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SECOND DIVISION

[G.R. No. 143370. February 6, 2002]

MARIO J. MENDEZONA and TERESITA M. MENDEZONA, LUIS J. MENDEZONA and MARICAR L. MENDEZONA and TERESITA ADAD VDA. DE MENDEZONA, petitioners, vs. JULIO H. OZAMIZ, ROBERTO J. MONTALVAN, JOSE MA. OZAMIZ, CARMEN H. OZAMIZ, PAZ O. MONTALVAN, MA. TERESA O.F. ZARRAGA, CARLOS O. FORTICH, JOSE LUIS O. ROS, PAULITA O. RODRIGUEZ, and LOURDES O. LON, respondents.

D E C I S I O N

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision[1] and the Resolution[2] of the Court of Appeals dated July 27, 1998 and May 19, 2000, respectively, in CA-G.R. CV No. 39752 which reversed and set aside the Decision[3] dated September 23, 1992 rendered in favor of the petitioners by the Regional Trial Court (RTC) of Cebu City, Branch 6 in Civil Case No. CEB-10766.

Civil Case No. CEB-10766 is a suit for quieting of title. It was instituted on September 25, 1991 by petitioner spouses Mario J. Mendezona and Teresita M. Mendezona as initial plaintiffs,[4]and in the amended complaint filed on October 7, 1991, herein co-petitioner spouses Luis J. Mendezona and Maricar L. Mendezona and Teresita Adad Vda. de Mendezona joined as co-plaintiffs.[5]

In their complaint, the petitioners, as plaintiffs therein, alleged that petitioner spouses Mario J. Mendezona and Teresita M. Mendezona, petitioner spouses Luis J. Mendezona and Maricar L.Mendezona, and petitioner Teresita Adad Vda. de Mendezona own a parcel of land each in the Banilad Estate, Lahug, Cebu City with almost similar areas of 3,462 square meters, 3,466 square meters and 3,468 square meters, covered and described in Transfer Certificate of Title (TCT) Nos. 116834, 116835, and 116836 respectively, of the Registry of Deeds of Cebu City.[6]

The petitioners ultimately traced their titles of ownership over their respective properties from a notarized Deed of Absolute Sale[7] dated April 28, 1989 executed in their favor by CarmenOzamiz for and in consideration of the sum of One Million Forty Thousand Pesos (P1,040,000.00).

The petitioners initiated the suit to remove a cloud on their said respective titles caused by the inscription thereon of a notice of lis pendens, which came about as a result of an incident in Special Proceeding No. 1250 of the RTC of Oroquieta City. Special Proceeding No. 1250 is a proceeding for guardianship over the person and properties of Carmen Ozamiz initiated by the respondents Julio H. Ozamiz, Jose Ma. Ozamiz, Carmen H. Ozamiz,[8] Paz O. Montalvan, Ma.

Teresa O.F. Zarraga, Carlos O. Fortich, Jose Luis O. Ros, Paulita O. Rodriguez and Lourdes O. Lon.[9]

It appears that on January 15, 1991, the respondents instituted the petition for guardianship with the Regional Trial Court of Oroquieta City, alleging therein that Carmen Ozamiz, then 86 years old, after an illness in July 1987, had become disoriented and could not recognize most of her friends; that she could no longer take care of herself nor manage her properties by reason of her failing health, weak mind and absent-mindedness. Mario Mendezona and Luis Mendezona, herein petitioners who are nephews of Carmen Ozamiz, and Pilar Mendezona, a sister of CarmenOzamiz, filed an opposition to the guardianship petition.

In the course of the guardianship proceeding, the petitioners and the oppositors thereto agreed that Carmen Ozamiz needed a guardian over her person and her properties, and thus respondent Paz O. Montalvan was designated as guardian over the person of Carmen Ozamiz while petitioner Mario J. Mendezona, respondents Roberto J. Montalvan and Julio H. Ozamiz were designated as joint guardians over the properties of the said ward.

As guardians, respondents Roberto J. Montalvan and Julio H. Ozamiz filed on August 6, 1991 with the guardianship court their “inventories and Accounts”,[10] listing therein Carmen Ozamiz’sproperties, cash, shares of stock, vehicles and fixed assets, including a 10,396 square meter property known as the Lahug property. Said Lahug property is the same property covered by the Deed of Absolute Sale dated April 28, 1989 executed by Carmen Ozamiz in favor of the petitioners. Respondents Roberto J. Montalvan and Julio H. Ozamiz caused the inscription on the titles of petitioners a notice of lis pendens,[11] regarding Special Proceeding No. 1250, thus giving rise to the suit for quieting of title, Civil Case No. CEB-10766, filed by herein petitioners.

In their Answer[12] in Civil Case No. CEB-10766 the respondents opposed the petitioners’ claim of ownership of the Lahug property and alleged that the titles issued in the petitioners names are defective and illegal, and the ownership of the said property was acquired in bad faith and without value inasmuch as the consideration for the sale is grossly inadequate and unconscionable. Respondents further alleged that at the time of the sale on April 28, 1989 Carmen Ozamiz was already ailing and not in full possession of her mental faculties; and that her properties having been placed in administration, she was in effect incapacitated to contract with petitioners.

The issues for resolution were delimited in the pre-trial to: (a) the propriety of recourse to quieting of title; (b) the validity or nullity of the Deed of Absolute Sale dated April 28, 1989 executed by Carmen Ozamiz in favor of herein petitioners; (c) whether the titles over the subject parcel of land in plaintiffs’ names be maintained or should they be cancelled and the subject parcels of landreconveyed; and (d) damages and attorney’s fees.[13]

Trial on the merits ensued with the parties presenting evidence to prove their respective allegations. Petitioners Mario Mendezona, Teresita Adad Vda. de Mendezona and Luis Mendezona, as plaintiffs therein, testified on the circumstances surrounding the sale. Carmencita Cedeno and Martin Yungco, instrumental witnesses to the Deed of Absolute Sale dated April 28, 1989, and, Atty. Asuncion Bernades, the notary public who notarized the said document, testified that on the day of execution of the said contract that Carmen Ozamiz was of sound mind and that she voluntarily and knowingly executed the said deed of sale.

For the defendants, the testimonies of respondent Paz O. Montalvan, a sister of Carmen Ozamiz; Concepcion Agac-ac, an assistant of Carmen Ozamiz; respondent Julio Ozamiz; CarolinaLagura, a househelper of Carmen Ozamiz; Joselito Gunio, an appraiser of land; Nelfa Perdido, a part-time bookkeeper of Carmen Ozamiz, and the deposition of Dr. Faith Go, physician of Carmen Ozamiz, were offered in evidence.

The petitioners presented as rebuttal witnesses petitioners Mario Mendezona and Luis Mendezona, to rebut the testimony of respondent Julio H. Ozamiz; and, Dr. William Buot, a doctor of neurology to rebut aspects of the deposition of Dr. Faith Go on the mental capacity of Carmen Ozamiz at the time of the sale.

During the trial, the trial court found that the following facts have been duly established:[14]

(1) On April 28, 1989, Carmen Ozamiz sold to her nephews, Mario, Antonio and Luis, all surnamed Mendezona, three (3) parcels of residential land in Cebu City, per a Deed of Absolute Sale (Exh. D) for a consideration of P1,040,000.00, in which deed the usufructuary rights were reserved during her lifetime.

(2) The three parcels of land were subsequently transferred to the names of the three vendees per TCTs Nos. 108729, 108730 and 108731 (Exhs. J, K & L, respectively). A partition agreement was entered into by the three vendees (Exh. 3) and the parcels of land are now titled in the names of the plaintiffs.

Mario Mendezona — TCT No. 116834 (Exh. A);

Luis Mendezona — TCT No. 116835 (Exh. B);

Antonio Mendezona — TCT No. 116836 (Exh. C);

(3) The reservation of the usufructuary rights to the vendor Carmen Ozamiz during her lifetime was confirmed by the plaintiffs-spouses Mario Mendezona and Teresita Moraza and plaintiffs spouses Luis Mendezona andMaricar Longa in a sworn statement (Exh. I) executed on October 15, 1990, which was duly annotated on the titles of the property;

(4) The capital gains tax was paid (Exh. H) on May 5, 1989 and a certificate (Exh. H-1) was issued by the Bureau of Internal Revenue authorizing the Register of Deeds to transfer the property to the vendees;

(5) A petition for guardianship over the person and properties of Carmen Ozamiz (Exh. E) was filed by all the defendants, (except the defendant Roberto Montalvan) on January 15, 1991 with the Regional Trial Court ofOroquieta City, denominated as Spec. Proc. No. 1250 and subsequently, an “Inventories and Accounts” (Exh. F) was filed by court-appointed guardians Roberto Montalvan and Julio Ozamiz, in which the property was listed (Exh. F-1) and a Notice of Lis Pendens was filed with the Register of Deeds of Cebu City on August 13, 1991 by said joint guardians. Plaintiff Mario Mendezona, as another joint guardian over Carmen Ozamiz, filed his opposition (Exh. R) to the “Inventories and Accounts”, with the Oroquieta Court as to the inclusion of the property (Exh.R-1).

(6) Prior to his death, the deceased husband of plaintiff Teresita Adad Mendezona was granted a General Power of Attorney (Exh. 1) by Carmen Ozamiz on March 23, 1988 and after his demise, Carmen Ozamizgranted Mario Mendezona a General Power of Attorney (Exh. 2.) on August 11, 1990. Both powers of attorney relate to the administration of the property, subject of this action, in Cebu City.

On September 23, 1992 the trial court rendered its decision in favor of the petitioners, the dispositive portion of which reads, to wit:

Wherefore, premises considered, the Court is of the opinion and so declares that:

1. The property described in the complaint was sold, with reservation of usufructuary rights by Carmen Ozamiz to the plaintiffs under a valid contract, voluntarily and deliberately entered into while she was of sound mind, for sufficient and good consideration, and without fraud, force, undue influence or intimidation having been exercised upon her, and consequently, the Court orders the defendants herein to acknowledge and recognize the plaintiffs’ title to the aforecited property and to refrain from further clouding the same;

2. That the one-third (1/3) share erroneously titled to Antonio Mendezona should be titled in the name of Teresita Adad vda. de Mendezona as her paraphernal property and the Register of Deeds of Cebu City is hereby ordered to do so;

3. The Notice of Lis Pendens affecting the property should be eliminated from the record and the Register of Deeds of Cebu City is ordered to expunge the same.

No pronouncement as to costs.

SO ORDERED.

On appeal to the Court of Appeals, the appellate court reversed the factual findings of the trial court and ruled that the Deed of Absolute Sale dated April 28, 1989 was a simulated contract since the petitioners failed to prove that the consideration was actually paid, and, furthermore, that at the time of the execution of the contract the mental faculties of Carmen Ozamiz were already seriously impaired. Thus, the appellate court declared that the Deed of Absolute Sale of April 28, 1989 is null and void. It ordered the cancellation of the certificates of title issued in the petitioners’ names and directed the issuance of new certificates of title in favor of Carmen Ozamiz or her estate.

Petitioners filed a motion for reconsideration of the decision of the appellate court. Subsequent thereto, the petitioners filed a motion for a new trial and/or for reception of evidence. They contended, among other things, that the appellate court totally ignored the testimony of Judge Teodorico Durias regarding the mental condition of Carmen Ozamiz a month before the execution of the Deed of Absolute Sale in question. The said testimony was taken in the Special Proceeding No. 1250 in the Regional Trial Court of Oroquieta City. However, Judge Durias was not presented as a witness in Civil Case No. CEB-10766 in the Regional Trial Court of Cebu City. Petitioners alleged that Judge Durias’s testimony is a

newly-discovered evidence which could not have been discovered prior to the trial in the court below by the exercise of due diligence.

The appellate court denied both motions in its Resolution dated May 19, 2000. Hence, the instant petition anchored on the following grounds:[15]

I.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE APRIL 28, 1989 DEED OF ABSOLUTE SALE WAS A SIMULATED CONTRACT.

A.

THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE STATUTORY PRESUMPTIONS OF ACTUAL AND SUFFICIENT CONSIDERATION FOR, AND OF THE REGULARITY AND TRUTHFULNESS OF, THE NOTARIZED DEED OF ABSOLUTE SALE.

B.

THE COURT OF APPEALS GRAVELY ERRED IN IMPOSING ON THE PETITIONERS THE BURDEN OF PROVING PAYMENT, AND IN REFUSING TO RECOGNIZE AND RULE THAT IT WAS THE RESPONDENTS - AS THE PARTIES ASSAILING THE DEED OF ABSOLUTE SALE - WHO HAD FAILED TO DISCHARGE THEIR BURDEN OF PROVING THAT THERE WAS NO CONSIDERATION FOR THE TRANSACTION.

C.

THE COURT OF APPEALS GRAVELY ERRED IN REFUSING TO RECEIVE IN EVIDENCE THE THREE (3) CHECKS, WHICH PROVED BEYOND ANY DOUBT THAT THE PURCHASE PRICE FOR THE LAHUG PROPERTY HAD BEEN PAID TO CARMEN OZAMIZ, AFTER ASKING FOR THEM AND HAVING THEM PRESENTED TO IT IN OPEN COURT, THUS COOPERATING WITH RESPONDENTS’ EFFORTS TO SUPPRESS THE CHECKS (WHICH THE COURT ITSELF AND RESPONDENTS CHALLENGED PETITIONERS TO PRODUCE).

II.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT CARMEN OZAMIZ’S MENTAL FACULTIES WERE SERIOUSLY IMPAIRED WHEN SHE EXECUTED THE DEED OF ABSOLUTESALE ON APRIL 28, 1989.

A.

THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE STATUTORY PRESUMPTION THAT CARMEN OZAMIZ WAS OF SOUND MIND AND HAD THE REQUISITE CAPACITY TO CONTRACT WHEN SHE EXECUTED THE DEED OF

ABSOLUTE SALE, AND IN REFUSING TO RULE THAT IT WAS THE RESPONDENTS - AS THE PARTIES ALLEGING MENTAL INCAPACITY- WHO HAD FAILED TO DISCHARGE THEIR BURDEN OF REBUTTING THAT PRESUMPTION.

B.

THE COURT OF APPEALS GRAVELY ERRED IN REFUSING TO ACCEPT AND GIVE DUE AND PREPONDERANT WEIGHT TO UNREFUTED EVIDENCE, INCLUDING THE UNREFUTED TESTIMONIES OF THE INSTRUMENTAL WITNESSES AND OF THE NOTARY PUBLIC, THAT CARMEN OZAMIZ EXECUTED THE DEED OF ABSOLUTE SALE FREELY, VOLUNTARILY, KNOWINGLY, AND INTELLIGENTLY.

C.

THE COURT OF APPEALS GRAVELY ERRED IN GIVING WEIGHT TO THE HEARSAY TESTIMONY OF DR. FAITH GO ON THE MENTAL CONDITION OF CARMEN OZAMIZ ON THE DATE SHE EXECUTED THE DEED OF ABSOLUTE SALE.

D.

THE COURT OF APPEALS GRAVELY ERRED IN IGNORING, AND IN REFUSING TO RECEIVE IN EVIDENCE, JUDGE TEODORICO DURIAS’S TESTIMONY (THAT CARMEN OZAMIZ WAS OF SOUND MIND WHEN SHE EXECUTED ANOTHER CONTRACT BARELY A MONTH BEFORE SHE EXECUTED THE DEED OF ABSOLUTE SALE) ON THE GROUND THAT THAT TESTIMONY WAS FORGOTTEN EVIDENCE.

We shall first rule on the issue of whether to consider the testimony of Judge Durias as newly discovered evidence. A motion for new trial upon the ground of newly discovered evidence is properly granted only where there is concurrence of the following requisites, namely: (a) the evidence had been discovered after trial; (b) the evidence could not have been discovered and produced during trial even with the exercise of reasonable diligence; and (c) the evidence is material and not merely corroborative, cumulative or impeaching and is of such weight that if admitted, would probably alter the result. All three (3) requisites must characterize the evidence sought to be introduced at the new trial.

We find that the requirement of reasonable diligence has not been met by the petitioners. As early as the pre-trial of the case at bar, the name of Judge Durias has already cropped up as a possible witness for the defendants, herein respondents. That the respondents chose not to present him is not an indicia per se of suppression of evidence, since a party in a civil case is free to choose who to present as his witness. Neither can Judge Durias’ testimony in another case be considered as newly discovered evidence since the facts to be testified to by Judge Durias which were existing before and during the trial, could have been presented by the petitioners at the trial below.[16] The testimony of Judge Durias has been in existence waiting only to be elicited from him by questioning.[17]

It has been held that a lack of diligence is exhibited where the newly discovered evidence was necessary or proper under the pleadings, and its existence must have occurred to the party in the course of the preparation of the case, but no effort was made to secure it; there is a failure to make inquiry of persons who were likely to know the facts in question, especially where information was not sought from co-parties; there is a failure to seek evidence available through public records; there is a failure to discover evidence that is within the control of the complaining party; there is a failure to follow leads contained in other evidence; and, there is a failure to utilize available discovery procedures.[18] Thus, the testimony of Judge Durias cannot be considered as newly discovered evidence to warrant a new trial.

In this petition at bench, herein petitioners essentially take exception to two (2) main factual findings of the appellate court, namely, (a) that the notarized Deed of Absolute Sale dated April 28, 1989 was a simulated contract, and (b) that Carmen Ozamiz’s mental faculties were seriously impaired when she executed the said contract on April 28, 1989. The petitioners allege that both conclusions are contrary or opposed to well-recognized statutory presumptions of regularity enjoyed by a notarized document and that a contracting party to a notarized contract is of sound and disposing mind when she executes the contract.

The respondents posit a different view. They contend that clear and convincing evidence refuted the presumptions on regularity of execution of the Deed of Absolute Sale and existence of consideration thereof. Relying upon the testimonies of Paz O. Montalvan, Concepcion Agac-ac, Carolina Lagura and Dr. Faith Go, they aver that they were able to show that Carmen Ozamiz was already physically and mentally incapacitated since the latter part of 1987 and could not have executed the said Deed of Absolute Sale on April 28, 1989 covering the disputed Lahug property. They also alleged that no error is ascribable to the appellate court for not considering the allegedly rehearsed testimonies of the instrumental witnesses and the notary public.

Factual findings of the appellate court are generally conclusive on this Court which is not a trier of facts. It is not the function of the Supreme Court to analyze or weigh evidence all over again. However, this rule is not without exception. If there is a showing that the appellate court’s findings of facts complained of are totally devoid of support in the record or that they are so glaringly erroneous as to constitute grave abuse of discretion, this Court must discard such erroneous findings of facts.[19] We find that the exception applies in the case at bench.

Simulation is defined as “the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purposes of deception, the appearances of a juridical act which does not exist or is different from what that which was really executed.”[20] The requisites of simulation are: (a) an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons.[21] None of these were clearly shown to exist in the case at bar.

Contrary to the erroneous conclusions of the appellate court, a simulated contract cannot be inferred from the mere non-production of the checks. It was not the burden of the petitioners to prove so. It is significant to note that the Deed of Absolute Sale dated April 28, 1989 is a notarized document duly acknowledged before a notary public. As such, it has in its favor the presumption of regularity, and it carries the evidentiary weight conferred upon it with respect to

its due execution. It is admissible in evidence without further proof of its authenticity and is entitled to full faith and credit upon its face.[22]

Payment is not merely presumed from the fact that the notarized Deed of Absolute Sale dated April 28, 1989 has gone through the regular procedure as evidenced by the transfer certificates of title issued in petitioners’ names by the Register of Deeds. In other words, whosoever alleges the fraud or invalidity of a notarized document has the burden of proving the same by evidence that is clear, convincing, and more than merely preponderant.[23] Therefore, with this well-recognized statutory presumption, the burden fell upon the respondents to prove their allegations attacking the validity and due execution of the said Deed of Absolute Sale. Respondents failed to discharge that burden; hence, the presumption in favor of the said deed stands. But more importantly, that notarized deed shows on its face that the consideration of One Million Forty Thousand Pesos (P1,040,000.00) was acknowledged to have been received by Carmen Ozamiz.

Simulation cannot be inferred from the alleged absence of payment based on the testimonies of Concepcion Agac-ac, assistant of Carmen Ozamiz, and Nelfa Perdido, part-time bookkeeper of Carmen Ozamiz. The testimonies of these two (2) witnesses are unreliable and inconsistent.

While Concepcion Agac-ac testified that she was aware of all the transactions of Carmen Ozamiz, she also admitted that not all income of Carmen Ozamiz passed through her since AntonioMendezona, as appointed administrator, directly reported to Carmen Ozamiz.[24] With respect to Nelfa Perdido, she testified that most of the transactions that she recorded refer only to rental income and expenses, and the amounts thereof were reported to her by Concepcion Agac-ac only, not by Carmen Ozamiz. She does not record deposits or withdrawals in the bank accounts of Carmen Ozamiz.[25] Their testimonies hardly deserve any credit and, hence, the appellate court misplaced reliance thereon.

Considering that Carmen Ozamiz acknowledged, on the face of the notarized deed, that she received the consideration at One Million Forty Thousand Pesos (P1,040,000.00), the appellate court should not have placed too much emphasis on the checks, the presentation of which is not really necessary. Besides, the burden to prove alleged non-payment of the consideration of the sale was on the respondents, not on the petitioners. Also, between its conclusion based on inconsistent oral testimonies and a duly notarized document that enjoys presumption of regularity, the appellate court should have given more weight to the latter. Spoken words could be notoriously unreliable as against a written document that speaks a uniform language.[26]

Furthermore, the appellate court erred in ruling that at the time of the execution of the Deed of Absolute Sale on April 28, 1989 the mental faculties of Carmen Ozamiz were already seriously impaired.[27] It placed too much reliance upon the testimonies of the respondents’ witnesses. However, after a thorough scrutiny of the transcripts of the testimonies of the witnesses, we find that the respondents’ core witnesses all made sweeping statements which failed to show the true state of mind of Carmen Ozamiz at the time of the execution of the disputed document. The testimonies of the respondents’ witnesses on the mental capacity of Carmen Ozamiz are far from being clear and convincing, to say the least.

Carolina Lagura, a househelper of Carmen Ozamiz, testified that when Carmen Ozamiz was confronted by Paz O. Montalvan in January 1989 with the sale of the Lahug property, CarmenOzamiz denied the same. She testified that Carmen Ozamiz understood the question

then.[28] However, this declaration is inconsistent with her (Carolina’s) statement that since 1988 CarmenOzamiz could not fully understand the things around her, that she was physically fit but mentally could not carry a conversation or recognize persons who visited her.[29] Furthermore, the disputed sale occurred on April 28, 1989 or three (3) months after this alleged confrontation in January 1989. This inconsistency was not explained by the respondents.

The revelation of Dr. Faith Go did not also shed light on the mental capacity of Carmen Ozamiz on the relevant day - April 28, 1989 when the Deed of Absolute Sale was executed and notarized. At best, she merely revealed that Carmen Ozamiz was suffering from certain infirmities in her body and at times, she was forgetful, but there was no categorical statement that CarmenOzamiz succumbed to what the respondents suggest as her alleged “second childhood” as early as 1987. The petitioners’ rebuttal witness, Dr. William Buot, a doctor of neurology, testified that no conclusion of mental incapacity at the time the said deed was executed can be inferred from Dr. Faith Go’s clinical notes nor can such fact be deduced from the mere prescription of a medication for episodic memory loss.

It has been held that a person is not incapacitated to contract merely because of advanced years or by reason of physical infirmities. Only when such age or infirmities impair her mental faculties to such extent as to prevent her from properly, intelligently, and fairly protecting her property rights, is she considered incapacitated.[30] The respondents utterly failed to show adequate proof that at the time of the sale on April 28, 1989 Carmen Ozamiz had allegedly lost control of her mental faculties.

We note that the respondents sought to impugn only one document, namely, the Deed of Absolute Sale dated April 28, 1989, executed by Carmen Ozamiz. However, there are nine (9) other important documents that were, signed by Carmen Ozamiz either before or after April 28, 1989 which were not assailed by the respondents.[31] Such is contrary to their assertion of complete incapacity of Carmen Ozamiz to handle her affairs since 1987. We agree with the trial court’s assessment that “it is unfair for the [respondents] to claim soundness of mind of Carmen Ozamizwhen it benefits them and otherwise when it disadvantages them.”[32] A person is presumed to be of sound mind at any particular time and the condition is presumed to continue to exist, in the absence of proof to the contrary.[33] Competency and freedom from undue influence, shown to have existed in the other acts done or contracts executed, are presumed to continue until the contrary is shown.[34]

All the foregoing considered, we find the instant petition to be meritorious and the same should be granted.

WHEREFORE, the instant petition is hereby GRANTED and the assailed Decision and Resolution of the Court of Appeals are hereby REVERSED and SET ASIDE. The Decision datedSeptember 23, 1992 of the Regional Trial Court of Cebu City, Branch 6, in Civil Case No. CEB-10766 is REINSTATED. No pronouncement as to costs.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

[G.R. No. 118305. February 12, 1998]

AYALA INVESTMENT & DEVELOPMENT CORP. and ABELARDO MAGSAJO, petitioners, vs. COURT OF APPEALS and SPOUSES ALFREDO & ENCARNACION CHING, respondents.

D E C I S I O N

MARTINEZ, J.:

Under Article 161 of the Civil Code, what debts and obligations contracted by the husband alone are considered “for the benefit of the conjugal partnership” which are chargeable against the conjugal partnership? Is a surety agreement or an accommodation contract entered into by the husband in favor of his employer within the contemplation of the said provision?

These are the issues which we will resolve in this petition for review.

The petitioner assails the decision dated April 14, 1994 of the respondent Court of Appeals in “Spouses Alfredo and Encarnacion Ching vs. Ayala Investment and Development Corporation,et. al.,” docketed as CA-G.R. CV No. 29632,[1] upholding the decision of the Regional Trial Court of Pasig, Branch 168, which ruled that the conjugal partnership of gains of respondents-spouses Alfredo and Encarnacion Ching is not liable for the payment of the debts secured by respondent-husband Alfredo Ching.

A chronology of the essential antecedent facts is necessary for a clear understanding of the case at bar.

Philippine Blooming Mills (hereinafter referred to as PBM) obtained a P50,300,000.00 loan from petitioner Ayala Investment and Development Corporation (hereinafter referred to as AIDC). As added security for the credit line extended to PBM, respondent Alfredo Ching, Executive Vice President of PBM, executed security agreements on December 10, 1980 and on March 20, 1981 making himself jointly and severally answerable with PBM’s indebtedness to AIDC.

PBM failed to pay the loan. Thus, on July 30, 1981, AIDC filed a case for sum of money against PBM and respondent-husband Alfredo Ching with the then Court of First Instance of Rizal (Pasig), Branch VIII, entitled “Ayala Investment and Development Corporation vs. Philippine Blooming Mills and Alfredo Ching,” docketed as Civil Case No. 42228.

After trial, the court rendered judgment ordering PBM and respondent-husband Alfredo Ching to jointly and severally pay AIDC the principal amount of P50,300,000.00 with interests.

Pending appeal of the judgment in Civil Case No. 42228, upon motion of AIDC, the lower court issued a writ of execution pending appeal. Upon AIDC’s putting up of an P8,000,000.00 bond, a writ of execution dated May 12, 1982 was issued. Thereafter, petitioner Abelardo Magsajo, Sr., Deputy Sheriff of Rizal and appointed sheriff in Civil Case No. 42228, caused the issuance and service upon respondents-spouses of a notice of sheriff sale dated May 20, 1982 on three (3) of their conjugal properties. Petitioner Magsajo then scheduled the auction sale of the properties levied.

On June 9, 1982, private respondents filed a case of injunction against petitioners with the then Court of First Instance of Rizal (Pasig), Branch XIII, to enjoin the auction sale alleging that

petitioners cannot enforce the judgment against the conjugal partnership levied on the ground that, among others, the subject loan did not redound to the benefit of the said conjugal partnership.[2]Upon application of private respondents, the lower court issued a temporary restraining order to prevent petitioner Magsajo from proceeding with the enforcement of the writ of execution and with the sale of the said properties at public auction.

AIDC filed a petition for certiorari before the Court of Appeals,[3] questioning the order of the lower court enjoining the sale. Respondent Court of Appeals issued a Temporary Restraining Order on June 25, 1982, enjoining the lower court[4] from enforcing its Order of June 14, 1982, thus paving the way for the scheduled auction sale of respondents-spouses conjugal properties.

On June 25, 1982, the auction sale took place. AIDC being the only bidder, was issued a Certificate of Sale by petitioner Magsajo, which was registered on July 2, 1982. Upon expiration of the redemption period, petitioner sheriff issued the final deed of sale on August 4, 1982 which was registered on August 9, 1983.

In the meantime, the respondent court, on August 4, 1982, decided CA-G.R. SP No. 14404, in this manner:

“WHEREFORE, the petition for certiorari in this case is granted and the challenged order of the respondent Judge dated June 14, 1982 in Civil Case No. 46309 is hereby set aside and nullified. The same petition insofar as it seeks to enjoin the respondent Judge from proceeding with Civil Case No. 46309 is, however, denied. No pronouncement is here made as to costs. x x x x.”[5]

On September 3, 1983, AIDC filed a motion to dismiss the petition for injunction filed before Branch XIII of the CFI of Rizal (Pasig) on the ground that the same had become moot and academic with the consummation of the sale. Respondents filed their opposition to the motion arguing, among others, that where a third party who claims ownership of the property attached or levied upon, a different legal situation is presented; and that in this case, two (2) of the real properties are actually in the name of Encarnacion Ching, a non-party to Civil Case No. 42228.

The lower court denied the motion to dismiss. Hence, trial on the merits proceeded. Private respondents presented several witnesses. On the other hand, petitioners did not present any evidence.

On September 18, 1991, the trial court promulgated its decision declaring the sale on execution null and void. Petitioners appealed to the respondent court, which was docketed as CA-G.R. CV No. 29632.

On April 14, 1994, the respondent court promulgated the assailed decision, affirming the decision of the regional trial court. It held that:

“The loan procured from respondent-appellant AIDC was for the advancement and benefit of Philippine Blooming Mills and not for the benefit of the conjugal partnership of petitioners-appellees.

x x x x x x x x x

As to the applicable law, whether it is Article 161 of the New Civil Code or Article 1211 of the Family Code-suffice it to say that the two provisions are substantially the

same. Nevertheless, We agree with the trial court that the Family Code is the applicable law on the matter x x x x x x.

Article 121 of the Family Code provides that ‘The conjugal partnership shall be liable for: x x x (2) All debts and obligations contracted during the marriage by the designated Administrator-Spouse for the benefit of the conjugal partnership of gains x x x.’ The burden of proof that the debt was contracted for the benefit of the conjugal partnership of gains, lies with the creditor-party litigant claiming as such. In the case at bar, respondent-appellant AIDC failed to prove that the debt was contracted by appellee-husband, for the benefit of the conjugal partnership of gains.”

The dispositive portion of the decision reads:

“WHEREFORE, in view of all the foregoing, judgment is hereby rendered DISMISSING the appeal. The decision of the Regional Trial Court is AFFIRMED in toto.”[6]

Petitioner filed a Motion for Reconsideration which was denied by the respondent court in a Resolution dated November 28, 1994.[7]

Hence, this petition for review. Petitioner contends that the “respondent court erred in ruling that the conjugal partnership of private respondents is not liable for the obligation by the respondent-husband.”

Specifically, the errors allegedly committed by the respondent court are as follows:

“I. RESPONDENT COURT ERRED IN RULING THAT THE OBLIGATION INCURRED BY RESPONDENT HUSBAND DID NOT REDOUND TO THE BENEFIT OF THE CONJUGAL PARTNERSHIP OF THE PRIVATE RESPONDENT.

II RESPONDENT COURT ERRED IN RULING THAT THE ACT OF RESPONDENT HUSBAND IN SECURING THE SUBJECT LOAN IS NOT PART OF HIS INDUSTRY, BUSINESS OR CAREER FROM WHICH HE SUPPORTS HIS FAMILY.”

Petitioners in their appeal point out that there is no need to prove that actual benefit redounded to the benefit of the partnership; all that is necessary, they say, is that the transaction was entered into for the benefit of the conjugal partnership. Thus, petitioners aver that:

“The wordings of Article 161 of the Civil Code is very clear: for the partnership to be held liable, the husband must have contracted the debt ‘for the benefit of’ the partnership, thus:

‘Art. 161. The conjugal partnership shall be liable for:

1) all debts and obligations contracted by the husband for the benefit of the conjugal partnership x x x.’

There is a difference between the phrases: ‘redounded to the benefit of’ or ‘benefited from’ (on the one hand) and ‘for the benefit of’ (on the other). The former require that actual benefit must have been realized; the latter requires only that the transaction

should be one which normally would produce benefit to the partnership, regardless of whether or not actual benefit accrued.”[8]

We do not agree with petitioners that there is a difference between the terms “redounded to the benefit of” or “benefited from” on the one hand; and “for the benefit of” on the other. They mean one and the same thing. Article 161 (1) of the Civil Code and Article 121 (2) of the Family Code are similarly worded, i.e., both use the term “for the benefit of.” On the other hand, Article 122 of the Family Code provides that “The payment of personal debts by the husband or the wife before or during the marriage shall not be charged to the conjugal partnership except insofar as they redounded to the benefit of the family.” As can be seen, the terms are used interchangeably.

Petitioners further contend that the ruling of the respondent court runs counter to the pronouncement of this Court in the case of Cobb-Perez vs. Lantin,[9] that the husband as head of the family and as administrator of the conjugal partnership is presumed to have contracted obligations for the benefit of the family or the conjugal partnership.

Contrary to the contention of the petitioners, the case of Cobb-Perez is not applicable in the case at bar. This Court has, on several instances, interpreted the term “for the benefit of the conjugal partnership.”

In the cases of Javier vs. Osmeña,[10] Abella de Diaz vs. Erlanger & Galinger, Inc.,[11] Cobb-Perez vs. Lantin[12] and G-Tractors, Inc. vs. Court of Appeals,[13] cited by the petitioners, we held that:

“The debts contracted by the husband during the marriage relation, for and in the exercise of the industry or profession by which he contributes toward the support of his family, are not his personal and private debts, and the products or income from the wife’s own property, which, like those of her husband’s, are liable for the payment of the marriage expenses, cannot be excepted from the payment of such debts.” (Javier)

“The husband, as the manager of the partnership (Article 1412, Civil Code), has a right to embark the partnership in an ordinary commercial enterprise for gain, and the fact that the wife may not approve of a venture does not make it a private and personal one of the husband.” (Abella de Diaz)

“Debts contracted by the husband for and in the exercise of the industry or profession by which he contributes to the support of the family, cannot be deemed to be his exclusive and private debts.” (Cobb-Perez)

“x x x if he incurs an indebtedness in the legitimate pursuit of his career or profession or suffers losses in a legitimate business, the conjugal partnership must equally bear the indebtedness and the losses, unless he deliberately acted to the prejudice of his family.” (G-Tractors)

However, in the cases of Ansaldo vs. Sheriff of Manila, Fidelity Insurance & Luzon Insurance Co.,[14] Liberty Insurance Corporation vs. Banuelos,[15] and Luzon Surety Inc. vs. De Garcia,[16]cited by the respondents, we ruled that:

“The fruits of the paraphernal property which form part of the assets of the conjugal partnership, are subject to the payment of the debts and expenses of the spouses, but

not to the payment of the personal obligations (guaranty agreements) of the husband, unless it be proved that such obligations were productive of some benefit to the family.” (Ansaldo; parenthetical phrase ours.)

“When there is no showing that the execution of an indemnity agreement by the husband redounded to the benefit of his family, the undertaking is not a conjugal debt but an obligation personal to him.” (Liberty Insurance)

“In the most categorical language, a conjugal partnership under Article 161 of the new Civil Code is liable only for such ‘debts and obligations contracted by the husband for the benefit of the conjugal partnership.’ There must be the requisite showing then of some advantage which clearly accrued to the welfare of the spouses. Certainly, to make a conjugal partnership respond for a liability that should appertain to the husband alone is to defeat and frustrate the avowed objective of the new Civil Code to show the utmost concern for the solidarity and well-being of the family as a unit. The husband, therefore, is denied the power to assume unnecessary and unwarranted risks to the financial stability of the conjugal partnership.” (Luzon Surety, Inc.)

From the foregoing jurisprudential rulings of this Court, we can derive the following conclusions:

(A) If the husband himself is the principal obligor in the contract, i.e., he directly received the money and services to be used in or for his own business or his own profession, that contract falls within the term “x x x x obligations for the benefit of the conjugal partnership.” Here, no actual benefit may be proved. It is enough that the benefit to the family is apparent at the time of the signing of the contract. From the very nature of the contract of loan or services, the family stands to benefit from the loan facility or services to be rendered to the business or profession of the husband. It is immaterial, if in the end, his business or profession fails or does not succeed. Simply stated, where the husband contracts obligations on behalf of the family business, the law presumes, and rightly so, that such obligation will redound to the benefit of the conjugal partnership.

(B) On the other hand, if the money or services are given to another person or entity, and the husband acted only as a surety or guarantor, that contract cannot, by itself, alone be categorized as falling within the context of “obligations for the benefit of the conjugal partnership.” The contract of loan or services is clearly for the benefit of the principal debtor and not for the surety or his family. No presumption can be inferred that, when a husband enters into a contract of surety or accommodation agreement, it is “for the benefit of the conjugal partnership.” Proof must be presented to establish benefit redounding to the conjugal partnership.

Thus, the distinction between the Cobb-Perez case, and we add, that of the three other companion cases, on the one hand, and that of Ansaldo, Liberty Insurance and Luzon Surety, is that in the former, the husband contracted the obligation for his own business; while in the latter, the husband merely acted as a surety for the loan contracted by another for the latter’s business.

The evidence of petitioner indubitably show that co-respondent Alfredo Ching signed as surety for the P50M loan contracted on behalf of PBM. Petitioner should have adduced evidence

to prove that Alfredo Ching’s acting as surety redounded to the benefit of the conjugal partnership. The reason for this is as lucidly explained by the respondent court:

“The loan procured from respondent-appellant AIDC was for the advancement and benefit of Philippine Blooming Mills and not for the benefit of the conjugal partnership of petitioners-appellees. Philippine Blooming Mills has a personality distinct and separate from the family of petitioners-appellees - this despite the fact that the members of the said family happened to be stockholders of said corporate entity.”

x x x x x x x x x

x x x. The burden of proof that the debt was contracted for the benefit of the conjugal partnership of gains, lies with the creditor-party litigant claiming as such. In the case at bar, respondent-appellant AIDC failed to prove that the debt was contracted by appellee-husband, for the benefit of the conjugal partnership of gains. What is apparent from the facts of the case is that the judgment debt was contracted by or in the name of the Corporation Philippine Blooming Mills and appellee-husband only signed as surety thereof. The debt is clearly a corporate debt and respondent-appellant’s right of recourse against appellee-husband as surety is only to the extent of his corporate stockholdings. It does not extend to the conjugal partnership of gains of the family of petitioners-appellees. x x x x x x.” [17]

Petitioners contend that no actual benefit need accrue to the conjugal partnership. To support this contention, they cite Justice J.B.L. Reyes’ authoritative opinion in the Luzon Surety Company case:

“I concur in the result, but would like to make of record that, in my opinion, the words ‘all debts and obligations contracted by the husband for the benefit of the conjugal partnership’ used in Article 161 of the Civil Code of the Philippines in describing the charges and obligations for which the conjugal partnership is liable do not require that actual profit or benefit must accrue to the conjugal partnership from the husband’s transaction; but it suffices that the transaction should be one that normally would produce such benefit for the partnership. This is the ratio behind our ruling in Javier vs. Osmeña, 34 Phil. 336, that obligations incurred by the husband in the practice of his profession are collectible from the conjugal partnership.”

The aforequoted concurring opinion agreed with the majority decision that the conjugal partnership should not be made liable for the surety agreement which was clearly for the benefit of a third party. Such opinion merely registered an exception to what may be construed as a sweeping statement that in all cases actual profit or benefit must accrue to the conjugal partnership. The opinion merely made it clear that no actual benefits to the family need be proved in some cases such as in the Javier case. There, the husband was the principal obligor himself. Thus, said transaction was found to be “one that would normally produce x x x benefit for the partnership.” In the later case of G-Tractors, Inc., the husband was also the principal obligor - not merely the surety. This latter case, therefore, did not create any precedent. It did not also supersede the Luzon Surety Company case, nor any of the previous accommodation contract cases, where this Court ruled that they were for the benefit of third parties.

But it could be argued, as the petitioner suggests, that even in such kind of contract of accommodation, a benefit for the family may also result, when the guarantee is in favor of the husband’s employer.

In the case at bar, petitioner claims that the benefits the respondent family would reasonably anticipate were the following:

(a) The employment of co-respondent Alfredo Ching would be prolonged and he would be entitled to his monthly salary of P20,000.00 for an extended length of time because of the loan he guaranteed;

(b) The shares of stock of the members of his family would appreciate if the PBM could be rehabilitated through the loan obtained;

(c) His prestige in the corporation would be enhanced and his career would be boosted should PBM survive because of the loan.

However, these are not the benefits contemplated by Article 161 of the Civil Code. The benefits must be one directly resulting from the loan. It cannot merely be a by-product or a spin-off of the loan itself.

In all our decisions involving accommodation contracts of the husband,[18] we underscored the requirement that: “there must be the requisite showing x x x of some advantage which clearly accrued to the welfare of the spouses” or “benefits to his family” or “that such obligations are productive of some benefit to the family.” Unfortunately, the petition did not present any proof to show: (a) Whether or not the corporate existence of PBM was prolonged and for how many months or years; and/or (b) Whether or not the PBM was saved by the loan and its shares of stock appreciated, if so, how much and how substantial was the holdings of the Ching family.

Such benefits (prospects of longer employment and probable increase in the value of stocks) might have been already apparent or could be anticipated at the time the accommodation agreement was entered into. But would those “benefits” qualify the transaction as one of the “obligations x x x for the benefit of the conjugal partnership”? Are indirect and remote probable benefits, the ones referred to in Article 161 of the Civil Code? The Court of Appeals in denying the motion for reconsideration, disposed of these questions in the following manner:

“No matter how one looks at it, the debt/credit extended by respondents-appellants is purely a corporate debt granted to PBM, with petitioner-appellee-husband merely signing as surety. While such petitioner-appellee-husband, as such surety, is solidarily liable with the principal debtor AIDC, such liability under the Civil Code provisions is specifically restricted by Article 122 (par. 1) of the Family Code, so that debts for which the husband is liable may not be charged against conjugal partnership properties. Article 122 of the Family Code is explicit – ‘The payment of personal debts contracted by the husband or the wife before or during the marriage shall not be charged to the conjugal partnership except insofar as they redounded to the benefit of the family.’

Respondents-appellants insist that the corporate debt in question falls under the exception laid down in said Article 122 (par. one). We do not agree. The loan procured from respondent-appellant AIDC was for the sole advancement and benefit

of Philippine Blooming Mills and not for the benefit of the conjugal partnership of petitioners-appellees.

x x x appellee-husband derives salaries, dividends benefits from Philippine Blooming Mills (the debtor corporation), only because said husband is an employee of said PBM. These salaries and benefits, are not the ‘benefits’ contemplated by Articles 121 and 122 of the Family Code. The ‘benefits’ contemplated by the exception in Article 122 (Family Code) is that benefit derived directly from the use of the loan. In the case at bar, the loan is a corporate loan extended to PBM and used by PBM itself, not by petitioner-appellee-husband or his family. The alleged benefit, if any, continuously harped by respondents-appellants, are not only incidental but also speculative.”[19]

We agree with the respondent court. Indeed, considering the odds involved in guaranteeing a large amount (P50,000,000.00) of loan, the probable prolongation of employment in PBM and increase in value of its stocks, would be too small to qualify the transaction as one “for the benefit” of the surety’s family. Verily, no one could say, with a degree of certainty, that the said contract is even “productive of some benefits” to the conjugal partnership.

We likewise agree with the respondent court (and this view is not contested by the petitioners) that the provisions of the Family Code is applicable in this case. These provisions highlight the underlying concern of the law for the conservation of the conjugal partnership; for the husband’s duty to protect and safeguard, if not augment, not to dissipate it.

This is the underlying reason why the Family Code clarifies that the obligations entered into by one of the spouses must be those that redounded to the benefit of the family and that the measure of the partnership’s liability is to “the extent that the family is benefited.”[20]

These are all in keeping with the spirit and intent of the other provisions of the Civil Code which prohibits any of the spouses to donate or convey gratuitously any part of the conjugal property.[21] Thus, when co-respondent Alfredo Ching entered into a surety agreement he, from then on, definitely put in peril the conjugal property (in this case, including the family home) and placed it in danger of being taken gratuitously as in cases of donation.

In the second assignment of error, the petitioner advances the view that acting as surety is part of the business or profession of the respondent-husband.

This theory is new as it is novel.

The respondent court correctly observed that:

“Signing as a surety is certainly not an exercise of an industry or profession, hence the cited cases of Cobb-Perez vs. Lantin; Abella de Diaz vs. Erlanger & Galinger; G-Tractors, Inc. vs. CA do not apply in the instant case. Signing as a surety is not embarking in a business.”[22]

We are likewise of the view that no matter how often an executive acted or was persuaded to act, as a surety for his own employer, this should not be taken to mean that he had thereby embarked in the business of suretyship or guaranty.

This is not to say, however, that we are unaware that executives are often asked to stand as surety for their company’s loan obligations. This is especially true if the corporate officials have

sufficient property of their own; otherwise, their spouses’ signatures are required in order to bind the conjugal partnerships.

The fact that on several occasions the lending institutions did not require the signature of the wife and the husband signed alone does not mean that being a surety became part of his profession. Neither could he be presumed to have acted for the conjugal partnership.

Article 121, paragraph 3, of the Family Code is emphatic that the payment of personal debts contracted by the husband or the wife before or during the marriage shall not be charged to the conjugal partnership except to the extent that they redounded to the benefit of the family.

Here, the property in dispute also involves the family home. The loan is a corporate loan not a personal one. Signing as a surety is certainly not an exercise of an industry or profession nor an act of administration for the benefit of the family.

On the basis of the facts, the rules, the law and equity, the assailed decision should be upheld as we now uphold it. This is, of course, without prejudice to petitioner’s right to enforce the obligation in its favor against the PBM receiver in accordance with the rehabilitation program and payment schedule approved or to be approved by the Securities & Exchange Commission.

WHEREFORE, the petition for review should be, as it is hereby, DENIED for lack of merit.

SO ORDERED.

Regalado, (Chairman), Melo, Puno, and Mendoza, JJ., concur.

SECOND DIVISION

[G.R. No. 132887. August 11, 2005]

THE MANILA BANKING CORPORATION, petitioner, vs. EDMUNDO S. SILVERIO and THE COURT OF APPEALS, respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

Before the Court is a petition for review on certiorari of the Decision[1] and Resolution[2] of the Court of Appeals reversing the dismissal by the Regional Trial Court (RTC) of Makati City of the petition of private respondent for cancellation of notice of levy on attachment and writ of attachment on two (2) parcels of land located in Parañaque City.

The facts that gave rise to the present controversy are as follows:

Purificacion Ver was the registered owner of two parcels of land located at La Huerta, Parañaque City, covered by Transfer Certificates of Title (TCTs) No. 31444 (452448) and No. 45926 (452452) of the Registry of Deeds of Parañaque City.[3]

On 16 April 1979, Purificacion Ver sold the properties to Ricardo C. Silverio, Sr. (Ricardo, Sr.) for P1,036,475.00.[4] The absolute deed of sale evidencing the transaction was not registered; hence, title remained with the seller, Purificacion Ver.

On 22 February 1990, herein petitioner, The Manila Banking Corporation (TMBC), filed a complaint with the RTC of Makati City for the collection of a sum of money with application for the issuance of a writ of preliminary attachment against Ricardo, Sr. and the Delta Motors Corporation docketed as Civil Case No. 90-513.[5] On 02 July 1990, by virtue of an Order of Branch 62 of the RTC of Makati City, notice of levy on attachment of real property and writ of attachment were inscribed on TCTs No. 31444 (452448) and No. 45926 (452452).[6] On 29 March 1993, the trial court rendered its Decision in favor of TMBC and against Ricardo, Sr. and the Delta Motors Corporation.[7] The Decision was brought up to the Court of Appeals for review.[8]

In the meantime, on 22 July 1993, herein private respondent, Edmundo S. Silverio (Edmundo), the nephew[9] of judgment debtor Ricardo, Sr., requested TMBC to have the annotations on the subject properties cancelled as the properties were no longer owned by Ricardo, Sr.[10] This letter was referred to the Bangko Sentral Ng Pilipinas, TMBC’s statutory receiver.[11] No steps were taken to have the annotations cancelled.[12] Thus, on 17 December 1993, Edmundo filed in the RTC of Makati City a case for “Cancellation of Notice of Levy on Attachment and Writ of Attachment on Transfer Certificates of Title Nos. 452448 and 452452 of the Office of the Registrar of Land Titles and Deeds of Parañaque, Metro Manila.” In his petition, Edmundo alleged that as early as 11 September 1989, the properties, subject matter of the case, were already sold to him by Ricardo, Sr. As such, these properties could not be levied upon on 02 July 1990 to answer for the debt of Ricardo, Sr. who was no longer the owner thereof. In its Answer with Compulsory Counterclaim, TMBC alleged, among other things, that the sale in favor of Edmundo was void, therefore, the properties levied upon were still owned by Ricardo, Sr., the debtor in Civil Case No. 90-513.

On 02 May 1995, after trial on the merits, the lower court rendered its Decision dismissing Edmundo’s petition. TMBC’s counterclaim was likewise dismissed for lack of sufficient merit. The trial court held:

After a careful study of the facts proven in the instant case, the Court is compelled to rule that the petitioner is not entitled to a cancellation of the annotations/inscriptions of the notice of levy on attachment and writ of attachment appearing on Transfer Certificates of Title Nos. 45228 31444 and (452452) 45926 of the Registry of Deeds of Parañaque, Metro Manila. The Court is inclined to agree with the contention of oppositor that the supposed deed of sale in favor of herein petitioner is fictitious and simulated and thus void ab initio. The all-important factor that what appears in the notarial register of the notary public, albeit in loose form, is not a deed of sale but a mere affidavit of a different person – Maria J. Segismundo --, as shown in Exhibit 10-A, is sufficient to prove that no effective, valid and legal sale of the properties in question was executed between the Silverio uncle and nephew. There being no valid sale to him, petitioner has no right at all to ask for the cancellation of the aforementioned annotations.

WHEREFORE, the instant petition is hereby dismissed, with costs against petitioner. Oppositor’s counterclaim is ordered dismissed for lack of sufficient merit.[13]

The Court of Appeals, upon reviewing the case at the instance of Edmundo, reversed and set aside the trial court’s ruling. The dispositive portion of its Decision reads:

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET-ASIDE. A new one is rendered ORDERING the Register of Deeds of Parañaque City to cancel the Notice of Levy on Attachment and the Writ of Attachment made on TCT Nos. 452448 and 452452.

Costs against oppositor-appellee.[14]

The motion for reconsideration filed by TMBC was denied for lack of merit in a Resolution dated 25 February 1998.[15]

Hence, the present petition, TMBC imputing upon the Court of Appeals grave error in:

I.

. . . HOLDING THAT PETITIONER TMBC CANNOT QUESTION THE VALIDITY OF THE SALE OF THE PROPERTIES COVERED BY TCT NO. 31444 (452448) AND 45926 (452452); UNDER ARTICLE 1421 OF THE CIVIL CODE, THE DEFENSE OF NULLITY OF A CONTRACT IS AVAILABLE TO THIRD PERSONS WHOSE INTERESTS ARE DIRECTLY AFFECTED.

II.

… ORDERING THE CANCELLATION OF THE NOTICE OF LEVY ON ATTACHMENT AND THE WRIT OF ATTACHMENT MADE ON TCT NO. 452448 AND 452452 SINCE AS AGAINST TWO (2) TRANSACTIONS CONCERNING THE SAME LAND, THE REGISTERED TRANSACTION PREVAILS OVER THE ALLEGED EARLIER UNREGISTERED RIGHT.

III.

… FINDING THAT PETITIONER TMBC IS GUILTY OF BAD FAITH IN FAILING TO MAKE INQUIRIES ON THE RIGHTS OF RICARDO SILVERIO, SR. OVER THE SUBJECT PROPERTIES.

Basic is the rule that only properties belonging to the debtor can be attached, and an attachment and sale of properties belonging to a third party are void.[16] At the pith of the controversy, therefore, is the issue of ownership of the subject properties at the time of the levy thereof as the right of petitioner TMBC, as creditor, depends on whether such properties were still owned by its debtor, Ricardo, Sr., and not by Edmundo, who is concededly not a debtor of TMBC. If the properties were validly transferred to Edmundo before the levy thereof then cancellation of the annotation is in order. If, however, the sale was absolutely simulated and was entered into between uncle and nephew for the lone reason of removing the properties from the reach of TMBC, then the annotation should stay.

The issue of whether the contract is simulated or real is factual in nature, and the Court eschews factual examination in a petition for review under Rule 45 of the Rules of Court.[17] This rule, however, is not without exceptions, one of which is when there exists a conflict between the factual findings of the trial court and of the appellate court,[18] as in the case at bar.

The trial court, in ruling that TMBC was well within its rights to cause the levy of the properties through a writ of preliminary attachment, held that the sale between Ricardo, Sr. and his nephew, Edmundo, ostensibly effected before the levy of the subject properties, was void for being absolutely simulated. The fictitious nature of the sale between the uncle and nephew, according to the trial court, is made evident by the “all-important factor that what appears in the notarial register of the notary public, albeit in loose form, is not a deed of sale but a mere affidavit of a different person – Maria J. Segismundo -- as shown in Exhibit 10-A.” The trial court thus concluded that as the sale was void, the properties were still owned by Ricardo, Sr. at the time the levy thereon was effected.

In reversing the trial court, the Court of Appeals reasoned, among other things, that the sale between Ricardo, Sr. and Edmundo was not void and that assuming it to be void, only the parties to the sale and/or their assigns can impugn or assail its validity. Moreover, assailing the validity of a sale for being in fraud of creditors is a remedy of last resort, i.e., accion pauliana can be availed of only after the creditor has had exhausted all the properties of the debtor not exempt from execution.[19] In herein case, it does not appear that TMBC sought other properties of Ricardo, Sr. other than the subject properties alleged to have been transferred in fraud of creditors. Thus, as the sale of the subject properties was not void, it rightfully transferred ownership to Edmundo who is not a debtor of TMBC. Consequently, TMBC could not legally attach the same under Section 5, Rule 57 of the Rules of Civil Procedure.

The validity of the contract of sale being the focal point in the two court’s decision, we begin our analysis into the matter with two veritable presumptions: first, that there was sufficient consideration of the contract[20] and, second, that it was the result of a fair and regular private transaction.[21] As we held in Suntay v. Court of Appeals,[22] if shown to hold, these presumptions infer prima facie the transaction’s validity, except that it must yield to the evidence adduced.

Between the disparate positions of the trial court and the Court of Appeals, we find those of the trial court to be more in accord with the evidence on hand and the laws applicable thereto.

It will be noted that the Court of Appeals never justified its ruling that the lower court erred in finding the subject sale was void. On the other hand, the evidence is overwhelming that the sale dated 11 September 1989 between Ricardo Sr. and Edmundo was absolutely simulated and that it was non-existent prior to its initial appearance on 22 July 1993 when the latter wrote TMBC to cause the cancellation of its lien.

An absolutely simulated contract, under Article 1346 of the Civil Code, is void.[23] It takes place when the parties do not intend to be bound at all.[24] The characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties.[25] Thus, where a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title and control of the property; hence, the deed of transfer is but a sham.[26]Lacking, therefore, in a fictitious and simulated contract is consent which is essential to a valid and enforceable contract.[27]

In herein case, badges of fraud and simulation permeate the whole transaction, thus, we cannot but refuse to give the sale validity and legitimacy. Consider the following circumstances:

1) There is no proof that the said sale took place prior to the date of the attachment. The notarized deed of sale, which would have served as the best evidence of the transaction, did not materialize until 22 July 1993, or three (3) years after TMBC caused the annotation of its lien on the titles subject matter of the alleged sale. Mr. Jerry Tanchuan, Archivist 1 of the Records Management of the Archives Office (RMAO), testified that the procedure being followed with respect to notarized documents is that the Records Section of the RTC will transmit to the RMAO copies in its possession of the original documents notarized by a notary public together with the Notarial Registry Book.[28] In herein case, the RTC did not transmit any book of Atty. Anacleto T. Lacanilao, Jr., the notary public who allegedly notarized the deed of sale between Ricardo, Sr. and Edmundo for the year 1989.[29] Instead, what the RMAO was in possession of was only a loose leaf entry form for “Document No. 444, Page 90, Book No. 17, Series of 1989” which is an affidavit of one Maria J. Segismundo dated 11 September 1989.[30] The RMAO did not have available in its file the particular deed of sale acknowledged by Atty. Lacanilao as Document No. 444, Page 90, Book No. 17, Series of 1989.[31] In Tala Realty Services Corporation v. Banco Filipino Savings and Mortgage Bank,[32] as reiterated in two other Tala cases,[33] the Court rejected a notarized deed that was not reported to the Clerk of Court of the RTC by the notary public who notarized it. The Court held that this fact militates against the use of the document as basis to uphold the petitioner’s claim. The same is true in this case. The fact that the assailed deed of sale is not one of those submitted by Atty. Lacanilao to the Clerk of Court of the RTC of Makati City[34] renders it virtually worthless in the absence of corroboration as to its due execution other than petitioner (now private respondent) Edmundo’s self-serving statements. This being the case, Edmundo could simply have presented the witnesses to the transaction (his wife and his lawyer), Atty. Lacanilao or the seller himself, Ricardo Sr., to testify as to the execution of the contract of sale on 11 September 1989. This he did not do, thus lending more credence to the theory of TMBC that the sale was entered into only as an afterthought, hatched to prevent the transfer of the properties to TMBC after the latter had already annotated its lien thereon.

2) Edmundo, to say the least, was very evasive when questioned regarding details of the alleged sale. The deed of sale mentioned Three Million One Hundred Nine Thousand and Four Hundred Twenty-Five pesos (P3,109,425.00) as the contract price paid by hand during the execution of the contract, yet, when asked on cross-examination, Edmundo could not remember if he paid directly to Ricardo, Sr.[35] Worse, he could not remember where Ricardo, Sr. was at the time of the sale.[36] Thus:

Q: Now, Mr. Silverio, there is on page 2 marked as Exhibit “D-1” a signature over the typewritten name Edmundo S. Silverio, will you please tell us whose signature is that?

A. My signature.

Q. And again, there is a signature over the typewritten name Ricardo Silverio, vendor, will you please tell us whose signature is that?

A: That is the signature of the seller.

Q: And why do you say or how did you know that this is the signature of Ricardo Silverio?

A: Because the Deed of Absolute Sale was executed and signed infront of me.[37]

. . .

Q: And Mr. Witness, at the time of the Deed of Sale on September 11, 1989, was Ricardo Silverio in the country at that time?

A: I cannot give the exact presence of him. I cannot remember now.

Q: But at the time of the Deed of Sale on September 11, 1989, you know if he was in the country or not?

A: I cannot remember.

Q: With respect to the consideration for the purchase of subject parcels of land, what was the manner of payment for said consideration?

A: It is already mentioned in the Deed of Absolute Sale.

Q: In the deed of Absolute Sale there is mentioned made by hand, can you explain that?

A: The Deed of Absolute Sale clearly specified already the payment on which the payment was made.

Q: The Deed of Absolute Sale mentioned by hand, what does that mean – that you personally handed the payment to Mr. Silverio?

A: Payment was made to him.

Q: By hand you mean he was present?

A: When you said date, there was an exemption of payments made.

Q: But you gave the payment personally to Mr. Silverio?

A: I have to recall.

Q: So you cannot recall?

A: I cannot recall.[38]

If it were true that money indeed changed hands on 11 September 1989 as evidenced by the assailed deed of sale, then, at the very least, Edmundo, as buyer, would definitely not have forgotten personally handing P3,109,425.00 to the seller, Ricardo, Sr. It goes against ordinary human experience for a person to simply forget the details of the day when he became poorer byP3,109,425.00 cash. The only logical conclusion is that there was actually no consideration for the said sale. Verily, a deed of sale in which the stated consideration has not in fact been paid is a false contract that is void ab initio.[39] Likewise, “a contract of purchase and sale is null and void and produces no effect whatsoever where it appears that [the] same is without cause or consideration which should have been the motive thereof, or the purchase price appears thereon as paid but which in fact has never been paid by the purchaser to the vendor.” [40]

3) As correctly pointed out by TMBC, an indication of simulation of contract is the complete absence of an attempt in any manner on the part of the ostensible buyer to assert rights of ownership over the subject properties. In herein case, Edmundo did not attempt to have the 1989 deed of sale registered until 1993.[41] He was not in possession of the properties.[42] He did not have a contract of lease with the actual occupant of the properties.[43] As late as 1991, it was Ricardo, Sr. who was claiming to be the rightful owner of the properties in connection with an ejectment case he filed against third persons.[44] When asked to explain why it was Ricardo, Sr. who was asserting ownership over the properties, Edmundo lamely replied “because I am asking him so.”[45]

Taken together with the other circumstances surrounding the sale, Edmundo’s failure to exercise acts of dominium over the subject properties buttresses TMBC’s position that the former did not at all intend to be bound by the contract of sale. In Suntay,[46] as reiterated in such cases as Santiago v. Court of Appeals,[47] Cruz v. Bancom Finance Corporation[48] and Ramos v. Heirs of Ramos, Sr.,[49] we held that “the most proturberant index of simulation is the complete absence of an attempt in any manner on the part of the [ostensible buyer] to assert his rights of ownership over the [properties] in question.” The supposed buyer’s failure to take exclusive possession of the property allegedly sold or, in the alternative, to collect rentals, is contrary to the principle of ownership.[50] Such failure is a clear badge of simulation that renders the whole transaction void pursuant to Article 1409 of the Civil Code.[51]

When a contract is void, the right to set-up its nullity or non-existence is available to third persons whose interests are directly affected thereby.[52] The material interest of TMBC need not be belabored. Suffice it to say that as judgment creditor of Ricardo, Sr., it has the right to protect its lien acquired through a writ of preliminary attachment as security for the satisfaction of any judgment in its favor.

The Court of Appeals, however, erroneously ruled that TMBC should first go after the properties of its debtor, Ricardo, Sr., and, failing therein would be the only time it will acquire a material interest over the subject properties, thus:

Article 117 of the New Civil Code is very explicit that the right or remedy of the creditor to impugn the acts which the debtor may have done to defraud them is subsidiary in nature. It can only be availed of in the absence of any other legal remedy to obtain reparation for the injury. Otherwise stated, the right of accion pauliana can be availed of only AFTER the creditor have exhausted all the properties of the debtor not exempt from executions.

This fact is not present in this case. Not a single proof was offered to show that oppositor-appellee had exhausted all the properties of Ricardo Silverio before it tried to question the validity of the contract of sale. In fact, oppositor-appellee never alleged in its pleadings that it had exhausted all the properties of Ricardo Silverio before it impugned the validity of the sale made by Ricardo Silverio to petitioner-appellant.

This being the case, oppositor-appellee cannot and is not in the proper position to question the validity of the sale of the subject properties by Ricardo Silverio to petitioner-appellant. Oppositor-appellee has not shown that it has the material interest to question the sale.[53]

Contrary to the position taken by the Court of Appeals, TMBC need not look farther than the subject properties to protect its rights. The remedy of accion pauliana is available when the subject matter is a conveyance, otherwise valid¸ undertaken in fraud of creditors.[54] Such a contract is governed by the rules on rescission which prescribe, under Art. 1383 of the Civil Code, that such action can be instituted only when the party suffering damage has no other legal means to obtain reparation for the same. The contract of sale before us, albeit undertaken as well in fraud of creditors, is not merely rescissible but is void ab initio for lack of consent of the parties to be bound thereby. A void or inexistent contract is one which has no force and effect from the very beginning, as if it had never been entered into; it produces no effect whatsoever either against or in favor of anyone.[55] Rescissible contracts, on the other hand, are not void ab initio, and the principle, “quod nullum est nullum producit effectum,” in void and inexistent contracts is inapplicable.[56] Until set aside in an appropriate action, rescissible contracts are respected as being legally valid, binding and in force.[57] Tolentino, a noted civilist, distinguished between these two types of contracts entered into in fraud of creditors, thus:

Absolute simulation implies that there is no existing contract, no real act executed; while fraudulent alienation means that there is a true and existing transfer or contract. The former can be attacked by any creditor, including one subsequent to the contract; while the latter can be assailed only by the creditors before the alienation. In absolute simulation, the insolvency of the debtor making the simulated transfer is not a prerequisite to the nullity of the contract; while in fraudulent alienation, the action to rescind, or accion pauliana, requires that the creditor cannot recover in any other manner what is due him. Finally, the action to declare a contract absolutely simulated does not prescribe (articles 1409 and 1410); while the accion pauliana to rescind a fraudulent alienation prescribes in four years (article 1389).[58]

IN SUM, considering that an absolutely simulated contract is not a recognized mode of acquiring ownership,[59] the levy of the subject properties on 02 July 1990 pursuant to a writ of preliminary attachment duly issued by the RTC in favor of TMBC and against its debtor, Ricardo, Sr., was validly made as the properties were invariably his. Consequently, Edmundo, who has no legal interest in these properties, cannot cause the cancellation of the annotation of such lien for the reasons stated in his petition.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 17 October 1997 and its Resolution dated 25 February 1998 are hereby REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Makati City, Branch 145, dated 02 May 1995, is REINSTATED, dismissing the petition for Cancellation of Notice of Levy on Attachment and Writ of Attachment on Transfer Certificates of Title No. 31444 (452448) and No. 45926 (452452) of the Registry of Deeds of Parañaque City. With costs.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-19565 January 30, 1968

ESTRELLA DE LA CRUZ, plaintiff-appellee, vs. SEVERINO DE LA CRUZ, defendant-appellant.

Estacion and Paltriguera for plaintiff-appellee. Manuel O. Soriano and Pio G. Villoso for defendant-appellant.

CASTRO, J.:

The plaintiff Estrella de la Cruz filed a complaint on July 22, 1958 with the Court of First Instance of Negros Occidental, alleging in essence that her husband, the defendant Severino de la Cruz, had not only abandoned her but as well was mismanaging their conjugal partnership properties, and praying for (1) separation of property, (2) monthly support of P2,500 during the pendency of the action, and (3) payment of P20,000 as attorney's fees, and costs.

The court a quo forthwith issued an order allowing the plaintiff the amount prayed for as alimony pendente lite, which however, upon defendant's motion, was reduced to P2,000.

On June 1, 1961 the trial court rendered judgment ordering separation and division of the conjugal assets, and directing the defendant to pay to the plaintiff the sum of P20,000 as attorney's fees, with legal interest from the date of the original complaint, that is, from July 22, 1958, until fully paid, plus costs. From this judgment the defendant appealed to the Court of Appeals, which certified the case to us, "it appearing that the total value of the conjugal assets is over P500,000".

The basic facts are not controverted. The plaintiff and the defendant were married in Bacolod City on February 1, 1938. Six children were born to them, namely, Zenia (1939), Ronnie (1942), Victoria (1944), Jessie 1945), Bella (1946), and Felipe (1948). During their coverture they acquired seven parcels of land of the Bacolod Cadastre, all assessed at P45,429, and three parcels of the Silay Cadastre, all assessed at P43,580. All these parcels are registered in their names. The hacienda in Silay yielded for the year 1957 a net profit of P3,390.49.

They are also engaged in varied business ventures with fixed assets valued as of December 31, 1956 at P496,006.92, from which they obtained for that year a net profit of P75,655.78. The net gain of the Philippine Texboard Factory, the principal business of the spouses, was P90,454.48 for the year 1957. As of December 31, 1959, the total assets of the various enterprises of the conjugal partnership were valued at P1,021,407.68, not including those of the Top Service Inc., of which firm the defendant has been the president since its organization in 1959 in Manila with a paid-up capital of P50,000, P10,000 of which was contributed by him. This corporation was the Beverly Hills Subdivision in Antipolo, Rizal, the Golden Acres Subdivision and the Green Valley Subdivision in Las Piñas, Rizal, and a lot and building located at M. H. del Pilar, Manila purchased for P285,000, an amount borrowed from the Manufacturer's Bank and Trust Company.

The spouses are indebted to the Philippine National Bank and the Development Bank of the Philippines for loans obtained, to secure which they mortgaged the Philippine Texboard Factory, the Silay hacienda, their conjugal house, and all their parcels of land located in Bacolod City.

The essential issues of fact may be gleaned from the nine errors the defendant imputes to the court a quo, namely,

1. In finding that the only visit, from May 15, 1955 to the rendition of the decision, made by the defendant to the conjugal abode to see his wife was on June 15, 1955;

2. In finding that the letter exh. 3 was written by one Nenita Hernandez and that she and the defendant are living as husband and wife;

3. In finding that since 1951 the relations between the plaintiff and the defendant were far from cordial, and that it was from 1948 that the former has been receiving an allowance from the latter;

4. In finding that the defendant has abandoned the plaintiff;

5. In finding that the defendant since 1956 has not discussed with his wife the business activities of the partnership, and that this silence constituted "abuse of administration of the conjugal partnerships";

6. In declaring that the defendant mortgaged the conjugal assets without the knowledge of the plaintiff and thru false pretences to which the latter was prey;

7. In allowing the plaintiff, on the one hand, to testify on facts not actually known by her, and, on the other hand, in not allowing the defendant to establish his special defenses;

8. In ordering separation of the conjugal partnership properties; and

9. In sentencing the defendant to pay to the plaintiff attorney's fees in the amount of P20,000, with interest at the legal rate.1äwphï1.ñët

Two issues of law as well emerge, requiring resolution petition: (1) Did the separation of the defendant from the plaintiff constitute abandonment in law that would justify a separation of the conjugal partnership properties? (2) Was the defendant's failure and/or refusal to inform the plaintiff of the state of their business enterprises such an abuse of his powers of administration of the conjugal partnership as to warrant a division of the matrimonial assets?

The plaintiff's evidence may be summarized briefly. The defendant started living in Manila in 1955, although he occasionally returned to Bacolod City, sleeping in his office at the Philippine Texboard Factory in Mandalagan, instead of in the conjugal home at 2nd Street, Bacolod City. Since 1955 the defendant had not slept in the conjugal dwelling, although in the said year he paid short visits during which they engaged in brief conversations. After 1955 up to

the time of the trial, the defendant had never visited the conjugal abode, and when he was in Bacolod, she was denied communication with him. He has abandoned her and their children, to live in Manila with his concubine, Nenita Hernandez. In 1949 she began to suspect the existence of illicit relations between her husband and Nenita. This suspicion was confirmed in 1951 when she found an unsigned note in a pocket of one of her husband's polo shirt which was written by Nenita and in which she asked "Bering" to meet her near the church. She confronted her husband who forthwith tore the note even as he admitted his amorous liaison with Nenita. He then allayed her fears by vowing to forsake his mistress. Subsequently, in November 1951, she found in the iron safe of her husband a letter, exh. C, also written by Nenita. In this letter the sender (who signed as "D") apologized for her conduct, and expressed the hope that the addressee ("Darling") could join her in Baguio as she was alone in the Patria Inn and lonely in "a place for honeymooners". Immediately after her husband departed for Manila the following morning, the plaintiff enplaned for Baguio, where she learned that Nenita had actually stayed at the Patria Inn, but had already left for Manila before her arrival. Later she met her husband in the house of a relative in Manila from whence they proceeded to the Avenue Hotel where she again confronted him about Nenita. He denied having further relations with this woman.

Celia Bañez, testifying for the plaintiff, declared that she was employed as a cook in the home of the spouses from May 15, 1955 to August 15, 1958, and that during the entire period of her employment she saw the defendant in the place only once. This declaration is contradicted, however, by the plaintiff herself who testified that in 1955 the defendant "used to have a short visit there," which statement implies more than one visit.

The defendant, for his part, denied having abandoned his wife and children, but admitted that in 1957, or a year before the filing of the action, he started to live separately from his wife. When he transferred his living quarters to his office in Mandalagan, Bacolod City, his intention was not, as it never has been, to abandon his wife and children, but only to teach her a lesson as she was quarrelsome and extremely jealous of every woman. He decided to live apart from his wife temporarily because at home he could not concentrate on his work as she always quarreled with him, while in Mandalagan he could pass the nights in peace. Since 1953 he stayed in Manila for some duration of time to manage their expanding business and look for market outlets for their texboard products. Even the plaintiff admitted in both her original and amended complaints that "sometime in 1953, because of the expanding business of the herein parties, the defendant established an office in the City of Manila, wherein some of the goods, effects and merchandise manufactured or produced in the business enterprises of the parties were sold or disposed of". From the time he started living separately in Mandalagan up to the filing of the complaint, the plaintiff herself furnished him food and took care of his laundry. This latter declaration was not rebutted by the plaintiff.

The defendant, with vehemence, denied that he has abandoned his wife and family, averring that he has never failed, even for a single month, to give them financial support, as witnessed by the plaintiff's admission in her original and amended complaints as well as in open court that during the entire period of their estrangement, he was giving her around P500 a month for support. In point of fact, his wife and children continued to draw allowances from his office of a total ranging from P1,200 to P1,500 a month. He financed the education of their children, two of whom were studying in Manila at the time of the trial and were not living with the

plaintiff. While in Bacolod City, he never failed to visit his family, particularly the children. His wife was always in bad need of money because she played mahjong, an accusation which she did not traverse, explaining that she played mahjong to entertain herself and forget the infidelities of her husband.

Marcos V. Ganaban, the manager of the Philippine Texboard Factory, corroborated the testimony of the defendant on the matter of the support the latter gave to his family, by declaring in court that since the start of his employment in 1950 as assistant general manager, the plaintiff has been drawing an allowance of P1,000 to P1,500 monthly, which amount was given personally by the defendant or, in his absence, by the witness himself.

The defendant denied that he ever maintained a mistress in Manila. He came to know Nenita Hernandez when she was barely 12 years old, but had lost track of her thereafter. His constant presence in Manila was required by the pressing demands of an expanding business. He denied having destroyed the alleged note which the plaintiff claimed to have come from Nenita, nor having seen, previous to the trial, the letter exh. C. The allegation of his wife that he had a concubine is based on mere suspicion. He had always been faithful to his wife, and not for a single instance had he been caught or surprised by her with another woman.

On the matter of the alleged abuse by the defendant of his powers of administration of the conjugal partnership, the plaintiff declared that the defendant refused and failed to inform her of the progress of their various business concerns. Although she did not allege, much less prove, that her husband had dissipated the conjugal properties, she averred nevertheless that her husband might squander and dispose of the conjugal assets in favor of his concubine. Hence, the urgency of separation of property.

The defendant's answer to the charge of mismanagement is that he has applied his industry, channeled his ingenuity, and devoted his time, to the management, maintenance and expansion of their business concerns, even as his wife threw money away at the mahjong tables. Tangible proof of his endeavors is that from a single cargo truck which he himself drove at the time of their marriage, he had built up one business after another, the Speedway Trucking Service, the Negros Shipping Service, the Bacolod Press, the Philippine Texboard Factory, and miscellaneous other business enterprises worth over a million pesos; that all that the spouses now own have been acquired through his diligence, intelligence and industry; that he has steadily expanded the income and assets of said business enterprises from year to year, contrary to the allegations of the complainant, as proved by his balance sheet and profit and loss statements for the year 1958 and 1959 (exhibits 1 and 2); and that out of the income of their enterprises he had purchased additional equipment and machineries and has partially paid their indebtedness to the Philippine National Bank and the Development Bank of the Philippines.

It will be noted that the plaintiff does not ask for legal separation. The evidence presented by her to prove concubinage on the part of the defendant, while pertinent and material in the determination of the merits of a petition for legal separation, must in this case be regarded merely as an attempt to bolster her claim that the defendant had abandoned her, which abandonment, if it constitutes abandonment in law, would justify separation of the conjugal assets under the applicable provisions of article 178 of the new Civil Code which read: "The

separation in fact between husband and wife without judicial approval, shall not affect the conjugal partnership, except that . . . if the husband has abandoned the wife without just cause for at least one year, she may petition the court for a receivership, or administration by her of the conjugal partnership property, or separation of property". In addition to abandonment as a ground, the plaintiff also invokes article 167 of the new Civil Code in support of her prayer for division of the matrimonial assets. This article provides that "In case of abuse of powers of administration of the conjugal partnership property by the husband, the courts, on the petition of the wife, may provide for a receivership, or administration by the wife, or separation of property". It behooves us, therefore, to inquire, in the case at bar, whether there has been abandonment, in the legal sense, by the defendant of the plaintiff, and/or whether the defendant has abused his powers of administration of the conjugal partnership property, so as to justify the plaintiff's plea for separation of property.

We have made a searching scrutiny of the record, and it is our considered view that the defendant is not guilty of abandonment of his wife, nor of such abuse of his powers of administration of the conjugal partnership, as to warrant division of the conjugal assets.

The extraordinary remedies afforded to the wife by article 178 when she has been abandoned by the husband for at least one year are the same as those granted to her by article 167 in case of abuse of the powers of administration by the husband. To entitle her to any of these remedies, under article 178, there must be real abandonment, and not mere separation. 1 The abandonment must not only be physical estrangement but also amount to financial and moral desertion.

Although an all-embracing definition of the term "abandonment " is yet to be spelled out in explicit words, we nevertheless can determine its meaning from the context of the Law as well as from its ordinary usage. The concept of abandonment in article 178 may be established in relation to the alternative remedies granted to the wife when she has been abandoned by the husband, namely, receivership, administration by her, or separation of property, all of which are designed to protect the conjugal assets from waste and dissipation rendered imminent by the husband's continued absence from the conjugal abode, and to assure the wife of a ready and steady source of support. Therefore, physical separation alone is not the full meaning of the term "abandonment", if the husband, despite his voluntary departure from the society of his spouse, neither neglects the management of the conjugal partnership nor ceases to give support to his wife.

The word "abandon", in its ordinary sense, means to forsake entirely; to forsake or renounce utterly. 2 The dictionaries trace this word to the root idea of "putting under a bar". The emphasis is on the finality and the publicity with which some thing or body is thus put in the control of another, and hence the meaning of giving up absolutely, with intent never again to resume or claim one's rights or interests. 3 When referring to desertion of a wife by a husband, the word has been defined as "the act of a husband in voluntarily leaving his wife with intention to forsake her entirely, never to return to her, and never to resume his marital duties towards her, or to claim his marital rights; such neglect as either leaves the wife destitute of the common necessaries of life, or would leave her destitute but for the charity of others." 4 The word "abandonment", when referring to the act of one consort of leaving the other, is "the act of the

husband or the wife who leaves his or her consort wilfully, and with an intention of causing per perpetual separation." 5 Giving to the word "abandoned", as used in article 178, the meaning drawn from the definitions above reproduced, it seems rather clear that to constitute abandonment of the wife by the husband, there must be absolute cessation of marital relations and duties and rights, with the intention of perpetual separation.

Coming back to the case at bar, we believe that the defendant did not intend to leave his wife and children permanently. The record conclusively shows that he continued to give support to his family despite his absence from the conjugal home. This fact is admitted by the complainant, although she minimized the amount of support given, saying that it was only P500 monthly. There is good reason to believe, however, that she and the children received more than this amount, as the defendant's claim that his wife and children continued to draw from his office more than P500 monthly was substantially corroborated by Marcos Ganaban, whose declarations were not rebutted by the plaintiff. And then there is at all no showing that the plaintiff and the children were living in want. On the contrary, the plaintiff admitted, albeit reluctantly, that she frequently played mahjong, from which we can infer that she had money; to spare.

The fact that the defendant never ceased to give support to his wife and children negatives any intent on his part not to return to the conjugal abode and resume his marital duties and rights. In People v. Schelske, 6 it was held that where a husband, after leaving his wife, continued to make small contributions at intervals to her support and that of their minor child, he was not guilty of their "abandonment", which is an act of separation with intent that it shall be perpetual, since contributing to their support negatived such intent. In re Hoss' Estate, supra, it was ruled that a father did not abandon his family where the evidence disclosed that he almost always did give his wife part of his earnings during the period of their separation and that he gradually paid some old rental and grocery bills.

With respect to the allegation that the defendant maintained a concubine, we believe, contrary to the findings of the court a quo, that the evidence on record fails to preponderate in favor of the plaintiff's thesis. The proof that Nenita Hernandez was the concubine of the defendant and that they were living as husband and wife in Manila, is altogether too indefinite. Aside from the uncorroborated statement of the plaintiff that she knew that Nenita Hernandez was her husband's concubine, without demonstrating by credible evidence the existence of illicit relations between Nenita and the defendant, the only evidence on record offered to link the defendant to his alleged mistress is exh. C. The plaintiff however failed to connect authorship of the said letter with Nenita, on the face whereof the sender merely signed as "D" and the addressee was one unidentified "Darling". The plaintiff's testimony on cross-examination, hereunder quoted, underscores such failure:

Q. You personally never received any letter from Nenita?

A. No.

Q. Neither have you received on any time until today from 1949 from Nenita?

A. No.

Q. Neither have you written to her any letter yourself until now?

A. Why should I write a letter to her.

Q. In that case, Mrs. De la Cruz, you are not familiar with the handwriting of Nenita. Is that right?

A. I can say that Nenita writes very well.

Q. I am not asking you whether she writes very well or not but, my question is this: In view of the fact that you have never received a letter from Nenita, you have ot sent any letter to her, you are not familiar with her handwriting?

A. Yes.

Q. You have not seen her writing anybody?

A. Yes.

Anent the allegation that the defendant had mismanaged the conjugal partnership property, the record presents a different picture. There is absolutely no evidence to show that he has squandered the conjugal assets. Upon the contrary, he proved that through his industry and zeal, the conjugal assets at the time of the trial had increased to a value of over a million pesos.

The lower court likewise erred in holding that mere refusal or failure of the husband as administrator of the conjugal partnership to inform the wife of the progress of the family businesses constitutes abuse of administration. For "abuse" to exist, it is not enough that the husband perform an act or acts prejudicial to the wife. Nor is it sufficient that he commits acts injurious to the partnership, for these may be the result of mere inefficient or negligent administration. Abuse connotes willful and utter disregard of the interests of the partnership, evidenced by a repetition of deliberate acts and/or omissions prejudicial to the latter. 7

If there is only physical separation between the spouses (and nothing more), engendered by the husband's leaving the conjugal abode, but the husband continues to manage the conjugal properties with the same zeal, industry, and efficiency as he did prior to the separation, and religiously gives support to his wife and children, as in the case at bar, we are not disposed to grant the wife's petition for separation of property. This decision may appear to condone the husband's separation from his wife; however, the remedies granted to the wife by articles 167 and 178 are not to be construed as condonation of the husband's act but are designed to protect the conjugal partnership from waste and shield the wife from want. Therefore, a denial of the wife's prayer does not imply a condonation of the husband's act but merely points up the insufficiency or absence of a cause of action.1äwphï1.ñët

Courts must need exercise judicial restraint and reasoned hesitance in ordering a separation of conjugal properties because the basic policy of the law is homiletic, to promote healthy family life and to preserve the union of the spouses, in person, in spirit and in property.

Consistent with its policy of discouraging a regime of separation as not in harmony with the unity of the family and the mutual affection and help expected of the spouses, the Civil Code (both old and new) requires that separation of property shall not prevail unless expressly stipulated in marriage settlements before the union is solemnized or by formal judicial decree during the existence of the marriage (Article 190, new Civil Code, Article 1432, old Civil Code): and in the latter case, it may only be ordered by the court for causes specified in Article 191 of the new Civil Code. 8

Furthermore, a judgment ordering the division of conjugal assets where there has been no real abandonment, the separation not being wanton and absolute, may altogether slam shut the door for possible reconciliation. The estranged spouses may drift irreversibly further apart; the already broken family solidarity may be irretrievably shattered; and any flickering hope for a new life together may be completely and finally extinguished.

The monthly alimony in the sum of P2,000 which was allowed to the wife in 1958, long before the devaluation of the Philippine peso in 1962, should be increased to P3,000.

On the matter of attorney's fees, it is our view that because the defendant, by leaving the conjugal abode, has given cause for the plaintiff to seek redress in the courts, and ask for adequate support, an award of attorney's fees to the plaintiff must be made. Ample authority for such award is found in paragraphs 6 and 11 of article 2208 of the new Civil Code which empower courts to grant counsel's fees "in actions for legal support" and in cases "where the court deems it just and equitable that attorney's fees . . . should be recovered." However, an award of P10,000, in our opinion, is, under the environmental circumstances, sufficient.

This Court would be remiss if it did not, firstly, remind the plaintiff and the defendant that the law enjoins husband and wife to live together, and, secondly, exhort them to avail of — mutually, earnestly and steadfastly — all opportunities for reconciliation to the end that their marital differences may be happily resolved, and conjugal harmony may return and, on the basis of mutual respect and understanding, endure.

ACCORDINGLY, the judgment a quo, insofar as it decrees separation of the conjugal properties, is reversed and set aside. Conformably to our observations, however, the defendant is ordered to pay to the plaintiff, in the concept of support, the amount of P3,000 per month, until he shall have rejoined her in the conjugal home, which amount may, in the meantime, be reduced or increased in the discretion of the court a quo as circumstances warrant. The award of attorney's fees to the plaintiff is reduced to P10,000, without interest. No pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.

FIRST DIVISI0N

SPS. JORGE NAVARRA and CARMELITA BERNARDO NAVARRA and RRRC DEVELOPMENT CORPORATION, Petitioners, - versus - PLANTERS DEVELOPMENT BANK and ROBERTO GATCHALIAN REALTY, INC., Respondents.

G.R. No. 172674 Present: PUNO, C.J., Chairperson, *SANDOVAL-GUTIERREZ, CORONA, AZCUNA and GARCIA, JJ. Promulgated: July 12, 2007

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D E C I S I O N

GARCIA, J.:

Assailed and sought to be set aside in this petition for review under Rule 45 of the Rules of Court is the decision[1] dated September 27, 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 50002, as reiterated in its resolution[2] dated May 8, 2006, denying reconsideration thereof. The challenged decision reversed that of the Regional Trial Court (RTC) of Makati City, Branch 66, in its Civil Case No. 16917, an action for Specific Performance and Injunction thereat commenced by the herein petitioners against the respondents. The Makati RTC ruled that a perfected contract of sale existed in favor of Jorge Navarra and Carmelita Bernardo Navarra (Navarras) over the properties involved in the suit and accordingly ordered Planters Development Bank (Planters Bank) to execute the necessary deed of sale therefor. The CA reversed that ruling. Hence, this recourse by the petitioners.

The facts: The Navarras are the owners of five (5) parcels of land located at B.F. Homes, Parañaque

and covered by Transfer Certificates of Title (TCT) Nos. S-58017, S-58011, S-51732, S-51733 and A-14574. All these five (5) parcels of land are the subject of this controversy.

On July 5, 1982, the Navarras obtained a loan of P1,200,000.00 from Planters Bank and,

by way of security therefor, executed a deed of mortgage over their aforementioned five (5) parcels of land. Unfortunately, the couple failed to pay their loan obligation. Hence, Planters Bank foreclosed on the mortgage and the mortgaged assets were sold to it for P1,341,850.00, it

being the highest bidder in the auction sale conducted on May 16, 1984. The one-year redemption period expired without the Navarras having redeemed the foreclosed properties.

On the other hand, co-petitioner RRRC Development Corporation (RRRC) is a real estate

company owned by the parents of Carmelita Bernardo Navarra. RRRC itself obtained a loan

from Planters Bank secured by a mortgage over another set of properties owned by RRRC. The

loan having been likewise unpaid, Planters Bank similarly foreclosed the mortgaged assets of

RRRC. Unlike the Navarras, however, RRRC was able to negotiate with the Bank for the

redemption of its foreclosed properties by way of a concession whereby the Bank allowed RRRC

to refer to it would-be buyers of the foreclosed RRRC properties who would remit their

payments directly to the Bank, which payments would then be considered as redemption price

for RRRC. Eventually, the foreclosed properties of RRRC were sold to third persons whose

payments therefor, directly made to the Bank, were in excess by P300,000.00 for the redemption

price.

In the meantime, Jorge Navarra sent a letter to Planters Bank, proposing to repurchase the five (5) lots earlier auctioned to the Bank, with a request that he be given untilAugust 31, 1985 to pay the down payment of P300,000.00. Dated July 18, 1985 and addressed to then Planters Bank President Jesus Tambunting, the letter reads in full:

This will formalize my request for your kind consideration in allowing my

brother and me to buy back my house and lot and my restaurant building and lot together with the adjacent road lot.

Since my brother, who is working in Saudi Arabia, has accepted this

arrangement only recently as a result of my urgent offer to him, perhaps it will be safe for us to set August 31, 1985 as the last day for the payment of a P300,000.00 downpayment. I hope you will grant us the opportunity to raise the funds within this period, which includes an allowance for delays.

The purchase price, I understand, will be based on the redemption value

plus accrued interest at the prevailing rate up to the date of our sales contract. Maybe you can give us a long term payment scheme on the basis of my brother’s annual savings of roughly US$30,000.00 everytime he comes home for his home leave.

I realize that this is not a regular transaction but I am seeking your favor to

give me a chance to reserve whatever values I can still recover from the properties and to avoid any legal complications that may arise as a consequence of the total

loss of the Balangay lot. I hope that you will extend to me your favorable action on this grave matter.

In response, Planters Bank, thru its Vice-President Ma. Flordeliza Aguenza, wrote back

Navarra via a letter dated August 16, 1985, thus:

Regarding your letter dated July 18, 1985, requesting that we give up to August 31, 1985 to buy back your house and lot and restaurant and building subject to a P300,000.00 downpayment on the purchase price, please be advised that the Collection Committee has agreed to your request.

Please see Mr. Rene Castillo, Head, Acquired Assets Unit, as soon as possible for the details of the transaction so that they may work on the necessary documentation.

Accordingly, Jorge Navarra went to the Office of Mr. Rene Castillo on August 20, 1985,

bringing with him a letter requesting that the excess payment of P300,000.00 in connection with

the redemption made by the RRRC be applied as down payment for the Navarras’ repurchase of

their foreclosed properties.

Because the amount of P300,000.00 was sourced from a different transaction between

RRRC and Planters Bank and involved different debtors, the Bank required Navarra to submit a

board resolution from RRRC authorizing him to negotiate for and its behalf and empowering him

to apply the excess amount of P300,000.00 in RRRC’s redemption payment as down payment

for the repurchase of the Navarras’ foreclosed properties. Meanwhile, titles to said properties were consolidated in the name of Planters Bank, and

on August 27, 1985, new certificates of title were issued in its name, to wit: TCT Nos. 97073, 97074, 97075, 97076 and 97077.

Then, on January 21, 1987, Planters Bank sent a letter to Jorge Navarra informing him

that it could not proceed with the documentation of the proposed repurchase of the foreclosed

properties on account of his non- compliance with the Bank’s request for the submission of the

needed board resolution of RRRC.

In his reply-letter of January 28, 1987, Navarra claimed having already delivered copies

of the required board resolution to the Bank. The Bank, however, did not receive said

copies. Thus, on February 19, 1987, the Bank sent a notice to the Navarrras demanding that they

surrender and vacate the properties in question for their failure to exercise their right of

redemption.

Such was the state of things when, on June 31, 1987, in the RTC of Makati City, the

Navarras filed their complaint for Specific Performance with Injunction against Planters

Bank. In their complaint docketed in said court as Civil Case No. 16917 and raffled to Branch

66 thereof, the Navarras, as plaintiffs, alleged that a perfected contract of sale was made between

them and Planters Bank whereby they would repurchase the subject properties for P1,800,000.00

with a down payment of P300,000.00.

In its Answer, Planters Bank asserted that there was no perfected contract of sale because

the terms and conditions for the repurchase have not yet been agreed upon.

On September 9, 1988, a portion of the lot covered by TCT No. 97077 (formerly TCT

No. A-14574) was sold by Planters Bank to herein co-respondent Roberto Gatchalian Realty,

Inc. (Gatchalian Realty). Consequently, TCT No. 97077 was cancelled and TCT No. 12692 was

issued in the name of Gatchalian Realty. This prompted the Navarras to amend their complaint

by impleading Gatchalian Realty as additional defendant.

In a decision dated July 10, 1995, the trial court ruled that there was a perfected contract

of sale between the Navarras and Planters Bank, and accordingly rendered judgment as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered

ordering: a) the cancellation of the Deed of Absolute Sale (Exh. “2”) over

lot 4137-C between defendant Planters Development Bank and defendant Roberto Gatchalian Realty Corporation (RGRI) with the

vendor bank refunding all the payments made by the vendee RGRI “without interest less the five percent (5%) broker’s commission”:

b) the defendant Planters Development Bank to execute the

Deed of Absolute Sale over the lots covered by TCT Nos. 97073, 97074, 97075, 97076, and 97077 in favor of all the plaintiffs for a consideration of ONE MILLION EIGHT HUNDRED THOUSAND (P1,800,000.00) less the downpayment of P300,000.00 plus interest at the rate of twenty five percent (25%) per year for five (5) years to be paid in full upon the execution of the contract;

c) the defendant Planters Development Bank the amount of

TEN THOUSAND PESOS (P10,000.00) by way of attorney’s fees.

d) No costs.

SO ORDERED.

Therefrom, Planters Bank and Gatchalian Realty separately went on appeal to the CA

whereat their appellate recourse were consolidated and docketed as CA-G.R. CV No. 50002.

As stated at the threshold hereof, the appellate court, in its decision of September 27,

2004, reversed that of the trial court and ruled that there was no perfected contract of sale

between the parties. Partly says the CA in its decision: The Court cannot go along with the deduction of the trial court that the response of Planters Bank was favorable to Jorge Navarra’s proposal and that the P300,000.00 in its possession is a down payment and as such sufficient bases to conclude that there was a valid and perfected contract of sale. Based on the turn of events and the tenor of the communications between the offerors and the creditor bank, it appears that there was not even a perfected contract to sell, much less a perfected contract of sale. Article 1319 cited by the trial court provides that the acceptance to an offer must be absolute. Simply put, there must be unqualified acceptance and no condition must tag along. But Jorge Navarra in trying to convince the bank to agree, had himself laid out terms in offering (1) a downpayment of P300,000.00 and setting (2) as deadline August 31, 1985 for the payment thereof. Under these terms and conditions the bank indeed accepted his offer, and these are essentially the contents of Exhibits “J” and “K.”

But was there compliance? According to the evidence on file the P300,000.00, if at all, was given beyond the agreed period. The court a quo missed the fact that the said amount came from the excess of the proceeds of the sale to the Peña spouses which Jorge Navarra made to appear was made before the deadline he set of August 31, 1985. But this is athwart Exhibits “M-1” and “N”, the Contract to Sell and the Deed of Sale between RRRC and the Peñas, for these were executed only on September 13, 1985 and October 7, 1985 respectively.

xxx xxx xxx There were two separate and independent loans secured by distinct mortgages on different lots and their only commonality is the relationship of the Navarras and Bernardo families. It is thus difficult to conceive and to conclude that such Byzantine arrangement was acquiesced to and provided for in that single and simple letter of the bank.

With their motion for reconsideration having been denied by the CA in its resolution

of May 8, 2006, petitioners are now with this Court via this recourse on their submission that the

CA erred -

I

XXX IN CONCLUDING THAT THERE WAS NO PERFECTED CONTRACT TO REPURCHASE THE FORECLOSED PROPERTIES BETWEEN THE PETITIONERS AND THE PRIVATE RESPONDENT PLANTERS DEVELOPMENT BANK, AS CORRECTLY FOUND BY THE TRIAL COURT.

II

XXX IN HOLDING THAT THE PARTIES NEVER GOT PAST THE NEGOTIATION STAGE.

While the question raised is essentially one of fact, of which the Court normally eschews

from, yet, given the conflicting factual findings of the trial and appellate courts, the Court shall

go by the exception[3] to the general rule and proceed to make its own assessment of the

evidence.

We DENY.

Petitioners contend that a perfected contract of sale came into being when respondent

Bank, thru a letter dated August 16, 1985, formally accepted the offer of the Navarras to

repurchase the subject properties.

In general, contracts undergo three distinct stages, to wit: negotiation, perfection or birth,

and consummation. Negotiation begins from the time the prospective contracting parties

manifest their interest in the contract and ends at the moment of their agreement. Perfection or

birth of the contract takes place when the parties agree upon the essential elements of the

contract, i.e., consent, object and price. Consummation occurs when the parties fulfill or

perform the terms agreed upon in the contract, culminating in the extinguishment thereof.[4]

A negotiation is formally initiated by an offer which should be certain with respect to

both the object and the cause or consideration of the envisioned contract. In order to produce a

contract, there must be acceptance, which may be express or implied, but it must not qualify the

terms of the offer. The acceptance of an offer must be unqualified and absolute to perfect the

contract. In other words, it must be identical in all respects with that of the offer so as to produce

consent or meeting of the minds.[5]

Here, the Navarras assert that the following exchange of correspondence between them

and Planters Bank constitutes the offer and acceptance, thus:

Letter dated July 18, 1985 of Jorge Navarra: This will formalize my request for your kind consideration in allowing my

brother and me to buy back my house and lot and my restaurant building and lot together with the adjacent road lot.

Since my brother, who is working in Saudi Arabia, has accepted this

arrangement only recently as a result of my urgent offer to him, perhaps it will be safe for us to set August 31, 1985 as the last day for the payment of a P300,000.00 downpayment. I hope you will grant us the opportunity to raise the funds within this period, which includes an allowance for delays.

The purchase price, I understand, will be based on the redemption value

plus accrued interest at the prevailing rate up to the date of our sales contract. Maybe you can give us a long term payment scheme on the basis of my brother’s annual savings of roughly US$30,000.00 everytime he comes home for his home leave.

I realize that this is not a regular transaction but I am seeking your favor to

give me a chance to reserve whatever values I can still recover from the properties and to avoid any legal complications that may arise as a consequence of the total loss of the Balangay lot. I hope that you will extend to me your favorable action on this grave matter.

Letter dated August 16, 1985 of Planters Bank Regarding your letter dated July 18, 1985, requesting that we give up to August 31, 1985 to buy back your house and lot and restaurant and building subject to a P300,000.00 downpayment on the purchase price, please be advised that the Collection Committee has agreed to your request.

Please see Mr. Rene Castillo, Head, Acquired Assets Unit, as soon as possible for the details of the transaction so that they may work on the necessary documentation. (Emphasis ours)

Given the above, the basic question that comes to mind is: Was the offer certain and the

acceptance absolute enough so as to engender a meeting of the minds between the parties?

Definitely not.

While the foregoing letters indicate the amount of P300,000.00 as down payment, they

are, however, completely silent as to how the succeeding installment payments shall be made. At

most, the letters merely acknowledge that the down payment of P300,000.00 was agreed upon by

the parties. However, this fact cannot lead to the conclusion that a contract of sale had been

perfected. Quite recently, this Court held that before a valid and binding contract of sale can

exist, the manner of payment of the purchase price must first be established since the agreement

on the manner of payment goes into the price such that a disagreement on the manner of payment

is tantamount to a failure to agree on the price.[6]

Too, the Navarras’ letter/offer failed to specify a definite amount of the purchase price

for the sale/repurchase of the subject properties. It merely stated that the “purchase price will be

based on the redemption value plus accrued interest at the prevailing rate up to the date of the

sales contract.” The ambiguity of this statement only bolsters the uncertainty of the Navarras’ so-

called “offer” for it leaves much rooms for such questions, as: what is the redemption value?

what prevailing rate of interest shall be followed: is it the rate stipulated in the loan agreement or

the legal rate? when will the date of the contract of sale be based, shall it be upon the time of the

execution of the deed of sale or upon the time when the last installment payment shall have been

made? To our mind, these questions need first to be addressed, discussed and negotiated upon by

the parties before a definite purchase price can be arrived at.

Significantly, the Navarras wrote in the same letter the following: Maybe you can give us a long-term payment scheme on the basis of my

brother’s annual savings of roughly US$30,000.00 every time he comes home for his home leave.

Again, the offer was not clear insofar as concerned the exact number of years that will

comprise the long-term payment scheme. As we see it, the absence of a stipulated period within

which the repurchase price shall be paid all the more adds to the indefiniteness of the Navarras’

offer.

Clearly, then, the lack of a definite offer on the part of the spouses could not possibly

serve as the basis of their claim that the sale/repurchase of their foreclosed properties was

perfected. The reason is obvious: one essential element of a contract of sale is wanting: the price

certain. There can be no contract of sale unless the following elements concur: (a) consent or

meeting of the minds; (b) determinate subject matter; and (c) price certain in money or its

equivalent. Such contract is born or perfected from the moment there is a meeting of minds upon

the thing which is the object of the contract and upon the price.[7] Here, what is dramatically

clear is that there was no meeting of minds vis-a-visthe price, expressly or impliedly, directly or

indirectly.

Further, the tenor of Planters Bank’s letter-reply negates the contention of the Navarras

that the Bank fully accepted their offer. The letter specifically stated that there is a need to

negotiate on the other details of the transaction[8] before the sale may be formalized. Such

statement in the Bank’s letter clearly manifests lack of agreement between the parties as to the

terms of the purported contract of sale/repurchase, particularly the mode of payment of the

purchase price and the period for its payment. The law requires acceptance to be absolute and

unqualified. As it is, the Bank’s letter is not the kind which would constitute acceptance as

contemplated by law for it does not evince any categorical and unequivocal undertaking on the

part of the Bank to sell the subject properties to the Navarras.

The Navarras’ attempt to prove the existence of a perfected contract of sale all the more

becomes futile in the light of the evidence that there was in the first place no acceptance of their

offer. It should be noted that aside from their first letter dated July 18, 1985, the Navarras wrote

another letter dated August 20, 1985, this time requesting the Bank that the down payment

of P300,000.00 be instead taken from the excess payment made by the RRRC in redeeming its

own foreclosed properties. The very circumstance that the Navarras had to make this new request

is a clear indication that no definite agreement has yet been reached at that point. As we see it,

this request constitutes a new offer on the part of the Navarras, which offer was again

conditionally accepted by the Bank as in fact it even required the Navarras to submit a board

resolution of RRRC before it could proceed with the proposed sale/repurchase. The eventual

failure of the spouses to submit the required board resolution precludes the perfection of a

contract of sale/repurchase between the parties. As earlier mentioned, contracts are perfected

when there is concurrence of the parties’ wills, manifested by the acceptance by one of the offer

made by the other.[9] Here, there was no concurrence of the offer and acceptance as would result

in a perfected contract of sale.

Evidently, what transpired between the parties was only a prolonged negotiation to buy

and to sell, and, at the most, an offer and a counter-offer with no definite agreement having been

reached by them. With the hard reality that no perfected contract of sale/repurchase exists in this

case, any independent transaction between the Planters Bank and a third-party, like the one

involving the Gatchalian Realty, cannot be affected.

WHEREFORE, the petition is DENIED and the assailed decision and resolution of the

Court of Appeals are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

CANCIO C. GARCIA Associate Justice

WE CONCUR:

REYNATO S. PUNO Chief Justice Chairperson

(On leave)

ANGELINA SANDOVAL-GUTIERREZ Associate Justice

RENATO C. CORONA Associate Justice

ADOLFO S. AZCUNA

Associate Justice

C E R T I F I C A T I O N Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO Chief Justice

THIRD DIVISION

LORDITO ARROGANTE, JOHNSTON ARROGANTE, ARME ARROGANTE, and FE D. ARROGANTE,

Petitioners,

- versus -

BEETHOVEN DELIARTE, Joined by SPOUSE LEONORA DUENAS,

Respondents.

G.R. No. 152132

Present:

YNARES-SANTIAGO, J.,

Chairperson,

AUSTRIA-MARTINEZ,

CHICO-NAZARIO, and

NACHURA, JJ.

Promulgated:

July 24, 2007

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

This Petition for Review on Certiorari assails the Decision[1] dated August 28, 2001 of the Court of Appeals (CA) in CA-G.R. CV No. 58493 which affirmed the Decision[2] dated February 18, 1997 of the Regional Trial Court (RTC), Branch 10, of Cebu City in an action for quieting of title and damages.

It appears that the lot in controversy, Lot No. 472-A (subject lot), is situated in Poblacion Daanbantayan, Cebu, and was originally conjugal property of the spouses Bernabe Deliarte, Sr. and Gregoria Placencia who had nine children, including herein respondent Beethoven Deliarte and petitioner Fe Deliarte Arrogante. The other petitioners, Lordito, Johnston, and Arme, Jr., all surnamed Arrogante, are the children of Fe and, thus, nephews of Beethoven. Respondent Leonora Duenas is the wife of Beethoven.

A series of misfortunes struck the Deliarte family. The first tragedy occurred when a brother of Beethoven and Fe was hospitalized and eventually died in Davao. Beethoven shouldered the hospitalization and other related expenses, including the transport of the body from Davao to Cebu and then to Daanbantayan.

The next occurrence took place a year after, when Gregoria was likewise hospitalized and subsequently died on July 29, 1978. Once again, Beethoven paid for all necessary expenses. Soon thereafter, it was Bernabe, the parties’ ailing father, who died on November 7, 1980. Not surprisingly, it was Beethoven who spent for their father’s hospitalization and burial.

In between the deaths of Gregoria and Bernabe, on November 16, 1978, the Deliarte siblings agreed to waive and convey in favor of Beethoven all their rights, interests, and claims to the subject lot in consideration of P15,000.00.[3] At the signing of the deed of absolute sale, the siblings who failed to attend the family gathering, either because they were dead or were simply unable to, were represented by their respective spouses who signed the document on their behalf.[4] Bernabe, who was already blind at that time, was likewise present and knew of the sale that took place among his children.

Thus, from then on, Beethoven occupied and possessed the subject lot openly, peacefully, and in the concept of owner. He exercised full ownership and control over the subject lot without any objection from all his siblings, or their heirs, until 1993 when the controversy arose.[5] In fact, on March 26, 1986, all of Beethoven’s siblings, except Fe, signed a deed of confirmation of sale in favor of Beethoven to ratify the 1978 private deed of sale.

Sometime in August 1993, petitioner Lordito Arrogante installed placards on the fence erected by respondents, claiming that the subject lot was illegally acquired by the latter.[6] The placards depicted Beethoven as a land grabber who had unconscionably taken the subject lot from Lordito who claimed that the lot is a devise from his grandfather.[7] Allegedly, the bequeathal was made in Bernabe’s last will and testament which was, unfortunately, torn up and destroyed by Beethoven.[8]

Thus, on November 10, 1993, respondents filed an action for quieting of title and damages against the petitioners.

In their answer, the petitioners averred that Beethoven does not own the whole of the subject lot because Bernabe was still alive in 1978 when Beethoven’s siblings sold to him all their rights and claims to and interests in that lot. Thus, the siblings could sell only their respective inheritance from one-half of the subject lot, representing Gregoria’s share in the conjugal property. Corollarily, the petitioners claimed that Fe continues to own 1/9 of one-half of the subject lot, comprising Bernabe’s share of the property, which allegedly was not contemplated in the conveyance in 1978. According to petitioners, this contention is supported by Fe’s failure to sign the deed of confirmation of sale in 1986.

As regards the damaging placards, the petitioners asseverated that Lordito acted on his own when he installed the same, and that this was resorted to merely to air his grievance against his uncle, Beethoven, for claiming ownership of the entire lot.

After trial, the RTC rendered a Decision quieting title on the subject lot in favor of respondents and directing petitioners, jointly and severally, to pay the respondentsP150,000.00 as moral damages, P25,000.00 as attorney’s fees, and P10,000.00 as litigation expenses.

On appeal, the CA affirmed the trial court’s decision but deleted the award of attorney’s fees and litigation expenses. In ruling for the respondents, both the trial and appellate courts upheld the validity of the 1978 sale as between the parties. Considering that petitioner Fe signed the document and consented to the transaction, she is now barred from repudiating the terms thereof. In this regard, the RTC and the CA applied the parole evidence rule and allowed the introduction of evidence on the additional consideration for the conveyance, namely, the expenses incurred by Beethoven during the three tragedies that had befallen the Deliarte family. Both courts found that the sale was already completely executed, thus removing it from the ambit of the Statute of Frauds.[9]

As for the award of moral damages, the trial and appellate courts held that the other petitioners’ failure to prevent Lordito from putting up, or at least, removing the placards, amounted to the defamation and opprobrium of Beethoven with their knowledge and acquiescence. Thus, the assessment of moral damages was appropriate, given the humiliation and embarrassment suffered by Beethoven considering his stature and reputation in the community as an electrical engineer handling several big projects.

However, petitioners insist that the lower courts erred in their rulings. They maintain that the 1978 sale did not contemplate the alienation of Bernabe’s share in the conjugal partnership as he failed to sign the private document. As such, the courts’ application of the parole evidence rule and the Statute of Frauds were erroneous. In the same vein, the petitioners posit that both courts’ ruling that they are jointly and severally liable for moral damages is inconsistent with the evidence on record that Lordito was the sole author of the damaging placards.

In this appeal, the issues for the resolution of this Court are:

I.

WHETHER OR NOT THE PRIVATE DEED OF SALE EXECUTED IN 1978 IS A VALID CONVEYANCE OF THE ENTIRE LOT 472-A TO PETITIONER BEETHOVEN DELIARTE.

II.

WHETHER OR NOT THE PAROLE EVIDENCE RULE IS APPLICABLE TO THIS CASE.

III.

WHETHER OR NOT THE STATUTE OF FRAUDS IS APPLICABLE TO THIS CASE.

IV.

WHETHER OR NOT THE PETITIONERS ARE JOINTLY AND SEVERALLY LIABLE FOR MORAL DAMAGES.

At the outset, we note that both the lower and the appellate courts failed to identify the applicable law.

First. The 1978 private deed of sale, insofar as it disposed of Bernabe’s share in the conjugal partnership prior to his death, is void for being a conveyance of the Deliarte siblings’ future inheritance.

Article 1347, paragraph 2 of the Civil Code characterizes a contract entered into upon future inheritance as void.[10] The law applies when the following requisites concur: (1) the succession has not yet been opened; (2) the object of the contract forms part of the inheritance; and (3) the promissor has, with respect to the object, an expectancy of a right which is purely hereditary in nature.[11]

In this case, at the time the contract was entered into, succession to Bernabe’s estate had yet to be opened, and the object thereof, i.e., Bernabe’s share in the subject lot, formed part of his children’s inheritance, and the children merely had an inchoate hereditary right thereto.

True, the prohibition on contracts respecting future inheritance admits of exceptions, as when a person partitions his estate by an act inter vivos under Article 1080 of the Civil Code.[12] However, the private deed of sale does not purport to be a partition of Bernabe’s estate as would exempt it from the application of Article 1347. Nowhere in the said document does Bernabe separate, divide, and assign to his children his share in the subject lot effective only upon his death.[13] Indeed, the document does not even bear the signature of Bernabe.

Neither did the parties demonstrate that Bernabe undertook an oral partition of his estate. Although we have held on several occasions that an oral or parole partition is valid, our holdings thereon were confined to instances wherein the partition had actually been consummated, enforced, and recognized by the parties.[14] Absent a showing of an overt act by Bernabe indicative of an unequivocal intent to partition his estate among his children, his knowledge and ostensible acquiescence to the private deed of sale does not equate to an oral partition by an act inter vivos. Besides, partition of property representing future inheritance cannot be made effective during the lifetime of its owner.[15]

Considering the foregoing, it follows that the 1986 deed of confirmation of sale which sought to ratify the 1978 sale likewise suffers from the same infirmity.[16] In short, the 1986 deed is also void.

Nevertheless, it is apparent that Bernabe treated his share[17] in the subject lot as his children’s present inheritance, and he relinquished all his rights and claim thereon in their favor subject to Beethoven’s compensation for the expenses he initially shouldered for the family. The records reveal that Bernabe, prior to his hospitalization and death, wanted to ensure that his children attended to the expenditure relating thereto, and even articulated his desire that such surpass the provision for both his son and wife, Beethoven’s and Fe’s brother and mother, respectively.[18] Their arrangement contemplated the Deliarte siblings’ equal responsibility for the family’s incurred expenses.

We take judicial notice of this collective sense of responsibility towards family. As with most nuclear Filipino families, the Deliarte siblings endeavored to provide for their parents or any member of their family in need. This was evident in Florenda Deliarte Nacua’s, the youngest Deliarte sibling’s, remittance to her parents of her salary for two years so they could redeem the subject lot.[19]

Florenda corroborated the testimony of Beethoven that their father was present during, and was aware of, the transaction that took place among his children.[20] The 1978 deed of sale, albeit void, evidenced the consent and acquiescence of each Deliarte sibling to said transaction. They raised no objection even after Beethoven forthwith possessed and occupied the subject lot.

The foregoing arrangement, vaguely reflected in the void deed of sale, points to a meeting of the minds among the parties constitutive of an innominate contract, akin to both an onerous and a remuneratory donation.[21] In this regard, Bernabe’s waiver and relinquishment of his share in the subject lot is effectively a donation inter vivos to his children. However, the gratuitous act is coupled with an onerous cause – equal accountability of the Deliarte siblings for the hospitalization and death expenses of deceased family members to be taken from their shares in the subject lot. In turn, the remunerative cause pertains to Beethoven’s recompense for the family expenses he initially shouldered.

During his lifetime, Bernabe remained the absolute owner of his undivided interest in the subject lot. Accordingly, he could have validly disposed of his interest therein. His consent to the disposition of the subject lot in favor of Beethoven, agreed upon among his children, is evident, considering his presence in, knowledge of, and acquiescence to the transaction. Further, the arrangement was immediately effected by the parties with no objection from Bernabe or any of the Deliarte siblings, including herein petitioner Fe. Ineluctably, the actual arrangement between the parties included Bernabe, and the object thereof did not constitute future inheritance.

Second. The parole evidence rule is applicable. While the application thereof presupposes the existence of a valid agreement, the innominate contract between the parties has been directly put in issue by the respondents. Verily, the failure of the deed of sale to express the true intent and agreement of the parties supports the application of the parole evidence rule.[22]

Contrary to petitioners’ contention, the absence of Bernabe’s signature in the 1978 deed of sale is not necessarily conclusive of his dissent or opposition to the effected arrangement. As previously adverted to, the agreement had multiple causes or consideration, apart from the P15,000.00 stated in the deed of sale. To repeat, the agreement between the parties had both an onerous and a remunerative cause. Also worthy of note is the moral consideration for the agreement given the relationship between the parties.

Third. We agree with both the lower and the appellate courts that the Statute of Frauds is not applicable to the instant case.

The general rule is that contracts are valid in whatever form they may be.[23] One exception thereto is the Statute of Frauds which requires a written instrument for the enforceability of a contract.[24] However, jurisprudence dictates that the Statute of Frauds only applies to executory, not to completed, executed, or partially consummated, contracts.[25]

In the case at bench, we find that all requisites for a valid contract are present, specifically: (1) consent of the parties; (2) object or subject matter, comprised of the parties’

respective shares in the subject lot; and (3) the consideration, over and above the P15,000.00 stipulated price. We note that the agreement between the parties had long been consummated and completed. In fact, the agreement clearly contemplated immediate execution by the parties. More importantly, the parties, including petitioner Fe, ratified the agreement by the acceptance of benefits thereunder.[26]

One other thing militates against Fe’s claim of ownership - silence and palpable failure to object to the execution of the agreement. Fe insists that she only intended to sell her share of the lot inherited from her mother’s estate, exclusive of her father’s share therein.

We are not persuaded by the belated claim. This afterthought is belied by the express stipulations in the 1978 deed of sale that the heirs of Bernabe and Gregoria, absolutely sell, quitclaim, and transfer the subject lot in favor of Beethoven. Although a void contract is not a source of rights and obligations between the parties, the provisions in the written agreement and their signature thereon are equivalent to an express waiver of all their rights and interests in the entire lot in favor of Beethoven, regardless of which part pertained to their mother’s or father’s estate.

Truly significant is the fact that in all the years that Beethoven occupied the subject lot, Fe never disturbed the former in his possession. Neither did she present her other siblings to buttress her contradicting claim over the subject lot. Likewise, she never asked for a partition of the property even after the death of their father, Bernabe, to settle his estate, or when her other siblings executed the deed of confirmation of sale in 1986. Fe also does not pretend to share in the payment of realty taxes thereon, but merely advances the claim that Priscillana, one of their siblings, had already paid said taxes.[27] Ultimately, petitioner Fe is estopped from staking a claim on the subject lot and wresting ownership therein from Beethoven.

Our holding in the case of Tinsay v. Yusay[28] is still good law, thus:

Juana Servando not being a party to the partition agreement Exhibit 1, the agreement standing alone was, of course, ineffective as against her. The attempt to partition her land among her heirs, constituting a partition of future inheritance was invalid under the second paragraph of Article 1271 of the Civil Code and for the same reason the renunciation of all interest in the land which now constitutes lots Nos. 241 and 713 made by the appellants in favor of the children of Jovito Yusay would likewise be of no binding force as to the undivided portion which belonged to Juan Servando. But if the parties entered into the partition agreement in good faith and treated all of the land as a present inheritance, and if the appellants on the strength of the agreement obtained their Torrens title to the land allotted to them therein, and if Perpetua Sian in reliance on the appellants’ renunciation of all interest claimed by her on behalf of her children in the cadastral case refrained from presenting any opposition to the appellants’ claim to the entire fee in the land assigned to them in the partition agreement and if the appellants after the death of Juana Servando continued to enjoy the benefits of the agreement refusing to compensate the heirs of Jovito Yusay for the latters’ loss of their interest in lots Nos. 2 and 744 through the registration of the lots in the name of the appellants and the subsequent alienation of the same to innocent third parties, said appellants are now estopped from repudiating the partition agreement of 1911 and from claiming any further interest in lots Nos. 241 and 713. There is, however, no reason why they should not be allowed to share in the distribution of the other property left by Juana Servando.

Fourth. As to the lower courts’ award of moral damages, we sustain respondents’ entitlement thereto. Undeniably, respondents suffered besmirched reputation, wounded feelings, and social humiliation due to the damaging placards.[29] The injury is aggravated because of the relationship among the parties. Respondent Beethoven was able to prove that his nephews, petitioners Lordito, Johnston, and Arme, Jr., stayed with him at some point, and that he financially supported and trained them to be electricians.[30]

Yet, Lordito denies malice in the aforesaid act. He argues that his only quarrel with Beethoven stems from the latter’s claim of ownership over the subject lot which was, supposedly, already bequeathed to him by his grandfather, Bernabe. Lordito maintains that his claim is valid, supported by a will Beethoven had torn up, which allegedly negates malice in his act of putting up the placards.

We are not convinced.

To begin with, the supposed devise to Lordito appears to be void. Considering that Bernabe’s estate consisted merely of his conjugal share in the subject lot, the bequeathal infringes on his compulsory heirs’ legitimes, including that of Lordito’s mother, Fe.[31] Lordito’s claim, therefore, is only subordinate to Beethoven’s claim as a compulsory heir, even without delving into the innominate contract between the parties. In all, the ascription of malice and Lordito’s corresponding liability for moral damages is correct given the words he employed in the placards.

However, we agree with petitioners that there is a dearth of evidence pointing to their collective responsibility for Lordito’s act.

Corollary thereto, Lordito admits and claims sole responsibility for putting up the placards. The other petitioners’ specific participation in the tortious act was not proven. Failure to prevent Lordito or command him to remove the placards, alone, does not justify the finding that all the petitioners are jointly and severally liable. It does not suffice that all the petitioners were moved by a common desire to acquire the subject property, absent any proof that they individually concurred in Lordito’s act.

Entrenched is the rule that “the rights of a party cannot be prejudiced by an act, declaration, or omission of another.”[32] The exception under Section 32, Rule 130 of the Rules of Court does not obtain in this instance. The other petitioners’ acquiescence to and apparent concurrence in Lordito’s act cannot be inferred merely from their failure to remove the placards

or reprimand Lordito. While the placards indeed defamed Beethoven, there is nothing that directly links the other petitioners to this dastardly act.

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The August 28, 2001 Decision of the Court of Appeals is hereby MODIFIED.Petitioner Lordito Arrogante is held solely liable to respondents for moral damages in the amount of P150,000.00. The quieting of title in favor of respondents is herebyAFFIRMED. No costs.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson, Third Division

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO

Chief Justice

FIRST DIVISION

[G.R. No. 136427. December 17, 2002]

SONIA F. LONDRES, ARMANDO V. FUENTES, CHI-CHITA FUENTES QUINTIA, ROBERTO V. FUENTES, LEOPOLDO V. FUENTES, OSCAR V. FUENTES and MARILOU FUENTES ESPLANA petitioners, vs. THE COURT OF APPEALS, THE DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, THE DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, ELENA ALOVERA SANTOS and CONSOLACION ALIVIO ALOVERA, respondents.

D E C I S I O N

CARPIO, J.:

Before us is a petition for review on certiorari[1] of the March 17, 1997 Decision[2] and the November 16, 1998 Resolution[3] of the Court of Appeals in CA-G.R. CV No. 35540 entitled“Londres vs. Alovera”. The assailed decision affirmed the validity of the Absolute Sale dated April 24, 1959 vesting ownership of two parcels of land, Lots 1320 and 1333, to private respondents. The same decision also ordered public respondents to pay just compensation to private respondents. The questioned resolution denied the motion for reconsideration of petitioners.

The Antecedent Facts

The present case stemmed from a battle of ownership over Lots 1320 and 1333 both located in Barrio Baybay, Roxas City, Capiz. Paulina Arcenas (“Paulina” for brevity) originally owned these two parcels of land. After Paulina’s death, ownership of the lots passed to her daughter, Filomena VidaI (“Filomena” for brevity). The surviving children of Filomena, namely, Sonia Fuentes Londres (“Sonia” for brevity), Armando V. Fuentes, Chi-Chita Fuentes Quintia, Roberto V. Fuentes, Leopoldo V. Fuentes and Marilou Fuentes Esplana (“petitioners” for brevity) now claim ownership over Lots 1320 and 1333.

On the other hand, private respondents Consolacion Alivio Alovera (“Consolacion” for brevity) and Elena Alovera Santos (“Elena” for brevity) anchor their right of ownership over Lots 1320 and 1333 on the Absolute Sale executed by Filomena on April 24, 1959 (“Absolute Sale” for brevity). Filomena sold the two lots in favor of Consolacion and her husband, Julian Alovera (“Julian” for brevity). Elena is the daughter of Consolacion and Julian (deceased).

On March 30, 1989, petitioners filed a complaint for the declaration of nullity of contract, damages and just compensation. Petitioners sought to nullify the Absolute Sale conveying Lots 1320 and 1333 and to recover just compensation from public respondents Department of Public Works and Highways (“DPWH” for brevity) and Department of Transportation and Communication (“DOTC” for brevity). The case was raffled to the Regional Trial Court, Branch 18, Roxas City, Capiz and docketed as Civil Case No. V-5668.

In their Complaint, petitioners claimed that as the surviving children of Filomena, they are the owners of Lots 1320 and 1333. Petitioners claimed that these two lots were never sold to Julian. Petitioners doubt the validity of the Absolute Sale because it was tampered. The cadastral lot number of the second lot mentioned in the Absolute Sale was altered to read Lot 1333 when it

was originally written as Lot 2034. Petitioners pointed out that Lot 2034, situated in Barrio Culasi, Roxas City, Capiz, was also owned by their grandmother, Paulina.

Petitioners alleged that it was only recently that they learned of the claim of private respondents when Consolacion filed a petition for the judicial reconstitution of the original certificates of title of Lots 1320 and 1333 with the Capiz Cadastre.[4] Upon further inquiry, petitioners discovered that there exists a notarized Absolute Sale executed on April 24, 1959 registered only on September 22, 1982 in the Office of the Register of Deeds of Roxas City. The private respondents’ copy of the Absolute Sale was tampered so that the second parcel of lot sold, Lot 2034 would read as Lot 1333. However, the Records Management and Archives Office kept an unaltered copy of the Absolute Sale. This other copy shows that the objects of the sale were Lots 1320 and 2034.

In their Answer, private respondents maintained that they are the legal owners of Lots 1333 and 1320. Julian purchased the lots from Filomena in good faith and for a valid consideration. Private respondents explained that Julian was deaf and dumb and as such, was placed in a disadvantageous position compared to Filomena. Julian had to rely on the representation of other persons in his business transactions. After the sale, Julian and Consolacion took possession of the lots. Up to now, the spouses’ successors-in-interest are in possession of the lots in the concept owners. Private respondents claimed that the alteration in the Absolute Sale was made by Filomena to make it conform to the description of the lot in the Absolute Sale. Private respondents filed a counterclaim with damages.

The cross-claim of petitioners against public respondents was for the recovery of just compensation. Petitioners claimed that during the lifetime of Paulina, public respondents took a 3,200-square meter portion of Lot 1320. The land was used as part of the Arnaldo Boulevard in Roxas City without any payment of just compensation. In 1988, public respondents also appropriated a 1,786-square meter portion of Lot 1333 as a vehicular parking area for the Roxas City Airport. Sonia, one of the petitioners, executed a deed of absolute sale in favor of the Republic of the Philippines over this portion of Lot 1333. According to petitioners, the vendee agreed to pay petitioners P214,320.00. Despite demands, the vendee failed to pay the stipulated amount.

Public respondents in their Answer raised the following defenses: (1) they have no capacity to sue and be sued since they have no corporate personality separate and distinct from the Government; (2) they cannot comply with their undertaking since ownership over the portions of land is disputed by private respondents and until the issue of ownership is settled, petitioners have no cause of action against public respondents; and (3) they are not proper parties since they were not parties to the Absolute Sale sought to be nullified.

On May 28, 1991, the trial court issued its decision upholding the validity of the Absolute Sale. The dispositive portion of the decision reads:

“IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered:

1. Declaring the Absolute Sale executed by Filomina Vidal in favor of spouses Julian Alovera and Consolacion Alivio on April 24, 1959 over subject Lots 1320 and 1333 (Exh. 4) valid and effective;

2. Declaring private defendants Consolacion Alivio Alovera and Elena Alovera Santos legal owners of subject Lots 1320 and 1333;

3. Ordering public defendants Department of Public Works and Highways and Department of Transportation and Communications to pay jointly and severally private defendants Consolacion Alivio Alovera and Elena Alovera Santos just compensation of the 3,200-square meter portion taken by the government from subject Lot 1320 used as part of the Arnaldo Boulevard in Roxas City, and the 1,786-square meter portion also taken by the government from subject Lot 1333 to be used as vehicle parking area of the Roxas City Airport; and

4. Ordering the dismissal of the complaint for lack of merit.

The cross-claim of private defendants against public defendants and private defendants’ counterclaim for damages against the plaintiffs are likewise ordered dismissed. Costs against plaintiffs.

SO ORDERED.”[5]

Petitioners and private respondents appealed. On March 17, 1997, the Court of Appeals promulgated its decision affirming the decision of the trial court, thus:

“PREMISES CONSIDERED, the decision appealed from is hereby AFFIRMED.

SO ORDERED.”[6]

On November 16, 1998, the Court of Appeals denied the respective motions for reconsideration of petitioners and private respondents. The dispositive portion of the resolution reads:

“WHEREFORE, for lack of merit, the two motions for reconsideration are hereby DENIED.

SO ORDERED.”[7]

The Ruling of the Trial Court

The trial court ruled that the Absolute Sale is valid based on the following facts:

“First, the description of subject Lot 1333, as appearing in the Absolute Sale dated April 24, 1959 executed by Filomena Vidal in favor of spouses Julian Alovera and Consolacion Alivio (Exhs. 24 and 24-A), reads:

“2) A parcel of land (Lot No. 1333 of the Cadastral Survey of Capiz), with the improvements thereon, situated in the Barrio of Baybay, Municipality of Capiz (now Roxas City). Bounded on the N. by the property of Nemesio Fuentes; on the S. by the property of Rufo Arcenas; on the E. by the property of Mateo Arcenas; and on the W. by the property of Valeriano Arcenas;

containing an area of Eighteen Thousand Five Hundred Fifty Seven (18,557) square meters, more or less. This parcel of land is all rice land and the boundaries thereon are visible consisting of stone monuments erected thereon by the Bureau of Lands. It is declared under Tax Dec. No. 336 in the name of Filomena Vidal and assessed at P930.00.”

In the Absolute Sale executed by the same parties on the same date, the above-quoted description is the same except the lot number, i.e., instead of the figure “1333” what is written therein is the figure “1320”;

Second, subject Lot 1333 is situated in Barangay Baybay, Roxas City, whereas Lot 2034 which is the second lot subject of the questioned absolute sale is situated in Barangay Culasi, Roxas City as evidenced by a certified true/xerox copy of a sketch plan (Exh. 29) thereby indicating that said Lot 2034 in said Barangay Culasi (Exh. 29-A).

Third, Lot 2034 was previously owned by Jose Altavas (Exhs, 38 and 38-A) and later is owned in common by Libertad Altavas Conlu, et al. (Exhs. 37 and 37-A) and there is no convincing evidence showing that this lot was ever owned, at one time or another, by Paulina Arcenas or by Filomena Vidal or by plaintiffs, or their predecessors-in-interest;

Fourth, the two lots have been the subject of the transactions made by their former owner, Filomena Vidal, with some persons, including spouses Julian Alovera and defendant Consolacion Alivio;

Fifth, the subject two lots have been continuously worked on since the early 1950’s up to the present by Alejandro Berlandino, and later by his son, Zosimo Berlandino, who were instituted therein as tenants by Julian Alovera and the private defendants;

Sixth, these two lots have never been in the possession of the plaintiffs.”[8]

The trial court further noted that while petitioners and private respondents claimed that Lots 1320 and 1333 are titled, both failed to account for the certificates of title. The trial court then concluded that there is merely a disputable presumption that Lots 1320 and 1333 are titled and covered by certificates of title. The trial court further declared that ownership over the two lots can still be acquired by ordinary prescription as in this case.

Private respondents and their predecessors-in-interest have been in continuous possession of Lots 1320 and 1333 for nearly 30 years in good faith and with just title. The tax declarations issued in the name of Consolacion and the real estate taxes paid by private respondents are strong evidence of ownership over Lots 1320 and 1333. Petitioners’ late filing of the complaint, 30 years after the execution of the Absolute Sale or seven years after the registration of the same, was considered by the trial court as laches.

The trial court gave more credence to the explanation of private respondents as to why the Absolute Sale was altered. Consolacion noticed that the lot number of the second parcel of and sold to them by Filomena under the Absolute Sale appeared to be “Lot 2034” and not “Lot 1333”. Together with her husband, Julian, Consolacion went to Filomena. It was Filomena who erased “Lot 2034” in the deed of sale and changed it to “Lot 1333”. However, the copies of the

document in the custody of the Notary Public were not correspondingly corrected. Consequently, the copies kept by the Records Management and Archives Office still referred to the second parcel of land sold as “Lot 2034”.

Based on its factual findings, the trial court held that private respondents are the legal owners of Lots 1320 and 1333. Private respondents are therefore entitled to just compensation for the portions of land taken by public respondents from the two lots. However, the trial court ruled that private respondents could not recover attorney’s fees since there was no indication that the complaint was maliciously filed and intended to prejudice private respondents. The trial court held that petitioners filed the action in good faith, believing that they were the real owners of the two lots.

The Ruling of the Court of Appeals

The Court of Appeals sustained the factual findings of the trial court, specifically the six points enumerated by the trial court establishing Lots 1320 and 1333 as the objects of the Absolute Sale. Applying Article 1370 of the Civil Code,[9] the Court of Appeals agreed with the trial court that there could be no room for interpretation as to the intention of the parties on the objects of their contract.

The Court of Appeals upheld the ruling of the trial court that private respondents are not entitled to attorney’s fees and damages. The Court of Appeals opined that while there might have been incipient greed when the DPWH and DOTC notified petitioners of the just compensation from the government, there was, however, no evidence that petitioners filed the complaint in bad faith. There was nothing in the records to indicate that petitioners had actual or constructive knowledge of the sale of the two lots to Julian. The document on file with the Records Management archives Office alluded to a parcel of land denominated as Lot 2034 which is different from the property in question, Lot 1333. It was only during the hearing of the case that it was made clear through the presentation of evidence that the lot referred to in the Absolute Sale was Lot 1333, not Lot 2034, in addition to Lot 1320.

The Issues

Petitioners thus interposed this appeal, raising the following errors allegedly committed by the Court of Appeals:

“I.

THE COURT OF APPEALS ACTED WITH PATENT GRAVE ABUSE OF DISCRETION IN NOT REVERSING THE DECISION OF THE TRIAL COURT, INSOFAR AS IT DECLARED VALID AND EFFECTIVE AN ABSOLUTE SALE”, PURPORTEDLY EXECUTED BY FILOMENA VIDAL, PREDECESSOR-IN-INTEREST OF PETITIONERS, IN FAVOR OF PRIVATE RESPONDENT CONSOLACION ALIVIO AND HER SPOUSE, JULIAN ALOVERA, ON 24 APRIL 1959, OVER SUBJECT LOTS 1320 AND 1333.

II.

THE COURT OF APPEALS ACTED WITH PATENT GRAVE ABUSE OF DISCRETION IN NOT REVERSING THE DECISION OF THE TRIAL COURT, INSOFAR AS IT DECLARED PRIVATE RESPONDENTS “LEGAL OWNERS OF SUBJECT LOTS 1320 AND 1333”.

Ill.

THE COURT OF APPEALS ACTED WITH PATENT GRAVE ABUSE OF DISCRETION IN NOT REVERSING THE DECISION OF THE TRIAL COURT, INSOFAR AS IT RULED THAT THE COMPENSATION FOR PORTIONS OF THE SUBJECT LOTS TAKEN BY THE PUBLIC RESPONDENTS BE PAID TO THE PRIVATE RESPONDENTS AND NOT TO THE PETITIONERS.

IV.

THE COURT OF APPEALS ACTED WITH PATENT GRAVE ABUSE OF DISCRETION IN NOT REVERSING THE DECISION OF THE TRIAL COURT, INSOFAR AS IT DISMISSED THE COMPLAINT IN CIVIL CASE NO. V-5668, RTC-ROXAS CITY, BRANCH 18.”[10]

The Court’s Ruling

At the outset, it must be pointed out that this petition was seasonably filed, contrary to private respondents’ contention that it was filed one day late. Petitioners had until January 17, 1999 to file this petition, which was a Sunday. Since the last day for filing this petition fell on a Sunday, the time to file the petition would not have run until the next working day.[11] Petitioners filed the petition the next working day, January 18, 1999. Plainly then, the petition was filed on time.

The petition, however, must fail on substantive grounds.

Petitioners implore the Court to declare the Absolute Sale void for failing to identify with certainty the two parcels of land sold by Filomena, their mother, to private respondents. However, there is no valid ground for annulling the Absolute Sale. The Absolute Sale is clear as to the first parcel of lot sold, which is Lot 1320. What raises some doubt is the identity of the second parcel of lot sold, Is it Lot 2034 as indicated in the registered copy of the Absolute Sale? Or is it Lot 1333 as made to appear in the copy of the Absolute Sale of private respondents?

In civil cases, the party with the burden of proof must establish his case by a preponderance of evidence.[12] By “preponderance of evidence” is meant that the evidence as a whole adduced by one side is superior to that of the other.[13] Petitioners have the burden of proving that Lot 2034 was the real object of the Absolute Sale and the alteration of the same instrument was unauthorized, warranting the absolute nullification of the sale. The trial court and the Court of Appeals found the evidence of private respondents far more convincing in explaining the alteration in their copy of the Absolute Sale. Both courts ruled that the correction was made by the parties to reflect the true object of the sale, which was Lot 1333, not Lot 2034. In arriving at this conclusion, the two courts considered contemporaneous and subsequent acts that indicate that what Filomena actually sold to private respondents were Lots 1320 and 1333. These factual findings are binding upon the Court.[14]

As a rule, the appellate jurisdiction of the Court is limited only to question of law.[15] There is a question of law in a given case when the doubt or difference arises as to what the law is given a certain set of facts, and there is a question of fact when the doubt arises as to the truth or the falsity of the alleged facts.[16] No exceptional circumstances are present in this case that would justify a re-evaluation of the factual findings of the trial court and the Court of Appeals, findings that are duly supported by evidence of record.

Petitioners insist that there is serious doubt as to the identity of the objects of the Absolute Sale because the descriptions of Lots 1320 and 1333 in the Absolute Sale do not correspond to the technical descriptions of the two lots as found by the Bureau of Lands. Petitioners direct the Court’s attention to these discrepancies:

TECHNICAL DESCRIPTION[17] Lot 1320, Cad-I 33,

C-01 Capiz Cadastre, Ap-06-004023

A PARCEL OF LAND (Lot 1320, Cad-133, C-01, Capiz Cadastre, Ap-06-004023, situated in the barrio of Baybay, municipality of Capiz (Now Roxas City), province of Capiz, island of Panay.

Bounded on the NE., along line 1-2 by Lot 1327; along line 2-3 by Lot 1328; along line 3-4 by Lot 1329; on the E., along line 4-5 by Lot 1326; on and the S., along line 5-6 by Lot 1325; along lines 6-7-8 by Lot 1321; on the W., along line 8-9 by Lot 1295; on the NW., along lines 9-10-11 by Lot 1319; along line 11-12 by Lot 1318; along line 12-13 by Lot 1328; on the NE., along line 13-1 by Lot 1327, all of Cad-133, Capiz Cadastre.

Beginning at point marked “1” on plan being N. 88-28 W., 651.78 meters from BBM No. 12, Cad-133, Capiz Cadastre, thence N. 85-01 E., 23.00 m. to point 2; N. 83-40E., 19.03m. to point 4; S. 84-22W., 61.31 m. to point 6; S. 83-00 W., 145.33 m. to point 8; N. 87-42 E., 26.49 m. to point 10;

DESCRIPTION PER ABSOLUTE SALE

1) A parcel of land (Lot No. 1320 of the Cadastral Survey of Capiz), with the improvements thereon, situated in the Barrio of Baybay, Municipality of Capiz(now Roxas City).

Bounded on the N. by the property of Matea Arcenas; on the S. by the property of Roque Severino; on the E. by the property of Matea Arcenas; the W. by the property of Damaso Arches;

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N. 83-07 E., 31.86 m. to point 12; N. 83-09 E., 76.04 m. to point 13; S. 07-04E., 41. 88 m. to point 1. Point of beginning;

Containing an area of TWENTY FIVE THOUSAND SEVEN HUNDRED SEVENTY FIVE (25,775) SQUARE METERS, more or less.

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containing an area of THIRTY THOUSAND NINE HUNDRED FORTY FOUR (30,944) SQUARE METERS, more or less. This parcel of land is all rice land and the boundaries thereon are visible consisting of stone monuments erected thereon by the Bureau of Lands. It is declared under Tax Dec. No. 4338 in the name of Filomena Vidal and assessed at P1,550.00.

TECHNICAL DESCRIPTION[18] Lot 1333, Cad-I 33, C-01

Capiz Cadastre, Ap-06-004022

A PARCEL OF LAND (Lot 1333, Cad-133, C-01, Capiz Cadastre, Ap-06-004022, situated in the barrio of Baybay, municipality of Capiz (now Roxas City), province of Capiz, island of Panay.

Bounded on the SE., along line 1-2 by Lot 1330; on the W., & NW., along lines2-3-4-5 by Lot 1329; on the NW., along line 5-6 by Lot 1334; along line 6-7 by Lot 1335; on the NE., & SE., along lines 7-8-1 by Lot 1332; all of Cad-133, Capiz Cadastre.

Beginning at a point marked “1” on plan being N. 78-44., 326.64 meters from BBM No. 12, Cad-133, Capiz Cadastre, thence

S. 81-42 W., 59.67 meters to point 2;

N. 07-36 W., 46.62 meters to point 3;

DESCRIPTION PER ABSOLUTE SALE

2) A parcel of land (Lot No. 1333 of the Cadastral Survey of Capiz), with the Improvements thereon, situated in the Barrio of Baybay, Municipality of Capiz (now Roxas City).

Bounded on the N. by the property of Nemesio Fuentes; on the S. by the property of Rufo Arcenas; on the E. by the property of Matea Arcenas; and on the W. by the property of Valeriano Arcenas;

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N. 82-34 E., 84.29 meters to point 4;

N. 09-13 W., 40-05 meters to point 5;

N. 82-57 E., 59.24 meters to point 6;

N. 81-48 E., 18.71 meters to point 7;

S. 03-30 E., 95.46 meters to point 8;

S. 82-57 W., 94.35 meters to point 1;

Point of beginning.

Containing an area of TEN THOUSAND EIGHT HUNDRED SIXTY less.

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containing an area of EIGHTEEN THOUSAND FIVE HUNDRED FIFTY (10,860) SQUARE METERS, more orSEVEN (18,557) SQUARE METERS, more or less. This parcel of land is all rice land and the boundaries thereon are visible consisting of stone monuments erected thereon by the Bureau of Lands. It is declared under Tax Dec. No. 4336 in the name of Filomena Vidal and assessed at P930.00.

We are not persuaded. Petitioners rely on the technical descriptions of Lots 1320 and 1333 that were issued by the Bureau of Lands on November 8, 1988. It must be pointed out that when private respondents and Filomena executed the sale in 1959, they based the description of the two lots on the tax declarations of Filomena. Early tax declarations are, more often than not, based on approximation or estimation rather than on computation.[19] This is understandably so because of the absence then of technical knowledge in the accurate measurement of lands.[20] What really defines a piece of land is not the area mentioned in its description, but the boundaries therein laid down, as enclosing the land and indicating its limits.[21] In this case, the boundaries of the two lots are sufficiently designated in the Absolute Sale, leaving no room to doubt the identity of the objects of the sale.

Petitioners anchor their right of ownership over Lots 1320 and 1333 as the sole heirs of their mother, Filomena, who previously owned the lots. However, Filomena had already ceded her right of ownership over Lots 1320 and 1333 to private respondents when she executed the Absolute Sale. A sale of real property is a contract transferring dominion and other real rights in the thing sold.[22] Proof of the conveyance of ownership is the fact that from the time of the sale, or after more than 30 years, private respondents have been in possession of Lots 1320 and 1333. Petitioners on the other hand have never been in possession of the two lots.

Filomena died sometime in 1985[23] and petitioners instituted the complaint four years after Filomena’s death. It is unthinkable for Filomena to have allowed private respondents to enjoy ownership of Lots 1320 and 1333 if she never really intended to sell the two lots to private respondents or if she had Lot 2034 in mind when she signed the Absolute Sale. In the first place, Lot 2034 could not have been contemplated by the parties since this parcel of land was never owned by Filomena, or by her mother, Paulina. Secondly, Lot 2034 does not fit the description of the second parcel of lot mentioned in the Absolute Sale. The Absolute Sale describes the second lot as located in Barangay Baybay, Roxas City. Lot 2034 is situated in Barangay Culasi, Roxas City.

In resolving the similar case of Atilano vs. Atilano,[24] where there was also a mistake in the designation of the lot number sold, the Court took into account facts and circumstances to uncover the true intentions of the parties. The Court held that when one sells or buys real property, one sells or buys the property as he sees it, in its actual setting and by its physical metes and bounds, and not by the mere lot number assigned to it in the certificate of title. As long as the true intentions of the parties are evident, the mistake will not vitiate the consent of the parties, or affect the validity and binding effect of the contract between them. In this case, the evidence shows that the designation of the second parcel of land sold as Lot 2034 was merely an oversight or a typographical error. The intention of the parties to the Absolute Sale became unmistakably clear when private respondents, as vendees, took possession of Lots 1320 and 1333 in the concept of owners without the objection of Filomena, the vendor.

Petitioners harp on the fact that the notarized and registered copy of the Absolute Sale should have, been correspondingly corrected. Petitioners believe that the notarized and archived copy should prevail. We disagree. A contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price.[25] Being consensual, a contract of sale has the force of law between the contracting parties and they are expected to abide in good faith with their respective contractual commitments.[26] Article 1358 of the Civil Code, which requires certain contracts to be embodied in a public instrument, is only for convenience, and registration of the instrument is needed only to adversely affect third parties.[27]Formal requirements are, therefore, for the purpose of binding or informing third parties.[28] Non-compliance with formal requirements does not adversely affect the validity of the contract or the contractual rights and obligations of the parties.[29]

Petitioners fault the trial court for declaring that Lots 1333 and 1320 can be acquired by prescription even though these lots are already covered by certificates of title. The real issue in this case is the true intentions of the parties to the Absolute Sale, not adverse possession. The decisions of the trial court and the Court of Appeals are clear on this point. In fact, the Court of Appeals no longer dealt with the issue of acquisitive prescription since it was already convinced that private respondents’ right over Lots 1333 and 1320 emanates from the Absolute Sale.

In a desperate bid to compel the Court to disregard the evidence of private respondents, petitioners question the admissibility of the testimony of Consolacion on the ground that it violates the Dead Man’s Statute. Petitioners contend that Consolacion’s testimony as to how the alteration of the Absolute Sale took place should have been disregarded since at the time that Consolacion testified, death had already sealed the lips of Filomena, precluding petitioners from refuting Consolacion’s version.

The contention is without basis. The Dead Man’s Statute then embodied in Section 20 (a) of Rule 130 of the 1988 Rules of Court provides:

“SEC. 20. Disqualification by reason of interest or relationship. - The following persons cannot testify as to matters in which they are interested, directly or indirectly, as herein enumerated:

(a) Parties or assignors of parties to a case, or persons in whose behalf a case is prosecuted, against an executor or administrator or other representative of a deceased person, or against a person of unsound mind, upon a claim or demand against the estate of such deceased person or against such person of unsound mind, cannot testify as to any matter of fact occurring before the death of such deceased person or before such person became of unsound mind;

xxx”

The foregoing prohibition applies to a case against the administrator or representative of an estate upon a claim against the estate of the deceased person.[30] The present case was not filed against the administrator of the estate, nor was it filed upon claims against the estate since it was the heirs of Filomena who filed the complaint against private respondents. Even assuming that Consolacion’s testimony was within the purview of the Dead Man’s Statute, the fact that the counsel of petitioners failed to timely object to the admissibility of Consolacion’s testimony is a waiver of the prohibition.[31] The waiver was made more evident when the counsel of petitioners cross-examined Consolacion.[32] Petitioners cannot now invoke the rule they knowingly waived.

From the time of the execution of the Absolute Sale on April 24, 1959, private respondents became the owners of Lots 1320 and 1333. The expropriation of any portion of the two lots from the time of the execution of the Absolute Sale would necessarily entitle private respondents to the payment of just compensation. We cannot, however, agree with the trial court and the Court of Appeals that public respondents could be ordered to pay private respondents just compensation in the same suit. Public respondents were impleaded in this case when petitioners filed a cross-claim against them for just compensation. The cross-claim should have been dismissed, as it does not comply with Section 7 of Rule 6 of the 1988 Rules of Court. The rule provides:

“SEC. 7. Cross-claim. A cross-claim is any claim by one party against a co-party arising out of the transaction or occurrence that is the subject matter either of the original action or of a counterclaim therein. Such cross-claim may include a claim that the party against whom it is asserted is or may be liable to the cross-claimant for all or part of a claim asserted in the action against the cross-claimant.”

Based on the foregoing rule, the cross-claim is proper only when:

“1. It arises out of the subject matter of the complaint.

2. It is filed against a co-party.

3. The cross-claimant stands to be prejudiced by the filing of the action against him.”[33]

The three requisites are absent in this case. The cross-claim for just compensation is a new matter raising a new cause of action that must be litigated in a separate action, not in the same action for the nullification of contract. The purpose of a cross-claim is to avoid multiplicity of suits.[34] Multiplicity of suits should be avoided if the filing of a separate and independent action to recover a claim would entail proving exactly the same claim in an existing action.[35] However, when the causes of action are distinct and separate from each other, as in this case, the independent interest should be pursued in another proceeding.[36] Also, petitioners and public respondents are not co-parties as they are not co-plaintiffs. Lastly, petitioners, as cross-claimants, would not be prejudiced by the filing of the action since they are the plaintiffs in this case.

At any rate, private respondents are not left without any recourse. They can file their claim for compensation with the proper government agency. Public respondent DPWH in its Comment points out that it is now public respondent DOTC that has jurisdiction over the claim for compensation since the portions of the properties subject of this case were taken to form part of the parking area of the Roxas Airport.[37] In the same Comment, public respondent DPWH concedes that they have never denied their obligation from the very beginning of this case.[38] Public respondents were only constrained to withhold payment of just compensation as the reel owners of the lots In question were yet to be declared by the Court. Since the issue of ownership has been settled, private respondents can now rightfully claim just compensation for the portions of Lots 1320 and 1333 taken by the government after the execution of the Absolute Sale.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 35540 is hereby AFFIRMED with the MODIFICATION that the cross-claim against public respondents is DISMISSED. Costs against petitioners.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Vitug, Ynares-Santiago and Azcuna, JJ., concur. SECOND DIVISION

MAYOR FELIPE K. CONSTANTINO, G.R. No. 140656 Petitioner, Present: QUISUMBING, J.,

Chairperson, - versus - CARPIO, CARPIO MORALES,

TINGA, and VELASCO, JR., JJ.

HON. SANDIGANBAYAN (FIRST DIVISION) and THE PEOPLE OF THE PHILIPPINES, Promulgated: Respondents.

September 13, 2007 x-----------------------------------------------------------------------------x NORBERTO N. LINDONG, G.R. No. 154482 Petitioner,

- versus - PEOPLE OF THE PHILIPPINES and SANDIGANBAYAN, Respondents. x-----------------------------------------------------------------------------x

D E C I S I O N

TINGA, J.: Before us are two (2) consolidated petitions, the determination of both rests ultimately on whether Felipe K. Constantino (Constantino), mayor of Malungon, Sarangani Province, was indeed guilty beyond reasonable doubt of violating Section 3(e) of Republic Act No. 3019 (R.A. No. 3019), otherwise known as The Anti-Graft and Corrupt Practices Act. In G.R. No. 140656, Constantino filed a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, assailing the 15 November 1999 decision[1]and the 15 March 2000 resolution[2] of the Sandiganbayan (First Division) in Criminal Case No. 23433 finding him and his co-accused, petitioner Norberto N. Lindong (Lindong) guilty beyond reasonable doubt of violating Section 3(e) of R.A. No. 3019. On the other hand, G.R. No. 154482 is a petition for certiorari with prayer for preliminary injunction under Rule 65 of the 1997 Rules of Civil Procedure, filed by Lindong questioning three (3) orders[3] of the Sandiganbayan (First Division) relative to the execution of judgment against him also in Criminal Case No. 23433.

The Antecedents In an Information dated 31 July 1996, Constantino, in his capacity as mayor of Malungon, Sarangani Province, together with his co-accused Lindong, was charged with violation of Section 3 (e) of R.A. No. 3019 before the Sandiganbayan, to wit:

That on or about February 28, 1996, in Davao City, Philippines, and within the jurisdiction of this Honorable Court, accused Felipe K. Constantino, a public officer, being then the Mayor of the Municipality of Malungon, Sarangani Province, committing the crime herein-charged in relation to, while in the performance and taking advantage of his official functions, with evident bad faith, manifest partiality or through gross inexcusable negligence, and conspiring and confederating with accused Norberto N. Lindong, President and Chairman of the Board of the Norlovanian Corporation, Davao City, did then and there wil[l]fully, unlawfully and criminally enter into a Lease Agreement for the rental of various heavy equipments (sic) for a period of six (6) years for and in consideration of the sum of PESOS: TWO HUNDRED FIFTY-SEVEN THOUSAND ONE HUNDRED ELEVEN and 11/100 (P257,111.11) per month or a total consideration of PESOS: EIGHTEEN MILLION FIVE HUNDRED ELEVEN THOUSAND NINE HUNDRED NINETY-NINE and 92/100 (P18,511,999.92) and a guaranty deposit of PESOS: ONE MILLION SEVEN HUNDRED EIGHTY THOUSAND(P1,780,000.00) contrary to the express mandate of Resolution No. 2, series of 1995, of the Municipal Planning and Development Council implementing Sangguniang Bayan Resolution No. 198, series of 1995 and Sangguniang Bayan Resolution No. 21 dated February 22, 1996 authorizing the Municipal Mayor of Malungon to enter into an agreement for the purchase of heavy equipments (sic) on a five-year term basis for and in consideration of the amount of PESOS: TWO MILLION TWO HUNDRED THOUSAND (P2,200,000.00) per year or a total consideration of only PESOS: ELEVEN MILLION (P11,000,000.00), thus, giving said Norlovanian Corporation, which was fully paid for the Guaranty Deposit and was actually paid heavy equipment rentals for the period March 5 to May 6,

1996 in the aggregate sum of PESOS: TWO MILLION ONE HUNDRED SEVENTY-SEVEN THOUSAND NINETY and 91/100 (P2,177,090.91), unwarranted benefits and advantage and causing undue injury to the government. CONTRARY TO LAW.[4]

Both accused pleaded not guilty to the charge. In the ensuing trial, the prosecution presented Nazario B. Tomanan (Tomanan), Commission on Audit (COA) Auditor III of the COA Regional Office No. XI. In rebuttal, it presented Benjamin C. Asgapo (Asgapo), councilor of Malungon, Sarangani Province and one of the complainants below. The prosecution sought to establish the facts as follows: The Municipality of Malungon listed as one of its priority programs, the acquisition of a fleet of heavy equipment needed by the municipality in its development projects.[5] For this purpose, it appropriated an amount of P2.2 Million per annum for a period of five (5) years beginning in 1996 for the amortization of such purchase.[6] Pursuant thereto, the municipality conducted two (2) public biddings for suppliers of the required fleet of heavy equipment. Both attempts, however, failed. Hence, the Sangguniang Bayaninstead passed Resolution No. 21 on 22 February 1996, authorizing petitioner Constantino to enter into a negotiated contract for the lease/purchase of the needed fleet of heavy equipment.[7] On 28 February 1996, Constantino entered into a Lease Agreement[8] with Norlovanian Corporation, represented by Lindong. The agreement required, among others, the municipality to provide Norlovanian Corporation with a guaranty deposit. The following day, Lindong appeared before the Sangguniang Bayan to discuss the Lease Agreement. Not one of the members of the Sanggunian questioned the legality of the agreement.[9] The seven (7) units of heavy equipment subject of the agreement were thus delivered to the municipality on 4 March 1996.[10] On 6 March 1996, the Municipality ofMalungon paid Norlovanian Corporation a total amount of P2,177,090.91 representing the guaranty deposit as well as the rental for the period of 5 March 1996 to 5 April 1996 and partial rental for the period of 5 April 1996 to 6 May 1996.[11] Thereafter, on 18 April 1996, the Sangguniang Bayan unanimously passed Resolution No. 38[12] requesting petitioner to operate the newly acquired fleet of heavy equipment. The municipality subsequently utilized the fleet.[13]

However, only five (5) days later, or on 23 April 1996, Sanggunian members Benjamin C. Asgapo, Rafael J. Suson, Sr. (Suson), Leo G. Ingay (Ingay), Pablo V. Octavio (Octavio) and Wilfredo P. Espinosa (Espinosa), and Vice Mayor Primitiva L. Espinosa (Vice Mayor Espinosa) filed a formal complaint against petitioners Constantino and Lindong for violation of R.A. No. 3019. On 6 June 1996, the Sangguniang Bayan passed Resolution No. 47, urging the municipality to “stop all forms of unauthorized payment/expenditure relative to the illegally acquired pool of heavy equipment by the Municipality of Malungon.”[14] In particular, Tomanan testified that he was directed by the COA Regional Office XI to conduct a special and comprehensive audit of the municipality of Malungon for the period of 1 May 1995 to 31 May 1996[15] in view of a complaint filed by certain officials therein. In January 1997, Tomanan submitted his report detailing the following adverse findings relative to the purchase of the subject fleet of heavy equipment: (a) the lease/purchase contract was disadvantageous to the municipal government because of the rigid terms and conditions therein required of the municipality before the latter could acquire ownership over the pool of heavy equipment; (b) Norlovanian Corporation had no proof of ownership of the fleet of equipment as the audit revealed that title to the equipment was in the name of Lindong; (c) the lease/purchase procedure violated Sections 27 and 28 of the Rules and Regulations on Supply and Property Management in Local Governments;[16] and (d) the lease/purchase procedure utilized by the municipality was uneconomical and resulted to a wastage of P9,658,000.00 of government funds.[17] Asgapo, on the other hand, testified that he was present during the 29 February 1996 meeting where Lindong appeared before the Sanggunian. The witness asserted that the lease contract was never concurred in by the municipal council as required by Resolution No. 21. He admitted, however, that neither was there any resolution passed opposing, objecting to or rejecting the lease contract. Moreover, Asgapo alleged that at the time he first obtained a copy of the lease contract from the municipal treasurer on 6 March 1996, he did not see the Undertaking dated 28 February 1996[18] attached or annexed thereto. He was only able to get a copy of the latter document about three (3) or four (4) days thereafter, following an inquiry with the provincial auditor.[19]

The defense presented Lindong as its sole witness. According to Lindong, after negotiations between himself and petitioner Constantino, together with some members of theSanggunian, the parties agreed to a lease/purchase scheme in accordance with the mandate of Resolution No. 21. They agreed that since the municipality did not have sufficient funds to buy the fleet of heavy equipment outright at P8.9 Million, the latter would purchase the subject equipment on installment basis but with allowance for Norlovanian Corporation to recover some incremental cost. Thus, on the very same day, 28 February 1996, Lindong as representative of Norlovanian Corporation and Constantino as representative of the municipality entered into the lease/purchase agreement. They contemporaneously executed the Lease Agreement and Undertaking in the presence of the members of the Sanggunian who accompanied the mayor.[20] Lindong further testified that he attended the municipal council meeting on 29 February 1996 to provide the members thereof with a copy of the lease contract and to explain the transaction. Moreover, he explained that notwithstanding the fact that the main agreement was captioned only as a “Lease Agreement,” the same being a standard pre-printed form of his corporation, the intent of the parties was to enter into a lease/purchase agreement. Hence, he clarified that the Undertaking he executed bound him to convey ownership over the fleet of heavy equipment to the municipality upon the full payment thereof.[21] Finally, Lindong averred that more than two (2) months after he delivered the fleet of equipment to the municipality, he received a Certificate of Concurrence dated 9 May 1996 issued by Nemesio Liray, Chairman of the Committee of Finance of the Sangguniang Bayan, certifying that the Lease Agreement was concurred in by the members of the Committee on 29 February 1996. Likewise, he received a Certification dated 17 May 1996 from the Pre-Qualification, Bids and Awards Committee of the Municipality ofMalungon, that the members thereof approved, concurred in and signed the contract of lease between the municipality and Norlovanian Corporation.[22] Finding that the prosecution had proven beyond reasonable doubt the guilt of Constantino and Lindong of the offense as charged, the Sandiganbayan rendered the assailed decision sentencing them both, thus:

WHEREFORE, judgment is hereby rendered finding accused FELIPE K. CONSTANTINO and NORBERTO N. LINDONG GUILTY beyond reasonable doubt of the crime of violation of Section 3 (e) of R.A. No. 3019, otherwise

known as “The Anti-Graft and Corrupt Practices Act,” and said accused are hereby sentenced, as follows:

(a) to suffer an indeterminate sentence of imprisonment for a period of six (6) years and one (1) month as minimum to twelve (12) years and one (1) month as maximum;

(b) to suffer perpetual disqualification from public office;

(c) to jointly and severally indemnify the Municipality of Malungon, Province of Sarangani the sum of Two Million One Hundred Seventy-Seven Thousand [sic] and 91/1000 [sic] Pesos (P2,177,090.91), representing the amount actually paid to Norlovanian Corporation, with interest at the legal rate computed from March 6, 1996 until fully paid; and

(d) to pay the costs of suit.

SO ORDERED.[23] The Sandiganbayan held that neither manifest partiality nor evident bad faith attended the commission of the offense. However, it found that petitioner Constantino caused undue injury to the Municipality of Malungon through his gross inexcusable negligence in executing only a lease agreement over the fleet of heavy equipment. Anent Lindong, the graft court upheld his culpability as co-conspirator of Constantino despite its finding that the latter violated the anti-graft law through negligence only. The Sandiganbayan ratiocinated that since the law violated is a special law, proof that he intended to commit the particular offense was not essential, as it otherwise would have been for a felony punishable by the Revised Penal Code. The Sandiganbayan ruled that it was sufficient for the prosecution to have proven, as it did, that Lindong allowed or failed to prevent Constantino from entering into an agreement which was clearly contrary to law. Thus, even if petitioner was found guilty of causing undue injury to the municipality through gross inexcusable negligence, the anti-graft court concluded that his co-conspirator could likewise be held liable.[24] It appears that during trial, both accused were represented by the same counsel. However, after judgment was rendered against them, Constantino and Lindong filed separate appeals to the Supreme Court which have taken disparate routes. On 25 April 2006, during the pendency of his present appeal, Constantino passed away.[25]

Lindong himself likewise filed a petition for review on certiorari, docketed as G.R. No. 142379, to seek a reversal of the Sandiganbayan decision finding him guilty as Constantino’s co-conspirator. On 10 July 2000, this Court denied Lindong’s petition for failure to state the material date of receipt of the assailed decision of the Sandiganbayan. His subsequent attempts for reconsideration proved futile. On 25 July 2001, the Court issued the Entry of Judgment in the case. Thereafter, the Sandiganbayan (First Division) issued three (3) orders relative to the execution of judgment against Lindong, all of which are assailed by the latter, in his petition for certiorari in G.R. No. 154482, for having been issued with grave abuse of discretion. The Sandiganbayan issued on 16 May 2002 the first challenged order which directed petitioner Lindong to appear before it in person for the execution of judgment. On 6 June 2002, the respondent court issued a resolution, the second assailed order herein, denying Lindong’s urgent motion to defer execution of judgment. The third assailed order, a resolution issued on 3 July 2002, directed the issuance of a bench warrant against petitioner Lindong and the confiscation of his cash bond for provisional liberty pending appeal, and required him to surrender his person to the court and explain why judgment should not be rendered against the cash bond. With the demise of Constantino during the pendency of his appeal, the same should normally be regarded as moot and academic following the norm that the death of the accused marks the extinction of his criminal liability.[26] However, the present two petitions are so intertwined that the absolution of Constantino is ultimately determinative of the absolution of Lindong. Indeed, the exoneration of Constantino will necessarily signify the injustice of carrying out the penalty imposed on Lindong. Thus, the Court in this instance has to ascertain the merits of Constantino’s appeal to prevent a developing miscarriage of justice against Lindong. The "moot and academic" principle is not a magical formula that can automatically dissuade the courts in resolving a case. Courts will decide cases, otherwise moot and academic, if: First, there is a grave violation of the Constitution;[27] Second, the exceptional character of the situation and the paramount public interest is involved;[28] Third, when constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and the public;[29] and Fourth, the case is capable of repetition yet evading review.[30] In the instant case, the exceptional character of the appeals of Constantino and Lindong in relation to each other, as well as the higher interest of justice, requires that the Court determine the merits of the petition and not dismiss the same outright on the ground of mootness.

The Ruling of the Court

G.R. No. 140656 Petitioner Constantino impugned his conviction and asserted that the Sandiganbayan erred in convicting him based on its finding that he violated Resolution No. 21 by entering into a “Lease Agreement” with the Norlovanian Corporation and for his failure to sign the accompanying “Undertaking.” Likewise, he argued that the evidence adduced by the prosecution was insufficient to overcome the constitutional presumption of innocence in his favor. Finally, Constantino contended that it was error for the Sandiganbayan to disregard the findings of the Supreme Court en banc in the earlier case of Constantino v. Hon. Ombudsman Desierto.[31] Constantino’s petition would have been granted and he would have been absolved of criminal liability had he been still alive today. This is why it is so. Section 3(e) of R.A. No. 3019 provides:

SEC. 3. Corrupt practices of public officers. — In addition to acts or omissions of public officers already penalized by existing law, the following shall constitute corrupt practices of any public officer and are hereby declared to be unlawful: x x x x (e) Causing any undue injury to any party, including the Government, or giving any private party any unwarranted benefits, advantage, or preference in the discharge of his official, administrative or judicial functions through manifest partiality, evident bad faith or gross inexcusable negligence. This provision shall apply to officers and employees of offices or government corporations charged with the grant of licenses or permits or other concessions.

In order to be liable for violating the law, the following elements must concur: (1) the accused is a public officer or a private person charged in conspiracy with the former; (2) he or she causes undue injury to any party, whether the government or a private party; (3) the said

public officer commits the prohibited acts during the performance of his or her official duties or in relation to his or her public positions; (4) such undue injury is caused by giving unwarranted benefits, advantage or preference to such parties; and (5) the public officer has acted with manifest partiality, evident bad faith or gross inexcusable negligence.[32] There are two (2) modes of committing the offense, thus: (1) the public officer caused any undue injury to any party, including the government; or (2) the public officer gave any private party unwarranted benefits, advantage or preference in the discharge of his functions.[33] An accused may be charged under either mode[34] or under both should both modes concur.[35] Additionally, Section 3(e) poses the standard of manifest partiality, evident bad faith or gross inexcusable negligence before liability can be had under the provision. Manifest partiality is characterized by a clear, notorious or plain inclination or predilection to favor one side rather than the other.[36] Evident bad faith connotes a manifest deliberate intent on the part of the accused to do wrong or cause damage.[37] Gross inexcusable negligence is defined as negligence characterized by the want of even slight care, acting or omitting to act in a situation where there is a duty to act, not inadvertently but willfully and intentionally with a conscious indifference to consequences insofar as other persons may be affected.[38] Mere bad faith or partiality and negligence per se are not enough for one to be held liable under the law since the act of bad faith or partiality must in the first place be evident or manifest, respectively, while the negligent deed should both be gross and inexcusable.[39] As discussed previously, the Sandiganbayan held that manifest partiality could not be rightfully imputed to Constantino.[40] The prosecution did not present proof that he was actuated with malice or fraud sufficient to meet the requirement of proof beyond reasonable doubt.[41] However, the respondent court found that Constantino’s act of entering into a purportedly pure lease agreement instead of a lease/purchase agreement was a flagrant violation of Resolution No. 21. In view of the rigid terms of the subject contract to which Constantino assented, coupled by his failure to secure the concurrence of the Sangguniang Bayan before entering into the agreement, the Sandiganbayan found that his conduct constituted gross inexcusable negligence.[42] Likewise, the anti-graft court ruled that Constantino’s acts resulted in undue injury to the Municipality of Malungon.[43] Notably, in the course of trial, the prosecution admitted that it had no proof that unwarranted benefits and advantage had been given to Norlovanian Corporation.[44]

Undoubtedly, the standard of culpability imposed by Section 3 of R.A. No. 3019 is quite high which, in this case, was not hurdled by the evidence presented against Constantino. Verily, the prosecution failed to satisfy the requisite proof to demonstrate Constantino’s guilt beyond reasonable doubt. While Constantino should have exercised more prudence when he transacted with Norlovanian Corporation, he could not however be held liable for “gross inexcusable negligence” as contemplated in R.A. No. 3019. Indeed, in the earlier case of Constantino v. Desierto,[45] the Court had already made an express finding that petitioner Constantino did not violate the mandate of Resolution No. 21 but instead merely carried out its directive. That case was a special civil action for certiorari filed by Constantino to seek the invalidation of the resolution of the Ombudsman finding him guilty of grave misconduct prejudicial to the best interest of the service and/or gross neglect of duty, and on that account, dismissing him from service. The controversy arose from the same transaction entered into between Constantino and Norlovanian Corporation and involved the same subject matter as in the case at bar. The administrative complaint was initiated through a letter-complaint and joint affidavit signed by Vice Mayor Espinosa and to it was appended a certification signed by the Vice Mayor and Councilors Suson, Ingay, Asgapo, Espinosa and Octavio. In exonerating Constantino from the administrative charges, the Court found that the evidence against him was inadequate to warrant his dismissal from service on the grounds of grave misconduct, conduct prejudicial to the best interest of the service and gross neglect of duty. More particularly, we made the following pronouncements:

The explicit terms of Resolution No. 21, Series of 1996 clearly authorized Mayor Constantino to “lease/purchase one (1) fleet of heavy equipment” composed of seven (7) generally described units, through a “negotiated contract.” That resolution, as observed at the outset, contained no parameters as of rate of rental, period of lease, purchase price. Pursuant thereto, Mayor Constantino, representing the Municipality of Malungon, and Norberto Lindong, representing the Norlovanian Corporation, executed two written instruments of the same date and occasion, viz.: One — an agreement(on a standard printed form) dated Febr[ua]ry 28, 1996 for the lease by the corporation to the municipality of heavy equipment of the number and description required by Resolution no. 21, and

Two — an undertaking for the subsequent conveyance and transfer of ownership of the equipment to the municipality at the end of the term of the lease. That the Members of the Sangguniang Bayan knew of this “lease/purchase” is evident from Resolution No. 38, Series of 1996 unanimously enacted by them shortly after delivery of the equipment. In that resolution they (1) declared that “the Municipal Government ** has just acquired its fleet of heavy equipment leased/purchased from the Norlovanian Corporation,” and (2) requested Mayor Constantino “to operate the newly acquired heavy equipment ** leased/purchase from the Norlovanian Corporation.” The Resolution is consistent with the allegations of Mayor Constantino — which in any event are not denied by the Councilors or Vice-Mayor Espinosa — that: 1) the equipment was delivered to the Municipality by Norlovanian Corporation on February 28, 1996 and duly inspected by Councilors Guilley, Ruñez, Nallos and Liray, as well as the Municipal Engineer and the Municipal Treasurer; 2) prior to the delivery of the units, the Vice Mayor and other Members of the Sanguniang Bayan had opportunity to read the “Lease Agreement” as well as the “Undertaking” but then raised no objections thereto; 3) neither did they raise any objections (a) at the session of the Municipal Council on February 29, 1996, when Norberto Lindong explained the terms of the “negotiated contract” of “lease/purchase,” or (b) at the time that the units were delivered and inspected by designated minicipal officials. Now, it is germane to advert to the deplorable inaccuracies in the Joint Affidavit of private respondents (P.L. Espinosa, Suson, Sr., Ingay, W. P. Espinosa, Octavio, Asgapo) submitted as part of their complaint in the Ombudsman’s Office. The affidavit contains a clearly distorted version of Resolution No. 21 of February 22, 1996. In that document of the affiants described Resolution No. 21 as authorizing Mayor Constantino “to purchase and acquire ** heavy equipments (sic) to be paid within five (5) years at the yearly amortization of P2.2 million **.” This is a misleading reading of Resolution No. 21. As the most cursory perusal of that resolution at once discloses, what the Mayor was thereby empowered to do was “to enter into a negotiated contract” in the Municipality’s behalf with “interested parties,” in line with the expressed wish of the Municipality to “lease/purchase one (1) fleet of heavy equipment **” —not simply to “purchase and acquire” said equipment (as complainant Councilors aver). Neither does Resolution No. 21 state (contrary to complainant’s description of it) that the price shall be “paid within five (5) years at the yearly amortization of P2.2 million **;” indeed, as already above stressed, the resolution is completely silent as regards any terms and conditions of the “negotiated

contract” that the Mayor was assigned to execute in the town’s behalf. Such obvious distortions cannot but erode the complainant councilors’ credibility and bona fides. It is also relevant to draw attention to the flagrantly inaccurate statements and inferences about the Mayor’s “negotiated contract” regarding the heavy equipment, contained in Resolution No. 47 approved only by four (4) Members of the Municipal Council at its session of June 6, 1996 (the four (4) being Councilors Octavio, Espinosa, Asgapo and Ingay). That Resolution No. 47, it will be recalled, stopped all “rental payment/expenditures relative to the pool of heavy equipment of the Norlovanian Company.” The stoppage was based on prior resolutions of the Council — allegedly setting down the terms under which the heavy equipment should be acquired, and which terms were supposedly violated by the Mayor. but — unaccountably and again indicative of bad faith, if not malice, on the part of private respondents — Resolution No. 47 made absolutely no reference to two (2) resolution which on their face justify the Mayor’s contract with Norlovanian Corporation, to wit: (1) Resolution No. 21 which, having been enacted after the cited resolutions, must be deemed to have superseded them, and which, to repeat, motivated and constitutes the justification for the lease-purchase agreement entered into by the Mayor and Norlovanian Corporation, and (2) Resolution No. 38 in which the Councilors not only expressly aknowledged that “the municipal government ** (had) just acquired its fleet of heavy equipment leased/purchased from the Norlovanian Corporation,” but also “requested ** (the) Mayor ** to operate the newly acquired heavy equipment of the municipality leased/purchased from the Norlovanian Corporation.” In light of the forego[i]ng facts, which appear to the Court to be quite apparent on the record, it is difficult to perceive how the Office of the Ombudsman could have arrived at a conclusion of any wrongdoing by the Mayor in relation to the transaction in question. It is difficult to see how the transaction between the Mayor and Norlovanian Corporation —entered into pursuant to Resolution No. 21 — and tacitly accepted and approved by the town Council through its Resolution No. 38 — could be deemed an infringement of the same Resolution No. 21. In truth, an examination of the pertinent writings (the resolution, the two (2) instruments constituting the negotiated contract, and the certificate of delivery) unavoidably confirms their integrity and congruity. It is in fine, difficult to see how those pertinent written instrument, could establish a prima facie case to warrant the preventive suspension of Mayor Constantino. A person with the most elementary grasp of the English language would, from merely scanning those material documents, at once realize that the Mayor had done nothing but carry out the expressed wishes of the Sangguniang Bayan. x x x x

The investigator also opined that Resolution No. 21 should be interpreted in light of other official documents, executed a year earlier. He [Graft Prosecutor Buena] does not explain why he did not adopt the more obvious construction of Resolution No. 21 indicated by the elementary doctrine that it is within the power and prerogative of the town council to repeal its prior acts, either expressly, or by the passage of essentially inconsistent resolutions. When the town council passed Resolution No. 21 without any mention whatever of those prior official documents respecting the acquisition to heavy equipment, the evident intention was to supersede them and to have such acquisition governed solely by Resolution No. 21. This conclusion is strongly supported by the fact that the Sanggunian expressly admitted — in the Second Whereas Clause of its Resolution No. 21 — that there had been a “failure of bidders to submit bids despite of two biddings ... public announcement” [sic] — the two biddings being obviously related to said earlier official acts of the town council. The conclusion is further bolstered by the fact that the Council (with full awareness of said “negotiated contract,”) and of the delivery of equipment thereunder, had requested the Mayor to put the equipment into operation for the town projects. The Court is thus satisfied that it was in fact the Council’s intention, which it expressed in clear language, to confer on the Mayor ample discretion to execute a “negotiated contract” with any interested party, without regard to any official acts of the Council prior to Resolution No. 21. It is also difficult to see why the patent inaccuracies in the affidavit-complaint and Resolution No. 47 were ignored — as difficult to understand how the execution of two writings to embody one contract of “lease/purchase” could be regarded as fatally defective, and even indicative of a criminal conspiracy, or why said two writings should be interpreted in such a way as to magnify their seeming inconsistencies. The fundamental and familiar legal principle — which the Office of the Ombudsman ignored — is that it is perfectly legitimate for a bilateral contract to be embodied in two or more separate writings, and that in such an event the writings should be read and interpreted together in such a way as to eliminate seeming inconsistencies and render the parties’ intention effectual. The statement in the appealed Resolution — as to the absence of prior consent of the Council to the “negotiated contract” executed by Mayor Constantino and Norlovanian Corporation — flies in the teeth of the evidence; there is unrebutted proof that the heavy equipment delivered to the Municipality pursuant to the contract, was inspected by designated councilors and municipal officers; that shortly thereafter, the negotiated contract — composed of two documents — was explained and discussed at the session of the town Council of February 29, 1996; and that afterwards the Council requested Mayor Constantino to put the equipment into operation. (Emphasis supplied)[46]

Although the instant case involves a criminal charge whereas Constantino involved an administrative charge, still the findings in the latter case are binding herein because the same set of facts are the subject of both cases. What is decisive is that the issues already litigated in a final and executory judgment preclude— by the principle of bar by prior judgment, an aspect of the doctrine of res judicata, and even under the doctrine of “law of the case,” —the re-litigation of the same issue in another action.[47] It is well established that when a right or fact has been judicially tried and determined by a court of competent jurisdiction, so long as it remains unreversed, it should be conclusive upon the parties and those in privity with them.[48] The dictum therein laid down became the law of the case and what was once irrevocably established as the controlling legal rule or decision continues to be binding between the same parties as long as the facts on which the decision was predicated continue to be the facts of the case before the court. Hence, the binding effect and enforceability of that dictum can no longer be resurrected anew since such issue had already been resolved and finally laid to rest, if not by the principle ofres judicata, at least by conclusiveness of judgment.[49]

It may be true that the basis of administrative liability differs from criminal liability as

the purpose of administrative proceedings on the one hand is mainly to protect the public service, based on the time-honored principle that a public office is a public trust. On the other hand, the purpose of the criminal prosecution is the punishment of crime.[50]However, the dismissal by the Court of the administrative case against Constantino based on the same subject matter and after examining the same crucial evidence operates to dismiss the criminal case because of the precise finding that the act from which liability is anchored does not exist.

It is likewise clear from the decision of the Court in Constantino that the level of proof

required in administrative cases which is substantial evidence was not mustered therein. The same evidence is again before the Court in connection with the appeal in the criminal case. Ineluctably, the same evidence cannot with greater reason satisfy the higher standard in criminal cases such as the present case which is evidence beyond reasonable doubt.

The elementary principle is that it is perfectly legitimate for a bilateral contract to be

embodied in two or more separate writings, and that in such an event the writings should be read and interpreted together in such a way as to eliminate seeming inconsistencies and render the intention of the parties effectual.[51] In construing a written contract, the reason behind and the circumstances surrounding its execution are of paramount importance to place the interpreter in the situation occupied by the parties concerned at the time the writing was executed.[52] Construction of the terms of a contract, which would amount to impairment or loss

of right, is not favored. Conservation and preservation, not waiver, abandonment or forfeiture of a right, is the rule.[53] In case of doubts in contracts, the same should be settled in favor of the greatest reciprocity of interests.[54] G.R. No. 154482 Lindong ascribes grave abuse of discretion on the part of respondent court in issuing the challenged orders. He argues that the Sandiganbayan erred in not holding in abeyance the execution of judgment against him in light of the pending petition for review by his co-accused before this Court of the same decision for which he was convicted. Should the decision be set aside by the Supreme Court, petitioner Lindong contends, he will be benefited to the extent that there can no longer be any judgment to legally execute against both himself and Constantino. The virtual acquittal of Constantino inevitably puts a welcome end to the tribulations of Lindong. Thus, we grant the petition. One of the essential elements for violating Section 3(e) of R.A. No. 3019 is that the respondent is a public officer discharging administrative, judicial or official functions, or that he or she is a private individual in conspiracy with such public officer. In the instant case, the essential acquittal of Constantino, as presaged in G.R. No. 140656 and presented in the disquisition, renders an absence in the critical requisite of a public officer with whom Lindong, the private individual, allegedly conspired to commit the crime charged. Hence, we now have before us an incongruous situation where execution of judgment has been entered against a private person accused with conspiring with a public officer for violation of the anti-graft law, but at the same time said public officer would unequivocably be entitled to exoneration had he not died in the meantime. Yet, it is utterly illogical to absolve Constantino who entered into the contract on behalf of the government and send the private person to prison. The case of Marcos v. Sandiganbayan (1st Division)[55] is instructive. Here, the Court granted the motion for reconsideration filed by former First Lady Imelda Marcos and acquitted her of the charge of violating Section 3(g) of R.A. No. 3019. Her acquittal was based on the finding that she signed the subject lease agreement not as a public officer, but as a private person. Thus, the Court found that the first element of the offense, i.e., that the accused is a public officer, was lacking. However, the acquittal of the former First Lady was taken in conjunction with the acquittal of the public officer with whom she was accused.[56]

The case of Go v. The Fifth Division, Sandiganbayan, et al.[57] further elucidates the matter as illustrated in Marcos, to wit:

x x x [T]he acquittal of the former First Lady should be taken in the context of the Court’s Decision dated January 29, 1198, in Dans, Jr. v. People, which the former First Lady sought to reconsider and, finding merit in her motion, gave rise to the Court’s Resolution in Marcos. In Dans, the Information filed against the former First Lady and Jose P. Dans, Jr., then Minister of Transportation and Communications, for violation of Section 3(g) of R[.]A[.] [No.] 3019, alleged that they were both public officers and, conspiring with each other, entered into the subject lease agreement covering the LRTA property with the PGHFI, a private entity, under terms and conditions manifestly and grossly disadvantageous to the government. The Court in its original decision affirmed the former First Lady’s conviction for violation of Section 3(g) of R[.]A[.] [No.] 3019 but acquitted her co-accused, Dans, Jr., of the said offense. As stated earlier, upon the former First Lady’s motion for reconsideration, the Court reversed her conviction in its Resolution in Marcos. It can be gleaned from the entire context of Marcos and Dans that the reversal of the former First Lady’s conviction was based on the fact that it was later held that she signed the subject lease agreement as a private person, not a public officer. However, this acquittal should also be taken in conjunction with the fact that the public officer with whom she had supposedly conspired, her co-accused Dans, had earlier been acquitted. In other words, the element that the accused is a public officer, was totally wanting in the former First Lady’s case because Dans, the public officer with whom she had allegedly conspired in committing Section 3(g) of R[.]A[.] [No.] 3019, had already been acquitted. Obviously, the former First Lady could not be convicted, on her own as a private person, of the same offense. (Emphasis supplied)

It is therefore apparent that in light of the prevailing milieu in the instant case, we cannot sustain the execution of judgment against Lindong. The reversal of the decision of the Sandiganbayan in Criminal Case No. 23433 makes it legally absurd to execute any such judgment against him. Moreover, Rule 122, Section 11(a) of the Revised Rules of Criminal Procedure operates in his favor. The Rule provides:

SEC. 11. Effect of appeal by any of several accused.—

(a) An appeal taken by one or more of several accused shall not affect those who did not appeal, except insofar as the judgment of the appellate court is favorable and applicable to the latter.

Although the rule states that a favorable judgment shall benefit those who did not appeal, we have held that a literal interpretation of the phrase “did not appeal” will not give justice to the purpose of the provision. It should be read in its entirety and should not be myopically construed so as to defeat its reason, i.e., to benefit an accused who did not join in the appeal of his co-accused in case where the appellate judgment is favorable.[58] In fact, the Court has at various times applied the foregoing provision without regard to the filing or non-filing of an appeal by a co-accused, so long as the judgment was favorable to him. In such cases, the co-accused already withdrew his appeal,[59] failed to file an appellant’s brief,[60] or filed a notice of appeal with the trial court but eventually withdrew the same.[61] Even more, in these cases, all the accused appealed from the judgment of conviction but for one reason or another, their conviction had already become final and executory. Nevertheless, the Court still applied to them the favorable judgment in favor of their co-accused.[62] Therefore, we cannot find a reason to treat Lindong differently, especially so in this case where the public officer accused of violating the anti-graft law has been acquitted, and the appeal by Lindong was dismissed on a technicality. WHEREFORE, the petition in G.R. No. 140656, although meritorious, is DENIED on the ground of mootness. The petition in G.R. No. 154482 is GRANTED. The challenged orders of the

Sandiganbayan in Criminal Case No. 23433 are NULLIFIED and SET ASIDE. The Sandiganbayan is permanently enjoined from executing said orders.

SO ORDERED.

DANTE O. TINGA Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING Associate Justice

Chairperson

ANTONIO T. CARPIO CONCHITA CARPIO MORALES Associate Justice Associate Justice

PRESBITERO J. VELASCO, JR. Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

LEONARDO A. QUISUMBING Associate Justice Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division. REYNATO S. PUNO Chief Justice

SECOND DIVISION

SALVADOR P. ESCAÑO G. R. No. 151953 and MARIO M. SILOS, Petitioners, Present: QUISUMBING, - versus - Chairperson, CARPIO, CARPIO MORALES, TINGA, and RAFAEL ORTIGAS, JR., VELASCO, JR., JJ. Respondent.

Promulgated: June 29, 2007 x---------------------------------------------------------------------------------x

D E C I S I O N

TINGA, J.:

The main contention raised in this petition is that petitioners are not under obligation to reimburse respondent, a claim that can be easily debunked. The more perplexing question is whether this obligation to repay is solidary, as contended by respondent and the lower courts, or merely joint as argued by petitioners.

On 28 April 1980, Private Development Corporation of the Philippines (PDCP)[1] entered

into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms and conditions.[2] On the same day, three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George T. Scholey executed an Assumption of Solidary Liability whereby they agreed “to assume in [their] individual capacity, solidary liability with [Falcon] for the due and punctual payment” of the loan contracted by Falcon with PDCP.[3] In the meantime, two separate guaranties were executed to guarantee the payment of the same loan by other stockholders and officers of Falcon, acting in their personal and individual capacities. One Guaranty[4] was executed by petitioner Salvador Escaño (Escaño), while the other[5] by petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez). Two years later, an agreement developed to cede control of Falcon to Escaño, Silos and Joseph M. Matti (Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased George T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and Matti.[6] Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve themselves of all liability arising from their previous joint and several undertakings with Falcon, including those related to the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was executed by the concerned parties,[7] namely: with Escaño, Silos and Matti identified in the document as “SURETIES,” on one hand, and Ortigas, Inductivo and the Scholeys as “OBLIGORS,” on the other. The Undertaking reads in part:

3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release OBLIGORS from their said guarantees [sic], SURETIES hereby irrevocably agree and undertake to assume all of OBLIGORs’ said guarantees [sic] to PDCP and PAIC under the following terms and conditions:

a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the payment of FALCON’s obligations with it, any of [the] OBLIGORS shall immediately inform SURETIES thereof so that the latter can timely take appropriate measures; b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS for collection of said loans and/or credit facilities, SURETIES agree to defend OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for contribution, indemnity, subrogation or other relief in respect to any of the claims of PDCP and/or PAIC; and

c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount to PDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment; 4. OBLIGORS hereby waive in favor of SURETIES any and all fees

which may be due from FALCON arising out of, or in connection with, their said guarantees[sic].[8]

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there remained a subsisting deficiency of P5,031,004.07, which Falcon did not satisfy despite demand.[9]

On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum

of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escaño, Silos,

Silverio and Inductivo. The case was docketed as Civil Case No. 89-5128. For his part, Ortigas filed together with his answer a cross-claim against his co-defendants Falcon, Escaño and Silos, and also manifested his intent to file a third-party complaint against the Scholeys and Matti.[10] The cross-claim lodged against Escaño and Silos was predicated on the 1982 Undertaking, wherein they agreed to assume the liabilities of Ortigas with respect to the PDCP loan.

Escaño, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come

to terms with PDCP was Escaño, who in December of 1993, entered into a compromise agreement whereby he agreed to pay the bank P1,000,000.00. In exchange, PDCP waived or assigned in favor of Escaño one-third (1/3) of its entire claim in the complaint against all of the other defendants in the case.[11] The compromise agreement was approved by the RTC in a Judgment[12] dated 6 January 1994.

Then on 24 February 1994, Ortigas entered into his own compromise agreement[13] with

PDCP, allegedly without the knowledge of Escaño, Matti and Silos. Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as “full satisfaction of the PDCP’s claim against Ortigas,”[14] in exchange for PDCP’s release of Ortigas from any liability or claim arising from the Falcon loan agreement, and a renunciation of its claims against Ortigas.

In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he

agreed to pay P500,000.00 in exchange for PDCP’s waiver of its claims against him.[15] In the meantime, after having settled with PDCP, Ortigas pursued his claims against

Escaño, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and Silos,[16] while he maintained his cross-claim against Escaño. In 1995, Ortigas filed a motion for Summary Judgment in his favor against Escaño, Silos and Matti. On 5 October 1995, the RTC issued the Summary Judgment, ordering Escaño, Silos and Matti to pay Ortigas, jointly and severally, the amount of P1,300,000.00, as well as P20,000.00 in attorney’s fees.[17] The trial court ratiocinated that none of the third-party defendants disputed the 1982 Undertaking, and that “the mere denials of defendants with respect to non-compliance of Ortigas of the terms and conditions of the Undertaking, unaccompanied by any substantial fact which would be admissible in evidence at a hearing, are not sufficient to raise genuine issues of fact necessary to defeat a motion for summary judgment, even if such facts were raised in the pleadings.”[18] In an Order dated 7 March 1996, the trial court denied the motion for

reconsideration of the Summary Judgment and awarded Ortigas legal interest of 12% per annum to be computed from 28 February 1994.[19]

From the Summary Judgment, recourse was had by way of appeal to the Court of

Appeals. Escaño and Silos appealed jointly while Matti appealed by his lonesome. In a Decision[20] dated 23 January 2002, the Court of Appeals dismissed the appeals and affirmed the Summary Judgment. The appellate court found that the RTC did not err in rendering the summary judgment since the three appellants did not effectively deny their execution of the 1982 Undertaking. The special defenses that were raised, “payment and excussion,” were characterized by the Court of Appeals as “appear[ing] to be merely sham in the light of the pleadings and supporting documents and affidavits.”[21] Thus, it was concluded that there was no genuine issue that would still require the rigors of trial, and that the appealed judgment was decided on the bases of the undisputed and established facts of the case.

Hence, the present petition for review filed by Escaño and Silos.[22] Two main issues are

raised. First, petitioners dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document which they do not disavow and have in fact annexed to their petition. Second, on the assumption that they are liable to Ortigas under the 1982 Undertaking, petitioners argue that they are jointly liable only, and not solidarily. Further assuming that they are liable, petitioners also submit that they are not liable for interest and if at all, the proper interest rate is 6% and not 12%.

Interestingly, petitioners do not challenge, whether in their petition or their memorandum

before the Court, the appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if the pleadings, supporting affidavits, depositions and admissions on file show that, except as to the amount of damages, there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Petitioner have not attempted to demonstrate before us that there existed a genuine issue as to any material fact that would preclude summary judgment. Thus, we affirm with ease the common rulings of the lower courts that summary judgment is an appropriate recourse in this case.

The vital issue actually raised before us is whether petitioners were correctly held liable to Ortigas on the basis of the 1982 Undertaking in this Summary Judgment. An examination of the document reveals several clauses that make it clear that the agreement was brought forth by the desire of Ortigas, Inductivo and the Scholeys to be released from their liability under the loan agreement which release was, in turn, part of the consideration for the assignment of their shares in Falcon to petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself with Falcon for the payment of the loan with PDCP, and that “amongst the consideration for OBLIGORS and/or their principals aforesaid selling is SURETIES’ relieving OBLIGORS of any and all liability arising from their said joint and several undertakings with FALCON.”[23] Most crucial is the clause in Paragraph 3 of the Undertaking wherein petitioners “irrevocably agree and undertake to assume all of OBLIGORs’ said guarantees [sic] to PDCP x x x under the following terms and conditions.”[24]

At the same time, it is clear that the assumption by petitioners of Ortigas’s “guarantees”

[sic] to PDCP is governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by “any of OBLIGORS” of any demand from PDCP for the payment of Falcon’s obligations with it, “any of OBLIGORS” was to immediately inform “SURETIES” thereof so that the latter can timely take appropriate measures. Second, should “any and/or all of OBLIGORS” be impleaded by PDCP in a suit for collection of its loan, “SURETIES agree[d] to defend OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for contribution, indemnity, subrogation or other relief”[25] in respect to any of the claims of PDCP. Third, if any of the “OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES [were to] reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment.”[26]

Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not

“made to pay” PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount of P1.3 Million as an amicable settlement of the claims posed by the bank against him. However, the subject clause in paragraph 3(c) actually reads “[i]n the event that any of OBLIGORS is for any reason made to pay any amount to PDCP x x x”[27] As pointed out by Ortigas, the phrase “for any reason” reasonably includes any extra-judicial settlement of obligation such as what Ortigas had undertaken to pay to PDCP, as it is indeed obvious that the

phrase was incorporated in the clause to render the eventual payment adverted to therein unlimited and unqualified.

The interpretation posed by petitioners would have held water had the Undertaking made

clear that the right of Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as a consequence of a final and executory judgment. On the contrary, the clear intent of the Undertaking was for petitioners and Matti to relieve the burden on Ortigas and his fellow “OBLIGORS” as soon as possible, and not only after Ortigas had been subjected to a final and executory adverse judgment.

Paragraph 1 of the Undertaking enjoins petitioners to “exert all efforts to cause PDCP x x

x to within a reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x x”[28] In the event that Ortigas and his fellow “OBLIGORS” could not be released from their guaranties, paragraph 2 commits petitioners and Matti to cause the Board of Directors of Falcon to make a call on its stockholders for the payment of their unpaid subscriptions and to pledge or assign such payments to Ortigas, et al., as security for whatever amounts the latter may be held liable under their guaranties. In addition, paragraph 1 also makes clear that nothing in the Undertaking “shall prevent OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the release of their said guarantees [sic].”[29]

There is no argument to support petitioners’ position on the import of the phrase “made

to pay” in the Undertaking, other than an unduly literalist reading that is clearly inconsistent with the thrust of the document. Under the Civil Code, the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.[30] Likewise applicable is the provision that if some stipulation of any contract should admit of several meanings, it shall be understood as bearing

that import which is most adequate to render it effectual.[31] As a means to effect the general intent of the document to relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners, that holds sway with this Court.

Neither do petitioners impress us of the non-fulfillment of any of the other conditions set

in paragraph 3, as they claim. Following the general assertion in the petition that Ortigas violated the terms of the Undertaking, petitioners add that Ortigas “paid PDCP BANK the amount of P1.3 million without petitioners ESCANO and SILOS’s knowledge and consent.”[32] Paragraph 3(a) of the Undertaking does impose a requirement that any of the “OBLIGORS” shall immediately inform “SURETIES” if they received any demand for payment of FALCON’s obligations to PDCP, but that requirement is reasoned “so that the [SURETIES] can timely take appropriate measures”[33] presumably to settle the obligation without having to burden the “OBLIGORS.” This notice requirement in paragraph 3(a) is markedly way off from the suggestion of petitioners that Ortigas, after already having been impleaded as a defendant in the collection suit, was obliged under the 1982 Undertaking to notify them before settling with PDCP.

The other arguments petitioners have offered to escape liability to Ortigas are similarly

weak. Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that

Ortigas had, in his answer, denied any liability to PDCP and had alleged that he signed the Assumption of Solidary Liability not in his personal capacity, but as an officer of Falcon. However, such position, according to petitioners, could not be justified since Ortigas later voluntarily paid PDCP the amount of P1.3 Million. Such circumstances, according to petitioners, amounted to estoppel on the part of Ortigas.

Even as we entertain this argument at depth, its premises are still erroneous. The Partial

Compromise Agreement between PDCP and Ortigas expressly stipulated that Ortigas’s offer to pay PDCP was conditioned “without [Ortigas’s] admitting liability to plaintiff PDCP Bank’s complaint, and to terminate and dismiss the said case as against Ortigas solely.”[34] Petitioners profess it is “unthinkable” for Ortigas to have voluntarily paid PDCP without admitting his

liability,[35] yet such contention based on assumption cannot supersede the literal terms of the Partial Compromise Agreement.

Petitioners further observe that Ortigas made the payment to PDCP after he had already

assigned his obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial claim against Ortigas notwithstanding the Undertaking he executed with petitioners. Not being a party to such Undertaking, PDCP was not precluded by a contract from pursuing its claim against Ortigas based on the original Assumption of Solidary Liability.

At the same time, the Undertaking did not preclude Ortigas from relieving his distress

through a settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that “nothing herein shall prevent OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the release of their said guarantees [sic].”[36]Simply put, the Undertaking did not bar Ortigas from pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering from petitioners whatever amount he may have paid PDCP through his own settlement. The stipulation that if Ortigas was “for any reason made to pay any amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment”[37] makes it clear that petitioners remain liable to reimburse Ortigas for the sums he paid PDCP.

We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the

assumption that they are indeed liable. Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas,

claiming that the Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil Code, which states in part that “[t]here is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.”

Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the Undertaking, as the language used in the agreement “clearly shows that it is a surety agreement”[38] between the obligors (Ortigas group) and the sureties (Escaño group). Ortigas points out that the Undertaking uses the word “SURETIES” although the document, in describing the parties. It is further contended that the principal objective of the parties in executing the Undertaking cannot be attained unless petitioners are solidarily liable “because the total loan obligation can not be paid or settled to free or release the OBLIGORS if one or any of the SURETIES default from their obligation in the Undertaking.”[39]

In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation, Article 1207 of the Civil Code states that among them, “[t]here is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.” Article 1210 supplies further caution against the broad interpretation of solidarity by providing: “The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility.” These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or more debtors in one and the same obligation, and in the absence of express and indubitable terms characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove such fact with a preponderance of evidence.

The Undertaking does not contain any express stipulation that the petitioners agreed “to bind themselves jointly and severally” in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to overcome the presumption of jointness of obligations. We rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the Undertaking as “SURETIES”, a term repeated no less than thirteen (13) times in the document. Ortigas claims that such manner of identification sufficiently establishes that the obligation of petitioners to him was joint and solidary in nature.

The term “surety” has a specific meaning under our Civil Code. Article 2047 provides the

statutory definition of a surety agreement, thus:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the

provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. [Emphasis supplied][40] As provided in Article 2047 in a surety agreement the surety undertakes to be bound

solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract. It appears that Ortigas’s argument rests solely on the solidary nature of the obligation of the surety under Article 2047. In tandem with the nomenclature “SURETIES” accorded to petitioners and Matti in the Undertaking, however, this argument can only be viable if the obligations established in the

Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place. That clearly is not the case here, notwithstanding the use of the nomenclature “SURETIES” in the Undertaking.

Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the

surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation.[41] At the same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to. The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished.[42] At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact “become subrogated to all the rights and remedies of the creditor.”[43]

Note that Article 2047 itself specifically calls for the application of the provisions on

joint and solidary obligations to suretyship contracts.[44] Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).[45]However, a significant distinction still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor.

Dr. Tolentino explains the differences between a solidary co-debtor and a surety: A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by

reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

The second paragraph of [Article 2047] is practically equivalent to the

contract of suretyship. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between the co-debtors liable in solidum is similar to the common law suretyship.[46]

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment to the creditor “may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made.” Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety.

What is the source of this right to full reimbursement by the surety? We find the right

under Article 2066 of the Civil Code, which assures that “[t]he guarantor who pays for a debtor must be indemnified by the latter,” such indemnity comprising of, among others, “the total amount of the debt.”[47] Further, Article 2067 of the Civil Code likewise establishes that “[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.”[48]

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several obligations should apply to sureties. We reject that argument, and instead adopt Dr. Tolentino’s observation that “[t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that suretyship is withdrawn from the applicable provisions governing guaranty.”[49] For if that were not the implication, there would be no material

difference between the surety as defined under Article 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the same rules and limitations.

Accordingly, the rights to indemnification and subrogation as established and granted to

the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who pays, since the “indemnification” that pertains to the latter extends “only [to] the share which corresponds to each [co-debtor].” It is for this reason that the Court cannot accord the conclusion that because petitioners are identified in the Undertaking as “SURETIES,” they are consequently joint and severally liable to Ortigas.

In order for the conclusion espoused by Ortigas to hold, in light of the general

presumption favoring joint liability, the Court would have to be satisfied that among the petitioners and Matti, there is one or some of them who stand as the principal debtor to Ortigas and another as surety who has the right to full reimbursement from the principal debtor or debtors. No suggestion is made by the parties that such is the case, and certainly the Undertaking is not revelatory of such intention. If the Court were to give full fruition to the use of the term “SURETIES” as conclusive indication of the existence of a surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the necessary implication would be to lay down a corresponding set of rights and obligations as between the “SURETIES” which petitioners and Matti did not clearly intend.

It is not impossible that as between Escaño, Silos and Matti, there was an agreement

whereby in the event that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them was to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from the other two obligors. In such case, there would have been, in fact, a surety agreement which evinces a solidary obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not appear on the record. More consequentially, no such intention is reflected in the Undertaking itself, the very document that creates the conditional obligation that petitioners and Matti reimburse Ortigas should he be made to pay PDCP. The mere utilization of the term “SURETIES” could not work to such effect, especially as it does not appear who exactly is the principal debtor whose obligation is “assured” or “guaranteed” by the surety.

Ortigas further argues that the nature of the Undertaking requires “solidary obligation of

the Sureties,” since the Undertaking expressly seeks to “reliev[e] obligors of any and all liability arising from their said joint and several undertaking with [F]alcon,” and for the “sureties” to

“irrevocably agree and undertake to assume all of obligors said guarantees to PDCP.”[50] We do not doubt that a finding of solidary liability among the petitioners works to the benefit of Ortigas in the facilitation of these goals, yet the Undertaking itself contains no stipulation or clause that establishes petitioners’ obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by themselves establish that the nature of the obligation requires solidarity. Even if the liability of petitioners and Matti were adjudged as merely joint, the full relief and reimbursement of Ortigas arising from his payment to PDCP would still be accomplished through the complete execution of such a judgment.

Petitioners further claim that they are not liable for attorney’s fees since the Undertaking

contained no such stipulation for attorney’s fees, and that the situation did not fall under the instances under Article 2208 of the Civil Code where attorney’s fees are recoverable in the absence of stipulation.

We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his

being impleaded in the suit filed by PDCP. The Undertaking was precisely executed as a means to obtain the release of Ortigas and the Scholeys from their previous obligations as sureties of Falcon, especially considering that they were already divesting their shares in the corporation. Specific provisions in the Undertaking obligate petitioners to work for the release of Ortigas from his surety agreements with Falcon. Specific provisions likewise mandate the immediate repayment of Ortigas should he still be made to pay PDCP by reason of the guaranty agreements from which he was ostensibly to be released through the efforts of petitioners. None of these provisions were complied with by petitioners, and Article 2208(2) precisely allows for the recovery of attorney’s fees “[w]hen the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest.”

Finally, petitioners claim that they should not be liable for interest since the Undertaking

does not contain any stipulation for interest, and assuming that they are liable, that the rate of interest should not be 12% per annum, as adjudged by the RTC.

The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals[51] set forth the

rules with respect to the manner of computing legal interest:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual

and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of

money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be

12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.[52]

Since what was the constituted in the Undertaking consisted of a payment in a sum of

money, the rate of interest thereon shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand. The interest rate imposed by the RTC is thus proper. However, the computation should be reckoned from judicial or extrajudicial demand. Per records, there is no indication that Ortigas made any extrajudicial demand to petitioners and Matti after he paid PDCP, but on 14 March 1994, Ortigas made a judicial demand when he filed a Third-Party Complaint praying that petitioners and Matti be made to reimburse him for the payments made to PDCP. It is the filing of this Third Party Complaint on 14 March 1994 that should be considered as the date of judicial demand from which the computation of interest should be reckoned.[53] Since the RTC held that interest should be computed from 28 February 1994, the appropriate redefinition should be made.

WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial

Court dated 5 October 1995 is MODIFIED by declaring that petitioners and Joseph M. Matti are only jointly liable, not jointly and severally, to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order of the Regional Trial Court dated 7 March 1996 is MODIFIED in that the legal interest of 12% per annum on the amount of P1,300,000.00 is to be computed from 14 March 1994, the date of judicial demand, and not from28 February 1994 as directed in the Order of the lower court. The assailed rulings are affirmed in all other respects. Costs against petitioners.

SO ORDERED.

DANTE O. TINGA Associate Justice

WE CONCUR: (On Official Leave)

LEONARDO A. QUISUMBING Associate Justice

Chairperson

ANTONIO T. CARPIO CONCHITA CARPIO MORALES Associate Justice Associate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division. ANTONIO T. CARPIO Associate Justice Acting Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO Chief Justice

FIRST DIVISION

[G.R. No. 115966. March 20, 2003]

JUANA ALMIRA, RENATO GARCIA, ROGELIO GARCIA, RODOLFO GARCIA, ROSITA GARCIA, RHODORA GARCIA, ROSALINDA GARCIA, ROLANDO GARCIA and RAFAEL GARCIA Represented in this suit by EDGARDO ALVAREZ, petitioners, vs. COURT OF APPEALS AND FEDERICO BRIONES, respondents.

D E C I S I O N

AZCUNA, J.:

Before us is a petition for review on certiorari assailing the decision rendered by the Court of Appeals in C.A. G.R. CV No. 40954[1] which reversed the decision of the Regional Trial Court, Branch 32, of San Pedro, Laguna that rescinded the Kasunduan ng Pagbibilihan[2] entered into between petitioners and private respondent over a portion of a parcel of land situated in Sta. Rosa, Laguna.

The facts of the case are as follows:

Petitioners are the wife and the children of the late Julio Garcia who inherited from his mother, Maria Alibudbud, a portion of a 90,655 square-meter property denominated as Lot 1642 of the Sta. Rosa Estate in Barangay Caingin, Sta. Rosa, Laguna and covered by TCT No. RT-1076. Lot 1642 was co-owned and registered in the names of three persons with the following shares: Vicente de Guzman (½), Enrique Hemedes (1/4), and Francisco Alibudbud, the father of Maria Alibudbud (¼). Although there was no separate title in the name of Julio Garcia, there

were tax declarations in his name to the extent of his grandfather’s share covering an area of 21,460 square meters. On July 5, 1984, petitioners, as heirs of Julio Garcia, and respondent Federico Briones entered into a Kasunduan ng Pagbibilihan (Kasunduan for brevity) over the 21,460 square-meter portion for the sum of P150,000.00. Respondent paid P65,000.00 upon execution of the contract while the balance of P85,000.00 was made payable within six (6) months from the date of the execution of the instrument. At the time of the execution of the Kasunduan, petitioners allegedly informed respondent that TCT No. RT-1076 was in the possession of their cousin, Conchalina Alibudbud who having bought Vicente de Guzman’s ½ share, owned the bigger portion of Lot 1642. This notwithstanding, respondent willingly entered into the Kasunduan provided that the full payment of the purchase price will be made upon delivery to him of the title.[3]

The Kasunduan provides:

Na ang UNANG BAHAGI ay siyang magkakamayari (co-owners), bilang tagapagmana ng yumaong Julio Garcia sa isang lagay na lupang taniman ng palay, matatagpuan sa nayon ng Caingin, Santa Rosa, Laguna, may buong lawak na 21,460 metrong parisukat, humigi‘t kumulang, na lalong makikilala sa mga katangiang inilalahad sa pahayag ng Buwis Bilang 3472 na ganito ang natutunguhan: Mga kahanggan: Hilaga-1641-Nazario Lauriles; Timog-Barique Hemedez; Silangan- Vicente de Guzman; at Kanluran-Francisco Alibudbod; hinalagahan para sa pagbabayad ng buwis pampamahalaan ng P12,720.00; at kasalukuyang may nabibinbing kahilingan sa hukuman upang magkaroon ng sariling titulo; nalilibot ng batong mohon na nagsisilbing hanganan sa bawa‘t sulok.

Na ang UNANG BAHAGI ay inialok sa IKALAWANG BAHAGI upang bilihin ang lupang nabanggit sa kabuuang halagang ISANG DAAN AT LIMAMPUNG LIBONG (P150,000.00) PISO, Salaping Pilipino, at ang IKALAWANG BAHAGI ay sumangayon na bilhin ang naulit na lupa batay sa sumusunod na mga pasubali at Kasunduan:

(1) Na pinatutunayan ng UNANG BAHAGI na tinanggap nila sa buong kasiyahan ng kalooban buhat sa IKALAWANG BAHAGI ang halagang ANIMNAPU AT LIMANG LIBONG (P65,000.00) PISO, salaping Pilipino, bilang paunang bayad, at ang nalalabing WALUMPU AT LIMANG LIBONG (85,000.00) PISO, ay babayaran ng IKALAWANG BAHAGI sa UNANG BAHAGI sa loob ng anim na buwan simula sa takda ng kasulatang ito, sa pasubali na ang kaukulang titulo sa lupang nabanggit ay maipagkakaloob ng UNANG BAHAGI;

(2) Na ang UNANG BAHAGI ang siyang mananagot tungkol sa anumang kasulatang inihanda ukol sa pagbibilihang ito, gayundin sa gastos sa notaryo publiko, capital gains tax at pagpapatala ng kasulatan sa lalawigan ng Laguna;

(3) Na ang UNANG BAHAGI ay lalagda sa isang “Kasulatan ng Bilihang Tuluyan” matapos na mabayarang lahat ng IKALAWANG BAHAGI ang kaukulang kabuuang halaga ng lupang nabanggit.

Respondent took possession of the property subject of the Kasunduan and made various payments to petitioners amounting to P58,500.00. However, upon failure of petitioners to deliver to him a separate title to the property in the name of Julio Garcia, he refused to make further

payments, prompting petitioners to file a civil action before the Regional Trial Court of San Pedro, Laguna, Branch 32, on May 13, 1991 for (a) rescission of the Kasunduan; (b) return by respondent to petitioners of the possession of the subject parcel of land; and (c) payment by respondent of damages in favor of petitioners.

Petitioners alleged that respondent was bound to pay the balance of the purchase price within six (6) months from the date of the execution of the Kasunduan and upon delivery to him of TCT No. RT-1076. Petitioners claimed that they approached respondent several times to deliver TCT No. RT-1076 but respondent told them that he did not have money to pay the balance of the purchase price.[4] Respondent, on the other hand, filed a counterclaim for damages and averred that he refused to make further payments because of petitioners’ failure to deliver to him a separate title in the name of Julio Garcia.

On November 26, 1992, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant decreeing the rescission of the “Kasunduan ng Pagbibilihan” dated July 5, 1984 and ordering the defendant to return and restore possession of the property subject of the Kasunduan ng Pagbibilihan to the plaintiffs. For paucity of evidence, no judgment can be rendered on the other reliefs prayed for in the complaint.

On the other hand, plaintiffs are hereby ordered to refund to the defendant the downpayment of P65,000.00 and the partial payment of the balance totaling to P58,500.00 plus legal interest. Defendant’s counterclaim is hereby dismissed for lack of merit. Costs against defendant.[5]

In its decision, the trial court noted that proceedings for the issuance of a separate title covering the property subject of sale entail time and the parties could not have intended delivery by petitioners to respondent of a separate title in the name of Julio Garcia as a condition for respondent’s payment of the full purchase price within six months from the time of the execution of theKasunduan. Said court observed that even if petitioners were obliged to deliver a separate title in the name of Julio Garcia to respondent, the latter appeared to have insufficient funds to settle his obligation as indicated by the fact that his payments amounting to P58,500.00 were made in “trickles,” having been given on thirty-nine occasions within a span of two years from the time of the execution of the Kasunduan. It concluded that respondent refused to complete payment of the full purchase price not because of the failure of petitioners to deliver a separate title in the name of Julio Garcia but because respondent simply did not have sufficient funds at hand.

The Court of Appeals, however, noting that the Kasunduan made no reference to TCT No. RT-1076, reversed the decision of the trial court, and dismissed the complaint. The appellate court opined that the parties intended to refer to a separate title over the 21,460 square meter lot when the Kasunduan mentioned a “kaukulang titulo ng lupang nabanggit” since it was the portion which was covered by a separate tax declaration in the name of Julio Garcia and it was the portion that petitioners could sell. The appellate court noted that the actuations of the parties subsequent to the execution of the Kasunduan confirmed respondent’s claim that a separate title to the property subject of the Kasunduan should be delivered to him. Nevertheless, respondent’s

counterclaim for damages was dismissed on the ground that the filing of the complaint for rescission was not attended by malice, there being an honest difference of opinion between the parties as to the interpretation of the Kasunduan.

Feeling aggrieved by the aforesaid decision, petitioners filed before us the instant petition for certiorari, raising issues which may essentially be summarized as follows: (1) whether payment of the balance of the purchase price is conditioned upon delivery of a separate title in the name of Julio Garcia; (2) whether petitioners are entitled to rescind the Kasunduan for failure of respondent to complete payment of the purchase price; and (3) whether the Court of Appeals should have dismissed respondent’s appeal for failure to comply with Circular 28-91.

Petitioners contend that the Kasunduan never made a reference to a “title in the name of Julio Garcia” and that there was nothing in the actuations of the parties which would indicate that full payment of the purchase price is conditioned upon the delivery to respondent of said title. Petitioners allege that respondent refused to give further payments not because of their failure to deliver a separate title in the name of Julio Garcia but because he simply did not have sufficient funds to complete payment of the purchase price. Petitioners ask for rescission of the Kasunduanpursuant to Article 1191 of the Civil Code on the ground that respondent failed to complete payment of the purchase price. They further aver that the appellate court should have dismissed respondent’s appeal in the first place for failure of respondent to comply with Circular No. 28-91[6] requiring parties to submit a certification of non-forum shopping in petitions filed before the Supreme Court and the Court of Appeals. Petitioners lament that although they raised the issue regarding respondent’s procedural lapse early on at the appellate court, the latter still entertained respondent’s appeal.

As a rule, our jurisdiction in cases brought before us from the Court of Appeals under Rule 45 of the Rules of Court is limited to reviewing errors of law. Factual findings of the appellate court are generally binding on us.[7] However, this principle is subject to certain exceptions such as the situation in this case where the trial court and the appellate court arrived at diverse factual findings.[8]

The subject of conflicting interpretations between the parties pertains to the provision in the Kasunduan which states:

(1) Na pinatutunayan ng UNANG BAHAGI na tinanggap nila sa buong kasiyahan ng kalooban buhat sa IKALAWANG BAHAGI ang halagang ANIMNAPU AT LIMANG LIBO (P65,000.00) PISO, Salaping Pilipino, bilang paunang bayad, at ang nalalabing WALUMPU AT LIMANG LIBONG (85,000.00) PISO ay babayaran ng IKALAWANG BAHAGI sa UNANG BAHAGI sa loob ng anim na buwan simula sa takda ng kasulatang ito, sa pasubali na ang kaukulang titulo ng lupang nabanggit ay maipagkakaloob ng UNANG BAHAGI sa IKALAWANG BAHAGI”

Petitioners allege that the kaukulang titulo ng lupang nabanggit refers to TCT No. RT-1076 and not to a separate title in the name of Julio Garcia. Petitioners stress the implausibility of delivering the separate title to respondent within six (6) months from the time of the execution of the Kasunduan considering that issuance of the title required prior settlement of the estates of Francisco Alibudbud, Vicente de Guzman and Enrique Hemedes; partition of Lot 1642; and segregation of the portion pertaining to the share acquired by Julio Garcia. Respondent, for his part, insists that the kaukulang titulo ng lupang nabanggit refers to a separate title in the name of

Julio Garcia. He argues that he only acceded to the Kasunduan upon having been assured by petitioners that they would be able to deliver to him a separate title in the name of Julio Garcia. Petitioners allegedly told respondent that there was a pending petition in the court of Biñan for the issuance of a separate title to the subject property.[9]

It is basic in the interpretation and construction of contracts that the literal meaning of the stipulations shall control if the terms of the contract are clear and leave no doubt on the intention of the contracting parties. However, if the terms of the agreement are ambiguous, resort is made to contract interpretation which is the determination of the meaning attached to written or spoken words that make the contract.[10] To ascertain the true intention of the parties, their subsequent or contemporaneous actions must be principally considered.

The tenor of the correspondence between petitioners and respondent shows that the parties intended that a separate title to the property in the name of Julio Garcia shall be delivered to respondent as a condition for the latter’s payment of the balance of the purchase price. Thus, petitioner Juana Almira’s letter dated July 24, 1986 to respondent reads:

Ang totoo po ngayon ay kailangan naming ang halagang LABING LIMANG LIBO (P15,000.00) PISO, yan po ang dahilan kung bakit kami ay sumulat sa inyo, sapagkat sa mga unang naghawak at nag-ayos ng papeles ng lupang ito ay hindi nila naayos at hindi nila natapos, kaya po kami ay nakakita at malaki po ang nagastos naming sa una na walang nangyari, kaya nga itong huli ay lalong lumaki

Unawain po naman ninyo kami sa halagang kailangan naming para sa huling gumagawa ng Titulo ng lupa para naman po maayos na ito.[11]

Respondent signified his willingness to pay the balance of the purchase price but reminded petitioners of their obligation to deliver title to the property in the following reply:

Hindi lingid sa inyong kaalaman na sa ilalim ng naubit na “Kasunduan ng Pagbibilihan” ay maliwanag ang inyong tungkulin na ipagkaboob sa amin ang kaukulang titulo ng lupa sa boob ng anim (6) na buwan simula sa takda ng nasabing kasulatan at kami naman ay nahahandang magbayad ng lahat ng nalababing kabayaran x x x at tuwing kayo ay kukuha ng pera ang lagi niyong idinadahilan ay ang diumano ay paglalakad tungkol sa titulo. x x x[12]

Had the parties intended that petitioners deliver TCT No. RT-1076 instead of a separate title in the name of Julio Garcia to respondent, then there would have been no need for petitioners to ask for partial sums on the ground that this would be used to pay for the processing of the title to the property. Petitioners had only to present the existing title, TCT No. RT-1076, to respondent and demand the balance of the purchase price. This, petitioners did not do. Instead, they were content to ask small sums from respondent on thirty-nine occasions for two years before filing an action in court for rescission of the Kasunduan another five years later. It is readily discernible from the tenor of various receipts[13] issued by petitioners that the sums given by respondent on these thirty-nine occasions were made upon request of petitioners seeking respondent’s indulgence. A letter[14] dated October 11, 1984 and addressed to respondent’s father, Tata Omy, whom respondent authorized to give payments during the time he was working abroad reads:

Tata Omy,

Ako si Rogelio A. Garcia ang sumulat nito at ang maydala ay si Rolando Garcia na kapatid kong bunso at ito ay pinagawa ng aking ina si Juana Garcia. Ang dahilan ay mayroon silang nabiling t.v. 17 inches at ngayon ay naririto sa amin. Kaya ako ay labis na nahihiya sa inyo ni Viring ngunit ano ang magagawa ko para diyan kaya kayo na ang bahalang magpasensiya sa amin. Ang kailangan nila ay halagang P800.00 at para mabili nila ang T. V. + P200.00

Ang gumagalang, (Sgd.) Rogelio Garcia

Received: P1,000.00 By( Sgd). Rosita Garcia

There is thus no basis to conclude that insufficiency of funds rather than failure of petitioners to deliver a separate title in the name of Julio Garcia prevented respondent from completing payment of the purchase price.

That the parties agreed on delivery of a separate title in the name of Julio Garcia as a condition for respondent’s payment of the balance of the purchase price is bolstered by the fact that there was already an approved subdivision plan of the 21,460 square-meter lot years before petitioners filed an action in court for rescission.[15] The parties evidently assumed petitioners would be able to deliver a separate title in the name of Julio Garcia to respondent within six (6) months from the time of the execution of the Kasunduan since there was already a pending petition in court for the issuance of a separate title to 21,460 square-meter lot at that time. Unfortunately, the petitioners were not able to secure a separate title in the name of Julio Garcia within the stipulated period.

Finally, we note that, as quoted earlier, the Kasunduan itself in its opening paragraph refers to the subject property being sold as “buong lawak na 21,640 metrong parisukat, x x x at sa kasalukuyan may nabibinbing kahilingan sa hukuman upang magkaroon ng sariling titulo; x x x.” The next paragraph of the Kasunduan, therefore, which speaks of “ang kaukulang titulo sa lupang nabanggit,” clearly refers to the separate title being applied for, even without resort to extraneous evidence.

Petitioners, however, insist that it was respondent’s counsel who prepared the Kasunduan and any ambiguity therein should be construed against respondent pursuant to Article 1377 of the Civil Code which states that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

We find no reason to apply Article 1377 of the Civil Code in this case where the evident intention of the parties can be readily discerned by their subsequent and contemporaneous acts. While it is true that the Kasunduan was prepared by the counsel of respondent, there is no indication that respondent took unfair advantage of petitioners when he had the terms of theKasunduan drawn by his counsel. Petitioners freely assented to the Kasunduan which is written entirely in a language spoken and understood by both parties. That petitioners were fully aware of the terms of the Kasunduan is evidenced by their attempts to comply with their

obligation by securing a subdivision plan and technical description[16] of the property subject of sale.

Having ruled that the kaukulang titulo ng lupang nabanggit refers to a separate title in the name of Julio Garcia, we proceed to the issue as to whether petitioners may rescind theKasunduan pursuant to Article 1191 of the Civil Code for failure of respondent to give full payment of the balance of the purchase price.

The rights of the parties are governed by the terms and the nature of the contract they enter into. Hence, although the nature of the Kasunduan was never placed in dispute by both parties, it is necessary to ascertain whether the Kasunduan is a contract to sell or a contract of sale before the issue as to whether petitioners may ask for rescission of the contract may be resolved. In a contract to sell, ownership is, by agreement, reserved to the vendor and is not to pass until full payment of the purchase price; whereas, in contract of sale, title to the property passes to the vendee upon delivery of the thing sold.[17] Non-payment by the vendee in a contract of sale entitles the vendor to demand specific performance or rescission of the contract, with damages, under Article 1191 of the Civil Code.

Although both parties have consistently referred to the Kasunduan as a contract to sell, a careful reading of the provisions of the Kasunduan reveals that it is a contract of sale. A deed of sale is absolute in nature in the absence of any stipulation reserving title to the vendor until full payment of the purchase price. In such cases ownership of the thing sold passes to the vendee upon actual or constructive delivery thereof.[18] There is nothing in the Kasunduan which expressly provides that petitioners retain title or ownership of the property, until full payment of the purchase price. The absence of such stipulation in the Kasunduan coupled with the fact that respondent took possession of the property upon the execution of the Kasunduan indicate that the parties have contemplated a contract of absolute sale.

Stated otherwise, there was a perfected contract of sale. The parties agreed on the sale of a determinate object, i.e., 21, 460 square meters of Lot 1642, covered by a tax declaration in the name of Julio Garcia, and the price certain therefor, without any reservation of title on the part of petitioners. Ownership was effectively conveyed by petitioners to respondent, who was given possession of the property. The delivery of a separate title in the name of Julio Garcia was a condition imposed on respondent’s obligation to pay the balance of the purchase price. It was not a condition imposed on the perfection of the contract of sale. In Laforteza v. Machuca,[19] we stated that the fact that the obligation to pay the balance of the purchase price was made subject to the condition that the seller first deliver the reconstituted title of the property does not make the agreement a contract to sell for such condition is not inconsistent with a contract of sale.

Addressing now the issue as to whether rescission of the Kasunduan by petitioners may prosper, we rule in the negative. The power to rescind is only given to the injured party. The injured party is the party who has faithfully fulfilled his obligation or is ready and willing to perform with his obligation. In the case at bar, petitioners were not ready, willing and able to comply with their obligation to deliver a separate title in the name of Julio Garcia to respondent. Therefore, they are not in a position to ask for rescission of the Kasunduan. Moreover, respondent’s obligation to pay the balance of the purchase price was made subject to delivery by petitioners of a separate title in the name of Julio Garcia within six (6) months from the time of the execution of theKasunduan, a condition with which petitioners failed to comply. Failure to comply with a condition imposed on the performance of an obligation gives the other party the

option either to refuse to proceed with the sale or to waive that condition under Article 1545 of the Civil Code.[20] Hence, it is the respondent who has the option either to refuse to proceed with the sale or to waive the performance of the condition imposed on his obligation to pay the balance of the purchase price.

It follows that, not having established that they were ready, able and willing to comply with their obligation to deliver to respondent a separate title in the name of Julio Garcia, petitioners may not ask for rescission of the Kasunduan nor recover damages.

As regards the issue that the appellate court should have dismissed respondent’s appeal for failure of respondent to comply with Circular No. 28-91 requiring the submission of a certificate of non-forum shopping in petitions filed before us and the Court of Appeals, suffice it to say that when technicality deserts its function of being an aid to justice, the courts are justified in exempting from its operations a particular case.[21] Procedural rules are intended to insure the orderly conduct of litigation, because of the higher objective they seek, which is to protect the parties’ substantive rights.[22]

WHEREFORE, the petition is DENIED and the decision rendered by the Court of Appeals in CA G.R. No. 40954 entitled, “Juana Almira, et al., plaintiffs-appellees v. Federico Briones,defendant-appellant” is AFFIRMED. No costs.

SO ORDERED.

Davide, Jr., C.J. (Chairman), Vitug, and Carpio, JJ., concur. Ynares-Santiago, J., on leave.

SECOND DIVISION

[G.R. No. 140182. April 12, 2005]

TANAY RECREATION CENTER AND DEVELOPMENT CORP., petitioner, vs. CATALINA MATIENZO FAUSTO+ and ANUNCIACION FAUSTO PACUNAYEN, respondents.

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

Petitioner Tanay Recreation Center and Development Corp. (TRCDC) is the lessee of a 3,090-square meter property located in Sitio Gayas, Tanay, Rizal, owned by Catalina Matienzo Fausto,[1] under a Contract of Lease executed on August 1, 1971. On this property stands the Tanay Coliseum Cockpit operated by petitioner. The lease contract provided for a 20-year term, subject to renewal within sixty days prior to its expiration. The contract also provided that should Fausto decide to sell the property, petitioner shall have the “priority right” to purchase the same.[2]

On June 17, 1991, petitioner wrote Fausto informing her of its intention to renew the lease.[3] However, it was Fausto’s daughter, respondent Anunciacion F. Pacunayen, who replied,

asking that petitioner remove the improvements built thereon, as she is now the absolute owner of the property.[4] It appears that Fausto had earlier sold the property to Pacunayen on August 8, 1990, for the sum of P10,000.00 under a “Kasulatan ng Bilihan Patuluyan ng Lupa,”[5] and title has already been transferred in her name under Transfer Certificate of Title (TCT) No. M-35468.[6]

Despite efforts, the matter was not resolved. Hence, on September 4, 1991, petitioner filed an Amended Complaint for Annulment of Deed of Sale, Specific Performance with Damages, and Injunction, docketed as Civil Case No. 372-M.[7]

In her Answer, respondent claimed that petitioner is estopped from assailing the validity of the deed of sale as the latter acknowledged her ownership when it merely asked for a renewal of the lease. According to respondent, when they met to discuss the matter, petitioner did not demand for the exercise of its option to purchase the property, and it even asked for grace period to vacate the premises.[8]

After trial on the merits, the Regional Trial Court of Morong, Rizal (Branch 78), rendered judgment extending the period of the lease for another seven years from August 1, 1991 at a monthly rental of P10,000.00, and dismissed petitioner’s claim for damages.[9]

On appeal, docketed as CA-G.R. CV No. 43770, the Court of Appeals (CA) affirmed with modifications the trial court’s judgment per its Decision dated June 14, 1999.[10] The dispositive portion of the decision reads:

WHEREFORE, the appealed decision is AFFIRMED AND ACCORDINGLY MODIFIED AS DISCUSSED.

Furthermore, we resolved:

1.0. That TRCDC VACATE the leased premises immediately;

2.0. To GRANT the motion of Pacunayen to allow her to withdraw the amount of P320,000.00, deposited according to records, with this court.

3.0. To order TRCDC to MAKE THE NECESSARY ACCOUNTING regarding the amounts it had already deposited (for unpaid rentals for the extended period of seven [7] years of the contract of lease). In case it had not yet completed its deposit, to immediately pay the remaining balance to Pacunayen.

4.0. To order TRCDC to PAY the amount of P10,000.00 as monthly rental, with regard to its continued stay in the leased premises even after the expiration of the extended period of seven (7) years, computed from August 1, 1998, until it finally vacates therefrom.

SO ORDERED.[11]

In arriving at the assailed decision, the CA acknowledged the priority right of TRCDC to purchase the property in question. However, the CA interpreted such right to mean that it shall be applicable only in case the property is sold to strangers and not to Fausto’s relative. The CA

stated that “(T)o interpret it otherwise as to comprehend all sales including those made to relatives and to the compulsory heirs of the seller at that would be an absurdity,” and “her (Fausto’s) only motive for such transfer was precisely one of preserving the property within her bloodline and that someone administer the property.”[12] The CA also ruled that petitioner already acknowledged the transfer of ownership and is deemed to have waived its right to purchase the property.[13] The CA even further went on to rule that even if the sale is annulled, petitioner could not achieve anything because the property will be eventually transferred to Pacunayen after Fausto’s death.[14]

Petitioner filed a motion for reconsideration but it was denied per Resolution dated September 14, 1999.[15]

Dissatisfied, petitioner elevated the case to this Court on petition for review on certiorari, raising the following grounds:

THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE ERROR IN HOLDING THAT THE CONTRACTUAL STIPULATION GIVING PETITIONER THE PRIORITY RIGHT TO PURCHASE THE LEASED PREMISES SHALL ONLY APPLY IF THE LESSOR DECIDES TO SELL THE SAME TO STRANGERS;

THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE ERROR IN HOLDING THAT PETITIONER’S PRIORITY RIGHT TO PURCHASE THE LEASED PREMISES IS INCONSEQUENTIAL.[16]

The principal bone of contention in this case refers to petitioner’s priority right to purchase, also referred to as the right of first refusal.

Petitioner’s right of first refusal in this case is expressly provided for in the notarized “Contract of Lease” dated August 1, 1971, between Fausto and petitioner, to wit:

7. That should the LESSOR decide to sell the leased premises, the LESSEE shall have the priority right to purchase the same;[17]

When a lease contract contains a right of first refusal, the lessor is under a legal duty to the lessee not to sell to anybody at any price until after he has made an offer to sell to the latter at a certain price and the lessee has failed to accept it. The lessee has a right that the lessor's first offer shall be in his favor.[18] Petitioner’s right of first refusal is an integral and indivisible part of the contract of lease and is inseparable from the whole contract. The consideration for the lease includes the consideration for the right of first refusal[19] and is built into the reciprocal obligations of the parties.

It was erroneous for the CA to rule that the right of first refusal does not apply when the property is sold to Fausto’s relative.[20] When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon. As such, there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement, except when it fails to express the true intent and agreement of the parties.[21] In this case, the wording of the stipulation giving petitioner the right of first refusal is plain and unambiguous, and leaves no room for interpretation. It simply means that should

Fausto decide to sell the leased property during the term of the lease, such sale should first be offered to petitioner. The stipulation does not provide for the qualification that such right may be exercised only when the sale is made to strangers or persons other than Fausto’s kin. Thus, under the terms of petitioner’s right of first refusal, Fausto has the legal duty to petitioner not to sell the property to anybody, even her relatives, at any price until after she has made an offer to sell to petitioner at a certain price and said offer was rejected by petitioner. Pursuant to their contract, it was essential that Fausto should have first offered the property to petitioner before she sold it to respondent. It was only after petitioner failed to exercise its right of first priority could Fausto then lawfully sell the property to respondent.

The rule is that a sale made in violation of a right of first refusal is valid. However, it may be rescinded, or, as in this case, may be the subject of an action for specific performance.[22] InRiviera Filipina, Inc. vs. Court of Appeals,[23] the Court discussed the concept and interpretation of the right of first refusal and the consequences of a breach thereof, to wit:

. . . It all started in 1992 with Guzman, Bocaling & Co. v. Bonnevie where the Court held that a lease with a proviso granting the lessee the right of first priority “all things and conditions being equal” meant that there should be identity of the terms and conditions to be offered to the lessee and all other prospective buyers, with the lessee to enjoy the right of first priority. A deed of sale executed in favor of a third party who cannot be deemed a purchaser in good faith, and which is in violation of a right of first refusal granted to the lessee is not voidable under the Statute of Frauds but rescissible under Articles 1380 to 1381 (3) of the New Civil Code.

Subsequently in 1994, in the case of Ang Yu Asuncion v. Court of Appeals, the Court en banc departed from the doctrine laid down in Guzman, Bocaling & Co. v. Bonnevie and refused to rescind a contract of sale which violated the right of first refusal. The Court held that the so-called “right of first refusal” cannot be deemed a perfected contract of sale under Article 1458 of the New Civil Code and, as such, a breach thereof decreed under a final judgment does not entitle the aggrieved party to a writ of execution of the judgment but to an action for damages in a proper forum for the purpose.

In the 1996 case of Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., the Court en banc reverted back to the doctrine in Guzman Bocaling & Co. v. Bonnevie stating that rescission is a relief allowed for the protection of one of the contracting parties and even third persons from all injury and damage the contract may cause or to protect some incompatible and preferred right by the contract.

Thereafter in 1997, in Parañaque Kings Enterprises, Inc. v. Court of Appeals, the Court affirmed the nature of and the concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing the rulings in Guzman, Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., held that in order to have full compliance with the contractual right granting petitioner the first option to purchase, the sale of the properties for the price for which they were finally sold to a third person should have likewise been first offered to the former. Further, there should be identity of terms and conditions to be offered to the buyer holding a right of first refusal if such right is not to be rendered illusory. Lastly, the basis of the right of first refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer.

The prevailing doctrine therefore, is that a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible.[24]

It was also incorrect for the CA to rule that it would be useless to annul the sale between Fausto and respondent because the property would still remain with respondent after the death of her mother by virtue of succession, as in fact, Fausto died in March 1996, and the property now belongs to respondent, being Fausto’s heir.[25]

For one, Fausto was bound by the terms and conditions of the lease contract. Under the right of first refusal clause, she was obligated to offer the property first to petitioner before selling it to anybody else. When she sold the property to respondent without offering it to petitioner, the sale while valid is rescissible so that petitioner may exercise its option under the contract.

With the death of Fausto, whatever rights and obligations she had over the property, including her obligation under the lease contract, were transmitted to her heirs by way of succession, a mode of acquiring the property, rights and obligation of the decedent to the extent of the value of the inheritance of the heirs. Article 1311 of the Civil Code provides:

ART. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.

A lease contract is not essentially personal in character.[26] Thus, the rights and obligations therein are transmissible to the heirs. The general rule is that heirs are bound by contracts entered into by their predecessors-in-interest except when the rights and obligations arising therefrom are not transmissible by (1) their nature, (2) stipulation or (3) provision of law.[27]

In this case, the nature of the rights and obligations are, by their nature, transmissible. There is also neither contractual stipulation nor provision of law that makes the rights and obligations under the lease contract intransmissible. The lease contract between petitioner and Fausto is a property right, which is a right that passed on to respondent and the other heirs, if any, upon the death of Fausto.

In DKC Holdings Corporation vs. Court of Appeals,[28] the Court held that the Contract of Lease with Option to Buy entered into by the late Encarnacion Bartolome with DKC Holdings Corporation was binding upon her sole heir, Victor, even after her demise and it subsists even after her death. The Court ruled that:

. . . Indeed, being an heir of Encarnacion, there is privity of interest between him and his deceased mother. He only succeeds to what rights his mother had and what is valid and binding against her is also valid and binding as against him. This is clear from Parañaque Kings Enterprises vs. Court of Appeals, where this Court rejected a similar defense-

With respect to the contention of respondent Raymundo that he is not privy to the lease contract, not being the lessor nor the lessee referred to therein, he could thus not have violated its provisions, but he is nevertheless a proper party. Clearly, he stepped into the

shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed all the obligations of the lessor under the lease contract. Moreover, he received benefits in the form of rental payments. Furthermore, the complaint, as well as the petition, prayed for the annulment of the sale of the properties to him. Both pleadings also alleged collusion between him and respondent Santos which defeated the exercise by petitioner of its right of first refusal.

In order then to accord complete relief to petitioner, respondent Raymundo was a necessary, if not indispensable, party to the case. A favorable judgment for the petitioner will necessarily affect the rights of respondent Raymundo as the buyer of the property over which petitioner would like to assert its right of first option to buy.[29] (Emphasis supplied)

Likewise in this case, the contract of lease, with all its concomitant provisions, continues even after Fausto’s death and her heirs merely stepped into her shoes.[30] Respondent, as an heir of Fausto, is therefore bound to fulfill all its terms and conditions.

There is no personal act required from Fausto such that respondent cannot perform it. Fausto’s obligation to deliver possession of the property to petitioner upon the exercise by the latter of its right of first refusal may be performed by respondent and the other heirs, if any. Similarly, nonperformance is not excused by the death of the party when the other party has a property interest in the subject matter of the contract.[31]

The CA likewise found that petitioner acknowledged the legitimacy of the sale to respondent and it is now barred from exercising its right of first refusal. According to the appellate court:

Second, when TRCDC, in a letter to Fausto, signified its intention to renew the lease contract, it was Pacunayen who answered the letter on June 19, 1991. In that letter Pacunayen demanded that TRCDC vacate the leased premises within sixty (60) days and informed it of her ownership of the leased premises. The pertinent portion of the letter reads:

Furtherly, please be advised that the land is no longer under the absolute ownership of my mother and the undersigned is now the real and absolute owner of the land.

Instead of raising a howl over the contents of the letter, as would be its expected and natural reaction under the circumstances, TRCDC surprisingly kept silent about the whole thing. As we mentioned in the factual antecedents of this case, it even invited Pacunayen to its special board meeting particularly to discuss with her the renewal of the lease contract. Again, during that meeting, TRCDC did not mention anything that could be construed as challenging Pacunayen’s ownership of the leased premises. Neither did TRCDC assert its priority right to purchase the same against Pacunayen.[32]

The essential elements of estoppel are: (1) conduct of a party amounting to false representation or concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation, that this conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the real facts.[33]

The records are bereft of any proposition that petitioner waived its right of first refusal under the contract such that it is now estopped from exercising the same. In a letter dated June 17, 1991, petitioner wrote to Fausto asking for a renewal of the term of lease.[34] Petitioner cannot be faulted for merely seeking a renewal of the lease contract because obviously, it was working on the assumption that title to the property is still in Fausto’s name and the latter has the sole authority to decide on the fate of the property. Instead, it was respondent who replied, advising petitioner to remove all the improvements on the property, as the lease is to expire on the 1st of August 1991. Respondent also informed petitioner that her mother has already sold the property to her.[35]In order to resolve the matter, a meeting was called among petitioner’s stockholders, including respondent, on July 27, 1991, where petitioner, again, proposed that the lease be renewed. Respondent, however, declined. While petitioner may have sought the renewal of the lease, it cannot be construed as a relinquishment of its right of first refusal. Estoppel must be intentional and unequivocal.[36]

Also, in the excerpts from the minutes of the special meeting, it was further stated that the possibility of a sale was likewise considered.[37] But respondent also refused to sell the land, while the improvements, “if for sale shall be subject for appraisal.”[38] After respondent refused to sell the land, it was then that petitioner filed the complaint for annulment of sale, specific performance and damages.[39] Petitioner’s acts of seeking all possible avenues for the amenable resolution of the conflict do not amount to an intentional and unequivocal abandonment of its right of first refusal.

Respondent was well aware of petitioner’s right to priority of sale, and that the sale made to her by her mother was merely for her to be able to take charge of the latter’s affairs. As admitted by respondent in her Appellee’s Brief filed before the CA, viz.:

After June 19, 1991, TRCDC invited Pacunayen to meeting with the officers of the corporation. . . . In the same meeting, Pacunayen’s attention was called to the provision of the Contract of Lease had by her mother with TRCDC, particularly paragraph 7 thereof, which states:

7. That should the lessor decide to sell the leased premises, the LESSEE shall have the priority right to purchase the same.

Of course, in the meeting she had with the officers of TRCDC, Pacunayen explained that the sale made in her favor by her mother was just a formality so that she may have the proper representation with TRCDC in the absence of her parents, more so that her father had already passed away, and there was no malice in her mine (sic) and that of her mother, or any intention on their part to deceive TRCDC. All these notwithstanding, and for her to show their good faith in dealing with TRCDC, Pacunayen started the ground work to reconvey ownership over the whole land, now covered by Transfer Certificare (sic) of Title No. M-259, to and in the name of her mother (Fausto), but the latter was becoming sickly, old and weak, and they found no time to do it as early as they wanted to.[40] (Emphasis supplied)

Given the foregoing, the “Kasulatan ng Bilihan Patuluyan ng Lupa” dated August 8, 1990 between Fausto and respondent must be rescinded. Considering, however, that Fausto already died on March 16, 1996, during the pendency of this case with the CA, her heirs should have

been substituted as respondents in this case. Considering further that the Court cannot declare respondent Pacunayen as the sole heir, as it is not the proper forum for that purpose, the right of petitioner may only be enforced against the heirs of the deceased Catalina Matienzo Fausto, represented by respondent Pacunayen.

In Parañaque Kings Enterprises, Inc. vs. Court of Appeals,[41] it was ruled that the basis of the right of the first refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer. It is only after the grantee fails to exercise its right of first priority under the same terms and within the period contemplated, could the owner validly offer to sell the property to a third person, again, under the same terms as offered to the grantee. The circumstances of this case, however, dictate the application of a different ruling. An offer of the property to petitioner under identical terms and conditions of the offer previously given to respondent Pacunayen would be inequitable. The subject property was sold in 1990 to respondent Pacunayen for a measly sum of P10,000.00. Obviously, the value is in a small amount because the sale was between a mother and daughter. As admitted by said respondent, “the sale made in her favor by her mother was just a formality so that she may have the proper representation with TRCDC in the absence of her parents…”[42] Consequently, the offer to be made to petitioner in this case should be under reasonable terms and conditions, taking into account the fair market value of the property at the time it was sold to respondent.

In its complaint, petitioner prayed for the cancellation of TCT No. M-35468 in the name of respondent Pacunayen,[43] which was issued by the Register of Deeds of Morong on February 7, 1991.[44] Under ordinary circumstances, this would be the logical effect of the rescission of the “Kasulatan ng Bilihan Patuluyan ng Lupa” between the deceased Fausto and respondent Pacunayen. However, the circumstances in this case are not ordinary. The buyer of the subject property is the seller’s own daughter. If and when the title (TCT No. M-35468) in respondent Pacunayen’s name is cancelled and reinstated in Fausto’s name, and thereafter negotiations between petitioner and respondent Pacunayen for the purchase of the subject property break down, then the subject property will again revert to respondent Pacunayen as she appears to be one of Fausto’s heirs. This would certainly be a winding route to traverse. Sound reason therefore dictates that title should remain in the name of respondent Pacunayen, for and in behalf of the other heirs, if any, to be cancelled only when petitioner successfully exercises its right of first refusal and purchases the subject property.

Petitioner further seeks the award of the following damages in its favor: (1) P100,000.00 as actual damages; (2) P1,100,000.00 as compensation for lost goodwill or reputation; (3)P100,000.00 as moral damages; (4) P100,000.00 as exemplary damages; (5) P50,000.00 as attorney’s fees; (6) P1,000.00 appearance fee per hearing; and (7) the costs of suit.[45]

According to petitioner, respondent’s act in fencing the property led to the closure of the Tanay Coliseum Cockpit and petitioner was unable to conduct cockfights and generate income of not less than P100,000.00 until the end of September 1991, aside from the expected rentals from the cockpit space lessees in the amount of P11,000.00.[46]

Under Article 2199 of the Civil Code, it is provided that:

Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or compensatory damages. (Emphasis supplied)

The rule is that actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty. A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have been suffered by the injured party and on the best obtainable evidence of the actual amount thereof. It must point out specific facts, which could afford a basis for measuring whatever compensatory or actual damages are borne.[47]

In the present case, there is no question that the Tanay Coliseum Cockpit was closed for two months and TRCDC did not gain any income during said period. But there is nothing on record to substantiate petitioner’s claim that it was bound to lose some P111,000.00 from such closure. TRCDC’s president, Ambrosio Sacramento, testified that they suffered income losses with the closure of the cockpit from August 2, 1991 until it re-opened on October 20, 1991.[48] Mr. Sacramento, however, cannot state with certainty the amount of such unrealized income.[49] Meanwhile, TRCDC’s accountant, Merle Cruz, stated that based on the corporation’s financial statement for the years 1990 and 1991,[50] they derived the amount of P120,000.00 as annual income from rent.[51] From said financial statement, it is safe to presume that TRCDC generated a monthly income of P10,000.00 a month (P120,000.00 annual income divided by 12 months). At best therefore, whatever actual damages that petitioner suffered from the cockpit’s closure for a period of two months can be reasonably summed up only to P20,000.00.

Such award of damages shall earn interest at the legal rate of six percent (6%) per annum, which shall be computed from the time of the filing of the Complaint on August 22, 1991, until the finality of this decision. After the present decision becomes final and executory, the rate of interest shall increase to twelve percent (12%) per annum from such finality until its satisfaction, this interim period being deemed to be equivalent to a forbearance of credit.[52] This is in accord with the guidelines laid down by the Court in Eastern Shipping Lines, Inc. vs. Court of Appeals,[53]regarding the manner of computing legal interest, viz.:

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time quantification of damages may be deemed to have been reasonably ascertained). The

actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.[54]

Petitioner also claims the amount of P1,100,000.00 as compensation for lost goodwill or reputation. It alleged that “with the unjust and wrongful conduct of the defendants as above-described, plaintiff stands to lose its goodwill and reputation established for the past 20 years.”[55]

An award of damages for loss of goodwill or reputation falls under actual or compensatory damages as provided in Article 2205 of the Civil Code, to wit:

Art. 2205. Damages may be recovered:

(1) For loss or impairment of earning capacity in cases of temporary or permanent personal injury;

(2) For injury to the plaintiff’s business standing or commercial credit.

Even if it is not recoverable as compensatory damages, it may still be awarded in the concept of temperate or moderate damages.[56] In arriving at a reasonable level of temperate damages to be awarded, trial courts are guided by the ruling that:

. . . There are cases where from the nature of the case, definite proof of pecuniary loss cannot be offered, although the court is convinced that there has been such loss. For instance, injury to one's commercial credit or to the goodwill of a business firm is often hard to show certainty in terms of money. Should damages be denied for that reason? The judge should be empowered to calculate moderate damages in such cases, rather than that the plaintiff should suffer, without redress from the defendant's wrongful act. (Araneta v. Bank of America, 40 SCRA 144, 145)[57]

In this case, aside from the nebulous allegation of petitioner in its amended complaint, there is no evidence on record, whether testimonial or documentary, to adequately support such claim. Hence, it must be denied.

Petitioner’s claim for moral damages must likewise be denied. The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system.[58] Petitioner being a corporation,[59] the claim for moral damages must be denied.

With regard to the claim for exemplary damages, it is a requisite in the grant thereof that the act of the offender must be accompanied by bad faith or done in wanton, fraudulent or malevolent manner.[60] Moreover, where a party is not entitled to actual or moral damages, an

award of exemplary damages is likewise baseless.[61] In this case, petitioner failed to show that respondent acted in bad faith, or in wanton, fraudulent or malevolent manner.

Petitioner likewise claims the amount of P50,000.00 as attorney’s fees, the sum of P1,000.00 for every appearance of its counsel, plus costs of suit. It is well settled that no premium should be placed on the right to litigate and not every winning party is entitled to an automatic grant of attorney's fees. The party must show that he falls under one of the instances enumerated in Article 2208 of the Civil Code. In this case, since petitioner was compelled to engage the services of a lawyer and incurred expenses to protect its interest and right over the subject property, the award of attorney’s fees is proper. However there are certain standards in fixing attorney's fees, to wit: (1) the amount and the character of the services rendered; (2) labor, time and trouble involved; (3) the nature and importance of the litigation and business in which the services were rendered; (4) the responsibility imposed; (5) the amount of money and the value of the property affected by the controversy or involved in the employment; (6) the skill and the experience called for in the performance of the services; (7) the professional character and the social standing of the attorney; and (8) the results secured, it being a recognized rule that an attorney may properly charge a much larger fee when it is contingent than when it is not.[62] Considering the foregoing, the award ofP10,000.00 as attorney’s fees, including the costs of suit, is reasonable under the circumstances.

WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. The Court of Appeals’ Decision dated June 14, 1999 in CA-G.R. CV No. 43770 is MODIFIED as follows:

(1) the “Kasulatan ng Bilihan Patuluyan ng Lupa” dated August 8, 1990 between Catalina Matienzo Fausto and respondent Anunciacion Fausto Pacunayen is hereby deemed rescinded;

(2) The Heirs of the deceased Catalina Matienzo Fausto who are hereby deemed substituted as respondents, represented by respondent Anunciacion Fausto Pacunayen, are ORDERED to recognize the obligation of Catalina Matienzo Fausto under the Contract of Lease with respect to the priority right of petitioner Tanay Recreation Center and Development Corp. to purchase the subject property under reasonable terms and conditions;

(3) Transfer Certificate of Title No. M-35468 shall remain in the name of respondent Anunciacion Fausto Pacunayen, which shall be cancelled in the event petitioner successfully purchases the subject property;

(4) Respondent is ORDERED to pay petitioner Tanay Recreation Center and Development Corporation the amount of Twenty Thousand Pesos (P20,000.00) as actual damages, plus interest thereon at the legal rate of six percent (6%) per annum from the filing of the Complaint until the finality of this Decision. After this Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction; and,

(5) Respondent is ORDERED to pay petitioner the amount of Ten Thousand Pesos (P10,000.00) as attorney’s fees, and to pay the costs of suit.

(6) Let the case be remanded to the Regional Trial Court, Morong, Rizal (Branch 78) for further proceedings on the determination of the “reasonable terms and conditions” of the offer to sell by respondents to petitioner, without prejudice to possible mediation between the parties.

The rest of the unaffected dispositive portion of the Court of Appeals’ Decision is AFFIRMED.

SO ORDERED.

Puno, (Chairman), Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

SECOND DIVISION

[G.R. No. 117355. April 5, 2002]

RIVIERA FILIPINA, INC., petitioner, vs. COURT OF APPEALS, JUAN L. REYES, (now deceased), substituted by his heirs, namely, Estefania B. Reyes, Juanita R. de la Rosa, Juan B. Reyes, Jr. and Fidel B. Reyes, PHILIPPINE CYPRESS CONSTRUCTION & DEVELOPMENT CORPORATION, CORNHILL TRADING CORPORATION AND URBAN DEVELOPMENT BANK, respondents.

D E C I S I O N

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision[1] of the Court of Appeals[2] dated June 6, 1994 in CA-G.R. CV No. 26513 affirming the Decision[3] dated March 20, 1990 of the Regional Trial Court of Quezon City, Branch 89 dismissing Civil Case No. Q-89-3371.

Civil Case No. Q-89-3371 is a suit instituted by Riviera Filipina, Inc. (Riviera) on August 31, 1989[4] to compel the defendants therein Juan L. Reyes, now deceased, Philippine Cypress Construction & Development Corporation (Cypress), Cornhill Trading Corporation (Cornhill) and Urban Development Bank to transfer the title covering a 1,018 square meter parcel of land located along EDSA, Quezon City for alleged violation of Riviera’s right of first refusal.

It appears that on November 23, 1982, respondent Juan L. Reyes (Reyes, for brevity) executed a Contract of Lease with Riviera. The ten-year (10) renewable lease of Riviera, which started on August 1, 1982, involved a 1,018 square meter parcel of land located along Edsa, Quezon City, covered and described in Transfer Certificate of Title No. 186326 of the Registry of Deeds of Quezon City in the name of Juan L. Reyes.[5]

The said parcel of land was subject of a Real Estate Mortgage executed by Reyes in favor of Prudential Bank. Since the loan with Prudential Bank remained unpaid upon maturity, the mortgagee bank extrajudicially foreclosed the mortgage thereon. At the public auction sale, the mortgagee bank emerged as the highest bidder. The redemption period was set to expire on

March 7, 1989. Realizing that he could not possibly raise in time the money needed to redeem the subject property, Reyes decided to sell the same.[6]

Since paragraph 11 of the lease contract expressly provided that the “LESSEE shall have the right of first refusal should the LESSOR decide to sell the property during the term of the lease,”[7] Reyes offered to sell the subject property to Riviera, through its President Vicente C. Angeles, for Five Thousand Pesos (P5,000.00) per square meter. However, Angeles bargained for Three Thousand Five Hundred Pesos (P3,500.00) per square meter. Since Reyes was not amenable to the said price and insisted on Five Thousand Pesos (P5,000.00) per square meter, Angeles requested Reyes to allow him to consult the other members of the Board of Directors of Riviera.[8]

Seven (7) months later, or sometime in October 1988, Angeles communicated with Reyes Riviera’s offer to purchase the subject property for Four Thousand Pesos (P4,000.00) per square meter. However, Reyes did not accept the offer. This time he asked for Six Thousand Pesos (P6,000.00) per square meter since the value of the property in the area had appreciated in view of the plans of Araneta to develop the vicinity.[9]

In a letter dated November 2, 1988, Atty. Irineo S. Juan, acting as counsel for Reyes, informed Riviera that Reyes was selling the subject property for Six Thousand Pesos (P6,000.00) per square meter, net of capital gains and transfer taxes, registration fees, notarial fees and all other attendant charges. He further stated therein that:

In this connection, conformably to the provisions stipulated in Paragraph/Item No. 11 of your CONTRACT OF LEASE (Doc. No. 365, Page No. 63, Book No. X, Series of 1982, of the Notarial Registry of Notary Public Leovillo S. Agustin), notice is served upon your goodselves for you to exercise “the right of first refusal” in the sale of said property, for which purpose you are hereby given a period of ten (10) days from your receipt hereof within which to thus purchase the same under the terms and conditions aforestated, and failing which you shall be deemed to have thereby waived such pre-emptive right and my client shall thereafter be absolutely free to sell the subject property to interested buyers.[10]

To answer the foregoing letter and confirm their telephone conversation on the matter, Riviera sent a letter dated November 22, 1988 to Atty. Juan, counsel for Reyes, expressing Riviera’s interest to purchase the subject property and that Riviera is already negotiating with Reyes which will take a couple of days to formalize.[11] Riviera increased its offer to Five Thousand Pesos (P5,000.00) per square meter but Reyes did not accede to said price as it was still lower than his quoted price of Six Thousand Pesos (P6,000.00) per square meter.[12] Angeles asked Reyes to give him until the end of November 1988 for Riviera’s final decision.

In a letter dated December 2, 1988, Angeles wrote Reyes confirming Riviera’s intent to purchase the subject property for the fixed and final[13] price of Five Thousand Pesos (P5,000.00) per square meter, complete payment within sixty (60) to ninety (90) days which “offer is what we feel should be the market price of your property.” Angeles asked that the decision of Reyes and his written reply to the offer be given within fifteen (15) days since there are also other properties being offered to them at the moment.[14]

In response to the foregoing letter, Atty. Juan sent a letter to Riviera dated December 5, 1988 informing Riviera that Riviera’s offer is not acceptable to his client. He further expressed,

“let it be made clear that, much as it is the earnest desire of my client to really give you the preference to purchase the subject property, you have unfortunately failed to take advantage of such opportunity and thus lost your right of first refusal in sale of said property.”[15]

Meanwhile, on December 4, 1988, Reyes confided to Rolando P. Traballo, a close family friend and President of Cypress, his predicament about the nearing expiry date of the redemption period of the foreclosed mortgaged property with Prudential Bank, the money for which he could not raise on time thereby offering the subject property to him for Six Thousand Pesos (P6,000.00) per square meter. Traballo expressed interest in buying the said property, told Reyes that he will study the matter and suggested for them to meet the next day.[16]

They met the next day, December 5, 1988, at which time Traballo bargained for Five Thousand Three Hundred Pesos (P5,300.00) per square meter. After considering the reasons cited by Traballo for his quoted price, Reyes accepted the same. However, since Traballo did not have the amount with which to pay Reyes, he told the latter that he will look for a partner for that purpose.[17] Reyes told Traballo that he had already afforded Riviera its right of first refusal but they cannot agree because Riviera’s final offer was for Five Thousand Pesos (P5,000.00) per square meter.[18]

Sometime in January 1989, apprehensive of the impending expiration in March 1989 of the redemption period of the foreclosed mortgaged property with Prudential Bank and the deal between Reyes and Traballo was not yet formally concluded, Reyes decided to approach anew Riviera. For this purpose, he requested his nephew, Atty. Estanislao Alinea, to approach Angeles and find out if the latter was still interested in buying the subject property and ask him to raise his offer for the purchase of the said property a little higher. As instructed, Atty. Alinea met with Angeles and asked the latter to increase his offer of Five Thousand Pesos (P5,000.00) per square meter but Angeles said that his offer is Five Thousand Pesos (P5,000.00) per square meter.[19]

Following the meeting, Angeles sent a letter dated February 4, 1989 to Reyes, through Atty. Alinea, that his offer is Five Thousand Pesos (P5,000.00) per square meter payment of which would be fifty percent (50%) down within thirty (30) days upon submission of certain documents in three (3) days, the balance payable in five (5) years in equal monthly installments at twelve percent (12%) interest in diminishing balance.[20] With the terms of this second offer, Angeles admittedly downgraded the previous offer of Riviera on December 2, 1988.[21]

Atty. Alinea conveyed to Reyes Riviera’s offer of Five Thousand Pesos (P5,000.00) per square meter but Reyes did not agree. Consequently, Atty. Alinea contacted again Angeles and asked him if he can increase his price. Angeles, however, said he cannot add anymore.[22] Reyes did not expressly offer his subject property to Riviera at the price of Five Thousand Three Hundred Pesos (P5,300.00) per square meter.[23]

Sometime in February 1989, Cypress and its partner in the venture, Cornhill Trading Corporation, were able to come up with the amount sufficient to cover the redemption money, with which Reyes paid to the Prudential Bank to redeem the subject property.[24] On May 1, 1989, a Deed of Absolute Sale covering the subject property was executed by Reyes in favor of Cypress and Cornhill for the consideration of Five Million Three Hundred Ninety Five Thousand Four Hundred Pesos (P5,395,400.00).[25] On the same date, Cypress and Cornhill mortgaged the subject property to Urban Development Bank for Three Million Pesos (P3,000,000.00).[26]

Thereafter, Riviera sought from Reyes, Cypress and Cornhill a resale of the subject property to it claiming that its right of first refusal under the lease contract was violated. After several unsuccessful attempts,[27]Riviera filed the suit to compel Reyes, Cypress, Cornhill and Urban Development Bank to transfer the disputed title to the land in favor of Riviera upon its payment of the price paid by Cypress and Cornhill.

Following trial on the merits, the trial court dismissed the complaint of Riviera as well as the counterclaims and cross-claims of the other parties.[28] It ruled that the defendants therein did not violate Riviera’s right of first refusal, ratiocinating in this wise:

Resolving the first issue, this Court takes note that since the beginning of the negotiation between the plaintiff and defendant Reyes for the purchase of the property, in question, the plaintiff was firm and steadfast in its position, expressed in writing by its President Vicente Angeles, that it was not willing to buy the said property higher than P5,000.00, per square meter, which was far lower than the asking price of defendant Reyes forP6,000.00, per square meter, undoubtedly, because, in its perception, it would be difficult for other parties to buy the property, at a higher price than what it was offering, since it is in occupation of the property, as lessee, the term of which was to expire after about four (4) years more.

On the other hand, it was obvious, upon the basis of the last ditch effort of defendant Reyes, thru his nephew, Atty. Alinea, to have the plaintiff buy the property, in question, that he was willing to sell the said property at a price less than P6,000.00 and a little higher than P5,000.00, per square meter, precisely, because Atty. Alinea, in behalf of his uncle, defendant Reyes, sought plaintiff’s Angeles and asked him to raise his price a little higher, indicating thereby the willingness of defendant Reyes to sell said property at less than his offer of P6,000.00, per square meter.

This being the case, it can hardly be validly said by the plaintiff that he was deprived of his right of first refusal to buy the subject property at a price of P5,300.00, per square meter which is the amount defendants Cypress/Cornhill bought the said property from defendant Reyes. For, it was again given such an opportunity to exercise its right of first refusal by defendant Reyes had it only signified its willingness to increase a little higher its purchase price above P5,000.00, per square meter, when its President, Angeles, was asked by Atty. Alinea to do so, instead of adamantly sticking to its offer of only P5,000.00 per square meter, by reason of which, therefore, the plaintiff had lost, for the second time, its right of first refusal, even if defendant Reyes did not expressly offer to sell to it the subject land at P5,300.00, per square meter, considering that by the plea of Atty. Alinea, in behalf of defendant Reyes, for it to increase its price a little, the plaintiff is to be considered as having forfeited again its right of first refusal, it having refused to budged from its regid (sic) offer to buy the subject property at no more than P5,000.00, per square meter.

As such, this Court holds that it was no longer necessary for the defendant Reyes to expressly and categorically offer to the plaintiff the subject property at P5,300.00, per square meter, in order that he can comply with his obligation to give first refusal to the plaintiff as stipulated in the Contract of Lease, the plaintiff having had already lost its right of first refusal, at the first instance, by refusing to buy the said property at P6,000.00, per square meter, which was the asking price of defendant Reyes, since to do so would be a useless ceremony and would only be

an exercise in futility, considering the firm and unbending position of the plaintiff, which defendant Reyes already knew, that the plaintiff, at any event, was not amenable to increasing its price at over P5,000.00, per square meter.

Dissatisfied with the decision of the trial court, both parties appealed to the Court of Appeals.[29] However, the appellate court, through its Special Seventh Division, rendered a Decision dated June 6, 1994 which affirmed the decision of the trial court in its entirety.[30] In sustaining the decision of the trial court, the Court of Appeals adopted the above-quoted ratiocination of the trial court and further added:

To put things in its proper perspective in accordance with the peculiar attendant circumstances herein, particular stress should be given to RIVIERA’s uncompromising counter offer of only P5,000.00 per square meter on all the occasions when REYES offered the subject property to it. RIVIERA, in its letter to REYES dated December 2, 1988 (Exhibit “D”, p. 68, Rollo) justified its rigid offer by saying that “the above offer is what we feel should be the market price of your property.” If that be the case, We are convinced, the same manner that REYES was, that RIVIERA was unwilling to increase its counter offer at any present or future time. RIVIERA’s unilateral valuation of the subject property thus binds him, it cannot now be heard to claim that it could have upped its offer had it been informed of CYPRESS’ and CORNHILL’S offer of P5,000.00 (sic) per square meter. Defendants CYPRESS and CORNHILL were therefore right in saying that:

On the basic assumption that RIVIERA really meant what it said in its letter, DR. REYES could not be faulted for believing that RIVIERA was definitely NOT WILLING TO PAY MORE THAN P5,000.00 PER SQUARE METER ON HIS PROPERTY. The fault lies with the deceptive and insincere words of RIVIERA. Injustice (sic) and equity, RIVIERA must be deemed in estoppel in now belatedly asserting that it would have been willing to pay a price higher than P5,000.00 x x x.” (Defendants-Appellees Cypress’ and Cornhill’s Brief, p. 8)

For this reason, no adverse inference can be drawn from REYES’ failure to disclose to RIVIERA the intervening counter-offer of CYPRESS and CORNHILL.

It would have been far different had REYES’ non-disclosure of CYPRESS’ and CORNHILL’s counter-offer to RIVIERA resulted in the sale of the subject property at equal or less than RIVIERA’s offer; in which case, REYES would have been rightly accused of cunningly circumventing RIVIERA’s right of first refusal. But the incontrovertible antecedents obtaining here clearly reveal REYES’ earnest efforts in respecting RIVIERA’s contractual right to initially purchase the subject property. Not only once – but twice – did REYES approach RIVIERA, the last one being the most telling indication of REYES’ sincerest intention in RIVIERA eventually purchasing the subject property if only the latter would increase a little its offer of P5,000.00 per square meter. And to this REYES was desperately willing to accede to despite the financial quandary he was then in as the expiration of the redemption period drew closer and closer, and despite the better offer of CYPRESS and CORNHILL. REYES unquestionably had displayed good faith. Can the same be said of RIVIERA? We do not think so. It appears that RIVIERA all along was trying to push REYES’ back against the wall, for RIVIERA was well-aware of REYES’ precarious financial needs at that time, and by clinging to its offer, REYES might

eventually succumb to its offer out of sheer desperation. RIVIERA was, to be frank, whimsically exercising its contractual right to the prejudice of REYES who had commendably given RIVIERA extra leeway in exercising it. And to this We say that no amount of jurisprudence RIVIERA might avail of for the purpose of construing the right of first refusal, however enlightening and persuasive they may be, will cover-up for its arrogant exercise of its right as can be gleaned from the factual premises. Equity in this case tilts in favor of defendants REYES, CYPRESS and CORNHILL that the consummated sale between them concerning the subject property be given this Court’s imprimatur, for if RIVIERA lost its opportunity to acquire it, it has only itself to blame. For after all, REYES’ fundamental and intrinsic right of ownership which necessarily carries with it the exclusive right to dispose of it to whoever he pleases, must ultimately prevail over RIVIERA’s right of first refusal which it unscrupulously tried to exercise.

From this decision, Riviera filed a motion for reconsideration,[31] but the appellate court denied the same in a Resolution dated September 22, 1994.[32]

Hence, Riviera interposed the instant petition anchored on the following errors:[33]

I

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN RULING THAT PETITIONER RIVIERA FILIPINA, INC. ALREADY LOST ITS RIGHT OF FIRST REFUSAL.

II

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN NOT FINDING THAT IT WAS THE PETITIONER, NOT RESPONDENT JUAN L. REYES, WHICH HAD BEEN THOROUGHLY DECEIVED BY THE LATTER OUT OF ITS RIGHTS TO ITS CONTINUING PREJUDICE.

III

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN DENYING RECONSIDERATION.

IV

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN DECIDING PETITIONER’S APPEAL AT A TIME WHEN THE PRINCIPAL APPELLEE IS ALLEGEDLY DEAD AND NO PROPER SUBSTITUTION OF THE ALLEGED DECEASED PARTY HAS BEEN MADE; HENCE, THE DECISION OF THE COURT OF APPEALS AND ITS RESOLUTION DENYING RECONSIDERATION, IS NULL AND VOID.

At the outset, we note that, while Riviera alleges that the Court of Appeals committed grave abuse of discretion amounting to lack or excess of jurisdiction, the instant petition is, as it should be, treated as a petition for review under Rule 45 and not as a special civil action for certiorari under Rule 65 of the Revised Rules of Court, now the 1997 Rules of Civil Procedure.

The distinctions between Rule 45 and 65 are far and wide, the most notable of which is that errors of jurisdiction are best reviewed in a special civil action for certiorari under Rule 65, while errors of judgment are correctible only by appeal in a petition for review under Rule 45.[34] The rationale for the distinction is simple. When a court exercises its jurisdiction an error committed while so engaged does not deprive it of the jurisdiction being exercised when the error is committed. If it did, every error committed by a court would deprive it of its jurisdiction and every erroneous judgment would be a void judgment. This cannot be allowed. The administration of justice would not countenance such a rule. Thus, an error of judgment that the court may commit in the exercise of its jurisdiction is not correctible through the original special civil action of certiorari.[35]Appeal from a final disposition of the Court of Appeals, as in the case at bar, is by way of a petition for review under Rule 45.[36]

In the petition at bar, Riviera posits the view that its right of first refusal was totally disregarded or violated by Reyes by the latter’s sale of the subject property to Cypress and Cornhill. It contends that the right of first refusal principally amounts to a right to match in the sense that it needs another offer for the right to be exercised.

The concept and interpretation of the right of first refusal and the consequences of a breach thereof evolved in Philippine juristic sphere only within the last decade. It all started in 1992 with Guzman, Bocaling & Co. v. Bonnevie[37] where the Court held that a lease with a proviso granting the lessee the right of first priority “all things and conditions being equal” meant that there should be identity of the terms and conditions to be offered to the lessee and all other prospective buyers, with the lessee to enjoy the right of first priority. A deed of sale executed in favor of a third party who cannot be deemed a purchaser in good faith, and which is in violation of a right of first refusal granted to the lessee is not voidable under the Statute of Frauds but rescissible under Articles 1380 to 1381 (3) of the New Civil Code.

Subsequently in 1994, in the case of Ang Yu Asuncion v. Court of Appeals,[38] the Court en banc departed from the doctrine laid down in Guzman, Bocaling & Co. v. Bonnevie and refused to rescind a contract of sale which violated the right of first refusal. The Court held that the so-called “right of first refusal” cannot be deemed a perfected contract of sale under Article 1458 of the New Civil Code and, as such, a breach thereof decreed under a final judgment does not entitle the aggrieved party to a writ of execution of the judgment but to an action for damages in a proper forum for the purpose.

In the 1996 case of Equatorial Realty Development, Inc. v. Mayfair Theater, Inc.,[39] the Court en banc reverted back to the doctrine in Guzman Bocaling & Co. v. Bonnevie stating that rescission is a relief allowed for the protection of one of the contracting parties and even third persons from all injury and damage the contract may cause or to protect some incompatible and preferred right by the contract.

Thereafter in 1997, in Parañaque Kings Enterprises, Inc. v. Court of Appeals,[40] the Court affirmed the nature of and the concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing the rulings in Guzman, Bocaling & Co. v.

Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., held that in order to have full compliance with the contractual right granting petitioner the first option to purchase, the sale of the properties for the price for which they were finally sold to a third person should have likewise been first offered to the former. Further, there should be identity of terms and conditions to be offered to the buyer holding a right of first refusal if such right is not to be rendered illusory. Lastly, the basis of the right of first refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer.

Thus, the prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible.

However, we must remember that general propositions do not decide specific cases. Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled upon on the basis of isolated clinical classroom principles.[41] Analysis and construction should not be limited to the words used in the contract, as they may not accurately reflect the parties’ true intent.[42] The court must read a contract as the average person would read it and should not give it a strained or forced construction.[43]

In the case at bar, the Court finds relevant and significant the cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial consideration and in case of doubt, their contemporaneous and subsequent acts shall be principally considered.[44] Where the parties to a contract have given it a practical construction by their conduct as by acts in partial performance, such construction may be considered by the court in construing the contract, determining its meaning and ascertaining the mutual intention of the parties at the time for contracting. The parties’ practical construction of their contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and as an important, significant, convincing, persuasive, or influential factor in determining the proper construction of the contract.[45]

An examination of the attendant particulars of the case do not persuade us to uphold Riviera’s view. As clearly shown by the records and transcripts of the case, the actions of the parties to the contract of lease, Reyes and Riviera, shaped their understanding and interpretation of the lease provision “right of first refusal” to mean simply that should the lessor Reyes decide to sell the leased property during the term of the lease, such sale should first be offered to the lessee Riviera. And that is what exactly ensued between Reyes and Riviera, a series of negotiations on the price per square meter of the subject property with neither party, especially Riviera, unwilling to budge from his offer, as evidenced by the exchange of letters between the two contenders.

It can clearly be discerned from Riviera’s letters dated December 2, 1988 and February 4, 1989 that Riviera was so intractable in its position and took obvious advantage of the knowledge of the time element in its negotiations with Reyes as the redemption period of the subject foreclosed property drew near. Riviera strongly exhibited a “take-it or leave-it” attitude in its negotiations with Reyes. It quoted its “fixed and final” price as Five Thousand Pesos (P5,000.00) and not any peso more. It voiced out that it had other properties to consider so Reyes should decide and make known its decision “within fifteen days.” Riviera, in its letter dated February 4, 1989, admittedly, even downgraded its offer when Reyes offered anew the property to it, such that whatever amount Reyes initially receives from Riviera would absolutely

be insufficient to pay off the redemption price of the subject property. Naturally, Reyes had to disagree with Riviera’s highly disadvantageous offer.

Nary a howl of protest or shout of defiance spewed forth from Riviera’s lips, as it were, but a seemingly whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989 that Riviera had lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five Thousand Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have matched said price. Its stubborn approach in its negotiations with Reyes showed crystal-clear that there was never any need to disclose such information and doing so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Pursuant to Article 1339[46] of the New Civil Code, silence or concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the communication should be made.[47] We apply the general rule in the case at bar since Riviera failed to convincingly show that either of the exceptions are relevant to the case at bar.

In sum, the Court finds that in the interpretation of the right of first refusal as understood by the parties herein, the question as to what is to be included therein or what is meant by the same, as in all other provisions of the contract, is for the parties and not for the court to determine, and this question may not be resolved by what the parties might have provided had they thought about it, which is evident from Riviera claims, or by what the court might conclude regarding abstract fairness.[48]

The Court would be rewriting the contract of Reyes and Riviera under the guise of construction were we to interpret the right of first refusal as Riviera propounds it, despite a contrary construction as exhibited by its actions. A court, even the Supreme Court, has no right to make new contracts for the parties or ignore those already made by them, simply to avoid seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract of an obligation not assumed.[49]

On the last error attributed to the Court of Appeals which is the effect on the jurisdiction of the appellate court of the non-substitution of Reyes, who died during the pendency of the appeal, the Court notes that when Riviera filed its petition with this Court and assigned this error, it later filed on October 27, 1994 a Manifestation[50] with the Court of Appeals stating that it has discovered that Reyes is already dead, in view of which the appellate court issued a Resolution dated December 16, 1994 which noted the manifestation of Riviera and directed the counsel of Reyes to submit a copy of the latter’s death certificate and to file the proper motion for substitution of party.[51] Complying therewith, the necessary motion for substitution of deceased Reyes, who died on January 7, 1994, was filed by the heirs, namely, Estefania B. Reyes, Juanita R. de la Rosa, Juan B. Reyes, Jr. and Fidel B. Reyes.[52] Acting on the motion for substitution, the Court of Appeals granted the same.[53]

Notwithstanding the foregoing, Section 16[54] and 17[55] of Rule 3 of the Revised Rules of Court, upon which Riviera anchors its argument, has already been amended by the 1997 Rules of Civil Procedure.[56] Even applying the old Rules, the failure of a counsel to comply with his duty under Section 16 of Rule 3 of the Revised Rules of Court, to inform the court of the death of his client and no substitution of such is effected, will not invalidate the proceedings and the judgment thereon if the action survives the death of such party,[57] as this case does, since the

death of Reyes did not extinguish his civil personality. The appellate court was well within its jurisdiction to proceed as it did with the case since the death of a party is not subject to its judicial notice. Needless to stress, the purpose behind the rule on substitution of parties is the protection of the right of every party to due process. This purpose has been adequately met in this case since both parties argued their respective positions through their pleadings in the trial court and the appellate court. Besides, the Court has already acquired jurisdiction over the heirs of Reyes by voluntarily submitting themselves to our jurisdiction.[58]

In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in its challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the Decision of the Court of Appeals dated June 6, 1994 in CA-G.R. CV No. 26513 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, and Quisumbing, JJ., concur.

SECOND DIVISION

[G.R. No. 139523. May 26, 2005]

SPS. FELIPE AND LETICIA CANNU, petitioners, vs. SPS. GIL AND FERNANDINA GALANG AND NATIONAL HOME MORTGAGE FINANCE CORPORATION, respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari which seeks to set aside the decision[1] of the Court of Appeals dated 30 September 1998 which affirmed with modification the decision of Branch 135 of the Regional Trial Court (RTC) of Makati City, dismissing the complaint for Specific Performance and Damages filed by petitioners, and its Resolution[2] dated 22 July 1999 denying petitioners’ motion for reconsideration.

A complaint[3] for Specific Performance and Damages was filed by petitioners-spouses Felipe and Leticia Cannu against respondents-spouses Gil and Fernandina Galang and the National Home Mortgage Finance Corporation (NHMFC) before Branch 135 of the RTC of Makati, on 24 June 1993. The case was docketed as Civil Case No. 93-2069.

The facts that gave rise to the aforesaid complaint are as follows:

Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings & Loan Association for P173,800.00 to purchase a house and lot located at Pulang Lupa, Las Piñas,

with an area of 150 square meters covered by Transfer Certificate of Title (TCT) No. T-8505 in the names of respondents-spouses. To secure payment, a real estate mortgage was constituted on the said house and lot in favor of Fortune Savings & Loan Association. In early 1990, NHMFC purchased the mortgage loan of respondents-spouses from Fortune Savings & Loan Association for P173,800.00.

Respondent Fernandina Galang authorized[4] her attorney-in-fact, Adelina R. Timbang, to sell the subject house and lot.

Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the balance of the mortgage obligations with the NHMFC and with CERF Realty[5] (the Developer of the property).

Of the P120,000.00, the following payments were made by petitioners:

Date Amount Paid July 19, 1990 P40,000.00[6] March 13, 1991 15,000.00[7] April 6, 1991 15,000.00[8] November 28, 1991 5,000.00[9] Total P75,000.00

Thus, leaving a balance of P45,000.00.

A Deed of Sale with Assumption of Mortgage Obligation[10] dated 20 August 1990 was made and entered into by and between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and Felipe Cannu (vendees) over the house and lot in question which contains, inter alia, the following:

NOW, THEREFORE, for and in consideration of the sum of TWO HUNDRED FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency, receipt of which is hereby acknowledged by the Vendors and the assumption of the mortgage obligation, the Vendors hereby sell, cede and transfer unto the Vendees, their heirs, assigns and successor in interest the above-described property together with the existing improvement thereon.

It is a special condition of this contract that the Vendees shall assume and continue with the payment of the amortization with the National Home Mortgage Finance Corporation Inc. in the outstanding balance ofP_______________, as of __________ and shall comply with and abide by the terms and conditions of the mortgage document dated Feb. 27, 1989 and identified as Doc. No. 82, Page 18, Book VII, S. of 1989 of Notary Public for Quezon City Marites Sto. Tomas Alonzo, as if the Vendees are the original signatories.

Petitioners immediately took possession and occupied the house and lot.

Petitioners made the following payments to the NHMFC:

Date Amount Receipt No. July 9, 1990 P 14,312.47 D-503986[11] March 12, 1991 8,000.00 D-729478[12]

February 4, 1992 10,000.00 D-999127[13] March 31, 1993 6,000.00 E-563749[14] April 19, 1993 10,000.00 E-582432[15] April 27, 1993 7,000.00 E-618326[16] P 55,312.47

Petitioners paid the “equity” or second mortgage to CERF Realty.[17]

Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of P45,000.00 or in the alternative to vacate the property in question, petitioners refused to do so.

In a letter[18] dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T. Arzaga, Vice President, Fund Management Group of the NHMFC, that the ownership rights over the land covered by TCT No. T-8505 in the names of respondents-spouses had been ceded and transferred to her and her husband per Deed of Sale with Assumption of Mortgage, and that they were obligated to assume the mortgage and pay the remaining unpaid loan balance. Petitioners’ formal assumption of mortgage was not approved by the NHMFC.[19]

Because the Cannus failed to fully comply with their obligations, respondent Fernandina Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining mortgage loan with NHMFC.[20]

Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting that the subject property had already been sold to them. Consequently, the NHMFC held in abeyance the release of said TCT.

Thereupon, a Complaint for Specific Performance and Damages was filed asking, among other things, that petitioners (plaintiffs therein) be declared the owners of the property involved subject to reimbursements of the amount made by respondents-spouses (defendants therein) in preterminating the mortgage loan with NHMFC.

Respondent NHMFC filed its Answer.[21] It claimed that petitioners have no cause of action against it because they have not submitted the formal requirements to be considered assignees and successors-in-interest of the property under litigation.

In their Answer,[22] respondents-spouses alleged that because of petitioners-spouses’ failure to fully pay the consideration and to update the monthly amortizations with the NHMFC, they paid in full the existing obligations with NHMFC as an initial step in the rescission and annulment of the Deed of Sale with Assumption of Mortgage. In their counterclaim, they maintain that the acts of petitioners in not fully complying with their obligations give rise to rescission of the Deed of Sale with Assumption of Mortgage with the corresponding damages.

After trial, the lower court rendered its decision ratiocinating:

On the basis of the evidence on record, testimonial and documentary, this Court is of the view that plaintiffs have no cause of action either against the spouses Galang or the NHMFC. Plaintiffs have admitted on record they failed to pay the amount of P45,000.00 the balance due to the Galangs in consideration of the Deed of Sale With Assumption of Mortgage Obligation (Exhs. “C” and “3”). Consequently, this is a breach of contract and evidently a failure to comply with obligation arising from contracts. . . In this case, NHMFC has not been

duly informed due to lack of formal requirements to acknowledge plaintiffs as legal assignees, or legitimate tranferees and, therefore, successors-in-interest to the property, plaintiffs should have no legal personality to claim any right to the same property.[23]

The decretal portion of the decision reads:

Premises considered, the foregoing complaint has not been proven even by preponderance of evidence, and, as such, plaintiffs have no cause of action against the defendants herein. The above-entitled case is ordered dismissed for lack of merit.

Judgment is hereby rendered by way of counterclaim, in favor of defendants and against plaintiffs, to wit:

1. Ordering the Deed of Sale With Assumption of Mortgage Obligation (Exhs. “C” and “3”) rescinded and hereby declared the same as nullified without prejudice for defendants-spouses Galang to return the partial payments made by plaintiffs; and the plaintiffs are ordered, on the other hand, to return the physical and legal possession of the subject property to spouses Galang by way of mutual restitution;

2. To pay defendants spouses Galang and NHMFC, each the amount of P10,000.00 as litigation expenses, jointly and severally;

3. To pay attorney’s fees to defendants in the amount of P20,000.00, jointly and severally; and

4. The costs of suit.

5. No moral and exemplary damages awarded.[24]

A Motion for Reconsideration[25] was filed, but same was denied. Petitioners appealed the decision of the RTC to the Court of Appeals. On 30 September 1998, the Court of Appeals disposed of the appeal as follows:

Obligations arising from contract have the force of law between the contracting parties and should be complied in good faith. The terms of a written contract are binding on the parties thereto.

Plaintiffs-appellants therefore are under obligation to pay defendants-appellees spouses Galang the sum of P250,000.00, and to assume the mortgage.

Records show that upon the execution of the Contract of Sale or on July 19, 1990 plaintiffs-appellants paid defendants-appellees spouses Galang the amount of only P40,000.00.

The next payment was made by plaintiffs-appellants on March 13, 1991 or eight (8) months after the execution of the contract. Plaintiffs-appellants paid the amount of P5,000.00.

The next payment was made on April 6, 1991 for P15,000.00 and on November 28, 1991, for another P15,000.00.

From 1991 until the present, no other payments were made by plaintiffs-appellants to defendants-appellees spouses Galang.

Out of the P250,000.00 purchase price which was supposed to be paid on the day of the execution of contract in July, 1990 plaintiffs-appellants have paid, in the span of eight (8) years, from 1990 to present, the amount of only P75,000.00. Plaintiffs-appellants should have paid the P250,000.00 at the time of the execution of contract in 1990. Eight (8) years have already lapsed and plaintiffs-appellants have not yet complied with their obligation.

We consider this breach to be substantial.

The tender made by plaintiffs-appellants after the filing of this case, of the Managerial Check in the amount of P278,957.00 dated January 24, 1994 cannot be considered as an effective mode of payment.

Performance or payment may be effected not by tender of payment alone but by both tender and consignation. It is consignation which is essential in order to extinguish plaintiffs-appellants obligation to pay the balance of the purchase price.

In addition, plaintiffs-appellants failed to comply with their obligation to pay the monthly amortizations due on the mortgage.

In the span of three (3) years from 1990 to 1993, plaintiffs-appellants made only six payments. The payments made by plaintiffs-appellants are not even sufficient to answer for the arrearages, interests and penalty charges.

On account of these circumstances, the rescission of the Contract of Sale is warranted and justified.

. . .

WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification. Defendants-appellees spouses Galang are hereby ordered to return the partial payments made by plaintiff-appellants in the amount of P135,000.00.

No pronouncement as to cost.[26]

The motion for reconsideration[27] filed by petitioners was denied by the Court of Appeals in a Resolution[28] dated 22 July 1999.

Hence, this Petition for Certiorari.

Petitioners raise the following assignment of errors:

1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT PETITIONERS’ BREACH OF THE OBLIGATION WAS SUBSTANTIAL.

2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN EFFECT IT HELD THAT THERE WAS NO SUBSTANTIAL COMPLIANCE WITH THE OBLIGATION TO PAY THE MONTHLY AMORTIZATION WITH NHMFC.

3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THE OTHER FACTS AND CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.

4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT THE ACTION FOR RESCISSION IS SUBSIDIARY.[29]

Before discussing the errors allegedly committed by the Court of Appeals, it must be stated a priori that the latter made a misappreciation of evidence regarding the consideration of the property in litigation when it relied solely on the Deed of Sale with Assumption of Mortgage executed by the respondents-spouses Galang and petitioners-spouses Cannu.

As above-quoted, the consideration for the house and lot stated in the Deed of Sale with Assumption of Mortgage is P250,000.00, plus the assumption of the balance of the mortgage loan with NHMFC. However, after going over the record of the case, more particularly the Answer of respondents-spouses, the evidence shows the consideration therefor is P120,000.00, plus the payment of the outstanding loan mortgage with NHMFC, and of the “equity” or second mortgage with CERF Realty (Developer of the property).[30]

Nowhere in the complaint and answer of the petitioners-spouses Cannu and respondents-spouses Galang shows that the consideration is “P250,000.00.” In fact, what is clear is that of theP120,000.00 to be paid to the latter, only P75,000.00 was paid to Adelina Timbang, the spouses Galang’s attorney-in-fact. This debunks the provision in the Deed of Sale with Assumption of Mortgage that the amount of P250,000.00 has been received by petitioners.

Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the true intent and agreement of the parties regarding its consideration, the same should not be fully relied upon. The foregoing facts lead us to hold that the case on hand falls within one of the recognized exceptions to the parole evidence rule. Under the Rules of Court, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express the true intent and agreement of the parties thereto.[31]

In the case at bar, when respondents-spouses enumerated in their Answer the terms and conditions for the sale of the property under litigation, which is different from that stated in the Deed of Sale with Assumption with Mortgage, they already put in issue the matter of consideration. Since there is a difference as to what the true consideration is, this Court has admitted evidencealiunde to explain such inconsistency. Thus, the Court has looked into the pleadings and testimonies of the parties to thresh out the discrepancy and to clarify the intent of the parties.

As regards the computation[32] of petitioners as to the breakdown of the P250,000.00 consideration, we find the same to be self-serving and unsupported by evidence.

On the first assigned error, petitioners argue that the Court erred when it ruled that their breach of the obligation was substantial.

Settled is the rule that rescission or, more accurately, resolution,[33] of a party to an obligation under Article 1191[34] is predicated on a breach of faith by the other party that violates the reciprocity between them.[35] Article 1191 reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had only for such breaches that are substantial and fundamental as to defeat the object of the parties in making the agreement.[36] The question of whether a breach of contract is substantial depends upon the attending circumstances[37] and not merely on the percentage of the amount not paid.

In the case at bar, we find petitioners’ failure to pay the remaining balance of P45,000.00 to be substantial. Even assuming arguendo that only said amount was left out of the supposed consideration of P250,000.00, or eighteen (18%) percent thereof, this percentage is still substantial. Taken together with the fact that the last payment made was on 28 November 1991, eighteen months before the respondent Fernandina Galang paid the outstanding balance of the mortgage loan with NHMFC, the intention of petitioners to renege on their obligation is utterly clear.

Citing Massive Construction, Inc. v. Intermediate Appellate Court,[38] petitioners ask that they be granted additional time to complete their obligation. Under the facts of the case, to give petitioners additional time to comply with their obligation will be putting premium on their blatant non-compliance of their obligation. They had all the time to do what was required of them (i.e., pay the P45,000.00 balance and to properly assume the mortgage loan with the NHMFC), but still they failed to comply. Despite demands for them to pay the balance, no payments were made.[39]

The fact that petitioners tendered a Manager’s Check to respondents-spouses Galang in the amount of P278,957.00 seven months after the filing of this case is of no moment. Tender of payment does not by itself produce legal payment, unless it is completed by consignation.[40] Their failure to fulfill their obligation gave the respondents-spouses Galang the right to rescission.

Anent the second assigned error, we find that petitioners were not religious in paying the amortization with the NHMFC. As admitted by them, in the span of three years from 1990 to 1993, their payments covered only thirty months.[41] This, indeed, constitutes another breach or violation of the Deed of Sale with Assumption of Mortgage. On top of this, there was no formal

assumption of the mortgage obligation with NHMFC because of the lack of approval by the NHMFC[42] on account of petitioners’ non-submission of requirements in order to be considered as assignees/successors-in-interest over the property covered by the mortgage obligation.[43]

On the third assigned error, petitioners claim there was no clear evidence to show that respondents-spouses Galang demanded from them a strict and/or faithful compliance of the Deed of Sale with Assumption of Mortgage.

We do not agree.

There is sufficient evidence showing that demands were made from petitioners to comply with their obligation. Adelina R. Timbang, attorney-in-fact of respondents-spouses, per instruction of respondent Fernandina Galang, made constant follow-ups after the last payment made on 28 November 1991, but petitioners did not pay.[44] Respondent Fernandina Galang stated in her Answer[45] that upon her arrival from America in October 1992, she demanded from petitioners the complete compliance of their obligation by paying the full amount of the consideration (P120,000.00) or in the alternative to vacate the property in question, but still, petitioners refused to fulfill their obligations under the Deed of Sale with Assumption of Mortgage. Sometime in March 1993, due to the fact that full payment has not been paid and that the monthly amortizations with the NHMFC have not been fully updated, she made her intentions clear with petitioner Leticia Cannu that she will rescind or annul the Deed of Sale with Assumption of Mortgage.

We likewise rule that there was no waiver on the part of petitioners to demand the rescission of the Deed of Sale with Assumption of Mortgage. The fact that respondents-spouses accepted, through their attorney-in-fact, payments in installments does not constitute waiver on their part to exercise their right to rescind the Deed of Sale with Assumption of Mortgage. Adelina Timbang merely accepted the installment payments as an accommodation to petitioners since they kept on promising they would pay. However, after the lapse of considerable time (18 months from last payment) and the purchase price was not yet fully paid, respondents-spouses exercised their right of rescission when they paid the outstanding balance of the mortgage loan with NHMFC. It was only after petitioners stopped paying that respondents-spouses moved to exercise their right of rescission.

Petitioners cite the case of Angeles v. Calasanz[46] to support their claim that respondents-spouses waived their right to rescind. We cannot apply this case since it is not on all fours with the case before us. First, in Angeles, the breach was only slight and casual which is not true in the case before us. Second, in Angeles, the buyer had already paid more than the principal obligation, while in the instant case, the buyers (petitioners) did not pay P45,000.00 of the P120,000.00 they were obligated to pay.

We find petitioners’ statement that there is no evidence of prejudice or damage to justify rescission in favor of respondents-spouses to be unfounded. The damage suffered by respondents-spouses is the effect of petitioners’ failure to fully comply with their obligation, that is, their failure to pay the remaining P45,000.00 and to update the amortizations on the mortgage loan with the NHMFC. Petitioners have in their possession the property under litigation. Having parted with their house and lot, respondents-spouses should be fully compensated for it, not only monetarily, but also as to the terms and conditions agreed upon by the parties. This did not happen in the case before us.

Citing Seva v. Berwin & Co., Inc.,[47] petitioners argue that no rescission should be decreed because there is no evidence on record that respondent Fernandina Galang is ready, willing and able to comply with her own obligation to restore to them the total payments they made. They added that no allegation to that effect is contained in respondents-spouses’ Answer.

We find this argument to be misleading.

First, the facts obtaining in Seva case do not fall squarely with the case on hand. In the former, the failure of one party to perform his obligation was the fault of the other party, while in the case on hand, failure on the part of petitioners to perform their obligation was due to their own fault.

Second, what is stated in the book of Justice Edgardo L. Paras is “[i]t (referring to the right to rescind or resolve) can be demanded only if the plaintiff is ready, willing and able to comply with his own obligation, and the other is not.” In other words, if one party has complied or fulfilled his obligation, and the other has not, then the former can exercise his right to rescind. In this case, respondents-spouses complied with their obligation when they gave the possession of the property in question to petitioners. Thus, they have the right to ask for the rescission of the Deed of Sale with Assumption of Mortgage.

On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code, maintain that the Court of Appeals erred when it failed to consider that the action for rescission is subsidiary.

Their reliance on Article 1383 is misplaced.

The subsidiary character of the action for rescission applies to contracts enumerated in Articles 1381[48] of the Civil Code. The contract involved in the case before us is not one of those mentioned therein. The provision that applies in the case at bar is Article 1191.

In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v. Court of Appeals,[49] rescission under Article 1191 was distinguished from rescission under Article 1381. Justice J.B.L. Reyes said:

. . . The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations by the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: “Non servanti fidem, non est fides servanda.” Hence, the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence of that prejudice, because it is the raison d être as well as the measure of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article 1191.

From the foregoing, it is clear that rescission (“resolution” in the Old Civil Code) under Article 1191 is a principal action, while rescission under Article 1383 is a subsidiary action. The former is based on breach by the other party that violates the reciprocity between the parties, while the latter is not.

In the case at bar, the reciprocity between the parties was violated when petitioners failed to fully pay the balance of P45,000.00 to respondents-spouses and their failure to update their amortizations with the NHMFC.

Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the right to unilaterally rescind the sale under the Deed of Sale with Assumption of Mortgage, they should have first asked the court for the rescission thereof before they fully paid the outstanding balance of the mortgage loan with the NHMFC. They claim that such payment is a unilateral act of rescission which violates existing jurisprudence.

In Tan v. Court of Appeals,[50] this court said:

. . . [T]he power to rescind obligations is implied in reciprocal ones in case one of the obligors should not comply with what is incumbent upon him is clear from a reading of the Civil Code provisions. However, it is equally settled that, in the absence of a stipulation to the contrary, this power must be invoked judicially; it cannot be exercised solely on a party’s own judgment that the other has committed a breach of the obligation. Where there is nothing in the contract empowering the petitioner to rescind it without resort to the courts, the petitioner’s action in unilaterally terminating the contract in this case is unjustified.

It is evident that the contract under consideration does not contain a provision authorizing its extrajudicial rescission in case one of the parties fails to comply with what is incumbent upon him. This being the case, respondents-spouses should have asked for judicial intervention to obtain a judicial declaration of rescission. Be that as it may, and considering that respondents-spouses’ Answer (with affirmative defenses) with Counterclaim seeks for the rescission of the Deed of Sale with Assumption of Mortgage, it behooves the court to settle the matter once and for all than to have the case re-litigated again on an issue already heard on the merits and which this court has already taken cognizance of. Having found that petitioners seriously breached the contract, we, therefore, declare the same is rescinded in favor of respondents-spouses.

As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with Assumption of Mortgage, it is the duty of the court to require the parties to surrender whatever they may have received from the other. The parties should be restored to their original situation.[51]

The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of the P120,000.00 agreed upon. They also made payments to NHMFC amounting to P55,312.47. As to the petitioners’ alleged payment to CERF Realty of P46,616.70, except for petitioner Leticia Cannu’s bare allegation, we find the same not to be supported by competent evidence. As a general rule, one who pleads payment has the burden of proving it.[52] However, since it has been admitted in respondents-spouses’ Answer that petitioners shall assume the second mortgage with CERF Realty in the amount of P35,000.00, and that Adelina Timbang, respondents-spouses’ very own witness, testified[53] that same has been paid, it is but proper to return this amount to petitioners. The three amounts total P165,312.47 -- the sum to be returned to petitioners.

WHEREFORE, premises considered, the decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION. Spouses Gil and Fernandina Galang are hereby ordered to return the partial payments made by petitioners in the amount of P165,312.47. With costs.

SO ORDERED.

Puno, Acting C.J., (Chairman), Austria-Martinez, and Callejo, Sr., JJ., concur. Tinga, J., out of the country.

SECOND DIVISION

[G.R. No. 126000. October 7, 1998]

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM (MWSS), petitioner, vs. COURT OF APPEALS, HON. PERCIVAL LOPEZ, AYALA CORPORATION and AYALA LAND, INC., respondents.

[G.R. No. 128520. October 7, 1998]

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON. PERCIVAL MANDAP LOPEZ, CAPITOL HILLS GOLF AND COUNTRY CLUB INC., SILHOUETTE TRADING CORPORATION, and PABLO ROMAN JR., respondents.

D E C I S I O N

MARTINEZ, J.:

These are consolidated petitions for review emanating from Civil Case No. Q-93-15266 of the Regional Trial Court of Quezon City, Branch 78, entitled "Metropolitan Waterworks and Sewerage System (hereafter MWSS) vs. Capitol Hills Golf & Country Club Inc. (hereafter, CHGCCI), STC (hereafter, SILHOUETTE), Ayala Corporation, Ayala Land, Inc.(hereafter AYALA) Pablo Roman, Jr., Josefino Cenizal, Jose A. Roxas, Jesus Hipolito, Alfredo Juinio, National Treasurer of the Philippines and the Register of Deeds of Quezon City."

From the voluminous pleadings and other documents submitted by the parties and their divergent styles in the presentation of the facts, the basic antecedents attendant herein are as follows:

Sometime in 1965, petitioner MWSS (then known as NAWASA) leased around one hundred twenty eight (128) hectares of its land (hereafter, subject property) to respondent CHGCCI

(formerly the International Sports Development Corporation) for twenty five (25) years and renewable for another fifteen (15) years or until the year 2005, with the stipulation allowing the latter to exercise a right of first refusal should the subject property be made open for sale. The terms and conditions of respondent CHGCCI's purchase thereof shall nonetheless be subject to presidential approval.

Pursuant to Letter of Instruction (LOI) No. 440 issued on July 29, 1976 by then President Ferdinand E. Marcos directing petitioner MWSS to negotiate the cancellation of the MWSS-CHGCCI lease agreement for the disposition of the subject property, Oscar Ilustre, then General Manager of petitioner MWSS, sometime in November of 1980 informed respondent CHGCCI, through its president herein respondent Pablo Roman, Jr., of its preferential right to buy the subject property which was up for sale. Valuadation thereof was to be made by an appraisal company of petitioner MWSS'choice, the Asian Appraisal Co., Inc. which, on January 30, 1981, pegged a fair market value of P40.00 per square meter or a total of P53,800,000.00 for the subject property.

Upon being informed that petitioner MWSS and respondent CHGCCI had already agreed in principle on the purchase of the subject property, President Marcos expressed his approval of the sale as shown in his marginal note on the letter sent by respondents Jose Roxas and Pablo Roman, Jr. dated December 20, 1982.

The Board of Trustees of petitioner MWSS thereafter passed Resolution 36-83, approving the sale of the subject property in favor of respondent SILHOUETTE, as assignee of respondent CHGCCI, at the appraised value given by Asian Appraisal Co., Inc. Said Board Resolution reads:

"NOW, THEREFORE, BE IT RESOLVED, as it is hereby resolved, that in accordance with Section 3, Par. (g) of the MWSS Charter and subject to the approval of the President of the Philippines, the sale of a parcel of land located in Balara, Quezon City, covered by TCT No. 36069 of the Registry of Deeds of Quezon City, containing an area of ONE HUNDRED TWENTY SEVEN (127.313) hectares more or less, which is the remaining portion of the area under lease after segregating a BUFFER ZONE already surveyed along the undeveloped area near the treatment plant and the developed portion of the CHGCCI golf course, to SILHOUETTE TRADING CORPORATION as Assignee of Capitol Hills Golf & Country Club, Inc., at FORTY (P40.00) PESOS per square meter, be and is hereby approved.

"BE IT RESOLVED FURTHER, that the General Manager be authorized, as he is hereby authorized to sign for and in behalf of the MWSS the contract papers and other pertinent documents relative thereto."

The MWSS-SILHOUETTE sales agreement eventually pushed through. Per the Agreement dated May 11, 1983 covering said purchase, the total price for the subject property isP50,925,200, P25 Million of which was to be paid upon President Marcos' approval of the contract and the balance to be paid within one (1) year from the transfer of the title to respondent SILHOUETTE as vendee with interest at 12% per annum. The balance was also secured by an irrevocable letter of credit. A Supplemental Agreement was forged between petitioner MWSS and respondent SILHOUETTE on August 11, 1983 to accurately identify the subject property.

Subsequently, respondent SILHOUETTE, under a deed of sale dated July 26, 1984, sold to respondent AYALA about sixty-seven (67) hectares of the subject property at P110.00 per square meter. Of the total price of around P74 Million, P25 Million was to be paid by respondent AYALA directly to petitioner MWSS for respondent SILHOUETTE's account and P2 Million directly to respondent SILHOUETTE. P11,600,000 was to be paid upon the issuance of title in favor of respondent AYALA, and the remaining balance to be payable within one (1) year with 12% per annum interest.

Respondent AYALA developed the land it purchased into a prime residential area now known as the Ayala Heights Subdivision.

Almost a decade later, petitioner MWSS on March 26, 1993 filed an action against all herein named respondents before the Regional Trial Court of Quezon City seeking for the declaration of nullity of the MWSS-SILHOUETTE sales agreement and all subsequent conveyances involving the subject property, and for the recovery thereof with damages.

Respondent AYALA filed its answer pleading the affirmative defenses of (1) prescription, (2) laches, (3) waiver/estoppel/ratification, (4) no cause of action, (5) non-joinder of indispensable parties, and (6) non-jurisdiction of the court for non-specification of amount of damages sought.

On June 10, 1993; the trial court issued an Order dismissing the complaint of petitioner MWSS on grounds of prescription, laches, estoppel and non-joinder of indispensable parties.

Petitioner MWSS's motion for reconsideration of such Order was denied, forcing it to seek relief from the respondent Court where its appeal was docketed as CA-G.R. CV No. 50654. It assigned as errors the following:

"I. The court a quo committed manifest serious error and gravely abused its discretion when it ruled that plaintiff's cause of action is for annulment of contract which has already prescribed in the face of the clear and unequivocal recitation of six causes of action in the complaint, none of which is for annulment.

II. The lower court erred and exceeded its jurisdiction when, contrary to the rules of court and jurisprudence, it treated and considered the affirmative defenses of Ayalas - defenses not categorized by the rules as grounds for a motion to dismiss - as grounds of a motion to dismiss which justify the dismissal of the complaint.

III. The lower court abused its discretion and exceeded its jurisdiction when it favorably acted on Ayala's motion for preliminary hearing of affirmative defenses (motion to dismiss) by dismissing the complaint without conducting a hearing or otherwise requiring the Ayalas to present evidence on the factual moorings of their motion.

IV. The lower court acted without jurisdiction and committed manifest error when it resolved factual issues and made findings and conclusions of facts all in favor of the Ayalas in the absence of any evidence presented by the parties.

V. The court a quo erred when, contrary to the rules and jurisprudence, it prematurely ruled that laches and estoppel bar the complaint as against Ayalas or that otherwise the alleged failure to implead indispensable parties dictates the dismissal of the complaint."

In the meantime, respondents CHGCCI and Roman filed their own motions to hear their affirmative defenses which were identical to those adduced by respondent AYALA. For its part, respondent SILHOUETTE filed a similarly grounded motion to dismiss.

Ruling upon these motions, the trial court issued an order dated December 13, 1993 denying all of them. The motions for reconsideration of the respondents concerned met a similar fate in the May 9, 1994 Order of the trial court. They thus filed special civil actions for certiorari before the respondent Court which were docketed as CA-G.R. SP Nos. 34605, 34718 and 35065 and thereafter consolidated with CA-G.R. CV No. 50694 for disposition.

Respondent court, on August 19, 1996, rendered the assailed decision, the dispositive portion of which reads:

"WHEREFORE, judgment is rendered:

1.) DENYING the petitions for writ of certiorari for lack of merit; and

2.) AFFIRMING the order of the lower court dismissing the complaint against the appellees Ayalas.

"SO ORDERED."

Petitioner MWSS appealed to this Court that portion of the respondent Court's decision affirming the trial court's dismissal of its complaint against respondent AYALA, docketed as G.R. No. 126000. The portion dismissing the petition for certiorari (CA-GR Nos. 34605, 347718 and 35065) of respondents Roman, CHGCCI and SILHOUETTE, however, became final and executory for their failure to appeal therefrom. Nonetheless, these respondents were able to thereafter file before the trial court another motion to dismiss grounded, again, on prescription which the trial court in an Order of October 1996 granted.

This prompted petitioner MWSS to file another petition for review of said trial court Order before this Court and docketed as G.R. No. 128520. On motion of petitioner MWSS, this Court in a Resolution dated December 3, 1997 directed the consolidation of G.R. Nos. 126000 and 128520.

The errors assigned by petitioner MWSS in CA-GR No. 126000 are:

I

In holding, per the questioned Decision dated 19 August 1996, that plaintiffs cause of action is for annulment of contract which has already prescribed in the face of the clear and unequivocal recitation of six causes of action in the complaint, none of which is for annulment and in effect affirming the dismissal by the respondent judge of the complaint

against respondent Ayalas. This conclusion of respondent CH is, with due respect, manifestly mistaken and legally absurd.

II

In failing to consider that the complaint recited six alternative causes of action, such that the insufficiency of one cause - assuming there is such insufficiency - does not render insufficient the other causes and the complaint itself. The contrary ruling in this regard by respondent CA is founded entirely on speculation and conjecture and is constitutive of grave abuse of discretion.

In G.R. No. 128520, petitioner MWSS avers that:

I

The court of origin erred in belatedly granting respondent's motions to dismiss which are but a rehash, a disqualification, of their earlier motion for preliminary hearing of affirmative defense / motion to dismiss. These previous motions were denied by the lower court, which denial the respondents raised to the Court of Appeals by way of perfection for certiorari, which petitions in turn were dismissed for lack of merit by the latter court. The correctness and validity of the lower court's previous orders denying movant's motion for preliminary hearing of affirmative defense/motion to dismiss has accordingly been settled already with finality and cannot be disturbed or challenged anew at this instance of defendant's new but similarly anchored motions to dismiss, without committing procedural heresy causative of miscarriage of justice.

II

The lower court erred in not implementing correctly the decision of the Court of Appeal. After all, respondents' own petitions for certiorari questioning the earlier denial of their motion for preliminary hearing of affirmative defense / motion to dismiss were dismissed by the Court of Appeal, in the process of affirming the validity and legality of such denial by the court a quo. The dismissal of the respondents' petitions are embodied in the dispositive portion of the said decision of the Court of Appeals dated 19 August 1996. The lower court cannot choose to disregard such decretal aspect of the decision and instead implement an obiter dictum.

III.

That part of the decision of the decision of the Court of Appeals resolving the issue of prescription attendant to the appeal of plaintiff against the Ayalas, has been appealed by plaintiff to the Supreme Court by way of a petition for review on certiorari. Not yet being final and executory, the lower court erred in making capital out of the same to dismiss the case against the other defendants, who are the respondents herein.

IV.

The lower court erred in holding, per the questioned orders, that plaintiff's cause of action is for annulment of contract which has already prescribed in the face of the clear and unequivocal recitation of six causes of action in the complaint, none of which is for annulment. This conclusion of public respondent is manifestly mistaken and legally absurd.

V.

The court a quo erred in failing to consider the complaint recites six alternative causes of action, such that the insufficiency of one cause - assuming there is such insufficiency - does not render insufficient the other cause and the complaint itself. The contrary ruling in this regard by public respondent is founded entirely on speculation and conjecture and is constitutive of grave abuse of discretion.

In disposing of the instant petition, this Court shall dwell on the more crucial upon which the trial court and respondent based their respective rulings unfavorable to petitioner MWSS; i.e., prescription, laches, estoppel/ratification and non-joinder of indispensable parties.

RE: Prescription

Petitioner MWSS claims as erroneous both the lower courts' uniform finding that the action has prescribed, arguing that its complaint is one to declare the MWSS-SILHOUETTE sale, and all subsequent conveyances of the subject property, void which is imprescriptible.

We disagree.

The very allegations in petitioner MWSS' complaint show that the subject property was sold through contracts which, at most, can be considered only as voidable, and not void. Paragraph 12 of the complaint reads in part:

"12. xxx.

The plaintiff has been in continuous, peaceful and public possession and ownership of the afore-described properties, the title (TCT No. [36069] 199170) thereto, including its derivative titles TCT Nos. 213872 and 307655, having been duly issued in its name. However, as a result of fraudulent and illegal acts of herein defendants, as described in the paragraphs hereinafter following, the original of said title/s were cancelled and in lieu thereof new titles were issued to corporate defendant/s covering subject 127.9271 hectares. xxx."

Paragraph 34 alleges:

"34. Sometime thereafter, clearly influenced by the premature if not questionable approval by Mr. Marcos of a non-existent agreement, and despite full knowledge that both the assessed and market value of subject property were much much higher, the MWSS Board of Trusties illegally passed an undated resolution ( 'Resolution No. 36-83' ), approving the 'sale' of the property to CHGCCI at P40/sq.m. and illegally authorizing General Manager Ilustre to sign the covering contract.

This 'resolution' was signed by Messrs. Jesus Hipolito as Chairman; Oscar Ilustre, as Vice Chairman; Aflredo Junio, as Member; and Silvestre Payoyo, as Member; xxx"

Paragraph 53 states:

" 53. Defendants Pablo Roman, Jr., Josefino Cenizal, and Jose Roxas as well as defendant corporations (CHGCCI, STC and Ayala) who acted through the former and their other principal officers, knowingly induced and caused then President Marcos and the former officers of plaintiff MWSS to enter into the aforesaid undated 'Agreement' which are manifestly and grossly disadvantageous to the government and which gave the same defendants unwarranted benefits, i.e., the ownership and dominion of the afore-described property of plaintiff."

Paragraph 54 avers:

"54. Defendants Jesus Hipolito and Alfredo Junio, then public officers, together with the other public officers who are now deceased (Ferdinand Marcos, Oscar liustre, and Sivestre Payoyo) knowingly allowed themselves to be persuaded, induced and influenced to approve and/or enter into the aforementioned 'Agreements' which are grossly and manifestly disadvantageous to the MWSS/government and which bestowed upon the other defendants the unwarranted benefit/ownership of subject property."

The three elements of a contract - consent, the object, and the cause of obligation[1]1 are all present. It cannot be otherwise argued that the contract had for its object the sale of the property and the cause or consideration thereof was the price to be paid (on the part of respondents CHGCCI/SILHOUETTE) and the land to be sold (on the part of petitioner MWSS). Likewise, petitioner MWSS' consent to the May 11, 1983 and August 11, 1983 Agreements is patent on the face of these documents and on its own resolution No. 36-83.

As noted by both lower courts, petitioner MWSS admits that it consented to the sale of the property, with the qualification that such consent was allegedly unduly influenced by the President Marcos. Taking such allegation to be hypothetically true, such would have resulted in only voidable contracts because all three elements of a contract, still obtained nonetheless. The alleged vitiation of MWSS' consent did not make the sale null and void ab initio. Thus, "a contract where consent is given through mistake, violence, intimidation, undue influence or fraud, is voidable."[2]Contracts "where consent is vitiated by mistake, violence, intimidation, undue influence or fraud" are voidable or annullable.[3] These are not void as -

"Concepts of Voidable Contracts. - Voidable or anullable contracts are existent, valid, and binding, although they can be annulled because of want of capacity or vitiated consent of the one of the parties, but before annulment, they are effective and obligatory between parties. Hence, it is valid until it is set aside and its validity may be assailed only in an action for that purpose. They can be confirmed or ratified."[4]

As the contracts were voidable at the most, the four year prescriptive period under Art. 1391 of the New Civil Code will apply. This article provides that the prescriptive period shall begin in the cases of intimidation, violence or undue influence, from the time the defect of the consent ceases", and "in case of mistake or fraud, from the time of the discovery of the same time".

Hypothetically admitting that President Marcos unduly influenced the sale, the prescriptive period to annul the same would have begun on February 26, 1986 which this Court takes judicial notice of as the date President Marcos was deposed. Prescription would have set in by February 26, 1990 or more than three years before petitioner MWSS' complaint was filed.

However, if petitioner MWSS' consent was vitiated by fraud, then the prescriptive period commenced upon discovery. Discovery commenced from the date of the execution of the sale documents as petitioner was party thereto. At the least, discovery is deemed to have taken place on the date of registration of the deeds with the register of Deeds as registration is constructive notice to the world.[5] Given these two principles on discovery, the prescriptive period commenced in 1983 as petitioner MWSS actually knew of the sale, or, in 1984 when the agreements were registered and titles thereafter were issued to respondent SILHOUETTE. At the latest, the action would have prescribed by 1988, or about five years before the complaint was instituted. Thus, inAznar vs. Bernard[6], this Court held that:

"Lastly, even assuming that the petitioners had indeed failed to raise the affirmative defense of prescription in a motion to dismiss or in an appropriate pleading (answer, or amended or supplemental answer) and an amendment would no longer be feasible, still prescription, if apparent on the face of the complaint, may be favorably considered. In the case at bar, the private respondents admit in their complaint that the contract or real estate mortgage which they alleged to be fraudulent and which had been foreclosed, giving rise to this controversy with the petitioners, was executed on July 17, 1978, or more than eight long years before the commencement of the suit in the court a quo, on September 15, 1986. And an action declare a contract null and void on the ground of fraud must be instituted within four years. Extinctive prescription is thus apparent on the face of the complaint itself as resolved by the Court."

Petitioner MWSS further contends that prescription does not apply as its complaint prayed not for the nullification of voidable contracts but for the declaration of nullity of void ab initiocontracts which are imprescriptible. This is incorrect, as the prayers in a complaint are not determinative of what legal principles will operate based on the factual allegations of the complaint. And these factual allegations, assuming their truth, show that MWSS consented to the sale, only that such consent was purportedly vitiated by undue influence or fraud. Therefore, the rules on prescription will operate. Even if petitioner MWSS asked for the declaration of nullity of these contracts, the prayers will not be controlling as only the factual allegations in the complaint determine relief. "(I)t is the material allegations of fact in the complaint, not the legal conclusion made therein or the prayer that determines the relief to which the plaintiff is entitled"[7]. Respondent court is thus correct in holding that:

"xxx xxx xxx

The totality then of those allegations in the complaint makes up a case of a voidable contract of sale - not a void one. The determinative allegations are those that point out that the consent of MWSS in the Agreement of Sale was vitiated either by fraud or undue for the declaration of nullity of the said contract because the Complaint says no. Basic is the rule however that it is the body and not the caption nor the prayer of the Complaint that determines the nature of the action. True, the caption and prayer of the Complaint state that the action is for a judicial declaration of nullity of a contract, but alas, as already pointed out, its body unmistakably alleges

only a voidable contract. One cannot change the real nature of an action adopting a different nomenclature any more than one can change gin into whisky by just replacing the label on the bottle with that of the latter's and calling it whisky. No matter what, the liquid inside remains gin.

xxx xxx xxx."

Petitioner MWSS also theorizes that the May 11, 1983 MWSS-SILHOUETTE Agreement and the August 11, 1983 Supplemental Agreement were void ab initio because the "initial agreement" from which these agreements emanated was executed "without the knowledge, much less the approval" of petitioner MWSS through its Board of Trustees. The "initial agreement" referred to in petitioner MWSS' argument is the December 20, 1982 letter of respondents Roxas and Roman, Jr. to President Marcos where the authors mentioned that they had reached an agreement with petitioner's then general manager, Mr. Oscar Ilustre. Petitioner MWSS maintains that Mr. Ilustre was not authorized to enter into such "initial agreement", contrary to Art. 1874 of the New Civil Code which provides that "when a sale of a parcel of land or any interest therein is through an agent, the authority of the latter shall be in writing otherwise the sale shall be void." It then concludes that since its Res. No. 36-83 and the May 11, 1983 and August 11, 1983 Agreements are "fruits" of the "initial agreement" (for which Mr. Ilustre was allegedly not authorized in writing), all of these would have been also void under Art. 1422 of NCC, which provides that a contract which is the direct result of a pronounced illegal contract, is also void and inexistent."

The argument does not impress. The "initial agreement" reflected in the December 20, 1982 letter of respondent Roman to Pres. Marcos, is not a sale under Art. 1874. Since the nature of the "initial agreement" is crucial, we quote[8] the letter in full:

"We respectfully approach Your Excellency in all humility and in the spirit of the Yuletide Season. We have explained to Your Excellency when you allowed us the honor to see you, that the negotiations with MWSS which the late Pablo R. Roman initiated way back in 1975, with your kind approval, will finally be concluded.

We have agreed in principle with Mr. Oscar llustre on the terms of the sale as evidenced by the following:

1 . Our written agreement to hire Asian Appraisal Company to appraise the entire leased area which would then be the basis for the negotiations of the purchase price of the property; and

2. Our exchange of communications wherein MWSS made a counter-offer and our acceptance of the counter-offer.

However, we were informed by Mr. Ilustre that only written instruction from Your Excellency will allow us to finally sign the Agreement.

In sum, our Agreement is for the purchase price of FIFTY-SEVEN MILLION TWO-HUNDRED-FORTY THOUSAND PESOS (P 57,240,000) for the entire leased area of 135

hectares; TWENTY-SEVEN MILLION PESOS (P 27,000,000) payable upon approval of the contract by Your Excellency and the balance of THIRTY MILLION TWO HUNDRED FORTY THOUSAND PESOS (P30,240,000) after one (1) year inclusive of a 12% interest.

We believe that this arrangement is fair and equitable to both parties considering that the value of the land was appraised by a reputable company and independent appraisal company jointly commissioned by both parties and considering further that Capitol Hills has still a 23-year lien on the property by virtue of its existing lease contract with MWSS.

We humbly seek your instruction, Your Excellency and please accept our families' sincere wish for a Merry Christmas and a Happy New Year to you and the First Family."

The foregoing does not document a sale, but at most, only the conditions proposed by respondent Roman to enter into one. By the terms thereof, it refers only to an "agreement in principle". Reflecting a future consummation, the letter mentions "negotiations with MWSS (which) with your (Marcos') kind approval, will finally be concluded". It must likewise be noted that presidential approval had yet to be obtained. Thus, the "initial agreement" was not a sale as it did not in any way transfer ownership over the property. The proposed terms had yet to be approval by the President and the agreement in principle still had to be formalized in a deed of sale. Written authority as is required under Art. 1834 of the New Civil Code, was not needed at the point of the "initial agreement".

Verily, the principle on prescription of actions is designed to cover situations such as the case at bar, where there have been a series of transfers to innocent purchasers for value. To set aside these transactions only to accommodate a party who has slept on his rights is anathema to good order.[9]

RE: Laches

Even assuming, for argument's sake, that the allegations in the complaint establish the absolute nullity of the assailed contracts an hence imprescriptible, the complaint can still be dismissed on the ground of laches which is different from prescription. This Court, as early as 1966, has distinguished these two concepts in this wise:

"x x x (T)he defense of laches applies independently of prescription. Laches is different from the statute of limitations. Prescription is concerned with the fact of delay, whereas laches is concerned with the effect of delay. Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be enforced, this inequity being founded on some change in the condition of the property or the relation of the parties. Prescription is statutory; laches is not. Laches applies in inequity, whereas prescription applies at law. Prescription is based on fixed-time; laches is not."[10]

Thus, the prevailing doctrine is that the right to have a contract declared void ab initio may be barred by laches although not barred by prescription.[11]

It has, for all its elements are present, viz:

(1) conduct on the part of the defendant, or one under whom he claims, giving rise to the situation that led to the complaint and for which the complaint seeks a remedy;

(2) delay in asserting the complainant's rights, having had knowledge or notice of the defendant's conduct and having been afforded an opportunity to institute a suit;

(3) lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; and

(4) injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held barred.[12]

There is no question on the presence of the first element. The main thrust of petitioner MWSS's complaint is to bring to the fore what it claims as fraudulent and/or illegal acts of the respondents in the acquisition of the subject property.

The second element of delay is evident from the fact that petitions tarried for almost ten (10) years from the conclusion of the sale sometime in 1983 before formally laying claim to the subject property in 1993.

The third element is present as can be deduced from the allegations in the complaint that petitioner MWSS (a) demanded for downpayment for no less than three times; (b) accepted downpayment for P25 Million; and (c) accepted a letter of credit for the balance. The pertinent paragraphs in the complaint thus read:

"38. In a letter dated September 19, 1983, for failure of CHGCCI to pay on time, Mr. Ilustre demanded payment of the downpayment of P25 Million which was due as of 18 April 1983. A copy of this letter is hereto attached as Annex 'X';

"39. Again, in a letter dated February 7, 1984, then MWSS Acting General Manager Aber Canlas demanded payment from CHGCCI of the purchase price long overdue. A copy of this letter is hereto attached as Annex 'Y';

"40. Likewise, in a letter dated March 14, 1984, Mr. Canlas again demanded from CHGCCI payment of the price. A copy of this demand letter is hereto attached as Annex 'Z';

"41. Thereafter, in a letter dated July 27, 1984, another entity, defendant Ayala Corporation, through SVP Renato de la Fuente, paid with a check the long overdue downpayment ofP25,000,000.00 of STC/CHGCCI. Likewise a domestic stand-by letter of credit for the balance was issued in favor of MWSS; Copies of the said letter, check and letter of credit are hereto attached as Annexes 'AA', 'BB', and 'CC', respectively."

Under these facts supplied by petitioner MWSS itself, respondents have every good reason to believe that petitioner was honoring the validity of the conveyances of the subject property, and that the sudden institution of the complaint in 1993 alleging the nullity of such conveyances

was surely an unexpected turn of events for respondents. Hence, petitioner MWSS cannot escape the effect of laches.

RE: Ratification

Pertinent to this issue is the claim of petitioner MWSS that Mr. Ilustre was never given the authority by its Board of Trustees to enter into the "initial agreement" of December 20, 1982 and therefore, the sale of the subject property is invalid.

Petitioner MWSS misses the point. The perceived infirmity in the "initial agreement" can be cured by ratification. So settled is the precept that ratification can be made by the corporate board either expressly or impliedly. Implied ratification may take various forms - like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom.[13] Both modes of ratification have been made in this case.

There was express ratification made by the Board of petitioner MWSS when it passed Resolution No. 36-83 approving the sale of the subject property to respondent SILHOUETTE and authorizing Mr. Ilustre, as General Manager, "to sign for and in behalf of the MWSS the contract papers and other pertinent documents relative thereto." Implied ratification by "silence or acquiescence" is revealed from the acts of petitioner MWSS in (a) sending three (3) demand letters for the payment of the purchase price, (b) accepting P25 Million as downpayment, and (c) accepting a letter of credit for the balance, as hereinbefore mentioned. It may well be pointed out also that nowhere in petitioner MWSS' complaint is it alleged that it returned the amounts, or any part thereof, covering the purchase price to any of the respondents-vendees at any point in time. This is only indicative of petitioner MWSS' acceptance and retention of benefits flowing from the sales transactions which is another form of implied ratification.

RE: Non-joinder of indispensable parties

There is no denying that petitioner MWSS' action against herein respondents for the recovery of the subject property now converted into a prime residential subdivision would ultimately affect the proprietary rights of the many lot owners to whom the land has already been parceled out. They should have been included in the suit as parties-defendants, for. "it is well established that owners of property over which reconveyance is asserted are indispensable parties without whom no relief is available and without whom the court can render no valid judgment."[14] Being indispensable parties, the absence of these lot-owners in the suit renders all subsequent actions of the trial court null and void for want of authority to act, not only as to the absent parties but even as to those present.[15] Thus, when indispensable parties are not before the court, the action should be dismissed.[16]

WHEREFORE, in view of the foregoing, the consolidated petitions are hereby DENIED.

SO ORDERED

Regalado, Acting C.J., (Chairman), and Mendoza, JJ., concur.

Melo, J., No part, member of club Puno, J., No part due to close association.

THIRD DIVISION

DEPARTMENT OF HEALTH, Petitioner,

-versus-

C.V. CANCHELA & ASSOCIATES, ARCHITECTS (CVCAA), IN ASSOCIATION WITH MCS ENGINEERS CO., AND A.O. MANSUETO IV – ELECTRICAL ENGINEERING SERVICES, AND LUIS ALINA, SHERIFF IV, RTC, MANILA,

Respondents.

G.R. Nos. 151373-74

Present:

PANGANIBAN, Chairman,

SANDOVAL- GUTIERREZ,*

CORONA,

CARPIO MORALES, and

GARCIA, JJ.

Promulgated: November 17, 2005

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N CARPIO-MORALES, J.:

The Department of Health assails, via petition for review on certiorari,[1] the consolidated

June 28, 2000 decision of the Court of Appeals affirming that of the Sole Arbitrator of the

Construction Industry Arbitration Commission (CIAC)[2] which granted the monetary claim of

herein private respondents.

The following facts are not undisputed.

Petitioner entered into three Owner-Consultant Agreements (Agreements) with private

respondents covering infrastructure projects for the Baguio General Hospital and Medical Center

(Baguio Project), the Batangas Regional Hospital (Batangas Project) and the Corazon L.

Montelibano Memorial Regional Hospital in Bacolod City (Bacolod Project).

The first Agreement[3] dated October 7, 1996 was signed by Dr. Jesus del Prado, Chief of

Hospital of the Baguio General Hospital and Medical Center; the second,[4]dated October 8,

1996, by Dr. Vicente Gahol, Chief of Hospital of the Batangas Regional Hospital; and the

third,[5] dated October 7, 1996, by Dr. Lourdes Espina, Officer-in-Charge of the Bacolod

Regional Hospital.

The Agreements, which contained almost identical language, required the preparation by

private respondents of the following documents: detailed architectural and engineering design

plans; technical specifications and detailed estimates of cost of construction of the hospital,

including the preparation of bid documents and requirements; and construction supervision until

completion of hand-over and issuance of final certificate.

Work on the projects was generally divided into: architectural and engineering (A & E)

services, and construction supervision (CS).

The Agreements contained a common provision stating that private respondents’

consultancy or professional fees would be 7.5% of the project fund allocation, broken down

into detailed architectural and engineering services (6%), and full-time construction supervision

(1.5%).[6]

Thus, in the first Agreement involving the Baguio Project, petitioner agreed to pay

private respondents a professional fee in the amount of P1,444,875.00 or 7.5% of the project

fund allocation of P19,265,000.00.[7]

In the second agreement involving the Batangas Project, petitioner agreed to pay private

respondents a professional fee of P1,318,020.00 or 7.5% of the project fund allocation

of P17,575,000.00.[8]

In the third agreement, petitioner agreed to pay private respondents the amount

of P890,549.00 which is equivalent to 7.5% of the P11,875,000.00 fund allocated for the

Bacolod Project.[9]

While the Agreements were witnessed by the respective chief accountants of the hospitals

and were duly approved by the Secretary of Health,[10] the former did not issue corresponding

certificates of availability of funds to cover the professional or consultancy fees.[11]

Petitioner, acting through its representative Architect Ma. Rebecca M. Peñafiel, by

separate letters[12] to the respective chiefs of hospitals, all dated October 15, 1996, confirmed its

acceptance of private respondents’ complete Contract or Bid Documents including the A & E

Design Plans and Technical Specifications and the Detailed Cost Estimates for each project, and

accordingly recommended the payment of 7.5% of the project allocation to private respondents

as consultancy fees in accordance with the Agreements.[13] In the same letters, petitioner advised

that private respondents’ performance of full-time construction supervision services shall

commence upon issuance of the Notices to Proceed to the winning contractors.

Before the Notices to Proceed could be issued to the winning contractors, however,

petitioner amended the three Agreements on December 10, 1996 by deleting from private

respondents’ scope of work the item “full-time construction supervision” and replacing it with

“periodic visits,” thus:

1.5 Periodic Visits The CONSULTANT shall make periodic visits to the project site to

familiarize himself with the general progress and quality of the work and to determine whether, the work is proceeding in accordance with the Contract Documents. During such project site visits and on the basis of his observations he

shall report to the OWNER defects and deficiencies noted in the work of contractors and shall condemn work found failing to conform to the Contract Documents.[14]

The Amendment to each of the three Agreements was likewise duly witnessed and signed

by the hospitals’ respective chief accountants and approved by the Secretary of Health. Just the

same, no certifications of availability of funds for the purpose were issued.[15]

Full-time construction supervision having been excluded from private respondents’ scope

of work, their professional fee was correspondingly reduced from 7.5% of the project fund

allocation to 6% of the project contract cost, payable as follows:

5.2 Payment Schedule

a. Upon the completion and submission of the Contract

Documents, SEVENTY percent (70%) of the fee will be made computed upon estimated project construction cost;

b. Upon fifty percent completion of the construction of the project, the

payment shall be adjusted and made so that it will amount to a sum equivalent to EIGHTY percent (80%) of the fee, computed upon the Project Contract Cost

c. Upon completion and final acceptance of the project, the remaining

balance will be paid computed on the Project Contract Cost.

d. The payments arising from this Agreement, as amended shall be subject to the usual accounting and auditing rules and regulations.[16] (Emphasis supplied)

During the construction of the projects, various deficiencies in the performance of the

agreed scope of private respondents’ work were allegedly discovered[17] which were not,

however, communicated to private respondents.[18] Due to such deficiencies, petitioner withheld

payment of the consultancy fees due to private respondents. And petitioner did not return the

documents, plans, specifications and estimates submitted by private respondents.

As despite written demands for payment,[19] petitioner continued to withhold payment of

their professional fees, private respondents appealed, by letter dated August 29, 1997, to then

Department of Health Secretary Carmencita C. Reodica, they stating that their appeal was

“purposely done as our ultimate administrative remedy before resorting to arbitration under E.O.

1008.”

In a demand letter (undated) for payment addressed to Secretary Reodica and the chiefs of

hospital concerned, private respondents expressed their intention to resort to arbitration in

accordance with Article 12 of each of the Agreements.[20]

Still later, private respondents sent another letter dated February 19, 1998 to Secretary

Reodica stating that it would be submitting the dispute to the CIAC.

The demands for payment remained unheeded, prompting private respondents to file on

September 21, 1998 with the CIAC their request for adjudication of their claim for payment of

professional fees, escalation costs, attorney’s fees and costs of arbitration. The case was

docketed as CIAC Case No. 31-98.

Acting on private respondents’ petition, the CIAC appointed a Sole Arbitrator, Atty.

Custodio O. Parlade, from a list of three nominees to preside over the arbitration proceedings.[21]

In its Answer dated January 21, 1999,[22] petitioner alleged, inter alia, that payment was

withheld because the hospitals concerned were not satisfied with the performance of private

respondents who did not fulfill the terms and conditions of the contracts; withholding of payment

is sanctioned by Section 8.2 of the NEDA Board Approval Guidelines on the Procurement of

Consultancy Services for government projects (Implementing Rules and Regulations) which

provides:

To guarantee the faithful performance of the consultant under Contract,

the final payment shall be withheld until after a Certificate of Completion indicating satisfactory completion of the Consultancy Services shall have been issued by the concerned government agency. (Emphasis supplied);

the delay in the implementation of the project, as well as the payment of fees, is not due to the

fault of the hospitals but to private respondents’ failure to rectify its unsatisfactory work; and the

consultancy fees shall be on a per project basis and at 6% of the project contract cost.

In the parties’ “Terms of Reference,”[23] the following facts were stipulated, inter alia:

4. The A & E services were completed, and the Contract Documents (CD)

submitted by Claimant, on 15 October 1996 for the Consultancy Contracts for:

4.1 Baguio Project, with CD accepted/approved by Respondent for Project

Fund Allocation (PFA) or Project Construction Cost (PCC) of P19,719,376;

4.2 Batangas Project, with CD accepted/approved by Respondent for

PFA/PCC of P20,373,565; 4.3 Bacolod Project, with CD accepted/approved by Respondent for

PFA/PCC of P20,118,940.”

5. Claimants allege that they are entitled to 6% for A & E Fees, as follows, for: 5.1 the Consultancy Contract for Baguio Project in the amount

of P1,183,163; 5.2 the Consultancy Contract for Batangas Project in the amount

of P1,222,414; and 5.3 the Consultancy Contract for Bacolod Project in the amount

of P1,207,136.

The Respondent, however, maintains that the 6% payment must be based upon the actual project contract cost of each building which is defined as the cost of the winning bid price of the contractor which performed the work. (Italics supplied)

And defined as issues were as follows:

1. Did the Claimants complete their work under the contract on time so as to entitle them to their claims for A & E fees for:

[a] Baguio Project P 1,183,163.00 [b] Batangas Project 1,222,414.00 [c] Bacolod Project 1,207,136.00

------------------------ Total P 3,612,713.00

1.1 Was the work of the Claimants satisfactory so as to entitle them to

their claims? 1.2 How should the “project cost” be defined:

a. Should it be based on the detailed cost estimate for A & E services as provided in the bid documents; or

b. Should it be based on the actual contract cost for each building?

2. Was the payment of the claims of the Claimant so delayed so as to entitle

the Claimants to interest? If so, by how much, and what rate of interest should be applied?

3. Was the implementation of the project delayed so as to entitle the Claimants

to escalation? If so, how much? 4. Are the Claimants entitled to their claims for attorney’s fees and cost of

arbitration?

After the presentation of evidence and submission of memoranda by the parties, the Sole

Arbitrator rendered a decision of March 30, 1999, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, award is hereby made in favor of the

claimants sentencing the respondent to pay the claimants the amount of P3,492,713 for A & E services performed and completed for and accepted by DOH. This amount shall earn interest at 6% per annum from the date of this award until this decision becomes final. Thereafter, the principal and the interest accrued as of such time shall earn interest at 12% per annum.

The claim for escalation is denied. No award as to attorney’s fees and costs.

SO ORDERED.[24]

Petitioner elevated the case to the Court of Appeals via petition for review under Rule 43

of the Rules of Court, docketed as CA-G.R. No. 52538,[25] citing the following grounds in

support thereof: (a) the CIAC has no jurisdiction to hear and decide Case No. 31-98; (b) the Sole

Arbitrator acted with grave abuse of discretion amounting to lack or excess of jurisdiction when,

despite absence of factual and legal basis, he awarded to private respondents the monetary award

of P3,492,713 for A & E services, with interest at 6% per annum from the date of award until the

decision becomes final, and at 12% on the principal and accrued interest thereafter; and (c) the

Sole Arbitrator exceeded his powers and was partial to petitioner.

By Resolution of May 19, 1999, the Court of Appeals dismissed the petition for having

been filed out of time.[26]

Meanwhile, on May 31, 1999, the Sole Arbitrator, acting on private respondents’ Motion

for Execution which was filed soon after his decision as promulgated, directed the issuance of a

writ of execution.[27]

On June 10, 1999, the Office of the Solicitor General (OSG), counsel for petitioner, filed

a Motion for Reconsideration of the Court of Appeals’ Resolution dated May 19, 1999[28] which

was, by Resolution of June 29, 1999, denied, the appellate court noting that no Motion for

Extension to file petition for review was received prior to the filing of the petition for review.[29]

Petitioner subsequently filed on July 8, 1999 through the OSG, another petition before

the Court of Appeals under Rule 65 of the Rules of Court with urgent prayer for the issuance of a

Temporary Restraining Order and/or a Writ of Preliminary Injunction, docketed as CA-G.R. No.

53632,[30] assailing the Sole Arbitrator’s Order dated May 31, 1999 directing the issuance of a

writ of execution of the March 30, 1999 decision, as well as the Writ of Execution and the

Order denying petitioner’s motion for reconsideration of the Order dated May 31, 1999, upon the

following grounds: the petition questioning the Sole Arbitrator’s decision subject of the assailed

order dated May 31, 1999 was still pending with the Court of Appeals; the CIAC has no

jurisdiction to hear and decide Case No. 31-98; and “government funds and properties may not

be seized under writs of execution or garnishment to satisfy such judgments,”

following Commissioner of Public Highways v. San Diego[31] and Republic v. Villasor.[32]

On July 16, 1999, the OSG filed a Motion for Reconsideration of the appellate court’s

Resolution of June 29, 1999 but it was, by Resolution of June 29, 1999, denied.

By Resolution issued on July 20, 1999, the Court of Appeals required private respondents

to comment on petitioner’s second petition.[33] On even date, the OSG filed a motion for the

issuance of a temporary restraining order and/or writ of preliminary injunction[34] to restrain the

enforcement of the writ of execution, which motion was, by Resolution of July 23, 1999,

granted.

On July 27, 1999, the Court of Appeals issued a resolution in the first petition granting

petitioner’s Motion for Reconsideration and accordingly reinstating said first petition. By the

same Resolution, private respondents were directed to file their comment[35] thereon.

The two petitions were later consolidated on motion of the OSG.

Following the filing by private respondents of their Comments on the two petitions, the

Court of Appeals, by the assailed consolidated decision dated June 20, 2000, affirmed the

decision of the Sole Arbitrator, it finding that the CIAC, which has original and exclusive

jurisdiction over the dispute pursuant to Executive Order No. 1008,[36] did not commit grave

abuse of discretion amounting to lack or excess of jurisdiction in the promulgation of its assailed

decision, the same being well-supported by evidence and it containing a just interpretation and

application of the provisions of the consultancy agreements.[37]

The Court of Appeals having denied petitioner’s Motion for Reconsideration[38] for being

“barren of merit,”[39] petitioner now comes before this Court on petition for review by certiorari

under Rule 45 on the following assigned errors:

I

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE CLAIMS FILED BY RESPONDENT C.V. CANCHELA WERE PREMATURE

II

THE COURT OF APPEALS ERRED IN HOLDING THAT THE MONETARY AWARD BY RESPONDENT ARBITRATOR WAS IN ACCORD WITH THE TENOR OF THE AGREEMENT AS THERE WAS NO BASIS AT ALL FOR THE AWARD THEREOF

Petitioner asserts that the claims of private respondents are premature as they failed to

obtain the decision of the Secretary of Health prior to arbitration, a mandatory requirement under

Article 12 of the Agreements.[40]

But even granting that the claims were ripe for arbitration, petitioner asserts that the CIAC

should have dismissed the petition on the ground that the State is immune from suits, the

Agreements, being to promote the health and well-being of the citizens, having been entered into

pursuant to the State’s sovereign and governmental power.

With respect to the monetary award, petitioner contends that private respondents are only

entitled to the A & E services it rendered in the amount of P2,749,960.40 which is 6% of the

total cost of the project, taking into account the deletion of the provision on construction

supervision; and no interest on the principal is due as it did not incur any delay and the

Agreements contained no express stipulation on interest.

Private respondents, on the other hand, counter that, as correctly held by the Court of

Appeals and the Sole Arbitrator, they did not fail in their duty to go through the mode of settling

their claims for payment as stipulated in the Agreements and that the records clearly establish the

factual and legal bases for the award in their favor.

In compliance with the Resolution[41] of this Court requiring the parties to submit their

respective memoranda, petitioner filed its Memorandum[42] raising for the very first time the

argument that the Agreements are void from the beginning for failure to include therein a

certification of availability of funds which is required under existing law. As such, petitioner

concludes that the consultancy fees cannot be based on the project fund allocation but on the

basis of the reasonable value or on the principle of quantum meruit.

Petitioner thus additionally prays that the Sole Arbitrator’s Decision be nullified.

As reflected above, the failure of the respective chief accountants to issue a certification of

availability of funds for respondents’ services subject of the Agreements was not raised before

the CIAC or the Court of Appeals. It is settled that an issue which was neither averred in the

complaint nor raised during the trial cannot be raised for the first time on appeal as it would be

offensive to the basic rules of fair play, justice and due process,[43] save on exceptional

circumstances.[44] The paramount and overriding public policy is that no money shall be paid out

of the Treasury except upon an appropriation made by law.[45] That public funds are involved in

the present controversy thus justifies a relaxation of technical rules of procedure in order to serve

the demands of substantial justice.[46]

An inquiry into the fundamental issue of nullity of the Agreements is then warranted to

determine if petitioner duly observed the constitutional prescription for the prevention and

disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures,

or uses of public funds and properties.[47]

Proceeding from the foregoing consideration, the Court finds merit in the petition.

The Agreements, it bears noting, expressly stated that payments arising therefrom shall be

“subject to the usual accounting and auditing rules and regulations.”[48] Being government

contracts, they are governed and regulated by special laws, failure to comply with which renders

them void.

P.D. 1445 (The Auditing Code of the Philippines) provides that no contract involving the

expenditure of public funds shall be entered into unless there is an appropriation therefor[49] and

unless the proper accounting official of the agency concerned shall have certified to the officer

entering into the obligation that funds have been duly appropriated for the purpose and that the

amount necessary to cover the proposed contract for the current fiscal year is available for

expenditure on account thereof, subject to verification by the auditor concerned. The certificate

signed by the proper accounting official and the auditor who verified it shall be attached to and

become an integral part of the proposed contract.[50] Any contract entered into contrary to the

foregoing requirements is void.[51]

E.O. 292 (The Administrative Code of 1987) provides too that no funds shall be disbursed

without first securing the certification of a government agency’s chief accountant or head of the

accounting unit as to the availability of funds.[52] The issuance of such certification is thus a

condition sine qua non to entering into any contract or incurring any obligation that may be

chargeable against the authorized allotment in any department, office or agency. Unless the

certification is issued, the contract can not be considered final or binding.[53]

The formalities expressly required by the Auditing Code of the Philippines and The

Administrative Code of 1987 not having been complied with, the subject three Agreements are

null and void from the very beginning. The signatures of the chief accountants as instrumental

witnesses do not constitute substantial compliance with the explicit requirements of said

Codes. As Melchor v. Commission on Audit[54] teaches, the certification, not the accountant’s

signature as contract witness, is “the basic and more important validating document,” and “the

more reliable indicium of fund availability,” notwithstanding paragraph 2 of Letter of

Instructions No. 968[55] (LOI No. 968) which considers the signature of the chief accountant as

itself constituting a certification that funds are indeed available.[56] For LOI No. 968, being an

administrative issuance, must yield to the explicit provisions of The Auditing Code of the

Philippines and Revised Administrative Code of 1987.[57]

Even if each of the Agreements did not incorporate the provision calling for compliance

with the above-said Codes, the provisions thereof, as well as those of the 1987 Constitution and

LOI No. 968, must be deemed to form part of, and co-exist with, the Agreements. Applicable

peremptory provisions of law of this nature, affecting as they do public policy or impressed as

they are with public interest, are held to be written into the contract.[58]

The illegality of the subject Agreements proceeds, it bears emphasis, from an express

declaration or prohibition by law,[59] not from any intrinsic illegality. As such, the Agreements

are not illegal per se[60] and the party claiming thereunder may recover what had been paid or

delivered.[61]

The Court thus finds that private respondents are entitled to be compensated for the

services they actually performed for the benefit of petitioner, as shown by petitioner’s

acceptance and use[62] of the complete Contract or Bid Documents including the A & E Design

Plans and Technical Specifications and the Detailed Cost Estimates for each project that private

respondents promptly submitted, as in fact petitioner itself recommends that private respondents

be paid therefor.

The compensation must, however, exclude services for “periodic visits” which the records

irrefutably show not to have been rendered.

With respect to the stipulation in each of the Agreements that private respondents’

professional fees would be 7.5% of the project fund allocation, which was amended to 6% of the

project contract cost, the same patently contravenes Section 525 of the Government Accounting

and Auditing (GAA) Manual directing that fees for architectural, engineering design, and similar

professional services should be fixed in monetary or peso amounts, instead of as percentage of

the project cost.

Section 525 of GAA Manual provides:

Sec. 525. Contract fees for architectural, engineering design, and similar

professional services. – Professional fees for architectural, engineering design and similar professional services shall be stipulated in the contract in fixed monetary or peso amounts instead of as percentage of the project cost. Professional fees in terms of percent of the project cost is inconsistent with our national goal of economy in fiscal operations because the percentage fee motivates the architect or designer to design a project so as to maximize its cost since his fees will be computed as a direct proportion to the resulting cost (COA Cir. 82-191, July 5, 1982). (Emphasis and italics supplied)

Thus, on top of the chief accountants’ unexplained failure to issue the requisite certificates

of availability of funds[63] and the unjustified omission of the chiefs of hospital to secure such

certification before even entering into the Agreements with private respondents, these officers

failed to heed the guidelines embodied in above-quoted Section 525 of the GAA Manual. The

records do not show any explanation for these lapses.

Paragraph 2 of LOI 968 provides:

2. It shall be the responsibility of the Chief Accountant to verify the

availability of funds, as duly evidenced by programmed appropriations released by the Ministry of the Budget and received by the agency, from which such contract shall be ultimately payable. (Emphasis supplied)

And Book VI, Chapter 5, Section 40 of the Revised Administrative Code of 1987 provides:

SECTION 40. Certification of Availability of Funds. — No funds shall be disbursed, and no expenditures or obligations chargeable against any authorized allotment shall be incurred or authorized in any department, office or agency without first securing the certification of its Chief Accountant or head of accounting unit as to the availability of funds and the allotment to which the expenditure or obligation may be properly charged.

No obligation shall be certified to accounts payable unless the

obligation is founded on a valid claim that is properly supported by sufficient evidence and unless there is proper authority for its incurrence. xxx (Emphasis supplied)

As the immediately-quoted provisions of law mandate, the issuance of a certification that

funds are available is a legal duty imposed on the chief accountant or the head of the accounting

unit. And ascertainment that such certification exists prior to entering into any government

contract or incurring any obligation chargeable against public funds is a responsibility which

devolves on the officer concerned.

For their failure to discharge their duties under the law, The Revised Administrative Code

of 1987 provides that the officer or officers entering into the contract shall be liable to the

Government or other contracting party for any consequent damage to the same extent as if the

transaction had been wholly between private parties.[64]

On the other hand, COA Circular No. 76-34[65] directs the COA to call the attention of

management, within five days from receipt of a copy of the contract, any defects or deficiencies

therein and to suggest corrective measures as appropriate and warranted to facilitate the

processing of the claim upon presentation. The records do not show that COA complied with

said directive. It was thus negligent.[66]

The Court believes, however, that declaring the individual officers of petitioner who

entered into the Agreements personally liable for the unpaid professional fees due to private

respondents would be highly unjust, the government having already received and accepted the

benefits of the services rendered. En passant, it is, however, non sequitor to let these officers go

scot-free from their negligence.

Since the questioned Agreements are null and void for want of the requisite covering

certificates of appropriation, the teachings in Eslao v. Commission on Audit[67] and inRoyal Trust

Construction v. Commission on Audit[68] must be heeded.

In Eslao, this Court, directed payment to the contractor on a quantum meruit basis despite

the failure to undertake a public bidding, it holding that “to deny payment to the contractor of the

two buildings which are almost fully completed and presently occupied by the university would

be to allow the government to unjustly enrich itself at the expense of another.”

In Royal Trust, this Court, in the interest of substantial justice and equity, allowed payment

to the contractor on a quantum meruit basis despite the absence of a written contract and a

covering appropriation.

In the case at bar then, the nullity of the herein Agreements notwithstanding, the ends of

substantial justice and equity will be better served if payment to private respondents for their

consultancy services is allowed on a quantum meruit basis.

The measure of recovery under the principle of quantum meruit should relate to the

reasonable value of the services performed,[69] taking into account the standard of practice in the

profession, the architectural and engineering skills of private respondents, and their professional

expertise and standing.[70]

Respecting petitioner’s argument that the State is immune from suit, the same deserves

scant consideration. To sustain the argument would not only perpetuate a grave injustice on

private respondents who performed their services in good faith and were given the run-around

for over eight years, but would sanction as well unjust enrichment on the part of the State.

Such conduct by petitioner and its officers, in addition, derogates against the salutary

policies enunciated in Presidential Decree No. 1746 “CREATING THE CONSTRUCTION

INDUSTRY AUTHORITY OF THE PHILIPPINES (CIAP)”[71] and E.O. 1008

“CONSTRUCTION INDUSTRY ARBITRATION LAW.”[72] As expressed therein, these

statutes contain provisions for the promotion of the healthy partnership between the government

and the private sector and encourage the optimum development and growth of the local

construction industry.

As EPG Construction Company v. Vigilar[73] holds, “this Court – as the staunch guardian

of the citizens’ rights and welfare – cannot sanction an injustice so patent on its face, and allow

itself to be an instrument in the perpetration thereof. Justice and equity sternly demand that the

State’s cloak of invincibility against suit be shred in this particular instance, and that petitioners-

contractors be duly compensated – on the basis of quantum meruit – for construction done on the

public works housing project.”[74]

In light of the foregoing discussions, addressing the question of jurisdiction and other

collateral issues raised in the petition is rendered unnecessary.

WHEREFORE, the petition is GRANTED. The Owner-Consultant Agreements entered

into between petitioner Department of Health, through the respective chiefs of hospitals, and

private respondents are declared null and void ab initio.

The assailed consolidated decision of the Court of Appeals dated June 28, 2000 and its

Resolution dated November 23, 2001 in CA-G.R. SP Nos. 52538 and 53632 areREVERSED

AND SET ASIDE.

The Commission on Audit is hereby directed to determine and ascertain with dispatch, on

a quantum meruit basis, the total compensation due to private respondents for the performance of

consultancy services and to allow payment thereof upon the completion of said determination.

SO ORDERED. CONCHITA CARPIO-MORALES Associate Justice WE CONCUR:

ARTEMIO V. PANGANIBAN

Associate Justice

Chairman

(ON LEAVE)

ANGELINA SANDOVAL-GUTIERREZ

Associate Justice

RENATO C. CORONA

Associate Justice

CANCIO C. GARCIA

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

ARTEMIO V. PANGANIBAN

Associate Justice

Chairman

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman’s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court.

HILARIO G. DAVIDE, JR.

Chief Justice

THIRD DIVISION

[G.R. No. 153201. January 26, 2005]

JOSE MENCHAVEZ, JUAN MENCHAVEZ JR., SIMEON MENCHAVEZ, RODOLFO MENCHAVEZ, CESAR MENCHAVEZ, REYNALDO, MENCHAVEZ, ALMA MENCHAVEZ, ELMA MENCHAVEZ, CHARITO M. MAGA, FE M. POTOT, THELMA M. REROMA, MYRNA M. YBAÑEZ, and SARAH M. VILLABER, petitioners, vs. FLORENTINO TEVES JR., respondent.

D E C I S I O N

PANGANIBAN, J.:

Avoid contract is deemed legally nonexistent. It produces no legal effect. As a general rule, courts leave parties to such a contract as they are, because they are in pari delicto or equally at fault. Neither party is entitled to legal protection.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the February 28, 2001 Decision[2] and the April 16, 2002 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 51144. The challenged Decision disposed as follows:

“WHEREFORE, the assailed decision is hereby MODIFIED, as follows:

“1. Ordering [petitioners] to jointly and severally pay the [respondent] the amount of P128,074.40 as actual damages, and P50,000.00 as liquidated damages;

“2. Dismissing the third party complaint against the third party defendants;

“3. Upholding the counterclaims of the third party defendants against the [petitioners. Petitioners] are hereby required to pay [the] third party defendants the sum of P30,000.00 as moral damages for the clearly unfounded suit;

“4. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 in the concept of attorney’s fees and appearance fees of P300.00 per appearance;

“5. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 as exemplary damages pro bono publico and litigation expenses including costs, in the sum of P5,000.00.”[4]

The assailed Resolution denied petitioners’ Motion for Reconsideration.

The Facts

On February 28, 1986, a “Contract of Lease” was executed by Jose S. Menchavez, Juan S. Menchavez Sr., Juan S. Menchavez Jr., Rodolfo Menchavez, Simeon Menchavez, Reynaldo

Menchavez, Cesar Menchavez, Charito M. Maga, Fe M. Potot, Thelma R. Reroma, Myrna Ybañez, Sonia S. Menchavez, Sarah Villaver, Alma S. Menchavez, and Elma S. Menchavez, as lessors; and Florentino Teves Jr. as lessee. The pertinent portions of the Contract are herein reproduced as follows:

“WHEREAS, the LESSORS are the absolute and lawful co-owners of that area covered by FISHPOND APPLICATION No. VI-1076 of Juan Menchavez, Sr., filed on September 20, 1972, at Fisheries Regional Office No. VII, Cebu City covering an area of 10.0 hectares more or less located at Tabuelan, Cebu;

x x x x x x x x x

“NOW, THEREFORE, for and in consideration of the mutual covenant and stipulations hereinafter set forth, the LESSORS and the LESSEE have agreed and hereby agree as follows:

“1. The TERM of this LEASE is FIVE (5) YEARS, from and after the execution of this Contract of Lease, renewable at the OPTION of the LESSORS;

“2. The LESSEE agrees to pay the LESSORS at the residence of JUAN MENCHAVEZ SR., one of the LESSORS herein, the sum of FORTY THOUSAND PESOS (P40,000.00) Philippine Currency, annually x x x;

“3. The LESSORS hereby warrant that the above-described parcel of land is fit and good for the intended use as FISHPOND;

“4. The LESSORS hereby warrant and assure to maintain the LESSEE in the peaceful and adequate enjoyment of the lease for the entire duration of the contract;

“5. The LESSORS hereby further warrant that the LESSEE can and shall enjoy the intended use of the leased premises as FISHPOND FOR THE ENTIRE DURATION OF THE CONTRACT;

“6. The LESSORS hereby warrant that the above-premises is free from all liens and encumbrances, and shall protect the LESSEE of his right of lease over the said premises from any and all claims whatsoever;

“7. Any violation of the terms and conditions herein provided, more particularly the warranties above-mentioned, the parties of this Contract responsible thereof shall pay liquidated damages in the amount of not less thanP50,000.00 to the offended party of this Contract; in case the LESSORS violated therefor, they bound themselves jointly and severally liable to the LESSEE;”

x x x x x x x x x.[5]

On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo Cabigon demolished the fishpond dikes constructed by respondent and delivered possession of the subject property to other parties.[6] As a result, he filed a Complaint for damages with application for preliminary

attachment against petitioners. In his Complaint, he alleged that the lessors had violated their Contract of Lease, specifically the peaceful and adequate enjoyment of the property for the entire duration of the Contract. He claimed P157,184.40 as consequential damages for the demolition of the fishpond dikes, P395,390.00 as unearned income, and an amount not less than P100,000.00 for rentals paid.[7]

Respondent further asserted that the lessors had withheld from him the findings of the trial court in Civil Case No. 510-T, entitled “Eufracia Colongan and Paulino Pamplona v. Juan Menchavez Sr. and Sevillana S. Menchavez.” In that case involving the same property, subject of the lease, the Menchavez spouses were ordered to remove the dikes illegally constructed and to pay damages and attorney’s fees.[8]

Petitioners filed a Third Party Complaint against Benny and Elizabeth Allego, Albino Laput, Adrinico Che and Charlemagne Arendain Jr., as agents of Eufracia Colongan and Paulino Pamplona. The third-party defendants maintained that the Complaint filed against them was unfounded. As agents of their elderly parents, they could not be sued in their personal capacity. Thus, they asserted their own counterclaims.[9]

After trial on the merits, the RTC ruled thus:

“[The court must resolve the issues one by one.] As to the question of whether the contract of lease between Teves and the [petitioners] is valid, we must look into the present law on the matter of fishponds. And this is Pres. Decree No. 704 which provides in Sec. 24:

‘Lease of fishponds-Public lands available for fishpond development including those earmarked for family-size fishponds and not yet leased prior to November 9, 1972 shall be leased only to qualified persons, associations, cooperatives or corporations, subject to the following conditions.

‘1. The lease shall be for a period of twenty five years (25), renewable for another twenty five years;

‘2. Fifty percent of the area leased shall be developed and be producing in commercial scale within three years and the remaining portion shall be developed and be producing in commercial scale within five years; both periods begin from the execution of the lease contract;

‘3. All areas not fully developed within five years from the date of the execution of the lease contract shall automatically revert to the public domain for disposition of the bureau; provided that a lessee who failed to develop the area or any portion thereof shall not be permitted to reapply for said area or any portion thereof or any public land under this decree; and/or any portion thereof or any public land under this decree;

‘4. No portion of the leased area shall be subleased.’

The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution) states:

‘Sec. 2 - All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests, or timber, wild life, flora and fauna and other natural resources are owned by the state.

‘Sec. 3 - Lands of the public domain are classified into agricultural, forest or timber, mineral lands and national parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands x x x.’

“As a consequence of these provisions, and the declared public policy of the State under the Regalian Doctrine, the lease contract between Florentino Teves, Jr. and Juan Menchavez Sr. and his family is a patent nullity. Being a patent nullity, [petitioners] could not give any rights to Florentino Teves, Jr. under the principle: ‘NEMO DAT QUOD NON HABET’ - meaning ONE CANNOT GIVE WHAT HE DOES NOT HAVE, considering that this property in litigation belongs to the State and not to [petitioners]. Therefore, the first issue is resolved in the negative, as the court declares the contract of lease as invalid and void ab-initio.

“On the issue of whether [respondent] and [petitioners] are guilty of mutual fraud, the court rules that the [respondent] and [petitioners] are in pari-delicto. As a consequence of this, the court must leave them where they are found. x x x.

x x x x x x x x x

“x x x. Why? Because the defendants ought to have known that they cannot lease what does not belong to them for as a matter of fact, they themselves are still applying for a lease of the same property under litigation from the government.

“On the other hand, Florentino Teves, being fully aware that [petitioners were] not yet the owner[s], had assumed the risks and under the principle of VOLENTI NON FIT INJURIA NEQUES DOLUS - He who voluntarily assumes a risk, does not suffer damage[s] thereby. As a consequence, when Teves leased the fishpond area from [petitioners]- who were mere holders or possessors thereof, he took the risk that it may turn out later that his application for lease may not be approved.

“Unfortunately however, even granting that the lease of [petitioners] and [their] application in 1972 were to be approved, still [they] could not sublease the same. In view therefore of these, the parties must be left in the same situation in which the court finds them, under the principle IN PARI DELICTO NON ORITOR ACTIO, meaning[:] Where both are at fault, no one can found a claim.

“On the third issue of whether the third party defendants are liable for demolishing the dikes pursuant to a writ of execution issued by the lower court[, t]his must be resolved in the negative, that the third party defendants are not liable. First, because the third party defendants are mere agents of Eufracia Colongan and Eufenio Pamplona, who are the ones who should be made liable if at all, and considering that the demolition was pursuant to an order of the court to restore the prevailing party in that Civil Case 510-T, entitled: Eufracia Colongan v. Menchavez.

“After the court has ruled that the contract of lease is null and void ab-initio, there is no right of the [respondent] to protect and therefore[,] there is no basis for questioning the Sheriff’s authority to demolish the dikes in order to restore the prevailing party, under the

principle VIDETUR NEMO QUISQUAM ID CAPERE QUOD EI NECESSE EST ALII RESTITUERE - He will not be considered as using force who exercise his rights and proceeds by the force of law.

“WHEREFORE, in view of all foregoing [evidence] and considerations, this court hereby renders judgment as follows:

“1. Dismissing the x x x complaint by the [respondent] against the [petitioners];

“2. Dismissing the third party complaint against the third party defendants;

“3. Upholding the counterclaims of the third party defendants against the [petitioners. The petitioners] are hereby required to pay third party defendants the sum of P30,000.00 as moral damages for this clearly unfounded suit;

“4. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 in the concept of attorney’s fees and appearance fees of P300.00 per appearance;

“5. Requiring the [petitioners] to pay to the third party defendants the sum of P10,000.00 as exemplary damages probono publico and litigation expenses including costs, in the sum of P5,000.00.”[10] (Underscoring in the original)

Respondent elevated the case to the Court of Appeals, where it was docketed as CA-GR CV No. 51144.

Ruling of the Court of Appeals

The CA disagreed with the RTC’s finding that petitioners and respondent were in pari delicto. It contended that while there was negligence on the part of respondent for failing to verify the ownership of the subject property, there was no evidence that he had knowledge of petitioners’ lack of ownership.[11] It held as follows:

“x x x. Contrary to the findings of the lower court, it was not duly proven and established that Teves had actual knowledge of the fact that [petitioners] merely usurped the property they leased to him. What Teves admitted was that he did not ask for any additional document other than those shown to him, one of which was the fishpond application. In fact, [Teves] consistently claimed that he did not bother to ask the latter for their title to the property because he relied on their representation that they are the lawful owners of the fishpond they are holding for lease. (TSN, July 11, 1991, pp. 8-11)”[12]

The CA ruled that respondent could recover actual damages in the amount of P128,074.40. Citing Article 1356[13] of the Civil Code, it further awarded liquidated damages in the amount ofP50,000, notwithstanding the nullity of the Contract.[14]

Hence, this Petition.[15]

The Issues

Petitioners raise the following issues for our consideration:

“1. The Court of Appeals disregarded the evidence, the law and jurisprudence when it modified the trial court’s decision when it ruled in effect that the trial court erred in holding that the respondent and petitioners are in pari delicto, and the courts must leave them where they are found;

“2. The Court of Appeals disregarded the evidence, the law and jurisprudence in modifying the decision of the trial court and ruled in effect that the Regional Trial Court erred in dismissing the respondent’s Complaint.”[16]

The Court’s Ruling

The Petition has merit.

Main Issue:

Were the Parties in Pari Delicto?

The Court shall discuss the two issues simultaneously.

In Pari Delicto Rule on Void Contracts

The parties do not dispute the finding of the trial and the appellate courts that the Contract of Lease was void.[17] Indeed, the RTC correctly held that it was the State, not petitioners, that owned the fishpond. The 1987 Constitution specifically declares that all lands of the public domain, waters, fisheries and other natural resources belong to the State.[18] Included here are fishponds, which may not be alienated but only leased.[19] Possession thereof, no matter how long, cannot ripen into ownership.[20]

Being merely applicants for the lease of the fishponds, petitioners had no transferable right over them. And even if the State were to grant their application, the law expressly disallowed sublease of the fishponds to respondent.[21] Void are all contracts in which the cause, object or purpose is contrary to law, public order or public policy.[22]

A void contract is equivalent to nothing; it produces no civil effect.[23] It does not create, modify or extinguish a juridical relation.[24] Parties to a void agreement cannot expect the aid of the law; the courts leave them as they are, because they are deemed in pari delicto or “in equal fault.”[25] To this rule, however, there are exceptions that permit the return of that which may have been given under a void contract.[26] One of the exceptions is found in Article 1412 of the Civil Code, which states:

“Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:

“(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking;

“(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise.”

On this premise, respondent contends that he can recover from petitioners, because he is an innocent party to the Contract of Lease.[27] Petitioners allegedly induced him to enter into it through serious misrepresentation.[28]

Finding of In Pari Delicto: A Question of Fact

The issue of whether respondent was at fault or whether the parties were in pari delicto is a question of fact not normally taken up in a petition for review on certiorari under Rule 45 of the Rules of Court.[29] The present case, however, falls under two recognized exceptions to this rule.[30] This Court is compelled to review the facts, since the CA’s factual findings are (1) contrary to those of the trial court;[31] and (2) premised on an absence of evidence, a presumption that is contradicted by the evidence on record.[32]

Unquestionably, petitioners leased out a property that did not belong to them, one that they had no authority to sublease. The trial court correctly observed that petitioners still had a pending lease application with the State at the time they entered into the Contract with respondent.[33]

Respondent, on the other hand, claims that petitioners misled him into executing the Contract.[34] He insists that he relied on their assertions regarding their ownership of the property. His own evidence, however, rebuts his contention that he did not know that they lacked ownership. At the very least, he had notice of their doubtful ownership of the fishpond.

Respondent himself admitted that he was aware that the petitioners’ lease application for the fishpond had not yet been approved.[35] Thus, he knowingly entered into the Contract with the risk that the application might be disapproved. Noteworthy is the fact that the existence of a fishpond lease application necessarily contradicts a claim of ownership. That respondent did not know of petitioners’ lack of ownership is therefore incredible.

The evidence of respondent himself shows that he negotiated the lease of the fishpond with both Juan Menchavez Sr. and Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge Esparagoza.[36] His counsel’s presence during the negotiations, prior to the parties’ meeting of minds, further debunks his claim of lack of knowledge. Lawyers are expected to know that fishponds belong to the State and are inalienable. It was reasonably expected of the counsel herein to advise his client regarding the matter of ownership.

Indeed, the evidence presented by respondent demonstrates the contradictory claims of petitioners regarding their alleged ownership of the fishpond. On the one hand, they claimed ownership and, on the other, they assured him that their fishpond lease application would be approved.[37] This circumstance should have been sufficient to place him on notice. It should have compelled him to determine their right over the fishpond, including their right to lease it.

The Contract itself stated that the area was still covered by a fishpond application.[38] Nonetheless, although petitioners declared in the Contract that they co-owned the property, their erroneous declaration should not be used against them. A cursory examination of the Contract suggests that it was drafted to favor the lessee. It can readily be presumed that it was he or his counsel who prepared it -- a matter supported by petitioners’ evidence.[39] The ambiguity should therefore be resolved against him, being the one who primarily caused it.[40]

The CA erred in finding that petitioners had failed to prove actual knowledge of respondent of the ownership status of the property that had been leased to him. On the contrary, as the party alleging the fact, it was he who had the burden of proving – through a preponderance of evidence[41] -- that they misled him regarding the ownership of the fishpond. His evidence fails to support this contention. Instead, it reveals his fault in entering into a void Contract. As both parties are equally at fault, neither may recover against the other.[42]

Liquidated Damages Not Proper

The CA erred in awarding liquidated damages, notwithstanding its finding that the Contract of Lease was void. Even if it was assumed that respondent was entitled to reimbursement as provided under paragraph 1 of Article 1412 of the Civil Code, the award of liquidated damages was contrary to established legal principles.

Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of a breach thereof.[43] Liquidated damages are identical to penalty insofar as legal results are concerned.[44] Intended to ensure the performance of the principal obligation, such damages are accessory and subsidiary obligations.[45] In the present case, it was stipulated that the party responsible for the violation of the terms, conditions and warranties of the Contract would pay not less than P50,000 as liquidated damages. Since the principal obligation was void, there was no contract that could have been breached by petitioners; thus, the stipulation on liquidated damages was inexistent. The nullity of the principal obligation carried with it the nullity of the accessory obligation of liquidated damages.[46]

As explained earlier, the applicable law in the present factual milieu is Article 1412 of the Civil Code. This law merely allows innocent parties to recover what they have given without any obligation to comply with their prestation. No damages may be recovered on the basis of a void contract; being nonexistent, the agreement produces no juridical tie between the parties involved. Since there is no contract, the injured party may only recover through other sources of obligations such as a law or a quasi-contract.[47] A party recovering through these other sources of obligations may not claim liquidated damages, which is an obligation arising from a contract.

WHEREFORE, the Petition is GRANTED and the assailed Decision and Resolution SET ASIDE. The Decision of the trial court is hereby REINSTATED.

No pronouncement as to costs.

SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

SECOND DIVISION

[G.R. No. 136031. January 4, 2002]

JEFFERSON LIM, petitioner, vs. QUEENSLAND TOKYO COMMODITIES, INC., respondent.

D E C I S I O N

QUISUMBING, J.:

Before us is a petition for review assailing the June 25, 1998, decision[1] of the Court of Appeals in CA-G.R. CV No. 46495 which reversed and set aside the decision of the Regional Trial Court of Cebu, Branch 24, dismissing the complaint by respondent for a sum of money as well as petitioner’s counterclaim.

Private respondent Queensland Tokyo Commodities, Incorporated (Queensland, for brevity) is a duly licensed broker engaged in the trading of commodities futures with full membership and with a floor trading right at the Manila Futures Exchange, Inc..[2]

Sometime in 1992, Benjamin Shia, a market analyst and trader of Queensland, was introduced to petitioner Jefferson Lim by Marissa Bontia,[3] one of his employees. Marissa’s father was a former employee of Lim’s father.[4]

Shia suggested that Lim invest in the Foreign Exchange Market, trading U.S. dollar against the Japanese yen, British pound, Deutsche Mark and Swiss Franc.

Before investing, Lim requested Shia for proof that the foreign exchange was really lucrative. They conducted mock tradings without money involved. As the mock trading showed profitability, Lim decided to invest with a marginal deposit of US$5,000 in manager’s check. The marginal deposit represented the advance capital for his future tradings. It was made to apply to any authorized future transactions, and answered for any trading account against which the deposit was made, for any loss of whatever nature, and for all obligations, which the investor would incur with the broker.[5]

Because respondent Queensland dealt in pesos only, it had to convert US$5,000 in manager’s check to pesos, amounting to P125,000 since the exchange rate at that time was P25 to US$1.00. To accommodate petitioner’s request to trade right away, it advanced the P125,000 from its own funds while waiting for the manager’s check to clear. Thereafter, a deposit notice in the amount of P125,000 was issued to Queensland, marked as Exhibit “E”. This was sent to Lim who received it as indicated by his signature marked as Exhibit “E-1”. Then, Lim signed the Customer’s Agreement, marked as Exhibit “F,” which provides as follows:

25. Upon signing of this Agreement, I shall deposit an initial margin either by personal check, manager’s check or cash. In the case of the first, I shall not be permitted to trade until the check has been cleared by my bank and credited to your account. In respect of margin calls or additional deposits required, I shall likewise pay them either by personal check, manager’s check or cash. In the event my personal check is dishonored, the company has the right without call or notice to settle/close my trading account against which the deposit was made. In such event, any loss of whatever nature shall be borne by me and I shall settle such loss upon demand together

with interest and reasonable cost of collection. However, in the event such liquidation gives rise to a profit then such amount shall be credited to the Company. The above notwithstanding, I am not relieved of any legal responsibility as a result of my check being dishonored by my bank.[6]

Petitioner Lim was then allowed to trade with respondent company which was coursed through Shia by virtue of the blank order forms, marked as Exhibits “G”, “G-1” to “G-13”,[7] all signed by Lim. Respondent furnished Lim with the daily market report and statements of transactions as evidenced by the receiving forms, marked as Exhibits “J”, “J-1” to “J-4”,[8] some of which were received by Lim.

During the first day of trading or on October 22, 1992, Lim made a net profit of P6,845.57.[9] Shia went to the office of Lim and informed him about it. He was elated. He agreed to continue trading. During the second day of trading or on October 23, 1992, they lost P44,465.[10]

Meanwhile, on October 22, 1992, respondent learned that it would take seventeen (17) days to clear the manager’s check given by petitioner. Hence, on October 23, 1992, at about 11:00 A.M., upon management’s request, Shia returned the check to petitioner who informed Shia that petitioner would rather replace the manager’s check with a traveler’s check.[11] Considering that it was 12:00 noon already, petitioner requested Shia to come back at 2:00 P.M.. Shia went with petitioner to the bank to purchase a traveler’s check at the PCI Bank, Juan Luna Branch at 2:00 P.M.. Shia noticed that the traveler’s check was not indorsed but Lim told Shia that Queensland could sign the indorsee portion.[12] Because Shia trusted the latter’s good credit rating, and out of ignorance, he brought the check back to the office unsigned.[13] Inasmuch as that was a busy Friday, the check was kept in the drawer of respondent’s consultant. Later, the traveler’s check was deposited with Citibank.[14]

On October 26, 1992, Shia informed petitioner that they incurred a floating loss of P44,695[15] on October 23, 1992. He told petitioner that they could still recover their losses. He could unlock the floating loss on Friday. By unlocking the floating loss, the loss on a particular day is minimized.

On October 27, 1992, Citibank informed respondent that the traveler’s check could not be cleared unless it was duly signed by Lim, the original purchaser of the traveler’s check. A Miss Arajo, from the accounting staff of Queensland, returned the check to Lim for his signature, but the latter, aware of his P44,465 loss, demanded for a liquidation of his account and said he would get back what was left of his investment.[16] Meanwhile, Lim signed only one portion of the traveler’s check, leaving the other half blank. He then kept it.[17] Arajo went back to the office without it.

Respondent asked Shia to talk to petitioner for a settlement of his account but petitioner refused to talk with Shia. Shia made follow-ups for more than a week beginning October 27, 1992. Because petitioner disregarded this request, respondent was compelled to engage the services of a lawyer, who sent a demand letter[18] to petitioner. This letter went unheeded. Thus, respondent filed a complaint[19] against petitioner, docketed as Civil Case No. CEB-13737, for collection of a sum of money.

On April 22, 1994, the trial court rendered its decision, thus:

WHEREFORE, in view of all the foregoing, the complaint is dismissed without pronouncement as to costs. The defendant’s counterclaim is likewise dismissed.

SO ORDERED.[20]

On appeal by Queensland, the Court of Appeals reversed and set aside the trial court’s decision, with the following fallo:

WHEREFORE, the decision appealed from is hereby REVERSED AND SET ASIDE, and another one is entered ordering appellee [Jefferson Lim] to pay appellant the sum of P125,000.00, with interest at the legal rate until the whole amount is fully paid, P10,000.00 as attorney’s fees, and costs.[21]

Petitioner herein filed a motion for reconsideration before the Court of Appeals, which was denied in a resolution dated October 6, 1998.[22]

Dissatisfied, petitioner filed the instant recourse alleging that the appellate court committed errors:

I - … IN REVERSING THE DECISION OF THE RTC WHICH DISMISSED RESPONDENT’S COMPLAINT;

II -… IN HOLDING THAT THE PETITIONER IS ESTOPPED IN QUESTIONING THE VALIDITY OF THE CUSTOMER’S AGREEMENT AND FROM DENYING THE EFFECTS OF HIS CONDUCT;

III -… IN NOT TAKING JUDICIAL NOTICE OF THE LETTER OF RESPONDENT THAT THE SEC HAS ISSUED A CEASE AND DESIST ORDER AGAINST THE MANILA INTERNATIONAL FUTURES EXCHANGE COMMISSION AND ALL COMMODITY TRADERS INCLUDING THE RESPONDENT.

Despite the petitioner’s formulation of alleged errors, we find that the main issue is whether or not the appellate court erred in holding that petitioner is estopped from questioning the validity of the Customer’s Agreement that he signed.

The essential elements of estoppel are: (1) conduct of a party amounting to false representation or concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation, that this conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the real facts.[23]

Here, it is uncontested that petitioner had in fact signed the Customer’s Agreement in the morning of October 22, 1992,[24] knowing fully well the nature of the contract he was entering into. The Customer’s Agreement was duly notarized and as a public document it is evidence of the fact, which gave rise to its execution and of the date of the latter.[25] Next, petitioner paid his investment deposit to respondent in the form of a manager’s check in the amount of US$5,000 as evidenced by PCI Bank Manager’s Check No. 69007, dated October 22, 1992.[26] All these are indicia that petitioner treated the Customer’s Agreement as a valid and binding contract.

Moreover, we agree that, on petitioner’s part, there was misrepresentation of facts. He replaced the manager’s check with an unendorsed traveler’s check, instead of cash, while assuring Shia that respondent Queensland could sign the indorsee portion thereof.[27] As it turned out, Citibank informed respondent that only the original purchaser (i.e. the petitioner) could sign said check. When the check was returned to petitioner for his signature, he refused to sign. Then, as petitioner himself admitted in his Memorandum,[28] he used the traveler’s check for his travel expenses.[29]

More significantly, petitioner already availed himself of the benefits of the Customer’s Agreement whose validity he now impugns. As found by the CA, even before petitioner’s initial marginal deposit (in the form of the PCI manager’s check dated October 22, 1992)[30] was converted into cash, he already started trading on October 22, 1992, thereby making a net profit of P6,845.57. On October 23, he continued availing of said agreement, although this time he incurred a “floating loss” of P44,645.[31] While he claimed he had not authorized respondent to trade on those dates, this claim is belied by his signature affixed in the order forms, marked as Exhibits “G”, “G-1” to “G-13”.[32]

Clearly, by his own acts, petitioner is estopped from impugning the validity of the Customer’s Agreement. For a party to a contract cannot deny the validity thereof after enjoying its benefits without outrage to one’s sense of justice and fairness.

It appears that petitioner’s reason to back out of the agreement is that he began sustaining losses from the trade. However, this alone is insufficient to nullify the contract or disregard its legal effects. By its very nature it is already a perfected, if not a consummated, contract. Courts have no power to relieve parties from obligations voluntarily assumed, simply because their contracts turned out to be disastrous or unwise investments.[33] Notably, in the Customer’s Agreement, petitioner has been forewarned of the high risk involved in the foreign currency investment as stated in the “Risk Disclosure Statement,”[34] located in the same box where petitioner signed.

Further, petitioner contends that the Customer’s Agreement was rendered nugatory because: (1) the marginal deposit he gave was in dollars and (2) respondent allowed him to trade even before the US$5,000 manager’s check was cleared. This contention is disingenuous to say the least, but hardly meritorious.

Petitioner himself was responsible for the issuance of the US$5,000 manager’s check. It was he who failed to replace the manager’s check with cash. He authorized Shia to start trading even before the US$5,000 check had cleared. He could not, in fairness to the other party concerned, now invoke his own misdeeds to exculpate himself, conformably with the basic principle in law that he who comes to court must come with clean hands.

Contrary to petitioner’s contention, we also find that respondent did not violate paragraph 14 of the Guidelines for Spot/Futures Currency Trading, which provides:

14. DEPOSITS & PAYMENTS

All deposits, payments and repayments, etc. will be in Philippine Currency. When a deposit with the Company is not in cash or bank draft, such deposit will not take effect in the account

concerned until it has been confirmed NEGOTIABLE for payment by authorized management personnel.[35]

Respondent claims it informed petitioner of its policy not to accept dollar investment. For this reason, it converted the petitioner’s US$5,000 manager’s check to pesos (P125,000) out of respondent’s own funds to accommodate petitioner’s request to trade right away.[36] On record, it appears that petitioner agreed to the conversion of his dollar deposit to pesos. [37]

Neither is there merit in petitioner’s contention that respondent violated the Customer’s Agreement by allowing him to trade even if his manager’s check was not yet cleared, as he had no margin deposit as required by the Customer’s Agreement, viz:

5. Margin Receipt

A Margin Receipt issued by the Company shall only be for the purpose of acknowledging receipt of an amount as margin deposit for Spot/Futures Currency Trading. All checks received for the purpose of margin deposits have to be cleared through such bank account as may be opened by the Company before any order can be accepted.[38]

But as stated earlier, respondent advanced petitioner’s marginal deposit of P125,000 out of its own funds while waiting for the US$5,000 manager’s check to clear, relying on the good credit standing of petitioner. Contrary to petitioner’s averment now, respondent had advanced his margin deposit with his approval. Nowhere in the “Guidelines” adverted to by petitioner was such an arrangement prohibited. Note that the advance was made with petitioner’s consent, as indicated by his signature, Exhibit “E-1”,[39] affixed in the deposit notice, Exhibit “E”,[40] sent to him by respondent. By his failure to seasonably object to this arrangement and by affixing his signature to the notice of deposit, petitioner is barred from questioning said arrangement now.

Anent the last assigned error, petitioner faults the appellate court for not taking judicial notice of the cease and desist order against the Manila International Futures Exchange Commission and all commodity traders including respondent. However, we find that this issue was first raised only in petitioner’s motion for reconsideration of the Court of Appeals’ decision. It was never raised in the Memorandum[41] filed by petitioner before the trial court. Hence, this Court cannot now, for the first time on appeal, pass upon this issue. For an issue cannot be raised for the first time on appeal. It must be raised seasonably in the proceedings before the lower court. Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal.[42]

WHEREFORE, the instant petition is DENIED for lack of merit. The decision of the Court of Appeals dated June 25, 1998, in CA-G.R. CV No. 46495 is AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, and De Leon, Jr., JJ., concur. Buena, J., on official leave.

FIRST DIVISION

[G.R. NO. 156437 - March 1, 2004]

NATIONAL HOUSING AUTHORITY, Petitioner, v. GRACE BAPTIST CHURCH and the COURT OF APPEALS, Respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

This is a Petition for Review under Rule 45 of the Rules of Court, seeking to reverse the Decision of the Court of Appeals dated February 26, 2001,1 and its Resolution dated November 8, 2002,2 which modified the decision of the Regional Trial Court of Quezon City, Branch 90, dated February 25, 1997.3

On June 13, 1986, respondent Grace Baptist Church (hereinafter, the Church) wrote a letter to petitioner National Housing Authority (NHA), manifesting its interest in acquiring Lots 4 and 17 of the General Mariano Alvarez Resettlement Project in Cavite.4 In its letter-reply dated July 9, 1986, petitioner informed respondent:

In reference to your request letter dated 13 June 1986, regarding your application for Lots 4 and 17, Block C-3-CL, we are glad to inform you that your request was granted and you may now visit our Project Office at General Mariano Alvarez for processing of your application to purchase said lots.

We hereby advise you also that prior to approval of such application and in accordance with our existing policies and guidelines, your other accounts with us shall be maintained in good standing.5

Respondent entered into possession of the lots and introduced improvements thereon.6

On February 22, 1991, the NHAs Board of Directors passed Resolution No. 2126, approving the sale of the subject lots to respondent Church at the price of P700.00 per square meter, or a total price of P430,500.00.7 The Church was duly informed of this Resolution through a letter sent by the NHA.8

On April 8, 1991, the Church tendered to the NHA a managers check in the amount of P55,350.00, purportedly in full payment of the subject properties.9 The Church insisted that this was the price quoted to them by the NHA Field Office, as shown by an unsigned piece of paper with a handwritten computation scribbled thereon.10 Petitioner NHA returned the check, stating that the amount was insufficient considering that the price of the properties have changed. The Church made several demands on the NHA to accept their tender of payment, but the latter refused. Thus, the Church instituted a complaint for specific performance and damages against the NHA with the Regional Trial Court of Quezon City,11 where it was docketed as Civil Case No. Q-91-9148.

On February 25, 1997, the trial court rendered its decision, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering the defendant to reimburse to the plaintiff the amount of P4,290.00 representing the overpayment made for Lots 1, 2, 3, 18, 19 and 20;chanroblesvirtuallawlibrary

2. Declaring that there was no perfected contract of sale with respect to Lots 4 and 17 and ordering the plaintiff to return possession of the property to the defendant and to pay the latter reasonable rental for the use of the property at P200.00 per month computed from the time it took possession thereof until finally vacated. Costs against defendant.

SO ORDERED.12

On appeal, the Court of Appeals, affirmed the trial courts finding that there was indeed no contract of sale between the parties. However, petitioner was ordered to execute the sale of the lots to Grace Baptist Church at the price of P700.00 per square meter, with 6% interest per annum from March 1991. The dispositive portion of the Court of Appeals decision, dated February 26, 2001, reads:

WHEREFORE, the appealed Decision is hereby AFFIRMED with the MODIFICATION that defendant-appellee NHA is hereby ordered to sell to plaintiff-appellant Grace Baptist Church Lots 4 and 17 at the price of P700.00 per square meter, or a total cost P430,000.00 with 6% interest per annum from March, 1991 until full payment in cash.

SO ORDERED.13

The appellate court ruled that the NHAs Resolution No. 2126, which earlier approved the sale of the subject lots to Grace Baptist Church at the price of P700.00 per square meter, has not been revoked at any time and was therefore still in effect. As a result, the NHA was estopped from fixing a different price for the subject properties. Considering further that the Church had been occupying the subject lots and even introduced improvements thereon, the Court of Appeals ruled that, in the interest of equity, it should be allowed to purchase the subject properties.14

Petitioner NHA filed a Motion for Reconsideration which was denied in a Resolution dated November 8, 2002. Hence, the instant Petition for Review on the sole issue of: Can the NHA be compelled to sell the subject lots to Grace Baptist Church in the absence of any perfected contract of sale between the parties?chanroblesvirtualawlibrary

Petitioner submits that the Court cannot compel it to sell the subject property to Grace Baptist Church without violating its freedom to contract.15 Moreover, it contends that equity should be applied only in the absence of any law governing the relationship between the parties, and that the law on sales and the law on contracts in general apply to the present case.16

We find merit in petitioners submission.

Petitioner NHA is not estopped from selling the subject lots at a price equal to their fair market value, even if it failed to expressly revoke Resolution No. 2126. It is, after all, hornbook law that the principle of estoppel does not operate against the Government for the act of its agents,17 or, as in this case, their inaction.

On the application of equity, it appears that the crux of the controversy involves the characterization of equity in the context of contract law. Preliminarily, we reiterate that this Court, while aware of its equity jurisdiction, is first and foremost, a court of law. While equity might tilt on the side of one party, the same cannot be enforced so as to overrule positive provisions of law in favor of the other.18 Thus, before we can pass upon the propriety of an application of equitable principles in the case at bar, we must first determine whether or not positive provisions of law govern.

It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force of law between the parties and should be complied with in good faith.19However, it must be understood that contracts are not the only source of law that govern the rights and obligations between the parties. More specifically, no contractual stipulation may contradict law, morals, good customs, public order or public policy.20 Verily, the mere inexistence of a contract, which would ordinarily serve as the law between the parties, does not automatically authorize disposing of a controversy based on equitable principles alone. Notwithstanding the absence of a perfected contract between the parties, their relationship may be governed byother existing laws which provide for their reciprocal rights and obligations.

It must be remembered that contracts in which the Government is a party are subject to the same rules of contract law which govern the validity and sufficiency of contract between individuals. All the essential elements and characteristics of a contract in general must be present in order to create a binding and enforceable Government contract.21

It appearing that there is no dispute that this case involves an unperfected contract, the Civil Law principles governing contracts should apply. In Vda. de Urbano v. Government Service Insurance System,22 it was ruled that a qualified acceptance constitutes a counter-offer as expressly stated by Article 1319 of the Civil Code. In said case, petitioners offered to redeem mortgaged property and requested for an extension of the period of redemption. However, the offer was not accepted by the GSIS. Instead, it made a counter-offer, which petitioners did not accept. Petitioners again offer to pay the redemption price on staggered basis. In deciding said case, it was held that when there is absolutely no acceptance of an offer or if the offer is expressly rejected, there is no meeting of the minds. Since petitioners offer was denied twice by GSIS, it was held that there was clearly no meeting of the minds and, thus, no perfected contract. All that is established was a counter-offer.23

In the case at bar, the offer of the NHA to sell the subject property, as embodied in Resolution No. 2126, was similarly not accepted by the respondent.24 Thus, the alleged contract involved in this case should be more accurately denominated as inexistent. There being no concurrence of the offer and acceptance, it did not pass the stage of generation to the point of perfection.25 As such, it is without force and effect from the very beginning or from its incipiency, as if it had never been entered into, and hence, cannot be validated either by lapse of time or

ratification.26 Equity can not give validity to a void contract,27 and this rule should apply with equal force to inexistent contracts.

We note from the records, however, that the Church, despite knowledge that its intended contract of sale with the NHA had not been perfected, proceeded to introduce improvements on the disputed land. On the other hand, the NHA knowingly granted the Church temporary use of the subject properties and did not prevent the Church from making improvements thereon. Thus, the Church and the NHA, who both acted in bad faith, shall be treated as if they were both in good faith.28 In this connection, Article 448 of the Civil Code provides:

The owner of the land on which anything has been built, sown or planted in good faith, shall have the right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land and if its value is considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.

Pursuant to our ruling in Depra v. Dumlao,29 there is a need to remand this case to the trial court, which shall conduct the appropriate proceedings to assess the respective values of the improvements and of the land, as well as the amounts of reasonable rentals and indemnity, fix the terms of the lease if the parties so agree, and to determine other matters necessary for the proper application of Article 448, in relation to Articles 546 and 548, of the Civil Code.

WHEREFORE, in view of the foregoing, the petition is GRANTED. The Court of Appeals Decision dated February 26, 2001 and Resolution dated November 8, 2002 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Quezon City-Branch 90, dated February 25, 1997, is REINSTATED. This case is REMANDED to the Regional Trial Court of Quezon City, Branch 90, for further proceedings consistent with Articles 448 and 546 of the Civil Code.

No costs.

SO ORDERED.

Davide, Jr., C.J., Carpio, and Azcuna, JJ., concur. Panganiban, J., on official leave.