V.

Defective Contracts
(Rescissible Contracts (Art. 1380-1389)

Cases:

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 194366

October 10, 2012

NAPOLEON D. NERI, ALICIA D. NERI-MONDEJAR, VISMINDA D. NERI-CHAMBERS, ROSA

D. NERI-MILLAN, DOUGLAS D. NERI, EUTROPIA D. ILLUT-COCKINOS AND VICTORIA D.
ILLUT-PIALA, Petitioners,
vs.
HEIRS OF HADJI YUSOP UY AND JULPHA* IBRAHIM UY, Respondents.
DECISION
PERLAS-BERNABE, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioners Napoleon D.
Neri (Napoleon), Alicia D. Neri-Mondejar (Alicia), Visminda D. Neri-Chambers (Visminda), Rosa D.
Neri-Millan (Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos (Eutropia), and Victoria D.
Illut-Piala (Victoria) seek to reverse and set aside the April 27, 2010 Decision2 and October 18, 2010
Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 01031-MIN which annulled the October
25, 2004 Decision4 of the Regional Trial Court (RTC) of Panabo City, Davao del Norte and instead,
entered a new one dismissing petitioners complaint for annulment of sale, damages and attorneys
feesagainst herein respondents heirs of spouses Hadji Yusop Uy and Julpha Ibrahim Uy (heirs of
Uy).
The Facts
During her lifetime, Anunciacion Neri (Anunciacion) had seven children, two (2) from her first
marriage with Gonzalo Illut (Gonzalo), namely: Eutropia and Victoria, and five (5) from her second
marriage with Enrique Neri (Enrique), namely: Napoleon, Alicia, Visminda, Douglas and Rosa.
Throughout the marriage of spouses Enrique and Anunciacion, they acquired several homestead
properties with a total area of 296,555 square meters located in Samal, Davao del Norte, embraced
by Original Certificate of Title (OCT) Nos. (P-7998) P-21285, (P-14608) P-51536 and P-20551 (P8348)7issued on February 15, 1957, August 27, 1962 and July 7, 1967, respectively.

On September 21, 1977, Anunciacion died intestate. Her husband, Enrique, in his personal capacity
and as natural guardian of his minor children Rosa and Douglas, together with Napoleon, Alicia, and
Vismindaexecuted an Extra-Judicial Settlement of the Estate with Absolute Deed of Sale8 on July 7,
1979, adjudicating among themselves the said homestead properties, and thereafter, conveying
themto the late spouses Hadji Yusop Uy and Julpha Ibrahim Uy (spouses Uy)for a consideration
of P 80,000.00.
On June 11, 1996, the children of Enrique filed a complaint for annulment of saleof the said
homestead properties against spouses Uy (later substituted by their heirs)before the RTC, docketed
as Civil Case No.96-28, assailing the validity of the sale for having been sold within the prohibited
period. Thecomplaint was later amended to include Eutropia and Victoriaas additional plaintiffs for
having been excluded and deprived of their legitimes as childrenof Anunciacion from her first
marriage.
In their amended answer with counterclaim, the heirs of Uy countered that the sale took place
beyond the 5-year prohibitory period from the issuance of the homestead patents. They also denied
knowledge of Eutropia and Victorias exclusionfrom the extrajudicial settlement and sale of the
subject properties, and interposed further the defenses of prescription and laches.
The RTC Ruling
On October 25, 2004, the RTC rendered a decision ordering, among others, the annulment of the
Extra-Judicial Settlement of the Estate with Absolute Deed of Sale. It ruled that while the sale
occurred beyond the 5-year prohibitory period, the sale is still void because Eutropia and Victoria
were deprived of their hereditary rights and that Enrique had no judicial authority to sell the shares
of his minor children, Rosa and Douglas.
Consequently, it rejected the defenses of laches and prescription raised by spouses Uy, who claimed
possession of the subject properties for 17 years, holding that co-ownership rights are
imprescriptible.
The CA Ruling
On appeal, the CAreversed and set aside the ruling of the RTC in its April 27, 2010 Decision and
dismissed the complaint of the petitioners. It held that, while Eutropia and Victoria had no
knowledge of the extrajudicial settlement and sale of the subject properties and as such, were not
bound by it, the CA found it unconscionable to permit the annulment of the sale considering spouses
Uys possession thereof for 17 years, and thatEutropia and Victoriabelatedlyfiled their actionin 1997,
ormore than two years fromknowledge of their exclusion as heirs in 1994 when their stepfather
died. It, however, did not preclude the excluded heirs from recovering their legitimes from their coheirs.
Similarly, the CA declared the extrajudicial settlement and the subsequent saleas valid and binding
with respect to Enrique and hischildren, holding that as co-owners, they have the right to dispose of
their respective shares as they consider necessary or fit.While recognizing Rosa and Douglas to be
minors at that time, they were deemed to have ratified the sale whenthey failed to question it upon
reaching the age of majority.Italso found laches to have set in because of their inaction for a long
period of time.
The Issues

In this petition, petitioners imputeto the CA the following errors:

I. WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE WITH
ABSOLUTE DEED OF SALE" AS FAR AS THE SHARES OF EUTROPIA AND VICTORIA WERE
CONCERNED, THEREBY DEPRIVING THEM OF THEIR INHERITANCE;
II. WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE
WITH ABSOLUTE DEED OF SALE" WITH RESPECT TO THE SHARESOF ROSA AND DOUGLAS,
THEREBY DEPRIVING THEM OF THEIR INHERITANCE; and
III. WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.
The Ruling of the Court
The petitionis meritorious.
It bears to stress that all the petitioners herein are indisputably legitimate children of Anunciacion
from her first and second marriages with Gonzalo and Enrique, respectively, and consequently, are
entitled to inherit from her in equal shares, pursuant to Articles 979 and 980 of the Civil Code which
read:
ART. 979. Legitimate children and their descendants succeed the parents and other ascendants,
without distinction as to sex or age, and even if they should come from different marriages.
xxx
ART. 980. The children of the deceased shall always inherit from him in their own right, dividing the
inheritance in equal shares.
As such, upon the death of Anunciacion on September 21, 1977, her children and Enrique acquired
their respective inheritances,9 entitling them to their pro indiviso shares in her whole estate, as
follows:
Enrique

9/16 (1/2 of the conjugal assets + 1/16)

Eutropia

1/16

Victoria

1/16

Napoleon 1/16
Alicia

1/16

Visminda 1/16
Rosa

1/16

Douglas

1/16

Hence, in the execution of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale in
favor of spouses Uy, all the heirs of Anunciacionshould have participated. Considering that Eutropia
and Victoria were admittedly excluded and that then minors Rosa and Douglas were not properly

represented therein, the settlement was not valid and binding uponthem and consequently, a total
nullity.
Section 1, Rule 74 of the Rules of Court provides:
SECTION 1. Extrajudicial settlement by agreement between heirs. x x x
The fact of the extrajudicial settlement or administration shall be published in a newspaper of
general circulation in the manner provided in the next succeeding section; but no extrajudicial
settlement shall be binding upon any person who has not participated therein or had no notice
thereof. (Underscoring added)
The effect of excluding the heirs in the settlement of estate was further elucidated in Segura v.
Segura,10 thus:
It is clear that Section 1 of Rule 74 does not apply to the partition in question which was null and
void as far as the plaintiffs were concerned. The rule covers only valid partitions. The partition in the
present case was invalid because it excluded six of the nine heirs who were entitled to equal shares
in the partitioned property. Under the rule "no extrajudicial settlement shall be binding upon any
person who has not participated therein or had no notice thereof." As the partition was a total nullity
and did not affect the excluded heirs, it was not correct for the trial court to hold that their right to
challenge the partition had prescribed after two years from its execution
However, while the settlement of the estate is null and void, the subsequent sale of the subject
propertiesmade by Enrique and his children, Napoleon, Alicia and Visminda, in favor of the
respondents isvalid but only with respect to their proportionate shares therein.It cannot be denied
that these heirs have acquired their respective shares in the properties of Anunciacion from the
moment of her death11and that, as owners thereof, they can very well sell their undivided share in
the estate.12
With respect to Rosa and Douglas who were minors at the time of the execution of the settlement
and sale, their natural guardian and father, Enrique, represented them in the transaction. However,
on the basis of the laws prevailing at that time, Enrique was merely clothed with powers of
administration and bereft of any authority to dispose of their 2/16 shares in the estate of their
mother, Anunciacion.
Articles 320 and 326 of the Civil Code, the laws in force at the time of the execution of the
settlement and sale, provide:
ART. 320. The father, or in his absence the mother, is the legal administrator of the property
pertaining to the child under parental authority. If the property is worth more than two thousand
pesos, the father or mother shall give a bond subject to the approval of the Court of First Instance.
ART. 326. When the property of the child is worth more than two thousand pesos, the father or
mother shall be considered a guardian of the childs property, subject to the duties and obligations
of guardians under the Rules of Court.
Corollarily, Section 7, Rule 93 of the Rules of Court also provides:

SEC. 7. Parents as Guardians. When the property of the child under parental authority is worth
two thousand pesos or less, the father or the mother, without the necessity of court appointment,
shall be his legal guardian. When the property of the child is worth more than two thousand pesos,
the father or the mother shall be considered guardian of the childs property, with the duties and
obligations of guardians under these Rules, and shall file the petition required by Section 2 hereof.
For good reasons, the court may, however, appoint another suitable persons.
Administration includes all acts for the preservation of the property and the receipt of fruits
according to the natural purpose of the thing. Any act of disposition or alienation, or any reduction
in the substance of the patrimony of child, exceeds the limits of administration.13 Thus, a father or
mother, as the natural guardian of the minor under parental authority, does not have the power to
dispose or encumber the property of the latter. Such power is granted by law only to a judicial
guardian of the wards property and even then only with courts prior approval secured in
accordance with the proceedings set forth by the Rules of Court.14
Consequently, the disputed sale entered into by Enrique in behalf of his minor children without the
proper judicial authority, unless ratified by them upon reaching the age of majority, 15 is
unenforceable in accordance with Articles 1317 and 1403(1) of the Civil Code which provide:
ART. 1317. No one may contract in the name of another without being authorized by the latter or
unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal representation,
or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed, before it is revoked by the other
contracting party.
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;
xxx
Ratification means that one under no disability voluntarily adopts and gives sanction to some
unauthorized act or defective proceeding, which without his sanction would not be binding on him.
It is this voluntary choice, knowingly made, which amounts to a ratification of what was theretofore
unauthorized, and becomes the authorized act of the party so making the ratification.16 Once
ratified, expressly or impliedly such as when the person knowingly received benefits from it, the
contract is cleansed from all its defects from the moment it was constituted,17 as it has a retroactive
effect.
Records, however, show that Rosa had ratified the extrajudicial settlement of the estate with
absolute deed of sale. In Napoleon and Rosas Manifestation18 before the RTC dated July 11,
1997,they stated:
"Concerning the sale of our parcel of land executed by our father, Enrique Neri concurred in and
conformed to by us and our other two sisters and brother (the other plaintiffs), in favor of Hadji
Yusop Uy and his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the same was

voluntary and freely made by all of us and therefore the sale was absolutely valid and enforceable
as far as we all plaintiffs in this case are concerned;" (Underscoring supplied)
In their June 30, 1997 Joint-Affidavit,19 Napoleon and Rosa also alleged:
"That we are surprised that our names are included in this case since we do not have any intention
to file a case against Hadji Yusop Uy and Julpha Ibrahim Uy and their family and we respect and
acknowledge the validity of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale
dated July 7, 1979;" (Underscoring supplied)
Clearly, the foregoing statements constitutedratification of the settlement of the estate and the
subsequent sale, thus, purging all the defects existing at the time of its execution and legitimizing
the conveyance of Rosas 1/16 share in the estate of Anunciacion to spouses Uy. The same,
however, is not true with respect to Douglas for lack of evidence showing ratification.
Considering, thus, that the extrajudicial settlement with sale is invalid and therefore, not binding on
Eutropia, Victoria and Douglas, only the shares ofEnrique, Napoleon, Alicia, Visminda and Rosa in
the homestead properties have effectivelybeen disposed in favor of spouses Uy. "A person can only
sell what he owns, or is authorized to sell and the buyer can as a consequence acquire no more
than what the sellercan legally transfer."20 On this score, Article 493 of the Civil Codeis relevant,
which provides:
Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining
thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in
its enjoyment, except when personal rights are involved. But the effect of the alienation or the
mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to
him in the division upon the termination of the co-ownership.
Consequently, spouses Uy or their substituted heirs became pro indiviso co-owners of the
homestead properties with Eutropia, Victoria and Douglas, who retained title to their respective 1/16
shares. They were deemed to be holding the 3/16 shares of Eutropia, Victoria and Douglas under an
implied constructive trust for the latters benefit, conformably with Article 1456 of the Civil Code
which states:"if property is acquired through mistake or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for the benefit of the person from whom the property
comes." As such, it is only fair, just and equitable that the amount paid for their shares equivalent
to P 5,000.0021 each or a total of P 15,000.00 be returned to spouses Uy with legal interest.
On the issue of prescription, the Court agrees with petitioners that the present action has not
prescribed in so far as it seeks to annul the extrajudicial settlement of the estate. Contrary to the
ruling of the CA, the prescriptive period of 2 years provided in Section 1 Rule 74 of the Rules of
Court reckoned from the execution of the extrajudicial settlement finds no application to petitioners
Eutropia, Victoria and Douglas, who were deprived of their lawful participation in the subject estate.
Besides, an "action or defense for the declaration of the inexistence of a contract does not
prescribe" in accordance with Article 1410 of the Civil Code.
However, the action to recover property held in trust prescribes after 10 years from the time the
cause of action accrues,22 which is from the time of actual notice in case of unregistered deed.23 In
this case, Eutropia, Victoria and Douglas claimed to have knowledge of the extrajudicial settlement

with sale after the death of their father, Enrique, in 1994 which spouses Uy failed to refute. Hence,
the complaint filed in 1997 was well within the prescriptive period of 10 years.
WHEREFORE, the instant petition is GRANTED. The April 27, 2010 Decision and October 18, 2010
Resolution of the Court of Appeals are REVERSED and SET ASIDE and a new judgment is
entered:
1. Declaring the Extra-Judicial Settlement of the Estate of Anunciacion
Neri NULL and VOID;
2. Declaring the Absolute Deed of Sale in favor of the late spouses Hadji Yusop Uy and
Julpha Ibrahim Uy as regards the 13/16 total shares of the late Enrique Neri, Napoleon Neri,
Alicia D. Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan VALID;
3. Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and Douglas D. Neri as
the LAWFUL OWNERSof the 3/16 portions of the subject homestead properties, covered
by Original Certificate of Title Nos. (P-7998) P-2128, (P-14608) P-5153 and P-20551 (P8348); and
4. Ordering the estate of the late Enrique Neri, as well as Napoleon Neri, Alicia D. NeriMondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan to return to the respondents
jointly and solidarily the amount paid corresponding to the 3/16 shares of Eutropia, Victoria
and Douglas in the total amount of P 15,000.00, with legal interest at 6% per annum
computed from the time of payment until finality of this decision and 12% per annum
thereafter until fully paid.
No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners,
vs.
MAYFAIR THEATER, INC., respondent.

HERMOSISIMA, JR., J.:

Before us is a petition for review of the decision 1 of the Court of

Appeals 2 involving questions in the resolution of which the respondent appellate court analyzed
and interpreted particular provisions of our laws on contracts and sales. In its assailed decision,
the respondent court reversed the trial court 3 which, in dismissing the complaint for specific
performance with damages and annulment of contract, 4found the option clause in the lease
contracts entered into by private respondent Mayfair Theater, Inc. (hereafter, Mayfair) and
petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to be impossible of performance and
unsupported by a consideration and the subsequent sale of the subject property to petitioner
Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been made without any
breach of or prejudice to, the said lease contracts. 5

We reproduce below the facts as narrated by the respondent court, which narration, we
note, is almost verbatim the basis of the statement of facts as rendered by the petitioners in
their pleadings:
Carmelo owned a parcel of land, together with two 2-storey buildings constructed
thereon located at Claro M Recto Avenue, Manila, and covered by TCT No. 18529
issued in its name by the Register of Deeds of Manila.
On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's
lease of a portion of Carmelo's property particularly described, to wit:
A PORTION OF THE SECOND FLOOR of the two-storey building,
situated at C.M. Recto Avenue, Manila, with a floor area of 1,610
square meters.
THE SECOND FLOOR AND MEZZANINE of the two-storey building,
situated at C.M. Recto Avenue, Manila, with a floor area of 150
square meters.
for use by Mayfair as a motion picture theater and for a term of twenty (20) years.
Mayfair thereafter constructed on the leased property a movie house known as
"Maxim Theatre."
Two years later, on March 31, 1969, Mayfair entered into a second contract of lease
with Carmelo for the lease of another portion of Carmelo's property, to wit:
A PORTION OF THE SECOND FLOOR of the two-storey building,
situated at C.M. Recto Avenue, Manila, with a floor area of 1,064
square meters.
THE TWO (2) STORE SPACES AT THE GROUND FLOOR and
MEZZANINE of the two-storey building situated at C.M. Recto
Avenue, Manila, with a floor area of 300 square meters and bearing
street numbers 1871 and 1875,
for similar use as a movie theater and for a similar term of twenty (20) years.
Mayfair put up another movie house known as "Miramar Theatre" on this leased
property.

Both contracts of lease provides (sic) identically worded paragraph 8, which reads:
That if the LESSOR should desire to sell the leased premises, the
LESSEE shall be given 30-days exclusive option to purchase the
same.
In the event, however, that the leased premises is sold to someone
other than the LESSEE, the LESSOR is bound and obligated, as it
hereby binds and obligates itself, to stipulate in the Deed of Sale
hereof that the purchaser shall recognize this lease and be bound by
all the terms and conditions thereof.
Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang,
President of Mayfair, through a telephone conversation that Carmelo was desirous of
selling the entire Claro M. Recto property. Mr. Pascal told Mr. Yang that a certain
Jose Araneta was offering to buy the whole property for US Dollars 1,200,000, and
Mr. Pascal asked Mr. Yang if the latter was willing to buy the property for Six to
Seven Million Pesos.
Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23,
1974, Mayfair replied through a letter stating as follows:
It appears that on August 19, 1974 your Mr. Henry Pascal informed
our client's Mr. Henry Yang through the telephone that your company
desires to sell your above-mentioned C.M. Recto Avenue property.
Under your company's two lease contracts with our client, it is
uniformly provided:
8. That if the LESSOR should desire to sell the leased premises the
LESSEE shall be given 30-days exclusive option to purchase the
same. In the event, however, that the leased premises is sold to
someone other than the LESSEE, the LESSOR is bound and obligated,
as it is (sic) herebinds (sic) and obligates itself, to stipulate in the
Deed of Sale thereof that the purchaser shall recognize this lease and
be bound by all the terms and conditions hereof (sic).
Carmelo did not reply to this letter.
On September 18, 1974, Mayfair sent another letter to Carmelo purporting to
express interest in acquiring not only the leased premises but "the entire building
and other improvements if the price is reasonable. However, both Carmelo and
Equatorial questioned the authenticity of the second letter.
Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land
and building, which included the leased premises housing the "Maxim" and
"Miramar" theatres, to Equatorial by virtue of a Deed of Absolute Sale, for the total
sum of P11,300,000.00.

In September 1978, Mayfair instituted the action a quo for specific performance and
annulment of the sale of the leased premises to Equatorial. In its Answer, Carmelo
alleged as special and affirmative defense (a) that it had informed Mayfair of its
desire to sell the entire C.M. Recto Avenue property and offered the same to Mayfair,
but the latter answered that it was interested only in buying the areas under lease,
which was impossible since the property was not a condominium; and (b) that the
option to purchase invoked by Mayfair is null and void for lack of consideration.
Equatorial, in its Answer, pleaded as special and affirmative defense that the option
is void for lack of consideration (sic) and is unenforceable by reason of its
impossibility of performance because the leased premises could not be sold
separately from the other portions of the land and building. It counterclaimed for
cancellation of the contracts of lease, and for increase of rentals in view of alleged
supervening extraordinary devaluation of the currency. Equatorial likewise crossclaimed against co-defendant Carmelo for indemnification in respect of Mayfair's
claims.
During the pre-trial conference held on January 23, 1979, the parties stipulated on
the following:
1. That there was a deed of sale of the contested premises by the
defendant Carmelo . . . in favor of defendant Equatorial . . .;
2. That in both contracts of lease there appear (sic) the stipulation
granting the plaintiff exclusive option to purchase the leased
premises should the lessor desire to sell the same (admitted subject
to the contention that the stipulation is null and void);
3. That the two buildings erected on this land are not of the
condominium plan;
4. That the amounts stipulated and mentioned in paragraphs 3 (a)
and (b) of the contracts of lease constitute the consideration for the
plaintiff's occupancy of the leased premises, subject of the same
contracts of lease, Exhibits A and B;
xxx xxx xxx
6. That there was no consideration specified in the option to buy
embodied in the contract;
7. That Carmelo & Bauermann owned the land and the two buildings
erected thereon;
8. That the leased premises constitute only the portions actually
occupied by the theaters; and
9. That what was sold by Carmelo & Bauermann to defendant
Equatorial Realty is the land and the two buildings erected thereon.

xxx xxx xxx

After assessing the evidence, the court a quo rendered the appealed decision, the
decretal portion of which reads as follows:
WHEREFORE, judgment is hereby rendered:
(1) Dismissing the complaint with costs against the plaintiff;
(2) Ordering plaintiff to pay defendant Carmelo & Bauermann
P40,000.00 by way of attorney's fees on its counterclaim;
(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00
per month as reasonable compensation for the use of areas not
covered by the contract (sic) of lease from July 31, 1979 until plaintiff
vacates said area (sic) plus legal interest from July 31, 1978; P70,000
00 per month as reasonable compensation for the use of the
premises covered by the contracts (sic) of lease dated (June 1, 1967
from June 1, 1987 until plaintiff vacates the premises plus legal
interest from June 1, 1987; P55,000.00 per month as reasonable
compensation for the use of the premises covered by the contract of
lease dated March 31, 1969 from March 30, 1989 until plaintiff
vacates the premises plus legal interest from March 30, 1989; and
P40,000.00 as attorney's fees;
(4) Dismissing defendant Equatorial's crossclaim against defendant
Carmelo & Bauermann.
The contracts of lease dated June 1, 1967 and March 31, 1969 are
declared expired and all persons claiming rights under these
contracts are directed to vacate the premises. 6
The trial court adjudged the identically worded paragraph 8 found in both aforecited lease
contracts to be an option clause which however cannot be deemed to be binding on Carmelo
because of lack of distinct consideration therefor.
The court a quo ratiocinated:
Significantly, during the pre-trial, it was admitted by the parties that the option in the
contract of lease is not supported by a separate consideration. Without a
consideration, the option is therefore not binding on defendant Carmelo &
Bauermann to sell the C.M. Recto property to the former. The option invoked by the
plaintiff appears in the contracts of lease . . . in effect there is no option, on the
ground that there is no consideration. Article 1352 of the Civil Code, provides:
Contracts without cause or with unlawful cause, produce no effect
whatever. The cause is unlawful if it is contrary to law, morals, good
custom, public order or public policy.

Contracts therefore without consideration produce no effect whatsoever. Article 1324

provides:
When the offeror has allowed the offeree a certain period to accept,
the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded
upon consideration, as something paid or promised.
in relation with Article 1479 of the same Code:
A promise to buy and sell a determine thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to sell a determine thing for
a price certain is binding upon the promissor if the promise is
supported by a consideration distinct from the price.
The plaintiff cannot compel defendant Carmelo to comply with the promise unless
the former establishes the existence of a distinct consideration. In other words, the
promisee has the burden of proving the consideration. The consideration cannot be
presumed as in Article 1354:
Although the cause is not stated in the contract, it is presumed that it
exists and is lawful unless the debtor proves the contrary.
where consideration is legally presumed to exists. Article 1354 applies to contracts in
general, whereas when it comes to an option it is governed particularly and more
specifically by Article 1479 whereby the promisee has the burden of proving the
existence of consideration distinct from the price. Thus, in the case of Sanchez
vs. Rigor, 45 SCRA 368, 372-373, the Court said:
(1) Article 1354 applies to contracts in general, whereas the second
paragraph of Article 1479 refers to sales in particular, and, more
specifically, to an accepted unilateral promise to buy or to sell. In
other words, Article 1479 is controlling in the case at bar.
(2) In order that said unilateral promise may be binding upon the
promissor, Article 1479 requires the concurrence of a condition,
namely, that the promise be supported by a consideration distinct
from the price.
Accordingly, the promisee cannot compel the promissor to comply
with the promise, unless the former establishes the existence of said
distinct consideration. In other words, the promisee has the burden
of proving such consideration. Plaintiff herein has not even alleged
the existence thereof in his complaint. 7
It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M.
Recto property to the former.

Mayfair taking exception to the decision of the trial court, the battleground shifted to the
respondent Court of Appeals. Respondent appellate court reversed the court a quo and
rendered judgment:
1. Reversing and setting aside the appealed Decision;
2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to
Equatorial the amount of P11,300,000.00 within fifteen (15) days from notice of this
Decision, and ordering Equatorial Realty Development, Inc. to accept such payment;
3. Upon payment of the sum of P11,300,000, directing Equatorial Realty
Development, Inc. to execute the deeds and documents necessary for the issuance
and transfer of ownership to Mayfair of the lot registered under TCT Nos. 17350,
118612, 60936, and 52571; and
4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as
adjudged, declaring the Deed of Absolute Sale between the defendants-appellants
Carmelo & Bauermann, Inc. and Equatorial Realty Development, Inc. as valid and
binding upon all the parties. 8
Rereading the law on the matter of sales and option contracts, respondent Court of Appeals
differentiated between Article 1324 and Article 1479 of the Civil Code, analyzed their
application to the facts of this case, and concluded that since paragraph 8 of the two lease
contracts does not state a fixed price for the purchase of the leased premises, which is an
essential element for a contract of sale to be perfected, what paragraph 8 is, must be a right
of first refusal and not an option contract. It explicated:
Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second
paragraph, of the Civil Code.
Article 1324 speaks of an "offer" made by an offeror which the offeree may or may
not accept within a certain period. Under this article, the offer may be withdrawn by
the offeror before the expiration of the period and while the offeree has not yet
accepted the offer. However, the offer cannot be withdrawn by the offeror within the
period if a consideration has been promised or given by the offeree in exchange for
the privilege of being given that period within which to accept the offer. The
consideration is distinct from the price which is part of the offer. The contract that
arises is known as option. In the case of Beaumont vs. Prieto, 41 Phil. 670, the
Supreme court, citing Bouvier, defined an option as follows: "A contract by virtue of
which A, in consideration of the payment of a certain sum to B, acquires the privilege
of buying from or selling to B, certain securities or properties within a limited time at
a specified price," (pp. 686-7).
Article 1479, second paragraph, on the other hand, contemplates of an "accepted
unilateral promise to buy or to sell a determinate thing for a price within (which) is
binding upon the promisee if the promise is supported by a consideration distinct
from the price." That "unilateral promise to buy or to sell a determinate thing for a
price certain" is called an offer. An "offer", in laws, is a proposal to enter into a
contract (Rosenstock vs. Burke, 46 Phil. 217). To constitute a legal offer, the

proposal must be certain as to the object, the price and other essential terms of the
contract (Art. 1319, Civil Code).
Based on the foregoing discussion, it is evident that the provision granting Mayfair
"30-days exclusive option to purchase" the leased premises is NOT AN OPTION in
the context of Arts. 1324 and 1479, second paragraph, of the Civil Code. Although
the provision is certain as to the object (the sale of the leased premises) the price for
which the object is to be sold is not stated in the provision Otherwise stated, the
questioned stipulation is not by itself, an "option" or the "offer to sell" because the
clause does not specify the price for the subject property.
Although the provision giving Mayfair "30-days exclusive option to purchase" cannot
be legally categorized as an option, it is, nevertheless, a valid and binding
stipulation. What the trial court failed to appreciate was the intention of the parties
behind the questioned proviso.
xxx xxx xxx
The provision in question is not of the pro-forma type customarily found in a contract
of lease. Even appellees have recognized that the stipulation was incorporated in the
two Contracts of Lease at the initiative and behest of Mayfair. Evidently, the
stipulation was intended to benefit and protect Mayfair in its rights as lessee in case
Carmelo should decide, during the term of the lease, to sell the leased property. This
intention of the parties is achieved in two ways in accordance with the stipulation.
The first is by giving Mayfair "30-days exclusive option to purchase" the leased
property. The second is, in case Mayfair would opt not to purchase the leased
property, "that the purchaser (the new owner of the leased property) shall recognize
the lease and be bound by all the terms and conditions thereof."
In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation
giving Mayfair "30-days exclusive option to purchase the (leased premises)," was
meant to provide Mayfair the opportunity to purchase and acquire the leased
property in the event that Carmelo should decide to dispose of the property. In order
to realize this intention, the implicit obligation of Carmelo once it had decided to sell
the leased property, was not only to notify Mayfair of such decision to sell the
property, but, more importantly, to make an offer to sell the leased premises to
Mayfair, giving the latter a fair and reasonable opportunity to accept or reject the
offer, before offering to sell or selling the leased property to third parties. The right
vested in Mayfair is analogous to the right of first refusal, which means that Carmelo
should have offered the sale of the leased premises to Mayfair before offering it to
other parties, or, if Carmelo should receive any offer from third parties to purchase
the leased premises, then Carmelo must first give Mayfair the opportunity to match
that offer.
In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal
when he made the telephone call to Mr. Yang in 1974. Mr. Pascal thus testified:
Q Can you tell this Honorable Court how you made
the offer to Mr. Henry Yang by telephone?

A I have an offer from another party to buy the

property and having the offer we decided to make an
offer to Henry Yang on a first-refusal basis. (TSN
November 8, 1983, p. 12.).
and on cross-examination:
Q When you called Mr. Yang on August 1974 can you
remember exactly what you have told him in
connection with that matter, Mr. Pascal?
A More or less, I told him that I received an offer
from another party to buy the property and I was
offering him first choice of the enter property. (TSN,
November 29, 1983, p. 18).
We rule, therefore, that the foregoing interpretation best renders effectual the
intention of the parties.9
Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the
requirement of distinct consideration indispensable in an option contract, has no application,
respondent appellate court also addressed the claim of Carmelo and Equatorial that
assuming arguendo that the option is valid and effective, it is impossible of performance
because it covered only the leased premises and not the entire Claro M. Recto property,
while Carmelo's offer to sell pertained to the entire property in question. The Court of
Appeals ruled as to this issue in this wise:
We are not persuaded by the contentions of the defendants-appellees. It is to be
noted that the Deed of Absolute Sale between Carmelo and Equatorial covering the
whole Claro M. Recto property, made reference to four titles: TCT Nos. 17350,
118612, 60936 and 52571. Based on the information submitted by Mayfair in its
appellant's Brief (pp. 5 and 46) which has not been controverted by the appellees,
and which We, therefore, take judicial notice of the two theaters stand on the
parcels of land covered by TCT No. 17350 with an area of 622.10 sq. m and TCT No.
118612 with an area of 2,100.10 sq. m. The existence of four separate parcels of
land covering the whole Recto property demonstrates the legal and physical
possibility that each parcel of land, together with the buildings and improvements
thereof, could have been sold independently of the other parcels.
At the time both parties executed the contracts, they were aware of the physical and
structural conditions of the buildings on which the theaters were to be constructed in
relation to the remainder of the whole Recto property. The peculiar language of the
stipulation would tend to limit Mayfair's right under paragraph 8 of the Contract of
Lease to the acquisition of the leased areas only. Indeed, what is being
contemplated by the questioned stipulation is a departure from the customary
situation wherein the buildings and improvements are included in and form part of
the sale of the subjacent land. Although this situation is not common, especially
considering the non-condominium nature of the buildings, the sale would be valid
and capable of being performed. A sale limited to the leased premises only, if
hypothetically assumed, would have brought into operation the provisions of co-

ownership under which Mayfair would have become the exclusive owner of the
leased premises and at the same time a co-owner with Carmelo of the subjacent
land in proportion to Mayfair's interest over the premises sold to it. 10
Carmelo and Equatorial now comes before us questioning the correctness and legal basis for
the decision of respondent Court of Appeals on the basis of the following assigned errors:
I
THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION
CLAUSE IN THE CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL
PROVISO. IN DOING SO THE COURT OF APPEALS DISREGARDED THE CONTRACTS
OF LEASE WHICH CLEARLY AND UNEQUIVOCALLY PROVIDE FOR AN OPTION, AND
THE ADMISSION OF THE PARTIES OF SUCH OPTION IN THEIR STIPULATION OF
FACTS.
II
WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS
ERRED IN DIRECTING EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN (18)
YEARS AFTER MAYFAIR FAILED TO EXERCISE ITS OPTION (OR, EVEN ITS RIGHT
OF FIRST REFUSAL ASSUMING IT WAS ONE) WHEN THE CONTRACTS LIMITED THE
EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE.
III
THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED
IMPLEMENTATION OF ITS DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT
GRANTED MAYFAIR A RELIEF THAT WAS NOT EVEN PRAYED FOR IN THE
COMPLAINT.
IV
THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE
ASSIGNMENT OF APPEALED CASES WHEN IT ALLOWED THE SAME DIVISION XII,
PARTICULARLY JUSTICE MANUEL HERRERA, TO RESOLVE ALL THE MOTIONS IN
THE "COMPLETION PROCESS" AND TO STILL RESOLVE THE MERITS OF THE CASE
IN THE "DECISION STAGE". 11

We shall first dispose of the fourth assigned error respecting alleged irregularities in the
raffle of this case in the Court of Appeals. Suffice it to say that in our Resolution, 12 dated
December 9, 1992, we already took note of this matter and set out the proper applicable
procedure to be the following:

On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc.
wrote a letter-complaint to this Court alleging certain irregularities and infractions
committed by certain lawyers, and Justices of the Court of Appeals and of this Court
in connection with case CA-G.R. CV No. 32918 (now G.R. No. 106063). This partakes

of the nature of an administrative complaint for misconduct against members of the

judiciary. While the letter-complaint arose as an incident in case CA-G.R. CV No.
32918 (now G.R. No. 106063), the disposition thereof should be separate and
independent from Case G.R. No. 106063. However, for purposes of receiving the
requisite pleadings necessary in disposing of the administrative complaint, this
Division shall continue to have control of the case. Upon completion thereof, the
same shall be referred to the Court En Banc for proper disposition. 13
This court having ruled the procedural irregularities raised in the fourth assigned error of
Carmelo and Equatorial, to be an independent and separate subject for an administrative
complaint based on misconduct by the lawyers and justices implicated therein, it is the
correct, prudent and consistent course of action not to pre-empt the administrative
proceedings to be undertaken respecting the said irregularities. Certainly, a discussion
thereupon by us in this case would entail a finding on the merits as to the real nature of the
questioned procedures and the true intentions and motives of the players therein.
In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of
paragraph 8 stipulated in the two contracts of lease between Carmelo and Mayfair in the
face of conflicting findings by the trial court and the Court of Appeals; and (2) to determine
the rights and obligations of Carmelo and Mayfair, as well as Equatorial, in the aftermath of
the sale by Carmelo of the entire Claro M. Recto property to Equatorial.
Both contracts of lease in question provide the identically worded paragraph 8, which reads:
That if the LESSOR should desire to sell the leased premises, the LESSEE shall be
given 30-days exclusive option to purchase the same.
In the event, however, that the leased premises is sold to someone other than the
LESSEE, the LESSOR is bound and obligated, as it hereby binds and obligates itself,
to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease
and be bound by all the terms and conditions thereof. 14
We agree with the respondent Court of Appeals that the aforecited contractual stipulation
provides for a right of first refusal in favor of Mayfair. It is not an option clause or an option
contract. It is a contract of a right of first refusal.
As early as 1916, in the case of Beaumont vs. Prieto, 15 unequivocal was our characterization

of an option contract as one necessarily involving the choice granted to another for a distinct and
separate consideration as to whether or not to purchase a determinate thing at a predetermined
fixed price.

It is unquestionable that, by means of the document Exhibit E, to wit, the letter of

December 4, 1911, quoted at the beginning of this decision, the defendant Valdes
granted to the plaintiff Borck the right to purchase the Nagtajan Hacienda belonging
to Benito Legarda, during the period of three months and for its assessed valuation,
a grant which necessarily implied the offer or obligation on the part of the defendant
Valdes to sell to Borck the said hacienda during the period and for the price
mentioned . . . There was, therefore, a meeting of minds on the part of the one and
the other, with regard to the stipulations made in the said document. But it is not
shown that there was any cause or consideration for that agreement, and this

omission is a bar which precludes our holding that the stipulations contained in
Exhibit E is a contract of option, for, . . . there can be no contract without the
requisite, among others, of the cause for the obligation to be established.
In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the
following language:
A contract by virtue of which A, in consideration of the payment of a
certain sum to B, acquires the privilege of buying from, or selling to
B, certain securities or properties within a limited time at a specified
price. (Story vs. Salamon, 71 N.Y., 420.)
From vol. 6, page 5001, of the work "Words and Phrases," citing the case of Ide
vs. Leiser (24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the following quotation
has been taken:
An agreement in writing to give a person the option to purchase
lands within a given time at a named price is neither a sale nor an
agreement to sell. It is simply a contract by which the owner of
property agrees with another person that he shall have the right to
buy his property at a fixed price within a certain time. He does not
sell his land; he does not then agree to sell it; but he does sell
something; that is, the right or privilege to buy at the election or
option of the other party. The second party gets in praesenti, not
lands, nor an agreement that he shall have lands, but he does get
something of value; that is, the right to call for and receive lands if
he elects. The owner parts with his right to sell his lands, except to
the second party, for a limited period. The second party receives this
right, or, rather, from his point of view, he receives the right to elect
to buy.
But the two definitions above cited refer to the contract of option, or, what amounts
to the same thing, to the case where there was cause or consideration for the
obligation, the subject of the agreement made by the parties; while in the case at
bar there was no such cause or consideration. 16 (Emphasis ours.)
The rule so early established in this jurisdiction is that the deed of option or the option
clause in a contract, in order to be valid and enforceable, must, among other things, indicate
the definite price at which the person granting the option, is willing to sell.
Notably, in one case we held that the lessee loses his right to buy the leased property for a named
price per square meter upon failure to make the purchase within the time specified; 17 in one other

case we freed the landowner from her promise to sell her land if the prospective buyer could raise
P4,500.00 in three weeks because such option was not supported by a distinct consideration; 18 in the
same vein in yet one other case, we also invalidated an instrument entitled, "Option to Purchase" a parcel
of land for the sum of P1,510.00 because of lack of consideration; 19 and as an exception to the doctrine
enumerated in the two preceding cases, in another case, we ruled that the option to buy the leased
premises for P12,000.00 as stipulated in the lease contract, is not without consideration for in reciprocal
contracts, like lease, the obligation or promise of each party is the consideration for that of the
other. 20 In all these cases, the selling price of the object thereof is always predetermined and specified

in the option clause in the contract or in the separate deed of option. We elucidated, thus, in the very
recent case of Ang Yu Asuncion vs. Court of Appeals 21 that:

. . . In sales, particularly, to which the topic for discussion about the case at bench
belongs, the contract is perfected when a person, called the seller, obligates himself,
for a price certain, to deliver and to transfer ownership of a thing or right to another,
called the buyer, over which the latter agrees. Article 1458 of the Civil Code
provides:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell" where
invariably the ownership of the thing sold in retained until the fulfillment of a positive
suspensive condition (normally, the full payment of the purchase price), the breach
of the condition will prevent the obligation to convey title from acquiring an
obligatory force. . . .
An unconditional mutual promise to buy and sell, as long as the object is made
determinate and the price is fixed, can be obligatory on the parties, and compliance
therewith may accordingly be exacted.
An accepted unilateral promise which specifies the thing to be sold and the price to
be paid, when coupled with a valuable consideration distinct and separate from the
price, is what may properly be termed a perfected contract of option. This contract is
legally binding, and in sales, it conforms with the second paragraph of Article 1479
of the Civil Code, viz:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing
for a price certain is binding upon the promisor if the promise is
supported by a consideration distinct from the price. (1451a).
Observe, however, that the option is not the contract of sale itself. The optionee has
the right, but not the obligation, to buy. Once the option is exercised timely, i.e., the
offer is accepted before a breach of the option, a bilateral promise to sell and to buy
ensues and both parties are then reciprocally bound to comply with their respective
undertakings.
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect
promise (policitacion) is merely an offer. Public advertisements or solicitations and
the like are ordinarily construed as mere invitations to make offers or only as
proposals. These relations, until a contract is perfected, are not considered binding
commitments. Thus, at any time prior to the perfection of the contract, either
negotiating party may stop the negotiation. The offer, at this stage, may be

withdrawn; the withdrawal is effective immediately after its manifestation, such as

by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico
vs. Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept
the offer, the following rules generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the
offeror is still free and has the right to withdraw the offer before its acceptance, or if
an acceptance has been made, before the offeror's coming to know of such fact, by
communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also
Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a
unilateral promise to sell under Art. 1479, modifying the previous decision in South
Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural
Bank of Paraaque, Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA
368). The right to withdraw, however, must not be exercised whimsically or
arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the
Civil Code which ordains that "every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith."
(2) If the period has a separate consideration, a contract of "option" deemed
perfected, and it would be a breach of that contract to withdraw the offer during the
agreed period. The option, however, is an independent contract by itself; and it is to
be distinguished from the projected main agreement (subject matter of the option)
which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the
offer before its acceptance (exercise of the option) by the optionee-offeree, the
latter may not sue for specific performance on the proposed contract ("object" of the
option) since it has failed to reach its own stage of perfection. The optioner-offeror,
however, renders himself liable for damages for breach of the opinion. . .
In the light of the foregoing disquisition and in view of the wording of the questioned
provision in the two lease contracts involved in the instant case, we so hold that no option to
purchase in contemplation of the second paragraph of Article 1479 of the Civil Code, has
been granted to Mayfair under the said lease contracts.
Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of
first refusal to Mayfair and is not an option contract. It also correctly reasoned that as such,
the requirement of a separate consideration for the option, has no applicability in the instant
case.
There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969
contracts which would bring them into the ambit of the usual offer or option requiring an
independent consideration.
An option is a contract granting a privilege to buy or sell within an agreed time and at a
determined price. It is a separate and distinct contract from that which the parties may enter
into upon the consummation of the option. It must be supported by consideration. 22 In the
instant case, the right of first refusal is an integral part of the contracts of lease. The
consideration is built into the reciprocal obligations of the parties.

To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is
governed by Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and
sell would render in effectual or "inutile" the provisions on right of first refusal so commonly
inserted in leases of real estate nowadays. The Court of Appeals is correct in stating that
Paragraph 8 was incorporated into the contracts of lease for the benefit of Mayfair which
wanted to be assured that it shall be given the first crack or the first option to buy the
property at the price which Carmelo is willing to accept. It is not also correct to say that
there is no consideration in an agreement of right of first refusal. The stipulation is part and
parcel of the entire contract of lease. The consideration for the lease includes the
consideration for the right of first refusal. Thus, Mayfair is in effect stating that it consents to
lease the premises and to pay the price agreed upon provided the lessor also consents that,
should it sell the leased property, then, Mayfair shall be given the right to match the offered
purchase price and to buy the property at that price. As stated in Vda. De Quirino
vs. Palarca, 23 in reciprocal contract, the obligation or promise of each party is the consideration
for that of the other.

The respondent Court of Appeals was correct in ascertaining the true nature of the
aforecited paragraph 8 to be that of a contractual grant of the right of first refusal to
Mayfair.
We shall now determine the consequential rights, obligations and liabilities of Carmelo,
Mayfair and Equatorial.
The different facts and circumstances in this case call for an amplification of the precedent
in Ang Yu Asuncion vs. Court of Appeals. 24
First and foremost is that the petitioners acted in bad faith to render Paragraph 8 "inutile".
What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair
will have the right of first refusal in the event Carmelo sells the leased premises. It is
undisputed that Carmelo did recognize this right of Mayfair, for it informed the latter of its
intention to sell the said property in 1974. There was an exchange of letters evidencing the
offer and counter-offers made by both parties. Carmelo, however, did not pursue the
exercise to its logical end. While it initially recognized Mayfair's right of first refusal, Carmelo
violated such right when without affording its negotiations with Mayfair the full process to
ripen to at least an interface of a definite offer and a possible corresponding acceptance
within the "30-day exclusive option" time granted Mayfair, Carmelo abandoned negotiations,
kept a low profile for some time, and then sold, without prior notice to Mayfair, the entire
Claro M Recto property to Equatorial.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in
question rescissible. We agree with respondent Appellate Court that the records bear out the
fact that Equatorial was aware of the lease contracts because its lawyers had, prior to the
sale, studied the said contracts. As such, Equatorial cannot tenably claim to be a purchaser
in good faith, and, therefore, rescission lies.
. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3)
of the Civil Code, a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The status of creditors
could be validly accorded the Bonnevies for they had substantial interests that were

prejudiced by the sale of the subject property to the petitioner without recognizing
their right of first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting
parties and even to third persons, to secure reparation for damages caused to them
by a contract, even if this should be valid, by means of the restoration of things to
their condition at the moment prior to the celebration of said contract. It is a relief
allowed for the protection of one of the contracting parties and even third persons
from all injury and damage the contract may cause, or to protect some incompatible
and preferent right created by the contract. Rescission implies a contract which,
even if initially valid, produces a lesion or pecuniary damage to someone that
justifies its invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the contract
is an obstacle to the action for its rescission where it is shown that such third person
is in lawful possession of the subject of the contract and that he did not act in bad
faith. However, this rule is not applicable in the case before us because the
petitioner is not considered a third party in relation to the Contract of Sale nor may
its possession of the subject property be regarded as acquired lawfully and in good
faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale.
Moreover, the petitioner cannot be deemed a purchaser in good faith for the record
shows that it categorically admitted it was aware of the lease in favor of the
Bonnevies, who were actually occupying the subject property at the time it was sold
to it. Although the Contract of Lease was not annotated on the transfer certificate of
title in the name of the late Jose Reynoso and Africa Reynoso, the petitioner cannot
deny actual knowledge of such lease which was equivalent to and indeed more
binding than presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another
without notice that some other person has a right to or interest in such property and
pays a full and fair price for the same at the time of such 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. Tested by these principles, the petitioner cannot tenably claim to be a buyer
in good faith as it had notice of the lease of the property by the Bonnevies and such
knowledge should have cautioned it to look deeper into the agreement to determine
if it involved stipulations that would prejudice its own interests.
The petitioner insists that it was not aware of the right of first priority granted by the
Contract of Lease. Assuming this to be true, we nevertheless agree with the
observation of the respondent court that:
If Guzman-Bocaling failed to inquire about the terms of the Lease
Contract, which includes Par. 20 on priority right given to the
Bonnevies, it had only itself to blame. Having known that the
property it was buying was under lease, it behooved it as a prudent
person to have required Reynoso or the broker to show to it the
Contract of Lease in which Par. 20 is contained. 25

Petitioners assert the alleged impossibility of performance because the entire property is
indivisible property. It was petitioner Carmelo which fixed the limits of the property it was
leasing out. Common sense and fairness dictate that instead of nullifying the agreement on
that basis, the stipulation should be given effect by including the indivisible appurtenances in
the sale of the dominant portion under the right of first refusal. A valid and legal contract
where the ascendant or the more important of the two parties is the landowner should be
given effect, if possible, instead of being nullified on a selfish pretext posited by the owner.
Following the arguments of petitioners and the participation of the owner in the attempt to
strip Mayfair of its rights, the right of first refusal should include not only the property
specified in the contracts of lease but also the appurtenant portions sold to Equatorial which
are claimed by petitioners to be indivisible. Carmelo acted in bad faith when it sold the entire
property to Equatorial without informing Mayfair, a clear violation of Mayfair's rights. While
there was a series of exchanges of letters evidencing the offer and counter-offers between
the parties, Carmelo abandoned the negotiations without giving Mayfair full opportunity to
negotiate within the 30-day period.
Accordingly, even as it recognizes the right of first refusal, this Court should also order that
Mayfair be authorized to exercise its right of first refusal under the contract to include the
entirety of the indivisible property. The boundaries of the property sold should be the
boundaries of the offer under the right of first refusal. As to the remedy to enforce Mayfair's
right, the Court disagrees to a certain extent with the concluding part of the dissenting
opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion vs.Court of
Appeals should be modified, if not amplified under the peculiar facts of this case.
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the rights of
and to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals,
Equatorial admitted that its lawyers had studied the contract of lease prior to the sale.
Equatorial's knowledge of the stipulations therein should have cautioned it to look further
into the agreement to determine if it involved stipulations that would prejudice its own
interests.
Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is
first set aside or rescinded. All of these matters are now before us and so there should be no
piecemeal determination of this case and leave festering sores to deteriorate into endless
litigation. The facts of the case and considerations of justice and equity require that we
order rescission here and now. Rescission is a relief allowed for the protection of one of the
contracting parties and even third persons from all injury and damage the contract may
cause or to protect some incompatible and preferred right by the contract. 26 The sale of the
subject real property by Carmelo to Equatorial should now be rescinded considering that Mayfair,
which had substantial interest over the subject property, was prejudiced by the sale of the
subject property to Equatorial without Carmelo conferring to Mayfair every opportunity to
negotiate within the 30-day stipulated period. 27

This Court has always been against multiplicity of suits where all remedies according to the
facts and the law can be included. Since Carmelo sold the property for P11,300,000.00 to
Equatorial, the price at which Mayfair could have purchased the property is, therefore, fixed.
It can neither be more nor less. There is no dispute over it. The damages which Mayfair
suffered are in terms of actual injury and lost opportunities. The fairest solution would be to

allow Mayfair to exercise its right of first refusal at the price which it was entitled to accept
or reject which is P11,300,000.00. This is clear from the records.
To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the
sale to the latter of the disputed property would be unjust and unkind to Mayfair because it
is once more compelled to litigate to enforce its right. It is not proper to give it an empty or
vacuous victory in this case. From the viewpoint of Carmelo, it is like asking a fish if it would
accept the choice of being thrown back into the river. Why should Carmelo be rewarded for
and allowed to profit from, its wrongdoing? Prices of real estate have skyrocketed. After
having sold the property for P11,300,000.00, why should it be given another chance to sell it
at an increased price?
Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was
nothing to execute because a contract over the right of first refusal belongs to a class of
preparatory juridical relations governed not by the law on contracts but by the codal
provisions on human relations. This may apply here if the contract is limited to the buying
and selling of the real property. However, the obligation of Carmelo to first offer the
property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal
which created the obligation. It should be enforced according to the law on contracts instead
of the panoramic and indefinite rule on human relations. The latter remedy encourages
multiplicity of suits. There is something to execute and that is for Carmelo to comply with its
obligation to the property under the right of the first refusal according to the terms at which
they should have been offered then to Mayfair, at the price when that offer should have
been made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous nor
is it merely preparatory. Paragraphs 8 of the two leases can be executed according to their
terms.
On the question of interest payments on the principal amount of P11,300,000.00, it must be
borne in mind that both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and
deliberately broke a contract entered into with Mayfair. It sold the property to Equatorial
with purpose and intend to withhold any notice or knowledge of the sale coming to the
attention of Mayfair. All the circumstances point to a calculated and contrived plan of noncompliance with the agreement of first refusal.
On the part of Equatorial, it cannot be a buyer in good faith because it bought the property
with notice and full knowledge that Mayfair had a right to or interest in the property superior
to its own. Carmelo and Equatorial took unconscientious advantage of Mayfair.
Neither may Carmelo and Equatorial avail of considerations based on equity which might
warrant the grant of interests. The vendor received as payment from the vendee what, at
the time, was a full and fair price for the property. It has used the P11,300,000.00 all these
years earning income or interest from the amount. Equatorial, on the other hand, has
received rents and otherwise profited from the use of the property turned over to it by
Carmelo. In fact, during all the years that this controversy was being litigated, Mayfair paid
rentals regularly to the buyer who had an inferior right to purchase the property. Mayfair is
under no obligation to pay any interests arising from this judgment to either Carmelo or
Equatorial.
WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23,
1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between

petitioners Equatorial Realty Development, Inc. and Carmelo & Bauermann, Inc. is hereby
deemed rescinded; petitioner Carmelo & Bauermann is ordered to return to petitioner
Equatorial Realty Development the purchase price. The latter is directed to execute the
deeds and documents necessary to return ownership to Carmelo and Bauermann of the
disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the
aforesaid lots for P11,300,000.00.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 182435

August 13, 2012

LILIA B. ADA, LUZ B. ADANZA, FLORA C. BA YLON, REMO BA YLON, JOSE BA YLON, ERIC
BA YLON, FLORENTINO BA YLON, and MA. RUBY BA YLON, Petitioners,
vs.
FLORANTE BA YLON, Respondent.
VILLARAMA, JR.,*
DECISION
REYES, J.:
Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to
annul and set aside the Decision1 dated October 26, 2007 rendered by the Court of Appeals (CA) in
CA-G.R. CV No. 01746. The assailed decision partially reversed and set aside the Decision2 dated
October 20, 2005 issued ~y the Regional Trial Court (RTC), Tan jay City, Negros Oriental, Branch 43
in Civil Case No. 11657.
The Antecedent Facts
This case involves the estate of spouses Florentino Baylon and Maximina Elnas Baylon (Spouses
Baylon) who died on November 7, 1961 and May 5, 1974, respectively.3 At the time of their death,
Spouses Baylon were survived by their legitimate children, namely, Rita Baylon (Rita), Victoria
Baylon (Victoria), Dolores Baylon (Dolores), Panfila Gomez (Panfila), Ramon Baylon (Ramon) and
herein petitioner Lilia B. Ada (Lilia).
Dolores died intestate and without issue on August 4, 1976. Victoria died on November 11, 1981
and was survived by her daughter, herein petitioner Luz B. Adanza. Ramon died intestate on July 8,
1989 and was survived by herein respondent Florante Baylon (Florante), his child from his first
marriage, as well as by petitioner Flora Baylon, his second wife, and their legitimate children,
namely, Ramon, Jr. and herein petitioners Remo, Jose, Eric, Florentino and Ma. Ruby, all surnamed
Baylon.

On July 3, 1996, the petitioners filed with the RTC a Complaint4 for partition, accounting and
damages against Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during their
lifetime, owned 43 parcels of land5 all situated in Negros Oriental. After the death of Spouses
Baylon, they claimed that Rita took possession of the said parcels of land and appropriated for
herself the income from the same. Using the income produced by the said parcels of land, Rita
allegedly purchased two parcels of land, Lot No. 47096 and half of Lot No. 4706,7situated in Candauay, Dumaguete City. The petitioners averred that Rita refused to effect a partition of the said
parcels of land.
In their Answer,8 Florante, Rita and Panfila asserted that they and the petitioners co-owned 229 out
of the 43 parcels of land mentioned in the latters complaint, whereas Rita actually owned 10 parcels
of land10 out of the 43 parcels which the petitioners sought to partition, while the remaining 11
parcels of land are separately owned by Petra Cafino Adanza,11 Florante,12 Meliton Adalia,13 Consorcia
Adanza,14 Lilia15 and Santiago Mendez.16Further, they claimed that Lot No. 4709 and half of Lot No.
4706 were acquired by Rita using her own money. They denied that Rita appropriated solely for
herself the income of the estate of Spouses Baylon, and expressed no objection to the partition of
the estate of Spouses Baylon, but only with respect to the co-owned parcels of land.
During the pendency of the case, Rita, through a Deed of Donation dated July 6, 1997, conveyed
Lot No. 4709 and half of Lot No. 4706 to Florante. On July 16, 2000, Rita died intestate and without
any issue. Thereafter, learning of the said donation inter vivos in favor of Florante, the petitioners
filed a Supplemental Pleading17 dated February 6, 2002, praying that the said donation in favor of
the respondent be rescinded in accordance with Article 1381(4) of the Civil Code. They further
alleged that Rita was already sick and very weak when the said Deed of Donation was supposedly
executed and, thus, could not have validly given her consent thereto.
Florante and Panfila opposed the rescission of the said donation, asserting that Article 1381(4) of
the Civil Code applies only when there is already a prior judicial decree on who between the
contending parties actually owned the properties under litigation.18
The RTC Decision
On October 20, 2005, the RTC rendered a Decision,19 the decretal portion of which reads:
Wherefore judgment is hereby rendered:
(1) declaring the existence of co-ownership over parcels nos. 1, 2, 3, 5, 7, 10, 13, 14, 16,
17, 18, 26, 29, 30, 33, 34, 35, 36, 40 and 41 described in the complaint;
(2) directing that the above mentioned parcels of land be partitioned among the heirs of
Florentino Baylon and Maximina Baylon;
(3) declaring a co-ownership on the properties of Rita Baylon namely parcels no[s]. 6, 11,
12, 20, 24, 27, 31, 32, 39 and 42 and directing that it shall be partitioned among her heirs
who are the plaintiffs and defendant in this case;
(4) declaring the donation inter vivos rescinded without prejudice to the share of Florante
Baylon to the estate of Rita Baylon and directing that parcels nos. 1 and 2 paragraph V of
the complaint be included in the division of the property as of Rita Baylon among her heirs,
the parties in this case;

(5) excluding from the co-ownership parcels nos. 20, 21, 22, 9, 43, 4, 8, 19 and 37.
Considering that the parties failed to settle this case amicably and could not agree on the partition,
the parties are directed to nominate a representative to act as commissioner to make the partition.
He shall immediately take [his] oath of office upon [his] appointment. The commissioner shall make
a report of all the proceedings as to the partition within fifteen (15) days from the completion of this
partition. The parties are given ten (10) days within which to object to the report after which the
Court shall act on the commissioner report.
SO ORDERED.20 (Emphasis ours)
The RTC held that the death of Rita during the pendency of the case, having died intestate and
without any issue, had rendered the issue of ownership insofar as parcels of land which she claims
as her own moot since the parties below are the heirs to her estate. Thus, the RTC regarded Rita as
the owner of the said 10 parcels of land and, accordingly, directed that the same be partitioned
among her heirs. Nevertheless, the RTC rescinded the donation inter vivos of Lot No. 4709 and half
of Lot No. 4706 in favor of Florante. In rescinding the said donation inter vivos, the RTC explained
that:
However, with respect to lot nos. 4709 and 4706 which [Rita] had conveyed to Florante Baylon by
way of donation inter vivos, the plaintiffs in their supplemental pleadings (sic) assailed the same to
be rescissible on the ground that it was entered into by the defendant Rita Baylon without the
knowledge and approval of the litigants [or] of competent judicial authority. The subject parcels of
lands are involved in the case for which plaintiffs have asked the Court to partition the same among
the heirs of Florentino Baylon and Maximina Elnas.
Clearly, the donation inter vivos in favor of Florante Baylon was executed to prejudice the plaintiffs
right to succeed to the estate of Rita Baylon in case of death considering that as testified by Florante
Baylon, Rita Baylon was very weak and he tried to give her vitamins x x x. The donation inter vivos
executed by Rita Baylon in favor of Florante Baylon is rescissible for the reason that it refers to the
parcels of land in litigation x x x without the knowledge and approval of the plaintiffs or of this
Court. However, the rescission shall not affect the share of Florante Baylon to the estate of Rita
Baylon.21
Florante sought reconsideration of the Decision dated October 20, 2005 of the RTC insofar as it
rescinded the donation of Lot No. 4709 and half of Lot No. 4706 in his favor.22 He asserted that, at
the time of Ritas death on July 16, 2000, Lot No. 4709 and half of Lot No. 4706 were no longer part
of her estate as the same had already been conveyed to him through a donation inter vivos three
years earlier. Thus, Florante maintained that Lot No. 4709 and half of Lot No. 4706 should not be
included in the properties that should be partitioned among the heirs of Rita.
On July 28, 2006, the RTC issued an Order23 which denied the motion for reconsideration filed by
Florante.
The CA Decision
On appeal, the CA rendered a Decision24 dated October 26, 2007, the dispositive portion of which
reads:

WHEREFORE, the Decision dated October 20, 2005 and Order dated July 28, 2006
are REVERSEDand SET ASIDE insofar as they decreed the rescission of the Deed of Donation
dated July 6, 1997 and the inclusion of lot no. 4709 and half of lot no. 4706 in the estate of Rita
Baylon. The case isREMANDED to the trial court for the determination of ownership of lot no. 4709
and half of lot no. 4706.
SO ORDERED.25
The CA held that before the petitioners may file an action for rescission, they must first obtain a
favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the estate of
Spouses Baylon and not to Rita. Until then, the CA asserted, an action for rescission is premature.
Further, the CA ruled that the petitioners action for rescission cannot be joined with their action for
partition, accounting and damages through a mere supplemental pleading. Thus:
If Lot No. 4709 and half of Lot No. 4706 belonged to the Spouses estate, then Rita Baylons
donation thereof in favor of Florante Baylon, in excess of her undivided share therein as co-heir, is
void. Surely, she could not have validly disposed of something she did not own. In such a case, an
action for rescission of the donation may, therefore, prosper.
If the lots, however, are found to have belonged exclusively to Rita Baylon, during her lifetime, her
donation thereof in favor of Florante Baylon is valid. For then, she merely exercised her ownership
right to dispose of what legally belonged to her. Upon her death, the lots no longer form part of her
estate as their ownership now pertains to Florante Baylon. On this score, an action for rescission
against such donation will not prosper. x x x.
Verily, before plaintiffs-appellees may file an action for rescission, they must first obtain a favorable
judicial ruling that lot no. 4709 and half of lot no. 4706 actually belonged to the estate of Spouses
Florentino and Maximina Baylon, and not to Rita Baylon during her lifetime. Until then, an action for
rescission is premature. For this matter, the applicability of Article 1381, paragraph 4, of the New
Civil Code must likewise await the trial courts resolution of the issue of ownership.
Be that as it may, an action for rescission should be filed by the parties concerned independent of
the proceedings below. The first cannot simply be lumped up with the second through a mere
supplemental pleading.26 (Citation omitted)
The petitioners sought reconsideration27 of the Decision dated October 26, 2007 but it was denied
by the CA in its Resolution28 dated March 6, 2008.
Hence, this petition.
Issue
The lone issue to be resolved by this Court is whether the CA erred in ruling that the donation inter
vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may only be rescinded if there is
already a judicial determination that the same actually belonged to the estate of Spouses Baylon.
The Courts Ruling
The petition is partly meritorious.

Procedural Matters
Before resolving the lone substantive issue in the instant case, this Court deems it proper to address
certain procedural matters that need to be threshed out which, by laxity or otherwise, were not
raised by the parties herein.
Misjoinder of Causes of Action
The complaint filed by the petitioners with the RTC involves two separate, distinct and independent
actions partition and rescission. First, the petitioners raised the refusal of their co-heirs, Florante,
Rita and Panfila, to partition the properties which they inherited from Spouses Baylon. Second, in
their supplemental pleading, the petitioners assailed the donation inter vivos of Lot No. 4709 and
half of Lot No. 4706 made by Rita in favor of Florante pendente lite.
The actions of partition and
rescission cannot be joined in a
single action.
By a joinder of actions, or more properly, a joinder of causes of action is meant the uniting of two or
more demands or rights of action in one action, the statement of more than one cause of action in a
declaration. It is the union of two or more civil causes of action, each of which could be made the
basis of a separate suit, in the same complaint, declaration or petition. A plaintiff may under certain
circumstances join several distinct demands, controversies or rights of action in one declaration,
complaint or petition.29
The objectives of the rule or provision are to avoid a multiplicity of suits where the same parties and
subject matter are to be dealt with by effecting in one action a complete determination of all
matters in controversy and litigation between the parties involving one subject matter, and to
expedite the disposition of litigation at minimum cost. The provision should be construed so as to
avoid such multiplicity, where possible, without prejudice to the rights of the litigants.30
Nevertheless, while parties to an action may assert in one pleading, in the alternative or otherwise,
as many causes of action as they may have against an opposing party, such joinder of causes of
action is subject to the condition, inter alia, that the joinder shall not include special civil actions
governed by special rules.31
Here, there was a misjoinder of causes of action. The action for partition filed by the petitioners
could not be joined with the action for the rescission of the said donation inter vivos in favor of
Florante. Lest it be overlooked, an action for partition is a special civil action governed by Rule 69 of
the Rules of Court while an action for rescission is an ordinary civil action governed by the ordinary
rules of civil procedure. The variance in the procedure in the special civil action of partition and in
the ordinary civil action of rescission precludes their joinder in one complaint or their being tried in a
single proceeding to avoid confusion in determining what rules shall govern the conduct of the
proceedings as well as in the determination of the presence of requisite elements of each particular
cause of action.32
A misjoined cause of action, if not
severed upon motion of a party or
by the court sua sponte, may be

adjudicated by the court together

with the other causes of action.
Nevertheless, misjoinder of causes of action is not a ground for dismissal. Indeed, the courts have
the power, acting upon the motion of a party to the case or sua sponte, to order the severance of
the misjoined cause of action to be proceeded with separately.33 However, if there is no objection to
the improper joinder or the court did not motu proprio direct a severance, then there exists no bar
in the simultaneous adjudication of all the erroneously joined causes of action. On this score, our
disquisition in Republic of the Philippines v. Herbieto34 is instructive, viz:
This Court, however, disagrees with petitioner Republic in this regard. This procedural lapse
committed by the respondents should not affect the jurisdiction of the MTC to proceed with and
hear their application for registration of the Subject Lots.
xxxx
Considering every application for land registration filed in strict accordance with the Property
Registration Decree as a single cause of action, then the defect in the joint application for
registration filed by the respondents with the MTC constitutes a misjoinder of causes of action and
parties. Instead of a single or joint application for registration, respondents Jeremias and David,
more appropriately, should have filed separate applications for registration of Lots No. 8422 and
8423, respectively.
Misjoinder of causes of action and parties do not involve a question of jurisdiction of the court to
hear and proceed with the case. They are not even accepted grounds for dismissal thereof. Instead,
under the Rules of Court, the misjoinder of causes of action and parties involve an implied admission
of the courts jurisdiction. It acknowledges the power of the court, acting upon the motion of a party
to the case or on its own initiative, to order the severance of the misjoined cause of action, to be
proceeded with separately (in case of misjoinder of causes of action); and/or the dropping of a party
and the severance of any claim against said misjoined party, also to be proceeded with separately
(in case of misjoinder of parties).35 (Citations omitted)
It should be emphasized that the foregoing rule only applies if the court trying the case has
jurisdiction over all of the causes of action therein notwithstanding the misjoinder of the same. If
the court trying the case has no jurisdiction over a misjoined cause of action, then such misjoined
cause of action has to be severed from the other causes of action, and if not so severed, any
adjudication rendered by the court with respect to the same would be a nullity.
Here, Florante posed no objection, and neither did the RTC direct the severance of the petitioners
action for rescission from their action for partition. While this may be a patent omission on the part
of the RTC, this does not constitute a ground to assail the validity and correctness of its decision.
The RTC validly adjudicated the issues raised in the actions for partition and rescission filed by the
petitioners.
Asserting a New Cause of Action in a Supplemental Pleading
In its Decision dated October 26, 2007, the CA pointed out that the said action for rescission should
have been filed by the petitioners independently of the proceedings in the action for partition. It
opined that the action for rescission could not be lumped up with the action for partition through a
mere supplemental pleading.

We do not agree.
A supplemental pleading may raise
a new cause of action as long as it
has some relation to the original
cause of action set forth in the
original complaint.
Section 6, Rule 10 of the Rules of Court reads:
Sec. 6. Supplemental Pleadings. Upon motion of a party the court may, upon reasonable notice
and upon such terms as are just, permit him to serve a supplemental pleading setting forth
transactions, occurrences or events which have happened since the date of the pleading sought to
be supplemented. The adverse party may plead thereto within ten (10) days from notice of the
order admitting the supplemental pleading.
In Young v. Spouses Sy,36 this Court had the opportunity to elucidate on the purpose of a
supplemental pleading. Thus:
As its very name denotes, a supplemental pleading only serves to bolster or add something to the
primary pleading. A supplement exists side by side with the original. It does not replace that which it
supplements. Moreover, a supplemental pleading assumes that the original pleading is to stand and
that the issues joined with the original pleading remained an issue to be tried in the action. It is but
a continuation of the complaint. Its usual office is to set up new facts which justify, enlarge or
change the kind of relief with respect to the same subject matter as the controversy referred to in
the original complaint.
The purpose of the supplemental pleading is to bring into the records new facts which will enlarge
or change the kind of relief to which the plaintiff is entitled; hence, any supplemental facts which
further develop the original right of action, or extend to vary the relief, are available by way of
supplemental complaint even though they themselves constitute a right of action.37 (Citations
omitted and emphasis ours)
Thus, a supplemental pleading may properly allege transactions, occurrences or events which had
transpired after the filing of the pleading sought to be supplemented, even if the said supplemental
facts constitute another cause of action.
Admittedly, in Leobrera v. Court of Appeals,38 we held that a supplemental pleading must be based
on matters arising subsequent to the original pleading related to the claim or defense presented
therein, and founded on the same cause of action. We further stressed therein that a supplemental
pleading may not be used to try a new cause of action.
However, in Planters Development Bank v. LZK Holdings and Development Corp.,39 we clarified that,
while a matter stated in a supplemental complaint should have some relation to the cause of action
set forth in the original pleading, the fact that the supplemental pleading technically states a new
cause of action should not be a bar to its allowance but only a matter that may be considered by the
court in the exercise of its discretion. In such cases, we stressed that a broad definition of "cause of
action" should be applied.

Here, the issue as to the validity of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706
made by Rita in favor of Florante is a new cause of action that occurred after the filing of the
original complaint. However, the petitioners prayer for the rescission of the said donation inter vivos
in their supplemental pleading is germane to, and is in fact, intertwined with the cause of action in
the partition case. Lot No. 4709 and half of Lot No. 4706 are included among the properties that
were sought to be partitioned.
The petitioners supplemental pleading merely amplified the original cause of action, on account of
the gratuitous conveyance of Lot No. 4709 and half of Lot No. 4706 after the filing of the original
complaint and prayed for additional reliefs, i.e., rescission. Indeed, the petitioners claim that the
said lots form part of the estate of Spouses Baylon, but cannot be partitioned unless the gratuitous
conveyance of the same is rescinded. Thus, the principal issue raised by the petitioners in their
original complaint remained the same.
Main Issue: Propriety of Rescission
After having threshed out the procedural matters, we now proceed to adjudicate the substantial
issue presented by the instant petition.
The petitioners assert that the CA erred in remanding the case to the RTC for the determination of
ownership of Lot No. 4709 and half of Lot No. 4706. They maintain that the RTC aptly rescinded the
said donation inter vivos of Lot No. 4709 and half of Lot No. 4706 pursuant to Article 1381(4) of the
Civil Code.
In his Comment,40 Florante asserts that before the petitioners may file an action for rescission, they
must first obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually
belonged to the estate of Spouses Baylon. Until then, Florante avers that an action for rescission
would be premature.
The petitioners contentions are well-taken.
The resolution of the instant dispute is fundamentally contingent upon a determination of whether
the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may be
rescinded pursuant to Article 1381(4) of the Civil Code on the ground that the same was made
during the pendency of the action for partition with the RTC.
Rescission is a remedy to address
the damage or injury caused to the
contracting parties or third
persons.
Rescission is a remedy granted by law to the contracting parties and even to third persons, to
secure the reparation of damages caused to them by a contract, even if it should be valid, by means
of the restoration of things to their condition at the moment prior to the celebration of said
contract.41 It is a remedy to make ineffective a contract, validly entered into and therefore obligatory
under normal conditions, by reason of external causes resulting in a pecuniary prejudice to one of
the contracting parties or their creditors.42

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

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

condition sine qua non before the rescissory action contemplated under Article 1381(4) of the Civil
Code may be instituted.
Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of the
Civil Code is preconditioned upon a judicial determination with regard to the thing subject litigation,
this would only bring about the very predicament that the said provision of law seeks to obviate.
Assuming arguendo that a rescissory action under Article 1381(4) of the Civil Code could only be
instituted after the dispute with respect to the thing subject of litigation is judicially determined,
there is the possibility that the same may had already been conveyed to third persons acting in good
faith, rendering any judicial determination with regard to the thing subject of litigation illusory.
Surely, this paradoxical eventuality is not what the law had envisioned.
Even if the donation inter vivos is
validly rescinded, a determination
as to the ownership of the subject
parcels of land is still necessary.
Having established that the RTC had aptly ordered the rescission of the said donation inter vivos in
favor of Florante, the issue that has to be resolved by this Court is whether there is still a need to
determine the ownership of Lot No. 4709 and half of Lot No. 4706.
In opting not to make a determination as to the ownership of Lot No. 4709 and half of Lot No. 4706,
the RTC reasoned that the parties in the proceedings before it constitute not only the surviving heirs
of Spouses Baylon but the surviving heirs of Rita as well. As intimated earlier, Rita died intestate
during the pendency of the proceedings with the RTC without any issue, leaving the parties in the
proceedings before the RTC as her surviving heirs. Thus, the RTC insinuated, a definitive
determination as to the ownership of the said parcels of land is unnecessary since, in any case, the
said parcels of land would ultimately be adjudicated to the parties in the proceedings before it.
We do not agree.
Admittedly, whoever may be adjudicated as the owner of Lot No. 4709 and half of Lot No. 4706, be
it Rita or Spouses Baylon, the same would ultimately be transmitted to the parties in the
proceedings before the RTC as they are the only surviving heirs of both Spouses Baylon and Rita.
However, the RTC failed to realize that a definitive adjudication as to the ownership of Lot No. 4709
and half of Lot No. 4706 is essential in this case as it affects the authority of the RTC to direct the
partition of the said parcels of land. Simply put, the RTC cannot properly direct the partition of Lot
No. 4709 and half of Lot No. 4706 until and unless it determines that the said parcels of land indeed
form part of the estate of Spouses Baylon.
It should be stressed that the partition proceedings before the RTC only covers the properties coowned by the parties therein in their respective capacity as the surviving heirs of Spouses Baylon.
Hence, the authority of the RTC to issue an order of partition in the proceedings before it only
affects those properties which actually belonged to the estate of Spouses Baylon.
In this regard, if Lot No. 4709 and half of Lot No. 4706, as unwaveringly claimed by Florante, are
indeed exclusively owned by Rita, then the said parcels of land may not be partitioned
simultaneously with the other properties subject of the partition case before the RTC. In such case,
although the parties in the case before the RTC are still co-owners of the said parcels of land, the

RTC would not have the authority to direct the partition of the said parcels of land as the
proceedings before it is only concerned with the estate of Spouses Baylon.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is PARTIALLY
GRANTED. The Decision dated October 26, 2007 issued by the Court of Appeals in CA-G.R. CV No.
01746 is MODIFIED in that the Decision dated October 20, 2005 issued by the Regional Trial Court,
Tanjay City, Negros Oriental, Branch 43 in Civil Case No. 11657, insofar as it decreed the rescission
of the Deed of Donation dated July 6, 1997 is herebyREINSTATED. The case is REMANDED to the
trial court for the determination of the ownership of Lot No. 4709 and half of Lot No. 4706 in
accordance with this Decision.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Baguio City
FIRST DIVISION
G.R. No. 144169 March 28, 200
KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY STEVEN KHE, petitioners,
vs.
COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI CITY and PHILAM
INSURANCE CO., INC.,respondents.
KAPUNAN, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45, seeking to set aside the
decision of the Court of Appeals dated April 10, 2000 and its resolution dated July 11, 2000 denying
the motion for reconsideration of the aforesaid decision. The original complaint that is the subject
matter of this case is an accion pauliana -- an action filed by Philam Insurance Company, Inc.
(respondent Philam) to rescind or annul the donations made by petitioner Khe Hong Cheng allegedly
in fraud of creditors. The main issue for resolution is whether or not the action to rescind the
donations has already prescribed. While the first paragraph of Article 1389 of the Civil Code states:
"The action to claim rescission must be commenced within four years..." the question is, from which
point or event does this prescriptive period commence to run?
The facts are as follows:
Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. It appears that
on or about October 4, 1985, the Philippine Agricultural Trading Corporation shipped on board the
vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of copra at Masbate,
Masbate, for delivery to Dipolog City, Zamboanga del Norte. The said shipment of copra was
covered by a marine insurance policy issued by American Home Insurance Company (respondent
Philam's assured). M/V PRINCE ERlC, however, sank somewhere between Negros Island and
Northeastern Mindanao, resulting in the total loss of the shipment. Because of the loss, the insurer,
American Home, paid the amount of P354,000.00 (the value of the copra) to the consignee.
1wphi 1.nt

Having been subrogated into the rights of the consignee, American Home instituted Civil Case No.
13357 in the Regional Trial Court (RTC) of Makati , Branch 147 to recover the money paid to the
consignee, based on breach of contract of carriage. While the case was still pending, or on
December 20, 1989, petitioner Khe Hong Cheng executed deeds of donations of parcels of land in
favor of his children, herein co-petitioners Sandra Joy and Ray Steven. The parcel of land with an
area of 1,000 square meters covered by Transfer Certificate of Title (TCT) No. T-3816 was donated
to Ray Steven. Petitioner Khe Hong Cheng likewise donated in favor of Sandra Joy two (2) parcels of
land located in Butuan City, covered by TCT No. RT-12838. On the basis of said deeds, TCT No. T3816 was cancelled and in lieu thereof, TCT No. T-5072 was issued in favor of Ray Steven and TCT
No. RT-12838 was cancelled and in lieu thereof, TCT No. RT-21054 was issued in the name of
Sandra Joy.
The trial court rendered judgment against petitioner Khe Hong Cheng in Civil Case No.13357 on
December 29, 1993, four years after the donations were made and the TCTs were registered in the
donees' names. The decretal portion of the aforesaid decision reads:
"Wherefore, in view of the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against the defendant, ordering the latter to pay the former:
1) the sum of P354,000.00 representing the amount paid by the plaintiff to the Philippine
Agricultural Trading Corporation with legal interest at 12% from the time of the filing of the
complaint in this case;
2) the sum of P50,000.00 as attorney's fees;
3) the costs.1
After the said decision became final and executory, a writ of execution was forthwith' issued on
September 14, 1995. Said writ of execution however, was not served. An alias writ of execution
was, thereafter, applied for and granted in October 1996. Despite earnest efforts, the sheriff found
no property under the name of Butuan Shipping Lines and/or petitioner Khe Hong Cheng to levy or
garnish for the satisfaction of the trial court's decision. When the sheriff, accompanied by counsel of
respondent Philam, went to Butuan City on January 17, 1997, to enforce the alias writ of execution,
they discovered that petitioner Khe Hong Cheng no longer had any property and that he had
conveyed the subject properties to his children.
On February 25, 1997, respondent Philam filed a complaint with the Regional Trial Court of Makati
City, Branch 147, for the rescission of the deeds of donation executed by petitioner Khe Hong Cheng
in favor of his children and for the nullification of their titles (Civil Case No.97-415). Respondent
Philam alleged, inter alia, that petitioner Khe Hong Cheng executed the aforesaid deeds in fraud of
his creditors, including respondent Philam.2
Petitioners subsequently filed their answer to the complaint a quo. They moved for its dismissal on
the ground that the action had already prescribed. They posited that the registration of the deeds of
donation on December 27, 1989 constituted constructive notice and since the complaint a quo was
filed only on February 25, 1997, or more than four (4) years after said registration, the action was
already barred by prescription.3

Acting thereon, the trial court denied the motion to dismiss. It held that respondent Philam's
complaint had not yet prescribed. According to the trial court, the prescriptive period began to run
only from December 29, 1993, the date of the decision of the trial court in Civil Case No. 13357.4
On appeal by petitioners, the CA affirmed the trial court's decision in favor of respondent Philam.
The CA declared that the action to rescind the donations had not yet prescribed. Citing Articles 1381
and 1383 of the Civil Code, the CA basically ruled that the four year period to institute the action for
rescission began to run only in January 1997, and not when the decision in the civil case became
final and executory on December 29, 1993. The CA reckoned the accrual of respondent Philam's
cause of action on January 1997, the time when it first learned that the judgment award could not
be satisfied because the judgment creditor, petitioner Khe Hong Cheng, had no more properties in
his name. Prior thereto, respondent Philam had not yet exhausted all legal means for the satisfaction
of the decision in its favor, as prescribed under Article 1383 of the Civil Code.5
The Court of Appeals thus denied the petition for certiorari filed before it, and held that the trial
court did not commit any error in denying petitioners' motion to dismiss. Their motion for
reconsideration was likewise dismissed in the appellate court's resolution dated July 11, 2000.
Petitioners now assail the aforesaid decision and resolution of the CA alleging that:
I
PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN GRAVE ABUSE OF DISCRETION
WHEN IT DENIED THE PETITION TO DISMISS THE CASE BASED ON THE GROUND OF
PRESCRIPTION.
II
PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
PRESCRIPTION BEGINS TO RUN WHEN IN JANUARY 1997 THE SHERIFF WENT TO BUTUAN
CITY IN SEARCH OF PROPERTIES OF PETITIONER FELIX KHE CHENG TO SATISFY THE
JUDGMENT IN CIVIL CASE NO.13357 AND FOUND OUT THAT AS EARLY AS DEC. 20, 1989,
PETITIONERS KHE CHENG EXECUTED THE DEEDS OF DONATIONS IN FAVOR OF HIS COPETITIONERS THAT THE ACTION FOR RESCISSION ACCRUED BECAUSE PRESCRIPTION
BEGAN TO RUN WHEN THESE DONATIONS WERE REGISTERED WITH THE REGISTER OF
DEEDS IN DECEMBER 1989, AND WHEN THE COMPLAINT WAS FILED ONLY IN FEBRUARY
1997, MORE THAN FOUR YEARS HAVE ALREADY LAPSED AND THEREFORE, IT HAS
ALREADY PRESCRIBED.6
Essentially, the issue for resolution posed by petitioners is this: When did the four (4) year

prescriptive period as provided for in Article 1389 of the Civil Code for respondent Philam to file its
action for rescission of the subject deeds of donation commence to run?
The petition is without merit.
Article 1389 of the Civil Code simply provides that, "The action to claim rescission must be
commenced within four years." Since this provision of law is silent as to when the prescriptive period
would commence, the general rule, i.e., from the moment the cause of action accrues, therefore,
applies. Article 1150 of the Civil Code is particularly instructive:

Art. 1150. The time for prescription for all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they may be brought.
Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action which
determines the starting point for the computation of the prescriptive period for the action.7 Article
1383 of the Civil Code provides as follows:
Art. 1383. An action for rescission is subsidiary; it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation for the same.
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.8 (Emphasis
ours)
We quote with approval the following disquisition of the CA on the matter:
An accion pauliana accrues only when the creditor discovers that he has no other legal
remedy for the satisfaction of his claim against the debtor other than an accion
pauliana. The accion pauliana is an action of a last resort. For as long as the creditor still has
a remedy at law for the enforcement of his claim against the debtor, the creditor will not
have any cause of action against the creditor for rescission of the contracts entered into by
and between the debtor and another person or persons. Indeed, an accion
paulianapresupposes a judgment and the issuance by the trial court of a writ of execution
for the satisfaction of the judgment and the failure of the Sheriff to enforce and satisfy the
judgment of the court. It presupposes that the creditor has exhausted the property of the
debtor. The date of the decision of the trial court against the debtor is immaterial. What is
important is that the credit of the plaintiff antedates that of the fraudulent alienation by the
debtor of his property. After all, the decision of the trial court against the debtor will retroact
to the time when the debtor became indebted to the creditor.9
Petitioners, however, maintain that the cause of action of respondent Philam against them for the
rescission of the deeds of donation accrued as early as December 27, 1989, when petitioner Khe
Hong Cheng registered the subject conveyances with the Register of Deeds. Respondent Philam
allegedly had constructive knowledge of the execution of said deeds under Section 52 of Presidential
Decree No. 1529, quoted infra, as follows:
Section 52. Constructive knowledge upon registration. - Every conveyance, mortgage, lease,
lien, attachment, order, judgment, instrument or entry affecting registered land shall, if
registered, filed or entered in the Office of the Register of Deeds for the province or city
where the land to which it relates lies, be constructive notice to all persons from the time of
such registering, filing, or entering.

Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is
misplaced, for in no way does this imply that the specific provisions of the former may be all
together ignored. To count the four year prescriptive period to rescind an allegedly fraudulent
contract from the date of registration of the conveyance with the Register of Deeds, as alleged by
the petitioners, would run counter to Article 1383 of the Civil Code as well as settled jurisprudence.
It would likewise violate the third requisite to file an action for rescission of an allegedly fraudulent
conveyance of property, i.e., the creditor has no other legal remedy to satisfy his claim.
An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial court
of a writ of execution for the satisfaction of the judgment, and 3) the failure of the sheriff to enforce
and satisfy the judgment of the court. It requires that the creditor has exhausted the property of the
debtor: The date of the decision of the trial court is immaterial. What is important is that the credit
of the plaintiff antedates that of the fraudulent alienation by the debtor of his property. After all, the
decision of the trial court against the debtor will retroact to the time when the debtor became
indebted to the creditor.
Tolentino, a noted civilist, explained:
"xxx[T]herefore, credits with suspensive term or condition are excluded, because the accion
paulianapresupposes a judgment and unsatisfied execution, which cannot exist when the
debt is not yet demandable at the time the rescissory action is brought. Rescission is a
subsidiary action, which presupposes that the creditor has exhausted the property of the
debtor which is impossible in credits which cannot be enforced because of a suspensive term
or condition.
While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the
judgment be subsequent to the alienation, it is merely declaratory with retroactive effect to
the date when the credit was constituted."10
These principles were reiterated by the Court when it explained the requisites of an accion
pauliana in greater detail, to wit:
"The following successive measures must be taken by a creditor before he may bring an
action for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor
through levying by attachment and execution upon all the property of the debtor, except
such as are exempt from execution; (2) exercise all the rights and actions of the debtor,
save those personal to him (accion subrogatoria); and (3) seek rescission of the contracts
executed by the debtor in fraud of their rights (accion pauliana). Without availing of the first
and second remedies, i.e.. exhausting the properties of the debtor or subrogating
themselves in Francisco Bareg's transmissible rights and actions. petitioners simply:
undertook the third measure and filed an action for annulment of sale. This cannot be
done."11 (Emphasis ours)
In the same case, the Court also quoted the rationale of the CA when it upheld the dismissal of
the accion pauliana on the basis of lack of cause of action:
"In this case, plaintiffs appellants had not even commenced an action against defendantsappellees Bareng for the collection of the alleged indebtedness, Plaintiffs-appellants had not
even tried to exhaust the property of defendants-appellees Bareng, Plaintiffs-appellants, in

seeking the rescission of the contracts of sale entered into between defendantsappellees, failed to show and prove that defendants-appellees Bareng had no other
property, either at the time of the sale or at the time this action was filed, out of which they
could have collected this (sic) debts." (Emphasis ours)
Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng
had executed the deeds of donation in favor of his children, the complaint against Butuan Shipping
Lines and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent Philam
had no inkling, at the time, that the trial courts judgment would be in its favor and further, that
such judgment would not be satisfied due to the deeds of donation executed by petitioner Khe Hong
Cheng during the pendency of the case. Had respondent Philam filed his complaint on December 27,
1989, such complaint would have been dismissed for being premature. Not only were all other legal
remedies for the enforcement of respondent Philam's claims not yet exhausted at the time the
needs of donation were executed and registered. Respondent Philam would also not have been able
to prove then that petitioner Khe Hong Cheng had no more property other than those covered by
the subject deeds to satisfy a favorable judgment by the trial court.
It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he
had reserved to himself property sufficient to answer for his debts contracted prior to this date:
"That the DONOR further states, for the same purpose as expressed in the next preceding
paragraph, that this donation is not made with the object of defrauding his creditors having
reserved to himself property sufficient to answer his debts contracted prior to this date".12
As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by
petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City
to attach the properties of petitioner Khe Hong Cheng. There they found that he no longer had any
properties in his name. It was only then that respondent Philam's action for rescission of the deeds
of donation accrued because then it could be said that respondent Philam had exhausted all legal
means to satisfy the trial court's judgment in its favor. Since respondent Philam filed its complaint
for accion pauliana against petitioners on February 25, 1997, barely a month from its discovery that
petitioner Khe Hong Cheng had no other property to satisfy the judgment award against him, its
action for rescission of the subject deeds clearly had not yet prescribed.
1wphi 1.nt

A final point. Petitioners now belatedly raise on appeal the defense of improper venue claiming that
respondent Philam's complaint is a real action and should have been filed with the RTC of Butuan
City since the property subject matter or the donations are located therein. Suffice it to say that
petitioners are already deemed to have waived their right to question the venue of the instant case.
Improper venue should be objected to as follows 1) in a motion to dismiss filed within the time but
before the filing of the answer;13 or 2) in the answer as an affirmative defense over which, in the
discretion of the court, a preliminary hearing may be held as if a motion to dismiss had been
filed.14 Having failed to either file a motion to dismiss on the ground of improper of venue or include
the same as an affirmative defense in their answer, petitioners are deemed to have their right to
object to improper venue.
WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit.
SO ORDERED.

3. Voidable Contracts (Arts. 1390-1402, NCC)

Case:
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 139982

November 21, 2002

JULIAN FRANCISCO (Substituted by his Heirs, namely: CARLOS ALTEA FRANCISCO;

the heirs of late ARCADIO FRANCISCO, namely: CONCHITA SALANGSANG-FRANCISCO
(surviving spouse),
and his children namely: TEODULO S. FRANCISCO, EMILIANO S. FRANCISCO, MARIA
THERESA S. FRANCISCO,
PAULINA S. FRANCISCO, THOMAS S. FRANCISCO;
PEDRO ALTEA FRANCISCO; CARINA FRANCISCO-ALCANTARA; EFREN ALTEA
FRANCISCO; DOMINGA LEA FRANCISCO-REGONDON;
BENEDICTO ALTEA FRANCISCO and ANTONIO ALTEA FRANCISCO), petitioner,
vs.
PASTOR HERRERA, respondent.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari of the decision1 of the Court of Appeals, dated August 30,
1999, in CA-G.R. CV No. 47869, which affirmed in toto the judgment2 of the Regional Trial Court
(RTC) of Antipolo City, Branch 73, in Civil Case No. 92-2267. The appellate court sustained the trial
courts ruling which: (a) declared null and void the deeds of sale of the properties covered by Tax
Declaration Nos. 01-00495 and 01-00497; and (b) directed petitioner to return the subject properties
to respondent who, in turn, must refund to petitioner the purchase price of P1,750,000.
The facts, as found by the trial court and affirmed by the Court of Appeals, are as follows:
Eligio Herrera, Sr., the father of respondent, was the owner of two parcels of land, one consisting of
500 sq. m. and another consisting of 451 sq. m., covered by Tax Declaration (TD) Nos. 01-00495
and 01-00497, respectively. Both were located at Barangay San Andres, Cainta, Rizal.3
On January 3, 1991, petitioner bought from said landowner the first parcel, covered by TD No. 0100495, for the price of P1,000,000, paid in installments from November 30, 1990 to August 10, 1991.
On March 12, 1991, petitioner bought the second parcel covered by TD No. 01-00497, for P750,000.
Contending that the contract price for the two parcels of land was grossly inadequate, the children of
Eligio, Sr., namely, Josefina Cavestany, Eligio Herrera, Jr., and respondent Pastor Herrera, tried to
negotiate with petitioner to increase the purchase price. When petitioner refused, herein respondent
then filed a complaint for annulment of sale, with the RTC of Antipolo City, docketed as Civil Case
No. 92-2267. In his complaint, respondent claimed ownership over the second parcel, which is the

lot covered by TD No. 01-00497, allegedly by virtue of a sale in his favor since 1973. He likewise
claimed that the first parcel, the lot covered by TD No. 01-00495, was subject to the co-ownership of
the surviving heirs of Francisca A. Herrera, the wife of Eligio, Sr., considering that she died intestate
on April 2, 1990, before the alleged sale to petitioner. Finally, respondent also alleged that the sale
of the two lots was null and void on the ground that at the time of sale, Eligio, Sr. was already
incapacitated to give consent to a contract because he was already afflicted with senile dementia,
characterized by deteriorating mental and physical condition including loss of memory.
In his answer, petitioner as defendant below alleged that respondent was estopped from assailing
the sale of the lots. Petitioner contended that respondent had effectively ratified both contracts of
sales, by receiving the consideration offered in each transaction.
On November 14, 1994, the Regional Trial Court handed down its decision, the dispositive portion of
which reads:
WHEREFORE, in view of all the foregoing, this court hereby orders that:
1. The deeds of sale of the properties covered by Tax Dec. Nos. 01-00495 and 01-00497 are
declared null and void;
2. The defendant is to return the lots in question including all improvements thereon to the
plaintiff and the plaintiff is ordered to simultaneously return to the defendant the purchase
price of the lots sold totalling toP750,000.00 for lot covered by TD 01-00497
and P1,000,000.00 covered by TD 01-00495;
3. The court also orders the defendant to pay the cost of the suit.
<>4. The counter-claim of the defendant is denied for lack of merit.
SO ORDERED.4
Petitioner then elevated the matter to the Court of Appeals in CA-G.R. CV No. 47869. On August 30,
1999, however, the appellate court affirmed the decision of the Regional Trial Court, thus:
WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED in
toto. Costs against defendant-appellant.
SO ORDERED.5
Hence, this petition for review anchored on the following grounds:
I. THE COURT OF APPEALS COMPLETELY IGNORED THE BASIC DIFFERENCE
BETWEEN A VOID AND A MERELY VOIDABLE CONTRACT THUS MISSING THE
ESSENTIAL SIGNIFICANCE OF THE ESTABLISHED FACT OF RATIFICATION BY THE
RESPONDENT WHICH EXTINGUISHED WHATEVER BASIS RESPONDENT MAY HAVE
HAD IN HAVING THE CONTRACT AT BENCH ANNULLED.
II. THE DECISION OF THE COURT OF APPEALS ON "SENILE DEMENTIA":
A. DISREGARDED THE FACTUAL BACKGROUND OF THE CASE;

B. WAS CONTRARY TO ESTABLISHED JURISPRUDENCE; AND

C. WAS PURELY CONJECTURAL, THE CONJECTURE BEING ERRONEOUS.
III. THE COURT OF APPEALS WAS IN GROSS ERROR AND IN FACT VIOLATED
PETITIONERS RIGHT TO DUE PROCESS WHEN IT RULED THAT THE
CONSIDERATION FOR THE QUESTIONED CONTRACTS WAS GROSSLY
INADEQUATE.6
The resolution of this case hinges on one pivotal issue: Are the assailed contracts of sale void or
merely voidable and hence capable of being ratified?
Petitioner contends that the Court of Appeals erred when it ignored the basic distinction between
void and voidable contracts. He argues that the contracts of sale in the instant case, following Article
13907 of the Civil Code are merely voidable and not void ab initio. Hence, said contracts can be
ratified. Petitioner argues that while it is true that a demented person cannot give consent to a
contract pursuant to Article 1327,8 nonetheless the dementia affecting one of the parties will not
make the contract void per se but merely voidable. Hence, when respondent accepted the purchase
price on behalf of his father who was allegedly suffering from senile dementia, respondent effectively
ratified the contracts. The ratified contracts then become valid and enforceable as between the
parties.
Respondent counters that his act of receiving the purchase price does not imply ratification on his
part. He only received the installment payments on his senile fathers behalf, since the latter could
no longer account for the previous payments. His act was thus meant merely as a safety measure to
prevent the money from going into the wrong hands. Respondent also maintains that the sales of the
two properties were null and void. First, with respect to the lot covered by TD No. 01-00497, Eligio,
Sr. could no longer sell the same because it had been previously sold to respondent in 1973. As to
lot covered by TD No. 01-00495, respondent contends that it is co-owned by Eligio, Sr. and his
children, as heirs of Eligios wife. As such, Eligio, Sr. could not sell said lot without the consent of his
co-owners.
We note that both the trial court and the Court of Appeals found that Eligio, Sr. was already suffering
from senile dementia at the time he sold the lots in question. In other words, he was already mentally
incapacitated when he entered into the contracts of sale. Settled is the rule that findings of fact of the
trial court, when affirmed by the appellate court, are binding and conclusive upon the Supreme
Court.9
Coming now to the pivotal issue in this controversy. A void or inexistent contract is one which has no
force and effect from the very beginning. Hence, it is as if it has never been entered into and cannot
be validated either by the passage of time or by ratification. There are two types of void contracts:
(1) those where one of the essential requisites of a valid contract as provided for by Article 131810 of
the Civil Code is totally wanting; and (2) those declared to be so under Article 140911 of the Civil
Code. By contrast, a voidable or annullable contract is one in which the essential requisites for
validity under Article 1318 are present, but vitiated by want of capacity, error, violence, intimidation,
undue influence, or deceit.
Article 1318 of the Civil Code states that no contract exists unless there is a concurrence of consent
of the parties, object certain as subject matter, and cause of the obligation established. Article 1327
provides that insane or demented persons cannot give consent to a contract. But, if an insane or
demented person does enter into a contract, the legal effect is that the contract is voidable or
annullable as specifically provided in Article 1390.12

In the present case, it was established that the vendor Eligio, Sr. entered into an agreement with
petitioner, but that the formers capacity to consent was vitiated by senile dementia. Hence, we must
rule that the assailed contracts are not void or inexistent per se; rather, these are contracts that are
valid and binding unless annulled through a proper action filed in court seasonably.
An annullable contract may be rendered perfectly valid by ratification, which can be express or
implied. Implied ratification may take the form of accepting and retaining the benefits of a
contract.13 This is what happened in this case. Respondents contention that he merely received
payments on behalf of his father merely to avoid their misuse and that he did not intend to concur
with the contracts is unconvincing. If he was not agreeable with the contracts, he could have
prevented petitioner from delivering the payments, or if this was impossible, he could have
immediately instituted the action for reconveyance and have the payments consigned with the court.
None of these happened. As found by the trial court and the Court of Appeals, upon learning of the
sale, respondent negotiated for the increase of the purchase price while receiving the installment
payments. It was only when respondent failed to convince petitioner to increase the price that the
former instituted the complaint for reconveyance of the properties. Clearly, respondent was
agreeable to the contracts, only he wanted to get more. Further, there is no showing that respondent
returned the payments or made an offer to do so. This bolsters the view that indeed there was
ratification. One cannot negotiate for an increase in the price in one breath and in the same breath
contend that the contract of sale is void.
Nor can we find for respondents argument that the contracts were void as Eligio, Sr., could not sell
the lots in question as one of the properties had already been sold to him, while the other was the
subject of a co-ownership among the heirs of the deceased wife of Eligio, Sr. Note that it was found
by both the trial court and the Court of Appeals that Eligio, Sr., was the "declared owner" of said lots.
This finding is conclusive on us. As declared owner of said parcels of land, it follows that Eligio, Sr.,
had the right to transfer the ownership thereof under the principle of jus disponendi.
In sum, the appellate court erred in sustaining the judgment of the trial court that the deeds of sale of
the two lots in question were null and void.
WHEREFORE, the instant petition is GRANTED. The decision dated August 30, 1999 of the Court of
Appeals in CA-G.R. CV No. 47869, affirming the decision of the Regional Trial Court in Civil Case
No. 92-2267 is REVERSED. The two contracts of sale covering lots under TD No. 01-00495 and No.
01-00497 are hereby declared VALID. Costs against respondent.
SO ORDERED.

4. Unenforceable Contracts (Arts. 1403-1408, NCC)

Cases:
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-3784

October 17, 1952

ERNEST BERG, plaintiff-appellee,

vs.
MAGDALENA ESTATE, INC., defendant-appellant.
Claro M. Recto and Eusebio C. Encarnacion for appellant.
Alva Hill, Taada, Pelaez and Teehankee for appellee.
BAUTISTA ANGELO, J.:
This is an action for partition of the property known as Crystal Arcade situated in the City of Manila.
The complaint avers that plaintiff and defendant are co-owners of said property, the former being the
owner of one-third interest and the latter of the remaining two-thirds. The division is asked because
plaintiff and defendant are unable to agree upon the management of the property and upon the
partition thereof.
Defendant answered setting up a special defense and a counterclaim. As a special defense,
defendant claims that on September 22, 1943, it sold to plaintiff one-third of the property in litigation
subject to the express condition that should either vendor or vendee decide to sell his or its
undivided share, the party selling would grant to the other part first an irrevocable option to purchase
the same at the seller's price. It avers that on January 1946 plaintiff fixed the sum of P200,000 as the
price of said share and offered to sell it to defendant, which offer was accepted, and for the payment
of said price plaintiff gave defendant a period of time which, including the extensions granted, would
expire on May 31, 1947. Defendant claims that, in spite of the acceptance of the offer, plaintiff
refused to accept the payment of the price, and for this refusal defendant suffered damages in the
amount of P100,000. For these reasons, defendant asks for specific performance.
Plaintiff filed a reply setting forth therein that the transaction referred to by the defendant in its
special defense relative to the property in litigation is not supported by any note or memorandum
subscribed by the parties, as in fact no such note or memorandum has been made evidencing the
transaction, for which reason, plaintiff claims, this transaction falls under the statute of frauds and
cannot form the basis of the special defense invoked by the defendant.
After trial, at which the parties presented testimonial and documentary evidence, the lower court
found for the plaintiff holding that no agreement has been reached between the parties relative to the
purchase and sale of the property in question, and, recognizing the right of plaintiff to demand
partition under the provisions of Rule 71 of the Rules of Court, it granted the relief prayed for in the
complaint. Hence this appeal.
The pivotal issue to be determined is whether an agreement to sell has actually been reached
between plaintiff and defendant of the share of the former in the property in litigation for the sum of
P200,000, as claimed by defendants, or whether there have been merely negotiations between them
which never ripened into an agreement, as claimed by plaintiff. And in the determination of this
issue, the preliminary question to be threshed out is the point raised by plaintiff touching on the
evidence submitted by defendant in the light of the principle underlying the statute of frauds.
It is an undisputed facts that since September 22, 1943, plaintiff and defendant were co owners pro
indiviso of the property known as Crystal Arcade in the proportion of one-third interest belonging to
the former and two-thirds to the latter. In the deed of sale executed by the parties on said date, they
stipulated that, should either of them decide to sell his or her share, the other party will have an
irrevocable option to purchase it at the seller's price. Then a disagreement ensued between the
parties as to what really occurred concerning the deal.

Thus, while Berg claims that his negotiations with Hemady ended when an offer by the latter to the
former to buy his interest for the sum of P350,000, Hemady on the other hand claims that Berg
offered to sell it to him for P200,000 subject to the condition that the necessary permit be obtained
from the United States Treasury Department.
It should be stated that, aside from the testimony of Berg and Hemady, no document has been
presented evidencing that alleged agreement to sell, and so when defendant made attempts to
prove, through the testimony of Hemady, that plaintiff made an offer to sell his interest to defendant
for the sum of P200,000, the attempt met the vigorous opposition of plaintiff invoking the rule that
such agreement can only be established by a contract in writing, or by a note or memorandum
subscribed by the party sought to be charged, as prescribed by the statute of frauds. It was then that
defendant submitted in evidence exhibits "3" and "4", contending that these documents, read in
connection with the option to sell embodied in exhibit "1", constitute a written proof contemplated by
said statute. The crux of this case, therefore, lies in the determination of whether said exhibits
partake of the nature of a note or memorandum within the purview of said statute as contended by
defendant.
It appears that right after the liberation of the Philippines, both Ernest Berg and K.H. Hemady were
accused of collaboration for which reason the Treasury Department of the United States ordered the
freezing of their properties under the law known as Trading with the Enemy Act. Under the
provisions of this Act both Berg and Hemady could not sell or dispose of their properties without first
securing the permit required by it, and so to comply this requirement, both Berg and Hemady filed
separately an application with said Department for the purchase and sale of the property in litigation.
These applications are the ones marked as exhibits "3" and "4". In the application exhibit "3", Ernest
berg stated that he desires a license in order to sell his interest in the Crystal Arcade, Escolta,
Manila, for P200,000 in cash to Magdalena Estate, Inc. asking at the same time for permission to
place the amount in an account in his name or in the name of the company he represents and to
apply the same from time to time to the payment of the obligations of Red Star Store Inc. In the
application exhibit "4", defendant in turn stated, through its president K. H. Hemady, that it desires a
license in order "to use a portion of the P400,000 requested as a loan from the National City Bank of
New York, Manila, or from any other bank in Manila, together with funds to be collected from old and
new sales of his real estate properties, for the purchase of the one-third (1/3) of the Crystal Arcade
property in the Escolta, Manila, belonging to Mr. Ernest Berg."
It is now defendant's position that if the option granted in exhibit "1" (deed of sale containing the
irrevocable option) is considered in relation to Berg's application exhibit "3" and defendant's
application exhibit "4", these documents constitute a sufficient note or memorandum of the parties'
alleged contract of purchase and sale within the purview of the statute of frauds. This claim is
disputed by Ernest Berg, appellee herein. Which of these contentions is correct?
Before we proceed, it is important to state at this juncture some principles governing the meaning,
extent and scope of the rule underlying the statute of frauds relative to the note or memorandum that
may serve as proof to determine the existence of an oral contract or agreement contemplated by it,
and for our purpose, it suffices for us to quote the following authorities:
No particular form of language or instrument is necessary to constitute a memorandum or
note in writing under the statute of frauds; any document or writing, formal or informal, written
either for the purpose of furnishing evidence of the contract or for another purpose, which
satisfies all the requirements of the statute as to contents and signature, as discussed
respectively infra secs. 178-200, and infra secs. 201-215, is a sufficient memorandum or
note. A memorandum may be written as well as with lead pencil as with pen and ink. It may
also be filled in on a printed form (37 C.J.S., 653-654).

The note or memorandum required by the statute of fraud need not be contained in a single
document, nor, when contained in two or more papers, need each paper to be sufficient as to
contents and signature to satisfy the statute. Two or more writings properly connected may
be considered together, matters missing or uncertain in one may be supplied or rendered
certain by another, and their sufficiency will depend on whether, taken together, they meet
the requirement of the statute as to contents and the requirements of the statute as to
signature, as considered respectively infra secs. 179-200 and secs. 201-215.
Papers connected. The rule is frequently applied to two or more, or a series of letters or
telegrams, or letters and telegrams sufficiently connected to allow their consideration
together; but the rule is not confined in its application to letters and telegrams; any other
documents can be read together when one refers to the other. Thus, the rule has been
applied so as to allow the consideration together, when properly connected, of a letter and
an order of court, a letter and order for goods, a letter and a deposition, letters or telegrams
and undelivered deeds, wills, corresponding and related papers, a check and a letter, a
receipt and a check, deeds and a map, a memorandum of agreement and a deed, a
memorandum of sale and an abstract of title, a memorandum of sale and a will, a
memorandum of sale and a receipt, and a contract, deed and instruction to a depository in
escrow. The number of papers connected to make out a memorandum is immaterial. (37
C.J.S. sec. 656-659).
Bearing in mind the foregoing rules, we are of the opinion that the applications marked exhibits "3"
and "4", whether considered separately or jointly, satisfy all the requirements of the statute as to
contents and signature and, as such, they constitute sufficient proof to evidence the agreement in
question. And we say so because in both applications all the requirements of a contract are present,
namely, the parties, the price or consideration, and the subject-matter. In the application exhibit "3",
Ernest Berg appears as the seller and the Magdalena Estate Inc. as the purchaser, the former's
interest in the Crystal Arcade as the subject-matter, and the sum of P200,000 as the consideration.
As the application appears signed by Ernest Berg, the party sought to be charged by the obligation.
In other words, it can clearly be implied that between Ernest Berg and the Magdalena Estate Inc.
there has been a clear agreement to sell said property for P200,000. From the language of the
application no other logical conclusion can be drawn for if there has not been any previous
agreement between the parties it is fool hardly to suppose that Ernest Berg would take the trouble of
filling an application with the Treasury Department of the United States to secure a license to sell the
property. the claim of Ernest Berg that the negotiations he had with the Hemady ended with an offer
on his part to buy his interest for P350,000 cannot be sustained, for if such is the case it is indeed
hard to comprehend why he should state in his application that he was selling the property for
P200,000. The fact that in the same application Berg also asked for license to place the money in an
account in his name, or in the name of the company he represents, and to apply the same to the
payment of the obligations of said company is of no consequence, nor does it argue against the
purpose of the application, for that request only means that, should the sale be carried out, he would
deposit the money in the name of the company and later would apply it to the payment of its
obligations.
We do not agree with the claim that the application Exhibit "4" submitted by the Magdalena Estate
Inc. does not harmonize with the terms appearing in the application Exhibit "3", for, contrary to the
claim, those two applications, considered together, harmonize and complement each other. And we
say so because the application Exhibit "4" states specifically that a portion of the sum of P400,000
which is desired to be raised as a loan will be used for the purchase of the one-third interest of
Ernest Berg, which portion undoubtedly refers to the sum of P200,000 mentioned in the application
Exhibit "3". This can be plainly seen by harmonizing together the two applications. As the rule well
points out, the sufficiency of the two documents will depend on whether, taken together, they meet
the requirements of the statute as to contents and as to signature, and here both requirements are

met because the two documents should be consider as a whole. Whether, therefore, we consider
the two applications jointly or separately, it is safe to state that they meet the requirements of the
principle underlying the statutes of frauds.
Let us now take the terms of the agreement to sell, considering that this has been properly
established to see if defendant has complied with them and can ask now for specific performance.
We have already seen that plaintiff agreed to sell to defendant his undivided one-third interest in the
property for the sum of P200,000. The next question is: within what period shall this consideration be
paid? Here are two possible theories: one under application Exhibit "3" and the other application
Exhibit "4". If we follow the application Exhibit "3", it is clear that payment is to be made in cash, or
as soon as the license has been granted to effect the transaction. This means that it shall be
effected immediately upon obtaining the license, or within a reasonable time thereafter. It is not
disputed that this license was granted, but we find that defendant failed to make good its offer within
a reasonable time for lack of money, it being a fact that defendant was only able to raise funds for
that purpose when it succeeded in selling a portion of its real estate to a foreign corporation one year
thereafter, or on March 14, 1947. It is true that, in its answer, defendant claims that plaintiff granted
to defendant an extension of time up to May 31, 1947, within which to realize the transaction, but this
claim is not supported by any proof. In the opinion of the Court, this delay has the effect of relieving
plaintiff of his obligation under the law (Articles 1124-1451, of the old Civil Code).
Supposing that the term of payment is, as contended by defendant, until defendant has obtained the
loan of P400,000 from the National City Bank of New York, or after it has obtained funds from other
sources (considering the terms of application Exhibit "4") what is the legal effect of this alternative
clause? Can it be considered a term within the meaning of our old Civil Code? Let us analyze it.
Under article 1125 of said code, obligations, for the fulfillment of which a day certain has been fixed,
shall be demandable only when the day arrives. A day certain is understood to be that which must
necessarily arrive, even though it is not known when. In order that an obligation may be with a term,
it is, therefore, necessary that it should arrive, sooner or later; otherwise, if its arrival is uncertain, the
obligation is conditional. To constitute a term the period must end on a day certain.
Viewing in this light the clause on which defendant relies for the enforcement of its right to buy the
property, it would seem that it is not a term, but a condition. Considering the first alternative, that is,
until defendant shall have obtained a loan from the National City Bank of New York, it is clear that
the granting of such loans is not definite and cannot be held to come within the terms "day certain"
provided for in the Civil code, for it may or it may not happen. As a matter of fact, the loan did not
materialize. And if we consider that the period given was until such time as defendant could raise
money from other sources, we also find it to be indefinite and contingent and so it is also a condition
and not a term within the meaning of the law. In any event it is apparent that the fulfillment of the
condition contained in this second alternative is made to depend upon the defendant's exclusive will,
and viewed in this light, we are of the opinion that plaintiff's obligation to sell did not arise, for, under
Article 1115 of the old Civil Code, "when the fulfillment of the condition depends upon the exclusive
will of the debtor the conditional obligation shall be void."
Having reached the foregoing conclusions, we find no legal way by which plaintiff could be
compelled to carry out the terms of his agreement to sell considering the circumstances surrounding
the transaction. To our mind, it is clear that there was an agreement to sell between the parties
under the terms appearing in the applications Exhibit "3" and "4". But it also appears that the plaintiff
has decided to agree to sell his interest because of his need of money at the time. He needed it not
only for his immediate needs but to pay the obligations of his own company, the Red Star Stores.
Inc. At that time the values of real estate were fast moving. They were growing up in a rapid fashion.
Time element was then of the essence of every transaction, and the parties knew it. When,
therefore, more than a year had transpired since the negotiations started and defendant failed to
come across, plaintiff changed his mind. The interest of defendant to purchase the share of plaintiff

in the property is understandable, not only because of the advisability to consolidate its ownership in
said property, but because it was a handsome transaction with a brighter prospect in the future. But
it is to be regretted that both Berg and Hemady who were both experienced businessmen did not put
the terms of their agreement clearly in writing. Had they done so perhaps this case would have been
avoided.
Finding no error in the decision appealed from, the same is hereby affirmed, with costs against
appellant.
Pablo, Padilla and Montemayor, JJ., concur.

Separate Opinions
BENGZON, J., concurring:
I concur in the result. I believe no agreement has been duly proved.

LABRADOR, J., concurring:

I concur. There might be some objection to considering Exhibit 3 (application of Ernest Berg with the
United States Treasury Department to sell his interest in the Crystal Arcade Building for P200,000
cash) and Exhibit 4 (application of the Magdalena Estate, Inc., with the United States Treasury
Department for a portion of the P200,000 requested as loan from the National City Bank of New
York to purchase one-third of the Crystal Arcade Building belonging to Ernest Berg) as notes or
memoranda of the contract entered into between the parties for the sale of the property, within the
meaning of the statute of frauds. In some jurisdictions it is held that in order to comply with the
requirements of the statute of frauds a letter must be sent to the contracting party or his agent(27
C.J.S., sec. 386, p. 302). Such a rule is the one adopted in the State of New Jersey. But in the Code
of Civil Procedure of the State of California (sections 1973-1974), from which our original statute of
frauds was taken (section 335 of Act No. 190), the rule is that a letter or telegram of the party sought
to be charged to a third person may be considered as a sufficient memorandum within the meaning
of the statute. Ibid.; Moss vs. Atkinson, 44 Cal. 3). This doctrine is also followed in Kansas, Missouri,
New York, Iowa, North Carolina, New England, and Ontario. (See footnotes to 27 C.J.S. 302.) In a
case decided in Kansas it was expressly held:
Nor is it necessary, in the case of a memorandum in the form of a letter, that it should be
addressed to the vendee. Letters to a third person are sufficient memoranda. Browne, St.
Frauds (5th Ed.) Sec. 354a. "The principle upon which these decisions are based we
understand to be that the statute was not intended to apply to written contracts, out to the
information of oral contracts when properly evidenced, as by the admission in writing of the
party to be charged. If the party sought to be charged has in writing admitted the contract,
this is sufficient, as we understand, to take the case out of the statute, no matter to whom the
writing may have been addressed. Warfield v. Cranberry Co., 33 Iowa, 312, 19 N.W. 224.
(Miller v. Kansas City, Ft. S. & M. R. Co., et al., 58 Kan. 189, 48 P. 853, 854).

As section 21 of Rule 123, Rules of Court, our statute of frauds when the communications to the
United States Treasury Department were sent by the parties to this case, is a rule of evidence (as to
the character of the new provision [article 1403] of the New Civil Code, quaere), and the written
memorandum is not the contract itself, but merely evidence thereof, it is not necessary for the
admission as evidence of any note or memorandum signed by a party thereto, that it be signed by,
or addressed to, the other also.
Defendant-appellant's counterclaim to compel plaintiff-appellee to sell the property must, however,
be denied, for the reason that the conditions under which the contract to sell were to be carried out
did not materialize within a reasonable time after it was entered into, and both parties, upon failure of
the contingencies relied upon, impliedly withdrew therefrom. The agreement was that the sale shall
be carried out when the vendor will get the necessary permit to sell from the United States Treasury
Department, and the Magdalena Estate, Inc., will get the loan from the National City Bank of New
York with which to pay the price. These conditions are suspensive. The sale was to be carried out
only if these should materialize.
En el segundo parrafo del articulo 1.113 y en el 1.114 inicia el Codigo la clasificacion mas
importante de las condiciones en suspensivas y resolutorias, desenvolviendola luego en los
articulos 1.122 y siguientes, al determinar los efectos, consecuencia del complimiento de
unas y otras. Su diferencia es bien clara; unas y otras influyen en la existencia de la
obligacion, pero por modos diametralmente opuestos: si la condicion suspensiva se cumple,
la obligacion surge; si se cumple la resolutoria, la obligacion se extingue; si la una no se
realiza, el vinculo de derecho no llega a aparecer; si la otra no se verifica, la relacion de
derecho se consolida; mientras dura la duda, la obligacion, en el primer caso, no aparece,
pero su existencia es una esperanza; y en el segundo, surte sus efectos, pero pesa sobre
ella una amenaza de caducidad. (8 Manresa, 122
That there were suspensive conditions may be inferred from their conduct. The defendantappellant's manager did not demand that the sale be carried out until after the filing of the complaint
in the month of April, 1947, or fully one year after the contract to sell had been agreed upon. Berg,
the vendor, also raised the funds he needed for his business by selling a property of his in Quezon
City to the vendee itself. (Deposition of Ernest Berg, Exhibit A, p. 4.) During all the time that they
were in continuous correspondence regarding the administration of the property, never was a word
said about carrying out the sale. All these show that they actually desisted from carrying out the
terms of the contract to sell.
Paras, C.J. and Jugo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-23351

March 13, 1968

CIRILO PAREDES, plaintiff-appellant,

vs.
JOSE L. ESPINO, defendant-appellee.

Simeon Capule for plaintiff-appellant.

Iigo R. Pea for defendant-appellee.
REYES, J.B.L., Actg. C.J.:
Appeal from an order of the Court of First Instance of Palawan in its Civil Case No. 453,
granting a motion to dismiss the complaint.
Appellant Cirilo Parades had filed an action to compel defendant-appellee Jose L. Espino to
execute a deed of sale and to pay damages. The complaint alleged that the defendant "had entered
into the sale" to plaintiff of Lot No. 67 of the Puerto Princesa Cadastre at P4.00 a square meter; that
the deal had been "closed by letter and telegram" but the actual execution of the deed of sale and
payment of the price were deferred to the arrival of defendant at Puerto Princesa; that defendant
upon arrival had refused to execute the deed of sale altho plaintiff was able and willing to pay the
price, and continued to refuse despite written demands of plaintiff; that as a result, plaintiff had lost
expected profits from a resale of the property, and caused plaintiff mental anguish and suffering, for
which reason the complaint prayed for specific performance and damages.
Defendant filed a motion to dismiss upon the ground that the complaint stated no cause of
action, and that the plaintiff's claim upon which the action was founded was unenforceable under the
Statute of Frauds.
Plaintiff opposed in writing the motion to dismiss and annexed to his opposition a copy of a
letter purportedly signed by defendant (Annex "A"), wherein it was stated (Record on Appeal, pp. 1920)
106 GonzagaSt.
Tuguegarao,Cagayan
May18,1964
Mr.CiriloParedes
Pto.Princesa,Palawan

Dear Mr. Paredes:

So far I received two letters from you, one dated April 17 and the other April
29, both 1964. In reply thereto, please be informed that after consulting with my wife,
we both decided to accept your last offer of Four (P4.00) pesos per square meter of
the lot which contains 1826 square meters and on cash basis.
In order that we can facilitate the transaction of the sale in question, we (Mrs.
Espino and I), are going there (Puerto Princess, Pal.) to be there during the last week
of the month, May. I will send you a telegram, as per your request, when I will reach
Manila before taking the boat for Pto. Princess. As it is now, there is no schedule yet
of the boats plying between Manila and Pto. Princess for next week.
Plaintiff also appended as Annex "A-1", a telegram apparently from defendant advising plaintiff
of his arrival by boat about the last week of May 1964 (Annex "A-1" Record on Appeal, p. 21), as
well as a previous letter of defendant (Appendix B, Record on Appeal, p. 35) referring to the lot as
the one covered by Certificate of Title No. 62.

These allegations and documents notwithstanding, the Court below dismissed the complaint
on the ground that there being no written contract, under Article 1403 of the Civil Code of the
Philippines
Although the contract is valid in itself, the same can not be enforced by virtue of the
Statute of Frauds. (Record on Appeal, p. 37).
1w ph1.t

Plaintiff duly appealed to this Court.

The sole issue here is whether enforcement of the contract pleaded in the complaint is barred
by the Statute of Frauds; and the Court a quo plainly erred in holding that it was unenforceable.
The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not
require that the contract itself be in writing. The plain text of Article 1403, paragraph (2) is clear that
a written note or memorandum, embodying the essentials of the contract and signed by the party
charged, or his agent, suffices to make the verbal agreement enforceable, taking it out of the
operation of the statute.
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) . . .
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot be received without
the writing, or a secondary evidence of its contents:
xxx

xxx

xxx

(e) An agreement for the leasing for a longer period than one year, or for the sale of
real property or of an interest therein.
1wph1.t

xxx

xxx

xxx

In the case at bar, the complaint in its paragraph 3 pleads that the deal had been closed by
letter and telegram" (Record on Appeal, p. 2), and the letter referred to was evidently the one copy of
which was appended as Exhibit A to plaintiff's opposition to the motion dismiss. This letter,
transcribed above in part, together with that one marked as Appendix B, constitute an adequate
memorandum of the transaction. They are signed by the defendant-appellee; refer to the property
sold as a lot in Puerto Princesa, Palawan, covered, by TCT No. 62; give its area as 1826 square
meters and the purchase price of four (P4.00) pesos per square meter payable in cash. We have in
them therefore, all the essential terms of the contract, and they satisfy the requirements of the
Statute of Frauds. We have ruled in Berg vs. Magdalena Estate, Inc., 92 Phil. 110, 115, that a
sufficient memorandum may be contained in two or more documents.
Defendant-appellee argues that the authenticity of the letters has not been established. That is
not necessary for the purpose of showing prima facie that the contract is enforceable. For as ruled
by us in Shaffer vs. Palma, L-24115, March 1, 1968, whether the agreement is in writing or not, is a
question of evidence; and the authenticity of the writing need not be established until the trial is held.
The plaintiff having alleged that the contract is backed by letter and telegram, and the same being a

sufficient memorandum, his cause of action is thereby established, especially since the defendant
has not denied the letters in question. At any rate, if the Court below entertained any doubts about
the existence of the written memorandum, it should have called for a preliminary hearing on that
point, and not dismissed the complaint.
WHEREFORE, the appealed order is hereby set aside, and the case remanded to the Court of
origin for trial and decision. Costs against defendant-appellee Jose L. Espino. So ordered.
Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 141877

August 13, 2004

GREGORIO F. AVERIA and SYLVANNA A. VERGARA, representing the absentee heir TERESA
AVERIA,petitioners,
vs.
DOMINGO AVERIA, ANGEL AVERIA, FELIPE AVERIA, and the Heirs of FELIMON F.
AVERIA, respondents.

DECISION

CARPIO-MORALES, J.:
Macaria Francisco (Macaria) and Marcos Averia contracted marriage which bore six issues, namely:
Gregorio, Teresa, Domingo, Angel, Felipe and Felimon.
Macaria was widowed and she contracted a second marriage with Roberto Romero (Romero) which
bore no issue.
Romero died on February 28, 1968,1 leaving three adjoining residential lots located at Sampaloc,
Manila.
In a Deed of Extrajudicial Partition and Summary Settlement of the Estate of Romero, the house and
lot containing 150 square meters at 725 Extremadura Street, Sampaloc was apportioned to Macaria.
Transfer Certificate of Title (TCT) No. 93310 covering the Extremadura property was accordingly
issued in the name of Macaria.2

Alleging that fraud was employed by her co-heirs in the partition of the estate of Romero, Macaria
filed on June 1, 1970 an action for annulment of title and damages before the Court of First Instance
of Manila against her co-heirs Domingo Viray, et al., docketed as Civil Case No. 79955. Macaria was
represented in the case by Atty. Mario C. R. Domingo. The case was pending litigation for about ten
years until the decision of the Court of Appeals which adjudged Macaria as entitled to an additional
30 square meters of the estate of Romero became final and executory.
Macarias son Gregorio and his family and daughter Teresas family lived with her at Extremadura
until her death on March 28, 1983.3
Close to six years after Macarias demise or on January 19, 1989, her children Domingo, Angel and
Felipe, along with Susan Pelayo vda. de Averia (widow of Macarias deceased son Felimon), filed
before the Regional Trial Court (RTC) of Manila a complaint against their brother Gregorio and niece
Sylvanna Vergara "representing her absentee mother" Teresa Averia, for judicial partition of the
Extremadura property inclusive of the 30 square meters judicially awarded.4 The case which was
docketed as Civil Case No. 89-47554 is now the subject of the present decision.
The defendants Gregorio and Sylvanna Vergara, in their February 8, 1989 Answer to the Complaint,
countered that Gregorio and his late wife Agripina spent for the litigation expenses in Civil Case No.
79955, upon the request of Macaria, and the couple spent not less P20,000.00 for the purpose
"which amount due to the inflation of the Philippine peso is now equivalent to more or
less P200,000.00;" that from 1974 to 1983, Macaria was bedridden and it was Gregorios wife
Agripina who nursed and took care of her; that before Macaria died, she in consideration of the court
and other expenses which were defrayed by Gregorio and his wife in prosecuting Civil Case No.
79955 and of "the kindness of the said couple in caring for her," verbally sold to the spouses
Gregorio and Agripina one-half () of her Extremadura property.
Gregorio and Sylvanna further countered that the plaintiff Domingo sold and assigned to the
spouses Gregorio and Agripina his one sixth (1/6) share in the remaining portion of the
Extremadura property.
Gregorio and Sylvanna concluded in their Answer that the plaintiffs are not co-owners of the
Extremadura property as thereof is solely owned by Gregorio and 1/6 of the other half representing
Domingos share thereof had already been sold and assigned by him (Domingo) to Gregorio and his
wife who died on May 20, 1987.5
During the pendency of the case or on June 7, 1989, Macarias son Felipe executed a WaiverAffidavit6 waiving his "share" in the property subject of litigation in favor of his co-heirs.
After trial, the trial court, Branch 31 RTC of Manila, rendered a decision of July 19, 19917 crediting
the version of the defendants in this wise, quoted verbatim:
The defendant Gregorio Averia, Sr. had established that he had paid plaintiff Domingo Averia
P10,000.00 although denied by the latter but Domingo Averia did not deny receiving the
amount of P5,000.00 on July 10, 1983 given by Gregorio Averias wife Agrifina. According to
the testimony of defendants witness, plaintiff Domingo Averia sold on July 10, 1983 his
inheritance share in the property [consisting of a] house and lot located at 725 Extremadura
because he was in . . . need of money and that he was paid P5,000.00 on July 10, 1983 by
Agrifina Averia and another P5,000.00 by Major Gregorio Averia inside his room at the
Makati Police Department three (3) days later. The reason why Domingo Averia became
insistent in claiming his inheritance is the fact that Gregorio Averia refused the request of
Domingo Averia and his children to occupy the portion of subject house which was sold to

him by their mother and it was for this reason that they sought the assistance of the Citizens
Legal Assistance Office (CLAO), Atty. Benjamin Roxas in writing defendant Gregorio Averia
to allow him (Domingo Averia) to occupy a portion of subject house but plaintiff Domingo
Averia did not tell his brothers and sisters that he had already sold his 1/6 share of the
inheritance although verbally in favor of Gregorio Averia and his wife.
In the light of the foregoing, the Court, after a circumspect assessment of the evidence presented by
both parties, hereby declares, that defendant Gregorio Averia then a major of police precinct in
Makati was the person responsible for the expenses in litigation in Civil Case No. 79955, involving
the property and their mother had indeed awarded him with portion of the property and that
Domingo Averia sold 1/6 of [his] share of the remaining portion of the property to defendant
Gregorio. (Underscoring supplied)
Accordingly, the trial court disposed as follows, quoted verbatim:
WHEREFORE, the remaining 5/6 of of the property may still be subject of partition among
the remaining heirs but the summary settlement of the remaining estate of the 5/6 remaining
portion of the estate . . . may be sold and the proceeds thereof be distributed among the
heirs in accordance with the aliquot portions of each and every heir of the deceased Macaria
Francisco.
Both parties are hereby ordered to shoulder their respective expenses for attorneys fees and
litigation costs. (Underscoring supplied)
On appeal to the Court of Appeals (CA) wherein the plaintiffs Domingo et al. assigned two errors, to
wit:
A. THE TRIAL COURT ERRED IN ITS FINDING THAT THERE WAS A SALE OF ONEHALF OF THE DECEASED MACARIA F. AVERIAS INTEREST AND OWNERSHIP OVER
THE SUBJECT PROPERTY IN FAVOR OF DEFENDANT-APPELLEE GREGORIO AVERIA.
B. THE TRIAL COURT ERRED IN ALLOWING THE RECEPTION OF PAROL EVIDENCE
TO THE EFFECT THAT PLAINTIFF-APPELLANT DOMINGO AVERIA HAD ALREADY
DISPOSED OF HIS ONE SIXTH (1/6) SHARE OF THE SUBJECT PROPERTY IN FAVOR
OF DEFENDANT-APPELLEE GREGORIO AVERIA8(Emphasis supplied),
the appellate court reversed the decision of the trial court.
In reversing the trial court, the appellate court, noting that the alleged transfers made by Macaria and
Domingo in favor of Gregorio were bereft of any written memoranda, held that it was error for the
trial court to rely solely on the evidence adduced by the defendants consisting of the testimonies of
Gregorio, Veronica Bautista, Sylvanna Vergara Clutario, Atty. Mario C.R. Domingo, Felimon
Dagondon and Gregorio Averia, Jr. The CA explained its ruling in this wise:
[T]he alleged conveyances purportedly made by Macaria Francisco and plaintiff-appellant
Domingo Averia are unenforceable as the requirements under the Statute of Frauds have not
been complied with. Article 1403, 2(e) of the New Civil Code is explicit:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) x x x

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In
the following cases an agreement thereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be in writing and subscribed
by the party charged, or by this agent; evidence, therefore, of the agreement cannot
be received without the writing, or a secondary evidence of its contents:
(a) x x x;
(b) x x x;
(e) an agreement for the leasing for a longer period than one year, or for the sale of
real property or of an interest therein;
(f) x x x"
The two (2) transactions in question being agreements for the sale of real property or of an
interest therein are in clear contravention of the prescription that it must be in writing and
subscribed by the party charged or by an agent thereof. Hence, the strong insistence by
defendants-appellees on the verbal conveyances cannot be made the basis for the alleged
ownership over the undivided interests claimed by Gregorio Averia.
The parol evidence upon which the trial court anchored its award in favor of defendantappellee Gregorio Averia is irregular as such kind of evidence is foreclosed by Article 1403 of
the Civil Code that no evidence of the alleged agreements can be received without the
writing of secondary evidence which embodies the sale of the real property. The introduction
of the testimonies of Gregorio Averias witnesses were timely objected to by plaintiffsappellants. Since the testimonies of defendants-appellees witnesses are inadmissible, then
such exclusion has pulled the rug under the assailed decision of the trial court and it has no
more leg to stand on.
In the vain attempt to salvage the situation, defendants-appellees however argue that the
Article 1403 or the Statute of Frauds does not apply because the same only refers to purely
executory contracts and not to partially or completely executed contracts.
This contention is untenable. It was not amply demonstrated how such alleged transfers
were executed since plaintiffs-appellants have vigorously objected and opposed the claims
of ownership by defendants-appellees. He who asserts a fact or the affirmative of an issue
has the burden of proving it. Defendants-appellees miserably failed in this respect.
While this Court cannot discount the fact that either defendant-appellee Gregorio Averia or
plaintiff-appellant Domingo Averia may have valid claims against the estate of Macaria
Francsico, such matter can best be threshed out in the proceedings for partition before the
court a quo bearing in mind that such partition is subject to the payment of the debts of the
deceased under Article 1078 of the Civil Code.9(Citations omitted; Emphasis and
underscoring supplied)
The appellate court thus remanded the case to the trial court.
WHEREFORE, the decision dated July 19, 1991 is reversed and set aside. The case
is remanded to the court a quo which is directed to effect the partition of the subject property
or if not, possible, sell the entire lot and distribute the proceeds of the sale based on equal

shares among the children of the late Macaria Francisco after debts of the said deceased are
paid or settled pursuant to Article 1078 of the Civil Code.10(Underscoring supplied)
Gregorio and Sylvannas motion for reconsideration having been denied by the appellate court, they
lodged the Petition for Review on Certiorari at bar upon the following assignment of errors:
I. THE COURT OF APPEALS (SECOND DIVISION) ERRED IN ITS FINDING THAT THERE
WAS NO SALEOF ONE-HALF (1/2) OF THE DECEASED MACARIA F. AVERIAS
INTEREST AND OWNERSHIP OVER THE SUBJECT PROPERTY IN FAVOR OF
PETITIONER GREGORIO F. AVERIA.
II. THE COURT OF APPEALS (SECOND DIVISION) ERRED IN ITS FINDING THAT THE
RECEPTION OF PAROL EVIDENCE TO THE EFFECT THAT RESPONDENT DOMINGO
AVERIA HAD ALREADY SOLD HIS ONE SIXTH (1/6) SHARE IN THE SUBJECT
PROPERTY IN FAVOR OF PETITIONER GREGORIO AVERIAIS NOT IN ACCORDANCE
WITH LAW.11
Petitioners contend that contrary to the findings of the Court of Appeals, they were able to amply
establish, by the testimonies of credible witnesses, the conveyances to Gregorio of of the
Sampaloc property and 1/6 of the remaining half representing the share of Domingo.12
With respect to the application by the appellate court of the Statute of Frauds, petitioners contend
that the same refers only to purely executory contracts and not to partially or completely executed
contracts as in the instant case. The finding of the CA that the testimonies of petitioners witnesses
were timely objected to by respondents is not, petitioners insist, borne out in the records of the case
except with respect to the testimony of Gregorio.13
Petitioners thus conclude that respondents waived any objection to the admission of parol evidence,
hence, it is admissible and enforceable14 following Article 140515 of the Civil Code.16
The Court finds for petitioner.
Indeed, except for the testimony of petitioner Gregorio bearing on the verbal sale to him by Macaria
of the property, the testimonies of petitioners witnesses Sylvanna Vergara Clutario and Flora Lazaro
Rivera bearing on the same matter were not objected to by respondents. Just as the testimonies of
Gregorio, Jr. and Veronica Bautista bearing on the receipt by respondent Domingo on July 23, 1983
from Gregorios wife of P5,000.00 representing partial payment of the P10,000.00 valuation of his
(Domingos) 1/6 share in the property, and of thetestimony of Felimon Dagondon bearing on the
receipt by Domingo of P5,000.00 from Gregorio were not objected to. Following Article 1405 of the
Civil Code,17 the contracts which infringed the Statute of Frauds were ratified by the failure to object
to the presentation of parol evidence, hence, enforceable.
ARTICLE 1403. The following contracts are unenforceable, unless they are ratified:
xxx
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be in writing, and subscribed
by the party charged, or by his agent; evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its contents:

xxx
(e) An agreement for the leasing for a longer period than one year, or for the sale of
real property or of an interest therein;
x x x (Emphasis and underscoring supplied),
Contrary then to the finding of the CA, the admission of parol evidence upon which the trial court
anchored its decision in favor of respondents is not irregular and is not foreclosed by Article 1405.
In any event, the Statute of Frauds applies only to executory contracts and not to contracts which
are either partially or totally performed.18 In the case at bar, petitioners claimed that there was total
performance of the contracts, full payment of the objects thereof having already been made and the
vendee Gregorio having, even after Macarias death in 1983, continued to occupy the property until
and after the filing on January 19, 1989 of the complaint subject of the case at bar as in fact he is still
occupying it.
In proving the fact of partial or total performance, oral evidence may be received as what the trial
court in the case at bar did. Noted civilist Arturo M. Tolentino elucidates on the matter:
The statute of frauds is not applicable to contracts which are either totally or partially
performed, on the theory that there is a wide field for the commission of frauds in executory
contracts which can only be prevented by requiring them to be in writing, a fact which is
reduced to a minimum in executed contracts because the intention of the parties becomes
apparent by their execution, and execution concludes, in most cases, the rights of the
parties. However it is not enough for a party to allege partial performancein order to
render the Statute of Frauds inapplicable; such partial performance must be duly
proved. But neither is such party required to establish such partial performance by
documentary proof before he could have the opportunity to introduce oral testimony
on the transaction. The partial performance may be proved by either
documentary or oral evidence.19 (Emphasis, underscoring and italics supplied)
The testimonies of petitioners witnesses being credible and straightforward, the trial court did not err
in giving them credence.
The testimony of Sylvana Vergara Clutario, daughter of Teresa, in fact was more than sufficient to
prove the conveyance of half of the subject property by Macaria to Gregorio.
ATTY. DOMINGO:
Q: Are you the same Sylvana Vergara representing the defendant Teresa Averia in this
case?
WITNESS:
A: Yes, sir.
Q: Now on February 28, 1972, about 5:30 in the afternoon, where were you?
A: As far as I can remember, I was inside my residence at 725 Extremadura at that date, and
time.

Q: On that date and time, where were you residing?

A: At said address, 725 Extremadura Street, that time and date at 5:30 in the afternoon.
Q: Who were your companions if you have any?
A: I was there with my brothers and sisters and Uncle Gregorio and Auntie Agripina and the
children and my grand mother and also the lady who is leading in the prayers because on
that date it is the anniversary of the death of my grandfather.
Q: What is the name of your grandmother?
A: Macaria Averia, sir.
Q: Now, this Gregorio Averia whom you identified to be your Uncle, is he the same Gregorio
Averia who is also the defendant in this case?
WITNESS:
A: The same, sir.
Q: What is the name of your grandfather whom you said whose death anniversary you are
then celebrating on that date?
A: Roberto Romero, sir.
Q: What actually you were doing that time 5:30?
A: We had a gathering and merienda in recollection of the celebration (sic) of the death of my
grandfather, sir.
Q: When you said you were eating then, where were you eating then?
A: It was beside my grandmother.
Q: Where?
A: At the dining room, sir.
Q: So you were sitting at the dining table all of you?
A: Yes, sir the others were a little bit near the table.
Q: Who were seated in the dining table?
A: The Spouses Gregorio and Agripina, my sister Beth and my cousins and my Lola Macaria.
Q: When you were then seated in taking that ginatan as you stated what transpired?

A: Somebody called up and the one who called up was the Secretary of a lawyer and they
were asking for [payment of] expenses in connection with . . . [Criminal Case No. 79955].
Q: You said that it was Agripina who was the one who answered that telephone call. After
answering it, what did she say to anyone seated in that table?
A: Agripina said if Gregorio has some money, he will pay them but Gregorio said he will be
responsible for the expenses.
Q: Did you come to know how much was amount being asked?
A: P500.00, sir.
Q: What else happened after Gregorio said that he would answer for the expenses to be sent
to the lawyer?
A: My Lola said that she was embarrassed and ashame[d] because at that time she d[id] not
have any money and it was the couple who was taking the expenses of the case.
Q: When you said "Lola," you are referring to Macaria Averia?
A: Yes, sir.
Q: What else transpired?
A: Because of her embarrassment, she told [them that] one half (1/2) of the House and Lot
will be given to the couple to cover the expenses of the case.
ATTY. DOMINGO:
Q: To whom did your grandmother say this?
A: Well, she said that to Gregorio and Agripina and Gregorio told her, if that is what you wish,
I will agree to your proposal.
Q: What was the reply of your grand mother?
A: My Lola told Gregorio that since you agree, you better prepare all the documents and we
will make ready the documents for the division or partition.
Q: Do you know what House and Lot one half (1/2) of which your grand mother was given
(sic) to your Uncle and Auntie . . .?
A: She is referring to the House and Lot where I used to live before.
Q: You are referring to the House and Lot located at 725 Extremadura Street, Sampaloc,
Manila.
A: Yes, sir.

x x x20 (Emphasis and underscoring supplied)

Not only on account of Sylvanas manner of testifying that her testimony should be given weight. Her
testimony was against the interest of her mother Teresa whom she represented, her mother being
also an heir of Macaria. If the transfer by Macaria to Gregorio of of the property is upheld as valid
and enforceable, then the share of the other heirs including Sylvannas mother would considerably
be reduced.
That Atty. Mario C. R. Domingo who was admittedly Macarias counsel in Civil Case No. 79955
(which, as priorly reflected, entailed a period of ten years in court), affirmed on the witness stand that
Gregorio and his wife were the ones who paid for his attorneys fees amounting
to P16,000.0021 should no doubt strongly lend credence to Gregorios claim to that effect.
As to the sale of Domingos 1/6 share to Gregorio, petitioners were able to establish said transaction
by parol evidence, consisting of the testimonies of Gregorio Averia, Jr.,22 Veronica Averia23 and
Felimon Dagondon24 the presentation of which was, it bears repeating, not objected to.
Albeit Domingo never denied having received the total amount of P10,000.00 from Gregorio and his
wife, he denied having sold to Gregorio his interest over the property. Such disclaimer cannot,
however, prevail over the categorical, positive statements of petitioners above-named witnesses.
In sum, not only did petitioners witnesses prove, by their testimonies, the forging of the contracts of
sale or assignment. They proved the full performance or execution of the contracts as well.
WHEREFORE, the petition is hereby GRANTED. The January 31, 2000 Decision of the Court of
Appeals in CA-G.R. No. 44704 is hereby SET ASIDE.
The case is hereby remanded to the trial court, Branch 31 of the RTC of Manila, for appropriate
action, following Section 2 of Rule 69 of the Rules of Civil Procedure.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. L-51058 January 27, 1992

ASIA PRODUCTION CO., INC., WANG TA PENG and WINSTON WANG, petitioners,
vs.
HON. ERNANI CRUZ PAO, as Judge of the Court of First Instance of Rizal (Quezon City,
Branch XVIII), LOLITA LEE LE HUA and ALBERTO DY, respondents.
Ismael J. Andres for petitioner Asia Production Co., Inc.
Burgos, Sarte, Rebueno & Sarte for petitioners.

Roman Careaga for Alberto Dy.

DAVIDE, JR. J.:

The simple issue in this case is whether or not an action for the refund of partial payments of the
purchase price of a building covered by an oral agreement to sell it with an oral promise to assign
the contract of lease on the lot where the building is constructed is barred by the Statute of Frauds.
Sometime in March 1976, private respondents, who claimed to be the owners of a building
constructed on a lot leased from Lucio San Andres and located in Valenzuela, Bulacan, offered to
sell the building to the petitioners for P170,000.00. Petitioners agreed because of private
respondents' assurance that they will also assign to the petitioners the contract of lease over the
land. The above agreement and promise were not reduced to writing. Private respondents undertook
to deliver to the petitioners the deed of conveyance over the building and the deed of assignment of
the contract of lease within sixty (60) days from the date of payment of the downpayment of
P20,000.00. The balance was to be paid in monthly installments. On 20 March 1976, petitioners paid
the downpayment and issued eight (8) postdated checks drawn against the Equitable Banking
Corporation for the payment of the eight (8) monthly installments, as follows:
Check No. Amount Due Date
10112253 P10,000.00 June 30, 1976
10112254 20,000.00 July 30, 1976
10112255 20,000.00 August 30, 1976
10112256 20,000.00 September 30, 1976
10112257 20,000.00 October 30, 1976
10112258 20,000.00 November 30, 1976
10112259 20,000.00 December 30, 1976
10112260 20,000.00 January 31, 1977
Relying on the good faith of private respondents, petitioners constructed in May 1976 a weaving
factory on the leased lot. Unfortunately, private respondents, despite extensions granted, failed to
comply with their undertaking to execute the deed to sale and to assign the contract despite the fact
that they were able to encash the checks dated 30 June and 30 July 1976 in the total amount of
P30,000.00. Worse, the lot owner made it plain to petitioners that he was unwilling to give consent to
the assignment of the lease unless petitioners agreed to certain onerous terms, such as an increase
in rental, or the purchase of the land at a very unconscionable price.
Petitioners were thus compelled to request for a stop payment order of the six (6) remaining checks.
Succeeding negotiations to save the transaction proved futile by reason of the continued failure of
private respondents to execute the deed of sale of the building and the deed of assignment of the
contract of lease.
So, on or about 29 December 1976, upon prior agreement with private respondents, petitioners
removed all their property, machinery and equipment from the building, vacated the same and
returned its possession to private respondents. Petitioners demanded from the latter the return of
their partial payment for the purchase price of the building in the total sum of P50,000.00. Private
respondents refused to return it. Hence, petitioners, filed against private respondents a
complaint 1 for its recovery and for actual, moral and exemplary damages and attorney's fees with the
then Court of First Instance (now Regional Trial Court) of Quezon City, which was docketed as Civil Case

No. Q-23593. The case was raffled to Branch XVIII of the court which was then presided over by herein
respondent Judge.

Private respondent Lolita Lee Le Hua did not file an Answer; hence, she was declared in default.
Upon the other hand, private respondent Alberto Dy filed a motion
to dismiss the complaint on the ground that the claim on which the action is based an alleged
purchase of a building which is not evidenced by any writing cannot be proved by parol evidence
since Article 1356 in relation to Article 1358 of the Civil Code requires that it should be in writing. 2 In
their
opposition 3 to said motion, petitioners argue that their complaint is essentially for collection of a sum of
money; it does not seek to enforce the sale, but aims to compel private respondents to refund a sum of
money which was paid to them as purchase price in a sale which did not materialize by reason of their
bad faith. Furthermore, the execution of the document was an undertaking of the private respondents,
which they refused to comply with. Hence, they cannot now be heard to complain against something
which they themselves brought about.

In his Order 4 of 18 April 1979, respondent Judge granted the motion to dismiss on the ground that the
complaint is barred by the Statute of Frauds. He says:

It cannot be disputed that the contract in this case is condemned by the Statutes of
Fraud (sic) it involves not merely the sale of real property (the building), it also
includes an alleged lease agreement that must certainly be for more than one year
(See Art. 1403, No. 2, subparagraph e, New Civil Code).
Plaintiffs cannot avoid the Statutes of Fraud (sic) by saying that this is merely an
action for the collection of a sum of money. To be entitled to the sum of P50,000.00,
it is necessary to show that such contract was executed and the same was violated
but plaintiffs are prevented from proving this alleged agreement by parol evidence.
Neither may plaintiffs claim that by the payment of the sum of P50,000.00 the
contract was removed from the Statutes of Fraud (sic). This is so because plaintiffs
have not fully complied with their obligation to pay P170,000.00. If there had been full
payment of P170,000.00, the situation would have been different.
Plaintiffs knew or should have known that their contract (as described by them in
their complaint) was unenforceable; they had thereby voluntarily assumed the risks
attendant to such contract. Moreover, the primordial aim of the Statutes of Fraud (sic)
is to prevent fraud and perjury in the enforcement of obligations depending upon the
unassisted memory of witnesses (Shoemaker vs. La Tondea, 68 Phil. 24). The
Court would find it difficult to determine whether the sum of P50,000.00 was paid
because of the unenforceable contract or for some other transactions.
Their motion for reconsideration 5 having been denied by respondent Judge in his Order 6 of 21 June
1979 for the reason that the oral contract in this case was not removed from the operation of the Statute
of Frauds because there was no full or complete performance by the petitioners of the contract as
required in Paterno vs. Jao Yan 7 and Babao vs. Perez, 8petitioners filed this petition 9 on 16 July 1979, alleging
therein as ground therefor grave abuse of discretion on the part of respondent Judge in issuing the orders
of 18 April 1979 and 21 June 1979.

After private respondent Alberto Dy filed his Comment 10 to the petition in compliance with the
resolution 11 of 23 July 1979 and petitioners filed their Reply 12 to said comment on 2 April 1980, this Court

gave due course 13 to the petition. Private respondent Lolita Lee Le Hua was considered to have waived
her right to file her comment to the petition. 14

Petitioners were subsequently required to file their Brief, which they complied with on 13 October
1981; 15 they make the following assignment of errors:
I
The lower court erred in holding that for a contract of purchase and sale to be
removed from the operation of the Statute of Frauds, there must be full and complete
payment of the purchase price.
II
The lower court erred in failing to appreciate the nature of petitioners' cause of
action.
III
The lower court erred in not finding that this case is not covered by the Statute of
Frauds.
IV
The lower court erred in not following the procedure prescribed by this Honorable
Court in cases when partial performance is alleged.
V
The lower court erred in dismissing the case.
Private respondents did not file their Brief.
We find merit in the petition. Respondent Judge committed grave abuse of discretion in dismissing
the complaint on the ground that the claim is barred by the Statute of Frauds.
Article 1403 of the Civil Code declares the following contracts, among others, as unenforceable,
unless they are ratified:
xxx xxx xxx
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In
the following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary evidence of its
contents:
(a) An agreement that by its terms is not to be performed within a
year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage

of another;
(c) An agreement made in consideration of marriage, other than a
mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at
a price not less than five hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the evidences, or some of
them, of such things in action, or pay at the time some part of the
purchase money; but when a sale is made by auction and entry is
made by the auctioneer in his sales book, at the time of the sale, of
the amount and kind of property sold, terms of sale, price, names of
the purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
(e) An agreement for the leasing for a longer period than one year, or
for the sale of real property or of an interest therein;
(f) A representation to the credit of a third person.
xxx xxx xxx
The purpose of the statute is to prevent fraud and perjury in the enforcement of obligations
depending for their evidence on the unassisted memory of witnesses by requiring certain
enumerated contracts and transactions to be evidenced by a writing signed by the party to be
charged. 16 It was not designed to further or perpetuate fraud. Accordingly, its application is limited. It
makes only ineffective actions for specific performance of the contracts covered by it; it does not declare
them absolutely void and of no effect. As explicitly provided for in the above-quoted paragraph (2), Article
1403 of the Civil Code, the contracts concerned are simply "unenforceable" and the requirement that they
or some note or memorandum thereof be in writing refers only to the manner they are to be proved.
It goes without saying then, as held in the early case of Almirol, et al. vs. Monserrat, 17 that the statute will
apply only to executory rather than executed contracts. Partial execution is even enough to bar the
application of the statute. In Carbonnel vs. Poncio, et al., 18 this Court held:

. . . It is well-settled in this jurisdiction that the Statute of Frauds is applicable only to

executory contracts (Facturan vs. Sabanal, 81 Phil. 512), not to contracts that are
totally or partially performed (Almirol, et al. vs. Monserrat, 48 Phil. 67, 70; Robles vs.
Lizarraga Hermanos, 50 Phil. 387; Diana vs. Macalibo, 74 Phil. 70).
Subject to a rule to the contrary followed in a few jurisdictions, it is the
accepted view that part performance of a parol contract for the sale of
real estate has the effect, subject to certain conditions concerning the
nature and extent of the acts constituting performance and the right to
equitable relief generally, of taking such contract from the operation
of the statute of frauds, so that chancery may decree its specific
performance or grant other equitable relief. It is well settled in Great
Britain and in this country, with the exception of a few states, that a
sufficient part performance by the purchaser under a parol contract
for the sale of real estate removes the contract form the operation of
the statute of frauds (49 Am. Jur. 722-723).

In the words of former Chief Justice Moran: "The reason is simple. In executory
contracts there is a wide field for fraud because unless they be in writing there is no
palpable evidence of the intention of the contracting parties. The statute has
precisely been enacted to prevent fraud." (Comments on the Rules of Court, by
Moran, Vol. III [1957 ed.] p. 178). However, if a contract has been totally or partially
performed, the exclusion of parol evidence would promote fraud or bad faith, for it
would enable the defendant to keep the benefits already derived by him form the
transaction in litigation, and, at the same time, evade the obligations, responsibilities
or liabilities assumed or contracted by him thereby.
It follows then that the statute applies only to executory contracts and in actions for their
specific performance. It does not apply to actions which are neither for violation of a contract
nor for the performance thereof. 19
There can be no dispute that the instant case is not for specific performance of the agreement to sell
the building and to assign the leasehold right. Petitioners merely seek to recover their partial
payment for the agreed purchase price of the building, which was to be paid on installments, with the
private respondents promising to execute the corresponding deed of conveyance, together with the
assignment of the leasehold rights, within two (2) months from the payment of the agreed
downpayment of P20,000.00. By their motion to dismiss, private respondents theoretically or
hypothetically admitted the truth of the allegations of fact in the complaint. 20 Among the allegations
therein are:
(1) that the P50,000.00 sought to be recovered represents the downpayment of P20,000.00 and two (2)
monthly installments of the purchase price, and (2) that petitioners decided, in effect, to withdraw from the
agreement by ordering the stop payment of the remaining six (6) checks and to return the possession of
the building to private respondents because of the latter's failure to comply with their agreement. The
action is definitely not one for specific performance, hence the Statute of Frauds does not apply. And
even if it were for specific performance, partial execution thereof by petitioners effectively bars the private
respondents from invoking it. Since it is for refund of what petitioners had paid under the agreement,
originally unenforceable under the statute, because petitioners had withdrawn therefrom due to the "bad
faith" of the private respondents, the latter cannot be allowed to take shelter under the statute and keep
the P50,000.00 for themselves. If this were the case, the statute would only become a shield for fraud,
allowing private respondents not only to escape performance of their obligations, but also to keep what
they had received from petitioners, thereby unjustly enriching themselves.

Besides, even if the action were for specific performance, it was premature for the respondent Judge
to dismiss the complaint by reason of the Statute of Frauds despite the explicit allegations of partial
payment. As this Court stated in Carbonnel vs. Poncio, et al.: 21
For obvious reasons, it is not enough for a party to allege partial performance in
order to hold that there has been such performance and
to render a decision declaring that the Statute of Frauds is inapplicable. But neither is
such party required to establish such partial performance
by documentaryproof before he could have the opportunity to introduce oral
testimony on the transaction. Indeed, such oral testimony would usually be
unnecessary if there were documents proving partial performance. Thus, the
rejection of any and all testimonial evidence on partial performance, would nullify the
rule that the Statute of Frauds is inapplicable to contracts which have been partly
executed, and lead to the very evils that the statute seeks to prevent.
xxx xxx xxx

When the party concerned has pleaded partial performance, such party is entitled to
a reasonable chance to establish by parol evidence the truth of this allegation, as
well as the contract itself. "The recognition of the exceptional effect of part
performance in taking an oral contract out of the statute of frauds involves the
principle that oral evidence is admissible in such cases to prove both the contract
and the part performance of the contract" (49 Am. Jur. 927).
We thus rule that an action by a withdrawing party to recover his partial payment of the consideration
of a contract, which is otherwise unenforceable under the Statute of Frauds, by reason of the failure
of the other contracting party to comply with his obligation, is not covered by the Statute of Frauds.
WHEREFORE, the petition is hereby GRANTED. The challenged Orders of 18 April 1979 and 21
June 1979 in Civil Case No. Q-23593 of the court below are hereby ANNULLED and SET ASIDE,
and the complaint in said case is hereby ordered REINSTATED. The default order against private
respondent Lolita Lee Le Hua shall stand and private respondent Alberto Dy is ordered to file his
Answer to the complaint with the court below within ten (10) days from receipt of this decision. This
decision shall be immediately executory.
Costs against private respondents.
IT IS SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 176841

June 29, 2010

ANTHONY ORDUA, DENNIS ORDUA, and ANTONITA ORDUA, Petitioners,

vs.
EDUARDO J. FUENTEBELLA, MARCOS S. CID, BENJAMIN F. CID, BERNARD G. BANTA, and
ARMANDO GABRIEL, JR., Respondents.
DECISION
VELASCO, JR., J.:
In this Petition for Review1 under Rule 45 of the Rules of Court, Anthony Ordua, Dennis Ordua
and Antonita Ordua assail and seek to set aside the Decision2 of the Court of Appeals (CA) dated
December 4, 2006 in CA-G.R. CV No. 79680, as reiterated in its Resolution of March 6, 2007, which
affirmed the May 26, 2003 Decision3of the Regional Trial Court (RTC), Branch 3 in Baguio City, in
Civil Case No. 4984-R, a suit for annulment of title and reconveyance commenced by herein
petitioners against herein respondents.
Central to the case is a residential lot with an area of 74 square meters located at Fairview
Subdivision, Baguio City, originally registered in the name of Armando Gabriel, Sr. (Gabriel Sr.)
under Transfer Certificate of Title (TCT) No. 67181 of the Registry of Deeds of Baguio City.4

As gathered from the petition, with its enclosures, and the comments thereon of four of the five
respondents,5 the Court gathers the following relevant facts:
Sometime in 1996 or thereabouts, Gabriel Sr. sold the subject lot to petitioner Antonita Ordua
(Antonita), but no formal deed was executed to document the sale. The contract price was
apparently payable in installments as Antonita remitted from time to time and Gabriel Sr. accepted
partial payments. One of the Orduas would later testify that Gabriel Sr. agreed to execute a final
deed of sale upon full payment of the purchase price.6
As early as 1979, however, Antonita and her sons, Dennis and Anthony Ordua, were already
occupying the subject lot on the basis of some arrangement undisclosed in the records and even
constructed their house thereon. They also paid real property taxes for the house and declared it for
tax purposes, as evidenced by Tax Declaration No. (TD) 96-04012-1110877 in which they place the
assessed value of the structure at PhP 20,090.
After the death of Gabriel Sr., his son and namesake, respondent Gabriel Jr., secured TCT No. T714998 over the subject lot and continued accepting payments from the petitioners. On December
12, 1996, Gabriel Jr. wrote Antonita authorizing her to fence off the said lot and to construct a road in
the adjacent lot.9 On December 13, 1996, Gabriel Jr. acknowledged receipt of a PhP 40,000
payment from petitioners.10 Through a letter11 dated May 1, 1997, Gabriel Jr. acknowledged that
petitioner had so far made an aggregate payment of PhP 65,000, leaving an outstanding balance of
PhP 60,000. A receipt Gabriel Jr. issued dated November 24, 1997 reflected a PhP 10,000 payment.
Despite all those payments made for the subject lot, Gabriel Jr. would later sell it to Bernard Banta
(Bernard) obviously without the knowledge of petitioners, as later developments would show.
As narrated by the RTC, the lot conveyance from Gabriel Jr. to Bernard was effected against the
following backdrop: Badly in need of money, Gabriel Jr. borrowed from Bernard the amount of PhP
50,000, payable in two weeks at a fixed interest rate, with the further condition that the subject lot
would answer for the loan in case of default. Gabriel Jr. failed to pay the loan and this led to the
execution of a Deed of Sale12 dated June 30, 1999 and the issuance later of TCT No. T-7278213 for
subject lot in the name of Bernard upon cancellation of TCT No. 71499 in the name of Gabriel, Jr. As
the RTC decision indicated, the reluctant Bernard agreed to acquire the lot, since he had by then
ready buyers in respondents Marcos Cid and Benjamin F. Cid (Marcos and Benjamin or the Cids).
Subsequently, Bernard sold to the Cids the subject lot for PhP 80,000. Armed with a Deed of
Absolute Sale of a Registered Land14 dated January 19, 2000, the Cids were able to cancel TCT No.
T-72782 and secure TCT No. 7278315 covering the subject lot. Just like in the immediately preceding
transaction, the deed of sale between Bernard and the Cids had respondent Eduardo J. Fuentebella
(Eduardo) as one of the instrumental witnesses.
Marcos and Benjamin, in turn, ceded the subject lot to Eduardo through a Deed of Absolute
Sale16 dated May 11, 2000. Thus, the consequent cancellation of TCT No. T-72782 and issuance on
May 16, 2000 of TCT No. T-327617 over subject lot in the name of Eduardo.
As successive buyers of the subject lot, Bernard, then Marcos and Benjamin, and finally Eduardo,
checked, so each claimed, the title of their respective predecessors-in-interest with the Baguio
Registry and discovered said title to be free and unencumbered at the time each purchased the
property. Furthermore, respondent Eduardo, before buying the property, was said to have inspected
the same and found it unoccupied by the Orduas.18

Sometime in May 2000, or shortly after his purchase of the subject lot, Eduardo, through his lawyer,
sent a letter addressed to the residence of Gabriel Jr. demanding that all persons residing on or
physically occupying the subject lot vacate the premises or face the prospect of being ejected.19
Learning of Eduardos threat, petitioners went to the residence of Gabriel Jr. at No. 34 Dominican
Hill, Baguio City. There, they met Gabriel Jr.s estranged wife, Teresita, who informed them about
her having filed an affidavit-complaint against her husband and the Cids for falsification of public
documents on March 30, 2000. According to Teresita, her signature on the June 30, 1999 Gabriel
Jr.Bernard deed of sale was a forgery. Teresita further informed the petitioners of her intent to
honor the aforementioned 1996 verbal agreement between Gabriel Sr. and Antonita and the partial
payments they gave her father-in-law and her husband for the subject lot.
On July 3, 2001, petitioners, joined by Teresita, filed a Complaint20 for Annulment of Title,
Reconveyance with Damages against the respondents before the RTC, docketed as Civil Case No.
4984-R, specifically praying that TCT No. T-3276 dated May 16, 2000 in the name of Eduardo be
annulled. Corollary to this prayer, petitioners pleaded that Gabriel Jr.s title to the lot be reinstated
and that petitioners be declared as entitled to acquire ownership of the same upon payment of the
remaining balance of the purchase price therefor agreed upon by Gabriel Sr. and Antonita.
While impleaded and served with summons, Gabriel Jr. opted not to submit an answer.
Ruling of the RTC
By Decision dated May 26, 2003, the RTC ruled for the respondents, as defendants a quo, and
against the petitioners, as plaintiffs therein, the dispositive portion of which reads:
WHEREFORE, the instant complaint is hereby DISMISSED for lack of merit. The four (4) plaintiffs
are hereby ordered by this Court to pay each defendant (except Armando Gabriel, Jr., Benjamin F.
Cid, and Eduardo J. Fuentebella who did not testify on these damages), Moral Damages of Twenty
Thousand (P20,000.00) Pesos, so that each defendant shall receive Moral Damages of Eighty
Thousand (P80,000.00) Pesos each. Plaintiffs shall also pay all defendants (except Armando
Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who did not testify on these damages),
Exemplary Damages of Ten Thousand (P10,000.00) Pesos each so that eachdefendant shall
receive Forty Thousand (P40,000.00) Pesos as Exemplary Damages. Also, plaintiffs are ordered to
pay each defendant (except Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who
did not testify on these damages), Fifty Thousand (P50,000.00) Pesos as Attorneys Fees, jointly
and solidarily.
Cost of suit against the plaintiffs.21
On the main, the RTC predicated its dismissal action on the basis of the following grounds and/or
premises:
1. Eduardo was a purchaser in good faith and, hence, may avail himself of the provision of
Article 154422 of the Civil Code, which provides that in case of double sale, the party in good
faith who is able to register the property has better right over the property;
2. Under Arts. 135623 and 135824 of the Code, conveyance of real property must be in the
proper form, else it is unenforceable;
3. The verbal sale had no adequate consideration; and

4. Petitioners right of action to assail Eduardos title prescribes in one year from date of the
issuance of such title and the one-year period has already lapsed.
From the above decision, only petitioners appealed to the CA, their appeal docketed as CA-G.R. CV
No. 79680.
The CA Ruling
On December 4, 2006, the appellate court rendered the assailed Decision affirming the RTC
decision. The falloreads:
WHEREFORE, premises considered, the instant appeal is hereby DISMISSED and the 26 May 2003
Decision of the Regional Trial Court, Branch 3 of Baguio City in Civil Case No. 4989-R is hereby
AFFIRMED.
SO ORDERED.25
Hence, the instant petition on the submission that the appellate court committed reversible error of
law:
1. xxx WHEN IT HELD THAT THE SALE OF THE SUBJECT LOT BY ARMANDO GABRIEL,
SR. AND RESPONDENT ARMANDO GABRIEL, JR. TO THE PETITIONERS IS
UNENFORCEABLE.
2. xxx IN NOT FINDING THAT THE SALE OF THE SUBJECT LOT BY RESPONDENT
ARMANDO GABRIEL, JR. TO RESPONDENT BERNARD BANTA AND ITS SUBSEQUENT
SALE BY THE LATTER TO HIS CO-RESPONDENTS ARE NULL AND VOID.
3. xxx IN NOT FINDING THAT THE RESPONDENTS ARE BUYERS IN BAD FAITH
4. xxx IN FINDING THAT THE SALE OF THE SUBJECT LOT BETWEEN GABRIEL, SR.
AND RESPONDENT GABRIEL, JR. AND THE PETITIONERS HAS NO ADEQUATE
CONSIDERATION.
5. xxx IN RULING THAT THE INSTANT ACTION HAD ALREADY PRESCRIBED.
6. xxx IN FINDING THAT THE PLAINTIFFS-APPELLANTS ARE LIABLE FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES.26
The Courts Ruling
The core issues tendered in this appeal may be reduced to four and formulated as follows, to
wit: first, whether or not the sale of the subject lot by Gabriel Sr. to Antonita is unenforceable under
the Statute of Frauds; second, whether or not such sale has adequate consideration; third, whether
the instant action has already prescribed; and, fourth, whether or not respondents are purchasers in
good faith.
The petition is meritorious.
Statute of Frauds Inapplicable to Partially Executed Contracts

It is undisputed that Gabriel Sr., during his lifetime, sold the subject property to Antonita, the
purchase price payable on installment basis. Gabriel Sr. appeared to have been a recipient of some
partial payments. After his death, his son duly recognized the sale by accepting payments and
issuing what may be considered as receipts therefor. Gabriel Jr., in a gesture virtually
acknowledging the petitioners dominion of the property, authorized them to construct a fence
around it. And no less than his wife, Teresita, testified as to the fact of sale and of payments
received.
Pursuant to such sale, Antonita and her two sons established their residence on the lot, occupying
the house they earlier constructed thereon. They later declared the property for tax purposes, as
evidenced by the issuance of TD 96-04012-111087 in their or Antonitas name, and paid the real
estates due thereon, obviously as sign that they are occupying the lot in the concept of owners.
Given the foregoing perspective, Eduardos assertion in his Answer that "persons appeared in the
property"27only after "he initiated ejectment proceedings"28 is clearly baseless. If indeed petitioners
entered and took possession of the property after he (Eduardo) instituted the ejectment suit, how
could they explain the fact that he sent a demand letter to vacate sometime in May 2000?
With the foregoing factual antecedents, the question to be resolved is whether or not the Statute of
Frauds bars the enforcement of the verbal sale contract between Gabriel Sr. and Antonita.
The CA, just as the RTC, ruled that the contract is unenforceable for non-compliance with the
Statute of Frauds.
We disagree for several reasons. Foremost of these is that the Statute of Frauds expressed in
Article 1403, par. (2),29 of the Civil Code applies only to executory contracts, i.e., those where no
performance has yet been made. Stated a bit differently, the legal consequence of non-compliance
with the Statute does not come into play where the contract in question is completed, executed,
or partially consummated.30
The Statute of Frauds, in context, provides that a contract for the sale of real property or of an
interest therein shall be unenforceable unless the sale or some note or memorandum thereof is in
writing and subscribed by the party or his agent. However, where the verbal contract of sale has
been partially executed through the partial payments made by one party duly received by the
vendor, as in the present case, the contract is taken out of the scope of the Statute.
The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations
depending for their evidence on the unassisted memory of witnesses, by requiring certain
enumerated contracts and transactions to be evidenced by a writing signed by the party to be
charged.31 The Statute requires certain contracts to be evidenced by some note or memorandum in
order to be enforceable. The term "Statute of Frauds" is descriptive of statutes that require certain
classes of contracts to be in writing. The Statute does not deprive the parties of the right to contract
with respect to the matters therein involved, but merely regulates the formalities of the contract
necessary to render it enforceable.32
Since contracts are generally obligatory in whatever form they may have been entered into, provided
all the essential requisites for their validity are present,33 the Statute simply provides the method by
which the contracts enumerated in Art. 1403 (2) may be proved but does not declare them
invalid because they are not reduced to writing. In fine, the form required under the Statute is for
convenience or evidentiary purposes only.

There can be no serious argument about the partial execution of the sale in question. The records
show that petitioners had, on separate occasions, given Gabriel Sr. and Gabriel Jr. sums of money
as partial payments of the purchase price. These payments were duly receipted by Gabriel Jr. To
recall, in his letter of May 1, 1997, Gabriel, Jr. acknowledged having received the aggregate
payment of PhP 65,000 from petitioners with the balance of PhP 60,000 still remaining unpaid. But
on top of the partial payments thus made, possession of the subject of the sale had been transferred
to Antonita as buyer. Owing thus to its partial execution, the subject sale is no longer within the
purview of the Statute of Frauds.
Lest it be overlooked, a contract that infringes the Statute of Frauds is ratified by the acceptance of
benefits under the contract.34 Evidently, Gabriel, Jr., as his father earlier, had benefited from the
partial payments made by the petitioners. Thus, neither Gabriel Jr. nor the other respondents
successive purchasers of subject lotscould plausibly set up the Statute of Frauds to thwart
petitioners efforts towards establishing their lawful right over the subject lot and removing any cloud
in their title. As it were, petitioners need only to pay the outstanding balance of the purchase price
and that would complete the execution of the oral sale.
There was Adequate Consideration
Without directly saying so, the trial court held that the petitioners cannot sue upon the oral sale since
in its own words: "x x x for more than a decade, [petitioners] have not paid in full Armando Gabriel,
Sr. or his estate, so that the sale transaction between Armando Gabriel Sr. and [petitioners] [has] no
adequate consideration."
The trial courts posture, with which the CA effectively concurred, is patently flawed. For starters,
they equated incomplete payment of the purchase price with inadequacy of price or what passes as
lesion, when both are different civil law concepts with differing legal consequences, the first being a
ground to rescind an otherwise valid and enforceable contract. Perceived inadequacy of price, on
the other hand, is not a sufficient ground for setting aside a sale freely entered into, save perhaps
when the inadequacy is shocking to the conscience.35
The Court to be sure takes stock of the fact that the contracting parties to the 1995 or 1996 sale
agreed to a purchase price of PhP 125,000 payable on installments. But the original lot owner,
Gabriel Sr., died before full payment can be effected. Nevertheless, petitioners continued remitting
payments to Gabriel, Jr., who sold the subject lot to Bernard on June 30, 1999. Gabriel, Jr., as may
be noted, parted with the property only for PhP 50,000. On the other hand, Bernard sold it for PhP
80,000 to Marcos and Benjamin. From the foregoing price figures, what is abundantly clear is that
what Antonita agreed to pay Gabriel, Sr., albeit in installment, was very much more than what his
son, for the same lot, received from his buyer and the latters buyer later. The Court, therefore,
cannot see its way clear as to how the RTC arrived at its simplistic conclusion about the transaction
between Gabriel Sr. and Antonita being without "adequate consideration."
The Issues of Prescription and the Bona
Fides of the Respondents as Purchasers
Considering the interrelation of these two issues, we will discuss them jointly.
There can be no quibbling about the fraudulent nature of the conveyance of the subject lot effected
by Gabriel Jr. in favor of Bernard. It is understandable that after his fathers death, Gabriel Jr.
inherited subject lot and for which he was issued TCT No. No. T-71499. Since the Gabriel Sr.
Antonita sales transaction called for payment of the contract price in installments, it is also
understandable why the title to the property remained with the Gabriels. And after the demise of his

father, Gabriel Jr. received payments from the Orduas and even authorized them to enclose the
subject lot with a fence. In sum, Gabriel Jr. knew fully well about the sale and is bound by the
contract as predecessor-in-interest of Gabriel Sr. over the property thus sold.
Yet, the other respondents (purchasers of subject lot) still maintain that they are innocent purchasers
for value whose rights are protected by law and besides which prescription has set in against
petitioners action for annulment of title and reconveyance.
The RTC and necessarily the CA found the purchaser-respondents thesis on prescription correct
stating in this regard that Eduardos TCT No. T-3276 was issued on May 16, 2000 while petitioners
filed their complaint for annulment only on July 3, 2001. To the courts below, the one-year
prescriptive period to assail the issuance of a certificate of title had already elapsed.
We are not persuaded.
The basic complaint, as couched, ultimately seeks the reconveyance of a fraudulently registered
piece of residential land. Having possession of the subject lot, petitioners right to the reconveyance
thereof, and the annulment of the covering title, has not prescribed or is not time-barred. This is so
for an action for annulment of title or reconveyance based on fraud is imprescriptible where the
suitor is in possession of the property subject of the acts,36 the action partaking as it does of a suit for
quieting of title which is imprescriptible.37 Such is the case in this instance. Petitioners have
possession of subject lots as owners having purchased the same from Gabriel, Sr. subject only to
the full payment of the agreed price.
The prescriptive period for the reconveyance of fraudulently registered real property is 10 years,
reckoned from the date of the issuance of the certificate of title, if the plaintiff is not in possession,
but imprescriptible if he is in possession of the property.38 Thus, one who is in actual possession of a
piece of land claiming to be the owner thereof may wait until his possession is disturbed or his title is
attacked before taking steps to vindicate his right.39As it is, petitioners action for reconveyance is
imprescriptible.
This brings us to the question of whether or not the respondent-purchasers, i.e., Bernard, Marcos
and Benjamin, and Eduardo, have the status of innocent purchasers for value, as was the thrust of
the trial courts disquisition and disposition.
We are unable to agree with the RTC.
It is the common defense of the respondent-purchasers that they each checked the title of the
subject lot when it was his turn to acquire the same and found it clean, meaning without annotation
of any encumbrance or adverse third party interest. And it is upon this postulate that each claims to
be an innocent purchaser for value, or one who buys the property of another without notice that
some other person has a right to or interest in it, and who pays therefor a full and fair price at the
time of the purchase or before receiving such notice.40
The general rule is that one dealing with a parcel of land registered under the Torrens System may
safely rely on the correctness of the certificate of title issued therefor and is not obliged to go beyond
the certificate.41 Where, in other words, the certificate of title is in the name of the seller, the innocent
purchaser for value has the right to rely on what appears on the certificate, as he is charged with
notice only of burdens or claims on the res as noted in the certificate. Another formulation of the rule
is that (a) in the absence of anything to arouse suspicion or (b) except where the party has actual
knowledge of facts and circumstances that would impel a reasonably cautious man to make such
inquiry or (c) when the purchaser has knowledge of a defect of title in his vendor or of sufficient facts

to induce a reasonably prudent man to inquire into the status of the title of the property,42 said
purchaser is without obligation to look beyond the certificate and investigate the title of the seller.
Eduardo and, for that matter, Bernard and Marcos and Benjamin, can hardly claim to be innocent
purchasers for value or purchasers in good faith. For each knew or was at least expected to know
that somebody else other than Gabriel, Jr. has a right or interest over the lot. This is borne by the
fact that the initial seller, Gabriel Jr., was not in possession of subject property. With respect to
Marcos and Benjamin, they knew as buyers that Bernard, the seller, was not also in possession of
the same property. The same goes with Eduardo, as buyer, with respect to Marcos and Benjamin.

ten.lihpw a1

Basic is the rule that a buyer of a piece of land which is in the actual possession of persons other
than the seller must be wary and should investigate the rights of those in possession. Otherwise,
without such inquiry, the buyer can hardly be regarded as a buyer in good faith. When a man
proposes to buy or deal with realty, his duty is to read the public manuscript, i.e., to look and see
who is there upon it and what his rights are. A want of caution and diligence which an honest man of
ordinary prudence is accustomed to exercise in making purchases is, in contemplation of law, a want
of good faith. The buyer who has failed to know or discover that the land sold to him is in adverse
possession of another is a buyer in bad faith.43
Where the land sold is in the possession of a person other than the vendor, the purchaser must go
beyond the certificates of title and make inquiries concerning the rights of the actual
possessor.44 And where, as in the instant case, Gabriel Jr. and the subsequent vendors were not in
possession of the property, the prospective vendees are obliged to investigate the rights of the one
in possession. Evidently, Bernard, Marcos and Benjamin, and Eduardo did not investigate the rights
over the subject lot of the petitioners who, during the period material to this case, were in actual
possession thereof. Bernard, et al. are, thus, not purchasers in good faith and, as such, cannot be
accorded the protection extended by the law to such purchasers.45 Moreover, not being purchasers
in good faith, their having registered the sale, will not, as against the petitioners, carry the day for
any of them under Art. 1544 of the Civil Code prescribing rules on preference in case of double sales
of immovable property. Occeav. Esponilla46 laid down the following rules in the application of Art.
1544: (1) knowledge by the first buyer of the second sale cannot defeat the first buyers rights except
when the second buyer first register in good faith the second sale; and (2) knowledge gained by the
second buyer of the first sale defeats his rights even if he is first to register, since such knowledge
taints his registration with bad faith.
Upon the facts obtaining in this case, the act of registration by any of the three respondentpurchasers was not coupled with good faith. At the minimum, each was aware or is at least
presumed to be aware of facts which should put him upon such inquiry and investigation as might be
necessary to acquaint him with the defects in the title of his vendor.
The award by the lower courts of damages and attorneys fees to some of the herein respondents
was predicated on the filing by the original plaintiffs of what the RTC characterized as an
unwarranted suit. The basis of the award, needless to stress, no longer obtains and, hence, the
same is set aside.
WHEREFORE, the petition is hereby GRANTED. The appealed December 4, 2006 Decision and the
March 6, 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 79680 affirming the May 26,
2003 Decision of the Regional Trial Court, Branch 3 in Baguio City are hereby REVERSED and SET
ASIDE. Accordingly, petitioner Antonita Ordua is hereby recognized to have the right of ownership
over subject lot covered by TCT No. T-3276 of the Baguio Registry registered in the name of
Eduardo J. Fuentebella. The Register of Deeds of Baguio City is hereby ORDERED to cancel said
TCT No. T-3276 and to issue a new one in the name of Armando Gabriel, Jr. with the proper

annotation of the conditional sale of the lot covered by said title in favor of Antonita Ordua subject
to the payment of the PhP 50,000 outstanding balance. Upon full payment of the purchase price by
Antonita Ordua, Armando Gabriel, Jr. is ORDERED to execute a Deed of Absolute Sale for the
transfer of title of subject lot to the name of Antonita Ordua, within three (3) days from receipt of
said payment.
No pronouncement as to costs.
SO ORDERED.