Vous êtes sur la page 1sur 134

I.

OBLIGATIONS:
1. ELIZABETH DEL CARMEN VS SPOUSES RESTITUTO AND MIMA SABORDO,
G.R. No. 181723, August 11, 2014
FACTS:
Sometime in 1961, Suico spouses, along with several business partners, entered into a business
venture by establishing a rice and corn mill at Mandaue City, Cebu. As part of their capital, they
obtained a loan from the Development Bank of the Philippines (DBP), and to secure the said
loan, four parcels of land owned by the Suico spouses, denominated as Lots 506, 512, 513 and
514, and another lot owned by their business partner, Juliana Del Rosario, were mortgaged.
Subsequently, the Suico spouses and their business partners failed to pay their loan obligations
forcing DBP to foreclose the mortgage. After the Suico spouses and their partners failed to
redeem the foreclosed properties, DBP consolidated its ownership over the same. Nonetheless,
DBP later allowed the Suico spouses and Flores spouses, as substitutes for Juliana Del Rosario,
to repurchase the subject lots by way of a conditional sale. The Suico and Flores spouses were
able to pay the downpayment and the first monthly amortization, but no monthly installments
were made thereafter. Threatened with the cancellation of the conditional sale, the Suico and
Flores spouses sold their rights over the said properties to herein respondents Restituto and Mima
Sabordo, subject to the condition that the latter shall pay the balance of the sale price.
Respondents and the Suico and Flores spouses executed a supplemental agreement whereby they
affirmed that what was actually sold to respondents were Lots 512 and 513, while Lots 506 and
514 were given to them as usufructuaries. DBP approved the sale of rights of the Suico and
Flores spouses in favor of herein respondents. Subsequently, respondents were able to repurchase
the foreclosed properties of the Suico and Flores spouses.
Respondent Restituto filed with the then Court of First Instance of Negros Occidental an original
action for declaratory relief with damages and prayer for a writ of preliminary injunction raising
the issue of whether or not the Suico spouses have the right to recover from respondents Lots
506 and 514.
The Regional Trial Court (RTC), ruled in favor of the Suico spouses directing that the latter have
until August 31, 1987 within which to redeem or buy back from respondents Lots 506 and 514.
On appeal, the CA, modified the RTC decision by giving the Suico spouses until October 31,
1990 within which to exercise their option to purchase or redeem the subject lots from
respondents by paying the sum of P127,500.00.
Toribio died leaving his widow, Eufrocina, and several others, including herein petitioner, as
legal heirs. Later, they discovered that respondents mortgaged Lots 506 and 514 with Republic
Planters Bank (RPB) as security for a loan, subsequently, became delinquent. Thereafter,
claiming that they are ready with the payment of P127,500.00, but alleging that they cannot
determine as to whom such payment shall be made, petitioner and her co-heirs filed a
Complaint with the RTC of San Carlos City, Negros Occidental seeking to compel herein
respondents and RPB to interplead and litigate between themselves their respective interests on
the abovementioned sum of money. The Complaint also prayed that respondents be directed to
substitute Lots 506 and 514 with other real estate properties as collateral for their outstanding
obligation with RPB and that the latter be ordered to accept the substitute collateral and release
the mortgage on Lots 506 and 514. Upon filing of their complaint, the heirs of Toribio deposited
the amount of P127,500.00 with the RTC of San Carlos City, Branch 59.
Respondents filed their Answer with Counterclaim praying for the dismissal of the above
Complaint on the grounds that the period within which the complainants are allowed to purchase
Lots 506 and 514 had already expired; and that there was no valid consignation.
The RTC rendered judgment, dismissing the Complaint of petitioner and her co-heirs for lack of
merit. Petitioner and her co-heirs filed an appeal with the CA contending that the judicial
deposit or consignation of the amount of P127,500.00 was valid and binding and produced the
1

effect of payment of the purchase price of the subject lots. In its assailed Decision, the CA
denied the appeal for lack of merit and affirmed the disputed RTC Decision.
ISSUE:
Whether or not consignation made by the petitioners is valid.
HELD:
Petitioner's main contention is that the consignation which she and her co-heirs made was a
judicial deposit based on a final judgment and, as such, does not require compliance with the
requirements of Articles 1256 and 1257 of the Civil Code.
At the outset, the Court quotes with approval the discussion of the CA regarding the definition
and nature of consignation, to wit:
consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment, and it generally
requires a prior tender of payment. It should be distinguished from tender of
payment which is the manifestation by the debtor to the creditor of his desire to
comply with his obligation, with the offer of immediate performance. Tender is the
antecedent of consignation, that is, an act preparatory to the consignation, which is the
principal, and from which are derived the immediate consequences which the debtor
desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is
necessarily judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. Tender and consignation, where
validly made, produces the effect of payment and extinguishes the obligation.
In the instant case, petitioner and her co-heirs, upon making the deposit with the RTC, did not
ask the trial court that respondents be notified to receive the amount that they have deposited. In
fact, there was no tender of payment. Instead, what petitioner and her co-heirs prayed for is that
respondents and RPB be directed to interplead with one another to determine their alleged
respective rights over the consigned amount; that respondents be likewise directed to substitute
the subject lots with other real properties as collateral for their loan with RPB and that RPB be
also directed to accept the substitute real properties as collateral for the said loan.
For a consignation or deposit with the court of an amount due on a judgment to be considered as
payment, there must be prior tender to the judgment creditor who refuses to accept it. As stated
above, tender of payment involves a positive and unconditional act by the obligor of offering
legal tender currency as payment to the obligee for the formers obligation and demanding that
the latter accept the same. It is settled that compliance with the requisites of a valid consignation
is mandatory. Failure to comply strictly with any of the requisites will render the consignation
void. One of these requisites is a valid prior tender of payment.
Under Article 1256, the only instances where prior tender of payment is excused are: (1) when
the creditor is absent or unknown, or does not appear at the place of payment; (2) when the
creditor is incapacitated to receive the payment at the time it is due; (3) when, without just cause,
the creditor refuses to give a receipt; (4) when two or more persons claim the same right to
collect; and (5) when the title of the obligation has been lost. None of these instances are present
in the instant case. Hence, the fact that the subject lots are in danger of being foreclosed does not
excuse petitioner and her co-heirs from tendering payment to respondents, as directed by the
court.

2. SPOUSES RODOLFO BEROT AND LILIA BEROT, v. FELIPE C. SIAPNO, G.R.


No. 188944, July 09, 2014
FACTS:
On May 23, 2002, Macaria and spouses Rodolfo A. Berot (or appellant) and Lilia obtained a
loan from Felipe C. Siapno (or appellee) in the sum of P250,000.00, payable within one year
together with interest thereon at the rate of 2% per annum from that date until fully paid.
As security for the loan, Macaria, appellant and Lilia mortgaged to appellee a portion, consisting
of 147 square meters, of that parcel of land with an area of 718 square meters, situated in
Banaoang, Calasiao, Pangasinan and covered by Tax Declaration No. 1123 in the names of
Macaria and her husband Pedro Berot (or Pedro), deceased. On June 23, 2003, Macaria died.
Because of the mortgagors default, appellee filed an action against them for foreclosure of
mortgage and damages on July 15, 2004 in the Regional Trial Court of Dagupan City (Branch
42). The action was anchored on the averment that the mortgagors failed and refused to pay the
abovementioned sum of P250,000.00 plus the stipulated interest of 2% per month despite lapse
of one year from May 23, 2002.
In answer, appellant and Lilia, alleged that the contested property was the inheritance of the
former from his deceased father, Pedro; that on said property is their family home; that the
mortgage is void as it was constituted over the family home without the consent of their children,
who are the beneficiaries thereof; that their obligation is only joint.
The lower court rendered a decision allowing the foreclosure of the subject mortgage and
ordered the defendants to pay to the plaintiff within ninety (90) days from notice of this Decision
the amount of P250,000.00 representing the principal loan, with interest at two (2%) percent
monthly from February, 2004 the month when they stopped paying the agreed interest up to
satisfaction of the claim and 30% of the amount to be collected as and for attorneys fees. If
within the aforestated 90-day period the defendants fail to pay plaintiff the above-mentioned
amounts, the sale of the property subject of the mortgage shall be made and the proceeds of the
sale to be delivered to the plaintiff to cover the debt and charges mentioned above, and after such
payments the excess, if any shall be delivered to the defendants.
The trial court expressly ruled that the nature of petitioners obligation to respondent was
solidary. It scrutinized the real estate mortgage and arrived at the conclusion that petitioners had
bound themselves to secure their loan obligation by way of a real estate mortgage in the event
that they failed to settle it.
Appellant filed a motion for reconsideration of the decision but it was denied. CA affirmed the
decision of the lower court with modification. The CA did not make a categorical finding that the
nature of the obligation was joint or solidary on the part of petitioners. It neither sustained their
argument that the mortgage was invalid for having been constituted over a family home without
the written consent of the beneficiaries who were of legal age.
ISSUE:
Whether or not the obligation is joint.
HELD:
On the issue of whether the nature of the loan obligation contracted by petitioners is joint or
solidary, we rule that it is joint.
Under Article 1207 of the Civil Code of the Philippines, the general rule is that when there is a
concurrence of two or more debtors under a single obligation, the obligation is presumed to be
joint:
3

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one
and the same obligation does not imply that each one of the former has a right to demand,
or that each one of the latter is bound to render, entire compliance with the prestations.
There is a solidary liability only when the obligation expressly so states, or when the law
or the nature of the obligation requires solidarity.
The law further provides that to consider the obligation as solidary in nature, it must expressly be
stated as such, or the law or the nature of the obligation itself must require solidarity. In PH
Credit Corporation v. Court of Appeals, we held that:
A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of the whole
obligation from any or all of the debtors. On the other hand, a joint obligation is one in
which each debtors is liable only for a proportionate part of the debt, and the creditor is
entitled to demand only a proportionate part of the credit from each debtor. The wellentrenched rule is that solidary obligations cannot be inferred lightly. They must be
positively and clearly expressed. A liability is solidary only when the obligation
expressly so states, when the law so provides or when the nature of the obligation so
requires.
The testimony of petitioner Rodolfo only established that there was that existing loan to
respondent, and that the subject property was mortgaged as security for the said obligation. His
admission of the existence of the loan made him and his late mother liable to respondent. We
have examined the contents of the real estate mortgage but found no indication in the plain
wordings of the instrument that the debtors the late Macaria and herein petitioners had
expressly intended to make their obligation to respondent solidary in nature. Absent from the
mortgage are the express and indubitable terms characterizing the obligation as solidary.
Respondent was not able to prove by a preponderance of evidence that petitioners obligation to
him was solidary. Hence, applicable to this case is the presumption under the law that the nature
of the obligation herein can only be considered as joint. It is incumbent upon the party alleging
otherwise to prove with a preponderance of evidence that petitioners obligation under the loan
contract is indeed solidary in character.
The CA properly upheld respondents course of action as an availment of the second remedy
provided under Section 7, Rule 86 of the 1997 Revised Rules of Court. Under the said provision
for claims against an estate, a mortgagee has the legal option to institute a foreclosure suit and to
recover upon the security, which is the mortgaged property.
During her lifetime, Macaria was the registered owner of the mortgaged property, subject of the
assailed foreclosure. Considering that she had validly mortgaged the property to secure a loan
obligation, and given our ruling in this case that the obligation is joint, her intestate estate is
liable to a third of the loan contracted during her lifetime. Thus, the foreclosure of the property
may proceed, but would be answerable only to the extent of the liability of Macaria to
respondent.

3. GOLDEN VALLEY EXPLORATION, INC. (GVEI) v. PINKIAN MINING


COMPANY (PMC) AND COPPER VALLEY, INC., G.R. No. 190080, June 11, 2014
FACTS:
PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, 15 of which were
covered by Mining Lease Contract (MLC), while the remaining 66 had pending applications for
lease. On October 30, 1987, PMC entered into an Operating Agreement (OA) with GVEI,
granting the latter full, exclusive and irrevocable possession, use, occupancy, and control over
the mining claims, and every matter pertaining to the examination, exploration, development and
mining of the mining claims and the processing and marketing of the products x x x, for a
period of 25 years.
In a Letter dated June 8, 1999, PMC extra-judicially rescinded the OA upon GVEIs violation of
Section 5.01, Article V thereof. Cited as further justification for its action were reasons such as:
(a) violation of Section 2.03, Article II of the OA, or the failure of GVEI to advance the actual
cost for the perfection of the mining claims or for the acquisition of mining rights, cost of lease
applications, lease surveys and legal expenses incidental thereto; (b) GVEIs non-reimbursement
of the expenses incurred by PMC General Manager Benjamin Saguid in connection with the visit
of a financier to the mineral property in 1996; (c) its non-remittance of the US$300,000.00
received from Excelsior Resources, Ltd.; (d) its non- disclosure of contracts entered into with
other mining companies with respect to the mining claims; (e) its being a mere
promoter/broker of PMCs mining claims instead of being the operator thereof; and (f) its nonperformance of the necessary works on the mining claims.
GVEI contested PMCs extra-judicial rescission of the OA through a Letter dated December 7,
1999, averring therein that its obligation to pay royalties to PMC arises only when the mining
claims are placed in commercial production which condition has not yet taken place. It also
reminded PMC of its prior payment of the amount of P185,000.00 as future royalties in exchange
for PMCs express waiver of any breach or default on the part of GVEI.
PMC no longer responded to GVEIs letter. Instead, it entered into a Memorandum of
Agreement with CVI, whereby the latter was granted the right to enter, possess, occupy and
control the mining claims and to explore and develop the mining claims, mine or extract the
ores, mill, process and beneficiate and/or dispose the mineral products in any method or
process, among others, for a period of 25 years.
Due to the foregoing, GVEI filed a Complaint for Specific Performance, Annulment of Contract
and Damages against PMC and CVI before the RTC. The RTC rendered a Decision in favor of
GVEI The RTC, thus, declared the rescission of the OA void and the execution of the MOA
between PMC and CVI without force and effect. In this relation, it ordered PMC to comply with
the terms and conditions of the OA until the expiration of its period. PMC elevated the case on
appeal to the CA. The CA reversed the RTC ruling, finding that while the OA gives PMC the
right to rescind only on the ground of (GVEIs) failure to pay the stipulated royalties, Article
1191 of the Civil Code allows PMC the right to rescind the agreement based on a breach of any
of its provisions. The CA upheld the validity of PMCs rescission of the OA and its subsequent
execution of the MOA with CVI. GVEI filed a motion for reconsideration which was, however,
denied by the CA hence, this petition.
ISSUE:
Whether or not there was a valid rescission of the OA.

HELD:
In reciprocal obligations, either party may rescind the contract upon the others substantial
breach of the obligation/s he had assumed thereunder and the basis therefor is Article 1191 of the
Civil Code.

More accurately referred to as resolution, the right of rescission under Article 1191 is predicated
on a breach of faith that violates the reciprocity between parties to the contract. This retaliatory
remedy is given to the contracting party who suffers the injurious breach on the premise that it is
unjust that a party be held bound to fulfill his promises when the other violates his.
As a general rule, the power to rescind an obligation must be invoked judicially and cannot be
exercised solely on a partys own judgment that the other has committed a breach of the
obligation. This is so because rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental violations as would defeat the very object
of the parties in making the agreement. As a well-established exception, however, an injured
party need not resort to court action in order to rescind a contract when the contract itself
provides that it may be revoked or cancelled upon violation of its terms and conditions.
With this in mind, the Court therefore affirms the correctness of the CAs Decision upholding
PMCs unilateral rescission of the OA due to GVEIs non-payment of royalties considering the
parties express stipulation in the OA that said agreement may be cancelled on such ground.
By expressly stipulating in the OA that GVEIs non-payment of royalties would give PMC
sufficient cause to cancel or rescind the OA, the parties clearly had considered such violation to
be a substantial breach of their agreement. Thus, in view of the above-stated jurisprudence on the
matter, PMCs extra-judicial rescission of the OA based on the said ground was valid.
Where parties agree to a stipulation allowing extra-judicial rescission, no judicial decree is
necessary for rescission to take place; the extra-judicial rescission immediately releases the party
from its obligation under the contract, subject only to court reversal if found improper. On the
other hand, without a stipulation allowing extra-judicial rescission, it is the judicial decree that
rescinds, and not the will of the rescinding party.
Judicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a
contract already deemed rescinded by virtue of an agreement providing for rescission even
without judicial intervention, but in order to determine whether or not the rescission was proper.
This notwithstanding, jurisprudence still indicates that an extra-judicial rescission based on
grounds not specified in the contract would not preclude a party to treat the same as rescinded.
The rescinding party, however, by such course of action, subjects himself to the risk of being
held liable for damages when the extra-judicial rescission is questioned by the opposing party in
court.
In other words, the party who deems the contract violated may consider it resolved or rescinded,
and act accordingly, without previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law.

4. UNION BANK OF THE PHILIPPINES V. DEVELOPMENT BANK OF THE


PHILIPPINES, G.R. NO. 191555, JANUARY 20, 2014.
FACTS:
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Banks predecessor-ininterest, Bancom Development Corporation (Bancom), and to DBP. FI and DBP, among others,
entered into a Deed of Cession of Property In Payment of Debt (dacion en pago) whereby the
former ceded in favor of the latter certain properties (including a processing plant in Marilao,
Bulacan [processing plant]) in consideration of the following: (a) the full and complete
satisfaction of FIs loan obligations to DBP; and (b) the direct assumption by DBP of FIs
obligations to Bancom in the amount of P17,000,000.00 (assumed obligations).
On the same day, DBP, as the new owner of the processing plant, leased back for 20 years the
said property to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be
shared by DBP and Bancom.
DBP also entered into a separate agreement with Bancom (Assumption Agreement) whereby the
former: (a) confirmed its assumption of FIs obligations to Bancom; and (b) undertook to remit
up to 30% of any and all rentals due from FI to Bancom (subject rentals) which would serve as
payment of the assumed obligations, to be paid in monthly instalments
Meanwhile, FI assigned its leasehold rights under the Lease Agreement to Foodmasters
Worldwide, Inc. (FW); while, Bancom conveyed all its receivables, including, among others,
DBPs assumed obligations, to Union Bank. Claiming that the subject rentals have not been duly
remitted despite its repeated demands, Union Bank filed, a collection case against DBP before
the RTC. The RTC ruled in favor of Union Bank, ruling that there lies no evidence which would
show that DBPs receipt of the rental payments from FW is a condition precedent to the formers
obligation to remit the subject rentals under the Lease Agreement. Thus, when DBP failed to
remit the subject rentals to Union Bank, it defaulted on its assumed obligations. On appeal, the
CA set aside the RTC ruling. At odds with the CAs ruling, Union Bank and DBP filed separate
petitions for review on certiorari before the Court.
The Court denied both petitions in a Resolution. First, it upheld the CAs finding that while DBP
directly assumed FIs obligations to Union Bank, DBP was only obliged to remit to the latter
30% of the lease rentals collected from FW, from which any deficiency was to be settled by DBP
not later than December 29, 1998. Similarly, the Court agreed with the CA that the denial of
DBPs motion to dismiss was proper since substitution of parties, in case of transfers pendente
lite, is merely discretionary on the part of the court, adding further that the proposed substitution
of APT will amount to a novation of debtor which cannot be done without the consent of the
creditor. This decision became final and executory.
Union Bank filed a motion for execution before the RTC, praying that DBP be directed to pay
the amount of P9,732,420.555 which represents the amount of the subject rentals. DBP opposed
Union Banks motion, contending that it sought to effectively vary the dispositive portion of the
CAs decision. Also, DBP filed its own motion for execution against FW, citing the same CA
decision as its basis.
In a Consolidated Order of Execution, the RTC granted both motions for execution. As a result, a
writ of execution and, thereafter, a notice of garnishment against DBP were issued. Records,
however, do not show that the same writ was implemented against FW.
In a Decision, the Court granted DBPs appeal, and thereby reversed and set aside the CAs
ruling. It found significant points of variance between the CAs Decision, and the RTCs Order
of Execution. It ruled that both the body and the dispositive portion of the same decision
acknowledged that DBPs obligation to Union Bank for remittance of the lease payments is
contingent on FWs prior payment to DBP, and that any deficiency DBP had to pay by

December 29, 1998 as per the Assumption Agreement cannot be determined until after the
satisfaction of FWs own rental obligations to DBP.
The RTC issued an Order denying the motion to Affirm Legal Compensation for lack of merit,
holding that Union Banks stated grounds were already addressed by the Court in its Decision.
With Union Banks motion for reconsideration therefrom having been denied, it filed a petition
for certiorari with the CA which was subsequently denied by CA.
Meanwhile, pending resolution, Union Bank issued Managers Check amounting to
P52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution. DBP, however, averred
that Union Bank still has a balance of P756,372.39 representing a portion of the garnished funds
of DBP, which means that said obligation had not been completely extinguished.
ISSUE:
Whether or not the CA correctly upheld the denial of Union Banks motion to affirm legal
compensation.
HELD:
No. The rule on legal compensation is stated in Article 1290 of the Civil Code which provides
that "when all the requisites mentioned in Article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount, even though the
creditors and debtors are not aware of the compensation."
In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken
place in order to effectively offset (a) its own obligation to return the funds it previously received
from DBP as directed under the September 6, 2005 Writ of Execution with (b) DBPs assumed
obligations under the Assumption Agreement. However, legal compensation could not have
taken place between these debts for the apparent reason that requisites 3 and 4 under Article
1279 of the Civil Code are not present. Since DBPs assumed obligations to Union Bank for
remittance of the lease payments are contingent on the prior payment thereof by [FW] to DBP,"
it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code). Also, in
the same ruling, the Court observed that any deficiency that DBP had to make up for the full
satisfaction of the assumed obligations cannot be determined until after the satisfaction of
Foodmasters obligation to DBP." In this regard, it cannot be concluded that the same debt had
already been liquidated, and thereby became demandable (requisite 4 of Article 1279 of the Civil
Code).
The aforementioned Court decision had already attained finality on April 30, 200455 and, hence,
pursuant to the doctrine of conclusiveness of judgment, the facts and issues actually and directly
resolved therein may not be raised in any future case between the same parties, even if the latter
suit may involve a different cause of action.

5. DEVELOPMENT BANK OF THE PHILIPPINES (DBP) V. GUARIA


AGRICULTURAL AND REALTY DEVELOPMENT CORPORATION, G.R. NO.
160758. JANUARY 15, 2014
FACTS:
Guaria Agricultural and Realty Development Corporation (Guaria Corporation) applied for a
loan from the Development Bank of the Philippines (DBP) to finance the development of its
resort complex situated Iloilo in the amount of P3,387,000.00. The loan was approved hence
Guaria Corporation executed a promissory note due on November 3, 1988. On October 5, 1976,
Guaria Corporation executed a real estate mortgage over several real properties in favor of DBP
as security for the repayment of the loan. On May 17, 1977, Guaria Corporation executed a
chattel mortgage over the personal properties existing at the resort complex and those yet to be
acquired out of the proceeds of the loan, also to secure the performance of the obligation. Prior to
the release of the loan, DBP required Guaria Corporation to put up a cash equity of
P1,470,951.00 for the construction of the buildings and other improvements on the resort
complex.
The loan was released in several installments, and Guaria Corporation used the proceeds to
defray the cost of additional improvements in the resort complex. In all, the total amount
released was P3,003,617.49, from which DBP withheld P148,102.98 as interest.
Guaria Corporation demanded the release of the balance of the loan, but DBP refused. Instead,
DBP directly paid some suppliers of Guaria Corporation over the latter's objection. DBP found
upon inspection of the resort project, its developments and improvements that Guaria
Corporation had not completed the construction works. In a letter dated February 27, 1978, and a
telegram dated June 9, 1978, DBP thus demanded that Guaria Corporation expedite the
completion of the project, and warned that it would initiate foreclosure proceedings should
Guaria Corporation not do so.
Unsatisfied with the non-action and objection of Guaria Corporation, DBP initiated
extrajudicial foreclosure proceedings. A notice of foreclosure sale was sent to Guaria
Corporation and the notice was eventually published.
Thereafter, Guaria Corporation sued DBP in the RTC to demand specific performance of the
latter's obligations under the loan agreement, and to stop the foreclosure of the mortgages.
However, DBP moved for the dismissal of the complaint, stating that the mortgaged properties
had already been sold to satisfy the obligation of Guaria Corporation at a public auction. Due to
this, Guaria Corporation amended the complaint to seek the nullification of the foreclosure
proceedings and the cancellation of the certificate of sale. Trial ensued.
The RTC rendered its judgment resolving that the extra-judicial sales of the mortgaged
properties of the plaintiff are null and void. It also resolved the defendant to give back to the
plaintiff the actual possession and enjoyment of all the properties foreclosed and possessed by it.
To pay the plaintiff the reasonable rental for the use of its beach resort during the period starting
from the time it (defendant) took over its occupation and use up to the time possession is actually
restored to the plaintiff. And, on the part of the plaintiff, to pay the defendant the loan it obtained
as soon as it takes possession and management of the beach resort and resume its business
operation. On appeal DBP challenged the judgment of the RTC, CA sustained the RTC's
judgment. DBP filed a motion for reconsideration, but the CA denied its motion.
ISSUE:
Whether or not Guaria Corporation is already in default?
HELD:
DBP submits that the loan had been granted under its supervised credit financing scheme for the
development of a beach resort, and the releases of the proceeds would be subject to conditions
that included the verification of the progress of works in the project to forestall diversion of the
9

loan proceeds; and that further loan releases would be terminated and the account would be
considered due and demandable in the event of a deviation from the purpose of the loan,
including the failure to put up the required equity and the diversion of the loan proceeds to other
purposes under the mortgage contract. It assails the declaration by the CA that Guaria
Corporation had not yet been in default in its obligations despite violations of the terms of the
mortgage contract securing the promissory note.
These submissions of DBP lack merit and substance. The SC held that the agreement between
DBP and Guaria Corporation was a loan. Under the law, a loan requires the delivery of money
or any other consumable object by one party to another who acquires ownership thereof, on the
condition that the same amount or quality shall be paid. Loan is a reciprocal obligation, as it
arises from the same cause where one party is the creditor, and the other the debtor. The
obligation of one party in a reciprocal obligation is dependent upon the obligation of the other,
and the performance should ideally be simultaneous. This means that in a loan, the creditor
should release the full loan amount and the debtor repays it when it becomes due and
demandable.
Further, the CA found that it was never established that appellee was already in default.
Appellant, in a telegram to the appellee reminded the latter to make good on its construction
works, otherwise, it would foreclose the mortgage it executed. It did not mention that appellee
was already in default. The records show that appellant did not make any demand for payment of
the promissory note. It appears that the basis of the foreclosure was not a default on the loan but
appellee's failure to complete the project in accordance with appellant's standards.
The loan agreement between the parties is a reciprocal obligation. Appellant in the instant case
bound itself to grant appellee the loan conditioned on appellee's payment of the amount when it
falls due. Furthermore, the loan was evidenced by the promissory note which was secured by real
estate mortgage over several properties and additional chattel mortgage. 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. The promise of appellee to pay the loan upon due date as
well as to execute sufficient security for said loan by way of mortgage gave rise to a reciprocal
obligation on the part of appellant to release the entire approved loan amount. Thus, appellees
are entitled to receive the total loan amount as agreed upon and not an incomplete amount. The
appellant did not release the total amount of the approved loan. Appellant therefore could not
have made a demand for payment of the loan since it had yet to fulfill its own obligation.
Moreover, the fact that appellee was not yet in default rendered the foreclosure proceedings
premature and improper.
The properties which stood as security for the loan were foreclosed without any demand having
been made on the principal obligation. For an obligation to become due, there must generally be
a demand. Default generally begins from the moment the creditor demands the performance of
the obligation. Without such demand, judicial or extrajudicial, the effects of default will not
arise.

10

6. METRO CONCAST STEEL CORP., SPOUSES JOSE S. DYCHIAO AND TIU OH


YAN, ET AL. V. ALLIED BANK CORPORATION, G.R. NO. 177921, DECEMBER 4,
2013.
FACTS:
Metro Concast, a corporation duly organized and existing under Philippine laws and engaged in
the business of manufacturing steel, through its officers, herein individual petitioners, on various
dates and different amounts obtained several loans from Allied Bank. These loan transactions
were covered 18 by promissory note and separate letters of credit/trust receipts. The interest rate
under Promissory Note No. 96-21301 was pegged at 15.25% p.a., with penalty charge of 3% per
month in case of default; while the twelve (12) trust receipts uniformly provided for an interest
rate of 14% p.a. and 1% penalty charge. By way of security, the individual petitioners executed
several Continuing Guaranty/Comprehensive Surety Agreements in favor of Allied Bank.
Petitioners failed to settle their obligations under the aforementioned promissory note and trust
receipts, hence, Allied Bank, through counsel, sent them demand letters, all dated December 10,
1998, seeking payment of the total amount of P51,064,093.62, but to no avail. Thus, Allied Bank
was prompted to file a complaint for collection of sum of money (subject complaint) against
petitioners before the RTC, docketed as Civil Case No. 00-1563. In their second Amended
Answer, petitioners admitted their indebtedness to Allied Bank but denied liability for the
interests and penalties charged, claiming to have paid the total sum of P65,073,055.73 by way of
interest charges for the period covering 1992 to 1997.24 They also alleged that the economic
reverses suffered by the Philippine economy in 1998 as well as the devaluation of the peso
against the US dollar contributed greatly to the downfall of the steel industry, directly affecting
the business of Metro Concast and eventually leading to its cessation. Hence, in order to settle
their debts with Allied Bank, petitioners offered the sale of Metro Concasts remaining assets,
consisting of machineries and equipment, to Allied Bank, which the latter, however, refused.
Instead, Allied Bank advised them to sell the equipment and apply the proceeds of the sale to
their outstanding obligations. Accordingly, petitioners offered the equipment for sale, but since
there were no takers, the equipment was reduced into scrap metal over the years.
Peakstar Oil Corporation (Peakstar), represented by one Crisanta Camiling (Camiling), expressed
interest in buying the scrap metal. During the negotiations with Peakstar, petitioners claimed that
Atty. Peter Saw, a member of Allied Banks legal department, acted as the latters agent.
Eventually, with the alleged conformity of Allied Bank, through Atty. Saw, a Memorandum of
Agreement was drawn between Metro Concast, represented by petitioner Jose Dychiao, and
Peakstar, through Camiling, under which Peakstar obligated itself to purchase the scrap metal for
a total consideration of P34,000,000.00. Unfortunately, Peakstar reneged on all its obligations
under the MoA. In this regard, petitioners claimed that: (a) their failure to pay their outstanding
loan obligations to Allied Bank must be considered as force majeure; and (b) since Allied Bank
was the party that accepted the terms and conditions of payment proposed by Peakstar,
petitioners must therefore be deemed to have settled their obligations to Allied Bank. Claiming
that the subject complaint was falsely and maliciously filed, petitioners prayed for the award of
moral damages in favor of Metro Concast and at least P25,000,000.00 for each individual
petitioners, exemplary damages, attorneys fees, and other litigation expenses, including costs of
suit.
RTC dismissed the complaint holding that the causes of action sued upon had been paid or
otherwise extinguished. It ruled that since Allied Bank was duly represented by its agent, Atty.
Saw, in all the negotiations and transactions with Peakstar considering that Atty. Saw (a)
drafted the MOA, (b) accepted the bank guarantee issued by Bankwise, and (c) was apprised of
developments regarding the sale and disposition of the scrap metal then it stands to reason that
the MoA between Metro Concast and Peakstar was binding upon said bank.
CA reversed and set aside the ruling of the RTC.
ISSUE:
Whether or not the loan obligations incurred by the petitioners under the subject promissory note
and various trust receipts have already been extinguished.
11

HELD:
Article 1231 of the Civil Code states that obligations are extinguished either by payment or
performance, the loss of the thing due, the condonation or remission of the debt, the confusion or
merger of the rights of creditor and debtor, compensation or novation.
In the present case, petitioners essentially argue that their loan obligations to Allied Bank had
already been extinguished due to Peakstars failure to perform its own obligations to Metro
Concast pursuant to the MoA. Petitioners classify Peakstars default as a form of force majeure
in the sense that they have, beyond their control, lost the funds they expected to have received
from the Peakstar (due to the MoA) which they would, in turn, use to pay their own loan
obligations to Allied Bank. They further state that Allied Bank was equally bound by Metro
Concasts MoA with Peakstar since its agent, Atty. Saw, actively represented it during the
negotiations and execution of the said agreement.
The Court held petitioners arguments untenable. The MoA is a sale of assets contract, while
petitioners obligations to Allied Bank arose from various loan transactions. Absent any showing
that the terms and conditions of the latter transactions have been, in any way, modified or
novated by the terms and conditions in the MoA, said contracts should be treated separately and
distinctly from each other, such that the existence, performance or breach of one would not
depend on the existence, performance or breach of the other. In the foregoing respect, the issue
on whether or not Allied Bank expressed its conformity to the assets sale transaction between
Metro Concast and Peakstar (as evidenced by the MoA) is actually irrelevant to the issues related
to petitioners loan obligations to the bank.
While it may be argued that Peakstars breach of the MoA was unforeseen by petitioners, the
same is clearly not impossible to foresee or even an event which is independent of human
will. Neither has it been shown that said occurrence rendered it impossible for petitioners to pay
their loan obligations to Allied Bank and thus, negates the formers force majeure theory
altogether. In any case, as earlier stated, the performance or breach of the MoA bears no relation
to the performance or breach of the subject loan transactions, they being separate and distinct
sources of obligation. The fact of the matter is that petitioners loan obligations to Allied Bank
remain subsisting for the basic reason that the former has not been able to prove that the same
had already been paid or, in any way, extinguished. In this regard, petitioners liability, as
adjudged by the CA, must perforce stand. Considering, however, that Allied Banks extrajudicial demand on petitioners appears to have been made only on December 10, 1998, the
computation of the applicable interests and penalty charges should be reckoned only from such
date.
Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is
therefore, not enough that the event should not have been foreseen or anticipated, as is
commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same.
To constitute a fortuitous event, the following elements must concur: (a) the cause of the
unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations
must be independent of human will; (b) it must be impossible to foresee the event that constitutes
the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must
be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and, (d)
the obligor must be free from any participation in the aggravation of the injury or loss.

12

7. CONSOLIDATED INDUSTRIAL GASES INC (CIGI). VS. ALABANG MEDICAL


CENTER (AMC), GR NO. 181983; 13 NOVEMBER 2013
FACTS:
CIGI and AMC entered into an agreement for the continuation of the centralized medical oxygen
and vacuum pipeline system in the hospitals fourth & fifth floors (Phase 2 installation project) at
the cost of Two Million Two Hundred Sixty-Seven Thousand Three Hundred Forty-Four Pesos
and 42/100 (P2,267,344.42). This contract followed the same terms and conditions of the
contract for the Phase 1 installation project. CIGI forthwith commenced installation works for
Phase 2 while AMC paid the partial amount of One Million Pesos (P1,000,000.00) with the
agreement that the balance shall be paid through progress billing and within fifteen (15) days
from the date of receipt of the original invoice sent by CIGI.
CIGI sent AMC Charge Sales Invoice as completion billing for the unpaid balance of
P1,267,344.42 for the Phase 2 installation project. When the sales invoice was left unheeded,
CIGI sent a demand letter to AMC. AMC, however, still failed to pay thus prompting CIGI to
file a collection suit before the RTC on September 15, 1998.
Petitioners argued that the debt of AMC was already due and demandable pursuant to their
contract stating that the project shall be paid through progress billing within fifteen (15) days
from the date of receipt of original invoice. On the other hand, AMC averred that s obligation to
pay the balance of the contract price has not yet accrued because CIGI still has not turned over a
complete and functional medical oxygen and vacuum pipeline system.
The RTC ruled in favor of CIGI wherein it adjudged AMC to have breached the contract for
failure to perform its obligation of paying the remaining balance of the contract price. Upon
appeal to the CA, the court reversed the decision of the RTC were it ruled that it was CIGI who
breached the contract when it failed to complete the project and to turn over a fully functional
centralized medical oxygen and vacuum pipeline system. AMC moved for reconsideration which
was partially granted, and amended its earlier decision where, among others, CIGI was ordered
to pay AMC the sum of P50,000.00 by way of attorneys fees plus costs. Hence, this petition.
ISSUE:
Whether or not CIGIs demand for payment upon AMC is proper.
HELD:
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, so that the performance of one
is conditioned upon the simultaneous fulfillment of the other." 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 fulfils his obligation,
delay by the other begins.
Under the subject contracts, CIGI as contractor bound itself to install a centralized medical
oxygen and vacuum pipeline system for the first to fifth floors of AMC, which in turn, undertook
to pay the contract price therefor in the manner prescribed in the contract. Being reciprocal in
nature, the respective obligations of AMC and CIGI are dependent upon the performance of the
other of its end of the deal such that any claim of delay or non-performance can only prosper if
the complaining party has faithfully complied with its own obligation.
The Court finds that CIGI did not faithfully complete its prestations and hence, its demand for
payment cannot prosper based on the following grounds: (a) under the two installation contracts,
CIGI was bound to perform more prestations than merely supplying labor and materials; and (b)
CIGI failed to prove by substantial evidence that it requested AMC for electrical facilities as
such, its failure to conduct a test run and orientation/seminar is unjustified.

13

In reciprocal obligations, before a party can demand the performance of the obligation of the
other, the former must also perform its own obligation. For its failure to turn over a complete
project in accordance with the terms and conditions of the installation contracts, CIGI cannot
demand for the payment of the contract price balance from AMC, which, in turn, cannot legally
be ordered to pay. Otherwise, AMC will be effectively forced to accept an incomplete
performance contrary to Article 1248 of the Civil Code which states that "unless there is an
express stipulation to that effect, the creditor cannot be compelled partially to receive the
prestations in which the obligation consists."

14

8. EDS MANUFACTURING, INC. VS. HEALTHCHECK INTERNATIONAL, INC., GR


NO. 162802; 9 OCTOBER 2013
FACTS:
EDS Manufacturing, Inc. (EMI) and Healthcheck International, Inc (HCI) entered into a oneyear contract in which HCI was to provide the 4,191 employees of EMI and their 4,592
dependents as host of medical services and benefits. Putting the Agreement into effect, EMI paid
the full premium for the coverage in the staggering amount of P8,826,307.50.
Until the difficulties between HCI and its client came to a head, EMI formally notified HCI that
it was rescinding their Agreement on account of HCIs serious and repeated breach of its
undertaking including but not limited to the unjustified non-availability of services. It demanded
a return of premium for the unused period, giving a ballpark figure of P6 million.
What went in the way of the rescission of the contract, was the failure of EMI to collect all the
HMO cards of the employees and surrender them to HCI as stipulated in the Agreement. HCI
had to tell EMI that its employees were still utilizing the cards even beyond the pre-termination
date set by EMI. It asked for the surrender of the cards so that it could process the pretermination of the contract and finalize the reconciliation of accounts.
Without responding to this reminder, EMI sent HCI two letters demanding for the payment of
P5,884,205 as the 2/3 portion of the premium that remained unutilized after the Agreement was
rescinded in the previous September.
HCI pre-empted EMIs threat of legal action by instituting the present case before the Regional
Trial Court of Pasig. The cause of action it presented was the unlawful pre-termination of the
contract and failure of EMI to submit to a joint reconciliation of accounts and deliver such assets
as properly belonged to HCI. EMI responded with an answer alleging that HCI reneged on its
duty to provide adequate medical coverage after EMI paid the premium in full. Having rescinded
the contract, it claimed that it was entitled to the unutilized portion of the premium, and that the
accounting required by HCI could not be undertaken until it submitted the monthly utilization
reports mentioned in the Agreement.
The RTC ruled in favor of HCI as it found that EMIs rescission of the Agreement was not done
through court action or by a notarial act and was based on casual or slight breaches of the
contract.
Upon appeal, the CA reversed the decision of the RTC and ruled that HCI substantially breached
the contract, it also appears that Eds Manufacturing, Inc. (EMI) did not validly rescind the
contract between them. Thus, the CA dismissed the complaint filed by HCI, while at the same
time dismissing the counterclaim filed by EMI. Hence, this present petition.
ISSUE:
Whether or not there was a valid rescission under Article 1191 of the Civil Code.
HELD:
The general rule is that rescission (more appropriately, resolution) of a contract will not be
permitted for a slight or casual breach, but only for such substantial and fundamental violations
as would defeat the very object of the parties in making the agreement.
In the present case, it is apparent that HCI violated its contract with EMI to provide medical
service to its employees in a substantial way. As aptly found by the CA, the various reports made
by the EMI employees from July to August 1998 are living testaments to the gross denial of
services to them at a time when the delivery was crucial to their health and lives.
However, although a ground exists to validly rescind the contract between the parties, it appears
that EMI failed to judicially rescind the same. In Iringan v. Court of Appeals, this Court
15

reiterated the rule that in the absence of a stipulation, a party cannot unilaterally and
extrajudicially rescind a contract. A judicial or notarial act is necessary before a valid rescission
(or resolution) can take place.
Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or
not automatic rescission has been stipulated. It is to be noted that the law uses the phrase "even
though" emphasizing that when no stipulation is found on automatic rescission, the judicial or
notarial requirement still applies.
The party entitled to rescind should apply to the court for a decree of rescission. The right cannot
be exercised solely on a partys own judgment that the other committed a breach of the
obligation. The operative act which produces the resolution of the contract is the decree of the
court and not the mere act of the vendor. Since a judicial or notarial act is required by law for a
valid rescission to take place, the letter written by respondent declaring his intention to rescind
did not operate to validly rescind the contract.

16

9. PHILIPPINE RECLAMATION AUTHORITY VS. ROMAGO, INC., GR NOS. 174665


& 175221; 18 SEPTEMBER 2013
FACTS:
The BCDA entered into a Memorandum of Agreement (MOA) with the Philippine Reclamation
Authority (PRA), formerly the Public Estates Authority, designating it as the Project Manager.
The BCDA, PRA, and the Philippine National Bank (PNB) executed a Pool Formation Trust
Agreement (PFTA) under which BCDA, as project owner, was to issue Heritage Park Investment
Certificates that would evidence the holders right to the perpetual use and care of specific
interment plots. The PFTA designated PRA as Project Manager, tasked with the physical
development of the park. The PNB was to act as trustee for the Heritage Park securitization.
After public bidding, the PRA awarded the outdoor electrical and lighting works for the park to
respondent Romago, Inc. (Romago) with which it entered into a Construction Agreement for the
contract price of P176,326,794.10.8 On receipt of the PRAs notice to proceed, Romago
immediately began construction works. Meanwhile, the parties to the PFTA established HPMC
to take over the management of the project. Subsequently, the PRA informed Romago of its
termination of its services.
Because the HPMC refused to recognize the PRAs contract with Romago, it filed with the
Construction Industry Arbitration Commission (CIAC) a complaint, seeking to collect its claims
totaling P24,467,621.64, plus interest from the PRA, HPMC, and Rosehills Memorial
Management (Phils.), Inc. (RMMI).
The CIAC held that the PRA and HPMC are jointly and severally liable to Romago for the total
amount of 16,211,421.51.
Upon appeal, the CA ruled that the unpaid accomplishment of Romago should be reduced from
P22,191,249.33 to P18,641,208.89, and that interests on the damages awarded to Romago arising
from the reduction in project area and on its unpaid accomplishment should be deleted, therefore
entitling it to actual damages in the amount of P8,935,673.8635 plus interest and the costs of
arbitration. In arriving at the decision, the CA rejected the PRAs argument that it can no longer
be held liable to Romago after turning over and assigning the project, including all its duties and
obligations relating to it, to the HPMC. Romago was not a party to the PFTA and it did not give
consent to the PRAs supposed assignment of its obligations to the HPMC. Hence, this petition.
ISSUE:
Whether or not the PRAs obligation to Romago has been extinguished by novation.
HELD:
In novation, a subsequent obligation extinguishes a previous one through substitution either by
changing the object or principal conditions, by substituting another in place of the debtor, or by
subrogating a third person into the rights of the creditor. Novation requires (a) the existence of a
previous valid obligation; (b) the agreement of all parties to the new contract; (c) the
extinguishment of the old contract; and (d) the validity of the new one.
There cannot be novation in this case since the proposed substituted parties did not agree to the
PRAs supposed assignment of its obligations under the contract for the electrical and light
works at Heritage Park to the HPMC. The latter definitely and clearly rejected the PRAs
assignment of its liability under that contract to the HPMC. Romago tried to follow up its claims
with the HPMC, not because of any new contract it entered into with the latter, but simply
because the PRA told it that the HPMC would henceforth assume the PRAs liability under its
contract with Romago.

17

10. SC MEGAWORLD CONSTRUCTION AND DEVELOPMENT CORPORATION VS.


ENGR. LUIS PARADA, GR NO. 183804; 11 SEPTEMBER 2013

FACTS:
S.C. Megaworld Construction and Development Corporation (petitioner) bought electrical
lighting materials from Genlite Industries, a sole proprietorship owned by Engineer Luis U.
Parada (respondent), for its Read-Rite project in Canlubang, Laguna. The petitioner was unable
to pay for the above purchase on due date, but blamed it on its failure to collect under its subcontract with the Enviro Kleen Technologies, Inc. (Enviro Kleen). It was however able to
persuade Enviro Kleen to agree to settle its above purchase, but after paying the respondent
P250,000.00, Enviro Kleen stopped making further payments, leaving an outstanding balance of
P816,627.00. It also ignored the various demands of the respondent, who then filed a suit in the
RTC.
The RTC rendered judgment in favor of the Respondent. Upon appeal to the CA, the Court
affirmed the decision of the RTC that by retaining his option to seek satisfaction from the
petitioner, any acquiescence which the respondent had made was limited to merely accepting
Enviro Kleen as an additional debtor from whom he could demand payment, but without
releasing the petitioner as the principal debtor from its debt to him.
ISSUE:
Whether or not novation has took place.
HELD:
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third person
to the rights of the creditor. It is the substitution of a new contract, debt, or obligation for an
existing one between the same or different parties. Article 1293 of the Civil Code defines
novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place
of the original one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him rights mentioned in Articles 1236 and 1237.
Thus, in order to change the person of the debtor, the former debtor must be expressly released
from the obligation, and the third person or new debtor must assume the formers place in the
contractual relation. Article 1293 speaks of substitution of the debtor, which may either be in the
form of expromision or delegacion, as seems to be the case here. In both cases, the old debtor
must be released from the obligation, otherwise, there is no valid novation.
From the circumstances obtaining, we can infer no clear and unequivocal consent by the
respondent to the release of the petitioner from the obligation to pay the cost of the lighting
materials. In fact, from the letters of the respondent to Enviro Kleen, it can be said that he
retained his option to go after the petitioner if Enviro Kleen failed to settle the petitioners debt.
The settled rule is that novation is never presumed, but must be clearly and unequivocally
shown. In order for a new agreement to supersede the old one, the parties to a contract must
expressly agree that they are abrogating their old contract in favor of a new one. Thus, the mere
substitution of debtors will not result in novation, and the fact that the creditor accepts payments
from a third person, who has assumed the obligation, will result merely in the addition of debtors
and not novation, and the creditor may enforce the obligation against both debtors. If there is no
agreement as to solidarity, the first and new debtors are considered obligated jointly.
18

11. ADELAIDA SORIANO VS. PEOPLE OF THE PHILIPPINES, GR NO. 181692; 14


AUGUST 2013
FACTS:
Soriano was charged and convicted of the crime of estafa as follows:
Evelyn Alagao (Evelyn), daughter of private complainant Consolacion Alagao (Alagao), as
borrower-mortgagor, executed a Contract of Loan Secured by Real Estate Mortgage with
Special Power to Sell Mortgage Property without Judicial Proceedings in favor of petitioner as
lender-mortgagee. The instrument provides for a P40,000 loan secured by a parcel of land
covered by Original Certificate of Title No. P-6254, located in OId. Nongnongan, Don Carlos,
Bukidnon, registered in Evelyns name. It likewise provides that the loan was to be paid two
years from the date of execution of the contract, or on February 18, 1996, and that Evelyn agrees
to give petitioner of every harvest from her corn land until the full amount of the loan has been
paid, starting from the first harvest. Based on Alagaos testimony, the first harvest was made
only in September 1994. Petitioner on the other hand claims that from the time the loan was
obtained until September 1994, there were already four harvests. During pre-trial, it was
admitted by Alagao that she did not only receive P40,000 as provided in the contract of loan but
P51,730 in the form of fertilizers and cash advances.
Alagao and some companions delivered 398 sacks of corn grains to petitioner. Petitioner
prepared a voucher indicating that Alagao had received the amount of P85,607 as full payment
for the 398 sacks of corn grains. Alagao signed said voucher even if she only received P3,000.10
According to Alagao, 64 of the 398 sacks will serve as partial payment of her P40,000 loan with
petitioner while the remaining balance will come from the P85,607 cash she was supposed to
receive as payment for the corn grains delivered so she can redeem her daughters land title
The RTC found her guilty beyond reasonable doubt for the crime of estafa and was ordered,
among others, to pay the offended party in this case the amount of P85,607.00 representing the
value of the 398 sacks of corn grains.
She was acquitted upon appeal to the CA. As regards the civil liability, she was ordered to pay
private complainant CONSOLACION R. ALAGAO the sum of seventy-four thousand, eight
hundred seven pesos (P74,807.00) as payment for the remaining balance of the cash value of the
398 sacks of corn grains, plus, legal interest at the rate of 12% per annum until fully paid.
In determining petitioners civil liability, the CA deducted from P85,607 the total value of the
398 sacks of corn grains delivered to petitioner the P3,000 petitioner had paid Alagao and the
P7,800 which the CA considered as the value of the 64 sacks of corn grains which Alagao
intended as partial payment for the P40,000 loan, thus leaving the balance of P74,807.
Petitioner now questions the propriety of her civil liability.
ISSUE:
Whether or not the CA was correct in applying the principle of Set off or Compensation in
arriving at her civil liability.
HELD:
Compensation is a mode of extinguishing to the concurrent amount, the debts of persons who in
their own right are creditors and debtors of each other. The object of compensation is the
prevention of unnecessary suits and payments through the mutual extinction by operation of law
of concurring debts. Article 1279 of the Civil Code provides for the requisites for compensation
to take effect:
ART. 1279. In order that compensation may be proper, it is necessary:

19

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
This Court rules that all the above requisites for compensation are present in the instant case.
First, petitioner and Alagao are debtors and creditors of each other. It is undisputable that
petitioner and Alagao owe each other sums of money. Petitioner owes P85,607 for the value of
the corn grains delivered to her by Alagao while Alagao owes petitioner P51,730 by virtue of a
loan extended by the latter.
Second, both debts consist in a sum of money. There is no issue as to the P85,607 debt by
petitioner that it consists a sum of money. As to the P51,730 received by Alagao from petitioner,
though what was extended by petitioner consists of cash advances and fertilizers, there is no
dispute that said amount is payable in money.
Third, both debts are due. Upon delivery of the 398 sacks to petitioner, she was under the
obligation to pay for the value thereof as buyer. As to Alagaos debt, the contract of loan
provided that it is payable in February 1996. Though it was not yet due when she delivered the
398 sacks of corn grains to petitioner, it eventually became due at the time of trial of the instant
case.
Fourth, both debts are liquidated and demandable. A debt is liquidated when the amount is
known or is determinable by inspection of the terms and conditions of relevant documents.19
There is no dispute that the value of the 398 sacks of corn grains is P85,607. As to Alagaos debt,
we disagree with respondent People that the loan amount is only P40,000 since during pre-trial,
Alagao herself admitted that she did not only receive P40,000 but P51,730 in the form of cash
advances and fertilizers from petitioner.
With the presence of all the requisites mentioned in Article 1279, legal compensation took effect
by operation of law as provided in Article 1290 of the Civil Code.

20

12. SPOUSES CACAYORIN VS. ARMED FORCES AND POLICE MUTUAL BENEFIT
ASSOCIATION, INC., GR NO. 171298; 15 APRIL 2013
FACTS:
Oscar and his wife, on one hand, and the Rural Bank of San Teodoro (the Rural Bank) on the
other, executed a Loan and Mortgage Agreement with the former as borrowers and the Rural
Bank as lender, under the auspices of Pag-IBIG or Home Development Mutual Funds Home
Financing Program.
The Rural Bank issued a letter of guaranty informing AFPMBAI that the proceeds of petitioners
approved loan in the amount of P77,418.00 shall be released to AFPMBAI after title to the
property is transferred in petitioners name and after the registration and annotation of the
parties mortgage agreement.
On the basis of the Rural Banks letter of guaranty, AFPMBAI executed in petitioners favor a
Deed of Absolute Sale, and a new title was issued in their name, with the corresponding
annotation of their mortgage agreement with the Rural Bank.
Unfortunately, the Pag-IBIG loan facility did not push through and the Rural Bank closed and
was placed under receivership by the Philippine Deposit Insurance Corporation (PDIC).
Meanwhile, AFPMBAI somehow was able to take possession of petitioners loan documents and
TCT, while petitioners were unable to pay the loan/consideration for the property.
Petitioners filed a Complaint for consignation of loan payment, recovery of title and cancellation
of mortgage annotation against AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa
City. They alleged in their Complaint that as a result of the Rural Banks closure and PDICs
claim that their loan papers could not be located, they were left in a quandary as to where they
should tender full payment of the loan and how to secure cancellation of the mortgage annotation
on TCT; AFPMBAI, on the other hand, filed a Motion to Dismiss the Complaint for lack of
jurisdiction as it should be the HLURB, not the RTC which has jurisdiction over the case.
The RTC denied the Motion to Dismiss, as well as its Motion for Reconsideration. Upon appeal,
the CA reversed the order of the RTC judge, as the case should have been filed at the HLURB
which has the jurisdiction over the case. Hence, this petition.
ISSUE:
Whether or not there was a valid consignation.
HELD:
Under Article 1256 of the Civil Code, the debtor shall be released from responsibility by the
consignation of the thing or sum due, without need of prior tender of payment, when the creditor
is absent or unknown, or when he is incapacitated to receive the payment at the time it is due, or
when two or more persons claim the same right to collect, or when the title to the obligation has
been lost. Applying Article 1256 to the petitioners case as shaped by the allegations in their
Complaint, the Court finds that a case for consignation has been made out, as it now appears that
there are two entities which petitioners must deal with in order to fully secure their title to the
property: 1) the Rural Bank (through PDIC), which is the apparent creditor under the July 4,
1994 Loan and Mortgage Agreement; and 2) AFPMBAI, which is currently in possession of the
loan documents and the certificate of title, and the one making demands upon petitioners to pay.
Clearly, the allegations in the Complaint present a situation where the creditor is unknown, or
that two or more entities appear to possess the same right to collect from petitioners. Whatever
transpired between the Rural Bank or PDIC and AFPMBAI in respect of petitioners loan
account, if any, such that AFPMBAI came into possession of the loan documents and TCT No.
37017, it appears that petitioners were not informed thereof, nor made privy thereto.
On the question of jurisdiction, petitioners case should be tried in the Puerto Princesa RTC, and
not the HLURB. Consignation is necessarily judicial, as the Civil Code itself provides that
21

consignation shall be made by depositing the thing or things due at the disposal of judicial
authority.
The consignation having been made, the interested parties shall also be notified thereof.
The above provision clearly precludes consignation in venues other than the courts. Elsewhere,
what may be made is a valid tender of payment, but not consignation. The two, however, are to
be distinguished.
Tender of payment must be distinguished from consignation. Tender is the antecedent of
consignation, that is, an act preparatory to the consignation, which is the principal, and from
which are derived the immediate consequences which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the
priority of the first is the attempt to make a private settlement before proceeding to the
solemnities of consignation.

22

13. MAGLASANG VS. NORTHWESTERN UNIVERSITY, GR NO. 188986; 20 MARCH


2013
FACTS:
Respondent Northwestern University (Northwestern), an educational institution offering
maritime-related courses, engaged the services of a Quezon City-based firm, petitioner GL
Enterprises, to install a new IBS in Laoag City.). For this purpose, the parties executed two
contracts. Common to both contracts are the following provisions: (1) the IBS and its
components must be compliant with the IMO and CHED standard and with manuals for
simulators/major equipment; (2) the contracts may be terminated if one party commits a
substantial breach of its undertaking; and (3) any dispute under the agreement shall first be
settled mutually between the parties, and if settlement is not obtained, resort shall be sought in
the courts of law.
Two months after the execution of the contracts, GL Enterprises technicians delivered various
materials to the project site. However, when they started installing the components, respondent
halted the operations. GL Enterprises then asked for an explanation. For its part, Northwestern
justified the work stoppage upon its finding that the delivered equipment was substandard.
Instead of heeding this suggestion, GL Enterprises filed a Complaint for breach of contract and
prayed for the following sums: P1.97 million, representing the amount that it would have earned,
had Northwestern not stopped it from performing its tasks under the two contracts. Petitioner
alleged that Northwestern breached the contracts by ordering the work stoppage and thus
preventing the installation of the materials for the IBS. In its defense, Northwestern asserted that
since the equipment delivered were not in accordance with the specifications provided by the
contracts, all succeeding works would be futile and would entail unnecessary expenses. Hence, it
prayed , among others, for the rescission of the contracts.
The RTC held that both parties are at fault, and thus, it ordered mutual restitution, which would
thereby restore the parties to their original positions. Upon appeal to the CA, the court applied
Article 1191 of the Civil Code, and declared the rescission of the contracts. It then proceeded to
affirm the RTCs order of mutual restitution. Hence, this appeal.
ISSUE:
Whether or not there was a substantial breach of contract that would give rise to the propriety of
rescission.
HELD:
The power to rescind the obligations of the injured party is implied in reciprocal obligations,
such as in this case. On this score, the CA correctly applied Article 1191. 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.
Given that petitioner, without justification, supplied substandard components for the new IBS, it
is thus clear that its violation was not merely incidental, but directly related to the essence of the
agreement pertaining to the installation of an IBS compliant with the CHED and IMO standards.
In contrast, Northwesterns breach, if any, was characterized by the appellate court as slight or
casual. By way of negative definition, a breach is considered casual if it does not fundamentally
defeat the object of the parties in entering into an agreement. Furthermore, for there to be a
breach to begin with, there must be a "failure, without legal excuse, to perform any promise
which forms the whole or part of the contract.

23

14. MONDRAGON PERSONAL SALES INC. VS. VICTORIANO SOLA, GR 174882; 21


JANUARY 2013
FACTS:
Mondragon Personal Sales Inc., a company engaged in the business of selling various consumer
products through a network of sales representatives, entered into a Contract of Services with
respondent Victoriano S. Sola, Jr. for a period of three years commencing. Under the said
contract, respondent, as service contractor, would provide service facilities, i.e., bodega cum
office, to petitioner's products, sales force and customers in General Santos City and as such, he
was entitled to commission or service fee.
Prior to the execution of the contract, however, respondents wife, Lina Sola, had an existing
obligation with petitioner arising from her Franchise Distributorship Agreement with the latter.
Respondent wrote a letter addressed to Renato G. de Leon, petitioner's Vice-President for
Finance, wherein he acknowledged and confirmed his wifes indebtedness to petitioner in the
amount of P1,973,154.73 (the other accountability in the sum of P1,490,091.15 was still subject
to reconciliation) and, together with his wife, bound himself to pay on installment basis the said
debt. Consequently, petitioner withheld the payment of respondent's service fees and applied the
same as partial payments to the debt which he obligated to pay. Respondent closed and
suspended operation of his office cum bodega where petitioner's products were stored and
customers were being dealt with.
ISSUE:
Whether or not legal compensation took place.
HELD:
We find that petitioner's act of withholding respondent's service fees/commissions and applying
them to the latter's outstanding obligation with the former is merely an acknowledgment of the
legal compensation that occurred by operation of law between the parties. Compensation is a
mode of extinguishing to the concurrent amount the obligations of persons who in their own
right and as principals are reciprocally debtors and creditors of each other. Legal compensation
takes place by operation of law when all the requisites are present, as opposed to conventional
compensation which takes place when the parties agree to compensate their mutual obligations
even in the absence of some requisites. Legal compensation requires the concurrence of the
following conditions:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
We find the presence of all the requisites for legal compensation. Petitioner and respondent are
both principal obligors and creditors of each other. Their debts to each other consist in a sum of
money. Respondent acknowledged and bound himself to pay petitioner the amount of
P1,973,154.73 which was already due, while the service fees owing to respondent by petitioner
become due every month. Respondent's debt is liquidated and demandable, and petitioner's
payments of service fees are liquidated and demandable every month as they fall due. Finally,
there is no retention or controversy commenced by third persons over either of the debts. Thus,
compensation is proper up to the concurrent amount where petitioner owes respondent
P125,040.01 for service fees, while respondent owes petitioner P1,973,154.73.

24

15. METROPOLITAN BANK & TRUST COMPANY VS. ABSOLUTE MANAGEMENT


CORPORATION, GR 170498; 9 JANUARY 2013

FACTS:
Sherwood Holdings Corporation, Inc. (SHCI) filed a complaint for sum of money against
Absolute Management Corporation (AMC). SHCI alleged in its complaint that it made advance
payments to AMC for the purchase of 27,000 pieces of plywood and 16,500 ply boards in the
sum of P12,277,500.00, covered by Metrobank Check Nos. 1407668502, 140768507,
140768530, 140768531, 140768532, 140768533 and 140768534. These checks were all crossed,
and were all made payable to AMC. They were given to Chua, AMCs General Manager.
Metrobank filed a motion for bill of particulars, seeking to clarify certain ambiguous statements
in AMCs answer. The RTC granted the motion but AMC failed to submit the required bill of
particulars. Hence, Metrobank filed a motion to strike out the third-party complaint
As regards the third party complaint, the RTC categorized Metrobanks allegation in the fourthparty complaint as a "cobro de lo indebido" a kind of quasi-contract that mandates recovery of
what has been improperly paid. Quasi-contracts fall within the concept of implied contracts that
must be included in the claims required to be filed with the judicial settlement of the deceaseds
estate under Section 5, Rule 86 of the Rules of Court. As such claim, it should have been filed in
Special Proceedings No. 99-0023, not before the RTC as a fourth-party complaint. The RTC,
acting in the exercise of its general jurisdiction, does not have the authority to adjudicate the
fourth-party complaint. As a trial court hearing an ordinary action, it cannot resolve matters
pertaining to special proceedings because the latter is subject to specific rule. Metrobank
appealed this decision to the CA, which affirmed the findings of the RTC. Hence this present
petition.

ISSUE:
Whether or not Metrobanks claim against the Estate of Jose Chua based on a quasi-contract.

HELD:
Both the RTC and the CA described Metrobanks claim against Chuas estate as one based on
quasi-contract. A quasi-contract involves a juridical relation that the law creates on the basis of
certain voluntary, unilateral and lawful acts of a person, to avoid unjust enrichment. The Civil
Code provides an enumeration of quasi-contracts, but the list is not exhaustive and merely
provides examples.
According to the CA, Metrobanks fourth-party complaint falls under the quasi-contracts
enunciated in Article 2154 of the Civil Code. Article 2154 embodies the concept "solutio
indebiti" which arises when something is delivered through mistake to a person who has no right
to demand it. It obligates the latter to return what has been received through mistake.
Solutio indebiti, as defined in Article 2154 of the Civil Code, has two indispensable requisites:
first, that something has been unduly delivered through mistake; and second, that something was
received when there was no right to demand it.
In its fourth-party complaint, Metrobank claims that Chuas estate should reimburse it if it
becomes liable on the checks that it deposited to Ayala Lumber and Hardwares account upon
Chuas instructions.
This fulfills the requisites of solutio indebiti. First, Metrobank acted in a manner akin to a
mistake when it deposited the AMC checks to Ayala Lumber and Hardwares account; because
of Chuas control over AMCs operations, Metrobank assumed that the checks payable to AMC
25

could be deposited to Ayala Lumber and Hardwares account. Second, Ayala Lumber and
Hardware had no right to demand and receive the checks that were deposited to its account;
despite Chuas control over AMC and Ayala Lumber and Hardware, the two entities are distinct,
and checks exclusively and expressly payable to one cannot be deposited in the account of the
other. This disjunct created an obligation on the part of Ayala Lumber and Hardware, through its
sole proprietor, Chua, to return the amount of these checks to Metrobank.

26

II. CONTRACTS:
1. ECE REALTY AND DEVELOPMENT, INC., VS. RACHEL MANDAP, G.R. NO.
196182, SEPTEMBER 1, 2014
FACTS:
Petitioner is a corporation engaged in the building and development of condominium units. In
1995, it started the construction of a condominium project called Central Park Condominium
Building located in Pasay City. However, printed advertisements were made indicating therein
that the said project was to be built in Makati City. In December 1995, respondent, agreed to buy
a unit from the above project by paying a reservation fee and, thereafter, downpayment and
monthly installments. In June 1996, respondent and the representatives of petitioner executed a
Contract to Sell. In the said Contract, it was indicated that the condominium project is located in
Pasay City.
More than two years after the execution of the Contract to Sell, respondent, through her counsel,
wrote petitioner a letter demanding the return the payments she made, on the ground that she
subsequently discovered that the condominium project was being built in Pasay City and not in
Makati City as indicated in its printed advertisements. However, instead of answering
respondent's letter, petitioner sent her a written communication informing her that her unit is
ready for inspection and occupancy should she decide to move in.
The respondent filed a complaint with the Expanded National Capital Region Field Office
(ENCRFO) of the Housing and Land Use Regulatory Board (HLURB) seeking the annulment of
her contract with petitioner, the return of her payments, and damages. The ENCRFO dismissed
respondent's complaint for lack of merit and directed the parties to resume the fulfillment of the
terms and conditions of their sales contract. The ENCRFO held that respondent failed to show
or substantiate the legal grounds that consist of a fraudulent or malicious dealing with her by the
petitioner, such as, the latter's employment of insidious words or machinations which induced or
entrapped her into the contract and which, without them, would not have encouraged her to buy
the unit.
Respondent filed a petition for review with the HLURB Board of Commissioners questioning the
decision of the ENCRFO. The HLURB Board of Commissioners rendered judgment dismissing
respondent's complaint and affirming the decision of the ENCRFO. Respondent filed an appeal
with the Office of the President. The Office of the President dismissed respondent's appeal and
affirmed in toto the decision of the HLURB Board of Commissioners.
Respondent filed a Motion for Reconsideration, but the Office of the President denied it.
Respondent then filed a petition for review with the CA. The CA ruled to reverse and set aside
the decision and resolution of the Office of the President and ordered ECE Realty to return the
payments made by Rachel G. Mandap on reservation fee, downpayment and monthly
installments on the condominium unit, with legal interest thereon at twelve percent (12%) per
annum from the date of filing of action until fully paid. The CA held that petitioner employed
fraud and machinations to induce respondent to enter into a contract with it. The CA also
expressed doubt on the due execution of the Contract to Sell between the parties.
ISSUE:
Whether or not petitioner was guilty of fraud and if so, whether such fraud is sufficient ground to
nullify its contract with respondent.
HELD:
Article 1338 of the Civil Code provides that there is 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. In addition, under Article 1390 of the same Code, a
contract is voidable or annullable where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
27

Also, Article 1344 of the same Code provides that [i]n order that fraud may make a contract
voidable, it should be serious and should not have been employed by both contracting parties.
Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it
must fulfill two conditions.
First, the fraud must be dolo causante or it must be fraud in obtaining the consent of the party.
This is referred to as causal fraud. The deceit must be serious. The fraud is serious when it is
sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive
a prudent person cannot be a ground for nullity. The circumstances of each case should be
considered, taking into account the personal conditions of the victim.
Second, the fraud must be proven by clear and convincing evidence and not merely by a
preponderance thereof. In the present case, this Court finds that petitioner is guilty of false
representation of a fact. This is evidenced by its printed advertisements indicating that its subject
condominium project is located in Makati City when, in fact, it is in Pasay City. The Court
agrees with the Housing and Land Use Arbiter, the HLURB Board of Commissioners, and the
Office of the President, in condemning petitioner's deplorable act of making misrepresentations
in its advertisements and in issuing a stern warning that a repetition of this act shall be dealt with
more severely. However, insofar as the present case is concerned, the Court agrees with the
Housing and Land Use Arbiter, the HLURB Board of Commissioners, and the Office of the
President, that the misrepresentation made by petitioner in its advertisements does not constitute
causal fraud which would have been a valid basis in annulling the Contract to Sell between
petitioner and respondent. In his decision, the Housing and Land Use Arbiter found that
respondent failed to show that the essential and/or moving factor that led the [respondent] to
give her consent and agree to buy the unit was precisely the project's advantageous or unique
location in Makati [City] to the exclusion of other places or city x x x. Both the HLURB
Board of Commissioners and the Office of the President affirmed the finding of the Arbiter and
unanimously held that respondent failed to prove that the location of the said project was the
causal consideration or the principal inducement which led her into buying her unit in the said
condominium project.
In any case, even assuming that petitioners misrepresentation consists of fraud which could be a
ground for annulling their Contract to Sell, respondent's act of affixing her signature to the said
Contract, after having acquired knowledge of the property's actual location, can be construed as
an implied ratification thereof. Ratification of a voidable contract is defined under Article 1393
of the Civil Code as follows:
Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a
tacit ratification if, with knowledge of the reason which renders the contract voidable and
such reason having ceased, the person who has a right to invoke it should execute an act
which necessarily implies an intention to waive his right. Implied ratification may take
diverse forms, such as by silence or acquiescence; by acts showing approval or adoption
of the contract; or by acceptance and retention of benefits flowing there from.
Under Article 1392 of the Civil Code, ratification extinguishes the action to annul a voidable
contract. In addition, Article 1396 of the same Code provides that ratification cleanses the
contract from all its defects from the moment it was constituted.
Hence, based on the foregoing, the findings and conclusions of the Housing and Land Use
Arbiter, the HLURB Board of Commissioners and the Office of the President, should be
sustained.

28

2. AVELINA ABARIENTOS REBUSQUILLO [substituted by her heirs, except Emelinda


R. Gualvez] and SALVADOR A. OROSCO, vs. SPS. DOMINGO and EMELINDA
REBUSQUILLO GUALVEZ and the CITY ASSESSOR OF LEGAZPI CITY, G.R. No.
204029, June 4, 2014
FACTS:
Petitioners Avelina and Salvador filed a Complaint for annulment and revocation of an Affidavit
of Self-Adjudication and a Deed of Absolute Sale before the court a quo. Petitioners alleged that
Avelina was one of the children of Eulalio and Victoria. Eulalio died intestate, survived by his
wife Victoria, six legitimate children, and one illegitimate child, namely: (1) Avelina AbarientosRebusquillo, petitioner in this case; (2) Fortunata Abarientos-Orosco, the mother of petitioner
Salvador; (3) Rosalino Abarientos; (4) Juan Abarientos; (5) Feliciano Abarientos; (6) Abraham
Abarientos; and (7) Carlos Abarientos. His wife Victoria eventually died intestate.
Eulalio left behind an untitled parcel of land in Legazpi City consisting of two thousand eight
hundred sixty-nine (2,869) square meters, more or less, which was covered by Tax Declaration
ARP No. (TD) 0141.
In 2001, Avelina was supposedly made to sign two (2) documents by her daughter Emelinda and
her son-in-law Domingo, respondents in this case, on the pretext that the documents were needed
to facilitate the titling of the lot. Petitioners claim that in 2003 Avelina realized that what she
signed was an Affidavit of Self-Adjudication and a Deed of Absolute Sale in favor of
respondents. As respondents purportedly ignored her when she tried to talk to them, Avelina
sought the intervention of the RTC to declare null and void the two (2) documents in order to
reinstate TD0141 and so correct the injustice done to the other heirs of Eulalio. In their answer,
respondents admitted that the execution of the Affidavit of Self-Adjudication and the Deed of
Sale was intended to facilitate the titling of the subject property.
The RTC rendered its Decision annulling the Affidavit of Self-Adjudication and the Deed of
Absolute Sale executed by Avelina on the grounds that (1) with regard to the Affidavit of SelfAdjudication, she was not the sole heir of her parents and was not therefore solely entitled to
their estate; and (2) in the case of the Deed of Absolute Sale, Avelina did not really intend to sell
her share in the property as it was only executed to facilitate the titling of such property.
Respondents interposed an appeal with the CA arguing that the Deed of Sale cannot be annulled
being a public document that has for its object the creation and transmission of real rights over
the immovable subject property. The fact that Avelinas testimony was not offered in evidence,
so respondents argued, the signature on the adverted deed remains as concrete proof of her
agreement to its terms. The appellate court granted the appeal, reversed and set aside the
Decision of the RTC. The appellate court observed that the Deed of Absolute Sale cannot be
nullified as it is a notarized document that has in its favor the presumption of regularity and is
entitled to full faith and credit upon its face. Hence this petition.
ISSUE:
Whether or not the Deed of Sale cannot be annulled being a public document (notarized
document) that has for its object the creation and transmission of real rights over the immovable
subject property and has in its favor the presumption of regularly.
HELD:
The Deed of Absolute Sale executed by Avelina in favor of respondents was correctly nullified
and voided by the RTC. Avelina was not in the right position to sell and transfer the absolute
ownership of the subject property to respondents. As she was not the sole heir of Eulalio and her
Affidavit of Self-Adjudication is void, the subject property is still subject to partition. Avelina, in
fine, did not have the absolute ownership of the subject property but only an aliquot portion.
What she could have transferred to respondents was only the ownership of such aliquot portion.
29

It is apparent from the admissions of respondents and the records of this case that Avelina had no
intention to transfer the ownership, of whatever extent, over the property to respondents. Hence,
the Deed of Absolute Sale is nothing more than a simulated contract.
The Civil Code provides:
Art. 1345. Simulation of a contract may be absolute or relative. The former takes place
when the parties do not intend to be bound at all; the latter, when the parties conceal their
true agreement.
Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation,
when it does not prejudice a third person and is not intended for any purpose contrary to
law, morals, good customs, public order or public policy binds the parties to their real
agreement.
The Supreme Court explained the concept of the simulation of contracts:
In absolute simulation, there is a colorable contract but it has no substance as the parties
have no intention to be bound by it. The main characteristic of an absolute simulation is
that the apparent contract is not really desired or intended to produce legal effect or in
any way alter the juridical situation of the parties. As a result, an absolutely simulated or
fictitious contract is void, and the parties may recover from each other what they may
have given under the contract. However, if the parties state a false cause in the contract to
conceal their real agreement, the contract is relatively simulated and the parties are still
bound by their real agreement. Hence, where the essential requisites of a contract are
present and the simulation refers only to the content or terms of the contract, the
agreement is absolutely binding and enforceable between the parties and their successors
in interest.
In the present case, the true intention of the parties in the execution of the Deed of Absolute Sale
is immediately apparent from respondents very own Answer to petitioners Complaint. As
respondents themselves acknowledge, the purpose of the Deed of Absolute Sale was simply to
"facilitate the titling of the [subject] property," not to transfer the ownership of the lot to them.
Furthermore, respondents concede that petitioner Salvador remains in possession of the property
and that there is no indication that respondents ever took possession of the subject property after
its supposed purchase. Such failure to take exclusive possession of the subject property or, in the
alternative, to collect rentals from its possessor, is contrary to the principle of ownership and is a
clear badge of simulation that renders the whole transaction void.
Contrary to the appellate courts opinion, the fact that the questioned Deed of Absolute Sale was
reduced to writing and notarized does not accord it the quality of incontrovertibility otherwise
provided by the parole evidence rule. The form of a contract does not make an otherwise
simulated and invalid act valid.
The failure of the Deed of Absolute Sale to express the true intent and agreement of the
contracting parties was clearly put in issue in the present case. The RTC is, therefore, justified to
apply the exceptions provided in the second paragraph of Sec. 9, Rule 130 to ascertain the true
intent of the parties, which shall prevail over the letter of the document. That said, considering
that the Deed of Absolute Sale has been shown to be void for being absolutely simulated,
petitioners are not precluded from presenting evidence to modify, explain or add to the terms of
the written agreement.

30

3. SPOUSES BERNADETTE and RODULFO


OPINION, G.R. No. 176043. January 15, 2014

VILBAR, vs.

ANGELITO

L.

FACTS:
Spouses Vilbar claimed that they and Dulos Realty and Development Corporation (Dulos
Realty), entered into a Contract to Sell involving a parcel of land designated as Lot 20-B with
TCT for P19,440.00. Lot 20-A which is also covered and embraced by the same certificate of
title is the subject of another Contract to Sell between Elena and Dulos Realty. Upon full
payment of the purchase price for Lot 20 in 1981, Dulos Realty executed a duly notarized Deed
of Absolute Sale in favor of spouses Vilbar and their co-purchaser Elena. Dulos Realty also
surrendered and delivered the owners duplicate copy of TCT covering Lot 20. However,
spouses Vilbar and Elena were not able to register and transfer the title in their names because
Dulos Realty allegedly failed to have the lot formally subdivided despite its commitment to do
so, until its President died without the subdivision being accomplished.
Spouses Vilbar and Dulos Realty also executed a Contract to Sell covering Lot 21 amounting to
P128,880.00. To pay for the balance of the purchase price, spouses Vilbar obtained a housing
loan from the DBP secured by a real estate mortgage over the said lot. In 1991, the spouses
Vilbar were able to pay the loan in full and DBP issued the requisite Cancellation of Mortgage.
The spouses Vilbar have been in actual, open and peaceful possession of Lot 21 and occupy the
same as absolute owners since 1981.
In contrast, Opinion claimed that he legally acquired Lots 20 and 21 through extra-judicial
foreclosure of mortgage constituted over the said properties by Otilio Gorospe, Sr. and Otilio
"Lito" Gorospe, Jr. (Gorospes) in his favor. Opinion alleged that in 1995, the Gorospes executed
a Deed of Real Estate Mortgage to secure a loan over the disputed lots. The Gorospes defaulted,
prompting Opinion to file a Petition for Extra-Judicial Foreclosure of Real Estate Mortgage. The
subject properties were sold at a public auction where Opinion emerged as the highest bidder. A
Certificate of Sale was issued in his favor and annotated on the TCTs of the properties. The
Gorospes failed to redeem the properties thus, TCTs over the disputed lots in the name of
Opinion were issued.
Opinion filed a Petition for Issuance of a Writ of Possession against the Gorospes. However, the
writ was quashed when spouses Vilbar and Elena presented their title and the Deed of Absolute
Sale of the subject land. Opinion filed a Complaint for Accion Reinvindicatoria with Damages
for him to be declared as the lawful owner and possessor of the subject properties and for his
titles to be declared as authentic. Opinion likewise stated under oath that prior to the execution of
the real estate mortgage between him and the Gorospes, he verified the titles with the Registry of
Deeds and certified the titles to be authentic and that he inspected the subject properties and
learned that there were occupants. Opinion stated that he was informed that the occupants,
spouses Vilbar and Elena, were mere tenants. It was only after his Writ of Possession was
quashed when he learned that spouses Vilbar and Elena are also claiming ownership over the
properties.
The trial court rendered its Decision in favor of Opinion declaring that he lawfully acquired the
disputed properties and that his titles are valid.
ISSUE:
Whether or not Opinion as the predecessor-in-interest of Gorospes is a buyer in good faith.
HELD:
This Court notes that Dulos Realty, the former owner and common predecessor of the parties
herein, contracted with the spouses Vilbar for the sale and transfer of Lots 20 and 21 on July 10,
1979. As early as August 1979, the spouses Vilbar were already in peaceful and actual
possession of the subject properties and have been exercising acts of ownership and dominion
over their portion of Lot 20 and the entire Lot 21 despite the fact that the purchase price of the
lots have not yet been paid in full. Admittedly, all these took place before Gorospe, Sr. filed his
31

Complaint for Sum of Money, Specific Performance and Damages against Dulos Realty in 1981;
prior to the issuance of the Writ of Execution and Alias Writ of Execution by the trial court; prior
to the levy of the properties of Dulos Realty to answer for the judgment favorable to Gorospe, Sr.
in said collection/specific performance case; and prior to the public auction sale. However, the
Court also notes that the sale of Lot 20 was not annotated on the original title in the name of
Dulos Realty, while only a Contract to Sell was executed between the spouses Vilbar and Dulos
Realty as regards Lot 21 which makes the issuance of the title in the name of Bernadette Vilbar
questionable. What makes spouses Vilbars title over Lot 21 even more doubtful is the 2nd
Indorsement issued by the Registry of Deeds of Pasay City which states that Bernadette Vilbars
title over said lot is presumed to be not validly issued.
The spouses Vilbar contend that Gorospe, Sr. acted in bad faith when he levied on the disputed
properties and bought them at public auction. Simply, spouses Vilbar cannot ascribe bad faith on
the part of Gorospe, Sr. absent clear and convincing proof that he had knowledge of the said
spouses transactions with the company where he was the CEO. More importantly, the
aforementioned Deed of Absolute Sale and Contract to Sell were not registered and annotated on
the original titles in the name of Dulos Realty. Under land registration laws, the said properties
were not encumbered then, and third parties need only to rely on the face of the duly issued titles.
Consequently, the Court finds no bad faith on Gorospe, Sr.s part when he bought the properties
at public auction free from liens and encumbrances.
Bad faith cannot be presumed. "It is a question of fact that must be proven" by clear and
convincing evidence. "The burden of proving bad faith rests on the one alleging it." Sadly,
spouses Vilbar failed to adduce the necessary evidence.
The Court notes that when TCT for Lot 21 in the name of defendant Otilio Gorospe, Sr. was
issued to cancel TCT No. 39850 for the same lot registered in favor of the defendant Dulos
Realty there was no mention whatsoever that the latter title was already cancelled by another
TCT issued to defendant Bernadette Vilbar. This being so, the subsequent cancellation of TCT
for Lot 21 could not be affected by the supposed existence of the title of defendants Spouses
Vilbar. As to Lot 20, it is also noteworthy that the supposed Deed of Absolute Sale in favor of
defendants was not annotated on the title. Thus, when this was cancelled it was not subject to any
lien or encumbrance whatsoever pertaining to the claim of the above defendants over the same.
In effect, Gorospe, Sr. acquired through lawful means a valid right to the properties, and he and
his son had a legal right to mortgage the same to Opinion. As a consequence, the Gorospes
transmitted property rights to Opinion, who, in turn, acquired valid rights from the Gorospes.
Respondent Opinion is a Buyer in Good Faith.
This Court also treats Opinion as a buyer in good faith and agrees with the CA that Opinion is
not required to go beyond the Torrens title. It is settled that a party dealing with a registered land
does not have to inquire beyond the Certificate of Title in determining the true owner thereof,
and in guarding or protecting his interest, for all that he has to look into and rely on are the
entries in the Certificate of Title. Inarguably, Opinion acted in good faith in dealing with the
registered owners of the properties. He relied on the titles presented to him, which were
confirmed by the Registry of Deeds to be authentic, issued in accordance with the law, and
without any liens or encumbrances.
Besides, assuming arguendo that the Gorospes titles to the subject properties happened to be
fraudulent, public policy considers Opinion to still have acquired legal title as a mortgagee in
good faith.
The doctrine of the mortgagee in good faith based on the rule that all persons dealing with
property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to
go beyond what appears on the face of the title. The public interest in upholding the
indefeasibility of a certificate of title, as evidence of the lawful ownership of the land or of any
encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what
appears on the face of the certificate of title.

32

Respondent Opinion was proven to be in good faith when he dealt with the Gorospes and relied
on the titles presented to him. Spouses Vilbar, on the other hand, failed to present substantial
evidence to prove otherwise.

33

4. MANLAR RICE MILL, INC., vs. LOURDES L. DEYTO, doing business under the
trade name "J.D. Grains Center" and JENNELITA DEYTO ANG, a.k.a. "JANET
ANG," G.R. No. 191189, January 29, 2014
FACTS:
Petitioner Manlar, organized and existing under Philippine laws, is engaged in the business of
rice milling and selling of grains. Respondent Lourdes Deyto does business under the trade name
"JD Grains Center" and is likewise engaged in the business of milling and selling of grains.
Respondent Janet Ang is Deytos daughter and, prior to her alleged absconding, operated her
own rice trading business through her own store, "Janet Commercial Store".
It appears that in October 2000, Ang entered into a rice supply contract with Manlar, with the
former purchasing rice from the latter amounting to P3,843,220.00. The transaction was covered
by nine postdated checks issued by Ang from her personal bank/checking account with
Chinabank,
Upon presentment, the first two checks were dishonored for having been drawn against
insufficient funds; the remaining seven checks were dishonored for being drawn against a closed
account. Manlar made oral and written demands upon both Deyto and Ang, which went
unheeded. It appears that during the time demand was being made upon Deyto, she informed
Manlar, through its Sales Manager Pablo Pua (Pua), that Ang could not be located.
On November 24, 2000, Manlar filed a Complaint for sum of money against Deyto and Ang
before the Regional Trial Court (RTC) of Quezon City. The Complaint essentially sought to hold
Deyto and Ang solidarily liable on the rice supply contract. Manlar prayed for actual damages in
the total amount of P3,843,220.00, with interest; P300,000.00 attorneys fees, with charges for
appearance fees; and attachment bond and attachment expenses.
Deyto filed her Answer with Compulsory Counterclaim, claiming that she did not contract with
Manlar or any of its representatives regarding the purchase and delivery of rice; that JD Grains
Center was solely owned by her, and Ang had no participation therein, whether as employee,
consultant, agent or other capacity; that JD Grains Center was engaged in rice milling and not in
the buying and selling of rice; and that one of her customers was her daughter Ang, who was
engaged in the buying and selling of rice under the trade name "Janet Commercial Store." Deyto
prayed among others that the Complaint be dismissed.
Ang failed to file an Answer despite summons by publication; for this reason, she was declared
in default.
Deyto went up to the CA on appeal, assailing the Decision of the trial court and claiming that
there was no evidence to show her participation in the transactions between Manlar and Ang, or
that rice deliveries were even made to her; that she had no legal obligation to pay Manlar what
Ang owed the latter in her personal capacity; that the evidence proved that Ang had overpaid
Manlar;
The appellate court conceded that if Ang indeed contracted with Manlar, she did so on her own;
the evidence failed to indicate that Deyto had any participation in the supposed transactions
between her daughter and Manlar. The record reveals that Deyto and Ang owned separate
milling and grains businesses: JD Grains Center and Janet Commercial Store. If Ang did
business with Manlar, it is likely that she did so on her own or in her personal capacity, and not
for and in behalf of Deytos JD Grains Center. Besides, the subject checks were drawn against
Angs personal bank account, therefore Ang, not Deyto is bound to make good on the dishonored
checks.

34

Thus, the CA concluded that there is no legal basis to hold Deyto solidarily liable with Ang for
what the latter may owe Manlar. Manlar moved for reconsideration, but in its February 9, 2010
Resolution, the CA stood its ground. Hence, Manlar took the present recourse.
ISSUE/S:
Whether or not Deyto shall be held solidarily liable with Ang for the contract that the latter
entered into with Manlar.
HELD:
The CA is correct in concluding that there is no legal basis to hold Deyto solidarily liable with
Ang for what the latter may owe Manlar. The evidence does not support Manlars view that both
Deyto and Ang contracted with Manlar for the delivery of rice on credit; quite the contrary, the
preponderance of evidence indicates that it was Ang alone who entered into the rice supply
agreement with Manlar. Puas own direct testimony indicated that whenever rice deliveries were
made by Manlar, Deyto was not around; that it was solely Ang who issued the subject checks
and delivered them to Pua or Manlar. On cross-examination, he testified that no rice deliveries
were in fact made by Manlar at Deytos Bulusan Street residence; that although Deyto
guaranteed Angs checks, this guarantee was made verbally; and that while he ordered Manlars
drivers to deliver rice at Deytos residence at Bulusan Street, the deliveries would actually end
up at Angs Sabucoy residence.
The documentary evidence, on the other hand, shows that the subject checks were issued from a
bank account in Chinabank del Monte branch belonging to Ang alone. They did not emanate
from an account that belonged to both Ang and Deyto. This is supported by no less than the
testimony of Chinabank del Monte branch Operations Head Petallano.
The evidence on record further indicates that Deyto was an old lady who owned vast tracts of
land in Isabela province, and other properties in Metro Manila; that she is a reputable
businessperson in Isabela; that Ang originally worked for JD Grains Center, but was removed in
1997 for failure to remit collections; that as early as June 2000, or prior to the alleged transaction
with Manlar, Ang and Deyto were no longer on good terms as a result of Angs activities; that
Deyto took custody of one of Angs children, who was previously recovered from a kidnapping
perpetrated by no less than Angs best friend; and that Ang appears to have abandoned her own
family and could no longer be located. This shows not only what kind of person Ang is; it
likewise indicates the improbability of Deytos involvement in Angs activities, noting her age,
condition, reputation, and the extent of her business activities and holdings.
What this Court sees is an attempt to implicate Deyto in a transaction between Manlar and Ang
so that the former may recover its losses, since it could no longer recover them from Ang as a
result of her absconding; this conclusion is indeed consistent with what the totality of the
evidence on record appears to show. This, however, may not be allowed. As a general rule, a
contract affects only the parties to it, and cannot be enforced by or against a person who is not a
party thereto. "It is a basic principle in law that contracts can bind only the parties who had
entered into it; it cannot favor or prejudice a third person." Under Article 1311 of the Civil Code,
contracts take effect only between the parties, their assigns and heirs. Thus, Manlar may sue
Ang, but not Deyto, who the Court finds to be not a party to the rice supply contract.

35

5. DOMINGO GONZALO V. JOHN TARNATE, JR., G.R. NO. 160600, JANUARY 15,
2014
FACTS:
After the Department of Public Works and Highways (DPWH) had awarded on July 22, 1997 the
contract for the improvement of the Sadsadan-Maba-ay Section of the Mountain ProvinceBenguet Road in the total amount of P7,014,963.33 to Gonzalo Construction, Domingo Gonzalo
(Gonzalo) subcontracted to respondent John Tarnate, Jr. (Tarnate), the supply of materials and
labor for the project under the latters business known as JNT Aggregates. Their agreement
stipulated, among others, that Tarnate would pay to Gonzalo 8% and 4% of the contract price,
respectively, upon Tarnates first and second billing in the project.
In furtherance of their agreement, Gonzalo executed a deed of assignment whereby he, as the
contractor, was assigning to Tarnate an amount equivalent to 10% of the total collection from the
DPWH for the project. This 10% retention fee was the rent for Tarnates equipment that had
been utilized in the project. In the deed of assignment, Gonzalo further authorized Tarnate to use
the official receipt of Gonzalo Construction in the processing of the documents relative to the
collection of the 10% retention fee and in encashing the check to be issued by the DPWH for that
purpose. The deed of assignment was submitted to the DPWH. During the processing of the
documents for the retention fee, however, Tarnate learned that Gonzalo had unilaterally
rescinded the deed of assignment by means of an affidavit of cancellation of deed of assignment
filed in the DPWH; and that the disbursement voucher for the 10% retention fee had then been
issued in the name of Gonzalo, and the retention fee released to him.
Tarnate demanded the payment of the retention fee from Gonzalo, but to no avail. Thus, he
brought this suit against Gonzalo to recover the retention fee, moral and exemplary damages for
breach of contract, and attorneys fees. In his answer, Gonzalo admitted the deed of assignment
and the authority given therein to Tarnate, but averred that the project had not been fully
implemented because of its cancellation by the DPWH, and that he had then revoked the deed of
assignment. He insisted that the assignment could not stand independently due to its being a
mere product of the subcontract that had been based on his contract with the DPWH; and that
Tarnate, having been fully aware of the illegality and ineffectuality of the deed of assignment
from the time of its execution, could not go to court with unclean hands to invoke any right
based on the invalid deed of assignment or on the product of such deed of assignment.
RTC ruled that the deed of assignment was a valid and binding contract and that Gonzalo must
comply with his obligations under the deed of assignment and rendered judgment in favor of
Tarnate. Gonzalo appealed to the Court of Appeals (CA). The CA held that the subcontract was
an illegal agreement due to its object being specifically prohibited by Section 6 of Presidential
Decree No. 1594; that Gonzalo and Tarnate were guilty of entering into the illegal contract in
violation of Section 6 of Presidential Decree No. 1594; and that the deed of assignment, being a
product of and dependent on the subcontract, was also illegal and unenforceable, the CA did not
apply the doctrine of in pari delicto, explaining that the doctrine applied only if the fault of one
party was more or less equivalent to the fault of the other party. It found Gonzalo to be more
guilty than Tarnate, whose guilt had been limited to the execution of the two illegal contracts
while Gonzalo had gone to the extent of violating the deed of assignment. It declared that the
crediting of the 10% retention fee had unjustly enriched Gonzalo; and ruled, accordingly, that
Gonzalo should reimburse Tarnate in that amount because the latters equipment had been
utilized in the project.
ISSUES:
(a) Whether or not both parties were in pari delicto; (b) Whether or not CA is correct in holding
that the deed of assignment was void.
HELD:
Gonzalo submits in support of his contentions that the subcontract and the deed of assignment,
being specifically prohibited by law, had no force and effect; that upon finding both him and
36

Tarnate guilty of violating the law for executing the subcontract, the RTC and the CA should
have applied the rule of in pari delicto, to the effect that the law should not aid either party to
enforce the illegal contract but should leave them where it found them. The Court held that there
is no question that every contractor is prohibited from subcontracting with or assigning to
another person any contract or project that he has with the DPWH unless the DPWH Secretary
has approved the subcontracting or assignment. This is pursuant to Section 6 of Presidential
Decree No. 1594. Gonzalo, who was the sole contractor of the project in question, subcontracted
the implementation of the project to Tarnate in violation of the statutory prohibition. Their
subcontract was illegal, therefore, because it did not bear the approval of the DPWH Secretary.
Necessarily, the deed of assignment was also illegal, because it sprung from the subcontract. As
aptly observed by the CA, the intention of the parties in executing the Deed of Assignment was
merely to cover up the illegality of the sub-contract agreement. They knew for a fact that the
DPWH will not allow plaintiff-appellee to claim in his own name under the Sub-Contract
Agreement. Obviously, without the Sub-Contract Agreement there will be no Deed of
Assignment to speak of. The illegality of the Sub-Contract Agreement necessarily affects the
Deed of Assignment because the rule is that an illegal agreement cannot give birth to a valid
contract. To rule otherwise is to sanction the act of entering into transaction the object of which
is expressly prohibited by law and thereafter execute an apparently valid contract to subterfuge
the illegality. Under Article 1409 (1) of the Civil Code, a contract whose cause, object or
purpose is contrary to law is a void or inexistent contract. As such, a void contract cannot
produce a valid one. To the same effect is Article 1422 of the Civil Code, which declares that "a
contract, which is the direct result of a previous illegal contract, is also void and inexistent."
However, the Court did not concur with the CAs finding that the guilt of Tarnate for violation of
Section 6 of Presidential Decree No. 1594 was lesser than that of Gonzalo, for, as the CA itself
observed, Tarnate had voluntarily entered into the agreements with Gonzalo. Tarnate also
admitted that he did not participate in the bidding for the project because he knew that he was not
authorized to contract with the DPWH. Given that Tarnate was a businessman who had
represented himself in the subcontract as "being financially and organizationally sound and
established, with the necessary personnel and equipment for the performance of the project," he
justifiably presumed to be aware of the illegality of his agreements with Gonzalo. For these
reasons, Tarnate was not less guilty than Gonzalo.
According to Article 1412 (1) of the Civil Code, the guilty parties to an illegal contract cannot
recover from one another and are not entitled to an affirmative relief because they are in pari
delicto or in equal fault. The doctrine of in pari delicto is a universal doctrine that holds that no
action arises, in equity or at law, from an illegal contract; no suit can be maintained for its
specific performance, or to recover the property agreed to be sold or delivered, or the money
agreed to be paid, or damages for its violation; and where the parties are in pari delicto, no
affirmative relief of any kind will be given to one against the other. Nonetheless, the application
of the doctrine of in pari delicto is not always rigid. An accepted exception arises when its
application contravenes well-established public policy.

37

6. FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK, INC. V.


SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, G.R. NO. 185798,
JANUARY 13, 2014
FACTS:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower
while co-petitioner Fil-Estate Network, Inc. is its authorized marketing agent. Respondent
Spouses Conrado and Maria Victoria Ronquillo purchased from petitioners an 82-square meter
condominium unit at Central Park Place Tower in Mandaluyong City for a pre-selling contract
price of P5,174,000.00. Respondents executed and signed a Reservation Application Agreement
wherein they deposited P200,000.00 as reservation fee. As agreed upon, respondents paid the full
downpayment of P1,552,200.00 and had been paying the P63,363.33 monthly amortizations until
September 1998.
Upon learning that construction works had stopped, respondents likewise stopped paying their
monthly amortization. Claiming to have paid a total of P2,198,949.96 to petitioners, respondents
through two (2) successive letters, demanded a full refund of their payment with interest. When
their demands went unheeded, respondents were constrained to file a Complaint for Refund and
Damages before the Housing and Land Use Regulatory Board (HLURB). Respondents prayed
for reimbursement/refund of P2,198,949.96 representing the total amortization payments,
P200,000.00 as and by way of moral damages, attorneys fees and other litigation expenses.
The HLURB issued an Order of Default against petitioners for failing to file their Answer within
the reglementary period despite service of summons. Petitioners filed a motion to lift order of
default and attached their position paper attributing the delay in construction to the 1997 Asian
financial crisis. The HLURB rendered judgment ordering petitioners to jointly and severally pay
respondents. The Arbiter considered petitioners failure to develop the condominium project as a
substantial breach of their obligation which entitles respondents to seek for rescission with
payment of damages. The Arbiter also stated that mere economic hardship is not an excuse for
contractual and legal delay.
Petitioners appealed the Arbiters Decision through a petition for review. The Board of
Commissioners of the HLURB denied the petition and affirmed the Arbiters Decision. The
HLURB reiterated that the depreciation of the peso as a result of the Asian financial crisis is not
a fortuitous event which will exempt petitioners from the performance of their contractual
obligation.
Petitioners filed a motion for reconsideration but the same was denied. Thereafter, petitioners
filed a Notice of Appeal with the Office of the President and the appeal was subsequently
dismissed for lack of merit. Petitioners moved for reconsideration but their motion was again
denied. Petitioners sought relief from the Court of Appeals.
The Court of Appeals denied the petition for review for lack of merit. The appellate court echoed
the HLURB Arbiters ruling that "a buyer for a condominium/subdivision unit/lot unit which has
not been developed in accordance with the approved condominium/subdivision plan within the
time limit for complying with said developmental requirement may opt for reimbursement under
Section 20 in relation to Section 23 of Presidential Decree (P.D.) 957." The appellate court
supported the HLURB Arbiters conclusion, which was affirmed by the HLURB Board of
Commission and the Office of the President, that petitioners failure to develop the condominium
project is tantamount to a substantial breach which warrants a refund of the total amount paid,
including interest. The appellate court pointed out that petitioners failed to prove that the Asian
financial crisis constitutes a fortuitous event which could excuse them from the performance of
their contractual and statutory obligations. The appellate court also affirmed the award of moral
damages in light of petitioners unjustified refusal to satisfy respondents claim and the legality
of the administrative fine, as provided in Section 20 of Presidential Decree No. 957.

38

ISSUES:
Whether or not the Asian financial crisis constitute a fortuitous event which would justify delay
by petitioners in the performance of their contractual obligation; and whether or not respondents
are entitled to rescission based on the alleged breach by the petitioner.
HELD:
Petitioners claim that there was a mere delay in the completion of the project and that they only
resorted to "suspension and reformatting as a testament to their commitment to their buyers."
Petitioners attribute the delay to the 1997 Asian financial crisis that befell the real estate industry.
Invoking Article 1174 of the New Civil Code, petitioners maintain that they cannot be held liable
for a fortuitous event.
The Court held that the Asian financial crisis is not a fortuitous event that would excuse
petitioners from performing their contractual obligation; second, as a result of the breach
committed by petitioners, respondents are entitled to rescind the contract and to be refunded the
amount of amortizations paid including interest and damages; and third, petitioners are likewise
obligated to pay attorneys fees and the administrative fine. Indeed, the non-performance of
petitioners obligation entitles respondents to rescission under Article 1191 of the New Civil
Code. The injured party may choose between the fulfillment and the rescission of the obligation,
with payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale of
condominiums, which provides:
Section 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a
subdivision or condominium project for the lot or unit he contracted to buy shall be
forfeited in favor of the owner or developer when the buyer, after due notice to the owner
or developer, desists from further payment due to the failure of the owner or developer to
develop the subdivision or condominium project according to the approved plans and
within the time limit for complying with the same. Such buyer may, at his option, be
reimbursed the total amount paid including amortization interests but excluding
delinquency interests, with interest thereon at the legal rate.
Conformably with these provisions of law, respondents are entitled to rescind the contract and
demand reimbursement for the payments they had made to petitioners. Further, the issues had
already been settled by the Court in the case of Fil-Estate Properties, Inc. v. Spouses Go
promulgated on 17 August 2007, where the Court stated that the Asian financial crisis is not an
instance of caso fortuito. Citing further that a real estate enterprise engaged in the pre-selling of
condominium units is concededly a master in projections on commodities and currency
movements and business risks. The fluctuating movement of the Philippine peso in the foreign
exchange market is an everyday occurrence, and fluctuations in currency exchange rates happen
everyday, thus, not an instance of caso fortuito.

39

7. SPOUSES EDUARDO AND LYDIA SILOS, vs. PHILIPPINE NATIONAL BANK,


GR 181045 July 02, 2014
FACTS:
Spouses Eduardo and Lydia Silos have been in business for about two decades of operating a
department store and buying and selling of ready-to-wear apparel. Respondent PNB is a banking
corporation organized and existing under Philippine laws. To secure a one-year revolving credit
line of P150,000.00 from PNB, petitioners constituted a Real Estate Mortgage over a 370-square
meter lot. The credit line was increased to P1.8 million and the mortgage was correspondingly
increased to P1.8 million. And a Supplement to the Existing Real Estate Mortgage was executed
to cover the same credit line, which was increased to P2.5 million, and additional security was
given in the form of a 134-square meter lot. In addition, petitioners issued eight Promissory
Notes and signed a Credit Agreement. The Credit Agreement contained a stipulation on interest.
The eight Promissory Notes contained a stipulation granting PNB the right to increase or reduce
interest rates within the limits allowed by law or by the Monetary Board. The Real Estate
Mortgage agreement provided the same right to increase or reduce interest rates at any time
depending on whatever policy PNB may adopt in the future. Petitioners religiously paid interest
on the notes. An Amendment to Credit Agreement was executed by the parties, with the
stipulation regarding interest.
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB 18 Promissory
Notes, which petitioners settled except the last (the note covering the principal). The 9th up to
the 17th promissory notes provide for the payment of interest at the rate the Bank may at any
time without notice, raise within the limits allowed by law x x x. On the other hand, the 18th up
to the 26th promissory notes including PN 9707237, which is the 26th promissory note
carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in the Banks overall cost of funds. I/We
hereby agree that in the event I/we are not agreeable to the interest rate fixed for any
Interest Period, I/we shall have the option to prepay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting Date.
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the
promissory notes, religiously paying the interests without objection or fail. But the petitioners
faltered when the interest rates soared due to the Asian financial crisis. Petitioners sole
outstanding promissory note for P2.5 million PN 9707237 executed in July 1997 and due 120
days later or on October 28, 1997 became past due, and despite repeated demands, petitioners
failed to make good on the note. Incidentally, PN 9707237 provided for the penalty equivalent
to 24% per annum in case of default. Despite demand, petitioners failed to pay. Thus, PNB
foreclosed on the mortgage, and in 1999, TCTs were sold to it at auction for the amount of
P4,324,172.96. The sheriffs certificate of sale was registered on March 11, 1999.
More than a year later, petitioners filed Civil Case seeking annulment of the foreclosure sale and
an accounting of the PNB credit. Petitioners theorized that after the first promissory note, the
succeeding stipulations for the payment of interest in their loan agreements with PNB which
allegedly left to the latter the sole will to determine the interest rate became null and void.
Petitioners added that because the interest rates were fixed by respondent without their prior
consent or agreement, these rates are void, and as a result, petitioners should only be made liable
for interest at the legal rate of 12%. They claimed further that they overpaid interests on the
credit, and concluded that due to this overpayment of steep interest charges, their debt should
now be deemed paid, and the foreclosure and sale of the mortgage became unnecessary and
wrongful.

40

In its Answer, PNB denied that it unilaterally imposed or fixed interest rates; that petitioners
agreed that without prior notice, PNB may modify interest rates depending on future policy
adopted by it; and that the imposition of penalties was agreed upon in the Credit Agreement. It
added that the imposition of penalties is supported by the all-inclusive clause in the Real Estate
Mortgage agreement which provides that the mortgage shall stand as security for any and all
other obligations of whatever kind and nature owing to respondent, which thus includes penalties
imposed upon default or non-payment of the principal and interest on due date.
The trial court rendered judgment dismissing Civil Case ruling the following particularly on the
provision on interest rate that while the Credit Agreement allows PNB to unilaterally increase its
spread over the floating interest rate at any time depending on whatever policy it may adopt in
the future, it likewise allows for the decrease at any time of the same. Thus, such stipulation
authorizing both the increase and decrease of interest rates as may be applicable is valid. Banks
are allowed to stipulate that interest rates on loans need not be fixed and instead be made
dependent on prevailing rates upon which to peg such variable interest rates.
Court of Appeals modified the decision of the RTC and that the interest rate to be applied after
the expiration of the first 30-day interest period should be 12% per annum;
ISSUE:
Whether or not the interest rates on petitioners outstanding obligation were unilaterally and
arbitrarily imposed by PNB.
HELD:
In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties is void. Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license to increase the
interest rate at will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality which is essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker partys participation being reduced to the alternative to
take it or leave it. Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
Any modification in the contract, such as the interest rates, must be made with the consent of the
contracting parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan agreements,
the rate of interest is a principal condition, if not the most important component. Thus, any
modification thereof must be mutually agreed upon; otherwise, it has no binding effect.
Further, the Court finds that since the escalation clause is annulled, the principal amount of the
loan is subject to the original or stipulated rate of interest, and upon maturity, the amount due
shall be subject to legal interest at the rate of 12% per annum. The interests paid by petitioners
should be applied first to the payment of the stipulated or legal and unpaid interest, as the case
may be, and later, to the capital or principal. Respondent should then refund the excess amount
of interest that it has illegally imposed upon petitioners.

41

8. PHILIPPINE NATIONAL BANK V. TERESITA TAN DEE, ET AL., G.R. NO.


182128, FEBRUARY 19, 2014.
FACTS:
Respondent Teresita Tan Dee bought from respondent Prime East Properties Inc. (PEPI) on an
installment basis a residential lot located in Binangonan, Rizal. Subsequently, PEPI assigned its
rights over a 213,093sq. m property to respondent Armed Forces of the PhilippinesRetirement
and Separation Benefits System, Inc. (AFPRSBS), which included the property purchased by
Dee. Thereafter, PEPI obtained a P205,000,000.00 loan from petitioner Philippine National
Bank (PNB), secured by a mortgage over several properties, including Dees property. The
mortgage was eventually cleared by the Housing and Land Use Regulatory Board (HLURB).
After Dees full payment of the purchase price, a deed of sale was executed by respondents PEPI
and AFPRSBS in Dees favor. Consequently, Dee sought from the petitioner the delivery of the
owners duplicate title over the property, to no avail. Thus, she filed with the HLURB a
complaint for specific performance to compel delivery of TCT No. 619608 by the petitioner,
PEPI and AFPRSBS, among others.
The HLURB ruled in favor of Dee, ruling that the mortgaged property be released and the title to
said property be delivered to Dee. Such decision was affirmed by its Board of Commissioners.
Upon appeal, the said decision was also affirmed by the OP, and subsequently by the CA.
Hence, this appeal.
ISSUES:
(a) Whether or not PNB is obliged to perform any of the undertakings of PEPI and AFP-RSBS.
(b) Whether or not the mortgage on subject property should be released in favor of Teresita Dee.
HELD:
The basic principle of relativity of contracts is that contracts can only bind the parties who
entered into it, and cannot favor or prejudice a third person, even if he is aware of such contract
and has acted with knowledge thereof .
Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract
between respondents PEPI and Dee was still the Contract to Sell, as Dee was yet to fully pay the
purchase price of the property. On this point, PEPI was acting fully well within its right when it
mortgaged the property to the petitioner, for in a contract to sell, ownership is retained by the
seller and is not to pass until full payment of the purchase price. In other words, at the time of the
mortgage, PEPI was still the owner of the property. Thus, in China Banking Corporation v.
Spouses Lozada the Court affirmed the right of the owner/developer to mortgage the property
subject of development, to wit: PD No. 957 cannot totally prevent the owner or developer from
mortgaging the subdivision lot or condominium unit when the title thereto still resides in the
owner or developer awaiting the full payment of the purchase price by the installment
buyer. Moreover, the mortgage bore the clearance of the HLURB, in compliance with Section
18 of P.D. No. 957, which provides that no mortgage on any unit or lot shall be made by the
owner or developer without prior written approval of the HLURB.
Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI, the
former is still bound to respect the transactions between respondents PEPI and Dee. The
petitioner was well aware that the properties mortgaged by PEPI were also the subject of existing
contracts to sell with other buyers. While it may be that the petitioner is protected by Act No.
3135, as amended, it cannot claim any superior right as against the installment buyers. This is
because the contract between the respondents is protected by P.D. No. 957, a social justice
measure enacted primarily to protect innocent lot buyers.

42

9. PHILIPPINE NATIONAL BANK V. SPS. ENRIQUE MANALO & ROSALINDA


JACINTO, ET AL., G.R. NO. 174433, FEBRUARY 24, 2014.
FACTS:
The spouses Manalo applied for an All-Purpose Credit Facility in the amount of P1,000,000.00
with PNB to finance the construction of their house. Said loan was secured by a Real Estate
Mortgage, over their property. The credit facility was renewed and increased several times over
the years. Subsequently, the credit facility was again renewed for P7,000,000.00. As a
consequence, the parties executed a Supplement to and Amendment of Existing Real Estate
Mortgage whereby the property covered another parcel of land.
It was agreed upon that the Spouses Manalo would make monthly payments on the interest.
However, after failing to settle the unpaid account despite demand, PNB foreclosed the
mortgage.
After more than a year after the Certificate of Sale had been issued to PNB, the Spouses Manalo
instituted this action for the nullification of the foreclosure proceedings and damages, alleging
among others, that their loan would be restructured and converted into a long-term loan; that they
had been surprised to learn, therefore, that had been declared in default of their obligations, and
that the mortgage on their property had been foreclosed and their property had been sold.
The RTC ruled in favor of PNB, ruling, among others, that at the Spouses Manalos "contract of
adhesion" argument was unfounded because they had still accepted the terms and conditions of
their credit agreement with PNB and had exerted efforts to pay their obligation; that the Spouses
Manalo were now estopped from questioning the interest rates unilaterally imposed by PNB
because they had paid at those rates for three years without protest; and that their allegation
about PNB violating the notice and publication requirements during the foreclosure proceedings
was untenable because personal notice to the mortgagee was not required under Act No. 3135.
Upon appeal to the CA, the court reversed the decision of the RTC, among others, that PNB
could not unilaterally increase the rate of interest considering that the credit agreements
specifically provided that prior notice was required before an increase in interest rate could be
effected. It found that PNB did not adduce proof showing that the Spouses Manalo had been
notified before the increased interest rates were imposed; and that PNBs unilateral imposition of
the increased interest rate was null and void for being violative of the principle of mutuality of
contracts enshrined in Article 1308 of the Civil Code. Reinforcing its "contract of adhesion"
conclusion, it added that the Spouses Manalos being in dire need of money rendered them to be
not on an equal footing with PNB. Hence, this appeal.
ISSUE:
Whether or not there was mutuality of consent in the imposition of the interest rates
HELD:
The unilateral determination and imposition of the increased rates is violative of the principle of
mutuality of contracts under Article 1308 of the Civil Code, which provides that the contract
must bind both contracting parties; its validity or compliance cannot be left to the will of one of
them. A perusal of the Promissory Note will readily show that the increase or decrease of
interest rates hinges solely on the discretion of petitioner. It does not require the conformity of
the maker before a new interest rate could be enforced. Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable result, thus partaking of
the nature of a contract of adhesion, is void. Any stipulation regarding the validity or compliance
of the contract left solely to the will of one of the parties is likewise invalid.
PNB could not also justify the increases it had effected on the interest rates by citing the fact that
the Spouses Manalo had paid the interests without protest, and had renewed the loan several
times. We rule that the CA, citing Philippine National Bank v. Court of Appeals, rightly
concluded that "a borrower is not estopped from assailing the unilateral increase in the interest
made by the lender since no one who receives a proposal to change a contract, to which he is a
43

party, is obliged to answer the same and said partys silence cannot be construed as an
acceptance thereof."
Lastly, the CA observed, and properly so, that the credit agreements had explicitly provided that
prior notice would be necessary before PNB could increase the interest rates. In failing to notify
the Spouses Manalo before imposing the increased rates of interest, therefore, PNB violated the
stipulations of the very contract that it had prepared. Hence, the varying interest rates imposed by
PNB have to be vacated and declared null and void, and in their place an interest rate of 12% per
annum computed from their default is fixed pursuant to the ruling in Eastern Shipping Lines, Inc.
v. Court of Appeals.

44

10. ALPHA INSURANCE AND SURETY CO. VS ARSENIA SONIA CASTOR, GR NO.
198174; SEPTEMBER 2, 2013
FACTS:
Respondent entered into a contract of motor insurance with the petitioner, involving her motor
vehicle, a Toyota Revo DLX DSL. The contract of insurance obligates the petitioner to pay the
respondent the amount of Six Hundred Thirty Thousand Pesos (P630,000.00) in case of loss or
damage to said vehicle during the period covered, which is from February 26, 2007 to February
26, 2008.
On April 16, 2007, at about 9:00 in the morning, respondent instructed her driver, Jose Joel
Salazar Lanuza (Lanuza), to bring the above-described vehicle to a nearby auto-shop for a tuneup. However, Lanuza no longer returned the motor vehicle to respondent and despite diligent
efforts to locate the same, said efforts proved futile. Resultantly, respondent promptly reported
the incident to the police and concomitantly notified petitioner of the said loss and demanded
payment of the insurance proceeds in the total sum of P630,000.00. Petitioner denied the
insurance claim of respondent stating among others, that the loss is not covered by the her policy.
Accordingly, respondent filed a Complaint for Sum of Money with Damages against petitioner
before the Regional Trial Court (RTC) of Quezon City.
The RTC of Quezon City ruled in favor of respondent, such decision was affirmed by the Court
of Appeals. Hence, this petition.
ISSUE:
Whether or not the contract of insurance should be construed in favor of the insured.
HELD:
An insurance contract should be interpreted as to carry out the purpose for which the parties
entered into the contract which is to insure against risks of loss or damage to the goods. Such
interpretation should result from the natural and reasonable meaning of language in the policy.
Where restrictive provisions are open to two interpretations, that which is most favorable to the
insured is adopted." The defendant would argue that if the person employed by the insured
would commit the theft and the insurer would be held liable, then this would result to an absurd
situation where the insurer would also be held liable if the insured would commit the theft. This
argument is certainly flawed. Of course, if the theft would be committed by the insured himself,
the same would be an exception to the coverage since in that case there would be fraud on the
part of the insured or breach of material warranty under Section 69 of the Insurance Code.
Moreover, contracts of insurance, like other contracts, are to be construed according to the sense
and meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.
Accordingly, in interpreting the exclusions in an insurance contract, the terms used specifying
the excluded classes therein are to be given their meaning as understood in common speech.
Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the insurance
contract contain limitations on liability, courts should construe them in such a way as to preclude
the insurer from non-compliance with his obligation. It must be remembered that an insurance
contract is a contract of adhesion which must be construed liberally in favor of the insured and
strictly against the insurer in order to safeguard the latters interest.

45

11. DR. LORNA FORMARAN VS. DR. GLENDA ONG, GR NO. 186264; JULY 8, 2013
FACTS:
Dr. Lorna Formaran prepared a Deed of Absolute Sale which defendant- respondent Ong and her
father brought along with them covering the land in question without any money involved. There
was no monetary consideration in exchange for executing the Deed of Absolute sale covering
of the property of Formaran. She did not also appear before the Notary Public Edilberto Miralles
when it was allegedly acknowledged by her on November 9, 1967.
A month thereafter, the plaintiff found out that the defendants did not push through with the loan
due to the high interest rates of the bank. With this plaintiff inquired about the Deed of Absolute
sale. Her uncle replied that they crampled (kinumos) the Deed of Absolute Sale and threw it
away. Knowing that it was already thrown away, plaintiff did not bother anymore about the
document she thought that there was no more transaction. Besides, she is also in actual
possession of the land and have even mortgaged the same.
From the time she signed the Deed of Absolute Sale in August, 1967 up to the present time of
Formarans change of residence to Antipolo City, defendant Glenda never demanded actual
possession of the land in question, except when the latter filed on May 30, 1996 a case for
unlawful detainer against her. Following the filing of the ejectment case, she learned for the first
time that the Deed of Absolute Sale was registered and was not thrown away contrary to what
Melquiades Barraca told her. Moreover, she and Melquiades Barraca did not talk anymore about
said Deed. That was also the first time she learned that the land in question is now declared for
taxation purposes in the name of defendant Glenda.
For her defense, respondent Glenda asserts, among others that the there was consideration for the
sale, and that she has been paying the Real Property Taxes since 1967 up to present.
The RTC ruled in favor of Fomaran declaring void the Deed of Absolute sale for being an
absolutely simulated contract and for want of consideration. Upon appeal, the CA reversed the
decision of the RTC. Hence, this petition.
ISSUE:
Whether or not the Deed of Absolute Sale is valid.
HELD:
The amplitude of foregoing undisputed facts and circumstances clearly shows that the sale of the
land in question was purely simulated. It is void from the very beginning . If the sale was
legitimate, defendant Glenda should have immediately taken possession of the land, declared in
her name for taxation purposes, registered the sale, paid realty taxes, introduced improvements
therein and should not have allowed plaintiff to mortgage the land. These omissions properly
militated against defendant Glendas submission that the sale was legitimate and the
consideration was paid.
While the Deed of Absolute Sale was notarized, it cannot justify the conclusion that the sale is a
true conveyance to which the parties are irrevocably and undeniably bound. Although the
notarization of Deed of Absolute Sale, vests in its favor the presumption of regularity, it does not
validate nor make binding an instrument never intended, in the first place, to have any binding
legal effect upon the parties thereto.

46

12. JOSELITO BORROMEO VS. JUAN MINA, GR NO. 193747; 5 JUNE 2013
FACTS:
Petitioner filed a Petition before the Provincial Agrarian Reform Office (PARO) of Isabela,
seeking that: (a) his landholding over the subject property be exempted from the coverage of the
governments OLT program under Presidential Decree No. 27 dated October 21, 19727 (PD 27);
and (b) respondents emancipation patent over the subject property be consequently revoked and
cancelled.
The PARO adopted the recommendation of the MARO and accordingly (a) cancelled
respondent's emancipation patent; (b) directed petitioner to allow respondent to continue in the
peaceful possession and cultivation of the subject property and to execute a leasehold contract
over the same pursuant to the provisions of Republic Act No. 3844 (RA 3844), otherwise known
as the "Agricultural Land Reform Code"; and (c) authorized petitioner to withdraw from the LBP
all amortizations deposited by respondent as rental payments for the latter's use of the said
property.
Upon appeal by the respondent, DAR Regional Director found in favor of the petitioner. A
Motion for Reconsideration was filed and subsequently dismissed. The DAR Secretary affirmed
the DAR Regional Directors ruling.
The CA, reversed the decision of the DAR Secretary where it held, among others, that the said
sale to be null and void for being a prohibited transaction under PD 27 which forbids the
transfers or alienation of covered agricultural lands after October 21, 1972 except to the tenantbeneficiaries thereof, of which petitioner was not. Hence, this petition.
ISSUE:
Whether or not the sale is void.
HELD:
Records reveal that the subject landholding fell under the coverage of PD 27 on October 21,
1972 and as such, could have been subsequently sold only to the tenant thereof, i.e., the
respondent. Notably, the status of respondent as tenant is now beyond dispute considering
petitioners admission of such fact. Likewise, as earlier discussed, petitioner is tied down to his
initial theory that his claim of ownership over the subject property was based on the 1982 deed
of sale. Therefore, as Garcia sold the property in 1982 to the petitioner who is evidently not the
tenant-beneficiary of the same, the said transaction is null and void for being contrary to law.
In consequence, petitioner cannot assert any right over the subject landholding, such as his
present claim for landholding exemption, because his title springs from a null and void source. A
void contract is equivalent to nothing; it produces no civil effect; and it does not create, modify
or extinguish a juridical relation. Hence, notwithstanding the erroneous identification of the
subject landholding by the MARO as owned by Cipriano Borromeo, the fact remains that
petitioner had no right to file a petition for landholding exemption since the sale of the said
property to him by Garcia in 1982 is null and void. Proceeding from this, the finding that
petitioners total agricultural landholdings is way below the retention limits set forth by law thus,
becomes irrelevant to his claim for landholding exemption precisely because he has no right over
the aforementioned landholding.

47

13. LAND BANK OF THE PHILIPPINES VS. SPOUSES CACAYURAN, GR 191667; 17


APRIL 2013
FACTS:
Eduardo Cacayuran, invoking his right as a taxpayer, filed a Complaint against the Implicated
Officers and Land Bank, assailing, among others, the validity of the Subject Loans entered into
by the Sangguniang Bayan of Agoo, La Union, to implement a multi-phased plan to redevelop
the Agoo Public Plaza, on the ground that the Plaza Lot used as collateral thereof is property of
public dominion and therefore, beyond the commerce of man.
The RTC ruled in favor of Cacayuran where it found that the resolutions approving the said loans
were passed in a highly irregular manner and thus, ultra vires; as such, the Municipality is not
bound by the same. Moreover, it found that the Plaza Lot is proscribed from collateralization
given its nature as property for public use. Upon appeal, the CA affirmed the decision of the
RTC with modification that the Vice Mayor is excluded from any personal liability arising from
the subject loan. Hence, this appeal.
ISSUE:
Whether or not the loans entered into by the Municipality are valid.
HELD:
Article 1409(1) of the Civil Code provides that a contract whose purpose is contrary to law,
morals, good customs, public order or public policy is considered void and as such, creates no
rights or obligations or any juridical relations. Consequently, given the unlawful purpose behind
the Subject Loans which is to fund the commercialization of the Agoo Plaza pursuant to the
Redevelopment Plan, they are considered as ultra vires in the primary sense thus, rendering them
void and in effect, non-binding on the Municipality. While the Subject Loans cannot bind the
Municipality for being ultra vires, the officers who authorized the passage of the Subject
Resolutions are personally liable. Case law states that public officials can be held personally
accountable for acts claimed to have been performed in connection with official duties where
they have acted ultra vires, as in this case.

48

14. SANDOVAL SHIPYARDS, INC. VS. PHILIPPINE


ACADEMY, GR NO. 188633; 10 APRIL 2013

MERCHANT

MARINE

FACTS:
Philippine Merchant Marine Academy (respondent) entered into a Ship Building Contract
(contract) with Sandoval Shipyards, Inc. for the construction of two units of 9.1 0-meter lifeboats
(lifeboats) to be used as training boats for the students of respondent. These lifeboats should have
45-HP Gray Marine diesel engines and should be delivered within 45 working days from the date
of the contract-signing and payment of the mobilization/organization fund. Respondent, for its
part, would pay petitioners P1,685,200 in installments based on the progress accomplishment of
the work as stated in the contract.
Respondent sent an inspection team to where the two lifeboats were docked to check whether the
plans and work specifications had been complied with. The team found that petitioners had
installed surplus Japan-made Isuzu C-240 diesel engines with plates marked "Isuzu Marine
diesel engine" glued to the top of the cylinder heads instead of the agreed upon 45-HP Gray
Marine diesel engines; that for the electric starting systems of the engines, there was no manual
which was necessary in case the systems failed; and that the construction of the engine
compartment was not in conformity with the approved plan. For these reasons, respondents dean
submitted a report and recommendation to the president of petitioners stating the latters
construction violations and asking for rectification.
The Commission on Audit (COA), through its technical audit specialist, conducted an ocular
inspection of the lifeboats. His report indicated that the lifeboats were corroded and deteriorating
because of their exposure to all types of weather elements; that the plankings and the benches
were also deteriorating, as they were not coated with fiberglass; that the lifeboats had no mast
sails or row locks installed on the boats; that the installed prime mover was an Isuzu engine,
contrary to the agreed plans and specifications; and that the lifeboats had been paid in full except
for the 10 percent retention. Hence, an action for Rescission of Contract with Damages was filed
against the petitioner.
The RTC ruled that although the caption of the Complaint was "Rescission of Contract with
Damages," the allegations in the body were for breach of contract. Petitioners were found to have
violated the contract by installing surplus diesel engines, contrary to the agreed plan and
specifications. Thus, petitioners were made jointly and severally liable for actual damages.
Upon appeal, the CA ruled that petitioners indeed committed a clear substantial breach of the
contract, which warranted its rescission. Rescission requires a mutual restoration of benefits
received. However, petitioners failed to deliver the lifeboats; their alleged delivery to Rosario
was invalid, as he was not a duly authorized representative named in the contract. Hence,
petitioners could not compel respondent to return something it never had possession or custody
of.
ISSUE:
Whether or not rescission is the proper remedy.
HELD:
In the Complaint before the RTC, the respondent alleged that petitioners failed to comply with
their obligation under the Ship Building Contract. Such failure or breach of respondents
contractual rights is the cause of action. Rescission or damages are part of the reliefs. Hence, it
was but proper for the RTC to first make a determination of whether there was indeed a breach
of contract on the part of petitioners; second, if there was a breach, whether it would warrant
rescission and/or damages. Petitioners violated the terms of the contract by installing surplus
diesel engines, contrary to the agreed plans and specifications, and by failing to deliver the
lifeboats within the agreed time. The breach was found to be substantial and sufficient to warrant
49

a rescission of the contract. Rescission entails a mutual restitution of benefits received. An


injured party who has chosen rescission is also entitled to the payment of damages. The factual
circumstances, however, rendered mutual restitution impossible. Both the RTC and the CA
found that petitioners delivered the lifeboats to Rosario. Although he was an engineer of
respondent, it never authorized him to receive the lifeboats from petitioners.
Hence, as the delivery to Rosario was invalid, it was as if respondent never received the
lifeboats. As it never received the object of the contract, it cannot return the object.
Unfortunately, the same thing cannot be said of petitioners. They admit that they received a total
amount of P1,516,680 from respondent as payment for the construction of the lifeboats. For this
reason, they should return the same amount to respondent.

50

15. SPOUSES IGNACIO AND ALICE JUICO VS. CHINA BANKING CORPORATION,
GR NO. 187678; 10 APRIL 2013

FACTS:
Spouses Ignacio F. Juico and Alice P. Juico obtained a loan from China Banking Corporation as
evidenced by two Promissory Notes both dated October 6, 1998 for the sums of 6,216,000 and
P4, 139,000, respectively. The loan was secured by a Real Estate Mortgage over petitioners
properties. When petitioners failed to pay the monthly amortizations due, respondent demanded
the full payment of the outstanding balance with accrued monthly interests.
On May 8, 2001, Spouses Juico received a demand letter dated May 2, 2001 from China Banking
Corporation for the payment of P8,901,776.63, the amount of deficiency after applying the
proceeds of the foreclosure sale to the mortgage debt. As its demand remained unheeded,
respondent filed a collection suit in the trial court. The Regional Trial Court ruled in favor of the
China Banking Corporation, which was affirmed on appeal by the Court of Appeals.
Hence, this petition.
ISSUE:
Whether or not the stipulation in the promissory notes signed by the spouses where the interest
rate will be increased based on the prevailing market rates is valid.
HELD:
The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighted in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties, is likewise, invalid
The contractual provision in question states that "if there occurs any change in the prevailing
market rates, the new interest rate shall be the guiding rate in computing the interest due on the
outstanding obligation without need of serving notice to the Cardholder other than the required
posting on the monthly statement served to the Cardholder." This could not be considered an
escalation clause for the reason that it neither states an increase nor a decrease in interest rate.
Said clause simply states that the interest rate should be based on the prevailing market rate.
This notwithstanding, we hold that the escalation clause is still void because it grants respondent
the power to impose an increased rate of interest without a written notice to petitioners and their
written consent. Respondents monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing statement based on the new
imposed interest with corresponding computation of the total debt should have been provided by
the respondent to enable petitioners to make an informed decision. An appropriate form must
also be signed by the petitioners to indicate their conformity to the new rates. Compliance with
these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided
impositions do not have the force of law between the parties, because such impositions are not
based on the parties essential equality.
Modifications in the rate of interest for loans pursuant to an escalation clause must be the result
of an agreement between the parties. Unless such important change in the contract terms is
mutually agreed upon, it has no binding effect. In the absence of consent on the part of the
petitioners to the modifications in the interest rates, the adjusted rates cannot bind them.

51

16. ANCHOR SAVINGS BANK VS. FURIGAY, GR NO. 191178; 13 MARCH 2013
FACTS:
While Civil Case No. 99-865 was pending, respondent spouses donated their registered
properties in Alaminos, Pangasinan, to their minor children, respondents Hegem G. Furigay and
Herriette C. Furigay. As a result, Transfer Certificate of Title (TCT) Nos. 21743,7 21742,8
21741,9 and 2174010 were issued in the names of Hegem and Herriette Furigay.
Claiming that the donation of these properties was made in fraud of creditors, ASB filed a
Complaint for Rescission of Deed of Donation, Title and Damages against the respondent
spouses and their children.
The RTC dismissed the case due to lack of jurisdiction over the subject matter and that the action
for rescission has expired. It stated that an action for rescission grounded on fraud should be filed
within four (4) years from the discovery of fraud. ASB filed the action for rescission only on
October 14, 2005 or after four (4) years from the time the Deed of Donation was registered in the
Register of Deeds of Alaminos, Pangasinan, on April 4, 2001. The four-year prescriptive period
should be reckoned from the date of registration of the deed of donation and not from the date of
the actual discovery of the registration of the deeds of donation because registration is considered
notice to the whole world. Upon appeal the CA ruled that action for rescission has not yet
prescribed for it must be emphasized that it has not even accrued in the first place.
ISSUES:
Whether or not the action for rescission is the proper remedy.
HELD:
It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed of
only after all other legal remedies have been exhausted and have been proven futile. For an
accion pauliana to accrue, the following requisites must concur: 1) That the plaintiff asking for
rescission, has a credit prior to the alienation, although demandable later; 2) That the debtor has
made a subsequent contract conveying a patrimonial benefit to a third person; 3) That the
creditor has no other legal remedy to satisfy his claim, but would benefit by rescission of the
conveyance to the third person; 4) That the act being impugned is fraudulent; 5) That the third
person who received the property conveyed, if by onerous title, has been an accomplice in the
fraud.
It is clear that the four-year prescriptive period commences to run neither from the date of the
registration of the deed sought to be rescinded nor from the date the trial court rendered its
decision but from the day it has become clear that there are no other legal remedies by which the
creditor can satisfy his claims.

52

17. RODOLFO CRUZ VS. ATTY. GRUSPE, GR 191431; 13 MARCH 2013


FACTS: On October 24, 1999, the mini bus owned and operated by Cruz and driven by one
Arturo Davin collided with the Toyota Corolla car of Gruspe; Gruspes car was a total wreck.
The next day, on October 25, 1999, Cruz, along with Leonardo Q. Ibias went to Gruspes office,
apologized for the incident, and executed a Joint Affidavit of Undertaking promising jointly and
severally to replace the Gruspes damaged car in 20 days, or until November 15, 1999, of the
same model and of at least the same quality; or, alternatively, they would pay the cost of
Gruspes car amounting to P350,000.00, with interest at 12% per month for any delayed payment
after November 15, 1999, until fully paid. When Cruz and Leonardo failed to comply with their
undertaking, Gruspe filed a complaint for collection of sum of money against them on November
19, 1999 before the Regional Trial Court.
The RTC ruled in favor of Gruspe, which was affirmed on appeal to the Court of Appeals, but
reduced the interest rate to 12% per annum pursuant to the Joint Affidavit of Undertaking. It
declared that despite its title, the Joint Affidavit of Undertaking is a contract, as it has all the
essential elements of consent, object certain, and consideration required under Article 1318 of
the Civil Code.
Hence, this petition.
ISSUES:
(a) Whether Joint Affidavit of Undertaking has an obligatory force between the parties.
(b) Whether or not the consent of Cruz and Ibias were vitiated.
HELD:
(a) A simple reading of the terms of the Joint Affidavit of Undertaking readily discloses that it
contains stipulations characteristic of a contract. Contracts are obligatory no matter what their
forms may be, whenever the essential requisites for their validity are present. In determining
whether a document is an affidavit or a contract, the Court looks beyond the title of the
document, since the denomination or title given by the parties in their document is not conclusive
of the nature of its contents. In the construction or interpretation of an instrument, the intention
of the parties is primordial and is to be pursued. If the terms of the document are clear and leave
no doubt on the intention of the contracting parties, the literal meaning of its stipulations shall
control. If the words appear to be contrary to the parties evident intention, the latter shall prevail
over the former.
(b) No. Although the undertaking in the affidavit appears to be onerous and lopsided, this does
not necessarily prove the alleged vitiation of consent. They, in fact, admitted the genuineness and
due execution of the Joint Affidavit and Undertaking when they said that they signed the same to
secure possession of their vehicle. If they truly believed that the vehicle had been illegally
impounded, they could have refused to sign the Joint Affidavit of Undertaking and filed a
complaint, but they did not. That the release of their mini bus was conditioned on their signing
the Joint Affidavit of Undertaking does not, by itself, indicate that their consent was forced
they may have given it grudgingly, but it is not indicative of a vitiated consent that is a ground
for the annulment of a contract.

53

18. SPOUSES DELA CRUZ VS. PLANTERS PRODUCTS, INC., GR 158649; 18


FEBRUARY 2013
FACTS:
On March 23, 1978, Gloria applied for and was granted by respondent Planters Products, Inc.
(PPI) a regular credit line of P200,000.00 for a 60- day term, with trust receipts as collaterals.
Quirino and Gloria submitted a list of their assets in support of her credit application for
participation in the Special Credit Scheme (SCS) of PPI.
The 60-day credit term lapsed without Gloria paying her obligation under the Trust Receipt/SCS.
Hence, PPI wrote collection letters to her on April 24, 1979 and May 22, 1979. Receiving no
response from her, Inocencio E. Ortega, PPI District Distribution Manager, sent her on June 8,
1979 a demand letter on her "long overdue account" of P191,205,25.
On November 17, 1981, PPI brought against Quirino and Gloria in the erstwhile Court of First
Instance in Pasig, Metro Manila a complaint for the recovery of a sum of money with prayer for
a writ of preliminary attachment. PPI alleged that Gloria had violated the "fiduciary undertaking
in the Trust Receipt agreement covering product withdrawals under the Special Credit Scheme
which were subsequently charged to defendant dealers regular credit line; therefore, she is guilty
of fraudulently misapplying or converting to her own use the items delivered to her as contained
in the invoices." It charged that Gloria did not return the goods indicated in the invoices and did
not remit the proceeds of sales.
The RTC rendered judgment in favor of PPI, which was affirmed on appeal by the CA where it
held that the petitioners liable to PPI "for the value of the fertilizers and agricultural chemical
products covered by the trust receipts" because a creditor-debtor relationship existed between the
parties when, pursuant to the credit line of P200,000.00 and the SCS Program, the petitioners
"withdrew several fertilizers and agricultural chemical products on credit;" that the petitioners
then came under obligation to pay the equivalent value of the withdrawn goods, "or to return the
undelivered and/or unused products within the specified period.
ISSUE:
Whether or not there exists a creditor- debtor relationship between the Spouses Dela Cruz and
PPI.
HELD:
The established circumstances comprised by the contemporaneous and subsequent acts of Gloria
and Quirino that manifested their intention to enter into the creditor-debtor relationship with PPI
show that the CA properly held the petitioners fully liable to PPI. The law of contracts provides
that in determining the intention of the parties, their contemporaneous and subsequent acts shall
be principally considered. Consequently, the written terms of their contract with PPI, being clear
upon the intention of the contracting parties, should be literally applied.

54

19. HEIRS OF IGNACIO VS. HOME BANKERS SAVINGS AND TRUST CO., ET AL.,
GR NO. 177783; 23 JANUARY 2013
FACTS:
In August 1981, petitioner Fausto C. Ignacio mortgaged two parcels of land to Home Savings
Bank and Trust Company, the predecessor of respondent Home Bankers Savings and Trust
Company, as security for the P500,000.00 loan extended to him by said bank.
When petitioner defaulted in the payment of his loan obligation, respondent bank proceeded to
foreclose the real estate mortgage. With the failure of petitioner to redeem the foreclosed
properties within one year from such registration, title to the properties were consolidated in
favor of respondent bank.
Subsequently, in a letter addressed to respondent bank dated July 25, 1989, petitioner expressed
his willingness to pay the amount of P600,000.00 in full, as balance of the repurchase price, and
requested respondent bank to release to him the remaining parcels of land covered by TCT Nos.
111058 and T-154658 ("subject properties"). Respondent bank however, turned down his
request. This prompted petitioner to cause the annotation of an adverse claim on the said titles on
September 18, 1989. However, prior to the annotation of the adverse claim, the bank has
already sold the properties to respondent spouses Rodriguez without informing the petitioner.
Aggrieved, the petitioner filed with the RTC an action for specific performance against the
respondent bank. On September 7, 1990, the trial court rendered judgment in favor of petitioner.
The court concluded that the compromise agreement amounts to a valid contract of sale between
petitioner, as Buyer, and respondent bank, as Seller. Hence, in entertaining other buyers for the
same properties already sold to petitioner with intention to increase its revenues, respondent bank
acted in bad faith and is thus liable for damages to the petitioner.
Upon appeal, the CA reversed the decision of the RTC when it held that the petitioners, by
modifying the terms of the offer contained in the March 22, 1984 letter of respondent bank,
petitioner effectively rejected the original offer with his counter-offer. There was also no written
conformity by respondent bank's officers to the amended conditions for repurchase which were
unilaterally inserted by petitioner. Consequently, no contract of repurchase was perfected and
respondent bank acted well within its rights when it sold the subject properties to herein
respondents-intervenors. Hence, this petition.
ISSUE:
Whether or not there was a perfected contract to repurchase the subject properties.
HELD:
Contracts are perfected by mere consent, which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract.20 The requisite
acceptance of the offer is expressed in Article 1319 of the Civil Code.
Contracts that are consensual in nature, like a contract of sale, are perfected upon mere meeting
of the minds. Once there is concurrence between the offer and the acceptance upon the subject
matter, consideration, and terms of payment, a contract is produced. The offer must be certain.
To convert the offer into a contract, the acceptance must be absolute and must not qualify the
terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a
counter-offer and is a rejection of the original offer. Consequently, when something is desired
which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate
consent because any modification or variation from the terms of the offer annuls the offer.
Petitioner's acceptance of the respondent bank's terms and conditions for the repurchase of the
foreclosed properties was not absolute. Petitioner set a different repurchase price and also
modified the terms of payment, which even contained a unilateral condition for payment of the
55

balance (P600,000), that is, depending on petitioner's "financial position." The CA thus
considered the qualified acceptance by petitioner as a counter-proposal which must be accepted
by respondent bank. However, there was no evidence of any document or writing showing the
conformity of respondent bank's officers to this counter-proposal.
A contract of sale is consensual in nature and is perfected upon mere meeting of the minds.
When there is merely an offer by one party without acceptance of the other, there is no contract.
When the contract of sale is not perfected, it cannot, as an independent source of obligation,
serve as a binding juridical relation between the parties.

56

20. SPOUSES BENJAMIN AND SONIA MAMARIL VS. BOY SCOUTS OF THE
PHILIPPINES, ET. AL, GR 179382; JANUARY 13 2013
FACTS:
Spouses Benjamin C. Mamaril and Sonia P. Mamaril (Sps. Mamaril) are jeepney operators since
1971. They would park their six (6) passenger jeepneys every night at the Boy Scout of the
Philippines' (BSP) compound located at 181 Concepcion Street, Malate, Manila for a fee of
P300.00 per month for each unit. On May 26, 1995 at 8 o'clock in the evening, all these vehicles
were parked inside the BSP compound. The following morning, however, one of the vehicles,
with Plate No. DCG 392 was missing and was never recovered. According to the security guards
Cesario Pea (Pea) and Vicente Gaddi (Gaddi) of AIB Security Agency, Inc. (AIB) with whom
BSP had contracted for its security and protection, a male person who looked familiar to them
took the subject vehicle out of the compound.
On November 20, 1996, Sps. Mamaril filed a complaint for damages before the Regional Trial
Court (RTC) of Manila, Branch 39, against BSP, AIB, Pea and Gaddi. In support thereof, Sps.
Mamaril averred that the loss of the subject vehicle was due to the gross negligence of the abovenamed security guards on-duty who allowed the subject vehicle to be driven out by a stranger
despite their agreement that only authorized drivers duly endorsed by the owners could do so.
Pea and Gaddi even admitted their negligence during the ensuing investigation.
The RTC ruled in favor of the spouses. Upon appeal, the CA affirmed the decision of the RTC as
regards to the negligence on the part of the security guards, but absolved BSP from any liability,
holding that the Guard Service Contract is purely between BSP and AIB and that there was
nothing therein that would indicate any obligation and/or liability on the part of BSP in favor of
third persons. Hence, this petition.
ISSUE:
Whether or not BSP can be held liable for the negligent acts of the security agency.
HELD:
In order that a third person benefited by the second paragraph of Article 1311, referred to as a
stipulation pour autrui, may demand its fulfillment, the following requisites must concur: (1)
There is a stipulation in favor of a third person; (2) The stipulation is a part, not the whole, of the
contract; (3) The contracting parties clearly and deliberately conferred a favor to the third person
- the favor is not merely incidental; (4) The favor is unconditional and uncompensated; (5) The
third person communicated his or her acceptance of the favor before its revocation; and (6) The
contracting parties do not represent, or are not authorized, by the third party. However, none of
the foregoing elements obtains in this case.
It is undisputed that Sps. Mamaril are not parties to the Guard Service Contract. Neither did the
subject agreement contain any stipulation pour autrui. And even if there was, Sps. Mamaril did
not convey any acceptance thereof. Thus, under the principle of relativity of contracts, they
cannot validly claim any rights or favor under the said agreement.
In the instant case, the owners parked their six (6) passenger jeepneys inside the BSP compound
for a monthly fee of P300.00 for each unit and took the keys home with them. Hence, a lessorlessee relationship indubitably existed between them and BSP. On this score, Article 1654 of the
Civil Code provides that "the lessor (BSP) is obliged: (1) to deliver the thing which is the object
of the contract in such a condition as to render it fit for the use intended; (2) to make on the same
during the lease all the necessary repairs in order to keep it suitable for the use to which it has
been devoted, unless there is a stipulation to the contrary; and (3) to maintain the lessee in the
peaceful and adequate enjoyment of the lease for the entire duration of the contract." In relation
thereto, Article 1664 of the same Code states that "the lessor is not obliged to answer for a mere
act of trespass which a third person may cause on the use of the thing leased; but the lessee shall
have a direct action against the intruder." Here, BSP was not remiss in its obligation to provide

57

Sps. Mamaril a suitable parking space for their jeepneys as it even hired security guards to secure
the premises; hence, it should not be held liable for the loss suffered by Sps. Mamaril.
It bears to reiterate that the subject loss was caused by the negligence of the security guards in
allowing a stranger to drive out plaintiffs-appellants' vehicle despite the latter's instructions that
only their authorized drivers may do so. Moreover, the agreement with respect to the ingress and
egress of Sps. Mamaril's vehicles were coordinated only with AIB and its security guards,
without the knowledge and consent of BSP. Accordingly, the mishandling of the parked vehicles
that resulted in herein complained loss should be recovered only from the tortfeasors (Pea and
Gaddi) and their employer, AIB; and not against the lessor, BSP.

58

III. SPECIAL CONTRACTS a. SALES


1. OLIVAREZ REALTY CORPORATION AND DR. PABLO R. OLIVAREZ,
vs. BENJAMIN CASTILLO, G.R. No. 196251, July 09, 2014
FACTS:
Benjamin Castillo was the registered owner of a parcel of land located in Laurel, Batangas,
covered by Transfer Certificate of Title No. T-19972.The Philippine Tourism Authority (PTA)
allegedly claimed ownership of the same parcel of land based on Transfer Certificate of Title No.
T-18493.
Castillo and Olivarez Realty Corporation (Corporation), represented by Dr. Pablo R. Olivarez,
entered into a contract of conditional sale over the property. Under the deed of conditional sale,
Castillo agreed to sell his property to Olivarez Realty Corporation for P19,080,490.00. The
Corporation agreed to a down payment of P5,000,000.00, to be paid on a monthly basis from
April 2000 to November 2000.
As to the balance, the Corporation agreed to pay in 30 equal monthly installments every eighth
day of the month beginning in the month that the parties would receive a decision voiding the
PTAs title to the property. Under the deed of conditional sale, the Corporation shall file the
action against the PTA with the full assistance of Castillo. Should the action against the PTA
be denied, Castillo agreed to reimburse all the amounts paid by the Corporation. As to the
legitimate tenants occupying the property, the Corporation undertook to pay them disturbance
compensation, while Castillo undertook to clear the land of the tenants within six months from
the signing of the deed of conditional sale. Failure of Castillo to clear the land within six months,
the Corporation may suspend its monthly down payment until the tenants vacate the property.
The parties agreed that the Corporation may immediately occupy or take possession of the
property upon signing of the deed of conditional sale. Should the contract be cancelled, the
Corporation agreed to return the propertys possession to Castillo and forfeit all the
improvements it may have introduced on the property. However, the corporation only paid
P2,500,000.00 of the purchase price. Contrary to the agreement, the corporation did not file any
action against the PTA to void the latters title to the property. The corporation neither cleared
the land of the tenants nor paid them disturbance compensation. Despite demand, the
Corporation refused to fully pay the purchase price.
Castillo filed a complaint against the Corporation and Dr. Olivarez with the RTC for failure to
perform the conditions of the contract. Castillo alleged that the Corporation committed
substantial breach of the contract of conditional sale and prayed for rescission of contract under
Article 1191 of the Civil Code.
Olivarez Realty and Dr. Olivarez admitted that the corporation only paid P2,500,000.00 of the
purchase price for Castillo failed to fully assist the corporation in filing an action against the
PTA. Neither did Castillo clear the property of the tenants within six months from the signing of
the deed of conditional sale. Thus, the corporation had all the legal right to withhold the
subsequent payments to fully pay the purchase price. For the corporations failure to fully pay
the purchase price, Castillo claimed that he had all the right to pray for the rescission of the
contract, and he should not be held liable . . . for any alleged damages by way of litigation
expenses and attorneys fees.
The trial court held that the corporation was responsible for suing the PTA and for paying the
tenants disturbance compensation. Since defendant corporation neither filed any case nor paid
the tenants disturbance compensation, it ruled that defendant corporation had no right to
withhold payments from Castillo. The trial court ruled that Olivarez Realty Corporation breached
the contract of conditional sale, ordered for the rescission of the contract of conditional sale, and
the P2,500,000.00 forfeited in favor of Castillo as damages under Article 1191 of the Civil
Code.
The aggrieved party appealed this case to CA. The Court of Appeals affirmed in toto the trial
59

courts decision. The Corporation and Dr. Olivarez filed their motion for reconsideration but was
denied.
ISSUES:
Whether or not the parties contract is a conditional sale.
Whether or not Castillo is entitled to cancel the contract of conditional sale.
Whether or not Dr. Olivarez is solidary liable with Olivarez Realty for the amount of damages.

HELD:
Since Olivarez Realty Corporation illegally withheld payments of the purchase price, Castillo is
entitled to cancel his contract with petitioner corporation. However, we properly characterize the
parties contract as a contract to sell, not a contract of conditional sale. In both contracts to sell
and contracts of conditional sale, title to the property remains with the seller until the buyer fully
pays the purchase price. Both contracts are subject to the positive suspensive condition of the
buyers full payment of the purchase price. In a contract of conditional sale, the buyer
automatically acquires title to the property upon full payment of the purchase price. This transfer
of title is by operation of law without any further act having to be performed by the seller. In a
contract to sell, transfer of title to the prospective buyer is not automatic. The prospective seller
must convey title to the property through a deed of conditional sale.
The distinction is important to determine the applicable laws and remedies in case a party does
not fulfill his or her obligations under the contract. In contracts of conditional sale, our laws on
sales under the Civil Code of the Philippines apply. On the other hand, contracts to sell are not
governed by our law on sales but by the Civil Code provisions on conditional obligations.
Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does
not apply to contracts to sell. Failure to fully pay the purchase price is merely an event which
prevents the sellers obligation to convey title from acquiring binding force. This is because
there can be no rescission of an obligation that is still non-existent, the suspensive condition not
having happened. In this case, Castillo reserved his title to the property and undertook to
execute a deed of absolute sale upon Olivarez Realty Corporations full payment of the purchase
price. Since Castillo still has to execute a deed of absolute sale to Olivarez Realty Corporation
upon full payment of the purchase price, the transfer of title is not automatic. The contract in this
case is a contract to sell.
As this case involves a contract to sell, Article 1191 of the Civil Code of the Philippines does not
apply. The contract to sell is instead cancelled, and the parties shall stand as if the obligation to
sell never existed. Olivarez Realty Corporation shall return the possession of the property to
Castillo. Any improvement that Olivarez Realty Corporation may have introduced on the
property shall be forfeited in favor of Castillo per agreed stipulation. As for prospective sellers,
this court generally orders the reimbursement of the installments paid for the property when
setting aside contracts to sell. This is true especially if the propertys possession has not been
delivered to the prospective buyer prior to the transfer of title. In this case, however, Castillo
delivered the possession of the property to Olivarez Realty Corporation prior to the transfer of
title. We cannot order the reimbursement of the installments paid.
In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the property. It
only paid P2,500,000.00 out of the P19,080,490.00 agreed purchase price. Worse, petitioner
corporation has been in possession of Castillos property for 14 years since May 5, 2000 and has
not paid for its use of the property. The court ordered the P2,500,000.00 forfeited in favor of
Castillo as reasonable compensation for Olivarez Realty Corporations use of the property.
However, we find that Dr. Pablo R. Olivarez is not solidarily liable with Olivarez Realty
Corporation for the amount of damages. Under Article 1207 of the Civil Code of the Philippines,
there is solidary liability only when the obligation states it or when the law or the nature of the
obligation requires solidarity. In case of corporations, they are solely liable for their
obligations. The directors or trustees and officers are not liable with the corporation even if it is
60

through their acts that the corporation incurred the obligation. This is because a corporation is
separate and distinct from the persons comprising it. As an exception to the rule, directors or
trustees and corporate officers may be solidarily liable with the corporation for corporate
obligations if they acted in bad faith or with gross negligence in directing the corporate affairs.
In this case, we find that Castillo failed to prove with preponderant evidence that it was through
Dr. Olivarezs bad faith or gross negligence that Olivarez Realty Corporation failed to fully pay
the purchase price for the property. Dr. Olivarezs alleged act of making Castillo sign the deed of
conditional sale without explaining to the latter the deeds terms in Tagalog is not reason to hold
Dr. Olivarez solidarily liable with the corporation. Castillo had a choice not to sign the deed of
conditional sale. He could have asked that the deed of conditional sale be written in Tagalog.
Thus, Olivarez Realty Corporation is solely liable for the moral and exemplary damages and
attorneys fees to Castillo.

61

2. ROBERTO R. DAVID VS. EDUARDO C. DAVID, G.R. NO. 162365, JANUARY 15,
2014
FACTS:
On July 7, 1995, Eduardo and his brother Edwin, acting on their own and in behalf of their coheirs, sold their inherited properties to Roberto, specifically: (a) a parcel of land with an area of
1,231 square meters, together with all the improvements existing thereon, located in Baguio City;
and (b) two units International CO 9670 Truck Tractor with two Mi-Bed Trailers. A deed of sale
with assumption of mortgage (deed of sale) embodied the terms of their agreement, stipulating
that the consideration for the sale was P6,000,000.00, of which P2,000,000 was to be paid to
Eduardo and Edwin, and the remaining P4,000,000.00 to be paid to Development Bank of the
Philippines (DBP) in Baguio City to settle the outstanding obligation secured by a mortgage on
such properties. The parties further agreed to give Eduardo and Edwin the right to repurchase the
properties within a period of three years from the execution of the deed of sale based on the
purchase price agreed upon, plus 12% interest per annum.
In April 1997, Roberto and Edwin executed a memorandum of agreement (MOA) with the
Spouses Marquez and Soledad Go (Spouses Go), by which they agreed to sell the Baguio City
lot to the latter for a consideration ofP10,000,000.00. The MOA stipulated that "in order to save
payment of high and multiple taxes Edwin will execute the necessary Deed of Absolute Sale in
favor of the Spouses Go, in lieu of Roberto." The Spouses Go then deposited the amount
of P10,000,000.00 to Robertos account.
After the execution of the MOA, Roberto gave Eduardo P2,800,000.00 and returned to him one
of the truck tractors and trailers subject of the deed of sale. Eduardo demanded for the return of
the other truck tractor and trailer, but Roberto refused to heed the demand. Thus, Eduardo
initiated this replevin suit against Roberto, alleging that he was exercising the right to repurchase
under the deed of sale; and that he was entitled to the possession of the other motor vehicle and
trailer. In his answer, Roberto denied that Eduardo could repurchase the properties in question;
and insisted that the MOA had extinguished their deed of sale by novation.
The RTC rendered judgment in favor of Eduardo, holding that the stipulation giving Eduardo the
right to repurchase had made the deed of sale a conditional sale; that Eduardo had fulfilled the
conditions for the exercise of the right to repurchase; that the ownership of the properties in
question had reverted to Eduardo; that Robertos defense of novation had no merit; and that due
to Robertos bad faith in refusing to satisfy Eduardos claim, Eduardo should be awarded
litigation expenses and attorneys fees. Roberto appealed to the CA and the CA promulgated its
decision affirming the RTC. It opined that although there was no express exercise of the right to
repurchase, the sum of all the relevant circumstances indicated that there was an exercise of the
right to repurchase pursuant to the deed of sale, that the findings of the RTC to the effect that the
conditions for the exercise of the right to repurchase had been adequately satisfied by Eduardo,
and that no novation as claimed by Roberto had intervened. CA denied Robertos motion for
reconsideration. Hence, this petition for review on certiorari.
ISSUE:
Whether or not the conditions set forth in the Deed of Sale with assumption of Mortgage had
been satisfied for Eduardo to exercise his right of repurchase.
HELD:
A sale with right to repurchase is governed by Article 1601 of the Civil Code, which provides
that: "Conventional redemption shall take place when the vendor reserves the right to repurchase
the thing sold, with the obligation to comply with the provisions of Article 1616 and other
stipulations which may have been agreed upon." Conformably with Article 1616, the seller given
the right to repurchase may exercise his right of redemption by paying the buyer: (a) the price of
the sale, (b) the expenses of the contract, (c) legitimate payments made by reason of the sale, and
(d) the necessary and useful expenses made on the thing sold.

62

It should be noted that the alleged repurchase was exercised within the stipulated period of three
(3) years from the time the Deed of Sale with Assumption of Mortgage was executed.
From the testimony of the defendant himself, the preconditions set for the exercise of plaintiff's
right to repurchase were adequately satisfied by the latter. Thus, as stated, from the Php10
Million purchase price which was directly paid to the defendant, the latter deducted his expenses
plus interests and the loan, and the remaining amount he turned over to the plaintiff. This
testimony is an unequivocal acknowledgement from defendant that plaintiff and his co-heirs
exercised their right to repurchase the property within the agreed period by satisfying all the
conditions stipulated in the Deed of Sale with Assumption of Mortgage. Moreover, defendant
returned to plaintiff the amount of Php2.8 Million from the total purchase price of Php10.0
Million. This only means that this is the excess amount pertaining to plaintiff and co-heirs after
the defendant deducted the repurchase price of Php2.0 Million plus interests and his expenses.
Add to that is the fact that defendant returned one of the trucks and trailers subject of the Deed of
Sale with Assumption of Mortgage to the plaintiff. This is, at best, a tacit acknowledgement of
the defendant that plaintiff and his co-heirs had in fact exercised their right to repurchase. x x x
The Court affirms the judgment of the CA upholding Eduardos exercise of the right of
repurchase. With both the RTC and the CA finding and holding that Eduardo had fulfilled the
conditions for the exercise of the right to repurchase, therefore, we conclude that Eduardo had
effectively repurchased the properties subject of the deed of sale.
In Metropolitan Bank and Trust Company v. Tan, the Court ruled that a redemption within the
period allowed by law is not a matter of intent but of payment or valid tender of the full
redemption price within the period. Verily, the tender of payment is the sellers manifestation of
his desire to repurchase the property with the offer of immediate performance. As we stated in
Legaspi v. Court of Appeals, a sincere tender of payment is sufficient to show the exercise of the
right to repurchase. Here, Eduardo paid the repurchase price to Roberto by depositing the
proceeds of the sale of the Baguio City lot in the latters account. Such payment was an effective
exercise of the right to repurchase.
In sales with the right to repurchase, the title and ownership of the property sold are immediately
vested in the vendee, subject to the resolutory condition of repurchase by the vendor within the
stipulated period. Accordingly, the ownership of the affected properties reverted to Eduardo once
he complied with the condition for the repurchase, thereby entitling him to the possession of the
other motor vehicle with trailer.

63

3. HEIRS OF REYNALDO DELA ROSA VS MARIO A. BATONGBACAL, et al., G.R.


No. 179205, July 30, 2014
FACTS:
The subject property consists of a 3,750 square meter-portion of the 15,001 square meters parcel
of land situated in Barrio Saog, Marilao, Bulacan denominated as Lot No. 1, and registered
under Transfer Certificate of Title (TCT) No. T-1074494 under the names of Reynaldo Dela
Rosa (Reynaldo), Eduardo Dela Rosa (Eduardo), Araceli Dela Rosa (Araceli) and Zenaida Dela
Rosa (Zenaida). In 1984, Reynaldo offered to sell the subject property to Guillermo Batongbacal
(Guillermo) and Mario Batongbacal (Mario) for P50.00 per square meter or for a total of
P187,500.00. Pursuant to the agreement, Reynaldo received an advance payment of P31,500.00
leaving a balance of P156,000.00. As shown in the document denominated as Resibo and signed
by Reynaldo, the parties agreed that the amount of P20,000.00 as part of the advance payment
shall be paid upon the delivery of the Special Power-of-Attorney (SPA), which would authorize
Reynaldo to alienate the subject property on behalf of his co-owners and siblings. The balance
thereon shall be paid in P10,000.00 monthly installments until the purchase price is fully settled.
Thereafter, Mario and Guillermo initiated a survey to segregate the area of 3,750 square meters
from the whole area covered by TCT No. T-107449 delineating the boundaries of the subdivided
parts. Mario and Guillermo thereafter made several demands from Reynaldo to deliver the SPA
as agreed upon, but such demands all went unheeded.
Consequently, Guillermo and Mario initiated an action for Specific Performance or Rescission
and Damages before the Regional Trial Court (RTC) of Malolos, Bulacan, seeking to enforce
their Contract to Sell. Mario and Guillermo asserted that they have a better right over the subject
property and alleged that the subsequent sale thereof effected by Reynaldo to third persons is
void as it was done in bad faith.
To protect their rights Mario and Guillermo filed a Notice of Lis Pendens registering their claim
on the certificate of title covering the entire property. Reynaldo countered that the purported
Contract to Sell is void, because he never gave his consent thereto for he was made to understand
that the contract between him and the Batongbacals was merely an equitable mortgage whereby
it was agreed that the latter will loan to him the amount of P31,500.00 payable once he receives
his share in the proceeds of the sale of the land.
Mario and Guillermo failed to adduce sufficient evidence to support their complaint, the RTC,
dismissed the Civil Case and ordered Reynaldo to return to the former the sum of P28,000.00
with 12% annual interest. Reynaldo failed to convince the court a quo that the contract he
entered into was an equitable mortgage. It was held by the trial court that the supposed Contract
to Sell denominated as Resibo is unenforceable under Article 1403 of the New Civil Code
because Reynaldo cannot bind his co-owners into such contract without an SPA authorizing him
to do so.
On appeal, the Court of Appeals, brushed aside the claim of equitable mortgage and held that the
sale effected by Reynaldo of his undivided share in the property is valid and enforceable.No SPA
is necessary for Reynaldo's disposition of his undivided share as it is limited to the portion that
may be allotted to him upon the termination of the co-ownership. The Batongbacals could have
validly demanded from Reynaldo to deliver the subject property pursuant to the Contract to Sell
but such option is no longer feasible because the entire property has already been sold to third
persons to whom a new title was issued. The appellate court thus proceeded to rescind the
contract and ordered Reynaldo to return the amount he received as consideration thereby
restoring the parties to their situation before entering into the agreement.
Mario and Guillermo filed a motion for reconsideration which was granted by the court.
Reynaldo died pending the resolution of the case hence he was substituted by his heirs in this
case. Petitioners Heirs of Reynaldo are now before this Court via this instant Petition for Review
on Certiorari.
64

ISSUE:
Whether or not the contract entered into by parties was a Contract to Sell or an equitable
mortgage.
HELD:
An equitable mortgage is defined as one although lacking in some formality, or form or words,
or other requisites demanded by a statute, nevertheless reveals the intention of the parties to
charge real property as security for a debt, and contains nothing impossible or contrary to law.
For the presumption of an equitable mortgage to arise, two requisites must concur: (1) that the
parties entered into a contract denominated as a sale; and (2) the intention was to secure an
existing debt by way of mortgage.
A perusal of the contract denominated as Resibo reveals the utter frailty of petitioners' position
because nothing therein suggests, even remotely, that the subject property was given to secure a
monetary obligation. The terms of the contract set forth in no uncertain terms that the instrument
was executed with the intention of transferring the ownership of the subject property to the buyer
in exchange for the price. Nowhere in the deed is it indicated that the transfer was merely
intended to secure a debt obligation. On the contrary, the document clearly indicates the intent of
Reynaldo to sell his share in the property. The primary consideration in determining the true
nature of a contract is the intention of the parties. 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. That the parties intended some other acts or contracts apart from the express
terms of the agreement, was not proven by Reynaldo during the trial or by his heirs herein.
Beyond their bare and uncorroborated asseverations that the contract failed to express the true
intention of the parties, the record is bereft of any evidence indicative that there was an equitable
mortgage.
Neither could the allegation of gross inadequacy of the price carry the day for the petitioners. It
must be underscored at this point that the subject of the Contract to Sell was limited only to proindiviso share of Reynaldo consisting an area of 3,750 square meter and not the entire 15,001square meter parcel of land. As a co-owner of the subject property, Reynaldo's right to sell,
assign or mortgage his ideal share in the property held in common is sanctioned by law. The
applicable law is Article 493 of the New Civil Code, which spells out the rights of co-owners
over a co-owned property.
Pursuant to this law, a co-owner has the right to alienate his proindiviso share in the co-owned
property even without the consent of his co-owners. This right is absolute and in accordance with
the well-settled doctrine that a co-owner has a full ownership of his pro-indiviso share and has
the right to alienate, assign or mortgage it, and substitute another person for its enjoyment. In
other words, the law does not prohibit a co-owner from selling, alienating, mortgaging his ideal
share in the property held in common.
Thus, even if the impression of the Court of Appeals were true, i.e., that the entire property has
been sold to thirds persons, such sale could not have affected the right of Mario and Guillermo to
recover the property from Reynaldo. In view of the nature of co-ownership, the Court of Appeals
correctly ruled that the terms in the Contract to Sell, which limited the subject to Reynaldo's
ideal share in the property held in common is perfectly valid and binding. In fact, no authority
from the other co-owners is necessary for such disposition to be valid as he is afforded by the
law full ownership of his part and of the fruits and benefits pertaining thereto condition set forth
in a sale contract requiring a co-owner to secure an authority from his co-owners for the
alienation of his share, as seemingly indicated in this case, should be considered mere surplusage
and does not, in any way, affect the validity or the enforceability of the contract. Nor should such
a condition indicate an intention to sell the whole because the contrary intention has been clearly
written.

65

4. THE HEIRS OF VICTORINO SARILI, NAMELY, ISABEL A. SARILI, ET AL. V.


PEDRO F. LAGROSA, REPRESENTED IN THIS ACT BY HIS ATTORNEY-INFACT, LOURDES LABIOS MOJICA, G.R. NO. 193517, JANUARY 15, 2014
FACTS:
Respondent, represented by his attorney-in-fact Lourdes Labios Mojica (Lourdes) via a special
power of attorney, filed a complaint against Sps. Sarili and the Register of Deeds of Caloocan
City (RD) before the RTC, alleging, among others, that he is the owner of a certain parcel of land
situated in Caloocan City covered by TCT No. 55979 (subject property) and has been religiously
paying the real estate taxes therefore since its acquisition. Respondent claimed that he is a
resident of California, USA, and that during his vacation in the Philippines, he discovered that a
new certificate of title to the subject property was issued by the RD in the name of Victorino
married to Isabel Amparo, by virtue of a falsified Deed of Absolute Sale dated February 16, 1978
purportedly executed by him and his wife, Amelia U. Lagrosa. He averred that the falsification
of the said deed of sale was a result of the fraudulent, illegal, and malicious acts committed by
Sps. Sarili and the RD in order to acquire the subject property and, as such, prayed for the
annulment of the issued TCT, and that Sps. Sarili deliver to him the possession of the subject
property, or, in the alternative, that Sps. Sarili and the RD jointly and severally pay him the
amount of P1,000,000.00, including moral damages as well as attorneys fees.
In their answer, Sps. Sarili maintained that they are innocent purchasers for value, having
purchased the subject property from Ramon B. Rodriguez (Ramon), who possessed and
presented a Special Power of Attorney (subject SPA) to sell/dispose of the same, and, in such
capacity, executed a Deed of Absolute Sale conveying the said property in their favor. In this
relation, they denied any participation in the preparation of the deed of sale, which may have
been merely devised by the "fixer" they hired to facilitate the issuance of the title in their
names. Victorino passed away and was substituted by his heirs, herein petitioners.
The RTC rendered a Decision finding respondents signature on the subject SPA as "the same
and exact replica" of his signature in the SPA in favor of Lourdes. Thus, with Ramons authority
having been established, it declared the November 20, 1992 deed of sale executed by the latter as
"valid, genuine, lawful and binding" and, as such, had validly conveyed the subject property in
favor of Sps. Sarili. It further found that respondent "acted with evident bad faith and malice"
and was, therefore, held liable for moral and exemplary damages. Aggrieved, respondent
appealed to the CA. The CA granted respondents appeal and held that the RTC erred in its
ruling since the November 20, 1992 deed of sale, which the RTC found "as valid and genuine,"
was not the source document for the transfer of the subject property and the issuance of TCT in
the name of Sps. Sarili but rather the February 16, 1978 deed of sale, the fact of which may be
gleaned from the Affidavit of Late Registration executed by Isabel. Further, it found that
respondent was "not only able to preponderate his claim over the subject property, but has
likewise proved that his and his wifes signatures in the 1978 deed of sale x x x were forged."
"A comparison by the naked eye of the genuine signature of respondent found in his 1999 SPA
in favor of Lourdes, and those of his falsified signatures in the 1978 deed of sale and the subject
SPA shows that they are not similar." It also observed that "the testimony of respondent denying
the authenticity of his purported signature with respect to the February 16, 1978 deed of sale was
not rebutted x x x." In fine, the CA declared the deeds of sale dated February 16, 1978 and
November 20, 1992, as well as the subject SPA as void, and consequently ordered the RD to
cancel TCT in the name of Victorino married to Isabel, and consequently reinstate TCT in
respondents name.
Dissatisfied, petitioners moved for reconsideration which was, however, denied in a Resolution,
hence, the instant petition.
ISSUE:
Whether or not Sps. Sarili are innocent purchasers for value.
Whether or not Ramon with a Special Power of Attorney can validly execute a Deed of sale that
would convey the property to the buyer.
66

HELD:
A higher degree of prudence is required from one who buys from a person who is not the
registered owner, although the land object of the transaction is registered. In such a case, the
buyer is expected to examine not only the certificate of title but all factual circumstances
necessary for him to determine if there are any flaws in the title of the transferor. The buyer also
has the duty to ascertain the identity of the person with whom he is dealing with and the latters
legal authority to convey the property. The strength of the buyers inquiry on the sellers
capacity or legal authority to sell depends on the proof of capacity of the seller. If the proof of
capacity consists of a special power of attorney duly notarized, mere inspection of the face of
such public document already constitutes sufficient inquiry. If no such special power of attorney
is provided or there is one but there appears to be flaws in its notarial acknowledgment, mere
inspection of the document will not do; the buyer must show that his investigation went beyond
the document and into the circumstances of its execution.
In the present case, it is undisputed that Sps. Sarili purchased the subject property from Ramos
on the strength of the latters ostensible authority to sell under the subject SPA. The said
document, however, readily indicates flaws in its notarial acknowledgment since the
respondents community tax certificate (CTC) number was not indicated thereon. Despite this
irregularity, however, Sps. Sarili failed to show that they conducted an investigation beyond the
subject SPA and into the circumstances of its execution as required by prevailing jurisprudence.
Hence, Sps. Sarili cannot be considered as innocent purchasers for value.
The due execution and authenticity of the subject SPA are of great significance in determining
the validity of the sale entered into by Victorino and Ramon since the latter only claims to be the
agent of the purported seller (i.e., respondent). Article 1874 of the Civil Code provides that
"when a sale of a piece of land or any interest therein is through an agent, the authority of the
latter shall be in writing; otherwise, the sale shall be void." In other words, if the subject SPA
was not proven to be duly executed and authentic, then it cannot be said that the foregoing
requirement had been complied with; hence, the sale would be void.
While Ramon identified the signature of respondent on the subject SPA based on his alleged
familiarity with the latters signature, he, however, stated no basis for his identification of the
signatures of respondents wife Amelia and the witness, Evangeline F. Murral, and even failed to
identify the other witness, who were also signatories to the said document. In other words, no
evidence was presented to authenticate the signatures of the other signatories of the subject SPA
outside from respondent. Respondents signature appearing on the subject SPA is not similar to
his genuine signature appearing in the November 25, 1999 SPA in favor of Lourdes, especially
the signature appearing on the left margin of the first page.
The respondent was able to preponderate his claims of forgery against the subject SPA. In view
of its invalidity, the November 20, 1992 sale relied on by Sps. Sarili to prove their title to the
subject property is therefore void.
At this juncture, it is well to note that it was, in fact, the February 16, 1978 deed of sale which
as the CA found was actually the source of the issuance of TCT No. 262218. Nonetheless, this
document was admitted to be also a forgery. Since Sps. Sarilis claim over the subject property is
based on forged documents, no valid title had been transferred to them (and, in turn, to
petitioners). Verily, when the instrument presented is forged, even if accompanied by the
owners duplicate certificate of title, the registered owner does not thereby lose his title, and
neither does the assignee in the forged deed acquire any right or title to the
property. Accordingly, TCT No. 262218 in the name of Victorino married to Isabel should be
annulled, while TCT No. 55979 in the name of respondent should be reinstated.

67

5. OPTIMUM DEVELOPMENT BANK V. SPOUSES BENIGNO V. JOVELLANOS


AND LOURDES R. JOVELLANOS, G.R. NO. 189145, DECEMBER 4, 2013.
FACTS:
Sps. Jovellanos entered into a Contract to Sell with Palmera Homes, Inc. (Palmera Homes) for
the purchase of a residential house and lot situated in Block 3, Lot 14, Villa Alegria Subdivision,
Caloocan City for a total consideration of P1,015,000.00. Pursuant to the contract, Sps.
Jovellanos took possession of the subject property upon a down payment of P91,500.00,
undertaking to pay the remaining balance of the contract price in equal monthly installments of
P13,107.00 for a period of 10 years starting June 12, 2005.
In 2006, Palmera Homes assigned all its rights, title and interest in the Contract to Sell in favor
of petitioner Optimum Development Bank (Optimum) through a Deed of Assignment of even
date.
Optimum issued a Notice of Delinquency and Cancellation of Contract to Sell for Sps.
Jovellanoss failure to pay their monthly installments despite several written and verbal notices.
In a final Demand Letter dated May 25, 2006, Optimum required Sps. Jovellanos to vacate and
deliver possession of the subject property within seven (7) days which, however, remained
unheeded. Hence, Optimum filed a complaint for unlawful detainer before the MeTC.
Despite having been served with summons, together with a copy of the complaint, Sps.
Jovellanos failed to file their answer within the prescribed reglementary period, thus prompting
Optimum to move for the rendition of judgment. Thereafter, Sps. Jovellanos filed their
opposition with motion to admit answer, questioning the jurisdiction of the court, among others.
Further, they filed a Motion to Reopen and Set the Case for Preliminary Conference, which the
MeTC denied.
MeTC ordered Sps. Jovellanos to vacate the subject property and pay Optimum reasonable
compensation for its use and occupation until possession has been surrendered. It held that Sps.
Jovellanoss possession of the said property was by virtue of a Contract to Sell which had
already been cancelled for nonpayment of the stipulated monthly installment payments. As
such, their rights of possession over the subject property necessarily terminated or expired and
hence, their continued possession thereof constitute unlawful detainer.
Sps. Jovellanos appealed to the RTC, claiming that Optimum counsel made them believe that a
compromise agreement was being prepared, thus their decision not to engage the services of
counsel and their concomitant failure to file an answer. They also assailed the jurisdiction of the
MeTC, claiming that the case did not merely involve the issue of physical possession but rather,
questions arising from their rights under a contract to sell which is a matter that is incapable of
pecuniary estimation and, therefore, within the jurisdiction of the RTC.
RTC affirmed MeTCs decision holding that the latter did not err in refusing to admit Sps.
Jovellanoss belatedly filed answer considering the mandatory period for its filing. It also
affirmed the MeTCs finding that the action does not involve the rights of the respective parties
under the contract but merely the recovery of possession by Optimum of the subject property
after the spouses default.
CA reversed and set aside RTCs decision. It found that the controversy does not only involve
the issue of possession but also the validity of the cancellation of the Contract to Sell and the
determination of the rights of the parties thereunder as well as the governing law, among others,
Republic Act No. (RA) 6552.
ISSUE:
Whether or not there was a cancellation of the Contract to Sell and petitioners having the right of
possession over the subject property.

68

HELD:
The unlawful detainer suit filed by Optimum against Sps. Jovellanos for illegally withholding
possession of the subject property is similarly premised upon the cancellation or termination of
the Contract to Sell between them. Indeed, it was well within the jurisdiction of the MeTC to
consider the terms of the parties agreement in order to ultimately determine the factual bases of
Optimums possessory claims over the subject property. Proceeding accordingly, the MeTC held
that Sps. Jovellanos nonpayment of the installments due had rendered the Contract to Sell
without force and effect, thus depriving the latter of their right to possess the property subject of
said contract. As the Court similarly held in other cases, the sellers cancellation of the contract
to sell necessarily extinguished the buyers right of possession over the property that was the
subject of the terminated agreement. Verily, in a contract to sell, the prospective seller binds
himself to sell the property subject of the agreement exclusively to the prospective buyer upon
fulfillment of the condition agreed upon which is the full payment of the purchase price but
reserving to himself the ownership of the subject property despite delivery thereof to the
prospective buyer. The full payment of the purchase price in a contract to sell is a suspensive
condition, the nonfulfillment of which prevents the prospective sellers obligation to convey
title from becoming effective.
Further, it is significant to note that given that the Contract to Sell in this case is one which has
for its object real property to be sold on an installment basis, the said contract is especially
governed by and thus, must be examined under the provisions of RA 6552, or the Realty
Installment Buyer Protection Act, which provides for the rights of the buyer in case of his
default in the payment of succeeding installments.
Since Sps. Jovellanos failed to pay their stipulated monthly installments as found by the MeTC,
the Court examines Optimums compliance with Section 4 of RA 6552, which is the provision
applicable to buyers who have paid less than two (2) yearsworth of installments. Essentially, the
said provision provides for three (3) requisites before the seller may actually cancel the subject
contract: first, the seller shall give the buyer a 60day grace period to be reckoned from the date
the installment became due; second, the seller must give the buyer a notice of
cancellation/demand for rescission by notarial act if the buyer fails to pay the installments due at
the expiration of the said grace period; and third, the seller may actually cancel the contract only
after thirty (30) days from the buyers receipt of the said notice of cancellation/demand for
rescission by notarial act.
The 60day grace period automatically operated in favor of the buyers, Sps. Jovellanos, and took
effect from the time that the maturity dates of the installment payments lapsed. With the said
grace period having expired bereft of any installment payment on the part of Sps. Jovellanos,
Optimum then issued a notarized Notice of Delinquency and Cancellation of Contract on April
10, 2006. Finally, in proceeding with the actual cancellation of the contract to sell, Optimum
gave Sps. Jovellanos an additional thirty (30) days within which to settle their arrears and
reinstate the contract, or sell or assign their rights to another. It was only after the expiration of
the thirty day (30) period did Optimum treat the contract to sell as effectively cancelled making
as it did a final demand upon Sps. Jovellanos to vacate the subject property only on May 25,
2006. The Court finds that there was a valid and effective cancellation of the Contract to Sell in
accordance with Section 4 of RA 6552 and since Sps. Jovellanos had already lost their right to
retain possession of the subject property as a consequence of such cancellation, their refusal to
vacate and turn over possession to Optimum makes out a valid case for unlawful detainer as
properly adjudged by the MeTC. Petition is granted.

69

6. ACE FOODS, INC. V. MICRO PACIFIC TECHNOLOGIES CO., LTD., G.R. NO.
200602, DECEMBER 11, 2013
FACTS:
On September 26, 2001, MTCL sent a letter-proposal for the delivery and sale of the subject
products to be installed at various offices of ACE Foods. On October 29, 2001, ACE Foods
accepted MTCLs proposal and accordingly issued Purchase Order No. 100023 (Purchase Order)
for the subject products amounting to 646,464.00 (purchase price). Thereafter, or on March 4,
2002, MTCL delivered the said products to ACE Foods as reflected in Invoice No. 7733 (Invoice
Receipt). The fine print of the invoice states, inter alia, , that title to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the terms and
conditions of above and payment of the price. (title reservation stipulation).
After delivery, the subject products were then installed and configured in ACE Foodss premises.
MTCLs demands against ACE Foods to pay the purchase price, however, remained unheeded.
Instead of paying the purchase price, ACE Foods sent MTCL a Letter dated September 19, 2002,
stating that it ha[s] been returning the [subject products] to [MTCL] thru [its] sales
representative Mr. Mark Anteola who has agreed to pull out the said [products] but had failed to
do so up to now.
Thus, on October 16, 2002, ACE Foods filed a complaint against MTCL before the RTC,
praying that the latter pull out from its premises the subject products since MTCL breached its
after delivery obligations.
In its answer, MTCL alleged, among others, that they have duly complied with their obligations,
and as such, prayed that ACE Foods be compelled to pay the purchase price as well as damages
related to the transaction.
The RTC ruled in favor of ACE foods finding that the agreement between ACE Foods and
MTCL was a contract to sell. This conclusion was based on the fine print of the Invoice Receipt
which expressly reserved the title of ownership to MTCL until the price is fully paid, noting
further that in a contract to sell, the prospective seller explicitly reserves the transfer of title to
the prospective buyer, and said transfer is conditioned upon the full payment of the purchase
price.
Upon appeal, the CA reversed the decision of the RTC, where it found that the agreement
between the parties is in the nature of a contract of sale, observing that the said contract had been
perfected from the time ACE Foods sent the Purchase Order to MTCL which, in turn, delivered
the subject products covered by the Invoice Receipt and subsequently installed and configured
them in ACE Foods premises. Hence, this present petition.

ISSUE: Whether the contract entered into by the parties was a contract to sell or a contract of
sale.
HELD:
A contract is what the law defines it to be, taking into consideration its essential elements, and
not what the contracting parties call it. The real nature of a contract may be determined from the
express terms of the written agreement and from the contemporaneous and subsequent acts of the
contracting parties. However, in the construction or interpretation of an instrument, the intention
of the parties is primordial and is to be pursued. The denomination or title given by the parties in
their contract is not conclusive of the nature of its contents. The very essence of a contract of sale
is the transfer of ownership in exchange for a price paid or promised. This may be gleaned from
Article 1458 of the Civil Code.
A contract of sale is classified as a consensual contract, which means that the sale is perfected by
mere consent. No particular form is required for its validity. Upon perfection of the contract, the
70

parties may reciprocally demand performance, i.e., the vendee may compel transfer of ownership
of the object of the sale, and the vendor may require the vendee to pay the thing sold.
In contrast, a contract to sell is defined as a bilateral contract whereby the prospective seller,
while expressly reserving the ownership of the property despite delivery thereof to the
prospective buyer, binds himself to sell the property exclusively to the prospective buyer upon
fulfillment of the condition agreed upon, i.e., the full payment of the purchase price. A contract
to sell may not even be considered as a conditional contract of sale where the seller may likewise
reserve title to the property subject of the sale until the fulfillment of a suspensive condition,
because in a conditional contract of sale, the first element of consent is present, although it is
conditioned upon the happening of a contingent event which may or may not occur.
The Court concurs with the CA that the parties have agreed to a contract of sale and not to a
contract to sell as adjudged by the RTC. Bearing in mind its consensual nature, a contract of sale
had been perfected at the precise moment ACE Foods, as evinced by its act of sending MTCL
the Purchase Order, accepted the latters proposal to sell the subject products in consideration of
the purchase price of P646,464.00. From that point in time, the reciprocal obligations of the
parties i.e., on the one hand, of MTCL to deliver the said products to ACE Foods, and, on the
other hand, of ACE Foods to pay the purchase price therefor within thirty (30) days from
delivery already arose and consequently may be demanded. Article 1475 of the Civil Code
makes this clear.
Records are bereft of any showing that the title reservation stipulation novated the contract of
sale between the parties which, to repeat, already existed at the precise moment ACE Foods
accepted MTCLs proposal. To be sure, novation, in its broad concept, may either be extinctive
or modificatory. It is extinctive when an old obligation is terminated by the creation of a new
obligation that takes the place of the former; it is merely modificatory when the old obligation
subsists to the extent it remains compatible with the amendatory agreement. In either case,
however, novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and unequivocal to
be mistaken. In the present case, it has not been shown that the title reservation stipulation
appearing in the Invoice Receipt had been included or had subsequently modified or superseded
the original agreement of the parties. The fact that the Invoice Receipt was signed by a
representative of ACE Foods does not, by and of itself, prove animus novandi since: (a) it was
not shown that the signatory was authorized by ACE Foods (the actual party to the transaction)
to novate the original agreement; (b) the signature only proves that the Invoice Receipt was
received by a representative of ACE Foods to show the fact of delivery; and (c) as matter of
judicial notice, invoices are generally issued at the consummation stage of the contract and not
its perfection, and have been even treated as documents which are not actionable per se, although
they may prove sufficient delivery. Absent any clear indication that the title reservation
stipulation was actually agreed upon, the Court must deem the same to be a mere unilateral
imposition on the part of MTCL which has no effect on the nature of the parties original
agreement as a contract of sale. The obligations arising thereto, among others, ACE Foodss
obligation to pay the purchase price as well as to accept the delivery of the goods, remain
enforceable and subsisting.

71

7. SPOUSES MICHELLE AND NOEL NOYNAY VS. CITIHOMES BUILDER AND


DEVELOPMENT, INC., G.R. NO. 204160, SEPTEMBER 22, 2014.
FACTS:
Citihomes and Spouses Noynay executed a contract to sell covering the sale of a house and lot
located in San Jose Del Monte, Bulacan, and covered by Transfer Certificate of Title (TCT) No.
T-43469. Under the terms of the contract, the price of the property was fixed at P915,895.00,
with a downpayment of P183,179.00, and the remaining balance to be paid in 120 equal monthly
installments with an annual interest rate of 21% commencing on February 8, 2005 and every 8th
day of the month thereafter.
Subsequently, Citihomes executed the Deed of Assignment of Claims and Accounts8
(Assignment) in favor of United Coconut Planters Bank (UCPB) on May 12, 2005. Under the
said agreement, UCPB purchased from Citihomes various accounts, including the account of
Spouses Noynay, for a consideration of P100,000,000.00. In turn, Citihomes assigned its rights,
titles, interests, and participation in various contracts to sell with its buyers to UCPB.
Spouses Noynay allegedly started to default in their payments. Months later, Citihomes decided
to declare Spouses Noynay delinquent and to cancel the contract considering that nine months of
agreed amortizations were left unpaid. On December 8, 2007, the notarized Notice of
Delinquency and Cancellation of the Contract to Sell was received by Spouses Noynay. They
were given 30 days within which to pay the arrears and failure to do so would authorize
Citihomes to consider the contract as cancelled.
Thus, Citihomes sent its final demand letter asking Spouses Noynay to vacate the premises due
to their continued failure to pay the arrears. Spouses Noynay did not heed the demand, forcing
Citihomes to file the complaint for unlawful detainer before the MTCC. The MTCC dismissed
the complaint.
On appeal to the RTC, however, the RTC stated that the MTCC erred in interpreting the deed of
assignment as having the effect of relinquishing all of Citihomes rights over the subject
property. The RTC explained that the assignment was limited only to the installment accounts
receivables due from Spouses Noynay and did not include the transfer of title or ownership over
the property. It pointed out that Citihomes remained as the registered owner of the subject
property, and so it had the right to ask for the eviction of Spouses Noynay. As to the issue of who
had the better right of possession, the RTC ordered that the records be remanded to the MTCC
for the proper determination. Said decision was affirmed by the CA upon appeal. Here, the CA
primarily recognized the relevance of Republic Act (R.A.) No. 6552, otherwise known as the
Realty Installment Buyer Act (Maceda Law), in determining the limits of the right to possess of
Spouses Noynay in their capacity as defaulting buyers in a realty installment scheme.
Spouses Noynay moved for reconsideration, but the CA denied their motion.
Hence, this petition.
ISSUES:
Whether or not Citihomes has a cause of action for ejectment against Spouses Noynay. In effect,
Spouses Noynay would have this Court determine whether Citihomes may rightfully evict them.
HELD:
In this case, the execution of the Assignment in favor of UCPB relegated Citihomes to the status
of a mere stranger to the jural relations established under the contract to sell. With UCPB as the
assignee, it is clear that Citihomes has ceased to have any right to cancel the contract to sell with
Spouses Noynay. Without this right, which has been vested in UCPB, Citihomes undoubtedly
had no cause of action against Spouses Noynay.
This is not to say that Citihomes lost all interest over the property. To be clear, what were
assigned covered only the rights in the Contract to Sell and not the property rights over the house
72

and lot, which remained registered under Citihomes name. Considering, however, that the
unlawful detainer case involves mere physical or material possession of the property and is
independent of any claim of ownership by any of the parties, the invocation of ownership by
Citihomes is immaterial in the just determination of the case.
Granting that the MTCC erred in ruling that Citihomes had no cause of action by reason of the
Assignment it made in favor of UCPB, the Court still upholds the right of the Spouses Noynay to
remain undisturbed in the possession of the subject property. The reason is simple Citihomes
failed to comply with the procedures for the proper cancellation of the contract to sell as
prescribed by Maceda Law.
In Pagtalunan v. Manzano, the Court stressed the importance of complying with the provisions of
the Maceda Law as to the cancellation of contracts to sell involving realty installment schemes.
There it was held that the cancellation of the contract by the seller must be in accordance with
Section 3 (b) of the Maceda Law, which requires the notarial act of rescission and the refund to
the buyer of the full payment of the cash surrender value of the payments made on the property.
The actual cancellation of the contract takes place after thirty (30) days from receipt by the buyer
of the notice of cancellation or the demand for rescission of the contract by a notarial act and
upon full payment of the cash surrender value to the buyer.
According to the lower courts, Spouses Noynay failed to complete the two-year minimum period
of paid amortizations, thus, the cancellation of the contract to sell no longer required the payment
of the cash surrender value. This conclusion rests on the allegation that the amortization
payments commenced only on May 31, 2005. If indeed it were true that the payments started
only on that date, Spouses Noynay would not have completed the required two-year period to be
entitled to the payment of cash surrender value. Records, however, show otherwise.
Moreover, based on the Statement of Account, dated March 18, 2009, Spouses Noynay started
defaulting from January 8, 2008. This shows that prior to that date, amortizations covering the 3year period, which started with the downpayment, had been paid. This is consistent with the
admission of Citihomes during the preliminary conference. By its admission that Spouses
Noynay had been paying the amortizations for three (3) years, there is no reason to doubt
Spouses Noynays compliance with the minimum requirement of two years payment of
amortization, entitling them to the payment of the cash surrender value provided for by law and
by the contract to sell. To reiterate, Section 3(b) of the Maceda Law requires that for an actual
cancellation to take place, the notice of cancellation by notarial act and the full payment of the
cash surrender value must be first received by the buyer. Clearly, no payment of the cash
surrender value was made to Spouses Noynay. Necessarily, no cancellation of the contract to
sell could be considered as validly effected.
Without the valid cancellation of the contract, there is no basis to treat the possession of the
property by Spouses Noynay as illegal. In AMOSUP-PTGWO-ITF v. Decena, the Court
essentially held that such similar failure to validly cancel the contract, meant that the possessor
therein, similar to Spouses Noynay in this case, remained entitled to the possession of the
property.

73

8. SPOUSES JOSE AND BEATRIZ ROQUE, et al. vs. MA. PAMELA P. AGUADO, et al;
G.R. No. 193787, April 7, 2014
FACTS:
Petitioners- Spouses Roque and the original owners of the then unregistered Lot 18089, Rivero et
al. executed a Deed of Conditional Sale of Real Property (1977 Deed of Conditional Sale) over a
1,231-sq. m. portion of Lot 18089 (subject portion) for a consideration of P30,775.00. The
parties agreed that Spouses Roque shall make an initial payment of P15,387.50 upon signing,
while the remaining balance of the purchase price shall be payable upon the registration of Lot
18089, as well as the segregation and the concomitant issuance of a separate title over the subject
portion in their names. After the deeds execution, Spouses Roque took possession and
introduced improvements on the subject portion which they utilized as a balut factory.
Fructuoso Sabug, Jr., former Treasurer of the National Council of Churches in the Philippines
(NCCP), applied for a free patent over the entire Lot 18089 and was eventually issued Original
Certificate of Title (OCT). Sabug, Jr. and Rivero, in their personal capacity and in representation
of Rivero, et al., executed a Joint Affidavit (1993 Joint Affidavit), acknowledging that the
subject portion belongs to Spouses Roque and expressed their willingness to segregate the same
from the entire area of Lot 18089.
However, Sabug, Jr., through a Deed of Absolute Sale (1999 Deed of Absolute Sale), sold Lot
18089 to one Ma. Pamela P. Aguado (Aguado) for P2,500,000.00, who, in turn, caused the
cancellation of OCT and the issuance of Transfer Certificate of Title in her name.
Thereafter, Aguado obtained an P8,000,000.00 loan from the Land Bank secured by a mortgage
over Lot 18089. Aguado defaulted hence Land Bank commenced extra-judicial foreclosure
proceedings and eventually tendered the highest bid in the auction sale. Upon Aguados failure
to redeem the subject property, Land Bank consolidated its ownership, and TCTwas issued in its
name.
In 2003, Spouses Roque filed a complaint for reconveyance, annulment of sale, deed of real
estate mortgage, foreclosure, and certificate of sale, and damages before the RTC seeking to be
declared as the true owners of the subject portion which had been erroneously included in the
sale between Aguado and Sabug, Jr., and, subsequently, the mortgage to Land Bank, both
covering Lot 18089 in its entirety. In defense, NCCP and Sabug, Jr. denied any knowledge of the
1977 Deed of Conditional Sale through which the subject portion had been purportedly conveyed
to Spouses Roque.
Aguado raised the defense of an innocent purchaser for value as she allegedly derived her title
from Sabug, Jr., the registered owner in OCT, which certificate of title at the time of sale was
free from any lien and/or encumbrances. On the other hand, Land Bank averred that it had no
knowledge of Spouses Roques claim relative to the subject portion, considering that at the time
the loan was taken out, its entirety was registered in Aguados name and no lien and/or
encumbrance was annotated on her certificate of title.
NCCP filed a separate complaint also for declaration of nullity of documents and certificates of
title and damages. It claimed to be the real owner of Lot 18089 which it supposedly acquired
from Sabug, Jr. through an oral contract of sale in the early part of 1998, followed by the
execution of a Deed of Absolute Sale on December 1998. NCCP also alleged that in October of
the same year, it entered into a Joint Venture Agreement (JVA) with Pilipinas Norin
Construction Development Corporation (PNCDC), a company owned by Aguados parents, for
the development of its real properties, including Lot 18089, into a subdivision project, and as
such, turned over its copy of OCT to PNCDC. Upon knowledge of the purported sale of Lot to
Aguado, Sabug, Jr. denied the transaction and alleged forgery claiming that the Aguados and
PNCDC conspired to defraud NCCP. NCCP averred that Land Bank failed to exercise the
diligence required to ascertain the true owners of Lot 18089. There being no lien and/ or

74

encumbrance annotated on its certificate of title, it cannot be held liable for NCCPs claims.
Thus, it prayed for the dismissal of NCCPs complaint.
The RTC dismissed the complaints of Spouses Roque and NCCP. The CA affirmed RTCs
decision. Aggrieved, both Spouses Roque and NCCP moved for reconsideration but were denied
by the CA.
ISSUES:
Whether or not the contract entered into by the Spouses Roques was a contract of sale.
Whether or not there was a double sale.
HELD:
Spouses Roque claim that the subject portion covered by the 1977 Deed of Conditional Sale
between them and Rivero, et al. was wrongfully included in the certificates of title covering Lot
18089, and, hence, must be segregated therefrom and their ownership thereof be confirmed.
Examining the provisions of the contract, the Court finds that the stipulation shows that the 1977
Deed of Conditional Sale is actually in the nature of a contract to sell and not one of sale
contrary to Spouses Roques belief. In this relation, it has been consistently ruled that where the
seller promises to execute a deed of absolute sale upon the completion by the buyer of the
payment of the purchase price, the contract is only a contract to sell even if their agreement is
denominated as a Deed of Conditional Sale, as in this case. This treatment stems from the legal
characterization of a contract to sell, that is, 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 subject property exclusively to the prospective buyer
upon fulfillment of the condition agreed upon, such as, the full payment of the purchase price.
Elsewise stated, in a contract to sell, ownership is retained by the vendor and is not to pass to the
vendee until full payment of the purchase price.
It is undisputed that Spouses Roque have not paid the final installment of the purchase price. As
such, the condition which would have triggered the parties obligation to enter into and thereby
perfect a contract of sale in order to effectively transfer the ownership of the subject portion from
the sellers (i.e., Rivero et al.) to the buyers (Spouses Roque) cannot be deemed to have been
fulfilled. Consequently, the latter cannot validly claim ownership over the subject portion even if
they had made an initial payment and even took possession of the same.
It is essential to distinguish between a contract to sell and a conditional contract of sale specially
in cases where the subject property is sold by the owner not to the party the seller contracted
with, but to a third person, as in the case at bench. In a contract to sell, there being no previous
sale of the property, a third person buying such property despite the fulfilment of the suspensive
condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer
in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property.
There is no double sale in such case. Title to the property will transfer to the buyer after
registration because there is no defect in the owner-sellers title per se, but the latter, of course,
may be sued for damages by the intending buyer.
On the matter of double sales, suffice it to state that Sps. Roques reliance on Article 1544 of the
Civil Code has been misplaced since the contract they base their claim of ownership on is, as
earlier stated, a contract to sell, and not one of sale. In Cheng v. Genato, the Court stated the
circumstances which must concur in order to determine the applicability of Article 1544, none of
which are obtaining in this case.

75

9. BIGNAY EX-IM PHILIPPINES, INC. V. UNION BANK OF THE PHILIPPINES /


UNION BANK OF THE PHILIPPINES V. BIGNAY EX-IM PHILIPPINES, INC.,
G.R. NO. 171590 & G.R. NO. 171598, FEBRUARY 12, 2014.
FACTS:
Petitioner Bignay EX- IM Philippines, Inc. offered to purchase a foreclosed property located at
Loyola Heights, Quezon City. A Deed of Absolute Sale was executed by and between Union
Bank and Bignay whereby the property was conveyed to Bignay for P4 million. The deed of sale
was executed by the parties through Bignays Siy and Union Banks Senior Vice President
Anthony Robles. Thereafter, Bignay mortgaged the property to Union Bank, presumably to
secure a loan obtained from the latter.
The trial court found that Union Banks Senior Vice President, Robles, maintained a secret
alliance and relationship of trust with Bignays Siy, whereby Robles would look out for desirable
properties from the banks asset inventory, recommend them to Siy, then facilitate the
negotiation, sale and documentation for her. In return, he would receive a 3% commission from
Siy, or some other benefit; in fact, Siy made him an incorporator and director of one of her
corporations, IGAPC. The trial court believed Siys claim that she signed papers in blank and left
them with Robles in order to facilitate the negotiation and purchase of bank properties which
they both considered to be cheap and viable. In this connection, the trial court concluded that it
was Robles and not Siy who prepared the September 6, 1989 letterproposal on a piece of
paper signed in blank by Siy, and that even though the pending Civil Case No. Q52702 was
mentioned in the letterproposal, Siy in fact had no knowledge thereof. This is proved by the fact
that she proceeded to construct a costly building on the property; if Siy knew of the pending
Civil Case No. Q52702, it is highly doubtful that she would do so.
The trial court thus declared that Union Bank, through Robles, acted in bad faith in selling the
subject property to Bignay; for this reason, the stipulation in the December 20, 1989 deed of sale
limiting Union Banks liability in case of eviction cannot apply, because under Article 1553 of
the Civil Code, [a]ny stipulation exempting the vendor from the obligation to answer for
eviction shall be void, if he acted in bad faith. Moreover, it held that in its handling of Civil
Case No. Q52702, the bank was guilty of gross negligence amounting to bad faith, which thus
contravened its undertaking in the deed of sale to defend its title to the Parcel/s of Land with
improvement thereon against the claims of any person whatsoever.
Thus, it held that Bignay was entitled to the return of the value of the property (P4 million), as
well as the cost of the building erected thereon (P20 million), since Union Bank acted in bad
faith. At the same time, the trial court held that the banks counterclaim was not at all connected
with Bignays Complaint, which makes it a permissive counterclaim for which the docket fees
should accordingly be paid. Since the bank did not pay the docket fees, the trial court held that it
did not acquire jurisdiction over its counterclaim; thus, it dismissed the same.
Upon appeal to the CA, the court held that Union Bank is liable pursuant to its commitment
under the December 20, 1989 deed of sale to defend the title to the property against the claims of
third parties. It shared the trial courts opinion that the bank was guilty of negligence in the
handling and prosecution of Civil Case No. Q52702, for which reason it should be made
answerable, since it lost its title to the whole property when it could have protected its right to
Alfonsos share therein considering that the Decision in Civil Case No. Q52702 merely
awarded Rosarios conjugal share. In other words, the CA intimated that if Union Bank exercised
prudence, it could have maintained at least its rights and title to Alfonsos onehalf share in the
property, and the trial courts Decision completely nullifying the AlfonsoUnion Bank mortgage,
the banks new title TCT 362405, and the Union BankBignay sale could have been avoided.
Hence, this petition.

76

ISSUE:
Whether or not there was gross negligence on the part of Union Bank to warrant the annulment
of the sale.
HELD:
The record reveals that Union Bank was grossly negligent in the handling and prosecution of
Civil Case No. Q-52702. Its appeal of the December 12, 1991 Decision in said case was
dismissed by the CA for failure to file the required appellants brief. Next, the ensuing Petition
for Review on Certiorari filed with this Court was likewise denied due to late filing and payment
of legal fees. Finally, the bank sought the annulment of the December 12, 1991 judgment, yet
again, the CA dismissed the petition for its failure to comply with Supreme Court Circular No.
28-91. As a result, the December 12, 1991 Decision became final and executory, and Bignay was
evicted from the property. Such negligence in the handling of the case is far from coincidental; it
is decidedly glaring, and amounts to bad faith. Negligence may be occasionally so gross as to
amount to malice or bad faith. Indeed, in culpa contractual or breach of contract, gross
negligence of a party amounting to bad faith is a ground for the recovery of Damages by the
injured party.

77

10. IGLESIA FILIPINA INDEPENDIENTE V. HEIRS OF BERNARDINO TAEZA, G.R.


NO. 179597, FEBRUARY 3, 2014.
FACTS:
The Iglesia Filipina Independiente (IFI), through its then Supreme Bishop Macario Ga, sold two
parcels of land to Bienvenido de Guzman and defendant Bernardino Taeza, respectively. A
complaint for annulment of the deed of sale with mortgage (to defendant Taeza) was filed by the
Parish Council of Tuguegarao, Cagayan, but was subsequently dismissed on the ground that the
plaintiffs therein lacked the personality to file the case.
After the expiration of Rev. Macario Ga's term of office as Supreme Bishop of the IFI on May 8,
1981, Bishop Abdias dela Cruz was elected as the Supreme Bishop. Thereafter, an action for the
declaration of nullity of the elections was filed by Rev. Ga, with the Securities and Exchange
Commission (SEC). While the case was still pending with the SEC, IFI filed a complaint for
annulment of the sale of the subject parcels of land against Rev. Ga and the defendant
Bernardino Taeza, which was subsequently dismissed for the reason that the issue as to whom of
the Supreme Bishops could sue for the church had not yet been resolved by the SEC. Meanwhile,
the defendant Bernardino Taeza registered the subject parcels of land.
In January 1990, a complaint for annulment of sale was again filed by the plaintiff-appellee IFI,
this time through Supreme Bishop Most Rev. Tito Pasco, against defendant- appellant Taeza.
The court ruled in favour of IFI, rendering among others, that the deed of sale and mortgage was
null and void. Upon appeal to the CA, the court reversed the RTC decision, thereby dismissing
the complaint. The CA ruled that petitioner, being a corporation sole, validly transferred
ownership over the land in question through its Supreme Bishop, who was at the time the
administrator of all properties and the official representative of the church. It further held that
"the authority of the then Supreme Bishop Rev. Ga to enter into a contract and represent the
plaintiff-appellee cannot be assailed, as there are no provisions in its constitution and canons
giving the said authority to any other person or entity.
Hence, this petition.
ISSUE:
Whether then Supreme Bishop Rev. Ga is authorized to enter into a contract of sale in behalf of
petitioner.
HELD:
Under petitioner's Canons, any sale of real property requires not just the consent of the Supreme
Bishop but also the concurrence of the laymen's committee, the parish priest, and the Diocesan
Bishop, as sanctioned by the Supreme Council. However, petitioner's Canons do not specify in
what form the conformity of the other church entities should be made known. Thus, as
petitioner's witness stated, in practice, such consent or approval may be assumed as a matter of
fact, unless some opposition is expressed.
Here, the trial court found that the laymen's committee indeed made its objection to the sale
known to the Supreme Bishop. The CA, on the other hand, glossed over the fact of such
opposition from the laymen's committee, opining that the consent of the Supreme Bishop to the
sale was sufficient, especially since the parish priest and the Diocesan Bishop voiced no
objection to the sale.
This case clearly falls under the category of unenforceable contracts mentioned in Article 1403,
paragraph (1) of the Civil Code, which provides, thus:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;
xxx
In Mercado v. Allied Banking Corporation, the Court explained that:

78

x x x Unenforceable contracts are those which cannot be enforced by a proper action in court,
unless they are ratified, because either they are entered into without or in excess of authority
or they do not comply with the statute of frauds or both of the contracting parties do not
possess the required legal capacity. x x x.

79

11. FIRST UNITED CONSTRUCTORS CORPORATION, ET AL. V. BAYANIHAN


AUTOMOTIVE CORPORATION, G.R. NO. 164985, JANUARY 15, 2014.
FACTS:
Petitioners First United Constructors Corporation (FUCC) and Blue Star Construction
Corporation (Blue Star) were associate construction firms sharing financial resources, equipment
and technical personnel on a case-to-case basis. From May 27, 1992 to July 8, 1992, they ordered
six units of dump trucks from the respondent, a domestic corporation engaged in the business of
importing and reconditioning used Japan-made trucks, and of selling the trucks to interested
buyers who were mostly engaged in the construction business.
On September 1992 FUCC ordered two dump trucks, partially paid in cash and the balance
though post-dated checks. Upon presentment of the checks for payment, the respondent learned
that FUCC had ordered the payment stopped. The respondent immediately demanded the full
settlement of their obligation from the petitioners, but to no avail. Instead, the petitioners
informed the respondent that they were withholding payment of the checks due to the breakdown
of one of the dump trucks they had earlier purchased from respondent, specifically the second
dump truck delivered on May, 1992. Subsequently, the respondent filed an action for collection
seeking the payment of the unpaid balance. In their answer, the petitioners averred that they had
stopped the payment on the two checks worth P735,000.00 because of the respondents refusal to
repair the second dump truck; and that they had informed the respondent of the defects in that
unit but the respondent had refused to comply with its warranty, compelling them to incur
expenses for the repair and spare parts. It was the position of the respondent that the petitioners
were not legally justified in withholding payment of the unpaid balance of the purchase price of
the Hino Prime Mover and the Isuzu Transit Mixer due the alleged defects in second dump truck
because the purchase of the two units was an entirely different transaction from the sale of the
dump trucks, the warranties for which having long expired.
The RTC ruled in favor of the respondent, finding the petitioners liable to pay for the unpaid
balance of the purchase price. The RTC held that the petitioners could not avail themselves of
legal compensation because the claims they had set up in the counterclaim were not liquidated
and demandable. Upon appeal, the Court of Appeals affirmed the RTC ruling holding that he
remedy of recoupment could not be properly invoked by the petitioners because the transactions
were different; that the expenses incurred for the repair and spare parts of the second dump truck
were not a proper subject of recoupment because they did not arise out of the purchase of the
Hino Prime Mover and the Isuzu Transit Mixer; and that the petitioners claim could not also be
the subject of legal compensation or set-off, because the debts in a set-off should be liquidated
and demandable. Hence, this petition.
ISSUE:
Whether the provisions of Art. 1599 (1) of the Civil Code is applicable in the case at bar.
HELD:
Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one
is sued by means of a legal or equitable right resulting from a counterclaim arising out of the
same transaction. It is the setting up of a demand arising from the same transaction as the
plaintiffs claim, to abate or reduce that claim.
In its decision, the CA applied the first paragraph of Article 1599 of the Civil Code to this case,
explaining thusly:
Paragraph (1) of Article 1599 of the Civil Code which provides for the remedy of
recoupment in diminution or extinction of price in case of breach of warranty by the
seller should therefore be interpreted as referring to the reduction or extinction of the
price of the same item or unit sold and not to a different transaction or contract of sale.
This is more logical interpretation of the said article considering that it talks of breach of
warranty with respect to a particular item sold by the seller. Necessarily, therefore, the
buyers remedy should relate to the same transaction and not to another.
80

Defendants-appellants act of ordering the payment on the prime mover and transit mixer
stopped was improper considering that the said sale was a different contract from that of the
dump trucks earlier purchased by defendants-appellants.
The claim of defendants-appellants for breach of warranty, i.e. the expenses paid for the repair
and spare parts of dump truck no. 2 is therefore not a proper subject of recoupment since it does
not arise out of the contract or transaction sued on or the claim of plaintiff-appellee for unpaid
balances on the last two (2) purchases, i. e. the prime mover and the transit mixer.
The CA was correct. It was improper for petitioners to set up their claim for repair expenses and
other spare parts of the dump truck against their remaining balance on the price of the prime
mover and the transit mixer they owed to respondent.1avvphi1 Recoupment must arise out of the
contract or transaction upon which the plaintiffs claim is founded. To be entitled to recoupment,
therefore, the claim must arise from the same transaction, i.e., the purchase of the prime mover
and the transit mixer and not to a previous contract involving the purchase of the dump truck.
That there was a series of purchases made by petitioners could not be considered as a single
transaction, for the records show that the earlier purchase of the six dump trucks was a separate
and distinct transaction from the subsequent purchase of the Hino Prime Mover and the Isuzu
Transit Mixer. Consequently, the breakdown of one of the dump trucks did not grant to
petitioners the right to stop and withhold payment of their remaining balance on the last two
purchases

81

12. GATCHALIAN REALTY, INC. (GRI) VS ANGELES, GR 202358, NOVEMBER 27,


2013
FACTS:
In 1994, Angeles purchased a house (under Contract to Sell No. 2272) and lot (under Contract to
Sell No. 2271) from GRI valued at Seven Hundred Fifty Thousand Pesos (Php 750,000.00) and
Four Hundred Fifty Thousand Pesos (Php 450,000.00), respectively, with twenty-four percent
(24%) interest per annum to be paid by installment within a period of ten years. The house and
lot were delivered to Angeles in 1995. Nonetheless, under the contracts to sell executed between
the parties, GRI retained ownership of the property until full payment of the purchase price.
Angeles failed to satisfy her monthly installments with GRI. [Angeles] was only able to pay
thirty-five (35) installments for Contract to Sell No. 2271 and forty-eight (48) installments for
Contract to Sell No. 2272. After giving a total of fifty-one (51) months grace period for both
contracts and in consideration of the continued disregard of the demands of GRI, Angeles was
served with a notice of notarial rescission by registered mail.
Consequently Angeles was furnished by GRI with a demand letter dated 26 September 2003. She
was informed in said letter that the fifty percent (50%) refundable amount that she is entitled to
has already been deducted with the reasonable value for the use of the properties or the
reasonable rentals she incurred during such period that she was not able to pay the installments
due her. After deducting the rentals from the refundable amount, she still had a balance of One
Hundred Twelve Thousand Three Hundred Four Pesos and Forty Two Centavos (Php
112,304.42)
For her continued failure to satisfy her obligations with GRI and her refusal to vacate the house
and lot, GRI filed a complaint for unlawful detainer against Angeles on 11 November 2003.
The MeTC ruled in favor of GRI, where it held, among others, that GRI was able to establish the
validity of the rescission. Upon appeal to the RTC, the court ruled that hat Republic Act No.
6552 (R.A. 6552) provides that the non-payment by the buyer of an installment prevents the
obligation of the seller to convey title from acquiring binding force. Moreover, cancellation of
the contract to sell may be done outside the court when the buyer agrees to the cancellation. In
the present case, Angeles denied knowledge of GRIs notice of cancellation. Cancellation of the
contract must be done in accordance with Section 3 of R.A. 6552, which requires a notarial act of
rescission and refund to the buyer of the cash surrender value of the payments on the properties.
Thus, GRI cannot insist on compliance with Section 3(b) of R.A. 6552 by applying Angeles
cash surrender value to the rentals of the properties after Angeles failed to pay the installments
due. In granting GRIs Motion for Reconsideration, the RTC ruled that GRI had complied with
the provisions of R.A. 6552, and had refunded the cash surrender value to Angeles upon its
cancellation of the contract to sell when it deducted the amount of the cash surrender value from
rentals due on the subject properties. Upon appeal to the CA, the court reversed the RTCs ruling
and held that Angeles received the notice of notarial rescission, it ruled that the actual
cancellation of the contract between the parties did not take place because GRI failed to refund to
Angeles the cash surrender value. Hence, this petition.
ISSUE:
Whether or not the contract to sell was validly cancelled.
HELD:
This Court has been consistent in ruling that a valid and effective cancellation under R.A. 6552
must comply with the mandatory twin requirements of a notarized notice of cancellation and a
refund of the cash surrender value.
In Olympia Housing, Inc. v. Panasiatic Travel Corp.,39 we ruled that the notarial act of
rescission must be accompanied by the refund of the cash surrender value.

82

x x x The actual cancellation of the contract can only be deemed to take


place upon the expiry of a 30-day period following the receipt by the buyer
of the notice of cancellation or demand for rescission by a notarial act and
the full payment of the cash surrender value.
In Pagtalunan v. Dela Cruz Vda. De Manzano,40 we ruled that there is no valid cancellation of
the Contract to Sell in the absence of a refund of the cash surrender value. We stated that:
x x x Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value
of the payments on the property to the buyer before cancellation of the
contract. The provision does not provide a different requirement for
contracts to sell which allow possession of the property by the buyer upon
execution of the contract like the instant case. Hence, petitioner cannot insist
on compliance with the requirement by assuming that the cash surrender
value payable to the buyer had been applied to rentals of the property after
respondent failed to pay the installments due.
In view of the absence of a valid cancellation, the Contract to Sell between GRI and
Angeles remains valid and subsisting.

83

13. SPOUSES BAUTISTA VS. SPOUSES JALANDONI & MANILA CREDIT


CORPORATION, GR 171434; NOVEMBER 27, 2013
FACTS:
Spouses Jalandoni were the registered owners of two (2) parcels of land, covered by Transfer
Certificate of Title (TCT) Nos. 2010485 and 201049. The two lots were located in Muntinlupa
City. In May 1997, the Spouses Jalandoni applied for a loan with a commercial bank and, as a
security thereof, they offered to constitute a real estate mortgage over their two lots. After a
routine credit investigation, it was discovered that their titles over the two lots had been
cancelled and new TCT Nos. 206091 and 205624 were issued in the names of Spouses Baustista.
Upon further investigation, they found out that the bases for the cancellation of their titles were
two deeds of absolute sale, dated April 4, 1996 and May 4, 1996, purportedly executed and
signed by them in favor of Spouses Baustista.
Aggrieved, Spouses Jalandoni filed a complaint for cancellation of titles and damages claiming
that they did not sell the subject lots and denied having executed the deeds of absolute sale. They
asserted that the owner's duplicate certificates of title were still in their possession; that their
signatures appearing on the deeds of absolute sale were forged and that said deeds were null and
void and transferred no title in favor of Spouses Bautista; that they never met the Spouses
Bautista; that they did not appear before the notary public who notarized the deeds of absolute
sale; that the community tax certificates indicated in the deeds of absolute sale were not issued to
them and that the entries therein were forged and falsified; that Spouses Bautista paid a grossly
inadequate price of only P600,000.00 per lot; and that the Spouses Bautista were aware of the
true value of the lots because they mortgaged one lot to Spouses Tongco for P1,700,000.00 and
the other lot for P3,493,379.82 to Manila Credit Corporation (MCC).
The RTC rendered judgment declaring the sale of the subject lots void. The RTC explained that
Nasino had no authority to negotiate for the Spouses Jalandoni, much less to receive the
consideration of the sale. Spouses Bautista were not innocent purchasers in good faith and for
value for their failure to personally verify the original copies of the titles of the subject properties
and to ascertain the authority of Nasino since they were not dealing with the registered owner.
The RTC, nonetheless, found MCC a mortgagee in good faith and upheld the validity of the
mortgage contract between Spouses Bautista and MCC. Upon appeal to the CA, the court in an
Amended Decision, denied Spouses Bautista s motion for reconsideration and ruled in favor of
Spouses Jalandoni. The CA held that MCC s purported right over the subject properties could not
be greater than that of Spouses Jalandoni, who remained the lawful owners of the subject lots.
Hence, this appeal.
ISSUE:
Whether or not Spouses Jalandoni have a better right than MCC over the subject lot.
HELD:
MCC has a better right over the subject lot. In the case at bar, it is undisputed that the sale of the
subject lots to Spouses Bautista was void. Based on the records, Nasino had no written authority
from Spouses Jalandoni to sell the subject lots. The testimony of Eliseo that Nasino was
empowered by a special power of attorney to sell the subject lots was bereft of merit as the
alleged special power attorney was neither presented in court nor was it referred to in the deeds
of absolute sale.
A buyer in good faith is one who buys the property of another without notice that some other
person has a right to or interest in such property. He is a buyer for value if he pays a full and fair
price at the time of the purchase or before he has notice of the claim or interest of some other
person in the property." "Good faith connotes an honest intention to abstain from taking
unconscientious advantage of another." To prove good faith, the following conditions must be
present: (a) the seller is the registered owner of the land; (b) the owner is in possession thereof;
and (3) at the time of the sale, the buyer was not aware of any claim or interest of some other
person in the property, or of any defect or restriction in the title of the seller or in his capacity to
84

convey title to the property. All these conditions must be present, otherwise, the buyer is under
obligation to exercise extra ordinary diligence by scrutinizing the certificates of title and
examining all factual circumstances to enable him to ascertain the seller's title and capacity to
transfer any interest in the property.
Spouses Bautistas claim of good faith is negated by their failure to verify the extent and nature
of Nasinos authority. Since Spouses Bautista did not deal with the registered owners but with
Nasino, who merely represented herself to be their agent, they should have scrutinized all factual
circumstances necessary to determine her authority to insure that there are no flaws in her title or
her capacity to transfer the land. They should not have merely relied on her verbal representation
that she was selling the subject lots on behalf of Spouses Jalandoni. Moreover, Eliseos claim
that he did not require Nasino to give him a copy of the special power of attorney because he
trusted her is unacceptable.

85

14. AQUILES RIOSA VS. TABACO LA SUERTE CORPORATION, GR NO. 203786;


OCTOBER 23, 2013
FACTS:
Riosa filed a complaint for Annulment/Declaration of Nullity of Deed of Absolute Sale and
Transfer Certificate of Title, Reconveyance and Damages against respondent Tabaco La Suerte
Corporation with the RTC alleging among others, that he was the owner and in actual possession
of a 52-square meter commercial lot situated in Barangay Quinale, Tabaco City, Albay which he
acquired through a deed of cession and quitclaim executed by his parents. He declared the
property in his name and had been religiously paying the realty tax on the said property.
Thereafter, his daughter, Annie Lyn Riosa Zampelis, renovated the commercial building on the
lot and introduced improvements costing no less than P300,000.00. Subsequently, on three (3)
occasions, he obtained loans from Sia Ko Pio in the total amount of P50,000.00. As a security for
the payment of loans, Sia Ko Pio requested from him a photocopy of the deed of cession and
quitclaim.Sia Ko Pio presented to him a document purportedly a receipt for the P50,000.00 loan
with an undertaking to pay the total amount of P52,000.00 including the P2,000.00 attorneys
fees. Without reading the document, he affixed his signature thereon; and that in September
2001, to his surprise, he received a letter from La Suerte informing him that the subject lot was
already registered in its name.
The RTC ruled in his favor, ordering among others, the annulment of sale of the subject lot
purportedly executed by Riosa in favor of La Suerte Tabaco. Upon appeal however, the CA
reversed the decision of the RTC, declaring La Suerte as the lawful owner of the subject lot and
improvements thereon, subject to the right of reimbursement for the renovation expenses. Hence,
this present petition.
ISSUE:
Whether or not there was a perfected contract of sale.
HELD:
The elements of a contract of sale are: 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.
In this case, there was no clear and convincing evidence that Aquiles definitely sold the subject
property to La Suerte, nor was there evidence that La Suerte authorized its chief executive
officer, Sia Ko Pio, to negotiate and conclude a purchase of the property.
There was no agreement between the parties. As the first element was wanting, Aquiles correctly
argued that there was no contract of sale. Under Article 1475 of the Civil Code, the contract of
sale is perfected at the moment there is a meeting of minds on the thing which is the object of the
contract and on the price.
The fact that the alleged deed of sale indubitably bore Aquiles signature deserves no evidentiary
value there being no consent from him to part with his property. Had he known that the
document presented to him was an instrument of sale, he would not have affixed his signature on
the document. It has been held that the existence of a signed document purporting to be a
contract of sale does not preclude a finding that the contract is invalid when the evidence shows
that there was no meeting of the minds between the seller and buyer.

86

15. VENTURA VS. HEIRS OF SPOUSES ENDAYA, GR NO. 190016; OCTOBER 2, 2013
FACTS:
On June 29, 1981, Dolores Ventura (Dolores) entered into a Contract to Sell (contract to sell)
with spouses Eustacio and Trinidad Endaya (Sps. Endaya) for the purchase of two parcels of land
located at Paranaque City, Metro Manila.
The contract to sell provides that the purchase price of P347,760.00 shall be paid by Dolores in
the following manner: (a) down payment of P103,284.00 upon execution of the contract; and (b)
the balance of P244,476.00 within a 15-year period (payment period), plus 12% interest per
annum (p.a.) on the outstanding balance and 12% interest p.a. on arrearages. It further provides
that all payments made shall be applied in the following order: first, to the reimbursement of real
estate taxes and other charges; second, to the interest accrued to the date of payment; third, to the
amortization of the principal obligation; and fourth, to the payment of any other accessory
obligation subsequently incurred by the owner in favor of the buyer. It likewise imposed upon
Dolores the obligation to pay the real property taxes over the subject properties, or to reimburse
Sps. Endaya for any tax payments made by them, plus 1% interest per month. Upon full payment
of the stipulated consideration, Sps. Endaya undertook to execute a final deed of sale and transfer
ownership over the same in favor of Dolores. Meanwhile, Dolores was placed in possession of
the subject properties and allowed to erect a building thereon. However, on April 10, 1992,
before the payment period expired, Dolores passed away.
The heirs of Dolores instituted a complaint for specific performance seeking to compel Sps.
Endaya to execute a deed of sale over the subject properties. After trial, the RTC, found that
petitioners were able to prove by a preponderance of evidence the fact of full payment of the
purchase price for the subject properties.31 As such, it ordered Sps. Endaya to execute a deed of
absolute sale covering the sale of the subject properties in petitioners favor and to pay them
attorney's fees and costs of suit. Upon appeal, the CA reversed and set aside the RTC ruling. It
found that petitioners were not able to show that they fully complied with their obligations under
the contract to sell. Hence, this petition
ISSUE:
Whether or not respondents should execute a deed of sale over the subject properties in favor of
petitioners.
HELD:
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 latter upon his fulfillment of the
conditions agreed upon, i.e., the full payment of the purchase price and/or compliance with the
other obligations stated in the contract to sell. Given its contingent nature, the failure of the
prospective buyer to make full payment and/or abide by his commitments stated in the contract
to sell prevents the obligation of the prospective seller to execute the corresponding deed of sale
to effect the transfer of ownership to the buyer from arising.
To note, while the quality of contingency inheres in a contract to sell, the same should not be
confused with a conditional contract of sale. In a contract to sell, the fulfillment of the suspensive
condition will not automatically transfer ownership to the buyer although the property may have
been previously delivered to him. The prospective seller still has to convey title to the
prospective buyer by entering into a contract of absolute sale. On the other hand, in a conditional
contract of sale, the fulfillment of the suspensive condition renders the sale absolute and the
previous delivery of the property has the effect of automatically transferring the sellers
ownership or title to the property to the buyer.
Keeping with these principles, the Court finds that respondents had no obligation to petitioners to
execute a deed of sale over the subject properties. As aptly pointed out by the CA, aside from the
payment of the purchase price and 12% interest p.a. on the outstanding balance, the contract to
87

sell likewise imposed upon petitioners the obligation to pay the real property taxes over the
subject properties as well as 12% interest p.a. on the arrears.56 However, the summary of
payments as well as the statement of account submitted by petitioners clearly show that only the
payments corresponding to the principal obligation and the 12% interest p.a. on the outstanding
balance were considered in arriving at the amount of P952,152.00. The Court has examined the
petition as well as petitioners' memorandum and found no justifiable reason for the said
omission. Hence, the reasonable conclusion would therefore be that petitioners indeed failed to
comply with all their obligations under the contract to sell and, as such, have no right to enforce
the same.

88

16. SPOUSES TUMIBAY VS. SPOUSES LOPEZ, GR NO. 171692; JUNE 3, 2013
FACTS:
Petitioner spouses filed a complaint for the declaration of nullity ab initio of sale, and recovery
of ownership and possession of land against the Spouses Lopez with the RTC of Malaybalay
City, alleging among others, that they are the owners of a parcel of land located in Sumpong,
Malaybalay, Bukidnon covered by Transfer Certificate of Title (TCT) No. T-253348 (subject
land) in the name of petitioner Aurora; that they are natural born Filipino citizens but petitioner
Delfin acquired American citizenship while his wife, petitioner Aurora, remained a Filipino
citizen; that petitioner Aurora is the sister of Reynalda Visitacion (Reynalda); that on July 23,
1997, Reynalda sold the subject land to her daughter, Rowena Gay T. Visitacion Lopez
(respondent Rowena), through a deed of sale10 for an unconscionable amount of P95,000.00
although said property had a market value of more than P2,000,000.00; and that the subject sale
was done without the knowledge and consent of petitioner.
In their answer, defendant spouses averred, among others, that, petitioners executed a special
power of attorney (SPA) in favor of Reynalda granting the latter the power to offer for sale the
subject land; that sometime in 1994, respondent Rowena and petitioners agreed that the former
would buy the subject land for the price of P800,000.00 to be paid on installment; that on
January 25, 1995, respondent Rowena paid in cash to petitioners the sum of $1,000.00; that from
1995 to 1997, respondent Rowena paid the monthly installments thereon as evidenced by money
orders; that, in furtherance of the agreement, a deed of sale was executed and the corresponding
title was issued in favor of respondent Rowena; that the subject sale was done with the
knowledge and consent of the petitioners as evidenced by the receipt of payment by petitioners.
The RTC ruled in favor of the petitioners where it held that the SPA merely authorized Reynalda
to offer for sale the subject land for a price subject to the approval of the petitioners, thus, the
sale contravenes Article 1491, paragraph 2, of the Civil Code which prohibits the agent from
acquiring the property subject of the agency unless the consent of the principal has been given.
The trial court held that Reynalda, as agent, acted outside the scope of her authority under the
SPA. Thus, the sale is null and void and the subject land should be reconveyed to petitioners.
On appeal, the CA reversed the decision of the RTC, where it found that the SPA sufficiently
conferred on Reynalda the authority to sell the subject land, thus the sale is not contrary to public
policy because there is no rule or law which prohibits the sale of property subject of the agency
between the agent and his children unless it would be in fraud of creditors which is not the case
here. Hence, this present petition.
ISSUE:
Whether or not Reynalda entered into a contract to sell or a contract of sale.
HELD:
There was, indeed, a contractual agreement between the parties for the purchase of the subject
land and that this agreement partook of an oral contract to sell for the sum of P800,000.00. A
contract to sell has been 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." In a
contract to sell, "ownership is retained by the seller and is not to pass until the full payment of
the price x x x." It is "commonly entered into so as to protect the seller against a buyer who
intends to buy the property in installments by withholding ownership over the property until the
buyer effects full payment therefor.
In the case at bar, while there was no written agreement evincing the intention of the parties to
enter into a contract to sell, its existence and partial execution were sufficiently established by,
and may be reasonably inferred from the actuations of the parties, to wit: (1) the title to the
89

subject land was not immediately transferred, through a formal deed of conveyance, in the name
of respondent Rowena prior to or at the time of the first payment of $1,000.00 by respondent
Rowena to petitioner Aurora on January 25, 1995;28 (2) after this initial payment, petitioners
received 22 intermittent monthly installments from respondent Rowena in the sum of $500.00;
and, (3) in her testimony, respondent Rowena admitted that she had the title to the subject land
transferred in her name only later on or on July 23, 1997, through a deed of sale, because she
believed that she had substantially paid the purchase price thereof, and that she was entitled
thereto as a form of security for the installments she had already paid.

90

17. ROGELIO DANTIS VS JULIO MAGHINANG, JR., GR NO. 191696; APRIL 10, 2013
FACTS:
Petitioner filed with the RTC an action for quieting of title against respondent alleging that that
he was the registered owner of a parcel of land covered by Transfer Certificate of Title (TCT)
No. T-125918, with an area of 5,657 square meters, located in Sta. Rita, San Miguel, Bulacan;
that he acquired ownership of the property through a deed of extrajudicial partition of the estate
of his deceased father, Emilio Dantis (Emilio), dated December 22, 1993; that he had been
paying the realty taxes on the said property; that Julio, Jr. occupied and built a house on a portion
of his property without any right at all; that demands were made upon Julio, Jr. that he vacate the
premises but the same fell on deaf ears; and that the acts of Julio, Jr. had created a cloud of doubt
over his title and right of possession of his property. He, thus, prayed that judgment be rendered
declaring him to be the true and real owner of the parcel of land covered by TCT No. T-125918;
ordering Julio, Jr. to deliver the possession of that portion of the land he was occupying; and
directing Julio, Jr. to pay rentals from October 2000 and attorneys fees of P100,000.00.
The defendant, on the other hand, claimed that his father, Julio Maghinang (Sr.), bought the said
lot from the parents of Rogelio Dantis. He admitted that the affidavit was not signed by the
alleged vendor, Emilio Dantis, the father of Rogelio Dantis. The receipt he presented was
admittedly a mere photocopy. He spent P50,000.00 as attorneys fees. Since 1953, he has not
declared the property as his nor paid the taxes thereon because there is a problem.
The RTC ruled in favor of the petitioner and found, among others that that the purchase price for
the subject lot had not yet been completely paid and, hence, Rogelio was not duty-bound to
deliver the property to Julio, Jr. The RTC found Julio, Jr. to be a mere possessor by tolerance.
Upon appeal to the CA, it reversed the decision of the RTC where it ruled that ruled that the
partial payment of the purchase price, coupled with the delivery of the res, gave efficacy to the
oral sale and brought it outside the operation of the statute of frauds. Finally, the court a quo
declared that Julio, Jr. and his predecessors-in-interest had an equitable claim over the subject lot
which imposed on Rogelio and his predecessors-in-interest a personal duty to convey what had
been sold after full payment of the selling price. Hence, this present petition.

ISSUE:
Whether or not there was a perfected contract of sale.
HELD:
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 is a consensual contract and, thus, is perfected by mere consent
which is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. Until the contract of sale is perfected, it cannot, as an
independent source of obligation, serve as a binding juridical relation between the parties. The
essential elements of a contract of sale are: 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. The absence of any of the essential elements shall negate the
existence of a perfected contract of sale.
Such being the situation, it cannot, therefore, be said that a definite and firm sales agreement
between the parties had been perfected over the lot in question. Indeed, this Court has already
ruled before that a definite agreement on the manner of payment of the purchase price is an
essential element in the formation of a binding and enforceable contract of sale. The fact,
therefore, that the petitioners delivered to the respondent the sum of P10,000.00 as part of the
91

down-payment that they had to pay cannot be considered as sufficient proof of the perfection of
any purchase and sale agreement between the parties herein under Art. 1482 of the new Civil
Code, as the petitioners themselves admit that some essential matter - the terms of payment - still
had to be mutually covenanted.

92

III.b. LEASE
1. THE PRESIDENT OF THE CHURCH OF JESUS CHRIST OF LATTER DAY
SAINTS (COJCOLDS) VS. BTL CONSTRUCTION, GR 176439, JANUARY 15, 2014
FACTS:
COJCOLDS and BTL entered into a Construction Contract (Contract) for the latters
construction of the formers meetinghouse facility at Barangay Cabug, Medina, Misamis
Oriental (Medina Project). The contract price was set at P12,680,000.00 (contract price), and the
construction period from January 15 to September 15, 2000. However, due to bad weather
conditions, power failures, and revisions in the construction plans among others, the completion
date of the Medina Project was extended.
BTL informed COJCOLDS that it suffered financial losses from another project and thereby
requested that it be allowed to: (a) bill COJCOLDS based on 95% and 100% completion of the
Medina Project; and (b) execute deeds of assignment in favor of its suppliers so that they may
collect any eventual payments directly from COJCOLDS. COJCOLDS granted said request
which BTL, in turn, acknowledged.
BTL ceased its operations in the Medina Project because of its lack of funds to advance the cost
of labor necessary to complete the said project, as well as the supervening increase in the prices
of materials and other items for construction. Consequently, COJCOLDS terminated its Contract
with BTL12 on August 17, 2001 and, thereafter, engaged the services of another contractor,
Vigor Construction, to complete the Medina Project.
Thus, BTL filed a complaint against COJCOLDS before the CIAC, claiming a total amount of
P28,716,775.40. For its part, COJCOLDS filed its answer with compulsory counterclaim. The
case was submitted for resolution by the CIAC. In its decision, COJCOLDS was found liable
only for 98% of the original contract price (i.e., P12, 680,000.00) in the amount of P12,
426,400.00. Considering its previous payments in the total amount of P10,814,382.26,
COJCOLDS was then ordered to pay BTL the unpaid balance of P1,612,017.74, as well as the
costs of the additional works made on the Medina Project, particularly, P804,460.89 for the
concrete retaining wall, and P344,360.16 for the unpaid balances from the works done under
Change Order Nos. 8 to 12. On the other hand, BTL was ordered to pay COJCOLDS liquidated
damages at the rate of P12,680.00 per day, or a total of P1,191,920.00, pursuant to Article 3(B)
of the Contract as well as Article 29.04 of the General Conditions, due to the formers 94-day
delay, notwithstanding several extensions.
Aggrieved, COJCOLDS elevated the matter to the CA. The CA ordered COJCOLDS not only to
pay BTL the amount of P1, 612,017.74 representing the unpaid portion of 98% of the contract
price, but also to return to BTL the 10% retention money in the amount of P1, 248,179.87, after
deducting the cost overrun of P526,400.00 that BTL was held to shoulder as per Article 3(E) of
the Contract. Meanwhile, the CA ordered BTL to return to COJCOLDS the amount of P300,
533.49 which was found to be an overpayment made by the latter pursuant to the change orders.
Further, the CA deleted the awards for the additional works, and finally, CA deleted the award of
attorneys fees in BTLs favor as COJCOLDS was not in bad faith in refusing to pay the
formers claims.
Dissatisfied, both parties moved for reconsideration, which were denied. Hence, these petitions.
ISSUE:
Whether or not COJCOLDS is liable for the additional works performed by the BTL.
HELD:
Article 1724 of the Civil Code governs the recovery of additional costs in contracts for a
stipulated price (such as fixed lump-sum contracts), as well as the increase in price for any
additional work due to a subsequent change in the original plans and specifications. Based on the
same provision, such added costs can only be allowed upon the: (a) written authority from the
93

developer or project owner ordering or allowing the written changes in work; and (b) written
agreement of parties with regard to the increase in price or cost due to the change in work or
design modification. Case law instructs that compliance with these two (2) requisites is a
condition precedent for recovery. The absence of one or the other condition thus bars the claim
of additional costs. Notably, neither the authority for the changes made nor the additional price
to be paid therefor may be proved by any evidence other than the written authority and
agreement as above-mentioned.
In these cases, records reveal that there is neither a written authorization nor agreement covering
the additional price to be paid for the concrete retaining wall. This confirms the CAs finding
that the construction of the perimeter wall of the Medina Project, which is included in the
original plans and specifications for the same, already subsumes the construction of the concrete
retaining wall. Accordingly, COJCOLDS should not pay the amount of P804,460.89 claimed by
BTL as additional cost for the same.
In similar regard, the COJCOLDS should not be held liable for the costs of the additional works
taken under Change Order Nos. 8 to 12 amounting to P344,360.16 as claimed by BTL. As
correctly observed by the CA, BTL had, in fact, requested COJCOLDS to make the payments
therefor directly to its suppliers in view of its financial losses in another project.44 Hence,
considering that COJCOLDSs payment to BTLs suppliers already covered the costs of said
additional works upon its own request and to its own credit, BTL maintains no right to pursue
such claim.
With BTLs claims for the costs of additional works herein denied, COJCOLDSs total liability
to BTL thus stands in the amount of P1,612,017.74, which represents the unpaid balance of 98%
of the contract price, inclusive of the 10% retention money, as previously stated.

94

III. c. LOAN
1. FLORPINA BENVIDEZ V. NESTOR SALVADOR, G.R. NO. 173331, DECEMBER
11, 2013
FACTS:
Sometime in February 1998, petitioner Florpina Benavidez (Benavidez) approached and asked
respondent Nestor Salvador (Salvador) for a loan that she would use to repurchase her property
in Tanay, Rizal which was foreclosed by the Farmers Savings and Loan Bank, Inc. (Farmers
Savings). After inspecting the said property, Salvador agreed to lend the money subject to certain
conditions. To secure the loan, Benavidez was required to execute a real estate mortgage, a
promissory note and a deed of sale. She was also required to submit a special power of attorney
(SPA) executed and signed by Benavidezs daughter, Florence B. Baning (Baning), whom she
named as the vendee in the deed of absolute sale of the repurchased property. In the SPA, Baning
would authorize her mother to obtain a loan and to constitute the said property as security of her
indebtedness to Salvador.
Pursuant to the agreement, Salvador issued a managers check in favor of Benavidez in the
amount of One Million Pesos (P1,000,000.00) and released Five Hundred Thousand Pesos
(P500,000.00) in cash. For the loan obtained, Benavidez executed a promissory note, dated
March 11, 1998.
Benavidez, however, failed to deliver the required SPA. She also defaulted in her obligation
under the promissory note. All the postdated checks which she had issued to pay for the interests
were dishonored. This development prompted Salvador to send a demand letter with a
corresponding statement of account, dated January 11, 2000. Unfortunately, the demand fell on
deaf ears which constrained Salvador to file a complaint for sum of money with damages with
prayer for issuance of preliminary attachment.
The RTC found that indeed Benavidez obtained a loan from Salvador in the amount of
P1,500,000.00. It also noted that up to the time of the rendition of the judgment, she had failed to
settle her obligation despite having received oral and written demands from Salvador. Also, the
trial court pointed out that the evidence had shown that as of January 11, 2000, Benavidezs
obligation had already reached the total amount of P4,810,703.21.4
The RTC decision was affirmed by the CA, hence, this petition.
ISSUE:
Whether or not there was a valid loan.
HELD:
It is clear that there was an amount of money borrowed from Salvador which was used in the
repurchase of her foreclosed property. Whether or not it was Atty. Segarra who arranged the loan
is immaterial. The fact stands that she borrowed from Salvador and she benefited from it. Her
insistence that the remaining balance of P450,000.00 of the money loaned was never handed to
her by Atty. Segarra is a matter between the two of them. As far as she and Salvador are
concerned, there is admittedly an obligation. Whether the promissory note was void or not could
have been proven by her during the trial but she forfeited her right to do so when she and her
lawyer failed to submit a pre-trial brief and to appear at the pre-trial.

95

III.d. GUARANTY AND SURETYSHIP


1. MARIANO LIM VS. SECURITY BANK CORPORATION GR 188539; 12 MARCH
2014
FACTS:
Petitioner executed a Continuing Suretyship in favor of respondent to secure "any and all types
of credit accommodation that may be granted by the bank hereinto and hereinafter" in favor of
Raul Arroyo for the amount of P2,000,000.00 which is covered by a Credit Agreement/
Promissory Note. Said Promissory Note stated that the interest on the loan shall be 19% per
annum, compounded monthly, for the first 30 days from the date thereof, and if the note is not
fully paid when due, an additional penalty of 2% per month of the total outstanding principal and
interest due and unpaid, shall be imposed.
In turn, the Continuing Suretyship executed by petitioner stipulated that:
3. Liability of the Surety. - The liability of the Surety is solidary and not contingent upon
the pursuit of the Bank of whatever remedies it may have against the Debtor or the
collaterals/liens it may possess. If any of the Guaranteed Obligations is not paid or
performed on due date (at stated maturity or by acceleration), the Surety shall, without
need for any notice, demand or any other act or deed, immediately become liable therefor
and the Surety shall pay and perform the same.
Guaranteed Obligations are defined in the same document as follows:
a) "Guaranteed Obligations" - the obligations of the Debtor arising from all credit
accommodations extended by the Bank to the Debtor, including increases, renewals, rollovers, extensions, restructurings, amendments or novations thereof, as well as (i) all
obligations of the Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all
expenses which the Bank may incur in enforcing any of its rights, powers and remedies
under the Credit Instruments as defined hereinbelow.
The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner received a
Notice of Final Demand informing him that he was liable to pay the loan obtained by Raul and
Edwina Arroyo, including the interests and penalty fees amounting to P7,703,185.54, and
demanding payment thereof. For failure of petitioner to comply with said demand, respondent
filed a complaint for collection of sum of money against him and the Arroyo spouses. Since the
Arroyo spouses can no longer be located, summons was not served on them, hence, only
petitioner actively participated in the case.
The Regional Trial Court of Davao rendered judgment against petitioner ordering defendant Lim
to pay the principal sum plus nineteen interests. Petitioner appealed to the CA, but the appellate
court, affirmed the RTC judgment. Petitioner's motion for reconsideration of the CA Decision
was denied. Petitioner then elevated the matter to this Court via a petition for review on certiorari
ISSUE:
Whether or not petitioner may validly be held liable for the principal debtor's loan obtained six
months after the execution of the Continuing Suretyship.
HELD:
A contract of suretyship is an agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in
favor of another party, called the obligee. Although the contract of a surety is secondary only to a
valid principal obligation, the surety becomes liable for the debt or duty of another although it
possesses no direct or personal interest over the obligations nor does it receive any benefit
therefrom
.

96

The surety's obligation is not an original and direct one for the performance of his own act, but
merely accessory or collateral to the obligation contracted by the principal. Nevertheless,
although the contract of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the principal.
Thus, suretyship arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling an obligation. A surety is considered in law as being
the same party as the debtor in relation to whatever is adjudged touching the obligation of the
latter, and their liabilities are interwoven as to be inseparable.
In this case, what petitioner executed was a Continuing Suretyship. Comprehensive or continuing
surety agreements are, in fact, quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates entering into a series of credit
transactions with a particular company, normally requires the projected principal debtor to
execute a continuing surety agreement along with its sureties. By executing such an agreement,
the principal places itself in a position to enter into the projected series of transactions with its
creditor; with such suretyship agreement, there would be no need to execute a separate surety
contract or bond for each financing or credit accommodation extended to the principal debtor.
The terms of the Continuing Suretyship executed by petitioner, quoted earlier, are very clear. It
states that petitioner, as surety, shall, without need for any notice, demand or any other act or
deed, immediately become liable and shall pay "all credit accommodations extended by the Bank
to the Debtor, including increases, renewals, roll-overs, extensions, restructurings, amendments
or novations thereof, as well as (i) all obligations of the Debtor presently or hereafter owing to
the Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect,
and (ii) any and all expenses which the Bank may incur in enforcing any of its rights, powers and
remedies under the Credit Instruments as defined herein below."
Such stipulations are valid and legal and constitute the law between the parties, as Article 2053
of the Civil Code provides that "a guaranty may also be given as security for future debts, the
amount of which is not yet known; x x x." Thus, petitioner is unequivocally bound by the terms
of the Continuing Suretyship.

97

2. PEOPLES TRANS-EAST ASIA INSURANCE CORPORATION, A.K.A. PEOPLE'S


GENERAL INSURANCE CORPORATION, v. DOCTORS OF NEW MILLENNIUM
HOLDINGS, INC., G.R. No. 172404, August 13, 2014
FACTS:
Doctors of New Millennium Holdings, Inc. is a domestic corporation comprised of about 80
doctors. In 1999, it entered into a construction and development agreement (signed agreement)
with Million State Development Corporation, a contractor, for the construction of a 200-bed
capacity hospital in Cainta, Rizal.
According to the terms of the signed agreement, Doctors of New Millennium obliged itself to
pay P10,000,000.00 to Million State Development at the time of the signing of the agreement to
commence the construction of the hospital. Million State Development was to shoulder 95% of
the project cost and committed itself to secure P385,000,000.00 within 25 banking days from
Doctors of New Millenniums initial payment, part of which was to be used for the purchase of
the lot where the hospital was to be constructed. As part of the conditions prior to the initial
payment, Million State Development submitted a surety bond of P10,000,000.00 to Doctors of
New Millennium. The surety bond was issued by Peoples Trans-East Asia Insurance
Corporation, now known as Peoples General Insurance Corporation. Doctors of New
Millennium, on the other hand, made the initial payment of P10,000,000.00.
Million State Development, however, failed to comply with its obligation to secure
P385,000,000.00 within 25 banking days from initial payment. On April 7, 1999, it faxed a letter
to Doctors of New Millennium explaining its delay was caused by its foreign creditors delay in
processing its application.
On April 9, 1999, Doctors of New Millennium sent a formal demand letter to Million State
Development for the remittance of the funds to be used for the purchase of the lot and
demanding for the cost of money from the time the remittance was due. Instead of replying to
the demand letter, Million State Development sent another letter on April 16, 1999, explaining
that they would have their standby letter of credit within 15 banking days. When Million State
Development reneged on its obligations, Doctors of New Millennium sent a demand letter dated
June 14, 1999 to Peoples General Insurance for the return of its initial payment of
P10,000,000.00, in accordance with its surety bond. On July 9, 1999, Doctors of New
Millennium sent another letter to Peoples General Insurance, this time furnishing a copy to the
Insurance Commission. The Insurance Commission referred the matter to its Public Assistance
and Investigation Division, which conducted conciliation proceeding.
On October 5, 1999, while the administrative complaint was pending before the Insurance
Commission, Doctors of New Millennium sent a demand letter to Million State Development for
the return of their initial payment of P10,000,000.00. Due to Million State Developments
inaction, Doctors of New Millennium filed a complaint for breach of contract with damages with
prayer for the issuance of preliminary attachment against Million State Development and
Peoples General Insurance with the RTC.
The trial court rendered its decision finding only Million State Development liable to Doctors of
New Millennium. It discharged Peoples General Insurance from any liability on the ground that
the inclusion of the clause or the Project Owners waiver in the signed agreement was a
novation of the draft agreement. It found that the Doctors of New Millenniums right under the
surety bond can only be exercised upon the fulfillment of the conditions provided for in Article
XIII(13.1).
The Doctors of New Millennium filed an appeal with the Court of Appeals, seeking the reversal
of the trial courts finding that the surety was not liable. The Court of Appeals rendered a
decision granting the appeal and holding Peoples General Insurance jointly and severally liable
with Million State Development.

98

The appellate court found that the surety bond was made to cover for the initial payment made
by Doctors of New Millennium. Citing the Whereas Clause of the surety bond, it ruled that
Peoples General Insurance guaranteed not only the construction of the hospital but also secured
the initial payment in case the contractor defaults.
Peoples General Insurance filed a motion for reconsideration, which the Court of Appeals
denied in a resolution dated April 20, 2006. Aggrieved, it filed the present petition for review on
certiorari praying for the reversal of the decision of the Court of Appeals. Petitioner Peoples
General Insurance also alleges that because of the disputed clause, the initial payment was
released to the contractor on the pretext that the preconditions were already waived by Doctors
of New Millennium. It argues that the clause effectively deprived [it] of the opportunity to
objectively assess the real risk of its undertaking and fix the reasonable rate of premium
thereon. This, it argues, constituted an implied novation, which should automatically relieve it
from its undertaking as a surety as it makes its obligation more onerous.
ISSUE:
Whether or not the surety bond guaranteeing respondent Doctors of New Millenniums initial
payment was impliedly novated by the insertion of a clause in the principal contract, which
waived the conditions for the initial payments release.
HELD:
The principal contract of the suretyship is the signed agreement.
The obligations of the surety to the principal under the surety bond are different from the
obligations of the contractor to the client under the principal contract. The surety guarantees the
performance of the contractors obligations. Upon the contractors default, its client may
demand against the surety bond even if there was no privity of contract between them. This is
the essence of a surety agreement.
The definition of a surety is provided for under the Civil Code, which states:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.
A contract of suretyship is an agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in
favor of another party, called the obligee. By its very nature, under the laws regulating
suretyship, the liability of the surety is joint and several but is limited to the amount of the bond,
and its terms are determined strictly by the terms of the contract of suretyship in relation to the
principal contract between the obligor and the obligee.
A suretyship consists of two different contracts: (1) the surety contract and (2) the principal
contract which it guarantees. Since the insurers liability is strictly based only on the terms
stated in the surety contract in relation to the principal contract, any change in the principal
contract, which materially alters the principals obligations would, in effect, constitute an
implied novation of the surety contract.
A surety is released from its obligation when there is a material alteration of the contract in
connection with which the bond is given, such as a change which imposes a new obligation on
the promising party, or which takes away some obligation already imposed, or one which
changes the legal effect of the original contract and not merely its form. A surety, however, is
not released by a change in the contract which does not have the effect of making its obligation
more onerous.
99

3. TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE


PHILIPPINES (FORMERLY PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION) V. ASIA PACES CORPORATION, ET AL., G.R.
NO. 187403. FEBRUARY 12, 2014
FACTS:
Respondents Asia Paces Corporation (ASPAC) and Paces Industrial Corporation (PICO) entered
into a sub-contracting agreement with the Electrical Projects Company of Libya (ELPCO), as
main contractor, for the construction and erection of a double circuit bundle phase conductor
transmission line in the country of Libya.
To finance its working capital requirements, ASPAC obtained loans from foreign banks Banque
Indosuez and PCI Capital (Hong Kong) Limited (PCI Capital) which, upon the latters request,
were secured by several Letters of Guarantee issued by petitioner Trade and Investment
Development Corporation of the Philippines (TIDCORP), then Philippine Export and Foreign
Loan Guarantee Corp., a government owned and controlled corporation created for the primary
purpose of, among others, "guaranteeing, with the prior concurrence of the Monetary Board,
subject to the rules and regulations that the Monetary Board may prescribe, approved foreign
loans, in whole or in part, granted to any entity, enterprise or corporation organized or licensed to
engage in business in the Philippines."
Under the Letters of Guarantee, TIDCORP irrevocably and unconditionally guaranteed full
payment of ASPACs loan obligations to Banque Indosuez and PCI Capital in the event of
default by the latter.
As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee, ASPAC,
PICO, and ASPACs President, respondent Nicolas C. Balderrama had to execute several Deeds
of Undertaking, binding themselves to jointly and severally pay TIDCORP for whatever
damages or liabilities it may incur under the aforementioned letters. In the same light, ASPAC,
as principal debtor, entered into surety agreements with Paramount, Phoenix, Mega Pacific and
Fortune, as sureties, also holding themselves solidarily liable to TIDCORP, as creditor, for
whatever damages or liabilities the latter may incur under the Letters of Guarantee.
ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI Capital,
prompting them to demand payment from TIDCORP under the Letters of Guarantee.
Seeking payment for the damages and liabilities it had incurred under the Letters of Guarantee
and with its previous demands therefor left unheeded, TIIDCORP filed a collection case against:
(a) ASPAC, PICO, and Balderrama on account of their obligations under the deeds of
undertaking; and (b) the bonding companies on account of their obligations under the Surety
Bonds.
The RTC partially granted TIDCORPs complaint and thereby found ASPAC, PICO, and
Balderrama jointly and severally liable to TIDCORP in the sum of P277,891,359.66 pursuant to
the terms of the Deeds of Undertaking, but absolved the bonding companies from liability on the
ground that the moratorium request and the consequent payment extensions granted by Banque
Indosuez and PCI Capital in TIDCORPs favor without their consent extinguished their
obligations under the Surety Bonds. As basis, the RTC cited Article 2079 of the Civil Code
which provides that an extension granted to the debtor by the creditor without the consent of the
guarantor/surety extinguishes the guaranty/suretyship, and, in this relation, added that the
bonding companies "should not be held liable as sureties for the extended period.
On appeal the CA upheld the RTCs ruling that the moratorium request "had the effect of an
extension granted to a debtor, which extension was without the consent of the guarantor, and
thus released the surety companies from their respective liabilities under the issued surety bonds"
pursuant to Article 2079 of the Civil Code. To this end, it noted that "the maturity of the foreign
loans was extended to December 31, 1989 or up to December 31, 1994 as provided under
100

Section 4.01 of the Restructuring Agreement," and that "said extension is beyond the expiry
dates of the surety bonds x x x and the maturity date of the principal obligations it purportedly
secured, which extension was without [the bonding companies] consent," It further discredited
TIDCORPs contention that Article 2079 of the Civil Code is only limited to contracts of
guaranty by citing the Courts pronouncement on the provisions applicability to suretyships in
the case of Security Bank and Trust Co., Inc. v. Cuenca (Security Bank). As for Balderrama, the
CA debunked his assignment of error, ratiocinating that "[h]is undertaking to pay is not
dependent upon the payment to be made by ELPCO to ASPAC." The CA, however, modified the
RTC decision to the extent of holding ASPAC, PICO, and Balderrama liable to TIDCORP for
attorneys fees in the reasonable amount of P2,000,000.00 since the payment of attorneys fees
was stipulated by the parties in the Deed of Undertaking dated April 2, 1982. Hence, this petition
ISSUE:
Whether or not the suretys liabilities have been extinguished.
HELD:
A surety is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable. Although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the
debt and duty of another although he possesses no direct or personal interest over the obligations
nor does he receive any benefit therefrom. The fundamental reason therefor is that a contract of
suretyship effectively binds the surety as a solidary debtor.
Applying these principles, the Court finds that the payment extensions granted by Banque
Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement did not have the
effect of extinguishing the bonding companies obligations to TIDCORP under the Surety
Bonds, notwithstanding the fact that said extensions were made without their consent. This is
because Article 2079 of the Civil Code refers to a payment extension granted by the creditor to
the principal debtor without the consent of the guarantor or surety. In this case, the Surety Bonds
are suretyship contracts which secure the debt of ASPAC, the principal debtor, under the Deeds
of Undertaking to pay TIDCORP, the creditor, the damages and liabilities it may incur under the
Letters of Guarantee, within the bounds of the bonds respective coverage periods and amounts.
No payment extension was, however, granted by TIDCORP in favor of ASPAC in this regard;
hence, Article 2079 of the Civil Code should not be applied with respect to the bonding
companies liabilities to TIDCORP under the Surety Bonds.

101

4. THE MANILA INSURANCE COMPANY, INC. VS. SPOUSES AMURAO, GR


179628; JANUARY 16, 2013
FACTS:
Respondent-spouses Roberto and Aida Amurao entered into a Construction Contract Agreement
with Aegean Construction and Development Corporation (Aegean) for the construction of a sixstorey commercial building in Tomas Morato corner E. Rodriguez Avenue, Quezon City. To
guarantee its full and faithful compliance with the terms and conditions of the CCA, Aegean
posted performance bonds secured by petitioner The Manila Insurance Company, Inc. and Intra
Strata Assurance Corporation.
Due to the failure of Aegean to complete the project, respondent spouses filed with the Regional
Trial Court of Quezon City, against petitioner and Intra Strata to collect on the performance
bonds they issued in the amounts of P2,760,000.00 and P4,440,000.00, respectively.
Petitioner filed a Motion to Dismiss, but was denied by the RTC. During the pre-trial, petitioner
and Intra Strata discovered that the CCA entered into by respondent-spouses and Aegean
contained an arbitration clause. Hence, both filed their respective Motions to Dismiss on the
ground of lack of cause of action and lack of jurisdiction. Said motions were denied by the RTC.
On appeal the CA ruled that the presence of an arbitration clause in the CCA does not merit a
dismissal of the case because under the CCA, it is only when there are differences in the
interpretation of Article I of the construction agreement that the parties can resort to arbitration.
The CA also found no grave abuse of discretion on the part of the RTC when it disregarded the
fact that the CCA was not yet signed at the time petitioner issued the performance bond on
February 29, 2000. It explained that the performance bond was intended to be coterminous with
the construction of the building. It pointed out that "if the delivery of the original contract is
contemporaneous with the delivery of the suretys obligation, each contract becomes completed
at the same time, and the consideration which supports the principal contract likewise supports
the subsidiary one." Likewise it said that, although the contract of surety is only an accessory to
the principal contract, the suretys liability is direct, primary and absolute. Hence this appeal

ISSUE:
Whether the nature of the liability was that of a solidary debtor or that of a solidary guarantor.
HELD:
A contract of suretyship is defined as "an agreement whereby a party, called the surety,
guarantees the performance by another party, called the principal or obligor, of an obligation or
undertaking in favor of a third party, called the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by any company by virtue of and under the provisions
of Act No. 536, as amended by Act No. 2206." We have consistently held that a suretys
liability is joint and several, limited to the amount of the bond, and determined strictly by the
terms of contract of suretyship in relation to the principal contract between the obligor and the
obligee. It bears stressing, however, that although the contract of suretyship is secondary to the
principal contract, the suretys liability to the obligee is nevertheless direct, primary, and
absolute.

102

III.e. MORTGAGE
1. RURAL BANK OF CABADBARAN, INC., v. JORGITA A. MELECIO-YAP, LILIA
MELECIO PACIFICO (DECEASED, SUBSTITUTED BY HER ONLY CHILD
ERLL* ISAAC M. PACIFICO, JR.), REYNALDO A. MELECIO, ROSIE MELECIO
DELOSO, AND SARAH MELECIO PALMA-GIL, G.R. No. 178451, July 30, 2014
FACTS:
Erna and respondents Jorgita, Lilia, Reynaldo, Rosie, and Sarah are the children of the late
spouses Isaac and Trinidad Melecio (Melecio Heirs). They inherited a 3,044 square meterresidential lot located in Tolosa, Cabadbaran, Agusan del Norte, together with the ancestral
house and two (2) other structures erected thereon (subject properties). The administration and
management of the said properties were left to the care of Erna who was then residing in their
ancestral home.
The Melecio Heirs purportedly executed a notarized Special Power of Attorney
(SPA) authorizing Erna to apply for a loan with petitioner Rural Bank of Cabadbaran, Inc.
(RBCI) and mortgage the subject properties. Armed with the said SPA, Erna applied for and was
granted a commercial loan by RBCI.The loan was secured by a Real Estate Mortgage over the
subject properties which was registered with the Registry of Deeds of Agusan del Norte and
annotated on Tax Declaration covering the mortgaged lot.
Erna, however, defaulted in the payment of her loan obligation when it fell due, causing RBCI to
extra-judicially foreclose the mortgaged properties. RBCI emerged as the highest bidder in the
public auction sale held. Since Erna failed to redeem the subject properties within the redemption
period despite notice, the latest tax declarations in the names of the Melecio Heirs covering the
subject properties were cancelled and new tax declarations in the name of RBCI were
issued. Thereafter, RBCI informed Erna of its intent to take physical possession of the subject
properties, while the actual occupant thereof, a certain Jimmyrando C. Morales, was directed to
pay rentals to RBCI.
Respondents, through counsel, informed RBCI that they were unaware of the loan obtained by
Erna and did not authorize the mortgage transaction over the subject properties which they coowned. They claimed that the SPA submitted by Erna in support of her loan application was
spurious, and that their signatures appearing thereon were falsified. As such, they demanded
RBCI to release the subject properties from the coverage of Erna's loan obligation to the extent
of their shares.
In reply, RBCI maintained the validity of the SPA and its right to rely on it being a notarized
document. In view of respondents refusal to vacate the premises, RBCI applied for and was
issued a writ of possession. Respondents filed a complaint for declaration of nullity of
documents, recovery of possession and ownership, and damages with prayer for the issuance of a
writ of preliminary injunction against the herein petitioners. They alleged that they did not
participate in the execution of the said SPA and prayed that the same, as well as the mortgage
contract, the writ of possession, the sheriffs turn-over receipt, and all derivative titles,
documents, issuances, and registrations arising therefrom be declared null and void and that the
subject properties be reconveyed back to them. Having relied on the SPA, RBCI invoked the
defense of a mortgagee in good faith whose subsequent ownership and possession of the subject
properties must be respected.
The trial court declared the real estate mortgage and the consequential foreclosure proceedings to
be valid and binding against respondents. Respondents appealed to the CA. The CA reversed the
RTC Decision, finding that Erna had no authority to mortgage the subject properties to RBCI
since the SPA was actually a forgery, and, hence, null and void. The CA declared the real estate
mortgage executed on the strength of the falsified SPA as an invalid encumbrance of
respondents individual shares over the subject properties which cannot be bound by the
subsequent foreclosure proceedings conducted. Nevertheless, it held that a valid transaction was

103

executed between RBCI and Erna to the extent of the latters 1/6 share in the subject properties
which portion respondents, as co-owners, may redeem.

ISSUE:
Whether or not RBCI can be considered as a mortgagee in good faith.
HELD:
The settled rule is that persons constituting a mortgage must be legally authorized for the
purpose. In the present case, while Erna appears to be a co-owner of the mortgaged properties,
she made it appear that she was duly authorized to sell the entire properties by virtue of the
notarized SPA.
Generally, a notarized document carries the evidentiary weight conferred upon it with respect to
its due execution, and documents acknowledged before a notary public have in their favor the
presumption of regularity which may only be rebutted by clear and convincing
evidence. However, the presumptions that attach to notarized documents can be affirmed only so
long as it is beyond dispute that the notarization was regular. A defective notarization will strip
the document of its public character and reduce it to a private document.
The forged status of the subject SPA alone is already enough for the Court to declare the real
estate mortgage contract null and void but only with respect to the shares of the other co-owners
(i.e., respondents) whose consent thereto was not actually procured by Erna. While Erna, as
herself a co-owner, by virtue of Article 493 of the Civil Code, had the right to mortgage or even
sell her undivided interest in the said properties, she, could not, however, dispose of or mortgage
the subject properties in their entirety without the consent of the other co-owners. Accordingly,
the validity of the subject real estate mortgage and the subsequent foreclosure proceedings
therefor conducted in favor of RBCI should be limited only to the portion which may be allotted
to it (as the successor-in-interest of Erna) in the event of partition. In this relation, the CAs
directive to remand the case to the RTC in order to determine the exact extent of the respective
rights, interests, shares and participation of respondents and RBCI over the subject properties,
and thereafter, effect a final division, adjudication and partition in accordance with law remains
in order.
As for RBCIs claim that it should be deemed a mortgagee in good faith for having conducted
exhaustive investigations on the history of the mortgagors title, the Court finds the same
untenable. Two reasons impel this conclusion: first, the doctrine of mortgagee in good faith
applies only to lands registered under the Torrens system and not to unregistered lands, as the
properties in suit; and second, the principle is inapplicable to banking institutions which are
behooved to exercise greater care and prudence before entering into a mortgage contract. Hence,
the ascertainment of the status or condition of properties offered as security for loans must be a
standard and an indispensable part of its operations.
In this case, RBCI failed to observe the required level of caution in ascertaining the genuineness
of the SPA considering that Erna owns only an aliquot part of the properties offered as security
for the loan. It should not have simply relied on the face of the documents submitted since its
undertaking to lend a considerable amount of money as a banking institution requires a greater
degree of diligence. Hence, its rights as mortgagee and, now, as co-owner, should only be limited
to Ernas share to the subject properties and not, absent the other co-owners consent, to its
entirety.

104

2. MACARIA ARGUELLES AND THE HEIRS OF THE DECEASED PETRONIO


ARGUELLES V. MALARAYAT RURAL BANK, INC., G.R. NO. 200468, MARCH 19,
2014
FACTS:
The late Fermina M. Guia was the registered owner of Lot 3, a parcel of agricultural land in
Barrio Pinagkurusan, Alitagtag, Batangas, with an area of 4,560 square meters, as evidenced by
Original Certificate of Title (OCT). In 1990, Fermina M. Guia sold the south portion of the land
with an approximate area of 1,350 square meters to the spouses Petronio and Macaria Arguelles.
Although the spouses Arguelles immediately acquired possession of the land, the Deed of Sale
was neither registered with the Register of Deeds nor annotated on OCT. At the same time,
Fermina M. Guia ordered her son Eddie Guia and the latters wife Teresita Guia to subdivide the
land into three lots and to apply for the issuance of separate titles therefor, to wit: Lot 3A, Lot
3B, and Lot 3C. Thereafter, she directed the delivery of the Transfer Certificate of Title
(TCT) corresponding to Lot 3C to the vendees of the unregistered sale or the spouses Arguelles.
However, despite their repeated demands, the spouses Arguelles claimed that they never received
the TCT corresponding to Lot 3C from the spouses Guia.
Nevertheless, in accordance with the instructions of Fermina M. Guia, the spouses Guia
succeeded in cancelling OCT and in subdividing the lot where Lot 3C was registered under
Fermina Guia.
The spouses Guia obtained a loan in the amount of P240,000 from the respondent Malarayat
Rural Bank and secured the loan with a Deed of Real Estate Mortgage over Lot 3-C. The loan
and Real Estate Mortgage were made pursuant to the Special Power of Attorney purportedly
executed by the registered owner of Lot 3-C, Fermina M. Guia, in favor of the mortgagors,
spouses Guia. Moreover, the Real Estate Mortgage and Special Power of Attorney were duly
annotated in the memorandum of encumbrances of TCT covering Lot 3-C.
The spouses Arguelles alleged that it was only in 1997 or after seven years from the date of the
unregistered sale that they discovered from the Register of Deeds of Batangas City the following
facts: (1) subdivision of Lot 3 into Lots 3-A, 3-B, and 3-C; (2) issuance of separate TCTs for
each lot; and (3) the annotation of the Real Estate Mortgage and Special Power of Attorney over
Lot 3-C covered by TCT No. T-83944. Two years thereafter, or on June 17, 1999, the spouses
Arguelles registered their adverse claim based on the unregistered sale dated December 1, 1990
over Lot 3-C. On July 22, 1999, the spouses Arguelles filed a complaint for Annulment of
Mortgage and Cancellation of Mortgage Lien with Damages against the respondent Malarayat
Rural Bank with the RTC. In asserting the nullity of the mortgage lien, the spouses Arguelles
alleged ownership over the land that had been mortgaged in favor of the respondent Malarayat
Rural Bank. On August 16, 1999, the respondent Malarayat Rural Bank filed an Answer with
Counterclaim and Cross-claim against cross-claim-defendant spouses Guia wherein it argued that
the failure of the spouses Arguelles to register the Deed of Sale dated December 1, 1990 was
fatal to their claim of ownership.
RTC rendered decision declaring the mortgage made by the defendants Spouses Guia in favor of
defendant Malarayat Rural Bank null and void, setting aside the foreclosure sale and the
corresponding certificate of sale issued by this Court and ordering the Register of Deeds to
cancel the annotation pertaining to the memorandum of encumbrances.
The RTC found that the Spouses Guia were no longer the absolute owners of the land described
as Lot 3-C at the time they mortgaged the same to the respondent Rural Bank in view of the
unregistered sale in favor of the vendee spouses Arguelles. Thus, the RTC annulled the real
estate mortgage, the subsequent foreclosure sale, and the corresponding issuance of the
certificate of title. Moreover, the RTC declared that the respondent Bank was not a mortgagee in
good faith as it failed to exercise the exacting degree of diligence required from banking
institutions. The CA reversed and set aside the RTCs decision. Aggrieved, the petitioners filed
the instant petition.
105

ISSUE:
Whether or not the respondent Malarayat Rural Bank is a mortgagee in good faith who is entitled
to protection on its mortgage lien.
HELD:
The Court finds that the respondent Malarayat Rural Bank is not a mortgagee in good faith.
Therefore, the spouses Arguelles as the vendees to the unregistered sale have a superior right to
the mortgaged land. The doctrine of "mortgagee in good faith" is based on the rule that all
persons dealing with the property covered by a Torrens Certificate of Title, as buyers or
mortgagees, are not required to go beyond what appears on the face of the title. The public
interest in upholding the indefeasibility of a certificate of title, as evidence of lawful ownership
of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith,
relied upon what appears on the face of the certificate of title.
A mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of the
property offered as security, and in the absence of any sign that might arouse suspicion; the
mortgagee has no obligation to undertake further investigation.
In cases where the mortgagee does not directly deal with the registered owner of real property,
the law requires that a higher degree of prudence be exercised by the mortgagee. While one who
buys from the registered owner does not need to look behind the certificate of title, one who buys
from one who is not the registered owner is expected to examine not only the certificate of title
but all factual circumstances necessary for one to determine if there are any flaws in the title of
the transferor, or in the capacity to transfer the land. Although the instant case does not involve a
sale but only a mortgage, the same rule applies inasmuch as the law itself includes a mortgagee
in the term "purchaser." Thus, where the mortgagor is not the registered owner of the property
but is merely an attorney-in-fact of the same, it is incumbent upon the mortgagee to exercise
greater care and a higher degree of prudence in dealing with such mortgagor.
The Court held in numerous cases that where the mortgagee is a bank, it cannot rely merely on
the certificate of title offered by the mortgagor in ascertaining the status of mortgaged properties.
Since its business is impressed with public interest, the mortgagee-bank is duty-bound to be
more cautious even in dealing with registered lands. Indeed, the rule that person dealing with
registered lands can rely solely on the certificate of title does not apply to banks. Thus, before
approving a loan application, it is a standard operating practice for these institutions to conduct
an ocular inspection of the property offered for mortgage and to verify the genuineness of the
title to determine the real owners thereof. The apparent purpose of an ocular inspection is to
protect the "true owner" of the property as well as innocent third parties with a right, interest or
claim thereon from a usurper who may have acquired a fraudulent certificate of title thereto.
In this case, the Court finds that the respondent Malarayat Rural Bank fell short of the required
degree of diligence, prudence, and care in approving the loan application of the spouses Guia.
Respondent should have diligently conducted an investigation of the land offered as collateral.
Although the Report of Inspection and Credit Investigation found at the dorsal portion of the
Application for Agricultural Loan proved that the respondent Malarayat Rural Bank inspected
the land, the respondent turned a blind eye to the finding therein that the "lot is planted with
sugarcane with annual yield (crops) in the amount of P15,000." The Court disagrees with
respondent's stance that the mere planting and harvesting of sugarcane cannot reasonably trigger
suspicion that there is adverse possession over the land offered as mortgage. Indeed, such fact
should have immediately prompted the respondent to conduct further inquiries, especially since
the Spouses Guia were not the registered owners of the land being mortgaged. Since the subject
land was not mortgaged by the owner thereof and since the respondent Malarayat Rural Bank is
not a mortgagee in good faith, said bank is not entitled to protection under the law. The
unregistered sale in favor of the spouses Arguelles must prevail over the mortgage lien of
respondent Malarayat Rural Bank.

106

3. HOMEOWNERS SAVINGS AND LOAN BANK V. ASUNCION P. FELONIA AND


LYDIA C. DE GUZMAN, REP. BY MARIBEL FRIAS, ET AL., G.R. NO. 189477,
FEBRUARY 26, 2014.
FACTS:
Felonia and De Guzman mortgaged the property to Delgado to secure the loan in the amount of
P1,655,000.00. However, instead of a real estate mortgage, the parties executed a Deed of
Absolute Sale with an Option to Repurchase. Felonia and De Guzman filed an action for
Reformation of Contract. On the findings that it is "very apparent that the transaction had
between the parties is one of a mortgage and not a deed of sale with right to repurchase," the
RTC rendered a judgment favorable to Felonia and De Guzman.
Aggrieved, Delgado elevated the case to the CA. The said court affirmed the trial court decision.
In spite of the pendency of the Reformation case in which she was the defendant, Delgado filed a
"Petition for Consolidation of Ownership of Property Sold with an Option to Repurchase and
Issuance of a New Certificate of Title" in the RTC of Las Pias. After an ex-parte hearing, the
RTC ordered the issuance of a new title under Delgados name. By virtue of the RTC decision,
Delgado transferred the title to her name.
Aggrieved, Felonia and De Guzman elevated the case to the CA through a Petition for
Annulment of Judgment. Meanwhile, Delgado mortgaged the subject property to Homeowners
Savings and Loan Bank (HSLB) using her newly registered title. On September 1995, Felonia
and De Guzman caused the annotation of a Notice of Lis Pendens on Delgados title.
Subsequently, HSLB foreclosed the subject property and later consolidated ownership in its
favor, causing the issuance of a new title in its name. However, the CA annulled and set aside
the decision of the RTC, Las Pias City in the Consolidation case. In the decision of the CA, the
court declared Felonia and De Guzman as the absolute owners of the subject property and
ordered the cancellation of Delgados title.
Thus, Felonia and De Guzman, represented by Maribel Frias, claiming to be the absolute owners
of the subject property, instituted the instant complaint against Delgado, HSLB, Register of
Deeds of Las Pias City and Rhandolfo B. Amansec before the RTC of Las Pias City for
Nullity of Mortgage and Foreclosure Sale, Annulment of Titles of Delgado and HSLB, and
finally, Reconveyance of Possession and Ownership of the subject property in their favor. The
RTC ruled in their favor. Such decision was affirmed upon appeal. Hence, this petition.
ISSUE:
Whether or not the concept of mortgagor in good faith applies in the instant case.
HELD:
The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the certificate
of title of the mortgagor of the property given as security and in the absence of any sign that
might arouse suspicion, has no obligation to undertake further investigation. Hence, even if the
mortgagor is not the rightful owner of, or does not have a valid title to, the mortgaged property,
the mortgagee or transferee in good faith is nonetheless entitled to protection.
However, the rights of the parties to the present case are defined not by the determination of
whether or not HSLB is a mortgagee in good faith, but of whether or not HSLB is a purchaser in
good faith. And, HSLB is not such a purchaser.
In the case at bar, HSLB utterly failed to take the necessary precautions. At the time the subject
property was mortgaged, there was yet no annotated Notice of Lis Pendens. However, at the time
HSLB purchased the subject property, the Notice of Lis Pendens was already annotated on the
title.

107

The subject of the lis pendens on the title of HSLBs vendor, Delgado, is the "Reformation case"
filed against Delgado by the herein respondents. The case was decided with finality by the CA in
favor of herein respondents. The contract of sale in favor of Delgado was ordered reformed into
a contract of mortgage. By final decision of the CA, HSLBs vendor, Delgado, is not the
property owner but only a mortgagee. As it turned out, Delgado could not have constituted a
valid mortgage on the property. That the mortgagor be the absolute owner of the thing mortgaged
is an essential requisite of a contract of mortgage. Article 2085 (2) of the Civil Code specifically
says so:
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
xxxx
(2) That the pledgor or mortagagor be the absolute owner of the thing pledged or
mortgaged.
Succinctly, for a valid mortgage to exist, ownership of the property is an essential requisite.
Reyes v. De Leon cited the case of Philippine National Bank v. Rocha where it was pronounced
that "a mortgage of real property executed by one who is not an owner thereof at the time of the
execution of the mortgage is without legal existence." Such that, according to DBP v. Prudential
Bank, there being no valid mortgage, there could also be no valid foreclosure or valid auction
sale.

108

4. METROPOLITAN FABRICS, INC., (MFI) ET AL. V. PROSPERITY CREDIT


RESOURCES, INC. (PCRI), ET AL., G.R. NO. 154390, MARCH 17, 2014.
FACTS:
MFI sought from PCRI a loan in the amount of P3,443,330.52, the balance of the cost of its
boiler machine, to prevent its repossession by the seller. PCRI, also a familyowned corporation
licensed since 1980 to engage in money lending, was represented by Domingo Ang (Domingo)
its President, and his son Caleb, VicePresident. The parties knew each other because they
belonged to the same family association, the Lioc Kui Tong Fraternity.
The first amortization check bounced for insufficient fund due to MFIs continuing business
losses. It was then that the appellees allegedly learned that PCRI had filled up the 24 blank
checks with dates and amounts that reflected a 35% interest rate per annum, instead of just 24%,
and a twoyear repayment period, instead of 10 years. Vicky avers that her strong protest caused
PCRI to desist from depositing the other 23 checks, and that it was about this time that PCRI
finally furnished MFI with its copy of the promissory note and the disclosure statement.
PCRIs account statement showed that MFIs total loan obligation amounted to P4,167,472.71.
The statement from PCRI, however, showed that all seven (7) titles were placed as collateral for
their P3.5 million loan. MFI maintained that per their appraisal report, four of the properties
were already worth P6.5 million while the three other lots were valued around P4.6 million.
Enrique received a Notice of Sheriffs Sale announcing the auction of the seven lots due to
unpaid indebtedness of P10.5 million. Vicky insisted that prior to the auction notice, they never
received any statement or demand letter from the defendants to pay P10.5 million, nor did the
defendants inform them of the intended foreclosure. The last statement they received showed the
amount due of only P4,167,472.71. Vicky recalled that they held several meetings to discuss the
options available to them to repay their loan, such as the offsetting of their rent collectibles and
properties to cover the amortizations and the loan balance.
Upon defendants continued failure to honor their agreement, Atty. Ismael Andres threatened to
sue PCRI if they would not accept the P3 million payment of his client. Atty. Andres also sent
them similar letters and after several more discussions, the defendants finally agreed to accept
the P3 million from Winston Wang, but under these conditions: a) MFI must pay the
P300,000.00 attorneys fees paid for the foreclosure proceedings and the P190,000.00 for real
estate taxes; b) PCRI shall issue the certificate of redemption over the three lots; c) plaintiffs
shall execute a Memorandum of Undertaking concerning their right of way over the other
properties, the lots being redeemed being situated along Tandang Sora Street.
On two occasions, PCRI sent the plaintiffs a letter demanding that they vacate the four remaining
lots. Caleb was also now asking for P10.5 million. Caleb executed an affidavit of non
redemption of TCT Nos. 317699, 317702, 317703 and 317704. On June 7, 1990, S.G. del
Rosario, PCRIs vicepresident, wrote Vicky reiterating their demand to vacate the premises and
remove pieces of machinery, equipment and persons therein, which MFI eventually heeded.
The RTC ruled in favor of the petitioners holding that the real estate mortgage and the
subsequent foreclosure made by the defendants on the plaintiffs properties covered by Transfer
Certificate of Title Nos. 317699, 317702, 317703, 317704 of the Register of Deeds of Quezon
City null and void and the titles issued in favor of the defendants canceled and ordered
reconveyed to the plaintiffs
Said decision was reversed and set aside by the Court of Appeals in holding that the action for
annulment of title and reconveyance was based on the allegation of fraud which attended the
mortgage contract between the parties. Article 1391 of the Civil Code provides that actions to
annul a contract based on fraud should be brought within four years from discovery of the fraud.
If the transaction involves registered land, the fouryear period is computed from the registration
of the conveyance/transaction on account of constructive notice and not on actual knowledge. In
109

the instant case, the mortgage over the seven lots was annotated on the back of their respective
titles on September 05, 1984, so that the action to annul the mortgage should have been
commenced before September 05, 1988.
ISSUE:
Whether or not there was fraud respondents committed fraud when the officers of Metropolitan
were made to sign the deed of real estate mortgage in blank.
HELD:
The contested deed of real estate mortgage was a public document by virtue of its being
acknowledged before notary public Atty. Noemi Ferrer. As a notarized document, the deed
carried the evidentiary weight conferred upon it with respect to its due execution, and had in its
favor the presumption of regularity. Hence, it was admissible in evidence without further proof
of its authenticity, and was entitled to full faith and credit upon its face. To rebut its authenticity
and genuineness, the contrary evidence must be clear, convincing and more than merely
preponderant; otherwise, the deed should be upheld.
Petitioners undeniably failed to adduce clear and convincing evidence against the genuineness
and authenticity of the deed. Instead, their actuations even demonstrated that their transaction
with respondents had been regular and at armslength, thereby belying the intervention of fraud.
To start with, the evidence adduced by Vicky Ang, the lone witness for petitioners, tried to cast
doubt on the contents and due execution of the deed of real estate mortgage by pointing to
certain irregularities. But she could not be effective for the purpose because she had not been
among the signatories of the deed. The signatories were her late father Enrique Ang, her mother
Natividad Africa, and her brother Edmundo Ang, none of whom came forward to testify against
the deed, or otherwise to assail the genuineness and due execution of the deed by any other
means. They would have been in the better position than Vicky Ang to substantiate the allegation
of fraud if that was the case. Their silence reflected the inanity of the allegation of fraud by
Vicky Ang.
Secondly, petitioners freely and voluntarily surrendered to respondents the seven transfer
certificates of title (TCTs) of their lots. Such surrender of the TCTs evinced their intention to
offer the lots as collateral for the performance of their obligations contracted with respondents.
They thereby confirmed the genuineness and due execution of the deed of real estate mortgage.
Surely, they would not have surrendered the TCTs had their intention been otherwise.
Thirdly, another circumstance belying the commission of fraud by respondents was petitioners
pleading with respondents for the resetting of foreclosure sale of the properties after receiving
the notice of the impending sale. As a result, the sale was reset thrice. Had the mortgage and its
foreclosure been unreasonable or fraudulent, petitioners should have instead resolutely contested
respondents move to foreclose.
Fourthly, even after their properties were eventually sold as the consequence of the foreclosure,
petitioners negotiated with respondents on the partial redemption of three of the seven lots. They
also took the trouble of finding a buyer (Mr. Winston Wang of Asia Cotton) of some of the lots.
Had the mortgage been fraudulent, they could have instead instituted a complaint to nullify the
real estate mortgage and the foreclosure sale.
And, lastly, Vicky Angs own letters to respondents had an apologetic tenor, and was seeking
leniency from them. Such tenor and tone of her communications were antithetical to her
allegation of having been the victim of their fraudulent acts.
These circumstances tended to indicate that fraud was not attendant during the transactions
between the parties. Verily, as between the duly executed real estate mortgage and the
unsubstantiated allegations of fraud, the Court affords greater weight to the former.

110

5. METROPOLITAN BANK AND TRUST COMPANY VS. SPOUSES CRISTOBAL,


GR 175768; DECEMBER 11, 2013

FACTS:
Respondents Spouses Cristobal obtained a loan from petitioner Metropolitan Bank and Trust
Company in the amount of P4,500,000.00. The loan was secured by two real estate mortgages
and its three amendments, which respondents executed in favor of petitioner. Petitioners failed to
pay their loan despite demand, resulting in the extrajudicial foreclosure and auction sale of their
mortgaged properties. In the auction sale, petitioner emerged as the highest bidder so a
Certificate of Sale was issued in its name.
Thereafter, the Bank demanded the Spouses Cristobal to vacate the properties covered by the
mortgage. However, this went unheeded, thus, forcing the Metropolitan Bank to file with the
Regional Trial Court a petition seeking a Writ of Possession over the subject properties. The
Regional Trial Court denied the petition, ruling that the 12 month redemption period has not yet
been expired and that the petitioner did not submit sufficient evidence from which it could base
the amount of the bond required in an application for a Writ of Possession done within the 12month redemption period. The Banks Motion for Reconsideration was likewise denied. Upon
appeal to the Court of Appeals, the court also denied the petition ruling that while the posting of
a bond is no longer necessary upon the expiration of the redemption period, it is however
required that the ownership over the property be consolidated with the purchaser of the
foreclosed property.
Hence, this petition.
ISSUE:
Whether or not consolidation of title is necessary before possession may automatically given to
the petitioner, considering that the 12 month redemption period has already lapsed and the need
for a bond is already dispensed with.
HELD:
The Supreme Court ruled in the affirmative. Jurisprudence articulates that the purchaser can
demand possession at any time following the consolidation of ownership in his name and the
issuance to him of a new transfer certificate of title. After the consolidation of title in the
buyers name for failure of the mortgagor to redeem the property, the writ of possession becomes
a matter of right.

111

6. PHILIPPINE NATIONAL BANK VS. SPOUSES MARANON, GR 189316; JULY 1,


2013
FACTS:
The subject lot was among the properties mortgaged by Spouses Rodolfo and Emilie
Montealegre to Philippine National Bank as a security for a loan. In their transactions with PNB,
Spouses Montealegre used Transfer Certificate of Title (TCT) No. T-156512 over the subject lot
purportedly registered in the name of Emilie Montealegre.
When Spouses Montealegre failed to pay the loan, PNB initiated foreclosure proceedings on the
mortgaged properties, including the subject lot. In the auction sale held on August 16, 1991,
PNB emerged as the highest bidder. Before the expiration of the redemption period or on July
29, 1992, Spouses Maraon filed before the RTC a complaint for Annulment of Title,
Reconveyance and Damages against the Petitioner alleging that they are the true registered
owners of the subject lot by virtue of TCT No. T-129577 which was illegally cancelled by TCT
No. T-156512 under the name of Emilie who used a falsified Deed of Sale bearing the forged
signatures of Spouse Maraon to effect the transfer of title to the property in her name.
The RTC ruled in favor of the Maranon spouses and ruled that the sale was void because the
signatures of Spouses Maraon in the Deed of Sale presented by Spouses Montealegre before the
Register of Deeds to cause the cancellation of TCT No. T-129577 were forged. The RTC
concluded the sale to be null and void and PNB was adjudged to be a mortgagee in good faith
whose lien on the subject lot must be respected.
Subsequently, the spouses filed motions for Withdrawal of deposited rentals, which the RTC
granted. Aggrieved, PNB sought recourse with the CA via a petition for certiorari and mandamus
claiming that as the lawful owner of the subject lot per the RTCs judgment dated June 2, 2006,
it is entitled to the fruits of the same such as rentals paid by tenants, but the CA dismissed the
petition and the later motion for reconsideration. Hence, this petition
ISSUE:
Whether or not PNB is entitled to the rent because it became the subject lots new owner when
the redemption period expired without the property being redeemed
HELD:
The protection afforded to PNB as a mortgagee in good faith refers to the right to have its
mortgage lien carried over and annotated on the new certificate of title issued to Spouses
Maraon as so adjudged by the RTC. Thereafter, to enforce such lien thru foreclosure
proceedings in case of non-payment of the secured debt,as PNB did so pursue. The principle,
however, is not the singular rule that governs real estate mortgages and foreclosures attended by
fraudulent transfers to the mortgagor.
Rent, as an accessory follow the principal. In fact, when the principal property is mortgaged, the
mortgage shall include all natural or civil fruits and improvements found thereon when the
secured obligation becomes due as provided in Article 2127 of the Civil Code.
However, the rule is not without qualifications. The Court explained that Article 2127 is
predicated on the presumption that the ownership of accessions and accessories also belongs to
the mortgagor as the owner of the principal. After all, it is an indispensable requisite of a valid
real estate mortgage that the mortgagor be the absolute owner of the encumbered property.
It is beyond question that PNBs mortgagors, Spouses Montealegre, are not the true owners of
the subject lot much less of the building which produced the disputed rent. The foreclosure
proceedings on August 16, 1991 caused by PNB could not have, thus, included the building
found on the subject lot and the rent it yields. PNBs lien as a mortgagee in good faith pertains to
112

the subject lot alone because the rule that improvements shall follow the principal in a mortgage
under Article 2127 of the Civil Code does not apply under the premises. Accordingly, since the
building was not foreclosed, it remains a property of Spouses Maraon; it is not affected by nonredemption and is excluded from any consolidation of title made by PNB over the subject lot.
Thus, PNBs claim for the rent paid by Tolete has no basis.

113

7. SPOUSES RAMOS VS. RAUL OBISPO AND FAR EAST BANK & TRUST
COMPANY, GR NO. 193804; FEBRUARY 27, 2013
FACTS:
Petitioners filed a complaint for annulment of real estate mortgage with damages against FEBTC
and Obispo. Petitioners alleged that they signed the blank REM form given by Obispo who
facilitated the loan with FEBTC, and that they subsequently received the loan proceeds of
P250,000.00 which they paid in full through Obispo. With their loan fully settled, they demanded
the release of their title but Obispo refused to talk or see them, as he is now hiding from them.
Upon verification with the Registry of Deeds of Quezon City, petitioners said they were
surprised to learn that their property was in fact mortgaged for P1,159,096.00. Petitioners thus
prayed that the REM be declared void and cancelled; that FEBTC be ordered to deliver to them
all documents pertaining to the loan and mortgage of Obispo; and that FEBTC and Obispo be
ordered to pay moral damages and attorneys fee.
In its Answer With Compulsory Counterclaim and Cross-claim, FEBTC averred that petitioners
agreed to execute the REM over their property as partial security for the loans obtained by
Obispo with a total principal balance of P2,500,000.00. Since the obligation secured by the REM
remains unpaid, FEBTC contended, among others, that it should not be compelled to release the
mortgage on the subject property.
The RTC ruled in favor of Ramos where it held among others, that the Real Estate Mortgate in
favor of Far East Bank & Trust Company is null and void. Upon appeal to the CA, the court
reversed the decision of the RTC holding that petitioners were third-party mortgagors under
Article 2085 of the Civil Code and that they failed to present any evidence to prove their
allegations. Hence, this petition.
ISSUE:
Whether or not the mortgage in favor of Far East Bank & Trust Co. is valid.
HELD:
The validity of an accommodation mortgage is allowed under Article 2085 of the Civil Code
which provides that "third persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property." An accommodation mortgagor, ordinarily,
is not himself a recipient of the loan, otherwise that would be contrary to his designation as such.
It bears stressing that an accommodation mortgagor, ordinarily, is not himself a recipient of the
loan, otherwise that would be contrary to his designation as such. We have held that it is not
always necessary that the accommodation mortgagor be apprised beforehand of the entire
amount of the loan nor should it first be determined before the execution of the Special Power of
Attorney in favor of the debtor.18 This is especially true when the words used by the parties
indicate that the mortgage serves as a continuing security for credit obtained as well as future
loan availments.
Here, petitioners as owners signed the REM as mortgagors and there is no evidence adduced that
suggests fraud or irregularity in its execution. Petitioners are not contracting parties whom the
law considers ignorant or disadvantaged but former overseas workers with sufficient education
as to be well-aware of the consequences of their personal decisions, consistent with the legal
presumption that a person takes ordinary care of his concerns. Hence, it can be reasonably
inferred from the facts on record that it was more probable that petitioners allowed Obispo to use
their property as additional collateral so as to avail of his existing credit line with FEBTC instead
of petitioners directly applying for a separate loan.

114

III.f. AGENCY
1. ALVIN PATRIMONIO v. NAPOLEON GUTIERREZ AND OCTAVIO MARASIGAN
III, G.R. No. 187769, June 04, 2014
FACTS:
The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture
under the name of Slam Dunk Corporation (Slum Dunk). Petitioner was already then a decorated
professional basketball player while Gutierrez was a well-known sports columnist. In the course
of their business, the petitioner pre-signed several checks to answer for the expenses of Slam
Dunk. The blank checks were entrusted to Gutierrez with the specific instruction not to fill them
out without previous notification to and approval by the petitioner.
In 1993, without the petitioners knowledge and consent, Gutierrez secured a loan from
Marasigan in the amount of P200,000.00. Marasigan acceded to Gutierrez request and gave him
P200,000.00. Gutierrez simultaneously delivered to Marasigan one of the blank checks the
petitioner pre-signed with the blank portions filled. On May 24, 1994, Marasigan deposited the
check but it was dishonored for the reason ACCOUNT CLOSED. It was later revealed that
petitioners account with the bank had been closed since May 28, 1993.
Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters
to the petitioner asking for the payment of P200,000.00, but his demands likewise went
unheeded. Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner.
The petitioner filed before the Regional Trial Court (RTC) a Complaint for Declaration of Nullity
of Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan. He
completely denied authorizing the loan or the checks negotiation, and asserted that he was not
privy to the parties loan agreement.
RTC ruled in favor of Marasigan. On appeal, the CA affirmed the RTC ruling, although
premised on different factual findings. After the CA denied the subsequent motion for
reconsideration, the petitioner filed the present petition for review on certiorari under Rule 45.
ISSUES:
1. Whether or not the contract of loan granted by respondent Marasigan to petitioner,
through respondent Gutierrez, may be nullified for being void;
2. Whether or not there is basis to hold the petitioner liable for the payment of the
P200,000.00 loan;
HELD:
The petitioner seeks to nullify the contract of loan on the ground that he never authorized the
borrowing of money. He points to Article 1878, paragraph 7 of the Civil Code, which explicitly
requires a written authority when the loan is contracted through an agent. The petitioner contends
that absent such authority in writing, he should not be held liable for the face value of the check
because he was not a party or privy to the agreement.
Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person
"binds himself to render some service or to do something in representation or on behalf of
another, with the consent or authority of the latter." Agency may be express, or implied from the
acts of the principal, from his silence or lack of action, or his failure to repudiate the agency,
knowing that another person is acting on his behalf without authority. As a general rule, a
contract of agency may be oral. However, it must be written when the law requires a specific
form, for example, in a sale of a piece of land or any interest therein through an agent. Article
1878 paragraph 7 of the Civil Code expressly requires a special power of authority before an
agent can loan or borrow money in behalf of the principal. Article 1878 does not state that the
authority be in writing. As long as the mandate is express, such authority may be either oral or
written. The authority must be duly established by competent and convincing evidence other than
115

the self serving assertion of the party claiming that such authority was verbally given, thus: The
requirements of a special power of attorney in Article 1878 of the Civil Code and of a special
authority in Rule 138 of the Rules of Court refer to the nature of the authorization and not its
form. The requirements are met if there is a clear mandate from the principal specifically
authorizing the performance of the act.
Gutierrez did not have any authority to borrow money in behalf of the petitioner. Records do not
show that the petitioner executed any special power of attorney (SPA) in favor of Gutierrez. In
fact, the petitioners testimony confirmed that he never authorized Gutierrez (or anyone for that
matter), whether verbally or in writing, to borrow money in his behalf, nor was he aware of any
such transaction. Marasigan however submits that the petitioners acts of pre-signing the blank
checks and releasing them to Gutierrez suffice to establish that the petitioner had authorized
Gutierrez to fill them out and contract the loan in his behalf. In the absence of any authorization,
Gutierrez could not enter into a contract of loan in behalf of the petitioner. It is a general rule in
the law of agency that, in order to bind the principal by a mortgage on real property executed by
an agent, it must upon its face purport to be made, signed and sealed in the name of the principal,
otherwise, it will bind the agent only. It is not enough merely that the agent was in fact
authorized to make the mortgage, if he has not acted in the name of the principal. In the absence
of any showing of any agency relations or special authority to act for and in behalf of the
petitioner, the loan agreement Gutierrez entered into with Marasigan is null and void. Thus, the
petitioner is not bound by the parties loan agreement.
Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally
sufficient because the authority to enter into a loan can never be presumed. The contract of
agency and the special fiduciary relationship inherent in this contract must exist as a matter of
fact. The person alleging it has the burden of proof to show, not only the fact of agency, but also
its nature and extent. The records show that Marasigan merely relied on the words of Gutierrez
without securing a copy of the SPA in favor of the latter and without verifying from the
petitioner whether he had authorized the borrowing of money or release of the check. He was
thus bound by the risk accompanying his trust on the mere assurances of Gutierrez.
A contract of loan, like any other contract, is subject to the rules governing the requisites and
validity of contracts in general.Article 1318 of the Civil Code enumerates the essential requisites
for a valid contract, namely:
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.
In this case, the petitioner denied liability on the ground that the contract lacked the essential
element of consent. Gutierrez did not have the petitioners written/verbal authority to enter into a
contract of loan. While there may be a meeting of the minds between Gutierrez and Marasigan,
such agreement cannot bind the petitioner whose consent was not obtained and who was not
privy to the loan agreement. Hence, only Gutierrez is bound by the contract of loan.
True, the petitioner had issued several pre-signed checks to Gutierrez, one of which fell into the
hands of Marasigan. This act, however, does not constitute sufficient authority to borrow money
in his behalf and neither should it be construed as petitioners grant of consent to the parties
loan agreement. Without any evidence to prove Gutierrez authority, the petitioners signature in
the check cannot be taken, even remotely, as sufficient authorization, much less, consent to the
contract of loan. Without the consent given by one party in a purported contract, such contract
could not have been perfected; there simply was no contract to speak of.

116

2. SALLY YOSHIZAKI VS. JOY TRAINING CENTER OF AURORA, INC., GR NO.


174978; JULY 31, 2013
FACTS:
The spouses Richard and Linda Johnson sold the real properties, a Wrangler jeep, and other
personal properties in favor of the spouses Sally and Yoshio Yoshizaki. A Deed of Absolute Sale
and a Deed of Sale of Motor Vehicle were executed in favor of the spouses Yoshizaki. The
spouses Johnson were members of Joy Trainings board of trustees at the time of sale. On
December 7, 1998, TCT No. T-25334 was cancelled and TCT No. T-260527 was issued in the
name of the spouses Yoshizaki.
Joy Training, represented by its Acting Chairperson Reuben V. Rubio, filed an action for the
Cancellation of Sales and Damages with prayer for the issuance of a Temporary Restraining
Order and/or Writ of Preliminary Injunction against the spouses Yoshizaki and the spouses
Johnson before the Regional Trial Court of Baler, Aurora (RTC). The complaint alleged, among
others, that the spouses Johnson sold its properties without the requisite authority from the board
of directors. It assailed the validity of a board resolution dated September 1, 1998 which
purportedly granted the spouses Johnson the authority to sell its real properties.
For their defense, the spouses Yoshizaki averred, among others, that Joy Training authorized the
spouses Johnson to sell the parcel of land. They asserted that a majority of the board of trustees
approved the resolution. They maintained that the actual members of the board of trustees issued
a certification dated February 20, 1998 authorizing the spouses Johnson to act on Joy Trainings
behalf. Furthermore, they highlighted that the Wrangler jeep and other personal properties were
registered in the name of the spouses Johnson.
The RTC ruled in favor of the spouses Yoshizaki, as the sale was valid because Joy Training
authorized the spouses Johnson to sell the real properties. Moreover the sale of personal
properties was valid because they were registered in the spouses Johnsons name.
Upon appeal to the CA, the court reversed the ruling of the RTC with respect to the sale of the
real property. It ruled that esolution is void because it was not approved by a majority of the
board of trustees. Hence , this present petition.
ISSUE:
Whether or not there was a contract of agency to sell the real properties between Joy Training
and the spouses Johnson.
HELD:
Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person
"binds himself to render some service or to do something in representation or on behalf of
another, with the consent or authority of the latter." It may be express, or implied from the acts of
the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing
that another person is acting on his behalf without authority.
As a general rule, a contract of agency may be oral. However, it must be written when the law
requires a specific form. Specifically, Article 1874 of the Civil Code provides that the contract
of agency must be written for the validity of the sale of a piece of land or any interest therein.
Otherwise, the sale shall be void. A related provision, Article 1878 of the Civil Code, states that
special powers of attorney are necessary to convey real rights over immovable properties.
Moreover, the certification is a mere general power of attorney which comprises all of Joy
Trainings business. Article 1877 of the Civil Code clearly states that "an agency couched in
general terms comprises only acts of administration, even if the principal should state that he
withholds no power or that the agent may execute such acts as he may consider appropriate, or
even though the agency should authorize a general and unlimited management.

117

At this point, we reiterate the established principle that persons dealing with an agent must
ascertain not only the fact of agency, but also the nature and extent of the agents authority. A
third person with whom the agent wishes to contract on behalf of the principal may require the
presentation of the power of attorney, or the instructions as regards the agency. The basis for
agency is representation and a person dealing with an agent is put upon inquiry and must
discover on his own peril the authority of the agent. Thus, Sally bought the real properties at her
own risk; she bears the risk of injury occasioned by her transaction with the spouses Johnson.

118

3. REMAN RECIO VS. SPS. AGUEDO AND MARIA ALTAMIRANO, GR 182349;


JULY 24, 2013
FACTS:
Nena Recio leased from Respondent Altamiranos a parclel of land with improvements at Lipa,
Batangas. In 1988, the Altamiranos offered to sell the subject property to Nena for Five Hundred
Thousand Pesos (P500,000.00). The latter accepted such offer, which prompted the Altamiranos
to waive the rentals for the subject property. However, the sale did not materialize at that time
due to the fault of the Altamiranos. Nonetheless, Nena continued to occupy and use the property
with the consent of the Altamiranos. In the latter part of 1994, the petitioner renewed Nenas
option to buy the subject property. After negotiations, the Altamiranos through Alejandro entered
into an oral contract of sale with the petitioner over the subject property. In January 1995, in
view of the said oral contract of sale, the petitioner made partial payments to the Altamiranos in
the total amount of One Hundred Ten Thousand Pesos (P110,000.00). Alejandro duly received
and acknowledged these partial payments as shown in a receipt dated January 24, 1995. On April
14, 1995, the petitioner made another payment in the amount of Fifty Thousand Pesos
(P50,000.00), which Alejandro again received and acknowledged through a receipt of the same
date. Subsequently, the petitioner offered in many instances to pay the remaining balance of the
agreed purchase price of the subject property in the amount of Three Hundred Forty Thousand
Pesos (P340,000.00), but Alejandro kept on avoiding the petitioner. Because of this, the
petitioner demanded from the Altamiranos, through Alejandro, the execution of a Deed of
Absolute Sale in exchange for the full payment of the agreed price.
The petitioner subsequently filed an action for specific performance against the Altamiranos, and
to annotate a notice of Lis Pendens at the back of the title of the parcel of land. However,
petitioner discovered that the subject property has been subsequently sold to respondents Lauro
and Marcelina Lajarca.
The RTC ruled in favor of petitioner and declared the second sale void. Upon appeal, the CA
affirmed but modified the findings of the trial court, and declared, among others, that the first
sale (oral sale) is only valid as to the share of Alejandro, and thus Recio was declared a coowner of the subject parcel of land. Hence this petition
ISSUE:
Whether or not the verbal contract of sale between Alejandro and the petitioner; involving the
subject property is valid.

HELD:
Given the expressed requirement under the Articles 1874 and 1878 of the Civil Code that there
must be a written authority to sell an immovable property, the petitioners arguments must fail.
The petitioner asserts that since TCT No. T-102563 contained a notice of lis pendens, the
Altamiranos very well knew of the earlier sale to him by Alejandro. While this may be true, it
does not negate the fact that Alejandro did not have any SPA. It was a finding that need not be
disturbed that Alejandro had no authority from his co-owners to sell the subject property.
Indeed, the petitioner can only apply the principle of apparent authority if he is able to prove the
acts of the Altamiranos which justify his belief in Alejandros agency; that the Altamiranos had
such knowledge thereof; and if the petitioner relied upon those acts and conduct, consistent with
ordinary care and prudence.
The instant case shows no evidence on record of specific acts which the Altamiranos made
before tile sale of the subject property to the petitioner, indicating that they fully knew of the
representation of Alejandro. All that the petitioner relied upon were acts that happened after the
sale to him. Absent the consent of Alejandro's co-owners, the Court holds that the sale between
119

the other Altamiranos and the petitioner is null and void. But as held by the appellate court, the
sale between the petitioner and Alejandro is valid insofar as the aliquot share of respondent
Alejandro is concerned. Being a co-owner, Alejandro can validly and legally dispose of his share
even without the consent of all the other co-heirs. Since the balance of the full price has not yet
been paid, the amount paid shall represent as payment to his aliquot share. This then leaves the
sale of the lot of the Altamiranos to the Spouses Lajarca valid only insofar as their shares are
concerned, exclusive of the aliquot part of Alejandro, as ruled by the CA.

120

III.f. TRUST
1. GERSIP ASSOCIATION, INC., ET.AL VS. GSIS, GR NO. 189827; OCTOBER 16,
2013
FACTS:
The GSIS Board of Trustees approved the proposed GSIS Provident Fund Plan where employees
who are members of the Provident Fund (Fund) contribute through salary deduction a sum
equivalent to five percent (5%) of their monthly salary while respondents monthly contribution
is fixed at 45% of each members monthly salary. A Committee of Trustees (Committee)
appointed by respondent administers the Fund by investing it "in a prudent manner to ensure the
preservation of the Fund capital and the adequacy of its earnings.
Out of the earnings realized by the Fund, twenty percent (20%) of the proportionate earnings of
respondents contributions is deducted and credited to a General Reserve Fund (GRF) and the
remainder is credited to the accounts of the members in proportion to the amounts standing to
their credit at the beginning of each quarter. Upon retirement, members are entitled to withdraw
the entire amount of their contributions and proportionate share of the accumulated earnings
thereon, and 100% of respondents contributions with its proportionate earnings.
Petitioner GERSIP Association, Inc.9 (GERSIP), composed of retired GSIS employees and
officers wrote the President and General Manager of respondent requesting the liquidation and
partition of the GRF. In his letter-reply10 dated August 14, 2001, then President and General
Manager Winston F. Garcia explained that there exists a trust relation rather than co-ownership
with respect to the Fund. He stressed that the PFRR authorizes a reduction of 20% earnings for
the GRF, not a total liquidation of the fund itself. Moreover, the GRF, being an integral part of
the Fund, must be maintained as a general policy to serve its purpose of providing supplementary
benefits to retired, separated and disabled GSIS employees and, in the event of death, payment of
definite amounts to their beneficiaries.
Petitioners filed a Petition with the GSIS Board alleging that they have not been paid their
portion of the GRF upon their retirement, to which they are entitled as "co-owners" of the Fund.
The GSIS Board denied the petition holding that e execution of the Trust Agreement14 between
respondent and the Committee is a clear indication that the parties intended to establish an
express trust, not a co-ownership, with respondent as Trustor, the Committee as Trustee of the
Fund and the members as Beneficiaries.
On appeal, the CA affirmed the ruling of the GSIS Board. Hence, this present petition.
ISSUE:
Whether or not the Fund is a trust or a co-ownership.
HELD:
Trust is the legal relationship between one person having an equitable ownership in property and
another person owning the legal title to such property, the equitable ownership of the former
entitling him to the performance of certain duties and the exercise of certain powers by the latter.
A trust fund refers to money or property set aside as a trust for the benefit of another and held by
a trustee. Under the Civil Code, trusts are classified as either express or implied. An express trust
is created by the intention of the trustor or of the parties, while an implied trust comes into being
by operation of law.
There is no doubt that respondent intended to establish a trust fund from the employees
contributions (5% of monthly salary) and its own contributions (45% of each members monthly
salary and all unremitted Employees Welfare contributions). We cannot accept petitioners
submission that respondent could not impose terms and conditions on the availment of benefits
from the Fund on the ground that members already own respondents contributions from the
moment such was remitted to their account. Petitioners assertion that the Plan was a purely
contractual obligation on the part of respondent is likewise mistaken.
121

IV. EXTRA-CONTRACTUAL OBLIGATIONS


1. ANTONIO LOCSIN II V. MEKENI FOOD CORPORATION, G.R. NO. 192105,
DECEMBER 9, 2013.
FACTS:
Respondent Mekeni Food Corporation (Mekeni) a Philippine company engaged in food
manufacturing and meat processing offered petitioner Antonio Locsin II the position of
Regional Sales Manager to oversee Mekenis National Capital Region Supermarket/Food
Service and South Luzon operations. In addition to a compensation and benefit package, Mekeni
offered petitioner a car plan, under which one-half of the cost of the vehicle is to be paid by the
company and the other half to be deducted from petitioners salary. Mekenis offer was
contained in an Offer Sheet which was presented to petitioner. Petitioner began his stint as
Mekeni Regional Sales Manager on March 17, 2004. To be able to effectively cover his
appointed sales territory, Mekeni furnished petitioner with a used Honda Civic car valued at
P280,000.00, which used to be the service vehicle of petitioners immediate supervisor.
Petitioner paid for his 50% share through salary deductions of P5,000.00 each month.
Subsequently, Locsin resigned. By then, a total of P112,500.00 had been deducted from his
monthly salary and applied as part of the employees share in the car plan. Mekeni supposedly
put in an equivalent amount as its share under the car plan. In his resignation letter, petitioner
made an offer to purchase his service vehicle by paying the outstanding balance thereon. The
parties negotiated, but could not agree on the terms of the proposed purchase. Petitioner thus
returned the vehicle to Mekeni. Petitioner made personal and written follow-ups regarding his
unpaid salaries, commissions, benefits, and offer to purchase his service vehicle. Mekeni replied
that the company car plan benefit applied only to employees who have been with the company
for five years; for this reason, the balance that petitioner should pay on his service vehicle stood
at P116,380.00 if he opts to purchase the same.
Thereafter, Petitioner filed against Mekeni, a Complaint for the recovery of monetary claims
consisting of unpaid salaries, commissions, sick/vacation leave benefits, and recovery of monthly
salary deductions which were earmarked for his cost-sharing in the car plan. The case was
docketed in the NLRC. The Labor Arbiter rendered a Decision, directing the respondents to turnover to complainant the subject vehicle upon the said complainants payment to them of the sum
of P100,435.84. On appeal, the Labor Arbiters Decision was reversed. The NLRC held that
petitioners amortization payments on his service vehicle amounting to P112,500.00 should be
reimbursed; if not, unjust enrichment would result, as the vehicle remained in the possession and
ownership of Mekeni. In addition, the employers share in the monthly car plan payments should
likewise be awarded to petitioner because it forms part of the latters benefits under the car plan.
It held further that Mekenis claim that the company car plan benefit applied only to employees
who have been with the company for five years has not been substantiated by its evidence, in
which case the car plan agreement should be construed in petitioners favor. Mekeni moved to
reconsider, but in an April 30, 2009 Resolution, the NLRC sustained its original findings.
The CA held that the NLRC possessed jurisdiction over petitioners claims, including the
amounts he paid under the car plan, since his Complaint against Mekeni is one for the payment
of salaries and employee benefits. In the absence of evidence as to the stipulations of the car
plan arrangement between Mekeni and petitioner, the CA treated petitioners monthly
contributions in the total amount of P112,500.00 as rentals for the use of his service vehicle for
the duration of his employment with Mekeni. The appellate court applied Articles 1484-1486 of
the Civil Code, and added that the instalments paid by petitioner should not be returned to him
inasmuch as the amounts are not unconscionable. Thus, the instant petition.
ISSUE:

Whether petitioner is entitled to a refund of all the amounts applied to the cost of the service
vehicle under the car plan.

122

HELD:

From the evidence on record, it is seen that the Mekeni car plan offered to petitioner was subject
to no other term or condition than that Mekeni shall cover one-half of its value, and petitioner
shall in turn pay the other half through deductions from his monthly salary. Mekeni has not
shown, by documentary evidence or otherwise, that there are other terms and conditions
governing its car plan agreement with petitioner. There is no evidence to suggest that if petitioner
failed to completely cover one-half of the cost of the vehicle, then all the deductions from his
salary going to the cost of the vehicle will be treated as rentals for his use thereof while working
with Mekeni, and shall not be refunded. Indeed, there is no such stipulation or arrangement
between them.
It was made clear in the above pronouncement that installments made on the car plan may be
treated as rentals only when there is an express stipulation in the car plan agreement to such
effect. It was therefore patent error for the appellate court to assume that, even in the absence of
express stipulation, petitioners payments on the car plan may be considered as rentals which
need not be returned.
Any benefit or privilege enjoyed by petitioner from using the service vehicle was merely
incidental and insignificant, because for the most part the vehicle was under Mekenis control
and supervision. Free and complete disposal is given to the petitioner only after the vehicles cost
is covered or paid in full. Until then, the vehicle remains at the beck and call of Mekeni. Given
the vast territory petitioner had to cover to be able to perform his work effectively and generate
business for his employer, the service vehicle was an absolute necessity, or else Mekenis
business would suffer adversely. Thus, it is clear that while petitioner was paying for half of the
vehicles value, Mekeni was reaping the full benefits from the use thereof.
In light of the foregoing, it is unfair to deny petitioner a refund of all his contributions to the car
plan. Under Article 22 of the Civil Code, every person who through an act of performance by
another, or any other means, acquires or comes into possession of something at the expense of
the latter without just or legal ground, shall return the same to him. Article 2142 of the same
Code likewise clarifies that there are certain lawful, voluntary and unilateral acts which give rise
to the juridical relation of quasi-contract, to the end that no one shall be unjustly enriched or
benefited at the expense of another. In the absence of specific terms and conditions governing the
car plan arrangement between the petitioner and Mekeni, a quasi-contractual relation was created
between them. Consequently, Mekeni may not enrich itself by charging petitioner for the use of
its vehicle which is otherwise absolutely necessary to the full and effective promotion of its
business. It may not, under the claim that petitioners payments constitute rents for the use of the
company vehicle, refuse to refund what petitioner had paid, for the reasons that the car plan did
not carry such a condition; the subject vehicle is an old car that is substantially, if not fully,
depreciated; the car plan arrangement benefited Mekeni for the most part; and any personal
benefit obtained by petitioner from using the vehicle was merely incidental.
Conversely, petitioner cannot recover the monetary value of Mekenis counterpart contribution
to the cost of the vehicle; that is not property or money that belongs to him, nor was it intended
to be given to him in lieu of the car plan. In other words, Mekenis share of the vehicles cost
was not part of petitioners compensation package. To start with, the vehicle is an asset that
belonged to Mekeni. Just as Mekeni is unjustly enriched by failing to refund petitioners
payments, so should petitioner not be awarded the value of Mekenis counterpart contribution to
the car plan, as this would unjustly enrich him at Mekenis expense.
There is unjust enrichment when a person unjustly retains a benefit to the loss of another, or
when a person retains money or property of another against the fundamental principles of justice,
equity and good conscience. The principle of unjust enrichment requires two conditions: (1) that
a person is benefited without a valid basis or justification, and (2) that such benefit is derived at
the expense of another. The main objective of the principle against unjust enrichment is to
prevent one from enriching himself at the expense of another without just cause or consideration.

123

2. DRA. LEILA A. DELA LLANA V. REBECCA BIONG, DOING BUSINESS UNDER


THE NAME AND STYLE OF PONGKAY TRADING, G.R. NO. 182356, DECEMBER
4, 2013
FACTS:
On March 30, 2000, at around 11:00 p.m., Juan dela Llana was driving a 1997 Toyota Corolla
car along North Avenue, Quezon City while his sister, Dra. dela Llana, was seated at the front
passenger seat while a certain Calimlim was at the backseat.
Juan stopped the car across the Veterans Memorial Hospital when the signal light turned red. A
few seconds after the car halted, a dump truck containing gravel and sand suddenly rammed the
cars rear end, violently pushing the car forward. Due to the impact, the cars rear end collapsed
and its rear windshield was shattered. Glass splinters flew, puncturing Dra. dela Llana. Apart
from these minor wounds, Dra. dela Llana did not appear to have suffered from any other visible
physical injuries.
The traffic investigation report dated March 30, 2000 identified the truck driver as Joel Primero.
It stated that Joel was recklessly imprudent in driving the truck. Joel later revealed that his
employer was respondent Rebecca Biong, doing business under the name and style of "Pongkay
Trading" and was engaged in a gravel and sand business.
In the first week of May 2000, Dra. dela Llana began to feel mild to moderate pain on the left
side of her neck and shoulder. The pain became more intense as days passed by. Her injury
became more severe. Her health deteriorated to the extent that she could no longer move her left
arm. On June 9, 2000, she consulted with Dr. Rosalinda Milla, a rehabilitation medicine
specialist, to examine her condition. Dr. Milla told her that she suffered from a whiplash injury,
an injury caused by the compression of the nerve running to her left arm and hand. Dr. Milla
required her to undergo physical therapy to alleviate her condition. Dra. dela Llanas condition
did not improve despite three months of extensive physical therapy.
Thus, Dra. dela Llana sued Rebecca for damages before the Regional Trial Court of Quezon City
(RTC). She alleged that she lost the mobility of her arm as a result of the vehicular accident.
The RTC ruled in favor of Dra. dela Llana and held that the proximate cause of Dra. dela Llanas
whiplash injury to be Joels reckless driving. The CA reversed the RTC ruling. It held that Dra.
dela Llana failed to establish a reasonable connection between the vehicular accident and her
whiplash injury by preponderance of evidence. Hence , this petition.
ISSUE:

Whether or not Joels reckless driving is the proximate cause of Dra. dela Llanas whiplash
injury.
HELD:

Article 2176 of the Civil Code provides that "whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence,
if there is no pre-existing contractual relation between the parties, is a quasi-delict."
124

Under this provision, the elements necessary to establish a quasi-delict case are:
(1) damages to the plaintiff;
(2) negligence, by act or omission, of the defendant or by some person for whose acts the
defendant must respond, was guilty; and
(3) the connection of cause and effect between such negligence and the damages.
These elements show that the source of obligation in a quasi-delict case is the breach or omission
of mutual duties that civilized society imposes upon its members, or which arise from noncontractual relations of certain members of society to others.
Based on these requisites, Dra. dela Llana must first establish by preponderance of evidence the
three elements of quasi-delict before we determine Rebeccas liability as Joels employer. She
should show the chain of causation between Joels reckless driving and her whiplash injury. Only
after she has laid this foundation can the presumption - that Rebecca did not exercise the
diligence of a good father of a family in the selection and supervision of Joel - arise.
Once negligence, the damages and the proximate causation are established, this Court can then
proceed with the application and the interpretation of the fifth paragraph of Article 2180 of the
Civil Code.
Under Article 2176 of the Civil Code, in relation with the fifth paragraph of Article 2180, "an
action predicated on an employees act or omission may be instituted against the employer who
is held liable for the negligent act or omission committed by his employee."
The rationale for these graduated levels of analyses is that it is essentially the wrongful or
negligent act or omission itself which creates the vinculum juris in extra-contractual obligations.
Indeed, a perusal of the pieces of evidence presented by the parties before the trial court shows
that Dra. Dela Llana did not present any testimonial or documentary evidence that directly shows
the causal relation between the vehicular accident and Dra. Dela Llanas injury. Her claim that
Joels negligence causes her whiplash injury was not established because of the deficiency of the
presented evidence during trial. We point out in this respect that courts cannot take judicial
notice that vehicular ccidents cause whiplash injuries. This proportion is not public knowledge,
or is capable of unquestionable demonstration, or ought to be known to judges because of their
judicial functions. We have no expertise in the field of medicine. Justices and judges are only
tasked to apply and interpret the law on the basis of the parties pieces of evidence and their
corresponding legal arguments.
In sum, Dra. dela Llana miserably failed to establish her cause by preponderance of evidence.

While we commiserate with her, our solemn duty to independently and impartially assess the
merits of the case binds us to rule against Dra. dela Llanas favor. Her claim, unsupported by
preponderance of evidence, is merely a bare assertion and has no leg to stand on.

125

V. DAMAGES
1. MARIANO C. MENDOZA AND ELVIRA LIM, v. SPOUSES LEONORA J. GOMEZ
AND GABRIEL V. GOMEZ, G.R. No. 160110, June 18, 2014
FACTS:
An Isuzu Elf truck (Isuzu truck) owned by respondent Leonora and driven by Perez, was hit by a
Mayamy Transportation bus, registered under the name of petitioner Elvira Lim and driven by
petitioner Mariano C. Mendoza. Respondents filed a separate complaint for damages against
Mendoza and Lim, seeking actual damages, compensation for lost income, moral damages,
exemplary damages, attorneys fees and costs of the suit.
The Isuzu truck, coming from Katipunan Road and heading towards E. Rodriguez, Sr. Avenue, was
travelling along the downward portion of Boni Serrano Avenue when, upon reaching the corner of
Riviera Street, fronting St. Ignatius Village, its left front portion was hit by the Mayamy bus. The
Mayamy bus, while traversing the opposite lane, intruded on the lane occupied by the Isuzu truck.
Mendoza tried to escape by speeding away, but he was apprehended.
As a result of the incident, Perez, as well as the helpers on board the Isuzu truck, sustained injuries
necessitating medical treatment amounting to P11,267.35, which amount was shouldered by
respondents. Moreover, the Isuzu truck sustained extensive damages on its cowl, chassis, lights and
steering wheel, amounting to P142,757.40. Additionally, respondents averred that the mishap
deprived them of a daily income of P1,000.00. Respondents claimed that the Isuzu truck was vital in
the furtherance of their business.
The RTC found Mendoza liable for direct personal negligence under Article 2176 of the Civil Code,
and it also found Lim vicariously liable under Article 2180 of the same Code.
Thus, the RTC rendered judgment in favor of the respondents and ordered petitioners to pay jointly
and severally, the costs of repair of the damaged vehicle; the amount of P1,000.00 per day from
March 7, 1997 up to November 1997 representing the unrealized income of the respondents when
the incident transpired up to the time the damaged Isuzu truck was repaired; P100,000.00 as moral
damages, plus a separate amount of P50,000.00 as exemplary damages; P50,000.00 as attorneys
fees; and the costs of suit.
On appeal to the CA, it affirmed the decision of the RTC with the exception of the award of
unrealized income.
ISSUES:
Whether or not the respondents are entitled to claim for actual, moral, exemplary damages.
HELD:
Respondents anchor their claim for damages on Mendozas negligence, banking on Article 2176 of
the Civil Code. The obligation imposed by Article 2176 is demandable not only for ones own acts
or omissions, but also for those of persons for whom one is responsible. Employers shall be liable for
the damages caused by their employees and household helpers acting within the scope of their
assigned tasks, even though the former are not engaged in any business of industry.
As found by the RTC, and affirmed by the CA, Mendoza was negligent in driving the subject
Mayamy bus, as demonstrated by the fact that, at the time of the collision, the bus intruded on the
lane intended for the Isuzu truck. Having encroached on the opposite lane, Mendoza was clearly in
violation of traffic laws. Article 2185 of the Civil Code provides that unless there is proof to the
contrary, it is presumed that a person driving a motor vehicle has been negligent if at the time of the
mishap, he was violating any traffic regulation. In the case at bar, Mendozas violation of traffic laws
was the proximate cause of the harm.
According to Manresa, liability for personal acts and omissions is founded on that indisputable
principle of justice recognized by all legislations that when a person by his act or omission causes
126

damage or prejudice to another, a juridical relation is created by virtue of which the injured person
acquires a right to be indemnified and the person causing the damage is charged with the
corresponding duty of repairing the damage. The reason for this is found in the obvious truth that
man should subordinate his acts to the precepts of prudence and if he fails to observe them and
causes damage to another, he must repair the damage. His negligence having caused the damage,
Mendoza is certainly liable to repair said damage.
Additionally, Mendozas employer may also be held liable under the doctrine of vicarious liability or
imputed negligence. Under such doctrine, a person who has not committed the act or omission which
caused damage or injury to another may nevertheless be held civilly liable to the latter either directly
or subsidiarily under certain circumstances. In our jurisdiction, vicarious liability or imputed
negligence is embodied in Article 2180 of the Civil Code and the basis for damages in the action
under said article is the direct and primary negligence of the employer in the selection or
supervision, or both, of his employee.
Generally, when an injury is caused by the negligence of a servant or employee, there instantly arises
a presumption of law that there was negligence on the part of the master or employer either in the
selection of the servant or employee (culpa in eligiendo) or in the supervision over him after the
selection (culpa vigilando), or both. The presumption is juris tantum and not juris et de jure;
consequently, it may be rebutted. Accordingly, the general rule is that if the employer shows to the
satisfaction of the court that in the selection and supervision of his employee he has exercised the
care and diligence of a good father of a family, the presumption is overcome and he is relieved of
liability. However, with the enactment of the motor vehicle registration law, the defenses available
under Article 2180 of the Civil Code - that the employee acts beyond the scope of his assigned task
or that it exercised the due diligence of a good father of a family to prevent damage are no longer
available to the registered owner of the motor vehicle, because the motor vehicle registration law, to
a certain extent, modified Article 2180.
Actual or Compensatory Damages. Actual or compensatory damages are those awarded in
satisfaction of, or in recompense for, loss or injury sustained. They simply make good or replace the
loss caused by the wrong. Article 2202 of the Civil Code provides that in crimes and quasi- delicts,
the defendant shall be liable for all damages which are the natural and probable consequences of the
act or omission complained of. Article 2199 of the same Code, however, sets the limitation that,
except as provided by law or by stipulation, one is entitled to an adequate compensation only for
such pecuniary loss suffered by him as he has duly proved. As such, to warrant an award of actual or
compensatory damages, the claimant must prove that the damage sustained is the natural and
probable consequences of the negligent act and, moreover, the claimant must adequately prove the
amount of such damage.
In the case at bar, the RTC, basing on the receipts submitted by respondents and which receipts
petitioners had the opportunity to examine, respondents are entitled to as actual and compensatory
damages. Although respondents alleged in their complaint that the damage to their Isuzu truck
caused them the loss of a daily income of P1,000.00, such claim was not duly substantiated by any
evidence on record, and thus cannot be awarded in their favor.
Moral Damages. Moral damages are awarded to enable the injured party to obtain means, diversions
or amusements that will serve to alleviate the moral suffering he has undergone, by reason of the
defendant's culpable action. In prayers for moral damages, however, recovery is more an exception
rather than the rule. Moral damages are not meant to be punitive but are designed to compensate and
alleviate the physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar harm unjustly caused to a person. To
be entitled to such an award, the claimant must satisfactorily prove that he has suffered damages and
that the injury causing it has sprung from any of the cases listed in Articles 2219 and 2220 of the
Civil Code. Moreover, the damages must be shown to be the proximate result of a wrongful act or
omission. The claimant must thus establish the factual basis of the damages and its causal tie with
the acts of the defendant. In fine, an award of moral damages calls for the presentation of 1) evidence
of besmirched reputation or physical, mental or psychological suffering sustained by the claimant; 2)
127

a culpable act or omission factually established; 3) proof that the wrongful act or omission of the
defendant is the proximate cause of the damages sustained by the claimant; and 4) the proof that the
act is predicated on any of the instances expressed or envisioned by Article 2219 and Article 2220 of
the Civil Code.
Respondents were not able to show that their claim properly falls under Articles 2219 and 2220 of
the Civil Code. Respondents cannot rely on Article 2219 (2) of the Civil Code which allows moral
damages in quasi-delicts causing physical injuries because in physical injuries, moral damages are
recoverable only by the injured party, and in the case at bar, herein respondents were not the ones
who were actually injured.
Exemplary Damages. Article 2229 of the Civil Code provides that exemplary or corrective damages
are imposed, by way of example or correction for the public good, in addition to moral, temperate,
liquidated or compensatory damages. Article 2231 of the same Code further states that in quasidelicts, exemplary damages may be granted if the defendant acted with gross negligence.
Our jurisprudence sets certain conditions when exemplary damages may be awarded: First, they may
be imposed by way of example or correction only in addition, among others, to compensatory
damages, and cannot be recovered as a matter of right, their determination depending upon the
amount of compensatory damages that may be awarded to the claimant. Second, the claimant must
first establish his right to moral, temperate, liquidated or compensatory damages. Third, the wrongful
act must be accompanied by bad faith, and the award would be allowed only if the guilty party acted
in a wanton, fraudulent, reckless, oppressive or malevolent manner.
In motor vehicle accident cases, exemplary damages may be awarded where the defendants
misconduct is so flagrant as to transcend simple negligence and be tantamount to positive or
affirmative misconduct rather than passive or negative misconduct. In characterizing the requisite
positive misconduct which will support a claim for punitive damages, the courts have used such
descriptive terms as willful, wanton, grossly negligent, reckless, or malicious, either alone or in
combination.
In the case at bar, having established respondents right to compensatory damages, exemplary
damages are also in order, given the fact that Mendoza was grossly negligent in driving the Mayamy
bus. His act of intruding or encroaching on the lane rightfully occupied by the Isuzu truck shows his
reckless disregard for safety.

128

2. GILAT SATELLITE NETWORKS LTD, VS UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO.,
G.R. NO. 189563; APRIL 7, 2014
FACTS:

One Virtual placed with GILAT a purchase order for various telecommunications equipment,
accessories, spares, services and software, at a total purchase price of US$2,128,250.00. Of the
said purchase price for the goods delivered, One Virtual promised to pay a portion thereof
totalling US$1.2 Million in accordance with the payment schedule dated 22 November 1999. To
ensure the prompt payment of this amount, it obtained defendant UCPB General Insurance Co.
(UCPB), Inc.s surety bond dated 3 December 1999, in favor of GILAT.
During the period between September 1999 and June 2000, GILAT shipped and delivered to One
Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading. All
of the equipment was shipped by GILAT and duly received by One Virtual. Under an
endorsement dated December 23, 1999, the surety issued, with One Virtuals conformity, an
amendment to the surety bond, correcting its expiry date from May 30, 2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of US$400,000.00 on the due date of May 30, 2000
in accordance with the payment schedule to the surety bond, prompting GILAT to write the
surety defendant UCPB on June 5, 2000, a demand letter for payment of the said amount of
US$400,000.00. No part of the amount set forth in this demand has been paid to date by either
One Virtual or defendant UCPB. One Virtual likewise failed to pay on the succeeding payment
installment date of 30 November 2000 of the surety bond, prompting GILAT to send a second
demand letter dated January 24, 2001, for the payment of the full amount of US$1,200,000.00
guaranteed under the surety bond, plus interests and expenses and which letter was received by
the defendant surety on January 25, 2001. However, defendant UCPB failed to settle the amount
of US$1,200,000.00 or a part thereof, hence, the instant complaint."
Petitioner GILAT filed a Complaint against respondent UCPB to recover the amounts

supposedly covered by the surety bond, plus interests and expenses. After due hearing, the RTC
rendered its Decision ordering the defendant surety to pay the plaintiff the amount of
US$1,200,000.00 representing the principal debt under the surety bond, with legal interest
thereon at the rate of 12% per annum computed from the time the judgment becomes final and
executory until the obligation is fully settled and the defendant surety to pay the plaintiff for
attorneys fees and litigation expenses.
The RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the subject
equipments and the same was installed. Even with the delivery and installation made, One
Virtual failed to pay any of the payments agreed upon. Demand notwithstanding, defendant
failed and refused and continued to fail and refused to settle the obligation." Insofar as the
interests were concerned, the RTC denied petitioners claim on the premise that while a surety
can be held liable for interest even if it becomes more onerous than the principal obligation, the
surety shall only accrue when the delay or refusal to pay the principal obligation is without any
justifiable cause. Here, respondent failed to pay its surety obligation because of the advice of its
principal (One Virtual) not to pay. The RTC then obligated respondent to pay petitioner the
amount of USD1,200,000.00 representing the principal debt under the Surety Bond, with legal
interest at the rate of 12% per annum computed from the time the judgment becomes final and
executory, and USD44,004.04 representing attorneys fees and litigation expenses.
Respondent appealed to the CA dismissing the appealed case for lack of jurisdiction and ordered
the parties to proceed to arbitration, the outcome of which shall necessary bind the parties,
including the surety. The CA ruled that in "enforcing a surety contract, the complementarycontracts-construed-together doctrine finds application." According to this doctrine, the
accessory contract must be construed with the principal agreement. In this case, the appellate
court considered the Purchase Agreement entered into between petitioner and One Virtual as the
129

principal contract, whose stipulations are also binding on the parties to the suretyship. Bearing in
mind the arbitration clause contained in the Purchase Agreement and pursuant to the policy of
the courts to encourage alternative dispute resolution methods, the trial courts Decision was
vacated; petitioner and One Virtual were ordered to proceed to arbitration. Hence, this instant
Petition.
ISSUE:

Whether or not petitioner is entitled to legal interest due to the delay in the fulfillment by
respondent of its obligation under the Suretyship Agreement.
HELD:

Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor
in the payment of the latters obligation, provided that the delay is inexcusable. Petitioner alleges
that it deserves to be paid legal interest of 12% per annum from the time of its first demand on
respondent on 5 June 2000 or at most, from the second demand on 24 January 2001 because of
the latters delay in discharging its monetary obligation. Citing Article 1169 of the Civil Code,
petitioner insists that the delay started to run from the time it demanded the fulfillment of
respondents obligation under the suretyship contract. Significantly, respondent does not contest
this point, but instead argues that it is only liable for legal interest of 6% per annum from the date
of petitioners last demand on 24 January 2001.
In rejecting petitioners position, the RTC stated that interests may only accrue when the delay or
the refusal of a party to pay is without any justifiable cause. In this case, respondents failure to
heed the demand was due to the advice of One Virtual that petitioner allegedly breached its
undertakings as stated in the Purchase Agreement. The Court sustains the petitioner.
Article 2209 of the Civil Code is clear: "if an obligation consists in the payment of a sum of
money, and the debtor incurs a delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation,
the legal interest."
Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply. Delay, as used in Article 1169, is
synonymous with default or mora, which means delay in the fulfillment of obligations. It is the
non-fulfillment of an obligation with respect to time. In order for the debtor (in this case, the
surety) to be in default, it is necessary that the following requisites be present: (1) that the
obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.
Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in
thus paying, its liability becomes more than the principal obligation. The increased liability is not
because of the contract, but because of the default and the necessity of judicial collection.
However, for delay to merit interest, it must be inexcusable in nature. As to the issue of when
interest must accrue, our Civil Code is explicit in stating that it accrues from the time judicial or
extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of
Article 1169 of the Civil Code and of the settled rule that where there has been an extra-judicial
demand before an action for performance was filed, interest on the amount due begins to run, not
from the date of the filing of the complaint, but from the date of that extra-judicial demand.
Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the
Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June 2000, we
agree with the latter that interest must start to run from the time petitioner sent its first demand
letter (5 June 2000), because the obligation was already due and demandable at that time.

130

3. BJDC CONSTRUCTION, REPRESENTED BY ITS MANAGER/PROPRIETOR

JANET S. DELA CRUZ, v. NENA E. LANUZO, CLAUDETTE E. LANUZO, JANET


E. LANUZO, JOAN BERNABE E. LANUZO, AND RYAN JOSE E. LANUZO, G.R.
No. 161151, March 24, 2014
FACTS:
Nena E. Lanuzo (Nena) filed a complaint for damages against BJDC Construction (company), a
single proprietorship engaged in the construction business. The company was the contractor of
the reblocking project to repair the damaged portion of one lane of the national highway at San
Agustin, Pili, Camarines Sur from September 1997 to November 1997.
Nena alleged that she was the surviving spouse of the late Balbino Los Baos Lanuzo (Balbino)
who figured in the accident that transpired at the site of the reblocking work; that Balbinos
Honda motorcycle sideswiped the road barricade placed by the company in the right lane portion
of the road, causing him to lose control of his motorcycle and to crash on the newly cemented
road, resulting in his instant death; and that the companys failure to place illuminated warning
signs on the site of the project, especially during night time, was the proximate cause of the death
of Balbino. She prayed that the company be held liable for damages.
The company denied Nenas allegations of negligence, insisting that it had installed warning
signs and lights along the highway and on the barricades of the project; that at the time of the
incident, the lights were working and switched on; that its project was duly inspected by the
Department of Public Works and Highways (DPWH), the Office of the Mayor of Pili, and the
Pili Municipal Police Station; and that it was found to have satisfactorily taken measures to
ensure the safety of motorists. The company further alleged that since the start of the project in
September 1997, it installed several warning signs.
The company insisted that the death of Balbino was an accident brought about by his own
negligence, as confirmed by the police investigation report that stated, among others, that
Balbino was not wearing any helmet at that time, and the accident occurred while Balbino was
overtaking another motorcycle; and that the police report also stated that the road sign/barricade
installed on the road had a light.
The RTC rendered judgment in favor of the company and opined that the plaintiffs were unable
to make out a case for damages, with a preponderance of evidence. On appeal, the CA reversed
and set aside the RTC decision and ordered the defendantappellee to pay the plaintiff
appellants, heirs of the victim Balbino L. B. Lanuzo, the sums of P50,000.00 as death indemnity,
P20,000.00 by way of temperate damages and P939,736.50 as loss of earning capacity of the
deceased Balbino L. B. Lanuzo.
ISSUE:
Whether or not the proximate cause of the accident is the victims own negligence.
HELD:
Negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent and reasonable man would not do, or as Judge Cooley defines it, the
failure to observe for the protection of the interests of another person, that degree of care,
precaution, and vigilance which the circumstances justly demand, whereby such other person
suffers injury. In order that a party may be held liable for damages for any injury brought about
by the negligence of another, the claimant must prove that the negligence was the immediate and
proximate cause of the injury. Proximate cause is defined as that cause, which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the injury and
without which the result would not have occurred.

131

The test by which to determine the existence of negligence in a particular case may be stated as
follows:
Did the defendant in doing the alleged negligent act use that reasonable care and caution
which an ordinarily prudent person would have used in the same situation? If not, then he is
guilty of negligence. The law here in effect adopts the standard supposed to be supplied by
the imaginary conduct of the discreet pater familias of the Roman law. The existence of
negligence in a given case is not determined by reference to the personal judgment of the
actor in the situation before him. The law considers what would be reckless, blameworthy,
or negligent in the man of ordinary intelligence and prudence and determines liability by
that.
The question as to what would constitute the conduct of a prudent man in a given situation must
of course be always determined in the light of human experience and in view of the facts
involved in the particular case. Abstract speculation cannot here be of much value but this much
can be profitably said: Reasonable men govern their conduct by the circumstances which are
before them or known to them. They are not, and are not supposed to be, omniscient of the
future. Hence they can be expected to take care only when there is something before them to
suggest or warn of danger. Could a prudent man, in the case under consideration, foresee harm as
a result of the course actually pursued? If so, it was the duty of the actor to take precautions to
guard against that harm. Reasonable foresight of harm, followed by the ignoring of the
suggestion born of this prevision, is always necessary before negligence can be held to exist.
Stated in these terms, the proper criterion for determining the existence of negligence in a given
case is this: Conduct is said to be negligent when a prudent man in the position of the tortfeasor
would have foreseen that an effect harmful to another was sufficiently probable to warrant his
foregoing the conduct or guarding against its consequences.
The Lanuzo heirs argued in the trial and appellate courts that there was a total omission on the
part of the company to place illuminated warning signs on the site of the project, especially
during night time, in order to warn motorists of the project. They claim that the omission was the
proximate cause of the death of Balbino. In this appeal, however, they contend that the
negligence of the company consisted in its omission to put up adequate lighting and the required
signs to warn motorists of the project, abandoning their previous argument of a total omission to
illuminate the project site. The witnesses of the plaintiffs were not consistent on their
recollections of the significant detail of the illumination of the site.
In contrast, the company credibly refuted the allegation of inadequate illumination. Zamora, its
flagman in the project, rendered an eyewitness account of the accident by stating that the site had
been illuminated by light bulbs and gas lamps, and that Balbino had been in the process of
overtaking another motorcycle rider at a fast speed when he hit the barricade placed on the newly
cemented road. On his part, SPO1 Corporal, the police investigator recalled that there were light
bulbs on the other side of the barricade on the lane coming from Naga City; and that the light
bulb on the lane where the accident had occurred was broken because it had been hit by the
victims motorcycle. Witnesses Gerry Alejo and Engr. Victorino del Socorro remembered that
light bulbs and gas lamps had been installed in the area of the project.
In our view, the RTC properly gave more weight to the testimonies of Zamora and SPO1
Corporal than to those of the witnesses for the Lanuzo heirs. There was justification for doing so,
because the greater probability pertained to the former. Moreover, the trial courts assessment of
the credibility of the witnesses and of their testimonies is preferred to that of the appellate courts
because of the trial courts unique firsthand opportunity to observe the witnesses and their
demeanor as such.
The RTC was correct on its conclusions and findings that the company was not negligent in
ensuring safety at the project site. All the established circumstances showed that the proximate
and immediate cause of the death of Balbino was his own negligence. Hence, the Lanuzo heirs
could not recover damages.
132

4. INTERNATIONAL CONTAINER TERMINAL SERVICES, INC. V. CELESTE M.


CHUA, G.R. NO. 195031, MARCH 26, 2014
FACTS:
The twenty (20)feet container van loaded with the personal effects of respondent Celeste M.
Chua arrived at the North Harbor, Manila, from Oakland, California. On even date, it was
unloaded from the vessel and was placed in the depot belonging to petitioner for safekeeping
pending the customs inspection.
The container van was stripped and partially inspected by custom authorities. Further inspection
thereof was scheduled. However, on the date scheduled, petitioners depot was gutted by fire and
respondents container van, together with fortyfour (44) others, were burned. In the survey
conducted thereafter, seventy percent (70%) of the contents of the van was found to be totally
burnt while thirty percent (30%) thereof was wet, dirty, and unusable. Respondent demanded
reimbursement for the value of the goods. However, her demands fell on deaf ears.
Respondent filed the suit below alleging, in essence, that the proximate cause of the fire that
engulfed petitioners depot was the combustible chemicals stored thereat; and, that petitioner, in
storing the said flammable chemicals in its depot, failed to exercise due diligence in the selection
and supervision of its employees and/or of their work.
In its Answer, petitioner admits that it accepted, in good order, respondents container van for
storage and safekeeping at its depot but denies that there was negligence on its part or that of its
employees. It asserts that the fire that gutted its depot was due to a fortuitous event because it
exercised the due diligence required by law. It maintains that respondent is not entitled to her
claim because she did not declare the true and correct value of the goods, as the Bill of Lading
indicates that the contents of the van have no commercial value. Asserting that respondent has no
cause of action or that respondents cause of action, if any, has already prescribed because the
complaint was not filed within twelve (12) months from the time of damage or loss, it prays for
the dismissal of the complaint.
The trial court rendered a decision ordering herein petitioner to pay respondent actual and moral
damages and attorneys fees. Aggrieved, petitioner filed an appeal to the Court of Appeals. The
Court of Appeals affirmed the trial courts decision.
ISSUE:
Whether or not petitioners may be held liable for damages.
Held:
The Court held that there is no doubt that petitioner is liable to respondent for damages on
account of the loss of the contents of her container van. Petitioner itself admitted during the pre
trial of this case that respondents container van caught fire while stored within its premises.
Absent any justifiable explanation on the part of petitioner on the cause of the fire as would
absolve it from liability, the presumption that there was negligence on its part comes into play.
The situation in this case, therefore, calls for the application of the doctrine of res ipsa loquitur.
The doctrine of res ipsa loquitur is based on the theory that the defendant either knows the
cause of the accident or has the best opportunity of ascertaining it and the plaintiff, having no
knowledge thereof, is compelled to allege negligence in general terms. In such instance, the
plaintiff relies on proof of the happening of the accident alone to establish negligence. The
principle, furthermore, provides a means by which a plaintiff can hold liable a defendant who, if
innocent, should be able to prove that he exercised due care to prevent the accident complained
of from happening. It is, consequently, the defendants responsibility to show that there was no
negligence on his part. The doctrine, however, can be invoked when and only when, under the
circumstances involved, direct evidence is absent and not readily available. Here, there was no
evidence as to how or why the fire in the container yard of petitioner started; hence, it was up to
133

petitioner to satisfactorily prove that it exercised the diligence required to prevent the fire from
happening. This it failed to do. Thus, the trial court and the Court of Appeals acted appropriately
in applying the principle of res ipsa loquitur to the case at bar.
Article 2199 of the Civil Code states that except as provided by law or by stipulation, one is
entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly
proved. Such compensation is referred to as actual or compensatory damages.
Actual damages are compensation for an injury that will put the injured party in the position
where it was before the injury. They pertain to such injuries or losses that are actually sustained
and susceptible of measurement. Except as provided by law or by stipulation, a party is entitled
to adequate compensation only for such pecuniary loss as is duly proven. Basic is the rule that to
recover actual damages, not only must the amount of loss be capable of proof; it must also be
actually proven with a reasonable degree of certainty, premised upon competent proof or the best
evidence obtainable.
Respondent failed to adduce evidence adequate enough to satisfactorily prove the amount of
actual damages claimed. The receipts she submitted cannot be considered competent proof since
she failed to prove that the items listed therein are indeed the items that were in her container van
and vice versa. As pointed out above, there are discrepancies between the items listed in the
submitted receipts and those contained in the respective inspection reports of the marine
surveyors. Hence, the said receipts cannot be made the basis for the grant of actual damages. The
Court has emphasized that actual damages cannot be presumed and courts, in making an award,
must point out specific facts which could afford a basis for measuring whatever compensatory or
actual damages are borne. An award of actual damages is dependent upon competent proof of
the damages suffered and the actual amount thereof. The award must be based on the evidence
presented, not on the personal knowledge of the court; and certainly not on flimsy, remote,
speculative and unsubstantial proof.
Under Article 2217, Moral damages include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Though incapable of pecuniary computation, moral damages may be recovered if they are
the proximate result of the defendants wrongful act or omission.
Certainly, an award of moral damages must be anchored on a clear showing that the party
claiming the same actually experienced mental anguish, besmirched reputation, sleepless nights,
wounded feelings, or similar injury. In the case herein under consideration, the records are bereft
of any proof that respondent in fact suffered moral damages as contemplated in the aforequoted
provision of the Civil Code. The testimony of respondent, on the other hand, merely states that
when she failed to recover damages from petitioner, she was saddened, had sleepless nights and
anxiety without providing specific details of the suffering she allegedly went through. Since an
award of moral damages is predicated on a categorical showing by the claimant that she actually
experienced emotional and mental sufferings, it must be disallowed absent any evidence thereon.
Further, an award of attorneys fees has always been the exception rather than the rule and there
must be some compelling legal reason to bring the case within the exception and justify the
award. In this case, none of the exceptions applies. Attorneys fees are not awarded every time a
party prevails in a suit. The policy of the Court is that no premium should be placed on the right
to litigate. Even when a claimant is compelled to litigate with third persons or to incur expenses
to protect his rights, still, attorneys fees may not be awarded where no sufficient showing of bad
faith could be reflected in a partys persistence in a case other than an erroneous conviction of
the righteousness of his cause.
The petition is partially granted and that the award of actual damages, moral damages and
attorneys fees are deleted. However, petitioner is ordered to pay respondent temperate damages.

134