Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
00, a loan of
SUPREME COURT ₱20,000,000.00 and a subsequent credit line with a limit of ₱100,000,000.00.
Manila
As security for its loan obligations, SSC executed five separate deeds of chattel mortgage
THIRD DIVISION constituted over various equipment found in its steel manufacturing plant. The deeds of
mortgage were dated September 17, 2001, February 26, 2003, April 16, 2003, May 25, 2004
G.R. No. 176008 August 10, 2011 and June 7, 2004.
METROPOLITAN BANK and TRUST COMPANY, substituted by MERIDIAN (SPV-AMCI) Subsequently, SSC defaulted in the payment of its obligations. IEB's demand for payment
CORPORATION,Petitioner, went unheeded. On July 7, 2004, the IEB filed with the RTC of Misamis Oriental an action for
vs. injunction for the purpose of enjoining SSC from taking out the mortgaged equipment from its
INTERNATIONAL EXCHANGE BANK, Respondent. premises. The case was docketed as Civil Case No. 2004-197. Thereafter, IEB filed a
Supplemental Complaint praying for the issuance of a writ of replevin or, in the alternative, for
the payment of SSC's outstanding obligations and attorney's fees. 3
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 176131 On the other hand, on July 18, 2004, SSC filed with the same RTC of Misamis Oriental a
Complaint for annulment of mortgage and specific performance for the purpose of compelling
the IEB to restructure SSC's outstanding obligations. SSC also prayed for the issuance of a
CHUAYUCO STEEL MANUFACTURING, Petitioner, Temporary Restraining Order (TRO) and writ of preliminary injunction to prevent IEB from
vs. taking any steps to dispossess SSC of any equipment in its steel manufacturing plant as well
INTERNATIONAL EXCHANGE BANK (now UNION BANK OF THE as to restrain it from foreclosing the mortgage on the said equipment.4 The RTC issued a
PHILIPPINES), Respondent. TRO. The case was docketed as Civil Case No. 2004-200 and was subsequently
consolidated with Civil Case No. 2004-197.
DECISION
On July 23, 2004, the RTC issued an Order5 granting IEB's application for the issuance of a
PERALTA, J.: writ of replevin. However, upon agreement of the parties, the implementation of the said writ
was held in abeyance pending the trial court's resolution of the other incidents in the said
Before the Court are two consolidated petitions for review on certiorari under Rule 45 of the case.6 The RTC also directed that there shall be "no commercial operation without court
Rules of Court, both of which are seeking the reversal and setting aside of the Decision 1 and approval.7
Resolution2 of the Court of Appeals (CA) dated May 5, 2006 and December 22, 2006,
respectively, in CA-G.R. SP No. 00549-MIN which annulled and set aside the Orders dated On August 26, 2004, the IEB filed a petition for extrajudicial foreclosure of chattel mortgage.
September 6, 2004 and February 14, 2005, the Resolution dated March 15, 2005 and the
Joint Resolution dated June 8, 2005 of the Regional Trial Court (RTC) of Misamis Oriental, SSC opposed IEB's petition and prayed for the issuance of a writ of preliminary injunction.
Branch 17 in Civil Case Nos. 2004-197 and 2004-200.
On September 6, 2004, the RTC issued an Order disposing as follows:
The pertinent factual and procedural antecedents of the case are as follows:
WHEREFORE, let a Writ of preliminary injunction be issued restraining defendant iBank
Sacramento Steel Corporation (SSC) is a business entity engaged in manufacturing and [IEB], the Sheriff, his agents and other person/s acting in their behalf as agents – privies or
producing steel and steel products, such as cold rolled coils and galvanized sheets, in its own representative[s] in whatever capacity, from conducting foreclosure, whether judicial or
steel manufacturing plant located at Tagoloan, Misamis Oriental. extrajudicial, of any properties subject of the controversy and are further directed not to take
any steps that will, in effect, dispossess plaintiff [SSC] of any of its machineries and
For the purpose of increasing its capital, SSC entered into a Credit Agreement with herein equipment in its steel manufacturing plant pending determination of the case. Let a bond
respondent International Exchange Bank (IEB) on September 10, 2001 wherein the latter (cash or surety) of Five Hundred Thousand (P500,000.00) Pesos be posted by the plaintiff
Sacramento Steel Corporation as required by law.
On March 15, 2005, the RTC issued a Resolution, the dispositive portion of which reads, (B) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED WHEN
thus: IT RULED THAT THE TRIAL COURT COMMITTED GRAVE ABUSE OF
DISCRETION IN ALLOWING PETITIONER'S COMPLAINT-IN-INTERVENTION.17
WHEREFORE, premises considered, the motion to operate the machineries pendente lite is
hereby GRANTED based on law and equity as soon as practicable. This is without prejudice In G.R. No. 176131, petitioner CSMC raises the following grounds:
on the part of the I-bank [IEB] to assert the enforcement of the proposed schedule of
payment submitted by SSC to the Court (Exh. "A" – Motion for Early Resolution, 2/16/2005
I. THE HONORABLE COURT ERRED IN NOT PASSING UPON THE ISSUE THAT
hearing) and to continually post their security guards unless withdrawn.
HEREIN RESPONDENT IBANK IS GUILTY OF FORUM-SHOPPING.
SO ORDERED.13
II. THE HONORABLE COURT ERRED IN NOT RULING THAT HEREIN
RESPONDENT IBANK'S FAILURE TO FILE A MOTION FOR RECONSIDERATION
On June 8, 2005, the RTC issued a Joint Resolution14 reiterating its admission of CSMC's TO THE ORDER DATED 08 JUNE 2005 IS FATAL TO ITS PETITION.
motion for intervention and directing the latter to file its complaint-in-intervention.
III. THE HONORABLE COURT ERRED IN RULING THAT THE ORDER OF JUDGE
On August 25, 2005, IEB filed a petition for certiorari, prohibition and mandamus with the CA SEALANA-ABBU ADMITTING THE INTERVENTION OF HEREIN PETITIONER
assailing the RTC Orders dated September 6, 2004 and February 14, 2005, Resolution dated CSMC IS WITHOUT LEGAL BASIS.18
March 15, 2005 and Joint Resolution dated June 8, 2005.15
In a Manifestation and Motion dated September 26, 2007, petitioner Metrobank manifested
On May 5, 2006, the CA rendered its presently assailed Decision which disposed of the case that it no longer has any interest in pursuing the instant case as the loan obligation owed by
as follows: SSC to it has been sold by the latter to a corporation known as Meridian (SPV-AMC)
In a Resolution20 dated November 12, 2007, this Court granted Metrobank's Motion. However, jurisprudence is clear that the following successive measures must be taken by a
creditor before he may bring an action for rescission of an allegedly fraudulent contract: (1)
At the outset, the Court takes note that no arguments or questions were raised by petitioners exhaust the properties of the debtor through levying by attachment and execution upon all the
with respect to the September 6, 2004 Order and March 15, 2005 Resolution of the RTC property of the debtor, except such as are exempt by law from execution; (2) exercise all the
which were annulled by the CA. Hence, the only issues left for resolution in the instant rights and actions of the debtor, save those personal to him (accion subrogatoria); and (3)
petition are whether or not petitioners Metrobank and CSMC may be allowed to intervene in seek rescission of the contracts executed by the debtor in fraud of their rights (accion
Civil Case Nos. 2004-197 and 2004-200. pauliana).23 It is thus apparent that an action to rescind, or an accion pauliana, must be of last
resort, availed of only after the creditor has exhausted all the properties of the debtor not
The Court will dwell first on the issues raised by Metrobank in G.R. No. 176008. exempt from execution or after all other legal remedies have been exhausted and have been
proven futile.24
In its first assigned error, Metrobank contends that the CA erred in ruling that its Complaint-
in-Intervention is in the nature of an accion pauliana. It does not appear that Metrobank sought other properties of SSC other than the subject lots
alleged to have been transferred in fraud of creditors. Neither is there any showing that
Metrobank subrogated itself in SSC's transmissible rights and actions. Without availing of the
The Court does not agree. first and second remedies, Metrobank simply undertook the third measure and filed an action
for annulment of the chattel mortgages. This cannot be done. Article 1383 of the New Civil
A perusal of Metrobank's Complaint-in-Intervention would show that its main objective is to Code is very explicit that the right or remedy of the creditor to impugn the acts which the
have the chattel mortgages executed by SSC in favor of IEB rescinded. This is clearly evident debtor may have done to defraud them is subsidiary in nature.25 It can only be availed of in
in its prayer, which reads as follows: the absence of any other legal remedy to obtain reparation for the injury.26 This fact is not
present in this case. No evidence was presented nor even an allegation was offered to show
WHEREFORE, premises considered, it is respectfully prayed unto the Honorable Court that that Metrobank had availed of the abovementioned remedies before it tried to question the
judgment be rendered: validity of the contracts of chattel mortgage between IEB and SSC.
(1) RESCINDING the chattel mortgages executed by Defendants Sacramento Metrobank also contends that in order to apply the concept of, and the rules pertaining
and Delmo in favor of Defendant Ibank dated May 25, 2004 and June 7, 2004, to, accion pauliana, the subject matter must be a conveyance, otherwise valid, which is
respectively; undertaken in fraud of creditors. Metrobank claims that since there is no conveyance involved
in the contract of chattel mortgage between SSC and IEB, which Metrobank seeks to rescind,
(2) Ordering defendants Sacramento, Delmo and Ibank to pay, jointly and severally, the CA erred in ruling that the latter's Complaint-in-Intervention is an accion pauliana.
Plaintiff-Intervenor the amounts of:
The Court is not persuaded.
(A) ₱500,000.00, as and by way of exemplary damages;
In the instant case, the contract of chattel mortgage entered into by and between SSC and
(B) ₱500,000.00, as and by way of attorney's fees; and IEB involves a conveyance of patrimonial benefit in favor of the latter as the properties
subject of the chattel mortgage stand as security for the credit it extended to SSC. In a very
recent case involving an action for the rescission of a real estate mortgage, 27 while this Court
(C) Costs of suit.
found that some of the elements of accion pauliana were not present, it found that a
mortgage contract involves the conveyance of a patrimonial benefit.
Other reliefs as may be just and equitable under the premises are likewise prayed for.
In sum, Metrobank may not be allowed to intervene and pray for the rescission of the chattel
x x x x21 mortgages executed by SSC in favor of IEB. The remedy being sought by Metrobank is in the
nature of an accion pauliana which, under the factual circumstances obtaining in the present
Lastly, the Court does not agree with the CA when it ruled that the applicable provision is
Rule 3, Section 19 (erroneously cited as Section 20) of the Rules of Court on transfer of
interest and substitution of parties. Being a mere lessee of the subject properties, CSMC is a
stranger insofar as the dispute between SSC and IEB is concerned. The action filed by IEB
against SSC is an action for the payment or satisfaction of the loans incurred by the latter,
which includes a possible foreclosure of the subject properties given as security for the said
loans. CSMC may not be considered a successor, and may not be substituted in place of
SSC, insofar as these loans are concerned. If any, what has been transferred to CSMC is
only the right of SSC to operate the subject equipment and machineries which it owns. As
such, SSC may not be removed as defendant because its interest in the subject properties
remains, being the owner thereof.
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP
No. 00549-MIN are AFFIRMED with MODIFICATION. The February 14, 2005 Order of the
Regional Trial Court of Misamis Oriental, Branch 17, is MODIFIED by denying Metrobank's
Motion for Intervention, while the Joint Resolution of the same trial court, dated June 8, 2005,
reiterating its admission of CSMC's Motion for Intervention and directing the latter to file its
complaint-in-intervention, is REINSTATED.
SO ORDERED.
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court. The Wellex In the First Memorandum of Agreement, Wellex and U-Land agreed to develop a long-term
Group, Inc. (Wellex) prays that the Decision2 dated July 30, 2004 of the Court of Appeals in business relationship through the creation of joint interest in airline operations and property
CA-GR. CV No. 74850 be reversed and set aside.3 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
The Court of Appeals affirmed the Decision4 of the Regional Trial Court, Branch 62 of Makati of Agreement:
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 (a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES
Agreement5 between Wellex and U-Land.6 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
Wellex is a corporation established under Philippine law and it maintains airline operations in shares . . . [;]
the Philippines.7 It owns shares of stock in several corporations including Air Philippines
International Corporation (APIC), Philippine Estates Corporation (PEC), and Express Savings (b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES
Bank (ESB).8 Wellex alleges that it owns all shares of stock of Air Philippines Corporation CORPORATION ("PEC") equivalent to at least 35% of the outstanding capital stock
(APC).9 of PEC, but in any case, not less than 490,000,000 shares . . . [;]
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and existing under the (c) U-LAND shall enter into a joint development agreement with PEC . . . [; and]
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 (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
On May 16, 1998, Wellex and U-Land entered into a Memorandum of Agreement12 (First ESB . . . under terms to be mutually agreed.16
Memorandum of Agreement) to expand their respective airline operations in Asia. 13
I. Acquisition of APIC and PEC shares
Terms of the First Memorandum of Agreement
The First Memorandum of Agreement stated that within 40 days from its execution date,
The preambular clauses of the First Memorandum of Agreement state: 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
Wellex and U-Land agreed to an initial purchase price of P0.30 per share of APIC and 0.65 Section 3 of the First Memorandum of Agreement reads:
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 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.
Both parties agreed that the purchase price of APIC shares and PEC shares would be paid For this purpose, WELLEX shall cause the resignation of its nominated Directors in APIC and
upon the execution of the share purchase agreement and Wellex’s delivery of the stock PEC to accommodate U-LAND’s pro rata number of Directors. Subject to applicable
certificates covering the shares of stock. The transfer of APIC shares and PEC shares to U- Philippine law and regulations, operational control of APIC and Air Philippines Corporation
Land was conditioned on the full remittance of the final purchase price as reflected in the ("APC") shall be lodged jointly to WELLEX and U-LAND on the basis of mutual agreement
share purchase agreement. Further, the transfer was conditioned on the approval of the and consultations. Further, U-LAND may second technical and other consultants into APIC
Securities and Exchange Commission of the issuance of the shares of stock and the approval and/or APC with the view to increasing service, productivity and efficiency, identifying and
by the Taiwanese government of U-Land’s acquisition of these shares of stock.20 implementing profit-service opportunities, developing technical capability and resources, and
installing adequate safety systems and procedures. In addition, U-LAND shall arrange for the
Thus, Section 2 of the First Memorandum of Agreement reads: 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
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless control and responsibility for APC’s international operations.26
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 III. Entering into and funding a joint development agreement
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 Wellex and U-Land also agreed to enter into a joint development agreement simultaneous
be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY FIVE with the execution of the share purchase agreement. The joint development agreement shall
CENTAVOS (P0.65) per share. cover housing and other real estate development projects.27
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon U-Land agreed to remit the sum ofUS$3 million not later than May 22, 1998. This sum was to
execution of the SHPA against delivery of the Subject Shares. The parties may agree on serve as initial funding for the development projects that Wellex and U-Land were to
such other terms and conditions governing the acquisition of the Subject Shares to be undertake pursuant to the joint development agreement. In exchange for the US$3 million,
provided in a separate instrument. Wellex would deliver stock certificates covering 57,000,000 PEC shares to U-Land.28
The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the The execution of a joint development agreement was also conditioned on the execution of a
purchase price reflected in the SHPA has been fully paid; (ii) the Philippine Securities & share purchase agreement.29
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 Section 4 of the First Memorandum of Agreement reads:
Subject Shares shall likewise have been obtained.21
4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA,
II. Operation and management of APIC/PEC/APC 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
U-Land was "entitled to a proportionate representation in the Board of Directors of APIC and estate development projects as the parties shall agree. All profits derived from the projects
PEC in accordance with Philippine law."22 Operational control of APIC and APC would be covered by the JDA shall be shared equally between ULAND and PEC. U-LAND shall, not
exercised jointly by Wellex and U-Land "on the basis of mutual agreement and later than May 22, 1998, remit the sum of US$3.0 million as initial funding for the aforesaid
consultations."23 The parties intended that U-Land would gain primary control and development projects against delivery by WELLEX of 57,000,000 shares of PEC as security
responsibility for the international operations of APC.24 Wellex manifested that APC is a for said amount in accordance with Section 9 below. 30
Finally, Wellex and U-Land agreed that if they were unable to agree on the terms of the share - and –
purchase agreement and the joint development agreement within 40 days from signing, then
the First Memorandum of Agreement would cease to be effective.33
AIR PHILIPPINES CORPORATION, corporation duly organized and existing under the laws
of the Philippines, with offices at Multinational Building, Ayala Avenue, Makati City
In case no agreements were executed, the parties would be released from their respective (hereinafter referred to as "APC").
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
W I T N E S S E T H: That -
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: 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
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the advances to APC for the _____ (illegible in rollo) of aircraft, equipment and for working capital
JDA within forty (40) days from date hereof (or such period as the parties shall mutually used in the latter’s operations (the "_____ (illegible in rollo) ADVANCES").
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 WHEREAS, APIC desires to obtain full ownership and control of APC, including all of _____
have the right to recover on the 57,000,000 PEC shares delivered to U-LAND under Section (illegible in rollo) assets, franchise, goodwill and operations, and for this purpose has offered
4.35 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
The First Memorandum of Agreement was signed by Wellex Chairman and President William
same in consideration of the conveyance by APIC to TWGI of certain investments, _____
T. Gatchalian (Mr. Gatchalian) and U-Land Chairman Ker Gee Wang (Mr. Wang) on May 16, (illegible in rollo) issuance of TWGI of shares of stock of APIC in exchange for said APC
1998.36 SHARES and the _____ (illegible in rollo) ADVANCES, as more particularly described
hereunder.
Annex "A" or the Second Memorandum of Agreement
NOW, THEREFORE, the parties agree as follows:
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
1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange for the
Agreement" entered into by Wellex, APIC, and APC.37
_____ (illegible in rollo) by APIC to TWGI of investment shares of APIC in
Express Bank, Petro Chemical _____ (illegible in rollo) of Asia Pacific,
The Second Memorandum of Agreement states: Republic Resources & Development Corporation and Philippine _____
(illegible in rollo) Corporation (the "APIC INVESTMENTS").
IN WITNESS WHEREOF, the parties have caused these presents to be September 25, 1998 399,972.50
signed on the date _____ (illegible in rollo) first above written.38 (Emphasis 99, 972.50
supplied)
Total US$7,499,945.0048
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 Wellex acknowledged the receipt of these remittances in a confirmation letter addressed to
process of acquiring and consolidating its title to shares of stock of APIC." 39 It "included the U-Land dated September 30, 1998.49
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
According to Wellex, the parties agreed to enter into a security arrangement. If the sale of the
shares of stock failed to push through, the partial payments or remittances U-Land made
The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC President were to be secured by these shares of stock and parcels of land.50 This meant that U-Land
Salud,41 and APC President Augustus C. Paiso.42 It was not dated, and no place was could recover the amount it paid to Wellex by selling these shares of stock and land titles or
indicated as the place of signing.43 It was not notarized either, and no other witnesses signed using them to generate income.
the document.44
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock certificates
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not able to enter into representing 60,770,000 PEC shares and 72,601,000 APIC shares. 51 These were delivered
any share purchase agreement although drafts were exchanged between the two. to U-Land on July 1, 1998, September 1, 1998, and October 1, 1998.52
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to enter into the. . . U-Land alleged that, as of the date of filing of the Complaint, Wellex still refused to return the
Share Purchase Agreement."59 As far as U-Land was concerned, the First Memorandum of amount of US$7,499,945.00 while refusing to enter into the share purchase agreement.79 U-
Agreement was no longer in effect, pursuant to Section 9.60 As such, U-Land offered to return Land stated that it was induced by Wellex to enter into and execute the First Memorandum of
all the stock certificates covering APIC shares and PEC shares as well as the titles to real Agreement, as well as release the amount of US$7,499,945.00.80
property given by Wellex as security for the amount remitted by U-Land.61
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-Land had no cause
Wellex sent U-Land a letter62dated August 2, 1999, which refuted U-Land’s claims. Counsel of action.82 Wellex maintained that under the First Memorandum of Agreement, the parties
for Wellex stated that the two parties carried out several negotiations that included finalizing agreed to enter into a share purchase agreement and a joint development
the terms of the share purchase agreement and the terms of the joint development agreement.83 Wellex alleged that to bring the share purchase agreement to fruition, it would
agreement. Wellex asserted that under the joint development agreement, U-Land agreed to have to acquire the corresponding shares in APIC. 84 It claimed that U-Land was fully aware
remit the sum of US$3 million by May 22,1998 as initial funding for the development that the former "still ha[d] to consolidate its title over these shares."85 This was the reason for
projects.63 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
Wellex further asserted that it conducted extended discussions with U-Land in the hope of U-Land’s claim of misrepresentation.86
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 Wellex further alleged that U-Land breached the First Memorandum of Agreement since the
"would have demonstrated [U-Land’s] good faith in finalizing the agreements."65 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
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually agreed on the
US$3 million on May 22, 1998 was a mandatory obligation on the part of U-Land.89 Wellex
terms of both [the share purchase agreement and the joint development
averred that it presented draft versions of the share purchase agreement, which were never
agreement.]"66 Wellex believed that the parties had already "gone beyond the ‘intent’ stage of
finalized.90 Thus, it believed that there was an implied extension of the 40-day period within
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 which to enter into the share purchase agreement and the joint development agreement
payment for the APIC shares and PEC shares.68 "[Wellex] on the other hand, had [already] since U-Land began remitting sums of money in partial payment for the purchase of the
shares of stock.91
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 In its counterclaim against U-Land, Wellex alleged that it had already set in motion building
regional economic turmoil."70 and development of real estate projects on four (4) major sites in Cavite, Iloilo, and Davao. It
U-Land specifically denied that it had any knowledge prior to or during the execution of the According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr. Wang requested
First Memorandum of Agreement that Wellex still had to "consolidate its title over" its shares sometime in June of 1998 for an extension for the execution of the share purchase
in APIC. U-Land averred that it relied on Wellex’s representation that it was a majority owner agreement and the remittance of the US$3 million. As proof that Mr. Wang made this request,
of APIC shares and that APIC owned a majority of APC shares.102 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,
Moreover, U-Land denied any knowledge of the initial steps that Wellex undertook to pursue
which Wellex rejected. Wellex drafted a new version of the share purchase
the development projects and denied any awareness of a study conducted by Wellex
agreement.115 However, the share purchase agreement was not executed because during the
regarding the potential profit of these projects.103
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
The case proceeded to trial. in the amount of US$7,499,945.00.117
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Executive Officer, as Ms. Ting testified that U-Land was supposed to make an initial payment of US$19 million
its sole witness.104 Mr. Tseng testified that "[s]ometime in 1997, Mr. William Gatchalian who under the First Memorandum of Agreement. However, U-Land only paid US$7,499,945.00.
was in Taiwan invited [U-Land] to join in the operation of his airline company[.]"105 U-Land did The total payments should have amounted to US$41 million.118
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
In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s misrepresentation that A Air Philippines Corporation right now is own [sic] by Wellex Group and certain individual.
APIC owns APC is made clear, as follows:
Q How much shares of Air Philippines Corporation is owned by Wellex Group?
"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 A Around twenty...at this moment around twenty five percent (25%).
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")
Q Can you tell us if you know who are the other owners of the shares of Air Philippines?
Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the owners? 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
A As of this moment, no sir." defendant will make good its representation that APC is a subsidiary of APIC. The said
remittances are admitted by defendant.
(lbid, p. 16)
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
That defendant represented to plaintiff that it needed the remittances of plaintiff, even if no
the intention to cause the transfer of APC shares to APIC. [D]efendant obviously did not enter
SPA was executed yet between the parties, to effect the transfer of APC shares to APIC is
into the stipulated SPA because it did not have the shares of APC transferred to APIC
admitted by its same witness also in this wise:
despite its representations. Under the circumstances, it is clear that defendant fraudulently
violated the provisions of the MOA.120 (Emphasis supplied)
"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?
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
A Yes, Sir. granting the rescission:
Q During all these times, that remittances were made in the total amount of more than seven Records show that in the answer filed by defendant-appellant, the latter itself asked for the
million dollars, did you ever know if plaintiff asked for evidence from your company that AIR rescission of the MOA. Thus, in effect, it prays for the return of what has been given or paid
PHILIPPINES INTERNATIONAL CORPORATION has already acquired shares of AIR under the MOA, as the law creates said obligation to return the things which were the object
PHILIPPINES CORPORATION? 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:
A There were queries on the matter.
"Rescission creates the obligation to return the things which were the object of the contract,
Q And what was your answer to those queries, Madam Witness? 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."
A We informed them that the decision was still in the process.
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to return what has
Q Even up to the time that plaintiff U-Land stopped the remittances sometime in September been paid to it. Further, appellant’s claim that the lower court erred in ruling for the rescission
1998 you have not effected the transfer of shares of AIR PHILIPPINES CORPORATION to of the MOA is absurd and ridiculous because rescission thereof is prayed for by the former. . .
AIR PHILIPPINES INTERNATIONCAL [sic] CORPORATION[,] am I correct? . 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
A APC to APIC, well at that time it’s still in the process. 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
Q In fact, Madam Witness, is it not correct for me to say that one of the reasons why U-Land
the guilty party cannot ask for rescission.
Incorporated was convinced to remit the amounts of money totalling seven million dollars
plus,
The lower court . . . correctly ruled that:
was that your company said that it needed funds to effect these transfers, is that correct?
". . . 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
A Yes, sir."
misrepresentation that it will cause the transfer of APC shares in APIC inducing plaintiff to
Finally, petitioner Wellex argues that respondent U-Land could have recovered through the
Hence, this Petition was filed.
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
Petitioner’s Arguments 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
Petitioner Wellex argues that contrary to the finding of the Court of Appeals, respondent U- Code]."136Respondent’s Arguments
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 Respondent U-Land argues that it was the execution of the share purchase agreement that
US$17.5 million for all of APIC shares and PEC shares under the First Memorandum of would result in its purchase of the APIC shares and PEC shares.137 It was not the full
Agreement and the US$3 million to pursue the development projects under the joint remittance of the purchase price of the shares of stock as indicated in the First Memorandum
development agreement. In sum, respondent U-Land was liable to petitioner Wellex for the of Agreement, as alleged by petitioner Wellex.138 Respondent U-Land asserts that the First
total amount of US$20.5 million. Neither the Court of Appeals nor the Regional Trial Court Memorandum of Agreement provides that the exact number of APIC shares and PEC shares
made any mention of the legal effect of respondent U-Land’s failure to pay the full purchase to be purchased under the share purchase agreement and the final price of these shares
price.123 were not yet determined by the parties.139
On the share purchase agreement, petitioner Wellex asserts that its obligation to deliver the Respondent U-Land reiterates that it was petitioner Wellex that requested for the remittances
totality of the shares of stock would become demandable only upon remittance of the full amounting to US$7,499,945.00 to facilitate APIC’s purchase of APC shares.140 Thus, it was
purchase price of US$17.5 million.124 The full remittance of the purchase price of the shares petitioner Wellex’s refusal to enter into the share purchase agreement that led to respondent
of stock was a suspensive condition for the execution of the share purchase agreement and U-Land demanding rescission of the First Memorandum of Agreement and the return of the
delivery of the shares of stock. Petitioner Wellex argues that the use of the term "upon" in US$7,499,945.00.141 Respondent U-Land further argues before this court that petitioner
Section 2 of the First Memorandum of Agreement clearly provides that the full payment of the Wellex failed to present evidence as to how the money was spent, stating that Ms. Ting
purchase price must be given "simultaneously" or "concurrent" with the execution of the share admitted that the Second Memorandum of Agreement "was not consummated at any
purchase agreement.125 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
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail I. Basic Agreement. - The parties agree to develop a long-term business relationship initially
over the former. through the creation of joint interest in airline operations as well as in property development
projects in the Philippines to be implemented as follows:
In Norton Resources and Development Corporation v. All Asia Bank Corporation:151
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES
INTERNATIONAL CORPORATION ("APIC") equivalent to at least 35% of the
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon In Section 1, the parties agreed to enter into a joint business venture, through entering into
execution of the SHPA against delivery of the Subject Shares. The parties may agree on two (2) agreements: a share purchase agreement and a joint development agreement.
such other terms and conditions governing the acquisition of the Subject Shares to be However, Section 1 provides that in the share purchase agreement, "U-LAND shall acquire
provided in a separate instrument. 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
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 As for the PEC shares, Section 1 provides that respondent U-Land shall purchase from
(iii) any required approval by the Taiwanese government of the acquisition by U-LAND of the petitioner Wellex "shares of stock of PHILIPPINE ESTATES CORPORATION (‘PEC’)
Subject Shares shall likewise have been obtained.156 (Emphasis supplied) 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
As for the joint development agreement, the First Memorandum of Agreement contained the
following stipulation: 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
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 agree on the number of shares of stock to be purchased.
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 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
2) The parties concerned must agree to a new contract. . . . 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
3) The old contract must be extinguished. 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
4) There must be a valid new contract. 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
Novation may also be express or implied. It is express when the new obligation declares in the original obligation.171(Citations omitted)
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation
Article 1185 provides that if an obligation is conditioned on the nonoccurrence of a particular ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
event at a determinate time, that obligation arises (a) at the lapse of the indicated time, or(b) obligors should not comply with what is incumbent upon him.
if it has become evident that the event cannot occur.
The court shall decree the rescission claimed, unless there be just cause authorizing the At this juncture, it is noteworthy to point out that rescission does not merely terminate the
fixing of a period. 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
This is understood to be without prejudice to the rights of third persons who have acquired has been made. Consequently, mutual restitution, which entails the return of the benefits that
the thing, in accordance with articles 1385 and 1388 and the Mortgage Law. 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:
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: xxxx
(1) Those which are entered into by guardians whenever the wards whom they Mutual restitution is required in cases involving rescission under Article 1191. This means
represent suffer lesion by more than one-fourth of the value of the things which are bringing the parties back to their original status prior to the inception of the contract. Article
the object thereof; 1385 of the Civil Code provides, thus:
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion ART. 1385. Rescission creates the obligation to return the things which were the object of the
stated in the preceding number; 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
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner 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.
collect the claims due them;
In this case, indemnity for damages may be demanded from the person causing the loss.
(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; 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,
(5) All other contracts specially declared by law to be subject to rescission.
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
Article 1383 expressly provides for the subsidiary nature of rescission: the original, citations omitted)
ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the Rescission, as defined by Article 1385, mandates that the parties must return to each other
party suffering damage has no other legal means to obtain reparation for the same. 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
Rescission itself, however, is defined by Article 1385: contracts.
ART. 1385. Rescission creates the obligation to return the things which were the object of the For Article 1191 to be applicable, however, there must be reciprocal prestations as
contract, together with their fruits, and the price with its interest; consequently, it can be distinguished from mutual obligations between or among the parties. A prestation is the
carried out only when he who demands rescission can return whatever he may be obliged to object of an obligation, and it is the conduct required by the parties to do or not to do, or to
restore. Neither shall rescission take place when the things which are the object of the give.177 Parties may be mutually obligated to each other, but the prestations of these
contract are legally in the possession of third persons who did not act in bad faith. obligations are not necessarily reciprocal. The reciprocal prestations must necessarily
The failure of one of the parties to comply with its reciprocal prestation allows the wronged 4. Those which refer to things under litigation if they have been entered into by the
party to seek the remedy of Article 1191. The wronged party is entitled to rescission or defendant without the knowledge and approval of the litigants or of competent judicial
resolution under Article 1191, and even the payment of damages. It is a principal action authority; [and]
precisely because it is a violation of the original reciprocal prestation.
5. All other contracts specially declared by law to be subject to
Article 1381 and Article 1383, on the other hand, pertain to rescission where creditors or even rescission.183 (Citations omitted)
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: 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
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy contract should be among those enumerated in Article 1381 for the contract to be considered
granted by law to the contracting parties and even to third persons, to secure the reparation rescissible. Unlike Article 1191, rescission under Article 1381 must be a subsidiary action
of damages caused to them by a contract, even if this should be valid, by restoration of things because of Article 1383.
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 Contrary to petitioner Wellex’s argument, this is not rescission under Article 1381 of the Civil
omitted) 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
Ong elaborated on the confusion between "rescission" or resolution under Article 1191 and part of the debtor who is in the process of transferring or alienating property that can be used
rescission under Article 1381: to satisfy the obligation of the debtor to the creditor. There is no allegation of fraud for
The rescission on account of breach of stipulations is not predicated on injury to economic By the contract of sale, the vendor obligates himself to transfer the ownership of and to
interests of the party plaintiff but on the breach of faith by the defendant, that violates the deliver a determinate thing to the buyer, who in turn, is obligated to pay a price certain in
reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned money or its equivalent (Art. 1458, Civil Code). From the respondents’ own arguments, we
without disclosing anywhere that the action for rescission thereunder is subordinated to note that they have fully complied with their part of the reciprocal obligation. As a matter of
anything other than the culpable breach of his obligations by the defendant. This rescission is fact, they have already parted with the title as evidenced by the transfer certificate of title in
a principal action retaliatory in character, it being unjust that a party be held bound to fulfill his the petitioners’ name as of June 27, 1975.
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 The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage.
secondary.
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
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of buyer and seller because the contract of sale has been perfected and consummated. It is
action is subordinated to the existence of that prejudice, because it is the raison detre as well already one of a mortgagor and a mortgagee. In consideration of the petitioners’ promise to
as the measure of the right to rescind. Hence, where the defendant makes good the pay on installment basis the sum they owe the respondents, the latter have accepted the
damages caused, the action cannot be maintained or continued, as expressly provided in mortgage as security for the obligation.
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
The situation in this case is, therefore, different from that envisioned in the cited opinion of
not apply to cases under Article 1191.185
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
Rescission or resolution under Article 1191, therefore, is a principal action that is immediately remedy of rescission is not a principal action retaliatory in character but becomes a
available to the party at the time that the reciprocal prestation was breached. Article 1383 subsidiary one which by law is available only in the absence of any other legal remedy. (Art.
mandating that rescission be deemed a subsidiary action cannot be applicable to rescission 1384, Civil Code). Foreclosure here is not only a remedy accorded by law but, as earlier
or resolution under Article 1191. Thus, respondent U-Land correctly sought the principal relief stated, is a specific provision found in the contract between the parties.187 (Emphasis
of rescission or resolution under Article 1191. supplied)
The obligations of the parties gave rise to reciprocal prestations, which arose from the same In Suria, this court clearly applied rescission under Article 1384 and not rescission or
cause: the desire of both parties to enter into a share purchase agreement that would allow resolution under Article 1191. In addition, the First Memorandum of Agreement is not a
both parties to expand their respective airline operations in the Philippines and other contract to sell shares of stock. It is an agreement to negotiate with the view of entering into a
neighboring countries. share purchase agreement.
V 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
The jurisprudence relied upon by non-payment cannot serve as proof of a simulated contract.188 The case did not rule that the
petitioner Wellex is not applicable vendor has no obligation to deliver the thing sold if the buyer fails to fully pay the price
required by the contract. In Villaflor:
An obiter dictum has been defined as an opinion expressed by a court upon some question of
In the issuance of the Writ of Preliminary Attachment, the lower court found that petitioner
law that is not necessary in the determination of the case before the court. It is a remark Wellex committed fraud by inducing respondent U-Land to purchase APIC shares and PEC
made, or opinion expressed, by a judge, in his decision upon a cause by the way, that is, shares and by leading the latter to believe that APC was a subsidiary of APIC.
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 Determining the existence of fraud is not necessary in an action for rescission or resolution
made without argument, or full consideration of the point. It lacks the force of an adjudication, under Article 1191. The existence of fraud must be established if the rescission prayed for is
being a mere expression of an opinion with no binding force for purposes of res the rescission under Article 1381.
judicata.191 (Citations omitted)
However, the existence of fraud is a question that the parties have raised before this court.
Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses Agustin v. Court of To settle this question with finality, this court will examine the established facts and determine
Appeals is also misplaced. In these cases, this court held that there can be no rescission for whether petitioner Wellex indeed defrauded respondent U-Land.
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 In Tankeh v. Development Bank of the Philippines,193 this court enumerated the relevant
involved is a contract to sell. In a contract to sell, the failure of the buyer to pay renders the provisions of the Civil Code on fraud:
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 Fraud is defined in Article 1338 of the Civil Code as:
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. 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
In this case, the First Memorandum of Agreement is not a contract to sell. Entering into the to.
share purchase agreement or the joint development agreement remained a stipulation that
the parties themselves agreed to pursue in the First Memorandum of Agreement. This is followed by the articles which provide legal examples and illustrations of fraud.
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
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know
suspensive condition of full payment of the purchase price needed to execute either the
the facts, are not in themselves fraudulent. (n)
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. 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)
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
The absence of fraud in a transaction does not mean that rescission under Article 1191 is not VIII
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 Respondent U-Land was not
for fraud based on Article 1381 of the Civil Code. Rescission or resolution under Article 1191 obligated to exhaust the "securities"
is predicated on the failure of one of the parties in a reciprocal obligation to fulfill the given by petitioner Wellex
prestation as required by that obligation. It is not based on vitiation of consent through
fraudulent misrepresentations.
Contrary to petitioner Wellex’s assertion, there is no obligation on the part of respondent U-
Land to exhaust the "securities" given by petitioner Wellex. No such meeting of the minds to
VII 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
Respondent U-Land was not bound Code. Thus, there is no need to exhaust the securities given to respondent U-Land, and there
to pay the US$3 million under the is no need for a legal condition where respondent U-Land should pursue other remedies.
joint development agreement
Neither petitioner Wellex nor respondent U-Land stated that there was already a transfer of
The alleged failure of respondent U-Land to pay the amount of US$3 million to petitioner ownership of the shares of stock or the land titles. Respondent U-Land itself maintained that
Wellex does not justify the actions of the latter in refusing to return the US$7,499,945.00. 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
Article 1374 of the Civil Code provides that: understanding that the parties would subsequently enter a share purchase agreement. There
being no share purchase agreement, respondent U-Land is obligated to return the certificates
of shares of stock and the land titles to petitioner Wellex.
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 parties are bound by the 40-day period provided for in the First Memorandum of
The execution of the joint development agreement was contingent on the execution of the Agreement. Adherence by the parties to Section 9 of the First Memorandum of Agreement
share purchase agreement.1âwphi1 This is provided for in Section 4 of the First has the same effect as the rescission or resolution prayed for and granted by the trial court.
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 Informal acts are prone to ambiguous legal interpretation. This will be based on the say-so of
necessarily mean the failure of the joint development agreement’s execution. 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
Section 9 of the First Memorandum of Agreement provides that should the parties fail 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.
execute the agreement, they would be released from their mutual obligations. Had
They have the resources to engage legal representation. Indeed, they have reduced their
respondent U-Land paid the US$3 million and petitioner Wellex delivered the 57,000,000
agreement in writing.
PEC shares for the purpose of the joint development agreement, they would have been
obligated to return these to each other.
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,
Section 4 and Section 9 of the First Memorandum of Agreement must be interpreted
entered into by the parties. Our duty is to affirm legal expectations, not to guarantee good
together. Since the parties were unable to agree on a final share purchase agreement and
business judgments.
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 WHEREFORE, the petition is DENIED. The Decision of the Regional Trial Court in Civil Case
development projects under the joint development agreement. There being no joint 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.
DECISION On December 16, 1992 the RTC rendered a decision, declaring the DBP’s sale to Sofia
Quirong valid only with respect to the shares of Felisa and Rosa Funcion in the property. It
declared Felisa’s sale to the Funcions, the latter’s mortgage to the DBP, and the latter’s sale
ABAD, J.: to Sofia Quirong void insofar as they prejudiced the shares of the eight other children of
Emilio and Felisa who were each entitled to a tenth share in the subject lot.
This case is about the prescriptive period of an action for rescission of a contract of sale
where the buyer is evicted from the thing sold by a subsequent judicial order in favor of a The DBP received a copy of the decision on January 13, 1993 and, therefore, it had until
third party. January 28, 1993 within which to file a motion for its reconsideration or a notice of appeal
from it. But the DBP failed to appeal supposedly because of excusable negligence and the
The Facts and the Case withdrawal of its previous counsel of record.8
The facts are not disputed. When the late Emilio Dalope died, he left a 589-square meter When the RTC judgment became final and the court issued a writ of execution, the DBP
untitled lot1 in Sta. Barbara, Pangasinan, to his wife, Felisa Dalope (Felisa) and their nine resisted the writ by motion to quash, claiming that the decision could not be enforced
children, one of whom was Rosa Dalope-Funcion.2 To enable Rosa and her husband Antonio because it failed to state by metes and bounds the particular portions of the lot that would be
Funcion (the Funcions) get a loan from respondent Development Bank of the Philippines assigned to the different parties in the case. The RTC denied the DBP’s motion, prompting
(DBP), Felisa sold the whole lot to the Funcions. With the deed of sale in their favor and the the latter to seek recourse by special civil action of certiorari directly with this Court in G.R.
tax declaration transferred in their names, the Funcions mortgaged the lot with the DBP. 116575, Development Bank of the Philippines v. Fontanilla. On September 7, 1994 the Court
issued a resolution, denying the petition for failure of the DBP to pay the prescribed fees. This
On February 12, 1979, after the Funcions failed to pay their loan, the DBP foreclosed the resolution became final and executory on January 17, 1995.9
mortgage on the lot and consolidated ownership in its name on June 17, 1981. 3
On June 10, 1998 the Quirong heirs filed the present action 10 against the DBP before the
Four years later or on September 20, 1983 the DBP conditionally sold the lot to Sofia RTC of Dagupan City, Branch 44, in Civil Case CV-98-02399-D for rescission of the contract
Quirong4 for the price of P78,000.00. In their contract of sale, Sofia Quirong waived any of sale between Sofia Quirong, their predecessor, and the DBP and praying for the
warranty against eviction. The contract provided that the DBP did not guarantee possession reimbursement of the price of P78,000.00 that she paid the bank plus damages. The heirs
of the property and that it would not be liable for any lien or encumbrance on the same. alleged that they were entitled to the rescission of the sale because the decision in Civil Case
Quirong gave a down payment of P14,000.00. D-7159 stripped them of nearly the whole of the lot that Sofia Quirong, their predecessor,
bought from the DBP. The DBP filed a motion to dismiss the action on ground of prescription
Two months after that sale or on November 28, 1983 Felisa and her eight children and res judicata but the RTC denied their motion.
(collectively, the Dalopes)5 filed an action for partition and declaration of nullity of documents
with damages against the DBP and the Funcions before the Regional Trial Court (RTC) of On June 14, 2004, after hearing the case, the RTC rendered a decision,11 rescinding the sale
Dagupan City, Branch 42, in Civil Case D-7159. between Sofia Quirong and the DBP and ordering the latter to return to the Quirong heirs the
P78,000.00 Sofia Quirong paid the bank.12 On appeal by the DBP, the Court of Appeals (CA)
reversed the RTC decision and dismissed the heirs’ action on the ground of prescription. The
1. Whether or not the Quirong heirs’ action for rescission of respondent DBP’s sale of the But it is not that simple. The remedy of "rescission" is not confined to the rescissible contracts
subject property to Sofia Quirong was already barred by prescription; and enumerated under Article 1381.17 Article 1191 of the Civil Code gives the injured party in
reciprocal obligations, such as what contracts are about, the option to choose between
fulfillment and "rescission." Arturo M. Tolentino, a well-known authority in civil law, is quick to
2. In the negative, whether or not the heirs of Quirong were entitled to the rescission of the
note, however, that the equivalent of Article 1191 in the old code actually uses the term
DBP’s sale of the subject lot to the late Sofia Quirong as a consequence of her heirs having
"resolution" rather than the present "rescission."18 The calibrated meanings of these terms
been evicted from it.
are distinct.
The Court’s Rulings
"Rescission" is a subsidiary action based on injury to the plaintiff’s economic interests as
described in Articles 1380 and 1381. "Resolution," the action referred to in Article 1191, on
The CA held that the Quirong heirs’ action for rescission of the sale between DBP and their the other hand, is based on the defendant’s breach of faith, a violation of the reciprocity
predecessor, Sofia Quirong, is barred by prescription reckoned from the date of finality of the between the parties. As an action based on the binding force of a written contract, therefore,
December 16, 1992 RTC decision in Civil Case D-7159 and applying the prescriptive period rescission (resolution) under Article 1191 prescribes in 10 years. Ten years is the period of
of four years set by Article 1389 of the Civil Code. prescription of actions based on a written contract under Article 1144.
Unfortunately, the CA did not state in its decision the date when the RTC decision in Civil The distinction makes sense. Article 1191 gives the injured party an option to choose
Case D-7159 became final and executory, which decision resulted in the Quirong heirs’ loss between, first, fulfillment of the contract and, second, its rescission. An action to enforce a
of 80% of the lot that the DBP sold to Sofia Quirong. Petitioner heirs claim that the written contract (fulfillment) is definitely an "action upon a written contract," which prescribes
prescriptive period should be reckoned from January 17, 1995, the date this Court’s in 10 years (Article 1144). It will not be logical to make the remedy of fulfillment prescribe in
resolution in G.R. 116575 became final and executory. 15 10 years while the alternative remedy of rescission (or resolution) is made to prescribe after
only four years as provided in Article 1389 when the injury from which the two kinds of
But the incident before this Court in G.R. 116575 did not deal with the merit of the RTC actions derive is the same.
decision in Civil Case D-7159. That decision became final and executory on January 28,
1993 when the DBP failed to appeal from it within the time set for such appeal. The incident Here, the Quirong heirs alleged in their complaint that they were entitled to the rescission of
before this Court in G.R. 116575 involved the issuance of the writ of execution in that case. the contract of sale of the lot between the DBP and Sofia Quirong because the decision in
The DBP contested such issuance supposedly because the dispositive portion of the decision Civil Case D-7159 deprived her heirs of nearly the whole of that lot. But what was the status
failed to specify details that were needed for its implementation. Since this incident did not of that contract at the time of the filing of the action for rescission? Apparently, that contract of
affect the finality of the decision in Civil Case D-7159, the prescriptive period remained to be sale had already been fully performed when Sofia Quirong paid the full price for the lot and
reckoned from January 28, 1993, the date of such finality. when, in exchange, the DBP executed the deed of absolute sale in her favor. There was a
turnover of control of the property from DBP to Sofia Quirong since she assumed under their
The next question that needs to be resolved is the applicable period of prescription. The DBP contract, "the ejectment of squatters and/or occupants" on the lot, at her own expense.19
claims that it should be four years as provided under Article 1389 of the Civil Code. 16 Article
1389 provides that "the action to claim rescission must be commenced within four years." The Actually, the cause of action of the Quirong heirs stems from their having been ousted by
Quirong heirs, on the other hand, claim that it should be 10 years as provided under Article final judgment from the ownership of the lot that the DBP sold to Sofia Quirong, their
Article 1548. Eviction shall take place whenever by a final judgment based on a right prior to SO ORDERED.
the sale or an act imputable to the vendor, the vendee is deprived of the whole or of a part of
thing purchased.
xxxx
With the loss of 80% of the subject lot to the Dalopes by reason of the judgment of the RTC
in Civil Case D-7159, the Quirong heirs had the right to file an action for rescission against
the DBP pursuant to the provision of Article 1556 of the Civil Code which provides:
Article 1556. Should the vendee lose, by reason of the eviction, a part of the thing sold of
such importance, in relation to the whole, that he would not have bought it without said part,
he may demand the rescission of the contract; but with the obligation to return the thing
without other encumbrances than those which it had when he acquired it. x x x
And that action for rescission, which is based on a subsequent economic loss suffered by the
buyer, was precisely the action that the Quirong heirs took against the DBP. Consequently, it
prescribed as Article 1389 provides in four years from the time the action accrued. Since it
accrued on January 28, 1993 when the decision in Civil Case D-7159 became final and
executory and ousted the heirs from a substantial portion of the lot, the latter had only until
January 28, 1997 within which to file their action for rescission. Given that they filed their
action on June 10, 1998, they did so beyond the four-year period.
With the conclusion that the Court has reached respecting the first issue presented in this
case, it would serve no useful purpose for it to further consider the issue of whether or not the
heirs of Quirong would have been entitled to the rescission of the DBP’s sale of the subject
lot to Sofia Quirong as a consequence of her heirs having been evicted from it. As the Court
has ruled above, their action was barred by prescription. The CA acted correctly in reversing
the RTC decision and dismissing their action.
Parenthetically, the Quirong heirs were allowed by the RTC to intervene in the original action
for annulment of sale in Civil Case D-7159 that the Dalopes filed against the DBP and the
Funcions. Not only did the heirs intervene in defense of the sale, they likewise filed a cross
claim against the DBP. And they were apparently heard on their defense and cross claim but
the RTC did not adjudicate their claim for the reason that they failed to make a formal offer of
their documentary exhibits. Yet, they did not appeal from this omission or from the judgment
of the RTC, annulling the DBP’s sale of the subject lot to Sofia Quirong. This point is of
course entirely academic but it shows that the Quirong heirs have themselves to blame for
the loss of whatever right they may have in the case.