FIRST DIVISION 28335, S-39778 and S-29776, located at Airmen's Village Subdivision,
Pulang Lupa II, Las Pinas, Metro Manila.
January 13, 2016
G.R. No. 168078
FABIO CAHAYAG and CONRADO RIVERA, Petitioners,
vs.
COMMERCIAL CREDIT CORPORATION, represented by its President,
LEONARDO B. ALEJANDRO; TERESITA T. QUA, assisted by her
husband ALFONSO MA. QUA; and the REGISTER OF DEEDS OF LAS
PINAS, METRO MANILA, DISTRICT IV, Respondents.
x-----------------------x
G.R. No. 168357
DULOS REALTY & DEVELOPMENT CORPORATION, represented by its
President, JUANITO C. DULOS; and MILAGROS E. ESCALONA, and
ILUMINADA D. BALDOZA, Petitioners,
vs.
COMMERCIAL CREDIT CORPORATION, represented by its President,
LEONARDO B. ALEJANDRO; TERESITA T. QUA, assisted by her
husband ALFONSO MA. QUA; and the REGISTER OF DEEDS OF LAS
PINAS, METRO MANILA, DISTRICT IV, Respondents.
DECISION
SERENO, J.:
Before us are consolidated Rule 45 Petitions1 seeking to nullify the Court of
Appeals (CA) Decision dated 2 November 20042 and Resolution dated 10
May 20053 in CA-G.R. CV No. 47421. The CA Decision reversed and set
aside the Decision dated 6 July 1992 issued by the Regional Trial Court
(RTC), Branch 65 of Makati.4
FACTUAL ANTECEDENTS
Petitioner Dulos Realty was the registered owner of certain residential lots
covered by Transfer Certificate of Title (TCT) Nos. S-39767, S-39775, S-
On 20 December 1980, Dulos Realty obtained a loan from respondent CCC
in the amount of P300,000. To secure the loan, the realty executed a Real
Estate Mortgage over the subject properties in favor of respondent. The
mortgage was duly annotated on the certificates of title on 3 February 1981.5
On 29 March 1981, Dulos Realty entered into a Contract to Sell with
petitioner Cahayag over the lot covered by TCT No. S-39775.6
On 12 August 1981, Dulos Realty entered into another Contract to Sell, this
time with petitioner Rivera over the lot covered by TCT No. S-28335.7
Dulos Realty defaulted in the payment of the mortgage loan, prompting
respondent CCC to initiate extrajudicial foreclosure proceedings. On 17
November 1981, the auction sale was held, with respondent CCC emerging
as the highest bidder.8
On 23 November 1981, a Certificate of Sale covering the properties,
together with all the buildings and improvements existing thereon, was
issued in favor of CCC.9 The Certificate of Sale was annotated on the
corresponding titles to the properties on 8 March 1982.10
Thereafter, or on 13 January 1983, Dulos Realty entered into a Contract to
Sell with petitioner Escalona over the house and lot covered by TCT No. S-
29776.11
On 10 November 1983, an Affidavit of Consolidation in favor of respondent
CCC dated 26 August 1983 was annotated on the corresponding titles to the
properties.12 By virtue of the affidavit, TCT Nos. S-39775, S-28335, S-39778
and S-29776 - all in the name of Dulos Realty - were cancelled and TCT
Nos. 74531, 74532, 74533 and 74534 were issued in the name of
respondent CCC on the same day.13
On 10 December 1983, Dulos Realty entered into a Deed of Absolute Sale
with petitioner Baldoza over the property covered by TCT No. S-39778,
together with the improvements existing thereon.14
On 21 December 1983, respondent CCC, through a Deed of Absolute Sale,
sold to respondent Qua the same subject properties, now covered by TCT
Nos. 74531, 74532, 74533 and 74534, which were in the name of
respondent CCC. The sale was duly annotated on the corresponding titles to
the properties on 5 January 1984.15
Accordingly, TCT Nos. 74531, 74532, 74533 and 74534 were cancelled; and
TCT Nos. 77012, 77013, 77014 and 770015 were issued to respondent Qua
on 5 January 1984.16
Subsequently, respondent Qua filed ejectment suits individually against
petitioners Du1os Realty,17 Cahayag,18Esca1ona,19 and Rivera20 before the
Metropolitan Trial Court (MTC) of Las Piñas, Metro Manila.
The MTC rendered Decisions in favor of respondent Qua. It ordered Dulos
Realty, Escalona, Cahayag, and Rivera to vacate the properties.
On 8 March 1988, the MTC issued a Writ of Execution to enforce its
Decision dated 20 October 1986 in Civil Case No. 2257 against Dulos Realty
"and all persons claiming right under defendant." 21 The subject of the writ of
execution was Lot 11 Block II,22 which was the lot sold by Dulos Realty to
petitioner Baldoza.
COMPLAINT FOR ANNULMENT
OF SHERIFF'S SALE AND OTHER DOCUMENTS
On 5 December 1988, petitioners filed a Complaint against respondents for
the "Annulment of Sherifffs] Sale and Other Documents with Preliminary
Injunction and/or Temporary Restraining Order" before the RTC of Makati
City, where it was docketed as Civil Case No. 88-2599.23
The Complaint24 alleged that petitioners Cahayag, Rivera, Escalona and
Baldoza were owners of the properties in question by virtue of Contracts of
Sale individually executed in their favor, and that the Real Estate Mortgage
between Dulos Realty and defendant-appellant CCC did not include the
houses, but merely referred to the lands themselves. 25 Thus, the inclusion of
the housing units in the Deed of Sale executed by respondent CCC in favor
of respondent Qua was allegedly illegal.26
Respondents failed to file an answer within the reglementary period.
Subsequently, they were declared in default. They appealed the order of
default but their appeal was dismissed on 8 February 1990. 27
On 6 July 1992, the RTC rendered a Decision,28 which ruled that the houses
were not included in the Real Estate Mortgage; and that the foreclosure of
the mortgage over the subject lots, as well as the housing units, was not
valid.29 The trial court held that this conclusion was established by the
plaintiffs' evidence, which went unrefuted when defendants were declared in
default.30
THE CA DECISION
Respondents proceeded to the CA, where they secured a favorable ruling. In
its Decision rendered on 2 November 2004,31 the appellate court held that
the extrajudicial foreclosure was valid, since the Real Estate Mortgage
clearly included the buildings and improvements on the lands, subject of the
mortgage.
After establishing the inclusion of the housing units in the Real Estate
Mortgage, the CA determined the rights of the buyers in the Contracts to
Sell/Contract of Sale vis-a-vis those of the mortgagee and its successor-in-
interest.
In the cases of petitioners Cahayag, Rivera and Escalona, the CA pointed to
lack of evidence establishing full payment of the price. As supporting reason,
it stated that even if there were full payment of the purchase price, the
mortgagee and the latter's successor-in-interest had a better right over the
properties. The CA anchored this conclusion on the fact that the Real Estate
Mortgage was annotated at the back of the titles to the subject properties
before the execution of the Contracts to Sell. It said that the annotation
constituted sufficient notice to third parties that the property was subject to
an encumbrance. With the notice, Cahayag, Rivera and Escalona should
have redeemed the properties within the one-year redemption period, but
they failed to do so. Consequently, the right of respondent CCC over the
properties became absolute, and the transfer to respondent Qua was valid.
As regards Baldoza, though the case involved a Contract of Sale, and not a
mere Contract to Sell, the CA declared the transaction null and void on the
purported ground that Dulos was no longer the owner at the time of the sale.
The CA accordingly reversed and set aside the RTC Decision, dismissed the
case for lack of merit, and ordered petitioners to surrender possession of the
properties to respondent Qua.
THE RULE 45 PETITIONS
On 30 May 2005, petitioners Cahayag and Rivera filed their Rule 45 Petition
with this Court.32 For their part, petitioners Dulos Realty, Baldoza and
Escalona filed their Rule 45 Petition on 19 July 2005. 33
In the Petition under G.R. No. 168357, it is argued, among others, that the
Deed of Absolute Sale in favor of petitioner Baldoza was the culmination of a
Contract to Sell between her and Dulos Realty. She claims that the Contract
to Sell, marked as Exhibit "L" during the trial, was executed on 10 January
1979, which preceded the execution of the Deed of Real Estate Mortgage
and the registration of the mortgage on 3 February 1981.34 After full payment
of the price under the Contract to Sell, Dulos Realty executed the Deed of
Absolute Sale. In other words, Baldoza is arguing that she has a better title
to the property than respondent Qua since the unregistered contract to sell
in her favor was executed before the registration of the mortgage. But the
CA ignored Exhibit "L" and merely stated that there was only a Deed of
Absolute Sale in favor of Baldoza.
THE ARGUMENTS
The arguments of petitioners, as stated in their respective Memoranda, are
summarized as follows:
Coverage of the Mortgage
Initially, petitioners attempt to stave off the effects of the extra judicial
foreclosure by attacking the coverage of the Real Estate Mortgage with
respect to its subject-matter.35 They draw attention to the fact that the List of
Properties attached to the Deed of Real Estate Mortgage refers merely to
the lands themselves and does not include the housing units found
thereon.36 Petitioners also contend that doubts should be resolved against
the drafter inasmuch as the agreement is a contract of adhesion, having
been prepared by the mortgagee.37
As backup argument for the theory that the houses are outside the coverage
of the mortgage agreement, petitioners argue that the improvements were
not owned by Dulos Realty, the mortgagor, but by its buyers under the
Contracts to Sell and Contracts of Sale; hence, those improvements are
excluded from the coverage of the real estate mortgage.
Validity of the Mortgage
Petitioners next challenge the validity of the foreclosure sale on the ground
that the mortgage executed by the mortgagor (petitioner Dulos Realty) and
the mortgagee (respondent CCC) was null and void.38 Petitioners claim that
Dulos Realty was no longer the owner of the properties it had mortgaged at
the time of the execution of the mortgage contract, as they were sold under
existing Contracts to Sell and Deed of Absolute Sale.39
Petitioners Cahayag, Rivera and Escalona lean on the unregistered
Contracts to Sell they had individually executed with Dulos Realty as vendor.
For his part, petitioner Baldoza points to the Deed of Absolute Sale executed
by Dulos Realty in his favor.
Better Right over the Properties
Petitioners claim that respondent CCC cannot claim to be a mortgagee in
good faith, since it is a financial institution.40 As such, respondent CCC knew
that it was dealing with a subdivision developer, which was in the business
of selling subdivision lots.41 Dela Merced v. GSIS42 which states that the
general rule that a mortgagee need not look beyond the title cannot benefit
banks and other financial institutions, as a higher due diligence requirement
is imposed on them.
They also raise the contention that lack of full payment of the purchase price
under the Contracts to Sell on the part of Cahayag, Rivera and Escalona
was due to respondent Qua's "harassment and unlawful actuations. 43
Petitioners further state that respondent Qua is a mere transferee of
respondent CCC and that, like a stream, she cannot rise higher than her
source. They also argue that Qua is not an innocent purchaser for value,
since she is a former investor of respondent CCC and one of its principal
stockholders.44
No Prior Written HLURB Approval of
the Mortgage
Finally, petitioners allege that the mortgage contract in this case was not
approved by the BLURB, which violates Section 18 of P.D. 957 45 and results
in the nullity of the mortgage.46
Exhibit "L" as Evidence of a Prior
Contract to Sell
The matter of CA ignoring Exhibit "L" as evidence of a prior unregistered
Contract to Sell was not included in the Memoranda of petitioners.
THE ISSUES
Based on the foregoing facts and arguments raised by petitioners, the
threshold issues to be resolved are the following:
1. Whether the real mortgage covers the lands only, as enumerated
in the Deed of Real Estate Mortgage or the housing units as well;
2. Whether Dulos Realty was the owner of the properties it had
mortgaged at the time of its execution in view of the various
Contracts to Sell and Deed of Absolute Sale respectively executed
in favor of petitioners Cahayag, Rivera, Escalona and Cahayag;
3. Who, as between petitioners-buyers and respondent Qua, has a
better right over the properties?
4. Whether the Deed of Absolute Sale in favor of Baldoza was not
preceded by a Contract to Sell and full payment of the purchase
price; and
5. Whether the mortgage is void on the ground that it lacked the
prior written approval of the HLURB.
OUR RULING
We deny the Petition for reasons as follows.
1. Attack on the Subject-matter of
the Real Estate Mortgage
It is true that the List of Properties attached to the Deed of Real Estate
Mortgage refers merely to the lands themselves and does not include the
housing units found thereon. A plain reading of the Real Estate Mortgage,
however, reveals that it covers the housing units as well. We quote the
pertinent provision of the agreement:
[T]he MORTGAGOR has transferred and conveyed and, by these presents,
do hereby transfer and convey by way of FIRST MORTGAGE unto the
MORTGAGEE, its successors and assigns the real properties described in
the list appearing at the back of this document and/or in a supplemental
document attached hereto as Annex "A" and made and integral part
hereof, together with all the buildings and/or other improvements now
existing or which may hereafter be place[d] or constructed thereon, all
of which the MORTGAGOR hereby warrants that he is the absolute owner
and exclusive possessor thereof, free from all liens and encumbrances of
whatever kind and nature. xxx. 47 (Emphasis Ours)
Thus, the housing units would fall under the catch-all phrase "together with
all the buildings and/or other improvements now existing or which may
hereafter be placed or constructed thereon."
The contra proferentem rule finds no application to this case. The doctrine
provides that in the interpretation of documents, ambiguities are to be
construed against the drafter.48 By its very nature, the precept assumes the
existence of an ambiguity in the contract, which is why contra proferentem is
also called the ambiguity doctrine.49 In this case, the Deed of Real Estate
Mortgage clearly establishes that the improvements found on the real
properties listed therein are included as subject-matter of the contract. It
covers not only the real properties, but the buildings and improvements
thereon as well.
2. Challenge to the Foreclosure
Sale with Regard to the
Ownership of the Mortgaged
Properties
To begin with, the Contracts to Sell and Deed of Absolute Sale could not
have posed an impediment at all to the mortgage, given that these contracts
had yet to materialize when the mortgage was constituted. They were all
executed after the constitution of the Real Estate Mortgage on 20
December 1980.
As regards Cahayag, the Contract to Sell in his favor was executed on 29
March 1981, more than three months after the execution of the mortgage
contract.50 This is taken from the Contract to Sell itself, which forms part of
the records of this case.51
At this juncture, we note that the CA, for reasons unknown, specified 29
September 1980,52 and not 29 March 1981, as the date of the execution of
the Contract to Sell in its Decision. Respondent Qua has raised this point in
her Memorandum filed with us. This Court cannot be bound by the factual
finding of the CA with regard to the date of the Contract to Sell in favor of
Cahayag. The general rule that the Court is bound by the factual findings of
the CA must yield in this case, as it falls under one of the exceptions: when
the findings of the CA are contradicted by the evidence on record.53 In this
case, there is nothing in the records to support the CA's conclusion that the
Contract to Sell was executed on 29 September 1980. The evidence on
record, however, reveals that the correct date is 29 March 1981.
In the case of petitioner Rivera, the corresponding Contract to Sell in his
favor was executed only on 12 August 1981, or almost eight months after
the perfection of the mortgage contract on 20 December 1980.
Lastly, Dulos Realty executed the Deed of Absolute Sale in favor of
petitioner Baldoza on 10 December 1983, which was almost three years
from the time the mortgage contract was executed on 20 December 1980.
There was neither a contract to sell nor a deed of absolute sale to speak of
when the mortgage was executed.
Petitioners equate a contract to sell to a contract of sale, in which the vendor
loses ownership over the property upon its delivery.54 But a contract to sell,
standing alone, does not transfer ownership.55 At the point of perfection, the
seller under a contract to sell does not even have the obligation to transfer
ownership to the buyer.56 The obligation arises only when the buyer fulfills
the condition: full payment of the purchase price.57 In other words, the seller
retains ownership at the time of the execution of the contract to sell.58
There is no evidence to show that any of petitioners Cahayag, Rivera and
Escalona were able to effect full payment of the purchase price, which could
have at least given rise to the obligation to transfer ownership. Petitioners
Cahayag and Rivera even admit that they defaulted on their obligations
under their respective Contracts to Sell, although they attribute the default to
respondent Qua's "harassment and unlawful actuations." 59 The statement,
though, was a mere allegation that was left unsubstantiated and, as such,
could not qualify as proof of anything.60
3. Who Has a Better Right over the Properties
Registration of the mortgage hound the buyers under the Contracts to
Sell
Registration of the mortgage establishes a real right or lien in favor of the
mortgagee, as provided by Articles 131261and 212662 of the Civil
Code.63 Corollary to the rule, the lien has been treated as "inseparable from
the property inasmuch as it is a right in rem."64 In other words, it binds third
persons to the mortgage.
The purpose of registration is to notify persons other than the parties to the
contract that a transaction concerning the property was entered
into.65 Ultimately, registration, because it provides constructive notice to the
whole world, makes the certificate of title reliable, such that third persons
dealing with registered land need only look at the certificate to determine the
status of the property.66
In this case, the Real Estate Mortgage over the property was registered on 3
February 1981. On the other hand, the Contracts to Sell were all executed
after the registration of the mortgage. The Contract to Sell in favor of
petitioner Cahayag was executed on 29 March 1981, or almost two
months after the registration of the mortgage. The corresponding Contract to
Sell in favor of Rivera was executed only on 12 August 1981, roughly six
months after the registration of the mortgage contract. Lastly, the Contract to
Sell in favor of Escalona was executed on 13 January 1983, or nearly two
years after the registration of the mortgage on 3 February 1981.
Consequently, petitioners Cahayag, Rivera and Escalona, were bound to the
mortgage executed between mortgagor Dulos Realty and mortgagee CCC,
by virtue of its registration. Definitely, the buyers each had constructive
knowledge of the existence of the mortgage contract when they individually
executed the Contracts to Sell.
Dela Merced v. GSIS not applicable
Petitioner invokes the above case. Dela Merced involved a clash between
an unrecorded contract to sell and a registered mortgage contract. The
contract to sell between the mortgagors (Spouses Zulueta) and the buyer
(Francisco Dela Merced) was executed before the former's constitution of
the mortgage in favor of GSIS. Because the Zuluetas defaulted on their
loans, the mortgage was foreclosed; the properties were sold at public
auction to GSIS as the highest bidder; and the titles were consolidated after
the spouses' failure to redeem the properties within the one-year redemption
period. GSIS later sold the contested lot to Elizabeth D. Manlongat and Ma.
Therese D. Manlongat. However, Dela Merced was able to fully pay the
purchase price to Spouses Zulueta, who executed a Deed of Absolute Sale
in his favor prior to the foreclosure sale.
This Court stated therein the general rule that the purchaser is not required
to go beyond the Torrens title if there is nothing therein to indicate any cloud
or vice in the ownership of the property or any encumbrance thereon. The
case nonetheless provided an exception to the general rule. The exception
arises when the purchaser or mortgagee has knowledge of a defect in the
vendor's title or lack thereof, or is aware of sufficient facts to induce a
reasonably prudent person to inquire into the status of the property under
litigation. The Court applied the exception, taking into consideration the fact
that GSIS, the mortgagee, was a financing institution.
But Dela Merced is not relevant here. Dela Merced involved a Contract to
Sell that was executed prior to the mortgage, while the Contracts to Sell in
this case were all executed after the constitution and registration of the
mortgage.
In Dela Merced, since GSIS had knowledge of the contract to sell, this
knowledge was equivalent to the registration of the Contract to Sell.
Effectively, this constitutes registration canceled out the subsequent
registration of the mortgage. In other words, the buyer under the Contract to
Sell became the- first to register. Following the priority in time rule in civil
law, the lot buyer was accorded preference or priority in right in Dela
Merced.
In this case, the registration of the mortgage, which predated the Contracts
to Sell, already bound the buyers to the mortgage. Consequently, the
determination of good faith does not come into play.
Dela Merced materially differs from this case on another point. The Contract
to Sell in favor of Dela Merced was followed by full payment of the price
and execution of the Deed of Absolute Sale. In this case, the Contract to
Sell in favor of each of petitioners Cahayag, Rivera and Escalona, is not
coupled with full payment and execution of a deed of absolute sale.
This case also needs to be distinguished from Luzon Development Bank v.
Enriquez.67 In that case, the unregistered Contract to Sell was
executed after the execution of the mortgage. Instead of resorting to
foreclosure, the owner/developer and the bank entered into a dacion en
pago. The Court declared that the bank was bound by the Contract to Sell
despite the non-registration of the contract. It reasoned that the bank
impliedly assumed the risk that some of the units might have been covered
by contracts to sell. On the other hand, the Court pronounced the mortgage
to be void, as it was without the approval of the Housing and Land Use
Regulatory Board (HLURB). The Court consequently ordered the unit buyer
in that case to pay the balance to the bank, after which the buyer was
obliged to deliver a clean title to the property.
There are points of distinction between the case at bar and Luzon
Development Bank. First, there is a definite finding in Luzon Development
Bank that the mortgage was without prior HLURB approval, rendering the
mortgage void. In the present case, as will be discussed later, there is no
proof from the records on whether the HLURB did or did not approve the
mortgage. Second, Luzon Development Bank did not even reach the
foreclosure stage of the mortgage. This case, however, not only reached the
foreclosure stage; it even went past the redemption period, consolidation of
the title in the owner, and sale of the property by the highest bidder to a third
person.
The first distinction deserves elaboration. The absence of prior written
approval of the mortgage by the HLURB rendered it void. This effectively
wiped out any discussion on whether registration bound the installment
buyer. In fact, Luzon Development Bank did not even bother to state
whether the mortgage was registered or not. More important, the tables were
turned when Luzon Development Bank held that the bank was bound to the
Contract to Sell in view of the latter's constructive notice of the Contract to
Sell. Stated differently, the actually unregistered Contract to Sell became
fictionally registered, making it binding on the bank.
In this case, on account of its registration, and the fact that the contracts
were entered into after it, the mortgage is valid even as to petitioners.
No Redemption within One Year from the Foreclosure Sale
When it comes to extrajudicial foreclosures, the law68 grants mortgagors or
their successors-in-interest an opportunity to redeem the property within one
year from the date of the sale. The one-year period has been
jurisprudentially held to be counted from the registration of the foreclosure
sale with the Register of Deeds.69 An exception to this rule has been carved
out by Congress for juridical mortgagors. Section 47 of the General Banking
Law of 2000 shortens the redemption period to within three months after the
foreclosure sale or until the registration of the certificate of sale, whichever
comes first.70 The General Banking Law of 2000 came into law on 13 June
2000.
If the redemption period expires and the mortgagors or their successors-in-
interest fail to redeem the foreclosed property, the title thereto is
consolidated in the purchaser.71 The consolidation confirms the purchaser as
the owner of the property; concurrently, the mortgagor-for failure to exercise
the right of redemption within the period-loses all interest in the property.72
We now apply the rules to this case.
As the foreclosure sale took place prior to the advent of the General Banking
Law of 2000, the applicable redemption period is one year. In this case,
because the Certificate of Sale in favor of respondent CCC was registered
on 8 March 1982, the redemption period was until 8 March 1983. It lapsed
without any right of redemption having been exercised by Dulos Realty.
Consequently, the right of respondent CCC, as purchaser of the subject lots,
became absolute. As a matter of right, it was entitled to the consolidation of
the titles in its name and to the possession of those lots. Further, the right of
respondent CCC over the lots was transferred to respondent Qua by virtue
of the Deed of Sale executed between them.
Given the foregoing considerations, respondent Qua, who now has title to
the properties subject of the various Contracts to Sell, is the lawful owner
thereof.
Foreclosure Sale vs. Contract of Sale
When Dulos Realty executed a Deed of Absolute Sale covering the real
property registered under TCT No. S-39778 in favor of petitioner Baldoza on
10 December 1983, it was no longer the owner of the property. Titles to the
subject properties, including the one sold to Baldoza, had already been
consolidated in favor of respondent CCC as early as 10 November 1983. In
fact, on the same date, the titles to the subject lots in the name of Dulos
Realty had already been cancelled and new ones issued to respondent
CCC.
The fact that Dulos Realty was no longer the owner of the real property at
the time of the sale led the CA to declare that the Contract of Sale was null
and void. On this premise, the appellate court concluded that respondent
Qua had a better title to the property over petitioner Baldoza.
We find no error in the conclusion of the CA that respondent Qua has a
better right to the property. The problem lies with its reasoning. We therefore
take a different route to reach the same conclusion.
Proper place of nemo dat quod non habet in the Law on Sales
Undeniably, there is an established rule under the law on sales that one
cannot give what one does not have (Nemo dat quad non ha bet).73 The CA,
however, confuses the application of this rule with respect to time. It makes
the nemo dat quad non habet rule a requirement for the perfection of a
contract of sale, such that a violation thereof goes into the validity of the
sale. But the Latin precept has been jurisprudentially held to apply to a
contract of sale at its consummation stage, and not at the perfection stage.74
Cavite Development Bank v. Spouses Syrus Lim75 puts nemo dat quad non
habet in its proper place.1âwphi1 Initially, the Court rules out ownership as a
requirement for the perfection of a contract of sale. For all that is required is
a meeting of the minds upon the object of the contract and the price. The
case then proceeds to give examples of the rule. It cites Article 1434 of the
Civil Code, which provides that in case the seller does not own the subject
matter of the contract at the time of the sale, but later acquires title to the
thing sold, ownership shall pass to the buyer. The Court also refers to the
rule as the rationale behind Article 1462, which deals with sale of "future
goods."
Cavite Development Bank thereafter turns to Article 1459, which requires
ownership by the seller of the thing sold at the time of delivery or
consummation stage of the sale. The Court explains that if the rule were
otherwise, the seller would not be able to comply with the latter's obligation
to transfer ownership to the buyer under a perfected contract of sale. The
Court ends the discourse with the conclusion that "[i]t is at the
consummation stage where the principle of nemo dat quad non
habet applies.76
Case law also provides that the fact th,at the seller is not the owner of the
subject matter of the sale at the time of perfection does not make the sale
void.77
Hence, the lesson: for title to pass to the buyer, the seller must be the owner
of the thing sold at the consummation stage or at the time of delivery of the
item sold. The seller need not be the owner at the perfection stage of the
contract, whether it is of a contract to sell or a contract of sale. Ownership is
not a requirement for a valid contract of sale; it is a requirement for a valid
transfer of ownership'.
Consequently, it was not correct for the CA to consider the contract of sale
void. The CA erroneously considered lack of ownership on the part of the
seller as having an effect on the validity of the sale. The sale was very much
valid when the Deed of Absolute Sale between the parties was executed on
10 December 1983, even though title to the property had earlier been
consolidated in favor of respondent CCC as early as 10 November 1983.
The fact that Dulos Realty was no longer the owner of the property in
question at the time of the sale did not affect the validity of the contract.
On the contrary, lack of title goes into the performance of a contract of sale.
It is therefore crucial to determine in this case if the seller was the owner at
the time of delivery of the object of the sale. For this purpose, it should be
noted that execution of a public instrument evidencing a sale translates to
delivery.78 It transfers ownership of the item sold to the buyer.79
In this case, the delivery coincided with the perfection of the contract -The
Deed of Absolute Sale covering the real property in favor of petitioner
Baldoza was executed on 10 December 1983. As already mentioned, Dulos
Realty was no longer the owner of the property on that date. Accordingly, it
could not have validly transferred ownership of the real property it had sold
to petitioner.
Thus, the correct conclusion that should be made is that while there was a
valid sale, there was no valid transfer of title to Baldoza, since Dulos Realty
was no longer the owner at the time of the execution of the Deed of Absolute
Sale.
No Bad Faith on Qua
The contention that Qua is a stockholder and former member of the Board of
Directors of respondent CCC and therefore she is not exactly a stranger to
the affairs of CCC is not even relevant.
An innocent purchaser for value is one who "buys the property of another
without notice that some other person has a right to or interest in it, and who
pays a full and fair price at the time of the purchase or before receiving any
notice of another person's claim."80 The concept thus presupposes that there
must be an adverse claim or defect in the title to the property to be
purchased by the innocent purchaser for value.
Respondent Qua traces her title to respondent CCC, whose acquisition over
the property proceeded from a foreclosure sale that was valid. As there is no
defect in the title of respondent CCC to speak of in this case, there is no
need to go into a discussion of whether Qua is an innocent purchaser for
value.
4. Dispute as to the Factual Finding of the CA that the Deed of Absolute
Sale in Favor of Baldoza was not Preceded by a Contract to Sell and
Full Payment of the Purchase Price
We absolutely discard the argument. We can think of at least four reasons
why. First, Exhibit "L" was not formally offered in evidence. Second, it was
not even incorporated into the records. Third, the argument is
irrelevant. Fourth, it was even abandoned in the Memoranda filed by
petitioners with us. Last, we are not a trier of facts and thus we yield to the
finding of the CA.
Exhibit "L" not formally offered
A perusal of the records shows that the Contract to Sell that Baldoza
referred to had in fact been marked as Exhibit "L" during her direct
examination in court.81 Even so, Exhibit "L" was never formally offered as
evidence. For this reason, we reject her contention. Courts do not consider
evidence that has not been formally offered.82 This explains why the CA
never mentioned the alleged Contract to Sell in favor of Baldoza.
The rationale behind the rule rests on the need for judges to confine their
factual findings and ultimately their judgment solely and strictly to the
evidence offered by the parties to a suit.83 The rule has a threefold purpose.
It allows the trial judge to know the purpose of the evidence presented;
affords opposing parties the opportunity to examine the evidence and object
to its admissibility when necessary; and facilitates review, given that an
appellate court does not have to review documents that have not been
subjected to scrutiny by the trial court.84
Exhibit "L" not incorporated into the records
The rule, of course, admits an exception. Evidence not formally offered may
be admitted and considered by the trial court so long as the following
requirements obtain: (1) the evidence is duly identified by testimony duly
recorded; and (2) the evidence is incorporated into the records of the case.
The exception does not apply to the case of Baldoza. While she duly
identified the Contract to Sell during her direct examination, which was duly
recorded, Exhibit "L" was not incorporated into the records.
Exhibit "L" not relevant
Be that as it may, the contention that a Contract to Sell in favor of Baldoza
preceded the sale in her favor is irrelevant. It must be stressed that the sale
to Baldoza made by Dulos Realty took place after the lapse of the
redemption period and after consolidation of title in the name of
respondent CCC on 10 November 1983, one month prior to the sale to
Baldoza on 10 December 1983. Dulos Realty still would have lost all interest
over the property mortgaged.
The fact that Dulos Realty ceased to be the owner of the property and
therefore it could no longer effect delivery of the property at the time the
Deed of Absolute Sale in favor of Baldoza was executed is the very reason
why the case of Baldoza cannot be compared with Dela Merced. In the case,
the buyer in the Contract to Sell was able to effect full payment of the
purchase price and to execute a Deed of Absolute Sale in his favor before
the foreclosure sale. In this case, the full payment of the purchase price
and the execution of a Deed of Absolute Sale in favor of Baldoza was
done after the foreclosure sale.
Issue over Exhibit "L" not included in the Memorandum
Equally important is the fact that petitioners failed to include the issue over
Exhibit "L" in any of the Memoranda they filed with us. The omission is
fatal. Issues raised in previous pleadings but not included in the
memorandum are deemed waived or abandoned (A.M. No. 99-2-04-SC).
As they are "a summation of the parties' previous pleadings, the memoranda
alone may be considered by the Court in deciding or resolving the
petition."85 Thus, even as the issue was raised in the Petition, the Court may
not consider it in resolving the case on the ground of failure of petitioners to
include the issue in the Memorandum. They have either waived or
abandoned it.
5. Issue of HLURB's Non-Approval of the Mortgage
Petitioners allege before the Court that the mortgage contract in this case
was not approved by the HLURB. They claim that this violates Section 18 of
P.D. 95786 and results in the nullity of the mortgage. Respondents have
disputed the claim and counter-argue that the allegation of the petitioners is
not supported by evidence. Respondents likewise aver that the argument
was raised for the first time on appeal.87
It is rather too late in the day for petitioners to raise this argument. Parties
are not permitted to change their theory of a case at the appellate
stage.88 Thus, theories and issues not raised at the trial level will not be
considered by a reviewing court on the ground that they cannot be raised for
the first time on appeal.89 Overriding considerations of fair play, justice and
due process dictate this recognized rule.90 This Court cannot even receive
evidence on this matter.
Petitioners' original theory of the case is the nullity of the mortgage on the
grounds previously discussed. If petitioners are allowed to introduce their
new theory, respondents would have no more opportunity to rebut the new
claim with contrary evidence, as the trial stage has already been terminated.
In the interest of fair play and justice, the introduction of the new argument
must be barred.91
Exceptions Not Applicable
The Court is aware that the foregoing is merely a general rule. Exceptions
are written in case law: first, an issue of jurisdiction may be raised at any
time, even on appeal, for as long as the exercise thereof will not result in a
mockery of the demands of fair play;92 second, in the interest of justice and
at the sound discretion of the appellate court, a party may be allowed to
change its legal theory on appeal, but only when the factual bases thereof
would not require further presentation of evidence by the adverse party for
the purpose of addressing the issue raised in the new
theory;93 and last, which is actually a bogus exception, is when the question
falls within the issues raised at the trial court. 94
The exceptions do not apply to the instant case. The new argument offered
in this case concerns a factual matter - prior approval by the HLURB. This
prerequisite is not in any way related to jurisdiction, and so the first
exception is not applicable. There is nothing in the record to allow us to
make any conclusion with respect to this new allegation.
Neither will the case fall under the second exception. Evidence would be
required of the respondents to disprove the new allegation that the mortgage
did not have the requisite prior HLURB approval. Besides, to the mind of this
court, to allow petitioners to change their theory at this stage of the
proceedings will be exceedingly inappropriate.
Petitioners raised the issue only after obtaining an unfavorable judgment
from the CA. Undoubtedly, if we allow a change of theory late in the game,
so to speak, we will unjustifiably close our eyes to the fundamental right of
petitioners to procedural due process. They will lose the opportunity to meet
the challenge, because trial has already ended. Ultimately, we will be
throwing the Constitutional rulebook out the window.
WHEREFORE, premises considered, the Petitions are DENIED, and the
Court of Appeals Decision dated 2 November 2004 and Resolution dated 10
May 2005 in CA-G.R. CV No. 47421 are hereby AFFIRMED.
SO ORDERED.
SECOND DIVISION
G.R. No. 167519 January 14, 2015
THE WELLEX GROUP, INC., Petitioner,
vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of
Court. The Wellex Group, Inc. (Wellex) prays that the Decision 2 dated July
30, 2004 of the Court of Appeals in CA-GR. CV No. 74850 be reversed and
set aside.3
The Court of Appeals affirmed the Decision4 of the Regional Trial Court,
Branch 62 of Makati City in Civil Case No. 99-1407. The Regional Trial Court
rendered judgment in favor of U-Land Airlines, Co., Ltd. (ULand) and
ordered the rescission of the Memorandum of Agreement 5 between Wellex
and U-Land.6
Wellex is a corporation established under Philippine law and it maintains
airline operations in the Philippines.7 It owns shares of stock in several
corporations including Air Philippines International Corporation (APIC),
Philippine Estates Corporation (PEC), and Express Savings Bank
(ESB).8 Wellex alleges that it owns all shares of stock of Air Philippines
Corporation (APC).9
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and
existing under the laws of Taiwan, registered to do business . . . in the
Philippines."10 It is engaged in the business of air transportation in Taiwan
and in other Asian countries.11
On May 16, 1998, Wellex and U-Land entered into a Memorandum of
Agreement12 (First Memorandum of Agreement) to expand their respective
airline operations in Asia.13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation in
Taiwan, Philippines and/or in other countries in the Asian region, and desires
to expand its operation and increase its market share by, among others,
pursuing a long-term involvement in the growing Philippine airline industry;
WHEREAS, WELLEX, on the other hand, has current airline operation in the
Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the
Asian regional markets, a Memorandum of Agreement on ______, a certified
copy of which is attached hereto as Annex "A" and is hereby made an
integral part hereof, which sets forth, among others, the basis for WELLEX’s
present ownership of shares in Air Philippines International Corporation.
WHEREAS, the parties recognize the opportunity to develop a long-term
profitable relationship by combining such of their respective resources in an
expanded airline operation as well as in property development and in other
allied business activities in the Philippines, and desire to set forth herein the
basic premises and their understanding with respect to their joint
cooperation and undertakings.14
In the First Memorandum of Agreement, Wellex and U-Land agreed to
develop a long-term business relationship through the creation of joint
interest in airline operations and property development projects in the
Philippines.15 This long-term business relationship would be implemented
through the following transactions, stated in Section 1 of the First
Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC")
equivalent to at least 35% of the outstanding capital stock of APIC,
but in any case, not less than 1,050,000,000 shares . . . [;]
 (b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at
least 35% of the outstanding capital stock of PEC, but in any case,
not less than 490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement with
PEC . . . [; and]
(d) U-LAND shall be given the option to acquire from WELLEX
shares of stock of EXPRESS SAVINGS BANK ("ESB") up to 40%
of the outstanding capital stock of ESB . . . under terms to be
mutually agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from its
execution date, Wellex and U-Land would execute a share purchase
agreement covering U-Land’s acquisition of the shares of stock of both APIC
(APIC shares) and PEC (PEC shares).17 In this share purchase agreement,
U-Land would purchase from Wellex its APIC shares and PEC shares. 18
Wellex and U-Land agreed to an initial purchase price of P0.30 per share of
APIC and 0.65 per share of PEC. However, they likewise agreed that the
final price of the shares of stock would be reflected in the actual share
purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC shares
would be paid upon the execution of the share purchase agreement and
Wellex’s delivery of the stock certificates covering the shares of stock. The
transfer of APIC shares and PEC shares to U-Land was conditioned on the
full remittance of the final purchase price as reflected in the share purchase
agreement. Further, the transfer was conditioned on the approval of the
Securities and Exchange Commission of the issuance of the shares of stock
and the approval by the Taiwanese government of U-Land’s acquisition of
these shares of stock.20
Thus, Section 2 of the First Memorandum of Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date
hereof (unless extended by mutual agreement), U-LAND and WELLEX shall
execute a Share Purchase Agreement ("SHPA") covering the acquisition by
U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the
parties, the purchase price for the APIC Shares to be reflected in the SHPA
shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares
at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be
paid in full upon execution of the SHPA against delivery of the Subject
Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a separate
instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii) the
Philippine Securities & Exchange Commission (SEC) shall have approved
the issuance of the Subject Shares; and (iii) any required approval by the
Taiwanese government of the acquisition by U-LAND of the Subject Shares
shall likewise have been obtained.21
II. Operation and management of APIC/PEC/APC
U-Land was "entitled to a proportionate representation in the Board of
Directors of APIC and PEC in accordance with Philippine law." 22 Operational
control of APIC and APC would be exercised jointly by Wellex and U-Land
"on the basis of mutual agreement and consultations." 23 The parties
intended that U-Land would gain primary control and responsibility for the
international operations of APC.24 Wellex manifested that APC is a
subsidiary of APIC in the second preambular clause of the First
Memorandum of Agreement.25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a
proportionate representation in the Board of Directors of APIC and PEC in
accordance with Philippine law. For this purpose, WELLEX shall cause the
resignation of its nominated Directors in APIC and PEC to accommodate U-
LAND’s pro rata number of Directors. Subject to applicable Philippine law
and regulations, operational control of APIC and Air Philippines Corporation
("APC") shall be lodged jointly to WELLEX and U-LAND on the basis of
mutual agreement and consultations. Further, U-LAND may second
technical and other consultants into APIC and/or APC with the view to
increasing service, productivity and efficiency, identifying and implementing
profit-service opportunities, developing technical capability and resources,
and installing adequate safety systems and procedures. In addition, U-LAND
shall arrange for the lease by APC of at least three (3) aircrafts owned by
ULAND under such terms as the parties shall mutually agree upon. It is the
intent of the parties that U-LAND shall have primary control and
responsibility for APC’s international operations.26
III. Entering into and funding a joint development agreement
Wellex and U-Land also agreed to enter into a joint development agreement
simultaneous with the execution of the share purchase agreement. The joint
development agreement shall cover housing and other real estate
development projects.27
U-Land agreed to remit the sum ofUS$3 million not later than May 22, 1998.
This sum was to serve as initial funding for the development projects that
Wellex and U-Land were to undertake pursuant to the joint development
agreement. In exchange for the US$3 million, Wellex would deliver stock
certificates covering 57,000,000 PEC shares to U-Land.28
The execution of a joint development agreement was also conditioned on
the execution of a share purchase agreement. 29
Section 4 of the First Memorandum of Agreement reads:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint development
agreement ("JDA") to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate
development projects as the parties shall agree. All profits derived from the
projects covered by the JDA shall be shared equally between ULAND and
PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0
million as initial funding for the aforesaid development projects against
delivery by WELLEX of 57,000,000 shares of PEC as security for said
amount in accordance with Section 9 below.30
In case of conflict between the provisions of the First Memorandum of
Agreement and the provisions of the share purchase agreement or its
implementing agreements, the terms of the First Memorandum of Agreement
would prevail, unless the parties specifically stated otherwise or the context
of any agreement between the parties would reveal a different intent. 31 Thus,
in Section 6 of the First Memorandum of Agreement:
6. Primacy of Agreement. – It is agreed that in case of conflict between the
provisions of this Agreement and those of the SHPA and the implementing
agreements of the SHPA, the provisions of this Agreement shall prevail,
unless the parties specifically state otherwise, or the context clearly reveal a
contrary intent.32
Finally, Wellex and U-Land agreed that if they were unable to agree on the
terms of the share purchase agreement and the joint development
agreement within 40 days from signing, then the First Memorandum of
Agreement would cease to be effective.33
In case no agreements were executed, the parties would be released from
their respective undertakings, except that Wellex would be required to refund
within three (3) days the US$3 million given as initial funding by U-Land for
the development projects. If Wellex was unable to refund the US$3 million to
U-Land, U-Land would have the right to recover on the 57,000,000 PEC
shares that would be delivered to it.34 Section 9 of the First Memorandum of
Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of the
SHPA and/or the JDA within forty (40) days from date hereof (or such period
as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million
provided under Section 4 within three (3) days therefrom, otherwise U-LAND
shall have the right to recover on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.35
The First Memorandum of Agreement was signed by Wellex Chairman and
President William T. Gatchalian (Mr. Gatchalian) and U-Land Chairman Ker
Gee Wang (Mr. Wang) on May 16, 1998.36
Annex "A" or the Second Memorandum of Agreement
Attached and made an integral part of the First Memorandum of Agreement
was Annex "A," as stated in the second preambular clause. It is a document
denoted as a "Memorandum of Agreement" entered into by Wellex, APIC,
and APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and executed this ___th day of
______ at Makati City, by and between:
THE WELLEX GROUP, INC., a corporation duly organized and existing
under the laws of the Philippines, with offices at 22F Citibank Tower, 8741
Paseo de Roxas, Makati City (hereinafter referred to as "TWGI"),
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM
PACIFIC, INC.), likewise a corporation duly organized and existing under the
laws of the Philippines, with offices at 8F Rufino Towers, Ayala Avenue,
Makati City (hereinafter referred to as "APIC"),
- and –
AIR PHILIPPINES CORPORATION, corporation duly organized and existing
under the laws of the Philippines, with offices at Multinational Building, Ayala
Avenue, Makati City (hereinafter referred to as "APC").
W I T N E S S E T H: That -
WHEREAS, TWGI is the registered and beneficial owner, or has otherwise
acquired _____ (illegible in rollo) rights to the entire issued and outstanding
capital stock (the "APC SHARES") of AIR PHILIPPINES CORPORATION
("APC") and has made stockholder advances to APC for the _____ (illegible
in rollo) of aircraft, equipment and for working capital used in the latter’s
operations (the "_____ (illegible in rollo) ADVANCES").
WHEREAS, APIC desires to obtain full ownership and control of APC,
including all of _____ (illegible in rollo) assets, franchise, goodwill and
operations, and for this purpose has offered to acquire the _____ (illegible in
rollo) 302SHARES of TWGI in APC, including the APC ADVANCES due to
TWGI from APC, with _____ (illegible in rollo) of acquiring all the assets,
franchise, goodwill and operations of APC; and TWGI has _____ (illegible in
rollo) to the same in consideration of the conveyance by APIC to TWGI of
certain investments, _____ (illegible in rollo) issuance of TWGI of shares of
stock of APIC in exchange for said APC SHARES and the _____ (illegible in
rollo) ADVANCES, as more particularly described hereunder.
NOW, THEREFORE, the parties agree as follows:
1. TWGI agrees to transfer the APC ADVANCES in APIC
in exchange for the _____ (illegible in rollo) by APIC to
TWGI of investment shares of APIC in Express Bank,
Petro Chemical _____ (illegible in rollo) of Asia Pacific,
Republic Resources & Development Corporation and
Philippine _____ (illegible in rollo) Corporation (the "APIC
INVESTMENTS").
2. TWGI likewise agrees to transfer the APC SHARES to
APIC in exchange solely _____ (illegible in rollo) the
issuance by APIC of One Billion Seven Hundred Ninety-
Seven Million Eight Hundred Fifty Seven Thousand Three
Hundred Sixty Four (1,797,857,364) shares of its capital
stock of a _____ (illegible in rollo) value of ₱1.00 per
share (the "APIC SHARES"), taken from the currently
authorized but _____ (illegible in rollo) shares of the
capital stock of APIC, as well as from the increase in the
authorized capital _____ (illegible in rollo) of APIC from
₱2.0 billion to ₱3.5 billion.
3. It is the basic understanding of the parties hereto that
the transfer of the APC _____ (illegible in rollo) as well as
the APC ADVANCES to APIC shall be intended to enable
APIC to obtain _____ (illegible in rollo) and control of APC,
including all of APC’s assets, franchise, goodwill and
_____ (illegible in rollo).
4. Unless the parties agree otherwise, the effectivity of this
Agreement and transfers _____ (illegible in rollo) APC
ADVANCES in exchange for the APIC INVESTMENTS,
and the transfer of the _____ (illegible in rollo) SHARES in
exchange for the issuance of new APIC SHARES, shall be
subject to _____ (illegible in rollo) due diligence as the
parties shall see fit, and the condition subsequent that the
_____ (illegible in rollo) for increase in the authorized
capital stock of the APIC from ₱2.0 billion to ₱3.5 _____
(illegible in rollo) shall have been approved by the
Securities and Exchange Commission.
IN WITNESS WHEREOF, the parties have caused these
presents to be signed on the date _____ (illegible in rollo)
first above written.38 (Emphasis supplied)
This Second Memorandum of Agreement was allegedly incorporated into the
First Memorandum of Agreement as a "disclosure to [U-Land] [that] . . .
[Wellex] was still in the process of acquiring and consolidating its title to Total US$7,499,945.0048
shares of stock of APIC."39 It "included the terms of a share swap whereby
[Wellex] agreed to transfer to APIC its shareholdings and advances to APC
in exchange for the issuance by APIC of shares of stock to [Wellex]." 40 Wellex acknowledged the receipt of these remittances in a confirmation
letter addressed to U-Land dated September 30, 1998.49
The Second Memorandum of Agreement was signed by Mr. Gatchalian,
APIC President Salud,41 and APC President Augustus C. Paiso.42 It was not According to Wellex, the parties agreed to enter into a security arrangement.
dated, and no place was indicated as the place of signing. 43 It was not If the sale of the shares of stock failed to push through, the partial payments
notarized either, and no other witnesses signed the document. 44 or remittances U-Land made were to be secured by these shares of stock
and parcels of land.50 This meant that U-Land could recover the amount it
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not paid to Wellex by selling these shares of stock and land titles or using them
able to enter into any share purchase agreement although drafts were to generate income.
exchanged between the two.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land
Despite the absence of a share purchase agreement, U-Land remitted to stock certificates representing 60,770,000 PEC shares and 72,601,000 APIC
Wellex a total of US$7,499,945.00.46These were made in varying amounts shares.51 These were delivered to U-Land on July 1, 1998, September 1,
and through the issuance of post-dated checks.47 The dates of remittances 1998, and October 1, 1998.52
were the following:
In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT)
Nos. T-216769, T-216771, T-228231, T-228227, T-211250, and T-216775
Date Amount (in US$) covering properties owned by Westland Pacific Properties Corporation in
June 30, 1998 990,000.00 Bulacan; and TCT Nos. T-107306, T-115667, T-105910, T-120250, T-
1114398, and T-120772 covering properties owned by Rexlon Realty Group,
July 2, 1998 990,000.00 Inc.53 On October 1, 1998,54 U-Land received a letter from Wellex, indicating
a list of stock certificates that the latter was giving to the former by way of
20,000.00 "security."55
July 30, 1998 990,000.00
Despite these transactions, Wellex and U-Land still failed to enter into the
490,000.00 share purchase agreement and the joint development agreement.
490,000.00
In the letter56 dated July 22, 1999, 10 months57 after the last formal
August 1, 1998 990,000.00 communication between the two parties, U-Land, through counsel,
demanded the return of the US$7,499,945.00.58 This letter was sent 14
490,000.00 months after the signing of the First Memorandum of Agreement.
490,000.00
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to enter
August 3, 1998 990,000.00 into the. . . Share Purchase Agreement."59 As far as U-Land was concerned,
the First Memorandum of Agreement was no longer in effect, pursuant to
70,000.00
Section 9.60 As such, U-Land offered to return all the stock certificates
September 25, 1998 399,972.50 covering APIC shares and PEC shares as well as the titles to real property
given by Wellex as security for the amount remitted by U-Land.61
99, 972.50
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-Land’s
claims. Counsel for Wellex stated that the two parties carried out several
negotiations that included finalizing the terms of the share purchase
agreement and the terms of the joint development agreement. Wellex
asserted that under the joint development agreement, U-Land agreed to
remit the sum of US$3 million by May 22,1998 as initial funding for the
development projects.63
Wellex further asserted that it conducted extended discussions with U-Land
in the hope of arriving at the final terms of the agreement despite the failure
of the remittance of the US$3 million on May 22, 1998. 64 That remittance
pursuant to the joint development agreement "would have demonstrated [U-
Land’s] good faith in finalizing the agreements."65
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually
agreed on the terms of both [the share purchase agreement and the joint
development agreement.]"66 Wellex believed that the parties had already
"gone beyond the ‘intent’ stage of the [First Memorandum of Agreement] and
[had already] effected partial implementation of an over-all agreement."67 U-
Land even delivered a total of 12 post-dated checks to Wellex as payment
for the APIC shares and PEC shares.68 "[Wellex] on the other hand, had
[already] delivered to[U-Land] certificates of stock of APEC [sic] and PEC as
well as various land titles to cover actual remittances." 69 Wellex alleged that
the agreements were not finalized because U-Land was "forced to suspend
operations because of financial problems spawned by the regional economic
turmoil."70
Thus, Wellex maintained that "the inability of the parties to execute the
[share purchase agreement] and the [joint development agreement]
principally arose from problems at [U-Land’s] side, and not due to [Wellex’s]
‘unjustified refusal to enter into [the] [share purchase agreement][.]’" 71
On July 30, 1999, U-Land filed a Complaint72 praying for rescission of the
First Memorandum of Agreement and damages against Wellex and for the
issuance of a Writ of Preliminary Attachment.73 From U-Land’s point of view,
its primary reason for purchasing APIC shares from Wellex was APIC’s
majority ownership of shares of stock in APC (APC shares).74 After
verification with the Securities and Exchange Commission, U-Land
discovered that "APIC did not own a single share of stock in APC." 75 U-Land
alleged that it repeatedly requested that the parties enter into the share
purchase agreement.76 U-Land attached the demand letter dated July 22,
1999 to the Complaint.77 However, the 40-day period lapsed, and no share
purchase agreement was finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still
refused to return the amount of US$7,499,945.00 while refusing to enter into
the share purchase agreement.79 U-Land stated that it was induced by
Wellex to enter into and execute the First Memorandum of Agreement, as
well as release the amount of US$7,499,945.00.80
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-
Land had no cause of action.82 Wellex maintained that under the First
Memorandum of Agreement, the parties agreed to enter into a share
purchase agreement and a joint development agreement.83 Wellex alleged
that to bring the share purchase agreement to fruition, it would have to
acquire the corresponding shares in APIC.84 It claimed that U-Land was fully
aware that the former "still ha[d] to consolidate its title over these
shares."85 This was the reason for Wellex’s attachment of the Second
Memorandum of Agreement to the First Memorandum of Agreement. Wellex
attached the Second Memorandum of Agreement as evidence to refute U-
Land’s claim of misrepresentation.86
Wellex further alleged that U-Land breached the First Memorandum of
Agreement since the payment for the shares was to begin during the 40-day
period, which began on May 16, 1998.87 In addition, U-Land failed to remit
the US$3 million by May 22, 1998 that would serve as initial funding for the
development projects.88 Wellex claimed that the remittance of the US$3
million on May 22, 1998 was a mandatory obligation on the part of U-
Land.89 Wellex averred that it presented draft versions of the share purchase
agreement, which were never finalized.90 Thus, it believed that there was an
implied extension of the 40-day period within which to enter into the share
purchase agreement and the joint development agreement since U-Land
began remitting sums of money in partial payment for the purchase of the
shares of stock.91
In its counterclaim against U-Land, Wellex alleged that it had already set in
motion building and development of real estate projects on four (4) major
sites in Cavite, Iloilo, and Davao. It started initial construction on the basis of
its agreement with U-Land to pursue real estate development projects.92
Wellex claims that, had the development projects pushed through, the
parties would have shared equally in the profits of these projects.93 These
projects would have yielded an income of ₱2,404,948,000.00, as per the
study Wellex conducted, which was duly recognized by U-Land.94 Half of
that amount, ₱1,202,474,000.00, would have redounded to Wellex. 95 Wellex,
thus, prayed for the rescission of the First Memorandum of Agreement and
the payment of ₱1,202,474,000 in damages for loss of profit.96 It prayed for
the payment of moral damages, exemplary damages, attorney’s fees, and
costs of suit.97
In its Reply,98 U-Land denied that there was an extension of the 40-day
period within which to enter into the share purchase agreement and the joint
development agreement. It also denied requesting for an extension of the
40-day period. It further raised that there was no provision in the First
Memorandum of Agreement that required it to remit payments for Wellex’s
shares of stock in APIC and PEC within the 40-day period. Rather, the
remittances were supposed to begin upon the execution of the share
purchase agreement.99
As for the remittance of the US$3 million, U-Land stated that the issuance of
this amount on May 22, 1998 was supposed to be simultaneously made with
Wellex’s delivery of the stock certificates for 57,000,000 PEC shares. These
stock certificates were not delivered on that date.100
With regard to the drafting of the share purchase agreement, U-Land denied
that it was Wellex that presented versions of the agreement. U-Land averred
that it was its own counsel who drafted versions of the share purchase
agreement and the joint development agreement, which Wellex refused to
sign.101
U-Land specifically denied that it had any knowledge prior to or during the
execution of the First Memorandum of Agreement that Wellex still had to
"consolidate its title over" its shares in APIC. U-Land averred that it relied on
Wellex’s representation that it was a majority owner of APIC shares and that
APIC owned a majority of APC shares.102
Moreover, U-Land denied any knowledge of the initial steps that Wellex
undertook to pursue the development projects and denied any awareness of
a study conducted by Wellex regarding the potential profit of these
projects.103
The case proceeded to trial.
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief
Executive Officer, as its sole witness.104 Mr. Tseng testified that "[s]ometime
in 1997, Mr. William Gatchalian who was in Taiwan invited [U-Land] to join in
the operation of his airline company[.]"105 U-Land did not accept the offer at
that time.106 During the first quarter of 1998, Mr. Gatchalian "went to Taiwan
and invited [U-Land] to invest in Air Philippines[.]"107 This time, U-Land
alleged that subsequent meetings were held where Mr. Gatchalian,
representing Wellex, "claimed ownership of a majority of the shares of APIC
and ownership by APIC of a majority of the shares of [APC,] a domestic
carrier in the Philippines."108Wellex, through Mr. Gatchalian, offered to sell to
U-Land PEC shares as well.109
According to Mr. Tseng, the parties agreed to enter into the First
Memorandum of Agreement after their second meeting.110 Mr. Tseng
testified that under this memorandum of agreement, the parties would enter
into a share purchase agreement "within forty (40) days from its execution
which [would] put into effect the sale of the shares [of stock] of APIC and
PEC[.]"111 However, the "[s]hare [p]urchase [a]greement was not executed
within the forty-day period despite the draft . . . given [by U-Land to
Wellex]."112
Mr. Tseng further testified that it was only after the lapse of the 40-day
period that U-Land discovered that Wellex needed money for the transfer of
APC shares to APIC. This allegedly shocked U-Land since under the First
Memorandum of Agreement, APIC was supposed to own a majority of APC
shares. Thus, U-Land remitted to Wellex a total of US$7,499,945.00
because of its intent to become involved in the aviation business in the
Philippines. These remittances were confirmed by Wellex through a
confirmation letter. Despite the remittance of this amount, no share purchase
agreement was entered into by the parties.113
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President
of Wellex. She admitted her knowledge of the First Memorandum of
Agreement as she was involved in its drafting. She testified that the First
Memorandum of Agreement made reference, under its second preambular
clause, to the Second Memorandum of Agreement entered into by Wellex,
APIC, and APC. She testified that under the First Memorandum of
Agreement, U-Land’s purchase of APIC shares and PEC shares from Wellex
would take place within 40 days, with the execution of a share purchase
agreement.114
According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr.
Wang requested sometime in June of 1998 for an extension for the
execution of the share purchase agreement and the remittance of the US$3
million. As proof that Mr. Wang made this request, Ms. Ting testified that Mr.
Wang sent several post-dated checks to cover the payment of the APIC
shares and PEC shares and the initial funding of US$3 million for the joint
development agreement. She testified that Mr. Wang presented a draft of
the share purchase agreement, which Wellex rejected. Wellex drafted a new
version of the share purchase agreement. 115 However, the share purchase
agreement was not executed because during the period of negotiation,
Wellex learned from other sources that U-Land "encountered difficulties
starting October of 1998."116 Ms. Ting admitted that U-Land made the
remittances to Wellex in the amount of US$7,499,945.00. 117
Ms. Ting testified that U-Land was supposed to make an initial payment of
US$19 million under the First Memorandum of Agreement. However, U-Land
only paid US$7,499,945.00. The total payments should have amounted to
US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a
meeting to thresh out the problems of the First Memorandum of Agreement,
but U-Land did not reply. Instead, Wellex only received communication from
U-Land regarding their subsequent negotiations through the latter’s demand
letter dated July 22, 1999. In response, Wellex wrote to U-Land requesting
another meeting to discuss the demands. However, U-Land already filed the
Complaint for rescission and caused the attachment against the properties
of Wellex, causing embarrassment to Wellex.119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati City
held that rescission of the First Memorandum of Agreement was proper:
The first issue must be resolved in the negative. Preponderance of evidence
leans in favor of plaintiff that it is entitled to the issuance of the writ of
preliminary attachment. Plaintiff’s evidence establishes the facts that it is
engaged in the airline business in Taiwan, was approached by defendant,
through its Chairman William Gatchalian, and was invited by the latter to
invest in an airline business in the Philippines, Air Philippines Corporation
(APC); that plaintiff became interested in the invitation of defendant; that
during the negotiations between plaintiff and defendant, defendant induced
plaintiff to buy shares in Air Philippines International Corporation (APIC)
since it owns majority of the shares of APC; that defendant also induced
plaintiff to buy shares of APIC in Philippine Estates Corporation (PEC); that
the negotiations between plaintiff and defendant culminated into the parties
executing a MOA (Exhs. "C" to "C-3", also Exh. "1"); that in the second
"Whereas" clause of the MOA, defendant represented that it has a current
airline operation through its majority-owned subsidiary APIC, that under the
MOA, the parties were supposed to enter into a Share Purchase Agreement
(SPA) within forty (40) days from May 16, 1998, the date the MOA in order to
effect the transfer of APIC and PEC shares of defendant to plaintiff; that
plaintiff learned from defendant that APIC does not actually own a single
share in APC; that plaintiff verified with the Securities and Exchange
Commission (SEC), by obtaining a General Information Sheet therefrom
(Exh. "C-Attachment"); that APIC does not in fact own APC; that defendant
induced plaintiff to still remit its investment to defendant, which plaintiff did
as admitted by defendant per its Confirmation Letter (Exh. "D") in order that
APC shares could be transferred to APIC; that plaintiff remitted a total of
US$7,499,945.00 to defendant; and that during the forty-day period
stipulated in the MOA and even after the lapse of the said period, defendant
has not entered into the SPA, nor has defendant caused the transfer of APC
shares to APIC.
In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s
misrepresentation that APIC owns APC is made clear, as follows:
"WHEREAS, WELLEX, on the other hand, has current airline operation in
the Philippines through its majority-owned subsidiary Air Philippines
International Corporation (Exh. "C") and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its
operation in the Asian regional markets; x x x" (Second Whereas of Exh.
"C")
On the other hand, defendant’s evidence failed to disprove plaintiff’s
evidence. The testimony of defendant’s sole witness Elvira Ting, that plaintiff
knew at the time of the signing of the MOA that APIC does not own a
majority of the shares of APC because another Memorandum of Agreement
was attached to the MOA (Exh "1") pertaining to the purchase of APC
shares by APIC is unavailing. The second "Whereas" clause of the MOA
leaves no room for interpretation. . . . The second MOA purportedly attached
as Annex "A" of this MOA merely enlightens the parties on the manner by
which APIC acquired the shares of APC. Besides, . . . the second MOA was
not a certified copy and did not contain a marking that it is an Annex "A"
when it was supposed to be an Annex "A" and a certified copy per the MOA
between plaintiff and defendant. As can be also gathered from her
testimony, Ms. Ting does not have personal knowledge that plaintiff was not
informed that APIC did not own shares of APC during the negotiations as
she was not present during the negotiations between plaintiff and
defendant’s William Gatchalian. Her participation in the agreement between
the parties [was] merely limited to the preparation of the documents to be
signed. Ms. Ting testified, as follows:
"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.
Q And you are just making your statement that U-Land knew about the
intended transfer of shares from APC to APIC because of this WHEREAS
CLAUSE and the Annex to this Memorandum of Agreement?
A Yes, it was part of the contract."
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendant’s fraud in the performance of its obligation under the MOA is
further revealed when Ms. Ting testified on cross-examination that
notwithstanding the remittances made by plaintiff in the total amountn [sic] of
US$7,499, 945.00 to partially defray the cost of transferring APC shares to
APIC even as of the year 2000, as follows:
"Q Ms. Ting, can you please tell the Court if you know who owns shares of
Air Philippines Corporation at this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and
certain individual.
Q How much shares of Air Philippines Corporation is owned by Wellex
Group?
A Around twenty...at this moment around twenty five percent (25%).
Q Can you tell us if you know who are the other owners of the shares of Air
Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the
owners?
A As of this moment, no sir."
(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances of
plaintiff, even if no SPA was executed yet between the parties, to effect the
transfer of APC shares to APIC is admitted by its same witness also in this
wise:
"Q You said that remittances were made to the Wellex Group, Incorporated
by plaintiff for the period from June 1998 to September 1998[,] is that
correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total amount of
more than seven million dollars, did you ever know if plaintiff asked for
evidence from your company that AIR PHILIPPINES INTERNATIONAL
CORPORATION has already acquired shares of AIR PHILIPPINES
CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.
Q Even up to the time that plaintiff U-Land stopped the remittances
sometime in September 1998 you have not effected the transfer of shares of
AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
INTERNATIONCAL [sic] CORPORATION[,] am I correct?
A APC to APIC, well at that time it’s still in the process.
Q In fact, Madam Witness, is it not correct for me to say that one of the
reasons why U-Land Incorporated was convinced to remit the amounts of
money totalling seven million dollars plus,
was that your company said that it needed funds to effect these transfers, is
that correct?
A Yes, sir."
(lbid, pp. 25-29)
As the evidence adduced by the parties stand, plaintiff has established the
fact that it had made remittances in the total amount of US$7,499,945.00 to
defendant in order that defendant will make good its representation that APC
is a subsidiary of APIC. The said remittances are admitted by defendant.
Notwithstanding the said remittances, APIC does not own a single share of
APC. On the other hand, defendant could not even satisfactorily substantiate
its claim that at least it had the intention to cause the transfer of APC shares
to APIC. [D]efendant obviously did not enter into the stipulated SPA because
it did not have the shares of APC transferred to APIC despite its
representations. Under the circumstances, it is clear that defendant
fraudulently violated the provisions of the MOA. 120 (Emphasis supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial
Court.121 In its July 30, 2004 Decision, the Court of Appeals held that the
Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter itself
asked for the rescission of the MOA. Thus, in effect, it prays for the return of
what has been given or paid under the MOA, as the law creates said
obligation to return the things which were the object of the contract, and the
same could be carried out only when he who demands rescission can return
whatever he may be obliged to restore. The law says:
"Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission
can return whatever he may be obliged to restore."
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to
return what has been paid to it. Further, appellant’s claim that the lower court
erred in ruling for the rescission of the MOA is absurd and ridiculous
because rescission thereof is prayed for by the former. . . . This Court
agrees with the lower court that appellee is the injured party in this case, and
therefore is entitled to rescission, because the rescission referred to here is
predicated on the breach of faith by the appellant which breach is violative of
the reciprocity between the parties. It is noted that appellee has partly
complied with its own obligation, while the appellant has not. It is, therefore,
the right of the injured party to ask for rescission because the guilty party
cannot ask for rescission.
The lower court . . . correctly ruled that:
". . . This Court agrees with plaintiff that defendant’s misrepresentations
regarding APIC’s not owning shares in APC vitiates its consent to the MOA.
Defendant’s continued misrepresentation that it will cause the transfer of
APC shares in APIC inducing plaintiff to remit money despite the lapse of the
stipulated forty day period, further establishes plaintiff’s right to have the
MOA rescinded.
Section 9 of the MOA itself provides that in the event of the non-execution of
an SPA within the 40 day period, or within the extensions thereof, the
payments made by plaintiff shall be returned to it, to wit:
"9 Validity.- In the event that the parties are unable to agree on the terms of
the SHPA and/or JDA within forty (40) days from the date hereof (or such
period as the parties shall mutually agree), this Memorandum of Agreement
shall cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million
under Section 4 within three (3) days therefrom, otherwise U-LAND shall
have the right to recover the 57,000,000 PEC shares delivered to ULAND
under Section 4."
Clearly, the parties were not able to agree on the terms of the SPA within
and even after the lapse of the stipulated 40 day period. There being no SPA
entered into by and between the plaintiff and defendant, defendant’s return
of the remittances [of] plaintiff in the total amount of US$7,499,945 is only
proper, in the same vein, plaintiff should return to defendant the titles and
certificates of stock given to it by defendant.122 (Citations omitted)
Hence, this Petition was filed.
Petitioner’s Arguments
Petitioner Wellex argues that contrary to the finding of the Court of Appeals,
respondent U-Land was not entitled to rescission because the latter itself
violated the First Memorandum of Agreement. Petitioner Wellex states that
respondent U-Land was actually bound to pay US$17.5 million for all of
APIC shares and PEC shares under the First Memorandum of Agreement
and the US$3 million to pursue the development projects under the joint
development agreement. In sum, respondent U-Land was liable to petitioner
Wellex for the total amount of US$20.5 million. Neither the Court of Appeals
nor the Regional Trial Court made any mention of the legal effect of
respondent U-Land’s failure to pay the full purchase price.123
On the share purchase agreement, petitioner Wellex asserts that its
obligation to deliver the totality of the shares of stock would become
demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of stock
was a suspensive condition for the execution of the share purchase
agreement and delivery of the shares of stock. Petitioner Wellex argues that
the use of the term "upon" in Section 2 of the First Memorandum of
Agreement clearly provides that the full payment of the purchase price must
be given "simultaneously" or "concurrent" with the execution of the share
purchase agreement.125
Petitioner Wellex raises that the Court of Appeals erred in saying that the
rescission of the First Memorandum of Agreement was proper because
petitioner Wellex itself asked for this in its Answer before the trial court. 126 It
asserts that "there can be no rescission of a non-existent obligation, such as
[one] whose suspensive condition has not yet happened[,]"127 as held in
Padilla v. Spouses Paredes.128 Citing Villaflor v. Court of Appeals129 and
Spouses Agustin v. Court of Appeals,130 it argues that "the vendor. . . has no
obligation to deliver the thing sold. . . if the buyer. . . fails to fully pay the
price as required by the contract."131 In this case, petitioner Wellex maintains
that respondent U-Land’s remittance of US$7,499,945.00 constituted mere
partial performance of a reciprocal obligation.132 Thus, respondent U-Land
was not entitled to rescission. The nature of this reciprocal obligation
requires both parties’ simultaneous fulfillment of the totality of their reciprocal
obligations and not only partial performance on the part of the allegedly
injured party.
As to the finding of misrepresentations, petitioner Wellex raises that a seller
may sell a thing not yet belonging to him at the time of the transaction,
provided that he will become the owner at the time of delivery so that he can
transfer ownership to the buyer. Contrary to the finding of the lower courts,
petitioner Wellex was obliged to be the owner of the shares only when the
time came to deliver these to respondent U-Land and not during the
perfection of the contract itself.133
Finally, petitioner Wellex argues that respondent U-Land could have
recovered through the securities given to the latter. 134 Petitioner Wellex
invokes Suria v. Intermediate Appellate Court,135 which held that an "action
for rescission is not a principal action that is retaliatory in character [under
Article 1191 of the Civil Code, but] a subsidiary one which. . . is available
only in the absence of any other legal remedy [under Article 1384 of the Civil
Code]."136Respondent’s Arguments
Respondent U-Land argues that it was the execution of the share purchase
agreement that would result in its purchase of the APIC shares and PEC
shares.137 It was not the full remittance of the purchase price of the shares of
stock as indicated in the First Memorandum of Agreement, as alleged by
petitioner Wellex.138 Respondent U-Land asserts that the First Memorandum
of Agreement provides that the exact number of APIC shares and PEC
shares to be purchased under the share purchase agreement and the final
price of these shares were not yet determined by the parties.139
Respondent U-Land reiterates that it was petitioner Wellex that requested for
the remittances amounting to US$7,499,945.00 to facilitate APIC’s purchase
of APC shares.140 Thus, it was petitioner Wellex’s refusal to enter into the
share purchase agreement that led to respondent U-Land demanding
rescission of the First Memorandum of Agreement and the return of the
US$7,499,945.00.141 Respondent U-Land further argues before this court
that petitioner Wellex failed to present evidence as to how the money was
spent, stating that Ms. Ting admitted that the Second Memorandum of
Agreement "was not consummated at any time."142 Respondent U-Land
raises that petitioner Wellex was guilty of fraud by making it appear that APC
was a subsidiary of APIC.143 It reiterates that, as an airline company, its
primary reason for entering into the First Memorandum of Agreement was to
acquire management of APC, another airline company.144 Under Article
1191 of the Civil Code, respondent U-Land, as the injured party, was entitled
to rescission due to the fatal misrepresentations committed by petitioner
Wellex.145
Respondent U-Land further asserts that the "shareholdings in APIC and
APC were never in question."146 Rather, it was petitioner Wellex’s
misrepresentation that APIC was a majority shareholder of APC that
compelled it to enter into the agreement.147
As for Suria, respondent U-land avers that this case was inapplicable
because the pertinent provision in Suria was not Article 1191 but rescission
under Article 1383 of the Civil Code.148 The "rescission" referred to in Article
1191 referred to "resolution" of a contract due to a breach of a mutual
obligation, while Article 1384 spoke of "rescission" because of lesion and
damage.149 Thus, the rescission that is relevant to the present case is that of
Article 1191, which involves breach in a reciprocal obligation. It is, in fact,
resolution, and not rescission as a result of fraud or lesion, as found in
Articles 1381, 1383, and 1384 of the Civil Code.150
The Issue
The question presented in this case is whether the Court of Appeals erred in
affirming the Decision of the Regional Trial Court that granted the rescission
of the First Memorandum of Agreement prayed for by U-Land.
The Petition must be denied.
I law of the parties to the contract.
The requirement of a share
purchase agreement
The Civil Code provisions on the interpretation of contracts are controlling to
this case, particularly Article 1370, which 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.
In Norton Resources and Development Corporation v. All Asia Bank
Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the first
paragraph of Article 1370 of the Civil Code: "[i]f 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." This provision is akin to the
"plain meaning rule" applied by Pennsylvania courts, which assumes that the
intent of the parties to an instrument is "embodied in the writing itself, and
when the words are clear and unambiguous the intent is to be discovered
only from the express language of the agreement." It also resembles the
"four corners" rule, a principle which allows courts in some cases to search
beneath the semantic surface for clues to meaning. A court's purpose in
examining a contract is to interpret the intent of the contracting parties, as
objectively manifested by them. The process of interpreting a contract
requires the court to make a preliminary inquiry as to whether the contract
before it is ambiguous. A contract provision is ambiguous if it is susceptible
of two reasonable alternative interpretations. Where the written terms of the
contract are not ambiguous and can only be read one way, the court will
interpret the contract as a matter of law. If the contract is determined to be
ambiguous, then the interpretation of the contract is left to the court, to
resolve the ambiguity in the light of the intrinsic evidence. 152 (Emphasis
supplied)
As held in Norton, this court must first determine whether a provision or
stipulation contained in a contract is ambiguous. Absent any ambiguity, the
provision on its face will be read as it is written and treated as the binding
The parties have differing interpretations of the terms of the First
Memorandum of Agreement. Petitioner Wellex even admits that "the facts of
the case are fairly undisputed [and that] [i]t is only the parties’ respective
[understanding] of these facts that are not in harmony."153
The second preambular clause of the First Memorandum of Agreement
reads:
WHEREAS, WELLEX, on the other hand, has current airline operation in the
Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the
Asian regional markets; a Memorandum of Agreement on ______, a certified
copy of which is attached hereto as Annex "A" and is hereby made an
integral part hereof, which sets forth, among others, the basis for WELLEX’s
present ownership of shares in Air Philippines International
Corporation.154 (Emphasis supplied)
Section 1 of the First Memorandum of Agreement reads:
I. Basic Agreement. - The parties agree to develop a long-term business
relationship initially through the creation of joint interest in airline operations
as well as in property development projects in the Philippines to be
implemented as follows:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC")
equivalent to at least 35% of the outstanding capital stock of APIC,
but in any case, not less than 1,050,000,000 shares (the "APIC
Shares").
(b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at
 least 35% of the outstanding capital stock of PEC, but in any case,
not less than 490,000,000 shares (the "PEC Shares").
(c) U-LAND shall enter into a joint development agreement with
PEC to jointly pursue property development projects in the
Philippines.
(d) U-LAND shall be given the option to acquire from WELLEX
shares of stock of EXPRESS SAVINGS BANK ("ESB") up to 40%
of the outstanding capital stock of ESB (the "ESB Shares") under
terms to be mutually agreed.155
The First Memorandum of Agreement contained the following stipulations
regarding the share purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date
hereof (unless extended by mutual agreement), U-LAND and WELLEX shall
execute a Share Purchase Agreement ("SHPA") covering the acquisition by
U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the
parties, the purchase price for the APIC Shares to be reflected in the SHPA
shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares
at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be
paid in full upon execution of the SHPA against delivery of the Subject
Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a separate
instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii) the
Philippine Securities & Exchange Commission (SEC) shall have approved
the issuance of the Subject Shares; and (iii) any required approval by the
Taiwanese government of the acquisition by U-LAND of the Subject Shares
shall likewise have been obtained.156 (Emphasis supplied)
As for the joint development agreement, the First Memorandum of
Agreement contained the following stipulation:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint development
agreement ("JDA") to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate
development projects as the parties shall agree. All profits derived from the
projects covered by the JDA shall be shared equally between ULAND and
PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0
million as initial funding for the aforesaid development projects against
delivery by WELLEX of 57,000,000 shares of PEC as security for said
amount in accordance with Section 9 below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure to
agree on the terms of the share purchase agreement or the joint
development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of the
SHPA and/or the JDA within forty (40) days from date hereof (or such period
as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million
provided under Section 4 within three (3) days therefrom, otherwise U-LAND
shall have the right to recover on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that the
execution of a share purchase agreement containing mutually agreeable
terms and conditions must first be accomplished by the parties before
respondent U-Land purchases any of the shares owned by petitioner Wellex.
A perusal of the stipulation on its face allows for no other interpretation.
The need for a share purchase agreement to be entered into before
payment of the full purchase price can further be discerned from the other
stipulations of the First Memorandum of Agreement.
In Section 1, the parties agreed to enter into a joint business venture,
through entering into two (2) agreements: a share purchase agreement and
a joint development agreement. However, Section 1 provides that in the
share purchase agreement, "U-LAND shall acquire from WELLEX, shares of
stock of AIR PHILIPPINES INTERNATIONAL CORPORATION (‘APIC’)
equivalent to at least 35% of the outstanding capital stock of APIC, but in
any case, not less than 1,050,000,000 shares (the ‘APIC Shares’)."159
As for the PEC shares, Section 1 provides that respondent U-Land shall
purchase from petitioner Wellex "shares of stock of PHILIPPINE ESTATES
CORPORATION (‘PEC’) equivalent to at least 35% of the outstanding
capital stock of PEC, but in any case, not less than 490,000,000 shares(the
‘PEC Shares’)."160
The use of the terms "at least 35% of the outstanding capital stock of APIC,
but in any case, not less than 1,050,000,000 shares" and "at least 35% of
the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares" means that the parties had yet to agree on the number
of shares of stock to be purchased.
The need to execute a share purchase agreement before payment of the
purchase price of the shares is further shown by the clause, "[w]ithout
prejudice to any subsequent agreement between the parties, the purchase
price for the APIC Shares to be reflected in the [share purchase agreement]
shall be... P0.30 per share and that for the PEC Shares at... P0.65 per
share."161 This phrase clearly shows that the final price of the shares of stock
was to be reflected in the share purchase agreement. There being no share
purchase agreement executed, respondent U-Land was under no obligation
to begin payment or remittance of the purchase price of the shares of stock.
Petitioner Wellex argues that the use of "upon" in Section 2 162
of the First
Memorandum of Agreement means that respondent U-Land must pay the
purchase price of the shares of stock in its entirety when they are
transferred. This argument has no merit.
Article 1373 of the Civil Code provides:
ART. 1373. If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price and
the number of shares of stock to be purchased before respondent U-Land is
obligated to pay or remit the entirety of the purchase price. Thus, petitioner
Wellex’s argument cannot be sustained since the parties to the First
Memorandum of Agreement were clearly unable to agree on all the terms
concerning the share purchase agreement. It would be absurd for petitioner
Wellex to expect payment when respondent U-Land did not yet agree to the
final amount to be paid for the totality of an indeterminate number of shares
of stock.
The third paragraph of Section 2163 provides that the "transfer of the Subject
Shares" shall take place upon the fulfillment of certain conditions, such as
full payment of the purchase price "as reflected in the [share purchase
agreement]." The transfer of the shares of stock is different from the
execution of the share purchase agreement. The transfer of the shares of
stock requires full payment of the final purchase price. However, that final
purchase price must be reflected in the share purchase agreement. The
execution of the share purchase agreement will require the existence of a
final agreement.
In its Answer with counterclaim before the trial court, petitioner Wellex
argued that the payment of the shares of stock was to begin within the 40-
day period. Petitioner Wellex’s claim is not in any of the stipulations of the
contract. Its subsequent claim that respondent U-Land was actually required
to remit a total of US$20.5 million is likewise bereft of basis since there was
no final purchase price of the shares of stock that was agreed upon, due to
the failure of the parties to execute a share purchase agreement. In addition,
the parties had yet to agree on the final number of APIC shares and PEC
shares that respondent U-Land would acquire from petitioner Wellex.
Therefore, the understanding of the parties captured in the First
Memorandum of Agreement was to continue their negotiation to determine
the price and number of the shares to be purchased. Had it been otherwise,
the specific number or percentage of shares and its price should already
have been provided clearly and unambiguously. Thus, they agreed to a 40-
day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides that:
In the event the parties are unable to agree on the terms of the SHPA and/or
the JDA within forty (40)days from date hereof (or such period as the parties
shall mutually agree), this Memorandum of Agreement shall cease to be
effective and the parties released from their respective undertakings herein .
. .164
The First Memorandum of Agreement was, thus, an agreement to enter into
a share purchase agreement. The share purchase agreement should have
been executed by the parties within 40 days from May 16, 1998, the date of
the signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9 lapsed, the efficacy of the
First Memorandum of Agreement ceased. The parties were "released from
their respective undertakings." Thus, from June 25, 1998, the date when the
40-day period lapsed, the parties were no longer obliged to negotiate with
each other in order to enter into a share purchase agreement.
However, Section 9 provides for another period within which the parties
could still be required to negotiate. The clause "or such period as the parties
shall mutually agree" means that the parties should agree on a period within
which to continue negotiations for the execution of an agreement. This
means that after the 40-day period, the parties were still allowed to
negotiate, provided that they could mutually agree on a new period of
negotiation.
Based on the records and the findings of the lower courts, the parties were
never able to arrive at a specific period within which they would bind
themselves to enter into an agreement. There being no other period
specified, the parties were no longer under any obligation to negotiate and
enter into a share purchase agreement. Section 9 clearly freed them from
this undertaking.
II
There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were, therefore,
independent of the First Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
mentioned that there was an "implied partial objective or real novation" 165 of
the First Memorandum of Agreement. Petititoner did not raise this argument
of novation before this court. In Gayos v. Gayos, 166 this court held that "it is a
cherished rule of procedure that a court should always strive to settle the
entire controversy in a single proceeding leaving no root or branch to bear
the seeds of future litigation[.]"167
Articles 1291 and 1292 of the Civil Code provides how obligations may be
modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another
which substitute 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.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of
novation:
Novation extinguishes an obligation between two parties when there is a
substitution of objects or debtors or when there is subrogation of the creditor.
It occurs only when the new contract declares so "in unequivocal terms" or
that "the old and the new obligations be on every point incompatible with
each other."
....
For novation to take place, 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.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the
old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent
existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never
presumed, thus:
In the civil law setting, novatiois literally construed as to make new. So it is
deeply rooted in the Roman Law jurisprudence, the principle — novatio non
praesumitur— that novation is never presumed. At bottom, for novation to be
a jural reality, its animus must be ever present, debitum pro debito—
basically extinguishing the old obligation for the new one. 169 (Emphasis from
the original omitted, citations omitted)
Applying Arco, it is clear that there was no novation of the original obligation.
After the 40-day period, the parties did not enter into any subsequent written
agreement that was couched in unequivocal terms. The transaction of the
First Memorandum of Agreement involved large amounts of money from
both parties. The parties sought to participate in the air travel industry, which
has always been highly regulated and subject to the strictest commercial
scrutiny. Both parties admitted that their counsels participated in the crafting
and execution of the First Memorandum of Agreement as well as in the
efforts to enter into the share purchase agreement. Any subsequent
agreement would be expected to be clearly agreed upon with their counsels’
assistance and in writing, as well.
Given these circumstances, there was no express novation.
There was also no implied novation of the original obligation. In Quinto v.
People:170
[N]o specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts.
While there is really no hard and fast rule to determine what might constitute
to be a sufficient change that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable incompatibility between the
old and the new obligations.
....
. . . The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes
that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in nature and
insufficient to extinguish the original obligation.171(Citations omitted)
There was no incompatibility between the original terms of the First
Memorandum of Agreement and the remittances made by respondent U-
Land for the shares of stock. These remittances were actually made with the
view that both parties would subsequently enter into a share purchase
agreement. It is clear that there was no subsequent agreement inconsistent
with the provisions of the First Memorandum of Agreement.
Thus, no implied novation took place. In previous cases, 172 this court has
consistently ruled that presumed novation or implied novation is not deemed
favorable. In United Pulp and Paper Co., Inc. v. Acropolis Central Guaranty
Corporation:173
Neither can novation be presumed in this case. As explained in Duñgo v.
Lopena:
"Novation by presumption has never been favored. To be sustained, it need
be established that the old and new contracts are incompatible in all points,
or that the will to novate appears by express agreement of the parties or in
acts of similar import."174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement,
respondent U-Land is entitled to the return of the amount it remitted to
petitioner Wellex. Petitioner Wellex is likewise entitled to the return of the
certificates of shares of stock and titles of land it delivered to respondent U-
Land. This is simply an enforcement of Section 9 of the First Memorandum
of Agreement. Pursuant to Section 9, only the execution of a final share
purchase agreement within either of the periods contemplated by this
stipulation will justify the parties’ retention of what they received or would
receive from each other.
III
Applying Article 1185 of the Civil
Code, the parties are obligated to
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a determinate
time shall render the obligation effective from the moment the time indicated
has elapsed, or if it has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time
as may have probably been contemplated, bearing in mind the nature of the
obligation.
Article 1185 provides that if an obligation is conditioned on the
nonoccurrence of a particular event at a determinate time, that obligation
arises (a) at the lapse of the indicated time, or(b) if it has become evident
that the event cannot occur.
Petitioner Wellex and respondent U-Land bound themselves to negotiate
with each other within a 40-day period to enter into a share purchase
agreement. If no share purchase agreement was entered into, both parties
would be freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase agreement
that would give rise to the obligation to both parties to free each other from
their respective undertakings. This includes returning to each other all that
they received in pursuit of entering into the share purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a share
purchase agreement. This lapse is the first circumstance provided for in
Article 1185 that gives rise to the obligation. Applying Article 1185, the
parties were then obligated to return to each other all that they had received
in order to be freed from their respective undertakings.
However, the parties continued their negotiations after the lapse of the 40-
day period. They made subsequent transactions with the intention to enter
into the share purchase agreement. Despite that, they still failed to enter into
a share purchase agreement. Communication between the parties ceased,
and no further transactions took place.
It became evident that, once again, the parties would not enter into the share
purchase agreement. This is the second circumstance provided for in Article
1185. Thus, the obligation to free each other from their respective
undertakings remained.
As such, petitioner Wellex is obligated to return the remittances made by
respondent U-Land, in the same way that respondent U-Land is obligated to
return the certificates of shares of stock and the land titles to petitioner
Wellex.
IV
Respondent U-Land is praying for
rescission or resolution under
Article 1191, and not rescission
under Article 1381
The arguments of the parties generally rest on the propriety of the rescission
of the First Memorandum of Agreement. This requires a clarification of
rescission under Article 1191, and rescission under Article 1381 of the Civil
Code.
Article 1191 of the Civil Code provides:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with articles 1385 and 1388 and the
Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of
rescissible contracts: ART. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law. ART. 1381. The following
contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter
suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them;
 (4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and approval
of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to
rescission.
Article 1383 expressly provides for the subsidiary nature of rescission:
ART. 1383. The action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to obtain
reparation for the same.
Rescission itself, however, is defined by Article 1385:
ART. 1385. Rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore. Neither shall
rescission take place when the things which are the object of the contract
are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss. Gotesco Properties v. Fajardo175 categorically stated that
Article 1385 is applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not merely
terminate the contract and release the parties from further obligations to
each other, but abrogates the contract from its inception and restores the
parties to their original positions as if no contract has been made.
Consequently, mutual restitution, which entails the return of the benefits that
each party may have received as a result of the contract, is thus required. To
be sure, it has been settled that the effects of rescission as provided for in
Article 1385 of the Code are equally applicable to cases under Article 1191,
to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article
1191. This means bringing the parties back to their original status prior to the
inception of the contract. Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obligated to restore. Neither shall
rescission take place when the things which are the object of the contract
are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss.
This Court has consistently ruled that this provision applies to rescission
under Article 1191: [S]ince Article 1385 of the Civil Code expressly and
clearly states that "rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and the price
with its interest," the Court finds no justification to sustain petitioners’
position that said Article 1385 does not apply to rescission under Article
1191. x x x176 (Emphasis from the original, citations omitted)
Rescission, as defined by Article 1385, mandates that the parties must
return to each other everything that they may have received as a result of
the contract. This pertains to rescission or resolution under Article 1191, as
well as the provisions governing all forms of rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal
prestations as distinguished from mutual obligations between or among the
parties. A prestation is the object of an obligation, and it is the conduct
required by the parties to do or not to do, or to give. 177 Parties may be
mutually obligated to each other, but the prestations of these obligations are
not necessarily reciprocal. The reciprocal prestations must necessarily
emanate from the same cause that gave rise to the existence of the contract.
This distinction is best illustrated by an established authority in civil law, the
late Arturo Tolentino:
This article applies only to reciprocal obligations. It has no application to
every case where two persons are mutually debtor and creditor of each
other. There must be reciprocity between them. Both relations must arise
from the same cause, such that one obligation is correlative to the other.
Thus, a person may be the debtor of another by reason of an agency, and
his creditor by reason of a loan. They are mutually obligated, but the
obligations are not reciprocal. Reciprocity arises from identity of cause, and
necessarily the two obligations are created at the same time.178(Citation
omitted)
Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the
cause in perfecting the existence of an obligation:
An obligation is a juridical necessity to give, to do or not to do (Art. 1156,
Civil Code). The obligation is constituted upon the concurrence of the
essential elements thereof, viz: (a) The vinculum juris or juridical tie which is
the efficient cause established by the various sources of obligations (law,
contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is
the prestation or conduct, required to be observed (to give, to do or not to
do); and (c) the subject-persons who, viewed from the demandability of the
obligation, are the active (obligee) and the passive (obligor) subjects. 180
The cause is the vinculum juris or juridical tie that essentially binds the
parties to the obligation. This linkage between the parties is a binding
relation that is the result of their bilateral actions, which gave rise to the
existence of the contract.
The failure of one of the parties to comply with its reciprocal prestation
allows the wronged party to seek the remedy of Article 1191. The wronged
party is entitled to rescission or resolution under Article 1191, and even the
payment of damages. It is a principal action precisely because it is a
violation of the original reciprocal prestation.
Article 1381 and Article 1383, on the other hand, pertain to rescission where
creditors or even third persons not privy to the contract can file an action due
to lesion or damage as a result of the contract. In Ong v. Court of
Appeals,181 this court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code,
is a remedy granted by law to the contracting parties and even to third
persons, to secure the reparation of damages caused to them by a contract,
even if this should be valid, by restoration of things to their condition at the
moment prior to the celebration of the contract. It implies a contract, which
even if initially valid, produces a lesion or a pecuniary damage to
someone.182(Citations omitted)
Ong elaborated on the confusion between "rescission" or resolution under
Article 1191 and rescission under Article 1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission
applicable to reciprocal obligations. Reciprocal obligations are those which
arise from the same cause, and in which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed simultaneously such that
the performance of one is conditioned upon the simultaneous fulfillment of
the other. Rescission of reciprocal obligations under Article 1191 of the New
Civil Code should be distinguished from rescission of contracts under Article
1383. Although both presuppose contracts validly entered into and
subsisting and both require mutual restitution when proper, they are not
entirely identical.
While Article 1191 uses the term "rescission," the original term which was
used in the old Civil Code, from which the article was based, was
"resolution." Resolution is a principal action which is based on breach of a
party, while rescission under Article 1383 is a subsidiary action limited to
cases of rescissionfor lesion under Article 1381 of the New Civil Code, which
expressly enumerates the following rescissible contracts:
1. Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one fourth of the
value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter
suffer the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in
any manner collect the claims due them;
4. Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and approval
of the litigants or of competent judicial authority; [and]
5. All other contracts specially declared by law to be subject to
rescission.183 (Citations omitted)
When a party seeks the relief of rescission as provided in Article 1381, there
is no need for reciprocal prestations to exist between or among the parties.
All that is required is that the contract should be among those enumerated in
Article 1381 for the contract to be considered rescissible. Unlike Article
1191, rescission under Article 1381 must be a subsidiary action because of
Article 1383.
Contrary to petitioner Wellex’s argument, this is not rescission under Article
1381 of the Civil Code. This case does not involve prejudicial transactions
affecting guardians, absentees, or fraud of creditors. Article 1381(3) pertains
in particular to a series of fraudulent actions on the part of the debtor who is
in the process of transferring or alienating property that can be used to
satisfy the obligation of the debtor to the creditor. There is no allegation of
fraud for purposes of evading obligations to other creditors. The actions of
the parties involving the terms of the First Memorandum of Agreement do
not fall under any of the enumerated contracts that may be subject of
rescission.
Further, respondent U-Land is pursuing rescission or resolution under Article
1191, which is a principal action. Justice J.B.L. Reyes’ concurring opinion in
the landmark case of Universal Food Corporation v. Court of Appeals 184gave
a definitive explanation on the principal character of resolution under Article
1191 and the subsidiary nature of actions under Article 1381:
The rescission on account of breach of stipulations is not predicated on
injury to economic interests of the party plaintiff but on the breach of faith by
the defendant, that violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to
anything other than the culpable breach of his obligations by the defendant.
This rescission is a principal action retaliatory in character, it being unjust
that a party be held bound to fulfill his promises when the other violates his.
As expressed in the old Latin aphorism: "Non servanti fidem, non est fides
servanda." Hence, the reparation of damages for the breach is purely
secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice,
the cause of action is subordinated to the existence of that prejudice,
because it is the raison detre as well as the measure of the right to rescind.
Hence, where the defendant makes good the damages caused, the action
cannot be maintained or continued, as expressly provided in Articles 1383
and 1384. But the operation of these two articles is limited to the cases of
rescission for lesión enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191. 185
Rescission or resolution under Article 1191, therefore, is a principal action
that is immediately available to the party at the time that the reciprocal
prestation was breached. Article 1383 mandating that rescission be deemed
a subsidiary action cannot be applicable to rescission or resolution under
Article 1191. Thus, respondent U-Land correctly sought the principal relief of
rescission or resolution under Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which arose
from the same cause: the desire of both parties to enter into a share
purchase agreement that would allow both parties to expand their respective
airline operations in the Philippines and other neighboring countries.
V
The jurisprudence relied upon by
petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance its arguments against
respondent U-Land’s right to rescission are not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this
court specifically stated that the parties entered into a contract of sale, and
their reciprocal obligations had already been fulfilled: 186
There is no dispute that the parties entered into a contract of sale as
distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the
ownership of and to deliver a determinate thing to the buyer, who in turn, is
obligated to pay a price certain in money or its equivalent (Art. 1458, Civil
Code). From the respondents’ own arguments, we note that they have fully
complied with their part of the reciprocal obligation. As a matter of fact, they
have already parted with the title as evidenced by the transfer certificate of
title in the petitioners’ name as of June 27, 1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the deed
of mortgage. The payments on an installment basis secured by the
execution of a mortgage took the place of a cash payment. In other words,
the relationship between the parties is no longer one of buyer and seller
because the contract of sale has been perfected and consummated. It is
already one of a mortgagor and a mortgagee. In consideration of the
petitioners’ promise to pay on installment basis the sum they owe the
respondents, the latter have accepted the mortgage as security for the
obligation.
The situation in this case is, therefore, different from that envisioned in the
cited opinion of Justice J.B.L. Reyes. The petitioners’ breach of obligations is
not with respect to the perfected contract of sale but in the obligations
created by the mortgage contract. The remedy of rescission is not a principal
action retaliatory in character but becomes a subsidiary one which by law is
available only in the absence of any other legal remedy. (Art. 1384, Civil
Code). Foreclosure here is not only a remedy accorded by law but, as earlier
stated, is a specific provision found in the contract between the
parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not
rescission or resolution under Article 1191. In addition, the First
Memorandum of Agreement is not a contract to sell shares of stock. It is an
agreement to negotiate with the view of entering into a share purchase
agreement.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this court held
that non-payment of consideration of contracts only gave rise to the right to
sue for collection, but this non-payment cannot serve as proof of a simulated
contract.188 The case did not rule that the vendor has no obligation to deliver
the thing sold if the buyer fails to fully pay the price required by the contract.
In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts
proves their simulation. We disagree. Nonpayment, at most, gives him only
the right to sue for collection. Generally, in a contract of sale, payment of the
price is a resolutory condition and the remedy of the seller is to exact
fulfillment or, in case of a substantial breach, to rescind the contract under
Article 1191 of the Civil Code. However, failure to pay is not even a breach,
but merely an event which prevents the vendor’s obligation to convey title
from acquiring binding force.189 (Citations omitted) This court’s statement in
Villaflor regarding rescission under Article 1191 was a mere obiter dictum. In
Land Bank of the Philippines v. Suntay,190 this court discussed the nature of
an obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court upon
some question of law that is not necessary in the determination of the case
before the court. It is a remark made, or opinion expressed, by a judge, in
his decision upon a cause by the way, that is, incidentally or collaterally, and
not directly upon the question before him, or upon a point not necessarily
involved in the determination of the cause, or introduced by way of
illustration, or analogy or argument. It does not embody the resolution or
determination of the court, and is made without argument, or full
consideration of the point. It lacks the force of an adjudication, being a mere
expression of an opinion with no binding force for purposes of res
judicata.191 (Citations omitted)
Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses
Agustin v. Court of Appeals is also misplaced. In these cases, this court held
that there can be no rescission for an obligation that is nonexistent,
considering that the suspensive condition that will give rise to the obligation
has not yet happened. This is based on an allegation that the contract
involved is a contract to sell. In a contract to sell, the failure of the buyer to
pay renders the contract without effect. A suspensive condition is one whose
non-fulfillment prevents the existence of the obligation.192 Payment of the
purchase price, therefore, constitutes a suspensive condition in a contract to
sell. Thus, this court held that non-remittance of the full price allowed the
seller to withhold the transfer of the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to sell.
Entering into the share purchase agreement or the joint development
agreement remained a stipulation that the parties themselves agreed to
pursue in the First Memorandum of Agreement.
Based on the First Memorandum of Agreement, the execution of the share
purchase agreement was necessary to put into effect respondent U-Land’s
purchase of the shares of stock. This is the stipulation indicated in this
memorandum of agreement. There was no suspensive condition of full
payment of the purchase price needed to execute either the share purchase
agreement or the joint development agreement. Upon the execution of the
share purchase, the obligation of petitioner Wellex to transfer the shares of
stock and of respondent U-Land to pay the price of these shares would have
arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has the
same effect as rescission or resolution under Article 1191 of the Civil Code.
The parties are obligated to return to each other all that they may have
received as a result of the breach by petitioner Wellex of the reciprocal
obligation. Therefore, the Court of Appeals did not err in affirming the
rescission granted by the trial court.
VI
Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court found
that petitioner Wellex committed fraud by inducing respondent U-Land to
purchase APIC shares and PEC shares and by leading the latter to believe
that APC was a subsidiary of APIC.
Determining the existence of fraud is not necessary in an action for
rescission or resolution under Article 1191. The existence of fraud must be
established if the rescission prayed for is the rescission under Article 1381.
However, the existence of fraud is a question that the parties have raised
before this court. To settle this question with finality, this court will examine
the established facts and determine whether petitioner Wellex indeed
defrauded respondent U-Land.
In Tankeh v. Development Bank of the Philippines,193 this court enumerated
the relevant provisions of the Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations
of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the former’s special
knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the
same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n) The distinction between fraud as a ground for rendering
a contract voidable or as basis for an award of damages is provided in
Article 1344:
In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
(1270)194
Tankeh further discussed the degree of evidence needed to prove the
existence of fraud:
[T]he standard of proof required is clear and convincing evidence. This
standard of proof is derived from American common law. It is less than proof
beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability is
higher than that of an ordinary civil case. Civil cases only require a
preponderance of evidence to meet the required burden of proof. However,
when fraud is alleged in an ordinary civil case involving contractual relations,
an entirely different standard of proof needs to be satisfied. The imputation
of fraud in a civil case requires the presentation of clear and convincing
evidence. Mere allegations will not suffice to sustain the existence of fraud.
The burden of evidence rests on the part of the plaintiff or the party alleging
fraud. The quantum of evidence is such that fraud must be clearly and
convincingly shown.195
To support its allegation of fraud, Mr. Tseng, respondent U-Land’s witness
before the trial court, testified that Mr. Gatchalian approached respondent U-
Land on two (2) separate meetings to propose entering into an agreement
for joint airline operations in the Philippines. Thus, the parties entered into
the First Memorandum of Agreement. Respondent U-Land primarily anchors
its allegation of fraud against petitioner Wellex on the existence of the
second preambular clause of the First Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
admitted that "[t]he amount of US$7,499,945.00 was remitted for the
purchase of APIC and PEC shares."196 In that brief, it argued that the parties
were already in the process of partially executing the First Memorandum of
Agreement.
As held in Tankeh, there must be clear and convincing evidence of fraud.
Based on the established facts, respondent U-Land was unable to clearly
convince this court of the existence of fraud.
Respondent U-Land had every reasonable opportunity to ascertain whether
APC was indeed a subsidiary of APIC. This is a multimillion dollar
transaction, and both parties admitted that the share purchase agreement
underwent several draft creations. Both parties admitted the participation of
their respective counsels in the drafting of the First Memorandum of
Agreement. Respondent U-Land had every opportunity to ascertain the
ownership of the shares of stock. Respondent U-Land itself admitted that it
was not contesting petitioner Wellex’s ownership of the APIC shares or APC
shares; hence, it was not contesting the existence of the Second
Memorandum of Agreement. Upon becoming aware of petitioner Wellex’s
representations concerning APIC’s ownership or control of APC as a
subsidiary, respondent U-Land continued to make remittances totalling the
amount sought to be rescinded. It had the option to opt out of negotiations
after the lapse of the 40-day period. However, it proceeded to make the
remittances to petitioner Wellex and proceed with negotiations.
Respondent U-Land was not defrauded by petitioner Wellex to agree to the
First Memorandum of Agreement.1awp++i1 To constitute fraud under Article
1338, the words and machinations must have been so insidious or deceptive
that the party induced to enter into the contract would not have agreed to be
bound by its terms if that party had an opportunity to be aware of the
truth.197 Respondent U-Land was already aware that APC was not a
subsidiary of APIC after the 40-day period. Still, it agreed to be bound by the
First Memorandum of Agreement by making the remittances from June 30 to
September 25, 1998.198 Thus, petitioner Wellex’s failure to inform
respondent U-Land that APC was not a subsidiary of APIC when the First
Memorandum of Agreement was being executed did not constitute fraud.
However, the absence of fraud does not mean that petitioner Wellex is free
of culpability. By failing to inform respondent U-Land that APC was not yet a
subsidiary of APIC at the time of the execution of the First Memorandum of
Agreement, petitioner Wellex violated Article 1159 of the Civil Code. Article
1159 reads:
ART. 1159. Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.
In Ochoa v. Apeta,199 this court defined good faith:
Good faith is an intangible and abstract quality with no technical meaning or
statutory definition, and it encompasses, among other things, an honest
belief, the absence of malice and the absence of design to defraud or to
seek an unconscionable advantage. It implies honesty of intention, and
freedom from knowledge of circumstances which ought to put the holder
upon inquiry. The essence of good faith lies in an honest belief in the validity
of one’s right, ignorance of a superior claim and absence of intention to
overreach another.200 (Citations omitted)
It was incumbent upon petitioner Wellex to negotiate the terms of the
pending share purchase agreement in good faith. This duty included
providing a full disclosure of the nature of the ownership of APIC in APC.
Unilaterally compelling respondent U-Land to remit money to finalize the
transactions indicated in the Second Memorandum of Agreement cannot
constitute good faith.
The absence of fraud in a transaction does not mean that rescission under
Article 1191 is not proper. This case is not an action to declare the First
Memorandum of Agreement null and void due to fraud at the inception of the
contract or dolo causante. This case is not an action for fraud based on
Article 1381 of the Civil Code. Rescission or resolution under Article 1191 is
predicated on the failure of one of the parties in a reciprocal obligation to
fulfill the prestation as required by that obligation. It is not based on vitiation
of consent through fraudulent misrepresentations.
VII
Respondent U-Land was not bound
to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay the amount of US$3 million
to petitioner Wellex does not justify the actions of the latter in refusing to
return the US$7,499,945.00.
Article 1374 of the Civil Code provides that:
ART. 1374. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all
of them taken jointly.
The execution of the joint development agreement was contingent on the
execution of the share purchase agreement.1âwphi1 This is provided for in
Section 4 of the First Memorandum of Agreement, which stated that the
execution of the two agreements is "[s]imultaneous."201 Thus, the failure of
the share purchase agreement’s execution would necessarily mean the is obligated to return the certificates of shares of stock and the land titles to
failure of the joint development agreement’s execution. petitioner Wellex.

Section 9 of the First Memorandum of Agreement provides that should the
parties fail to execute the agreement, they would be released from their
mutual obligations. Had respondent U-Land paid the US$3 million and
petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of
the joint development agreement, they would have been obligated to return
these to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be
interpreted together. Since the parties were unable to agree on a final share
purchase agreement and there was no exchange of money or shares of
stock due to the continuing negotiations, respondent U-Land was no longer
obliged to provide the money for the real estate development projects. The
payment of the US$3 million was for pursuing the real estate development
projects under the joint development agreement. There being no joint
development agreement, the obligation to deliver the US$3 million and the
delivery of the PEC shares for that purpose were no longer incumbent upon
the parties.
VIII
Respondent U-Land was not
obligated to exhaust the "securities"
given by petitioner Wellex
The parties are bound by the 40-day period provided for in the First
Memorandum of Agreement. Adherence by the parties to Section 9 of the
First Memorandum of Agreement has the same effect as the rescission or
resolution prayed for and granted by the trial court.
Informal acts are prone to ambiguous legal interpretation. This will be based
on the say-so of each party and is a fragile setting for good business
transactions. It will contribute to the unpredictability of the market as it would
provide courts with extraordinary expectations to determine the business
actor's intentions. The parties appear to be responsible businessmen who
know that their expectations and obligations should be clearly articulated
between them. They have the resources to engage legal representation.
Indeed, they have reduced their agreement in writing.
Petitioner Wellex now wants this court to define obligations that do not
appear in these instruments. We cannot do so. This court cannot interfere in
the bargains, good or bad, entered into by the parties. Our duty is to affirm
legal expectations, not to guarantee good business judgments.
WHEREFORE, the petition is DENIED. The Decision of the Regional Trial
Court in Civil Case No. 99-1407 and the Decision of the Court of Appeals in
CA-G.R. CV No. 74850 are AFFIRMED. Costs against petitioner The Wellex
Group, Inc.

Contrary to petitioner Wellex’s assertion, there is no obligation on the part of SO ORDERED.

respondent U-Land to exhaust the "securities" given by petitioner Wellex. No
such meeting of the minds to create a guarantee or surety or any other form
of security exists. The principal obligation is not a loan or an obligation
subject to the conditions of sureties or guarantors under the Civil Code.
Thus, there is no need to exhaust the securities given to respondent U-Land,
and there is no need for a legal condition where respondent U-Land should
pursue other remedies.

Neither petitioner Wellex nor respondent U-Land stated that there was
already a transfer of ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the delivery of the shares of stock
and the land titles were not in the nature of a pledge or mortgage. 202 It
received the certificates of shares of stock and the land titles with an
understanding that the parties would subsequently enter a share purchase
agreement. There being no share purchase agreement, respondent U-Land
 THIRD DIVISION
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.1âwphi1 Where a party’s consent to 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.
complaint,[5] docketed as Civil Case No. 1085-R, respondents alleged that
they were the registered owners of 18 parcels of land situated in
Rosales, Pangasinan and embraced in Transfer Certificate of Title
(TCT) Nos. 34998, 36022, 35158, 36017, 18128, 26761, 36020, 28387, 355
85, 25739, 36023, 40059, 40055, 40060, 40057, 40056, 36967 and 35268.[6]

Respondents claimed that sometime in February of 1993, they had

SO ORDERED. experienced business reversals and financial difficulties and had sought
assistance from petitioners in securing a loan. Petitioners allegedly proposed
that they would obtain the loan from the bank provided that respondents
secure the transfer of the titles to petitioners that would be used as security
for the loan. Respondents agreed, executed the corresponding deeds of sale
and caused the cancellation and issuance of new TCTs over the properties in
ALEXANDER and JEAN J. G.R. No. 170282 favor of petitioners. However, respondents claimed that after petitioners had
BACUNGAN, obtained the new titles, they never applied for a loan with the bank but had
Petitioners, Present: secretly negotiated for the sale of the properties to third parties. [7]

QUISUMBING, J., In their answer,[8] petitioners asserted that respondents offered to

Chairperson, sell to them 23 parcels of land, 18 of which were used as collateral for the loan
CARPIO MORALES, respondents had obtained from Traders Royal Bank. Petitioners claimed to
- versus - TINGA, have bought 22 parcels of land and executed the corresponding deeds of sale
VELASCO, JR., and on 26 February 1993 and 10 March 1993. They also allegedly paid in full
BRION, JJ. respondents obligation with said bank but only 18 certificates of title released
COURT OF APPEALS and SPS. by the bank were delivered to petitioners. Petitioners further maintained that
NAPOLEON and VICTORIA VELO, Promulgated: out of their gratuitousness, they returned one of the deeds of sale to
Respondents. respondents and considered the sale as cancelled. Petitioners averred that
December 18, 2008 the amounts they paid to respondents, as well as their payments to the bank,
were more than enough as consideration of the 23 contracts. [9]
DECISION After trial on the merits, the RTC rendered a decision on 20 April
1999, dismissing the complaint for lack of merit. The RTC gave evidentiary
TINGA, J.: weight on the notarized deeds of sale, the presumed validity and due
This is a petition for review on certiorari[1] under Rule 45 of the 1997 execution of which, according to the RTC, were not overcome by the
Rules of Civil Procedure, assailing the decision[2] and resolution[3] of the Court uncorroborated testimony of respondent Victoria Velo. The RTC held that in
of Appeals (CA) in CA-G.R. CV No. 64370. The Decision dated 21 March any case, respondents admitted to have voluntarily consented to the
2005 reversed and set aside the judgment[4] of dismissal by the Regional Trial simulation of the contracts, thus, the principle of in pari delicto must prevail
Court (RTC), Branch 53, Pangasinan in the action for reconveyance filed by and both parties were at fault and should be left at where the law finds them.
respondents against petitioners, while the resolution denied petitioners motion
for reconsideration of the CA decision. Respondents elevated the matter to the CA via a petition for review,
arguing that the contracts between respondents and petitioners were
The following factual antecedents are matters of record. simulated.
Respondents Napoleon and Victoria Velo instituted an action On 21 March 2005, the CA rendered the assailed decision, reversing
for reconveyance with damages against petitioners Alexander and the RTCs judgment. The dispositive portion of the CAs decision reads:
Jean Jimeno Bacungan before the RTC of Rosales, Pangasinan. In the
 WHEREFORE, the assailed decision dated 20 April 1999 of
the Regional Trial Court of Rosales, Pangasinan is SET
ASIDE. Judgment is hereby rendered:
1. Declaring the Deeds of Sale covering
parcels of land under TCT Nos. 34998,
36022, 35158, 36017, 18128, 26761, 36020,
28381, 35585, 25739, 36023, 40059, 40055,
40060, 40057, 40056, 36967and 35268 as
simulated; and
2. Ordering the defendants-
appellees to reconvey the aforesaid
properties to the plaintiffs-appellants.
SO ORDERED.[10]
In reversing the RTC decision, the CA held that by their
contemporaneous and subsequent acts, the deeds of sale were simulated as
the parties did not intend to be bound by them at all. Among the indicators
pointed out by the appellate court in support of its conclusion were the gross
inadequacy of prices, respondents failure to receive any part of the purchase
price stated in the deeds of sale, the offer by petitioners to return some of the
certificates of title and petitioner Alexander Bacungans admission that the
sale was simulated.[11]
Petitioners filed a motion for reconsideration, [12] raising the CAs
failure to consider the amounts tendered by petitioners for the redemption of
the properties as well as the amounts advanced by petitioners as payments
of the properties. On 7 November 2005, the CA issued the assailed resolution,
denying petitioners motion for reconsideration.
Hence, the instant petition, raising the following arguments: (1) the
deeds of sale embody the real agreement of the parties and are not nullified
by the gross inadequacy of the prices; (2) the contracts of sale cannot be
simulated because prior to their execution, petitioner extended a loan to
respondents which was used to redeem the mortgaged properties; and (3)
respondents admitted that the only agreement was the contracts of sale; thus,
the appellate court erred in interpreting the acts of the parties before and after
their execution.[13]
The petition is partly meritorious.
Respondents and petitioners advance contrasting claims. Petitioners
would have this Court uphold the validity of the deeds of sale while
respondents seek their nullification. Neither is claiming that they had agreed
other terms and conditions not embodied in the deeds of sale or that the deeds
of sale do not embody their real agreement. However, after a perusal of the
records of the case, the Court finds that the resolution of the controversy
cannot be limited only to determining whether the deeds of sale were void.
Such issue may still be considered and resolved by the Court in the interest
of substantial justice, if it finds that to do so is necessary to arrive at a just
decision, or when an issue is closely related to an issue raised in the trial court
and the Court of Appeals and is necessary for a just and complete resolution
of the case.[14]
After a careful examination of the records of the case, the Court finds
that the deeds of absolute sale do not embody the real intention of the parties.
The records reveal that respondents had earlier executed several real estate
mortgages over the properties to secure the payment of the total amount
of P350,000.00.[15] Respondents defaulted on the payments, prompting the
bank to foreclose the properties. However, as illustrated in the testimony of
respondent Victoria Velo, respondents and petitioners devised a plan in which
they agreed that in exchange for the apparent transfer of ownership of the
parcels of land to petitioners, the latter would provide for the funds for the
redemption of the properties from the bank in addition to the loan that
petitioners would obtain from the bank. Thus, respondents were able to
redeem the properties for the amount of P369,000.00 that was advanced by
way of mortgage to them by petitioners.[16] The amount approximates the total
loans in the amount of P350,000.00 secured by the properties subject of the
real estate mortgages executed by respondents.[17]
Thereafter, respondents executed several deeds of sale purporting
to transfer the 18 parcels of lands for a total consideration of P232,000.00.
The parties further agreed that upon the transfer of the properties in the name
of petitioners, the latter would obtain another loan from the bank using the
properties as collateral. Petitioners were supposed to remit the loan proceeds
to respondents after deducting the amount of P369,000.00 lent by petitioners
to respondents and, thereafter, allow respondents to buy back the properties.
However, because petitioners had failed to secure a loan from the bank after
the transfer of the titles in their names, respondents instituted the present
action to nullify the deeds of sale on the ground that the sale was simulated.
This kind of arrangement, where the ownership of the land is
supposedly transferred to the buyer who provides for the funds to redeem the
property from the bank but nonetheless allows the seller to later on buy back
the properties, is in the nature of an equitable mortgage governed by Articles
1602 and 1604 of the Civil Code, which provide:
 Article 1602. The contract shall be presumed to be
an equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to
repurchase is unusually inadequate;
(2) When the vendor remains in possession as
lessee or otherwise;
(3) When upon or after the expiration of the right
to repurchase another instrument extending the period of
redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part
of the purchase price;
(5) When the vendor binds himself to pay the taxes
on the thing sold;
(6) In any case where it may be fairly inferred that
the real intention of the parties is that the transaction shall
secure the payment of a debt or the performance of any
other obligation.
In any of the foregoing cases, any money, fruits,
or other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall be
subject to the usury laws.
Art. 1604. The provisions of Article 1602 shall also
apply to a contract purporting to be an absolute sale.
From a reading of the above-quoted provisions, for a presumption of an
equitable mortgage to arise, two requisites must be satisfied, namely: that the
parties entered into a contract denominated as a contract of sale and that their
intention was to secure an existing debt by way of mortgage. Under Art. 1604
of the Civil Code, a contract purporting to be an absolute sale shall be
presumed to be an equitable mortgage should any of the conditions in Art.
1602 be present. The existence of any of the circumstances therein, not a
concurrence or an overwhelming number of such circumstances, suffices to
give rise to the presumption that the contract is an equitable mortgage. [18]
In the instant case, three telling circumstances indicating that an
equitable mortgage exists are present. First, as established by the CA, the
price of each of the properties was grossly inadequate. Second, petitioners
retained part of the purchase price when they failed to turn over to the
respondents the loan that they were supposed to secure from the bank. Third,
petitioners insisted that part of the consideration of the sale consisted of
amounts previously borrowed by respondents from them, indicating that
petitioners were using the properties as security for the payment of
respondents other loans from them.
The CA concluded that the sale was simulated because of the gross
inadequacy of the prices and the failure by respondents to receive the
purchase price.
Gross inadequacy of price by itself will not result in a void
contract. Gross inadequacy of price does not even affect the validity of a
contract of sale, unless it signifies a defect in the consent or that the parties
actually intended a donation or some other contract. Inadequacy of cause will
not invalidate a contract unless there has been fraud, mistake or undue
influence.[19]
That respondents did not receive the purchase price is not entirely
correct. As already discussed above, the consideration for the transaction was
to secure the payment of respondents loan to petitioners.
Also, the CAs conclusion that petitioner
Alexander Bacungan admitted that the sale was simulated is not supported by
the records of the case. Petitioners merely admitted that previous to the
execution of the deeds of sale, respondents had borrowed other sums of
money from them.
All told, while the deeds of sale do not reflect the true intention of the
parties, their real agreement must nonetheless be recognized and enforced.
While neither party claimed that the real agreement was an equitable
mortgage, the factual circumstances of the case nudge the Court to declare
the real agreement as such and enforce the rights and liabilities of the parties
accordingly. This being the case, the proper remedy availed by either party
was to institute an action for the reformation of the deeds of sale in order to
reflect the true intention of the parties. However, instead of dismissing the
complaint altogether, the just and expeditious manner is to settle once and for
all the rights and obligations of the parties under the equitable mortgage.
It has been established that petitioners advanced the sum
of P369,000.00 to respondents that prompted the latter to transfer the
properties to petitioners. Thus, before the respondents can recover the said
amount, respondents must first return the amount of P369,000.00 to
petitioners. In Lustan v. Court Appeals,[20] where the Court established the
reciprocal obligations of the parties under an equitable mortgage, the Court
ordered the reconveyance of the property to the rightful owner therein upon
the payment of the loan within 90 days from the finality of this decision.
WHEREFORE, the petition for review on certiorari is PARTLY
GRANTED and the decision and resolution of the Court of Appeals in CA-G.R.
CV No. 64370 are AFFIRMED with the following MODIFICATIONS:
In this Petition[1] under Rule 45, petitioner Spouses Alfredo and
Rosella Edrada (petitioners) seek the reversal of the Former Second Division
of the Court of Appeals Decision[2] and Resolution[3] in CA-G.R. CV No.
66375, which affirmed the Decision of Regional Trial Court (RTC) of Antipolo
City, Branch 71,[4] in Civil Case No. 96-4057, and denied the Motion for
Reconsideration[5] therein.

Respondent spouses Eduardo and Carmencita Ramos

1) DECLARING the Deeds of Absolute Sale as equitable mortgages;
and
2) ORDERING petitioners to RECONVEY to respondents the
properties covered by Transfer Certificate of Title Nos. 34998, 36022, 35158,
36017, 18128, 26761, 36020, 28381, 35585, 25739, 36023, 40059, 40055,
40060, 40057, 40056, 36967 AND 35268 of the Register of Deeds
of Pangasinan UPON THE PAYMENT OF P369,000.00 by respondents
within NINETY DAYS FROM THE FINALITY OF THIS DECISION.
(respondents) are the owners of two (2) fishing vessels, the Lady Lalaine and
the Lady Theresa. On 1 April 1996, respondents and petitioners executed an
untitled handwritten document which lies at the center of the present
controversy. Its full text is reproduced below:
1st April 1996
This is to acknowledge that Fishing Vessels Lady
Lalaine and Lady Theresa owned by Eduardo O. Ramos
are now in my possession and received in good running and
serviceable order. As such, the vessels are now my
responsibility.

SO ORDERED. Documents pertaining to the sale and agreement

of payments between me and the owner of the vessel to
follow. The agreed price for the vessel is Nine Hundred
Thousand Only (P900,000.00).
SPS. ALFREDO R. EDRADA G.R. No. 154413
(SGD.) (SGD.)
and ROSELLA L. EDRADA,
EDUARDO O. RAMOS ALFREDO R. EDRADA
Petitioners, Present:
(Seller) (Purchaser)
PUNO, J.,
- versus - Chairman,
AUSTRIA-MARTINEZ ,
CALLEJO, SR.,
TINGA, and
CONFORME: CONFORME:
SPS. EDUARDO RAMOS CHICO-NAZARIO, JJ.
and CARMENCITA RAMOS,
(SGD.) (SGD.)
Respondents.
CARMENCITA RAMOS ROSIE ENDRADA[6]
Promulgated:
DECISION
Upon the signing of the document, petitioners delivered to
respondents four (4) postdated Far East Bank and Trust Company (FEBTC)
TINGA, J.:
checks payable to cash drawn by petitioner Rosella Edrada, in various
amounts totaling One Hundred Forty Thousand Pesos (P140,000.00). The
first three (3) checks were honored upon presentment to the drawee bank
while the fourth check for One Hundred Thousand Pesos (P100,000.00) was
dishonored because of a stop payment order.
On 3 June 1996, respondents filed an action against petitioners for
specific performance with damages before the RTC, praying that petitioners
be obliged to execute the necessary deed of sale of the two fishing vessels
and to pay the balance of the purchase price. In
their Complaint,[7] respondents alleged that petitioners contracted to buy the
two fishing vessels for the agreed purchase price of Nine Hundred Thousand
Pesos (P900,000.00), as evidenced by the above-quoted document, which
according to them evinced a contract to
buy. However, despite delivery of said vessels and repeated oral demands,
petitioners failed to pay the balance, so respondents further averred.
Belying the allegations of respondents, in their Answer with
Counterclaim,[8] petitioners averred that the document sued upon merely
embodies an agreement brought about by the loans they extended to
respondents. According to petitioners, respondents allowed them to manage
or administer the fishing vessels as a business on the understanding that
should they find the business profitable, the vessels would be sold to them for
Nine Hundred Thousand Pesos (P900,000.00). But petitioners decided to call
it quits after spending a hefty sum for the repair and maintenance of the
vessels which were already in dilapidated condition.
After trial, the RTC rendered a Decision[9] dated 22 February 1999,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in
favor of the plaintiffs and against the defendants and the
latter are ordered to pay to the former the amount of Eight
Hundred Sixty Thousand Pesos (P860,000.00) with legal
interests thereon from June 30, 1996 until fully paid; the
amount of P20,000.00 as attorneys fees and the cost of
suit.
The counterclaim of the defendants for moral and
exemplary damages and for attorneys fees is dismissed for
lack of merit.
SO ORDERED.[10]
The RTC treated the action as one for collection of a sum of money
and for damages and considered the document as a perfected contract of
sale. On 19 April 1999, petitioners filed a Motion for Reconsideration which
the RTC denied in an Order[11] dated 2 July 1999.
Both parties appealed the RTC Decision. However, finding no
reversible error in the appealed decision, the Court of Appeals, in
its Decision,[12]affirmed the same and dismissed both appeals. Only
petitioners elevated the controversy to this Court.
Petitioners raised the nature of the subject document as the primary
legal issue. They contend that there was no perfected contract of sale as
distinguished from a contract to sell. They likewise posed as sub-issues the
purpose for which the checks were issued, whether replacement of the crew
was an act of ownership or administration, whether petitioners failed to protest
the dilapidated condition of the vessels, and whether the instances when the
vessels went out to sea proved that the vessels were not seaworthy. [13] It is
also alleged in the petition that the true agreement as between the parties was
that of a loan.
Evidently, the petition hinges on the true nature of the document
dated 1 April 1996. Normally, the Court is bound by the factual findings of the
lower courts, and accordingly, should affirm the conclusion that the document
in question was a perfected contract of sale. However, we find that both the
RTC and the Court of Appeals gravely misapprehended the nature of the said
document, and a reevaluation of the document is in order. [14] Even if such
reevaluation would lead the court to examine issues not raised by the parties,
it should be remembered that the Court has authority to review matters even
if not assigned as errors in the appeal, if it is found that their consideration is
necessary in arriving at a just decision of the case. [15]
In doing so, we acknowledge that the contending parties offer vastly
differing accounts as to the true nature of the agreement. Still, we need not
look beyond the document dated 1 April 1996 and the stipulations therein in
order to ascertain what obligations, if any, have been contracted by the party.
The parol evidence rule forbids any addition to or contradiction of the terms of
a written agreement by testimony or other evidence purporting to show that
different terms were agreed upon by the parties, varying the purport of the
written
contract. Whatever is not found in the writing is understood to have been
waived and abandoned.[16]
We disagree with the RTC and the Court of Appeals that the
document is a perfected contract of sale. A contract of sale is defined as an
agreement whereby one of the contracting parties obligates himself to transfer
the ownership of and to deliver a determinate thing, and the other to pay
therefore a price certain in money or its equivalent. [17] It must evince the
consent on the part of the seller to transfer and deliver and on the part of the
buyer to pay.[18]
An examination of the document reveals that there is no perfected
contract of sale. The agreement may confirm the receipt by respondents of
the two vessels and their purchase price. However, there is no equivocal
agreement to transfer ownership of the vessel, but a mere commitment that
documents pertaining to the sale and agreement of payments[are] to follow.
Evidently, the document or documents which would formalize the transfer of
ownership and contain the terms of payment of the purchase price, or the
period when such would become due and demandable, have yet to be
executed. But no such document was executed and no such terms were
stipulated upon.
The fact that there is a stated total purchase price should not lead to
the conclusion that a contract of sale had been perfected. In numerous
cases,[19] the most recent of which is Swedish Match, AB v. Court of
Appeals,[20] we held that before a valid and binding contract of sale can exist,
the manner of payment of the purchase price must first be established, as
such stands as essential to the validity of the sale. After all, such agreement
on the terms of payment is integral to the element of a price certain, such that
a disagreement on the manner of payment is tantamount to a failure to agree
on the price.
Assuming arguendo that the document evinces a perfected contract
of sale, the absence of definite terms of payment therein would preclude its
enforcement by the respondents through the instant Complaint. A requisite for
the judicial enforcement of an obligation is that the same is due and
demandable. The absence of a stipulated period by which the purchase price
should be paid indicates that at the time of the filing of the complaint, the
obligation to pay was not yet due and demandable.
Respondents, during trial, did claim the existence of a period. Respondent
Carmencita Ramos, during cross-examination, claimed that the supposed
balance shall be paid on 30 June 1996.[21] But how do respondents explain
why the Complaint was filed on 3 June 1996? Assuming that the 30 June 1996
period was duly agreed upon by the parties, the filing of the Complaint was
evidently premature, as no cause of action had accrued yet. There could not
have been any breach of obligation because on the date the action was filed,
the alleged maturity date for the payment of the balance had not yet arrived.
In order that respondents could have a valid cause of action, it is
essential that there must have been a stipulated period within which the
payment would have become due and demandable. If the parties themselves
could not come into agreement, the courts may be asked to fix the period of
the obligation, under Article 1197 of the Civil Code.[22] The respondents did
not avail of such relief prior to the filing of the instant Complaint; thus, the
action should fail owing to its obvious prematurity.
Returning to the true nature of the document, we neither could conclude that
a contract to sell had been established. A contract to sell is defined as a
bilateral contract whereby the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof to the prospective
buyer, binds himself to sell the said property exclusively to the prospective
buyer upon fulfillment of the condition agreed upon, that is, full payment of the
purchase price.[23]
A contract is perfected when there is concurrence of the wills of the
contracting parties with respect to the object and the cause of the contract. In
this case, the agreement merely acknowledges that a purchase price had
been agreed on by the parties. There was no mutual promise to buy on the
part of petitioners and to sell on the part of respondents. Again, the aforestated
proviso in the agreement that documents pertaining to the sale and agreement
of payments between the parties will follow clearly manifests lack of
agreement between the parties as to the terms of the contract to sell,
particularly the object and cause of the contract.
The agreement in question does not create any obligatory force
either for the transfer of title of the vessels, or the rendition of payments as
part of the purchase price. At most, this agreement bares only their intention
to enter into either a contract to sell or a contract of sale.
Consequently, the courts below erred in ordering the enforcement of
a contract of sale that had yet to come into existence. Instead, the
instant Complaint should be dismissed. It prays for three reliefs arising from
the enforcement of the document: execution by the petitioners of the
necessary deed of sale over the vessels, the payment of the balance of the
purchase price, and damages. The lower courts have already ruled that
damages are unavailing. Our finding that there is no perfected contract of sale
precludes the finding of any cause of action that would warrant the granting of
the first two reliefs. No cause of action arises until there is a breach or violation
thereof by either party.[24] Considering that the documents create no obligation
to execute or even pursue a contract of sale, but only manifest an intention to
eventually contract one, we find no rights breached or violated that would
warrant any of the reliefs sought in the Complaint.
WHEREFORE, the petition is GRANTED. The assailed Decision and
Resolution of the Court of Appeals are REVERSED and SET ASIDE. The
case before the Regional Trial Court is ordered DISMISSED. No
pronouncement as to costs. SO ORDERED.
 SECOND DIVISION
G.R. No. 158646 June 23, 2005
HEIRS OF JESUS M. MASCUÑANA, represented by JOSE MA. R.
MASCUÑANA, petitioners,
vs.
COURT OF APPEALS, AQUILINO BARTE, and SPOUSES RODOLFO
and CORAZON LAYUMAS, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) in CA-G.R. CV No. 53117 affirming the Decision2 of the
Regional Trial Court (RTC) of San Carlos City, Negros Occidental, which
ordered the dismissal of the petitioners’ complaint for recovery of possession
and damages.
The Antecedents
Gertrudis Wuthrich and her six other siblings were the co-owners of a parcel
of land identified as Lot No. 124 of the San Carlos City, Negros Occidental
Cadastre, with an area of 1,729 square meters and covered by Transfer
Certificate of Title (TCT) No. 1453-R (T-29937)-38.3 Over time, Gertrudis
and two other co-owners sold each of their one-seventh (1/7) shares, or a
total area of 741 square meters, to Jesus Mascuñana. The latter then sold a
portion of his 140-square-meter undivided share of the property to Diosdado
Sumilhig. Mascuñana later sold an additional 160-square-meter portion to
Sumilhig on April 7, 1961. However, the parties agreed to revoke the said
deed of sale and, in lieu thereof, executed a Deed of Absolute Sale on
August 12, 1961. In the said deed, Mascuñana, as vendor, sold an undivided
469-square-meter portion of the property for ₱4,690.00, with ₱3,690.00 as
down payment, and under the following terms of payment:
That the balance of ONE THOUSAND PESOS (₱1,000.00) shall be paid by
the VENDEE unto the VENDOR as soon as the above-portions of Lot 124
shall have been surveyed in the name of the VENDEE and all papers
pertinent and necessary to the issuance of a separate Certificate of Title in
the name of the VENDEE shall have been prepared.4
On December 31, 1961, Mascuñana and Jose G. Estabillo executed a Deed
of Exchange and Absolute Sale of Real Estate,5 in which Estabillo deeded to
Mascuñana a portion of his property abutting that of Sumilhig on the
southeast.
In the meantime, a survey was conducted for the co-owners of Lot No. 124
on July 9, 1962. The subdivision plan of the said lot was approved by the
Director of Lands on August 2, 1962. The portion of the property deeded to
Sumilhig was identified in the said plan as Lot No. 124-B.6
Meanwhile, Mascuñana died intestate on April 20, 1965 and was survived by
his heirs, Eva M. Ellisin, Renee Hewlett, Carmen Vda. de Opeña, Marilou Dy
and Jose Ma. R. Mascuñana.
On April 24, 1968, Sumilhig executed a Deed of Sale of Real Property7 on a
portion of Lot No. 124-B with an area of 469 square meters and the
improvements thereon, in favor of Corazon Layumas, the wife of Judge
Rodolfo Layumas, for the price of ₱11,000.00. The spouses Layumas then
had the property subdivided into two lots: Lot No. 124-B-2 with an area of 71
square meters under the name of Jesus Mascuñana, and Lot No. 124-B-1,
with an area of 469 square meters under their names.8 The spouses
Layumas took possession of the property and caused the cutting of tall
grasses thereon. Upon the plea of a religious organization, they allowed a
chapel to be constructed on a portion of the property.9 In January 1985, the
spouses Layumas allowed Aquilino Barte to stay on a portion of the property
to ward off squatters.10 Barte and his kin, Rostom Barte, then had their
houses constructed on the property.
On October 1, 1985, the spouses Layumas received a Letter11 from the
counsel of Renee Tedrew, offering to buy their share of the property for
US$1,000.00. For her part, Corazon Layumas wrote Pepito Mascuñana,
offering to pay the amount of ₱1,000.00, the balance of the purchase price
of the property under the deed of absolute sale executed by Mascuñana and
Sumilhig on August 12, 1961.12 However, the addressee refused to receive
the mail matter.13
Unknown to the spouses Layumas, TCT No. 898614 was issued over Lot No.
124-B in the name of Jesus Mascuñana on March 17, 1986.
On November 17, 1986, the heirs of Mascuñana filed a Complaint 15 for
recovery of possession of Lot No. 124-B and damages with a writ of
preliminary injunction, alleging that they owned the subject lot by virtue of
successional rights from their deceased father. They averred that Barte
surreptitiously entered the premises, fenced the area and constructed a
house thereon without their consent. Attached as annexes to the complaint
were TCT No. 8986 and a certification16 from the Office of the City
Treasurer, Land Tax Division, vouching that the property in question was
owned by the petitioners and that they had paid the taxes thereon until 1992.
In his answer to the complaint, Barte admitted having occupied a portion of
Lot No. 124-B, but claimed that he secured the permission of Rodolfo
Layumas, the owner of the subject property. He added that he did not fence
the property, and that the petitioners did not use the same as a passageway
in going to Broce Street from their house. Barte raised the following special
defenses: (a) the petitioners were estopped from asserting ownership over
the lot in question because they did not object when he occupied the said
portion of the lot; (b) neither did the petitioners protest when a church was
built on the property, or when residential houses were constructed thereon;
(c) the petitioners still asked Barte and the other occupants whether they
had notified Rodolfo Layumas of the constructions on the property; and (d)
the heirs of Mascuñana, through the lawyer of Mrs. Renee M. Tedrew, even
wrote a letter17to Rodolfo Layumas on October 1, 1985, expressing her
willingness to buy the subject property for US$1,000.00.
On April 8, 1991, the spouses Layumas filed a Motion for Leave to
Intervene,18 alleging therein that they had a legal interest in Lot No. 124-B-1
as its buyers from Sumilhig, who in turn purchased the same from
Mascuñana. In their answer in intervention,19 the spouses Layumas alleged
that they were the true owners of the subject property and that they had
wanted to pay the taxes thereon, but the Land Tax clerk refused to receive
their payments on account that the petitioners had already made such
payment. The spouses Layumas further maintained that the petitioners had
no cause of action against Barte, as they had authorized him to occupy a
portion of Lot No. 124-B-1. The spouses Layumas also averred that the
petitioners were estopped from denying their right of ownership and
possession of the subject lot, as one of them had even offered to repurchase
a portion of Lot No. 124-B via letter. The said spouses interposed a
counterclaim for damages, claiming ownership over the property, and
prayed, thus:
WHEREFORE, it is most respectfully prayed that this HONORABLE COURT
render judgment in favor of the Intervenors and the defendant Aquilino
Barte, ordering:
1. That the complaint against Aquilino Barte be dismissed with
costs against the plaintiff;
2. That the Intervenors spouses Judge Rodolfo S. Layumas and
Corazon A. Layumas be declared as the legal and true owners of
Lot 124-B;
3. That the plaintiffs should deliver immediately to the Intervenors,
TCT No. 8986 which is in their possession;
4. That the plaintiffs be made to pay to the Intervenors the sum of
THIRTY THOUSAND (₱30,000.00) PESOS moral damages; TEN
THOUSAND (₱10,000.00) PESOS attorney’s fees plus THREE
HUNDRED (₱300.00) PESOS as appearance fee per hearing.
Intervenors pray for such other relief and remedies as may be deemed by
this Honorable Court as just and equitable in the premises.
At the trial, intervenor Rodolfo Layumas testified that he and his wife bought
the subject property in 1968, and that nobody objected to their possession of
the land, including the petitioners. In 1970, a religious organization asked his
permission to construct a chapel on the disputed lot; he allowed the
construction since the same would be used for the fiesta. He further
declared that part of the chapel still stood on the property. In 1985, a fire
razed the town’s public market, thereby dislocating numerous people. Barte
was one of the fire victims, who also happened to be a good friend and
political supporter of Rodolfo. Out of goodwill, Barte was allowed to occupy a
portion of the said lot, along with some other fire victims. Rodolfo clarified
that the others were to stay there only on a temporary basis, but admitted
that Barte’s children also stayed in the subject property. 20
Rodolfo Layumas further narrated that in 1987, Corazon wrote one of the
petitioners-heirs, Pepito Mascuñana, requesting that the title of the lot be
transferred in Sumilhig’s name so that they could likewise arrange for the
conveyance of the title in their names. Pepito failed to claim the letter, and
thereafter, filed a case of ejectment against Barte and Rodolfo Layumas’
brother-in-law, Pepito Antonio. The case, the witness added, was dismissed
as against the two parties. Offered in evidence were the following: a Sworn
Statement on the Current and Fair Market Value of the Real Property issued
in 1973 as required by Presidential Decree No. 76, and tax receipts. 21
Rodolfo Layumas admitted on cross-examination that at the time they
bought the property from Sumilhig, the title was still in the possession of the
Wuthrich family. He added that he filed an adverse claim before the Register
of Deeds of San Carlos City, Negros Occidental, on Lot No. 124-B in
January 1986, or after the case had already been filed in court. Lastly, the
witness deposed that he did not fence the property after buying the same,
but that his brother-in-law constructed a coco-lumber yard thereon upon his
authority.22
On January 30, 1996, the trial court rendered judgment in favor of Barte and
the spouses Layumas. The fallo of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of Intervenors-counterclaimants and defendant and against plaintiffs-
counterclaim defendants ordering as follows:
1. The dismissal of the plaintiff’s complaint with costs against them;
2. The plaintiffs to jointly pay Intervenors-counterclaimants now
RTC Judge Rodolfo S. Layumas and Corazon A. Layumas:
(a) ₱10,000.00 for attorney’s fees; and
(b) ₱30,000.00 as moral damages;
3. The plaintiffs, as counterclaim defendants, to comply with the
above-stated obligation of their late father, Mr. Jesus Mascuñana,
under the Deed of Absolute Sale, Exh. "3", pp. 92-93, Exp., thru
plaintiff Mr. Jose Mascuñana, including the desegragation (sic)
survey to desegregate the 469-square-meter portion of said Lot No.
124-B, San Carlos Cadastre, this province, sold to the late
Diosdado Sumilhig, if the same has not yet been done despite what
has been said herein earlier to said effect, and the execution of the
Final Deed of Sale in their capacity as the heirs and successors-in-
interest of the late Mr. Jesus Mascuñana, thru Mr. Jose
Mascuñana, covering the 469-square-meter desegregated portion
of said Lot No. 124-B, within sixty (60) days counted from the
finality of this Decision, in favor of the Intervenors-spouses, after
which the said Intervenors-spouses shall pay them, thru Mr. Jose
Mascuñana, the ₱1,000.00 balance due to them as successors-in-
interest of the late Mr. Jesus Mascuñana;
4. In case plaintiffs fail to comply with what are herein ordered for
them to do, the Clerk of Court V of this Court to do all that they
were to do as herein ordered in the text and dispositive portion
hereof, at the expense of Intervenors spouses to be later
reimbursed by plaintiffs, including the desegragation (sic) survey of
said 469-square-meter portion of said Lot [No.] 124-B, San Carlos
Cadastre, Negros Occidental, if the same has not yet been done
and the execution of the Final Deed of Sale on behalf of all the
plaintiffs as heirs and successors-in-interest of the late Mr. Jesus
Mascuñana covering the said desegregated portion of 469 square
meters of the aforesaid lot, in favor of Intervenors spouses, to the
end that separate title therefor may be issued in their names, after
they shall have paid the ₱1,000.00 balance due plaintiffs under said
Deed of Absolute Sale, Exh. "3."
SO ORDERED.23
Forthwith, the petitioners appealed the case to the CA, raising the following
issues of fact and law:
a. Whether or not the contract of alienation of Lot No. 124-B in
favor of Diosdado Sumilhig in 1961 was a contract to sell or a
contract of sale;
b. Whether or not Diosdado Sumilhig had any right to sell Lot No.
124-B in favor of intervenor Corazon Layumas in 1968.24
On May 5, 2003, the CA affirmed the decision of the trial court. It ruled that
the contract between the petitioners’ father and Sumilhig was one of sale.
Foremost, the CA explained, the contract was denominated as a "Deed of
Absolute Sale." The stipulations in the contract likewise revealed the clear
intention on the part of the vendor (Mascuñana) to alienate the property in
favor of the vendee (Sumilhig). In three various documents, the late
Mascuñana even made declarations that Sumilhig was already the owner of
the disputed land. The CA added that the admission may be given in
evidence against Mascuñana and his predecessors-in-interest under Section
26, Rule 130 of the Revised Rules on Evidence. As to the argument that the
contract between Mascuñana and Sumilhig was not effective because it was
subject to a suspensive condition that did not occur, the CA ruled that the
condition referred to by the petitioners refers only to the payment of the
balance of the purchase price and not to the effectivity of the
contract.1avvphi1.zw+
As to the petitioners’ contention that even if the contract were one of sale,
ownership cannot be transferred to Sumilhig because Mascuñana was not
yet the owner of the lot at the time of the alleged sale, the appellate court
ruled that the registration of the land to be sold is not a prerequisite to a
contract of sale.
The Present Petition
Aggrieved, the petitioners filed the instant petition for review
on certiorari with this Court, where the following lone legal issue was raised:
WAS THE SALE OF LOT NO. 124-B MADE BY JESUS M. MASCUÑANA IN
FAVOR OF DIOSDADO SUMILHIG A CONTRACT TO SELL OR
CONTRACT OF SALE?25
We note that the original action of the petitioners against Aquilino Barte was
one for recovery of possession of Lot No. 124-B. With the intervention of the
respondents Rodolfo and Corazon Layumas who claimed ownership over
the property, and the acquiescence of the parties, evidence was adduced to
prove who, between the petitioners (as plaintiffs) and the respondents (as
defendants-intervenors) were the lawful owners of the subject property and
entitled to its possession.
The petitioners resolutely contend that the Deed of Absolute Sale dated
August 12, 1961 between their father and Sumilhig was a mere contract to
sell because at the time of the said sale, the late Mascuñana was not yet the
registered owner of Lot No. 124 or any of its portions. They assert that
Sumilhig could not have acquired any rights over the lot due to the fact that a
person can only sell what he owns or is authorized to sell, and the buyer can
acquire no more than what the seller can transfer legally. Finally, the
petitioners insist that the document in controversy was subject to a
suspensive condition, not a resolutory condition, which is a typical attribute
of a contract of sale.
The petition is denied for lack of merit.
The issues raised by the petitioners in this case are factual, and under Rule
45 of the Rules of Court, only questions of law may be raised in this Court,
the reason being that this Court is not a trier of facts. It is not to re-examine
the evidence on record and to calibrate the same. Moreover, the findings
and conclusions of the trial court as affirmed by the CA are conclusive on the
Court, absent of any evidence that the trial court, as well as the CA ignored,
misinterpreted and misconstrued facts and circumstances of substance
which, if considered, would alter or reverse the outcome of the case.26
We have reviewed the records and find no justification for a reversal or even
a modification of the assailed decision of the CA.
Even on the merits of the petition, the Court finds that the decision of the trial
court as well as the ruling of the CA are based on the evidence on record
and the applicable law.
The petitioners reiterated their pose that the deed of absolute sale over the
property executed by their father, Jesus Mascuñana, as vendor, and
Diosdado Sumilhig as vendee, was a contract to sell and not a contract of
sale. They assert that on its face, the contract appears to be a contract to
sell, because the payment of the ₱1,000.00 balance of the purchase price
was subject to a suspensive condition: the survey of the property, the
segregation of the portion thereof subject of the sale, and the completion of
the documents necessary for the issuance of a Torrens title over the
property to and in the name of Sumilhig who was the vendee. The
petitioners assert that Sumilhig never paid the aforesaid amount to the
vendor; hence, the obligation of the latter and his predecessors-in-interest
(herein petitioners) to execute a final deed of sale never arose. As such,
they aver, title to the property remained reserved in the vendor and his heirs
even after his death. There was no need for the vendor to rescind the deed
or collect the said amount of ₱1,000.00 under Article 1191 of the New Civil
Code because such a remedy applies only to contracts of sale. The
petitioners insist that Sumilhig never acquired title over the property; he
could not have transferred any title to the respondents. Sumilhig could not
have transferred that which he did not own.
The petitioners’ contention has no factual and legal bases.
The deed of absolute sale executed by Jesus Mascuñana and Sumilhig,
provides, thus:
That the VENDOR is the true and absolute owner of a parcel of land known
as Lot No. 124 of the Cadastral Survey of San Carlos, situated at Broce
Street and is free from liens and encumbrances, and covered by O.C.T. No.
T-299[3]7 (R-1453) of Reg. of Deeds, Negros Occ.
That for and in consideration of the sum of FOUR THOUSAND SIX
HUNDRED NINETY PESOS (₱4,690.00), Philippine Currency, to be paid by
the VENDEE in the manner hereinafter stated, the VENDOR does hereby
sell, transfer, cede and convey, a portion of the above-described property
containing an area of 469 square meters, the sketch of which can be found
at the back of this document and having a frontage at Broce Street of around
14 meters, and from the Broce Street to the interior on its Southwest side
with a length of 30.9 meters, with a length of 24.8 meters on its Northeast
side where it turned to the right with a length of 2.8 meters and continuing to
Northwest with a length of 6.72 meters, the backyard dimension is 17.5
meters to the Northwest, unto the VENDEE, his heirs and assigns, by way of
Absolute Sale, upon the receipt of the down payment of THREE
THOUSAND SIX HUNDRED NINETY PESOS (₱3,690.00), which is hereby
acknowledged by the VENDOR as received by him.lawphil.net
That the balance of ONE THOUSAND PESOS (₱1,000.00) shall be paid by
the VENDEE unto the VENDOR as soon as the above-portions of Lot 124
shall have been surveyed in the name of the VENDEE and all papers
pertinent and necessary to the issuance of a separate Certificate of Title in
the name of the VENDEE shall have been prepared.
The evidence on record shows that during the lifetime of vendor Jesus
Mascuñana, and even after his death, his heirs, the petitioners herein,
unequivocably declared that Diosdado Sumilhig was the owner of the
property subject of this case, and that the respondents acquired title over the
property, having purchased the same via a deed of absolute sale from
Diosdado Sumilhig. Thus, on December 31, 1961, Jesus Mascuñana and
Jose Estabillo executed a Deed of Exchange and Absolute Sale of Real
Estate, in which both parties declared that they were co-owners of portions
of Lot No. 124 abutted by the property owned by Diosdado Sumilhig. 27
In the subdivision plan of Lot No. 124, signed by Ricardo Quilop, Private
Land Surveyor, following his survey of Lot No. 124 on July 9, 1962 for and in
behalf of Jesus Mascuñana, et al., it appears that Lot No. 124-B with an area
of 540 square meters belonged to Diosdado Sumilhig,28 which is abutted by
Lot No. 124-C, owned by Jesus Mascuñana.
On October 1, 1985, long after the death of Jesus Mascuñana, one of his
heirs, petitioner Renee Tedrew, through counsel, wrote respondent Rodolfo
Layumas offering to buy the property occupied by his overseer Aquilino
Barte for US$1,000.00:
ATTY. RODOLFO S. LAYUMAS
San Carlos City
Negros Occidental
Dear Atty. Layumas:
This has reference to the lot located at Broce Street, portions of which are
presently occupied by Mr. Barte.
Mrs. Renee Tedrew (nee Agapuyan), who is now in the United States, would
like to offer the amount of $1,000.00 to buy your share of the said lot.
If you are amenable, kindly inform the undersigned for him to communicate
[with] Mrs. Tedrew in California.
Very truly yours,
(Sgd.)
SAMUEL SM LEZAMA29
It was only after the respondents rejected the proposal of petitioner Renee
Tedrew that the petitioners secured title over the property on March 17, 1986
in the name of Jesus Mascuñana (already deceased at the time), canceling
TCT No. 967 issued on July 6, 1962 under the name of Jesus Mascuñana,
who appears to be a co-owner of Lot No. 124 with an undivided two-seventh
(2/7) portion thereof.30
While it is true that Jesus Mascuñana executed the deed of absolute sale
over the property on August 12, 1961 in favor of Diosdado Sumilhig for
₱4,690.00, and that it was only on July 6, 1962 that TCT No. 967 was issued
in his name as one of the co-owners of Lot No. 124, Diosdado Sumilhig and
the respondents nevertheless acquired ownership over the property. The
deed of sale executed by Jesus Mascuñana in favor of Diosdado Sumilhig
on August 12, 1961 was a perfected contract of sale over the property. It is
settled that a perfected contract of sale cannot be challenged on the ground
of the non-transfer of ownership of the property sold at that time of the
perfection of the contract, since it is consummated upon delivery of the
property to the vendee. It is through tradition or delivery that the buyer
acquires ownership of the property sold. As provided in Article 1458 of the
New Civil Code, when the sale is made through a public instrument, the
execution thereof is equivalent to the delivery of the thing which is the object
of the contract, unless the contrary appears or can be inferred. The record of
the sale with the Register of Deeds and the issuance of the certificate of title
in the name of the buyer over the property merely bind third parties to the
sale. As between the seller and the buyer, the transfer of ownership takes
effect upon the execution of a public instrument covering the real
property.31 Long before the petitioners secured a Torrens title over the
property, the respondents had been in actual possession of the property and
had designated Barte as their overseer.
Article 1458 of the New Civil Code provides:
By the contract of sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to
pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
Thus, there are three essential elements of sale, to wit:
a) Consent or meeting of the minds, that is, consent to transfer
ownership in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.32
In this case, there was a meeting of the minds between the vendor and the
vendee, when the vendor undertook to deliver and transfer ownership over
the property covered by the deed of absolute sale to the vendee for the price
of ₱4,690.00 of which ₱3,690.00 was paid by the vendee to the vendor as
down payment. The vendor undertook to have the property sold, surveyed
and segregated and a separate title therefor issued in the name of the
vendee, upon which the latter would be obliged to pay the balance of
₱1,000.00. There was no stipulation in the deed that the title to the property
remained with the vendor, or that the right to unilaterally resolve the contract
upon the buyer’s failure to pay within a fixed period was given to such
vendor. Patently, the contract executed by the parties is a deed of sale and
not a contract to sell. As the Court ruled in a recent case:
In Dignos v. Court of Appeals (158 SCRA 375), we have said that, although
denominated a "Deed of Conditional Sale," a sale is still absolute where the
contract is devoid of any proviso that title is reserved or the right to
unilaterally rescind is stipulated, e.g., until or unless the price is paid.
Ownership will then be transferred to the buyer upon actual or constructive
delivery (e.g. by the execution of a public document) of the property sold.
Where the condition is imposed upon the perfection of the contract itself, the
failure of the condition would prevent such perfection. If the condition is
imposed on the obligation of a party which is not fulfilled, the other party may
either waive the condition or refuse to proceed with the sale. (Art. 1545, Civil
Code)
Thus, in one case, when the sellers declared in a "Receipt of Down
Payment" that they received an amount as purchase price for a house and
lot without any reservation of title until full payment of the entire purchase
price, the implication was that they sold their property. In People’s Industrial
and Commercial Corporation v. Court of Appeals,it was stated:
A deed of sale is considered absolute in nature where there is neither a
stipulation in the deed that title to the property sold is reserved in the seller
until full payment of the price, nor one giving the vendor the right to
unilaterally resolve the contract the moment the buyer fails to pay within a
fixed period.
Applying these principles to this case, it cannot be gainsaid that the contract
of sale between the parties is absolute, not conditional. There is no
reservation of ownership nor a stipulation providing for a unilateral rescission
by either party. In fact, the sale was consummated upon the delivery of the
lot to respondent. Thus, Art. 1477 provides that the ownership of the thing
sold shall be transferred to the vendee upon the actual or constructive
delivery thereof.33
The condition in the deed that the balance of ₱1,000.00 shall be paid to the
vendor by the vendee as soon as the property sold shall have been
surveyed in the name of the vendee and all papers pertinent and necessary
to the issuance of a separate certificate of title in the name of the vendee
shall have been prepared is not a condition which prevented the efficacy of
the contract of sale. It merely provides the manner by which the total
purchase price of the property is to be paid. The condition did not prevent
the contract from being in full force and effect:
The stipulation that the "payment of the full consideration based on a survey
shall be due and payable in five (5) years from the execution of a formal
deed of sale" is not a condition which affects the efficacy of the contract of
sale. It merely provides the manner by which the full consideration is to be
computed and the time within which the same is to be paid. But it does not
affect in any manner the effectivity of the contract. … 34
In a contract to sell, ownership is retained by a seller and is not to be
transferred to the vendee until full payment of the price. Such payment is a
positive suspensive condition, the failure of which is not a breach of contract
but simply an event that prevented the obligation from acquiring binding
force.35
It bears stressing that in a contract of sale, the non-payment of the price is a
resolutory condition which extinguishes the transaction that, for a time,
existed and discharges the obligation created under the transaction. 36 A
seller cannot unilaterally and extrajudicially rescind a contract of sale unless
there is an express stipulation authorizing it. In such case, the vendor may
file an action for specific performance or judicial rescission. 37

Article 1169 of the New Civil Code provides that in reciprocal obligations,
neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him; from the
moment one of the parties fulfills his obligation, delay by the other begins. In
this case, the vendor (Jesus Mascuñana) failed to comply with his obligation
of segregating Lot No. 124-B and the issuance of a Torrens title over the
property in favor of the vendee, or the latter’s successors-in-interest, the
respondents herein. Worse, petitioner Jose Mascuñana was able to secure
title over the property under the name of his deceased father.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of

merit. Costs against the petitioners.

SO ORDERED.