G.R. No.

128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION,
INC., and VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-CBN)
seeks to reverse and set aside the decision 1 of 31 October 1996 and the resolution 2 of 10 March
1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the
decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case
No. Q-92-12309. The latter denied the motion to reconsider the decision of 31 October 1996.

The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:

In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A")
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films.
Sometime in December 1991, in accordance with paragraph 2.4 [sic] of said
agreement stating that —.

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva
films for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN from the actual
offer in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president
Charo Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN
may exercise its right of first refusal under the afore-said agreement (Exhs. "1" par,
2, "2," "2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio, "can tick off
only ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and therefore
did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film ''Maging Sino Ka Man."

For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" -
Viva) is hereby quoted:

6 January 1992

Dear Vic,

This is not a very formal business letter I am writing to you as I would like to express
my difficulty in recommending the purchase of the three film packages you are
offering ABS-CBN.

From among the three packages I can only tick off 10 titles we can purchase. Please
see attached. I hope you will understand my position. Most of the action pictures in
the list do not have big action stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled for telecast several action
pictures in out very first contract because of the cheap production value of these
movies as well as the lack of big action stars. As a film producer, I am sure you
understand what I am trying to say as Viva produces only big action pictures.

In fact, I would like to request two (2) additional runs for these movies as I can only
schedule them in our non-primetime slots. We have to cover the amount that was
paid for these movies because as you very well know that non-primetime advertising
rates are very low. These are the unaired titles in the first contract.

1. Kontra Persa [sic].

2. Raider Platoon.

3. Underground guerillas

4. Tiger Command

5. Boy de Sabog

6. Lady Commando

7. Batang Matadero

8. Rebelyon

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and have been rejected
because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very
adult themes.

As for the 10 titles I have choosen [sic] from the 3 packages please consider
including all the other Viva movies produced last year. I have quite an attractive offer
to make.

Thanking you and with my warmest regards.

(Signe
d)

Charo
Santos
-
Concio

On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio,
with a list consisting of 52 original movie titles (i.e. not yet aired on television)
including the 14 titles subject of the present case, as well as 104 re-runs (previously
aired on television) from which ABS-CBN may choose another 52 titles, as a total of
156 titles, proposing to sell to ABS-CBN airing rights over this package of 52
 originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash
and P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio
Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the
package proposal of Viva. What transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed
that ABS-CRN was granted exclusive film rights to fourteen (14) films for a total
consideration of P36 million; that he allegedly put this agreement as to the price and
number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario denied having
made any agreement with Lopez regarding the 14 Viva films; denied the existence of
a napkin in which Lopez wrote something; and insisted that what he and Lopez
discussed at the lunch meeting was Viva's film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising [sic]to
make a counter proposal which came in the form of a proposal contract Annex "C" of
the complaint (Exh. "1"·- Viva; Exh. "C" - ABS-CBN).

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-
president for Finance discussed the terms and conditions of Viva's offer to sell the
104 films, after the rejection of the same package by ABS-CBN.

On April 07, 1992, defendant Del Rosario received through his secretary, a
handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of
the contract. I hope you find everything in order," to which was attached a draft
exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3) a counter-proposal
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and
one film was added by Ms. Concio, for a consideration of P35 million. Exhibit "C"
provides that ABS-CBN is granted films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter proposal was however rejected by
Viva's Board of Directors [in the] evening of the same day, April 7, 1992, as Viva
would not sell anything less than the package of 104 films for P60 million pesos (Exh.
"9" - Viva), and such rejection was relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN and following several negotiations
and meetings defendant Del Rosario and Viva's President Teresita Cruz, in
consideration of P60 million, signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh.
"7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the present
case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer
for a writ of preliminary injunction and/or temporary restraining order against private respondents
Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter VIVA), and Vicente
Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.

On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents from
proceeding with the airing, broadcasting, and televising of the fourteen VIVA films subject of the
controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on private
respondents RBS' channel 7 at seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35
million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents moved for
reconsideration of the order and offered to put up a counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set up a
cross-claim against VIVA..

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction upon the
posting by RBS of a P30 million counterbond to answer for whatever damages ABS-CBN might
suffer by virtue of such dissolution. However, it reduced petitioner's injunction bond to P15 million as
a condition precedent for the reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.

At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to explore the
possibility of an amicable settlement. In the meantime, RBS prayed for and was granted reasonable
time within which to put up a P30 million counterbond in the event that no settlement would be
reached.

As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992.13

On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15 October
1992 Orders, which RBS opposed. 15

On 29 October 1992, the RTC conducted a pre-trial. 16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a
petition17challenging the RTC's Orders of 3 August and 15 October 1992 and praying for the
issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case
was docketed as CA-G.R. SP No. 29300.

On 3 November 1992, the Court of Appeals issued a temporary restraining order18 to enjoin the
airing, broadcasting, and televising of any or all of the films involved in the controversy.

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition in CA
-G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for review
filed with this Court on 19 January 1993, which was docketed as G.R. No. 108363.

In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against ABS-
CBN disposing as follows:

WHEREFORE, under cool reflection and prescinding from the foregoing, judgments
is rendered in favor of defendants and against the plaintiff.

(1) The complaint is hereby dismissed;

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

 a) P107,727.00, the amount of premium paid by RBS
to the surety which issued defendant RBS's bond to
lift the injunction;

b) P191,843.00 for the amount of print advertisement

for "Maging Sino Ka Man" in various newspapers;

c) Attorney's fees in the amount of P1 million;

d) P5 million as and by way of moral damages;

e) P5 million as and by way of exemplary damages;

(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay

P212,000.00 by way of reasonable attorney's fees.

(4) The cross-claim of defendant RBS against defendant VIVA is

dismissed.

(5) Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the VIVA
Board of Directors, and said agreement was disapproved during the meeting of the Board on 7 April
1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition Agreement had
previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely new contract.

On 21 June 1993, this Court denied21 ABS-CBN's petition for review in G.R. No. 108363, as no
reversible error was committed by the Court of Appeals in its challenged decision and the case had
"become moot and academic in view of the dismissal of the main action by the court a quo in its
decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there
was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to
exhibit the subject films. Private respondents VIVA and Del Rosario also appealed seeking moral
and exemplary damages and additional attorney's fees.

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract
between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of
Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The appellate court
did not even believe ABS-CBN's evidence that Lopez III actually wrote down such an agreement on
a "napkin," as the same was never produced in court. It likewise rejected ABS-CBN's insistence on
its right of first refusal and ratiocinated as follows:

As regards the matter of right of first refusal, it may be true that a Film Exhibition
Agreement was entered into between Appellant ABS-CBN and appellant VIVA under
Exhibit "A" in 1990, and that parag. 1.4 thereof provides:
 1.4 ABS-CBN shall have the right of first refusal to the next twenty-
four (24) VIVA films for TV telecast under such terms as may be
agreed upon by the parties hereto, provided, however, that such right
shall be exercised by ABS-CBN within a period of fifteen (15) days
from the actual offer in writing (Records, p. 14).

[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still
be subject to such terms as may be agreed upon by the parties thereto, and that the
said right shall be exercised by ABS-CBN within fifteen (15) days from the actual
offer in writing.

Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the
price of the film right to the twenty-four (24) films, nor did it specify the terms thereof.
The same are still left to be agreed upon by the parties.

In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated
that it can only tick off ten (10) films, and the draft contract Exhibit "C" accepted only
fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24)
films.

The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records,
pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was
sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo
Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where
ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly
observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992,
ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day
period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-
CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which ABS-
CBN shall exercise its right of first refusal has already expired.22

Accordingly, respondent court sustained the award of actual damages consisting in the cost of print
advertisements and the premium payments for the counterbond, there being adequate proof of the
pecuniary loss which RBS had suffered as a result of the filing of the complaint by ABS-CBN. As to
the award of moral damages, the Court of Appeals found reasonable basis therefor, holding that
RBS's reputation was debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the
non-showing of the film "Maging Sino Ka Man." Respondent court also held that exemplary damages
were correctly imposed by way of example or correction for the public good in view of the filing of the
complaint despite petitioner's knowledge that the contract with VIVA had not been perfected, It also
upheld the award of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No,
Q-92-1209, RBS was "unnecessarily forced to litigate." The appellate court, however, reduced the
awards of moral damages to P2 million, exemplary damages to P2 million, and attorney's fees to
P500, 000.00.

On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because it
was "RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in

I
 . . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN
PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.

II

. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF

PRIVATE RESPONDENT RBS.

III

. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE

RESPONDENT RBS.

IV

. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under
the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that
we give credence to Lopez's testimony that he and Del Rosario met at the Tamarind Grill
Restaurant, discussed the terms and conditions of the second list (the 1992 Film Exhibition
Agreement) and upon agreement thereon, wrote the same on a paper napkin. It also asserts that the
contract has already been effective, as the elements thereof, namely, consent, object, and
consideration were established. It then concludes that the Court of Appeals' pronouncements were
not supported by law and jurisprudence, as per our decision of 1 December 1995 in Limketkai Sons
Milling, Inc. v. Court of Appeals, 23 which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu
Asuncion v. Court of Appeals, 25 and Villonco Realty Company v. Bormaheco. Inc.26

Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the
premium on the counterbond of its own volition in order to negate the injunction issued by the trial
court after the parties had ventilated their respective positions during the hearings for the purpose.
The filing of the counterbond was an option available to RBS, but it can hardly be argued that ABS-
CBN compelled RBS to incur such expense. Besides, RBS had another available option, i.e., move
for the dissolution or the injunction; or if it was determined to put up a counterbond, it could have
presented a cash bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss or
injury is also required to exercise the diligence of a good father of a family to minimize the damages
resulting from the act or omission. As regards the cost of print advertisements, RBS had not
convincingly established that this was a loss attributable to the non showing "Maging Sino Ka Man";
on the contrary, it was brought out during trial that with or without the case or the injunction, RBS
would have spent such an amount to generate interest in the film.

ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary
damages. The controversy involving ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not arise from any contractual dealings
or from specific acts committed by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the complaint, An award of moral and
exemplary damages is not warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any case, free resort to courts for redress of wrongs
is a matter of public policy. The law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial for damages where by lack of sufficient
evidence, legal technicalities, or a different interpretation of the laws on the matter, the case would
lose ground. 28 One who makes use of his own legal right does no injury. 29 If damage results front the
filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are generally not
awarded in favor of a juridical person, unless it enjoys a good reputation that was debased by the
offending party resulting in social humiliation.31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal, or
equitable justification. In sustaining the trial court's award, the Court of Appeals acted in clear
disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of the decision should
state the reason why attorney's fees are being awarded; otherwise, the award should be disallowed.
Besides, no bad faith has been imputed on, much less proved as having been committed by, ABS-
CBN. It has been held that "where no sufficient showing of bad faith would be reflected in a party' s
persistence in a case other than an erroneous conviction of the righteousness of his cause,
attorney's fees shall not be recovered as cost." 33

On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA
absent any meeting of minds between them regarding the object and consideration of the alleged
contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly rejected by the
trial court. RBS insist the premium it had paid for the counterbond constituted a pecuniary loss upon
which it may recover. It was obliged to put up the counterbound due to the injunction procured by
ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or valid claim against
RBS and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN the
premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to
be more expensive, as the loss would be equivalent to the cost of money RBS would forego in case
the P30 million came from its funds or was borrowed from banks.

RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of
the film "Maging Sino Ka Man" because the print advertisements were put out to announce the
showing on a particular day and hour on Channel 7, i.e., in its entirety at one time, not a series to be
shown on a periodic basis. Hence, the print advertisement were good and relevant for the particular
date showing, and since the film could not be shown on that particular date and hour because of the
injunction, the expenses for the advertisements had gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured
injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to Article 19 and
21 of the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino,34 damages
may be awarded in cases of abuse of rights even if the act done is not illicit and there is abuse of
rights were plaintiff institutes and action purely for the purpose of harassing or prejudicing the
defendant.

In support of its stand that a juridical entity can recover moral and exemplary damages, private
respondents RBS cited People v. Manero,35 where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is debased resulting in social humiliation. it
then ratiocinates; thus:

There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in
this case. When RBS was not able to fulfill its commitment to the viewing public to
show the film "Maging Sino Ka Man" on the scheduled dates and times (and on two
occasions that RBS advertised), it suffered serious embarrassment and social
humiliation. When the showing was canceled, late viewers called up RBS' offices and
subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo naman
 ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something
RBS brought upon itself. it was exactly what ABS-CBN had planned to happen.

The amount of moral and exemplary damages cannot be said to be excessive. Two
reasons justify the amount of the award.

The first is that the humiliation suffered by RBS is national extent. RBS operations as
a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN,
consists of those who own and watch television. It is not an exaggeration to state,
and it is a matter of judicial notice that almost every other person in the country
watches television. The humiliation suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the film "Maging Sino Ka Man" on
May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to
this are the advertisers who had placed commercial spots for the telecast and to
whom RBS had a commitment in consideration of the placement to show the film in
the dates and times specified.

The second is that it is a competitor that caused RBS to suffer the humiliation. The
humiliation and injury are far greater in degree when caused by an entity whose
ultimate business objective is to lure customers (viewers in this case) away from the
competition. 36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the
Court of Appeals do not support ABS-CBN's claim that there was a perfected contract. Such factual
findings can no longer be disturbed in this petition for review under Rule 45, as only questions of law
can be raised, not questions of fact. On the issue of damages and attorneys fees, they adopted the
arguments of RBS.

The key issues for our consideration are (1) whether there was a perfected contract between VIVA
and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may be noted that
the award of attorney's fees of P212,000 in favor of VIVA is not assigned as another error.

I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two
persons whereby one binds himself to give something or to render some service to another 37 for a
consideration. there is no contract unless the following requisites concur: (1) consent of the
contracting parties; (2) object certain which is the subject of the contract; and (3) cause of the
obligation, which is established.38 A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of negotiation and

bargaining, ending at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties come to
agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms

agreed upon in the contract. 39

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once there
is concurrence between the offer and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced. The offer must be certain. To convert the offer into a
contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort from the proposal. A qualified
acceptance, or one that involves a new proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which is not exactly what is proposed in the
offer, such acceptance is not sufficient to generate consent because any modification or variation
from the terms of the offer annuls the offer.40

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992
to discuss the package of films, said package of 104 VIVA films was VIVA's offer to ABS-CBN to
enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a counter-
proposal in the form of a draft contract proposing exhibition of 53 films for a consideration of P35
million. This counter-proposal could be nothing less than the counter-offer of Mr. Lopez during his
conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no acceptance of
VIVA's offer, for it was met by a counter-offer which substantially varied the terms of the offer.

ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of

Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it was
held that an acceptance may contain a request for certain changes in the terms of the offer and yet
be a binding acceptance as long as "it is clear that the meaning of the acceptance is positively and
unequivocally to accept the offer, whether such request is granted or not." This ruling was, however,
reversed in the resolution of 29 March 1996, 43 which ruled that the acceptance of all offer must be
unqualified and absolute, i.e., it "must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds."

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer
were not material but merely clarificatory of what had previously been agreed upon. It cited the
statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's change in a phrase of the offer to
purchase, which change does not essentially change the terms of the offer, does not amount to a
rejection of the offer and the tender of a counter-offer." 45However, when any of the elements of the
contract is modified upon acceptance, such alteration amounts to a counter-offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in
a draft contract, VIVA through its Board of Directors, rejected such counter-offer, Even if it be
conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind
VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to do so.

Under Corporation Code,46 unless otherwise provided by said Code, corporate powers, such as the
power; to enter into contracts; are exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or contracted managers. The
delegation, except for the executive committee, must be for specific purposes, 47 Delegation to
officers makes the latter agents of the corporation; accordingly, the general rules of agency as to the
bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter must specially authorize them to do so. That Del Rosario did not have the authority
to accept ABS-CBN's counter-offer was best evidenced by his submission of the draft contract to
VIVA's Board of Directors for the latter's approval. In any event, there was between Del Rosario and
Lopez III no meeting of minds. The following findings of the trial court are instructive:

A number of considerations militate against ABS-CBN's claim that a contract was

perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred
to the price and the number of films, which he wrote on a napkin. However, Exhibit
"C" contains numerous provisions which, were not discussed at the Tamarind Grill, if
Lopez testimony was to be believed nor could they have been physically written on a
napkin. There was even doubt as to whether it was a paper napkin or a cloth napkin.
In short what were written in Exhibit "C'' were not discussed, and therefore could not
have been agreed upon, by the parties. How then could this court compel the parties
to sign Exhibit "C" when the provisions thereof were not previously agreed upon?

SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the
contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit
"C" mentions 53 films as its subject matter. Which is which If Exhibits "C" reflected
the true intent of the parties, then ABS-CBN's claim for 14 films in its complaint is
false or if what it alleged in the complaint is true, then Exhibit "C" did not reflect what
was agreed upon by the parties. This underscores the fact that there was no meeting
of the minds as to the subject matter of the contracts, so as to preclude perfection
thereof. For settled is the rule that there can be no contract where there is no object
which is its subject matter (Art. 1318, NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D")
states:

We were able to reach an agreement. VIVA gave us the exclusive

license to show these fourteen (14) films, and we agreed to pay Viva
the amount of P16,050,000.00 as well as grant Viva commercial slots
worth P19,950,000.00. We had already earmarked this P16,
050,000.00.

which gives a total consideration of P36 million (P19,950,000.00 plus

P16,050,000.00. equals P36,000,000.00).

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?

A. The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies because the price
was broken down accordingly. The none [sic] Viva and the seven
other Viva movies and the sharing between the cash portion and the
concerned spot portion in the total amount of P35 million pesos.

Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.

FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit
"C" to Mr. Del Rosario with a handwritten note, describing said Exhibit "C" as a
"draft." (Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well
defined meaning.

Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing

prepared for discussion, the terms and conditions thereof could not have been
previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally
bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and
conditions embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and there
was no discussion on said terms and conditions. . . .

As the parties had not yet discussed the proposed terms and conditions in Exhibit
"C," and there was no evidence whatsoever that Viva agreed to the terms and
conditions thereof, said document cannot be a binding contract. The fact that Viva
refused to sign Exhibit "C" reveals only two [sic] well that it did not agree on its terms
and conditions, and this court has no authority to compel Viva to agree thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at
the Tamarind Grill was only provisional, in the sense that it was subject to approval
by the Board of Directors of Viva. He testified:

Q. Now, Mr. Witness, and after that Tamarind meeting ... the second
meeting wherein you claimed that you have the meeting of the minds
between you and Mr. Vic del Rosario, what happened?

A. Vic Del Rosario was supposed to call us up and tell us specifically

the result of the discussion with the Board of Directors.

Q. And you are referring to the so-called agreement which you wrote
in [sic] a piece of paper?

A. Yes, sir.

Q. So, he was going to forward that to the board of Directors for

approval?

A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)

Q. Did Mr. Del Rosario tell you that he will submit it to his Board for
approval?

A. Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del
Rosario had no authority to bind Viva to a contract with ABS-CBN until and unless its
Board of Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is
the Executive Producer of defendant Viva" which "is a corporation." (par. 2,
complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what he
did is ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold
vs. Willetsand Paterson, 44 Phil. 634). As a mere agent, recognized as such by
plaintiff, Del Rosario could not be held liable jointly and severally with Viva and his
inclusion as party defendant has no legal basis. (Salonga vs. Warner Barner [sic] ,
COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions
that what was supposed to have been agreed upon at the Tamarind Grill between
Mr. Lopez and Del Rosario was not a binding agreement. It is as it should be
because corporate power to enter into a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board approval by the Viva board,
 whatever agreement Lopez and Del Rosario arrived at could not ripen into a valid
contract binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA
763). The evidence adduced shows that the Board of Directors of Viva rejected
Exhibit "C" and insisted that the film package for 140 films be maintained (Exh. "7-1"
- Viva ). 49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films
under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As observed by the trial court, ABS-CBN
right of first refusal had already been exercised when Ms. Concio wrote to VIVA ticking off ten films,
Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent,
was for an entirely different package. Ms. Concio herself admitted on cross-
examination to having used or exercised the right of first refusal. She stated that the
list was not acceptable and was indeed not accepted by ABS-CBN, (TSN, June 8,
1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of the first refusal
may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992,
pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its
rights of the first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992,
pp. 10-11) 50

II

However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages.
Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory
damages. Except as provided by law or by stipulation, one is entitled to compensation for actual
damages only for such pecuniary loss suffered by him as he has duly proved. 51 The indemnification
shall comprehend not only the value of the loss suffered, but also that of the profits that the obligee
failed to obtain. 52 In contracts and quasi-contracts the damages which may be awarded are
dependent on whether the obligor acted with good faith or otherwise, It case of good faith, the
damages recoverable are those which are the natural and probable consequences of the breach of
the obligation and which the parties have foreseen or could have reasonably foreseen at the time of
the constitution of the obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude,
he shall be responsible for all damages which may be reasonably attributed to the non-performance
of the obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages which
are the natural and probable consequences of the act or omission complained of, whether or not
such damages has been foreseen or could have reasonably been foreseen by the defendant.54

Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of
temporary or permanent personal injury, or for injury to the plaintiff's business standing or
commercial credit.55

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-
delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged knowledge of lack
of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim and Cross-claim under
the heading COUNTERCLAIM specifically alleges:

12. ABS-CBN filed the complaint knowing fully well that it has no cause of action
RBS. As a result thereof, RBS suffered actual damages in the amount of
P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the above law on
actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil
Code, which read as follows:

Art. 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.

Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for tile same.

Art. 21. Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.

It may further be observed that in cases where a writ of preliminary injunction is issued, the damages
which the defendant may suffer by reason of the writ are recoverable from the injunctive bond. 57 In
this case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for reduction of
the bond and even went to the Court of Appeals to challenge the order on the matter, Clearly then, it
was not necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for
the premium RBS paid for the counterbond.

Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack of
sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed sufficient ground for the issuance
thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual
basis, but because of the plea of RBS that it be allowed to put up a counterbond.

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be
recovered as actual or compensatory damages under any of the circumstances provided for in
Article 2208 of the Civil Code. 58

The general rule is that attorney's fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate.59 They are not to be awarded every
time a party wins a suit. The power of the court to award attorney's fees under Article 2208 demands
factual, legal, and equitable justification.60Even when claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's fees may not be awarded where no
sufficient showing of bad faith could be reflected in a party's persistence in a case other than
erroneous conviction of the righteousness of his cause. 61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article
2217 thereof defines what are included in moral damages, while Article 2219 enumerates the cases
where they may be recovered, Article 2220 provides that moral damages may be recovered in
breaches of contract where the defendant acted fraudulently or in bad faith. RBS's claim for moral
damages could possibly fall only under item (10) of Article 2219, thereof which reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Moral damages are in the category of an award designed to compensate the claimant for actual
injury suffered. and not to impose a penalty on the wrongdoer.62 The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured party to obtain means,
diversion, or amusements that will serve to obviate then moral suffering he has undergone. It is
aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should
be proportionate to the suffering inflicted.63 Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on the part of the trial court. 64

The award of moral damages cannot be granted in favor of a corporation because, being an artificial
person and having existence only in legal contemplation, it has no feelings, no emotions, no senses,
It cannot, therefore, experience physical suffering and mental anguish, which call be experienced
only by one having a nervous system. 65 The statement in People v. Manero 66 and Mambulao
Lumber Co. v. PNB 67 that a corporation may recover moral damages if it "has a good reputation that
is debased, resulting in social humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil Code.
These are imposed by way of example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. 68 They are recoverable in criminal cases as part of
the civil liability when the crime was committed with one or more aggravating circumstances; 69 in
quasi-contracts, if the defendant acted with gross negligence; 70 and in contracts and quasi-contracts,
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract,
delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or
duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another.
Article 20 speaks of the general sanction for all other provisions of law which do not especially
provide for their own sanction; while Article 21 deals with acts contra bonus mores, and has the
following elements; (1) there is an act which is legal, (2) but which is contrary to morals, good
custom, public order, or public policy, and (3) and it is done with intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or moral
obliquity. 73 Such must be substantiated by evidence. 74

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in its
formal submission of a draft contract. Settled is the rule that the adverse result of an action does
not per se make the action wrongful and subject the actor to damages, for the law could not have
meant to impose a penalty on the right to litigate. If damages result from a person's exercise of a
right, it is damnum absque injuria.75

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in
CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of attorney's fees in
favor of VIVA Productions, Inc. 1âw phi 1.nêt

No pronouncement as to costs.

SO ORDERED.

G.R. No. 126699 August 7, 1998

AYALA CORPORATION, petitioner,
vs.
RAY BURTON DEVELOPMENT CORPORATION, respondent.

MARTINEZ, J.:

Petitioner Ayala Corporation (AYALA) is the owner of the Ayala estate located in Makati City. The
said estate was originally a raw land which was subdivided for sale into different lots devoted for
residential, commercial and industrial purposes. The development of the estate consisted of road
and building construction and installation of a central sewerage treatment plant and drainage system
which services the whole Ayala Commercial Area.

On March 20, 1984, Karamfil Import-Export Company Ltd. (KARAMFIL) bought from AYALA a piece
of land identified as Lot 26, Block 2 consisting of 1,188 square meters, located at what is now known
as H.V. de la Costa Street, Salcedo Village, Makati City. The said land, which is now the subject of
this case, is more particularly described as follows:

A parcel of land (Lot 26, Block 2, of the subdivision plan [LRC] Psd-6086, being a
portion of Block D, described as plan [LRC] Psd-5812 LRC [GLRO] Rec. No. 2029)
situated in the Municipality of Makati, Province of Rizal, Is. of Luzon. Bounded on the
NE., points 2 to 3 by Lot 31, Block 2 (Creek 6.00 m. wide) of the subdivision plan, on
the SE., points 3 to 4 by Lot 27, Block 2 of the Subdivision plan; on the SW, points 4
to 5, by proposed Road, 17.00 m. wide (Block C[LRC] Psd-5812); points 5 to 1 by
Street Lot 2 (17.00 m. wide) of the subdivision plan. On the NW, points 1 to 2 by Lot
25, Block 2 of the subdivision plan. . . . beginning, containing an area of ONE
THOUSAND ONE HUNDRED EIGHTY EIGHT (1,188) SQUARE METERS.

The transaction was documented in a Deed of Sale 1 of even date, which provides, among
others, that the vendee would comply with certain special conditions and restrictions on the
use or occupancy of the land, among which
are —

Deed Restrictions: 2

a) The total height of the building to be constructed on the lot shall

not be more than forty-two (42) meters, nor shall it have a total gross
floor area of more than five (5) times the lot area; and

b) The sewage disposal must be by means of connection into the

sewerage system servicing the area.

Special Conditions: 3

a) The vendee must obtain final approval from AYALA of the building
plans and specifications of the proposed structures that shall be
constructed on the land;
 b) The lot shall not be sold without the building having been
completed; and

c) Any breach of the stipulations and restrictions entitles AYALA to

rescission of the contract.

As a result of the sale, a Transfer Certificate of Title No. 132086 4 was issued in the name of
KARAMFIL. The said special conditions and restrictions were attached as an annex to the deed of
sale and incorporated in the "Memorandum of Encumbrances" at the reverse side of the title of the
lot as Entry No. 2432/T-131086.

On February 18, 1988, KARAMFIL sold the lot to Palmcrest Development and Realty Corporation
(PALMCREST) under a Deed of Absolute Sale 5 of even date. This deed was submitted to AYALA
for approval in order to obtain the latter's waiver of the special condition prohibiting the resale of the
lot until after KARAMFIL shall have constructed a building thereon. AYALA gave its written
conformity to the sale but reflecting in its approval the same special conditions/restrictions as in the
previous sale. AYALA's conformity was annotated on the deed of sale. 6PALMCREST did not object
to the stipulated conditions and restrictions. 7

PALMCREST in turn sold the lot to Ray Burton Development Corporation (RBDC), now respondent,
on April 11, 1988, with the agreement that AYALA retains possession of the Owner's Duplicate copy
of the title until a building is erected on said parcel of land in accordance with the requirements
and/or restrictions of AYALA. 8 The Deed of Absolute Sale9 executed on the said date was also
presented to AYALA for approval since no building had yet been constructed on the lot at the time of
the sale. As in the KARAMFIL-PALMCREST transaction, AYALA gave its conformity to the sale,
subject to RBDC's compliance with the special conditions/restrictions which were annotated in the
deed of sale, thus:

With our conformity, subject to the compliance by the Vendees of the Special
Conditions of Sale on the reverse side of the Deed of Sale dated March 20, 1984 per
Doc. No. 140, Page No. 29, Book No. 1, Series of 1984 of the Notary Public Silverio
Aquino. 10

The conditions and restrictions of the sale were likewise entered as encumbrances at the
reverse side of the Transfer Certificate of Title No. 155384 which was later issued in the
name of RBDC. 11 Like PALMCREST, RBDC was not also averse to the aforesaid conditions
and restrictions. 12

Sometime in June of 1989, RBDC submitted to AYALA for approval a set of architectural plans for
the construction of a 5-storey office building on the subject lot, with a height of 25.85 meters and a
total gross floor area of 4,989.402 square meters. 13 The building was to be known as "Trafalgar
Tower" but later renamed "Trafalgar Plaza." Since the building was well within the 42-meter height
restriction, AYALA approved the architectural plans.

Upon written request 14 made by RBDC, AYALA likewise agreed to release the owner's copy of the
title covering the subject lot to the China Banking Corporation as guarantee of the loan granted to
RBDC for the construction of the 5-storey building.

Meanwhile, on November 28, 1989, RBDC, together with the Makati Developers Association, Inc.
(MADAI), of which RBDC is a member, and other lot owners, filed a complaint against AYALA before
the Housing and Land Use Regulatory Board (HLRB), docketed as HLRB Case No. REM-A-0818
(OAALA-REM-111489-4240). The complaint sought the nullification of the very same Deed
Restrictions incorporated in the deeds of sale of the lots purchased by the complainants from AYALA
and annotated on their certificates of title, on the grounds, inter alia, that said restrictions
purportedly: (a) place unreasonable control over the lots sold by AYALA, thereby depriving the
vendees of the full enjoyment of the lots they bought, in violation of Article 428 of the Civil Code; (b)
have been superseded by Presidential Decree No. 1096 (the National Building Code) and Metro
Manila Commission Zoning Ordinance No. 81-01; (c) violate the constitutional provision on equal
protection of the laws, since the restrictions are imposed without regard to reasonable standards or
classifications; and (d) are contracts of adhesion 15 since AYALA would not sell the lots unless the
buyers agree to the deed restrictions. The complaint also alleged that AYALA is in estoppel from
enforcing the restrictions in question when it allowed the construction of other high-rise buildings in
Makati City beyond the height and floor area limits. AYALA was further charged with unsound
business practice.

Early in June of 1990, RBDC made another set of building plans for "Trafalgar Plaza" and submitted
the same for approval, this time to the Building Official of the Makati City Engineer's Office, 16 not to
AYALA. In these plans, the building was to be 26-storey high, or a height of 98.60 meters, with a
total gross floor area of 28,600 square meters. After having obtained the necessary building permits
from the City Engineer's Office, RBDC began to construct "Trafalgar Plaza" in accordance with these
new plans.

On July 11, 1990, the majority of the lot owners in the Makati City area, including the Salcedo and
Legaspi Village areas, in a general assembly of the Makati Commercial Estate Association, Inc.
(MACEA), approved the revision of the Deed Restrictions, which revision was embodied in the
"Consolidated and Revised Deed Restrictions" 17(Revised Deed Restrictions) wherein direct height
restrictions were abolished in favor of floor area limits computed on the basis of "floor area ratios"
(FARs). In the case of buildings devoted solely to office use in Salcedo Village — such as the
"Trafalgar Plaza" — the same could have a maximum gross floor area of only eight (8) times the lot
area. Thus, under the Revised Deed Restrictions, "Trafalgar Plaza" could be built with a maximum
gross floor area of only 9,504 square meters (1,188 sq. m. — the size of the subject lot — multiplied
by 8). Even under the Revised Deed Restrictions, Trafalgar would still exceed 19,065 square meters
of floor area on the basis of a FARs of 8:1. RBDC did not vote for the approval of the Revised Deed
Restrictions and, therefore, it continued to be bound by the original Deed Restrictions.

In the meantime, on August 22, 1990, the HLRB En Banc rendered a decision 18 (a) upholding the
Deed Restrictions; (b) absolving AYALA from the charge of unsound business practice; and (c)
dismissing HLRB Case No. REM-A-0818. MADAI and RBDC separately appealed the decision to
the Office of the President, which appeal was docketed as O.P. Case No. 4476.

While the appeal was pending before the Office of the President, the September 21, 1990 issue of
the Business World magazine 19 featured the "Trafalgar Plaza" as a modern 27-storey structure
which will soon rise in Salcedo Village, Makati City. Stunned by this information, AYALA, through
counsel, then sent a letter 20 to RBDC demanding the latter to cease the construction of the building
which dimensions do not conform to the previous plans it earlier approved. RBDC, through counsel,
replied with a series of letters 21 requesting for time to assess the merits of AYALA's demand.

For failing to heed AYALA's bidding, RBDC was sued on January 25, 1991 before the Regional Trial
Court of Makati City (Branch 148). AYALA's complaint for Specific Performance or Rescission,
docketed as Civil Case No. 91-220, prayed inter alia that judgment be rendered —

xxx xxx xxx

 b. Ordering the defendant to comply with its contractual obligations and to remove or
demolish the portions or areas of the Trafalgar Tower/Plaza Building constructed
beyond or in excess of the approved height as shown by building plans approved by
the plaintiff, including any other portion of the building constructed not in accordance
with the building plans and specifications submitted to and approved by plaintiff.

c. Alternatively, in the event specific performance becomes impossible:

i) Ordering the cancellation and

rescission of the Deed of Sale dated
March 20, 1984 (Annex "A" hereof)
and ordering defendant to return to
plaintiff Lot 26, Block 2 of Salcedo
Village;

ii) Ordering the cancellation of

Transfer Certificate of Title No.
155384 (in the name of defendant)
and directing the Makati Register of
Deeds to issue a new title over the Lot
in the name of plaintiff; and

d. Ordering defendant to pay plaintiff attorney's fees in the amount of P500,000.00,

exemplary damages in the amount of P5,000.00 and the costs of the instant suit. 22

In its answer (with counterclaim) to the complaint, RBDC denied having "actual or constructive notice
of the Deed Restrictions" imposed by AYALA on the subject lot. RBDC alleged in essence that even
if said deed restrictions exist, the same are not economically viable and should not be enforced
because they constitute unreasonable restrictions on its property rights and are, therefore, contrary
to law, morals, good customs, public order or public policy. Moreover, RBDC claimed that the
enforcement of the deed restrictions has also been arbitrary or discriminatory since AYALA has not
made any action against a number of violators of the deed restrictions.

Meantime, the appeal of MADAI in O.P. Case No. 44761 was considered resolved when it entered
into a compromise agreement with AYALA wherein the latter adopted and acknowledged as binding
the Revised Deed Restrictions of July 11, 1990. 23 On the other hand, RBDC's appeal was dismissed
in an Order dated February 13, 1992, for the reason that, "insofar as the disposition of the appealed
(HLRB) decision is concerned, there is virtually no more actual controversy on the subject of the
'Deed Restrictions' because the same has been overriden by the 'Revised (Deed) Restrictions' which
the appellee Ayala Corporation has in fact acknowledged as binding and in full force and
effect . . . 24 Accordingly, aside from dismissing RBDC's appeal, the Order of February 13, 1992 also
"set aside" the appealed HLRB decision. From this order, AYALA sought a reconsideration or
clarification, noting, inter alia, that while the said order has ruled that AYALA can no longer enforce
the Deed Restrictions against RBDC, it does not expressly state that RBDC is bound by the Revised
Deed Restrictions. Clarifying this matter, the Office of the President issued a Resolution dated April
21,1992, 25 modifying the February 13, 1992 order, ruling: (1) that RBDC is bound by the original
Deed Restrictions, but it has the option to accept and be bound by the Revised Deed Restrictions in
lieu of the former; and (2) that the "HLRB decision dated 22 August 1990, to the extent that it
absolved Ayala from the charge of unsound business practice, subject of the basic complaint, is
affirmed." This time RBDC moved for a reconsideration of the April 21, 1992 Order, but the motion
was denied in a Resolution dated October 15, 1993. 26 Another Resolution of March 21, 1994 27 was
issued denying with finality RBDC's second motion for reconsideration.
AYALA then filed a Manifestation 28 in Civil Case No. 91-220, informing the trial court of the pertinent
rulings/resolutions in the proceedings before the HLRB and the Office of the President, which
rulings, AYALA suggested, amount to res judicata on the issue of the validity and enforceability of
the Deed Restrictions involved in the said civil case.

After trial on the merits, the trial court rendered a Decision on April 28, 1994 in favor of RBDC, the
dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

defendant and against the plaintiff, and as a consequence:

1. The instant case is hereby dismissed;

2. The motion/application for the annotation of the lis

pendens is hereby DENIED;

3. The motion/application to hold defendant in

continuing contempt is hereby also DENIED;

4. No damages is awarded to any of the parties;

5. Plaintiff is hereby ordered to pay the defendant

P30,000.00 for and as attorney's fees and litigation
expenses;

With costs against plaintiff.

SO ORDERED. 29

The trial court's decision is based on its findings that: (1) RBDC had neither actual nor constructive
notice of the 42-meter height limitation of the building to be constructed on the subject lot; (2) even if
the Deed Restrictions did exist, AYALA is estopped from enforcing the same against RBDC by
reason of the former's failure to enforce said restrictions against other violators in the same area; (3)
the Deed Restrictions partake of the nature of a contract of adhesion; (4) since the Trafalgar Plaza
building is in accord with the minimum requirements of P.D. No. 1096 (The National Building Code),
the Deed Restrictions may not be followed by RBDC; and (5) the rulings of the HLRB and the Office
of the President do not have binding effect in the instant case.

Dissatisfied, AYALA appealed to the Court of Appeals which affirmed the judgment of the trial court
in a Decision 30dated February 27, 1996 in CA-G.R. CV No. 46488. AYALA's motion for
reconsideration was likewise denied in the Resolution 31 of October 7, 1996.

AYALA now interposes the present petition for review on certiorari, citing several errors in the
decision of the Court of Appeals, some of which involve questions of fact.

The resolution of factual issues raised in the petition would certainly call for a review of the Court of
Appeals' findings of fact. As a rule, the re-examination of the evidence proffered by the contending
parties during the trial of the case is not a function that this Court normally undertakes inasmuch as
the findings of fact of the Court of Appeals are generally binding and conclusive on the Supreme
Court. 32 The jurisdiction of this Court in a petition for review on certiorari under Rule 45 of the
Revised Rules of Court is limited to reviewing only errors of law. 33 A reevaluation of factual issues by
this Court is justified when the findings of fact complained of are devoid of support by the evidence
on record, or when the assailed judgment is based on misapprehension of facts. 34

The present petition has shown that certain relevant facts were overlooked by the Court of Appeals,
which facts, if properly appreciated, would justify a different conclusion from the one reached in the
assailed decision.

The principal error raised here by petitioner AYALA pertains to the Court of Appeals' finding that
RBDC did not have actual or constructive notice of the 42-meter height restriction, since what was
annotated on its (RBDC's) title is the erroneous 23-meter height limit which, according to AYALA's
own witness, Jose Cuaresma, was not applicable to RBDC. 35 Thus, the Court of Appeals concluded,
RBDC "has the right to enjoy the subject property as if no restrictions and conditions were imposed
thereon." 36

The above finding and conclusion of the Court of Appeals, AYALA submits, are based on "surmises
and conjectures" which are "contrary to the evidence on record and (RBDC's) own admissions." 37

There is merit in AYALA's submission.

The erroneous annotation of the 23-meter height restriction in RBDC's title was explained by Jose
Cuaresma, AYALA's Assistant Manager for Marketing and Sales. Cuaresma testified that when the
deed of sale between PALMCREST and RBDC was submitted to the Register of Deeds of Makati
and the corresponding title was issued in the name of RBDC, the Register of Deeds annotated the
wrong height limit in Entry No. 2432 on the said title, but he emphasized that the incorrect annotation
does not apply to RBDC. 38

Jose Cuaresma further clarified that the correct height restriction imposed by AYALA on RBDC was
42 meters. 39This height ceiling, he said, is based on the deed of restrictions attached as annex to the
deed of sale, 40 and the same has been uniformly imposed on the transferees beginning from the
original deed of sale between AYALA and KARAMFIL. 41

This clarificatory statement of Jose Cuaresma should have cautioned the Court of Appeals from
making the unfounded and sweeping conclusion that RBDC can do anything it wants on the subject
property "as if no restrictions and conditions were imposed thereon," on the mistaken premise that
RBDC was unaware of the correct 42-meter height limit. It must be stressed that Cuaresma's
testimony is bolstered by documentary evidence and circumstances of the case which would show
that RBDC was put on notice about the 42-meter height restriction.

The record reveals that the subject Lot 26 was first sold by AYALA to KARAMFIL under a deed of
sale (Exhibit "A") dated March 20, 1984 and duly notarized by Notary Public Silverio Aquino.
Attached to the deed of sale is an appendix of special conditions/restrictions (deed restrictions),
which provides, inter alia, that the building to be constructed on the lot must have a total height of
not more than 42 meters, and that any building plans and specifications of the proposed structures
must have the approval of AYALA. The deed restrictions were incorporated in the memorandum of
encumbrances at the reverse side of the title of the lot as Entry No. 2432. When the lot was sold by
KARAMFIL to PALMCREST, the deed of sale (Exhibit "B") on this transaction bears an annotation of
AYALA's conformity to the transfer, with the condition that the approval was "subject to the
compliance by the vendee of the special conditions of sale on the reverse side of the deed of sale
dated March 20, 1984, per Doc. No. 140, Page No. 29, Book No. 1, Series of 1984 of Notary Public
Silverio F. Aquino" (Exhibit "B-1"). PALMCREST later resold the lot to RBDC by virtue of a deed of
sale (Exhibit "C"), to which AYALA's approval was also annotated therein (Exhibit "C-1"), but with the
same explicit inscription that RBDC, as vendee, must comply with the special deed restrictions
appended to the AYALA-KARAMFIL deed of sale of March 20, 1984. All these three (3) deeds of
sale and the accompanying special deed restrictions imposing a 42-meter height limit, were duly
registered with the Register of Deeds. Thus, RBDC cannot profess ignorance of the 42-meter height
restriction and other special conditions of the sale.

Verily, the deed restrictions are integral parts of the PALMCREST-RBDC deed of sale, considering
that AYALA's required conformity to the transfer, as annotated therein, was conditioned upon
RBDC's compliance of the deed restrictions. Consequently, as a matter of contractual obligation,
RBDC is bound to observe the deed restrictions which impose a building height of not more than 42
meters.

Moreover, RBDC was fully aware that it was bound by the 42-meter height limit. This is shown by the
fact that, pursuant to the special conditions/restrictions of the sale, it submitted to AYALA, for
approval, building plans for a 5-storey structure with a height of 25.85 meters. Certainly, RBDC
would not have submitted such plans had it truly believed that it was restricted by a lower 23-meter
height ceiling, in the same manner that RBDC did not seek AYALA's approval when it later made
another set of building plans for the 26-storey "Trafalgar Plaza," knowing that the same would be
disapproved for exceeding the 42-meter height restriction. The fact that RBDC was later issued a
building permit from the Makati City Engineer's Office for the construction of the "Trafalgar Plaza" is
not a valid justification to disregard the stipulated contractual restriction of 42 meters.

Another error which AYALA claims to have been committed by the Court of Appeals is the latter's
finding that AYALA, under the principle of estoppel, is now barred from enforcing the deed
restrictions because it had supposedly failed to act against other violators of the said restrictions.
AYALA argues that such finding is baseless and is contrary to the Civil Code provisions on estoppel
and applicable jurisprudence.

We agree with the petitioner.

In support of its finding that estoppel operates against AYALA, the Court of Appeals merely cited its
decision dated November 17, 1993, in CA-G.R. SP No. 29157, entitled Rosa-Diana Realty and
Development Corporation, Petitioner vs. Land Registration Authority and Ayala Corporation,
Respondents, and reiterated its findings therein, to wit:

Also, Ayala is barred from enforcing the deed of restrictions in question, pursuant to
the doctrines of waiver and estoppel. Under the terms of the deed of sale, the
vendee Sy Ka Kieng assumed faithful compliance with the special conditions of sale
and with the Salcedo Village deed of restrictions. One of the conditions was that a
building would be constructed within one year. Ayala did nothing to enforce the terms
of the contract. In fact, it even agreed to the sale of the lot by Sy Ka Kieng in favor of
the petitioner realty in 1989, or thirteen (13) years later. We, therefore, see no
justifiable reason for Ayala to attempt to enforce the terms of the conditions of the
sale against the petitioner. It should now be estopped from enforcing the said
conditions through any means.

xxx xxx xxx

Even assuming that petitioner RDR violated the floor area and height restrictions, it is
markedly significant that Ayala disregarded the fact that it had previously allowed and
tolerated similar and repeated violations of the same restrictive covenants by
property owners which it now seeks to enforce against the herein petitioner. Some
 examples of existing buildings in Salcedo Village that greatly exceeded the gross
floor area (5 times lot area) and height (42 meters) limitations are (Rollo, p. 32):

(1) Pacific Star (Nauru Center Building — 29 stories and 112.5

meters high)

(2) Sagittarius Building — 16 stories

(3) Shell House Building — 14 stories

(4) Eurovilla Building — 15 stories

(5) LPL Plaza Building — 18 stories

(6) LPL Tower Building — 24 stories. 42

An examination of the decision in the said Rosa Diana case reveals that the sole issue raised before
the appellate court was the propriety of the lis pendens annotation. However, the appellate court
went beyond the sole issue and made factual findings bereft of any basis in the record to
inappropriately rule that AYALA is in estoppel and has waived its right to enforce the subject
restrictions. Such ruling was immaterial to the resolution of the issue of the propriety of the
annotation of the lis pendens. The finding of estoppel was thus improper and made in excess of
jurisdiction.

Moreover, the decision in CA-G.R. SP No. 29157 is not binding on the parties herein, simply
because, except for Ayala, RBDC is not a party in that case. Section 49, Rule 39 of the Revised
Rules of Court (now Sec. 47, Rule 39 of the 1997 Rules of Civil Procedure) provides in part:

Sec. 49. Effect of judgments. The effect of a judgment or final order rendered by a
court or judge of the Philippines, having jurisdiction to pronounce the judgment or
order, may be as follows:

(a) . . .;

(b) In other cases the judgment or order is, with respect to the matter directly
adjudged or as to any other matter that could have been raised in relation thereto,
conclusive between the parties and their successors in interest by title subsequent to
the commencement of action or special proceeding, litigating for the same thing and
under the same title and in the same capacity; (emphasis supplied)

(c) . . . .

The clear mandate of the above-quoted rule is that a final judgment or order of a court is conclusive
and binding only upon the parties to a case and their successors in interest. Both the present case
and the Rosa-Diana case, however, involve different parties who are not litigating "for the same
thing" nor "under the same title and in the same capacity." Hence, the Rosa-Diana decision cannot
have binding effect against either party to the instant case.

In any case, AYALA asserts that a few gross violators of the deed restrictions "have been, or are
being, proceeded against." 43 AYALA admits, though, that there are other violations of the restrictions
but these are of a minor nature which do not detract from substantial compliance by the lot owners of
the deed restrictions. AYALA submits that minor violations are insufficient to warrant judicial action,
thus:

As a rule, non-objection to trivial breaches of a restrictive covenant does not result in

loss of the right to enforce the covenant by injunction, and acquiescence in violations
of a restrictive covenant which are immaterial and do not affect or injure one will not
preclude him from restraining violations thereof which would so operate as to cause
him to be damaged." (20 Am Jur. 2d Sec. 271, p. 835; emphasis provided).

Occasional and temporary violations by lot owners of a covenant forbidding the use
of property for mercantile purposes are not sufficient as a matter of law to warrant a
finding of a waiver or abandonment to the right to enforce the restriction. A waiver in
favor of one person and for a limited purpose is not a waiver as to all persons
generally. (id., at 836; emphasis provided). 44

It is the sole prerogative and discretion of AYALA to initiate any action against violators of the deed
restrictions. This Court cannot interfere with the exercise of such prerogative/discretion.

How AYALA could be considered in estoppel as found by both the trial court and the Court of
Appeals, was not duly established. "Under the doctrine of estoppel, an admission or representation
is rendered conclusive upon the person making it, and cannot be denied or disproved as against the
person relying thereon. A party may not go back on his own acts and representations to the
prejudice of the other party who relied upon them." 45 Here, we find no admission, false
representation or concealment that can be attributed to AYALA relied upon by RBDC.

What is clear from the record, however, is that RBDC was the party guilty of misrepresentation
and/or concealment when it resorted to the fraudulent scheme of submitting two (2) sets of building
plans, one (1) set conformed to the Deed Restrictions, which was submitted to and approved by
AYALA, 46 while another set violated the said restrictions, and which it presented to the Makati City
Building Official in order to secure from the latter the necessary building permit. 47 It is noteworthy
that after the submission of the second set of building plans to the Building Official, RBDC continued
to make representations to AYALA that it would build the five-storey building in accordance with the
first set of plans approved by AYALA, obviously for the purpose of securing the release of the title of
the subject lot to obtain bank funding. AYALA relied on RBDC's false representations and released
the said title. Hence, RBDC was in bad faith.

AYALA further assigns as error the finding of the respondent court that, "while the Deed of Sale to
Ray Burton (RBDC) did not appear to be a contract of adhesion," however, "the subject Deed
Restrictions annotated therein appeared to be one." 48 The only basis for such finding is that the
Deed Restrictions and Special Conditions were "pre-printed" and "prepared" by AYALA, and that
RBDC's participation thereof was "only to sign the Deed of Sale with the said restrictions and
conditions." 49

The respondent court erred in ruling that the Deed Restrictions is a contract of adhesion.

A contract of adhesion in itself is not an invalid agreement. This type of contract is as binding as a
mutually executed transaction. We have emphatically ruled in the case of Ong Yiu vs. Court of
Appeals, et. al. 50 that "contracts of adhesion wherein one party imposes a ready-made form of
contract on the other . . . are contracts not entirely prohibited. The one who adheres to the contract
is in reality free to reject it entirely; if he adheres he gives his consent." This ruling was reiterated
in Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., et. al., 51 wherein we further
declared through Justice Florenz Regalado that "not even an allegation of ignorance of a party
excuses non-compliance with the contractual stipulations since the responsibility for ensuring full
comprehension of the provisions of a contract of carriage (a contract of adhesion) devolves not on
the carrier but on the owner, shipper, or consignee as the case may be."

Contracts of adhesion, however, stand out from other contracts (which are bilaterally drafted by the
parties) in that the former is accorded inordinate vigilance and scrutiny by the courts in order to
shield the unwary from deceptive schemes contained in ready-made covenants. As stated by this
Court, speaking through Justice J.B.L. Reyes, in Qua Chee Gan vs. Law Union and Rock Insurance
Co., Ltd.: 52

The courts cannot ignore that nowadays, monopolies, cartels and concentration of
capital, endowed with overwhelming economic power, manage to impose upon
parties dealing with them cunningly prepared "agreements" that the weaker party
may not change one whit, his participation in the "agreement" being reduced to the
alternative to "take it or leave it" labeled since Raymond Saleilles "contracts by
adherence" (contracts d' adhesion) in contrast to those entered into by parties
bargaining on an equal footing. Such contracts (of which policies of insurance and
international bill of lading are prime examples) obviously call for greater strictness
and vigilance on the part of the courts of justice with a view to protecting the weaker
party from abuses and imposition, and prevent their becoming traps for the
unwary. 53 (Emphasis supplied)

The stringent treatment towards contracts of adhesion which the courts are enjoined to
observe is in pursuance of the mandate in Article 24 of the New Civil Code that "(i)n all
contractual, property or other relations, when one of the parties is at a disadvantage on
account of his moral dependence, ignorance, indigence, mental weakness, tender age or
other handicap, the courts must be vigilant for his protection."

Thus, the validity and/or enforceability of a contract of adhesion will have to be determined by the
peculiar circumstances obtaining in each case and the situation of the parties concerned.

In the instant case, the stipulations in the Deed Restrictions and Special Conditions are plain and
unambiguous which leave no room for interpretation. Moreover, there was even no attempt on the
part of RBDC to prove that, in the execution of the Deed of Sale on the subject lot, it was a weaker
or a disadvantaged party on account of its moral dependence, ignorance, mental weakness or other
handicap. On the contrary, as testified to by Edwin Ngo, President of RBDC, the latter is a realty firm
and has been engaged in realty business, 54 and that he, a businessman for 30 years, 55 represented
RBDC in the negotiations and in the eventual purchase of the subject lot from
PALMCREST. 56 Edwin Ngo's testimony proves that RBDC was not an unwary party in the subject
transaction. Instead, Edwin Ngo has portrayed RBDC as a knowledgeable realty firm experienced in
real estate business.

In sum, there is more than ample evidence on record pinpointing RBDC's violation of the applicable
FAR restrictions in the Consolidated and Revised Deed Restrictions (CRDRs) when it constructed
the 27-storey Trafalgar Plaza. The prayer of petitioner is that judgment be rendered as follows:

a. Ordering Ray Burton to comply with its contractual obligations in the construction
of Trafalgar Plaza' by removing or demolishing the portions of areas thereof
constructed beyond or in excess of the approved height, as shown by the building
plans submitted to, and approved by, Ayala, including any other portion of the
building constructed not in accordance with the said building plans;
 b. Alternatively, in the event specific performance becomes impossible:

(1) ordering the cancellation and rescission of the March 20, 1984
"Deed of Sale" and all subsequent "Deeds of Sale" executed in favor
of the original vendee's successors-in-interest and ordering Ray
Burton to return to Ayala Lot 26, Lot 2 of Salcedo Village;

(2) ordering the cancellation of Transfer Certificate of Title No.

155384 (in the name of defendant) and directing the Office of the
Register of Deeds of Makati to issue a new title over the lot in the
name of Ayala; and

xxx xxx xxx. 57

However, the record reveals that construction of Trafalgar Plaza began in 1990, and a
certificate of completion thereof was issued by the Makati City Engineer's Office per ocular
inspection on November 7, 1996. 58 Apparently Trafalgar Plaza has been fully built, and we
assume, is now fully tenanted. The alternative prayers of petitioner under the CRDRs, i.e.,
the demolition of excessively built space or to permanently restrict the use thereof, are no
longer feasible.

Thus, we perforce instead rule that RBDC may only be held alternatively liable for substitute
performance of its obligations — the payment of damages. In this regard, we note that the CRDRs
impose development charges on constructions which exceed the estimated Gross Limits permitted
under the original Deed Restrictions but which are within the limits of the CRDRs.

In this regard, we quote hereunder pertinent portions of The Revised Deed Restrictions, to wit:

3. DEVELOPMENT CHARGE

For any building construction within the Gross Floor Area limits defined under
Paragraphs C-2.1 to C-2.4 above, but which will result in a Gross Floor Area
exceeding certain standards defined in Paragraphs C-3.1-C below, the OWNER shall
pay MACEA, prior to the start of construction of any new building or any expansion of
an existing building, a DEVELOPMENT CHARGE as a contribution to a trust fund to
be administered by MACEA. This trust fund shall be used to improve facilities and
utilities in the Makati Central Business District.

3.1 The amount of the development charge that shall be due from the OWNER shall
be computed as follows:

DEVELOPMENT CHARGE = A x (B - C - D)

where:

A — is equal to the Area Assessment which shall be set at Five Hundred Pesos
(P500.00) until December 31, 1990. Each January 1st thereafter, such amount shall
increase by ten percent (10%) over the Area Assessment charged in the immediately
preceding year; provided that, beginning 1995 and at the end of every successive
five-year period thereafter, the increase in the Area Assessment shall be reviewed
and adjusted by the VENDOR to correspond to the accumulated increase in the
 construction cost index during the immediately preceding five years as based on the
weighted average of wholesale price and wage indices of the National Census and
Statistics Office and the Bureau of Labor Statistics.

B — is equal to the total Gross Floor Area of the completed or expanded building in
square meters.

C — is equal to the estimated Gross Floor Area permitted under the original deed
restrictions, derived by multiplying the lot area by the effective original FAR shown
below for each location: 59

Accordingly, in accordance with the unique, peculiar circumstance of the case at hand, we hold that
the said development charges are a fair measure of compensatory damages which RBDC has
caused in terms of creating a disproportionate additional burden on the facilities of the Makati
Central Business District.

As discussed above, Ray Burton Development Corporation acted in bad faith in constructing
Trafalgar Plaza in excess of the applicable restrictions upon a double submission of plans and
exercising deceit upon both AYALA and the Makati Engineer's Office, and thus by way of example
and correction, should be held liable to pay AYALA exemplary damages in the sum of
P2,500,000.00.

Finally, we find the complaint to be well-grounded, thus it is AYALA which is entitled to an award of
attorney's fees, and while it prays for the amount of P500,000.00, we award the amount of
P250,000.00 which we find to be reasonable under the circumstances.

WHEREFORE, premises considered, the assailed Decision of the Court of Appeals dated February
27, 1996, in CA-G.R. CV No. 46488, and its Resolution dated October 7, 1996 are hereby
REVERSED and SET ASIDE, and in lieu thereof, judgment is hereby rendered finding that:

(1) The Deed Restrictions are valid and petitioner AYALA is not
estopped from enforcing them against lot owners who have not yet
adopted the Consolidated and Revised Deed Restrictions;

(2) Having admitted that the Consolidated and Revised Deed

Restrictions are the applicable Deed Restrictions to Ray Burton
Development Corporation's Trafalgar Plaza, RBDC should be, and is,
bound by the same;

(3) Considering that Ray Burton Development Corporation's Trafalgar

Plaza exceeds the floor area limits of the Deed Restrictions, RBDC is
hereby ordered to pay development charges as computed under the
provisions of the Consolidated and Revised Deed Restrictions
currently in force.

(4) Ray Burton Development Corporation is further ordered to pay

AYALA exemplary damages in the amount of P2,500,000.00,
attorney's fees in the amount of P250,000.00, and the costs of suit.

SO ORDERED.
 G.R. No. 158622, January 27, 2016

SPOUSES ROBERT ALAN L. AND NANCY LEE LIMSO, Petitioners, v. PHILIPPINE NATIONAL BANK
AND THE REGISTER OF DEEDS OF DAVAO CITY, Respondents.

G.R. NO. 169441

DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION AND SPOUSES ROBERT ALAN
AND NANCY LIMSO, Petitioners, v. HON. JESUS V. QUITAIN, IN HIS CAPACITY AS PRESIDING
JUDGE OF REGIONAL TRIAL COURT, DAVAO CITY, BRANCH 15 AND PHILIPPINE NATIONAL
BANK, Respondents.

G.R. NO. 172958

DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION REPRESENTED BY ITS

PRESIDENT ROBERT ALAN L. LIMSO, AND SPOUSES ROBERT ALAN AND NANCY LEE
LIMSO, Petitioners, v. HON. JESUS V. QUITAIN, IN HIS CAPACITY AS PRESIDING JUDGE OF
REGIONAL TRIAL COURT, DAVAO CITY, BRANCH 15 AND PHILIPPINE NATIONAL
BANK, Respondents.

G.R. NO. 173194

PHILIPPINE NATIONAL BANK, Petitioner, v. DAVAO SUNRISE INVESTMENT AND DEVELOPMENT

CORPORATION AND SPOUSES ROBERT ALAN LIMSO AND NANCY LEE LIMSO, Respondents.

G.R. NO. 196958

PHILIPPINE NATIONAL BANK, Petitioner, v. DAVAO SUNRISE INVESTMENT AND DEVELOPMENT

CORPORATION AND SPOUSES ROBERT ALAN L. LIMSO AND NANCY LEE LIMSO, Respondent.

G.R. NO. 197120

DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION AND SPOUSES ROBERT ALAN
AND NANCY LEE LIMSO, Petitioners, v. PHILIPPINE NATIONAL BANK, Respondent.

G.R. NO. 205463

IN THE MATTER OF THE PETITION EX-PARTE FOR THE ISSUANCE OF THE WRIT OF POSSESSION
UNDER LRC RECORD NO. 12973, 18031 AND LRC RECORD NO. 317, PHILIPPINE NATIONAL BANK,

DECISION

LEONEN, J.:

There is no mutuality of contract when the interest rate in a loan agreement is set at the sole discretion of
one party. Nor is there any mutuality when there is no reasonable means by which the other party can
determine the applicable interest rate. These types of interest rates stipulated in the loan agreement are null
and void. However, the nullity of the stipulated interest rate does not automatically nullify the provision
requiring payment of interest. Certainly, it does not nullify the obligation to pay the principal loan obligation.

These consolidated cases arose from three related actions filed before the trial courts of Davao City.

In 1993, Spouses Robert Alan L. Limso and Nancy Lee Limso (Spouses Limso)1 and Davao Sunrise
Investment and Development Corporation (Davao Sunrise) took out a loan secured by real estate mortgages
from Philippine National Bank.2

The loan was in the total amount of P700 million, divided into two (2) kinds of loan accommodations: a
revolving credit line of P300 million, and a seven-year long-term loan of P400 million.3
To secure the loan, real estate mortgages were constituted on four (4) parcels of land registered with the
Registry of Deeds of Davao City.4 The parcels of land covered by TCT Nos. T-147820, T-151138, and T-
147821 were registered in the name of Davao Sunrise, while the parcel of land covered by TCT No. T-
140122 was registered in the name of Spouses Limso.5

In 1995, Spouses Limso sold the parcel of land covered by TCT No. T-140122 to Davao Sunrise.6

Spouses Limso and Davao Sunrise had difficulty in paying their loan. In 1999, they requested that their loan
be restructured. After negotiations, Spouses Limso, Davao Sunrise, and Philippine National Bank executed a
Conversion, Restructuring and Extension Agreement.7

The principal obligation in the restructured agreement totalled P1.067 billion. This included P217.15 million
unpaid interest.8

The restructured loan was divided into two (2) parts. Loan I was for the principal amount of P5 83.18
million, while Loan II was for the principal amount of P483.78 million.9 The restructured loan was secured by
the same real estate mortgage over four (4) parcels of land in the original loan agreement. All the properties
were registered in the name of Davao Sunrise.10

The terms of the restructured loan agreement state:

SECTION 1. TERMS OF THE CONVERSION,

RESTRUCTURING AND EXTENSION

1.01 The Conversion/Restructuring/Extension. Upon compliance by the Borrowers with the conditions
precedent provided herein, the Obligations shall be converted, restructured and/or its term extended
effective January 1, 1999 (the "Effectivity Date") in the form of term loans (the "Loans") as follows:
chanRoble svirtual Lawlib ra ry

(a) The Credit Line portion of the Obligations is hereby converted and restructured into a Seven-Year Long
Term Loan (the "Loan I") in the principal amount of P583.18 Million;

(b) The original term of the Loan is hereby extended for another four (4) years (from September 1, 2001 to
December 31, 2005), and interest portion of the Obligations (including the interest accruing on the Credit
Line and Loan up to December 31, 1998 estimated at P49.83 Million) are hereby capitalized. Accordingly,
both the Loan and Interest portions of the Obligations are hereby consolidated into a Term Loan (the "Loan
II") in the aggregate principal amount of P483.78 Million;

SECTION 2. TERMS OF LOAN I

2.01 Amount of Loan I. Loan I shall be in the principal amount not exceeding PESOS: FIVE HUNDRED
EIGHTY THREE MILLION ONE HUNDRED EIGHTY THOUSAND (P583,180,000.00).

2.02 Promissory Note. Loan I shall be evidenced by a promissory note (the "Note I") to be issued by the
Borrowers in favor of the Bank in form and substance satisfactory to the Bank.

2.03 Principal Repayment. The Borrowers agree to repay Loan I within a period of seven (7) years (inclusive
of a one (1) year grace period) in monthly amortizations with the first amortization to commence on January
2000 and a balloon payment on or before the end of the 7th year on December 2005.

2.04 Interest, (a) The Borrowers agree to pay the Bank interest on Loan I from the Effective Date, until the
date of full payment thereof at the rate per annum to be set by the Bank. The interest rate shall be reset by
the Bank every month.

(b) The interest provided in clause (a) above shall be payable monthly in arrears to commence on January,
1999.

SECTION 3. TERMS OF LOAN II

3.01 Amount of Loan II. Loan II shall be in the principal amount not exceeding PESOS: FOUR HUNDRED
EIGHTY THREE MILLION SEVEN HUNDRED EIGHTY THOUSAND (P483,780,00.00).

3.02 Promissory Note. Loan II shall be evidenced by a promissory note (the "Note II") to be issued by the
Borrowers in favor of the Bank in form and substance satisfactory to the Bank.

3.03 Principal Repayment. The Borrowers agree to repay Loan II within a period of seven (7) years
(inclusive of a one (1) year grace period) in monthly amortizations with the first amortization to commence
on January 2000 and a balloon payment on or before December 2005.

3.04 Interest, (a) The Borrowers agree to pay the Bank interest on Loan II from the Effective Date, until the
date of full payment thereof at the rate per annum to be set by the Bank. The interest rate shall be reset by
the Bank every month.

(b) The interest provided in clause (a) above shall be payable monthly in arrears to commence on January
1999.11 (Emphasis provided)

Spouses Limso and Davao Sunrise executed promissory notes, both dated January 5, 1999, in Philippine
National Bank's favor. The promissory notes bore the amounts of P583,183,333.34 and
P483,811,798.93.12 The promissory note for Loan II includes interest charges because one of the
preambular clauses of the Conversion, Restructuring and Extension Agreement states that:

WHEREAS, the Borrowers acknowledge that they have outstanding obligations (the "Obligations") with the
Bank broken down as follows:

(i) Credit Line - P583.18 Million (as of September 30, 1998);

(ii) Loan - P266.67 Million (as of September 30, 1998); and
(iii) Interest - P217.15 Million (as of December 31, 1998)[.]13 ChanRoble sVirt ualawli bra ry

Spouses Limso and Davao Sunrise encountered financial difficulties. Despite the restructuring of their loan,
they were still unable to pay.14 Philippine National Bank sent demand letters. Still, Spouses Limso and Davao
Sunrise failed to pay.15

On August 21, 2000, Philippine National Bank filed a Petition for Extrajudicial Foreclosure of Real Estate
Mortgage before the Sheriff's Office in Davao City.16 The Notice of Foreclosure was published. The bank
allegedly complied with all the other legal requirements under Act No. 3135.17 The auction sale was held on
October 26, 2000. Ball Park Realty Corporation, through its representative Samson G. To, submitted its bid
in the amount of P1,521,045,331.49.18 Philippine National Bank's bid was in the amount of
P1,521,055,331.49. Thus, it was declared the highest bidder.19

After the foreclosure sale, but before the Sheriff could issue the Provisional Certificate of Sale,20 Spouses
Limso and Davao Sunrise filed a Complaint for Reformation or Annulment of contract against Philippine
National Bank, Arty. Marilou D. Aldevera, in her capacity as Ex-Officio Provincial Sheriff of Davao City, and
the Register of Deeds of Davao City.21 The Complaint was filed on October 30, 2000, raffled to Branch 17 of
the Regional Trial Court of Davao City, and docketed as Civil Case No. 28,170-2000.22 It prayed for:

[the] declaration of nullity of unilateral imposition and increases of interest rates, crediting of illegal
interests collected to [Spouses Limso and Davao Sunrise's] account; elimination of all uncollected illegal
interests; reimposition of new interest rates at 12% per annum only from date of filing of Complaint, total
elimination of penalties; elimination also of attorney's fees or its reduction; declaration of nullity of auction
sale and the foreclosure proceedings; reduction of both loan accounts; reformation or annulment of
contract, reconveyance, damages and injunction and restraining order.23

Immediately after the Complaint was filed, the Executive Judge24 of the Regional Trial Court of Davao City
issued a 72-hour restraining order preventing Philippine National Bank from taking possession and selling
the foreclosed properties.25c ralaw red

Spouses Limso subsequently filed an amended Complaint.26 The prayer in the amended Complaint stated:

PRAYER

WHEREFORE, it is respectfully prayed that judgment issue in favor of plaintiffs and against the defendants:

ON THE TEMPORARY
RESTRAINING ORDER
1. That, upon the filing of the above-entitled case, a TEMPORARY RESTRAINING ORDER be maintained
enjoining the defendants from executing the provisional Certificate of Sale and final Deed of Absolute Sale;
confirmation of such sale; taking immediate possession thereof and from selling to third parties those
properties covered by TCT Nos. T-147820, T-147821/T-246386 and T-247012 and its improvements nor to
mortgage or pledge the same prior to the final outcome of the above-entitled case, including other
additional acts of foreclosure;.

2. That, plaintiffs' application for the issuance of the [Writ of Preliminary Injunction] be concluded within the
20 days lifetime period of the [Temporary Restraining Order], and

AFTER TRIAL ON THE MERITS

3. To declare the injunction as final;

4. Declaring that the unilateral increases of interest rates imposed by the defendant bankover and above the
stipulated interest rates provided for in the Promissory Notes, be also considered as null and void and
thereafter lowering the same to 12% per annum only, from the date of the filing of the Complaint;

5. Declaring also that all illegally imposed interest rates and penalty charges be considered eliminated
and/or deducted from any account balance of plaintiffs;

6. Declaring also either the complete elimination of attorney's fees, or in the alternative, reducing the same
to P500,000.00 only;

7. Declaring the reduction of the loan account balance to P827,012,149.50 only;

8. That subsequent thereto, ordering a complete reformation of the loan agreement and Real Estate
Mortgage which will now embody the lawful terms and conditions adjudicated by this Honorable Court, or in
the alternative, ordering its annulment, as may be warranted under the provision of Article 1359 of the New
Civil Code;

9. Ordering the defendant Register of Deeds to refrain from issuing a new title in favor of third parties, and
to execute the necessary documents necessary for the reconveyance of the properties now covered by TCT
Nos. T-147820, T-147821, T-246386 and T-247012 from the defendant bank in favor of the plaintiffs upon
payment of the recomputed loan accounts;

10. Ordering also the defendant bank to pay to the plaintiffs the sum of at least P500,000.00 representing
business losses and loss of income by the later [sic] arising from the improvident and premature institution
of extrajudicial foreclosure proceedings against the plaintiffs;

11. Ordering again the defendant bank to pay to the plaintiffs the sum of P400,000.00 as attorney's fees
and the additional sum of P100,000.00 for expenses incident to litigation; and

12. To pay the costs and for such other reliefs just and proper

under the circumstances.27 (Underscoring in the original)

Through the Order28 dated November 20, 2000, Branch 17 of the Regional Trial Court of Davao City denied
Spouses Limso's application for the issuance of a writ of preliminary injunction.29

Spouses Limso moved for reconsideration. On December 4, 2000, Branch 17 of the Regional Trial Court of
Davao City set aside its November 20, 2000 Order and issued a writ of preliminary injunction.30

Philippine National Bank then moved for reconsideration of the trial court's December 4, 2000 Order. The
bank's Motion was denied on December 21, 2000. Hence, Philippine National Bank filed before the Court of
Appeals a Petition for Certiorari assailing the December 4, 2000 and December 21, 2000 Orders of the trial
court. This was docketed as CA G.R. SP. No. 63351.31

In the meantime, Branch 17 continued with the trial of the Complaint for Reformation or Annulment of
Contract with Damages.32
On January 10, 2002, the Court of Appeals issued the Decision33 in CA G.R. SP. No. 63351 setting aside and
annulling the Orders dated December 4, 2000 and December 21, 2000 and dissolving the writ of preliminary
injunction.34

Spouses Limso and Davao Sunrise moved for reconsideration of the Court of Appeals' January 2, 2002
Resolution in CA G.R. SP No. 63351 but the motion was denied.35 They then filed a Petition for Review on
Certiorari before this court.36 Their Petition was docketed as G.R. No. 152812, which was denied on
procedural grounds.37

In view of the dissolution of the writ of preliminary injunction, Acting Clerk of Court and Ex-officio Provincial
Sheriff Rosemarie T. Cabaguio issued the Sheriff's Provisional Certificate of Sale dated February 4, 2002 in
the amount of P1,521,055,331.49.38 However, the Sheriff's Provisional Certificate of Sale39 did not state the
applicable redemption period and the redemption price payable by the mortgagor or redemptioner.40 cra lawred

On the same date, Philippine National Bank presented the Sheriff's Provisional Certificate of Sale to the
Register of Deeds of Davao City in order that the title to the foreclosed properties could be consolidated and
registered in Philippine National Bank's name. The presentation was recorded in the Primary Entry Book of
Davao City's Registry of Deeds under Act No. 496 and entered as Entry Nos. 4762 to 4765.41

On February 5, 2002, the registration of the Certificate of Sale was elevated en consulta by Atty. Florenda T.
Patriarca (Atty. Patriarca) , Acting Register of Deeds of Davao City, to the Land Registration Authority in
Manila. This was docketed as Consulta No. 3405.42

Acting on the consulta, the Land Registration Authority issued the Resolution dated May 21, 2002, which
states:43

"WHEREFORE, in view of the foregoing, the Sheriff's Provisional Certificate of Sale dated February 4, 2002 is
registrable on TCT Nos. T-147820, T-147386, T-247012 provided all other registration requirements are
complied with."44

Meanwhile, on March 25, 2002, the Spouses Limso filed a Petition for Declaratory Relief with Prayer for
Temporary Restraining Order/Injunction on March 25, 2002 against Philippine National Bank, Atty.
Rosemarie T. Cabaguio, in her capacity as Ex-Officio Provincial Sheriff, and the Register of Deeds of Davao
City (Petition for Declaratory Relief). The Sheriff's Provisional Certificate of Sale allegedly did not state any
redemption price and period for redemption. This case was raffled to Branch 14 of the Regional Trial Court of
Davao City and docketed as Civil Case No. 29,036-2002.45

The Petition for Declaratory Relief was filed while the Complaint for Reformation or Annulment with
Damages was still pending before Branch 17 of the Regional Trial Court of Davao City.

Spouses Limso subsequently filed an Amended Petition for Declaratory Relief, alleging:

6. That Petitioners with the continuing crisis and the unstable interest rates imposed by respondent PNB
admittedly failed to pay their loan, the demand letters were sent to both debtors-mortgagors separately,
one addressed to the Petitioners and another addressed to DSIDC, the last of which was dated April 12,
2000 xxx;

7. That on August 21, 200(0), respondent PNB filed a Petition for Extrajudicial Foreclosure of the mortgaged
properties against the petitioners-mortgagors-debtors and DSIDC;

8. That on October 26, 2000, the mortgaged properties were auctioned with the respondent PNB as the
highest bidder;

9. That on February 4, 2002, a Sheriff's Provisional Certificate of Sale was issued by respondent Sheriff who
certified xxxx

10. That the said Sheriff's Provisional Certificate of Sale did not contain a provision usually contained in a
regular Sheriff's Provisional Certificate of Sale as regards the period of redemption and the redemption price
to be raised within the ONE (1) YEAR redemption period in accordance with Act 3135, under which same law
the extrajudicial petition for sale was conducted as mentioned in the Certificate;

11. That the Sheriff's Provisional Certificate of Sale has not yet been registered with the office of respondent
Register of Deeds yet; that petitioners and DSIDC are still in actual possession of the subject properties;

12. That sometime in the middle part of year 2000, Republic Act No. 8791 otherwise known as General
Banking Laws of 2000 was approved and finally passed on April 12, 2000 and took effect sometime
thereafter;

13. That among the provisions of the said law particularly, Section 47 dealt with Foreclosure of Real Estate
Mortgage, quoted verbatim hereunder as follows:
chanRoble svirtual Lawlib ra ry

"Sec. 47. Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extra-
judicially, or any mortgage on real estate which is security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the real estate, to redeem the property by
paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage,
and all the costs and expenses incurred by the bank or institution from the sale and custody of said property
less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a
judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property
immediately after the date of the confirmation of the auction sale and administer the same in accordance
with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted
pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the
enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after,
the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case
shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has
been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until
their expiration."
14. That it is clear and evident that the absence of provisions as to redemption period and price in the
Sheriff's Provisional Certificate of Sale issued by respondent Sheriff, that respondent PNB and Sheriff
intended to apply the provisions of Section 47 of Republic Act No. 8791 which reduced the period of
redemption of a juridical person whose property is being sold pursuant to an extrajudicial foreclosure sale
until but not after the registration of the Certificate of Sale with the applicable Register of Deeds which in no
case shall be more than three (3) months after foreclosure, whichever is earlier;

15. That Petitioners in this subject mortgage are Natural Persons who are principal mortgagors-debtors and
at the same time registered owners of some properties at the time of the mortgage;

16. That the provisions of Republic Act No. 8791 do not make mention nor exceptions to this situation where
the Real Estate Mortgage is executed by both Juridical and Natural Persons; hence, the need to file this
instant case of Declaratory Relief under Rule 63 of the Revised Rules of Court of the Philippines;
....

PRAYER

WHEREFORE, it is respectfully prayed that judgment in favor of petitioners and against the respondent-PNB;

1. That upon the filing of the above-entitled case, a TEMPORARY RESTRAINING INJUNCTION be issued
immediately ordering a status quo, enjoining the Register of Deeds and defendant-PNB from registering the
subject Provisional Certificate of Sale from consolidating the title of the property covered by Transfer
Certificate of Title Nos. T-147820, T-147821, T-246386, T-24712 and Land Improvement, Etc.

2. That petitioners' application of the issuance of the Writ of Preliminary Injunctions be considered and
granted within 20 days lifetime period of the TRO.

AFTER TRIAL ON THE MERITS

3. To declare the injunction as final;

4. Ordering the Register of Deeds to refrain from registering the Sheriff's Certificate of Sale and further from
consolidating the titles of the said properties in its name and offering to sell the same to interested buyers
during the pendency of the above entitled case, while setting the date of hearing on the propriety of the
issuance of such Writ of Preliminary Injunction.

ON THE MAIN CASE

5. To declare the petitioners' right as principal mortgagors/owner jointly with a juridical person to redeem
within a period of 1 year the properties foreclosed by respondent PNB still protected and covered by Act
3135.

6. To declare the provisions on Foreclosure of Real Estate Mortgage under Republic Act 8791 or General
Banking Laws of 2000 discriminating and therefore unconstitutional.

OTHER RELIEFS AND REMEDIES are likewise prayed for.46

Branch 14 of the Regional Trial Court of Davao City issued a temporary restraining order47 on April 10, 2002.
This temporary restraining order enjoined the Register of Deeds from registering the Sheriff's Provisional
Certificate of Sale.48

The temporary restraining order was issued without first hearing the parties to the case. Hence, the
temporary restraining order was recalled by the same trial court in the Order49 dated April 16, 2002.

During the hearing for the issuance of a temporary restraining order in the Petition for Declaratory Relief,
Spouses Limso presented several exhibits, which included: Philippine National Bank's demand letter dated
April 12, 2000; Philippine National Bank's letter to the Acting Register of Deeds of Davao City dated
February 4, 2002 requesting the immediate registration of the Sheriff's Provisional Certificate of Sale; and
the Notice of Foreclosure dated September 5, 2000.50

Counsel for Philippine National Bank objected to the purpose of the presentation of the exhibits and argued
that since Spouses Limso were Davao Sunrise's co-debtors, they "were notified as a matter of formality[.]"51

On May 3, 2002, Branch 14 granted the prayer for the issuance of the writ of preliminary injunction
enjoining the registration of the Sheriff's Provisional Certificate of Sale.52

Branch 14 reasoned as follows:

This Court finds no merit in the claims advanced by private respondent Bank for the following reasons:

1. That the primary ground why the Court of Appeals dissolved the preliminary injunction granted by Branch
17 of this Court was because the ground upon which the same was issued was based on a pleading which
was not verified;

2. That Civil Case No. 28,170-2000 and Civil Case No. 29,036- 2002 while involving substantially the same
parties, the same do not involved [sic] the same issues as the former involves nullity of unilateral imposition
and increases of interest rates, etc. nullity of foreclosure proceedings, reduction of both loan accounts,
reformation or annulment of contract, reconveyance and damages, whereas the issues raised in the instant
petition before this Court is the right and duty of the petitioners under the last paragraph of Sec. 47,
Republic Act No. 8791 and whether the said section of said law is applicable to the petitioners considering
that the mortgage contract was executed when Act No. 3135 was the controlling law and was in fact made
part of the contract;

3. That the petition, contrary to the claim of private respondent Bank, clearly states a cause of action; and

4. That since petitioners are parties to the mortgage contract they, therefore, have locus standi to file the
instant petition.

If Section 7 of Republic Act 8791 were made to apply to the petitioners, the latter would have a shorter
period of three (3) months to exercise the right of redemption after the registration of the Certificate of
Sale, hence, the registration of the Sheriff's Provisional Certificate of Sale would cause great and irreparable
injury to them as their rights to the properties sold at public auction would be lost forever if the registration
of the same is not enjoined.53ChanRobles Vi rtua lawlib rary

Spouses Limso posted an injunction bond that was approved by the trial court in the Order dated May 6,
2002. Thus, the writ of preliminary prohibitory injunction was issued.54

Philippine National Bank moved for reconsideration of the Orders dated May 3, 2002 and May 6, 2002.55

Around this time, Judge William M. Layague (Judge Layague), Presiding Judge of Branch 14, was on
leave.56 Philippine National Bank's Motion for Reconsideration was granted by the Pairing Judge, Judge Jesus
V. Quitain (Judge Quitain),57 and the writ of preliminary prohibitory injunction was dissolved in the Order
dated May 23, 2002.58

On May 30, 2002, Philippine National Bank's lawyers went to the Register of Deeds of Davao City "to inquire
on the status of the registration of the Sheriff's Provisional Certificate of Sale."59

Philippine National Bank's lawyers were informed that the documents they needed "could not be found and
that the person in charge thereof, Deputy Register of Deeds Jorlyn Paralisan, was absent."60

Philippine National Bank contacted Jorlyn Paralisan at her residence. She informed Philippine National Bank
that the documents they were looking for were all inside Atty. Patriarca's office.61

Subsequently, Atty. Patriarca informed the representatives of Philippine National Bank that the Register of
Deeds "would not honor certified copies of [Land Registration Authority] resolutions even if an official copy
of the [Land Registration Authority] Resolution was already received by that Office through mail."62

On May 31, 2002, Philippine National Bank's representatives returned to the Register of Deeds of Davao City
and learned that Atty. Patriarca, the Acting Register of Deeds, had not affixed her signature, which was
necessary to complete the registration of the Sheriff's Certificate of Sale.63

Subsequently, Judge Layague reinstated the writ of preliminary prohibitory injunction in the Order64 dated
June 24, 2002.

Aggrieved, Philippine National Bank filed before the Court of Appeals a Petition for Certiorari, Prohibition and
Mandamus with Prayer for Temporary Restraining Order and Writ of Preliminary Injunction, both Prohibitory
and Mandatory, docketed as CA G.R. SP No. 71527. The Petition assailed the June 24, 2002 Order of Branch
14 of the Regional Trial Court, which reinstated the writ of preliminary prohibitory injunction.65

On July 3, 2002, Philippine National Bank inspected the titles and found that correction fluid had been
applied over Atty. Patriarca's signature on the titles.66

Also on July 3, 2002, Philippine National Bank filed before the Regional Trial Court of Davao City a Petition
for Issuance of the Writ of Possession under Act No. 3135, as amended, and Section 47 of Republic Act No.
8791.67 This was docketed as Other Case No. 124-2002 and raffled to Branch 15 of the Regional Trial Court
of Davao City, presided by Judge Quitain.68

Davao Sunrise filed a Motion to Expunge and/or Dismiss Petition for Issuance of Writ of Possession dated
July 12, 2002.69 In the Motion to Expunge, Davao Sunrise pointed out that Branch 1470 (in the Petition for
Declaratory Relief docketed as Civil Case No. 29,036-2002) issued a writ of preliminary injunction "enjoining
the Provincial Sheriff, the Register of Deeds of Davao City[,] and [Philippine National Bank] from registering
the Sheriff's Provisional Certificate of Sale and, if registered, enjoining [Philippine National Bank] to refrain
from consolidating the title of the said property in its name and/or offering to sell the same to interested
buyers during the pendency of the case."71

On July 18, 2002, Spouses Limso filed a Motion to Intervene72 in Other Case No. 124-2002.73

In the Resolution dated August 13, 2002, the Court of Appeals granted the temporary restraining order
prayed for by Philippine National Bank (in CA G.R. SP No. 71527) enjoining the implementation of Judge
Layague's Orders dated May 3, 2002 and June 24, 2002. These Orders pertained to the writ of preliminary
injunction enjoining the registration of the Sheriff's Provisional Certificate of Sale.74

Spouses Limso filed a Motion for Reconsideration with Prayers for the Dissolution of Temporary Restraining
Order and to Post Counter Bond.75

The Court of Appeals granted Philippine National Bank's Petition for Certiorari in the Decision76 dated
December 11, 2002. The dispositive portion of the Decision states:
WHEREFORE, premises considered, the writ prayed for in the herein petition is GRANTED and the assailed
Orders of respondent judge dated May 3 and June 24, 2002 granting the writ of preliminary injunction are
SET ASIDE. Civil Case No. 29,036-2002 is hereby ordered DISMISSED and respondent Register of Deeds of
Davao City is hereby ordered to register petitioner PNB's Sheriff's Provisional Certificate of Sale and cause
its annotation on TCTNos. T-147820, T-147821, T-246386 andT-247012.77

Spouses Limso filed a Motion to Reconsider Decision and To Call Case For Hearing on Oral Argument, which
was opposed by Philippine National Bank.78 Oral arguments were conducted on March 19, 2003.79

On June 10, 2003, the Court of Appeals denied Spouses Limso's Motion for Reconsideration.80

Spouses Limso then filed a Petition for Review on Certiorari81 before this court, questioning the Decision in
CA G.R. SP No. 71527, which ordered the Register of Deeds to register the Sheriff's Provisional Certificate of
Sale. This was docketed as G.R. No. 158622.82

With regard to the Complaint for Reformation or Annulment of Contract with Damages, Branch 17 of the
Regional Trial Court of Davao City promulgated its Decision83 on June 19, 2002.

Branch 17 ruled in favor of Spouses Limso and Davao Sunrise. It found the interest rate provisions in the
loan agreement to be unreasonable and unjust because the imposable interest rates were to be solely
determined by Philippine National Bank. The arbitrary imposition of interest rates also had the effect of
increasing the total loan obligation of Spouses Limso and Davao Sunrise to an amount that would be beyond
their capacity to pay.84

The dispositive portion of the Decision in the Complaint for Reformation or Annulment with Damages states:

WHEREFORE, finding the evidence of plaintiffs corporation through counsel, more than sufficient, to
constitute a preponderance to prove the various unilateral impositions of increased interest rates by
defendant bank, such usurious, unreasonable, arbitrary, unilateral imposition of interest rates, are declared,
null and void.

Accordingly, decision is issued in favor of the defendant bank, in a reduced amount based on the following:

1. The amount of One Hundred Twenty Seven Million, One Hundred Fifty Thousand (P127,150,000.00)
Pesos, representing illegal interest rate, the amount of One Hundred Seventy Six Million, Ninety
Eight Thousand, Forty Five and 95/100 (P176,098,045.95) Pesos, representing illegal penalty
charges and the amount of One Hundred Thirty Six Million, Nine Hundred Thousand, Nine Hundred
Twenty Eight and 85/100 (P136,900,928.85) Pesos, as unreasonable 10% Attorney's fees or in the
total amount of Four Hundred Forty Million, One Hundred Forty Eight Thousand, Nine Hundred
Seventy Four and 79/100 (P440,148,974.79) Pesos, are declared null and void, rescending [sic]
and/or altering the loan agreement of parties, on the ground of fraud, collusion, mutual mistake,
breach of trust, misconduct, resulting to gross inadequacy of consideration, in favor of plaintiffs
corporation, whose total reduced and remaining principal loan obligation with defendant bank, shall
only be the amount of Eight Hundred Eighty Two Million, Twelve Thousand, One Hundred Forty Nine
and 50/100 (P882,012,149.50) Pesos, as outstanding remaining loan obligation of plaintiffs
corporation, with defendant bank, to be deducted from the total payments so far paid by plaintiffs
corporation with defendant bank as already stated in this decision.

2. That thereafter, the above-amount as ordered reduced, shall earn an interest of 12% per annum,
the lawful rate of interest that should legitimately be imposed by defendant bank to the outstanding
remaining reduced principal loan obligation of plaintiffs corporation.

3. Notwithstanding, defendant bank, is entitled to a reduced Attorney's fees of Five Hundred Thousand
(P500,000.00) Pesos, as a reasonable Attorney's fees, subject to subsequent pronouncement as to
the real status of defendant bank, on whether or not, said institution is now a private agency or still
a government instrumentality in its capacity to be entitled or not of the said Attorney's fees.

4. The prayer of defendant bank for award of moral damages and exemplary damages, are denied, for
lack of factual and legal basis.

SO ORDERED.85 (Emphasis in the original)

Philippine National Bank moved for reconsideration of the Decision, while Spouses Limso and Davao Sunrise
filed a Motion for partial clarification of the Decision.86

Branch 17 of the Regional Trial Court of Davao City subsequently issued the Order87 dated August 13, 2002
clarifying the correct amount of Spouses Limso and Davao Sunrise's obligation, thus:

WHEREFORE, finding the motion for reconsideration of defendant bank through counsel, to the decision of
the court, grossly bereft of merit, merely a reiteration and rehash of the arguments already set forth during
the hearing, including therein matters not proved during the trial on the merits, and considered admitted, is
denied.

To provide a clarification of the decision of this court, relative to plaintiffs motion for partial clarification with
comment of defendant bank through counsel, the correct remaining balance of plaintiffs account with
defendant bank, pursuant to the decision of this court, in pages 17 and 18, dated June 19, 2002, is Two
Hundred Five Million Eighty Four Thousand Six Hundred Eighty Two Pesos & 61/100 (P205,084,682.61), as
above-clarified.

SO ORDERED.88 ChanRoblesVi rtua lawlib rary

Philippine National Bank appealed the Decision and Order in the Complaint for Reconstruction or Annulment
with Damages by filing a Notice of Appeal on August 16, 2002.89 The Notice of Appeal was approved by the
trial court in the Order dated September 25, 2002.90 The appeal was docketed as CA-G.R. CV No. 79732.91

On August 20, 2002,92 Spouses Limso and Davao Sunrise filed, in Other Case No. 124-2002 (Petition for
Issuance of Writ of Possession), a Motion to Inhibit the Presiding Judge (referring to Judge Quitain, before
whom the Petition for Issuance of Writ of Possession was pending) because his wife, Gladys Isla Quitain,
was a long-time Philippine National Bank employee who had retired.93 Spouses Limso and Davao Sunrise
also heard rumors that Gladys Isla Quitain had been serving as consultant for Philippine National Bank even
after retirement.94 Davao Sunrise also filed a Motion to Expunge and/or Dismiss Petition and argued that the
person who signed for Philippine National Bank was not authorized because no Board Resolution was
attached to the Verification and Certification against Forum Shopping.

In the Order95 dated March 21, 2003, Judge Quitain denied three motions:

(1) The Motion to Intervene filed by Spouses Robert Alan Limso and Nancy Limso;

(2) The Motion to Expunge and/or Dismiss Petition for the Issuance of Writ of Possession filed by Davao
Sunrise Investment and Development Corporation; and

(3) The Motion for Voluntary Inhibition filed by Davao Sunrise Investment and Development
Corporation.96 ChanRobles Virtualawl ibra ry

Judge Quitain denied the Motion to Inhibit on the ground that the allegations against him were mere
suspicions and conjectures.97 The Motion to Intervene was denied on the ground that Spouses Limso have
no interest in the case, not being the owners of the property.98

The Motion to Expunge and/or Dismiss filed by Davao Sunrise was also denied for lack of merit. Judge
Quitain ruled that "PNB Vice President Leopoldo is clearly clothed with authority to represent and sign in
behalf of the petitioner [referring to Philippine National Bank] as shown by the Verification and Certification
of the said petition as well as the Secretary's Certificate."99

Spouses Limso and Davao Sunrise filed a Motion for Reconsideration100 of the Order dated March 21, 2003.
Judge Quitain denied the Motion for Reconsideration in an Order dated September 1, 2003, only with regard
to the Motion to Intervene and Motion for Voluntary Inhibition. The Motion to Expunge and/or Dismiss was
not mentioned in the September 1,2003 Order.101

Spouses Limso and Davao Sunrise questioned the denial of the Motion for Inhibition by filing a Petition for
Certiorari before the Court of Appeals on September 26, 2003. This was docketed as CA G.R. SP No.
79500.102 Spouses Limso and Davao Sunrise subsequently filed a Supplemental Petition for Certiorari before
the Court of Appeals on October 3, 2003.103
In the meantime, Other Case No. 124-2002 (Petition for Issuance of Writ of Possession) was set for an ex-
parte hearing on October 10, 2003.104

However, on October 8, 2003, the Court of Appeals granted the prayer for the issuance of a temporary
restraining order in CA G.R. SP No. 79500 "enjoining public respondent Judge Quitain from proceeding with
Other Case No. 124-2002 for a period of sixty (60) days from receipt by respondents thereof."105

The temporary restraining order was effective from October 10, 2003 to December 9, 2003.106

On December 12, 2003, Judge Quitain issued the Order allowing Philippine National Bank to present
evidence ex-parte on December 18, 2003 despite the pendency of other incidents to be resolved.107

Spouses Limso and Davao Sunrise filed an Urgent Motion for Cancellation of the December 18, 2003 hearing
due to the pendency of CA G.R. SPNo. 79500.108

Judge Quitain reset the hearing for Other Case No. 124-2002 to January 23, 2004. The hearing was
subsequently reset to January 30, 2004. In the January 30, 2004 hearing, Judge Quitain heard the
arguments of parties regarding the Urgent Motion to Cancel Hearing.109

In the Order dated March 12, 2004, Judge Quitain "resolved the pending Urgent Motion to Cancel Hearing
and [Davao Sunrise's] Motion to Re-schedule Newly Scheduled Hearing Date."110

The March 12, 2004 Order also stated that "the Spouses Limso have no right to intervene because they are
no longer owners of the subject foreclosed property."111

Spouses Limso treated the March 12, 2004 Order as a denial of their Motion for Reconsideration regarding
their Motion to Intervene. Thus, they, together with Davao Sunrise, filed a Petition for Certiorari before the
Court of Appeals, which was docketed as CA G.R. SP No. 84279.112

CA G.R. SP No. 84279 was denied by the Court of Appeals in the Decision113 dated September 20, 2004.

Spouses Limso and Davao Sunrise filed a Motion for Reconsideration114 dated September 13, 2004, which
was denied in the Resolution115 dated July 8, 2005.

Spouses Limso and Davao Sunrise then filed a Petition for Review on Certiorari dated July 26, 2005 before
this court. This was docketed as G.R. No. 168947.116

Despite the pendency of Spouses Limso and Davao Sunrise's Motion for Reconsideration of the Order
denying Davao Sunrise's Motion to Expunge and/or Dismiss, Philippine National Bank filed a Motion for
Reception of Evidence and/or Resume Hearing dated March 30, 2004 in Other Case No. 124-2002.117

Judge Quitain granted the Motion "and set the hearing for reception of petitioner's evidence on 06 April 2004
at 2:00 p.m."118

Spouses Limso and Davao Sunrise filed an Extremely Urgent Manifestation and Motion dated April 5, 2004.
They prayed for the cancellation of the hearing for the reason that the March 12, 2004 Order was not yet
final and that Davao Sunrise had a pending Motion for Reconsideration of the Order denying its Motion to
Expunge and/or Dismiss.119

Judge Quitain cancelled the April 6, 2004 hearing due to the Manifestation and Motion filed by Spouses
Limso and Davao Sunrise.120

Spouses Limso filed a Motion for Reconsideration of the March 12, 2004 Order because it addressed issues
other than those raised in the Motion for Intervention.121

On April 20, 2004, Judge Quitain issued the Order and reset the case for hearing to May 7, 2004, even
though the Motion for Reconsideration of the Order denying the Motion to Expunge and/or Dismiss had not
been acted upon.122

During the May 7, 2004 hearing, counsel for Spouses Limso and Davao Sunrise pointed out to Judge Quitain
the pendency of the Motion for Reconsideration of the Order denying the Motion to Expunge and/or
Dismiss.123
Judge Quitain issued the Order dated July 5, 2004 denying Spouses Limso and Davao Sunrise's Motion for
Reconsideration to the March 12, 2004 Order (referring to the denial of Spouses Limso's Motion to
Intervene). Judge Quitain also set hearing dates on August 4 and 5, 2004 for the reception of Philippine
National Bank's evidence. Once again, the hearings were scheduled even though the Motion to Expunge
and/or Dismiss had yet to be resolved.124

Davao Sunrise then filed a Motion to Transfer Case or in the Alternative to Dismiss the Same on July 30,
2004. Davao Sunrise reiterated the arguments in its Motion to Expunge and/or Dismiss.125

Subsequently, Spouses Limso and Davao Sunrise filed an Extremely Urgent Manifestation and Motion dated
August 3, 2004 asking that the hearings scheduled for August 4 and 5, 2004 be cancelled, considering that
Davao Sunrise's Motion to Dismiss/Expunge the Petition was still unresolved.126

On August 4, 2004, Judge Quitain took cognizance of the Extremely Urgent Manifestation and Motion dated
August 3, 2004 and a Very Urgent Motion for Intervention filed by a third party. Thus, Judge Quitain
cancelled the hearings scheduled on August 4 and 5, 2004, reset the hearing to August 11, 2004, and
"impressed upon the parties that he would be able to resolve all pending incidents by that time."127

Spouses Limso and Davao Sunrise alleged that the pending incidents were hastily acted upon by Judge
Quitain, as follows:

[O]n 11 August 2004, at around 11:45 a.m., petitioners' counsel was furnished a copy of public
respondent's Order allegedly dated 06 August 2004 which declared as submitted for resolution the following
incidents, to wit: (a) petitioner DSIDC's Motion to Transfer the Case to Branch 17; (b) Petitioner
DSIDC's Motion to Postpone Hearing; (c) Motion for Intervention filed by a certain Karlan Lou Ong; (d)
petitioners' (DSIDC and Spouses Limso) Extremely Urgent Manifestation and Motion; and (e) Petitioner
DSIDC's Manifestation.

. . . And then, at around 2:10 p.m. of the same day, 11 August 2004, when petitioners' counsel was already
in court for the said hearing, he was furnished by a staff of public respondent Judge Quitain a copy of
an Order dated 11 August 2004 and consisting of two (2) pages, the dispositive portion of which reads as
follows:

"WHEREFOREM(sic), the Court hereby resolves the following motions: 1) DSIDC's motion to transfer case to
Branch 17 or dismiss the same is denied for lack of merit. 2) DSIDC's (sic) motion to postpone the hearing
is denied for lack of merit. 3) The motion of Karla Ong to intervene is denied for lack of merit. 4) The August
5 manifestation of DSIDC is noted."128 (Emphasis in the original)

Spouses Limso and Davao Sunrise also claimed that the Order dated August 11, 2004 was done hastily so
that Philippine National Bank would be able to present its evidence without objection.129

Spouses Limso and Davao Sunrise alleged that the August 11, 2004 Order contained factual findings not
supported by the record. When counsel for Spouses Limso and Davao Sunrise pointed out the errors, Judge
Quitain acknowledged the mistake and reset the August 11, 2004 hearing to August 27, 2004.130

Because of Judge Quitain's actions, Spouses Limso and Davao Sunrise filed a Motion for Compulsory
Disqualification on the ground that Judge Quitain was biased in Philippine National Bank's favor.131

In the Order132 dated March 10, 2005, Judge Quitain denied the Motion for Compulsory Disqualification.

Spouses Limso and Davao Sunrise moved for reconsideration of the March 10, 2005 Order, while Philippine
National Bank filed an Opposition to the Motion for Reconsideration.133

The August 11, 2004 Order also denied Davao Sunrise's Motion to Transfer Case to Branch 17 or Dismiss the
Same. Since the Motion to Transfer is a rehash of Davao Sunrise's Motion to Expunge and/or Dismiss
Petition, the denial of the Motion to Transfer is tantamount to the denial of Davao Sunrise's Motion to
Expunge and/or Dismiss.134 The August 11, 2004 Order did not specifically state that Spouses Limso and
Davao Sunrise's Motion for Reconsideration dated March 28, 2003 was denied, but since the issues raised in
the Motion to Reconsideration were also raised in the Motion to Expunge, the August 11, 2004 Order also
effectively denied the Motion for Reconsideration.135
Thus, Spouses Limso and Davao Sunrise filed a Petition136 for Certiorari before the Court of Appeals, which
was docketed as CA G.R. SP No. 85847.137 Spouses Limso and Davao Sunrise assailed the March 21, 2003
Order denying Davao Sunrise's Motion to Expunge and/or Dismiss Petition for Issuance of Writ of
Possession, as well as the August 11, 2004 Order denying Davao Sunrise's Motion to Dismiss.138

On September 1, 2004, the Court of Appeals promulgated its Decision139 in CA G.R. No. 79500140denying
Spouses Limso and Davao Sunrise's Petition, which assailed Judge Quitain's denial of their Motion to
Inhibit.141 The Court of Appeals ruled that Judge Quitain's reversal of Judge Layague's Orders "may
constitute an error of judgment . . . but it is not necessarily an evidence of bias and partiality."142

Spouses Limso and Davao Sunrise moved for reconsideration on September 23, 2004. The Motion was
denied in the Resolution143 dated August 11, 2005.144

While the cases between Spouses Limso, Davao Sunrise, and Philippine National Bank were pending,
Philippine National Bank, through counsel, filed administrative145 and criminal complaints146 against Atty.
Patriarca.

The administrative case against Atty. Patriarca was docketed as Administrative Case No. 02-13.147

In the Resolution148 dated January 12, 2005, the Land Registration Authority found Atty. Patriarca guilty of
grave misconduct and dismissed her from the service.149 Included in the Resolution are the following
pronouncements:

The registration of these documents became complete when respondent affixed her signature below these
annotations. Whatever information belatedly gathered thereafter relative to the circumstances as to the
registrability of these documents, respondent cannot unilaterally take judicial notice thereof and proceed to
lift at her whims and caprices what has already been officially in force and effective, by erasing thereon her
signature. With her years of experience in the Registry, not to mention her being a lawyer, respondent
should have taken the appropriate steps in filing a query to this Authority regarding the matter or should
have consulted Section 117 of PD 1529 in relation to Section 12 of Rule 43. The deplorable act of
Respondent was fraught with partiality to favor the DSIDC and Sps. Limso.150

Atty. Asteria E. Cruzabra (Atty. Cruzabra) replaced Atty. Patriarca as Register of Deeds of Davao
City.151Philippine National Bank wrote a letter to Atty. Cruzabra, arguing "that the Sheriff's Provisional
Certificate of Sale was already validly registered[,]"152 and the unauthorized application of correction
fluid153 to cover the original signature of the Acting Register of Deeds "did not deprive the Bank of its rights
under the registered documents."154

Meanwhile, on February 10, 2005, as CA-G.R. CV No. 79732, which was an appeal from Civil Case No.
28,170-2000 (Petition for Reformation and Annulment of Contract with Damages), was still pending,
Philippine National Bank filed the following applications before the Court of Appeals Nineteenth Division:155

a. Application to Hold Davao Sunrise Investment and Development Corporation, the Spouses Robert
Alan L. Limso and Nancy Lee Limso and Wellington Insurance Company, Inc. Jointly and Severally
liable for Damages on the Injunction Bond; and

b. Application for the Appointment of PNB as Receiver[.]156

Spouses Limso and Davao Sunrise filed their opposition to Philippine National Bank's application on March
29, 2005.157 Philippine National Bank filed its Reply to the Opposition on May 5, 2005.158

On March 2, 2006, the Court of Appeals denied Philippine National Bank's applications, reasoning that:

It is a settled rule that the procedure for claiming damages on account of an injunction wrongfully issued
shall be the same as that prescribed in Section 20 of Rule 57 of the Revised Rules of Court. Section 20
provides:
chanRoble svirtual Lawlib ra ry

Sec. 20. Claim for damages on account of improper, irregular or excessive attachment. - An application for
damages on account of improper, irregular or excessive attachment must be filed before the trial or before
appeal is perfected or before the judgment becomes executory, with due notice to the attaching obligee or
his surety or sureties, setting forth the facts showing his right to damages and the amount thereof. Such
damages may be awarded only after proper hearing and shall be included in the judgment on the main case.

If the judgment of the appellate court be favorable to the party against whom the attachment was issued,
he must claim damages sustained during the pendency of the appeal by filing an application in the appellate
court with notice to the party in whose favor the attachment was issued or his surety or sureties, before the
judgment of the appellate court becomes executory. The appellate court may allow the application to be
heard and decided by the trial court.

Nothing herein contained shall prevent the party against whom the attachment was issued from recovering
in the same action the damages awarded to him from any property of the attaching obligee not exempt from
execution should the bond or deposit given by the latter be insufficient or fail to fully satisfy the award.
Records show that when this Court annulled the RTC's order of injunction, Davao Sunrise thereafter elevated
the matter to the Supreme Court. On July 24, 2002, the Supreme Court denied its petition for having been
filed out of time and an Entry of Judgment was issued on Sept. 11, 2002.

PNB's instant application however was filed only on February 17, 2005 and/or in the course of its appeal on
the main case - about two (2) years and five (5) months after the judgment annulling the injunction order
attained finality.

Clearly, despite that it already obtained a favorable judgment on the injunction matter, PNB failed to file
(before the court a quo) an application for damages against the bond before judgment was rendered in the
main case by the court a quo. Thus, even for this reason alone, Davao Sunrise and its bondsman are
relieved of further liability thereunder.159(Citations omitted)

The Court of Appeals also denied Philippine National Bank's application to be appointed as receiver for failure
to fulfill the requirements to be appointed as receiver and for failure to prove the grounds for
receivership.160 It discussed that to appoint Philippine National Bank as receiver would violate the rule that
"neither party to a litigation should be appointed as receiver without the consent of the other because a
receiver should be a person indifferent to the parties and should be impartial and disinterested."161 The
Court of Appeals noted that Philippine National Bank was not an impartial and disinterested party, and
Davao Sunrise objected to Philippine National Bank's appointment as receiver.162

In addition, Rule 59, Section l(a)163 of the 1997 Rules of Court requires that the "property or fund involved is
in danger of being lost, removed, or materially injured." The Court of Appeals found that the properties
involved were "not in danger of being lost, removed[,] or materially injured."164 Further, Philippine National
Bank's application was premature since the loan agreement was still pending appeal and "a receiver should
not be appointed to deprive a party who is in possession of the property in litigation."165

The dispositive portion of the Court of Appeals Resolution166 states:

WHEREFORE, above premises considered, the Philippine National Bank's Application to Hold Davao Sunrise
Investment and Development Corporation, the Spouses Robert Alan L. Limso and Nancy Lee Limso and
Wellington Insurance Company, Inc. Jointly and Severally Liable for Damages on the Injunction Bond and its
Application for the Appointment of PNB as Receiver are hereby both DENIED. And, for the reasons above set
forth, the Plaintiff-Appellees' Motion to Dismiss is likewise DENIED.

With the filing of the Appellants' and the Appellees' respective Brief(s), this case is considered SUBMITTED
for Decision and ORDERED re-raffled to another justice for study and report.

SO ORDERED.167 ChanRoblesVi rtua lawlib rary

Philippine National Bank filed a Motion for Reconsideration on March 28, 2006, which was denied in the
Resolution168 dated May 26, 2006.169

Thus, on July 21, 2006, Philippine National Bank filed before this court a Petition for Review170 on Certiorari
questioning the Court of Appeals' denial of its applications.171 This was docketed as G.R. No. 173194.172

On February 16, 2007, Philippine National Bank's Ex-Parte Petition for Issuance of a Writ of Possession
docketed as Other Case No. 124-200 was dismissed173 based on the following grounds:

(1) For purposes of the issuance of the writ of possession, Petitioner should complete the entire process in
extrajudicial foreclosure ...
(2) The records disclose the [sic] contrary to petitioner's claim, the Certificate of Sale covering the subject
properties has not been registered with the Registry of Deeds of Davao City as the Court finds no annotation
thereof. As such, the sale is not considered perfected to entitled petitioner to the writ of possession as a
matter of rights [sic].174
ChanRoble sVirt ualawli bra ry

Philippine National Bank filed a Motion for Reconsideration with Motion for Evidentiary Hearing.175

Acting on the Motion for Reconsideration, the trial court required the Registry of Deeds to comment on the
matter.176

The trial court eventually denied the Motion for Reconsideration.177

Philippine National Bank appealed the trial court Decision dismissing the Petition for Issuance of a Writ of
Possession by filing a Rule 41 Petition before the Court of Appeals, which was docketed as CA-G.R. CV No.
01464-MIN.178

Meanwhile, when CA-G.R. CV No. 79732 was re-raffled,179 it was re-docketed as CA-G.R. CVNo. 79732-
MIN.180

In CA-G.R. CV No. 79732-MIN, the Court of Appeals resolved the issue of "whether or not there has been
mutuality between the parties, based on their essential equality, on the subject imposition of interest rates
on plaintiffs-appellees' loan obligation, i.e., the original loan and the restructured loan."181

On August 13, 2009, the Court of Appeals promulgated its Decision182 in CA-G.R. CV No. 79732-MIN. It held
that there was no mutuality between the parties because the interest rates were unilaterally determined and
imposed by Philippine National Bank.183

The Court of Appeals further explained that the contracts between Spouses Limso and Davao Sunrise, on
one hand, and Philippine National Bank, on the other, did not specify the applicable interest rates. The
contracts merely stated the interest rate to be "at a rate per annum that is determined by the bank[;]"184"at
the rate that is determined by the Bank to be the Bank's prime rate in effect at the Date of
Drawdown[;]"185 and "at the rate per annum to be set by the Bank. The interest rate shall be reset by the
Bank every month."186 In addition, the interest rate would depend on the prime rate, which was "to be
determined by the bank[.]"187 It was also discussed that:

But it even gets worse. After appellant bank had unilaterally determined the imposable interest on plaintiffs-
appellees loans and after the latter had been notified thereof, appellant bank unilaterally increased the
interest rates. Further aggravating the matter, appellant bank did not increase the interest rate only once
but on numerous occasions. Appellant bank unilaterally and arbitrarily increased the already arbitrarily
imposed interest rate within intervals of only seven (7) days and/or one (1) month.
....
The interests imposed under the Conversion, Restructuring and Extension Agreement, is not a valid
imposition. DSIDC and Spouses Limso have no choice except to assent to the conditions therein as they are
heavily indebted to PNB. In fact, the possibility of the foreclosure of their mortgage securities is right in their
doorsteps. Thus it cannot be considered "contracts'" between the parties, as the borrower's participation
thereat has been reduced to an unreasonable alternative that is to "take it or leave it." It has been used by
PNB to raise interest rates to levels which have enslaved appellees or have led to a hemorrhaging of the
latter's assets. Hence, for being an exploitation of the weaker party, the borrower, the alleged letter-
contracts should also be struck down for being violative of the principle of mutuality of contracts under
Article 1308.188 (Emphasis in the original)

Thus, the Court of Appeals nullified the interest rates imposed by Philippine National Bank:

We reiterate that since the unilateral imposition of rates of interest by appellant bank is not only violative of
the principle of mutuality of contracts, but also were found to be unconscionable, iniquitous and
unreasonable, it is as if there was no express contract thereon. Thus, the interest provisions on the (a)
revolving credit line in the amount of three hundred (300) million pesos, (b) seven-year long term loan in
the amount of four hundred (400) million pesos; and (c) Conversions, Restructuring and Extension
Agreement, Real Estate Mortgage, promissory notes, and all other loan documents executed
contemporaneous with or subsequent to the execution of the said agreements are hereby declared null and
void.
Such being the case, We apply the ruling of the Supreme Court in the case of United Coconut Planters Bank
vs. Spouses Samuel and Odette Beluso which stated:

"We see, however, sufficient basis to impose a 12% legal interest in favor of petitioner in the case at bar, as
what we have voided is merely the stipulated rate of interest and not the stipulation that the loan shall earn
interest."189(Citation omitted)

As to the trial court's reduction of the penalty charges and attorney's fees, the Court of Appeals affirmed the
trial court's ruling and stated that Article 1229190 of the Civil Code allows for the reduction of penalty
charges that are unconscionable.191 The Court of Appeals discussed that:

The penalties imposed by PNB are clearly unconscionable. Any doubt as to this fact can be removed by
simply glancing at the penalties charged by defendant-appellant which . . . already amounted to an
incredibly huge amount of P176,098,045.94 despite payments that already exceeded the amount of the loan
as of 1998.

With respect to attorney's fees, the Supreme Court had consistently and invariably ruled that even with the
presence of an agreement between the parties, the court may nevertheless reduce attorney's fees though
fixed in the contract when the amount thereof appears to be unconscionable or unreasonable. Again, the
fact that the attorney's fees imposed by PNB are unconscionable and unreasonable can clearly be seen. The
attorney's fees imposed similarly points to an incredibly huge sum of P136,900,928.85 as of October 30,
2000. Therefore, its reduction in the assailed decision is well-grounded.192 (Citation omitted)

The dispositive portion of the Court of Appeals Decision states:

WHEREFORE, the assailed Decision dated June 19, 2002 and Order dated August 13, 2002 of the Regional
Trial Court of Davao City, Branch 17 in Civil Case No. 28,170-2000 declaring the unilateral imposition of
interest rates by defendant-appellant PNB as null and void appealed from are AFFIRMED with the
MODIFICATION that the obligation of plaintiffs-appellees arising from the Loan and Revolving Credit Line
and subsequent Conversion, Restructuring and Extension Agreement as Loan I and Loan II shall earn
interest at the legal rate of twelve percent (12%) per annum computed from September 1, 1993, until fully
paid and satisfied.

SO ORDERED.193 (Emphasis in the original)

Philippine National Bank moved for reconsideration on September 3, 2009,194 arguing that the interest rates
were "mutually agreed upon[;]"195 that Spouses Limso and Davao Sunrise "never questioned the . . .
interest rates[;]"196 and that they "acknowledged the total amount of their debt (inclusive of loan principal
and accrued interest) to [Philippine National Bank] in the Conversion, Restructuring and Extension
Agreement which restructured their obligation to [Philippine National Bank] in the amount of P1.067
Billion[.]"197

Spouses Limso and Davao Sunrise moved for partial reconsideration on September 9, 2009,198 pointing, out
that their obligation to Philippine National Bank was only P205,084,682.61, as stated in the trial court's
Order dated August 13, 2002 in Civil Case No. 28,170-2000.199

Both Motions were denied by the Court of Appeals in the Resolution200 dated May 18, 2011.

The Court of Appeals held that Philippine National Bank's Motion for Reconsideration raised issues that were
a mere rehash of the issues already ruled upon.201

With regard to Spouses Limso and Davao Sunrise's Motion for Partial Reconsideration, the Court of Appeals
ruled that:

Since the appellees did not appeal from the decision of the lower court, they are not entitled to any award of
affirmative relief. It is well settled that an appellee who has not himself appealed cannot obtain from the
appellate court any affirmative relief other than those granted in the decision of the court below. The
appellee can only advance any argument that he may deem necessary to defeat the appellant's claim or to
uphold the decision that is being disputed. . . . Thus, the lower court's finding that the appellees have an
unpaid obligation with PNB, and not the other way around, should stand. It bears stressing that appellees
even acknowledged their outstanding indebtedness with the PNB when they filed their "Urgent Motion for
Execution Pending Appeal" of the August 13, 2002 Order of the lower court decreeing that appellees'
remaining obligation with PNB is P205,084,682.61. They cannot now claim that PNB is the one indebted to
them in the amount of P15,915,588.89.202

Philippine National Bank filed a Petition for Review on Certiorari203 assailing the Decision in CA-G.R. CV No.
79732-MIN. Philippine National Bank argues that there was mutuality of contracts between the parties, and
that the interest rates imposed were valid in view of the escalation clauses in their contract.204 Philippine
National Bank's Petition for Review was docketed as G.R. No. 196958.205

Spouses Limso and Davao Sunrise also filed a Petition for Review206 on Certiorari questioning the ruling of
the Court of Appeals in CA-G.R. CV No. 79732-MIN that their outstanding obligation was
P803,185,411.11.207 Spouses Limso and Davao Sunrise argue that they "made overpayments in the amount
of P15,915,588.89."208 This was docketed as G.R. No. 197120.209

On January 21, 2013, the Court of Appeals dismissed Philippine National Bank's appeal docketed as CA-G.R.
CV No. 01464-MIN (referring to the Petition for the Issuance of a Writ of Possession) on the ground that
Philippine National Bank availed itself of the wrong remedy.210 What the Philippine National Bank should
have filed was a "petition for review under Rule 45 and not an appeal under Rule 41[.]"211

On March 15, 2013, the Philippine National Bank filed a Petition for Review on Certiorari212 before this court,
assailing the dismissal of its appeal before the Court of Appeals and praying that the Decision of the trial
court — that the Sheriffs Provisional Certificate of Sale was not signed by the Register of Deeds and was not
registered — be reversed and set aside. The Petition was docketed as G.R. No. 205463.213

G.R. No. 158622 was filed on July 1, 2003;214 G.R. No. 169441 was filed on September 14, 2005;215G.R.
No. 172958 was filed on June 26, 2006;216 G.R. No. 173194 was filed on July 21, 2006;217 G.R. No. 196958
was filed on June 17, 2011;218 G.R. No. 197120 was filed on June 22, 2011;219 and G.R. No. 205463 was
filed on March 15, 2013.220

Docket Original Case Assailed Order/Decision

Number

G.R. No. Petition for Declaratory Court of Appeals Decision dated

158622 Relief with Prayer for the
Issuance of Preliminary
Injunction and Application
for Temporary Restraining
Order221
December 11, 2002 dismissing the
Petition for Certiorari filed by
Philippine National Bank. The
Petition for Certiorari questioned
the issuance of a writ of
preliminary injunction in favor of
Spouses Limso and Davao
Sunrise.222

G.R. Ex-Parte Petition223 for Court of Appeals Decision dated

No.169441 Issuance of Writ of
Possession under Act No.
3135 filed by Philippine
National Bank, praying
that it be granted
possession over four (4)
parcels of land owned by
Davao Sunrise
September 1, 2004 and Resolution
dated August 11, 2005.224
Spouses Limso and Davao Sunrise
filed a Motion to Inhibit Judge
Quitain, which was denied by Judge
Quitain. Thus, Spouses Limso and
Davao Sunrise questioned the
 denial of their Motion before the
Court of Appeals.225

G.R. No. Ex-Parte Petition226 for" Court of Appeals Decision227 dated

172958 Issuance of the Writ of September 1, 2005 and
Possession under Act No. Resolution228 dated May 26, 2006.
3135 filed by Philippine
National Bank, praying The Petition for Certiorari and
that it be granted Prohibition filed by Spouses Limso
possession over four (4) and Davao Sunrise assailed two
parcels of land owned by Orders of Judge Quitain, which
Davao Sunrise denied their Motion to Expunge
and/or Dismiss Petition for
Issuance of Writ of Possession.229

G.R. No. Petition for Reformation Court of Appeals

173194 or Annulment of Contract Resolution231 dated March 2, 2006,
with Damages filed by which denied Philippine National
Spouses Limso and Davao Bank's (1) Application to Hold
Sunrise230 [Spouses Limso and Davao
Sunrise] and the Surety Bond
Company Jointly and Severally
Liable for Damages on the
Injunction Bond, and (2)
Application for the Appointment of
[Philippine National Bank] as
Receiver.

Also assailed was the Court of

Appeals Resolution232dated May 26,
2006, which denied the Motion for
Reconsideration filed by Philippine
National Bank.

G.R. No. Petition for Reformation Court of Appeals Decision234 dated

196958 or Annulment of Contract August 13, 2009 and Court of
with Damages filed by Appeals Resolution235 dated May
Davao Sunrise and 18, 2011 docketed as CA-G.R. CV
Spouses Limso233 No. 79732-Min.

The decision dated August 13,

2009 affirmed with modification the
decision of the trial court in Civil
 Case No. 28,170-2000.236

The Resolution dated May 18,2011

in CA-G.R. CV No. 79732-Min
denied the Motion for
Reconsideration filed by Philippine
National Bank and also denied the
Motion for Partial Reconsideration
filed by Spouses Limso and Davao
Sunrise.237

The Rule 41 appeal was filed by

Philippine National Bank.238

G.R. No. Petition239 for Reformation Court of Appeals Decision240 dated

197120 or Annulment of Contract
with Damages filed by
Spouses Limso and Davao
Sunrise
August 13, 2009 and Court of
Appeals Resolution241dated May 18,
2011.
Spouses Limso and Davao Sunrise
assailed the portion of the Court of
Appeals Decision stating that their
outstanding obligation was
P803,185,411.11.242

G.R. No. Ex-Parte Petition for Court of Appeals Decision244 dated

205463 Issuance of the Writ of January 21, 2013 dismissing the
Possession under Act No. appeal under Rule 41 filed by
3135 filed by Philippine Philippine National Bank for being
National Bank, praying the wrong remedy
that it be granted
possession over four
parcels of land owned by
Davao Sunrise243

In the Manifestation and Motion245 dated May 26, 2006, Davao Sunrise prayed that it be allowed to withdraw
G.R. No. 169441 since the issues in the Petition had become moot and academic.

In the Resolution246 dated August 7, 2006, this court consolidated G.R. Nos. 172958, 173194, and 169441,
with G.R. No. 158622 as the lowest-numbered case.

Davao Sunrise's Manifestation and Motion dated May 26, 2006, which prayed that it be allowed to withdraw
G.R. No. 169441, was granted in the Resolution247 dated October 16, 2006. Thus, G.R. No. 169441 was
deemed closed and terminated as of October 16, 2006.248

In the Resolution249 dated March 7, 2007 in G.R. No. 173194, this court required respondents Spouses
Limso and Davao Sunrise to file their comment.
In the Resolution250 dated July 4, 2011, G.R. No. 197120 was consolidated with G.R. No. 196958.

On May 17, 2012, counsel for Spouses Limso and Davao Sunrise notified this court of the death of Robert
Alan L. Limso.251

On October 9, 2013, Spouses Limso and Davao Sunrise filed a Motion to Withdraw Petitions in G.R. Nos.
172958, 169441 and 158622.252 Davao Sunrise and Spouses Limso, through counsel, explained that G.R.
No. 169441 had been mooted by Judge Quitain's voluntary inhibition from hearing and deciding Other Case
No. 124-2002.253

After Judge Quitain had inhibited, Other Case No. 124-2002 was re-raffled to Branch 16 of the Regional Trial
Court of Davao City.254 Other Case No. 124-2002 was dismissed in the Order255 dated February 16, 2007.
Since Other Case No. 124-2002 was dismissed, G.R. No. 172958 was mooted as well.256

With regard to G.R. No. 158622, counsel for Spouses Limso and Davao Sunrise explained:

It is clear, however, that the ruling of the Regional Trial Court of Davao City in Civil Case No. 28,170-2000
and the Court of Appeals in CA G.R. No. 79732 already rendered Civil Case No. 29,036-2002 moot and
academic. Under the premises, there is no need for this Honorable Court to rule on the propriety of the
dismissal of the said action for Declaratory Relief as the loan agreements — from which the entire case
stemmed — had already been declared NULL AND VOID.257 (Emphasis in the original)

In the Resolution258 dated March 12, 2014, this court granted the Motion to Withdraw Petitions with regard
to G.R. Nos. 172958 and 158622. The prayer for the withdrawal of G.R. No. 169441 was noted without
action since G.R. No. 169441 was deemed closed and terminated in this court's Resolution dated October
16, 2006.259

On April 2, 2014, Spouses Limso and Davao Sunrise filed an "Omnibus Motion for Leave [1] To Intervene;
[2] To File/ Admit Herein Attached Comment-in-Intervention; and [3] To Consolidate Cases"260 in G.R. No.
205463.

Spouses Limso and Davao Sunrise argue that they were allowed to participate in Other Case No. 124-2002,
and that Philippine National Bank was in bad faith when it did not furnish Nancy Limso and Davao Sunrise
copies of the Petition for Review it had filed.261

In the Resolution262 dated April 2, 2014, this court gave due course to the Petition and required the parties
to submit their memoranda.

On April 15, 2014, Spouses Limso and Davao Sunrise filed a Motion to Dismiss the Petition in G.R. No.
173194 on the ground that the issues raised by Philippine National Bank are moot and academic. Spouses
Limso and Davao Sunrise also reiterated that Philippine National Bank availed of the wrong remedy.263

In the Resolution264 dated July 9, 2014, this court recommended the consolidation of G.R. No. 205463 with
G.R. Nos. 158622, 169441, 172958, 173194, 196958, and 197120.

In the Resolution265 dated October 13, 2014, this court noted and granted the Omnibus Motion for Leave to
Intervene filed by counsel for Nancy Limso and Davao Sunrise.266 This court also noted the memoranda filed
by counsel for Philippine National Bank, the Office of the Solicitor General, and counsel for Spouses Limso
and Davao Sunrise.267

The remaining issues for resolution are those raised in G.R. Nos. 173194, 196958, 197120, and 205463,
which are:

First, whether the Philippine National Bank's Petition for Review on Certiorari in G.R. No. 173194 is the
wrong remedy to assail the March 2, 2006 Court of Appeals Resolution,268 which denied Philippine National
Bank's (1) Application to Hold [Spouses Limso and Davao Sunrise ] and the Surety Bond Company Jointly
and Severally Liable for Damages on the Injunction Bond, and (2) Application for the Appointment of
[Philippine National Bank] as Receiver;

Second, whether Philippine National Bank committed forum shopping when it filed an ex-parte Petition for
the Issuance of a Writ of Possession and an Application to be Appointed as Receiver;
Third, whether the Court of Appeals erred in ruling that the interest rates imposed by Philippine National
Bank were usurious and unconscionable;

Fourth, whether the Conversion, Restructuring and Extension Agreement executed in 1999 novated the
original Loan and Credit Agreement executed in 1993;

Fifth, whether the Court of Appeals erred in dismissing the appeal under Rule 41 filed by Philippine National
Bank, which assailed the Court of Appeals Decision dated January 21, 2013 in CA-G.R. CV No. 01464-MIN,
for being the wrong remedy;

Sixth, whether the Sheriff's Provisional Certificate of Sale should be considered registered in view of the
entry made by the Register of Deeds in the Primary Entry Book; and

Lastly, whether Philippine National Bank is entitled to a writ of possession.

The Petition for Review in G.R. No. 173194 should be denied.

The Petition docketed as G.R. No. 173194, filed by Philippine National Bank, questions the Court of Appeals
Resolutions in CA-G.R. CV No. 79732-MIN dated March 2, 2006 and May 26, 2006, which denied Philippine
National Bank's applications for damages on the injunction bond and to be appointed as receiver.269

The assailed Resolutions in G.R. No. 173194 are interlocutory orders and are not appealable.

Rule 41, Section 1270 of the Rules of Court provides:

SECTION 1. Subject of Appeal. — An appeal may be taken from a judgment or final order that completely
disposes of the case, or of a particular matter therein when declared by these Rules to be appealable.

No appeal may be taken from:

....
(b) An interlocutory order;
....

In any of the foregoing circumstances, the aggrieved party may file an appropriate special civil action as
provided in Rule 65.

In addition, Rule 45, Section 1 of the Rules of Court provides:

SECTION 1. Filing of Petition with Supreme Court. — A party desiring to appeal by certiorari from a
judgment, final order or resolution of the Court of Appeals, the Sandiganbayan, the Court of Tax Appeals,
the Regional Trial Court or other courts, whenever authorized by law, may file with the Supreme Court a
verified petition for review on certiorari[.] (Emphasis supplied)

The difference between an interlocutory order and a final order was discussed in United Overseas Bank v.
Judge Ros:271

The word interlocutory refers to something intervening between the commencement and the end of the suit
which decides some point or matter but is not a final decision of the whole controversy. This Court had the
occasion to distinguish a final order or resolution from an interlocutory one in the case of Investments, Inc.
v. Court of Appeals, thus:
chanRoble svirtual Lawlib ra ry

x x x A "final" judgment or order is one that finally disposes of a case, leaving nothing more to be done by
the Court in respect thereto, e.g., an adjudication on the merits which, on the basis of the evidence
presented on the trial, declares categorically what the rights and obligations of the parties are and which
party is in the right; or a judgment or order that dismisses an action on the ground, for instance, of res
judicata or prescription. Once rendered, the task of the Court is ended, as far as deciding the controversy or
determining the rights and liabilities of the litigants is concerned. Nothing more remains to be done by the
Court except to await the parties' next move (which among others, may consist of the filing of a motion for
new trial or reconsideration, or the taking of an appeal) and ultimately, of course, to cause the execution of
the judgment once it becomes "final" or, to use the established and more distinctive term, "final and
executory."

xxx xxx xxx

Conversely, an order that does not finally dispose of the case, and does not end the Court's task of
adjudicating the parties' contentions and determining their rights and liabilities as regards each other, but
obviously indicates that other things remain to be done by the Court, is "interlocutory" e.g., an order
denying motion to dismiss under Rule 16 of the Rules, or granting of motion on extension of time to file a
pleading, or authorizing amendment thereof, or granting or denying applications for postponement, or
production or inspection of documents or things, etc. Unlike a "final" judgment or order, which is appealable,
as above pointed out, an "interlocutory" order may not be questioned on appeal except only as part of an
appeal that may eventually be taken from the final judgment rendered in the case.272 (Citations omitted)

The Resolutions denying Philippine National Bank's applications were interlocutory orders since the
Resolutions did not dispose of the merits of the main case.

CA-G.R. CV No. 79732-MIN originated from Civil Case No. 28,170-2000, which involved the issues regarding
the interest rates imposed by Philippine National Bank. Hence, the denial of Philippine National Bank's
applications did not determine the issues on the interest rates imposed by Philippine National Bank.

The proper remedy for Philippine National Bank would have been to file a petition for certiorari under Rule
65 or, in the alternative, to await the outcome of the main case and file an appeal, raising the denial of its
applications as an assignment of error.

In any case, we continue to resolve the arguments raised in G.R. No. 173194.

Philippine National Bank argues in its Petition for Review docketed as G.R. No. 173194 that its application to
hold the injunction bond liable for damages was filed on time. It points out that the phrase "before the
judgment becomes executory" found in Section 20273 of Rule 57 refers to the judgment in the main case,
which, in this case, refers to CA-G.R. CV No. 79732.274

Philippine National Bank also argues that the Court of Appeals erred in denying its application to be
appointed as receiver because although the Sheriff's Provisional Certificate of Sale was not registered, the
Certificate of Sale "provides the basis for [Philippine National Bank] to claim ownership over the foreclosed
properties."275 As the highest bidder, Philippine National Bank had the right to receive the rental income of
the foreclosed properties.276

Spouses Limso and Davao Sunrise filed their Comment,277 countering that the Court of Appeals did not err in
denying Philippine National Bank's applications to hold the injunction bond liable for damages and to be
appointed as receiver.278 They cite San Beda College v. Social Security System,279 where this court ruled
that "the claim for damages for wrongful issuance of injunction must be filed before the finality of the decree
dissolving the questioned writ."280

They highlight Philippine National Bank's admission that the writ of preliminary injunction was dissolved in
January 2002, and that^the Decision281 dissolving the writ attained finality on September 11, 2002.282

Spouses Limso and Davao Sunrise further point out that while CA-G.R. CV No. 79732 was still pending
before the Court of Appeals, "the decree dissolving the questioned Writ of Preliminary Injunction had already
become final."283 Thus, Philippine National Bank filed its application out of time.284

They argue that in any case, Philippine National Bank cannot claim damages on the injunction bond since it
was unable to secure a judgment in its favor in Civil Case No. 28,170-2000.285

They further argue that the Court of Appeals was correct in denying Philippine National Bank's application to
be appointed as receiver on the ground that Philippine National Bank is a party to the case and hence, it
cannot be appointed as receiver.286

Spouses Limso and Davao Sunrise then allege that Philippine National Bank is guilty of forum shopping.
They argue that Philippine National Bank's ex-parte Petition for the issuance of a writ of possession,
docketed as Other Case No. 124-2002, and the application to be appointed as receiver have the same
purpose: to obtain possession of the properties.287
Philippine National Bank, through counsel, filed its Reply, countering that San Beda College was decided
when the 1964 Rules of Court was still in effect.288 It argues that the cited case is no longer applicable
because the 1964 Rules was superseded by the 1997 Rules of Civil Procedure.289 The applicable case is Hanil
Development Co., Ltd. v. Intermediate Appellate Court290 where this court ruled that "the judgment against
the attachment bond could be included in the final judgment of the main case."291

Philippine National Bank also argued that under the 1997 Rules of Civil Procedure, the applicant for damages
does not have to be the winning party.292

Philippine National Bank further argues that it did not commit forum shopping since "there is no identity of
parties between CA G.R. CV No. 79732 ... and Other Case No. 124-2002."293 The causes of action and reliefs
sought in the two cases are different.294 It points out that its application to be appointed as receiver is a
provisional remedy under Rule 59 of the 1997 Rules of Civil Procedure, while its prayer for the issuance of a
writ of possession in Other Case No. 124-2002 is based on its right to possess the properties involved.295

We rule that the Court of Appeals properly denied Philippine National Bank's application to hold the
injunction bond liable for damages and be appointed as receiver. We also rule that no forum shopping was
committed by Philippine National Bank. However, the Court of Appeals erred in ruling that Philippine
National Bank filed its application to hold the injunction bond liable for damages out of time.

The Court of Appeals, in its Resolution dated March 2, 2006, explained:

Records show that when this Court annulled the RTC's order of injunction, Davao Sunrise thereafter elevated
the matter to the Supreme Court. On July 24, 2002, the Supreme Court denied its petition for having been
filed out of time and an Entry of Judgment was issued on Sept[ember] 11,2002.

PNB's instant application however was filed only on February 17, 2005 and/or in the course of its appeal on
the main case - about two (2) years and five (5) months after the judgment annulling the injunction order
attained finality.

Clearly, despite that it already obtained a favorable judgment on the injunction matter, PNB failed to file
(before the court a quo) an application for damages against the bond before judgment was rendered in the
main case by the court a quo. Thus, even for this reason alone, Davao Sunrise and its bondsman are
relieved of further liability thereunder.296(Citations omitted)

The Petition referred to by the Court of Appeals in the quoted Resolution was docketed as G.R. No. 152812
and was entitled Davao Sunrise Investment and Development Corporation, et al. v. Court of Appeals, et
al.297 G.R. No. 152812 originated from CA G.R. SP No. 63351.298 CA G.R. SP No. 63351 was a Petition for
Certiorari filed by Philippine National Bank, which questioned the issuance of a writ of preliminary injunction
in Civil Case No. 28,170-2000.299

In the Decision300 dated January 10, 2002, the Court of Appeals granted Philippine National Bank's Petition
for Certiorari and held that:

In the case at bar, respondents' claim to a right to preliminary injunction based on PNB's purported
unilateral imposition of interest rates and subsequent increases thereof, is not a right warranting the
issuance of an injunction to halt the foreclosure proceedings. On the contrary, it is petitioner bank which has
proven its right to foreclose respondents' mortgaged properties, especially since respondents have admitted
their indebtedness to PNB and merely questioning the interest rates imposed by the bank. . . .
....

Above all, the core and ultimate issue raised in the main case below is the interest stipulation in the loan
agreements between the petitioner and private respondents, the validity of which is still to be determined by
the lower court. Injunctive relief cannot be made to rest on the assumption that said interest stipulation is
void as it would preempt the merits of the main case.

WHEREFORE, premises considered, the assailed Orders of respondent judge dated December 4 and 21, 2000
are hereby ANNULLED and SET ASIDE, and the Order dated November 20, 2000 denying private
respondents prayer for the issuance of a writ of preliminary injunction is REINSTATED.

SO ORDERED.301 ChanRoblesVi rtua lawlib rary

Spouses Limso and Davao Sunrise assailed the Decision in CA-G.R. SP No. 63351 and filed before this court
a Petition for Review, docketed as GR. No. 152812. However, the Petition for Review was denied in the
Resolution302 dated July 24, 2002 for being filed out of time, and Entry of Judgment303 was made on
September 11, 2002.

The issuance of the writ of preliminary injunction in Civil Case No. 28,170-2000 was an interlocutory order,
and was properly questioned by Philippine National Bank through a Petition for Certiorari.

However, the Court of Appeals erred in ruling that Philippine National Bank's application was filed out of
time.

Section 20 of Rule 57 of the Rules of Civil Procedure provides:

SECTION 20. Claim for Damages on Account of Improper, Irregular or Excessive Attachment. — An
application for damages on account of improper, irregular or excessive attachment must be filed before the
trial or before appeal is perfected or before the judgment becomes executory, with due notice to the
attaching party and his surety or sureties, setting forth the facts showing his right to damages and the
amount thereof. Such damages may be awarded only after proper hearing and shall be included in the
judgment on the main case.

If the judgment of the appellate court be favorable to the party against whom the attachment was issued,
he must claim damages sustained during the pendency of the appeal by filing an application in the appellate
court, with notice to the party in whose favor the attachment was issued or his surety or sureties, before the
judgment of the appellate court becomes executory. The appellate court may allow the application to be
heard and decided by the trial court.

Nothing herein contained shall prevent the party against whom the attachment was issued from recovering
in the same action the damages awarded to him from any property of the attaching party not exempt from
execution should the bond or deposit given by the latter be insufficient or fail to fully satisfy the award.

The judgment referred to in Section 20 of Rule 57 should mean the judgment in the main case. In Carlos v.
Sandoval:304

Section 20 essentially allows the application to be filed at any time before the judgment becomes executory.
It should be filed in the same case that is the main action, and cannot be instituted separately. It should be
filed with the court having jurisdiction over the case at the time of the application. The remedy provided by
law is exclusive and by failing to file a motion for the determination of the damages on time and while the
judgment is still under the control of the court, the claimant loses his right to damages.305 (Citations
omitted)

In this case, Philippine National Bank filed its application306 during the pendency of the appeal before the
Court of Appeals. The application was dated January 12, 2005,307 while the appeal in the main case,
docketed as CA-G.R. CV No. 79732-MIN, was decided on August 13, 2009.308 Hence, Philippine National
Bank's application to hold the injunction bond liable for damages was filed on time.

The Court of Appeals properly denied Philippine National Bank's application to be appointed as a receiver.

Rule 59, Section 1 provides the grounds when a receiver may be appointed:

SECTION 1. Appointment of Receiver. — Upon a verified application, one or more receivers of the property
subject of the action or proceeding may be appointed by the court where the action is pending, or by the
Court of Appeals or by the Supreme Court, or a member thereof, in the following cases:

(a) When it appears from the verified application, and such other proof as
the court may require, that the party applying for the appointment of a
receiver has an interest in the property or fund which is the subject of
the action or proceeding, and that such property or fund is in danger of
 being lost, removed, or materially injured unless a receiver be
appointed to administer and preserve it;

(b) When it appears in an action by the mortgagee for the foreclosure of a

mortgage that the property is in danger of being wasted or dissipated
or materially injured, and that its value is probably insufficient to
discharge the mortgage debt, or that the parties have so stipulated in
the contract of mortgage;

(c) After judgment, to preserve the property during the pendency of an

appeal, or to dispose of it according to the judgment, or to aid
execution when the execution has been returned unsatisfied or the
judgment obligor refuses to apply his property in satisfaction of the
judgment, or otherwise to carry the judgment into effect;

(d) Whenever in other cases it appears that the appointment of a receiver

is the most convenient and feasible means of preserving, administering,
or disposing of the property in litigation.

During the pendency of an appeal, the appellate court may allow an application for the appointment of a
receiver to be filed in and decided by the court of origin and the receiver appointed to be subject to the
control of said court.

In Commodities Storage & Ice Plant Corporation v. Court of Appeals:309

The general rule is that neither party to a litigation should be appointed as receiver without the consent of
the other because a receiver should be a person indifferent to the parties and should be impartial and
disinterested. The receiver is not the representative of any of the parties but of all of them to the end that
their interests may be equally protected with the least possible inconvenience and expense.310 (Citations
omitted)

The Court of Appeals cited Spouses Limso and Davao Sunrise's objection to Philippine National Bank's
application to be appointed as receiver as one of the grounds why the application should fail.311

Also, the Court of Appeals found that the mortgaged properties of Spouses Limso and Davao Sunrise were
earning approximately P12,000,000.00 per month. This proves that the properties were being administered
properly and did not require the appointment of a receiver. Also, to appoint Philippine National Bank as
receiver would be premature since the trial court's Decision was pending appeal.312

Philippine National Bank did not commit forum shopping when it filed an ex-parte Petition for the issuance of
a writ of possession and an application for appointment as receiver.

The elements of forum shopping are:

(a) identity of parties, or at least such parties as represent the same interests in both actions;

(b) identity of rights asserted and relief prayed for, the relief being founded on the same facts; and

(c) the identity of the two preceding particulars, such that any judgment rendered in the other action will,
regardless of which party is successful, amount to res judicata in the action under consideration.313 (Citation
omitted)

There is no identity of parties because the party to the Petition for Issuance of Writ of Possession is
Philippine National Bank only, while there are two parties to application for appointment as receiver:
Philippine National Bank on one hand, and Spouses Limso and Davao Sunrise on the other.

The causes of action are also different. In the Petition for Issuance of Writ of Possession, Philippine National
Bank prays that it be granted a writ of possession over the foreclosed properties because it is the winning
bidder in the foreclosure sale.314 On the other hand, Philippine National Bank's application to be appointed as
receiver is for the purpose of preserving these properties pending the resolution of CA-G.R. CV No.
79732.315 While the issuance of a writ of possession or the appointment as receiver would have the same
result of granting possession of the foreclosed properties to Philippine National Bank, Philippine National
Bank's right to possess these properties as the winning bidder in the foreclosure sale is different from its
interest as creditor to preserve these properties.

II

There is no mutuality of contracts when the determination or imposition of interest rates is at the sole
discretion of a party to the contract. Further, escalation clauses in contracts are void when they allow the
creditor to unilaterally adjust the interest rates without the consent of the debtor.

The Petitions docketed as G.R. Nos. 196958 and 197120 assail the Decision in CA-G.R. CV No. 79732-
MIN.316

Philippine National Bank argues that the principle of mutuality of contracts was not violated because
Spouses Limso and Davao Sunrise were notified as to the applicable interest rates, and their consent was
obtained before the effectivity of the agreement.317 There was no unilateral imposition of interest rates since
the rates were dependent on the prevailing market rates.318

Philippine National Bank also argues that Spouses Limso and Davao Sunrise were regularly informed by
Philippine National Bank of the interest rates imposed on their loan, as shown by Robert Alan L. Limso's
signatures on the letters sent by Philippine National Bank.319

Philippine National Bank further argues that loan agreements with escalation clauses, by their nature,
"would not indicate the exact rate of interest applicable to a loan precisely because it is made to depend by
the parties to external factors such as market indicators and/or government regulations affecting the cost of
money."320

Philippine National Bank cites Solidbank Corp., (now Metropolitan Bank and Trust Company) v. Permanent
Homes, Incorporated,321 where this court held that "contracts with escalation clause do not violate the
principle of mutuality of contracts."322

Philippine National Bank contends that the Conversion, Restructuring and Extension Agreement novated the
previous contracts with Spouses Limso and Davao Sunrise. In addition, the alleged infirmities in the previous
contracts were set aside upon the execution of the Conversion, Restructuring and Extension Agreement.323

On the other hand, Spouses Limso and Davao Sunrise argue that the Court of Appeals did not err in ruling
that the interest rates were imposed unilaterally. Spouses Limso and Davao Sunrise allege that the interest
rates were not stipulated in writing, in violation of Article 1956 of the Civil Code.324 Also, the Court of
Appeals did not err in reducing the penalties and attorney's fees since Article 2227 of the Civil Code
states:325

Article 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.

Spouses Limso and Davao Sunrise add that the letters sent by Philippine National Bank to Davao Sunrise
were not agreements but mere notices that the interest rates were increased by Philippine National
Bank.326 Moreover, the letters were received by Davao Sunrise's employees who were not authorized to
receive such letters.327 Some of the letters did not even appear to have been received by anyone at all.328

Spouses Limso and Davao Sunrise allege that Philippine National Bank admitted that the penalties stated in
the agreements were in the nature of liquidated damages.329 Nevertheless, Spouses Limso and Davao
Sunrise question the Court of Appeals' ruling insofar as it held that their remaining obligation to Philippine
National Bank is P803,185,411.11 as of September 1, 2008. According to Spouses Limso and Davao
Sunrise, they have overpaid Philippine National Bank in the amount of P15,915,588.89.330
Philippine National Bank counters that Davao Sunrise and Spouses Limso's promissory notes had a provision
stating:

[T]he rate of interest shall be set at the start of every Interest Period. For this purpose, I/We agree that the
rate of interest herein stipulated may be increased or decreased for the subsequent Interest Periods,
with PRIOR NOTICE TO THE BORROWER in the event of changes in the interest rate prescribed by law or
the Monetary Board of Central Bank of the Philippines or in the Bank's overall cost of funds. I/We hereby
agree that IN THE EVENT I/WE ARE NOT AGREEABLE TO THE INTEREST RATE FIXED FOR ANY
INTEREST PERIOD, I/WE HAVE THE OPTION TO PREPAY THE LOAN OR CREDIT FACILITY
WITHOUT PENALTY within ten (10) calendar days from the Interest Setting Date.331(Emphasis in the
original)

As to the letters sent by Philippine National Bank, these letters were received by the Chief Finance Officer,
Chairman, and President of Davao Sunrise. In addition, assuming that the employees who allegedly received
the letters were not authorized to do so, the unauthorized acts were ratified by Spouses Limso and Davao
Sunrise when they used the proceeds of the loan.332

We rule that there was no mutuality of contract between the parties since the interest rates imposed were
based on the sole discretion of Philippine National Bank.333 Further, the escalation clauses in the real estate
mortgage "[did] not specify a fixed or base interest[.]"334 Thus, the interest rates are invalid.

The principle of mutuality of contracts is stated in Article 1308 of the Civil Code as follows:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.

The importance of the principle of mutuality of contracts was discussed in Juico v. China Banking
Corporation:335

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1)
that any obligation arising from contract has the force of law between the parties; and (2) that there must
be mutuality between the parties based on their essential equality. Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is
likewise, invalid.336 (Citation omitted)

When there is no mutuality between the parties to a contract, it means that the parties were not on equal
footing when the terms of the contract were negotiated. Thus, the principle of mutuality of contracts dictates
that a contract must be rendered void when the execution of its terms is skewed in favor of one party.337

The Court of Appeals also noted that since the interest rates imposed were at the sole discretion of
Philippine National Bank, and that Spouses Limso and Davao Sunrise were merely notified when there were
changes in the interest rates, Philippine National Bank violated the principle of mutuality of contracts.338 The
Court of Appeals ruled that:

We cannot subscribe to appellant bank's allegation that plaintiffs-appellees agreed to these interest rates by
receiving various letters from PNB. Those letters cannot be construed as agreements as a simple reading of
those letters would show that they are mere notices informing plaintiffs-appellees that the bank, through its
top management, had already imposed interest rates on their loan. The uniform wordings of the said letters
go this way:
chanRoble svirtual Lawlib ra ry

This refers to your existing credit facility in the principal amount of P850.0 MM granted by the Philippine
National Bank by and under the terms and conditions of that Credit Agreement dated 12.2.97 (Renewal of
Credit Facility).

We wish to advise you that the top management has approved an interest rate of 20.756% which will be
used in computing the interest due on your existing peso and redenominated availments against the credit
facility for the period July 20 to August 19, 1998.

If you are amenable to this arrangement, please signify your conformity on the space provided below and
return to us the original copy of the document. If we receive no written objection by the end of 10 days from
date of receipt of this letter, we will take it to mean that you agree to the new interest rate we quote. On
the other hand, if you disagree with the quoted rate, you will have to pay the loan in full within the same
ten-day period otherwise, the entire loan will be considered due and demandable.339 (Citation omitted)

The contents of the letter quoted by the Court of Appeals show that there was no room for negotiation
among Philippine National Bank, Spouses Limso, and Davao Sunrise when it came to the applicable interest
rate. Since there was no room for negotiations between the parties with regard to the increases of the rates
of interest, the principle of mutuality of contracts was violated. There was no meeting of the minds between
Spouses Limso, Davao Sunrise, and Philippine National Bank because the increases in the interest rates
were imposed on them unilaterally.

Meeting of the minds between parties to a contract is manifested when the elements of a valid contract are
all present.340 Article 1318 of the Civil Code provides:

Article 1318. There is no contract unless the following requisites concur:

chanRoble svirtual Lawlib ra ry

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

When one of the elements is wanting, no contract can be perfected.341In this case, no consent was given by
Spouses Limso and Davao Sunrise as to the increase in the interest rates. Consequently, the increases in
the interest rates are not valid.

Even the promissory notes contained provisions granting Philippine National Bank the sole discretion to set
the interest rate:

[Promissory Note] NO. 0015138516350115 . ..

. . . I/We, jointly and severally, promise to pay to the order of the Philippine National Bank (the 'Bank') at its
office in cm recto avenue davao city [sic], Philippines, the sum of PHILIPPINE
PESOS: 583.183.333.34 (P583383.333.34) together with interest thereon for the current Interest Period at
a rate of to be set by mzt. [management]. Interest Period shall mean the period commencing on the date
hereof and having a duration not exceeding monthly (____ ) days and each similar period thereafter
commencing upon the expiry of the immediately preceding Interest Period. The rate of interest shall be set
at the start of every Interest Period. For this purpose, I/We agree that the rate of interest herein stipulated
may be increased or decreased for the subsequent Interest Periods, with prior notice to the Borrower in the
event of changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank's overall cost of funds. I/We hereby agree that in the event I/We are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to prepay the loan or
credit facility without penalty within ten (10) calendar days from the Interest Setting Date.342 ChanRoblesVi rt ualawlib ra ry

Promissory Note No. 0015138516350116343 contained the same provisions, differing only as to the amount
of the obligation.

Assuming that Davao Sunrise and Spouses Limso agreed to the increase in interest rates, the interest rates
are still null and void for being unreasonable.344

This court has held that while the Usury Law was suspended by Central Bank Circular No. 905, Series of
1982, unconscionable interest rates may be declared illegal.345 The suspension of the Usury Law did not give
creditors an unbridled right to impose arbitrary interest rates. To determine whether an interest rate is
unconscionable, we are guided by the following pronouncement:

In determining whether the rate of interest is unconscionable, the mechanical application of pre-established
floors would be wanting. The lowest rates that have previously been considered unconscionable need not be
an impenetrable minimum. What is more crucial is a consideration of the parties' contexts. Moreover,
interest rates must be appreciated in light of the fundamental nature of interest as compensation to the
creditor for money lent to another, which he or she could otherwise have used for his or her own purposes
at the time it was lent. It is not the default vehicle for predatory gain. As such, interest need only be
reasonable. It ought not be a supine mechanism for the creditor's unjust enrichment at the expense of
another.346
A reading of the interest provisions in the original agreement and the Conversion, Restructuring and
Extension Agreement shows that the interest rates imposed by Philippine National Bank were usurious and
unconscionable.

In the original credit and loan agreements executed in 1993, the interest provisions provide:

CREDIT AGREEMENT
....
1.04 Interest on Availments. (a) The Borrowers agree to pay interest on each availment from date of each
availment up to, but not including the date of full payment thereof at a rate per annum that is determined
by the Bank to be equivalent to the Bank's prime rate less 1.0% in effect as of the date of the relevant
Availment, subject to quarterly review and to maintenance of deposits with ADB of at least 5% of the
amount availed in its savings and current account. Non compliance of ADB requirement shall subject the
credit line to regular interest rate which is the prime rate plus applicable spread.347

LOAN AGREEMENT

1.03 Interest, (a) The Borrowers hereby agree to pay interest on the loan from the date of Drawdown up to
Repayment Date at the rate that is determined by the Bank to be the Bank's prime rate in effect at the Date
of Drawdown less 1.0% and which shall be reset every 90 days to coincide with interest payments.

(b) The determination by the Bank of the amount of interest due and payable hereunder shall be conclusive
and binding on the borrower in the absence of manifest error in the computation.348 (Emphasis supplied,
underscoring in the original)

In the Conversion, Restructuring and Extension Agreement, the interest provisions state:

SECTION 2. TERMS OF LOAN I

....
2.04 Interest, (a) The Borrowers agree to pay the Bank interest on Loan I from the Effective Date, until the
date of full payment thereof at the rate per annum to be set by the Bank. The interest rate shall be reset by
the Bank every month.
....

SECTION 3. TERMS OF LOAN II

....
3.04 Interest, (a) The Borrowers agree to pay the Bank interest on Loan II from the Effective Date, until the
date of full payment thereof at the rate per annum to be set by the Bank. The interest rate shall be reset by
the Bank every month.349 (Emphasis supplied, underscoring in the original)

From the terms of the loan agreements, there was no way for Spouses Limso and Davao Sunrise to
determine the interest rate imposed on their loan because it was always at the discretion of Philippine
National Bank.

Nor could Spouses Limso and Davao Sunrise determine the exact amount of their obligation because of the
frequent changes in the interest rates imposed.

As found by the Court of Appeals, the loan agreements merely stated that interest rates would be imposed.
However, the specific interest rates were not stipulated, and the subsequent increases in the interest rates
were all at the discretion of Philippine National Bank.350

Also invalid are the escalation clauses in the real estate mortgage and promissory notes. The escalation
clause in the real estate mortgage states:

"(k) INCREASE OF INTEREST RATE:

"The rate of interest charged on the obligation secured by this mortgage as well as the interest on the
amount which may have been advanced by the mortgagee, in accordance with the provisions hereof shall be
subject during the life of this contract to A such an increase within the rate allowed by law, as the Board of
Directors of the MORTGAGEE may prescribe for its debtors."351

The escalation clause in the promissory notes352 states:

For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for
the subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate
prescribed by law or the Monetary Board or the Central Bank of the Philippines, or in the Bank's overall cost
of funds.353

Banco Filipino Savings and Mortgage Bank v. Judge Navarro354 defined an escalation clause as "one which
the contract fixes a base price but contains a provision that in the event of specified cost increases, the
seller or contractor may raise the price up to a fixed percentage of the base."355

This court has held that escalation clauses are not always void since they serve "to maintain fiscal stability
and to retain the value of money in long term contracts."356 However:

[A]n escalation clause "which grants the creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to an important modification in the
agreement" is void. A stipulation of such nature violates the principle of mutuality of contracts. Thus, this
Court has previously nullified the unilateral determination and imposition by creditor banks of increases in
the rate of interest provided in loan contracts.

. . . [W]e hold that the escalation clause is ... void because it grants respondent the power to impose an
increased rate of interest without a written notice to petitioners and their written consent. Respondent's
monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. A
detailed billing statement based on the new imposed interest with corresponding computation of the total
debt should have been provided by the respondent to enable petitioners to make an informed decision. An
appropriate form must also be signed by the petitioners to indicate their conformity to the new rates.
Compliance with these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided
impositions do not have the force of law between the parties, because such impositions are not based on the
parties' essential equality.357(Citations omitted)

The interest rate provisions in Philippine National Bank's loan agreements and real estate mortgage
contracts have been nullified by this court in several cases. Even the escalation clauses in Philippine National
Bank's contracts were noted to be violative of the principle of mutuality of contracts.358

The original loan agreement in this case was executed in 1993. Prior to the execution of the original loan
agreement, this court promulgated a Decision in 1991 ruling that "the unilateral action of the [Philippine
National Bank] in increasing the interest rate on the private respondent's loan, violated the mutuality of
contracts ordained in Article 1308 of the Civil Code[.]"359

In Philippine National Bank v. Court of Appeals360 the interest rate provisions were nullified because these
allowed Philippine National Bank to unilaterally increase the interest rate.361 The nullified interest rate
provisions were worded as follows:

"The Credit Agreement provided inter alia, that —

'(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future: Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum interest is
reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon
shall take effect on the effectivity date of the increase or decrease in the maximum interest rate.'

"The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice,
beyond the stipulated rate of 12% but only 'within the limits allowed by law.'

The Real Estate Mortgage contract likewise provided that —

'(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage
as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance
with the provision hereof, shall be subject during the life of this contract to such an increase within the rate
allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.'362

This court explained that:

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.363

In a subsequent case364 also involving Philippine National Bank, this court likewise nullified the interest rate
provisions of Philippine National Bank and discussed:

In this case no attempt was made by PNB to secure the conformity of private respondents to the successive
increases in the interest rate. Private respondents' assent to the increases cannot be implied from their lack
of response to the letters sent by PNB, informing them of the increases. For as stated in one case, no one
receiving a proposal to change a contract is obliged to answer the proposal.365 (Citation omitted)

However, only the interest rate imposed is nullified; hence, it is deemed not written in the contract. The
agreement on payment of interest on the principal loan obligation remains. It is a basic rule that a contract
is the law between contracting parties.366 In the original loan agreement and the Conversion, Restructuring
and Extension Agreement, Spouses Limso and Davao Sunrise agreed to pay interest on the loan they
obtained from Philippine National Bank. Such obligation was not nullified by this court. Thus, their obligation
to pay interest in their loan obligation subsists.367

Spouses Abella v. Spouses Abella368 involved a simple loan with an agreement to pay interest.
Unfortunately, the applicable interest rate was not stipulated by the parties. This court discussed that in
cases where the parties fail to specify the applicable interest rate, the legal rate of interest applies. This
court also discussed that the applicable legal rate of interest shall be the prevailing rate at the time when
the agreement was entered into:369

This is so because interest in this respect is used as a surrogate for the parties' intent, as expressed as of
the time of the execution of their contract. In this sense, the legal rate of interest is an affirmation of the
contracting parties' intent; that is, by their contract's silence on a specific rate, the then prevailing legal rate
of interest shall be the cost of borrowing money. This rate, which by their contract the parties have settled
on, is deemed to persist regardless of shifts in the legal rate of interest. Stated otherwise, the legal rate of
interest, when applied as conventional interest, shall always be the legal rate at the time the agreement was
executed and shall not be susceptible to shifts in rate.370

Further, Spouses Abella cited Article 2212371 of the Civil Code and the ruling in Nacar v. Gallery
Frames372which both state that "interest due shall itself earn legal interest from the time it is judicially
demanded:"373

[T]he interest due on conventional interest shall be at the rate of 12% per annum from [date of judicial
demand] to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per
annum.374

In this case, the Conversion, Restructuring and Extension Agreement was executed on January 28, 1999.
Thus, the applicable interest rate on the principal loan obligation (conventional interest) is at 12% per
annum. With regard to the interest due on the conventional interest, judicial demand was made on August
21, 2000 when Philippine National Bank filed a Petition375 for Extrajudicial Foreclosure of Real Estate
Mortgage.376 Thus, from August 21, 2000 to June 30, 2013, the interest rate on conventional interest shall
be at 12%. From July 1, 2013 until full payment, the applicable interest rate on conventional interest shall
be at 6%.

III

The Conversion, Restructuring and Extension Agreement novated the original agreement executed in 1993.
However, the nullified interest rate provisions in the original loan agreement cannot be deemed as having
been legitimized, ratified, or set aside.
Philippine National Bank argues that the Conversion, Restructuring and Extension Agreement novated the
original loan agreement and that the novation effectively set aside the infirmities in the original loan
agreement.377

The Civil Code provides that:

Article 1292. In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.

Novation has been defined as:

Novation may either be express, when the new obligation declares in unequivocal terms that the old
obligation is extinguished, or implied, when the new obligation is on every point incompatible with the old
one. The test of incompatibility lies on whether the two obligations can stand together, each one with its
own independent existence.

For novation, as a mode of extinguishing or modifying an obligation, to apply, the following requisites must
concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.378 (Citations omitted)

The original Credit Agreement379 was executed on September 1, 1993,380 while the Conversion,
Restructuring and Extension Agreement381 was executed on January 28, 1999.382

Pertinent portions of the Conversion, Restructuring and Extension Agreement state:

WITNESSETH: That -

....
WHEREAS, the Borrowers [referring to DSIDC and spouses Limso] acknowledge that they have outstanding
obligations (the "Obligations") with the Bank broken down as follows:

(i ) Credit Line - P583.18 Million (as of September 30, 1998);

(i i) Loan - P266.67 Million (as of September 30, 1998); and
(i i i) Interest -P217.15 Million (as of December 31, 1998);

WHEREAS, at the request of the Borrowers, the Bank has approved (a) the conversion and restructuring of
the Credit Line portion of the Obligations into a term loan, (b) the extension of the term of the Loan for
another four (4) years, (c) the capitalization on accrued interest (up to December 31,1998) on the
Obligations, (d) the waiver of the penalties charges (if any) accruing on the Obligations, and (e) the partial
release of chattel mortgage on stock inventories, subject to the terms and conditions hereinafter set forth;
....

SECTION 2. TERMS OF LOAN I

2.01 Amount of Loan I. Loan I shall be in the principal amount not exceeding PESOS: FIVE HUNDRED
EIGHTY THREE MILLION ONE HUNDRED EIGHTY THOUSAND (P583,180,000.00)
....

SECTION 3. TERMS OF LOAN II

3.01 Amount of Loan II. Loan II shall be in the principal amount not exceeding PESOS: FOUR HUNDRED
EIGHTY THREE MILLION SEVEN HUNDRED EIGHTY THOUSAND (P483,780,000.00).383

In this case, the previous valid obligation of Spouses Limso and Davao Sunrise was the payment of a loan in
the total amount of P700 million, plus interest.

Upon the request of Spouses Limso and Davao Sunrise, Philippine National Bank agreed to restructure the
original loan agreement.384

Philippine National Bank summarized the Conversion, Restructuring and Extension Agreement as follows:

(a) The conversion of the Revolving Credit Line into a Term Loan in the principal amount of 583.18 Million
and denominated as "Loan I".

(b) The Extension for another four (4) years of the original long term loan (from 01 September 2001 to 31
December 2005);

(c) The capitalization of the accrued interest on both the Revolving Credit Line and the Long Term Loan up
to 31 December 1998;

(d) The consolidation of the accrued interest and the outstanding obligation of the original Long Term Loan
to form "Loan 2" with the total principal amount of P483.82 Million;

(e) Waiver of penalty charges;

(f) Partial release of chattel mortgage on the stock inventories;

(g) Both "Loan I" and "Loan II" were made payable within seven (7) years in monthly amortization and a
balloon payment on or before December 2005.385

When the loan agreement was restructured, the principal obligation of Spouses Limso and Davao Sunrise
became P1.067 billion.

The Conversion, Restructuring and Extension Agreement novated the original credit agreement because the
principal obligation itself changed.

Important provisions of the original agreement were altered. For example, the penalty charges were waived
and the terms of payment were extended.

Further, the preambular clauses of the Conversion, Restructuring and Extension Agreement show that
Spouses Limso and Davao Sunrise sought to change the terms of the original agreement and that they
themselves acknowledged their obligation to be P1.067 billion. They are now estopped from claiming that
their obligation should be based on the original agreement when it was through their own actions that the
loan was restructured.

Thus, the Court of Appeals in CA-G.R. CV No. 79732-MIN erred in not declaring that the Conversion,
Restructuring and Extension Agreement novated the original agreement and in computing Spouses Limso
and Davao Sunrise's obligation based on the original agreement.

Since the Conversion, Restructuring and Extension Agreement novated the original credit agreement, we
modify the Court of Appeals Decision in that the outstanding obligation of Spouses Limso and Davao Sunrise
should be computed on the basis of the Conversion, Restructuring and Extension Agreement.

In the Court of Appeals Decision dated August 13, 2009:

Computing the interest at 12% per annum on the principal amount of 700 Million Pesos, the interest should
be 84 Million Pesos per annum. Multiplying 84 Million Pesos by 15 years from September 1, 1993 to
September 1, 2008, the interest for the 15-year period would be One Billion Two Hundred Sixty Million Pesos
(P1,260,000,000.00). Then, by adding the interest of P1,260,000,000.00 to the principal amount of 700
Million Pesos, the total obligation of plaintiffs-appellees would be One Billion Nine Hundred Sixty Million
Pesos (P1,960,000,000.00) by September 1, 2008. And since plaintiffs-appellees has paid a total amount of
One Billion One Hundred Fifty Six Million Eight Hundred Fourteen Thousand Five Hundred Eighty Eight Pesos
and 89/100 (P1,156,814,588.89) to appellant PNB as of December 5, 1998, as per PNB's official
computation of payments per official receipts, then, plaintiffs-appellees would still have an outstanding
balance of about Eight Hundred Three Million One Hundred Eighty Five Thousand Four Hundred Eleven and
11/100 Pesos (P 803,185,411.11) as of September 1, 2008. The amount of P 803,185,411.11 will earn
interest at the legal rate of 12% per annum from September 1, 2008 until fully paid.
....
chanrobles law

WHEREFORE, the assailed Decision dated June 19, 2002 and Order dated August 13, 2002 of the Regional
Trial Court of Davao City, Branch 17 in Civil Case No. 28,170-2000 declaring the unilateral imposition of
interest rates by defendant-appellant PNB as null and void appealed from are AFFIRMED with the
MODIFICATION that the obligation of plaintiffs-appellees arising from the Loan and Revolving Credit Line
and subsequent Conversion, Restructuring and Extension Agreement as Loan I and Loan II shall earn
interest at the legal rate of twelve percent (12%) per annum computed from September 1, 1993, until fully
paid and satisfied.

SO ORDERED.386

Notably, in the body of the Court of Appeals Decision, Spouses Limso and Davao Sunrise's obligation was
computed on the basis of the original loan agreement, while in the dispositive portion, the Court of Appeals
cited both the original loan agreement and the Conversion, Restructuring and Extension Agreement.

The general rule is that:

Where there is a conflict between the dispositive part and the opinion of the court contained in the text or
body of the decision, the former must prevail over the latter on the theory that the dispositive portion is the
final order, while the opinion is merely a statement ordering nothing.387 (Citation omitted)

To avoid confusion, we also rule that the interest rate provisions and the escalation clauses in the
Conversion, Restructuring and Extension Agreement are nullified insofar as they allow Philippine National
Bank to unilaterally determine and increase the imposable interest rates.

Article 1409388 of the Civil Code provides that void contracts cannot be ratified. Hence, the void interest rate
provisions in the original loan agreement could not have been ratified by the execution of the Conversion,
Restructuring and Extension Agreement.

IV

The proper remedy to assail a decision on pure questions of law is to file a petition for review on certiorari
under Rule 45, not an appeal under Rule 41 of the 1997 Rules of Civil Procedure.

One of the issues raised by Philippine National Bank in G.R. No. 205463 is the dismissal of its appeal under
Rule 41 by the Court of Appeals in its Decision dated January 21, 2013.389

Philippine National Bank, through counsel, argues that Rule 41 is the proper remedy because its Petition
raises questions of fact and of law.390 For example, the issue of whether there is an annotation of
encumbrance on the titles of the mortgaged properties is a question of fact.391

Denying Philippine National Bank's appeal under Rule 41, the Court of Appeals stated that:

[Philippine National Bank] simply takes issue against the conclusions made by the court a quo which
pertains to the matter of whether mere entry in the Primary Entry Book, sans the signature of the registrar,
already completes registration. It does not question the weight and probative value of the fact that the
signature of Atty. Patriarcha [sic] was previously entered in the records then revoked by her. What PNB
seeks, therefore, is a review of the decision of the court a quo dismissing its petition, without delving into
the weight of the evidence, but on the correctness of the court a quo's conclusions based on the evidence
presented before it. This is clearly a question of law.
....

To the mind of this Court, PNB seeks to harp repeatedly on the issue of the court a quo's failure to consider
that the certificate of sale has been duly registered on February 4, 2002 upon mere entry in the Primary
Entry Book, even without the signature of the then register of deeds. Though couched in different creative
presentations, all the errors assigned by PNB point to one vital question: What completes registration? To
answer it, this Court is not asked to calibrate the evidence presented, or gauge the truth or falsity, but to
apply the appropriate law to the situation. This is clearly a question of law.392 (Emphasis in the original)

In Land Bank of the Philippines v. Yatco Agricultural Enterprises,393 this court; discussed the difference
between questions of law and questions of fact:

As a general rule, the Court's jurisdiction in a Rule 45 petition is limited to the review of pure questions of
law. A question of law arises when the doubt or difference exists as to what the law is on a certain state of
facts. Negatively put, Rule 45 does not allow the review of questions of fact. A question of fact exists when
the doubt or difference arises as to the truth or falsity of the alleged facts.

The test in determining whether a question is one of law or of fact is "whether the appellate court can
determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question of
law[.]" Any question that invites calibration of the whole evidence, as well as their relation to each other and
to the whole, is a question of fact and thus proscribed in a Rule 45 petition.394 (Citations omitted)

Based on the foregoing, there was no error on the part of the Court of Appeals when it dismissed Philippine
National Bank's Petition for being the wrong remedy. Indeed, Philippine National Bank was not questioning
the probative value of the evidence. Instead, it was questioning the conclusion of the trial court that
registration had not been perfected based on the evidence presented.

The registration of the Sheriffs Provisional Certificate of Sale was completed.

Philippine National Bank argues that the registration was completed, and restates the doctrine in National
Housing Authority v. Basa, Jr., et al.:395

Once the Certificate of Sale is entered in the Primary Book of Entry of the Registry of Deeds with the
registrant having paid all the required fees and accomplished all that is required of him under the law to
cause registration, the registration is complete.396

Philippine National Bank further argues that "[t]he records of all the transactions are recorded in the Primary
Entry Book and the annotation on the titles of the transaction do not control registration. It is the recording
in the Primary Entry Book which controls registration."397

Philippine National Bank adds that though the annotation of a certificate of sale at the back of the
certificates of title is immaterial in the perfection of registration, the evidence shows that the Certificate of
Sale was annotated.398

Philippine National Bank alleges that registration was completed because Atty. Patriarca, the Register of
Deeds at that time, affixed her signature but would later erase it.399

Philippine National Bank cites Atty. Cruzabra's Comment, which alleges that the Sheriffs Provisional
Certificate of Sale and other documents relative to the sale were registered in the Primary Entry Book of the
Registry of Deeds of Davao City.400 The Comment also states that:

3. The Sheriffs Provisional Certificate of Sale was annotated at the back of the aforementioned titles but it
does not bear the signature of the former Registrar of Deeds. Noted however is that the portion below the
annotation of the Provisional Sheriffs [sic] Certificate of Sale there appears to be erasures ("snowpake"),
and [Atty. Cruzabra] is not in a position to conclude as to the circumstances [relative to said erasures], for
lack of personal knowledge as to what transpired at that time.401 (Citation omitted)

Philippine National Bank also cites the Decision in Administrative Case No. 02-13 dated January 12, 2005,
which was the case against Atty. Patriarca for Grave Misconduct and Conduct Unbecoming of a Public
Official. In the Decision, the Land Registration Authority found that:

Respondent herein likewise admits that she finally signed the PNB transaction annotated on the subject titles
when she was informed that the motion for reconsideration was denied by this Authority, but she
subsequently erased her signature when she subsequently found out that an appeal was filed by the Limso
spouses.
....

The registration of these documents became complete when respondent affixed her signature below these
annotations. Whatever information belatedly gathered thereafter relative to the circumstances as to the
registrability of these documents, respondent can not unilaterally take judicial notice thereof and proceed to
lift at her whims and caprices what has already been officially in force and effective, by erasing thereon her
signature.402

In addition, Philippine National Bank argues that the erasure of Atty. Patriarca's signature using correction
fluid could not have revoked, cancelled, or annulled the registration since under Section 108 of Presidential
Decree 1529, only a court order can revoke registration.403

Philippine National Bank alleges that it has complied with the requirements under Section 7 of Act No. 3135
and Section 47 of Republic Act No. 8791.404 Thus, it is entitled to a writ of possession.405

The Office of the Solicitor General filed its Comment,406 quoting the dispositive portion of the Land
Registration Authority's Consulta No. 3405 dated May 21, 2002:407

WHEREFORE, in view of the foregoing, the Sheriff's Provisional Certificate of Sale dated February 04, 2002 is
registerable on TCT Nos. T-147820, T-147386, and T-247012, provided all other registration requirements
are complied with.408 (Emphasis supplied)

The Office of the Solicitor General also quotes the dispositive portion of the Land Registration Authority's
Resolution in the Motion for Reconsideration:409

WHEREFORE, in view of the foregoing[J the Sheriff's Provisional Certificate of Sale dated February 4, 2002 is
registrable on TCT Nos. T-147820, T-147821, T-147386 and T-247012, provided all other registration
requirements are complied with.410 (Emphasis supplied)

The Office of the Solicitor General then cites National Housing Authority and Autocorp Group and
Autographies, Inc. v. Court of Appeals411 and discusses that when all the requirements for registration of
annotation has been complied with, it is ministerial upon the Register of Deeds to register the
annotation.412 The Register of Deeds is not authorized "to make an appraisal of proofs outside of the
documents sought to be registered."413

For the Office of the Solicitor General, the Register of Deeds' refusal to affix the annotation on the foreclosed
properties' titles "should not preclude the completion of the registration of any applicant who has complied
with the requirements of the law to register its right or interest in registered lands."414

Spouses Limso and Davao Sunrise, as intervenors-oppositors, filed a Memorandum.415 They cite Section
117416 of Presidential Decree No. 1529417 and argue that registration of the Certificate of Sale in the Primary
Entry Book is a preliminary step in registration.418 Since Philippine National Bank withdrew the documents it
submitted to the Register of Deeds of Davao City, the Sheriff's Provisional Certificate of Sale was not
registered.419

Further, Philippine National Bank's argument that "entry ... in the Primary Entry Book is equivalent to
registration"420 is not in accordance with Section 56421 of Presidential Decree No. 1529.422 Moreover, "[t]he
signature of the Register of Deeds is crucial to the completeness of the registration process."423

Spouses Limso and Davao Sunrise posit that Philippine National Bank admitted that the Certificate of Sale is
not registered in various hearings.424 These admissions are judicial admissions that should be binding on
Philippine National Bank.425

Spouses Limso and Davao Sunrise allege that during the oral arguments held on March 19, 2003 at the
Court of Appeals in CA G.R. SP No. 71527, counsel for Philippine National Bank stated:426

ATTY. [BENILDA A.] TEJADA:

Yes, we can show the documents which we are going to file your Honors.

We would like to state also your Honors the fact of why no registration was ever made in this case. Counsel
forgot to mention that the fact of no registration is simply because the Register of Deeds refused to register
our Certificate of Sale. We have a pending case against them Sir before the LRA and before the Ombudsman
fore [sic] refusal to register our Certificate of Sale. Now, we have filed this case because inspite [sic] of the
fact the Register of Deeds addressed a consulta to the Land Registration Authority on the registerity of the
Certificate of Sale your Honors [,] [i]t was at their instance that there was a consulta.

And then, the Land Registration Authority has already rendered its opinion that the document is registrable.
Despite that your Honors, the document has never been registered. So that was the subject of our case
against them. We do not understand the intransigencies we do not understand the refusal.427

In addition, the Court of Appeals correctly dismissed Philippine National Bank's appeal because the issue
raised involved a question of law, specifically "whether or not mere entry in the Primary Entry Book is
considered as registration of the subject Certificate of Sale."428

Section 56 of Presidential Decree No. 1529 states:

SECTION 56. Primary Entry Book; Fees; Certified Copies. — Each Register of Deeds shall keep a primary
entry book in which, upon payment of the entry fee, he shall enter, in the order of their reception, all
instruments including copies of writs and processes filed with him relating to registered land. He shall, as a
preliminary process in registration, note in such book the date, hour and minute of reception of all
instruments, in the order in which they were received. They shall be regarded as registered from the time so
noted, and the memorandum of each instrument, when made on the certificate of title to which it refers,
shall bear the same date: Provided, that the national government as well as the provincial and city
governments shall be exempt from the payment of such fees in advance in order to be entitled to entry and
registration. (Emphasis supplied)

In this case, Philippine National Bank filed the Sheriffs Provisional Certificate of Sale, which was duly
approved by the Executive Judge, before the Registry of Deeds of Davao City. Entries were made in the
Primary Entry Book. Hence, the Sheriffs Provisional Certificate of Sale should be considered registered.

Autocorp Group and Autographies, Inc. involved an extrajudicial foreclosure of mortgaged property and the
registration of a Sheriffs Certificate of Sale. Autocorp sought the issuance of a writ of injunction "to prevent
the register of deeds from registering the subject certificate of sale[.]"429

This court explained that a Sheriffs Certificate of Sale is an involuntary instrument and that a writ of
injunction will no longer lie because of the following reasons:

[F]or the registration of an involuntary instrument, the law does not require the presentation of the owner's
duplicate certificate of title and considers the annotation of such instrument upon the entry book, as
sufficient to affect the real estate to which it relates.
...
....

It is a ministerial duty on the part of the Register of Deeds to annotate the instrument on the certificate of
sale after a valid entry in the primary entry book. P.D. No. 1524 provides:
chanRoble svirtual Lawlib ra ry

SEC. 63. Foreclosure of Mortgage. — x x x

(b) If the mortgage was foreclosed extrajudicially, a certificate of sale executed by the officer who
conducted the sale shall be filed with the Register of Deeds who shall make a brief memorandum thereof on
the certificate of title.

In fine, petitioner's prayer for the issuance of a writ of injunction, to prevent the register of deeds from
registering the subject certificate of sale, had been rendered moot and academic by the valid entry of the
instrument in the primary entry book. Such entry is equivalent to registration.430 (Emphasis supplied,
citation omitted)

Based on the records of this case, the Sheriffs Certificate of Sale filed by Philippine National Bank was
already recorded in the Primary Entry Book.

The refusal of the Register of Deeds to annotate the registration on the titles of the properties should not
affect Philippine National Bank's right to possess the properties.

As to the argument that Philippine National Bank admitted in open court that the Certificate of Sale was not
registered, it is evident from Spouses Limso and Davao Sunrise's Memorandum that Philippine National Bank
immediately explained that the non-registration was due to the Register of Deeds' refusal. Thus, the alleged
non-registration was not due to Philippine National Bank's fault.

It appears on record that Philippine National Bank already complied with the requirements for registration.
Thus, there was no reason for the Register of Deeds to persistently refuse the registration of the Certificate
of Sale.

At any rate, the Land Registration Authority stated in its Resolution in Administrative Case No. 02-13 that
Atty. Patriarca herself admitted that she already affixed her signature on the annotation at the back of the
certificate of titles, and that she subsequently erased her signature.431 This finding of fact in the
administrative case supports the argument of Philippine National Bank and the opinion of the Office of the
Solicitor General that the Certificate of Sale should be considered registered.

With regard to the issue of whether Philippine National Bank is entitled to a writ of possession, the trial court
in Other Case No. 124-2002 denied the application for the writ of possession and explained:

Portion of Sec. 47 of RANo. 8791 is quoted:

chanRoble svirtual Lawlib ra ry

xxx the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have
the right to enter upon and take possession of such property immediately after the date of the confirmation
of the auction sale and administer the same in accordance with law xxx.
From the quoted provision, one can readily conclude that before the sale is confirmed, it is not considered
final or perfected to entitle the purchaser at the auction sale to the writ of possession as a matter of right....

In extra-judicial foreclosure, there is technically no confirmation of the auction sale in the manner provided
for by Sec. 7 of Rule 68. The process though involves an application, preparation of the notice of extra-
judicial sale, the extra-judicial foreclosure sale, issuance of the certificate of sale, approval of the Executive
Judge or in the latter's absence, the Vice-Executive Judge and the registration of the certificate of sale with
the Register of Deeds.

While it may be true that as found by the CA in the case earlier cited that DSIDC had only until January 24,
2001 to redeem its properties and that the registration of the certificate of foreclosure sale is no longer
relevant in the reckoning of the redemption period, for purposes of the issuance of the writ of possession,
petitioner to this Court's belief should complete the entire process in extra-judicial foreclosure. Otherwise
the sale may not be considered perfected and the application for writ of possession may be denied.

The records disclose that contrary to petitioner's claim, the Certificate of Sale covering the subject
properties has not been registered with the Registry of Deeds of Davao City as the Court finds no annotation
thereof. As such, the sale is not considered perfected to entitle petitioner to the writ of possession as a
matter of right.

Accordingly, for reason stated, the petition is DISMISSED. With the dismissal of the petition, PNB's Motion
for Reception and Admission of PNB's Ex-parte Testimonial and Documentary Evidence is DENIED.

SO ORDERED.432

However, Philippine National Bank is applying for the writ of possession on the ground that it is the winning
bidder during the auction sale, and not because it consolidated titles in its name. As such, the applicable
provisions of law are Section 47 of Republic Act No. 8791433 and Section 7 of Act No. 3135.434

Section 47 of Republic Act No. 8791 provides:

SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or
extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the real estate, to redeem the property by
paying the amount due under the mortgage deed, with interest thereon at the rate specified in the
mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of
said property less the income derived therefrom. However, the purchaser at the auction sale concerned
whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of
such property immediately after the date of the confirmation of the auction sale and administer the same in
accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings
instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond
in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by
the enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after,
the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case
shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has
been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until
their expiration. (Emphasis supplied)

Section 7 of Act No. 3135 provides:

SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First
Instance of the province or place where the property or any part thereof is situated, to give him possession
thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for
a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without
violating the mortgage or without complying with the requirements of this Act. Such petition shall be made
under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property
is registered, or in special proceedings in the case of property registered under the Mortgage Law or under
section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered
with a mortgage duly registered in the office of any register of deeds in accordance with any existing law,
and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in
paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as
amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the
bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is
situated, who shall execute said order immediately.

The rule under Section 7 of Act No. 3135 was restated in Nagtalon v. United Coconut Planters Bank:435

During the one-year redemption period, as contemplated by Section 7 of the above-mentioned law, a
purchaser may apply for a writ of possession by filing an ex parte motion under oath in the registration or
cadastral proceedings if the property is registered, or in special proceedings in case the property is
registered under the Mortgage Law. In this case, a bond is required before the court may issue a writ of
possession.436

On the other hand, a writ of possession may be issued as a matter of right when the title has been
consolidated in the buyer's name due to nonredemption by the mortgagor. Under this situation, the basis for
the writ of possession is ownership of the property.437

The Sheriffs Provisional Certificate of Sale should be deemed registered. However, Philippine National Bank
must still file a bond before the writ of possession may be issued.

VI

To fully dispose of all the issues in these consolidated cases, this court shall also rule on one of the issues
raised in G.R. No. 158622.

In G.R. No. 158622, Spouses Limso and Davao Sunrise allege that the Sheriffs Provisional Certificate of Sale
does not state the appropriate redemption period; thus, they filed a Petition for Declaratory Relief, which
was docketed as Civil Case No. 29,036-2002.438

In the loan agreement, natural and juridical persons are co-debtors, while the properties mortgaged to
secure the loan are owned by Davao Sunrise.

Act No. 3135 provides that the period of redemption is one (1) year after the sale.439 On the other hand,
Republic Act No. 8791 provides a shorter period of three (3) months to redeem in cases involving juridical
persons.440

We rule that the period of redemption for this case should be not more than three (3) months in accordance
with Section 47 of Republic Act No. 8791. The mortgaged properties are all owned by Davao Sunrise.
Section 47 of Republic Act No. 8791 states: "the mortgagor or debtor whose real property has been sold"
and "juridical persons whose property is being sold[.]" Clearly, the law itself provides that the right to
redeem belongs to the owner of the property mortgaged. As the mortgaged properties all belong to Davao
Sunrise, the shorter period of three (3) months is the applicable redemption period.

The policy behind the shorter redemption period was explained in Goldenway Merchandising Corporation v.
Equitable PCI Bank:441

The difference in the treatment of juridical persons and natural persons was based on the nature of the
properties foreclosed — whether these are used as residence, for which the more liberal one-year
redemption period is retained, or used for industrial or commercial purposes, in which case a shorter term is
deemed necessary to reduce the period of uncertainty in the ownership of property and enable mortgagee-
banks to dispose sooner of these acquired assets. It must be underscored that the General Banking Law of
2000, crafted in the aftermath of the 1997 Southeast Asian financial crisis, sought to reform the General
Banking Act of 1949 by fashioning a legal framework for maintaining a safe and sound banking system. In
this context, the amendment introduced by Section 47 embodied one of such safe and sound practices
aimed at ensuring the solvency and liquidity of our banks.442 (Citation omitted)

To grant a longer period of redemption on the ground that a co-debtor is a natural person defeats the
purpose of Republic Act No. 8791. In addition, the real properties mortgaged by Davao Sunrise appear to be
used for commercial purposes.443

WHEREFORE, the Petition for Review on Certiorari in G.R. No. 173194 is DENIED.

The Petition docketed as G.R. No. 196958 is PARTIALLY GRANTED, while the Petition docketed as G.R.
No. 197120 is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 79732-MIN is AFFIRMED
with MODIFICATION.

The Conversion, Restructuring and Extension Agreement executed in 1999 is deemed to have novated the
Credit Agreement and Loan Agreement executed in 1993. Thus, the principal loan obligation of Davao
Sunrise Investment and Development Corporation and Spouses Robert Alan and Nancy Limso shall be
computed on the basis of the amounts indicated in the Conversion, Restructuring and Extension Agreement.

Interest on the principal loan obligation shall be at the rate of 12% per annum and computed from January
28, 1999, the date of the execution of the Conversion, Restructuring and Extension Agreement. Interest rate
on the conventional interest shall be at the rate of 12% per annum from August 21, 2000, the date of
judicial demand, to June 30, 2013. From July 1, 2013 until full satisfaction, the interest rate on the
conventional interest shall be computed at 6% per annum in view of this court's ruling in Nacar v. Gallery
Frames.444

This case is ordered REMANDED to Branch 17 of the Regional Trial Court of Davao City for the computation
of the total amount of Davao Sunrise Investment and Development Corporation and Spouses Robert Alan
and Nancy Limso's remaining obligation.

The Petition docketed as G.R. No. 205463 is PARTIALLY GRANTED. The Sheriffs Provisional Certificate of
Sale is deemed to have been registered. In view of the facts of this case, the applicable period of
redemption shall be three (3) months as provided under Republic Act No. 8791.

In case the final computation shows that Davao Sunrise Investment and Development Corporation and
Spouses Robert Alan and Nancy Limso overpaid Philippine National Bank, Philippine National Bank must
return the excess amount.

The writ of possession prayed for by Philippine National Bank may only be issued after all the requirements
for the issuance of a writ of possession are complied with.

SO ORDERED. cralawlawlibra ry
UNION BANK OF G.R. No. 152347
THE PHILIPPINES,
Petitioner, Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
- versus -
CORONA,
AZCUNA, and
GARCIA, JJ.
SPS. ALFREDO ONG
Promulgated:
AND SUSANA ONG and
JACKSON LEE,
June 21, 2006
Respondents.

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

DECISION
GARCIA, J.:
By this petition for review under Rule 45 of the Rules of Court, petitioner
Union Bank of the Philippines (Union Bank) seeks to set aside the
decision[1] dated December 5, 2001 of the Court of Appeals (CA) in CA-G.R.
No. 66030 reversing an earlier decision of the Regional Trial Court (RTC)
of Pasig City in Civil Case No. 61601, a suit thereat commenced by the
petitioner against the herein respondents for annulment or rescission of
sale in fraud of creditors.

The facts:

Herein respondents, the spouses Alfredo Ong and Susana Ong, own the
majority capital stock of Baliwag Mahogany Corporation (BMC). On October
10, 1990, the spouses executed a Continuing Surety Agreement in favor of
Union Bank to secure a P40,000,000.00-credit line facility
made available to BMC. The agreement expressly stipulated
a solidary liability undertaking.
On October 22, 1991, or about a year after the execution of the surety
agreement, the spouses Ong, for P12,500,000.00, sold their 974-square
meter lot located in Greenhills, San Juan, Metro Manila, together with the
house and other improvements standing thereon, to their co-
respondent, Jackson Lee (Lee, for short). The following day, Lee registered
the sale and was then issued Transfer Certificate of Title (TCT) No. 4746-
R. At about this time, BMC had already availed itself of the credit
facilities, and had in fact executed a total of twenty-two (22) promissory
notes in favor of Union Bank.

On November 22, 1991, BMC filed a Petition for Rehabilitation and for
Declaration of Suspension of Payments with the Securities and Exchange
Commission (SEC). To protect its interest, Union Bank lost no time in filing
with the RTC of Pasig City an action for rescission of the sale
between the spouses Ong and Jackson Lee for purportedly being in fraud
of creditors.

In its complaint, docketed as Civil Case No. 61601 and eventually raffled to
Branch 157 of the court, Union Bank assailed the
validity of the sale, alleging that thespouses Ong and Lee entered into the
transaction in question for the lone purpose of fraudulently removing the
property from the reach of Union Bank and other creditors. The fraudulent
design, according to Union Bank, is evidenced by the following
circumstances: (1) insufficiency of consideration, the purchase price
of P12,500,000.00 being below the fair market value of the subject
property at that time; (2) lack of financial capacity on the part of Lee to
buy the property at that time since his gross income for the year 1990, per
the credit investigation conducted by the bank, amounted to
only P346,571.73; and (3) Lee did not assert absolute ownership over the
property as he allowed the spouses Ong to retain possession thereof under
a purported Contract of Lease dated October 29, 1991.

Answering, herein respondents, as defendants a quo, maintained, in the

main, that both contracts of sale and lease over the Greenhills
property were founded on good and valid consideration and executed in
good faith. They also scored Union Bank for forum shopping, alleging that
the latter is one of the participating creditors in BMCs petition for
rehabilitation.
Issues having been joined, trial followed. On September 27, 1999, the trial
court, applying Article 1381 of the Civil Code and noting that the evidence
on record present[s] a holistic combination of circumstances distinctly
characterized by badges of fraud, rendered judgment for Union Bank, the
Deed of Sale executed on October 22, 1991 by the spouses Ong in
favor of Lee being declared null and void.
Foremost of the circumstances adverted to relates to the execution of the
sale against the backdrop of the spouses Ong, as owners of 70% of BMC's
stocks, knowing of the
companys insolvency. This knowledge was the reason why, according to
the court, the spouses Ong disposed of the subject property leaving the
bank without recourse to recover BMC's indebtedness. The trial court also
made reference to the circumstances which Union Bank mentioned in its
complaint as indicia of conveyance in fraud of creditors.

Therefrom, herein respondents interposed an appeal to the

CA which docketed their recourse as CA-G.R. No. 66030.

In its Decision dated December 5, 2001, the CA reversed and set aside the
trial court's ruling, observing that the contract of sale executed
by the spouses Ong and Lee, being complete and regular on its face, is
clothed with the prima facie presumption of regularity and
legality. Plodding on, the appellate court said:

In order that rescission of a contract made in fraud of creditors may be

decreed, it is necessary that the complaining creditors must prove that
they cannot recover in any other manner what is due them. xxx.

There is no gainsaying that the basis of liability of the appellant spouses

in their personal capacity to Union Bank is the Continuing Surety
Agreement they have signed on October 10, 1990. However, the real
debtor of Union Bank is BMC, which has a separate juridical personality
from appellants Ong. Granting that BMC was already insolvent at the
time of the sale, still, there was no showing that at the time BMC filed a
petition for suspension of payment that appellants Ong were themselves
 bankrupt. In the case at bench, no attempt was made by Union Bank, not
even a feeble or half-hearted one, to establish that appellants spouses have
no other property from which Union Bank, as creditor of BMC, could
obtain payment. While appellants Ong may be independently liable
directly to Union Bank under the Continuing Surety Agreement, all that
Union Bank tried to prove was that BMC was insolvent at the time of the
questioned sale. No competent evidence was adduced showing that
appellants Ong had no leviable assets other than the subject property that
would justify challenge to the transaction.[2]

Petitioner moved for a reconsideration of the above decision but its

motion was denied by the appellate court in its resolution of February 21,
2002.[3]
Hence, petitioners present recourse on its submission that the appellate
court erred:
I. xxx WHEN IT CONSIDERED THAT THE SALE TRANSACTION
BETWEEN [ RESPONDENTS SPOUSES ONG AND LEE] ENJOYS
THE PRESUMPTION OF REGULARITY AND LEGALITY AS
THERE EXISTS ALSO A PRESUMPTION THAT THE SAID SALE
WAS ENTERED IN FRAUD OF CREDITORS. PETITIONER
THEREFORE NEED NOT PROVE THAT RESPONDENTS
SPOUSES ONG DID NOT LEAVE SUFFICIENT ASSETS TO PAY
THEIR CREDITORS. BUT EVEN THEN, PETITIONER HAS
PROVEN THAT THE SPOUSES HAVE NO OTHER ASSETS.

II. IN CONCLUDING, ASSUMING EX-GRATIA ARGUMENTI

THAT THE SALE BETWEEN DEFENDANT-APPELLANTS ENJOY
THE PRESUMPTION OF REGULARITY AND LEGALITY, THAT
THE EVIDENCE ADDUCED BY THE PETITIONER WAS NOT
SUFFICIENT TO OVERCOME THE PRESUMPTION.

III. xxx IN FINDING THAT IT WAS [RESPONDENT] LEE WHO

HAS SUFFICIENTLY PROVEN THAT THERE WAS A VALID AND
SUFFICIENT CONSIDERATION FOR THE SALE.

IV. xxx IN NOT FINDING THAT JACKSON LEE WAS IN BAD

FAITH WHEN HE PURCHASED THE PROPERTY.[4]

Petitioner maintains, citing China Banking Corporation vs. Court

of Appeals, that the sale in question, having been entered in fraud of
[5]
creditor, is rescissible.In the same breath, however, petitioner would fault
the CA for failing to consider that the sale between the Ongs and Lee is
presumed fraudulent under Section 70 of Act No. 1956, as amended,
or the Insolvency Law. Elaborating on this point, petitioner states that the
subject sale occurred thirty (30) days prior to the filing by BMC of a
petition for suspension of payment before the SEC, thus rendering the sale
not merely rescissible but absolutely void.

We resolve to deny the petition.

In effect, the determinative issue tendered in this case resolves itself into
the question of whether or not the Ong-Lee contract of sale partakes of a
conveyance to defraud Union Bank. Obviously, this
necessitates an inquiry into the facts and this Court eschews
factual examination in a petition for review under Rule 45 of the Rules of
Court, save when, as in the instant case, a clash between the factual
findings of the trial court and that of the appellate court exists,[6] among
other exceptions.

As between the contrasting positions of the trial court and the CA, that of
the latter commends itself for adoption, being more in accord with the
evidence on hand and the laws applicable thereto.

Essentially, petitioner anchors its case on Article 1381 of the Civil Code
which lists as among the rescissible contracts [T]hose undertaken in fraud
of creditors when the latter cannot in any other manner collect the
claim due them."

Contracts in fraud of creditors are those executed with the intention to

prejudice the rights of creditors. They should not be confused with those
entered into without such mal-intent, even if, as a direct
consequence thereof, the creditor may suffer some damage. In
determining whether or not a certain conveying contract is
fraudulent, what comes to mind first is the question of whether the
conveyance was a bona fide transaction or a trick and contrivance to
defeat creditors.[7] To creditors seeking contract rescission on the ground
of fraudulent conveyance rest the onus of proving by competent evidence
the existence of such fraudulent intent on the part of the debtor, albeit
they may fall back on the disputable presumptions, if proper, established
under Article 1387 of the Code.[8]

In the present case, respondent spouses Ong, as the CA had

determined, had sufficiently established the validity and legitimacy of the
sale in
question. The conveying deed, a duly notarized document, carries with it th
e presumption of validity and regularity. Too, the sale was duly recorded
and annotated on the title of the property owners, the spouses Ong. As the
transferee of said property, respondent Lee caused the transfer of title to
his name.

There can be no quibbling about the transaction being

supported by a valid and sufficient consideration. Respondent
Lees account, while on the witness box, about this angle of the sale was
categorical and straightforward. An excerpt of his testimony:

Atty. De Jesus :

Before you prepared the consideration of this formal offer, as standard

operating procedure of buy and sell, what documents were prepared?

xxx xxx xxx

Jackson Lee:

A. There is a downpayment.

Q. And how much was the downpayment?

A. P2,500,000.00.

Q. Was that downpayment covered by a receipt signed by

the seller?
A. Yes, Sir, P500,000.00 and P2,000,000.00

xxx xxx xxx

 Q. Are you referring to the receipt dated October 19, 1991,
how about the other receipt dated October 21, 1991?
A. Yes, Sir, this is the same receipt.

xxx xxx xxx

Q. Considering that the consideration of this document is
for P12,000,000.00 and you made mention only of P2,500,000.00, covered by
the receipts, do you have evidence to show that, finally, Susana Ong received
the balance of P10,000,000.00?
A. Yes, Sir.

Q. Showing to you a receipt denominated as

Acknowledgement Receipt, dated October 25, 1991, are
you referring to this receipt to cover the balance
of P10,000,000.00?
A. Yes, sir.[9]

The foregoing testimony readily proves that money indeed changed hands
in connection with the sale of the subject property. Respondent Lee, as
purchaser, paid the stipulated contract price to the spouses Ong, as
vendors. Receipts presented in evidence covered and proved such
payment. Accordingly, any suggestion negating payment and receipt
of valuable consideration for the subject conveyance, or worse, that the
sale was fictitious must simply be rejected.
In a bid to attach a badge of fraud on the transaction, petitioner raises the
issue of inadequate consideration, alleging in this regard that
only P12,500,000.00 was paid for property having, during the period
material, a fair market value of P14,500,000.00.

We do not agree.

The existence of fraud or the intent to defraud creditors cannot plausibly

be presumed from the fact that the price paid for a piece of real
estate is perceived to be slightly lower, if that really be the
case, than its market value. To be sure, it is logical, even
expected, for contracting minds, each having an interest to protect, to
negotiate on the price and other conditions before closing a sale of a
valuable piece of land. The negotiating areas could cover various
items. Thepurchase price, while undeniably an important consideration, is
doubtless only one of them. Thus, a scenario
where the price actually stipulated may, as a matter of fact, be lower than
the original asking price of the vendor or the fair market value of the
property, as what perhaps happened in the instant case, is not out of the
ordinary, let alone indicative of fraudulent intention. That the spouses
Ong acquiesced to the price of P12,500,000.00, which may be lower than
the market value of the house and lot at the time of alienation, is certainly
not an unusual business phenomenon.

Lest it be overlooked, the disparity between the price appearing in

the conveying deed and what the petitioner regarded as the real value of
the property is not as gross to support a conclusion of fraud. What is
more, one Oliver Morales, a licensed real estate appraiser and
broker, virtually made short shrift of petitioners claim of gross inadequacy
of the purchase price. Mr. Morales declared that there exists no gross
disparity between the market value of the subject property and the price
mentioned in the deed as consideration. He explained why:

ATTY. EUFEMIO:
Q. I am showing to you the said two (2) exhibits Mr. Morales and I
would like you to go over the terms and conditions stated therein and
as an expert in real estate appraiser (sic) and also as a real estate
broker, can you give this Honorable Court your considered opinion
whether the consideration stated therein P12,500,000.00 in the light
of all terms and conditions of the said Deed of Absolute Sale and
Offer to Purchase could be deemed fair and reasonable?
xxx xxx xxx
MR. MORALES:
A. My opinion generally a Deed of Absolute Sale indicated
prescribed not only the amount of the consideration. There are
also other expenses involved in the sales. I do not see here other
payment of who takes care of capital gains stocks (sic) in this
 Deed of Sale neither who shouldered the documentary stamps or
even transfer tax. That is my comment regarding this.
Q. Precisely Mr. Witness we have also shown to you the Offer to
Purchase which has been marked as Exhibit 9 as to the terms
which we are asking?
xxx xxx xxx
A. Well, it says here in item C of the conditions the Capital Gains
Stocks (sic), documentary stamps, transfer tax registration and
brokers fee for the buyers account. I do not know how much is
this worth. If at all in condition (sic) to the 12.5 million which is
the selling price, may I, therefore aside (sic) how much is the total
cost pertaining to this. The capital gains tax on (sic), documentary
stamps, transfer tax are all computed on the basis of the
consideration which is P12.5 M, the capital gain stocks (sic) is
5%, 5% of 12.5 M.
xxx xxx xxx
Yes sir if the 5% capital gains tax and documentary stamps
respectively shall be added to the 12.5 Million before the inclusion
of the transfer tax, the amount will be already in the vicinity
of P13,250.000.

Q. With such consideration Mr. Witness and in the light of the terms
and conditions in the said Offer to Purchase and Deed of Absolute
Sale could you give your opinion as to whether the consideration
is fair and reasonable.

xxx xxx xxx

A. With our proposal of P14.5 M as compared now to P13,250,000.00

may I give my opinion that generally there will be two appraisers. In
fairness to the situation, they should not vary by as much as 7% down
so we are playing at a variance actually of about 15%. In my
experience in this profession for the last 27 years as I have said in
fairness if there is another appraisal done by another person, that kind
of difference is very marginal should at least indicate the fairness of
the property and so therefore the only way to find out is to determine
the difference between the P14.5 M and the P13,250,000.00. My
computation indicates that it is close to 10% something like that
difference. What is the question again?
 Q. Whether it is fair and reasonable under the circumstances.
A. I have answered already the question and I said maximum of
15%.

Q. So based on your computation this is about 10% which is fair and

reasonable.
A That is right sir.[10]

Withal, the consideration of the sale is fair and reasonable as would justify
the conclusion that the sale is undoubtedly a true and genuine conveyance
to which the parties thereto are irrevocably and undeniably bound.

It may be stressed that, when the validity of sales contract is in issue, two
veritable presumptions are relevant: first, that there was sufficient
consideration of the contract[11]; and, second, that it was the result of a fair
and regular private transaction.[12] If shown to hold, these presumptions
infer prima facie the transaction's validity, except that it must yield to the
evidence adduced[13] which the party disputing such presumptive validity
has the burden of overcoming.Unfortunately for the petitioner, it failed to
discharge this burden. Its bare allegation respecting the sale having
been executed in fraud of creditors and without adequate consideration
cannot, without more, prevail over the respondents' evidence which more
than sufficiently supports a conclusion as to the legitimacy of the
transaction and the bona fides of the parties.

Parenthetically, the rescissory action to set aside contracts in fraud of

creditors is accion pauliana, essentially a subsidiary remedy accorded under
Article 1383 of the Civil Code which the party suffering damage can avail of
only when he has no other legal means to obtain reparation for the
same.[14] In net effect, the provision applies only when the creditor cannot
recover in any other manner what is due him.

It is true that respondent spouses, as surety for BMC, bound themselves to

answer for the latters debt. Nonetheless, for purposes
of recovering what the eventually insolvent BMC owed the bank, it
behooved the petitioner to show that it had exhausted all the properties
of the spouses Ong. It does not appear in this case that the
petitioner sought other properties of the spouses other than the
subject Greenhills property. The CA categorically said so. Absent proof,
therefore, that the spouses Ong had no other property except their
Greenhills home, the sale thereof to respondent Lee cannot simplistically
be considered as one in fraud of creditors.
Neither was evidence adduced to show that the sale in question
peremptorily deprived the petitioner of means to collect its
claim against the Ongs. Where acreditor fails to show that he has no other
legal recourse to obtain satisfaction for his claim, then he is not entitled to
the rescission asked.[15]

For a contract to be rescinded for being in fraud of creditors, both

contracting parties must be shown to have acted maliciously so as to
prejudice the creditors who were prevented from collecting their
claims.[16] Again, in this case, there is no evidence tending to prove that
the spouses Ong and Lee were conniving cheats. In fact, the petitioner did
not even attempt to prove the existence of personal closeness or business
and professional interdependence between the spouses Ong and Lee as to
cast doubt on their true intent in executing the contract of sale. With the
view we take of the evidence on record, their relationship vis--vis the
subject Greenhills property was no more than one between vendor and
vendee dealing with each other for the first time. Any insinuation that the
two colluded to gyp petitioner bank is to read in a relationship something
which, from all indications, appears to be purely business.

It cannot be overemphasized that rescission is generally unavailing should

a third person, acting in good faith, is in lawful possession of the
property,[17] that is to say, he is protected by law against a suit for
rescission by the registration of the transfer to him in the registry.
As recited earlier, Lee was - and may still be - in lawful possession of the
subject property as the transfer to him was by virtue of a presumptively
valid onerous contract of sale. His possession is evidenced by no less than
a certificate of title issued him by the Registry of Deeds of San Juan, Metro
Manila, after the usual registration of the corresponding conveying deed of
sale. On the other hand, the bona fides of his acquisition can be deduced
from his conduct and outward acts previous to the sale. As testified to
by him and duly noted by the CA, respondent Lee undertook what amounts
to due diligence on the possible defects in the title of the Ongs before
proceeding with the sale. As it were, Lee decided to buy the
property only after being satisfied of the absence of such defects.[18]

Time and again, the Court has held that one

dealing with a registered parcel of land need not go beyond the certificate
of title as he is charged with notice only of burdens which are noted on the
face of the register or on the certificate of title.[19] The Continuing Surety
Agreement, it ought to be particularly pointed out, was never recorded nor
annotated on the title of spouses Ong. There is no evidence extant in the
records to show that Lee had knowledge, prior to the subject sale, of the
surety agreement adverted to. In fine, there is nothing to remotely suggest
that the purchase of the subject property was characterized by anything
other than good faith.

Petitioner has made much of respondent Lee not taking immediate

possession of the property after the sale, stating that such failure is an
indication of his participation in the fraudulent scheme to prejudice
petitioner bank.

We are not persuaded.

Lee, it is true, allowed the respondent spouses to continue occupying the
premises even after the sale. This development, however, is not without
basis or practical reason. The spouses' continuous possession of
the property was by virtue of a one-
year lease[20] they executed with respondent Lee six days after the sale. As
explained by the respondent spouses, they insisted on the lease
arrangement as a condition for the sale in question. And pursuant to the
lease contract aforementioned, the respondent Ongs paid and Lee
collected rentals at the rate of P25,000.00 a month. Contrary thus to
the petitioners asseveration, respondent Lee, after the sale, exercised acts
of dominion over the said property and asserted his rights as the new
owner. So, when the respondent spouses continued to occupy the property
after its sale, they did so as mere tenants. While the failure of the vendee
to take exclusive possession of the property is generally recognized as a
badge of fraud, the same cannot be said here in the light of the existence
of what appears to be a genuine lessor-lessee relationship between the
spouses Ong and Lee. To borrow from Reyes vs. Court of
Appeals,[21] possession may be exercised in ones own name or in the name
of another; an owner of a piece of land has possession, either when he
himself physically occupies the same or when another person who
recognizes his right as owner is in such occupancy.
Petitioners assertion regarding respondent Lees lack of financial capacity to
acquire the property in question since his income in 1990 was
only P346,571.73 is clearly untenable. Assuming for argument that
petitioner got its figure right, it is clearly incorrect to measure ones
purchasing capacity with ones income at a given period. But the more
important consideration in this regard is the uncontroverted fact that
respondent Lee paid the purchase price of said property. Where he sourced
the needed cash is, for the nonce, really of no moment.
The cited case of China Banking[22] cannot plausibly provide petitioner with
a winning card. In that case, the Court, applying Article 1381 (3) of the
Civil Code, rescinded an Assignment of Rights to Redeem owing to the
failure of the assignee to overthrow the presumption that the said
conveyance/assignment is fraudulent. In turn, the presumption was culled
from Article 1387, par. 2, of the Code pertinently providing that
[A]lienation by onerous title are also presumed fraudulent when
made by persons against whom some judgment has been rendered in any
instance or some writ of attachment has been issued.
Indeed, when the deed of assignment was executed in China Banking, the
assignor therein already faced at that time an adverse judgment. In the
same case, moreover, the Court took stock of other signs of fraud which
tainted the transaction therein and which are, significantly, not obtaining in
the instant case. We refer, firstly, to the element of kinship, the assignor,
Alfonso Roxas Chua, being the father of the assignee,
Paulino. Secondly, Paulino admitted knowing his father to be
insolvent. Hence, the Court, rationalizing the rescission of the assignment
of rights, made the following remarks:
The mere fact that the conveyance was founded on valuable consideration
does not necessarily negate the presumption of fraud under Article 1387
of the Civil Code. There has to be valuable consideration and the
transaction must have been made bona fide.[23]

There lies the glaring difference with the instant case.

Here, the existence of fraud cannot be presumed, or, at the very least,
what were perceived to be badges of fraud have been proven to be
otherwise. And, unlike Alfonso Roxas Chua in China Banking, a judgment
has not been rendered against respondent spouses Ong or that a writ of
attachment has been issued against them at the time of the disputed sale.

In a last-ditch attempt to resuscitate a feeble cause, petitioner cites Section

70 of the Insolvency Law which, unlike the invoked Article 1381 of the Civil
Code that deals with a valid but rescissible contract, treats of a contractual
infirmity resulting in nullity no less of the transaction in question. Insofar as
pertinent, Section 70 of the Insolvency Law provides:

Sec. 70. If any debtor, being insolvent, or in contemplation of insolvency,

within thirty days before the filing of a petition by or against him, with a
view to giving a preference to any creditor or person having a claim
against him xxx makes any xxx sale or conveyance of any part of his
property, xxx such xxx sale, assignment or conveyance is void, and the
assignee, or the receiver, may recover the property or the value thereof, as
assets of such insolvent debtor. xxx. Any payment, pledge, mortgage,
conveyance, sale, assignment, or transfer of property of whatever
 character made by the insolvent within one (1) month before the filing of
a petition in insolvency by or against him, except for a valuable
pecuniary consideration made in good faith shall be void. xxx.
(Emphasis added)

Petitioner avers that the Ong-Lee sales contract partakes of a fraudulent

transfer and is null and void in contemplation of the aforequoted provision,
the salehaving occurred on October 22, 1991 or within thirty (30)
days before BMC filed a petition for suspension of payments on November
22, 1991.
Petitioner's reliance on the afore-quoted provision is misplaced for the
following reasons:

First, Section 70, supra, of the Insolvency Law specifically makes reference
to conveyance of properties made by a debtor or by an insolvent who filed
a petition, or against whom a petition for insolvency has been filed.
Respondent spouses Ong have doubtlessly not filed a petition for a
declaration of their own insolvency. Neither has one been filed against
them. And as the CA aptly observed, it was never proven that respondent
spouses are likewise insolvent, petitioner having failed to show that they
were down to their Greenhills property as their only asset.

It may be that BMC had filed a petition for rehabilitation and suspension of
payments with the SEC. The nagging fact, however is that
BMC is a different juridical person from the respondent spouses. Their
seventy percent (70%) ownership of BMCs capital stock does not change
the legal situation. Accordingly, the alleged insolvency of BMC cannot, as
petitioner postulates, extend to the respondent spouses such that
transaction of the latter comes within the purview of Section 70 of the
Insolvency Law.

Second, the real debtor of petitioner bank in this case is BMC. The fact that
the respondent spouses bound themselves to answer for BMCs
indebtedness under the surety agreement referred to at the outset is not
reason enough to conclude that the spouses are themselves debtors
of petitioner bank. We have already passed upon the simple reason for this
proposition. We refer to the basic precept in this jurisdiction that a
corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those of the persons composing
it.[24] Mere ownership by a single or small group of stockholders of nearly
all of the capital stock of the corporation is not, without more, sufficient to
disregard the fiction of separate corporate personality.[25]

Third, Section 70 of the Insolvency Law considers transfers made

within a month after the date of cleavage void, except those made in good
faith and for valuable pecuniary consideration. The twin elements of good
faith and valuable and sufficient consideration have been duly established.
Given the validity and the basic legitimacy of the sale in question, there is
simply no occasion to apply Section 70 of the Insolvency Law to nullify the
transaction subject of the instant case.
All told, we are far from convinced by petitioners argumentation that the
circumstances surrounding the sale of the subject property may be
considered badges of fraud. Consequently, its failure to show actual
fraudulent intent on the part of the spouses Ong defeats its own cause.
WHEREFORE, the instant petition is DENIED and the assailed decision of
the Court of Appeals is AFFIRMED.

Costs against petitioner.

SO ORDERED.
G.R. No. 196182 September 1, 2014

ECE REALTY AND DEVELOPMENT INC., Petitioner,

vs.
RACHEL G. MANDAP, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari assailing the Decision1 and Resolution2 of the
Court of Appeals (CA), dated July 21, 2010 and March 15, 2011, respectively, in CA-G.R. SP No.
100741.

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

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 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.4 In the said Contract, it was indicated that the condominium
project is located in Pasay City.

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 ₱422,500.00, 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.5

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.6

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.7

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."8

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.

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.10Respondent filed a Motion for Reconsideration,11 but the Office of the President
denied it in a Resolution12 dated August 29, 2007.

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:

WHEREFORE, premises considered, We hereby REVERSEand SET ASIDEthe Decision and the
Resolution dated June 21, 2007 and August 29, 2007, respectively, issued by the Office of the
President in OP Case No. 06-F-224. Accordingly, the contract between Rachel G. Mandap and ECE
Realty is hereby ANNULLED. Consequently, ECE Realty is ordered to return the total amountof
₱422,500.00 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.

No costs.

SO ORDERED.14

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.

Petitioner filed a Motion for Reconsideration, but the CA denied it in its March 15, 2011 Resolution.

Hence, the present petition for review on certiorariwith the following Assignment of Errors:

The Court of Appeals gravely erred in ruling that there was fraud in the execution of the subject
contract to sell and declaring the same as annulled and ordering petitioner ECE to refund all
payments made by respondent.

II

The Court of Appeals erred in ordering the award of legal interest at the rate of 12% per annum
starting from the filing of the complaint until fully paid when legal interest should have been pegged
at 6%.15

The Court finds the petition meritorious.

The basic issue in the present caseis whether petitioner was guilty of fraud and if so, whether such
fraud is sufficient ground to nullify its contract with respondent.

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 Codeprovides that "[i]n order that fraud may make a contract
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.

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 petitioner’s 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. It is understood that there is a tacit
1âw phi1

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.

G.R. No. 179597 February 3, 2014

IGLESIA FILIPINA INDEPENDIENTE, Petitioner,

vs.
HEIRS of BERNARDINO TAEZA, Respondents.

DECISION

PERALTA, J.:

This deals with the Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that
the Decision1of the Court of Appeals (CA), promulgated on June 30, 2006, and the Resolution2 dated
August 23, 2007, denying petitioner's motion for reconsideration thereof, be reversed and set aside.

The CA's narration of facts is accurate, to wit:

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.

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 plaintiff-appellee, to
the defendant Bernardino Taeza, for the amount of ₱100,000.00, through installment, with mortgage
to secure the payment of the balance. Subsequently, the defendant allegedly completed the
payments.

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.

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

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).

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.

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.

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.

On November 6, 2001, the court a quo rendered judgment in favor of the plaintiff-appellee. It held
1âwphi1

that the deed of sale executed by and between Rev. Ga and the defendant-appellant is null and
void.3

The dispositive portion of the Decision of Regional Trial Court of Tuguegarao City (RTC) reads as
follows:

WHEREFORE, judgment is hereby rendered:

1) declaring plaintiff to be entitled to the claim in the Complaint;

2) declaring the Deed of Sale with Mortgage dated February 5, 1976 null and void;

3) declaring Transfer Certificates of Title Numbers T-77995 and T-77994 to be null and void
ab initio;

4) declaring the possession of defendant on that portion of land under question and
ownership thereof as unlawful;

5) ordering the defendant and his heirs and successors-in-interest to vacate the premises in
question and surrender the same to plaintiff; [and]

6) condemning defendant and his heirs pay (sic) plaintiff the amount of ₱100,000.00 as
actual/consequential damages and ₱20,000.00 as lawful attorney's fees and costs of the
amount (sic).4

Petitioner appealed the foregoing Decision to the CA. On June 30, 2006, the CA rendered its
Decision reversing and setting aside the RTC Decision, thereby dismissing the complaint.5 The 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."6
Petitioner then elevated the matter to this Court via a petition for review on certiorari, wherein the
following issues are presented for resolution:

A.) WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING THE
FEBRUARY 5, 1976 DEED OF SALE WITH MORTGAGE AS NULL AND VOID;

B.) ASSUMING FOR THE SAKE OF ARGUMENT THAT IT IS NOT VOID, WHETHER OR
NOT THE COURT OF APPEALS ERRED IN NOT FINDING THE FEBRUARY 5, 1976
DEED OF SALE WITH MORTGAGE AS UNENFORCEABLE, [and]

C.) WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING

RESPONDENT TAEZA HEREIN AS BUYER IN BAD FAITH.7

The first two issues boil down to the question of 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.8

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.10

Here, the trial court found that the laymen's committee indeed made its objection to the sale known
to the Supreme Bishop.11 The CA, on the other hand, glossed over the fact of such opposition from
the laymen's committee, opining that the consent of the Supreme Bishop to the sale was sufficient,
especially since the parish priest and the Diocesan Bishop voiced no objection to the sale.12

The Court finds it erroneous for the CA to ignore the fact that the laymen's committee objected to the
sale of the lot in question. The Canons require that ALL the church entities listed in Article IV (a)
thereof should give its approval to the transaction. Thus, when the Supreme Bishop executed the
contract of sale of petitioner's lot despite the opposition made by the laymen's committee, he acted
beyond his powers.

This case clearly falls under the category of unenforceable contracts mentioned in Article 1403,
paragraph (1) of the Civil Code, which provides, thus:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers;

In Mercado v. Allied Banking Corporation,13 the Court explained that:

x x x Unenforceable contracts are those which cannot be enforced by a proper action in court,
unless they are ratified, because either they are entered into without or in excess of authority or they
do not comply with the statute of frauds or both of the contracting parties do not possess the
required legal capacity. x x x.14

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.17

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,18 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,19 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.

In Aznar,22 the Court explained the basis for the prescriptive period, to wit:

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-á-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:

(1) Upon a written contract;

(2) Upon an obligation created by law;

(3) Upon a judgment.

xxx xxx xxx

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.23

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, 1990.25

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

(4) Respondents to PAY costs of suit.

SO ORDERED.

G.R. No. 173211 October 11, 2012

HEIRS OF DR. MARIO S. INTAC and ANGELINA MENDOZA-INTAC, Petitioners,

vs.
COURT OF APPEALS and SPOUSES MARCELO ROY, JR. and JOSEFINA MENDOZA-ROY and
SPOUSES DOMINADOR LOZADA and MARTINA MENDOZA-LOZADA, Respondents.

DECISION

MENDOZA, J.:

This is a Petition for Review on Certiorari under Rule 45 assailing the February 16, 2006 Decision1 of
the Court of Appeals (CA), in CA G.R. CV No. 75982, which modified the April 30, 2002 Decision2 of
the Regional Trial Court, Branch 220, Quezon City ( RTC), in Civil Case No. Q-94-19452, an action
for cancellation of transfer certificate of title and reconveyance of property.

The Facts
From the records, it appears that Ireneo Mendoza (Ireneo), married to Salvacion Fermin (Salvacion),
was the owner of the subject property, presently covered by TCT No. 242655 of the Registry of
Deeds of Quezon City and situated at No. 36, Road 8, Bagong Pag-asa, Quezon City, which he
purchased in 1954. Ireneo had two children: respondents Josefina and Martina (respondents),
Salvacion being their stepmother. When he was still alive, Ireneo, also took care of his niece,
Angelina, since she was three years old until she got married. The property was then covered by
TCT No. 106530 of the Registry of Deeds of Quezon City. On October 25, 1977, Ireneo, with the
consent of Salvacion, executed a deed of absolute sale of the property in favor of Angelina and her
husband, Mario (Spouses Intac). Despite the sale, Ireneo and his family, including the respondents,
continued staying in the premises and paying the realty taxes. After Ireneo died intestate in 1982, his
widow and the respondents remained in the premises.3 After Salvacion died, respondents still
maintained their residence there. Up to the present, they are in the premises, paying the real estate
taxes thereon, leasing out portions of the property, and collecting the rentals.4

The Dispute

The controversy arose when respondents sought the cancellation of TCT No. 242655, claiming that
the sale was only simulated and, therefore, void. Spouses Intac resisted, claiming that it was a valid
sale for a consideration.

On February 22, 1994, respondents filed the Complaint for Cancellation of Transfer Certificate of
Title (TCT) No. 2426555 against Spouses Intac before the RTC. The complaint prayed not only for
the cancellation of the title, but also for its reconveyance to them. Pending litigation, Mario died on
May 20, 1995 and was substituted by his heirs, his surviving spouse, Angelina, and their children,
namely, Rafael, Kristina, Ma. Tricia Margarita, Mario, and Pocholo, all surnamed Intac (petitioners).

Averments of the Parties

In their Complaint, respondents alleged, among others, that when Ireneo was still alive, Spouses
Intac borrowed the title of the property (TCT No. 106530) from him to be used as collateral for a loan
from a financing institution; that when Ireneo informed respondents about the request of Spouses
Intac, they objected because the title would be placed in the names of said spouses and it would
then appear that the couple owned the property; that Ireneo, however, tried to appease them, telling
them not to worry because Angelina would not take advantage of the situation considering that he
took care of her for a very long time; that during his lifetime, he informed them that the subject
property would be equally divided among them after his death; and that respondents were the ones
paying the real estate taxes over said property.

It was further alleged that after the death of Ireneo in 1982, a conference among relatives was held
wherein both parties were present including the widow of Ireneo, Salvacion; his nephew, Marietto
Mendoza (Marietto); and his brother, Aurelio Mendoza (Aurelio). In the said conference, it was said
that Aurelio informed all of them that it was Ireneo’s wish to have the property divided among his
heirs; that Spouses Intac never raised any objection; and that neither did they inform all those
present on that occasion that the property was already sold to them in 1977.6

Respondents further alleged that sometime in 1993, after the death of Salvacion, rumors spread in
the neighborhood that the subject property had been registered in the names of Spouses Intac; that
upon verification with the Office of the Register of Deeds of Quezon City, respondents were
surprised to find out that TCT No. 106530 had indeed been cancelled by virtue of the deed of
absolute sale executed by Ireneo in favor of Spouses Intac, and as a result, TCT No. 242655 was
issued in their names; that the cancellation of TCT No. 106530 and the subsequent issuance of TCT
No. 242655 were null and void and had no legal effect whatsoever because the deed of absolute
sale was a fictitious or simulated document; that the Spouses Intac were guilty of fraud and bad faith
when said document was executed; that Spouses Intac never informed respondents that they were
already the registered owners of the subject property although they had never taken possession
thereof; and that the respondents had been in possession of the subject property in the concept of
an owner during Ireneo’s lifetime up to the present.

In their Answer,7 Spouses Intac countered, among others, that the subject property had been
transferred to them based on a valid deed of absolute sale and for a valuable consideration; that the
action to annul the deed of absolute sale had already prescribed; that the stay of respondents in the
subject premises was only by tolerance during Ireneo’s lifetime because they were not yet in need of
it at that time; and that despite respondents’ knowledge about the sale that took place on October
25, 1977, respondents still filed an action against them.

Ruling of the RTC

On April 30, 2002, the RTC rendered judgment in favor of respondents and against Spouses Intac.
The dispositive portion of its Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered:

(1) Declaring the Deed of Absolute Sale executed by Ireneo Mendoza in favor of Mario and
Angelina Intac dated October 25, 1977 as an equitable mortgage;

(2) Ordering the Register of Deeds of Quezon City to cancel Transfer Certificate Title No.
242655 and, in lieu thereof, issue a new Transfer Certificate of Title in the name of Ireneo
Mendoza; and

(3) Ordering defendants to pay plaintiffs the amount of Thirty Thousand Pesos
(Php30,000.00) as and for attorney’s fees.

The other claims for damages are hereby denied for lack of merit.

SO ORDERED.8

The RTC ruled, among others, that the sale between Ireneo and Salvacion, on one hand, and
Spouses Intac was null and void for being a simulated one considering that the said parties had no
intention of binding themselves at all. It explained that the questioned deed did not reflect the true
intention of the parties and construed the said document to be an equitable mortgage on the
following grounds: 1 the signed document did not express the real intention of the contracting parties
because Ireneo signed the said document only because he was in urgent need of funds; 2 the
amount of ₱60,000.00 in 1977 was too inadequate for a purchase price of a 240-square meter lot
located in Quezon City; 3 Josefina and Martina continued to be in possession of the subject property
from 1954 and even after the alleged sale took place in 1977 until this case was filed in 1994;
and 4 the Spouses Intac started paying real estate taxes only in 1999. The RTC added that the
Spouses Intac were guilty of fraud because they effected the registration of the subject property
even though the execution of the deed was not really intended to transfer the ownership of the
subject property.

Ruling of the CA
On appeal, the CA modified the decision of the RTC. The CA ruled that the RTC erred in first
declaring the deed of absolute sale as null and void and then interpreting it to be an equitable
mortgage. The CA believed that Ireneo agreed to have the title transferred in the name of the
Spouses Intac to enable them to facilitate the processing of the mortgage and to obtain a loan. This
was the exact reason why the deed of absolute sale was executed. Marietto testified that Ireneo
never intended to sell the subject property to the Spouses Intac and that the deed of sale was
executed to enable them to borrow from a bank. This fact was confirmed by Angelina herself when
she testified that she and her husband mortgaged the subject property sometime in July 1978 to
finance the construction of a small hospital in Sta. Cruz, Laguna.

The CA further observed that the conduct of Spouses Intac belied their claim of ownership. When
the deed of absolute sale was executed, Spouses Intac never asserted their ownership over the
subject property, either by collecting rents, by informing respondents of their ownership or by
demanding possession of the land from its occupants. It was not disputed that it was respondents
who were in possession of the subject property, leasing the same and collecting rentals. Spouses
Intac waited until Ireneo and Salvacion passed away before they disclosed the transfer of the title to
respondents. Hence, the CA was of the view that the veracity of their claim of ownership was
suspicious.

Moreover, wrote the CA, although Spouses Intac claimed that the purchase of the subject property
was for a valuable consideration (P60,000.00), they admitted that they did not have any proof of
payment. Marietto, whose testimony was assessed by the RTC to be credible, testified that there
was no such payment because Ireneo never sold the subject property as he had no intention of
conveying its ownership and that his only purpose in lending the title was to help Spouses Intac
secure a loan. Thus, the CA concluded that the deed of absolute sale was a simulated document
and had no legal effect.

Finally, the CA stated that even assuming that there was consent, the sale was still null and void
because of lack of consideration. The decretal portion of the CA Decision reads:

WHEREFORE, in view of the foregoing premises, the decision of the Regional Trial Court of Quezon
City, Branch 220, is AFFIRMED with modifications, as follows:

1. The Deed of Absolute Sale dated October 25, 1977 executed by Ireneo Mendoza and
Salvacion Fermen in favor of Spouses Mario and Angelina Intac is hereby declared NULL
AND VOID;

2. the Register of Deed[s] of Quezon City is ordered to cancel TCT No. 242655 and, in lieu
thereof, issue a new one and reinstate Ireneo Mendoza as the registered owner;

3. The defendant appellants are hereby ordered to pay the plaintiff appellees the amount of
thirty thousand pesos (Php30,000.00) as and for attorney’s fees; and

4. The other claims for damages are denied for lack of merit.

SO ORDERED.9

Not in conformity, petitioners filed this petition for review anchored on the following

ASSIGNMENT OF ERRORS
 I

THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT AFFIRMED THE

DECISION OF THE REGIONAL TRIAL COURT DATED FEBRUARY 16, 2006 WHICH WAS
CONTRARY TO THE APPLICABLE LAWS AND EXISTING JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT CLEARLY

OVERLOOKED, MISUNDERSTOOD AND/OR MISAPPLIED THE EVIDENCE PRESENTED
IN THE COURT A QUO.10

Petitioners’ position

Petitioners primarily argue that the subject deed of sale was a valid and binding contract between
the parties. They claim that all the elements of a valid contract of sale were present, to wit: [a]
consent or meeting of the minds, that is, consent to transfer ownership in exchange of price; [b]
determinate subject matter; and [c] price certain in money or its equivalent.

Petitioners claim that respondents have validly gave their consent to the questioned sale of the
subject property. In fact, it was Ireneo and Salvacion who approached them regarding their intention
to sell the subject property. Ireneo and Salvacion affixed their signatures on the questioned deed
and never brought any action to invalidate it during their lifetime. They had all the right to sell the
subject property without having to inform their children of their intention to sell the same. Ordinary
human experience dictates that a party would not affix his or her signature on any written instrument
which would result in deprivation of one’s property right if there was really no intention to be bound
by it. A party would not keep silent for several years regarding the validity and due execution of a
document if there was an issue on the real intention of the vendors. The signatures of Ireneo and
Salvacion meant that they had knowingly and willfully entered into such agreement and that they
were prepared for the consequences of their act.

Respondents’ Position

Respondents are of the position that the RTC and the CA were correct in ruling that the questioned
deed of absolute sale was a simulated one considering that Ireneo and Salvacion had no intention of
selling the subject property. The true intention rather was that Spouses Intac would just borrow the
title of the subject property and offer it as a collateral to secure a loan. No money actually changed
hands.

According to respondents, there were several circumstances which put in doubt the validity of the
deed of absolute sale. First, the parties were not on equal footing because Angelina was a doctor by
profession while Ireneo and Salvacion were less educated people who were just motivated by their
trust, love and affection for her whom they considered as their own child. Second, if there was really
a valid sale, it was just and proper for Spouses Intac to divulge the conveyance to respondents,
being compulsory heirs, but they did not. Third, Ireneo and Salvacion did nothing to protect their
interest because they banked on the representation of Spouses Intac that the title would only be
used to facilitate a loan with a bank. Fourth, Ireneo and Salvacion remained in possession of the
subject property without being disturbed by Spouses Intac. Fifth, the price of the sale was
inadequate and inequitable for a prime property located in Pag-asa, Quezon City. Sixth, Ireneo and
Salvacion had no intention of selling the subject property because they had heirs who would inherit
the same. Seventh, the Spouses Intac abused the trust and affection of Ireneo and Salvacion by
arrogating unto themselves the ownership of the subject property to the prejudice of his own
children, Josefina and Martina.

Finally, petitioners could not present a witness to rebut Marietto’s testimony which was
straightforward and truthful.

The Court’s Ruling

Basically, the Court is being asked to resolve the issue of whether the Deed of Absolute Sale,11 dated
October 25, 1977, executed by and between Ireneo Mendoza and Salvacion Fermin, as vendors,
and Mario Intac and Angelina Intac, as vendees, involving the subject real property in Pagasa,
Quezon City, was a simulated contract or a valid agreement.

The Court finds no merit in the petition.

A contract, as defined in the Civil Code, is a meeting of minds, with respect to the other, to give
something or to render some service. Article 1318 provides:

Art. 1318. 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;

(3) Cause of the obligation which is established.

Accordingly, for a contract to be valid, it must have three essential elements: (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.12

All these elements must be present to constitute a valid contract. Consent is essential to the
existence of a contract; and where it is wanting, the contract is non-existent. In a contract of sale, its
perfection is consummated at the moment there is a meeting of the minds upon the thing that is the
object of the contract and upon the price. Consent is manifested by the meeting of the offer and the
acceptance of the thing and the cause, which are to constitute the contract.

In this case, the CA ruled that the deed of sale executed by Ireneo and Salvacion was absolutely
simulated for lack of consideration and cause and, therefore, void. Articles 1345 and 1346 of the
Civil Code provide:

Art. 1345. Simulation of a contract may 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.

Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals, good customs,
public order or public policy binds the parties to their real agreement.

If the parties state a false cause in the contract to conceal their real agreement, the contract is only
relatively simulated and the parties are still bound by their real agreement. Hence, where the
essential requisites of a contract are present and the simulation refers only to the content or terms of
the contract, the agreement is absolutely binding and enforceable between the parties and their
successors in interest.13

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."14 "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."15

In the case at bench, the Court is one with the courts below that no valid sale of the subject property
actually took place between the alleged vendors, Ireneo and Salvacion; and the alleged vendees,
Spouses Intac. There was simply no consideration and no intent to sell it.

Critical is the testimony of Marietto, a witness to the execution of the subject absolute deed of sale.
He testified that Ireneo personally told him that he was going to execute a document of sale because
Spouses Intac needed to borrow the title to the property and use it as collateral for their loan
application. Ireneo and Salvacion never intended to sell or permanently transfer the full ownership of
the subject property to Spouses Intac. Marietto was characterized by the RTC as a credible witness.

Aside from their plain denial, petitioners failed to present any concrete evidence to disprove
Marietto’s testimony. They claimed that they actually paid P150,000.00 for the subject property.
They, however, failed to adduce proof, even by circumstantial evidence, that they did, in fact, pay it.
Even for the consideration of P60,000.00 as stated in the contract, petitioners could not show any
tangible evidence of any payment therefor. Their failure to prove their payment only strengthened
Marietto’s story that there was no payment made because Ireneo had no intention to sell the subject
property.

Angelina’s story, except on the consideration, was consistent with that of Marietto. Angelina testified
that she and her husband mortgaged the subject property sometime in July 1978 to finance the
construction of a small hospital in Sta. Cruz, Laguna. Angelina claimed that Ireneo offered the
property as he was in deep financial need.

Granting that Ireneo was in financial straits, it does not prove that he intended to sell the property to
Angelina. Petitioners could not adduce any proof that they lent money to Ireneo or that he shared in
the proceeds of the loan they had obtained. And, if their intention was to build a hospital, could they
still afford to lend money to Ireneo? And if Ireneo needed money, why would he lend the title to
Spouses Intac when he himself could use it to borrow money for his needs? If Spouses Intac took
care of him when he was terminally ill, it was not surprising for Angelina to reciprocate as he took
care of her since she was three (3) years old until she got married. Their caring acts for him, while
they are deemed services of value, cannot be considered as consideration for the subject property
for lack of quantification and the Filipino culture of taking care of their elders.

Thus, the Court agrees with the courts below that the questioned contract of sale was only for the
purpose of lending the title of the property to Spouses Intac to enable them to secure a loan. Their
arrangement was only temporary and could not give rise to a valid sale. Where there is no
consideration, the sale is null and void ab initio. In the case of Lequin v. Vizconde,16 the Court wrote:

There can be no doubt that the contract of sale or Kasulatan lacked the essential element of
consideration. It is a well-entrenched rule that where the 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 ab initio for lack of
consideration. Moreover, Art. 1471 of the Civil Code, which provides that "if the price is simulated,
the sale is void," also applies to the instant case, since the price purportedly paid as indicated in the
contract of sale was simulated for no payment was actually made.

Consideration and consent are essential elements in a contract of sale. Where a party’s consent to
1âwphi1

a contract of sale is vitiated or where there is lack of consideration due to a simulated price, the
contract is null and void ab initio. [Emphases supplied]

More importantly, Ireneo and his family continued to be in physical possession of the subject
property after the sale in 1977 and up to the present. They even went as far as leasing the same and
collecting rentals. If Spouses Intac really purchased the subject property and claimed to be its true
owners, why did they not assert their ownership immediately after the alleged sale took place? Why
did they have to assert their ownership of it only after the death of Ireneo and Salvacion? One of the
most striking badges of absolute simulation is the complete absence of any attempt on the part of a
vendee to assert his right of dominion over the property.17

On another aspect, Spouses Intac failed to show that they had been paying the real estate taxes of
the subject property. They admitted that they started paying the real estate taxes on the property for
the years 1996 and 1997 only in 1999. They could only show two (2) tax receipts (Real Property Tax
Receipt No. 361105, dated April 21, 1999, and Real Property Tax Receipt No. 361101, dated April
21, 1999).18 Noticeably, petitioners’ tax payment was just an afterthought. The non-payment of taxes
was also taken against the alleged vendees in the case of Lucia Carlos Aliño v. Heirs of Angelica A.
Lorenzo.19 Thus,

Furthermore, Lucia religiously paid the realty taxes on the subject lot from 1980 to 1987.While tax
receipts and declarations of ownership for taxation purposes are not, in themselves, incontrovertible
evidence of ownership, they constitute at least proof that the holder has a claim of title over the
property, particularly when accompanied by proof of actual possession. They are good indicia of the
possession in the concept of owner, for no one in his right mind would be paying taxes for a property
that is not in his actual or at least constructive possession. The voluntary declaration of a piece of
property for taxation purposes manifests not only one's sincere and honest desire to obtain title to
the property and announces his adverse claim against the State and all other interested parties, but
also the intention to contribute needed revenues to the Government. Such an act strengthens one's
bona fide claim of acquisition of ownership.

On the other hand, respondent heirs failed to present evidence that Angelica, during her lifetime,
paid the realty taxes on the subject lot. They presented only two tax receipts showing that Servillano,
Sr. belatedly paid taxes due on the subject lot for the years 1980-1981 and part of year 1982 on
September 8, 1989, or about a month after the institution of the complaint on August 3, 1989, a clear
indication that payment was made as an afterthought to give the semblance of truth to their claim.

Thus, the subsequent acts of the parties belie the intent to be bound by the deed of sale. [Emphases
supplied]

The primary consideration in determining the true nature of a contract 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.20 As heretofore shown, the
contemporaneous and subsequent acts of both parties in this case, point to the fact that the intention
of Ireneo was just to lend the title to the Spouses Intac to enable them to borrow money and put up a
hospital in Sta. Cruz, Laguna. Clearly, the subject contract was absolutely simulated and, therefore,
void.
In view of the foregoing, the Court finds it hard to believe the claim of the Spouses Intac that the stay
of Ireneo and his family in the subject premises was by their mere tolerance as they were not yet in
need of it. As earlier pointed out, no convincing evidence, written or testimonial, was ever presented
by petitioners regarding this matter. It is also of no moment that TCT No. 106530 covering the
subject property was cancelled and a new TCT (TCT No. 242655)21 was issued in their names. The
Spouses Intac never became the owners of the property despite its registration in their names. After
all, registration does not vest title.

As a logical consequence, petitioners did not become the owners of the subject property even after a
TCT had been issued in their names. After all, registration does not vest title. Certificates of title
merely confirm or record title already existing and vested. They cannot be used to protect a usurper
from the true owner, nor can they be used as a shield for the commission of fraud, or to permit one
to enrich oneself at the expense of others. Hence, reconveyance of the subject property is
warranted.22

The Court does not find acceptable either the argument of the Spouses Intac that respondents’
action for cancellation of TCT No. 242655 and the reconveyance of the subject property is already
barred by the Statute of Limitations. The reason is that the respondents are still in actual possession
of the subject property. It is a well-settled doctrine that "if the person claiming to be the owner of the
property is in actual possession thereof, the right to seek reconveyance, which in effect seeks to
quiet title to the property, does not prescribe."23 In Lucia Carlos Aliño, it was also written:

The lower courts fault Lucia for allegedly not taking concrete steps to recover the subject lot,
demanding its return only after 10 years from the registration of the title. They, however, failed to
consider that Lucia was in actual possession of the property.

It is well-settled that an action for reconveyance prescribes in 10 years, the reckoning point of which
is the date of registration of the deed or the date of issuance of the certificate of title over the
property. In an action for reconveyance, the decree of registration is highly regarded as
incontrovertible. What is sought instead is the transfer of the property or its title, which has been
erroneously or wrongfully registered in another person's name, to its rightful or legal owner or to one
who has a better right.

However, in a number of cases in the past, the Court has consistently ruled that if the person
claiming to he the owner of the property is in actual possession thereof, the right to seek
reconveyance, which in effect seeks to quiet title to the property, does not prescribe. The reason for
this is that one who is in actual possession of a piece of land claiming to be the owner thereof may
wait until his possession is disturbed or his title is attacked before taking steps to vindicate his right.
The reason being, that his undisturbed possession gives him the continuing right to seek the aid of a
court of equity to ascertain the nature of the adverse claim of a third party and its effect on his title,
which right can be claimed only by one who is in possession. Thus, considering that Lucia
continuously possessed the subject lot, her right to institute a suit to clear the cloud over her title
cannot he barred by the statute of limitations.:24[Emphases supplied]

WHEREFORE, the petition is DENIED.

SO ORDERED.

[G.R. No. 153201. January 26, 2005]

JOSE MENCHAVEZ, JUAN MENCHAVEZ JR., SIMEON MENCHAVEZ,
RODOLFO MENCHAVEZ, CESAR MENCHAVEZ, REYNALDO,
MENCHAVEZ, ALMA MENCHAVEZ, ELMA MENCHAVEZ,
CHARITO M. MAGA, FE M. POTOT, THELMA M. REROMA,
MYRNA M. YBAEZ, and SARAH M.
VILLABER, petitioners, vs. FLORENTINO TEVES
JR., respondent.

DECISION
PANGANIBAN, J.:

Avoid contract is deemed legally nonexistent. It produces no legal effect.

As a general rule, courts leave parties to such a contract as they are, because
they are in pari delicto or equally at fault. Neither party is entitled to legal
protection.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,

assailing the February 28, 2001 Decision[2] and the April 16, 2002
Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 51144. The
challenged Decision disposed as follows:

WHEREFORE, the assailed decision is hereby MODIFIED, as follows:

1. Ordering [petitioners] to jointly and severally pay the [respondent] the amount
of P128,074.40 as actual damages, and P50,000.00 as liquidated damages;

2. Dismissing the third party complaint against the third party defendants;

3. Upholding the counterclaims of the third party defendants against the [petitioners.
Petitioners] are hereby required to pay [the] third party defendants the sum
of P30,000.00 as moral damages for the clearly unfounded suit;

4. Requiring the [petitioners] to reimburse the third party defendants the sum
of P10,000.00 in the concept of attorneys fees and appearance fees of P300.00 per
appearance;
5. Requiring the [petitioners] to reimburse the third party defendants the sum
of P10,000.00 as exemplary damages pro bono publico and litigation expenses
including costs, in the sum of P5,000.00.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

On February 28, 1986, a Contract of Lease was executed by Jose S.

Menchavez, Juan S. Menchavez Sr., Juan S. Menchavez Jr., Rodolfo
Menchavez, Simeon Menchavez, Reynaldo Menchavez, Cesar Menchavez,
Charito M. Maga, Fe M. Potot, Thelma R. Reroma, Myrna Ybaez, Sonia S.
Menchavez, Sarah Villaver, Alma S. Menchavez, and Elma S. Menchavez, as
lessors; and Florentino Teves Jr. as lessee. The pertinent portions of the
Contract are herein reproduced as follows:

WHEREAS, the LESSORS are the absolute and lawful co-owners of that area
covered by FISHPOND APPLICATION No. VI-1076 of Juan Menchavez, Sr., filed
on September 20, 1972, at Fisheries Regional Office No. VII, Cebu City covering an
area of 10.0 hectares more or less located at Tabuelan, Cebu;

xxxxxxxxx

NOW, THEREFORE, for and in consideration of the mutual covenant and

stipulations hereinafter set forth, the LESSORS and the LESSEE have agreed and
hereby agree as follows:

1. The TERM of this LEASE is FIVE (5) YEARS, from and after the execution of this
Contract of Lease, renewable at the OPTION of the LESSORS;

2. The LESSEE agrees to pay the LESSORS at the residence of JUAN

MENCHAVEZ SR., one of the LESSORS herein, the sum of FORTY THOUSAND
PESOS (P40,000.00) Philippine Currency, annually x x x;

3. The LESSORS hereby warrant that the above-described parcel of land is fit and
good for the intended use as FISHPOND;

4. The LESSORS hereby warrant and assure to maintain the LESSEE in the peaceful
and adequate enjoyment of the lease for the entire duration of the contract;
5. The LESSORS hereby further warrant that the LESSEE can and shall enjoy the
intended use of the leased premises as FISHPOND FOR THE ENTIRE DURATION
OF THE CONTRACT;

6. The LESSORS hereby warrant that the above-premises is free from all liens and
encumbrances, and shall protect the LESSEE of his right of lease over the said
premises from any and all claims whatsoever;

7. Any violation of the terms and conditions herein provided, more particularly the
warranties above-mentioned, the parties of this Contract responsible thereof shall pay
liquidated damages in the amount of not less than P50,000.00 to the offended party of
this Contract; in case the LESSORS violated therefor, they bound themselves jointly
and severally liable to the LESSEE;

x x x x x x x x x.[5]

On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo

Cabigon demolished the fishpond dikes constructed by respondent and
delivered possession of the subject property to other parties.[6] As a result, he
filed a Complaint for damages with application for preliminary attachment
against petitioners. In his Complaint, he alleged that the lessors had violated
their Contract of Lease, specifically the peaceful and adequate enjoyment of
the property for the entire duration of the Contract. He claimed P157,184.40
as consequential damages for the demolition of the fishpond
dikes, P395,390.00 as unearned income, and an amount not less
than P100,000.00 for rentals paid.[7]
Respondent further asserted that the lessors had withheld from him the
findings of the trial court in Civil Case No. 510-T, entitled Eufracia Colongan
and Paulino Pamplona v. Juan Menchavez Sr. and Sevillana S. Menchavez.
In that case involving the same property, subject of the lease, the Menchavez
spouses were ordered to remove the dikes illegally constructed and to pay
damages and attorneys fees.[8]
Petitioners filed a Third Party Complaint against Benny and Elizabeth
Allego, Albino Laput, Adrinico Che and Charlemagne Arendain Jr., as agents
of Eufracia Colongan and Paulino Pamplona. The third-party defendants
maintained that the Complaint filed against them was unfounded. As agents of
their elderly parents, they could not be sued in their personal capacity. Thus,
they asserted their own counterclaims.[9]
After trial on the merits, the RTC ruled thus:
[The court must resolve the issues one by one.] As to the question of whether the
contract of lease between Teves and the [petitioners] is valid, we must look into the
present law on the matter of fishponds. And this is Pres. Decree No. 704 which
provides in Sec. 24:

Lease of fishponds-Public lands available for fishpond development including those

earmarked for family-size fishponds and not yet leased prior to November 9, 1972
shall be leased only to qualified persons, associations, cooperatives or corporations,
subject to the following conditions.

1. The lease shall be for a period of twenty five years (25), renewable for another
twenty five years;

2. Fifty percent of the area leased shall be developed and be producing in commercial
scale within three years and the remaining portion shall be developed and be
producing in commercial scale within five years; both periods begin from the
execution of the lease contract;

3. All areas not fully developed within five years from the date of the execution of the
lease contract shall automatically revert to the public domain for disposition of the
bureau; provided that a lessee who failed to develop the area or any portion thereof
shall not be permitted to reapply for said area or any portion thereof or any public land
under this decree; and/or any portion thereof or any public land under this decree;

4. No portion of the leased area shall be subleased.

The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution) states:

Sec. 2 - All lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces of potential energy, fisheries, forests, or timber, wild life, flora
and fauna and other natural resources are owned by the state.

Sec. 3 - Lands of the public domain are classified into agricultural, forest or timber,
mineral lands and national parks. Agricultural lands of the public domain may be
further classified by law according to the uses to which they may be devoted.
Alienable lands of the public domain shall be limited to agricultural lands x x x.

As a consequence of these provisions, and the declared public policy of the State
under the Regalian Doctrine, the lease contract between Florentino Teves, Jr. and Juan
Menchavez Sr. and his family is a patent nullity. Being a patent nullity, [petitioners]
could not give any rights to Florentino Teves, Jr. under the principle: NEMO DAT
QUOD NON HABET - meaning ONE CANNOT GIVE WHAT HE DOES NOT
HAVE, considering that this property in litigation belongs to the State and not to
[petitioners]. Therefore, the first issue is resolved in the negative, as the court declares
the contract of lease as invalid and void ab-initio.

On the issue of whether [respondent] and [petitioners] are guilty of mutual fraud, the
court rules that the [respondent] and [petitioners] are in pari-delicto. As a
consequence of this, the court must leave them where they are found. x x x.

xxxxxxxxx

x x x. Why? Because the defendants ought to have known that they cannot lease what
does not belong to them for as a matter of fact, they themselves are still applying for a
lease of the same property under litigation from the government.

On the other hand, Florentino Teves, being fully aware that [petitioners were] not yet
the owner[s], had assumed the risks and under the principle of VOLENTI NON FIT
INJURIA NEQUES DOLUS - He who voluntarily assumes a risk, does not suffer
damage[s] thereby. As a consequence, when Teves leased the fishpond area from
[petitioners]- who were mere holders or possessors thereof, he took the risk that it
may turn out later that his application for lease may not be approved.

Unfortunately however, even granting that the lease of [petitioners] and [their]
application in 1972 were to be approved, still [they] could not sublease the same. In
view therefore of these, the parties must be left in the same situation in which the
court finds them, under the principle IN PARI DELICTO NON ORITOR ACTIO,
meaning[:] Where both are at fault, no one can found a claim.

On the third issue of whether the third party defendants are liable for demolishing the
dikes pursuant to a writ of execution issued by the lower court[, t]his must be resolved
in the negative, that the third party defendants are not liable. First, because the third
party defendants are mere agents of Eufracia Colongan and Eufenio Pamplona, who
are the ones who should be made liable if at all, and considering that the demolition
was pursuant to an order of the court to restore the prevailing party in that Civil Case
510-T, entitled: Eufracia Colongan v. Menchavez.

After the court has ruled that the contract of lease is null and void ab-initio, there is no
right of the [respondent] to protect and therefore[,] there is no basis for questioning
the Sheriffs authority to demolish the dikes in order to restore the prevailing party,
under the principle VIDETUR NEMO QUISQUAM ID CAPERE QUOD EI
NECESSE EST ALII RESTITUERE - He will not be considered as using force who
exercise his rights and proceeds by the force of law.
WHEREFORE, in view of all foregoing [evidence] and considerations, this court
hereby renders judgment as follows:

1. Dismissing the x x x complaint by the [respondent] against the [petitioners];

2. Dismissing the third party complaint against the third party defendants;

3. Upholding the counterclaims of the third party defendants against the [petitioners.
The petitioners] are hereby required to pay third party defendants the sum
of P30,000.00 as moral damages for this clearly unfounded suit;

4. Requiring the [petitioners] to reimburse the third party defendants the sum
of P10,000.00 in the concept of attorneys fees and appearance fees of P300.00 per
appearance;

5. Requiring the [petitioners] to pay to the third party defendants the sum
of P10,000.00 as exemplary damages probono publico and litigation expenses
including costs, in the sum of P5,000.00.[10](Underscoring in the original)

Respondent elevated the case to the Court of Appeals, where it was

docketed as CA-GR CV No. 51144.

Ruling of the Court of Appeals

The CA disagreed with the RTCs finding that petitioners and respondent
were in pari delicto. It contended that while there was negligence on the part
of respondent for failing to verify the ownership of the subject property, there
was no evidence that he had knowledge of petitioners lack of ownership.[11] It
held as follows:

x x x. Contrary to the findings of the lower court, it was not duly proven and
established that Teves had actual knowledge of the fact that [petitioners] merely
usurped the property they leased to him. What Teves admitted was that he did not ask
for any additional document other than those shown to him, one of which was the
fishpond application. In fact, [Teves] consistently claimed that he did not bother to
ask the latter for their title to the property because he relied on their representation
that they are the lawful owners of the fishpond they are holding for lease. (TSN, July
11, 1991, pp. 8-11)[12]

The CA ruled that respondent could recover actual damages in the

amount of P128,074.40. Citing Article 1356[13] of the Civil Code, it further
awarded liquidated damages in the amount of P50,000, notwithstanding the
nullity of the Contract.[14]
Hence, this Petition.[15]

The Issues

Petitioners raise the following issues for our consideration:

1. The Court of Appeals disregarded the evidence, the law and jurisprudence when it
modified the trial courts decision when it ruled in effect that the trial court erred in
holding that the respondent and petitioners are in pari delicto, and the courts must
leave them where they are found;

2. The Court of Appeals disregarded the evidence, the law and jurisprudence in
modifying the decision of the trial court and ruled in effect that the Regional Trial
Court erred in dismissing the respondents Complaint.[16]

The Courts Ruling

The Petition has merit.

Main Issue:
Were the Parties in Pari Delicto?
The Court shall discuss the two issues simultaneously.
In Pari Delicto Rule
on Void Contracts
The parties do not dispute the finding of the trial and the appellate courts
that the Contract of Lease was void.[17] Indeed, the RTC correctly held that it
was the State, not petitioners, that owned the fishpond. The 1987 Constitution
specifically declares that all lands of the public domain, waters, fisheries and
other natural resources belong to the State.[18] Included here are fishponds,
which may not be alienated but only leased.[19] Possession thereof, no matter
how long, cannot ripen into ownership.[20]
Being merely applicants for the lease of the fishponds, petitioners had no
transferable right over them. And even if the State were to grant their
application, the law expressly disallowed sublease of the fishponds to
respondent.[21] Void are all contracts in which the cause, object or purpose is
contrary to law, public order or public policy.[22]
A void contract is equivalent to nothing; it produces no civil effect.[23] It
does not create, modify or extinguish a juridical relation.[24] Parties to a void
agreement cannot expect the aid of the law; the courts leave them as they
are, because they are deemed in pari delicto or in equal fault.[25] To this rule,
however, there are exceptions that permit the return of that which may have
been given under a void contract.[26] One of the exceptions is found in Article
1412 of the Civil Code, which states:

Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what
he has given by virtue of the contract, or demand the performance of the others
undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has
given by reason of the contract, or ask for the fulfillment of what has been promised
him. The other, who is not at fault, may demand the return of what he has given
without any obligation to comply with his promise.

On this premise, respondent contends that he can recover from

petitioners, because he is an innocent party to the Contract of
Lease.[27] Petitioners allegedly induced him to enter into it through serious
misrepresentation.[28]
Finding of In Pari Delicto:
A Question of Fact
The issue of whether respondent was at fault or whether the parties were
in pari delicto is a question of fact not normally taken up in a petition for review
on certiorari under Rule 45 of the Rules of Court.[29] The present case,
however, falls under two recognized exceptions to this rule.[30] This Court is
compelled to review the facts, since the CAs factual findings are (1) contrary
to those of the trial court;[31] and (2) premised on an absence of evidence, a
presumption that is contradicted by the evidence on record.[32]
Unquestionably, petitioners leased out a property that did not belong to
them, one that they had no authority to sublease. The trial court correctly
observed that petitioners still had a pending lease application with the State at
the time they entered into the Contract with respondent.[33]
 Respondent, on the other hand, claims that petitioners misled him into
executing the Contract.[34] He insists that he relied on their assertions
regarding their ownership of the property. His own evidence, however, rebuts
his contention that he did not know that they lacked ownership. At the very
least, he had notice of their doubtful ownership of the fishpond.
Respondent himself admitted that he was aware that the petitioners lease
application for the fishpond had not yet been approved.[35] Thus, he knowingly
entered into the Contract with the risk that the application might be
disapproved. Noteworthy is the fact that the existence of a fishpond lease
application necessarily contradicts a claim of ownership. That respondent did
not know of petitioners lack of ownership is therefore incredible.
The evidence of respondent himself shows that he negotiated the lease of
the fishpond with both Juan Menchavez Sr. and Juan Menchavez Jr. in the
office of his lawyer, Atty. Jorge Esparagoza.[36] His counsels presence during
the negotiations, prior to the parties meeting of minds, further debunks his
claim of lack of knowledge. Lawyers are expected to know that fishponds
belong to the State and are inalienable. It was reasonably expected of the
counsel herein to advise his client regarding the matter of ownership.
Indeed, the evidence presented by respondent demonstrates the
contradictory claims of petitioners regarding their alleged ownership of the
fishpond. On the one hand, they claimed ownership and, on the other, they
assured him that their fishpond lease application would be approved.[37] This
circumstance should have been sufficient to place him on notice. It should
have compelled him to determine their right over the fishpond, including their
right to lease it.
The Contract itself stated that the area was still covered by a fishpond
application.[38] Nonetheless, although petitioners declared in the Contract that
they co-owned the property, their erroneous declaration should not be used
against them. A cursory examination of the Contract suggests that it was
drafted to favor the lessee. It can readily be presumed that it was he or his
counsel who prepared it -- a matter supported by petitioners evidence.[39] The
ambiguity should therefore be resolved against him, being the one who
primarily caused it.[40]
The CA erred in finding that petitioners had failed to prove actual
knowledge of respondent of the ownership status of the property that had
been leased to him. On the contrary, as the party alleging the fact, it was he
who had the burden of proving through a preponderance of evidence[41] -- that
they misled him regarding the ownership of the fishpond. His evidence fails to
support this contention. Instead, it reveals his fault in entering into a void
Contract. As both parties are equally at fault, neither may recover against the
other.[42]
Liquidated Damages
Not Proper
The CA erred in awarding liquidated damages, notwithstanding its finding
that the Contract of Lease was void. Even if it was assumed that respondent
was entitled to reimbursement as provided under paragraph 1 of Article 1412
of the Civil Code, the award of liquidated damages was contrary to
established legal principles.
Liquidated damages are those agreed upon by the parties to a contract, to
be paid in case of a breach thereof.[43] Liquidated damages are identical to
penalty insofar as legal results are concerned.[44] Intended to ensure the
performance of the principal obligation, such damages are accessory and
subsidiary obligations.[45] In the present case, it was stipulated that the party
responsible for the violation of the terms, conditions and warranties of the
Contract would pay not less than P50,000 as liquidated damages. Since the
principal obligation was void, there was no contract that could have been
breached by petitioners; thus, the stipulation on liquidated damages was
inexistent. The nullity of the principal obligation carried with it the nullity of the
accessory obligation of liquidated damages.[46]
As explained earlier, the applicable law in the present factual milieu is
Article 1412 of the Civil Code. This law merely allows innocent parties to
recover what they have given without any obligation to comply with their
prestation. No damages may be recovered on the basis of a void contract;
being nonexistent, the agreement produces no juridical tie between the parties
involved. Since there is no contract, the injured party may only recover
through other sources of obligations such as a law or a quasi-contract.[47] A
party recovering through these other sources of obligations may not claim
liquidated damages, which is an obligation arising from a contract.
WHEREFORE, the Petition is GRANTED and the assailed Decision and
Resolution SET ASIDE. The Decision of the trial court is hereby
REINSTATED.
No pronouncement as to costs.
SO ORDERED.

JOAQUIN VILLEGAS and EMMA M. G.R. No. 161407

VILLEGAS,
 Petitioners, Present:

YNARES-SANTIAGO, J.,
Chairperson,
CARPIO,*
- versus - CORONA,**
NACHURA, and
LEONARDO-DECASTRO,***JJ.

Promulgated:
RURAL BANK OF TANJAY, INC.,
Respondent. June 5, 2009

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

DECISION

NACHURA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court assails
the Court of Appeals (CA) Decision[1] in CA-G.R. CV No. 40613 which affirmed
with modification the Regional Trial Court (RTC) Decision in Civil Case No.
9570.[2]

The facts, as summarized by the CA, follow.

Sometime in June, 1982, [petitioners], spouses Joaquin and Emma

Villegas, obtained an agricultural loan of P350,000.00 from [respondent]
Rural Bank of Tanjay, Inc. The loan was secured by a real estate
mortgage on [petitioners] residential house and 5,229 sq.m. lot situated
in Barrio Bantayan, Dumaguete City and covered by TCT No. 12389.

For failure of [petitioners] to pay the loan upon maturity, the mortgage
was extrajudicially foreclosed. At the foreclosure sale, [respondent],
being the highest bidder, purchased the foreclosed properties
for P367,596.16. Thereafter, the Sheriff executed in favor of
[respondent] a certificate of sale, which was subsequently registered with
the Registry of Deeds of Dumaguete City.

[Petitioners] failed to redeem the properties within the one-year

redemption period.

In May, 1987, [respondent] and [petitioner] Joaquin Villegas, through

his attorney-in-fact[,] Marilen Victoriano, entered into an agreement
denominated as Promise to Sell, whereby [respondent] promised to sell
to [petitioners] the foreclosed properties for a total price of P713,312.72,
payable within a period of five (5) years. The agreement reads in part:

PROMISE TO SELL

xxxx

WITNESSETH:

xxxx

2) That for and in consideration of SEVEN HUNDRED

THIRTEEN THOUSAND AND THREE HUNDRED
TWELVE & 72/100 PESOS (P713,312.72), the VENDOR
do hereby promise to sell, transfer, and convey unto the
VENDEE, their heirs, successors and assigns, all its rights,
interests and participations over the above parcel of land
with all the improvements thereon and a residential house.

3) That upon signing of this Promise To Sell, the VENDEE

shall agree to make payment of P250,000.00 (Philippine
Currency) and the balance of P463,312.72 payable in equal
yearly installments plus interest based on the prevailing rate
counting from the date of signing this Promise to Sell for a
period of five (5) years.

xxxx

5) Provided further, that in case of a delay in any yearly

installment for a period of ninety (90) days, this sale will
 become null and void and no further effect or validity; and
provided further, that payments made shall be reimbursed
(returned) to the VENDEE less interest on the account plus
additional 15% liquidated damages and charges.

Upon the signing of the agreement, [petitioners] gave [respondent] the

sum of P250,000.00 as down payment. [Petitioners], however, failed to
pay the first yearly installment, prompting [respondent] to consolidate its
ownership over the properties. Accordingly, TCT No. 12389 was
cancelled and a new one, TCT No. 19042, (Exh. 14) was issued in
[respondents] name on November 8, 1989. Thereafter, [respondent] took
possession of the properties. Hence, the action by [petitioners for
declaration of nullity of loan and mortgage contracts, recovery of
possession of real property, accounting and damages and, in the
alternative, repurchase of real estate] commenced on January 15, 1990.

In resisting the complaint, [respondent] averred that [petitioners] have

absolutely no cause of action against it, and that the complaint was filed
only to force it to allow [petitioners] to reacquire the foreclosed
properties under conditions unilaterally favorable to them.

xxxx

After trial on the merits, the [RTC] rendered a Decision dismissing the
complaint, disposing as follows:

In the light of the foregoing, it is considered opinion of this

Court, that [petitioners] failed to prove by preponderance of
evidence their case and therefore the herein complaint is
ordered dismissed. [Petitioners] are ordered to pay
[respondent] the sum of P3,000.00 as attorneys fees and to
pay costs without pronouncement as to counterclaim.

SO ORDERED.[3]

On appeal by both parties, the CA affirmed with modification the RTCs ruling,
thus:

WHEREFORE, the appealed Decision is hereby MODIFIED by

(a) ORDERING [respondent] to reimburse [petitioners] their down
 payment of P250,000.00 and (b) DELETING the award of attorneys
fees to [respondent].

SO ORDERED.[4]

Hence, this appeal by certiorari raising the following issues:

(1) The Court of Appeals erred in not holding that the loan and mortgage
contracts are null and void ab initio for being against public policy;

(2) The Court of Appeals erred in not holding that, by reason of the fact
that the loan and mortgage contracts are null and void ab initio for being
against public policy, the doctrine of estoppel does not apply in this case;

(3) The Court of Appeals erred in not finding that the addendum on the
promissory notes containing an escalation clause is null and void ab
initio for not being signed by petitioner Emma M. Villegas, wife of
petitioner Joaquin Villegas, there being a showing that the companion
real estate mortgage involves conjugal property. x x x.

(4) The Court of Appeals erred in not finding that the addendum on the
promissory notes containing an escalation clause is null and void ab
initio for being so worded that the implementation thereof would deprive
petitioners due process guaranteed by [the] constitution, the petitioners
not having been notified beforehand of said implementation.[5]

Notwithstanding petitioners formulation of the issues, the core issue for our
resolution is whether petitioners may recover possession of the mortgaged
properties.

The petition deserves scant consideration and ought to have been dismissed
outright. Petitioners are precluded from seeking a declaration of nullity of the loan
and mortgage contracts; they are likewise barred from recovering possession of the
subject property.
Petitioners insist on the nullity of the loan and mortgage contracts. Unabashedly,
petitioners admit that the loan (and mortgage) contracts were made to appear as
several sugar crop loans not exceeding P50,000.00 each even if they were not just
so the respondent rural bank could grant and approve the same pursuant to
Republic Act (R.A.) No. 720, the Rural Banks Act. Petitioners boldly enumerate
the following circumstances that show that these loans were obtained in clear
contravention of R.A. No. 720:

(a) The petitioners never planted sugar cane on any parcel of agricultural
land;

(b) The mortgaged real estate is residential, with a house, located in the
heart of Dumaguete City, with an area of only one-half (1/2)
hectare;

(c) Petitioners never planted any sugar cane on this one-half (1/2)
hectare parcel of land;

(d) Petitioners were never required to execute any chattel mortgage on

standing crops;

(e) To make it appear that the petitioners were entitled to avail

themselves of loan benefits under Republic Act No. 720, Rural
Banks Act, respondent made them sign promissory notes
for P350,000.00 in split amounts not exceeding P50,000.00
each.[6]

In short, petitioners aver that the sugar crop loans were merely simulated contracts
and, therefore, without any force and effect.

Articles 1345 and 1346 of the Civil Code are the applicable laws, and they
unmistakably provide:

Art. 1345. Simulation of a contract may 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.
 Art. 1346. An absolutely simulated or fictitious contract is void. A
relative simulation, when it does not prejudice a third person and is not
intended for any purpose contrary to law, morals, good customs, public
order or public policy binds the parties to their real agreement.

Given the factual antecedents of this case, it is obvious that the sugar crop loans
were relatively simulated contracts and that both parties intended to be bound
thereby. There are two juridical acts involved in relative simulation the ostensible
act and the hidden act.[7] The ostensible act is the contract that the parties pretend
to have executed while the hidden act is the true agreement between the
parties.[8] To determine the enforceability of the actual agreement between the
parties, we must discern whether the concealed or hidden act is lawful and the
essential requisites of a valid contract are present.

In this case, the juridical act which binds the parties are the loan and
mortgage contracts, i.e., petitioners procurement of a loan from respondent.
Although these loan and mortgage contracts were concealed and made to appear as
sugar crop loans to make them fall within the purview of the Rural Banks Act, all
the essential requisites of a contract[9] were present. However, the purpose thereof
is illicit, intended to circumvent the Rural Banks Act requirement in the
procurement of loans.[10] Consequently, while the parties intended to be bound
thereby, the agreement is void and inexistent under Article 1409 [11] of the Civil
Code.

In arguing that the loan and mortgage contracts are null and void, petitioners would
impute all fault therefor to respondent. Yet, petitioners averments evince an
obvious knowledge and voluntariness on their part to enter into the simulated
contracts. We find that fault for the nullity of the contract does not lie at
respondents feet alone, but at petitioners as well. Accordingly, neither party can
maintain an action against the other, as provided in Article 1412 of the Civil Code:

Art. 1412. If the act in which the unlawful or forbidden cause consists
does not constitute a criminal offense, the following rules shall be
observed:
 (1) When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the others undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover
what he has given by reason of the contract, or ask for the fulfillment of
what has been promised him. The other, who is not at fault, may demand
the return of what he has given without any obligation to comply with
his promise.

Petitioners did not come to court with clean hands. They admit that they never
planted sugarcane on any property, much less on the mortgaged property. Yet, they
eagerly accepted the proceeds of the simulated sugar crop loans. Petitioners readily
participated in the ploy to circumvent the Rural Banks Act and offered no
objection when their original loan of P350,000.00 was divided into small separate
loans not exceeding P50,000.00 each. Clearly, both petitioners and respondent are
in pari delicto, and neither should be accorded affirmative relief as against the
other.

In Tala Realty Services Corp. v. Banco Filipino Savings and Mortgage Bank,[12] we
held that when the parties are in pari delicto, neither will obtain relief from the
court, thus:

The Bank should not be allowed to dispute the sale of its lands to Tala
nor should Tala be allowed to further collect rent from the Bank. The
clean hands doctrine will not allow the creation or the use of a juridical
relation such as a trust to subvert, directly or indirectly, the law. Neither
the bank nor Tala came to court with clean hands; neither will obtain
relief from the court as one who seeks equity and justice must come to
court with clean hands. By not allowing Tala to collect from the Bank
rent for the period during which the latter was arbitrarily closed, both
Tala and the Bank will be left where they are, each paying the price for
its deception.[13]

Petitioners stubbornly insist that respondent cannot invoke the pari

delicto doctrine, ostensibly because of our obiter in Enrique T. Yuchengco, Inc., et
al. v. Velayo.[14]
In Yuchengco, appellant sold 70% of the subscribed and outstanding capital stock
of a Philippine corporation, duly licensed as a tourist operator, to appellees without
the required prior notice and approval of the Department of Tourism (DOT).
Consequently, the DOT cancelled the corporations Local Tour Operators License.
In turn, appellees asked for a rescission of the sale and demanded the return of the
purchase price.

We specifically ruled therein that the pari delicto doctrine is not applicable,
because:

The obligation to secure prior Department of Tourism approval devolved

upon the defendant (herein appellant) for it was he as the owner vendor
who had the duty to give clear title to the properties he was conveying. It
was he alone who was charged with knowing about rules attendant to a
sale of the assets or shares of his tourist-oriented organization. He should
have known that under said rules and regulations, on pain of nullity,
shares of stock in his company could not be transferred without prior
approval from the Department of Tourism. The failure to secure this
approval is attributable to him alone.[15]

Thus, we declared that even assuming both parties were guilty of the violation, it
does not always follow that both parties, being in pari delicto, should be left where
they are. We recognized as an exception a situation when courts must interfere and
grant relief to one of the parties because public policy requires their intervention,
even if it will result in a benefit derived by a plaintiff who is in equal guilt with
defendant.[16]

In stark contrast to Yuchengco, the factual milieu of the present case does not
compel us to grant relief to a party who is in pari delicto. The public policy
requiring rural banks to give preference to bona fide small farmers in the grant of
loans will not be served if a party, such as petitioners, who had equal participation
and equal guilt in the circumvention of the Rural Banks Act, will be allowed to
recover the subject property.

The following circumstances reveal the utter poverty of petitioners

arguments and militate against their bid to recover the subject property:
1. As previously adverted to, petitioners readily and voluntarily accepted the
proceeds of the loan, divided into small loans, without question.

2. After failing to redeem the mortgaged subject property, thereby allowing

respondent to consolidate title thereto,[17] petitioners then entered into a Promise to
Sell and made a down payment of P250,000.00.

3. Failing anew to comply with the terms of the Promise to Sell and pay the first
yearly installment, only then did petitioners invoke the nullity of the loan and
mortgage contracts.

In all, petitioners explicitly recognized respondents ownership over the subject

property and merely resorted to the void contract argument after they had failed to
reacquire the property and a new title thereto in respondents name was issued.

We are not unmindful of the fact that the Promise to Sell ultimately allows
petitioners to recover the subject property which they were estopped from
recovering under the void loan and mortgage contracts. However, the Promise to
Sell, although it involves the same parties and subject matter, is a separate and
independent contract from that of the void loan and mortgage contracts.

To reiterate, under the void loan and mortgage contracts, the parties, being in pari
delicto, cannot recover what they each has given by virtue of the
contract.[18] Neither can the parties demand performance of the contract. No
remedy or affirmative relief can be afforded the parties because of their
presumptive knowledge that the transaction was tainted with illegality. [19] The
courts will not aid either party to an illegal agreement and will instead leave the
parties where they find them.[20]

Consequently, the parties having no cause of action against the other based on a
void contract, and possession and ownership of the subject property being
ultimately vested in respondent, the latter can enter into a separate and distinct
contract for its alienation. Petitioners recognized respondents ownership of the
subject property by entering into a Promise to Sell, which expressly designates
respondent as the vendor and petitioners as the vendees. At this point, petitioners,
originally co-owners and mortgagors of the subject property, unequivocally
acquiesced to their new status as buyers thereof. In fact, the Promise to Sell makes
no reference whatsoever to petitioners previous ownership of the subject property
and to the void loan and mortgage contracts.[21] On the whole, the Promise to Sell,
an independent contract, did not purport to ratify the void loan and mortgage
contracts.

By its very terms, the Promise to Sell simply intended to alienate to petitioners the
subject property according to the terms and conditions contained therein. Article
1370 of the Civil Code reads:

Art. 1370. If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its
stipulations shall control.

If the words appear to be contrary to the evident intention of the parties,

the latter shall prevail over the former.

Thus, the terms and conditions of the Promise to Sell are controlling.

Paragraph 5 of the Promise to Sell provides:

5) Provided further, that in case of a delay in any yearly installment for a

period of ninety (90) days, this sale will become null and void
[without] further effect or validity; and provided further, that
payments made shall be reimbursed (returned to the VENDEE
less interest on the account plus additional 15% liquidated
damages and charges.[22]

As stipulated in the Promise to Sell, petitioners are entitled to reimbursement of

the P250,000.00 down payment. We agree with the CAs holding on this score:

We note, however, that there is no basis for the imposition of interest

and additional 15% liquidated damages and charges on the amount to be
thus reimbursed. The Promise to Sell is separate and distinct from the
loan and mortgage contracts earlier executed by the parties. Obviously,
 after the foreclosure, there is no more loan or account to speak of to
justify the said imposition.[23]

Finally, contrary to petitioners contention, the CA, in denying petitioners

appeal, did not commit an error; it did not ratify a void contract because void
contracts cannot be ratified. The CA simply refused to grant the specific relief of
recovering the subject property prayed for by petitioners. Nonetheless, it ordered
respondent to reimburse petitioners for their down payment of P250,000.00 and
disallowed respondents claim for actual, moral and exemplary damages and
attorneys fees.

WHEREFORE, premises considered, the petition is hereby DENIED. The

Decision of the Court of Appeals in CA-G.R. CV No. 40613 is
hereby AFFIRMED. Costs against petitioners.

SO ORDERED.
SPOUSES JOSELINA G.R. No. 165133
ALCANTARA
AND ANTONIO ALCANTARA, and Present:
SPOUSES JOSEFINO RUBI AND
ANNIE DISTOR- RUBI, CARPIO, J., Chairperson,
Petitioners, BRION,
DEL CASTILLO,
ABAD, and
PEREZ, JJ.
- versus -
Promulgated:

April 19, 2010

BRIGIDA L. NIDO, as attorney-in-
fact of REVELEN N.
SRIVASTAVA,
Respondent.
x--------------------------------------------------x

RESOLUTION
CARPIO, J.:

The Case
Spouses Antonio and Joselina Alcantara and Spouses Josefino and Annie Rubi
(petitioners) filed this Petition for Review[1] assailing the Court of Appeals
(appellate court) Decision[2] dated 10 June 2004 as well as the Resolution[3] dated
17 August 2004 in CA-G.R. CV No. 78215. In the assailed decision, the appellate
court reversed the 17 June 2002 Decision[4] of Branch 69 of the Regional Trial
Court of Binangonan, Rizal (RTC) by dismissing the case for recovery of
possession with damages and preliminary injunction filed by Brigida L. Nido
(respondent), in her capacity as administrator and attorney-in-fact of Revelen N.
Srivastava (Revelen).

The Facts
Revelen, who is respondents daughter and of legal age, is the owner of an
unregistered land with an area of 1,939 square meters located in Cardona, Rizal.
Sometime in March 1984, respondent accepted the offer of petitioners to purchase
a 200-square meter portion of Revelens lot (lot) at P200 per square meter.
Petitioners paid P3,000 as downpayment and the balance was payable on
installment. Petitioners constructed their houses in 1985. In 1986, with respondents
consent, petitioners occupied an additional 150 square meters of the lot. By 1987,
petitioners had already paid P17,500[5] before petitioners defaulted on their
installment payments.

On 11 May 1994, respondent, acting as administrator and attorney-in-fact of

Revelen, filed a complaint for recovery of possession with damages and prayer for
preliminary injunction against petitioners with the RTC.

The RTCs Ruling

The RTC stated that based on the evidence presented, Revelen owns the lot and
respondent was verbally authorized to sell 200 square meters to petitioners. The
RTC ruled that since respondents authority to sell the land was not in writing, the
sale was void under Article 1874[6] of the Civil Code.[7] The RTC ruled that
rescission is the proper remedy.[8]

On 17 June 2002, the RTC rendered its decision, the dispositive portion reads:

WHEREFORE, judgment is rendered in favor of plaintiff and

against the defendants, by -

1. Declaring the contract to sell orally agreed by the plaintiff

Brigida Nido, in her capacity as representative or agent of
her daughter Revelen Nido Srivastava, VOID and
UNENFORCEABLE.

2. Ordering the parties, upon finality of this judgment, to

have mutual restitution the defendants and all persons
claiming under them to peacefully vacate and surrender to
the plaintiff the possession of the subject lot covered by TD
No. 09-0742 and its derivative Tax Declarations, together
with all permanent improvements introduced thereon, and
all improvements built or constructed during the pendency
of this action, in bad faith; and the plaintiff, to return the
sum of P17,500.00, the total amount of the installment on
the land paid by defendant; the fruits and interests during
the pendency of the condition shall be deemed to have been
mutually compensated.

3. Ordering the defendants to pay plaintiff the sum

of P20,000.00 as attorneys fees, plus P15,000.00 as actual
litigation expenses, plus the costs of suit.

SO ORDERED.[9]

The Appellate Courts Ruling

On 5 January 2004, petitioners appealed the trial courts Decision to the

appellate court. In its decision dated 10 June 2004, the appellate court reversed the
RTC decision and dismissed the civil case.[10]
The appellate court explained that this is an unlawful detainer case. The prayer in
the complaint and amended complaint was for recovery of possession and the case
was filed within one year from the last demand letter. Even if the complaint
involves a question of ownership, it does not deprive the Municipal Trial Court
(MTC) of its jurisdiction over the ejectment case. Petitioners raised the issue of
lack of jurisdiction in their Motion to Dismiss and Answer before the RTC.[11] The
RTC denied the Motion to Dismiss and assumed jurisdiction over the case because
the issues pertain to a determination of the real agreement between the parties and
rescission of the contract to sell the property.[12]

The appellate court added that even if respondents complaint is for recovery of
possession or accion publiciana, the RTC still has no jurisdiction to decide the
case. The appellate court explained:

Note again that the complaint was filed on 11 May 1994. By that time,
Republic Act No. 7691 was already in effect. Said law took effect on 15
April 1994, fifteen days after its publication in the Malaya and in the
Time Journal on 30 March 1994 pursuant to Sec. 8 of Republic Act No.
7691.

Accordingly, Sec. 33 of Batas Pambansa 129 was amended by Republic

Act No. 7691 giving the Municipal Trial Court the exclusive original
jurisdiction over all civil actions involving title to, or possession of, real
property, or any interest therein where the assessed value of the property
or interest therein does not exceed P20,000 or, in civil actions in Metro
Manila, where such assessed value does not exceed P50,000, exclusive
of interest, damages of whatever kind, attorneys fees, litigation expenses
and costs.

At bench, the complaint alleges that the whole 1,939- square meter lot of
Revelen N. Srivastava is covered by Tax Declaration No. 09-0742 (Exh.
B, p. 100, Records) which gives its assessed value of the whole lot
of P4,890.00. Such assessed value falls within the exclusive original
prerogative or jurisdiction of the first level court and, therefore, the
Regional Trial Court a quo has no jurisdiction to try and decided the
same.[13]
The appellate court also held that respondent, as Revelens agent, did not have a
written authority to enter into such contract of sale; hence, the contract entered into
between petitioners and respondent is void. A void contract creates no rights or
obligations or any juridical relations. Therefore, the void contract cannot be the
subject of rescission.[14]

Aggrieved by the appellate courts Decision, petitioners elevated the case before
this Court.

Issues

Petitioners raise the following arguments:

1. The appellate court gravely erred in ruling that the contract entered
into by respondent, in representation of her daughter, and former
defendant Eduardo Rubi (deceased), is void; and

2. The appellate court erred in not ruling that the petitioners are
entitled to their counterclaims, particularly specific
[15]
performance.

Ruling of the Court

We deny the petition.

Petitioners submit that the sale of land by an agent who has no written authority is
not void but merely voidable given the spirit and intent of the law. Being only
voidable, the contract may be ratified, expressly or impliedly. Petitioners argue that
since the contract to sell was sufficiently established through respondents
admission during the pre-trial conference, the appellate court should have ruled on
the matter of the counterclaim for specific performance.[16]

Respondent argues that the appellate court cannot lawfully rule on petitioners
counterclaim because there is nothing in the records to sustain petitioners claim
that they have fully paid the price of the lot. [17] Respondent points out that
petitioners admitted the lack of written authority to sell. Respondent also alleges
that there was clearly no meeting of the minds between the parties on the purported
contract of sale.[18]

Sale of Land through an Agent

Articles 1874 and 1878 of the Civil Code provide:

Art. 1874. When a sale of a piece of land or any interest therein is

through an agent, the authority of the latter shall be in writing; otherwise,
the sale shall be void.

Art. 1878. Special powers of attorney are necessary in the following

cases:

xxx

(5) To enter into any contract by which the ownership of an immovable

is transmitted or acquired either gratuitously or for a valuable
consideration;

xxx
Article 1874 of the Civil Code explicitly requires a written authority before
an agent can sell an immovable property. Based on a review of the records, there is
absolutely no proof of respondents written authority to sell the lot to petitioners. In
fact, during the pre-trial conference, petitioners admitted that at the time of the
negotiation for the sale of the lot, petitioners were of the belief that respondent was
the owner of lot.[19] Petitioners only knew that Revelen was the owner of the lot
during the hearing of this case. Consequently, the sale of the lot by respondent who
did not have a written authority from Revelen is void. A void contract produces no
effect either against or in favor of anyone and cannot be ratified.[20]

A special power of attorney is also necessary to enter into any contract by

which the ownership of an immovable is transmitted or acquired for a valuable
consideration. Without an authority in writing, respondent cannot validly sell the
lot to petitioners. Hence, any sale in favor of the petitioners is void.
Our ruling in Dizon v. Court of Appeals[21] is instructive:

When the sale of a piece of land or any interest thereon is through an

agent, the authority of the latter shall be in writing; otherwise, the sale
shall be void. Thus the authority of an agent to execute a contract for the
sale of real estate must be conferred in writing and must give him
specific authority, either to conduct the general business of the principal
or to execute a binding contract containing terms and conditions which
are in the contract he did execute. A special power of attorney is
necessary to enter into any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or for a valuable
consideration. The express mandate required by law to enable an
appointee of an agency (couched) in general terms to sell must be one
that expressly mentions a sale or that includes a sale as a necessary
ingredient of the act mentioned. For the principal to confer the right
upon an agent to sell real estate, a power of attorney must so express the
powers of the agent in clear and unmistakable language. When there is
any reasonable doubt that the language so used conveys such power, no
such construction shall be given the document.

Further, Article 1318 of the Civil Code enumerates the requisites for a valid
contract, namely:

1. consent of the contracting parties;

2. object certain which is the subject matter of the contract;

3. cause of the obligation which is established.

Respondent did not have the written authority to enter into a contract to sell the lot.
As the consent of Revelen, the real owner of the lot, was not obtained in writing as
required by law, no contract was perfected. Consequently, petitioners failed to
validly acquire the lot.

General Power of Attorney

On 25 March 1994, Revelen executed a General Power of Attorney constituting
respondent as her attorney-in-fact and authorizing her to enter into any and all
contracts and agreements on Revelens behalf. The General Power of Attorney was
notarized by Larry A. Reid, Notary Public in California, U.S.A.

Unfortunately, the General Power of Attorney presented as Exhibit C[22] in the

RTC cannot also be the basis of respondents written authority to sell the lot.

Section 25, Rule 132 of the Rules of Court provides:

Sec. 25. Proof of public or official record. An official record or an entry

therein, when admissible for any purpose, may be evidenced by an
official publication thereof or by a copy attested by the officer having the
legal custody of the record, or by his deputy, and accompanied, if the
record is not kept in the Philippines, with a certificate that such officer
has the custody. If the office in which the record is kept is in a foreign
country, the certificate may be made by a secretary of embassy or
legation consul general, consul, vice consul, or consular agent or by any
officer in the foreign service of the Philippines stationed in the foreign
country in which the record is kept, and authenticated by the seal of his
office.

In Teoco v. Metropolitan Bank and Trust Company,[23] quoting Lopez v. Court of

Appeals,[24] we explained:

From the foregoing provision, when the special power of attorney is

executed and acknowledged before a notary public or other competent
official in a foreign country, it cannot be admitted in evidence unless it is
certified as such in accordance with the foregoing provision of the rules
by a secretary of embassy or legation, consul general, consul, vice
consul, or consular agent or by any officer in the foreign service of the
Philippines stationed in the foreign country in which the record is kept of
said public document and authenticated by the seal of his office. A city
judge-notary who notarized the document, as in this case, cannot issue
such certification.[25]
Since the General Power of Attorney was executed and acknowledged in the
United States of America, it cannot be admitted in evidence unless it is certified as
such in accordance with the Rules of Court by an officer in the foreign service of
the Philippines stationed in the United States of America. Hence, this document
has no probative value.

Specific Performance

Petitioners are not entitled to claim for specific performance. It must be stressed
that when specific performance is sought of a contract made with an agent, the
agency must be established by clear, certain and specific proof.[26] To reiterate,
there is a clear absence of proof that Revelen authorized respondent to sell her lot.

Jurisdiction of the RTC

Section 33 of Batas Pambansa Bilang 129,[27] as amended by Republic Act No.

7691 provides:
Section 33. Jurisdiction of Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in Civil Cases. Metropolitan
Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts
shall exercise:

xxx

(3) Exclusive original jurisdiction in all civil actions which involve title
to, possession of, real property, or any interest therein where the assessed
value of the property or interest therein does not exceed Twenty
thousand pesos (P20,000.00) or, in civil actions in Metro Manila, where
such assessed value does not exceed Fifty thousand pesos (P50,000.00)
exclusive of interest, damages of whatever kind, attorneys fees, litigation
expenses and costs: x x x

In Geonzon Vda. de Barrera v. Heirs of Vicente Legaspi,[28] the Court explained:

 Before the amendments introduced by Republic Act No. 7691, the
plenary action of accion publiciana was to be brought before the
regional trial court. With the modifications introduced by R.A. No. 7691
in 1994, the jurisdiction of the first level courts has been expanded to
include jurisdiction over other real actions where the assessed value does
not exceed P20,000, P50,000 where the action is filed in Metro Manila.
The first level courts thus have exclusive original jurisdiction
over accion publiciana and accion reivindicatoria where the assessed
value of the real property does not exceed the aforestated amounts.
Accordingly, the jurisdictional element is the assessed value of the
property.

Assessed value is understood to be the worth or value of property

established by taxing authorities on the basis of which the tax rate is
applied. Commonly, however, it does not represent the true or market
value of the property.

The appellate court correctly ruled that even if the complaint filed with the RTC
involves a question of ownership, the MTC still has jurisdiction because the
assessed value of the whole lot as stated in Tax Declaration No. 09-0742
is P4,890.[29] The MTC cannot be deprived of jurisdiction over an ejectment case
based merely on the assertion of ownership over the litigated property, and the
underlying reason for this rule is to prevent any party from trifling with the
summary nature of an ejectment suit.[30]

The general rule is that dismissal of a case for lack of jurisdiction may be raised at
any stage of the proceedings since jurisdiction is conferred by law. The lack of
jurisdiction affects the very authority of the court to take cognizance of and to
render judgment on the action; otherwise, the inevitable consequence would make
the courts decision a lawless thing.[31] Since the RTC has no jurisdiction over the
complaint filed, all the proceedings as well as the Decision of 17 June 2002 are
void. The complaint should perforce be dismissed.

WHEREFORE, we DENY the petition. We AFFIRM the Decision and

Resolution of the Court of Appeals in CA-G.R. CV No. 78215.
 SO ORDERED.
G.R. No. 173186

ANICETO UY, Petitioner,

vs.
COURT OF APPEALS, MINDANAO STATION, CAGAYAN DE ORO CITY, CARMENCITA
NAVAL-SAI, REP. BY HER ATTORNEY-INFACT RODOLFO FLORENTINO, Respondents.

DECISION

JARDELEZA, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Revised Rules of Court assailing the
Decision2dated January 26, 2006 of the Court of Appeals, Mindanao Station, Cagayan de Oro City in
CA-G.R. CV No. 70648, and its Resolution3 dated May 18, 2006 denying petitioner's motion for
reconsideration.

The Facts

In 1979, private respondent Carmencita Naval-Sai (Naval-Sai) acquired ownership of a parcel of

land described as Lot No. 54-B (LRC) Psd 39172 and covered by Transfer Certificate of Title (TCT)
No. T-19586 from herbrother. The land was later subdivided, with the corresponding titles issued in
Naval-Sai's name in the Register of Deeds of North Cotabato.4 Two of these subdivided lots, Lots
No. 54-B-8 (LRC) Psd 173106 and No. 54-B-9 (LRC) Psd 173106, covered by TCTs No. T-58334
and No. T-58335,5 respectively, are the subject of this case.

Subsequently, Naval-Sai sold Lot No. 54-B-76(LRC) Psd 173106 to a certain Bobby Adil on
installment, onthe condition that the absolute deed of sale will be executed only upon full payment.
Adil failed to pay the amortization, forcing him to sell his unfinished building on the property to
spouses Francisco and Louella Omandac.7

Meanwhile, Naval-Sai borrowed money from a certain Grace Ng. As security, Naval-Sai delivered to
Ng TCTs No. T-58334 and No.T-58335 covering Lots No. 54-B-8 and No. 54-B-9, respectively. Ng,
on the other hand, borrowed money from petitioner and also delivered to the latter the two titles to
guarantee payment of the loan.8

Sometime thereafter, Naval-Sai learned that petitioner filed a case for recovery of possession (Civil
Case No. 1007) against Francisco Omandac. Branch 17 of the Regional Trial Court (RTC) in
Kidapawan City ruled in favor of petitioner.9 Naval-Sai filed a motion for new trial before the Court of
Appeals, arguing that her signature in the purported deed of sale presented in the case between her
and petitioner was a forgery. Civil Case No. 1007, however, became final and executory in
2001.10 The spouses Omandac were ejected from the property and petitioner gained possession of
the same.11

In July 1999, Naval-Sai filed a Complaint for Annulment of Deed with Damages12 before the same
Branch 17 of the RTC in Kidapawan City against petitioner. The subject of the complaint was the
deed of sale allegedly executed between Naval-Sai and petitioner involving Lots No. 54-B-8 and No.
54-B-9. Naval-Sai prayed that the deed of sale be declared null and void ab initiobecause the
alleged sale between her and petitioner was a forgery. Naval-Sai argued that she never sold the lots
and that her signature in the purported deed of sale is spurious.

Naval-Sai filed an Amended Complaint13 dated July 29, 1999. She asserted that the subject TCTs
were already cancelled by virtue of the deed of sale. TCT No. T-62446 was issued in lieu of TCT No.
T-58334 and TCT No. T-62447 replaced TCT No. T-58335. Hence, the Amended Complaint added
as a relief the declaration of TCTs No. T-62446 and No.T-62447, which were registered in the name
of petitioner, as null and void abinitio.Unlike the original complaint, however, the Amended
Complaint was not signed by Naval-Sai, but by her counsel.

In his Answer with Counterclaim14 dated October 4, 1999, petitioner specifically denied that the two
TCTs were delivered to him by Ng as a guaranty for payment of her loan. Petitioner claimed that he
and Naval-Sai entered into a valid contract of sale in 1981 and that the lots were sold for value. The
corresponding TCTs were issued in his name shortly thereafter and since then, he had been in
complete control of the properties. When Francisco Omandac constructed a house in one of the
properties, petitioner filed Civil Case No. 1007.

Petitioner also raised special and affirmative defenses of, among others, non-compliance with the
requisite certification of non-forum shopping and prescription. He asserted that jurisdiction has never
been acquired over the parties and the subject matter because the certification against forum
shopping in the Amended Complaint was defective, for having been merely signed by Naval-Sai's
counsel. He further claimed that the action for annulment of deed of sale is already barred by the
statute of limitations and that Naval-Sai is guilty of estoppel and laches.

The RTC dismissed the complaint on the grounds of prescription and a defective certification against
forum shopping. The dispositive portion of its order reads:

WHEREFORE, finding the defendant’s defense meritorious, this Court hereby orders the dismissal
of the instant complaint without prejudice to the prosecution in the same action of the counterclaim
pleaded in the answer pursuant to Section 6 Rule 16 of the Rules of Court.

Let the hearing on the counterclaim be set on March 30, 2001.

SO ORDERED.15

The RTC found the action for annulment of deed of sale to be a collateral attack on the titles, which
is prohibited by law under the principle of indefeasibility of title after the lapse of one year from
registration. The RTC explained that Naval-Sai’s complaint was not only for the annulment of deed
of sale but, ultimately, for the cancellation of the titles in the name of petitioner, thus:

It is true that an action to set aside a contract which is void [abinitio] does not prescribe. However, a
closer glance on the substance of the plaintiff’s claim would reveal that its ultimate thrust is to have
the Transfer Certificate of Title Nos. T-62446 and T-62447 cancelled. This is evidenced by the
plaintiff’s prayer asking for the declaration of TCT Nos. T-62446 and TCT No. 62447 registered in
the name of the defendant as null and void [ab initio] in addition to her prayer for the declaration of
nullity of the subject deed of sale. x xx

Under the Land Registration Act, a title is valid and effective until annulled or reviewed in a direct
proceeding and not in a collateral one, which review must be made within one year from the
issuance of the title. After the lapse of such period, the title would be conclusive against the whole
world including the government. In other words, the title, after the lapse of one year from registration
become[s] indefeasible.16
On the issue of non-compliance with the required certification on non-forum shopping, the RTC
noted that Naval-Sai did not explain why she failed to comply with the Rules. The RTC cited the
case of Five Star Bus Company, Inc. v. Court of Appeals17where we, faced with the similar issue of
whether or not to dismiss a petition on the ground that the certification was signed by counsel, ruled
that there was non-compliance with the Supreme Court Revised Circular No. 28-9118 and that
substantial compliance cannot be applied.19

The Court of Appeals set aside the order of the RTC in the now assailed Decision20dated January 26,
2006.The Court of Appeals ruled that there was substantial compliance with the requirement of
verification and certification of non-forum shopping. It noted that the original complaint has a proper
verification and certification of non-forum shopping signed by Naval-Sai herself. What was signed by
Naval-Sai’s counsel was the amended complaint dated July 29, 1999. Its verification and certification
carries the statement "x xxthat this [a]mended [c]omplaint should be taken and read together with
the original complaint; x xx"21 which the Court of Appeals found to be a "cautionary move" tantamount
to substantial compliance.22The Court of Appeals further explained that the rule on certification
against forum shopping was complied with in the original complaint because although an amended
complaint supersedes the pleading that it amends, it is not an initiatory pleading contemplated under
the Rules of Court.23

On the issue of whether the action is a collateral attack in relation to prescription, the Court of
Appeals ruled that it is neither a direct nor a collateral attack. According to the Court of Appeals, the
action is a direct attack when the object of an action is to annul or set aside the judgment in the
registration proceeding. On the other hand, a collateral attack is when, in an action to obtain a
different relief, an attack on the judgment or registration proceeding is nevertheless made as an
incident thereof.

Here, however, Naval-Sai is seeking a relief for an annulment of the deed of sale, which is not an
attack on the judgment or registration proceeding pursuant to which the titles were decreed. It does
not seek to set aside the judgment of registration of titles nor does it seek to nullify the title by
challenging the judgment or proceeding that decreed its issuance. The action is in reality one for
reconveyance, which is imprescriptible when based on a void contract. Thus:

A perusal of the records of the case shows that the caption of appellant’s Complaint before the RTC
is annulment of deed. However considering that the ultimate relief sought is for the appellee to
"return" the subject property to him, it is in reality an action for reconveyance. In De Guzman [v.]
Court of Appeals, the Court held that, "the essence of an action for reconveyance is that the decree
of registration is respected as incontrovertible but what is sought instead is the transfer of the
property which has been wrongfully or erroneously registered in another person’s name, to its
rightful owner or to one with a better right."

xxx

An action for reconveyance on the ground that the certificate of title was obtained by means of a
fictitious or forged deed of sale is virtually an action for the declaration of the nullity of the forged
deed, hence, it does not prescribe. x xx24

However, the Court of Appeals emphasized that despite its discussion on the prescriptibility of the
action, it has not made a finding that the deed of sale is indeed fictitious or forged because it is for
the RTC to rule on after evidence has been presented and evaluated. Thus, the relevant dispositive
portion of the Court of Appeals' decision reads:
WHEREFORE, premises considered, the petition is GRANTED. The assailed Order of dismissal
dated 30 March 2001 is hereby SET ASIDE and deemed of no effect.

Let this case be remanded to the lower court for further proceedings.

SO ORDERED.25

Petitioner filed a Motion for Reconsideration26 onMarch 3, 2006, which was denied by the Court of
Appeals in its Resolution27 dated May 18, 2006.

Hence, this petition, which raises the following issues:

I.

THE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE WAS SUBSTANTIAL
COMPLIANCE WITH THE REQUIREMENTS ON CERTIFICATION FOR NON-FORUM SHOPPING.

II.

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ACTION HAS PRESCRIBED
AND/OR THE PRIVATE RESPONDENT IS GUILTY OF INACTION, LACHES OR ESTOPPEL.

Our Ruling

There was substantial compliance with the requirements on certification against forum
shopping.

A certification against forum shopping is a peculiar and personal responsibility of the party, an
assurance given to the court or other tribunal that there are no other pending cases involving
basically the same parties, issues and causes of action.28 It must be executed by the party-pleader,
not by his counsel. If, however, for reasonable or justifiable reasons, the party-pleader is unable to
sign, he must execute a Special Power of Attorney (SPA) designating his counsel of record to sign
on his behalf.29

Here, the original complaint contained a proper verification and certification against forum shopping
duly signed by Naval-Sai as plaintiff. The verification and certification in the amended complaint, on
the other hand, was only signed by her counsel, Atty. Norberto L. Ela. Atty. Ela was not authorized to
sign on behalf of Naval-Sai, as in fact, she assigned one Rodolfo Florentino as agent.30 The Court of
Appeals pointed out that in the certification in the amended complaint, Atty. Ela specified that it
should be taken and read together with the original complaint. The Court of Appeals took this as a
cautionary move on the part of Naval-Sai, justifying the relaxation of the rules on the ground of
substantial compliance. We find, however, that this cautionary move is ineffectual because under the
Rules of Civil Procedure, an amended complaint supersedes the original complaint.31 For all intents
and purposes, therefore, the original complaint and its verification and certification ceased to exist.
This, notwithstanding, we find there was still substantial compliance with the Rules.

In the case of Far Eastern Shipping Company v. Court of Appeals,32 while we said that, strictly, a
certification against forum shopping by counsel is a defective certification, the verification, signed by
petitioner’s counsel in said case, is substantial compliance because it served the purpose of the
Rules of informing the Court of the pendency of another action or proceeding involving the same
issues. We then explained that procedural rules are instruments in the speedy and efficient
administration of justice which should be used to achieve such end and not to derail it.33

We also find that the prima facie merits of the case serve as a special circumstance or a compelling
reason to relax the rules on certification against forum shopping.

In Sy Chin v. Court of Appeals,34 we recognized the flaw in the certification against forum shopping
which was signed only by the counsel, and not by the party. In LDP Marketing, Inc. v. Monter,35 there
was initially no proof that the one who signed the certification was authorized to do so in behalf of
the corporation. In these two cases, we nonetheless chose to overlook the procedural lapses in the
interest of substantial justice and the existence of prima facie merit in the petitions.

We have ruled that the general rule is that non-compliance or a defect in the certification is not
curable by its subsequent submission or correction. However, there are cases where we exercised
leniency and relaxed the rules on the ground of substantial compliance, the presence of special
circumstances or compelling reasons.36 The rules on forum-shopping are designed to promote and
facilitate the orderly administration of justice and "should not be interpreted with such absolute
literalness as to subvert its own ultimate and legitimate objective or the goal of all rules of
procedure— which is to achieve substantial justice as expeditiously as possible."37

The nature of Naval-Sai’s

action is an action for
reconveyance based on a void
contract, which does not
prescribe.

Petitioner argues that Naval-Sai’s action has already prescribed because her action should have
been filed within one year from the time of the registration of the titles. He asserts that even if the
action is in reality one for reconveyance as found by the Court of Appeals, the same is still barred by
prescription based on judicial pronouncements that an action for reconveyance of registered land
based on implied trust prescribes in ten (10) years. Petitioner also accuses Naval-Sai guilty of laches
and estoppel for her failure to assert her right over the two lots for more than eighteen (18) years.

In order to arrive at a conclusion on whether the action has prescribed, we have to determine the
nature of the action.

We agree with the Court of Appeals that the action of Naval-Sai is one for reconveyance. Although
the designation of the complaint is annulment of deed, and does not include reconveyance, the facts
alleged and reliefs sought show that reconveyance is the end goal. What determines the nature of
the action are the allegations in the complaint. The cause of action in a complaint is not determined
by the designation given by the complaint, but by what the allegations in the body of the complaint
define or describe,38as well as the character of the relief sought.39

An action for reconveyance is a legal and equitable remedy granted to the rightful owner of land
which has been wrongfully or erroneously registered in the name of another for the purpose of
compelling the latter to transfer or reconvey the land to him.40 In an action for reconveyance, the
decree of registration is respected as incontrovertible. What is sought instead is the transfer of the
property, which has been wrongfully or erroneously registered in another person’s name, to its
rightful and legal owner, or to one with a better right.41However, such recourse cannot be availed of
once the property has passed to an innocent purchaser for value. For an action for reconveyance to
prosper, the property should not have passed into the hands of an innocent purchaser for value.42
Here, Naval-Sai does not only seek to annul the purported deed of sale but also to cancel TCTs No.
T-62446 and No. 62447 in the name of petitioner. If the reliefs are granted and the TCTs are
cancelled, the titles to

the lots will revert to Naval-Sai as she was the previously registered owner. Thus, a ruling in favor of
Naval-Sai would be equal to what an action for reconveyance seeks to accomplish.

An action for reconveyanceis basedon Section 53, paragraph 3 of Presidential Decree (PD) No.
1529,43 which provides:

In all cases of registration procured by fraud, the owner may pursue all his legal and equitable
remedies against the parties to such fraud without prejudice, however, to the rights of any innocent
holder for valueof a certificate of title. x x x

In Caro v. Court of Appeals,44 we said that this provision should be read in conjunction with Article
1456 of the Civil Code, which provides:

Article 1456. If 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.

The law creates the obligation of the trustee to reconvey the property and its title in favor of the true
owner. Correlating Section 53, paragraph 3 of PD No. 1529 and Article 1456 of the Civil Code with
Article 1144 (2) of the Civil Code,45 the prescriptive period for the reconveyance of fraudulently
registered real property is ten (10) years reckoned from the date of the issuance of the certificate of
title.46 This ten-year prescriptive period begins to run from the date the adverse party repudiates the
implied trust, which repudiation takes place when the adverse party registers the land.47 An exception
to this rule is when the party seeking reconveyance based on implied or constructive trust is in
actual, continuous and peaceful possession of the property involved.48 Prescription does not
commence to run against him because the action would be in the nature of a suit for quieting of title,
an action that is imprescriptible.49

The foregoing cases on the prescriptibility of actions for reconveyanceapply when the action is
based on fraud, or when the contract used as basis for the action is voidable. Under Article 1390 of
the Civil Code, a contract is voidable when the consent of one of the contracting parties is vitiated by
mistake, violence, intimidation, undue influence or fraud. When the consent is totally absent and not
merely vitiated, the contract is void.50An action for reconveyance may also be based on a void
contract.51When the action for reconveyance is based on a void contract, as when there was no
consent on the part of the alleged vendor, the action is imprescriptible.52The property may be
reconveyed to the true owner, notwithstanding the TCTs already issued in another’s name. The
issuance of a certificate of title in the latter’s favor could not vest upon him or her ownership of the
property; neither could it validate the purchase thereof which is null and void. Registration does not
vest title; it is merely the evidence of such title. Our land registration laws do not give the holder any
better title than what he actually has. Being null and void, the sale produces no legal effects
whatsoever.53

Whether an action for reconveyance prescribes or not is therefore determined by the nature of the
action, that is, whether it is founded on a claim of the existence of an implied or constructive trust, or
one based on the existence of a void or inexistent contract.This is evident in several of our past
decisions. In Casipit v. Court of Appeals,54 we rejected the claim of imprescriptibility and applied the
10-year prescription where the action filed was based on fraud:
There is no dispute that an action for reconveyance based on a void contract is imprescriptible
(Castillo, et al. v. Madrigal, et al., G.R. No. 62650, June 27, 1991; Baranda, et al. v. Baranda, et al.,
G.R. No. 73275, May 20, 1987, 150 SCRA 59). However, We simply cannot apply this principle to
the present case because the action filed by petitioner before the trial court was 1) for reconveyance
based on fraud since the ownership of private respondents over the questioned property was
allegedly established on "false assertions, misrepresentations and deceptive allegations" (p. 182,
Records); and 2) for rescission of the "Kasulatan ng Pagmamana at Paghahati" (pp. 173, 187,
Records). x xx55

On the other hand, in Daclag v. Macahilig,56we rejected the claim of petitioners that prescription is
applicable because the action was based on fraud. We ruled that the action was not subject to
prescription because it was, in fact, based on a deed of sale that was null and void. Thus:

However, a review of the factual antecedents of the case shows that respondents' action for
reconveyance was not even subject to prescription.

The deed of sale executed by Maxima in favor of petitioners was null and void, since Maxima was
not the owner of the land she sold to petitioners, and the one-half northern portion of such land was
owned by respondents.

Being an absolute nullity, the deed is subject to attack anytime, in accordance with Article 1410 of
the Civil Code that an action to declare the inexistence of a void contract does not prescribe. x xxAn
action for reconveyance based on a void contract is imprescriptible. As long as the land wrongfully
registered under the Torrens system is still in the name of the person who caused such registration,
an action in personam will lie to compel him to reconvey the property to the real owner.57 (Citations
omitted)

In Santos v. Heirs of DomingaLustre,58 the complaint alleged that the deed of sale was simulated by
forging the signature of the original registered owner. We ruled in favor of imprescribility applying the
doctrine that the action for reconveyance on the ground that the certificate of title was obtained by
means of a fictitious deed of sale is virtually an action for the declaration of its nullity, which does not
prescribe.

Also, and more illustrative of the discussion above, in Castillo v. Heirs of Vicente Madrigal,59 it was
alleged by the plaintiffs that they never signed any document. We ruled as follows:

Petitioners allege that a reading of paragraphs 9 and 10 of their complaint reveals that they impugn
the existence and validity of the alleged deed of sale. As contained therein, petitioners never entered
into any transaction with any person conveying the subject property. They did not sign any document
in favor of [anyone] neither did they give [anyone]authorization for that purpose. Therefore, consent
and cause did not exist in the execution of the deed of sale, invoking Articles 1318, 1352 and
1409(3),of the Civil Code. And, pursuant to Article 1410 of the Civil Code, an action for the
declaration of the inexistence of a contract does not prescribe.

In dismissing petitioners' complaint on the ground of prescription, the trial court opined (p. 123,
Rollo):

"x xx, any action for annulment of the deed and TCT 72066 should have been instituted within ten
(10) years from the accrual of the cause of action, that, (sic) is, ten years from 1943 when the deed
was executed at the earliest, or ten years from 1944 at the latest. This action was filed on December
17, 1979, or after more than 30 years from 1943 and 1944. The action, therefore, has long
prescribed. xxx."
The Court of Appeals expressed the same opinion (p. 51, Rollo):

"xxx, even as We consider that there was fraud in the registration and the issuance of title in favor of
defendant Madrigal creating thereby a constructive trust in favor of the plaintiffs, the remedy of the
plaintiffs is an action for reconveyance within ten (10) years from the registration of the property in
the name of defendant Madrigal (Alzona v. Capunitan, 4 SCRA 450; Gonzales v. Jimenez 13 SCRA,
80). Again, the filing of the complaint was way beyond the ten-year period of limitation."

Both courts ruled incorrectly. It is evident in paragraphs 9, 10 and 12 of the complaint, supra, that
petitioners sought the declaration of the inexistence of the deed of sale because of the absence of
their consent. Thus, following the provision of Article 1410 of the Civil Code, this kind of action is
imprescriptible. The action for reconveyance is likewise imprescriptible because its basis is the
alleged void contract of sale. x xx60

(Citations omitted)

We conclude that, contrary to the claim of petitioner, the action for reconveyance is based neither on
an implied or constructive trust nor fraud. Naval-Sai alleged that the purported deed of sale, which
1âwphi1

became the basis to transfer the titles in petitioner’s name, was an absolute forgery because she
never sold the two lots to any person.61 Naval-Sai also alleged that her signature and that of her
husband’s, in the deed of sale are forgeries.62These allegations make the action one based on a void
or inexistent contract for lack of consent on the part of the alleged vendor, Naval-Sai. Based on the
complaint, Naval-Sai only consented to use the titles of the two lots as security to a loan she
obtained from Ng.63

Resolution of the issue of prescription hinges on whether the deed of sale was indeed forged and,
thus, void. Unfortunately, both the RTC and the Court of Appeals did not make actual findings on the
alleged forgery.

No full-blown trial occurred in the RTC to prove that the deed of sale was indeed simulated and that
the signatures were forgeries. The case was dismissed based on the pleadings of the parties. The
Court of Appeals also resolved to decide the case on available records and pleadings, in order to
avoid further delay, due to several resettings and motions for postponement filed by the parties one
after another. The lack of factual findings on the alleged forgery from the lower courts prevents us
from ruling on the issue of prescription.

Since it is apparent that the complaint on its face does not show that the action has already
prescribed, the RTC erred in dismissing it. We emphasize once more that a summary or outright
dismissal of an action is not proper where there are factual matters in dispute, which require
presentation and appreciation of evidence.64

Applying the foregoing cases and without prejudging the issue of forgery,the action for reconveyance
will not be subject to prescription if the trial court finds that the deed of sale is indeed forged,
because the action would now be based on a fictitious and void contract. If the trial court finds
otherwise, then the issue of prescription would not matter as the sale would stand and remain
binding between Naval-Sai and petitioner.

Similarly, the elements of laches must be proven positively. Laches is evidentiary in nature, a fact
that cannot be established by mere allegations in the pleadings.65 Therefore, at this stage, the
dismissal on the ground of laches would be premature. The issues must be resolved in the trial on
the merits.
Moreover, laches is a doctrine in equity, and applied only in the absence of, and never against,
statutory law.66 The positive mandate of Article 1410 of the Civil Code conferring imprescriptibility to
actions or defense for the declaration of the inexistence of a contract should pre-empt and prevail
over all abstract arguments based only on equity.67

WHEREFORE, the petition is DENIED. Let the records of this case be remanded for further
proceedings to the Regional Trial Court of Kidapawan City, Branch 17, which is hereby ORDERED
to try and decide the case with dispatch.

SO ORDERED.

G.R. No. 181623 December 5, 2012

ALEJANDRO DINAYUG and ANA DINA YUG, Petitioners,

vs.
EUGENIO UGADDAN, NORBERTO UGADDAN, PEDRO UGADDAN, ANGELINA UGADDAN,
TERESO UGADDAN, DOMINGA UGADDAN, GERONIMA UGADDAN, and BASILIA
LACAMBRA, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the Decision1 dated
August 6, 2007 and Order2 dated January 15, 2008 of the Regional Trial Court (RTC) of Tuguegarao
City, Branch IV3 in Civil Case No. 5395.

At the crux of this controversy are two parcels of land located in Barangay Libag, Tuguegarao,
Cagayan (subject properties) covered by Original Certificate of Title (OCT) No. P-311 issued by the
Registry of Deeds of Cagayan in the name of Gerardo Ugaddan (Gerardo), husband of respondent
Basilia Lacambra (Basilia) and father of the other respondents Eugenio, Norberto, Pedro, Angelina,
Tereso, Dominga, and Geronima, all bearing the surname Ugaddan. OCT No. P-311 particularly
described the subject properties as follows:

A parcel of land, [L]ot No. 1,H-186034, containing an area of 31,682 sq.m., more or less; bounded
on the North by public land on the southeast, by lot 2 of plan H-186034 and lot 9556 of Tuguegarao
Cadastre; on the south by public land and on the southwest by Cagayan River;

A parcel of land of Lot No. 2, H-186034, containing an area of (1,723) sq.m., more or less. Bounded
on the N., by Lot 9546 of Tuguegarao Cadastre; on the E., by Lot 9556; and on the SW., by Lot 1 of
plan H-186034.4

Gerardo acquired title over the subject properties through the grant of Homestead Patent No. V-
6269 in his favor on January 12, 1951. Said patent was registered and OCT No. P-311 was issued in
Gerardo’s name on March 5, 1951.5

Upon Gerardo’s death, respondents discovered that OCT No. P-311 had been cancelled. The
records of the Registry of Deeds show that Gerardo, with the consent of his wife Basilia, sold the
subject properties on July 10, 1951 to Juan Binayug (Juan) for the sum of P3,000.00.6 As a result of
the sale, OCT No. P-311 in Gerardo’s name was cancelled and Transfer Certificate of Title (TCT)
No. T-106394 in Juan’s name was issued. Juan was the father of petitioner Alejandro Binayug
(Alejandro) and the subject properties passed on to him and his wife Ana Ugaddan Binayug (Ana)
upon Juan’s death.

After conducting their own investigation, respondents filed on October 22, 1998 a complaint "for
declaration of nullity of title, annulment of instrument, [and] declaration of ownership with damages"
against petitioners. Respondents averred that the purported sale between Gerardo and Juan was
prohibited under Commonwealth Act No. 141, otherwise known as the Public Land Act, as amended;
and that the Absolute Deed of Sale dated July 10, 1951 between Gerardo (with Basilia’s consent)
and Juan was forged. Respondents specifically alleged in their complaint7that:

9. The said deed of sale which led to the cancellation of OCT No. P-311 in favor of Juan
Binayug has been falsified as said Gerardo Ugaddan and herein respondentBasilia
Lacambra could legibly write their names but the deed of sale presented to the Registry of
Deeds of Cagayan appears to have been thumbmarked;

10. Respondents cannot recall any deed or instrument of sale which was executed in favor of
Juan Binayug in the year 1951, particularly that deed of sale dated July 10, 1951, allegedly
notarized by Atty. Jose P. Carag under Doc. No. 100; Page No. 20; Book No. VII; Series of
1951 x x x;

11. The affixed thumbmark above the name of respondent Basilia Lacambra is a forgery as
shown in the Technical Investigation/ Identification Report FP Case No. 98-347 of the
National Bureau of Investigation NBI, Manila x x x;

12. OCT No. P-311 having been issued pursuant to a homestead patent cannot be
"alienated, transferred or conveyed after five (5) years and before twenty-five (25) years next
following the issuance thereof in the year 1951, without the approval of the Secretary of
Agriculture and Natural Resources x x x as annotated at the back of the same, x x x;

13. On April 8, 1997, without any legal personality or right, petitioner Ana Ugaddan executed
a Confirmation of Sale concerning said lots embraced under OCT No. P-311, stating thereat
that she is a surviving heir of the deceased Gerardo Ugaddan which is a falsehood as she is
not related in any manner to the deceased Gerardo Ugaddan, save for the same family
name, "Ugaddan", x x x;

14. Earlier in November 11, 1996, petitioner Ana Ugaddan filed a notice of loss of OCT No.
P-311 with the Register of Deeds of Cagayan stating among others that the original duplicate
copy of OCT No. P-311 was lost while in her possession, x x x;

15. Thereafter, petitioner Ana Ugadan petitioned for the issuance of another owner’s copy of
OCT No. P-311 which ultimately led to the issuance of TCT No. T-106394 in the name of
Juan Binayug, deceased father of petitioner Alejandro Binayug;

16. The original owner’s duplicate copy of OCT No. P-311 was never lost as the same has
been and is still in the possession of respondent Basilia Lacambra, hence the manner by
which petitioners caused the transfer of title in the name of Juan Binayug was a fraud.8

Hence, respondents asserted that TCT No. T-106394 in Juan’s name was void for having been
obtained through fraudulent means.
Petitioners essentially denied that the Absolute Deed of Sale dated July 10, 1951 was forged and
that they fraudulently obtained TCT No. T-106394. Petitioners’ Answer9 contained the following
averments:

3. x x x that, the respondents, except Geronima Ugaddan and Basilia Lacambra, are tenants
over the parcels of land covered by TCT No. T-106394; that due to the failure of the said
respondentsto pay the agreed lease rentals, the herein petitioners were constrained to file an
action against them at the Department of Agrarian Reform Adjudication Board x x x;

xxxx

8. That respondent Ana Ugaddan reported the loss of the owner’s duplicate copy of OCT No.
P-311 because when respondents demanded from Basilia Lacambra and her children the
surrender of the said title so that the deed of sale in favor of Juan Binayug could be
registered, they told said petitioner that it was lost, and when asked to sign an affidavit of
loss, they also refused to do so;

xxxx

10. That if the owner’s duplicate copy of said OCT No. P-311 was not actually lost, then said
Basilia Lacambra and her children have only themselves to blame if the loss was reported by
said Ana Ugaddan because, as above stated, when the petitioners demanded the surrender
to them of the said title, Basilia Lacambra and her children, told them that it was lost;

xxxx

12. That after respondents’ predecessor-in-interest had already long sold the subject
property to petitioners’ predecessor-in-interest, the former have no more existing legal rights
over the same which is one of the requisites before an injunction can be issued.10

During trial on the merits, respondents submitted, among other pieces of evidence, Technical
Investigation/Identification Report FP Case No. 98-347 dated September 28, 1998 of the National
Bureau of Investigation (NBI) to prove their allegation of fraud. According to the NBI, the thumbmark
found in the original and duplicate original Absolute Deed of Sale dated July 10, 1951 did not match
the specimen obtained from respondent Basilia.11

The RTC rendered a Decision on August 6, 2007.

The RTC found that petitioners have been in possession of the subject properties for some time
now. Petitioners were able to support their testimonies with tax declarations and official receipts,
proving that they and their predecessor-in-interest have been paying real property tax on the subject
properties. In contrast, respondents failed to produce before the court their own tax declaration for
the subject properties despite being given ample opportunity to do so; respondents merely claimed
that said document was already with their lawyer. The RTC also questioned how respondents could
insist on having possession of the subject properties but they could not even identify with certainty
the boundaries of the same. Furthermore, the RTC gave weight to the fact that petitioners filed
against respondents an agrarian case (based on allegations that respondents are agrarian tenants
who failed to pay their lease rentals) and an action for malicious mischief (based on allegations that
respondents destroyed the crops planted on the subject properties). The RTC stated that "one who
firmly believes to be the owner of a property is expected to protect it from intruders and necessarily
avail of the legal remedies to defend his rights."12 Admittedly, respondents were acquitted of the
criminal charge for malicious mischief, but the RTC herein stressed that the acquittal was because
respondents’ guilt was not proven beyond reasonable doubt and not because respondents did not at
all commit the crime charged. Hence, the RTC was convinced that the Absolute Deed of Sale dated
July 10, 1951 was genuine and in existence, actually executed by Gerardo in favor of Juan.

Despite its foregoing findings, the RTC pronounced that it did not necessarily follow that the
Absolute Deed of Sale dated July 10, 1951 was valid or legal. In fact, the RTC expressly declared
that said Deed suffered from legal infirmities.

The RTC determined that respondent Basilia did not actually give her consent to and affix her
thumbmark on said Absolute Deed of Sale, to wit:

The first witness presented by the respondents is Jose Palma, an employee of the Dactyloscopic
Division of the National Bureau of Investigation. He testified that in his examinations, the thumbmark
of Basilia Lacambra in the purported deed of sale is different from her standard fingerprint. This
finding was not refuted by the petitioners. Instead, they pointed their argument that the thumbmark of
Gerardo is genuine and likewise affixed his thumbmark on the questioned deed of sale and it is
placed a little bit above the name of Basilia. Petitioners’ theory in a nutshell is that, Gerardo laid his
thumbmarks on both his name and of Basilia. They however presented no evidence to prove this
contention. At best, it is merely surmises. The court sees no reason either why Gerardo would utilize
his own thumbmark in lieu of his wife’s. If the petitioners claim that spouses Gerardo and Basilia
were alive when the supposed deed of sale was executed, then it is presumed that both assented to
the conveyance of the contested lots absent of any indication that it was only Gerardo who
participated. But having found that the thumbmark of Basilia is spurious, the genuineness and
authenticity of the deed of sale become suspect.

The findings of witness-Palma is bolstered by the testimony of Guillermo Casagan when he testified
that Basilia knows how to write instead of resorting to her thumbmarks on documents:

ATTY. MARTIN

xxxx

Q- Do you know whether or not Basilia Ladambra has the ability to write?

A- Yes sir. She knows how to write.

Q- Why do you know that she can write?

A- I know that she knows how to write because she had a store before and I have often seen her
write.

Q- Mr. witness, how old were you in the year 1951?

A- Thirteen years old, sir.

xxxx

In his cross-examination, his declaration on this subject was not touched by the petitioners’ counsel.
In light of this factual milieu, the court finds that the thumbprint of Basilia Lacambra in the Absolute
Deed of Sale dated July 10, 1951 is not her own. There is no dispute that
Gerardo and Basilia were married. Thus, there is hardly any reason to reject that the homestead
property is conjugal in nature. And since no consent was given by Basilia in the alleged transfer, it
necessarily follows that the document has no force and effect.13

The RTC then declared the Absolute Deed of Sale dated July 10, 1951 as null and void for the
following reasons:

First, as proven by the testimonies of [respondents’] witnesses, the marital consent was not obtained
by Gerardo.

Second, Section 118 of the Public Land Law, amended by Commonwealth Act No. 456, reads as
follows:

"Section 118. Except 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 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 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 be denied except on constitutional and legal grounds."

On the basis of the afore-quoted section, a homestead patent cannot be alienated or encumbered
within five (5) years from the approval of application except in favor of the government or any of its
branches or institutions. Where a homestead was sold during the prohibited period, even if the sale
is approved by the Director of Lands subsequently after five (5) years, the approval will not give it
any valid curative effect. Such sale is illegal, inexistent, and null and void ab initio. The action to
declare the existence of such contract will not prescribe. As a matter of fact, the vendor never lost
his title or ownership over the homestead, and there is no need for him or his heirs to repurchase the
same from the vendee, or for the latter to execute a deed of reconveyance. Of course, the purchaser
may recover the price which he has paid, and where the homesteader vendor died, the recovery
may be pursued as a claim filed against his estate in the corresponding proceeding.

Petitioners do not deny that the contested lots were originally covered by a homestead patent. It
then behooves on their part to prove that the purported deed of sale was executed outside the five-
year prohibitory period. Failure to do so, the court has no choice but to declare null and void the
deed of sale executed by spouses Gerardo and Basilia in favor of Juan Binayug.

Evident from the records is that the issuance of the Patent was on 12 January 1951. The registration
thereof to the Register of Deeds was on 5 March 1951 and the supposed deed of sale was executed
on July 10, 1951. From the pleadings and testimonies of petitioners and their witness, none can be
carved out from them that the sale was beyond the prohibitory period. In fact, they seemed to have
evaded this issue. Coupled in considering the relevant months in the year 1951, months which are
too close to shield petitioners from Section 118, this court can only conclude that even if it is to
presume the genuineness of the deed of sale, the conveyance is void as it falls within the period of
five (5) years. Thus, the title obtained by the vendee-Juan Binayug, is also null and void ab initio. So
also, where a homestead was sold during the prohibitory period of five years and upon the expiration
of said period a new deed of sale was executed, such as a mere reproduction of the previous one, it
was held that the latter deed of sale was invalid as the prior deed which intended to ratify. For the
purpose of declaring such sale null and void, neither laches nor prescription can operate for the
action is imprescriptible.14 (Citations omitted.)

The RTC, however, recognized petitioners’ good faith and did not leave them empty handed, to wit:

This court is convinced that [petitioners] firmly believe in good faith that the land is theirs when they
took over from their parents. It however agonizes over the fact that the law is against them as their
forebears’ ignorance of the law has finally caught them. Of course all is not lost. Even if we are to
declare the sale as invalid, they can recover the price on the basis of the cited jurisprudence.
Considering that the sale was consummated in 1951, it is beyond the sphere of competence of
anybody to know the price. The court will then grant a reasonable amount of P100,000 for the Thirty-
Three Thousand Four-hundred Five (33,405) square meters of land.15

Ultimately, the RTC decreed thus:

WHEREFORE, premises considered, Transfer Certificate of Title No. T-106394 issued in the name
of Juan Binayug is declared null and void and is hereby ordered cancelled. Original Certificate of
Title No. P-311 in the name of Gerardo Ugaddan is declared still subsisting and valid. The Register
of Deeds of the Province of Cagayan is hereby directed to cause the necessary annotations thereof.
Respondents arehereby ordered to pay [petitioners] P100,000.00 as payment for the price of lots.
For lack of merit, the claim for other damages is hereby dismissed.16

Petitioners filed a Motion for Reconsideration of the aforementioned RTC judgment arguing that the
trial court contradicted itself in finding that the Absolute Deed of Sale dated July 10, 1951 is genuine
and in existence, then nullifying TCT No. T-106394 in Juan’s name. Petitioners likewise asserted
that a Torrens title such as TCT No. T-106394 is not susceptible to collateral attack.

In an Order dated January 15, 2008, the RTC denied petitioners’ Motion for Reconsideration due to
lack of substantial argument.

Aggrieved, petitioners immediately resorted to this Court by filing the instant Petition under Rule 45
of the Rules of Court, which presented a lone assignment of error:

THE HONORABLE REGIONAL TRIAL COURT BRANCH IV OF TUGUEGARAO CITY GRAVELY

ERRED IN APPLYING THE PROVISION OF SECTION 118 OF THE PUBLIC LAND ACT INSTEAD
OF APPLYING THE PROVISION OF SECTION 124 OF THE SAME LAW.17

Before discussing the merits of the case, the Court notes that petitioners no longer appealed the
RTC judgment before the Court of Appeals, going directly before this Court through a Petition for
Review on Certiorari under Rule 45 of the Rules of Court.

According to Rule 41, Section 2(c)18 of the Rules of Court, a decision or order of the RTC may be
appealed to the Supreme Court by petition for review on certiorari under Rule 45, provided that such
petition raises only questions of law.19 A question of law exists when the doubt or controversy
concerns the correct application of law or jurisprudence to a certain set of facts; or when the issue
does not call for an examination of the probative value of the evidence presented, the truth or
falsehood of facts being admitted. A question of fact exists when the doubt or difference arises as to
the truth or falsehood of facts or when the query invites calibration of the whole evidence considering
mainly the credibility of the witnesses, the existence and relevancy of specific surrounding
circumstances, as well as their relation to each other and to the whole, and the probability of the
situation.20
Petitioners raise and argue only one issue in their Petition: whether or not Section 118 of the Public
Land Act is applicable to their case. They no longer challenge the appreciation of evidence and
factual conclusions of the RTC. Consequently, petitioners’ resort directly to this Court via the instant
Petition for Review on Certiorari is in accordance with procedural rules.

Nonetheless, the Court finds no merit in the Petition and denies the same.

To reiterate, Section 118 of the Public Land Act, as amended, reads that "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 x x x." The provisions of law are clear and explicit. A
contract which purports to alienate, transfer, convey, or encumber any homestead within the
prohibitory period of five years from the date of the issuance of the patent is void from its execution.
In a number of cases, this Court has held that such provision is mandatory.21

In the present case, it is settled that Homestead Patent No. V-6269 was issued to Gerardo on
January 12, 1951 and the Absolute Deed of Sale between Gerardo and Juan was executed on July
10, 1951, after a lapse of only six months. Irrefragably, the alienation of the subject properties took
place within the five-year prohibitory period under Section 118 of the Public Land Act, as amended;
and as such, the sale by Gerardo to Juan is null and void right from the very start.22

As a void contract, the Absolute Deed of Sale dated July 10, 1951 produces no legal effect
whatsoever in accordance with the principle "quod nullum est nullum producit effectum,"23 thus, it
could not have transferred title to the subject properties from Gerardo to Juan and there could be no
basis for the issuance of TCT No. T-106394 in Juan’s name. A void contract is also not susceptible
of ratification, and the action for the declaration of the absolute nullity of such a contract is
imprescriptible.24

Petitioners contend that only the State can bring action for violation of Section 118 of the Public
Land Act, as amended. Moreover, Section 124 of the same Act explicitly provides for the
consequence of such a violation:

Section 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, recognized or confirmed,
actually or presumptively, and cause the reversion of the property and its improvement to the State.

Petitioners’ contentions are not novel.

In De los Santos v. Roman Catholic Church of Midsayap,25 a homestead patent covering a tract of
land in Midsayap, Cotabato was granted to Julio Sarabillo (Sarabillo) on December 9, 1938. OCT
No. RP-269 was issued to Sarabillo on March 17, 1939. On December 31, 1940,

Sarabillo sold two hectares of land to the Roman Catholic Church of Midsayap (Church). Upon
Sarabillo’s death, Catalina de los Santos (De los Santos) was appointed administratrix of his estate.
In the course of her administration, De los Santos discovered that Sarabillo’s sale of land to the
Church was in violation of Section 118 of the Public Land Act, prompting her to file an action for the
annulment of said sale. The Church raised as defense Section 124 of the Public Land Act, as well as
the principle of pari delicto. The Court, in affirming the CFI judgment favoring De los Santos,
ratiocinated:

The principles thus invoked by the Church, et al. are correct and cannot be disputed. They are
1âwphi1

recognized not only by our law but by our jurisprudence. Section 124 of the Public Land Act indeed
provides that any acquisition, conveyance or transfer executed in violation of any of its provisions
shall be null and void and shall produce the effect of annulling and cancelling the grant or patent and
cause the reversion of the property to the State, and the principle of pari delicto has been applied by
this Court in a number of cases wherein the parties to a transaction have proven to be guilty of
having effected the transaction with knowledge of the cause of its invalidity. But we doubt if these
principles can now be invoked considering the philosophy and the policy behind the approval of the
Public Land Act. The principle underlying pari delicto as known here and in the United States is not
absolute in its application. It recognizes certain exceptions one of them being when its enforcement
or application runs counter to an avowed fundamental policy or to public interest. As stated by us in
the Rellosa case, "This doctrine is subject to one important limitation, namely, "whenever public
policy is considered advanced by allowing either party to sue for relief against the transaction."

The case under consideration comes within the exception above adverted to. Here De Los Santos
desires to nullify a transaction which was done in violation of the law. Ordinarily the principle of pari
delicto would apply to her because her predecessor-in-interest has carried out the sale with the
presumed knowledge of its illegality, but because the subject of the transaction is a piece of public
land, public policy requires that she, as heir, be not prevented from re-acquiring it because it was
given by law to her family for her home and cultivation. This is the policy on which our homestead
law is predicated. This right cannot be waived. "It is not within the competence of any citizen to
barter away what public policy by law seeks to preserve". We are, therefore, constrained to hold that
De Los Santos can maintain the present action it being in furtherance of this fundamental aim of our
homestead law.

As regards the contention that because the immediate effect of the nullification of the sale is the
reversion of the property to the State, De Los Santos is not the proper party to institute it but the
State itself, that is a point which we do not have, and do not propose, to decide. That is a matter
between the State and the Grantee of the homestead, or his heirs. What is important to consider
now is who of the parties is the better entitled to the possession of the land while the government
does not take steps to assert its title to the homestead. Upon annulment of the sale, the purchaser’s
claim is reduced to the purchase price and its interest. As against the vendor or his heirs, the
purchaser is no more entitled to keep the land than any intruder. Such is the situation of the Church,
et al.. Their right to remain in possession of the land is no better than that of De Los Santos and,
therefore, they should not be allowed to remain in it to the prejudice of De Los Santos during and
until the government takes steps toward its reversion to the State.26 (Emphases supplied, citations
omitted.)

In Arsenal v. Intermediate Appellate Court,27 the Court adjudged that 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. Still in Arsenal, the Court referred to Menil v.
Court of Appeals28 and Manzano v. Ocampo,29 wherein the land was awarded back to the original
owner notwithstanding the fact that he was equally guilty with the vendee in circumventing the law.

Jurisprudence, therefore, supports the return of the subject properties to respondents as Gerardo’s
heirs following the declaration that the Absolute Deed of Sale dated July 10, 1951 between Gerardo
and Juan is void for being in violation of Section 118 of the Public Land Act, as amended. That the
subject properties should revert to the State under Section 124 of the Public Land Act, as amended,
is a non-issue, the State not even being a party herein.
As a final note, although not assigned as an error in their Petition, petitioners raise as an issue and
argue extensively in their Memorandum that they had acquired acquisitive prescription over the
subject properties. The issue of prescription involves questions of fact, i.e., when and for how long
petitioners have possessed the subject properties and whether their possession is open, continuous,
exclusive, notorious, and adverse. The RTC’s findings that petitioners and their predecessor-in-
interest have been in possession of the subject properties for "quite some time now" or "through the
years" are clearly insufficient. To resolve the issue of prescription, the Court must necessarily go
through the evidence presented by the parties, which it cannot do. This Court is not a trier of facts.
To reiterate, the Court only allowed petitioners to come directly before this Court from the RTC
through the instant Petition because they raise a pure question of law, namely, the applicability of
Sections 118 and 124 of the Public Land Act, as amended. The Court cannot take cognizance of the
issue of acquisitive prescription.

WHEREFORE, the Petition is hereby DENIED. The Decision dated August 6, 2007 and Order dated
January 15, 2008 of the Regional Trial Court of Tuguegarao City, Branch IV in Civil Case No. 5395
are hereby AFFIRMED.

Costs against petitioners.

G.R. No. 190846, February 03, 2016

TOMAS P. TAN, JR., Petitioner, v. JOSE G. HOSANA, Respondent.

DECISION

BRION, J.:

Before us is a petition for review on certiorari1 challenging the August 28, 2009 decision2 and November 17,
2009 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 88645. chanRoblesvi rtual Lawli bra ry

The Facts

The respondent Jose G. Hosana (Jose) married Milagros C. Hosana (Milagros) on January 14, 1979.4During
their marriage, Jose and Milagros bought a house and lot located at Tinago, Naga City, which lot was
covered by Transfer Certificate of Title (TCT) No. 21229.5 chanro blesvi rt uallawl ibra ry

On January 13, 1998, Milagros sold to the petitioner Tomas P. Tan, Jr. (Tomas) the subject property, as
evidenced by a deed of sale executed by Milagros herself and as attorney-in-fact of Jose, by virtue of a
Special Power of Attorney (SPA) executed by Jose in her favor.6 The Deed of Sale stated that the purchase
price for the lot was P200,000.00.7 After the sale, TCT No. 21229 was cancelled and TCT No. 32568 was
issued in the name of Tomas.8 chanro blesvi rtua llawli bra ry

On October 19, 2001, Jose filed a Complaint for Annulment of Sale/Cancellation of Title/Reconveyance and
Damages against Milagros, Tomas, and the Register of Deeds of Naga City.9 The complaint was filed before
the Regional Trial Court (RTC), Branch 62, Naga City. In the complaint, Jose averred that while he was
working in Japan, Milagros, without his consent and knowledge, conspired with Tomas to execute the SPA by
forging Jose's signature making it appear that Jose had authorized Milagros to sell the subject property to
Tomas.10 chanroblesv irt uallawl ibra ry

In his Answer, Tomas maintained that he was a buyer in good faith and for value.11 Before he paid the full
consideration of the sale, Tomas claimed he sought advice from his lawyer-friend who told him that the title
of the subject lot was authentic and in order.12 Furthermore, he alleged that the SPA authorizing Milagros to
sell the property was annotated at the back of the title.13 c hanrob lesvi rtua llawlib ra ry

Tomas filed a cross-claim against Milagros and claimed compensatory and moral damages, attorney's fees,
and expenses, for litigation, in the event that judgment be rendered in favor of Jose.14 chan roblesv irt uallawl ibra ry
The RTC declared Milagros in default for her failure to file her answer to Jose's complaint and Tomas' cross-
claim.15 On the other hand, it dismissed Tomas' complaint against the Register of Deeds since it was only a
nominal party.16 chanrob lesvi rtua llawlib ra ry

After the pre-trial conference, trial on the merits ensued.17 chan roblesv irt uallawl ibra ry

Jose presented his brother, Bonifacio Hosana (Bonifacio), as sole witness. Bonifacio testified that he learned
of the sale of the subject property from Milagros' son.18 When Bonifacio confronted Milagros that Jose would
get angry because of the sale, Milagros retorted that she sold the property because she needed the money.
Bonifacio immediately informed Jose, who was then in Japan, of the sale.19 chanrob lesvi rtua llawli bra ry

Jose was furious when he learned of the sale and went back to the Philippines. Jose and Bonifacio verified
with the Register of Deeds and discovered that the title covering the disputed property had been transferred
to Tomas.20 chanroblesvi rtua llawli bra ry

Bonifacio further testified that Jose's signature in the SPA was forged.21 Bonifacio presented documents
containing the signature of Jose for comparison: Philippine passport, complaint-affidavit, duplicate original of
SPA dated 16 February 2002, notice of lis pendens, community tax certificate, voter's affidavit, specimen
signatures, and a handwritten letter.22 cha nro blesvi rt uallawli bra ry

On the other hand, Tomas submitted his own account of events as corroborated by Rosana Robles (Rosana),
his goddaughter. Sometime in December 1997, Tomas directed Rosana to go to the house of Milagros to
confirm if Jose knew about the sale transaction. Through a phone call by Milagros to Jose, Rosana was able
to talk to Jose who confirmed that he was aware of the sale and had given his wife authority to proceed with
the sale. Rosana informed Tomas of Jose's confirmation.23 chan roble svirtuallaw lib rary

With the assurance that all the documents were in order, Tomas made a partial payment of P350,000.00
and another P350,000.00 upon the execution of the Deed of Absolute Sale (Deed of Sale). Tomas noticed
that the consideration written by Milagros on the Deed of Sale was only P200,000.00; he inquired why the
written consideration was lower than the actual consideration paid. Milagros explained that it was done to
save on taxes. Tomas also learned from Milagros that she needed money badly and had to sell the house
because Jose had stopped sending her money.24 chanRob lesvi rtua lLawl ibra ry

The RTC Ruling

In its decision dated December 27, 2006,25 the RTC decided in favor of Jose and nullified the sale of the
subject property to Tomas. The RTC held that the SPA dated June 10, 1996, wherein Jose supposedly
appointed Milagros as his attorney-in-fact, was actually null and void.

Tomas and Milagros were ordered to jointly and severally indemnify Jose the amount of P20,000.00 as
temperate damages.26 chanRoblesvi rtua lLawl ib rary

The CA Ruling

Tomas appealed the RTC's ruling to the CA.

In a decision dated August 28, 2009,27 the CA affirmed the RTC ruling that the deed of sale and the SPA
were void. However, the CA modified the judgment of the RTC: first, by deleting the award of temperate
damages; and second, by directing Jose and Milagros to reimburse Tomas the purchase price of
P200,000.00, with interest, under the principle of unjust enrichment. Despite Tomas' allegation that he paid
P700,000.00 for the subject lot, the CA found that there was no convincing evidence that established this
claim.28chan roble svirtuallaw lib rary

Tomas filed a motion for the reconsideration of the CA decision on the ground that the amount of
P200,000.00 as reimbursement for the purchase price of the house and lot was insufficient and not
supported by the evidence formally offered before and admitted by the RTC. Tomas contended that the
actual amount he paid as consideration for the sale was P700,000.00, as supported by his testimony before
the RTC.29 chanroble svirtuallaw lib rary

The C A denied the motion for reconsideration for lack of merit" in a resolution dated November 17,
2009.30chanRoble svi rtual Lawli bra ry
 The Petition

Tomas filed the present petition for review on certiorari to challenge the CA ruling which ordered the
reimbursement of P200,000.00 only, instead of the actual purchase price he paid in the amount of
P700,000.00.31 chanrob lesvi rtua llawlib ra ry

Tomas argues that, first, all matters contained in the deed of sale, including the consideration stated, cannot
be used as evidence since it was declared null and void; second, the deed of sale was not specifically offered
to prove the actual consideration of the sale;32third, his testimony establishing the actual purchase price of
P700,000.00 paid was uncontroverted;33 and, fourth, Jose must return the full amount actually paid under
the principle of solutio indebiti.34 cha nro blesvi rtua llawli bra ry

Jose, on the other hand, argues that first, Jose is estopped from questioning the purchase price indicated in
the deed of dale for failing to immediately raise this question; and second, the terms of an agreement
reduced into writing are deemed to include all the terms agreed upon and no other evidence can be
admitted other than the terms of the agreement itself.35 chanRoble svirtual Lawli bra ry

The Issues

The core issues are (1) whether the deed of sale can be used as the basis for the amount of consideration
paid; and (2) whether the testimony of Tomas is sufficient to establish the actual purchase price of the
sale.
chanRoblesv irt ual Lawlib rary

OUR RULING

We affirm the CA ruling and deny the petition.

Whether Tomas paid the purchase price of P700,000.00 is a question of fact not proper in a petition for
review on certiorari. Appreciation of evidence and inquiry on the correctness of the appellate court's factual
findings are not the functions of this Court, as we are not a trier of facts.36 chanroble svirtuallaw lib rary

This Court does not address questions of fact which require us to rule on "the truth or falsehood of alleged
facts,"37 except in the following cases: ChanRobles Virtualawl ibra ry

(1) when the findings are grounded entirely on speculations, surmises, or conjectures; (2) when the
inference made is manifestly mistaken, absurd, or impossible; (3) when there is a grave abuse of discretion;
(4) when the judgment is based on misappreciation of facts; (5) when the findings of fact are conflicting;
(6) when in making its findings, the same are contrary to the admissions of both appellant and appellee; (7)
when the findings are contrary to those of the trial court; (8) when the findings are conclusions without
citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as
in the petitioner's main and reply briefs are not disputed by the respondent; and (10) when the findings of
fact are premised on the supposed absence of evidence and contradicted by the evidence on record.38 cha nrob lesvi rtua llawlib ra ry

The present case does not fall under any of these exceptions.

Whether Tomas sufficiently proved that he paid P700,000.00 for the subject property is a factual question
that the CA had already resolved in the negative.39 The CA found Tomas' claim of paying P700,000.00 for
the subject property to be unsubstantiated as he failed to tender any convincing evidence to establish his
claim.

We uphold the CA's finding.

In civil cases, the basic rule is that the party making allegations has the burden of proving them by a
preponderance of evidence.40 Moreover, the parties must rely on the strength of their own evidence, not
upon the weakness of the defense offered by their opponent.41 chanro blesvi rtua llawli bra ry

Preponderance of evidence is the weight, credit, and value of the aggregate evidence on either side and
is usually considered to be synonymous with the term "greater weight of the evidence" or "greater weight of
the credible evidence."42 Preponderance of evidence is a phrase that, in the last analysis, means probability
of the truth. It is evidence that is more convincing to the court as it is worthier of belief than that which is
offered in opposition thereto.43 chan roblesv irt uallawl ibra ry

We agree with the CA that Tomas' bare allegation that he paid Milagros the sum of P700,000.00 cannot be
considered as proof of payment, without any other convincing evidence to establish this claim. Tomas' bare
allegation, while uncontroverted, does not automatically entitle it to be given weight and credence.

It is settled in jurisprudence that one who pleads payment has the burden of proving it;44 the burden rests
on the defendant to prove payment, rather than on the plaintiff to prove non-payment.45 A mere allegation
is not evidence,46 and the person who alleges has the burden of proving his or her allegation with the
requisite quantum of evidence, which in civil cases is preponderance of evidence.

The force and effect of a void contract is distinguished from its admissibility as evidence.

The next question to be resolved is whether the CA correctly ordered the reimbursement of P200,000.00,
which is the consideration stated in the Deed of Sale, based on the principle of unjust enrichment.

The petitioner argues that the CA erred in relying on the consideration stated in the deed of sale as basis for
the reimbursable amount because a null and void document cannot be used as evidence.

We find no merit in the petitioner's argument.

A void or inexistent contract has no force and effect from the very beginning.47 This rule applies to contracts
that are declared void by positive provision of law, as in the case of a sale of conjugal property without the
other spouse's written consent.48 A void contract is equivalent to nothing and is absolutely wanting in civil
effects.49 It cannot be validated either by ratification or prescription.50 When, however, any of the terms of a
void contract have been performed, an action to declare its inexistence is necessary to allow restitution of
what has been given under it.51 chanro blesvi rt uallawl ibra ry

It is basic that if a void contract has already "been performed, the restoration of what has been given is in
order."52 This principle springs from Article 22 of the New Civil Code which states that "every person who
through an act of performance by another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal ground, shall return the same." Hence, the
restitution of what each party has given is a consequence of a void and inexistent contract.

While the terms and provisions of a void contract cannot be enforced since it is deemed inexistent, it does
not preclude the admissibility of the contract as evidence to prove matters that occurred in the course of
executing the contract, i.e., what each party has given in the execution of the contract.

Evidence is the means of ascertaining in a judicial proceeding the truth respecting a matter of fact,
sanctioned by the Rules of Court.53 The purpose of introducing documentary evidence is to ascertain the
truthfulness of a matter at issue, which can be the entire content or a specific provision/term in the
document.

The deed of sale as documentary evidence may be used as a means to ascertain the truthfulness of the
consideration stated and its actual payment. The purpose of introducing the deed of sale as evidence is not
to enforce the terms written in the contract, which is an obligatory force and effect of a valid contract. The
deed of sale, rather, is used as a means to determine matters that occurred in the execution of such
contract, i.e., the determination of what each party has given under the void contract to allow restitution
and prevent unjust enrichment.

Evidence is admissible when it is relevant to the issue and is not excluded by the law of these rules.54There
is no provision in the Rules of Evidence which excludes the admissibility of a void document. The Rules only
require that the evidence is relevant and not excluded by the Rules for its admissibility.55 chan roble svirtual lawlib rary

Hence, a void document is admissible as evidence because the purpose of introducing it as evidence is to
ascertain the truth respecting a matter of fact, not to enforce the terms of the document itself.

It is also settled in jurisprudence that with respect to evidence which appears to be of doubtful relevancy,
incompetency, or admissibility, the safer policy is to be liberal and not reject them on doubtful or technical
grounds, but admit them unless plainly irrelevant, immaterial, or incompetent; for the reason that their
rejection places them beyond the consideration of the court, if they are thereafter found relevant or
competent. On the other hand, their admission, if they turn out later to be irrelevant or incompetent, can
easily be remedied by completely discarding them or ignoring them.56 chan roble svirtual lawlib rary

In the present case, the deed of sale was declared null and void by positive provision of the law prohibiting
the sale of conjugal property without the spouse's consent. It does not, however, preclude the possibility
that Tomas paid the consideration stated therein. The admission of the deed of sale as evidence is
consistent with the liberal policy of the court to admit the evidence: which appears to be relevant in
resolving an issue before the courts.

An offer to prove the regular execution of the deed of sale is basis for the court to determine the
presence of the essential elements of the sale, including the consideration paid.

Tomas argues that the Deed of Sale was not specifically offered to prove the actual consideration of the sale
and, hence, cannot be considered by the court. Tomas is incorrect.

The deed of sale in the present case was formally offered by both parties as evidence.57 Tomas, in fact,
formally offered it for the purpose of proving its execution and the regularity of the sale.58 chan roble svirtuallaw lib rary

The offer of the deed of sale to prove its regularity necessarily allowed the; lower courts to consider the
terms written therein to determine whether all the essential elements59 for a valid contract of sale are
present, including the consideration of the sale. The fact that the sale was declared null and void does not
prevent the court from relying on consideration stated in the deed of sale to determine the actual amount
paid by the petitioner for the purpose of preventing unjust enrichment.

Hence, the specific offer of the Deed of Sale to prove the actual consideration of the sale is not necessary
since it is necessarily included in determining the regular execution of the sale.

The consideration stated in the notarized Deed of Sale is prima facie evidence of the amount paid
by the petitioner.

The notarized deed of sale is a public document and is prima facie evidence of the truth of the facts stated
therein.60
cha nrob lesvi rtua llawlib ra ry

Prima facie evidence is defined as evidence good and sufficient on its face. Such evidence as, in the
judgment of the law, is sufficient to establish a given fact, or the group or chain of facts constituting the
party's claim or defense and which if not rebutted or contradicted, will remain sufficient.61 chanro blesv irt uallawl ibra ry

In the present case, the consideration stated in the deed of sale constitutes prima facie evidence of the
amount paid by Tomas for the transfer of the property to his name. Tomas failed to adduce satisfactory
evidence to rebut or contradict the consideration stated as the actual consideration and amount paid to
Milagros and Jose.

The deed of sale was declared null and void by a positive provision of law requiring the consent of both
spouses for the sale of conjugal property. There is, however, no question on the presence of the
consideration of the sale, except with respect to the actual amount paid. While the deed of sale has no force
and effect as a contract, it remains prima facie evidence of the actual consideration paid.

As earlier discussed, Tomas failed to substantiate his claim that he paid to Milagros the amount of
P700,000.00, instead of the amount of P200,000.00 stated in the deed of sale. No documentary or
testimonial evidence to prove payment of the higher amount was presented, apart from Tomas' sole
testimony. Tomas' sole testimony of payment is self-serving and insufficient to unequivocally prove that
Milagros received P700,000.00 for the subject property.

Hence, the consideration stated in the deed of sale remains sufficient evidence of the actual amount the
petitioner paid and the same amount which should be returned under the principle of unjust enrichment.

Unjust enrichment exists "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."62 The prevention of unjust enrichment is a recognized public policy of the State and is based on
Article 22 of the Civil Code.63 chan roblesv irt uallawl ibrary

The principle of unjust enrichment requires Jose to return what he or Milagros received under the void
contract which presumably benefitted their conjugal partnership.

Accordingly, the CA correctly ordered Jose to return the amount of P200,000.00 since this the consideration
stated in the Deed of Sale and given credence by the lower court. Indeed, even Jose expressly stated in his
comment that Tomas is entitled to recover the money paid by him in the amount of P200,000.00 as
appearing in the contract.

WHEREFORE, we hereby DENY the petition for review on certiorari. The decision dated August 28, 2009
and the resolution dated November 17, 2009, of the Court of Appeals in CA-G.R. CV No. 88645
is AFFIRMED. Costs against the petitioner.

SO ORDERED. cralawlawlibra ry

HEIRS OF POLICRONIO M. G.R. No. 165748

URETA, SR., namely: CONRADO
B. URETA, MACARIO B. URETA,
GLORIA URETA-GONZALES,
ROMEO B. URETA, RITA
URETA-SOLANO, NENA URETA-
TONGCUA, VENANCIO B.
URETA, LILIA URETA-TAYCO,
and HEIRS OF POLICRONIO B.
URETA, JR., namely: MIGUEL T.
URETA, RAMON POLICRONIO
T. URETA, EMMANUEL T.
URETA, and BERNADETTE T.
URETA,
Petitioners,

- versus -

HEIRS OF LIBERATO M.
URETA, namely: TERESA F.
URETA, AMPARO URETA-
CASTILLO, IGNACIO F. URETA,
SR., EMIRITO F. URETA,
WILKIE F. URETA, LIBERATO F.
URETA, JR., RAY F. URETA,
ZALDY F. URETA, and MILA
JEAN URETA CIPRIANO;
HEIRS OF PRUDENCIA URETA
PARADERO, namely: WILLIAM
U. PARADERO, WARLITO U.
PARADERO, CARMENCITA P.
PERLAS, CRISTINA P.
CORDOVA, EDNA P.
GALLARDO, LETICIA P. REYES;
NARCISO M. URETA;
VICENTE M. URETA;
HEIRS OF FRANCISCO M.
URETA, namely: EDITA T.
URETA-REYES and LOLLIE T.
URETA-VILLARUEL; ROQUE M.
URETA; ADELA URETA-
GONZALES; HEIRS OF
INOCENCIO M. URETA, namely:
BENILDA V. URETA, ALFONSO
V. URETA II, DICK RICARDO V.
URETA, and ENRIQUE V.
URETA; MERLINDA U. RIVERA;
JORGE URETA; ANDRES
URETA, WENEFREDA U.
TARAN; and BENEDICT URETA,
Respondents.
x--------------------------------------------------x
HEIRS OF LIBERATO M. G.R. No. 165930
URETA, namely: TERESA F.
URETA, AMPARO URETA-
CASTILLO, IGNACIO F. URETA,
SR., EMIRITO F. URETA,
WILKIE F. URETA, LIBERATO F.
URETA, JR., RAY F. URETA,
ZALDY F. URETA, and MILA
JEAN URETA CIPRIANO;
HEIRS OF PRUDENCIA URETA
PARADERO, namely: WILLIAM
U. PARADERO, WARLITO U.
PARADERO, CARMENCITA P.
PERLAS, CRISTINA P.
CORDOVA, EDNA P.
GALLARDO, LETICIA P. REYES;
NARCISO M. URETA;
VICENTE M. URETA;
HEIRS OF FRANCISCO M.
URETA, namely: EDITA T.
URETA-REYES and LOLLIE T.
URETA-VILLARUEL; ROQUE M.
URETA; ADELA URETA-
GONZALES; HEIRS OF
INOCENCIO M. URETA, namely:
BENILDA V. URETA, ALFONSO
V. URETA II, DICK RICARDO V.
URETA, and ENRIQUE V.
URETA; MERLINDA U. RIVERA;
JORGE URETA; ANDRES
URETA, WENEFREDA U.
TARAN; and BENEDICT URETA,
Petitioners,

- versus

HEIRS OF POLICRONIO M. Present:

URETA, SR., namely: CONRADO
B. URETA, MACARIO B. URETA, VELASCO, JR., J., Chairperson,
GLORIA URETA-GONZALES, PERALTA,
ROMEO B. URETA, RITA ABAD,
URETA-SOLANO, NENA URETA- MENDOZA, and
TONGCUA, VENANCIO B. SERENO, JJ.
URETA, LILIA URETA-TAYCO,
and HEIRS OF POLICRONIO B.
URETA, JR., namely: MIGUEL T.
URETA, RAMON POLICRONIO
T. URETA, EMMANUEL T.
URETA, and BERNADETTE T.
URETA, Promulgated:
Respondents. September 14, 2011

x--------------------------------------------------x
DECISION
MENDOZA, J.:
 These consolidated petitions for review on certiorari under Rule 45 of the
1997 Revised Rules of Civil Procedure assail the April 20, 2004 Decision[1] of the
Court of Appeals (CA), and its October 14, 2004 Resolution[2] in C.A.-G.R. CV No.
71399, which affirmed with modification the April 26, 2001 Decision [3] of the
Regional Trial Court, Branch 9, Kalibo, Aklan (RTC) in Civil Case No. 5026.

The Facts

In his lifetime, Alfonso Ureta (Alfonso) begot 14 children, namely, Policronio,

Liberato, Narciso, Prudencia, Vicente, Francisco, Inocensio, Roque, Adela,
Wenefreda, Merlinda, Benedicto, Jorge, and Andres. The children of
Policronio (Heirs of Policronio), are opposed to the rest of Alfonsos children and
their descendants (Heirs of Alfonso).

Alfonso was financially well-off during his lifetime. He owned several fishpens, a
fishpond, a sari-sari store, a passenger jeep, and was engaged in the buying and
selling of copra. Policronio, the eldest, was the only child of Alfonso who failed to
finish schooling and instead worked on his fathers lands.

Sometime in October 1969, Alfonso and four of his children, namely, Policronio,
Liberato, Prudencia, and Francisco, met at the house of Liberato. Francisco, who
was then a municipal judge, suggested that in order to reduce the inheritance taxes,
their father should make it appear that he had sold some of his lands to his children.
Accordingly, Alfonso executed four (4) Deeds of Sale covering several parcels of
land in favor of Policronio,[4] Liberato,[5] Prudencia,[6] and his common-law wife,
Valeriana Dela Cruz.[7] The Deed of Sale executed on October 25, 1969, in favor of
Policronio, covered six parcels of land, which are the properties in dispute in this
case.

Since the sales were only made for taxation purposes and no monetary
consideration was given, Alfonso continued to own, possess and enjoy the lands
and their produce.

When Alfonso died on October 11, 1972, Liberato acted as the administrator of his
fathers estate. He was later succeeded by his sister Prudencia, and then by her
daughter, Carmencita Perlas. Except for a portion of parcel 5, the rest of the parcels
transferred to Policronio were tenanted by the Fernandez Family. These tenants
never turned over the produce of the lands to Policronio or any of his heirs, but to
Alfonso and, later, to the administrators of his estate.
 Policronio died on November 22, 1974. Except for the said portion of parcel
5, neither Policronio nor his heirs ever took possession of the subject lands.

On April 19, 1989, Alfonsos heirs executed a Deed of Extra-Judicial

Partition,[8] which included all the lands that were covered by the four (4) deeds of
sale that were previously executed by Alfonso for taxation purposes. Conrado,
Policronios eldest son, representing the Heirs of Policronio, signed the Deed of
Extra-Judicial Partition in behalf of his co-heirs.

After their fathers death, the Heirs of Policronio found tax declarations in his name
covering the six parcels of land. On June 15, 1995, they obtained a copy of the
Deed of Sale executed on October 25, 1969 by Alfonso in favor of Policronio.

Not long after, on July 30, 1995, the Heirs of Policronio allegedly learned about the
Deed of Extra-Judicial Partition involving Alfonsos estate when it was published in
the July 19, 1995 issue of the Aklan Reporter.

Believing that the six parcels of land belonged to their late father, and as
such, excluded from the Deed of Extra-Judicial Partition, the Heirs of Policronio
sought to amicably settle the matter with the Heirs of Alfonso. Earnest efforts
proving futile, the Heirs of Policronio filed a Complaint for Declaration of
Ownership, Recovery of Possession, Annulment of Documents, Partition, and
Damages[9] against the Heirs of Alfonso before the RTC on November 17, 1995
where the following issues were submitted: (1) whether or not the Deed of Sale was
valid; (2) whether or not the Deed of Extra-Judicial Partition was valid; and (3)
who between the parties was entitled to damages.

The Ruling of the RTC

On April 26, 2001, the RTC dismissed the Complaint of the Heirs of Policronio and
ruled in favor of the Heirs of Alfonso in a decision, the dispositive portion of which
reads:

WHEREFORE, the Court finds that the preponderance of evidence

tilts in favor of the defendants, hence the instant case is hereby
DISMISSED.

The counterclaims are likewise DISMISSED.

 With costs against plaintiffs.

SO ORDERED.

The RTC found that the Heirs of Alfonso clearly established that the Deed of
Sale was null and void. It held that the Heirs of Policronio failed to rebut the
evidence of the Heirs of Alfonso, which proved that the Deed of Sale in the
possession of the former was one of the four (4) Deeds of Sale executed by Alfonso
in favor of his 3 children and second wife for taxation purposes; that although tax
declarations were issued in the name of Policronio, he or his heirs never took
possession of the subject lands except a portion of parcel 5; and that all the produce
were turned over by the tenants to Alfonso and the administrators of his estate and
never to Policronio or his heirs.

The RTC further found that there was no money involved in the sale. Even
granting that there was, as claimed by the Heirs of Policronio, ₱2,000.00 for six
parcels of land, the amount was grossly inadequate. It was also noted that the
aggregate area of the subject lands was more than double the average share
adjudicated to each of the other children in the Deed of Extra-Judicial Partition;
that the siblings of Policronio were the ones who shared in the produce of the land;
and that the Heirs of Policronio only paid real estate taxes in 1996 and 1997. The
RTC opined that Policronio must have been aware that the transfer was merely for
taxation purposes because he did not subsequently take possession of the properties
even after the death of his father.

The Deed of Extra-Judicial Partition, on the other hand, was declared valid
by the RTC as all the heirs of Alfonso were represented and received equal shares
and all the requirements of a valid extra-judicial partition were met. The RTC
considered Conrados claim that he did not understand the full significance of his
signature when he signed in behalf of his co-heirs, as a gratutitous assertion. The
RTC was of the view that when he admitted to have signed all the pages and
personally appeared before the notary public, he was presumed to have understood
their contents.

Lastly, neither party was entitled to damages. The Heirs of Alfonso failed to
present testimony to serve as factual basis for moral damages, no document was
presented to prove actual damages, and the Heirs of Policronio were found to have
filed the case in good faith.
The Ruling of the CA

Aggrieved, the Heirs of Policronio appealed before the CA, which rendered a
decision on April 20, 2004, the dispositive portion of which reads as follows:

WHEREFORE, the appeal is PARTIALLY GRANTED. The appealed

Decision, dated 26 April 2001, rendered by Hon. Judge Dean R. Telan of
the Regional Trial Court of Kalibo, Aklan, Branch 9, is hereby AFFIRMED
with MODIFICATION:

1.) The Deed of Sale in favor of Policronio Ureta, Sr., dated 25

October 1969, covering six (6) parcels of land is hereby declared VOID for
being ABSOLUTELY SIMULATED;

2.) The Deed of Extra-Judicial Partition, dated 19 April 1989,

is ANNULLED;

3.) The claim for actual and exemplary damages are DISMISSED for
lack of factual and legal basis.

The case is hereby REMANDED to the court of origin for the proper
partition of ALFONSO URETAS Estate in accordance with Rule 69 of the
1997 Rules of Civil Procedure. No costs at this instance.

SO ORDERED.

The CA affirmed the finding of the RTC that the Deed of Sale was void. It found
the Deed of Sale to be absolutely simulated as the parties did not intend to be
legally bound by it. As such, it produced no legal effects and did not alter the
juridical situation of the parties. The CA also noted that Alfonso continued to
exercise all the rights of an owner even after the execution of the Deed of Sale, as it
was undisputed that he remained in possession of the subject parcels of land and
enjoyed their produce until his death.

Policronio, on the other hand, never exercised any rights pertaining to an

owner over the subject lands from the time they were sold to him up until his death.
He never took or attempted to take possession of the land even after his fathers
death, never demanded delivery of the produce from the tenants, and never paid
realty taxes on the properties. It was also noted that Policronio never disclosed the
existence of the Deed of Sale to his children, as they were, in fact, surprised to
discover its existence. The CA, thus, concluded that Policronio must have been
aware that the transfer was only made for taxation purposes.

The testimony of Amparo Castillo, as to the circumstances surrounding the

actual arrangement and agreement between the parties prior to the execution of the
four (4) Deeds of Sale, was found by the CA to be unrebutted. The RTCs
assessment of the credibility of her testimony was accorded respect, and the
intention of the parties was given the primary consideration in determining the true
nature of the contract.

Contrary to the finding of the RTC though, the CA annulled the Deed of
Extra-Judicial Partition due to the incapacity of one of the parties to give his
consent to the contract. It held that before Conrado could validly bind his co-heirs
to the Deed of Extra-Judicial Partition, it was necessary that he be clothed with the
proper authority. The CA ruled that a special power of attorney was required under
Article 1878 (5) and (15) of the Civil Code. Without a special power of attorney, it
was held that Conrado lacked the legal capactiy to give the consent of his co-heirs,
thus, rendering the Deed of Extra-Judicial Partition voidable under Article 1390 (1)
of the Civil Code.

As a consequence, the CA ordered the remand of the case to the RTC for the proper
partition of the estate, with the option that the parties may still voluntarily effect the
partition by executing another agreement or by adopting the assailed Deed of
Partition with the RTCs approval in either case. Otherwise, the RTC may proceed
with the compulsory partition of the estate in accordance with the Rules.

With regard to the claim for damages, the CA agreed with the RTC and
dismissed the claim for actual and compensatory damages for lack of factual and
legal basis.

Both parties filed their respective Motions for Reconsideration, which were
denied by the CA for lack of merit in a Resolution dated October 14, 2004.

In their Motion for Reconsideration, the Heirs of Policronio argued that the RTC
violated the best evidence rule in giving credence to the testimony of Amparo
Castillo with regard to the simulation of the Deed of Sale, and that prescription had
set in precluding any question on the validity of the contract.
 The CA held that the oral testimony was admissible under Rule 130, Section
9 (b) and (c), which provides that evidence aliunde may be allowed to explain the
terms of the written agreement if the same failed to express the true intent and
agreement of the parties thereto, or when the validity of the written agreement was
put in issue. Furthermore, the CA found that the Heirs of Policronio waived their
right to object to evidence aliunde having failed to do so during trial and for raising
such only for the first time on appeal. With regard to prescription, the CA ruled that
the action or defense for the declaration of the inexistence of a contract did not
prescribe under Article 1410 of the Civil Code.

On the other hand, the Heirs of Alfonso argued that the Deed of Extra-
Judicial Partition should not have been annulled, and instead the preterited heirs
should be given their share. The CA reiterated that Conrados lack of capacity to
give his co-heirs consent to the extra-judicial settlement rendered the same
voidable.

Hence, the present Petitions for Review on Certiorari.

The Issues

The issues presented for resolution by the Heirs of Policronio in G.R. No.
165748 are as follows:
I.

Whether the Court of Appeals is correct in ruling that the Deed of

Absolute Sale of 25 October 1969 is void for being absolutely
fictitious and in relation therewith, may parol evidence be
entertained to thwart its binding effect after the parties have both
died?

Assuming that indeed the said document is simulated, whether or

not the parties thereto including their successors in interest are
estopped to question its validity, they being bound by Articles
1412 and 1421 of the Civil Code?

II.

Whether prescription applies to bar any question respecting the

validity of the Deed of Absolute Sale dated 25 October 1969?
 Whether prescription applies to bar any collateral attack on the
validity of the deed of absolute sale executed 21 years earlier?

III.

Whether the Court of Appeals correctly ruled in nullifying the

Deed of Extrajudicial Partition because Conrado Ureta signed the
same without the written authority from his siblings in
contravention of Article 1878 in relation to Article 1390 of the
Civil Code and in relation therewith, whether the defense of
ratification and/or preterition raised for the first time on appeal
may be entertained?
The issues presented for resolution by the Heirs of Alfonso in G.R. No.
165930 are as follows:

I.

Whether or not grave error was committed by the Trial Court

and Court of Appeals in declaring the Deed of Sale of subject
properties as absolutely simulated and null and void thru parol
evidence based on their factual findings as to its fictitious nature,
and there being waiver of any objection based on violation of the
parol evidence rule.

II.

Whether or not the Court of Appeals was correct in holding that

Conrado Uretas lack of capacity to give his co-heirs consent to the
Extra-Judicial Partition rendered the same voidable.

III.

Granting arguendo that Conrado Ureta was not authorized to

represent his co-heirs and there was no ratification, whether or
not the Court of Appeals was correct in ordering the remand of
the case to the Regional Trial Court for partition of the estate of
Alfonso Ureta.

IV.
 Since the sale in favor of Policronio Ureta Sr. was null and void ab
initio, the properties covered therein formed part of the estate of
the late Alfonso Ureta and was correctly included in the Deed of
Extrajudicial Partition even if no prior action for nullification of
the sale was filed by the heirs of Liberato Ureta.

V.

Whether or not the heirs of Policronio Ureta Sr. can claim that
estoppel based on Article 1412 of the Civil Code as well as the
issue of prescription can still be raised on appeal.
These various contentions revolve around two major issues, to wit: (1)
whether the Deed of Sale is valid, and (2) whether the Deed of Extra-Judicial
Partition is valid. Thus, the assigned errors shall be discussed jointly and
in seriatim.

The Ruling of the Court

Validity of the Deed of Sale

Two veritable legal presumptions bear on the validity of the Deed of Sale:
(1) that there was sufficient consideration for the contract; and (2) that it was the
result of a fair and regular private transaction. If shown to hold, these presumptions
infer prima facie the transactions validity, except that it must yield to the evidence
adduced.[10]

As will be discussed below, the evidence overcomes these two

presumptions.

Absolute Simulation

First, the Deed of Sale was not the result of a fair and regular private transaction
because it was absolutely simulated.

The Heirs of Policronio argued that the land had been validly sold to
Policronio as the Deed of Sale contained all the essential elements of a valid
contract of sale, by virtue of which, the subject properties were transferred in his
name as evidenced by the tax declaration. There being no invalidation prior to the
execution of the Deed of Extra-Judicial Partition, the probity and integrity of the
Deed of Sale should remain undiminished and accorded respect as it was a duly
notarized public instrument.

The Heirs of Policronio posited that his loyal services to his father and his being
the eldest among Alfonsos children, might have prompted the old man to sell the
subject lands to him at a very low price as an advance inheritance. They explained
that Policronios failure to take possession of the subject lands and to claim their
produce manifests a Filipino family practice wherein a child would take possession
and enjoy the fruits of the land sold by a parent only after the latters
death. Policronio simply treated the lands the same way his father Alfonso treated
them - where his children enjoyed usufructuary rights over the properties, as
opposed to appropriating them exclusively to himself. They contended
that Policronios failure to take actual possession of the lands did not prove that he
was not the owner as he was merely exercising his right to dispose of them. They
argue that it was an error on the part of the CA to conclude that ownership by
Policronio was not established by his failure to possess the properties
sold. Instead, emphasis should be made on the fact that the tax declarations, being
indicia of possession, were in Policronios name.

They further argued that the Heirs of Alfonso failed to appreciate that the
Deed of Sale was clear enough to convey the subject parcels of land. Citing
jurisprudence, they contend that there is a presumption that an instrument sets out
the true agreement of the parties thereto and that it was executed for valuable
consideration,[11] and where there is no doubt as to the intention of the parties to a
contract, the literal meaning of the stipulation shall control.[12] Nowhere in the
Deed of Sale is it indicated that the transfer was only for taxation purposes. On the
contrary, the document clearly indicates that the lands were sold. Therefore, they
averred that the literal meaning of the stipulation should control.

The Court disagrees.

The Court finds no cogent reason to deviate from the finding of the CA that
the Deed of Sale is null and void for being absolutely simulated. The Civil Code
provides:

Art. 1345. Simulation of a contract may 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.
 Art. 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended
for any purpose contrary to law, morals, good customs, public order or
public policy binds the parties to their real agreement.

Valerio v. Refresca[13] is instructive on the matter of simulation of contracts:

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. However, if the parties state
a false cause in the contract to conceal their real agreement, the contract is
relatively simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a contract are present
and the simulation refers only to the content or terms of the contract, the
agreement is absolutely binding and enforceable between the parties and
their successors in interest.

Lacking, therefore, in an absolutely simulated contract is consent which is

essential to a valid and enforceable contract.[14] Thus, where a person, in order to
place his property beyond the reach of his creditors, simulates a transfer of it to
another, he does not really intend to divest himself of his title and control of the
property; hence, the deed of transfer is but a sham.[15] Similarly, in this case,
Alfonso simulated a transfer to Policronio purely for taxation purposes, without
intending to transfer ownership over the subject lands.

The primary consideration in determining the true nature of a contract 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.[16] The true intention of the parties in this case
was sufficiently proven by the Heirs of Alfonso.

The Heirs of Alfonso established by a preponderance of evidence[17] that the

Deed of Sale was one of the four (4) absolutely simulated Deeds of Sale which
involved no actual monetary consideration, executed by Alfonso in favor of his
children, Policronio, Liberato, and Prudencia, and his second wife, Valeriana, for
taxation purposes.
Amparo Castillo, the daughter of Liberato, testified, to wit:

Q: Now sometime in the year 1969 can you recall if your grandfather and
his children [met] in your house?

A: Yes sir, that was sometime in October 1969 when they [met] in our
house, my grandfather, my late uncle Policronio Ureta, my late uncle
Liberato Ureta, my uncle Francisco Ureta, and then my auntie Prudencia
Ureta they talk[ed] about, that idea came from my uncle Francisco Ureta
to [sell] some parcels of land to his children to lessen the inheritance tax
whatever happened to my grandfather, actually no money involved in this
sale.

Q: Now you said there was that agreement, verbal agreement. [W]here
were you when this Alfonso Ureta and his children gather[ed] in your
house?

A: I was near them in fact I heard everything they were talking [about]

xxx

Q: Were there documents of sale executed by Alfonso Ureta in furtherance

of their verbal agreement?

A: Yes sir.

Q: To whom in particular did your grandfather Alfonso Ureta execute this

deed of sale without money consideration according to you?

A: To my uncle Policronio Ureta and to Prudencia Ureta Panadero.

Q: And who else?

A: To Valeriana dela Cruz.

Q: How about your father?

A: He has.[18]

The other Deeds of Sale executed by Alfonso in favor of his children

Prudencia and Liberato, and second wife Valeriana, all bearing the same date of
execution, were duly presented in evidence by the Heirs of Alfonso, and were
uncontested by the Heirs of Policronio. The lands which were the subject of these
Deeds of Sale were in fact included in the Deed of Extra-Judicial Partition
executed by all the heirs of Alfonso, where it was expressly stipulated:

That the above-named Amparo U. Castillo, Prudencia U. Paradero,

Conrado B. Ureta and Merlinda U. Rivera do hereby recognize and
acknowledge as a fact that the properties presently declared in their
respective names or in the names of their respective parents and are
included in the foregoing instrument are actually the properties of the
deceased Alfonso Ureta and were transferred only for the purpose of
effective administration and development and convenience in the payment
of taxes and, therefore, all instruments conveying or affecting the transfer
of said properties are null and void from the beginning.[19]

As found by the CA, Alfonso continued to exercise all the rights of an owner
even after the execution of the Deeds of Sale. It was undisputed that Alfonso
remained in possession of the subject lands and enjoyed their produce until his
death. No credence can be given to the contention of the Heirs of Policrionio that
their father did not take possession of the subject lands or enjoyed the fruits thereof
in deference to a Filipino family practice. Had this been true, Policronio should
have taken possession of the subject lands after his father died. On the contrary, it
was admitted that neither Policronio nor his heirs ever took possession of the
subject lands from the time they were sold to him, and even after the death of both
Alfonso and Policronio.

It was also admitted by the Heirs of Policronio that the tenants of the subject
lands never turned over the produce of the properties to Policronio or his heirs but
only to Alfonso and the administrators of his estate. Neither was there a demand for
their delivery to Policronio or his heirs. Neither did Policronio ever pay real estate
taxes on the properties, the only payment on record being those made by his heirs
in 1996 and 1997 ten years after his death. In sum, Policronio never exercised any
rights pertaining to an owner over the subject lands.

The most protuberant index of simulation of contract is the complete absence

of an attempt in any manner on the part of the ostensible buyer to assert rights of
ownership over the subject properties. Policronios failure to take exclusive
possession of the subject properties or, in the alternative, to collect rentals, is
contrary to the principle of ownership. Such failure is a clear badge of simulation
that renders the whole transaction void. [20]
 It is further telling that Policronio never disclosed the existence of the Deed
of Sale to his children. This, coupled with Policronios failure to exercise any rights
pertaining to an owner of the subject lands, leads to the conclusion that he was
aware that the transfer was only made for taxation purposes and never intended to
bind the parties thereto.

As the above factual circumstances remain unrebutted by the Heirs of Policronio,

the factual findings of the RTC, which were affirmed by the CA, remain binding
and conclusive upon this Court.[21]

It is clear that the parties did not intend to be bound at all, and as such, the
Deed of Sale produced no legal effects and did not alter the juridical situation of
the parties. The Deed of Sale is, therefore, void for being absolutely simulated
pursuant to Article 1409 (2) of the Civil Code which provides:

Art. 1409. The following contracts are inexistent and void from the
beginning:

xxx

(2) Those which are absolutely simulated or fictitious;

xxx

For guidance, the following are the most fundamental characteristics of void
or inexistent contracts:

1) As a general rule, they produce no legal effects whatsoever in

accordance with the principle "quod nullum est nullum producit
effectum."

2) They are not susceptible of ratification.

3) The right to set up the defense of inexistence or absolute nullity

cannot be waived or renounced.

4) The action or defense for the declaration of their inexistence or

absolute nullity is imprescriptible.
 5) The inexistence or absolute nullity of a contract cannot be invoked
by a person whose interests are not directly affected.[22]

Since the Deed of Sale is void, the subject properties were properly included
in the Deed of Extra-Judicial Partition of the estate of Alfonso.

Absence and Inadequacy of Consideration

The second presumption is rebutted by the lack of consideration for the

Deed of Sale.

In their Answer,[23] the Heirs of Alfonso initially argued that the Deed of
Sale was void for lack of consideration, and even granting that there was
consideration, such was inadequate. The Heirs of Policronio counter that the
defenses of absence or inadequacy of consideration are not grounds to render a
contract void.

The Heirs of Policronio contended that under Article 1470 of the Civil
Code, gross inadequacy of the price does not affect a contract of sale, except as it
may indicate a defect in the consent, or that the parties really intended a donation
or some other act or contract. Citing jurisprudence, they argued that inadequacy of
monetary consideration does not render a conveyance inexistent as liberality may
be sufficient cause for a valid contract, whereas fraud or bad faith may render it
either rescissible or voidable, although valid until annulled.[24] Thus, they argued
that if the contract suffers from inadequate consideration, it remains valid until
annulled, and the remedy of rescission calls for judicial intervention, which remedy
the Heirs of Alfonso failed to take.

It is further argued that even granting that the sale of the subject lands for a
consideration of ₱2,000.00 was inadequate, absent any evidence of the fair market
value of the land at the time of its sale, it cannot be concluded that the price at
which it was sold was inadequate.[25] As there is nothing in the records to show that
the Heirs of Alfonso supplied the true value of the land in 1969, the amount of
₱2,000.00 must thus stand as its saleable value.

On this issue, the Court finds for the Heirs of Alfonso.

 For lack of consideration, the Deed of Sale is once again found to be void. It
states that Policronio paid, and Alfonso received, the ₱2,000.00 purchase price on
the date of the signing of the contract:

That I, ALFONSO F. URETA, x x x for and in consideration of the

sum of TWO THOUSAND (₱2,000.00) PESOS, Philippine Currency, to me
in hand paid by POLICRONIO M. URETA, x x x, do hereby CEDE,
TRANSFER, and CONVEY, by way of absolute sale, x x x six (6) parcels of
land x x x.[26] [Emphasis ours]

Although, on its face, the Deed of Sale appears to be supported by valuable

consideration, the RTC found that there was no money involved in the sale.[27] This
finding was affirmed by the CA in ruling that the sale is void for being absolutely
simulated. Considering that there is no cogent reason to deviate from such factual
findings, they are binding on this Court.

It is well-settled in a long line of cases that 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.[28] Thus, although the contract states that
the purchase price of ₱2,000.00 was paid by Policronio to Alfonso for the subject
properties, it has been proven that such was never in fact paid as there was no
money involved. It must, therefore, follow that the Deed of Sale is void for lack of
consideration.

Given that the Deed of Sale is void, it is unnecessary to discuss the issue on
the inadequacy of consideration.

Parol Evidence and Hearsay

The Heirs of Policronio aver that the rules on parol evidence and hearsay
were violated by the CA in ruling that the Deed of Sale was void.

They argued that based on the parol evidence rule, the Heirs of Alfonso and,
specifically, Amparo Castillo, were not in a position to prove the terms outside of
the contract because they were not parties nor successors-in-interest in the Deed of
Sale in question. Thus, it is argued that the testimony of Amparo Castillo violates
the parol evidence rule.
 Stemming from the presumption that the Heirs of Alfonso were not parties
to the contract, it is also argued that the parol evidence rule may not be properly
invoked by either party in the litigation against the other, where at least one of the
parties to the suit is not a party or a privy of a party to the written instrument in
question and does not base a claim on the instrument or assert a right originating in
the instrument or the relation established thereby.[29]

Their arguments are untenable.

The objection against the admission of any evidence must be made at the
proper time, as soon as the grounds therefor become reasonably apparent, and if
not so made, it will be understood to have been waived. In the case of testimonial
evidence, the objection must be made when the objectionable question is asked or
after the answer is given if the objectionable features become apparent only by
reason of such answer.[30] In this case, the Heirs of Policronio failed to timely
object to the testimony of Amparo Castillo and they are, thus, deemed to have
waived the benefit of the parol evidence rule.

Granting that the Heirs of Policronio timely objected to the testimony of

Amparo Castillo, their argument would still fail.

Section 9 of Rule 130 of the Rules of Court provides:

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.
 [Emphasis ours]

Paragraphs (b) and (c) are applicable in the case at bench.

The failure of the Deed of Sale to express the true intent and agreement of
the parties was clearly put in issue in the Answer[31] of the Heirs of Alfonso to the
Complaint. It was alleged that the Deed of Sale was only made to lessen the
payment of estate and inheritance taxes and not meant to transfer ownership. The
exception in paragraph (b) is allowed to enable the court to ascertain the true intent
of the parties, and once the intent is clear, it shall prevail over what the document
appears to be on its face.[32] As the true intent of the parties was duly proven in the
present case, it now prevails over what appears on the Deed of Sale.

The validity of the Deed of Sale was also put in issue in the Answer, and
was precisely one of the issues submitted to the RTC for resolution.[33] The
operation of the parol evidence rule requires the existence of a valid written
agreement. It is, thus, not applicable in a proceeding where the validity of such
agreement is the fact in dispute, such as when a contract may be void for lack of
consideration.[34] Considering that the Deed of Sale has been shown to be void for
being absolutely simulated and for lack of consideration, the Heirs of Alfonso are
not precluded from presenting evidence to modify, explain or add to the terms of
the written agreement.

The Heirs of Policronio must be in a state of confusion in arguing that the

Heirs of Alfonso may not question the Deed of Sale for not being parties or
successors-in-interest therein on the basis that the parol evidence rule may not be
properly invoked in a proceeding or litigation where at least one of the parties to
the suit is not a party or a privy of a party to the written instrument in question and
does not base a claim on the instrument or assert a right originating in the
instrument or the relation established thereby. If their argument was to be accepted,
then the Heirs of Policronio would themselves be precluded from invoking the
parol evidence rule to exclude the evidence of the Heirs of Alfonso.

Indeed, the applicability of the parol evidence rule requires that the case be
between parties and their successors-in-interest.[35] In this case, both the Heirs of
Alfonso and the Heirs of Policronio are successors-in-interest of the parties to the
Deed of Sale as they claim rights under Alfonso and Policronio, respectively. The
parol evidence rule excluding evidence aliunde, however, still cannot apply
because the present case falls under two exceptions to the rule, as discussed above.

With respect to hearsay, the Heirs of Policronio contended that the rule on
hearsay was violated when the testimony of Amparo Castillo was given weight in
proving that the subject lands were only sold for taxation purposes as she was a
person alien to the contract. Even granting that they did not object to her testimony
during trial, they argued that it should not have been appreciated by the CA
because it had no probative value whatsoever.[36]

The Court disagrees.

It has indeed been held that hearsay evidence whether objected to or not
cannot be given credence for having no probative value.[37] This principle,
however, has been relaxed in cases where, in addition to the failure to object to the
admissibility of the subject evidence, there were other pieces of evidence presented
or there were other circumstances prevailing to support the fact in issue. In Top-
Weld Manufacturing, Inc. v. ECED S.A.,[38] this Court held:

Hearsay evidence alone may be insufficient to establish a fact in an

injunction suit (Parker v. Furlong, 62 P. 490) but, when no objection is
made thereto, it is, like any other evidence, to be considered and given the
importance it deserves. (Smith v. Delaware & Atlantic Telegraph &
Telephone Co., 51 A 464). Although we should warn of the undesirability
of issuing judgments solely on the basis of the affidavits submitted, where
as here, said affidavits are overwhelming, uncontroverted by competent
evidence and not inherently improbable, we are constrained to uphold the
allegations of the respondents regarding the multifarious violations of the
contracts made by the petitioner.

In the case at bench, there were other prevailing circumstances which

corroborate the testimony of Amparo Castillo. First, the other Deeds of Sale which
were executed in favor of Liberato, Prudencia, and Valeriana on the same day as
that of Policronios were all presented in evidence. Second, all the properties
subject therein were included in the Deed of Extra-Judicial Partition of the estate of
Alfonso. Third, Policronio, during his lifetime, never exercised acts of ownership
over the subject properties (as he never demanded or took possession of them,
never demanded or received the produce thereof, and never paid real estate taxes
thereon). Fourth, Policronio never informed his children of the sale.
 As the Heirs of Policronio failed to controvert the evidence presented, and to
timely object to the testimony of Amparo Castillo, both the RTC and the CA
correctly accorded probative weight to her testimony.

Prior Action Unnecessary

The Heirs of Policronio averred that the Heirs of Alfonso should have filed
an action to declare the sale void prior to executing the Deed of Extra-Judicial
Partition. They argued that the sale should enjoy the presumption of regularity, and
until overturned by a court, the Heirs of Alfonso had no authority to include the
land in the inventory of properties of Alfonsos estate. By doing so, they arrogated
upon themselves the power of invalidating the Deed of Sale which is exclusively
vested in a court of law which, in turn, can rule only upon the observance of due
process. Thus, they contended that prescription, laches, or estoppel have set in to
militate against assailing the validity of the sale.

The Heirs of Policronio are mistaken.

A simulated contract of sale is without any cause or consideration, and is,

therefore, null and void; in such case, no independent action to rescind or annul the
contract is necessary, and it may be treated as non-existent for all purposes.[39] A
void or inexistent contract is one which has no force and effect from the beginning,
as if it has never been entered into, and which cannot be validated either by time or
ratification. A void contract produces no effect whatsoever either against or in
favor of anyone; it does not create, modify or extinguish the juridical relation to
which it refers.[40] Therefore, it was not necessary for the Heirs of Alfonso to first
file an action to declare the nullity of the Deed of Sale prior to executing the Deed
of Extra-Judicial Partition.
Personality to Question Sale

The Heirs of Policronio contended that the Heirs of Alfonso are not parties,
heirs, or successors-in-interest under the contemplation of law to clothe them with
the personality to question the Deed of Sale. They argued that under Article 1311
of the Civil Code, contracts take effect only between the parties, their assigns and
heirs. Thus, the genuine character of a contract which personally binds the parties
cannot be put in issue by a person who is not a party thereto. They posited that the
Heirs of Alfonso were not parties to the contract; neither did they appear to be
beneficiaries by way of assignment or inheritance. Unlike themselves who are
direct heirs of Policronio, the Heirs of Alfonso are not Alfonsos direct heirs. For
the Heirs of Alfonso to qualify as parties, under Article 1311 of the Civil Code,
they must first prove that they are either heirs or assignees. Being neither, they
have no legal standing to question the Deed of Sale.

They further argued that the sale cannot be assailed for being barred under
Article 1421 of the Civil Code which provides that the defense of illegality of a
contract is not available to third persons whose interests are not directly affected.

Again, the Court disagrees.

Article 1311 and Article 1421 of the Civil Code provide:

Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, x x x

Art. 1421. The defense of illegality of contracts is not available to third

persons whose interests are not directly affected.

The right to set up the nullity of a void or non-existent contract is not limited
to the parties, as in the case of annullable or voidable contracts; it is extended to
third persons who are directly affected by the contract. Thus, where a contract is
absolutely simulated, even third persons who may be prejudiced thereby may set
up its inexistence.[41] The Heirs of Alfonso are the children of Alfonso, with his
deceased children represented by their children (Alfonsos grandchildren). The
Heirs of Alfonso are clearly his heirs and successors-in-interest and, as such, their
interests are directly affected, thereby giving them the right to question the legality
of the Deed of Sale.

Inapplicability of Article 842

The Heirs of Policronio further argued that even assuming that the Heirs of
Alfonso have an interest in the Deed of Sale, they would still be precluded from
questioning its validity. They posited that the Heirs of Alfonso must first prove that
the sale of Alfonsos properties to Policronio substantially diminished their
successional rights or that their legitimes would be unduly prejudiced, considering
that under Article 842 of the Civil Code, one who has compulsory heirs may
dispose of his estate provided that he does not contravene the provisions of the
Civil Code with regard to the legitime of said heirs. Having failed to do so, they
argued that the Heirs of Alfonso should be precluded from questioning the validity
of the Deed of Sale.
 Still, the Court disagrees.

Article 842 of the Civil Code provides:

Art. 842. One who has no compulsory heirs may dispose by will of all his
estate or any part of it in favor of any person having capacity to succeed.

One who has compulsory heirs may dispose of his estate provided he does
not contravene the provisions of this Code with regard to the legitime of
said heirs.

This article refers to the principle of freedom of disposition by will. What is

involved in the case at bench is not a disposition by will but by Deed of Sale.
Hence, the Heirs of Alfonso need not first prove that the disposition substantially
diminished their successional rights or unduly prejudiced their legitimes.

Inapplicability of Article 1412

The Heirs of Policronio contended that even assuming that the contract was
simulated, the Heirs of Alfonso would still be barred from recovering the
properties by reason of Article 1412 of the Civil Code, which provides that if the
act in which the unlawful or forbidden cause does not constitute a criminal offense,
and the fault is both on the contracting parties, neither may recover what he has
given by virtue of the contract or demand the performance of the others
undertaking. As the Heirs of Alfonso alleged that the purpose of the sale was to
avoid the payment of inheritance taxes, they cannot take from the Heirs of
Policronio what had been given to their father.

On this point, the Court again disagrees.

Article 1412 of the Civil Code is as follows:

Art. 1412. If the act in which the unlawful or forbidden cause consists does
not constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the others undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover
what he has given by reason of the contract, or ask for the fulfillment of
 what has been promised him. The other, who is not at fault, may
demand the return of what he has given without any obligation to
comply with his promise.

Article 1412 is not applicable to fictitious or simulated contracts, because

they refer to contracts with an illegal cause or subject-matter.[42] This article
presupposes the existence of a cause, it cannot refer to fictitious or simulated
contracts which are in reality non-existent.[43] As it has been determined that the
Deed of Sale is a simulated contract, the provision cannot apply to it.

Granting that the Deed of Sale was not simulated, the provision would still
not apply. Since the subject properties were included as properties of Alfonso in
the Deed of Extra-Judicial Partition, they are covered by corresponding inheritance
and estate taxes. Therefore, tax evasion, if at all present, would not arise, and
Article 1412 would again be inapplicable.

Prescription

From the position that the Deed of Sale is valid and not void, the Heirs of
Policronio argued that any question regarding its validity should have been
initiated through judicial process within 10 years from its notarization in
accordance with Article 1144 of the Civil Code. Since 21 years had already
elapsed when the Heirs of Alfonso assailed the validity of the Deed of Sale in
1996, prescription had set in. Furthermore, since the Heirs of Alfonso did not seek
to nullify the tax declarations of Policronio, they had impliedly acquiesced and
given due recognition to the Heirs of Policronio as the rightful inheritors and
should, thus, be barred from laying claim on the land.

The Heirs of Policronio are mistaken.

Article 1410 of the Civil Code provides:

Art. 1410. The action for the declaration of the inexistence of a contract
does not prescribe.

This is one of the most fundamental characteristics of void or inexistent

contracts.[44]
As the Deed of Sale is a void contract, the action for the declaration of its nullity,
even if filed 21 years after its execution, cannot be barred by prescription for it is
imprescriptible. Furthermore, the right to set up the defense of inexistence or
absolute nullity cannot be waived or renounced.[45] Therefore, the Heirs of Alfonso
cannot be precluded from setting up the defense of its inexistence.

Validity of the Deed of Extra-Judicial Partition

The Court now resolves the issue of the validity of the Deed of Extra-Judicial
Partition.

Unenforceability

The Heirs of Alfonso argued that the CA was mistaken in annulling the Deed of
Extra-Judicial Partition due to the incapacity of Conrado to give the consent of his
co-heirs for lack of a special power of attorney. They contended that what was
involved was not the capacity to give consent in behalf of the co-heirs but the
authority to represent them. They argue that the Deed of Extra-Judicial Partition is
not a voidable or an annullable contract under Article 1390 of the Civil Code, but
rather, it is an unenforceable or, more specifically, an unauthorized contract under
Articles 1403 (1) and 1317 of the Civil Code. As such, the Deed of Extra-Judicial
Partition should not be annulled but only be rendered unenforceable against the
siblings of Conrado.

They further argued that under Article 1317 of the Civil Code, when the
persons represented without authority have ratified the unauthorized acts, the
contract becomes enforceable and binding. They contended that the Heirs of
Policronio ratified the Deed of Extra-Judicial Partition when Conrado took
possession of one of the parcels of land adjudicated to him and his siblings, and
when another parcel was used as collateral for a loan entered into by some of the
Heirs of Policronio. The Deed of Extra-Judicial Partition having been ratified and
its benefits accepted, the same thus became enforceable and binding upon them.

The Heirs of Alfonso averred that granting arguendo that Conrado was not
authorized to represent his co-heirs and there was no ratification, the CA should
not have remanded the case to the RTC for partition of Alfonsos estate. They
argued that the CA should not have applied the Civil Code general provision on
contracts, but the special provisions dealing with succession and partition. They
contended that contrary to the ruling of the CA, the extra-judicial parition was not
an act of strict dominion, as it has been ruled that partition of inherited land is not a
conveyance but a confirmation or ratification of title or right to the
land.[46] Therefore, the law requiring a special power of attorney should not be
applied to partitions.

On the other hand, the Heirs of Policronio insisted that the CA

pronouncement on the invalidity of the Deed of Extra-Judicial Partition should not
be disturbed because the subject properties should not have been included in the
estate of Alfonso, and because Conrado lacked the written authority to represent
his siblings. They argued with the CA in ruling that a special power of attorney
was required before Conrado could sign in behalf of his co-heirs.

The Heirs of Policronio denied that they ratified the Deed of Extra-Judicial
Partition. They claimed that there is nothing on record that establishes that they
ratified the partition. Far from doing so, they precisely questioned its execution by
filing a complaint. They further argued that under Article 1409 (3) of the Civil
Code, ratification cannot be invoked to validate the illegal act of including in the
partition those properties which do not belong to the estate as it provides another
mode of acquiring ownership not sanctioned by law.

Furthermore, the Heirs of Policronio contended that the defenses of

unenforceability, ratification, and preterition are being raised for the first time on
appeal by the Heirs of Alfonso. For having failed to raise them during the trial, the
Heirs of Alfonso should be deemed to have waived their right to do so.

The Court agrees in part with the Heirs of Alfonso.

To begin, although the defenses of unenforceability, ratification and

preterition were raised by the Heirs of Alfonso for the first time on appeal, they are
concomitant matters which may be taken up. As long as the questioned items bear
relevance and close relation to those specifically raised, the interest of justice
would dictate that they, too, must be considered and resolved. The rule that only
theories raised in the initial proceedings may be taken up by a party thereto on
appeal should refer to independent, not concomitant matters, to support or oppose
the cause of action.[47]

In the RTC, the Heirs of Policronio alleged that Conrados consent was
vitiated by mistake and undue influence, and that he signed the Deed of Extra-
Judicial Partition without the authority or consent of his co-heirs.
 The RTC found that Conrados credibility had faltered, and his claims were
rejected by the RTC as gratuitous assertions. On the basis of such, the RTC ruled
that Conrado duly represented his siblings in the Deed of Extra-Judicial Partition.

On the other hand, the CA annulled the Deed of Extra-Judicial Partition

under Article 1390 (1) of the Civil Code, holding that a special power of attorney
was lacking as required under Article 1878 (5) and (15) of the Civil Code. These
articles are as follows:
Art. 1878. Special powers of attorney are necessary in the following cases:
xxx

(5) To enter into any contract by which the ownership of an immovable is

transmitted or acquired either gratuitously or for a valuable consideration;
xxx
(15) Any other act of strict dominion.

Art. 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.

This Court finds that Article 1878 (5) and (15) is inapplicable to the case at
bench. It has been held in several cases[48] that partition among heirs is not legally
deemed a conveyance of real property resulting in change of ownership. It is not a
transfer of property from one to the other, but rather, it is a confirmation or
ratification of title or right of property that an heir is renouncing in favor of another
heir who accepts and receives the inheritance. It is merely a designation and
segregation of that part which belongs to each heir. The Deed of Extra-Judicial
Partition cannot, therefore, be considered as an act of strict dominion. Hence, a
special power of attorney is not necessary.

In fact, as between the parties, even an oral partition by the heirs is valid if
no creditors are affected. The requirement of a written memorandum under the
statute of frauds does not apply to partitions effected by the heirs where no
creditors are involved considering that such transaction is not a conveyance of
property resulting in change of ownership but merely a designation and segregation
of that part which belongs to each heir.[49]

Neither is Article 1390 (1) applicable. Article 1390 (1) contemplates the
incapacity of a party to give consent to a contract. What is involved in the case at
bench though is not Conrados incapacity to give consent to the contract, but rather
his lack of authority to do so. Instead, Articles 1403 (1), 1404, and 1317 of the
Civil Code find application to the circumstances prevailing in this case. They are as
follows:
Art. 1403. The following contracts are unenforceable, unless they are
ratified:

(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers;

Art. 1404. Unauthorized contracts are governed by Article 1317 and the
principles of agency in Title X of this Book.

Art. 1317. No one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no

authority or legal representation, or who has acted beyond his powers,
shall be unenforceable, unless it is ratified, expressly or impliedly, by the
person on whose behalf it has been executed, before it is revoked by the
other contracting party.

Such was similarly held in the case of Badillo v. Ferrer:

The Deed of Extrajudicial Partition and Sale is not a voidable or an

annullable contract under Article 1390 of the New Civil Code. Article 1390
renders a contract voidable if one of the parties is incapable of giving
consent to the contract or if the contracting partys consent is vitiated by
mistake, violence, intimidation, undue influence or fraud. x x x

The deed of extrajudicial parition and sale is an unenforceable or,

more specifically, an unauthorized contract under Articles 1403(1) and
1317 of the New Civil Code.[50]
 Therefore, Conrados failure to obtain authority from his co-heirs to sign the
Deed of Extra-Judicial Partition in their behalf did not result in his incapacity to
give consent so as to render the contract voidable, but rather, it rendered the
contract valid but unenforceable against Conrados co-heirs for having been entered
into without their authority.

A closer review of the evidence on record, however, will show that the Deed
of Extra-Judicial Partition is not unenforceable but, in fact, valid, binding and
enforceable against all the Heirs of Policronio for having given their consent to the
contract. Their consent to the Deed of Extra-Judicial Partition has been proven by a
preponderance of evidence.

Regarding his alleged vitiated consent due to mistake and undue influence to
the Deed of Extra-Judicial Partition, Conrado testified, to wit:

Q: Mr. Ureta you remember having signed a document entitled deed of

extra judicial partition consisting of 11 pages and which have previously
[been] marked as Exhibit I for the plaintiffs?

A: Yes sir.

Q: Can you recall where did you sign this document?

A: The way I remember I signed that in our house.

Q: And who requested or required you to sign this document?

A: My aunties.

Q: Who in particular if you can recall?

A: Nay Pruding Panadero.

Q: You mean that this document that you signed was brought to your
house by your Auntie Pruding Pa[r]adero [who] requested you to sign that
document?

A: When she first brought that document I did not sign that said document
because I [did] no[t] know the contents of that document.

Q: How many times did she bring this document to you [until] you finally
signed the document?

A: Perhaps 3 times.
Q: Can you tell the court why you finally signed it?

A: Because the way she explained it to me that the land of my grandfather

will be partitioned.

Q: When you signed this document were your brothers and sisters who are
your co-plaintiffs in this case aware of your act to sign this document?

A: They do not know.

xxx

Q: After you have signed this document did you inform your brothers and
sisters that you have signed this document?

A: No I did not. [51]

xxx

Q: Now you read the document when it was allegedly brought to your
house by your aunt Pruding Pa[r]adero?

A: I did not read it because as I told her I still want to ask the advise of my
brothers and sisters.

Q: So do I get from you that you have never read the document itself or
any part thereof?

A: I have read the heading.

xxx

Q: And why is it that you did not read all the pages of this document
because I understand that you know also how to read in English?

A: Because the way Nay Pruding explained to me is that the property of my

grandfather will be partitioned that is why I am so happy.

xxx

Q: You mean to say that after you signed this deed of extra judicial
partition up to the present you never informed them?

A: Perhaps they know already that I have signed and they read already the
document and they have read the document.
 Q: My question is different, did you inform them?

A: The document sir? I did not tell them.

Q: Even until now?

A: Until now I did not inform them.[52]

This Court finds no cogent reason to reverse the finding of the RTC that
Conrados explanations were mere gratuitous assertions not entitled to any
probative weight. The RTC found Conrados credibility to have faltered when he
testified that perhaps his siblings were already aware of the Deed of Extra-Judicial
Partition. The RTC was in the best position to judge the credibility of the witness
testimony. The CA also recognized that Conrados consent was not vitiated by
mistake and undue influence as it required a special power of attorney in order to
bind his co-heirs and, as such, the CA thereby recognized that his signature was
binding to him but not with respect to his co-heirs. Findings of fact of the trial
court, particularly when affirmed by the CA, are binding to this Court.[53]

Furthermore, this Court notes other peculiarities in Conrados testimony.

Despite claims of undue influence, there is no indication that Conrado was forced
to sign by his aunt, Prudencia Paradero. In fact, he testified that he was happy to
sign because his grandfathers estate would be partitioned. Conrado, thus, clearly
understood the document he signed. It is also worth noting that despite the
document being brought to him on three separate occasions and indicating his
intention to inform his siblings about it, Conrado failed to do so, and still neglected
to inform them even after he had signed the partition. All these circumstances
negate his claim of vitiated consent. Having duly signed the Deed of Extra-Judicial
Partition, Conrado is bound to it. Thus, it is enforceable against him.

Although Conrados co-heirs claimed that they did not authorize Conrado to sign
the Deed of Extra-Judicial Partition in their behalf, several circumstances militate
against their contention.

First, the Deed of Extra-Judicial Partition was executed on April 19, 1989, and the
Heirs of Policronio claim that they only came to know of its existence on July 30,
1995through an issue of the Aklan Reporter. It is difficult to believe that Conrado
did not inform his siblings about the Deed of Extra-Judicial Partition or at least
broach its subject with them for more than five years from the time he signed it,
especially after indicating in his testimony that he had intended to do so.

Second, Conrado retained possession of one of the parcels of land

adjudicated to him and his co-heirs in the Deed of Extra-Judicial Partition.

Third, after the execution of the partition on April 19, 1989 and more than a
year before they claimed to have discovered the existence of the Deed of Extra-
Judicial Partition on July 30, 1995, some of the Heirs of Policronio, namely, Rita
Solano, Macario Ureta, Lilia Tayco, and Venancio Ureta executed on June 1, 1994,
a Special Power of Attorney[54] in favor of their sister Gloria Gonzales, authorizing
her to obtain a loan from a bank and to mortgage one of the parcels of land
adjudicated to them in the Deed of Extra-Judicial Partition to secure payment of the
loan. They were able to obtain the loan using the land as collateral, over which a
Real Estate Mortgage[55] was constituted. Both the Special Power of Attorney and
the Real Estate Mortgage were presented in evidence in the RTC, and were not
controverted or denied by the Heirs of Policronio.

Fourth, in the letter dated August 15, 1995, sent by the counsel of the Heirs
of Policronio to the Heirs of Alfonso requesting for amicable settlement, there was
no mention that Conrados consent to the Deed of Extra-Judicial Partition was
vitiated by mistake and undue influence or that they had never authorized Conrado
to represent them or sign the document on their behalf. It is questionable for such a
pertinent detail to have been omitted. The body of said letter is reproduced
hereunder as follows:
Greetings:

Your nephews and nieces, children of your deceased brother Policronio

Ureta, has referred to me for appropriate legal action the property they
inherited from their father consisting of six (6) parcels of land which is
covered by a Deed of Absolute Sale dated October 25, 1969. These
properties ha[ve] already been transferred to the name of their deceased
father immediately after the sale, machine copy of the said Deed of Sale is
hereto attached for your ready reference.

Lately, however, there was published an Extra-judicial Partition of the

estate of Alfonso Ureta, which to the surprise of my clients included the
properties already sold to their father before the death of said Alfonso
Ureta. This inclusion of their property is erroneous and illegal because
these properties were covered by the Deed of Absolute Sale in favor of
their father Policronio Ureta no longer form part of the estate of Alfonso
 Ureta. Since Policronio Ureta has [sic] died in 1974 yet, these properties
have passed by hereditary succession to his children who are now the true
and lawful owners of the said properties.

My clients are still entitled to a share in the estate of Alfonso Ureta who is
also their grandfather as they have stepped into the shoes of their deceased
father Policronio Ureta. But this estate of Alfonso Ureta should already
exclude the six (6) parcels of land covered by the Deed of Absolute Sale in
favor of Policronio Ureta.

My clients cannot understand why the properties of their late father

[should] be included in the estate of their grandfather and be divided
among his brothers and sisters when said properties should only be
divided among themselves as children of Policronio Ureta.

Since this matter involves very close members of the same family, I have
counseled my clients that an earnest effort towards a compromise or
amicable settlement be first explored before resort to judicial remedy is
pursued. And a compromise or amicable settlement can only be reached if
all the parties meet and discuss the problem with an open mind. To this
end, I am suggesting a meeting of the parties on September 16,
1995 at 2:00 P.M. at B Place Restaurant at C. Laserna St., Kalibo, Aklan. It
would be best if the parties can come or be represented by their duly
designated attorney-in-fact together with their lawyers if they so desire so
that the problem can be discussed unemotionally and intelligently.

I would, however, interpret the failure to come to the said meeting as an

indication that the parties are not willing to or interested in amicable
settlement of this matter and as a go signal for me to resort to legal and/or
judicial remedies to protest the rights of my clients.

Thank you very much.[56]

Based on the foregoing, this Court concludes that the allegation of Conrados
vitiated consent and lack of authority to sign in behalf of his co-heirs was a mere
afterthought on the part of the Heirs of Policronio. It appears that the Heirs of
Policronio were not only aware of the existence of the Deed of Extra-Judicial
Partition prior to June 30, 1995 but had, in fact, given Conrado authority to sign in
their behalf. They are now estopped from questioning its legality, and the Deed of
Extra-Judicial Partition is valid, binding, and enforceable against them.

In view of the foregoing, there is no longer a need to discuss the issue of

ratification.
Preterition

The Heirs of Alfonso were of the position that the absence of the Heirs of
Policronio in the partition or the lack of authority of their representative results, at
the very least, in their preterition and not in the invalidity of the entire deed of
partition. Assuming there was actual preterition, it did not render the Deed of
Extra-Judicial Partition voidable.Citing Article 1104 of the Civil Code, they aver
that a partition made with preterition of any of the compulsory heirs shall not be
rescinded, but the heirs shall be proportionately obliged to pay the share of the
person omitted. Thus, the Deed of Extra-Judicial Partition should not have been
annulled by the CA. Instead, it should have ordered the share of the heirs omitted
to be given to them.

The Heirs of Alfonso also argued that all that remains to be adjudged is the
right of the preterited heirs to represent their father, Policronio, and be declared
entitled to his share. They contend that remand to the RTC is no longer necessary
as the issue is purely legal and can be resolved by the provisions of the Civil Code
for there is no dispute that each of Alfonsos heirs received their rightful
share. Conrado, who received Policronios share, should then fully account for what
he had received to his other co-heirs and be directed to deliver their share in the
inheritance.

These arguments cannot be given credence.

Their posited theory on preterition is no longer viable. It has already been

determined that the Heirs of Policronio gave their consent to the Deed of Extra-
Judicial Partition and they have not been excluded from it. Nonetheless, even
granting that the Heirs of Policronio were denied their lawful participation in the
partition, the argument of the Heirs of Alfonso would still fail.

Preterition under Article 854 of the Civil Code is as follows:

Art. 854. The preterition or omission of one, some, or all of the
compulsory heirs in the direct line, whether living at the time of the
execution of the will or born after the death of the testator, shall annul the
institution of heir; but the devises and legacies shall be valid insofar as
they are not inofficious.
If the omitted compulsory heirs should die before the testator, the
institution shall be effectual, without prejudice to the right of
representation.
 Preterition has been defined as the total omission of a compulsory heir from
the inheritance. It consists in the silence of the testator with regard to a compulsory
heir, omitting him in the testament, either by not mentioning him at all, or by not
giving him anything in the hereditary property but without expressly disinheriting
him, even if he is mentioned in the will in the latter case.[57] Preterition is thus a
concept of testamentary succession and requires a will. In the case at bench, there
is no will involved. Therefore, preterition cannot apply.

Remand Unnecessary

The Deed of Extra-Judicial Partition is in itself valid for complying with all
the legal requisites, as found by the RTC, to wit:

A persual of the Deed of Extra-judicial Partition would reveal that

all the heirs and children of Alfonso Ureta were represented therein; that
nobody was left out; that all of them received as much as the others as
their shares; that it distributed all the properties of Alfonso Ureta except a
portion of parcel 29 containing an area of 14,000 square meters, more or
less, which was expressly reserved; that Alfonso Ureta, at the time of his
death, left no debts; that the heirs of Policronio Ureta, Sr. were
represented by Conrado B. Ureta; all the parties signed the document, was
witnessed and duly acknowledged before Notary Public Adolfo M. Iligan of
Kalibo, Aklan; that the document expressly stipulated that the heirs to
whom some of the properties were transferred before for taxation
purposes or their children, expressly recognize and acknowledge as a fact
that the properties were transferred only for the purpose of effective
administration and development convenience in the payment of taxes and,
therefore, all instruments conveying or effecting the transfer of said
properties are null and void from the beginning (Exhs. 1-4, 7-d).[58]

Considering that the Deed of Sale has been found void and the Deed of
Extra-Judicial Partition valid, with the consent of all the Heirs of Policronio duly
given, there is no need to remand the case to the court of origin for partition.

WHEREFORE, the petition in G.R. No. 165748 is DENIED. The petition

in G.R. No. 165930 is GRANTED. The assailed April 20, 2004 Decision
and October 14, 2004Resolution of the Court of Appeals in CA-G.R. CV No.
71399, are hereby MODIFIED in this wise:

(1) The Deed of Extra-Judicial Partition, dated April 19, 1989, is

VALID, and
 (2) The order to remand the case to the court of origin is
hereby DELETED.
SO ORDERED.
G.R. No. 160600 January 15, 2014

DOMINGO GONZALO, Petitioner,

vs.
JOHN TARNATE, JR., Respondent.

DECISION

BERSAMIN, J.:

The doctrine of in pari delicto which stipulates that the guilty parties to an illegal contract are not
entitled to any relief, cannot prevent a recovery if doing so violates the public policy against unjust
enrichment.

Antecedents

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

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 ₱233,526.13) was the rent for
Tarnate’s 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 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

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 ₱233,526.13, moral and exemplary damages for breach of
contract, and attorney’s fees.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

Ruling of the RTC

On January 26, 2001, the RTC, opining that the deed of assignment was a valid and binding
contract, and that Gonzalo must comply with his obligations under the deed of assignment, rendered
judgment in favor of Tarnate as follows:

WHEREFORE, premises considered and as prayed for by the plaintiff, John Tarnate, Jr. in his
Complaint for Sum of Money, Breach of Contract With Damages is hereby RENDERED in his favor
and against the above-named defendant Domingo Gonzalo, the Court now hereby orders as follows:

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 (₱233,526.13) representing the rental of equipment;

2. Defendant to pay Plaintiff the sum of THIRTY THOUSAND (₱30,000.00) PESOS by way
of reasonable Attorney’s Fees for having forced/compelled the plaintiff to litigate and engage
the services of a lawyer in order to protect his interest and to enforce his right. The claim of
the plaintiff for attorney’s fees in the amount of FIFTY THOUSAND PESOS (₱50,000.00)
plus THREE THOUSAND PESOS (₱3,000.00) clearly appears to be unconscionable and
therefore reduced to Thirty Thousand Pesos (₱30,000.00) as aforestated making the same
to be reasonable;

3. Defendant to pay Plaintiff the sum of FIFTEEN THOUSAND PESOS (₱15,000.00) by way
of litigation expenses;

4. Defendant to pay Plaintiff the sum of TWENTY THOUSAND PESOS (₱20,000.00) for
moral damages and for the breach of contract; and

5. To pay the cost of this suit.

Award of exemplary damages in the instant case is not warranted for there is no showing that the
defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner analogous to
the case of Xentrex Automotive, Inc. vs. Court of Appeals, 291 SCRA 66.8

Gonzalo appealed to the Court of Appeals (CA).

Decision of the CA

On February 18, 2003, the CA affirmed the RTC.9

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 ₱233,256.13 to his account had
unjustly enriched Gonzalo; and ruled, accordingly, that Gonzalo should reimburse Tarnate in that
amount because the latter’s equipment had been utilized in the project.

Upon denial of his motion for reconsideration,10 Gonzalo has now come to the Court to seek the
review and reversal of the decision of the CA.

Issues

Gonzalo contends that the CA erred in affirming the RTC because: (1) both parties were in pari
delicto; (2) the deed of assignment was void; and (3) there was no compliance with the arbitration
clause in the subcontract.

Gonzalo submits in support of his contentions that the subcontract and the deed of assignment,
being specifically prohibited by law, had no force and effect; that upon finding both him and Tarnate
guilty of violating the law for executing the subcontract, the RTC and the CA should have applied the
rule of in pari delicto, to the effect that the law should not aid either party to enforce the illegal
contract but should leave them where it found them; and that it was erroneous to accord to the
parties relief from their predicament.11

Ruling

We deny the petition for review, but we delete the grant of moral damages, attorney’s 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 CA’s 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. An accepted
1âwphi1

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 Tarnate’s favor. Consequently, the RTC and the CA
properly adjudged Gonzalo liable to pay Tarnate the equivalent amount of the 10% retention fee
(i.e., ₱233,526.13).

Gonzalo sought to justify his refusal to turn over the ₱233,526.13 to Tarnate by insisting that he
(Gonzalo) had a debt of ₱200,000.00 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 Gonzalo’s 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, attorney’s 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 ₱233,526.13. Not to afford this relief will make a travesty of the justice to
which Tarnate was entitled for having suffered too long from Gonzalo’s unjust enrichment.

WHEREFORE, we AFFIRM the decision promulgated on February 18, 2003, but DELETE the
awards of moral damages, attorney’s fees and litigation expenses; IMPOSE legal interest of 6% per
annum on the principal oL₱233,526.13 reckoned from September 13, 1999; and DIRECT the
petitioner to pay the costs of suit.

SO ORDERED.