Frances Anne Marie T. Garrido.

LLB2

G.R. No. 201112 - ARCHBISHOP FERNANDO R. CAPALLA, OMAR SOLITARIO ALI and MARY ANNE L.
SUSANO versus COMMISSION ON ELECTIONS

Principle that sale must not contravene the law or be contrary to law.

FACTS:

Comelec and Smartmatic-TIM entered into a Contract for the Provision of an Automated Election System for the May
10, 2010 Synchronized National and Local Elections (AES Contract) which is a Contract of Lease with Option to
Purchase (OTP) the goods listed therein consisting of the Precinct Count Optical Scan (PCOS), both software and
hardware. The Comelec was given until December 31, 2010 within which to exercise the option but opted not to exercise
the same except for 920 units of PCOS machines with the corresponding canvassing/consolidation system (CCS) for the
special elections in certain areas in Basilan, Lanao del Sur and Bulacan.Comelec issued Resolution No. 9373 resolving to
seriously consider exercising the OTP subject to certain conditions. Resolution No. 9378 resolving to approve the Deed
of Sale between the Comelec and Smartmatic-TIM to purchase the latter’s PCOS machines to be used in the upcoming
2013 elections. The Deed of Sale was forthwith execute. Claiming that the foregoing Comelec issuances and transactions
entered pursuant thereto are illegal and unconstitutional, movants filed separate petitions for certiorari, prohibition and
mandamus before the Court.

ISSUE:

Whether or not the parties’ right to amend the contract by extending the option period must be sustained

HELD:

Yes, Comelec validly exercised the option and eventually entered into a contract of sale of the subject goods. The
extension of the option period, the subsequent exercise thereof, and the eventual execution of the Deed of Sale became
the subjects of the petitions challenging their validity in light of the contractual stipulations of respondents and the
provisions of RA 9184. Considering that the performance security had not been released to Smartmatic-TIM, the
contract was still effective which can still be amended by the mutual agreement of the parties, such amendment being
reduced in writing.

ARMANDO V. ALANO vs PLANTERS DEVELOPMENT BANK

G.R. No. 171628

Principle of mortgagee in good faith and mirror doctrine

FACTS:

Agapito V. Alano, Jr. died leaving behind his wife, Lydia J. Alano , and four legitimate children, who adjudicated to themselves the
property in Quezon City.Title to the said property was reconstituted as Transfer Certificate of Title and registered solely in the names
of Lydia and her four children. Lydia filed with the Register of Deeds of Quezon City an Affidavit of Cancellation of Adverse Claim,
which caused the cancellation of the adverse claim annotated on TCT No. 18990. Thereafter, by virtue of a Deed of Absolute Sale
allegedly executed by her children in her favor, TCT No. 18990 was cancelled and a new one, TCT No. 90388, was issued solely in
her name. Slumberworld, Inc obtained from Maunlad Savings and Loan Association, Inc. a loan of P2.3 million, secured by a Real
Estate Mortgageover the property covered by TCT No. 90388. Petitioner filed a Complaint against Slumberworld.Maunlad Savings
and Loan Association, Inc. and the Register of Deeds of Quezon City before the Regional Trial Court. Petitioner sought the
cancellation of TCT No. 90388, the issuance of a new title in his name for his one-half share of the Quezon City property, and the
nullification of real estate mortgage insofar as his one-half share is concerned.

ISSUE:

WHETHER DEFENDANT MAUNLAD SAVINGS AND LOAN ASSOCIATION, INC. WAS AN INNOCENT MORTGAGEE
IN GOOD FAITH

HELD:

No, general rule that a mortgagee need not look beyond the title does not apply to banks and other financial institutions as greater care
and due diligence is required of them. Imbued with public interest, they are expected to be more cautious than ordinary
individuals.Maunlad Savings and Loan Association, Inc. failed to exercise due diligence in inspecting and ascertaining the status of
the mortgaged property because during the ocular inspection, the credit investigator failed to ascertain the actual occupants of the
subject property and to discover petitioners apartment at the back portion of the subject property and it was remiss in its duty in
ascertaining the status of the property to be mortgaged and verifying the ownership thereof, it is deemed a mortgagee in bad faith.

COMMUNITIES CAGAYAN INC. VS SPOUSES NANOL

GR NO. 176791

Principle of good faith

FACTS:

Respondent-spouses Arsenio and Angeles Nanol entered into a Contract to Sell with petitioner Communities Cagayan,
Inc. whereby the latter agreed to sell to respondent-spouses a house and Lots 17 and 19 located at Block 16, Camella
Homes Subdivision, Cagayan de Oro City for the price of P368,000.00. Respondent-spouses, however, did not avail of
petitioners inhouse financing due to its high interest rates.Instead, they obtained a loan from Capitol Development Bank,
a sister company of petitioner, using the property as collateral. To facilitate the loan, a simulated sale over the property
was executed by petitioner in favor of respondent-spouses. The bank collapsed and closed before it could release the
loan. Respondent-spouses entered into another Contract to Sell with petitioner over the same property for the same price.
This time, they availed of petitioner’s in-house financing thus, undertaking to pay the loan over four years, from 1997 to
2001. Petitioner sent respondent-spouses a notarizedNotice of Delinquency and Cancellation of Contract to Sell due to
the latters failure to pay the monthly amortizations. RTC rendered judgment declaring the Deed of Absolute Sale invalid
fo lack of consideration. Petitioner moved for reconsideration of the Decision but the Motion was denied in an Order.

ISSUE:

whether or not respondent-spouses are entitled to the cash surrender value of the payments bnbnbon the property

HELD:

Yes, Sections 3 of the Maceda Law provide for the rights of a defaulting buyer, to wit:

....(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on the
property equivalent to fifty percent of the total payments made......."

Under the Maceda Law, the actual cancellation of a contract to sell takes place after 30 days from receipt by the buyer of
the notarized notice of cancellation. Before a contract to sell can be validly and effectively cancelled, the seller has (1) to
send a notarized notice of cancellation to the buyer and (2) to refund the cash surrender value. Until and unless the seller
complies with these twin mandatory requirements, the contract to sell between the parties remains valid and subsisting.
Thus, the buyer has the right to continue occupying the property subject of the contract to sell, and may "still reinstate
the contract by updating the account during the grace period and before the actual cancellation of the contract.

ESTELITA VILLAMAR vs BALBINO MANGAOIL,

Sale of real property is made in a public instrument, the execution thereof is equivalent to the delivery of the thing object
of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.

FACTS:

Villamar is the registered owner of a 3.6080 hectares parcel of land [hereinafter referred as the subject property]
in San Francisco, Manuel, Isabela covered by Transfer Certificate of Title (TCT) No. T-92958-A. On March 30, 1998,
she entered into an Agreement with Mangaoil for the purchase and sale of said parcel of land,under the following terms
and conditions: "ONE HUNDRED EIGHTY FIVE THOUSAND (185,000.00) PESOS of the total price was already
received on March 27, 1998 for payment of the loan secured by the certificate of title covering the land in favor of the
Rural Bank of Cauayan, San Manuel Branch, San Manuel, Isabela [Rural Bank of Cauayan], in order that the certificate
of title thereof be withdrawn and released from the said bank, and the rest shall be for the payment of the mortgag[e]s in
favor of Romeo Lacaden and Florante Parangan;....." The parties executed a Deed of Absolute Sale whereby Villamar
(then Estelita Bernabe) transferred the subject parcel of land to Mangaoil. Respondent filed before the RTC a complaint
for rescission of contract against the petitioner and alleges that although the defendant had already long redeemed the
said land from the said bank and withdrawn TCT No. T-92958-A, she has failed and refused, despite repeated demands,
to hand over the said title to the plaintiff and still refuses and fails to do so; and the plaintiff could not physically,
actually and materially posses[s] and cultivate the said land because the private mortgage[e]s and/or present possessors
refuse to vacate the same. RTC ordered the rescission of the agreement and the deed of absolute sale executed between
the respondent and the petitioner. CA rendered the now assailed decision dismissing the petitioners appeal

ISSUE:

whether or not the failure of the petitioner to deliver to the respondent both the physical possession of the subject
property and the certificate of title constitutes a valid cause to rescind the agreement

HELD:

The court ruled in affirmative with RTC and the CA which both found that the petitioner failed to comply with her
obligations to deliver to the respondent both the possession of the subject property and the certificate of title covering the
same.The petitioner's claim that her execution of an absolute deed of sale was already sufficient as it already amounted
to a constructive delivery of the thing sold which Article 1498 of the NCC allows, cannot stand. Article 1191 of the NCC
is clear that 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 respondent cannot be deprived of his right to demand for rescission in view of the
petitioners failure to abide with item nos. 2 and 3 of the agreement. This remains true notwithstanding the absence of
express stipulations in the agreement indicating the consequences of breaches which the parties may commit.

THE ROMAN CATHOLIC CHURCH, represented by the Archbishop of Caceres, Petitioner,vs.REGINO

PANTE, Respondent.
G.R. No. 174118
Principle of validating a contract because of a vitiated consent

FACTS:

Church contracted with respondent Regino Pante for the sale of the lot (thru a Contract to Sell and to Buy) on
the belief that the latter was an actual occupant of the lot. The contract between them fixed the purchase price at
₱11,200.00, with the initial ₱1,120.00 payable as down payment, and the remaining balance payable in three years or
until September 25, 1995 and sold in favor of the spouses Nestor and Fidela Rubi (spouses Rubi) a 215-square meter lot
that included the lot previously sold to Pante.The spouses Rubi asserted their ownership by erecting a concrete fence
over the lot sold to Pante, effectively blocking Pante and his family’s access from their family home to the municipal
road. As no settlement could be reached between the parties, Pante instituted with the RTC an action to annul the sale
between the Church and the spouses Rubi, insofar as it included the lot previously sold to him. The Church alleged that
its consent to the contract was obtained by fraud when Pante, in bad faith, misrepresented that he had been an actual
occupant of the lot sold to him, when in truth, he was merely using the 32-square meter lot as a passageway from his
house to the town proper. It contended that it was its policy to sell its lots only to actual occupants.RTC ruled in favor of
the Church, finding that the Church’s consent to the sale was secured through Pante’s misrepresentation that he was an
occupant of the 32-square meter lot. Pante appealed the RTC’s decision with the CA. In a decision dated May 18,
2006,11 the CA granted Pante’s appeal and reversed the RTC’s ruling. The Church filed the present petition for review
on certiorari under Rule 45 of the Rules of Court to contest the CA’s ruling.

Issue:

Whether or not there was misrepresentation existed vitiating the seller’s consent and invalidating the contract

HELD:

No, there was no misrepresentation existed vitiating theseller’s consent and invalidating the contract. The Court finds it
unlikely that Pante could successfully misrepresent himself as the actual occupant of the lot; this was a fact that the
Church (which has a parish chapel in the same barangay where the lot was located) could easily verify had it conducted
an ocular inspection of its own property. The surrounding circumstances actually indicate that the Church was aware that
Pante was using the lot merely as a passageway. To create a valid contract, the meeting of the minds must be free,
voluntary, willful and with a reasonable understanding of the various obligations the parties assumed for themselves.

However, not every mistake renders a contract voidable. The Civil Code clarifies the nature of mistake that vitiates
consent:

Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the
object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract.

In the absence of any vitiation of consent, the contract between the Church and Pante stands valid and existing. Any
delay by Pante in paying the full price could not nullify the contract, since (as correctly observed by the CA) it was a
contract of sale.
G.R. No. 174118               April 11, 2012

THE ROMAN CATHOLIC CHURCH, represented by the Archbishop of Caceres, Petitioner, 

vs.
REGINO PANTE, Respondent.

DECISION

BRION, J.:

Through a petition for review on certiorari,1 the petitioner Roman Catholic Church (Church) seeks to set aside the
May 18, 2006 decision2 and the August 11, 2006 resolution3 of the Court of Appeals (CA) in CA-G.R.-CV No.
65069. The CA reversed the July 30, 1999 decision4 of the Regional Trial Court (RTC) of Naga City, Branch 24, in
Civil Case No. 94-3286.

THE FACTUAL ANTECEDENTS

The Church, represented by the Archbishop of Caceres, owned a 32-square meter lot that measured 2x16 meters
located in Barangay Dinaga, Canaman, Camarines Sur.5 On September 25, 1992, the Church contracted with
respondent Regino Pante for the sale of the lot (thru a Contract to Sell and to Buy6 ) on the belief that the latter was
an actual occupant of the lot. The contract between them fixed the purchase price at ₱11,200.00, with the initial
₱1,120.00 payable as down payment, and the remaining balance payable in three years or until September 25, 1995.

On June 28, 1994, the Church sold in favor of the spouses Nestor and Fidela Rubi (spouses Rubi) a 215-square
meter lot that included the lot previously sold to Pante. The spouses Rubi asserted their ownership by erecting a
concrete fence over the lot sold to Pante, effectively blocking Pante and his family’s access from their family home
to the municipal road. As no settlement could be reached between the parties, Pante instituted with the RTC an
action to annul the sale between the Church and the spouses Rubi, insofar as it included the lot previously sold to
him.7

The Church filed its answer with a counterclaim, seeking the annulment of its contract with Pante. The Church
alleged that its consent to the contract was obtained by fraud when Pante, in bad faith, misrepresented that he had
been an actual occupant of the lot sold to him, when in truth, he was merely using the 32-square meter lot as a
passageway from his house to the town proper. It contended that it was its policy to sell its lots only to actual
occupants. Since the spouses Rubi and their predecessors-in-interest have long been occupying the 215-square meter
lot that included the 32-square meter lot sold to Pante, the Church claimed that the spouses Rubi were the rightful
buyers.

During pre-trial, the following admissions and stipulations of facts were made:

1. The lot claimed by Pante is a strip of land measuring only 2x16 meters;

2. The lot had been sold by the Church to Pante on September 25, 1992;

3. The lot was included in the sale to the spouses Rubi by the Church; and

4. Pante expressly manifested and represented to the Church that he had been actually occupying the lot he
offered to buy.8

In a decision dated July 30, 1999,9 the RTC ruled in favor of the Church, finding that the Church’s consent to the
sale was secured through Pante’s misrepresentation that he was an occupant of the 32-square meter lot. Contrary to
his claim, Pante was only using the lot as a passageway; the Church’s policy, however, was to sell its lots only to
those who actually occupy and reside thereon. As the Church’s consent was secured through its mistaken belief that
Pante was a qualified "occupant," the RTC annulled the contract between the Church and Pante, pursuant to Article
1390 of the Civil Code.10

The RTC further noted that full payment of the purchase price was made only on September 23, 1995, when Pante
consigned the balance of ₱10,905.00 with the RTC, after the Church refused to accept the tendered amount. It
considered the three-year delay in completing the payment fatal to Pante’s claim over the subject lot; it ruled that if
Pante had been prompt in paying the price, then the Church would have been estopped from selling the lot to the
spouses Rubi. In light of Pante’s delay and his admission that the subject lot had been actually occupied by the
spouses Rubi’s predecessors, the RTC upheld the sale in favor of the spouses Rubi.

Pante appealed the RTC’s decision with the CA. In a decision dated May 18, 2006,11 the CA granted Pante’s appeal
and reversed the RTC’s ruling. The CA characterized the contract between Pante and the Church as a contract of
sale, since the Church made no express reservation of ownership until full payment of the price is made. In fact, the
contract gave the Church the right to repurchase in case Pante fails to pay the installments within the grace period
provided; the CA ruled that the right to repurchase is unnecessary if ownership has not already been transferred to
the buyer.

Even assuming that the contract had been a contract to sell, the CA declared that Pante fulfilled the condition
precedent when he consigned the balance within the three-year period allowed under the parties’ agreement; upon
full payment, Pante fully complied with the terms of his contract with the Church.

After recognizing the validity of the sale to Pante and noting the subsequent sale to the spouses Rubi, the CA
proceeded to apply the rules on double sales in Article 1544 of the Civil Code:

Article 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should be movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first
recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the
possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith.
[Emphasis ours.]

Since neither of the two sales was registered, the CA upheld the full effectiveness of the sale in favor of Pante who
first possessed the lot by using it as a passageway since 1963.

The Church filed the present petition for review on certiorari under Rule 45 of the Rules of Court to contest the
CA’s ruling.

THE PETITION

The Church contends that the sale of the lot to Pante is voidable under Article 1390 of the Civil Code, which states:

Article 1390. The following contracts are voidable or annullable, even though there may have been no damage to the
contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification.
[Emphasis ours.]

It points out that, during trial, Pante already admitted knowing that the spouses Rubi have been residing on the lot.
Despite this knowledge, Pante misrepresented himself as an occupant because he knew of the Church’s policy to sell
lands only to occupants or residents thereof. It thus claims that Pante’s misrepresentation effectively vitiated its
consent to the sale; hence, the contract should be nullified.

For the Church, the presence of fraud and misrepresentation that would suffice to annul the sale is the primary issue
that the tribunals below should have resolved. Instead, the CA opted to characterize the contract between the Church
and Pante, considered it as a contract of sale, and, after such characterization, proceeded to resolve the case in
Pante’s favor. The Church objects to this approach, on the principal argument that there could not have been a
contract at all considering that its consent had been vitiated.

THE COURT’S RULING

The Court resolves to deny the petition.

No misrepresentation existed vitiating the

seller’s consent and invalidating the contract

Consent is an essential requisite of contracts12 as it pertains to the meeting of the offer and the acceptance upon the
thing and the cause which constitute the contract.13 To create a valid contract, the meeting of the minds must be free,
voluntary, willful and with a reasonable understanding of the various obligations the parties assumed for
themselves.14 Where consent, however, is given through mistake, violence, intimidation, undue influence, or fraud,
the contract is deemed voidable.15 However, not every mistake renders a contract voidable. The Civil Code clarifies
the nature of mistake that vitiates consent:

Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the
object of the contract, or to those conditions which have principally moved one or both parties to enter into the
contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction. [Emphasis ours.]

For mistake as to the qualification of one of the parties to vitiate consent, two requisites must concur:

1. the mistake must be either with regard to the identity or with regard to the qualification of one of the
contracting parties; and

2. the identity or qualification must have been the principal consideration for the celebration of the
contract.16

In the present case, the Church contends that its consent to sell the lot was given on the mistaken impression arising
from Pante’s fraudulent misrepresentation that he had been the actual occupant of the lot. Willful misrepresentation
existed because of its policy to sell its lands only to their actual occupants or residents. Thus, it considers the buyer’s
actual occupancy or residence over the subject lot a qualification necessary to induce it to sell the lot.

Whether the facts, established during trial, support this contention shall determine if the contract between the
Church and Pante should be annulled. In the process of weighing the evidentiary value of these established facts, the
courts should consider both the parties’ objectives and the subjective aspects of the transaction, specifically, the
parties’ circumstances – their condition, relationship, and other attributes – and their conduct at the time of and
subsequent to the contract. These considerations will show what influence the alleged error exerted on the parties
and their intelligent, free, and voluntary consent to the contract.17

Contrary to the Church’s contention, the actual occupancy or residency of a buyer over the land does not appear to
be a necessary qualification that the Church requires before it could sell its land. Had this been indeed its policy,
then neither Pante nor the spouses Rubi would qualify as buyers of the 32-square meter lot, as none of them actually
occupied or resided on the lot. We note in this regard that the lot was only a 2x16-meter strip of rural land used as a
passageway from Pante’s house to the municipal road.

We find well-taken Pante’s argument that, given the size of the lot, it could serve no other purpose than as a mere
passageway; it is unthinkable to consider that a 2x16-meter strip of land could be mistaken as anyone’s residence. In
fact, the spouses Rubi were in possession of the adjacent lot, but they never asserted possession over the 2x16-meter
lot when the 1994 sale was made in their favor; it was only then that they constructed the concrete fence blocking
the passageway.

We find it unlikely that Pante could successfully misrepresent himself as the actual occupant of the lot; this was a
fact that the Church (which has a parish chapel in the same barangay where the lot was located) could easily verify
had it conducted an ocular inspection of its own property. The surrounding circumstances actually indicate that the
Church was aware that Pante was using the lot merely as a passageway.

The above view is supported by the sketch plan,18 attached to the contract executed by the Church and Pante, which
clearly labeled the 2x16-meter lot as a "RIGHT OF WAY"; below these words was written the name of "Mr. Regino
Pante." Asked during cross-examination where the sketch plan came from, Pante answered that it was from the
Archbishop’s Palace; neither the Church nor the spouses Rubi contradicted this statement.19

The records further reveal that the sales of the Church’s lots were made after a series of conferences with the
occupants of the lots.20 The then parish priest of Canaman, Fr. Marcaida, was apparently aware that Pante was not an
actual occupant, but nonetheless, he allowed the sale of the lot to Pante, subject to the approval of the Archdiocese’s
Oeconomous. Relying on Fr. Marcaida’s recommendation and finding nothing objectionable, Fr. Ragay (the
Archdiocese’s Oeconomous) approved the sale to Pante.

The above facts, in our view, establish that there could not have been a deliberate, willful, or fraudulent act
committed by Pante that misled the Church into giving its consent to the sale of the subject lot in his favor. That
Pante was not an actual occupant of the lot he purchased was a fact that the Church either ignored or waived as a
requirement. In any case, the Church was by no means led to believe or do so by Pante’s act; there had been no
vitiation of the Church’s consent to the sale of the lot to Pante.

From another perspective, any finding of bad faith, if one is to be made, should be imputed to the Church. Without
securing a court ruling on the validity of its contract with Pante, the Church sold the subject property to the spouses
Rubi. Article 1390 of the Civil Code declares that voidable contracts are binding, unless annulled by a proper court
action. From the time the sale to Pante was made and up until it sold the subject property to the spouses Rubi, the
Church made no move to reject the contract with Pante; it did not even return the down payment he paid. The
Church’s bad faith in selling the lot to Rubi without annulling its contract with Pante negates its claim for damages.

In the absence of any vitiation of consent, the contract between the Church and Pante stands valid and existing. Any
delay by Pante in paying the full price could not nullify the contract, since (as correctly observed by the CA) it was a
contract of sale. By its terms, the contract did not provide a stipulation that the Church retained ownership until full
payment of the price.21 The right to repurchase given to the Church in case Pante fails to pay within the grace period
provided22 would have been unnecessary had ownership not already passed to Pante.

The rule on double sales

The sale of the lot to Pante and later to the spouses Rubi resulted in a double sale that called for the application of
the rules in Article 1544 of the Civil Code:

Article 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should be movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first
recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the
possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith.
[Emphasis ours.]

As neither Pante nor the spouses Rubi registered the sale in their favor, the question now is who, between the two,
was first in possession of the property in good faith.1âwphi1

Jurisprudence has interpreted possession in Article 1544 of the Civil Code to mean both actual physical delivery and
constructive delivery.23 Under either mode of delivery, the facts show that Pante was the first to acquire possession
of the lot.

Actual delivery of a thing sold occurs when it is placed under the control and possession of the vendee. 24 Pante
claimed that he had been using the lot as a passageway, with the Church’s permission, since 1963.1âwphi1 After
purchasing the lot in 1992, he continued using it as a passageway until he was prevented by the spouses Rubi’s
concrete fence over the lot in 1994. Pante’s use of the lot as a passageway after the 1992 sale in his favor was a clear
assertion of his right of ownership that preceded the spouses Rubi’s claim of ownership.

Pante also stated that he had placed electric connections and water pipes on the lot, even before he purchased it in
1992, and the existence of these connections and pipes was known to the spouses Rubi.25 Thus, any assertion of
possession over the lot by the spouses Rubi (e.g., the construction of a concrete fence) would be considered as made
in bad faith because works had already existed on the lot indicating possession by another. "[A] buyer of real
property in the possession of persons other than the seller must be wary and should investigate the rights of those in
possession. Without such inquiry, the buyer can hardly be regarded as a buyer in good faith and cannot have any
right over the property."26

Delivery of a thing sold may also be made constructively. Article 1498 of the Civil Code states that:

Article 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the
delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot
clearly be inferred.

Under this provision, the sale in favor of Pante would have to be upheld since the contract executed between the
Church and Pante was duly notarized, converting the deed into a public instrument.27 In Navera v. Court of
Appeals,28 the Court ruled that:

[A]fter the sale of a realty by means of a public instrument, the vendor, who resells it to another, does not transmit
anything to the second vendee, and if the latter, by virtue of this second sale, takes material possession of the thing,
he does it as mere detainer, and it would be unjust to protect this detention against the rights of the thing lawfully
acquired by the first vendee.

Thus, under either mode of delivery, Pante acquired prior possession of the lot.
WHEREFORE, we DENY the petition for review on certiorari, and AFFIRM the decision of the Court of Appeals
dated May 18, 2006, and its resolution dated August 11, 2006, issued in CA-G.R.-CV No. 65069. Costs against the
Roman Catholic Church.

SO ORDERED.

G.R. No. 188661               April 11, 2012

ESTELITA VILLAMAR, Petitioner, 
vs.
BALBINO MANGAOIL, Respondent.

DECISION

REYES, J.:

The Case

Before us is a petition for review on certiorari1 under Rule 45 of the Rules of Court filed by Estelita Villamar
(Villamar) to assail the Decision2 rendered by the Court of Appeals (CA) on February 20, 2009 in CA-G.R. CV No.
86286, the dispositive portion of which reads:

WHEREFORE, the instant appeal is DISMISSED. The assailed decision is AFFIRMED in toto.

SO ORDERED.3

The resolution4 issued by the CA on July 8, 2009 denied the petitioner's motion for reconsideration to the foregoing.

The ruling5 of Branch 23, Regional Trial Court (RTC) of Roxas, Isabela, which was affirmed by the CA in the herein
assailed decision and resolution, ordered the (1) rescission of the contract of sale of real property entered into by
Villamar and Balbino Mangaoil (Mangaoil); and (2) return of the down payment made relative to the said contract.

Antecedents Facts

The CA aptly summarized as follows the facts of the case prior to the filing by Mangaoil of the complaint 6 for
rescission of contract before the RTC:

Villamar is the registered owner of a 3.6080 hectares parcel of land [hereinafter referred as the subject property] in
San Francisco, Manuel, Isabela covered by Transfer Certificate of Title (TCT) No. T-92958-A. On March 30, 1998,
she entered into an Agreement with Mangaoil for the purchase and sale of said parcel of land, under the following
terms and conditions:

"1. The price of the land is ONE HUNDRED AND EIGHTY THOUSAND (180,000.00) PESOS per
hectare but only the 3.5000 hec. shall be paid and the rest shall be given free, so that the total purchase or
selling price shall be [₱]630,000.00 only;

2. ONE HUNDRED EIGHTY FIVE THOUSAND (185,000.00) PESOS of the total price was already
received on March 27, 1998 for payment of the loan secured by the certificate of title covering the land
in favor of the Rural Bank of Cauayan, San Manuel Branch, San Manuel, Isabela [Rural Bank of
Cauayan], in order that the certificate of title thereof be withdrawn and released from the said bank, and the
rest shall be for the payment of the mortgag[e]s in favor of Romeo Lacaden and Florante Parangan;
3. After the release of the certificate of title covering the land subject-matter of this agreement, the
necessary deed of absolute sale in favor of the PARTY OF THE SECOND PART shall be executed and the
transfer be immediately effected so that the latter can apply for a loan from any lending institution using the
corresponding certificate of title as collateral therefor, and the proceeds of the loan, whatever be the
amount, be given to the PARTY OF THE FIRST PART;

4. Whatever balance left from the agreed purchase price of the land subject matter hereof after deducting
the proceed of the loan and the [₱]185,000.00 already received as above-mentioned, the PARTY OF THE
SECOND PART shall pay unto the PARTY OF THE FIRST PART not later than June 30, 1998 and
thereafter the parties shall be released of any obligations for and against each other; xxx"

On April 1, 1998, the parties executed a Deed of Absolute Sale whereby Villamar (then Estelita Bernabe)
transferred the subject parcel of land to Mangaoil for and in consideration of [₱]150,000.00.

In a letter dated September 18, 1998, Mangaoil informed Villamar that he was backing out from the sale
agreed upon giving as one of the reasons therefor:

"3. That the area is not yet fully cleared by incumbrances as there are tenants who are not willing to vacate
the land without giving them back the amount that they mortgaged the land."

Mangaoil demanded refund of his [₱]185,000.00 down payment. Reiterating said demand in another letter
dated April 29, 1999, the same, however, was unheeded.7 x x x (Citations omitted)

On January 28, 2002, the respondent filed before the RTC a complaint8 for rescission of contract against the
petitioner. In the said complaint, the respondent sought the return of ₱185,000.00 which he paid to the
petitioner, payment of interests thereon to be computed from March 27, 1998 until the suit's termination,
and the award of damages, costs and ₱20,000.00 attorney's fees. The respondent's factual allegations were
as follows:

5. That as could be gleaned the "Agreement" (Annex "A"), the plaintiff [Mangaoil] handed to the defendant
[Villamar] the sum of [₱]185,000.00 to be applied as follows; [₱]80,000 was for the redemption of the land
which was mortgaged to the Rural Bank of Cauayan, San Manuel Branch, San Manuel, Isabela, to enable
the plaintiff to get hold of the title and register the sale x x x and [₱]105,000.00 was for the redemption of
the said land from private mortgages to enable plaintiff to posses[s] and cultivate the same;

6. That although the defendant had already long redeemed the said land from the said bank and withdrawn
TCT No. T-92958-A, she has failed and refused, despite repeated demands, to hand over the said title to the
plaintiff and still refuses and fails to do so;

7. That, also, the plaintiff could not physically, actually and materially posses[s] and cultivate the said land
because the private mortgage[e]s and/or present possessors refuse to vacate the same;

xxxx

11. That on September 18, 1998, the plaintiff sent a letter to the defendant demanding a return of the
amount so advanced by him, but the latter ignored the same, x x x;

12. That, again, on April 29, 1999, the plaintiff sent to the defendant another demand letter but the latter
likewise ignored the same, x x x;

13. That, finally, the plaintiff notified the defendant by a notarial act of his desire and intention to rescind
the said contract of sale, xxx;
 x x x x.9 (Citations omitted)

In the respondent’s answer to the complaint, she averred that she had complied with her obligations to the
respondent. Specifically, she claimed having caused the release of TCT No. T-92958-A by the Rural Bank of
Cauayan and its delivery to a certain "Atty. Pedro C. Antonio" (Atty. Antonio). The petitioner alleged that Atty.
Antonio was commissioned to facilitate the transfer of the said title in the respondent's name. The petitioner likewise
insisted that it was the respondent who unceremoniously withdrew from their agreement for reasons only the latter
knew.

The Ruling of the RTC

On September 9, 2005, the RTC ordered the rescission of the agreement and the deed of absolute sale executed
between the respondent and the petitioner. The petitioner was, thus directed to return to the respondent the sum of
₱185,000.00 which the latter tendered as initial payment for the purchase of the subject property. The RTC
ratiocinated that:

There is no dispute that the defendant sold the LAND to the plaintiff for [₱]630,000.00 with down payment of
[₱]185,000.00. There is no evidence presented if there were any other partial payments made after the perfection of
the contract of sale.

Article 1458 of the Civil Code provides:

"Art. 1458. By the contract of sale[,] one of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay therefore a price certain in money or its
equivalent."

As such, in a contract of sale, the obligation of the vendee to pay the price is correlative of the obligation of the
vendor to deliver the thing sold. It created or established at the same time, out of the same course, and which result
in mutual relations of creditor and debtor between the parties.

The claim of the plaintiff that the LAND has not been delivered to him was not refuted by the defendant.
Considering that defendant failed to deliver to him the certificate of title and of the possession over the LAND to the
plaintiff, the contract must be rescinded pursuant to Article 1191 of the Civil Code which, in part, provides:

"Art. 1191. The power of rescind obligations is implied in reciprocal ones in case one of the obligors should
not comply with what is incumbent upon him."10

The petitioner filed before the CA an appeal to challenge the foregoing. She ascribed error on the part of the RTC
when the latter ruled that the agreement and deed of sale executed by and between the parties can be rescinded as
she failed to deliver to the respondent both the subject property and the certificate of title covering the same.

The Ruling of the CA

On February 20, 2009, the CA rendered the now assailed decision dismissing the petitioner’s appeal based on the
following grounds:

Burden of proof is the duty of a party to prove the truth of his claim or defense, or any fact in issue necessary to
establish his claim or defense by the amount of evidence required by law. In civil cases, the burden of proof is on
the defendant if he alleges, in his answer, an affirmative defense, which is not a denial of an essential ingredient
in the plaintiff's cause of action, but is one which, if established, will be a good defense – i.e., an "avoidance" of the
claim, which prima facie, the plaintiff already has because of the defendant's own admissions in the pleadings.
Defendant-appellant Villamar's defense in this case was an affirmative defense. She did not deny plaintiff-
appellee’s allegation that she had an agreement with plaintiff-appellee for the sale of the subject parcel of land.
Neither did she deny that she was obliged under the contract to deliver the certificate of title to plaintiff-appellee
immediately after said title/property was redeemed from the bank. What she rather claims is that she already
complied with her obligation to deliver the title to plaintiff-appellee when she delivered the same to Atty.
Antonio as it was plaintiff-appellee himself who engaged the services of said lawyer to precisely work for the
immediate transfer of said title in his name. Since, however, this affirmative defense as alleged in defendant-
appellant's answer was not admitted by plaintiff-appellee, it then follows that it behooved the defendant-appellant
to prove her averments by preponderance of evidence.

Yet, a careful perusal of the record shows that the defendant-appellant failed to sufficiently prove said affirmative
defense. She failed to prove that in the first place, "Atty. Antonio" existed to receive the title for and in behalf
of plaintiff-appellee. Worse, the defendant-appellant failed to prove that Atty. Antonio received said title
"as allegedly agreed upon."

We likewise sustain the RTC's finding that defendant-appellant V[i]llamar failed to deliver possession of the
subject property to plaintiff-appellee Mangaoil. As correctly observed by the RTC - "[t]he claim of the plaintiff that
the land has not been delivered to him was not refuted by the defendant." Not only that. On cross-examination, the
defendant-appellant gave Us insight on why no such delivery could be made, viz.:

"x x x x

Q: So, you were not able to deliver this property to Mr. Mangaoil just after you redeem the property because
of the presence of these two (2) persons, is it not?

xxx

A: Yes, sir.

Q: Forcing you to file the case against them and which according to you, you have won, is it not?

A: Yes, sir.

Q: And now at present[,] you are in actual possession of the land?

A: Yes, sir. x x x"

With the foregoing judicial admission, the RTC could not have erred in finding that defendant-[appellant] failed to
deliver the possession of the property sold, to plaintiff-appellee.

Neither can We agree with defendant-appellant in her argument that the execution of the Deed of Absolute Sale by
the parties is already equivalent to a valid and constructive delivery of the property to plaintiff-appellee. Not only is
it doctrinally settled that in a contract of sale, the vendor is bound to transfer the ownership of, and to deliver
the thing that is the object of the sale, the way Article 1547 of the Civil Code is worded, viz.:

"Art. 1547. In a contract of sale, unless a contrary intention appears, there is:

(1) An implied warranty on the part of the seller that he has a right to sell the thing at the time when the
ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful
possession of the thing;
 (2) An implied warranty that the thing shall be free from any hidden defaults or defects, or any change or
encumbrance not declared or known to the buyer.

x x x."

shows that actual, and not mere constructive delivery is warrantied by the seller to the buyer. "(P)eaceful possession
of the thing" sold can hardly be enjoyed in a mere constructive delivery.

The obligation of defendant-appellant Villamar to transfer ownership and deliver possession of the subject parcel of
land was her correlative obligation to plaintiff-appellee in exchange for the latter's purchase price thereof. Thus, if
she fails to comply with what is incumbent upon her, a correlative right to rescind such contract from plaintiff-
appellee arises, pursuant to Article 1191 of the Civil Code.11 x x x (Citations omitted)

The Issues

Aggrieved, the petitioner filed before us the instant petition and submits the following issues for resolution:

I.

WHETHER THE FAILURE OF PETITIONER-SELLER TO DELIVER THE CERTIFICATE OF TITLE OVER

THE PROPERTY TO RESPONDENT-BUYER IS A BREACH OF OBLIGATION IN A CONTRACT OF SALE
OF REAL PROPERTY THAT WOULD WARRANT RESCISSION OF THE CONTRACT;

II.

WHETHER PETITIONER IS LIABLE FOR BREACH OF OBLIGATION IN A CONTRACT OF SALE FOR

FAILURE OF RESPONDENT[-]BUYER TO IMMEDIATELY TAKE ACTUAL POSSESSION OF THE
PROPERTY NOTWITHSTANDING THE ABSENCE OF ANY STIPULATION IN THE CONTRACT
PROVIDING FOR THE SAME;

III.

WHETHER THE EXECUTION OF A DEED OF SALE OF REAL PROPERTY IN THE PRESENT CASE IS
ALREADY EQUIVALENT TO A VALID AND CONSTRUCTIVE DELIVERY OF THE PROPERTY TO THE
BUYER;

IV.

WHETHER OR NOT THE CONTRACT OF SALE SUBJECT MATTER OF THIS CASE SHOULD BE
RESCINDED ON SLIGHT OR CASUAL BREACH;

V.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE RTC
ORDERING THE RESCISSION OF THE CONTRACT OF SALE[.]12

The Petitioner's Arguments

The petitioner avers that the CA, in ordering the rescission of the agreement and deed of sale, which she entered into
with the respondent, on the basis of her alleged failure to deliver the certificate of title, effectively imposed upon her
an extra duty which was neither stipulated in the contract nor required by law. She argues that under Articles
149513 and 149614 of the New Civil Code (NCC), the obligation to deliver the thing sold is complied with by a seller
who executes in favor of a buyer an instrument of sale in a public document. Citing Chua v. Court of Appeals,15 she
claims that there is a distinction between transferring a certificate of title in the buyer's name, on one hand, and
transferring ownership over the property sold, on the other. The latter can be accomplished by the seller's execution
of an instrument of sale in a public document. The recording of the sale with the Registry of Deeds and the transfer
of the certificate of title in the buyer's name are necessary only to bind third parties to the transfer of ownership. 16

The petitioner contends that in her case, she had already complied with her obligations under the agreement and the
law when she had caused the release of TCT No. T-92958-A from the Rural Bank of Cauayan, paid individual
mortgagees Romeo Lacaden (Lacaden) and Florante Parangan (Paranga), and executed an absolute deed of sale in
the respondent's favor. She adds that before T-92958-A can be cancelled and a new one be issued in the respondent's
favor, the latter decided to withdraw from their agreement. She also points out that in the letters seeking for an
outright rescission of their agreement sent to her by the respondent, not once did he demand for the delivery of TCT.

The petitioner insists that the respondent's change of heart was due to (1) the latter's realization of the difficulty in
determining the subject property's perimeter boundary; (2) his doubt that the property he purchased would yield
harvests in the amount he expected; and (3) the presence of mortgagees who were not willing to give up possession
without first being paid the amounts due to them. The petitioner contends that the actual reasons for the respondent's
intent to rescind their agreement did not at all constitute a substantial breach of her obligations.

The petitioner stresses that under Article 1498 of the NCC, when a sale is made through a public instrument, its
execution is equivalent to the delivery of the thing which is the contract's object, unless in the deed, the contrary
appears or can be inferred. Further, in Power Commercial and Industrial Corporation v. CA,17 it was ruled that the
failure of a seller to eject lessees from the property he sold and to deliver actual and physical possession, cannot be
considered a substantial breach, when such failure was not stipulated as a resolutory or suspensive condition in the
contract and when the effects and consequences of the said failure were not specified as well. The execution of a
deed of sale operates as a formal or symbolic delivery of the property sold and it already authorizes the buyer to use
the instrument as proof of ownership.18

The petitioner argues that in the case at bar, the agreement and the absolute deed of sale contains no stipulation that
she was obliged to actually and physically deliver the subject property to the respondent. The respondent fully knew
Lacaden's and Parangan's possession of the subject property. When they agreed on the sale of the property, the
respondent consciously assumed the risk of not being able to take immediate physical possession on account of
Lacaden's and Parangan's presence therein.

The petitioner likewise laments that the CA allegedly misappreciated the evidence offered before it when it declared
that she failed to prove the existence of Atty. Antonio. For the record, she emphasizes that the said lawyer prepared
and notarized the agreement and deed of absolute sale which were executed between the parties. He was also the
petitioner’s counsel in the proceedings before the RTC. Atty. Antonio was also the one asked by the respondent to
cease the transfer of the title over the subject property in the latter's name and to return the money he paid in
advance.

The Respondent's Contentions

In the respondent's comment,19 he seeks the dismissal of the instant petition. He invokes Articles 1191 and 1458 to
argue that when a seller fails to transfer the ownership and possession of a property sold, the buyer is entitled to
rescind the contract of sale. Further, he contends that the execution of a deed of absolute sale does not necessarily
amount to a valid and constructive delivery. In Masallo v. Cesar,20 it was ruled that a person who does not have
actual possession of real property cannot transfer constructive possession by the execution and delivery of a public
document by which the title to the land is transferred. In Addison v. Felix and Tioco,21 the Court was emphatic that
symbolic delivery by the execution of a public instrument is equivalent to actual delivery only when the thing sold is
subject to the control of the vendor.

Our Ruling
The instant petition is bereft of merit.

There is only a single issue for resolution in the instant petition, to wit, whether or not the failure of the petitioner to
deliver to the respondent both the physical possession of the subject property and the certificate of title covering the
same amount to a substantial breach of the former's obligations to the latter constituting a valid cause to rescind the
agreement and deed of sale entered into by the parties.

We rule in the affirmative.

The RTC and the CA both found that the petitioner failed to comply with her obligations to deliver to the respondent
both the possession of the subject property and the certificate of title covering the same.

Although Articles 1458, 1495 and 1498 of the NCC and case law do not generally require the seller to deliver
to the buyer the physical possession of the property subject of a contract of sale and the certificate of title
covering the same, the agreement entered into by the petitioner and the respondent provides otherwise.
However, the terms of the agreement cannot be considered as violative of law, morals, good customs, public
order, or public policy, hence, valid.

Article 1458 of the NCC obliges the seller to transfer the ownership of and to deliver a determinate thing to the
buyer, who shall in turn pay therefor a price certain in money or its equivalent. In addition thereto, Article 1495 of
the NCC binds the seller to warrant the thing which is the object of the sale. On the other hand, Article 1498 of the
same code provides that when the sale is made through a public instrument, the execution thereof shall be equivalent
to the delivery of the thing which is the object of the contract, if from the deed, the contrary does not appear or
cannot clearly be inferred.

In the case of Chua v. Court of Appeals,22 which was cited by the petitioner, it was ruled that "when the deed of
absolute sale is signed by the parties and notarized, then delivery of the real property is deemed made by the seller to
the buyer."23 The transfer of the certificate of title in the name of the buyer is not necessary to confer ownership upon
him.

In the case now under our consideration, item nos. 2 and 3 of the agreement entered into by the petitioner and the
respondent explicitly provide:

2. ONE HUNDRED EIGHTY FIVE THOUSAND (₱185,000.00) PESOS of the total price was already
received on March 27, 1998 for payment of the loan secured by the certificate of title covering the land in
favor of the Rural Bank of Cauayan, San Manuel Branch, San Manuel, Isabela, in order that the certificate
of title thereof be withdrawn and released from the said bank, and the rest shall be for the payment of the
mortgages in favor of Romeo Lacaden and Florante Parangan;

3. After the release of the certificate of title covering the land subject-matter of this agreement, the
necessary deed of absolute sale in favor of the PARTY OF THE SECOND PART shall be executed and the
transfer be immediately effected so that the latter can apply for a loan from any lending institution using the
corresponding certificate of title as collateral therefor, and the proceeds of the loan, whatever be the
amount, be given to the PARTY OF THE FIRST PART;24 (underlining supplied)

As can be gleaned from the agreement of the contending parties, the respondent initially paid the petitioner
₱185,000.00 for the latter to pay the loan obtained from the Rural Bank of Cauayan and to cause the release from the
said bank of the certificate of title covering the subject property. The rest of the amount shall be used to pay the
mortgages over the subject property which was executed in favor of Lacaden and Parangan. After the release of the
TCT, a deed of sale shall be executed and transfer shall be immediately effected so that the title covering the subject
property can be used as a collateral for a loan the respondent will apply for, the proceeds of which shall be given to
the petitioner.
Under Article 1306 of the NCC, the contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order
or public policy.

While Articles 1458 and 1495 of the NCC and the doctrine enunciated in the case of Chua do not impose upon the
petitioner the obligation to physically deliver to the respondent the certificate of title covering the subject property or
cause the transfer in the latter's name of the said title, a stipulation requiring otherwise is not prohibited by law and
cannot be regarded as violative of morals, good customs, public order or public policy. Item no. 3 of the agreement
executed by the parties expressly states that "transfer [shall] be immediately effected so that the latter can apply for a
loan from any lending institution using the corresponding certificate of title as collateral therefore." Item no. 3 is
literal enough to mean that there should be physical delivery of the TCT for how else can the respondent use it as a
collateral to obtain a loan if the title remains in the petitioner’s possession. We agree with the RTC and the CA that
the petitioner failed to prove that she delivered the TCT covering the subject property to the respondent. What the
petitioner attempted to establish was that she gave the TCT to Atty. Antonio whom she alleged was commissioned
to effect the transfer of the title in the respondent's name. Although Atty. Antonio's existence is certain as he was the
petitioner’s counsel in the proceedings before the RTC, there was no proof that the former indeed received the TCT
or that he was commissioned to process the transfer of the title in the respondent's name.

It is likewise the petitioner’s contention that pursuant to Article 1498 of the NCC, she had already complied with her
obligation to deliver the subject property upon her execution of an absolute deed of sale in the respondent’s favor.
The petitioner avers that she did not undertake to eject the mortgagors Parangan and Lacaden, whose presence in the
premises of the subject property was known to the respondent.

We are not persuaded.

In the case of Power Commercial and Industrial Corporation25 cited by the petitioner, the Court ruled that the failure
of the seller to eject the squatters from the property sold cannot be made a ground for rescission if the said ejectment
was not stipulated as a condition in the contract of sale, and when in the negotiation stage, the buyer's counsel
himself undertook to eject the illegal settlers.

The circumstances surrounding the case now under our consideration are different. In item no. 2 of the agreement, it
is stated that part of the ₱185,000.00 initially paid to the petitioner shall be used to pay the mortgagors, Parangan
and Lacaden. While the provision does not expressly impose upon the petitioner the obligation to eject the said
mortgagors, the undertaking is necessarily implied. Cessation of occupancy of the subject property is logically
expected from the mortgagors upon payment by the petitioner of the amounts due to them.

We note that in the demand letter26 dated September 18, 1998, which was sent by the respondent to the petitioner, the
former lamented that "the area is not yet fully cleared of incumbrances as there are tenants who are not willing to
vacate the land without giving them back the amount that they mortgaged the land." Further, in the proceedings
before the RTC conducted after the complaint for rescission was filed, the petitioner herself testified that she won
the ejectment suit against the mortgagors "only last year". 27 The complaint was filed on September 8, 2002 or more
than four years from the execution of the parties' agreement. This means that after the lapse of a considerable period
of time from the agreement's execution, the mortgagors remained in possession of the subject property.

Notwithstanding the absence of stipulations in the agreement and absolute deed of sale entered into by
Villamar and Mangaoil expressly indicating the consequences of the former's failure to deliver the physical
possession of the subject property and the certificate of title covering the same, the latter is entitled to
demand for the rescission of their contract pursuant to Article 1191 of the NCC.

We note that the agreement entered into by the petitioner and the respondent only contains three items specifying the
parties' undertakings. In item no. 5, the parties consented "to abide with all the terms and conditions set forth in this
agreement and never violate the same."28
Article 1191 of the NCC is clear that "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 respondent cannot be deprived of his right to
demand for rescission in view of the petitioner’s failure to abide with item nos. 2 and 3 of the agreement. This
remains true notwithstanding the absence of express stipulations in the agreement indicating the consequences of
breaches which the parties may commit. To hold otherwise would render Article 1191 of the NCC as useless.

Article 1498 of the NCC generally considers the execution of a public instrument as constructive delivery by
the seller to the buyer of the property subject of a contract of sale. The case at bar, however, falls among the
exceptions to the foregoing rule since a mere presumptive and not conclusive delivery is created as the
respondent failed to take material possession of the subject property.

Further, even if we were to assume for argument's sake that the agreement entered into by the contending parties
does not require the delivery of the physical possession of the subject property from the mortgagors to the
respondent, still, the petitioner's claim that her execution of an absolute deed of sale was already sufficient as it
already amounted to a constructive delivery of the thing sold which Article 1498 of the NCC allows, cannot stand.

In Philippine Suburban Development Corporation v. The Auditor General,29 we held:

When the sale of real property is made in a public instrument, the execution thereof is equivalent to the delivery of
the thing object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.1âwphi1

In other words, there is symbolic delivery of the property subject of the sale by the execution of the public
instrument, unless from the express terms of the instrument, or by clear inference therefrom, this was not the
intention of the parties. Such would be the case, for instance, x x x where the vendor has no control over the thing
sold at the moment of the sale, and, therefore, its material delivery could not have been made.30 (Underlining
supplied and citations omitted)

Stated differently, as a general rule, the execution of a public instrument amounts to a constructive delivery of the
thing subject of a contract of sale. However, exceptions exist, among which is when mere presumptive and not
conclusive delivery is created in cases where the buyer fails to take material possession of the subject of sale. A
person who does not have actual possession of the thing sold cannot transfer constructive possession by the
execution and delivery of a public instrument.

In the case at bar, the RTC and the CA found that the petitioner failed to deliver to the respondent the possession of
the subject property due to the continued presence and occupation of Parangan and Lacaden. We find no ample
reason to reverse the said findings. Considered in the light of either the agreement entered into by the parties or the
pertinent provisions of law, the petitioner failed in her undertaking to deliver the subject property to the respondent.

IN VIEW OF THE FOREGOING, the instant petition is DENIED. The February 20, 2009 Decision and July 8,
2009 Resolution of the Court of Appeals, directing the rescission of the agreement and absolute deed of sale entered
into by Estelita Villamar and Balbino Mangaoil and the return of the down payment made for the purchase of the
subject property, are AFFIRMED. However, pursuant to our ruling in Eastern Shipping Lines, Inc. v.
CA,31 an interest of 12% per annum is imposed on the sum of ₱185,000.00 to be returned to Mangaoil to be
computed from the date of finality of this Decision until full satisfaction thereof.

SO ORDERED

G.R. No. 176791 : November 14, 2012

COMMUNITIES CAGAYAN, INC., Petitioner, v. SPOUSES ARSENIO (Deceased) and ANGELES NANOL

AND ANYBODY CLAIMING RIGHTS UNDER THEM, Respondents.

DECISION
 DEL CASTILLO, J.:

LAWS fill the gap in a contract.

This Petition for Review on Certiorari1Ï‚rνll under Rule 45 of the Rules of Court assails the December 29. 2006
Decision2Ï‚rνll and the February 12, 2007 Order3Ï‚rνll of the Regional Trial Court (RTC), Cagayan De Oro City,
Branch 18, in Civil Case No. 2005-158.

Factual Antecedents

Sometimes in 1994, respondent-spouses Arsenio and Angeles Nanol entered into a Contract to Sell4Ï‚rνll with
petitioner Communities Cagayan, Inc.,5Ï‚rνll whereby the latter agreed to sell to respondent-spouses a house and
Lots 17 and 196Ï‚rνll located at Block 16, Camella Homes Subdivision, Cagayan de Oro City, 7Ï‚rνll for the price
of P368,000.00.8ςrνllRespondent-spouses, however, did not avail of petitioners inhouse financing due to its high
interest rates.9Ï‚rνll Instead, they obtained a loan from Capitol Development Bank, a sister company of petitioner,
using the property as collateral.10Ï‚rνll To facilitate the loan, a simulated sale over the property was executed by
petitioner in favor of respondent-spouses.11Ï‚rνll Accordingly, titles were transferred in the names of respondent-
spouses under Transfer Certificates of Title (TCT) Nos. 105202 and 105203, and submitted to Capitol Development
Bank for loan processing.12Ï‚rνll Unfortunately, the bank collapsed and closed before it could release the
loan.13ςrνll

Thus, on November 30, 1997, respondent-spouses entered into another Contract to Sell14Ï‚rνll with petitioner over
the same property for the same price of P368,000.00.15Ï‚rνll This time, respondent-spouses availed of petitioners
in-house financing16thus, undertaking to pay the loan over four years, from 1997 to 2001.17ςrνll

Sometime in 2000, respondent Arsenio demolished the original house and constructed a three-story house allegedly
valued at P3.5 million, more or less.18ςrνll

In July 2001, respondent Arsenio died, leaving his wife, herein respondent Angeles, to pay for the monthly
amortizations.19ςrνll

On September 10, 2003, petitioner sent respondent-spouses a notarizedNotice of Delinquency and Cancellation of
Contract to Sell20Ï‚rνll due to the latters failure to pay the monthly amortizations.

In December 2003, petitioner filed before Branch 3 of the Municipal Trial Court in Cities of Cagayan de Oro City,
an action for unlawful detainer, docketed as C3-Dec-2160, against respondent-spouses. 21ςrνllWhen the case was
referred for mediation, respondent Angeles offered to pay P220,000.00 to settle the case but petitioner refused to
accept the payment.22Ï‚rνll The case was later withdrawn and consequently dismissed because the judge found out
that the titles were already registered under the names of respondent-spouses.23ςrνll

Unfazed by the unfortunate turn of events, petitioner, on July 27, 2005, filed before Branch 18 of the RTC, Cagayan
de Oro City, a Complaint for Cancellation of Title, Recovery of Possession, Reconveyance and
Damages,24Ï‚rνll docketed as Civil Case No. 2005-158, against respondent-spouses and all persons claiming rights
under them. Petitioner alleged that the transfer of the titles in the names of respondent-spouses was made only in
compliance with the requirements of Capitol Development Bank and that respondent-spouses failed to pay their
monthly amortizations beginning January 2000.25Ï‚rνll Thus, petitioner prayed that TCT Nos. T-105202 and T-
105203 be cancelled, and that respondent Angeles be ordered to vacate the subject property and to pay petitioner
reasonable monthly rentals from January 2000 plus damages.26ςrνll

In her Answer,27Ï‚rνll respondent Angeles averred that the Deed of Absolute Sale is valid, and that petitioner is not
the proper party to file the complaint because petitioner is different from Masterplan Properties, Inc. 28Ï‚rνll She
also prayed for damages by way of compulsory counterclaim.29ςrνll
In its Reply,30Ï‚rνll petitioner attached a copy of its Certificate of Filing of Amended Articles of
Incorporation31Ï‚rνll showing that Masterplan Properties, Inc. and petitioner are one and the same. As to the
compulsory counterclaim for damages, petitioner denied the same on the ground of "lack of knowledge sufficient to
form a belief as to the truth or falsity of such allegation."32ςrνll

Respondent Angeles then moved for summary judgment and prayed that petitioner be ordered to return the owners
duplicate copies of the TCTs.33ςrνll

Pursuant to Administrative Order No. 59-2005, the case was referred for mediation.34Ï‚rνll But since the parties
failed to arrive at an amicable settlement, the case was set for preliminary conference on February 23, 2006. 35ςrνll

On July 7, 2006, the parties agreed to submit the case for decision based on the pleadings and exhibits presented
during the preliminary conference.36ςrνll

Ruling of the Regional Trial Court

On December 29, 2006, the RTC rendered judgment declaring the Deed of Absolute Sale invalid for lack of
consideration.37Ï‚rνll Thus, it disposed of the case in this wise:chanroblesvirtuallawlibrary

WHEREFORE, the Court hereby declares the Deed of Absolute Sale VOID. Accordingly, Transfer Certificates of
Title Nos. 105202 and 105203 in the names of the [respondents], Arsenio (deceased) and Angeles Nanol, are
ordered CANCELLED. The [respondents] and any person claiming rights under them are directed to turn-over the
possession of the house and lot to [petitioner], Communities Cagayan, Inc., subject to the latters payment of their
total monthly installments and the value of the new house minus the cost of the original house.

SO ORDERED.38ςrνll

Not satisfied, petitioner moved for reconsideration of the Decision but the Motion39Ï‚rνll was denied in an
Order40Ï‚rνll dated February 12, 2007.

Issue

Instead of appealing the Decision to the Court of Appeals (CA), petitioner opted to file the instant petition directly
with this Court on a pure question of law, to wit:chanroblesvirtuallawlibrary

WHETHER X X X THE ACTION OF THE RTC BRANCH 18 X X X IN ORDERING THE RECOVERY OF

POSSESSION BY PETITIONER subject to the latters payment of their total monthly installments and the value of
the new house minus the cost of the original house IS CONTRARY TO LAW AND JURISPRUDENCE X X
X.41ςrνll

Petitioners Arguments

Petitioner seeks to delete from the dispositive portion the order requiring petitioner to reimburse respondent-spouses
the total monthly installments they had paid and the value of the new house minus the cost of the original
house.42Ï‚rνll Petitioner claims that there is no legal basis for the RTC to require petitioner to reimburse the cost of
the new house because respondent-spouses were in bad faith when they renovated and improved the house, which
was not yet their own.43Ï‚rνll Petitioner further contends that instead of ordering mutual restitution by the parties,
the RTC should have applied Republic Act No. 6552, otherwise known as the Maceda Law,44Ï‚rνll and that instead
of awarding respondent-spouses a refund of

all their monthly amortization payments, the RTC should have ordered them to pay petitioner monthly
rentals.45ςrνll
 Respondent Angeles Arguments

Instead of answering the legal issue raised by petitioner, respondent Angeles asks for a review of the Decision of the
RTC by interposing additional issues.46Ï‚rνll She maintains that the Deed of Absolute Sale is valid.47Ï‚rνll Thus,
the RTC erred in cancelling TCT Nos. 105202 and 105203.

Our Ruling

The petition is partly meritorious.

At the outset, we must make it clear that the issues raised by respondent Angeles may not be entertained. For failing
to file an appeal, she is bound by the Decision of the RTC. Well entrenched is the rule that "a party who does not
appeal from a judgment can no longer seek modification or reversal of the same. He may oppose the appeal of the
other party only on grounds consistent with the judgment."48Ï‚rνll For this reason, respondent Angeles may no
longer question the propriety and correctness of the annulment of the Deed of Absolute Sale, the cancellation of
TCT Nos. 105202 and 105203, and the order to vacate the property.

Hence, the only issue that must be resolved in this case is whether the RTC erred in ordering petitioner to reimburse
respondent-spouses the "total monthly installments and the value of the new house minus the cost of the original
house."49Ï‚rνll Otherwise stated, the issues for our resolution are:

1) Whether petitioner is obliged to refund to respondent-spouses all the monthly installments paid; and

2) Whether petitioner is obliged to reimburse respondent-spouses the value of the new house minus the cost of the
original house.

Respondent-spouses are entitled to the 

cash surrender value of the payments 
on the property equivalent to 50% of the 
total payments made.

Considering that this case stemmed from a Contract to Sell executed by the petitioner and the respondent-spouses,
we agree with petitioner that the Maceda Law, which governs sales of real estate on installment, should be applied.

Sections 3, 4, and 5 of the Maceda Law provide for the rights of a defaulting buyer, to
wit:chanroblesvirtuallawlibrary

Section 3. In all transactions or contracts involving the sale or financing of real estate on installment payments,
including residential condominium apartments but excluding industrial lots, commercial buildings and sales to
tenants under Republic Act Numbered Thirty-eight hundred forty-four, as amended by Republic Act Numbered
Sixty-three hundred eighty-nine, where the buyer has paid at least two years of installments, the buyer is entitled to
the following rights in case he defaults in the payment of succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him
which is hereby fixed at the rate of one month grace period for every one year of installment payments made:
Provided, That this right shall be exercised by the buyer only once in every five years of the life of the contract and
its extensions, if any.

(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on
the property equivalent to fifty percent of the total payments made, and, after five years of installments, an
additional five per cent every year but not to exceed ninety per cent of the total payments made: Provided, That the
actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.

Down payments, deposits or options on the contract shall be included in the computation of the total number of
installment payments made. (Emphasis supplied.)

Section 4. In case where less than two years of installments were paid, the seller shall give the buyer a grace period
of not less than sixty days from the date the installment became due.

If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract
after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract
by a notarial act.

Section 5. Under Sections 3 and 4, the buyer shall have the right to sell his rights or assign the same to another
person or to reinstate the contract by updating the account during the grace period and before actual cancellation of
the contract. The deed of sale or assignment shall be done by notarial act.

In this connection, we deem it necessary to point out that, under the Maceda Law, the actual cancellation of a
contract to sell takes place after 30 days from receipt by the buyer of the notarized notice of
cancellation,50Ï‚rνll and upon full payment of the cash surrender value to the buyer.51Ï‚rνll In other words, before
a contract to sell can be validly and effectively cancelled, the seller has (1) to send a notarized notice of cancellation
to the buyer and (2) to refund the cash surrender value.52Ï‚rνll Until and unless the seller complies with these twin
mandatory requirements, the contract to sell between the parties remains valid and subsisting. 53Ï‚rνll Thus, the
buyer has the right to continue occupying the property subject of the contract to sell,54Ï‚rνll and may "still reinstate
the contract by updating the account during the grace period and before the actual cancellation" 55Ï‚rνll of the
contract.

In this case, petitioner complied only with the first condition by sending a notarized notice of cancellation to the
respondent-spouses. It failed, however, to refund the cash surrender value to the respondent-spouses. Thus, the
Contract to Sell remains valid and subsisting and supposedly, respondent-spouses have the right to continue
occupying the subject property. Unfortunately, we cannot reverse the Decision of the RTC directing respondent-
spouses to vacate and turnover possession of the subject property to petitioner because respondent-spouses never
appealed the order. The RTC Decision as to respondent-spouses is therefore considered final.

In addition, in view of respondent-spouses failure to appeal, they can no longer reinstate the contract by updating the
account. Allowing them to do so would be unfair to the other party and is offensive to the rules of fair play, justice,
and due process. Thus, based on the factual milieu of the instant case, the most that we can do is to order the return
of the cash surrender value. Since respondent-spouses paid at least two years of installment, 56Ï‚rνll they are entitled
to receive the cash surrender value of the payments they had made which, under Section 3(b) of the Maceda Law, is
equivalent to 50% of the total payments made.

Respondent-spouses are entitled to 

reimbursement of the improvements 
made on the property.

Petitioner posits that Article 448 of the Civil Code does not apply and that respondent-spouses are not entitled to
reimbursement of the value of the improvements made on the property because they were builders in bad faith. At
the outset, we emphasize that the issue of whether respondent-spouses are builders in good faith or bad faith is a
factual question, which is beyond the scope of a petition filed under Rule 45 of the Rules of Court.57Ï‚rνll In fact,
petitioner is deemed to have waived all factual issues since it appealed the case directly to this Court, 58Ï‚rνll instead
of elevating the matter to the CA. It has likewise not escaped our attention that after their failed preliminary
conference, the parties agreed to submit the case for resolution based on the pleadings and exhibits presented. No
trial was conducted. Thus, it is too late for petitioner to raise at this stage of the proceedings the factual issue of
whether respondent-spouses are ilders in bad faith. Hence, in view of the special circumstances obtaining in this
case, we are constrained to rely on the presumption of good faith on the part of the respondent-spouses which the
petitioner failed to rebut. Thus, respondent-spouses being presumed builders in good faith, we now rule on the
applicability of Article 448 of the Civil Code.

As a general rule, Article 448 on builders in good faith does not apply where there is a contractual relation between
the parties,59Ï‚rνll such as in the instant case. We went over the records of this case and we note that the parties
failed to attach a copy of the Contract to Sell. As such, we are constrained to apply Article 448 of the Civil Code,
which provides viz:

ART. 448. 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 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.

Article 448 of the Civil Code applies when the builder believes that he is the owner of the land or that by some title
he has the right to build thereon,60Ï‚rνll or that, at least, he has a claim of title thereto.61Ï‚rνllConcededly, this is
not present in the instant case. The subject property is covered by a Contract to Sell hence ownership still remains
with petitioner being the seller. Nevertheless, there were already instances where this Court applied Article 448 even
if the builders do not have a claim of title over the property. Thus:chanroblesvirtuallawlibrary

This Court has ruled that this provision covers only cases in which the builders, sowers or planters believe
themselves to be owners of the land or, at least, to have a claim of title thereto. It does not apply when the interest is
merely that of a holder, such as a mere tenant, agent or usufructuary. From these pronouncements, good faith is
identified by the belief that the land is owned; or that by some title one has the right to build, plant, or sow thereon.

However, in some special cases, this Court has used Article 448 by recognizing good faith beyond this limited
definition. Thus, in Del Campo v. Abesia, this provision was applied to one whose house despite having been built
at the time he was still co-owner overlapped with the land of another. This article was also applied to cases wherein
a builder had constructed improvements with the consent of the owner. The Court ruled that the law deemed the
builder to be in good faith. In Sarmiento v. Agana, the builders were found to be in good faith despite their reliance
on the consent of another, whom they had mistakenly believed to be the owner of the land.62ςrνll

The Court likewise applied Article 448 in Spouses Macasaet v. Spouses Macasaet 63Ï‚rνll notwithstanding the fact
that the builders therein knew they were not the owners of the land. In said case, the parents who owned the land
allowed their son and his wife to build their residence and business thereon. As found by this Court, their occupation
was not by mere tolerance but "upon the invitation of and with the complete approval of (their parents), who desired
that their children would occupy the premises. It arose from familial love and a desire for family solidarity x x
x."64Ï‚rνll Soon after, conflict between the parties arose. The parents demanded their son and his wife to vacate the
premises. The Court thus ruled that as owners of the property, the parents have the right to possession over it.
However, they must reimburse their son and his wife for the improvements they had introduced on the property
because they were considered builders in good faith even if they knew for a fact that they did not own the property,
thus:chanroblesvirtuallawlibrary

Based on the aforecited special cases, Article 448 applies to the present factual milieu. The established facts of this
case show that respondents fully consented to the improvements introduced by petitioners. In fact, because the
children occupied the lots upon their invitation, the parents certainly knew and approved of the construction of the
improvements introduced thereon. Thus, petitioners may be deemed to have been in good faith when they built the
structures on those lots.
The instant case is factually similar to Javier v. Javier. In that case, this Court deemed the son to be in good faith for
building the improvement (the house) with the knowledge and consent of his father, to whom belonged the land
upon which it was built. Thus, Article 448 was applied.65ςrνll

In fine, the Court applied Article 448 by construing good faith beyond its limited definition. We find no reason not
to apply the Courts ruling in Spouses Macasaet v. Spouses Macasaet in this case. We thus hold that Article 448 is
also applicable to the instant case. First, good faith is presumed on the part of the respondent-spouses. Second,
petitioner failed to rebut this presumption. Third, no evidence was presented to show that petitioner opposed or
objected to the improvements introduced by the respondent-spouses. Consequently, we can validly presume that
petitioner consented to the improvements being constructed. This presumption is bolstered by the fact that as the
subdivision developer, petitioner must have given the respondent-spouses permits to commence and undertake the
construction. Under Article 453 of the Civil Code, "it is understood that there is bad faith on the part of the
landowner whenever the act was done with his knowledge and without opposition on his part."

In view of the foregoing, we find no error on the part of the RTC in requiring petitioner to pay respondent-spouses
the value of the new house minus the cost of the old house based on Article 448 of the Civil Code, subject to
succeeding discussions.

Petitioner has two options under Article 

448 and pursuant to the ruling in 
Tuatis v. Escol.66ςrνll

In Tuatis, we ruled that the seller (the owner of the land) has two options under Article 448: (1) he may appropriate
the improvements for himself after reimbursing the buyer (the builder in good faith) the necessary and useful
expenses under Articles 54667Ï‚rνll and 54868Ï‚rνll of the Civil Code; or (2) he may sell the land to the buyer,
unless its value is considerably more than that of the improvements, in which case, the buyer shall pay reasonable
rent.69Ï‚rνll Quoted below are the pertinent portions of our ruling in that case:chanroblesvirtuallawlibrary

Taking into consideration the provisions of the Deed of Sale by Installment and Article 448 of the Civil Code,
Visminda has the following options:chanroblesvirtuallawlibrary

Under the first option, Visminda may appropriate for herself the building on the subject property after
indemnifying Tuatis for the necessary and useful expenses the latter incurred for said building, as provided in
Article 546 of the Civil Code.

It is worthy to mention that in Pecson v. Court of Appeals, the Court pronounced that the amount to be refunded
to the builder under Article 546 of the Civil Code should be the current market value of the improvement,
thus:

xxx

Until Visminda appropriately indemnifies Tuatis for the building constructed by the latter, Tuatis may retain
possession of the building and the subject property.

Under the second option, Visminda may choose not to appropriate the building and, instead, oblige Tuatis to
pay the present or current fair value of the land. The P10,000.00 price of the subject property, as stated in the
Deed of Sale on Installment executed in November 1989, shall no longer apply, since Visminda will be obliging
Tuatis to pay for the price of the land in the exercise of Vismindas rights under Article 448 of the Civil Code, and
not under the said Deed. Tuatis obligation will then be statutory, and not contractual, arising only when Visminda
has chosen her option under Article 448 of the Civil Code.

Still under the second option, if the present or current value of the land, the subject property herein, turns out
to be considerably more than that of the building built thereon, Tuatis cannot be obliged to pay for the
subject property, but she must pay Visminda reasonable rent for the same. Visminda and Tuatis must agree
on the terms of the lease; otherwise, the court will fix the terms.

Necessarily, the RTC should conduct additional proceedings before ordering the execution of the judgment in Civil
Case No. S-618. Initially, the RTC should determine which of the aforementioned options Visminda will choose.
Subsequently, the RTC should ascertain: (a) under the first option, the amount of indemnification Visminda must
pay Tuatis; or (b) under the second option, the value of the subject property vis-vis that of the building, and
depending thereon, the price of, or the reasonable rent for, the subject property, which Tuatis must pay Visminda.

The Court highlights that the options under Article 448 are available to Visminda, as the owner of the subject
property. There is no basis for Tuatis demand that, since the value of the building she constructed is considerably
higher than the subject property, she may choose between buying the subject property from Visminda and selling the
building to Visminda for P502,073.00. Again, the choice of options is for Visminda, not Tuatis, to make. And,
depending on Vismindas choice, Tuatis rights as a builder under Article 448 are limited to the following: (a) under
the first option, a right to retain the building and subject property until Visminda pays proper indemnity; and (b)
under the second option, a right not to be obliged to pay for the price of the subject property, if it is considerably
higher than the value of the building, in which case, she can only be obliged to pay reasonable rent for the same.

The rule that the choice under Article 448 of the Civil Code belongs to the owner of the land is in accord with the
principle of accession, i.e., that the accessory follows the principal and not the other way around. Even as the option
lies with the landowner, the grant to him, nevertheless, is preclusive. The landowner cannot refuse to exercise either
option and compel instead the owner of the building to remove it from the land.

The raison detre for this provision has been enunciated thus: Where the builder, planter or sower has acted in good
faith, a conflict of rights arises between the owners, and it becomes necessary to protect the owner of the
improvements without causing injustice to the owner of the land. In view of the impracticability of creating a state
of forced co-ownership, the law has provided a just solution by giving the owner of the land the option to acquire the
improvements after payment of the proper indemnity, or to oblige the builder or planter to pay for the land and the
sower the proper rent. He cannot refuse to exercise either option. It is the owner of the land who is authorized to
exercise the option, because his right is older, and because, by the principle of accession, he is entitled to the
ownership of the accessory thing.

Vismindas Motion for Issuance of Writ of Execution cannot be deemed as an expression of her choice to recover
possession of the subject property under the first option, since the options under Article 448 of the Civil Code and
their respective consequences were also not clearly presented to her by the 19 April 1999 Decision of the RTC. She
must then be given the opportunity to make a choice between the options available to her after being duly informed
herein of her rights and obligations under both.70Ï‚rνll (Emphasis supplied.)

In conformity with the foregoing pronouncement, we hold that petitioner, as landowner, has two options. It may
appropriate the new house by reimbursing respondent Angeles the current market value thereof minus the cost of the
old house. Under this option, respondent Angeles would have "a right of retention which negates the obligation to
pay rent."71Ï‚rνll In the alternative, petitioner may sell the lots to respondent Angeles at a price equivalent to the
current fair value thereof. However, if the value of the lots is considerably more than the value of the improvement,
respondent Angeles cannot be compelled to purchase the lots. She can only be obliged to pay petitioner reasonable
rent.

In view of the foregoing disquisition and in accordance with Depra v. Dumlao72Ï‚rνll and Technogas Philippines
Manufacturing Corporation v. Court of Appeals,73Ï‚rνll we find it necessary to remand this case to the court of
origin for the purpose of determining matters necessary for the proper application of Article 448, in relation to
Articles 546 and 548 of the Civil Code.

WHEREFORE, the petition is hereby PARTIALLY GRANTED. The assailed Decision dated December 29, 2006
and the Order dated February 12, 2007 of the Regional Trial Court, Cagayan de Oro City, Branch 18, in Civil Case
No. 2005-158 are hereby AFFIRMED with MODIFICATION that petitioner Communities Cagayan, Inc. is
hereby ordered to RETURN the cash surrender value of the payments made by respondent-spouses on the
properties, which is equivalent to 50% of the total payments made, in ccordance with Section 3(b) of Republic Act
No. 6552, otherwise known as the Maceda Law.

The case is hereby REMANDED to the Regional Trial Court, Cagayan de Oro City, Branch 18, for further
proceedings consistent with the proper application of Articles 448, 546 and 548 of the Civil Code, as
follows:chanroblesvirtuallawlibrary

1. The trial court shall determine:

a) the present or current fair value of the lots;

b) the current market value of the new house;

c) the cost of the old house; and

d) whether the value of the lots is considerably more than the current market value of the new house minus the cost
of the old house.

2. After said amounts shall have been determined by competent evidence, the trial court shall render judgment as
follows:

a) Petitioner shall be granted a period of 15 days within which to exercise its option under the law (Article 448, Civil
Code), whether to appropriate the new house by paying to respondent Angeles the current market value of the new
house minus the cost of the old house, or to oblige respondent Angeles to pay the price of the lots. The amounts to
be respectively paid by the parties, in accordance with the option thus exercised by written notice to the other party
and to the court, shall be paid by the obligor within 15 days from such notice of the option by tendering the amount
to the trial court in favor of the party entitled to receive it.

b) If petitioner exercises the option to oblige respondent Angeles to pay the price of the lots but the latter rejects
such purchase because, as found by the trial court, the value of the lots is considerably more than the value of the
new house minus the cost of the old house, respondent Angeles shall give written notice of such rejection to
petitioner and to the trial court within 15 days from notice of petitioners option to sell the land. In that event, the
parties shall be given a period of 15 days from such notice of rejection within which to agree upon the terms of the
lease, and give the trial court formal written notice of the agreement and its provisos. If no agreement is reached by
the parties, the trial court, within 15 days from and after the termination of the said period fixed for negotiation, shall
then fix the period and terms of the lease, including the monthly rental, which shall be payable within the first five
days of each calendar month. Respondent Angeles shall not make any further constructions or improvements on the
building. Upon expiration of the period, or upon default by respondent Angeles in the payment of rentals for two
consecutive months, petitioner shall be entitled to terminate the forced lease, to recover its land, and to have the new
house removed by respondent Angeles or at the latters expense.

c) In any event, respondent Angeles shall pay petitioner reasonable compensation for the occupancy of the property
for the period counted from the time the Decision dated December 29, 2006 became final as to respondent Angeles
or 15 days after she received a copy of the said Decision up to the date petitioner serves notice of its option to
appropriate the encroaching structures, otherwise up to the actual transfer of ownership to respondent Angeles or, in
case a forced lease has to be imposed, up to the commencement date of the forced lease referred to in the preceding
paragraph.

d) The periods to be fixed by the trial court in its decision shall be nonextendible, and upon failure of the party
obliged to tender to the trial court the amount due to the obligee, the party entitled to such payment shall be entitled
to an order of execution for the enforcement of payment of the amount due and for compliance with such other acts
as may be required by the prestation due the obligee.
SO ORDERED.

G.R. No. 171628               June 13, 2011

ARMANDO V. ALANO [Deceased], Substituted by Elena Alano-Torres,* Petitioner, 

vs.
PLANTER'S DEVELOPMENT BANK, as Successor-in-Interest of MAUNLAD SAVINGS and LOAN
ASSOCIATION, INC.,*** Respondent.

DECISION

DEL CASTILLO, J.:

"No one can give what he does not have" (Nemo dat quod non habet).

This Amended Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the June 9, 2005
Decision2 and the February 21, 2006 Resolution3 of the Court of Appeals (CA) in CA G.R. CV No. 58554.

Factual Antecedents

Petitioner Armando V. Alano and his brother, the late Agapito V. Alano, Jr., inherited from their father a parcel of
land located at Gov. Forbes St., Sampaloc, Manila.4

On June 30, 1988, petitioner executed a Special Power of Attorney5 authorizing his brother to sell their property in
Manila. From the proceeds of the sale, the brothers purchased on September 22, 1988 a residential house located at
No. 60 Encarnacion St., BF Homes, Quezon City.6 The title of the Quezon City property, however, was not
immediately transferred to them because the duplicate and original copies of the title were destroyed by a fire that
gutted the Quezon City Hall Building.7

On June 27, 1990, Agapito V. Alano, Jr. died leaving behind his wife, Lydia J. Alano (Lydia), and four legitimate
children, who adjudicated to themselves the property in Quezon City.8 Consequently, title to the said property was
reconstituted as Transfer Certificate of Title (TCT) No. 18990 and registered solely in the names of Lydia and her
four children.9 This prompted petitioner to execute an Affidavit of Adverse Claim10 which was annotated on TCT
No. 18990.11 But because of the assurance of his nieces that they would put things right, petitioner agreed to delay
the filing of a case in court.12

Meanwhile, Lydia filed with the Register of Deeds of Quezon City an Affidavit of Cancellation of Adverse
Claim,13which caused the cancellation of the adverse claim annotated on TCT No. 18990.14 Thereafter, by virtue of a
Deed of Absolute Sale15 allegedly executed by her children in her favor, TCT No. 18990 was cancelled and a new
one, TCT No. 90388, was issued solely in her name.16

On February 8, 1994, Slumberworld, Inc., represented by its President, Melecio A. Javier, and Treasurer, Lydia,
obtained from Maunlad Savings and Loan Association, Inc. a loan of ₱2.3 million, secured by a Real Estate
Mortgage17 over the property covered by TCT No. 90388.18

On April 20, 1994, petitioner filed a Complaint19 against Lydia, Melecio A. Javier, Maunlad Savings and Loan
Association, Inc. and the Register of Deeds of Quezon City before the Regional Trial Court (RTC) of Quezon City,
which was raffled to Branch 92. Petitioner sought the cancellation of TCT No. 90388, the issuance of a new title in
his name for his one-half share of the Quezon City property, and the nullification of real estate mortgage insofar as
his one-half share is concerned.20
Defendants Maunlad Savings and Loan Association, Inc. and the Register of Deeds of Quezon City filed their
respective Answers.21 Defendants Lydia and Melecio A. Javier, however, failed to file their respective Answers.
Thus, the RTC in an Order22 dated August 29, 1994 declared them in default.

Ruling of the Regional Trial Court

On September 12, 1996, the RTC rendered its Decision23 declaring petitioner the owner of one-half of the subject
property since an implied trust exists between him and the heirs of his brother. 24 The RTC, however, sustained the
validity of the real estate mortgage.25 According to the RTC, Maunlad Savings and Loan Association, Inc. had the
right to rely on the Torrens title as there was no reason for it to doubt the mortgagor’s ownership over the subject
property.26 Accordingly, the fallo of the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Declaring plaintiff Armando Alano the owner of one-half of the property in question;

2. Ordering the Register of Deeds of Quezon City to cancel TCT No. 90388 issued in the name of Lydia J.
Alano and the corresponding owner’s duplicate certificate and to issue a new one in the names of Armando
V. Alano, single[,] ½ share pro indiviso and Lydia Alano, widow, ½ share pro indiviso with the
corresponding mortgage lien annotation in favor of the Maunlad Savings and Loan [Association,] Inc. upon
finality of this decision;

3. Ordering the defendant Maunlad Savings and Loan [Association,] Inc. to surrender [the] owner’s
duplicate copy of TCT No. 90388 to the Register of Deeds of Quezon City for cancellation upon finality of
this decision;

4. Ordering defendants Lydia J. Alano and Melecio Javier to jointly and severally pay the plaintiff the sum
of ₱20,000.00 as attorney’s fees and to pay the costs of suit.

SO ORDERED.27

Dissatisfied, petitioner moved for partial reconsideration28 but the RTC denied the same in its Order29 dated February
24, 1997.

Ruling of the Court of Appeals

Petitioner appealed30 to the CA but to no avail. The CA found Maunlad Savings and Loan Association, Inc. to be a
mortgagee in good faith since it took the necessary precautions to ascertain the status of the property sought to be
mortgaged as well as the identity of the mortgagor by conducting an ocular inspection of the property and requiring
the submission of documents, such as the latest tax receipts and tax clearance. 31 The CA thus disposed of the appeal
as follows:

WHEREFORE, premises considered, the appeal is hereby DISMISSED for lack of merit. The September 12, 1996
Decision of the Regional Trial Court of Quezon City, Branch 92, is hereby AFFIRMED.

SO ORDERED.32

Petitioner sought reconsideration33 but the CA denied the same in its Resolution34 dated February 21, 2006.

Issues

Hence, the present recourse, petitioner raising the following issues:

 I. WHETHER THE REAL ESTATE MORTGAGE EXECUTED BY DEFENDANT LYDIA J. ALANO
WAS VALID AND BINDING WITH RESPECT TO PETITIONER’S CO-OWNER’S SHARE IN THE
SUBJECT PROPERTY.

II. WHETHER DEFENDANT MAUNLAD SAVINGS AND LOAN ASSOCIATION, INC. WAS AN
INNOCENT MORTGAGEE IN GOOD FAITH.

III. WHETHER PETITIONER MAY RIGHTFULLY BE MADE TO SUFFER THE CONSEQUENCES

OF DEFENDANT LYDIA J. ALANO’S WRONGFUL ACT OF MORTGAGING THE SUBJECT
PROPERTY.35

Petitioner’s Arguments

Petitioner insists that Maunlad Savings and Loan Association, Inc. is not a mortgagee in good faith as it failed to
exercise due diligence in inspecting and ascertaining the status of the mortgaged property. Petitioner calls attention
to the testimony of Credit Investigator Carlos S. Mañosca, who admitted that when he inspected the mortgaged
property, he only checked the finishing of the house and the number of rooms.36 Hence, he failed to see petitioner’s
apartment at the back portion of the property.37 Moreover, the fact that there was an adverse claim annotated on the
previous title of the property should have alerted Maunlad Savings and Loan Association, Inc. to conduct further
investigation to verify the ownership of the mortgaged property.38 All these prove that Maunlad Savings and Loan
Association, Inc. was not a mortgagee in good faith. Corollarily, pursuant to Articles 208539 and 49340 of the Civil
Code, the real estate mortgage executed by Lydia is void insofar as petitioner’s share in the mortgaged property is
concerned.41

Respondent’s Arguments

Respondent contends that the issue of whether Maunlad Savings and Loan Association, Inc. is a mortgagee in good
faith is a question of fact, which is beyond the jurisdiction of this Court.42 As to petitioner’s allegation that there was
a separate apartment at the back portion of the property, respondent claims that this was never raised during the trial
or on appeal.43 Hence, it is barred by estoppel.44

Respondent further claims that Maunlad Savings and Loan Association, Inc. has no obligation to look beyond the
title considering that there was no adverse claim annotated on TCT No. 90388 covering the mortgaged
property.45And since the mortgaged property was occupied by the mortgagor Lydia, there was also no need for
Maunlad Savings and Loan Association, Inc. to verify the extent of her possessory rights.46

Our Ruling

The petition has merit.

The instant case is an exception to the rule that factual issues may not be raised in a petition under Rule 45 of the
Rules of Court.

The rule that only questions of law may be raised in a petition for review on certiorari under Rule 45 of the Rules of
Court is not without exception. A review of factual issues is allowed when there is a misapprehension of facts or
when the inference drawn from the facts is manifestly mistaken.47 This case falls under exception.

Maunlad Savings and Loan Association, Inc. is not a mortgagee in good faith.

The general rule that a mortgagee need not look beyond the title does not apply to banks and other financial
institutions as greater care and due diligence is required of them.48 Imbued with public interest, they "are expected to
be more cautious than ordinary individuals."49 Thus, before approving a loan, the standard practice for banks and
other financial institutions is to conduct an ocular inspection of the property offered to be mortgaged and verify the
genuineness of the title to determine the real owner or owners thereof.50 Failure to do so makes them mortgagees in
bad faith.

In this case, petitioner contends that Maunlad Savings and Loan Association, Inc. failed to exercise due diligence in
inspecting and ascertaining the status of the mortgaged property because during the ocular inspection, the credit
investigator failed to ascertain the actual occupants of the subject property and to discover petitioner’s apartment at
the back portion of the subject property.51

Indeed, the existence of petitioner’s apartment at the back portion of the subject property was never brought up
before the trial court and the appellate court. Nevertheless, we find petitioner’s allegation of negligence
substantiated by the testimony of the credit investigator, to wit:

ATTY. JAVELLANA

xxxx

Q - You said also that you inspected the property that was offered as collateral which is a house and lot located at
Encarnacion Street, BF Homes. Did you enter the property?

A - Yes, ma’am.

Q - And then you found out that the property was the home of Mrs. Lydia Alano and her children?

A - Yes, ma’am.

ATTY. JAVELLANA

Q - And you also saw that her brother-in-law Armando Alano was also residing there?

A - I do not recall if he was there, ma’am.

Q - You did not see him there?

A - When we went there ma’am, we only checked on the finishing of the house and also checked as to the number of
bedrooms and number of CR, ma’am.

Q - You did not verify who were actually residing there?

A - No, ma’am.

Q - You said that you also conducted a neighborhood checking, did you ask the neighbor who were residing in that
property?

A - Yes, and we were told that Lydia Alano was the one residing there, ma’am.

Q - You did not verify from them as to whether anybody else was residing there?

A - No, ma’am.52 (Emphasis supplied).

Clearly, while the credit investigator conducted an ocular inspection of the property as well as a "neighborhood
checking" and found the subject property occupied by the mortgagor Lydia and her children,53 he, however, failed to
ascertain whether the property was occupied by persons other than the mortgagor. Had he done so, he would have
discovered that the subject property is co-owned by petitioner and the heirs of his brother. Since Maunlad Savings
and Loan Association, Inc. was remiss in its duty in ascertaining the status of the property to be mortgaged and
verifying the ownership thereof, it is deemed a mortgagee in bad faith. Consequently, the real estate mortgage
executed in its favor is valid only insofar as the share of the mortgagor Lydia in the subject property. We need not
belabor that under Article 49354 of the Civil Code, a co-owner can alienate only his pro indiviso share in the co-
owned property, and not the share of his co-owners.1âwphi1

WHEREFORE, the petition is hereby GRANTED. The assailed June 9, 2005 Decision and the February 21, 2006
Resolution of the Court of Appeals in CA G.R. CV No. 58554 are SET ASIDE. The September 12, 1996 Decision
of the Regional Trial Court of Quezon City, Branch 92, is hereby MODIFIED by declaring the mortgage in favor of
respondent Maunlad Savings and Loan Association, Inc. NULL and VOID insofar as the ½ share of petitioner in the
subject property is concerned, and ordering the annotation of the mortgage lien in favor of respondent only on the ½
share of Lydia J. Alano in the subject property.

SO ORDERED.

EN BANC

[G.R. No. 201112, June 13, 2012]ARCHBISHOP FERNANDO R. CAPALLA, OMAR SOLITARIO ALI
AND MARY ANNE L. SUSANO, Petitioners, v. THE HONORABLE COMMISSION ON
ELECTIONS, Respondent.

[G.R. NO. 201121]

SOLIDARITY FOR SOVEREIGNTY (S4S), REPRESENTED BY MA. LINDA OLAGUER; RAMON

PEDROSA, BENJAMIN PAULINO SR., EVELYN CORONEL, MA. LINDA OLAGUER MONTAYRE,
AND NELSON T. MONTAYRE, Petitioners, v. COMMISSION ON ELECTIONS, REPRESENTED BY ITS
CHAIRMAN, COMMISSIONER SIXTO S. BRILLANTES, JR., Respondent.

[G.R. NO. 201127]

TEOFISTO T. GUINGONA, BISHOP BRODERICK S. PABILLO, SOLITA COLLAS MONSOD, MARIA

CORAZON MENDOZA ACOL, FR. JOSE DIZON, NELSON JAVA CELIS, PABLO R. MANALASTAS,
GEORGINA R. ENCANTO AND ANNA LEAH E. COLINA, Petitioners, v. COMMISSION ON
ELECTIONS AND SMARTMATIC TIM CORPORATION, Respondents.

[G.R. NO. 201413]

TANGGULANG DEMOKRASYA (TAN DEM), INC., EVELYN L. KILAYKO, TERESITA D.

BALTAZAR, PILAR L. CALDERON AND ELITA T. MONTILLA, Petitioners, v. COMMISSION ON
ELECTIONS AND SMARTMATIC-TIM CORPORATION, Respondents.

DECISION

PERALTA, J.:
Pursuant to its authority to use an Automated Election System (AES) under Republic Act (RA) No. 8436, as
amended by RA No. 9369, or the Automation Law and in accordance with RA No. 9184, otherwise known as
the Government Procurement Reform Act, the Commission on Elections (Comelec) posted and published an
invitation to apply for eligibility and to bid for the 2010 Poll Automation Project[1] (the Project). On March 18, 2009,
the Comelec approved and issued a Request for Proposal[2] (RFP) for the Project consisting of the following
components:

Component 1: Paper-Based Automation Election System (AES)

1-A. Election Management System (EMS)

1-B. Precinct Count Optical Scan (PCOS) System
1-C. Consolidation/Canvassing System (CCS)

Component 2: Provision for Electronic Transmission of Election Results using Public Telecommunications Network

Component 3: Overall Project Management[3]

On June 9, 2009, the Comelec issued Resolution No. 8608 awarding the contract for the Project to respondent
Smartmatic-TIM.[4] On July 10, 2009, the Comelec and Smartmatic-TIM entered into a Contract for the Provision
of an Automated Election System for the May 10, 2010 Synchronized National and Local Elections,[5] (AES
Contract, for brevity). The contract between the Comelec and Smartmatic-TIM was one of “lease of the AES with
option to purchase (OTP) the goods listed in the contract.” In said contract, the Comelec was given until December
31, 2010 within which to exercise the option.

On September 23, 2010, the Comelec partially exercised its OTP 920 units of PCOS machines with corresponding
canvassing/consolidation system (CCS) for the special elections in certain areas in the provinces of Basilan, Lanao
del Sur and Bulacan.[6] In a letter[7] dated December 18, 2010, Smartmatic-TIM, through its Chairman Cesar Flores
(Flores), proposed a temporary extension of the option period on the remaining 81,280 PCOS machines until March
31, 2011, waiving the storage costs and covering the maintenance costs. The Comelec did not exercise the option
within the extended period. Several extensions were given for the Comelec to exercise the OTP until its final
extension on March 31, 2012.

On March 6, 2012, the Comelec issued Resolution No. 9373[8] resolving to seriously consider exercising the OTP
subject to certain conditions. On March 21, 2012, the Comelec issued Resolution No. 9376[9]resolving to exercise
the OTP the PCOS and CCS hardware and software in accordance with the AES contract between the Comelec and
Smartmatic-TIM in connection with the May 10, 2010 elections subject to the following conditions: (1) the
warranties agreed upon in the AES contract shall be in full force and effect; (2) the original price for the hardware
and software covered by the OTP as specified in the AES contract shall be maintained, excluding the cost of the 920
units of PCOS and related peripherals previously purchased for use in the 2010 special elections; and (3) all other
services related to the 2013 AES shall be subject to public bidding. On March 29, 2012, the Comelec issued
Resolution No. 9377[10]resolving to accept Smartmatic-TIM’s offer to extend the period to exercise the OTP until
March 31, 2012 and to authorize Chairman Brillantes to sign for and on behalf of the Comelec the Agreement on the
Extension of the OTP Under the AES Contract[11] (Extension Agreement, for brevity). The aforesaid Extension
Agreement was signed on March 30, 2012.[12] On even date, the Comelec issued Resolution No. 9378[13] resolving to
approve the Deed of Sale between the Comelec and Smartmatic-TIM to purchase the latter’s PCOS machines
(hardware and software) to be used in the upcoming May 2013 elections and to authorize Chairman Brillantes to
sign the Deed of Sale for and on behalf of the Comelec. The Deed of Sale[14] was forthwith executed.

Claiming that the foregoing issuances of the Comelec, as well as the transactions entered pursuant thereto, are illegal
and unconstitutional, petitioners come before the Court in four separate Petitions for Certiorari, Prohibition,
and Mandamus imputing grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the
Comelec in issuing the assailed Resolutions and in executing the assailed Extension Agreement and Deed.

G.R. No. 201112

In G.R. No. 201112, petitioners Archbishop Fernando R. Capalla, Omar Solitario Ali and Mary Anne L. Susano
pray that a Temporary Restraining Order (TRO) be issued enjoining the Comelec from purchasing the PCOS
machines until after final judgment of the instant case; a writ of prohibition be issued against the Comelec for the
purchase of these defective PCOS machines; a writ of mandamus be issued compelling the Comelec to conduct the
necessary bidding for the equipment and facilities which shall be used for the 2013 National and Local Elections;
and to declare Comelec Resolution Nos. 9376, 9377, and 9378, on the purchase of PCOS machines, null and void.

Petitioners argue that if there is a necessity to purchase the PCOS machines, the Comelec should follow RA 9184
requiring competitive public bidding. They likewise argue that the OTP clause embodied in the contract with
Smartmatic-TIM should be rendered invalid not only because the OTP has already lapsed but because of the fact
that the OTP clause is a circumvention of the explicit provisions of RA 9184. Petitioners add that the current PCOS
machines do not meet the rigorous requirements of RA 9369 that the system procured must have demonstrated
capability and should have been successfully used in a prior electoral exercise here or abroad. Petitioners submit that
there are intrinsic technical infirmities as regards the PCOS machines used during the 2010 elections which rendered
it incapable for future use. Lastly, petitioners claim that the Comelec does not have the capability to purchase and
maintain the PCOS machines, because of lack of trained manpower and technical expertise to properly maintain the
PCOS machines; thus, the purchase is unfavorable to the general public.

G.R. No. 201121

In G.R. No. 201121, petitioners Solidarity for Sovereignty (S4S), represented by Ma. Linda Olaguer, Ramon
Pedrosa, Benjamin Paulino, Sr., Evelyn Coronel, Ma. Linda Olaguer Montayre and Nelson T. Montayre, pray that a
TRO be issued directing the Comelec to desist from implementing the contract; that Resolution No. 9376 be
declared unconstitutional and all acts made pursuant thereto, including the purchase of the PCOS machines unlawful
and void; that an Injunction be issued prohibiting the Comelec from further pursuing any act pursuant to Resolution
No. 9376.[15]

Petitioners argue that the Comelec’s act of exercising its OTP the PCOS machines from Smartmatic-TIM after the
period had already lapsed is illegal and unlawful.[16] They explain that the period within which the Comelec may
exercise the OTP could last only until December 31, 2010 without extension as provided in the Comelec’s bid
bulletin.[17] They further assert that the Comelec’s acceptance of Smartmatic-TIM’s unilateral extension of the option
period constitutes substantial amendment to the AES contract giving undue benefit to the winning bidder not
available to the other bidders.[18] Petitioners also contend that the Comelec’s decision to purchase and use the PCOS
machines is unconstitutional, as it allows the Comelec to abrogate its constitutional duty to safeguard the election
process by subcontracting the same to an independent provider (Smartmatic-TIM), who controls the software that
safeguards the entire election process. The purchase of the PCOS machines for use in the May 2013 elections would
be tantamount to a complete surrender and abdication of the Comelec’s constitutional mandate in favor of
Smartmatic-TIM. The control of the software and process verification systems places the Comelec at the end of the
process as it merely receives the report of Smartmatic-TIM. This, according to petitioners, amounts to a direct
transgression of the exclusive mandate of the Comelec completely to take charge of the enforcement and
administration of the conduct of elections. [19] Lastly, petitioners aver that the Comelec’s act of deliberately ignoring
the palpable infirmities and defects of the PCOS machines, as duly confirmed by forensic experts, is in violation of
Section 2, Article V of the Constitution, as it fails to safeguard the integrity of the votes. They went on by saying
that the subject PCOS machines lack security features which can guaranty the secrecy and sanctity of our votes in
direct contravention of RA 9369 which requires that the automated election system must at least possess an adequate
security feature against unauthorized access. In deciding to purchase the PCOS machines despite the above-
enumerated defects, the Comelec’s decision are claimed to be unconstitutional.[20]

G.R. No. 201127

In G.R. No. 201127, petitioners Teofisto Guingona, Bishop Broderick S. Pabillo, Solita Collas Monsod, Maria
Corazon Mendoza Acol, Fr. Jose Dizon, Nelson Java Celis, Pablo R. Manalastas, Georgina R. Encanto and Anna
Leah E. Colina pray that the Court issue a TRO enjoining and restraining respondents Comelec and Smartmatic-TIM
from implementing Comelec Resolution No. 9376 and the Deed of Sale for the acquisition and purchase of the
PCOS machines and related equipment; issue writ of preliminary injunction; declare Comelec Resolution No. 9376
void and unconstitutional and annul the Deed of Sale; and direct the Comelec to conduct public bidding soonest for
the automated election system to be used for the 2013 elections.[21]

Petitioners fault the Comelec in totally disregarding the recommendation of the Comelec Advisory Council (CAC)
not to exercise the OTP. They point out that in its Resolution No. 2012-2003, the CAC resolved to recommend that
the Comelec should exert all efforts to procure the necessary AES only through public bidding. The CAC likewise
allegedly recommended that the OTP should not be exercised if as a consequence, the rest of the system must come
from the same vendor as the Comelec would lose the opportunity to look for better technology; would prevent the
Comelec from taking advantage of the best possible technology available; would prevent other prospective vendors
from competitively participating in the bidding process; and may erode the public trust and confidence in the
electoral process. In its report to the Congressional Oversight Committee after the 2010 elections, the CAC
supposedly concluded that the Comelec does not need to use the same PCOS machines and that the Comelec would
be better off not exercising the OTP the PCOS machines so it can look for an even better solution for the May 2013
elections.[22] Like the other petitioners, it is their position that Comelec Resolution No. 9376 is totally null and void
having been issued in violation of the express provisions of RA 9184 and the AES contract. According to
petitioners, the Comelec itself provided in its bid bulletins for a fixed and determinate period, and such period ended
on December 31, 2010. Thus, Smartmatic-TIM could not have unilaterally extended the option period and the
Comelec could not have also given its consent to the extension. In extending the option period, it is tantamount to
giving the winning bidder a benefit that was not known and available to all bidders during the bidding of the 2010
AES, which is a clear violation of the bidding rules and the equal protection clause of the Constitution.
[23]
 Considering that the option period already expired, the purchase of the PCOS machines requires competitive
public bidding. Lastly, petitioners claim that the Comelec committed grave abuse of discretion in opting to buy the
PCOS machines and allied paraphernalia of Smartmatic-TIM for the 2013 elections, despite incontrovertible
findings of the glitches, malfunctions, bugs, and defects of the same.[24]

G.R. No. 201418

In G.R. No. 201418, petitioners Tanggulang Demokrasya (Tan Dem), Inc., Evelyn L. Kilayko, Teresita D. Baltazar,
Pilar L. Calderon and Elita T. Montilla pray that the Court annul Resolution No. 9376 and the March 30, 2012 Deed
of Sale, and prohibit the Comelec and Smartmatic-TIM from implementing the same; and declare said Resolution
and Deed of Sale invalid for having been issued and executed by the Comelec with grave abuse of discretion and for
violating the provisions of R.A. 9184.[25]

Petitioners claim that the Comelec committed grave abuse of discretion amounting to lack or excess of jurisdiction
in contracting for the purchase of AES goods and services from Smartmatic-TIM in spite of the below par
performance of the latter’s PCOS machines, CCS and other software and hardware in the May 2010 elections and
non-compliance with the minimum functional capabilities required by law. [26]They echo the other petitioners’
contention that the Comelec’s decision to buy the CCS, PCOS machines, software and hardware of Smartmatic
violates RA 9184’s requirement of a prior competitive public bidding. Since the Comelec is bent on pursuing the
purchase of the subject goods, which is an entirely new procurement, petitioners contend that there must be a public
bidding. They argue that there is enough time to conduct public bidding for the 2013 elections, considering that for
the May 2010 elections, the Comelec only had 10 months and they were able to conduct the public bidding.
Petitioners are of the view that there is no more OTP to speak of, because the option period already lapsed and could
not be revived by the unilateral act of one of the contracting parties.[27]

On April 24, 2012, the Court issued a TRO enjoining the implementation of the assailed contract of sale. The
consolidated cases were later set for Oral Arguments on the following issues:

I. Whether or not the Commission on Elections may validly accept the extension of time unilaterally given by
Smartmatic-TIM Corporation within which to exercise the option to purchase under Article 4 of the Contract for the
Provision of an Automated Election System for the May 2010 Synchronized National and Local Elections; and

II. Whether or not the acceptance of the extension and the issuance of Comelec En Banc Resolution No. 9376
violate Republic Act No. 9184 or the Government Procurement Reform Act and its Implementing Rules, and
Republic Act No. 9369 or the Automated Election Systems Act.
The parties were, thereafter, required to submit their Memoranda.

The petitions are without merit.

Simply stated, petitioners assail the validity and constitutionality of the Comelec Resolutions for the purchase of the
subject PCOS machines as well as the Extension Agreement and the Deed of Sale covering said goods mainly on
three grounds: (1) the option period provided for in the AES contract between the Comelec and Smartmatic-TIM
had already lapsed and, thus, could no longer be extended, such extension being prohibited by the contract; (2) the
extension of the option period and the exercise of the option without competitive public bidding contravene the
provisions of RA 9184; and, (3) despite the palpable infirmities and defects of the PCOS machines, the Comelec
purchased the same in contravention of the standards laid down in RA 9369.

For its part, the Comelec defends the validity and constitutionality of its decision to purchase the subject PCOS
machines, pursuant to the OTP under the AES contract with Smartmatic-TIM, on the following grounds: (1) Article
6.6 of the AES contract which states the option period was amended by the extension agreement; (2) the exercise of
the OTP is not covered by RA 9184, because it is merely an implementation of a previously bidded contract; (3)
taking into account the funds available for the purpose, exercising the OTP was the prudent choice for the Comelec
and is more advantageous to the government; and (4) the exercise of the OTP is consistent with the technical
requirements of RA 9369.

Stated in another way, Smartmatic-TIM insists on the validity of the subject transaction based on the following
grounds: (1) there is no prohibition either in the contract or provision of law for it to extend the option period; rather,
the contract itself allows the parties to amend the same; (2) the OTP is not an independent contract in itself, but is a
provision contained in the valid and existing AES contract that had already satisfied the public bidding requirements
of RA 9184; (3) exercising the option was the most advantageous option of the Comelec; and (4) Smartmatic-TIM
has an established track record in providing effective and accurate electoral solutions and its satisfactory
performance has been proven during the 2010 elections. The alleged glitches in the May 2010 elections, if at all, are
not attributable to the PCOS machines.

We agree with respondents.

At the outset, we brush aside the procedural barriers (i.e., locus standi of petitioners and the non-observance of the
hierarchy of courts) that supposedly prevent the Court from entertaining the consolidated petitions. As we held
in Guingona, Jr. v. Commission on Elections:[28]

There can be no doubt that the coming 10 May 2010 [in this case, May 2013] elections is a matter of great public
concern. On election day, the country's registered voters will come out to exercise the sacred right of suffrage. Not
only is it an exercise that ensures the preservation of our democracy, the coming elections also embodies our
people's last ounce of hope for a better future. It is the final opportunity, patiently awaited by our people, for the
peaceful transition of power to the next chosen leaders of our country. If there is anything capable of directly
affecting the lives of ordinary Filipinos so as to come within the ambit of a public concern, it is the coming
elections, more so with the alarming turn of events that continue to unfold. The wanton wastage of public funds
brought about by one bungled contract after another, in staggering amounts, is in itself a matter of grave public
concern.[29]

Thus, in view of the compelling significance and transcending public importance of the issues raised by petitioners,
the technicalities raised by respondents should not be allowed to stand in the way, if the ends of justice would not be
subserved by a rigid adherence to the rules of procedure. [30]

Now on the substantive issues. In order to achieve the modernization program of the Philippine Electoral System,
which includes the automation of the counting, transmission and canvassing of votes for the May 2010 national and
local elections with systems integration and over-all project management in a comprehensive and well-managed
manner,[31] the Comelec entered into an AES contract with Smartmatic-TIM for the lease of goods and purchase of
services under the contract, with option to purchase the goods.
The option contract between the Comelec and Smartmatic-TIM is embodied in Article 4.3 of the AES contract to
wit:

Article 4
Contract Fee and Payment

xxxx

4.3. OPTION TO PURCHASE

In the event the COMELEC exercises its option to purchase the Goods as listed in Annex “L”, COMELEC shall pay
the PROVIDER an additional amount of Two Billion One Hundred Thirty Million Six Hundred Thirty- Five
Thousand Forty-Eight Pesos and Fifteen Centavos (Php2,130,635,048.15) as contained in the Financial Proposal of
the joint venture partners – Smartmatic and TIM.

In case COMELEC should exercise its option to purchase, a warranty shall be required in order to assure that: (a)
manufacturing defects shall be corrected; and/or (b) replacements shall be made by the PROVIDER, for a minimum
period of three (3) months, in the case of supplies, and one (1) year, in the case of equipment, after performance of
this Contract. The obligation for the warranty shall be covered by retention money of ten percent (10%) of every
option to purchase payment made.

The retention money will be returned within five (5) working days after the expiration of the above warranty,
provided, however, that the goods supplied are in good operating condition free from patent and latent defects, all
the conditions imposed under the purchase contract have been fully met, and any defective machines, except to those
attributable to the COMELEC, have been either repaired at no additional charge or replaced or deducted from the
price under the Option to Purchase.[32]

Article 6.6 thereof, in turn provides for the period within which the Comelec could exercise the option, thus:

Article 6
COMELEC’s Responsibilities

xxxx

6.6. COMELEC shall notify the PROVIDER on or before 31 December 2010 of its option to purchase the Goods as
listed in Annex “L.”[33]

The Comelec did not exercise the option within the period stated in the above provision. Smartmatic, however,
unilaterally extended the same until its final extension on March 31, 2012. The Comelec, thereafter, accepted the
option and eventually executed a Deed of Sale involving said goods. Now, petitioners come before the Court
assailing the validity of the extension, the exercise of the option and the Deed of Sale. In light of the AES contract,
can Smartmatic-TIM unilaterally extend the option period? Can the Comelec accept the extension?

We answer in the affirmative.

It is a basic rule in the interpretation of contracts that an instrument must be construed so as to give effect to all the
provisions of the contract.[34] In essence, the contract must be read and taken as a whole.[35] While the contract indeed
specifically required the Comelec to notify Smartmatic-TIM of its OTP the subject goods until December 31, 2010,
a reading of the other provisions of the AES contract would show that the parties are given the right to amend the
contract which may include the period within which to exercise the option. There is, likewise, no prohibition on the
extension of the period, provided that the contract is still effective.

Article 2 of the AES contract lays down the effectivity of the contract, viz.:
 Article 2
EFFECTIVITY

2.1. This Contract shall take effect upon the fulfillment of all of the following conditions:

(a) Submission by the PROVIDER of the Performance Security;

(b) Signing of this Contract in seven (7) copies by the parties; and
(c) Receipt by the PROVIDER of the Notice to Proceed.

2.2. The Term of this Contract begins from the date of effectivity until the release of the Performance Security,
without prejudice to the surviving provisions of this Contract, including the warranty provision as prescribed in
Article 8.3 and the period of the option to purchase (Emphasis supplied).[36]

Obviously, the contract took effect even prior to the 2010 elections. The only question now is whether its existence
already ceased. Pursuant to the above-quoted provision, it is important to determine whether or not the performance
security had already been released to Smartmatic-TIM. In Article 8 of the AES contract, performance security was
defined and the rules in releasing said security were laid down, to wit:

Article 8
Performance Security and Warranty

8.1. Within three (3) days from receipt by the PROVIDER of the formal Notice of Award from COMELEC, the
PROVIDER shall furnish COMELEC with a Performance Security in an amount equivalent to five percent (5%) of
the Contract Amount; which Performance Security as of this date has been duly received by COMELEC.

Within seven (7) days from delivery by the PROVIDER to COMELEC of the Over-all Project Management Report
after successful conduct of the May 10, 2010 elections, COMELEC shall release to the PROVIDER the above-
mentioned Performance Security without need of demand.[37]

Smartmatic-TIM categorically stated in its Consolidated Comment to the petitions that the Comelec still retains
P50M of the amount due Smartmatic-TIM as performance security.[38] In short, the performance security had not yet
been released to Smartmatic-TIM which indicates that the AES contract is still effective and not yet terminated.
Consequently, pursuant to Article 19[39] of the contract, the provisions thereof may still be amended by mutual
agreement of the parties provided said amendment is in writing and signed by the parties. In light of the provisions
of the AES contract, there is, therefore, nothing wrong with the execution of the Extension Agreement.

Considering, however, that the AES contract is not an ordinary contract as it involves procurement by a government
agency, the rights and obligations of the parties are governed not only by the Civil Code but also by RA 9184. In
this jurisdiction, public bidding is the established procedure in the grant of government contracts. The award of
public contracts, through public bidding, is a matter of public policy.[40] The parties are, therefore, not at full liberty
to amend or modify the provisions of the contract bidded upon.

The three principles of public bidding are: (1) the offer to the public; (2) an opportunity for competition; and (3) a
basis for the exact comparison of bids.[41] By its very nature, public bidding aims to protect public interest by giving
the public the best possible advantages through open competition.[42]Competition requires not only bidding upon a
common standard, a common basis, upon the same thing, the same subject matter, and the same undertaking, but
also that it be legitimate, fair and honest and not designed to injure or defraud the government. [43] The essence of
competition in public bidding is that the bidders are placed on equal footing which means that all qualified bidders
have an equal chance of winning the auction through their bids.[44] Another self-evident purpose of public bidding is
to avoid or preclude suspicion of favoritism and anomalies in the execution of public contracts. [45]

A winning bidder is not precluded from modifying or amending certain provisions of the contract bidded upon.
However, such changes must not constitute substantial or material amendments that would alter the basic parameters
of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. [46] The
determination of whether or not a modification or amendment of a contract bidded out constitutes a substantial
amendment rests on whether the contract, when taken as a whole, would contain substantially different terms and
conditions that would have the effect of altering the technical and/or financial proposals previously submitted by the
other bidders. The modifications in the contract executed between the government and the winning bidder must be
such as to render the executed contract to be an entirely different contract from the one bidded upon.[47]

Public bidding aims to secure for the government the lowest possible price under the most favorable terms and
conditions, to curtail favoritism in the award of government contracts and avoid suspicion of anomalies, and it
places all bidders in equal footing. Any government action which permits any substantial variance between the
conditions under which the bids are invited and the contract executed after the award thereof is a grave abuse of
discretion amounting to lack or excess of jurisdiction which warrants proper judicial action.[48] If this flawed process
would be allowed, public bidding will cease to be competitive, and worse, government would not be favored with
the best bid. Bidders will no longer bid on the basis of the prescribed terms and conditions in the bid documents but
will formulate their bid in anticipation of the execution of a future contract containing new and better terms and
conditions that were not previously available at the time of the bidding. Such a public bidding will not inure to the
public good.[49]

In Power Sector Assets and Liabilities Management Corporation (PSALM) v. Pozzolanic Philippines Incorporated,
[50]
 the Court nullified the right of first refusal granted to respondent therein in the Batangas Contract for being
contrary to public policy. The Court explained that the same violated the requirement of competitive public bidding
in the government contract, because the grant of the right of first refusal did not only substantially amend the terms
of the contract bidded upon so that resultantly the other bidders thereto were deprived of the terms and opportunities
granted to respondent therein after it won the public auction, but also altered the bid terms by effectively barring any
and all true bidding in the future.[51]

Also in Agan, Jr. v. Philippine International Air Terminals Co., Inc., (PIATCO),[52] this Court declared as null and
void, for being contrary to public policy, the Concession Agreement entered into by the government with PIATCO,
because it contained provisions that substantially departed from the Draft Concession Agreement included in the bid
documents. The Court considered the subject contracts a mockery of the bidding process, because they were
substantially amended after their award to the successful bidder on terms more beneficial to PIATCO and prejudicial
to public interest.[53]

The same conclusions cannot be applied in the present case.

One. Smartmatic-TIM was not granted additional right that was not previously available to the other bidders.
Admittedly, the AES contract was awarded to Smartmatic-TIM after compliance with all the requirements of a
competitive public bidding. The RFP, Bid Bulletins and the AES contract identified the contract as one of lease with
option to purchase. The AES contract is primarily a contract of lease of goods[54] listed in the contract and purchase
of services[55] also stated in the contract. Section 4.3 thereof gives the Comelec the OTP the goods agreed upon. The
same provision states the conditions in exercising the option, including the additional amount that the Comelec is
required to pay should it exercise such right. It is, therefore, undisputed that this grant of option is recognized by
both parties and is already a part of the principal contract of lease. Having been included in the RFP and the bid
bulletins, this right given to the Comelec to exercise the option was known to all the bidders and was considered in
preparing their bids. The bidders were apprised that aside from the lease of goods and purchase of services, their
proposals should include an OTP the subject goods. Although the AES contract was amended after the award of the
contract to Smartmatic-TIM, the amendment only pertains to the period within which the Comelec could exercise
the option because of its failure to exercise the same prior to the deadline originally agreed upon by the parties.
Unlike in PSALM, wherein the winning bidder was given the right of first refusal which substantially amended the
terms of the contract bidded upon, thereby depriving the other bidders of the terms and opportunities granted to
winning bidder after it won the public auction; and in Agan, Jr., wherein the Concession Agreement entered into by
the government with PIATCO contained provisions that substantially departed from the draft Concession Agreement
included in the bid documents; the option contract in this case was already a part of the original contract and not
given only after Smartmatic-TIM emerged as winner. The OTP was actually a requirement by the Comelec when the
contract of lease was bidded upon. To be sure, the Extension Agreement does not contain a provision favorable to
Smartmatic-TIM not previously made available to the other bidders.
Two. The amendment of the AES contract is not substantial. The approved budget for the contract was
P11,223,618,400.00[56] charged against the supplemental appropriations for election modernization. Bids were,
therefore, accepted provided that they did not exceed said amount. After the competitive public bidding,
Smartmatic-TIM emerged as winner and the AES contract was thereafter executed. As repeatedly stated above, the
AES contract is a contract of lease with OTP giving the Comelec the right to purchase the goods agreed upon if it
decides to do so. The AES contract not only indicated the contract price for the lease of goods and purchase of
services which is P7,191,484,739.48, but also stated the additional amount that the Comelec has to pay if it decides
to exercise the option which is P2,130,635,048.15. Except for the period within which the Comelec could exercise
the OTP, the terms and conditions for such exercise are maintained and respected. Admittedly, the additional
amount the Comelec needed to pay was maintained (less the amount already paid when it purchased 920 units of
PCOS machines with corresponding CCS for the special elections in certain areas in the provinces of Basilan, Lanao
del Sur and Bulacan) subject to the warranties originally agreed upon in the AES contract. The contract amount not
only included that for the contract of lease but also for the OTP. Hence, the competitive public bidding conducted
for the AES contract was sufficient. A new public bidding would be a superfluity.

The Solicitor General himself clarified during the oral arguments that the purchase price of the remaining PCOS
machines stated in the assailed Deed of Sale was the price stated in Article 4.3 of the AES contract. Therefore, the
said amount was already part of the original amount bidded upon in 2009 for the AES contract which negates the
need for another competitive bidding.[57]

Third. More importantly, the amendment of the AES contract is more advantageous to the Comelec and the public.

The nature of an option contract was thoroughly explained in Eulogio v. Apeles,[58] to wit:

An option is a contract by which the owner of the property agrees with another person that the latter shall have the
right to buy the former's property at a fixed price within a certain time. It is a condition offered or contract by which
the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a
certain time, or under, or in compliance with certain terms and conditions; or which gives to the owner of the
property the right to sell or demand a sale. An option is not of itself a purchase, but merely secures the privilege to
buy. It is not a sale of property but a sale of the right to purchase. It is simply a contract by which the owner of the
property agrees with another person that he shall have the right to buy his property at a fixed price within a certain
time. He does not sell his land; he does not then agree to sell it; but he does sell something, i.e., the right or privilege
to buy at the election or option of the other party. Its distinguishing characteristic is that it imposes no binding
obligation on the person holding the option, aside from the consideration for the offer. [59]

Also in Carceller v. Court of Appeals,[60] the Court described an option in this wise:

An option is a preparatory contract in which one party grants to the other, for a fixed period and under specified
conditions, the power to decide, whether or not to enter into a principal contract. It binds the party who has given the
option, not to enter into the principal contract with any other person during the period designated and, within that
period, to enter into such contract with the one to whom the option was granted, if the latter should decide to use the
option. It is a separate agreement distinct from the contract which the parties may enter into upon the consummation
of the option.[61]

In Adelfa Properties, Inc. v. CA,[62] the Court described an option as:

An option, as used in the law on sales, is a continuing offer or contract by which the owner stipulates with another
that the latter shall have the right to buy the property at a fixed price within a certain time, or under, or in
compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell or
demand a sale. It is sometimes called an “unaccepted offer.” x x x[63]

From the foregoing jurisprudential pronouncements, an option is only a preparatory contract and a continuing offer
to enter into a principal contract. Under the set-up, the owner of the property, which is Smartmatic-TIM, gives the
optionee, which is the Comelec, the right to accept the former’s offer to purchase the goods listed in the contract for
a specified amount, and within a specified period. Thus, the Comelec is given the right to decide whether or not it
wants to purchase the subject goods. It is, therefore, uncertain whether or not the principal contract would be entered
into. The owner of the property would then have to wait for the optionee to make a decision. A longer option period
would mean that more time would be given to the optionee to consider circumstances affecting its decision whether
to purchase the goods or not. On the part of Smartmatic-TIM, it would have to wait for a longer period to determine
whether the subject goods will be sold to the Comelec or not, instead of freely selling or leasing them to other
persons or governments possibly at a higher price. This is especially true in this case as the terms and conditions for
the exercise of the option including the purchase price, had been included in the AES contract previously bidded
upon. The parties are bound to observe the limitations embodied therein, otherwise, a new public bidding would be
needed.

We agree with respondents that the exercise of the option is more advantageous to the Comelec, because the
P7,191,484,739.48 rentals paid for the lease of goods and purchase of services under the AES contract was
considered part of the purchase price. For the Comelec to own the subject goods, it was required to pay only
P2,130,635,048.15. If the Comelec did not exercise the option, the rentals already paid would just be one of the
government expenses for the past election and would be of no use to future elections. Assuming that the exercise of
the option is nullified, the Comelec would again conduct another public bidding for the AES for the 2013 elections
with its available budget of P7 billion. Considering that the said amount is the available fund for the whole election
process, the amount for the purchase or lease of new AES will definitely be less than P7 billion. Moreover, it is
possible that Smartmatic-TIM would again participate in the public bidding and could win at a possibly higher price.
The Comelec might end up acquiring the same PCOS machines but now at a higher price.

The advantage to the government of the exercise of the OTP was even recognized by petitioners, shown during the
oral arguments:

ASSOCIATE JUSTICE PERALTA:

May I just ask you, do you know the total value of the subject matter of this contract?

DEAN ESPEJO:
Php1.8 billion pesos, Your Honor.

ASSOCIATE JUSTICE PERALTA:

You’re referring to the Deed of Sale.

DEAN ESPEJO:
Yes, Your Honor.

ASSOCIATE JUSTICE PERALTA:

The whole, the whole equipment, subject matter of the contract.

DEAN ESPEJO:
I think roughly, the original contract something like 10 billion I am not sure, Your Honor.

ASSOCIATE JUSTICE PERALTA:

10 billion pesos.

DEAN ESPEJO:
Yes, Your Honor.

ASSOCIATE JUSTICE PERALTA:

Okay. Now, in the original contract of July 10, 2009, the contract was not actually a purchase contract but merely a
lease contract.

DEAN ESPEJO:
Yes, Your Honor.
ASSOCIATE JUSTICE PERALTA:
And the lease contract is 7.1 billion.

DEAN ESPEJO:
It says 7.1 billion.

ASSOCIATE JUSTICE PERALTA:

Okay. But it is here [denominated] as a lease contract.

DEAN ESPEJO:
Yes, Your Honor.

ASSOCIATE JUSTICE PERALTA:

So the value was 10 billion pesos then you just pay the difference between ten (10) and seven (7) you get 3 billion
pesos to purchase all of these equipment.

DEAN ESPEJO:
Yes, Your Honor.

ASSOCIATE JUSTICE PERALTA:

Okay. Now, you look at your Deed of Sale, this is annexed to your petition, the value of the Deed of Sale is
something like two billion one hundred thirty million (Php2,130,000,000).

DEAN ESPEJO:
Around that much, Your Honor.

ASSOCIATE JUSTICE PERALTA:

You add this at two [billion] one hundred thirty million and so to seven billion one ninety-one the subject matter of
your original contract; you come up with something like over 9 billion pesos.

DEAN ESPEJO:
Close to Ten, Your Honor.

ASSOCIATE JUSTICE PERALTA:

Close to Ten.

DEAN ESPEJO:
Yes, Your Honor.

ASSOCIATE JUSTICE PERALTA:

So that’s practically less than the total value of the equipment, because according to you the total value would come
up to 10 billion pesos, you add up the Lease Contract of 7 billion and two billion, plus under this Deed of Sale which
is the subject matter of this petition, you will come up with a little more than 9 billion pesos even less than the 10
billion pesos. Do you think that is disadvantageous to the government?

DEAN ESPEJO:
May I be allowed to explain?

ASSOCIATE JUSTICE PERALTA:

Go ahead, you go ahead, you have all the time.

DEAN ESPEJO:
It may appear advantageous, Your Honor please, but on the other hand, there are certain disadvantages there. For
one thing, these are not brand new machines; these are refurbished existing machines which could be suffering from
hardware or software problem. For the COMELEC to accept this, Your Honor please, each machine will have to be
checked as to its hardware and software. Eighty-two thousand (82,000) PCOS machines, Your Honor please, what if
half of them, [turn out] to be white elephants or malfunctioning, Your Honor please, then we will be acquiring
eighty-two thousand (82,000) with fifty percent (50%) malfunctioning machines. There is a danger, Your Honor
please, that does not appear to the naked eye. In any event, with respect to the financial figures there appears to be
some advantages, Your Honor, please.

ASSOCIATE JUSTICE PERALTA:

x x x these are merely speculative. Your’re only speculating that there are dangers, the dangers might not come, in
fact, it might even be void or favorable. Okay, now my other question is, do you think that if this was bidden out
under R.A. 9184 for the purchase of all these equipment, do you think that a bidder will come up with a bid of less
than 2 billion pesos for the whole equipment? When according to you, the equipment in 2009 is 10 billion, and
elections are very near already 2013, the filing of certificates of candidacy will be on the second to the last month of
this year?

DEAN ESPEJO:
May I be allowed to answer that by way of a speculation, Your Honor.

ASSOCIATE JUSTICE PERALTA:

Go ahead, please.

DEAN ESPEJO:
I think bidder will find it difficult to match that.

xxxx

ASSOCIATE JUSTICE PERALTA:

Okay. My other question is this. Okay, now you admitted that the original value is 10 billion. Are you also aware
that the budget of the COMELEC when they come up with this contract is 7 billion?

DEAN ESPEJO:
Yes, Your Honor.

ASSOCIATE JUSTICE PERALTA:

And the total value of the original contract is 10 billion. Do you think that the COMELEC will have money to
purchase equipment valued at 10 billion pesos with only 7 billion pesos for the elections of 2013? Because the
budget of 7 billion is not for the purpose only of the purchase of the equipment, but also includes for the budget of
the elections, pre, during and post elections expenses.

DEAN ESPEJO:
Well, Your Honor please, the shortfall of 3 billion pesos can be remedied if Congress will appropriate additional
amounts, if the President of this Republic will convince the legislature to appropriate an additional amount, I see no
problem why the shortfall of 3 billion cannot be remedied, Your Honor please.

ASSOCIATE JUSTICE PERALTA:

Oh, that’s again speculative.

DEAN ESPEJO:
Again, that’s unfortunate that’s my speculation.

ASSOCIATE JUSTICE PERALTA:

You will have first to go to Congress, then you go to Senate, and then you go to the President discounting the
possibility of filing a petition to question the allocation of additional amount for the 2013 elections, by the time that
all of these exercises are finished then election is there already.

DEAN ESPEJO:
Well, I’m hopeful, Your Honor please, that our Congressmen and our Senators will rise to the occasion and move
fast and appropriate the needed amount of 3 billion pesos to help the COMELEC acquire the proper Automated
election System.

x x x[64]

Another reason posed by petitioners for their objection to the exercise of the option and the eventual execution of the
March 30, 2012 Deed of Sale is the existence of the alleged defects, glitches, and infirmities of the subject goods.
The technology provided by Smartmatic-TIM was not perfect, because of some technical problems that were
experienced during the 2010 elections. Petitioners herein doubt that the integrity and sanctity of the ballots are
protected because of these defects.

We do not agree.

Prior to the execution of the Deed of Sale, the Comelec and Smartmatic-TIM had agreed that the latter would
undertake fixes and enhancements to the hardware and software to make sure that the subject goods are in working
condition to ensure a free, honest, and credible elections. As former Commissioner Augusto C. Lagman
admitted[65] during the oral arguments, there are possible software solutions to the alleged problems on the PCOS
machines and it is not inherently impossible to remedy the technical problems that have been identified. While there
is skepticism that Smartmatic-TIM would be able to correct the supposed defects prior to the 2013 elections because
of its inaction during the two years prior to the exercise of the option, we agree with the opinion of Chairman Sixto
S. Brillantes, Jr. that it is absurd to expect Smartmatic-TIM to invest time, money and resources in fixing the PCOS
machines to the specifications and requirements of the Comelec when prior to the exercise of the OTP, they do not
have the assurance from the Comelec that the latter will exercise the option.[66]

Moreover, as to the digital signature which appears to be the major concern of petitioners, it has been clarified
during the oral arguments that the PCOS machines are capable of producing digitally-signed transmissions:

JUSTICE CARPIO:
I have some questions. Counsel, the law requires that the election returns that are electronically transmitted must be
digitally signed, correct?

ATTY. LAZATIN:
That’s right, Your Honor.

JUSTICE CARPIO:
Now, but in the 2010 elections, all election returns electronically transmitted were NOT digitally signed, correct?

ATTY. LAZATIN:
They were, Your Honors, please…

JUSTICE CARPIO:
Why? How?

ATTY. LAZATIN:
Your Honor, as we explained in our presentation, the iButtons, Your Honor, contain the digital signatures…

JUSTICE CARPIO:
Yes, I understand that

ATTY. LAZATIN:
…and the iButtons [interrupted]

JUSTICE CARPIO:
because they are there, the machine is capable of producing digitally-signed transmissions. But you just said that the
BEI Chairman did not input their private keys because there was no time. It requires five (5) months.
ATTY. LAZATIN:
Your Honor, as I said, there is a digital signature that was assigned to the BEI…to the BEIs, your Honor, okay. I am
saying that there is digital signature. What I also said, Your Honor, is that there is also a possibility that another
digital certificate or signature can come from another certification authority xxx

JUSTICE CARPIO:
No, that’s a third party…that’s a third-party certifier, but that’s an option. The law does not require a third-party
certification. It merely says that transmission must be digitally signed.

ATTY. LAZATIN:
That’s right.

JUSTICE CARPIO:
That’s why Chairman Melo told Congress that it will cost one (1) billion to get a third-party certifier, but the law
does not require it even now, if you said in your presentation that the BEI Chairman could not input their private
key, that’s generated because it takes five (5) months to do that and the list of BEI Chairman is known only one (1)
month before the election, then how could there be a digital signature?

ATTY. LAZATIN:
Your Honor, as I mentioned it is a…not a customized or personal digital signature. It is a digital signature that is
assigned by COMELEC.

JUSTICE CARPIO:
Assigned by COMELEC? How can…who inputs that digital signature?

ATTY. LAZATIN:
It is cranked out, Your Honor, and…

JUSTICE CARPIO:
No, your…it is trusted that the list of the BEI Chairman is known only one (1) month before, so how can the BEI
Chairman input their digital signature five (5) months before?

ATTY. LAZATIN:
As I said, Your Honor, it is not a personal or customized signature. It is just like …

JUSTICE CARPIO:
It is a machine ID, in other words?

ATTY. LAZATIN:
No, let me explain it this way, Your Honor. The best example I can give, Your Honor, is …

JUSTICE CARPIO:
Okay, let us define first what a digital signature means.

ATTY. LAZATIN:
The Rules of Court, Your Honor, defines “digital signature” as the first one it is electronic signature consisting of a
transformation of an electronic document or an electronic data message using an asymmetric or public Cryptosystem
such that a person having the initial untransformed electronic document and the signer’s public key can accurately
determine: (i) whether the transformation was created using the private key that corresponds to the signer’s public
key; and (ii) whether the initial electronic document has been altered after the transformation was made.

JUSTICE CARPIO:
Therefore, digital signature requires private key and public key…

ATTY. LAZATIN:
Yes, Your Honor.
JUSTICE CARPIO:
…and this private key and public key are generated by an algorithm, correct?

ATTY. LAZATIN:
Yes, that’s right, Your Honor.

JUSTICE CARPIO:
And there is another algorithm which, if you match…if you put together the private key and the message, will
generate the signature.

ATTY. LAZATIN:
That’s right, Your Honor.

JUSTICE CARPIO:
And the third algorithm, that if you put together the public key and the signature it will accept or reject the message,
that’s correct?

ATTY. LAZATIN:
That’s correct, Your Honor.

JUSTICE CARPIO:
Now, was that used in the 2010 elections?

ATTY. LAZATIN:
Yes, your Honor.

JUSTICE CARPIO:
How was that private key generated?

ATTY. LAZATIN:
Again, Your Honor, as I said…

JUSTICE CARPIO:
Did the BEI Chairman know what that private key is?

ATTY. LAZATIN:
Your Honor, allow me to explain, Your Honor. The names, Your Honor, or the private keys are…were assigned to
the BEIs Your Honor. In the same way, Your Honor, in the office my code name, Your Honor, or assigned to me is
“00 xxx

JUSTICE CARPIO:
You mean to say the private key is embedded in the machine?

ATTY. LAZATIN:
No, Your Honor, it is embedded in the iButton and they are given a x x x

JUSTICE CARPIO:
Yes, in the machine…the iButton is in the machine.

ATTY. LAZATIN:
No, Your Honor.

JUSTICE CARPIO:
Where is it?
ATTY. LAZATIN:
It is a gadget, Your Honors, that is used…it is a separate gadget, your Honor xxx This is a sample of an iButton,
your Honor, and in fact we said that we are prepared to demonstrate, Your Honor, and to show to this Court…

xxxx

JUSTICE CARPIO:
On election Day, where was the iButton placed? In the machine?

ATTY. LAZATIN:
To start the machine, Your Honor, you have to put it on top of that Button xxx

JUSTICE CARPIO:
In other words, whoever is in possession of that iButton can make a digitally-transmitted election return, correct?

ATTY. LAZATIN:
That’s correct, Your Honor. Your Honor, together with the other BEIs because apart from this iButton, Your Honor,
for authentication the BEIs, three of them, Your Honor, have an 8-digit PIN, Your Honor.

JUSTICE CARPIO:
How is that 8-digit PIN given to them?

ATTY. LAZATIN:
In a sealed envelope, Your Honor, these are x x x

JUSTICE CARPIO:
And then they also input that in the keyboard?

ATTY. LAZATIN:
Yes, Your Honor.

JUSTICE CARPIO:
In the display?

ATTY. LAZATIN:
Yes, Your Honor.

JUSTICE CARPIO:
So, that iButton contains the private key?

ATTY. LAZATIN:
Yes, Your Honor, that’s my understanding.

JUSTICE CARPIO:
And who controls the public key? Who control[led] the public key in the last election?

ATTY. LAZATIN:
My understanding, Your honor, is COMELEC, your Honor.

JUSTICE CARPIO:
COMELEC had the public key?

ATTY. LAZATIN:
That’s my understanding, Your Honor.

JUSTICE CARPIO:
And there was no certifying agency because it cost too much and the law did not require that?

ATTY. LAZATIN:
That’s correct, Your Honor. But the machine, Your Honor, as I mentioned, is capable of accepting any number of
digital signatures whether self-generated or by a third-party certification authority, Your Honor.

JUSTICE CARPIO:
Okay. So, whoever is in possession of that iButton and in possession of the four (4) PINS, the set of PINs, for the
other BEI number, can send a transmission?

ATTY. LAZATIN:
Yes, Your Honor.

JUSTICE CARPIO:
The moment you are in possession of the iButton and the four (4) sets of PINs

ATTY. LAZATIN:
That’s correct, Your Honor.

JUSTICE CARPIO:
If they can send an electronic transmission that’s digitally signed and when received by the COMELEC and matched
with the public key will result with an official election return, correct?

ATTY. LAZATIN:
That’s correct. In the same way, Your Honor, that even if someone keeps his key or private key, Your Honor, if he is
under threat he will also divulge it, Your Honor. It’s the same.

JUSTICE CARPIO:
Okay, so whoever wants to send it, he will have to get the private key from the BEI Chairman and the PIN numbers
from the other members…

ATTY. LAZATIN:
Yes, Your Honor.

JUSTICE CARPIO:
…before they can send the electronic transmission.

ATTY. LAZATIN:
Yes, Your Honor.

JUSTICE CARPIO:
Okay. That clarifies things. x x x[67]

As the Comelec is confronted with time and budget constraints, and in view of the Comelec’s mandate to ensure
free, honest, and credible elections, the acceptance of the extension of the option period, the exercise of the option,
and the execution of the Deed of Sale, are the more prudent choices available to the Comelec for a successful 2013
automated elections. The alleged defects in the subject goods have been determined and may be corrected as in fact
fixes and enhancements had been undertaken by Smartmatic-TIM. Petitioners could not even give a plausible
alternative to ensure the conduct of a successful 2013 automated elections, in the event that the Court nullifies the
Deed of Sale.

WHEREFORE, premises considered, the petitions are DISMISSED. The Temporary Restraining Order issued by
the Court on April 24, 2012 is LIFTED.

SO ORDERED.