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Art 1312 Petitioner invokes the above case.

Dela
Merced involved a clash between an unrecorded
G.R. No. 168078 contract to sell and a registered mortgage
contract. The contract to sell between the
mortgagors (Spouses Zulueta) and the buyer
FABIO CAHAYAG and CONRADO
(Francisco Dela Merced) was
RIVERA, Petitioners,
executed before the former's constitution of the
vs.
mortgage in favor of GSIS. Because the Zuluetas
COMMERCIAL CREDIT CORPORATION,
defaulted on their loans, the mortgage was
foreclosed; the properties were sold at public
Registration of the mortgage hound the auction to GSIS as the highest bidder; and the
buyers under the Contracts to Sell titles were consolidated after the spouses' failure
to redeem the properties within the one-year
Registration of the mortgage establishes a real redemption period. GSIS later sold the contested
right or lien in favor of the mortgagee, as provided lot to Elizabeth D. Manlongat and Ma. Therese D.
by Articles 131261and 212662 of the Civil Manlongat. However, Dela Merced was able
Code.63 Corollary to the rule, the lien has been to fully pay the purchase price to Spouses
treated as "inseparable from the property Zulueta, who executed a Deed of Absolute Sale
inasmuch as it is a right in rem."64 In other words, in his favor prior to the foreclosure sale.
it binds third persons to the mortgage.
This Court stated therein the general rule that the
The purpose of registration is to notify persons purchaser is not required to go beyond the
other than the parties to the contract that a Torrens title if there is nothing therein to indicate
transaction concerning the property was entered any cloud or vice in the ownership of the property
into.65 Ultimately, registration, because it or any encumbrance thereon. The case
provides constructive notice to the whole world, nonetheless provided an exception to the general
makes the certificate of title reliable, such that rule. The exception arises when the purchaser or
third persons dealing with registered land need mortgagee has knowledge of a defect in the
only look at the certificate to determine the status vendor's title or lack thereof, or is aware of
of the property.66 sufficient facts to induce a reasonably prudent
person to inquire into the status of the property
In this case, the Real Estate Mortgage over the under litigation. The Court applied the exception,
property was registered on 3 February 1981. On taking into consideration the fact that GSIS, the
the other hand, the Contracts to Sell were all mortgagee, was a financing institution.
executed after the registration of the mortgage.
The Contract to Sell in favor of petitioner But Dela Merced is not relevant here. Dela
Cahayag was executed on 29 March 1981, or Merced involved a Contract to Sell that was
almost two months after the registration of the executed prior to the mortgage, while the
mortgage. The corresponding Contract to Sell in Contracts to Sell in this case were all
favor of Rivera was executed only on 12 August executed after the constitution and registration of
1981, roughly six months after the registration of the mortgage.
the mortgage contract. Lastly, the Contract to Sell
in favor of Escalona was executed on 13 January In Dela Merced, since GSIS had knowledge of
1983, or nearly two years after the registration of the contract to sell, this knowledge was
the mortgage on 3 February 1981. equivalent to the registration of the Contract to
Sell. Effectively, this constitutes registration
Consequently, petitioners Cahayag, Rivera and canceled out the subsequent registration of the
Escalona, were bound to the mortgage executed mortgage. In other words, the buyer under the
between mortgagor Dulos Realty and mortgagee Contract to Sell became the- first to register.
CCC, by virtue of its registration. Definitely, the Following the priority in time rule in civil law, the
buyers each had constructive knowledge of the lot buyer was accorded preference or priority in
existence of the mortgage contract when they right in Dela Merced.
individually executed the Contracts to Sell.
In this case, the registration of the mortgage,
Dela Merced v. GSIS not applicable which predated the Contracts to Sell, already

1
bound the buyers to the mortgage. Consequently, whether the mortgage was registered or not.
the determination of good faith does not come More important, the tables were turned
into play. when Luzon Development Bank held that the
bank was bound to the Contract to Sell in view of
Dela Merced materially differs from this case on the latter's constructive notice of the Contract to
another point. The Contract to Sell in favor of Sell. Stated differently, the actually unregistered
Dela Merced was followed by full payment of Contract to Sell became fictionally registered,
the price and execution of the Deed of making it binding on the bank.
Absolute Sale. In this case, the Contract to Sell
in favor of each of petitioners Cahayag, Rivera In this case, on account of its registration, and the
and Escalona, is not coupled with full payment fact that the contracts were entered into after it,
and execution of a deed of absolute sale. the mortgage is valid even as to petitioners.

This case also needs to be distinguished


from Luzon Development Bank v. Enriquez.67 In
that case, the unregistered Contract to Sell was Art. 1317
executed after the execution of the mortgage.
Instead of resorting to foreclosure, the G.R. No. 173140, January 11, 2016
owner/developer and the bank entered into
a dacion en pago. The Court declared that the MACTAN CEBU INTERNATIONAL AIRPORT
bank was bound by the Contract to Sell despite AUTHORITY [MCIAA], Petitioner, v. HEIRS OF
the non-registration of the contract. It reasoned GAVINA IJORDAN
that the bank impliedly assumed the risk that
some of the units might have been covered by
contracts to sell. On the other hand, the Court
Secondly, the CA and the RTC concluded that the
pronounced the mortgage to be void, as it was
Deed was void as far as the respondents' shares
without the approval of the Housing and Land
in the subject lot were concerned, but valid as to
Use Regulatory Board (HLURB). The Court
Julian's share. Their conclusion was based on the
consequently ordered the unit buyer in that case
absence of the authority from his co-heirs in favor
to pay the balance to the bank, after which the
of Julian to convey their shares in the subject lot.
buyer was obliged to deliver a clean title to the
We have no reason to overturn the affirmance of
property.
the CA on the issue of the respondents' co-
ownership with Julian. Hence, the conveyance by
There are points of distinction between the case Julian of the entire property pursuant to the Deed
at bar and Luzon Development Bank. First, there did not bind the respondents for lack of their
is a definite finding in Luzon Development consent and authority in his favor. As such, the
Bank that the mortgage was without prior HLURB Deed had no legal effect as to their shares in the
approval, rendering the mortgage void. In the property. Article 1317 of the Civil Code provides
present case, as will be discussed later, there is that no person could contract in the name of
no proof from the records on whether the HLURB another without being authorized by the latter, or
did or did not approve the mortgage. Second, unless he had by law a right to represent him; the
Luzon Development Bank did not even reach the contract entered into in the name of another by
foreclosure stage of the mortgage. This case, one who has no authority or legal representation,
however, not only reached the foreclosure stage; or who has acted beyond his powers, is
it even went past the redemption period, unenforceable, unless it is ratified, expressly or
consolidation of the title in the owner, and sale of impliedly, by the person on whose behalf it has
the property by the highest bidder to a third been executed, before it is revoked by the other
person. contracting party. But the conveyance by Julian
through the Deed had full force and effect with
The first distinction deserves elaboration. The respect to his share of 1/22 of the entire property
absence of prior written approval of the mortgage consisting of 546 square meters by virtue of its
by the HLURB rendered it void. This effectively being a voluntary disposition of property on his
wiped out any discussion on whether registration part. As ruled in Torres v. Lapinid24:
bound the installment buyer. In fact, Luzon
Development Bank did not even bother to state

2
x x x even if a co-owner sells the whole property fraud was employed to induce Sr. Medalle to affix
as his, the sale will affect only his own share but her thumbmark.
not those of the other co-owners who did not
consent to the sale. This is because the sale or There is fraud when one party is induced by the
other disposition of a co-owner affects only his other to enter into a contract, through and solely
undivided share and the transferee gets only because of the latter's insidious words or
what would correspond to his grantor in the machinations. But not all forms of fraud can vitiate
partition of the thing owned in common. consent. Under Article 1330, fraud refers to dolo
causante or causal fraud, in which, prior to or
MCIAA's assertion of estoppel or ratification to simultaneous with execution of a contract, one
bar the respondents' contrary claim of ownership party secures the consent of the other by using
deception, without which such consent would not
of their shares in the subject lot is bereft of
have been given.15
substance. The doctrine of estoppel applied only
to those who were parties to the contract and their
Between the two parties, we are inclined to give
privies or successors-in-interest.25 Moreover, the
credence to petitioner. First, the trial court did not
respondents could not be held to ratify the
give probative weight to the deposition of Sr.
contract that was declared to be null and void with Medalle basically stating that respondent's
respect to their share, for there was nothing for counsel failed to conform to Section 20, Rule 23
them to ratify. Verily, the Deed, being null and of the Rules of Court which provides that:
void, had no adverse effect on the rights of the
respondents in the subject lot. Section 20. Certification, and filing by officer. -
The officer shall certify on the deposition that the
witness was duly sworn to by him and that the
Art 1318 deposition is a true record of the testimony given
by the witness. He shall then securely seal the
BENJIE B. GEORG represented by BENJAMIN deposition in an envelope indorsed with the title
C. BELARMINO, JR., Petitioner, of the action and marked "Deposition of (here
vs. insert the name of witness)" and shall promptly
HOLY TRINITY COLLEGE, INC., Respondent. file it with the court in which the action is pending
or send it by registered mail to the clerk thereof
for filing.
The essential requisites of a contract under
Article 1318 of the New Civil Code are:
Indeed, there is no record of any certification from
Notary Public Romeo Juayno stating that the
(1) Consent of the contracting parties; witness, Sr. Medalle in this case, was sworn to by
him and that the deposition is a true record of the
(2) Object certain which is the subject testimony given by Sr. Medalle. Furthermore,
matter of the contract; petitioner correctly noted that respondent's
counsel did not seek a leave of court to conduct
(3) Cause of the obligation which is a deposition in violation of Section 1, Rule 23 of
established. the Rules of Court:

The validity of the MOA is being assailed for a Section 1. Depositions pending action, when may
defect in consent. Under Article 1330 of the Civil be taken.-By leave of court after jurisdiction has
Code, consent may be vitiated by any of the been obtained over any defendant or over
following: (1) mistake, (2) violence, (3) property which is the subject of the action, or
intimidation, (4) undue influence, and (5) fraud. without such leave after an answer has been
Under the same provision, the contract becomes served, the testimony of any person, whether a
voidable. party or not, may be taken, at the instance of any
party, by deposition upon oral examination or
Petitioner claims that Sr. Medalle knew fully well written interrogatories. The attendance of
the import of the MOA when she affixed her witnesses may be compelled by the use of a
thumbmark therein while respondent alleges that subpoena as provided in Rule 21. Depositions
shall be taken only in accordance with these

3
rules. The deposition of a person confined in care and caution was taken by Atty. Belarmino to
prison may be taken by leave of court on such verify what the Groups's trip was all about and the
terms as the court prescribes. extent of the authority of Sr. Medalle regarding
the project. Thus:
In Republic of the Phils. v. Sandiganbayan,16we
held that: It was in connection with the [Group's] 2001
European tour that, on April 21, 2001, one
Depositions pending action may be conducted by Edward or "Jojo" Enriquez contacted [petitioner]
oral examination or written interrogatories, and Benjie Georg, a Filipina, who as the wife of the
may be taken at the instance of any party, with or German national Heinz Georg, owned and
without leave of court. Leave of court is not operated the travel agency D' Travellers
necessary to take a deposition after an answer to Reiseburo Georg in Germany. Claiming to have
the complaint has been served. It is only when an been referred by Leonora Dietz, another Filipina-
answer has not yet been filed (but jurisdiction has German who has gained prominence for helping
been obtained over any defendant or over various cultural groups from the Philippines in
property subject of the action) that prior leave of obtaining engagements, financial assistance,
court is required. The reason for this is that before travel requirements and accommodations in
filing of the answer, the issues are not yet joined Europe, Edward Enriquez represented himself as
and the disputed facts are not clear.17 an employee of appellant, duly authorized by Sr.
[Medalle] to arrange [the Group's] impending
engagements in Greece, Italy, Spain and
In this case, respondent's counsel filed a Notice
Germany. Given the group's fixed schedule and
of Deposition for the Taking of Deposition on 28
the 2 weeks purportedly received by the bank for
October 2002. The Answer with Counterclaim
clearing the money allotted therefor, Edward
was only filed on 21 February 2005. In this
instance, respondent should have asked for leave Enriquez sought [petitioner's] assistance in
advancing the payment of the reserved airline
of court. Considering that the trial court has the
tickets of 48 people composed of 6 [of the
discretion to decide whether a deposition may or
Group's] staff, 25 choral[e] members and 17
may not be taken, it follows that it also has the
dancers.
discretion to disregard a deposition for non-
compliance with the rules.
After talking to Leonora Dietz who confirmed the
fact that she had been communicating with Sr.
Second, Sr. Medalle is presumed to know the
[Medalle] regarding [the Group's] approaching
import of her thumbmark in the MOA. While she
European tour and verifying from a priest that
was indeed confined at the UST Hospital at that
time, respondent however failed to prove that Sr. said nun, was, indeed [respondent's] President,
Medalle was too ill to comprehend the terms of [petitioner] decided to help the group and,
accordingly, contacted her brother, Atty.
the contract. True, Sr. Medalle suffered a stroke
Benjamin Belarmino, Jr., (Atty. Belarmino) who
but respondent did not present any evidence to
happened to be in Manila in the morning of April
show that her mental faculty was impaired by her
24, 2001, a Saturday. Apprised of the situation by
illness.
his sister, it appears that Atty. Belarmino received
a phone call from Edward Enriquez who
Moreover, there is nothing in the deposition that requested for a meeting at a coffee shop in
tends to prove that Sr. Medalle's consent was Century Park Hotel in Malate. Repairing to said
vitiated. place at around 11:00 a.m. of the same day, Atty.
Belarmino was introduced by Edward Enriquez,
Sr. Medalle claimed that she affixed her to one Violeta Buenaventura, the Vice-President
thumbmark on the MOA on the basis of of S.C. Roque Foundation, Inc. (SRFI), an
Enriquez's representation that her employee of said Foundation and one Gardenia
signature/thumbmark is necessary to facilitate Banez. Assured by Edward Enriquez that he was
the release of the loan. As intended, the affixing duly authorized to arrange [the Groups] tour by
of her thumbmark in fact caused the immediate Sr. [Medalle] who was, however, confined at the
release of the loan. Petitioner's claim that the University of Sto. Tomas (UST) Hospital at the
provisions of the MOA were read to Sr. Medalle time, Atty. Belarmino was further informed that
was found credible by the Court of Appeals. The
Court of Appeals discussed at length how proper

4
the group was going to receive a donation of that the subject tickets had, indeed, been paid
about P20,000,000.00 from SRFI. already.

Told that the reservation for the domestic and xxxx


airline tickets of the group will be forfeited if not
paid at 12:00 o'clock noon of the same day, Atty. Forthwith, Atty. Belarmino and Edward Enriquez
Belarmino asked for the telephone number of Sr. proceeded to the UST Hospital where he was
[Medalle] but was instead given [respondent's] introduced to Sr. [Medalle] who was confined
number in Palawan. Receiving no answer at said thereat following a stroke she appears to have
number, Atty. Belarmino was assured by Edward suffered. Although unable to speak clearly, Atty.
Enriquez that he was willing to accompany him to Belarmino claimed that Sr. [Medalle] had full
the UST Hospital after the subject tickets were mental capacity and was even able to
paid as per deadline. For added assurance, it acknowledge that she was, indeed,
appears that Atty. Belarmino asked for a talk with [respondent's] incumbent President and to
Solminio Roque, the President of SRFI, who was confirm that the students named in the
supposed to be at a Makati branch of Union Bank, documents used in requesting visas from the
processing the clearing of the P20,000,000.00 Spanish Embassy were participants in [the
donation to [the Group]. While he was able to talk Group's] European Tour. At the latter's room were
to Solminio Roque who confirmed that he was 2 or 3 nuns and several students, from whose
indeed processing the donation at said bank, conversation regarding the tour Atty. Belarmino
Atty. Belarmino was advised that a meeting learned that the same was not the first of its kind
between them just then was not feasible in view authorized by Sr. [Medalle]. After perusing the
of the aforesaid deadline. The latter's request for MOA which was additionally read to her in full by
a talk with an employee of the bank to ascertain Edward Enriquez, Sr. [Medalle] reported said
the veracity of the former's whereabouts was "Yes" in a soft voice and nodded her head before
likewise thwarted on the supposed ground that affixing her thumbmark on the document to
the same would be violative of the "Bank Secrecy signify her assent thereto.18
Law".
It simply defies logic that Atty. Belarmino would
As further precaution, Atty. Belarmino asked for employ fraud just so Sr. Medalle could affix her
the verification of the reservation with the Saudia thumbmark to facilitate the release of the loan
Airlines and the Philippine Airlines which coming from Atty. Belarmino himself.
confirmed the group's booking for international
and domestic flights. Shown a brochure which
At this juncture, it should be emphasized that a
detailed the artistic achievements and charitable notarized document enjoys the presumption of
vision-mission of the [Group], Atty. Belarmino regularity and is conclusive as to the truthfulness
was not only impressed but became concerned
of its contents absent any clear and convincing
that the cancellation of the group's imminent
proof to the contrary.19
European tour would - as he was made to
understand – mean the end of the scholarship for
the participants who were mostly graduating G.R. No. 201264
students. Upon the understanding that the money
advanced would be paid within 15 days or even FLORANTE VITUG, Petitioner,
on the same day should Solminio Roque be able vs.
to cause the bank's release of the intended EVANGELINE A. ABUDA, Respondent.
donation, Atty. Belarmino approved [petitioner's]
accomodation of the group's domestic and The National Housing Authority's restrictions
international airline tickets at about 12:30 p.m. were provisions in a contract it executed with
and, because of Edward Enriquez' added petitioner. This contract bound petitioner to
entreaties, even used his personal money in certain conditions before transferring or
advancing payment of the domestic airline tickets encumbering the property. Specifically, when the
for Palawan-Iloilo leg of the group's travel. As a National Housing Authority sold the property to
final precaution, Atty. Belarmino likewise petitioner, petitioner became obligated not to sell,
confirmed with the aforesaid airline companies encumber, mortgage, lease, sublease, alter, or

5
dispose the property without the National from entering into contracts involving the
Housing Authority's consent. properties of the municipality.65 The municipal
council's exercise of power to enter into these
These restrictions do not divest petitioner of his contracts might have been limited, but its power
ownership rights. They are mere burdens or was recognized. This court found that aside from
limitations on petitioner's jus disponendi. Thus, the lack of approval, the contract had no badge of
petitioner may dispose or encumber his property. illegality that would make it ipso facto void. The
However, the disposition or encumbrance of his execution of the contract was not tainted with
property is subject to the limitations and to the violation of public order, morality, or public policy.
rights that may accrue to the National Housing The contract could have been ratified. Hence, this
Authority. When annotated to the title, these court said that it was "merely voidable at the
restrictions serve as notice to the whole world that option of the party who in law is granted the right
the National Housing Authority has claims over to invoke its invalidity."66
the property, which it may enforce against others.
The same doctrine was repeated in Sarmiento v.
Contracts entered into in violation of restrictions Salud,67 which involved a property in Kamuning,
on a property owner's rights do not always have Quezon City. The property was sold by Philippine
the effect of making them void ab initio.58 This Homesite and Housing Corp. to Spouses
has been clarified as early as 1956 in Municipality Francisco and Marcelina Sarmiento. The transfer
of Camiling v. Lopez.59 certificate of title that covered the property
contained an annotation stating that the property
was sold on the condition that it could not be
The Municipality of Camiling sought to collect
resold within 25 years from contract date. Sale
from Diego Z. Lopez payments for the lease of
could be made within the period only to People's
"certain fisheries." As. a defense, Diego Z. Lopez
invoked the alleged nullity of the lease contract Homesite and Housing Corporation.68 Spouses
Sarmiento later mortgaged the property to Jorge
he entered into with the Municipality of Camiling.
Salud. Because Spouses Sarmiento failed to
redeem the property, the sheriff auctioned and
Citing Municipality of Hagonoy v. sold the property to Jorge Salud, who was issued
Evangelista,60 the trial court ruled that the lease a certificate of sale.
contract between the Municipality of Camiling and
Diego Z. Lopez was void since it "was not
Spouses Sarmiento sought to prevent the
approved by the provincial governor in violation
foreclosure of the property by filing an action for
of section 2196 of the Revised Administrative
annulment of the foreclosure proceedings, sale,
Code. "61 This court reversed the trial court's
Decision and noted the incorrect interpretation and certificate of sale on the ground that the
in Municipality of Hagonoy of the term "nulos" prohibition against sale of the property within 25
under Article 4 of the then Civil Code: "Son nulos years was violated.
las actos ejecutados contra lo dispuesto en la ley,
salvo las casos en que la naisma ley ordene su This court did not declare the contract void for
validez."62 violating the condition that the property could not
be resold within 25 years. Instead, it recognized
In Municipality of Camiling, this court explained People's Homesite and Housing Corporation's
right to cause the annulment of the contract.
that void acts declared in Article 4 of the Old Civil
Since the condition was made in favor of People's
Code63 refer to those made in violation of the law.
Homesite and Housing Corporation, it was the
Not all those acts are void from the beginning.
Void acts may be "those that are ipso facto void Corporation, not Spouses Sarmiento, who had a
cause of action for annulment.69 In effect, this
and those which are merely voidable."64
court considered the contract between Spouses
Sarmiento and Jorge Salud as merely voidable at
The lease contract executed by the Municipality the option of People's Homesite and Housing
of Camiling and Diego Z. Lopez was not treated Corporation.
as ipso facto void. Section 2196 of the
Administrative Code required the provincial
Thus, contracts that contain provisions in favor of
governor's approval before the municipal council
one party may be void ab initio or
entered into contracts. However, the same
voidable.70 Contracts that lack
provision did not prohibit the municipal council

6
consideration,71 those that are against public whether that person will invoke this right. Hence,
order or public policy,72 and .those that are there was effectively a waiver on the part of
attended by illegality73 or immorality74 are void ab People's Homesite and Housing Corporation
initio. when it did riot assail the validity of the mortgage
in that case:
Contracts that only subject a property owner's
property rights to conditions or limitations but It follows that on the assumption that the
otherwise contain all the elements of a valid mortgage to appellee Salud and the foreclosure
contract are merely voidable by the person in sale violated the condition in the Sarmiento
whose favor the conditions or limitations are contract, only the PHHC was entitled to invoke
made.75 the condition aforementioned, and not the
Sarmientos. The validity or invalidity of the
The mortgage contract entered into by petitioner sheriffs foreclosure sale to appellant Salud thus
and respondent contains all the elements of a depended exclusively on the PHHC; the latter
valid contract of mortgage. The trial court and the could attack the sale as violative of its right of
Court of Appeals found no irregularity in its exclusive reacquisition; but it (PHHC) also could
execution. There was no showing that it was waive the condition and treat the sale as good, in
attended by fraud, illegality, immorality, force or which event, the sale can not be assailed [for]
intimidation, and lack of consideration. breach of the condition aforestated. Since it does
not appear anywhere in the record that the PHHC
treated the mortgage and foreclosure sale as an
At most, therefore, the restrictions made the
infringement of the condition, the validity of the
contract entered into by the parties voidable76 by
mortgage, with all its consequences, including its
the person in whose favor they were made-in this
foreclosure and sale thereat, can not be an issue
case, by the National Housing
Authority.77 Petitioner has no actionable right or between the parties to the present case. In the
last analysis, the appellant, as purchaser at the
cause of action based on those restrictions.78
foreclosure sale, should be regarded as the
owner of the lot, subject only to the right of PHHC
Having the right to assail the validity of the to have his acquisition of the land set aside if it so
mortgage contract based on violation of the desires.81
restrictions, the National Housing Authority may
seek the annulment of the mortgage
There is no showing that the National Housing
contract.79 Without any action from the National
Authority assailed the validity of the mortgage
Housing Authority, rights and obligations,
contract on the ground of violation of restrictions
including the right to foreclose the property in
case of non-payment of the secured loan, are still on petitioner's title. The validity of the mortgage
enforceable between the parties that executed contract based on the restrictions is not an issue
between the parties. Petitioner has no cause of
the mortgage contract.
action against respondent based on those
restrictions. The mortgage contract remains
The voidable nature of contracts entered into in binding upon petitioner and respondent.
violation of restrictions or conditions necessarily
implies that the person in whose favor the
G.R. No. 172919
restrictions were made has two (2) options. It may
either: (1) waive80 its rights accruing from such
restrictions, in which case, the duly executed TIMOTEO BACALSO and DIOSDADA
subsequent contract remains valid; or (2) assail BACALSO, Petitioners,
the subsequent contract based on the breach of vs.
restrictions imposed in its favor. GREGORIA B. ACA-AC, EUTIQUIA B. AGUILA,
JULIAN BACUS and EVELYN
SYCHANGCO, Respondents.
In Sarmiento, this court recognized that the right
to waive follows from the right to invoke any
violation of conditions under the contract. Only Under the Civil Code, a contract is a meeting of
the person who has the right to invoke this minds, with respect to the other, to give
violation has the cause of action for annulment of something or to render some service. Article 1318
contract. The validity or invalidity of the contract provides:
on the ground of the violation is dependent on

7
Art. 1318. There is no contract unless the court of [Julian]. [Julian] made the following
following requisites concur: narration in his testimony:

(l) Consent of the contracting parties; Sometime in October 1987, he and his two sisters
agreed to sell to the [petitioners] Lot No. 1809-G-
(2) Object certain which is the subject 2-C because they needed money for the issuance
matter of the contract; of the titles to the four lots into which Lot 1809-G-
2 was subdivided. [Timoteo] lured him and his
sisters into selling the said land by his promise
(3) Cause of the obligation which is
and representation that money was coming from
established.
his sister, Lucena Bacalso, from Jolo, Sulu.
Timoteo Bacalso asked for two weeks within
In the case at bar, the petitioners argue that the which to produce the said money. However, no
Deed of Absolute Sale has all the requisites of a such money came. To the shock and surprise of
valid contract. The petitioners contend that there him and his sisters, a complaint was filed in Court
is no lack of consideration that would prevent the against them in Civil Case No. CEB-6693 by
existence of a valid contract. They assert that the [Timoteo], together with nine others, when
testimonies of Timoteo and witness Roberto Ybas Lucena Bacalso arrived from Jolo, Sulu, wherein
sufficiently established that the purchase price of they claimed as theirs Lot 1809-G. Instead of
P5,000.00 for Lot No. 1809-G-2-C was paid to being paid, he and his sisters were sued in Court.
Julian at Sto. Nifio Church in Cebu City before the From then on, [Timoteo] never cared anymore to
execution of the Deed of Absolute Sale. They pay for Lot 1809-G-2-C. He and his sisters just
also claim that even assuming that they failed to went through the titling of Lots 1809-G-A, 1809-
pay the purchase price, such failure does not G-2-B, Lot 1809-G-2-C and 1809-G-2-D on their
render the sale void for being fictitious or own.
simulated, rather, there is only non-payment of
the consideration within the period agreed upon
On his part, [Timoteo] himself acted in such a
for payment.18
manner as to confirm that he did not anymore
give significance or importance to the Deed of
The Court does not agree. Sale of Lot 1809-G-2-C which, in turn, creates an
impression or conclusion that he did not pay Jor
Contrary to the petitioners' claim, this is not the consideration or price thereof. Upon being
merely a case of failure to pay the purchase price cross-examined in Court on his testimony, he
which can only amount to a breach of obligation made the following significant admissions and
with rescission as the proper remedy. As correctly statements:
observed by the RTC, the disputed sale produces
no effect and is considered void ab initio for 1. That he did not let [Julian] sign a
failure to or want of consideration since the receipt for the sum of P8,000.00
petitioner failed to pay the consideration purportedly given by him to the latter as
stipulated in the Deed of Absolute Sale. The trial payment for the land in question;
court's discussion on the said issue, as affirmed
by the CA, is hereby quoted:
2. That the alleged payment of the said
sum of P8,000.00 was made not in the
To begin with, the Court hereby states that, from presence of the notary public who
the totality of the evidence adduced in this case notarized the document but in a place
which it scrutinized and evaluated, it has come up near Sto. Nino Church in Cebu City;
with a finding that there was failure or want of
consideration of the Deed of Sale of Lot 1809-G-
3. That it was only [Julian] who appeared
2-C executed in favor of the [petitioners] on
October 15, 1987. The Court is morally and before the notary public, but he had no
sufficiently convinced that [Timoteo] had not paid special power of attorney from his two
sisters;
to the [Bacus siblings] the price for the said land.
This fact has been competently and
preponderantly established by the testimony in 4. That the Deed of Sale of Lot 1809-G-
2-C was already in his possession before

8
Civil Case No. CEB-6693 was filed in Article 1352 of the New Civil Code of the
court; Philippines is explicit in providing that 'contracts
without cause produce no effect whatsoever'. If
5. That he did not however show the said there is no cause, the contract is void. x x x There
Deed of Sale to his lawyer who filed for being no price paid, there is no cause or
the plaintiffs the complaint in Civil Case consideration; hence, the contract is void as a
No. CEB 6693, as in fact he suppressed sale. x x x Consequently, in the case at bench,
the said document from others; the plaintiffs have not become absolute owners of
Lot 1809-G-2-C of Psd-07-022093 by virtue of the
Deed of Sale thereof which was executed on
6. That he did not bother to cause the
October 15, 1987 by the [Bacus siblings] in their
segregation of Lot 1809-G-2-C from the
favor.19 (Citations omitted)
rest of the lots even after he had already
bought it already;
It is clear from the factual findings of the RTC that
the Deed of Absolute Sale entirely lacked
7. That it was only after he lost in Civil
consideration and, consequently, void and
Case No. CEB-6693 that he decided to
without effect. No portion of the P8,000.00
file the present case;
consideration indicated in the Deed of Absolute
Sale was ever paid by the petitioners.1âwphi1
8. That he did not apply for building
permits for the three houses that he
The Court also finds no compelling reason to
purportedly caused to be built on the land
depart from the court a quo's finding that the
in question;
Deed of Absolute Sale executed on October 15,
1987 is null and void ab initio for lack of
9. That he did not also declare for consideration, thus:
taxation purposes the said alleged
houses;
It must be stressed that the present case is not
merely a case of failure to pay the purchase price,
10. That he did not declare either for as [the petitioners] claim, which can only amount
taxation purposes the land in question in to a breach of obligation with rescission as the
his name or he had not paid taxes proper remedy. What we have here is a purported
therefore; and contract that lacks a cause - one of the three
essential requisites of a valid contract. Failure to
11. That he did not bother to register with pay the consideration is different from lack of
the Registry of Deeds for the Province of consideration. The former results in a right to
Cebu the Deed of Sale of the demand the fulfillment or cancellation of the
lot.1a\^/phi1 obligation under an existing valid contract while
the latter prevents the existence of a valid
To the mind of the Court, [Timoteo] contract. Consequently, we rule that the October
desisted from paying to [the Bacus 15, 1987 Deed of Sale is null and void ab initio for
siblings] the price for Lot 1809-G-2-C lack of consideration.20 (Citation omitted)
when he, together with nine others, filed
in Court the complaint in Civil Case No. Well-settled is the rule that where there is no
CEB-6693. He found it convenient to just consideration, the sale is null and void ab
acquire the said land as supposed co- initio. In Sps. Lequin v. Sps. Vizconde,21 the
owners of Lot 1809-G of which the land Court ruled that:
in question is merely a part of xx x:
There can be no doubt that the contract of sale
xxxx or Kasulatan lacked the essential element of
consideration.1âwphi1 It is a well-entrenched
Thus, it is evident from all the foregoing rule that where the deed of sale states that the
circumstances that there was a failure to or want purchase price has been paid but in fact has
of consideration of the supposed sale of the land never been paid, the clcecl of sale is null and
in question to the [petitioners] on October 15, void ab initio for lack of consideration.22 (Citation
1987. So, the said sale could not be given effect. omitted)

9
paragraph of

1324 Article 1479 is the same as that in the last clause


of Article 1324.98 Instead of finding a
conflict, Sanchez v. Rigos harmonised the two
G.R. No. 202050, July 25, 2016
provisions, consistent with the established rules
of statutory construction.99chanrobleslaw
PHILIPPINE NATIONAL OIL COMPANY AND
PNOC DOCKYARD & ENGINEERING Thus, when an offer is supported by a separate
CORPORATION, Petitioners, v. KEPPEL consideration, a valid
PHILIPPINES HOLDINGS, INC., Respondent. option contract exists, i.e., there is a contracted
offer100 which the offerer cannot withdraw from
without incurring liability in damages.

On the other hand, when the offer is not


B. An option, though unsupported by a supported by a separate consideration, the offer
separate consideration, remains an stands but, in the absence of a binding contract,
offer that, if duly accepted, generates the offeror may withdraw it any time.101 In either
into a contract to sell where the case, once the acceptance of the offer is duly
parties' respective obligations communicated before the withdrawal of the offer,
become reciprocally demandable a bilateral contract to buy and sell is generated
The absence of a consideration supporting the which, in accordance with the first paragraph of
option contract, however, does not invalidate an Article 1479 of the Civil Code, becomes
offer to buy (or to sell). An option unsupported reciprocally demandable.102chanrobleslaw
by a separate consideration stands as an
unaccepted offer to buy (or to sell) which, Sanchez v. Rigos expressly overturned the 1955
when properly accepted, ripens into a case of Southwestern Sugar v. AGPC,103 which
contract to sell. This is the rule established by declared that
the Court en banc as early as 1958 in Atkins v.
Cua Hian Tek,96 and upheld in 1972 in Sanchez a unilateral promise to buy or to sell, even if
v. Rigos.97chanrobleslaw accepted, is only binding if supported by a
consideration... In other words, an accepted
Sanchez v. Rigos reconciled the apparent conflict unilateral promise can only have a binding
between Articles 1324 and 1479 of the Civil effect if supported by a consideration, which
Code, which are quoted means that the option can still be withdrawn,
below:ChanRoblesVirtualawlibrary even if accepted, if the same is not supported
by any consideration.104 [Emphasis supplied]
Article 1324. When the offerer has allowed the The Southwestern Sugar doctrine was based on
offeree a certain period to accept, the offer may the reasoning that Article 1479 of the Civil Code
be withdrawn at any time before acceptance by is distinct from Article 1324 of the Civil Code and
communicating such withdrawal, except when is a provision that specifically governs options to
the option is founded upon a consideration, buy (or to sell).105 As mentioned, Sanchez v.
as something paid or promised.
Rigos found no conflict between these two
provisions and accordingly abandoned
Article 1479. A promise to buy and sell a
determinate thing for a price certain is reciprocally the Southwestern Sugar doctrine.
demandable.
Unfortunately, without expressly overturning or
An accepted unilateral promise to buy or to abandoning the Sanchez ruling, subsequent
sell a determinate thing for a price certain is
cases reverted back to the Southwestern Sugar
binding upon the promissor if the promise is
doctrine.106 In 2009, Eulogio v Apeles107 referred
supported by a consideration distinct from
the price, [emphases supplied] to Southwestern Sugar v. AGPC as the
controlling doctrine108 and, due to the lack of a
The Court en banc declared that there is no separate consideration, refused to recognize the
distinction between these two provisions because
option to buy as an offer that would have resulted
the scenario contemplated in the second

10
in a sale given its timely acceptance by the OGCC opinion, the PNOC did not agree with
offeree. In 2010, Tuazon v. Del Rosario- Keppel's attempt to buy the land;115 nonetheless,
Suarez109 referred to Sanchez v. Rigos but the PNOC made no categorical withdrawal of the
erroneously cited as part of its ratio offer to sell provided under the Agreement.
decidendi that portion of the Southwestern Sugar
doctrine that Sanchez had expressly By 2000, Keppel had met the required Filipino
abandoned.110chanrobleslaw equity proportion and duly communicated its
acceptance of the offer to buy to
Given that! the issue raised in the present case PNOC.116 Keppel met with the board of directors
involves the application of Article 1324 and 1479 and officials of PNOC who interposed no
of the Civil Code, it becomes imperative for the objection to the sale.117 It was only when the
Court [en banc] to clarify and declare here which amount of purchase price was raised that the
between Sanchez and Southwestern Sugar is conflict between the parties arose,118 with PNOC
the controlling doctrine. backtracking in its position and questioning the
validity of the option.119chanrobleslaw
The Constitution itself declares that "no doctrine
or principle of law laid down by the court in a Thus, when Keppel communicated its
decision rendered en banc or in division may be acceptance, the offer to purchase the Bauan land
modified or reversed except by the court stood, not having been withdrawn by PNOC. The
sitting en banc.111Sanchez v. Rigos was an en offer having been duly accepted, a contract to
banc decision which was affirmed in 1994 sell the land ensued which Keppel can
in Asuncion v. CA,112 also an en banc decision, rightfully demand PNOC to comply with.
while the decisions citing the Southwestern
Sugar doctrine are all division cases.113Based on
the constitutional rule (as well as the inherent Art 1345-1346
logic in reconciling Civil Code provisions), there
should be no doubt that Sanchez v.
G.R. No. 167082, August 03, 2016
Rigos remains as the controlling doctrine.
TERESITA I.
Accordingly, when an option to buy or to sell is BUENAVENTURA, Petitioner, v. METROPOLIT
not supported by a consideration separate from AN BANK AND TRUST COMPANY,
the purchase price, the option constitutes as an
offer to buy or to sell, which may be withdrawn by Secondly, the petitioner submits that the
the offeror at any time prior to the communication promissory notes were null and void for being
of the offeree's acceptance. When the offer is simulated and fictitious; hence, the CA erred in
duly accepted, a mutual promise to buy and to enforcing them against her.
sell under the first paragraph of Article 1479 of the
Civil Code ensues and the parties' respective The submission contradicts the records and the
obligations become reciprocally demandable. law pertinent to simulated contracts.

Applied to the present case, we find that the offer Based on Article 134521 of the Civil
to buy the land was timely accepted by Code, simulation of contracts is of two kinds,
Keppel. namely: (1) absolute; and (2) relative. Simulation
is absolute when there is color of contract but
without any substance, the parties not intending
As early as 1994, Keppel expressed its desire to
to be bound thereby.22 It is relative when the
exercise its option to buy the land. Instead of parties come to an agreement that they hide or
rejecting outright Keppel's acceptance, PNOC conceal in the guise of another
referred the matter to the Office of the contract.23chanrobleslaw
Government Corporate Counsel (OGCC). In its
Opinion No. 160, series of 1994, the OGCC The effects of simulated contracts are dealt with
opined that Keppel "did not yet have the right to in Article 1346 of the Civil Code, to
purchase the Bauan lands."114 On account of the

11
wit:ChanRoblesVirtualawlibrary state that Imperial, who is not even privy thereto,
is the one primarily liable and that appellant is
Art. 1346. An absolutely simulated or fictitious merely a guarantor. Parenthetically, the
contract is void. A relative simulation, when it disclosure statement (Exh. "D") executed by
does not prejudice a third person and is not appellant states that PN No. 232711 is "secured
intended for any purpose contrary to law, morals, by postdated checks". In other words, it does not
good customs, public order or public policy binds appear that the PNs were executed as guaranty
the parties to their real agreement. for the payment of the subject checks.
The burden of showing that a contract is
Nevertheless, appellant insists that she did not
simulated rests on the party impugning the
obtain a short-term loan from appellee but
contract. This is because of the presumed validity
rediscounted the subject checks, with the PNs as
of the contract that has been duly
guaranty. The contention is untenable.
executed.24 The proof required to overcome the
presumption of validity must be convincing and
In Great Asian Sales Center Corporation vs.
preponderant. Without such proof, therefore, the
Court of Appeals (381 SCRA 557), which was
petitioner's allegation that she had been made to
cited in support of appellant's claim, the Supreme
believe that the promissory notes would be
Court explained the meaning of "discounting
guaranties for the rediscounted checks, not
line", thus:ChanRoblesVirtualawlibrary
evidence of her primary and direct liability under
loan agreements,25cralawred could not stand. "In the financing industry, the term 'discounting
line' means a credit facility with a financing
company or bank which allows a business entity
Moreover, the issue of simulation of contract was
to sell, on a continuing basis, its accounts
not brought up in the RTC. It was raised for the
receivable at a discount. The term 'discount'
first time only in the CA.26 Such belatedness
forbids the consideration of simulation of means the sale of a receivable at less than its
contracts as an issue. Indeed, the appellate face value. The purpose of a discounting line is to
enable a business entity to generate instant cash
courts, including this Court, should adhere to the
out of its receivables which are still to mature at
rule that issues not raised below should not be
future dates. The financing company or bank
raised for the first time on appeal. Basic
which buys the receivables makes its profit out of
considerations of due process and fairness impel
this adherence, for it would be violative of the the difference between the face value of the
right to be heard as well as unfair to the parties receivable and the discounted price."
and to the administration of justice if the points of A guarantor may bind himself for less, but not for
law, theories, issues and arguments not brought more than the principal debtor, both as regards
to the attention of the lower courts should be the amount and the onerous nature of the
considered and passed upon by the reviewing conditions (Art. 2054, id). Curiously, the face
courts for the first time. amounts of the PNs (totaling P3,000,000.00) are
more than those of the subject checks (totaling
Thirdly, the petitioner insists that the promissory P2,897,000.00). And unlike the subject checks,
notes, even if valid, were meant as guaranties to the PNs provide for interest, CESF and penalty.
secure payment of the checks by the issuer,
Rene Imperial; hence, her liability was that of a Moreover, the maturity date (July 1, 1997) of PN
guarantor, and would take effect only upon No. 232663 is ahead of the dates (January 5,
exhaustion of all properties and after resort to all 1998 and March 31, 1998) of the subject checks.
legal remedies against Imperial.27chanrobleslaw In other words, appellant, as "guarantor", was
supposed to make good her "guaranty", i.e. PNs
The insistence of the petitioner is bereft of merit. in question, even beforethe "principal"
obligations, i.e. subject checks, became due. It is
The CA rejected this insistence, expounding as also noted that the rediscounting of the subject
follows:ChanRoblesVirtualawlibrary checks (in January 1997) occurred
months ahead of the execution of PN No. 232711
A guaranty is not presumed; it must be expressed (on April 17, 1997) even as the PNs were
(Art. 2055, New Civil Code). The PNs provide, in supposedly a precondition to said rediscounting.
clear language, that appellant is primarily liable
thereunder. On the other hand, said PNs do not x x x x

12
when the document was notarized. Be that as it
Stated differently, appellant is primarily liable may, the irregularity in the notarization is not fatal
under the subject checks. She is a principal to the validity of the Extrajudicial Settlement. For
debtor and not a guarantor. Consequently, the even the absence of such formality would not
benefit of excussion may not be interposed as a necessarily invalidate the transaction embodied
defense in an action to enforce appellant's in the document - the defect merely renders the
warranty as indorser of the subject checks. written contract a private instrument rather than a
public one.
Moreover, it is absurd that appellant (as maker of
the PNs) may act as guarantor of her own While Art. 1358 of the New Civil Code seemingly
obligations (as indorser of the subject checks). requires that contracts transmitting or
Thus, Art. 2047 of the New Civil Code provides extinguishing real rights over immovable property
that "(b)y guaranty, a person called should be in a public document,57 hornbook
the guarantor, binds himself to the creditor to doctrine is that the embodiment of certain
fulfill the obligation of the principal debtor in contracts in a public instrument is only for
case the latter should fail to do so."28(Emphasis convenience.58 It is established in jurisprudence
supplied) that non-observance of the prescribed formalities
The CA was correct. A contract of guaranty is one does not necessarily excuse the contracting
where a person, the guarantor, binds himself or parties from complying with their respective
herself to another, the creditor, to fulfill the obligations under their covenant, and merely
grants them the right to compel each other to
obligation of the principal debtor in case of failure
execute the proper deed.59 A contract of sale has
of the latter to do so.29 It cannot be presumed, but
the force of law between the contracting parties
must be express and in writing to be and they are expected to abide, in good faith, by
enforceable,30 especially as it is considered a their respective contractual
special promise to answer for the debt, default or commitments60 notwithstanding their failure to
miscarriage of another.31 It being clear that the comply with Art. 1358.
promissory notes were entirely silent about the
supposed guaranty in favor of Imperial, we must As similarly observed by the appellate court, the
read the promissory notes literally due to the Extrajudicial Settlement is not a nullity, but a valid
absence of any ambiguities about their language document, albeit a private one. The CA never
and meaning. In other words, the petitioner could declared the document as void, but only that it
not validly insist on the guaranty. In addition, the cannot be considered as binding on third parties.
disclosure statements32 and the statements of It added, however, that respondents fall within the
loan release33 undeniably identified her, and no category of "third persons" against whom the
other, as the borrower in the transactions. Under stipulations in the private document can never be
such established circumstances, she was directly invoked.61 On this point, we digress.
and personally liable for the obligations under the
promissory notes. The principle of relativity of contracts dictates that
contractual agreements can only bind the parties
Art 1358 who entered into them, and cannot favor or
prejudice third persons, even if he is aware of
G.R. No. 221513, December 05, 2016 such contract and has acted with knowledge
thereof.62 The doctrine finds statutory basis under
Art. 1311 of the New Civil Code, which provides:
SPOUSES LUISITO PONTIGON AND
LEODEGARIA SANCHEZ -
Article 1311. Contracts take effect only between
PONTIGON, Petitioners, v. HEIRS OF MELITON
the parties, their assigns and heirs, except in
SANCHEZ
case where the rights and obligations arising from
the contract are not transmissible by their nature,
The appellate court did not err in ruling that the or by stipulation or by provision of law. xxx
Extrajudicial Settlement was not properly (Emphasis supplied)
notarized given the absence of Flaviana's
residence certificate number. As it appears, no
The law is categorical in declaring that as a
identification was ever presented by Flaviana
general rule, the heirs of the contracting parties

13
are precluded from denying the binding effect of ceases.65 Unfortunately for respondents, the
the valid agreement entered into by their prescriptive period for annulment had long since
predecessors-in-interest. This is so because they expired before they filed their Complaint. They
are not deemed "third persons" to the contract cannot be permitted to circumvent the law by
within the contemplation of law. Additionally, belatedly attacking, collaterally and as an
neither the provision nor the doctrine makes a afterthought at that, the validity of the erstwhile
distinction on whether the contract adverted to is voidable instrument in the present action for
oral or written, and, even more so, whether it is declaration of nullity of title.
embodied in a public or private instrument. It is
then immaterial that the Extrajudicial Settlement The validity of the Extrajudicial Settlement cannot
executed by Flaviana was not properly notarized then be gainsaid. Ratified by their inaction, the
for the said document to be binding on her heirs, document of conveyance, as well as the
herein respondents. consequences of its registration, would then bind
the respondents. This still holds true
Reliance by the trial court on the so-called notwithstanding the glaring irregularities in the
"damning rebuttal evidence" is misplaced and Petition for Approval. Obvious to the eye and
cannot be countenanced. Said evidence intellect as the errors may be, they are of no
contradicts the very allegations in their moment since the Extrajudicial Settlement, a
Complaint. It effectively modifies the private writing and unpublished as it were,
respondents' theory of the case and transforms nevertheless remains to be binding upon any
the action so as to include a collateral attack on person who participated thereon or had notice
the deed of conveyance. It cannot escape the thereof.66
attention of the court that despite alleging in their
Complaint and in their initial presentation of G.R. No. 167519 January 14, 2015
evidence that there was no document of
conveyance that justifies the issuance of TCT No. THE WELLEX GROUP, INC., Petitioner,
162403-R, respondents made a complete
vs.
turnabout and virtually admitted the existence of U-LAND AIRLINES, CO., LTD., Respondent.
the Extrajudicial Settlement on rebuttal, but
nevertheless argued against its validity.
The Civil Code provisions on the interpretation of
contracts are controlling to this case, particularly
To review, Thiogenes, son of respondent Perla
Article 1370, which reads:
Manalansan, testified that on November 7, 1979,
Juan, Luisito, and Leodegaria forcibly took
Flaviana and coerced the latter to execute the ART. 1370. If the terms of a contract are clear and
sale in favor of petitioners. If this version of the leave no doubt upon the intention of the
facts were to be believed, this could only mean: contracting parties, the literal meaning of its
(a) that the Extrajudicial Settlement existed, (b) stipulations shall control.
that Flaviana's heirs knew of its existence; and (c)
that Flaviana's consent was vitiated through force If the words appear to be contrary to the evident
and intimidation. Noteworthy, too, is that Agustin intention of the parties, the latter shall prevail over
Manalansan, one of the respondents in this case, the former.
even signed the deed as an instrumental witness
to the execution of the deed. Yet, he did not testify In Norton Resources and Development
to disavow the signature appearing above his Corporation v. All Asia Bank Corporation: 151
name in the Extrajudicial Settlement.
The cardinal rule in the interpretation of contracts
The above circumstances render the Extrajudicial is embodied in the first paragraph of Article 1370
Settlement voidable, not void.63 Under the law, a of the Civil Code: "[i]f the terms of a contract are
voidable contract retains the binding effect of a clear and leave no doubt upon the intention of the
valid one unless otherwise annulled.64 And as contracting parties, the literal meaning of its
prescribed, the action for annulment shall be stipulations shall control." This provision is akin to
brought within four (4) years, in cases of the "plain meaning rule" applied by Pennsylvania
intimidation, violence or undue influence, from the courts, which assumes that the intent of the
time the defect of the consent parties to an instrument is "embodied in the

14
writing itself, and when the words are clear and I. Basic Agreement. - The parties agree to
unambiguous the intent is to be discovered only develop a long-term business relationship initially
from the express language of the agreement." It through the creation of joint interest in airline
also resembles the "four corners" rule, a principle operations as well as in property development
which allows courts in some cases to search projects in the Philippines to be implemented as
beneath the semantic surface for clues to follows:
meaning. A court's purpose in examining a
contract is to interpret the intent of the contracting (a) U-LAND shall acquire from WELLEX,
parties, as objectively manifested by them. The shares of stock of AIR PHILIPPINES
process of interpreting a contract requires the INTERNATIONAL CORPORATION
court to make a preliminary inquiry as to whether ("APIC") equivalent to at least 35% of the
the contract before it is ambiguous. A contract outstanding capital stock of APIC, but in
provision is ambiguous if it is susceptible of two any case, not less than 1,050,000,000
reasonable alternative interpretations. Where the shares (the "APIC Shares").
written terms of the contract are not ambiguous
and can only be read one way, the court will
(b) U-LAND shall acquire from WELLEX,
interpret the contract as a matter of law. If the
shares of stock of PHILIPPINE
contract is determined to be ambiguous, then the
ESTATES CORPORATION ("PEC")
interpretation of the contract is left to the court, to
equivalent to at least 35% of the
resolve the ambiguity in the light of the intrinsic outstanding capital stock of PEC, but in
evidence.152 (Emphasis supplied) any case, not less than 490,000,000
shares (the "PEC Shares").
As held in Norton, this court must first determine
whether a provision or stipulation contained in a
(c) U-LAND shall enter into a joint
contract is ambiguous. Absent any ambiguity, the development agreement with PEC to
provision on its face will be read as it is written
jointly pursue property development
and treated as the binding law of the parties to the
projects in the Philippines.
contract.
(d) U-LAND shall be given the option to
The parties have differing interpretations of the acquire from WELLEX shares of stock of
terms of the First Memorandum of Agreement.
EXPRESS SAVINGS BANK ("ESB") up
Petitioner Wellex even admits that "the facts of
to 40% of the outstanding capital stock of
the case are fairly undisputed [and that] [i]t is only
ESB (the "ESB Shares") under terms to
the parties’ respective [understanding] of these
be mutually agreed.155
facts that are not in harmony."153
The First Memorandum of Agreement contained
The second preambular clause of the First
the following stipulations regarding the share
Memorandum of Agreement reads:
purchase agreement:

WHEREAS, WELLEX, on the other hand, has 2. Acquisition of APIC and PEC Shares. - Within
current airline operation in the Philippines through
forty (40) days from date hereof (unless extended
its majority-owned subsidiary Air Philippines
by mutual agreement), U-LAND and WELLEX
International Corporation and the latter’s
shall execute a Share Purchase Agreement
subsidiary, Air Philippines Corporation, and in like
("SHPA") covering the acquisition by U-LAND of
manner also desires to expand its operation in the the APIC Shares and PEC Shares (collectively,
Asian regional markets; a Memorandum of
the "Subject Shares"). Without prejudice to any
Agreement on ______, a certified copy of which
subsequent agreement between the parties, the
is attached hereto as Annex "A" and is hereby
purchase price for the APIC Shares to be
made an integral part hereof, which sets forth,
reflected in the SHPA shall be THIRTY
among others, the basis for WELLEX’s present CENTAVOS (P0.30) per share and that for the
ownership of shares in Air Philippines PEC Shares at SIXTY FIVE CENTAVOS (P0.65)
International Corporation.154 (Emphasis supplied)
per share.

Section 1 of the First Memorandum of Agreement


reads:

15
The purchase price for the Subject Shares as on the 57,000,000 PEC shares delivered to U-
reflected in the SHPA shall be paid in full upon LAND under Section 4.158
execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such Section 2 of the First Memorandum of Agreement
other terms and conditions governing the clearly provides that the execution of a share
acquisition of the Subject Shares to be provided purchase agreement containing mutually
in a separate instrument. agreeable terms and conditions must first be
accomplished by the parties before respondent
The transfer of the Subject Shares shall be U-Land purchases any of the shares owned by
effected to U-LAND provided that: (i) the petitioner Wellex. A perusal of the stipulation on
purchase price reflected in the SHPA has been its face allows for no other interpretation.
fully paid; (ii) the Philippine Securities &
Exchange Commission (SEC) shall have The need for a share purchase agreement to be
approved the issuance of the Subject Shares; entered into before payment of the full purchase
and (iii) any required approval by the Taiwanese price can further be discerned from the other
government of the acquisition by U-LAND of the stipulations of the First Memorandum of
Subject Shares shall likewise have been Agreement.
obtained.156 (Emphasis supplied)
In Section 1, the parties agreed to enter into a
As for the joint development agreement, the First joint business venture, through entering into two
Memorandum of Agreement contained the (2) agreements: a share purchase agreement
following stipulation: and a joint development agreement. However,
Section 1 provides that in the share purchase
4. Joint Development Agreement with PEC. – agreement, "U-LAND shall acquire from
Simultaneous with the execution of the SHPA, U- WELLEX, shares of stock of AIR PHILIPPINES
LAND and PEC shall execute a joint development INTERNATIONAL CORPORATION (‘APIC’)
agreement ("JDA") to pursue property equivalent to at least 35% of the outstanding
development projects in the Philippines. The JDA capital stock of APIC, but in any case, not less
shall cover specific housing and other real estate than 1,050,000,000 shares (the ‘APIC
development projects as the parties shall agree. Shares’)."159
All profits derived from the projects covered by
the JDA shall be shared equally between ULAND As for the PEC shares, Section 1 provides that
and PEC. U-LAND shall, not later than May 22, respondent U-Land shall purchase from
1998, remit the sum of US$3.0 million as initial petitioner Wellex "shares of stock of PHILIPPINE
funding for the aforesaid development projects ESTATES CORPORATION (‘PEC’) equivalent to
against delivery by WELLEX of 57,000,000 at least 35% of the outstanding capital stock of
shares of PEC as security for said amount in PEC, but in any case, not less than 490,000,000
accordance with Section 9 below.157 (Emphasis shares(the ‘PEC Shares’)."160
provided)
The use of the terms "at least 35% of the
Finally, the parties included the following outstanding capital stock of APIC, but in any
stipulation in case of a failure to agree on the case, not less than 1,050,000,000 shares" and "at
terms of the share purchase agreement or the least 35% of the outstanding capital stock of PEC,
joint development agreement: but in any case, not less than 490,000,000
shares" means that the parties had yet to agree
9. Validity. - In the event the parties are unable to on the number of shares of stock to be
agree on the terms of the SHPA and/or the JDA purchased.
within forty (40) days from date hereof (or such
period as the parties shall mutually agree), this The need to execute a share purchase
Memorandum of Agreement shall cease to be agreement before payment of the purchase price
effective and the parties released from their of the shares is further shown by the clause,
respective undertakings herein, except that "[w]ithout prejudice to any subsequent agreement
WELLEX shall refund the US$3.0 million provided between the parties, the purchase price for the
under Section 4 within three (3) days therefrom, APIC Shares to be reflected in the [share
otherwise U-LAND shall have the right to recover purchase agreement] shall be... P0.30 per share

16
and that for the PEC Shares at... P0.65 per when the words are clear and unambiguous the
share."161 This phrase clearly shows that the final intent is to be discovered only from the express
price of the shares of stock was to be reflected in language of the agreement". x x x A court's
the share purchase agreement. There being no purpose in examining a contract is to interpret the
share purchase agreement executed, respondent intent of the contracting parties, as objectively
U-Land was under no obligation to begin payment manifested by them. The process of
or remittance of the purchase price of the shares interpreting a contract requires the court to
of stock. make a preliminary inquiry as to whether the
contract before it is ambiguous. A contract
Petitioner Wellex argues that the use of "upon" in provision is ambiguous if it is susceptible of two
Section 2162 of the First Memorandum of reasonable alternative interpretations. Where
Agreement means that respondent U-Land must the written terms of the contract are not
pay the purchase price of the shares of stock in ambiguous and can only be read one way, the
its entirety when they are transferred. This court will interpret the contract as a matter of
argument has no merit. law. If the contract is determined to be
ambiguous, then the interpretation of the contract
is left to the court, to resolve the ambiguity in the
light of the intrinsic evidence.
G.R. No. 220479, August 17, 2016 x x x x

PASDA, The agreement or contract between the parties is


INCORPORATED, Petitioner, v. REYNALDO P. the formal expression of the parties' rights, duties
DIMAYACYAC, SR., SUBSTITUTED BY THE and obligations. It is the best evidence of the
HEIRS, REPRESENTED BY ATTY. intention of the parties. x x x Time and again, we
DEMOSTHENES D. C. have stressed the rule that a contract is the law
DIMAYACYAC, Respondent. between the parties, and courts have no choice
but to enforce such contract so long as it is not
Parties are bound by the literal meaning of the contrary to law, morals, good customs or public
contract in the absence of ambiguity policy. Otherwise, courts would be interfering with
the freedom of contract of the parties. Simply
Contracts have the force of law between the put, courts cannot stipulate for the parties or
parties, and unless the stipulations are contrary amend the latter's agreement, for to do so
to laws, morals, good customs, public order, or would be to alter the real intention of the
public policy, the same are binding as between contracting parties when the contrary
the parties.19Except when the terms are function of courts is to give force and effect
ambiguous, the literal meaning of a contract's to the intention of the parties. 22 [Emphases
stipulation is controlling.20 The courts cannot supplied]
enforce the contract contrary to its express terms, In other words, the courts must first determine
otherwise, it would trample the rights of the whether there is ambiguity in a particular
parties to stipulate the terms of their agreement. provision of a contract and the absence of which
The Court's ruling in Norton Resources and leaves the courts to read the provision on its face
Development Corporation v. All Asia Bank as it was written and treat it as the binding law of
Corporation,21 is the parties to the contract.23 Thus, a perusal of
instructive:ChanRoblesVirtualawlibrary the lease contract in this case is in order for the
determination of the propriety of the application of
The cardinal rule in the interpretation of the value of the retained items to Dimayacyac's
contracts is embodied in the first paragraph total liabilities. PASDA correctly pointed out that
of Article 1370 of the Civil Code: "[i]f the terms while the CA cited paragraph 23 in its decision,
of a contract are clear and leave no doubt paragraph 24 was the one that pertained to non-
upon the intention of the contracting parties, payment of rentals and the particular provision to
the literal meaning of its stipulations shall be interpreted. The said portion
control." This provision is akin to the "plain reads:ChanRoblesVirtualawlibrary
meaning rule" applied by Pennsylvania courts,
which assumes that the intent of the parties to an
instrument is "embodied in the writing itself, and

17
This Contract shall be considered automatically leased premises and apply the proceeds thereof
terminated and cancelled should the LESSEE to Dimayacyac's liabilities. It neither mandated
violate any of the provisions of this Contract or fail PASDA to sell the same nor authorized it to
to pay rentals due thereon within the time herein appropriate them and offset their value against
provided or where the premises are abandoned the outstanding liabilities of Dimayacyac. PASDA
by LESSEE as herein above state; in any of such was even bound to return to Dimayacyac any
cases, the LESSOR is hereby given the right
excess from the private sale.
without need of formal notice or demand to enter
into and take possession of the leased premises
and to exercise its right of ownership, as well as The CA postulated that paragraph 23, which was
the LESSOR'S rights as provided for in this of the same tenor as paragraph 24 of the lease
Contract of Lease; contract, was a forfeiture clause and, that
pursuant to Fort Bonifacio, the items retained by
Furthermore, when any or all of the above PASDA had been appropriated in its favor. Fort
circumstances occur, the LESSE hereby Bonifacio, however, does not fall squarely with
constitutes and appoints the LESSOR as his duly the facts at hand.
authorized attorney-in-fact with the power and
authority to cause the premises to be opened in A closer scrutiny of the lease contract in Fort
the presence of any peace officer, to take Bonifacio reveals that the lessor therein had the
inventories of all LESSEE'S merchandise, right to possess the properties of the lessee
effects, and/or equipment therein and to remove
in the leased premises, in case of the latter's
and transfer the same to the LESSOR'S bodega.
LESSEE hereby expressly agrees to pay for all default, and the authority to offset the prevailing
responsible expenses incurred by the LESSOR in value thereof as appraised by the lessor
connection therewith, including storage fees, against any unpaid rentals, charges and/or
which expenses and fees in addition to back damages. The contract did not only limit the
rentals or any other liabilities of the LESSEE to lessor to sell the same and apply the proceeds
the LESSOR, if any, shall be first and preferential thereof to any existing obligations but it also
lien on said LESSEE'S merchandise, effects, and provided that the lessor might opt to appropriate
equipment; Provided, furthermore, that failure of for itself the retained items.
the LESSEE to clear any such merchandise,
effects, and equipment within thirty (30) days In the case at bench, on the other hand,
from date of closure and abandonment of the paragraph 24 of the subject lease contract did not
premises as herein provided shall give rise to
grant PASDA the authority to appropriate and
the LESSOR'S right to dispose of the same in
apply the value of the retained articles against the
a private sale and to apply the proceeds
thereof first to the back rentals, next to lessee's outstanding liabilities. It merely gave the
expenses incurred by the LESSOR for lessor the right or authority to sell them in a
transfer storage and private sale to the other private sale, apply the proceeds thereof to the
liabilities of LESSEE to LESSOR and the lessee's existing liabilities, and turn over any
excess if any, shall be given to the LESSEE; excess to the latter.
LESSOR shall not incur any civil and/or criminal
liabilities whatsoever by exercising its rights Thus, paragraph 24 of the lease contract between
granted under these provisions. The rights PASDA and Dimayacyac is not akin to the
granted to the LESSOR in this section may be forfeiture clause stipulated in Fort Bonifacio.
exercised by the LESSOR'S duly authorized Although similar to the forfeiture clause in Fort
employees, agents or representatives and in so Bonifacio as it serves as a security in the lessor's
doing shall not incur civil and/or criminal liabilities
favor in the event of the lessee's default,
whatsoever.24 [Emphasis supplied]
paragraph 24 differs in that it stated that the
Paragraph 24 is clear and unequivocal. Hence, it articles involved were not automatically forfeited
must be applied according to its literal and in favor of PASDA as the latter could only sell
express terms and not in a manner which would them and use the proceeds to pay Dimayacyac's
expand or run contrary to it. Literally applying the obligations.
provisions of the present contract, PASDA merely
had the right or authority to sell the articles ih the As can be gleaned from paragraph 24, PASDA's

18
options were to either enforce the security and The rule is that where the language of a
sell the articles or claim the principal obligation contract is plain and unambiguous, its
and return the articles. As explained by PASDA, meaning should be determined without
it opted to institute the present action as it was reference to extrinsic facts or aids. The
unable to successfully sell the retained items in a intention of the parties must be gathered from that
private sale. To rule that the value of the subject language, and from that language alone. Stated
differently, where the language of a written
properties should be deducted from
contract is clear and unambiguous, the
Dimayacyac's outstanding obligations would run
contract must be taken to mean that which, on
afoul to the express provisions of paragraph 24 of its face, it purports to mean, unless some
the lease contract which merely gave PASDA the good reason can be assigned to show that the
right to possess the items and sell them in a words should be understood in a different
private sale before applying the proceeds to sense. Courts cannot make for the parties better
Dimayacyac's existing obligations and returning or more equitable agreements than they
the excess, if any, to the latter. themselves have been satisfied to make, or
rewrite contracts because they operate harshly or
Strictly applying the provisions of paragraph 24 of inequitably as to one of the parties, or alter them
the lease contract will not lead to PASDA's unjust for the benefit of one party and to the detriment of
enrichment. Nowhere in the said provision does it the other, or by construction, relieve one of the
mention that PASDA will retain the properties of parties from the terms which he voluntarily
consented to, or impose on him those which he
Dimayacyac in the concept of an owner and
did not.53 (Emphases and underscoring supplied)
dispose of them in any way it wishes. PASDA
merely possessed the properties as a security in
Thus, in the interpretation of contracts, the Court
case Dimayacyac defaulted in his obligations.
must first determine whether a provision or
The said items were only to be sold in a private stipulation therein is ambiguous. Absent any
sale and any excess proceeds, after applying ambiguity, the provision on its face will be read as
them against Dimayacyac's liabilities, were to be it is written and treated as the binding law of the
returned. In short, PASDA had no authority to parties to the contract.54
appropriate the items it had retained as security.
In the case at bar, CPI primarily invoked the
Considering that PASDA opted to file the present "Confidentiality of Documents and Non-Compete
action to recover the principal obligation, it could Clause" found in Babiano's employment
no longer keep the retained items which it had contract55 to justify the forfeiture of his
kept as security and could have disposed in a commissions, viz.:
private sale. As PASDA had decided to collect the
principal obligation, it no longer had any reason Confidentiality of Documents and Non-Compete
to continue to possess the personal properties of Clause
Dimayacyac.
All records and documents of the company and
CENTURY PROPERTIES, INC., Petitioner, all information pertaining to its business or affairs
vs or that of its affiliated companies are confidential
EDWIN J. BABIANO and EMMA B. and no unauthorized disclosure or reproduction
CONCEPCION, Respondents. or the same will be made by you any time during
or after your employment.
Article 1370 of the Civil Code provides that "[i]f
the terms of a contract are clear and leave no And in order to ensure strict compliance
doubt upon the intention of the contracting herewith, you shall not work for whatsoever
parties, the literal meaning of its stipulations shall capacity, either as an employee, agent or
control."51 In Norton Resources and consultant with any person whose business
Development Corporation v. All Asia Bank is in direct competition with the company
Corporation,52the Court had the opportunity to while you are employed and for a period of
thoroughly discuss the said rule as follows: one year from date of resignation or
termination from the company.

19
In the event the undersigned breaches any term achievement of agreed sales targets for a project
of this contract, the undersigned agrees and and to ensure that his team has a qualified and
acknowledges that damages may not be an competent manpower resources by conducting
adequate remedy and that in addition to any other recruitment activities, training sessions, sales
remedies available to the Company at law or in rallies, motivational activities, and evaluation
equity, the Company is entitled to enforce its programs."57 Hence, to allow Babiano to freely
rights hereunder by way of injunction, restraining move to direct competitors during and soon after
order or other relief to enjoin any breach or his employment with CPI would make the latter's
default of this contract. trade secrets vulnerable to exposure, especially
in a highly competitive marketing environment. As
The undersigned agrees to pay all costs, such, it is only reasonable that CPI and Babiano
expenses and attorney's fees incurred by the agree on such stipulation in the latter's
Company in connection with the enforcement of employment contract in order to afford a fair and
the obligations of the undersigned. The reasonable protection to CPI.58 Indubitably,
undersigned also agrees to .pay the Company all obligations arising from contracts, including
profits, revenues and income or benefits derived employment contracts, have the force of law
by or accruing to the undersigned resulting from between the contracting parties and should be
the undersigned's breach of the obligations complied with in good faith.59 Corollary thereto,
hereunder. This Agreement shall be binding upon parties are bound by the stipulations, clauses,
the undersigned, all employees, agents, officers, terms, and conditions they have agreed to,
directors, shareholders, partners and provided that these stipulations, clauses, terms,
representatives of the undersigned and all heirs, and conditions are not contrary to law, morals,
successors and assigns of the foregoing. public order or public policy,60 as in this case.

Finally, if undersigned breaches any terms of Therefore, the CA erred in limiting the
this contract, forms of compensation "Confidentiality of Documents and Non-Compete
including commissions and incentives will be Clause" only to acts done after the cessation of
forfeited.56 (Emphases and underscoring the employer-employee relationship or to the
supplied) "post-employment" relations of the parties. As
clearly stipulated, the parties wanted to apply said
Verily, the foregoing clause is not only clear and clause during the pendency of Babiano' s
employment, and CPI correctly invoked the same
unambiguous in stating that Babiano is barred to
before the labor tribunals to resist the farmer's
"work for whatsoever capacity x x x with any
claim for unpaid commissions on account of his
person whose business is in direct competition
breach of the said clause while the employer-
with [CPI] while [he is] employed and for a period
of one year from date of [his] resignation or employee relationship between them still
termination from the company," it also expressly subsisted. Hence, there is now a need to
determine whether or not Babiano breached said
provided in no uncertain terms that should
clause while employed by CPI, which would then
Babiano "[breach] any term of [the employment
resolve the issue of his entitlement to his unpaid
contract], forms of compensation including
commissions.
commissions and incentives will be forfeited."
Here, the contracting parties - namely Babiano on
one side, and CPI as represented by its COO- A judicious review of the records reveals that in
Vertical, John Victor R. Antonio, and Director for his resignation letter61 dated February 25, 2009,
Planning and Controls, Jose Carlo R. Antonio, on Babiano categorically admitted to CPI Chairman
the other - indisputably wanted the said clause to Jose Antonio that on February 12, 2009, he
be effective even during the existence of the sought employment from First Global, and five (5)
employer-employee relationship between days later, was admitted thereto as vice
Babiano and CPI, thereby indicating their president. From the foregoing, it is evidently clear
intention to be bound by such clause by affixing that when he sought and eventually accepted the
their respective signatures to the employment said position with First Global, he was still
contract. More significantly, as CPI's Vice employed by CPI as he has not formally resigned
President for Sales, Babiano held a highly at that time. Irrefragably, this is a glaring violation
sensitive and confidential managerial position as of the "Confidentiality of Documents and Non-
he "was tasked, among others, to guarantee the Compete Clause" in his employment contract

20
with CPI, thus, justifying the forfeiture of his of the shares of stock was to begin within the 40-
unpaid commissions. day period. Petitioner Wellex’s claim is not in any
of the stipulations of the contract. Its subsequent
claim that respondent U-Land was actually
required to remit a total of US$20.5 million is
Art 1373 likewise bereft of basis since there was no final
purchase price of the shares of stock that was
G.R. No. 167519 January 14, 2015 agreed upon, due to the failure of the parties to
execute a share purchase agreement. In addition,
the parties had yet to agree on the final number
THE WELLEX GROUP, INC., Petitioner,
of APIC shares and PEC shares that respondent
vs.
U-Land would acquire from petitioner Wellex.
U-LAND AIRLINES, CO., LTD., Respondent.
Therefore, the understanding of the parties
captured in the First Memorandum of Agreement
was to continue their negotiation to determine the
price and number of the shares to be purchased.
Had it been otherwise, the specific number or
Article 1373 of the Civil Code provides: percentage of shares and its price should already
have been provided clearly and unambiguously.
ART. 1373. If some stipulation of any contract Thus, they agreed to a 40-day period of
should admit of several meanings, it shall be negotiation.
understood as bearing that import which is most
adequate to render it effectual. Section 9 of the First Memorandum of Agreement
explicitly provides that:
It is necessary for the parties to first agree on the
final purchase price and the number of shares of In the event the parties are unable to agree on the
stock to be purchased before respondent U-Land terms of the SHPA and/or the JDA within forty
is obligated to pay or remit the entirety of the (40)days from date hereof (or such period as the
purchase price. Thus, petitioner Wellex’s parties shall mutually agree), this Memorandum
argument cannot be sustained since the parties of Agreement shall cease to be effective and the
to the First Memorandum of Agreement were parties released from their respective
clearly unable to agree on all the terms undertakings herein . . .164
concerning the share purchase agreement. It
would be absurd for petitioner Wellex to expect The First Memorandum of Agreement was, thus,
payment when respondent U-Land did not yet an agreement to enter into a share purchase
agree to the final amount to be paid for the totality agreement. The share purchase agreement
of an indeterminate number of shares of stock. should have been executed by the parties within
40 days from May 16, 1998, the date of the
The third paragraph of Section 2163 provides that signing of the First Memorandum of Agreement.
the "transfer of the Subject Shares" shall take
place upon the fulfillment of certain conditions, When the 40-day period provided for in Section 9
such as full payment of the purchase price "as lapsed, the efficacy of the First Memorandum of
reflected in the [share purchase agreement]." The Agreement ceased. The parties were "released
transfer of the shares of stock is different from the from their respective undertakings." Thus, from
execution of the share purchase agreement. The June 25, 1998, the date when the 40-day period
transfer of the shares of stock requires full lapsed, the parties were no longer obliged to
payment of the final purchase price. However, negotiate with each other in order to enter into a
that final purchase price must be reflected in the share purchase agreement.
share purchase agreement. The execution of the
share purchase agreement will require the
However, Section 9 provides for another period
existence of a final agreement.
within which the parties could still be required to
negotiate. The clause "or such period as the
In its Answer with counterclaim before the trial parties shall mutually agree" means that the
court, petitioner Wellex argued that the payment parties should agree on a period within which to

21
continue negotiations for the execution of an Similarly, in Roberts v. Papio,25 a case of
agreement. This means that after the 40-day unlawful detainer, the Court declared that the
period, the parties were still allowed to negotiate, defense of ownership by the respondent therein
provided that they could mutually agree on a new was untenable. The contract of sale invoked by
period of negotiation. the latter was void because the agent did not
have the written authority of the owner. A void
Based on the records and the findings of the contract produces no effect either against or in
lower courts, the parties were never able to arrive favor of anyone.
at a specific period within which they would bind
themselves to enter into an agreement. There In Ballesteros v. Abion,26 which also involves an
being no other period specified, the parties were action for unlawful detainer, the Court disallowed
no longer under any obligation to negotiate and the defense of ownership of the respondent
enter into a share purchase agreement. Section therein because the seller in their contract of sale
9 clearly freed them from this undertaking. was not the owner of the subject property. For
lacking an object, the said contract of sale was
II void ab initio.

Art. 1409 Void or Inexistent Contract Clearly, contracts may be declared void even in a
summary action for unlawful detainer because,
REBECCA FULLIDO, Petitioner, precisely, void contracts do not produce legal
vs. effect and cannot be the source of any rights. To
GINO GRILLI, Respondent. emphasize, void contracts may not be invoked as
a valid action or defense in any court proceeding,
including an ejectment suit. The next issue that
A void contract cannot be the
must be resolved by the Court is whether the
source of any right; it cannot
assailed lease contract and MOA are null and
be utilized in an ejectment suit
void.
A void or inexistent contract may be defined as
Art. 1410
one which lacks, absolutely either in fact or in law,
one or some of the elements which are essential
for its validity.20 It is one which has no force and G.R. No. 182537, June 01, 2016
effect from the very beginning, as if it had never
been entered into; it produces no effect MACTAN-CEBU INTERNATIONAL AIRPORT
whatsoever either against or in favor of AUTHORITY, Petitioner, v. RICHARD E.
anyone.21 Quod nullum est nullum producit UNCHUAN
effectum. Article 1409 of the New Civil Code
explicitly states that void contracts also cannot be The Court finds that the sale transaction executed
ratified; neither can the right to set up the defense between Atanacio, acting as an agent of his
of illegality be waived.22 Accordingly, there is no fellow registered owners, and the CAA was
need for an action to set aside a void or inexistent indeed void insofar as the other registered
contract.23 owners were concerned. They were represented
without a written authority from them clearly in
A review of the relevant jurisprudence reveals violation of the requirement under Articles 1874
that the Court did not hesitate to set aside a void and 1878 of the Civil Code, which provide:
contract even in an action for unlawful detainer. chanRoblesvirtualLawlibrary
In Spouses Alcantara v. Nido,24 which involves Art. 1874. When a sale of a piece of land or any
an action for unlawful detainer, the petitioners interest therein is through an agent, the authority
therein raised a defense that the subject land was of the latter shall be in writing; otherwise, the sale
already sold to them by the agent of the owner. shall be void.
The Court rejected their defense and held that the
contract of sale was void because the agent did Art. 1878. Special powers of attorney are
not have the written authority of the owner to sell necessary in the following cases:
the subject land.

22
x x x registered co-owners or their heirs were
concerned.
(5) To enter into any contract by which the
ownership of an immovable is transmitted or Thus, the Court cannot give any weight either to
acquired either gratuitously or for a valuable the Deed of Partition of Lot No. 4810, Open
consideration; Cadastre51(subsequently executed by all the
heirs of Ambrosio and Sotera Godinez to the
xxx effect that they had acknowledged52 the sale of
The significance of requiring the authority of an the subject lots in favor of CAA) or to other
agent to be put into writing was amplified in Dizon documents (such as Joint Affidavit of
v. Court of Appeals:49 Confirmation of Sale of Alloted Shares Already
Adjudicated and Quitclaim of a Portion of Lot No.
4810, Open Cadastre)53 all of which gave the
When the sale of a piece of land or any interest
thereon is through an agent, the authority of the impression that they had ratified54 the sale of the
latter shall be in writing; otherwise, the sale shall subject lots in favor of CAA, MCIAA's
predecessor-in-interest.
be void. Thus the authority of an agent to execute
a contract for the sale of real estate must be
The rule is that a void contract produces no effect
conferred in writing and must give him specific
either against or in favor of anyone and cannot be
authority, either to conduct the general business
of the principal or to execute a binding contract ratified.55 Similarly, laches will not set in against a
containing terms and conditions which are in the void transaction, as in this case, where the agent
did not have a special power of attorney to
contract he did execute. A special power of
dispose of the lots co-owned by the other
attorney is necessary to enter into any contract by
registered owners. In fact, Article 1410 of the Civil
which the ownership of an immovable is
transmitted or acquired either gratuitously or for a Code specifically provides that an action to
valuable consideration. The express mandate declare the inexistence of a void contract does
not prescribe.
required by law to enable an appointee of an
agency (couched) in general terms to sell must
be one that expressly mentions a sale or that Art 1411
includes a sale as a necessary ingredient of the
act mentioned. For the principal to confer the right DESIDERIO RANARA, JR., Petitioner
upon an agent to sell real estate, a power of vs.
attorney must so express the powers of the agent ZACARIAS DE LOS ANGELES, JR.,
in clear and unmistakable language. When there Respondent
is any reasonable doubt that the language so
used conveys such power, no such construction
Likewise, the question of whether the parties
shall be given the document.
are in pari delicto is a factual question and is
generally not within the scope of a Rule 45
Without a special power of attorney specifying his petition.29 Further, the Court had elaborated on
authority to dispose of an immovable, Atanacio the applicability of the doctrine particularly in the
could not be legally considered as the case of Constantino, et al. v. Heirs of Pedro
representative of the other registered co-owners Constantino, Jr. 30 where it stated:
of the properties in question. Atanacio's act of
conveying Lot No. 4810-A and Lot No. 4810-B
Latin for "in equal fault,'' in pari delicto connotes
cannot be a valid source of obligation to bind all
that two or more people are at fault or are guilty
the other registered co-owners and their heirs
of a crime. Neither courts of law nor equity will
because he was not clothed with any authority to
interpose to grant relief to the parties, when· an
enter into a contract with CAA. The other heirs
illegal agreement has been made, and both
could not have given their consent as required
parties stand in pari delicto. Under the pari delicto
under Article 147550 of the New Civil Code
doctrine, the parties to a controversy are equally
because there was no meeting of the minds
culpable or guilty, they shall have no action
among the other registered co-owners who gave
against each other, and it shall leave the parties
no written authority to Atanacio to transact on
where it finds them. This doctrine finds
their behalf. Therefore, no contract was perfected
expression in the maxims "ex dolo malo non oritur
insofar as the portions or shares of the other

23
actio" and "in pari delicto potior est condition are void for illegality of subject matter and not to
defendentis." contracts rendered void for being simulated, or
those in which the parties do not really intend to
xxxx be bound thereby. Specifically, in pari delicto
situations involve the parties in one contract who
are both at fault, such that neither can recover nor
As a doctrine in civil law, the rule on pari delicto
have any action against each other.31 (Citations
is principally governed by Articles 1411 and 1412
of the Civil Code, which state that: omitted and emphasis ours)

Here, there is neither an illegal cause nor


Article 1411. When the nullity proceeds from the
unlawful cause which would necessitate the
illegality of the cause or object of the contract,
application of Articles 1411 and 1412 of the Civil
and the act constitutes a criminal offense, both
Code.1âwphi1 The petitioner is mistaken in the
parties being in pari delicto, they shall have no
application of the doctrine of in pari delicto.
action against each other, and both shall be
prosecuted.
The Court agrees with the courts a quo that the
petitioner cannot claim reimbursement for any
xxxx
expense incurred in the improvements on the lot.
Article 1412. If the act in which the unlawful or
forbidden cause consists does not constitute a
criminal offense, the following rules shall be
observed: FLORANTE VITUG, Petitioner,
vs.
xxxx EVANGELINE A. ABUDA, Respondent.

1. When the fault is on the part of both contracting Even if the mortgage contract were illegal or
parties, neither may recover what he has given by wrongful, neither of the parties may assail the
virtue of the contract, or demand the performance contract's validity as against the other because
of the other's undertaking; they were equally at fault.85 This is the principle
of in pari delicto (or in delicto) as embodied in
Articles 1411 and 1412 of the Civil Code:
xxxx
Art. 1411. When the nullity proceeds from the
The petition at bench does not speak of an illegal illegality of the cause or object of the contract,
cause of contract constituting a criminal offense and the act constitutes a criminal offense, both
under Article 1411. Neither can it be said that parties being in pari delicto, they shall have no
Article 1412 finds application although such action against each other, and both shall be
provision which is part of Title II, Book IV of the prosecuted. Moreover, the provisions of the
Civil Code speaks of contracts in general, as well Penal Code relative to the disposal of effects or
as contracts which are null and void ab initio instruments of a crime shall be applicable to the
pursuant to Article 1409 of the Civil Code - such things or the price of the contract.
as the subject contracts, which as claimed, are
violative of the mandatory provision of the law on
legitimes. This rule shall be applicable when only one of the
parties is guilty; but the innocent one may claim
what he has given, and shall not be bound to
xxxx comply with his promise.

Finding the inapplicability of the in pari delicto Art. 1412. If the act in which the unlawful or
doctrine, We find occasion to stress that Article
forbidden cause consists does not constitute a
1412 of the Civil Code that breathes life to the
criminal offense, the following rules shall be
doctrine speaks of the rights and obligations
observed:
of the parties to the contract with an illegal
cause or object which does not constitute a
criminal offense. It applies to contracts which (1) When the fault is on the part of both
contracting parties, neither may recover

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what he has given by virtue of the donation, it had the occasion to say that the
contract, or demand the performance of parties were barred "from pleading the illegality of
the other's undertaking; the bargain either as a cause of action or as a
defense."93 The claimant was declared entitled to
(2) When only one of the contracting the donated property, without prejudice to the
parties is at fault, he cannot recover what share and legitimes of the donor's forced heirs.
he has given by reason of the contract, or
ask for the fulfillment of what has been In the later case of Villegas v. Rural Bank of
promised him. The other, who is not at Tanjay, Inc.,94 this court ruled that the petitioners
fault, may demand the return of what he in that case were not entitled to relief because
has given without any obligation to they did not come to court with clean hands.
comply his promise.
This court found that they "readily participated in
Under this principle, courts shall not aid parties in a ploy to circumvent the Rural Banks Act and
their illegal acts.86 The court shall leave them as offered no objection when their original loan of
they are.87 It is an equitable principle that bars P350,000.00 was divided into small separate
parties from enforcing their illegal acts, assailing loans not exceeding P50,000.00 each."95They
the validity of their acts, or using its invalidity as a and respondent bank were in pari delicto. They
defense.88 could not be given affirmative relief against each
other.96Hence, Spouses Villegas may not seek
In the 1906 case of Batarra v. Marcos,89 this court the annulment of the loan and mortgage contracts
declared that a person cannot enforce a promise they voluntarily executed with respondent bank
to marry based on the consideration of "carnal on the ground that these contracts were
connection." This court ruled that whether or not simulated to make it appear that the loans were
such consideration was a crime, neither of the sugar crop loans, allowing respondent bank to
parties can recover because the acts "were approve it pursuant to Republic Act No. 720,
common to both parties."90 otherwise known as the Rural Banks Act.

In Bough v. Cantiveros,91 this court refused to The principle of in pari delicto admits exceptions.
enforce in favor of the guilty parties a contract of It does not apply when the result of its application
sale that was not only simulated but also is clearly against statutory law, morals, good
executed to defeat any attempt by a husband to customs, and public policy.97
recover properties from his wife.
In Philippine Banking Corporation, representing
Another case, Liguez v. Court of the Estate of Justina Santos v. Lui She,98 this
Appeals,92 involves a party's claim over a court refused to apply the principle of in pari
property based on a deed of donation executed delicto. Applying the principle meant that this
in her favor when she was 16 years old. The heirs court had to declare as valid between the parties
of the donor assailed the donation on the ground a 50-year lease contract with option to buy, which
of having an illicit causa. was executed by a Filipino and a Chinese citizen.
This court ruled that the policy to conserve land
in favor of Filipinos would be defeated if the
The donor in that case was found to have had
principle of in pari delicto was applied instead of
sexual relations with the claimant. The donation
setting aside the contracts executed by the
was done to secure the claimant's continuous
cohabitation with the donor, as well as to gratify parties.99
the donor's sexual impulses. At the time of the
donation, the donor was married to another Petitioner in this case did not come to this court
woman. The donated property was part of their with clean hands. He was aware of the
conjugal property. restrictions in his title when he executed the loan
and mortgage contracts with respondent. He
voluntarily executed the contracts with
This court held that the donation was founded on
an illicit causa. While this court found the respondent despite this knowledge. He also
principle of in pari delicto inapplicable in that case availed himself of the benefits of the loan and
mortgage contract. He cannot now assail the
given the claimant's minority at the time of

25
validity of the mortgage contract to escape the According to Article 1412 (1) of the Civil Code, the
obligations incurred because of it.100 guilty parties to an illegal contract cannot recover
from one another and are not entitled to an
Petitioner also failed to show that upholding the affirmative relief because they are in pari delicto
validity of the mortgage contract would be or in equal fault. The doctrine of in pari delicto is
contrary to law, morals, good customs, and public a universal doctrine that holds that no action
policy. arises, in equity or at law, from an illegal contract;
no suit can be maintained for its specific
Petitioner's contract with the National Housing performance, or to recover the property agreed to
be sold or delivered, or the money agreed to be
Authority is not a law prohibiting the transfer or
paid, or damages for its violation; and where the
encumbrance of his property. It does not render
parties are in pari delicto, no affirmative relief of
subsequent transactions involving the property a
any kind will be given to one against the other.17
violation of morals, good customs, and public
policy. Violation of its terms does not render
subsequent transactions involving the property Nonetheless, the application of the doctrine of in
void ab initio.101 It merely provides the National pari delicto is not always rigid.1âwphi1 An
Housing Authority with a cause of action to annul accepted exception arises when its application
subsequent transactions involving the property. contravenes well-established public policy.18 In
this jurisdiction, public policy has been defined as
G.R. No. 160600 January 15, 2014 "that principle of the law which holds that no
subject or citizen can lawfully do that which has a
tendency to be injurious to the public or against
DOMINGO GONZALO, Petitioner, the public good."19
vs.
JOHN TARNATE, JR., Respondent.

Under Article 1409 (1) of the Civil Code, a


contract whose cause, object or purpose is
contrary to law is a void or inexistent contract. As
such, a void contract cannot produce a valid
one.13 To the same effect is Article 1422 of the
Civil Code, which declares that "a contract, which
is the direct result of a previous illegal contract, is
also void and inexistent."

We do not concur with the CA’s finding that the


guilt of Tarnate for violation of Section 6 of
Presidential Decree No. 1594 was lesser than
that of Gonzalo, for, as the CA itself observed,
Tarnate had voluntarily entered into the
agreements with Gonzalo.14 Tarnate also
admitted that he did not participate in the bidding
for the project because he knew that he was not
authorized to contract with the DPWH.15 Given
that Tarnate was a businessman who had
represented himself in the subcontract as "being
financially and organizationally sound and
established, with the necessary personnel and
equipment for the performance of the
project,"16 he justifiably presumed to be aware of
the illegality of his agreements with Gonzalo. For
these reasons, Tarnate was not less guilty than
Gonzalo.

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