents: Original Certificate of Title No. P8757 and Tax Declaration No. 13-021-5522; and,
4. REMANDING the instant case to the Regional Trial Court, Branch 10, Malaybalay City, for a
determination of the total amount to be returned by petitioners to respondent-spouses consisting
of the purchase price and the interest due thereon, and if the fruits realized by respondentspouses from their long possession of the subject land since 1977 would equitably compensate
the interest on the price.

4.

VALENTINA S. CLEMENTE, vs. THE COURT OF APPEALS, ANNIE SHOTWELL

JALANDOON, ET AL.
October 14, 2015
G.R. No. 175483
JARDELEZA, J.
Nature of the action: This is a Petition for Review on Certiorari1 under Rule 45 of the Revised
Rules of Court filed by Valentina S. Clemente ("petitioner") from the Decision2 of August 23,
2005 and the Resolution3 dated November 15, 2006 of the Court of Appeals (CA) Eighth
Division in CA-G.R. CV No. 70918.
Petitioner assails the Decision of the CA which ruled that two (2) deeds of absolute sale
executed between petitioner and Adela de Guzman Shotwell (Adela), her grandmother, are
void and inexistent for being simulated and lacking consideration. The CA affirmed the Decision
of the Regional Trial Court (RTC) of Quezon City, Branch 89, but deleted the holding of the latter
that an implied trust existed.
Facts:
1.

Adela owned three (3) adjoining parcels of land in Scout Ojeda Street, Diliman,
Quezon City, subdivided as Lots 32, 34 and 35-B (the Properties). Among the
improvements on the Properties was Adelas house (also referred to as the big

5.

house). During her lifetime, Adela allowed her children, namely, Annie Shotwell
Jalandoon, Carlos G. Shotwell (Carlos Sr.), Anselmo G. Shotwell and Corazon S.
Basset, and her grandchildren,4 the use and possession of the Properties and its
improvements.
Sometime in 1985 and 1987, Adela simulated the transfer of Lots 32 and Lot 34 to her
two grandsons from Carlos Sr., namely, Carlos V. Shotwell, Jr. (Carlos Jr.) and
Dennis V. Shotwell.6 As a consequence, Transfer Certificate of Title (TCT) No.
338708/PR 9421 was issued over Lot 32 under the name of Carlos Jr., while TCT No.
366256/PR 9422 was issued over Lot 34 under the name of Dennis.7 On the other
hand, Lot 35-B remained with Adela and was covered by TCT No. 374531. It is
undisputed that the transfers were never intended to vest title to Carlos Jr. and Dennis
who both will return the lots to Adela when requested.8 On April 18, 1989, prior to
Adela and petitioners departure for the United States, Adela requested Carlos Jr. and
Dennis to execute a deed of reconveyance9 over Lots 32 and 34. The deed of
reconveyance was executed on the same day and was registered with the Registry of
Deeds on April 24, 1989.10 On April 25, 1989, Adela executed a deed of absolute
sale11 over Lots 32 and 34, and their improvements, in favor of petitioner, bearing on
its face the price of 250,000.00. On the same day, Adela also executed a special
power of attorney12 (SPA) in favor of petitioner. Petitioners authority under the SPA
included the power to administer, take charge and manage, for Adelas benefit, the
Properties and all her other real and personal properties in the Philippines.13 The
deed of absolute sale and the SPA were notarized on the same day by Atty. Dionilo D.
Marfil in Quezon City.
On April 29, 1989, Adela and petitioner left for the United States.15 When petitioner
returned to the Philippines, she registered the sale over Lots 32 and 34 with the
Registry of Deeds on September 25, 1989. TCT No. 19811 and TCT No. 19809 were
then issued in the name of petitioner over Lots 32 and 34, respectively.16 On January
14, 1990, Adela died in the United States and was succeeded by her four children.17
Soon thereafter, petitioner sought to eject Annie and Carlos Sr., who were then staying
on the Properties. Only then did Annie and Carlos Sr. learn of the transfer of titles to
petitioner. Thus, on July 9, 1990, Annie, Carlos Sr. and Anselmo, represented by
Annie, (private respondents) filed a complaint for reconveyance of property18
against petitioner before Branch 89 of the RTC of Quezon City. It was docketed as
Civil Case No. Q-90-6035 and titled Annie S. Jalandoon, et al. v. Valentina
Clemente.
In the course of the trial, private respondents discovered that Adela and petitioner
executed another deed of absolute sale20 over Lot 35-B on April 25, 1989 (collectively
with the deed of absolute sale over Lots 32 and 34, Deeds of Absolute Sale), bearing
on its face the price of 60,000.00.21 This was notarized on the same date by one
Orancio Generoso in Manila, but it was registered with the Registry of Deeds only on
October 5, 1990. Thus, private respondents amended their complaint to include Lot
35-B.23 In their amended complaint, private respondents sought nullification of the
Deeds of Absolute Sale. They alleged that Adela only wanted to help petitioner travel
to the United States, by making it appear that petitioner has ownership of the
Properties. They further alleged that similar to the previous simulated transfers to
Carlos Jr. and Dennis, petitioner also undertook and warranted to execute a deed of
reconveyance in favor of the deceased over the Properties, if and when Adela should
demand the same. They finally alleged that no consideration was given by petitioner to
Adela in exchange for the simulated conveyances.
On October 3, 1997, Carlos Sr. died and was substituted only by Dennis.25 In an
order dated June 18, 1999, the case was dismissed with respect to Annie after she
manifested her intention to withdraw as a partyplaintiff.26 Anselmo Shotwell also died
without any compulsory heir on September 7, 2000. On February 26, 2001, the trial
court promulgated a Decision27 in favor of private respondents. Its decretal portion
reads: WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Declaring null and void the Deeds of Absolute Sale both dated April 25, 1989
between the late Adela De Guzman Shotwell and the defendant; 2. Ordering the
cancellation of Transfer Certificates of Title Nos. 19809, 19811 and 26558, all of the

6.

Registry of Deeds of Quezon City and in the name of defendant Valentina Clemente;
and 3. Ordering the defendant to execute a Deed of Reconveyance in favor of the
estate of the late Adela de Guzman Shotwell over the three (3) subject lots,
respectively covered by Transfer Certificates of Title Nos. 19809, 19811 and 26558 of
the Registry of Deeds of Quezon City; With costs against defendant.
On appeal, the CA affirmed with modification the Decision. The CA ruled that the
Deeds of Absolute Sale were simulated. It also ruled that the conveyances of the
Properties to petitioner were made without consideration and with no intention to have
legal effect.29 The CA agreed with the trial court that the contemporaneous and
subsequent acts of petitioner and her grandmother are enough to render the
conveyances null and void on the ground of being simulated.30 The CA found that
Adela retained and continued to exercise dominion over the Properties even after she
executed the conveyances to petitioner.31 By contrast, petitioner did not exercise
control over the properties because she continued to honor the decisions of Adela.
The CA also affirmed the court a quos finding that the conveyances were not
supported by any consideration.32 Petitioner filed a Motion for Reconsideration33
dated September 12, 2005 but this was denied by the CA in its Resolution34 dated
November 15, 2006. Hence, this petition.

ISSUE: Whether or not the CA erred in affirming the decision of the trial court, that the
Deeds of Absolute Sale between petitioner and her late grandmother over the Properties
are simulated and without consideration, and hence, void and inexistent.
RULING: NO. We deny the petition. Petitioner has not been able to show that the lower
courts committed error in appreciating the evidence of record. The Deeds of Absolute
Sale between petitioner and the late Adela Shotwell are null and void for lack of consent
and consideration.

While the Deeds of Absolute Sale appear to be valid on their face, the courts are not
completely precluded to consider evidence aliunde in determining the real intent of the
parties. This is especially true when the validity of the contracts was put in issue by
one of the parties in his pleadings. Here, private respondents assail the validity of the
Deeds of Absolute Sale by alleging that they were simulated and lacked consideration.
A. Simulated contract The Civil Code defines a contract as a meeting of minds
between two persons whereby one binds himself, with respect to the other, to give
something or to render some service.43 Article 1318 provides that there is no contract
unless the following requisites concur: (1) Consent of the contracting parties; (2)
Object certain which is the subject matter of the contract; and (3) Cause of the
obligation which is established. All these elements must be present to constitute a
valid contract; the absence of one renders the contract void. As one of the essential
elements, consent when wanting makes the contract non-existent. Consent is
manifested by the meeting of the offer and the acceptance of the thing and the cause,
which are to constitute the contract. A contract of sale is perfected at the moment
there is a meeting of the minds upon the thing that is the object of the contract, and
upon the price.
Here, there was no valid contract of sale between petitioner and Adela because
their consent was absent. The contract of sale was a mere simulation.
Simulation takes place when the parties do not really want the contract they
have executed to produce the legal effects expressed by its wordings. Article
1345 of the Civil Code provides that the simulation of a contract may either be
absolute or relative. The former takes place when the parties do not intend to be
bound at all; the latter, when the parties conceal their true agreement. The case of
Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M. Ureta47 is instructive on the
matter of absolute simulation of contracts, viz: In absolute simulation, there is a
colorable contract but it has no substance as the parties have no intention to be bound
by it. The main characteristic of an absolute simulation is that the apparent contract is
not really desired or intended to produce legal effect or in any way alter the juridical
situation of the parties. As a result, an absolutely simulated or fictitious contract is

void, and the parties may recover from each other what they may have given under
the contract... (Emphasis supplied) In short, in absolute simulation there appears to be
a valid contract but there is actually none because the element of consent is lacking.
This is so because the parties do not actually intend to be bound by the terms of the
contract. In determining the true nature of a contract, the primary test is the intention
of the parties. If the words of a contract appear to contravene the evident intention of
the parties, the latter shall prevail. Such intention is determined not only from the
express terms of their agreement, but also from the contemporaneous and
subsequent acts of the parties. This is especially true in a claim of absolute simulation
where a colorable contract is executed. In ruling that the Deeds of Absolute Sale were
absolutely simulated, the lower courts considered the totality of the prior,
contemporaneous and subsequent acts of the parties.
The following circumstances led the RTC and the CA to conclude that the Deeds of
Absolute Sale are simulated, and that the transfers were never intended to affect the
juridical relation of the parties: a) There was no indication that Adela intended to
alienate her properties in favor of petitioner. In fact, the letter of Adela to Dennis dated
April 18, 198951 reveals that she has reserved the ownership of the Properties in
favor of Dennis. b) Adela continued exercising acts of dominion and control over the
properties, even after the execution of the Deeds of Absolute Sale, and though she
lived abroad for a time. In Adelas letter dated August 25, 198952 to a certain Candy,
she advised the latter to stay in the bighouse. Also, in petitioners letter to her cousin
Dennis dated July 3, 1989,53 she admitted that Adela continued to be in charge of the
Properties; that she has no say when it comes to the Properties; that she does not
intend to claim exclusive ownership of Lot 35-B; and that she is aware that the
ownership and control of the Properties are intended to be consolidated in Dennis. c)
The SPA executed on the same day as the Deeds of Absolute Sale appointing
petitioner as administratrix of Adelas properties, including the Properties, is repugnant
to petitioners claim that the ownership of the same had been transferred to her. d)
The previous sales of the Properties to Dennis and Carlos, Jr. were simulated.
This history, coupled with Adelas treatment of petitioner, and the surrounding
circumstances of the sales, strongly show that Adela only granted petitioner the same
favor she had granted to Dennis and Carlos Jr. The April 18, 1989 letter to Dennis
convincingly shows Adelas intention to give him the Properties. Clearly, the
submission of petitioner to the orders of Adela does not only show that the latter
retained dominion over the Properties, but also that petitioner did not exercise acts of
ownership over it. If at all, her actions only affirm the conclusion that she was merely
an administratrix of the Properties by virtue of the SPA. On the SPA, petitioner claims
the lower courts erred in holding that it is inconsistent with her claim of ownership.
Petitioner claims that she has sufficiently explained that the SPA is not for the
administration of the Properties, but for the reconstitution of their titles. We agree with
the lower courts that the execution of an SPA for the administration of the Properties,
on the same day the Deeds of Absolute Sale were executed, is antithetical to the
relinquishment of ownership.
The SPA shows that it is so worded as to leave no doubt that Adela is appointing
petitioner as the administratrix of her properties in Scout Ojeda. Had the SPA been
intended only to facilitate the processing of the reconstitution of the titles, there would
have been no need to confer other powers of administration, such as the collection of
debts, filing of suit, etc., to petitioner. 59 In any case, the explanation given by
petitioner that the SPA was executed so as only to facilitate the reconstitution of the
titles of the Properties is not inconsistent with the idea of her being the administratrix
of the Properties. On the other hand, the idea of assigning her as administratrix is not
only inconsistent, but also repugnant, to the intention of selling and relinquishing
ownership of the Properties. Petitioner next questions the lower courts findings that
the Deeds of Absolute Sale are simulated because the previous transfers to Adelas
other grandchildren were also simulated. It may be true that, taken by itself, the fact
that Adela had previously feigned the transfer of ownership of Lots 32 and 34 to her
other grandchildren would not automatically mean that the subject Deeds of Absolute
Sale are likewise void. The lower courts, however, did not rely solely on this fact, but

considered it with the rest of the evidence, the totality of which reveals that Adelas
intention was merely to feign the transfer to petitioner. The fact that unlike in the case
of Dennis and Carlos, Jr., she was not asked by Adela to execute a deed of
reconveyance, is of no moment. There was a considerable lapse of time from the
moment of the transfer to Dennis and Carlos, Jr. of Lots 32 and 34 in 1985 and in
1987, respectively, and until the execution of the deed of reconveyance in 1989. Here,
the alleged Deeds of Absolute Sale were executed in April 1989. Adela died in January
1990 in the United States. Given the short period of time between the alleged
execution of the Deeds of Absolute Sale and the sudden demise of Adela, the fact that
petitioner was not asked to execute a deed of reconveyance is understandable. This is
because there was no chance at all to do so. Thus, the fact that she did not execute a
deed of reconveyance does not help her case. We affirm the conclusion reached by
the RTC and the CA that the evidence presented below prove that Adela did not intend
to alienate the Properties in favor of petitioner, and that the transfers were merely a
sham to accommodate petitioner in her travel abroad.
Petitioner claims that we should consider that there is only one heir of the late Adela
who is contesting the sale, and that out of the many transactions involving the
decedents other properties, the sale to petitioner is the only one being questioned.
We are not convinced that these are material to the resolution of the case. As aptly
passed upon by the CA in its assailed Resolution: In a contest for the declaration of
nullity of an instrument for being simulated, the number of contestants is not
determinative of the propriety of the cause. Any person who is prejudiced by a
simulated contract may set up its inexistence. In this instant case, it does not matter if
the contest is made by one, some or all of the heirs. Neither would the existence of
other contracts which remain unquestioned deter an action for the nullity of an
instrument. A contract is rendered meaningful and forceful by the intention of the
parties relative thereto, and such intention can only be relevant to that particular
contract which is produced or, as in this case, to that which is not produced. That the
deed of sale in [petitioners] favor has been held to be simulated is not indicative of the
simulation of any other contract executed by the deceased Adela de Guzman Shotwell
during her lifetime.60 To this we add that other alleged transactions made by Adela
cannot be used as evidence to prove the validity of the conveyances to petitioner. For
one, we are not aware of any of these transactions or whether there are indeed other
transactions. More importantly, the validity of these transactions does not prove
directly or indirectly the validity of the conveyances in question. B. No consideration
for the sale We also find no compelling reason to depart from the court a quo's finding
that Adela never received the consideration stipulated in the simulated Deeds of
Absolute Sale. Although on their face, the Deeds of Absolute Sale appear to be
supported by valuable consideration, the RTC and the CA found that there was no
money involved in the sale. The consideration in the Deeds of Absolute Sale was
superimposed on the spaces therein, bearing a font type different from that used in the
rest of the document.61 The lower courts also found that the duplicate originals of the
Deeds of Absolute Sale bear a different entry with regard to the price.
Article 1471 of the Civil Code provides that if the price is simulated, the sale is void.
Where a deed of sale states that the purchase price has been paid but in fact has
never been paid, the deed of sale is null and void for lack of consideration.63 Thus,
although the contracts state that the purchase price of 250,000.00 and 60,000.00
were paid by petitioner to Adela for the Properties, the evidence shows that the
contrary is true, because no money changed hands. Apart from her testimony,
petitioner did not present proof that she paid for the Properties. There is no implied
trust. We also affirm the CAs deletion of the pronouncement of the trial court as to the
existence of an implied trust. The trial court found that a resulting trust, a form of
implied trust based on Article 145364 of the Civil Code, was created between Adela
and petitioner. Resulting trusts65 arise from the nature or circumstances of the
consideration involved in a transaction whereby one person becomes invested with
legal title but is obligated in equity to hold his title for the benefit of another.66 It is
founded on the equitable doctrine that valuable consideration and not legal title is
determinative of equitable title or interest and is always presumed to have been

contemplated by the parties.67 Since the intent is not expressed in the instrument or
deed of conveyance, it is to be found in the nature of the parties transaction.68
Resulting trusts are thus describable as intention-enforcing trusts. 69 An example of a
resulting trust is Article 1453 of the Civil Code. We, however, agree with the CA that no
implied trust can be generated by the simulated transfers because being fictitious or
simulated, the transfers were null and void ab initio from the very beginning and
thus vested no rights whatsoever in favor of petitioner. That which is inexistent cannot
give life to anything at all.
Article 1453 contemplates that legal titles were validly vested in petitioner.
Considering, however, that the sales lack not only the element of consent for being
absolutely simulated, but also the element of consideration, these transactions are
void and inexistent and produce no effect. Being null and void from the beginning, no
transfer of title, both legal and beneficial, was ever effected to petitioner. In any case,
regardless of the presence of an implied trust, this will not affect the disposition of the
case. As void contracts do not produce any effect, the result will be the same in that
the Properties will be reconveyed to the estate of the late Adela de Guzman Shotwell.

The petition is DENIED.

10. G.R. No. 160600

January 15, 2014

DOMINGO GONZALO, Petitioner,

vs.
JOHN TARNATE, JR., Respondent.
Antecedents
1.

2.

After the Department of Public Works and Highways (DPWH) had awarded on July 22,
1997 the contract for the improvement of the Sadsadan-Maba-ay Section of the
Mountain Province-Benguet Road in the total amount of 7 014 963 33 to his company,
Gonzalo Construction,1 petitioner Domingo Gonzalo (Gonzalo) subcontracted to
respondent John Tarnate, Jr. (Tarnate) on October 15, 1997, the supply of materials
and labor for the project under the latter s business known as JNT Aggregates.
Their agreement stipulated, among others, that Tarnate would pay to Gonzalo eight
percent and four percent of the contract price, respectively, upon Tarnate s first and
second billing in the project.2

3.

In furtherance of their agreement, Gonzalo executed on April 6, 1999 a deed of

assignment whereby he, as the contractor, was assigning to Tarnate an amount
equivalent to 10% of the total collection from the DPWH for the project. This 10%
retention fee (equivalent to P233,526.13) was the rent for Tarnates equipment that
had been utilized in the project. In the deed of assignment, Gonzalo further authorized
Tarnate to use the official receipt of Gonzalo Construction in the processing of the
documents relative to the collection of the 10% retention fee and in encashing the
check to be issued by the DPWH for that purpose.3

4.

The deed of assignment was submitted to the DPWH on April 15, 1999. During the
processing of the documents for the retention fee, however, Tarnate learned that
Gonzalo had unilaterally rescinded the deed of assignment by means of an affidavit of
cancellation of deed of assignment dated April 19, 1999 filed in the DPWH on April 22,
1999;4 and that the disbursement voucher for the 10% retention fee had then been
issued in the name of Gonzalo, and the retention fee released to him. 5

5.

Tarnate demanded the payment of the retention fee from Gonzalo, but to no avail.
Thus, he brought this suit against Gonzalo on September 13, 1999 in the Regional
Trial Court (RTC) in Mountain Province to recover the retention fee of P233,526.13,
moral and exemplary damages for breach of contract, and attorneys fees.6

6.

In his answer, Gonzalo admitted the deed of assignment and the authority given
therein to Tarnate, but averred that the project had not been fully implemented
because of its cancellation by the DPWH, and that he had then revoked the deed of
assignment. He insisted that the assignment could not stand independently due to its
being a mere product of the subcontract that had been based on his contract with the
DPWH; and that Tarnate, having been fully aware of the illegality and ineffectuality of
the deed of assignment from the time of its execution, could not go to court with
unclean hands to invoke any right based on the invalid deed of assignment or on the
product of such deed of assignment.7

7.

On January 26, 2001, the REGIONAL TRIAL COURT IN FAVOR OF THE

PETITIONERS AND AGAINST THE DEFENDANT
1. Defendant Domingo Gonzalo to pay the Plaintiff, John Tarnate, Jr., the amount of
TWO HUNDRED THIRTY THREE THOUSAND FIVE HUNDRED TWENTY SIX and
13/100 PESOS (P233,526.13) representing the rental of equipment;

8. COURT OF APPEALS AFFIRMED THE DECISION OF THE

Although holding that the subcontract was an illegal agreement due to its object being
specifically prohibited by Section 6 of Presidential Decree No. 1594; that Gonzalo and Tarnate
were guilty of entering into the illegal contract in violation of Section 6 of Presidential Decree No.
1594; and that the deed of assignment, being a product of and dependent on the subcontract,
was also illegal and unenforceable, the CA did not apply the doctrine of in pari delicto, explaining
that the doctrine applied only if the fault of one party was more or less equivalent to the fault of
the other party. It found Gonzalo to be more guilty than Tarnate, whose guilt had been limited to
the execution of the two illegal contracts while Gonzalo had gone to the extent of violating the
deed of assignment. It declared that the crediting of the 10% retention fee equivalent
to P233,256.13 to his account had unjustly enriched Gonzalo; and ruled, accordingly, that
Gonzalo should reimburse Tarnate in that amount because the latters equipment had been
utilized in the project.
ISSUE:Whether or not both parties were in pari delicto; Whether or not the deed of assignment
was void; Whether or not there was no compliance with the arbitration clause in the
subcontract? NO TO ALL
RATIONALE:
We deny the petition for review, but we delete the grant of moral damages, attorneys fees and
litigation expenses.
There is no question that every contractor is prohibited from subcontracting with or assigning to
another person any contract or project that he has with the DPWH unless the DPWH Secretary
has approved the subcontracting or assignment. This is pursuant to Section 6 of Presidential
Decree No. 1594, which provides:
Section 6. Assignment and Subcontract. The contractor shall not assign, transfer, pledge,
subcontract or make any other disposition of the contract or any part or interest therein except

with the approval of the Minister of Public Works, Transportation and Communications, the
Minister of Public Highways, or the Minister of Energy, as the case may be. Approval of the
subcontract shall not relieve the main contractor from any liability or obligation under his contract
with the Government nor shall it create any contractual relation between the subcontractor and
the Government.
Gonzalo, who was the sole contractor of the project in question, subcontracted the
implementation of the project to Tarnate in violation of the statutory prohibition. Their subcontract
was illegal, therefore, because it did not bear the approval of the DPWH Secretary. Necessarily,
the deed of assignment was also illegal, because it sprung from the subcontract. As aptly
observed by the CA:
x x x. The intention of the parties in executing the Deed of Assignment was merely to cover up
the illegality of the sub-contract agreement. They knew for a fact that the DPWH will not allow
plaintiff-appellee to claim in his own name under the Sub-Contract Agreement.
Obviously, without the Sub-Contract Agreement there will be no Deed of Assignment to speak of.
The illegality of the Sub-Contract Agreement necessarily affects the Deed of Assignment
because the rule is that an illegal agreement cannot give birth to a valid contract. To rule
otherwise is to sanction the act of entering into transaction the object of which is expressly
prohibited by law and thereafter execute an apparently valid contract to subterfuge the illegality.
The legal proscription in such an instance will be easily rendered nugatory and meaningless to
the prejudice of the general public.12
Under Article 1409 (1) of the Civil Code, a contract whose cause, object or purpose is contrary to
law is a void or inexistent contract. As such, a void contract cannot produce a valid one.13 To the
same effect is Article 1422 of the Civil Code, which declares that "a contract, which is the direct
result of a previous illegal contract, is also void and inexistent."
We do not concur with the CAs finding that the guilt of Tarnate for violation of Section 6 of
Presidential Decree No. 1594 was lesser than that of Gonzalo, for, as the CA itself observed,
Tarnate had voluntarily entered into the agreements with Gonzalo. 14 Tarnate also admitted that
he did not participate in the bidding for the project because he knew that he was not authorized
to contract with the DPWH.15 Given that Tarnate was a businessman who had represented
himself in the subcontract as "being financially and organizationally sound and established, with
the necessary personnel and equipment for the performance of the project,"16 he justifiably
presumed to be aware of the illegality of his agreements with Gonzalo. For these reasons,
Tarnate was not less guilty than Gonzalo.
According to Article 1412 (1) of the Civil Code, the guilty parties to an illegal contract cannot
recover from one another and are not entitled to an affirmative relief because they are in pari
delicto or in equal fault. The doctrine of in pari delicto is a universal doctrine that holds that no
action arises, in equity or at law, from an illegal contract; no suit can be maintained for its
specific performance, or to recover the property agreed to be sold or delivered, or the money
agreed to be paid, or damages for its violation; and where the parties are in pari delicto, no
affirmative relief of any kind will be given to one against the other.17
Nonetheless, the application of the doctrine of in pari delicto is not always rigid.1wphi1 An
accepted exception arises when its application contravenes well-established public policy.18 In
this jurisdiction, public policy has been defined as "that principle of the law which holds that no
subject or citizen can lawfully do that which has a tendency to be injurious to the public or
against the public good."19

Unjust enrichment exists, according to Hulst v. PR Builders, Inc.,20 "when a person unjustly
retains a benefit at the loss of another, or when a person retains money or property of another
against the fundamental principles of justice, equity and good conscience." The prevention of
unjust enrichment is a recognized public policy of the State, for Article 22 of the Civil Code
explicitly provides that "[e]very person who through an act of performance by another, or any
other means, acquires or comes into possession of something at the expense of the latter
without just or legal ground, shall return the same to him." It is well to note that Article 22 "is part
of the chapter of the Civil Code on Human Relations, the provisions of which were formulated as
basic principles to be observed for the rightful relationship between human beings and for the
stability of the social order; designed to indicate certain norms that spring from the fountain of
good conscience; guides for human conduct that should run as golden threads through society
to the end that law may approach its supreme ideal which is the sway and dominance of
justice."21
There is no question that Tarnate provided the equipment, labor and materials for the project in
compliance with his obligations under the subcontract and the deed of assignment; and that it
was Gonzalo as the contractor who received the payment for his contract with the DPWH as well
as the 10% retention fee that should have been paid to Tarnate pursuant to the deed of
assignment.22 Considering that Gonzalo refused despite demands to deliver to Tarnate the
stipulated 10% retention fee that would have compensated the latter for the use of his
equipment in the project, Gonzalo would be unjustly enriched at the expense of Tarnate if the
latter was to be barred from recovering because of the rigid application of the doctrine of in pari
delicto. The prevention of unjust enrichment called for the exception to apply in Tarnates favor.
Consequently, the RTC and the CA properly adjudged Gonzalo liable to pay Tarnate the
equivalent amount of the 10% retention fee (i.e., P233,526.13).
Gonzalo sought to justify his refusal to turn over the P233,526.13 to Tarnate by insisting that he
(Gonzalo) had a debt of P200,000.00 to Congressman Victor Dominguez; that his payment of
the 10% retention fee to Tarnate was conditioned on Tarnate paying that debt to Congressman
Dominguez; and that he refused to give the 10% retention fee to Tarnate because Tarnate did
not pay to Congressman Dominguez.23 His justification was unpersuasive, however, because,
firstly, Gonzalo presented no proof of the debt to Congressman Dominguez; secondly, he did not
competently establish the agreement on the condition that supposedly bound Tarnate to pay to
Congressman Dominguez; 24 and, thirdly, burdening Tarnate with Gonzalos personal debt to
Congressman Dominguez to be paid first by Tarnate would constitute another case of unjust
enrichment.
The Court regards the grant of moral damages, attorneys fees and litigation expenses to
Tarnate to be inappropriate. We have ruled that no damages may be recovered under a void
contract, which, being nonexistent, produces no juridical tie between the parties involved.25 It is
notable, too, that the RTC and the CA did not spell out the sufficient factual and legal
justifications for such damages to be granted.
Lastly, the letter and spirit of Article 22 of the Civil Code command Gonzalo to make a full
reparation or compensation to Tarnate. The illegality of their contract should not be allowed to
deprive Tarnate from being fully compensated through the imposition of legal interest. Towards
that end, interest of 6% per annum reckoned from September 13, 1999, the time of the judicial
demand by Tarnate, is imposed on the amount of P233,526.13. Not to afford this relief will make
a travesty of the justice to which Tarnate was entitled for having suffered too long from Gonzalos
unjust enrichment.
WHEREFORE, we AFFIRM the decision promulgated on February 18, 2003, but DELETE the
awards of moral damages, attorneys fees and litigation expenses; IMPOSE legal interest of 6%
per annum on the principal oLP233,526.13 reckoned from September 13, 1999; and DIRECT
the petitioner to pay the costs of suit.

SO ORDERED.
11. PAULINO M. EJERCITO, JESSIE M. EJERCITO and JOHNNY D. CHANG vs. ORIENTAL
ASSURANCE CORPORATION
G.R. No. 192099
SERENO, CJ.
JUL Y 8, 2015
Nature of the action: This is a Petition for Review on Certiorari 1 filed by Paulino M. Ejercito,
Jessie M. Ejercito and Johnny D. Chang (petitioners) under Rule 45 of the 1997 Rules of Civil
Procedure assailing the Court of Appeals (CA) Decision dated 2 October 20092 and Resolution
dated 14 April 20103 in CAG.R. CV No. 90828. The Special Third Division of the CA reversed
and set aside the Regional Trial Court (RTC) Decision in Civil Case No. 01-101999: The present
appeal is hereby GRANTED. The Decision of the Regional Trial Court of Manila is hereby SET
ASIDE. A new judgment is hereby entered ordering the defendants-appellees Merissa C.
Somes, Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang jointly and severally liable
to pay plaintiff-appellant Oriental Assurance Corporation the following sums: The principal
amount of 3,000,000.00 with interest at the rate of 12% per annum from the time of the filing of
the complaint until the same shall have been fully paid; 2. Attorneys fees in the amount of 30,000.00; and 3. Costs of suit.
F acts:
1.

2.

3.

4.

5.

On 10 May 1999, respondent Oriental Assurance Corporation, through its Executive

Vice President Luz N. Cotoco issued a Surety Bond in favor of FFV Travel & Tours,
Inc. (Company). The bond was intended to guarantee the Companys payment of
airline tickets purchased on credit from participating members of International Air
Transport Association (IATA) to the extent of 3 million.
On the same day, petitioners and Merissa C. Somes (Somes) executed a Deed of
Indemnity in favor of respondent. The Surety Bond was effective for one year from its
issuance until 10 May 2000. It was renewed for another year, from 10 May 2000 to 10
May 2001, as shown in Bond Endorsement No. OAC-2000/0145 dated 17 April 2000.
The corresponding renewal premium amounting to 15,024.54 was paid by the insured
corporation under Official Receipt No. 100262. FFV Travel & Tours, Inc. has been
declared in default for failure to pay its obligations amounting to 5,484,086.97 and
USD 18,760.98 as of 31 July 2000.
Consequently, IATA demanded payment of the bond, and respondent heeded the
demand on 28 November 2000 as evidenced by China Bank Check No. 104949. IATA
executed a Release of Claim on 29 November 2000 acknowledging payment of the
surety bond. Respondent sent demand letters to petitioners and Somes for
reimbursement of the 3 million pursuant to the indemnity agreement. For their failure
to reimburse respondent, the latter filed a collection suit.
THE RTC RULING After trial, the RTC rendered a Decision dismissing the complaint
against petitioners for lack of merit and pronouncing Somes liable to pay the amount
of 3 million and interest per annum at the rate of 12% of the principal obligation from
the date the complaint was filed up to the date the obligation would have been fully
paid. The RTC found that there was no written agreement to show the intention of
petitioners to renew the Deed of Indemnity. The absence thereof was evidenced by
the nonappearance of any signature on the Renewal Notice, which was not signed by
Somes. However, she was held liable to pay the surety value of the cost of tickets as
she had paid the premium for the renewal of the Surety Bond and used the renewed
bond by submitting it to IATA.
THE CA RULING The CA reversed the finding of the RTC and ruled that petitioners
could not escape liability, as they had authorized respondent to grant any renewals or
extensions pursuant to the indemnity agreement. The Deed of Indemnity contained a
stipulation that the signatories (petitioners) were authorizing the Company
(respondent) to grant or consent to the grant of any extension, continuation, increase,
modification, change or alteration, and/or renewal of the original bond. Petitioners
voluntarily signed the agreement and, are educated persons (Paulino, being a lawyer),

so they could not have misunderstood the legal effects of the undertaking they had
signed.
ISSUE: Whether or not the contention of the petitioners that the Deed of Indemnity is a contract
of adhesion, hence invalid, has merit?
RULING: NO. We find no merit in the Petition.. Contracts of adhesion are not invalid per se and
that their binding effects have been upheld on numerous occasions.10 The pretension that
petitioners did not consent to the renewal of the bond is belied by the fact that the terms of the
contract which they voluntarily entered into contained a clause granting authority to the
Company to grant or consent to the renewal of the bond. Having entered into the contract with
full knowledge of its terms and conditions, petitioners are estopped from asserting that they did
so under the ignorance of the legal effect of the contract or the undertaking. It is true that on
some occasions, the Court has struck down such contract as void when the weaker party is
imposed upon in dealing with the dominant party and is reduced to the alternative of accepting
the contract or leaving it, completely deprived of the opportunity to bargain on equal footing.11
This reasoning cannot be used in the instant case. One of the petitioners, Paulino M. Ejercito, is
a lawyer who cannot feign ignorance of the legal effect of his undertaking. Petitioners could have
easily inserted a remark in the clause granting authority to the Company to renew the original
bond, if the renewal thereof was not their intention. The rule that ignorance of the contents of an
instrument does not ordinarily affect the liability of the one who signs it12 may also be applied to
this Indemnity Agreement. And the mistake of petitioners as to the legal effect of their obligation
is ordinarily no reason for relieving them of liability.
The contract of indemnity is the law between the parties. It is a cardinal rule in the interpretation
of a contract that if its terms are clear and leave no doubt on the intention of the contracting
parties, the literal meaning of its stipulation shall control. The CA aptly found provisions in the
contract that could not exonerate petitioners from their liability. The Deed of Indemnity contains
the following stipulations: INDEMNITY: -- To indemnify the COMPANY for any damages,
payments, advances, prejudices, loss, costs and expenses of whatever kind and nature,
including counsel or attorney's fees, which the Company may at any time, sustain or incur, as a
consequence of having executed the above-mentioned Bond, its renewals, extensions,
modifications or substitutions and said attorney's fees shall not be less than fifteen (15%) per
cent of the amount claimed by the Company in each action, the same to be due and payable,
irrespective of whether the case is settled judicially or extrajudicially. x x x x MATURITY OF OUR
OBLIGATIONS AS CONTRACTED HEREWITH: -- The said indemnities will be paid to the
COMPANY as soon as demand is received from the Creditor, or as soon as it becomes liable to
make payment of any sum under the terms of the abovementioned Bond, its renewals,
extension, modifications or substitutions, whether the said sum or sums or part thereof, have
been actually paid or not. We authorize the COMPANY to accept in any case and at its entire
discretion, from any of us, payment on account of the pending obligation, and to grant
extensions to any of us, to liquidate said obligations, without necessity of previous knowledge or
consent from the obligors. x x x x INCONTESTABILITY OF PAYMENTS MADE BY THE
COMPANY: -- Any payment or disbursement made by the COMPANY on account of the abovementioned Bond, its renewals, extensions, modifications or substitutions either in the belief that
the Company was obligated to make such payment or in the belief that said payment was
necessary in order to avoid greater losses or obligation for which the company might be liable by
virtue of the terms of the above-mentioned Bond, its renewals, extensions, modifications or
substitutions shall be final and will not be disputed by the undersigned who jointly and severally
bind themselves to indemnify the COMPANY of any and all such payments as stated in the
preceding clauses. x x x WAIVER: -- The undersigned hereby waive all the rights, privileges, and
benefits that they have or may have under Articles 2077, 2078, 2079, 2080 and 2081 of the Civil
Code. x x x RENEWALS, ALTERATIONS AND SUBSTITUTIONS: -- The undersigned hereby
empower and authorize the Company to grant or consent to the granting of, any extension,
continuation, increase, modifications, change, alteration and/or renewal of the original bond
herein referred to, and to execute or consent to the execution of any substitution for said bond
with the same or different conditions and parties, and the undersigned hereby hold themselves
jointly and severally liable to the Company for the original bond hereinabove mentioned or for

any extension, continuation, increase, modification, change, alteration, renewal or substitution

thereof until the full amount including principal interests, premiums, costs and other expenses
due to the Company thereunder is fully paid up.8 (Emphasis on the original) Clearly, as far as
respondent is concerned, petitioners have expressly bound themselves to the contract, which
provides for the terms granting authority to the Company to renew the original bond. The terms
of the contract are clear, explicit and unequivocal. Therefore, the subsequent acts of the
Company, through Somes, that led to the renewal of the surety bond are binding on petitioners
as well. The intention of Somes to renew the bond cannot be denied, as she paid the renewal
premium and even submitted the renewed bond to IATA.9 The claim of petitioners that they only
consented to the one-year validity of the surety bond must be directed against Somes in a
separate action. She allegedly convinced them that the bond was valid for one year only. The
allegation of petitioners is an agreement outside of the contract. In other words, respondent is
not privy to the alleged agreement between Somes and petitioners. For respondent, there was a
valid indemnity agreement executed by the parties, and contained a proviso that became the
basis for the authority to renew the original bond. With regard to the contention that the Deed of
Indemnity is a contract of adhesion, the Court has consistently held that contracts of adhesion
are not invalid per se and that their binding effects have been upheld on numerous occasions.10
The pretension that petitioners did not consent to the renewal of the bond is belied by the fact
that the terms of the contract which they voluntarily entered into contained a clause granting
authority to the Company to grant or consent to the renewal of the bond. Having entered into the
contract with full knowledge of its terms and conditions, petitioners are estopped from asserting
that they did so under the ignorance of the legal effect of the contract or the undertaking. It is
true that on some occasions, the Court has struck down such contract as void when the weaker
party is imposed upon in dealing with the dominant party and is reduced to the alternative of
accepting the contract or leaving it, completely deprived of the opportunity to bargain on equal
footing. This reasoning cannot be used in the instant case. One of the petitioners, Paulino M.
Ejercito, is a lawyer who cannot feign ignorance of the legal effect of his undertaking. Petitioners
could have easily inserted a remark in the clause granting authority to the Company to renew
the original bond, if the renewal thereof was not their intention. The rule that ignorance of the
contents of an instrument does not ordinarily affect the liability of the one who signs it12 may
also be applied to this Indemnity Agreement. And the mistake of petitioners as to the legal effect
of their obligation is ordinarily no reason for relieving them of liability.