G.R. No.

L-65922 December 3, 1991 Trinidad paid the installment for 1970 and 1971 on time but asked Francisco
for an extension of 60 days to pay the installment due on July 1, 1972.
LAURETA TRINIDAD, petitioner, However, she says she eventually decided not to continue paying the
vs. amortizations because the house was flooded again on July 18, 21, and 30,
INTERMEDIATE APPELLATE COURT and VICENTE J. 1972, the waters rising to as high as five feet on July 21. Upon her return
FRANCISCO, respondent. from the United States on October 11, 1972, she wrote the City Engineer's
office of Quezon City and requested an inspection of the subject premises to
Ramon A. Gonzales for petitioner. determine the cause of the flooding. The finding of City Engineer Pantaleon
P. Tabora was that "the lot is low and is a narrowed portion of the creek."
Raymundo T. Francisco for R.J. Francisco.

Siquia Law Offices for respondents Trinidad J. Francisco & Rosario F. On January 10, 1973, the petitioner filed her complaint against Francisco
Kelemen. alleging that she was induced to enter into the contract of sale because of his
misrepresentations. She asked that the agreement be annulled and her
payments refunded to her, together with the actual expenses she had
incurred for the "annexes and decorations" she had made on the house. She
also demanded the actual cost of the losses she had suffered as a result of
CRUZ, J.: the floods, moral and exemplary damages in the sum of P200,000.00, and
P10,000.00 attomey's
The house looked beautiful in summer but not when the waters came. Then it fees. 2
was flooded five feet deep and leas than prepossessing, let alone livable.
Disenchanted, the buyer sued the seller for the annulment of the sale and In his answer and amended answer, the defendant denied the charge of
damages, alleging fraud. misrepresentation and stressed that the plaintiff had thoroughly inspected the
property before she decided to buy it. The claimed creek was a drainage lot,
The house was Bungalow No. 17, situated at Commonwealth Village in and the floods complained of were not uncommon in the village and indeed
Quezon City, and belonged to the late Vicente J. Francisco. Sometime in even in the Greater Manila area if not the entire Luzon. In any event, the
early 1969, Laureta Trinidad, the petitioner herein, approached him and floods were fortuitous events not imputable to him. He asked for the
offered to buy the property. Francisco was willing to sell. Trinidad inspected rescission of the contract and the forfeiture of payments made by the plaintiff
the house and lot and examined a vicinity map which indicated drainage plus monthly rentals with interest of P700.00 for the property from July 2,
canals along the property. The purchase price was P70,000.00 with a down
1972, until the actual vacation of the property by the plaintiff. He also claimed
payment of P17,500.00. The balance was to be paid in five equal annual
installments not later than July 1 of each year at 12% interest per annum. litigation expenses, including attorney's fees. 3

On March 29, 1969, Trinidad paid Francisco P5,000.00 as earnest money

and entered into the possession of the house. However, as she relates it, she In his decision dated June 17, 1975, Judge Sergio F. Apostol of the then
subsequently heard from her new neighbors that two buyers had previously Court of First Instance of Rizal held in favor of the plaintiff and disposed as
vacated the property because it was subject to flooding. She says she talked follows:
to Francisco about this matter and that he told her everything had been fixed
and the house would never be flooded again. Thus assured, she gave him WHEREFORE, premises considered, judgment is hereby rendered:
P12,500.00 to complete the down payment. They signed the Contract of
Conditional Sale on August 8, 1969. 1 a) ordering the annulment of the contract of conditional sale entered into by
the parties;

b) ordering defendant's representatives to pay to the plaintiff the amount of

P49,840.00 with interest from the time of the filing of the complaint;
1
c) ordering the defendant's representatives to pay the amount of P39,800.00 2. The Intermediate Appellate Court palpably erred in finding that
representing the value of the improvements and the losses she incurred by there was no fraud prior to the sale that induced petitioner to enter
virtue of the flood; into the said sale.

d) ordering plaintiff to return to the defendant's representatives the house 3. The Intermediate Appellate Court palpably erred in cancelling the
and lot in question; complaint for non-payment of the installments and declaring previous
installments forfeited.
e) ordering defendant's representatives to pay the amount of P5,000.00 as
and by way of attomey's fees.
4. The Intermediate Appellate Court erred in not granting moral
WITH COSTS AGAINST THE DEFENDANT. damages and attorney's fees to petitioner.

Upon separate motions for reconsideration filed by both parties, Judge The basic issue in this controversy is whether or not, under the established
Apostol ordered and held a new trial, resulting in a new decision dated April facts, there was misrepresentation on the part of Francisco to justify the
13, 1976, reiterating his original dispositions. rescission of the sale and the award damages to the petitioner.

The pertinent provisions of the Civil Code on fraud are the following:
Both parties appealed to the respondent court, which reversed the trial court
in a decision promulgated on May 31, 1983. 4 The dispositive portion read as Art. 1338. There is fraud when, through insidious words or
follows: machinations of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not have agreed
to.
WHEREFORE, the appeal of plaintiff is hereby dismissed. With
respect to the appeal of defendant, the decision of the lower court is
hereby reversed and set aside and another one is rendered Art. 1339. Failure to disclose facts, when there is a duty to reveal
dimissing the complaint and, upon the counterclaim, sustaining the them, as when the parties are bound by confidential relations,
cancellation of the contract of conditional sale (Exh. B) and the constitutes fraud.
forfeiture of any and all sums of money paid by plaintiff to the
defendant on account of the contract to be treated as rentals for the Art. 1340. The usual exaggerations in trade, when the other party
use and occupation of the property and ordering the plaintiff to had an opportunity to know the facts, are not in themselves
vacate the property. No special pronouncement as to costs. fraudulent.

This Court gave due course to the herein petition for review on certiorari of Fraud is never lightly inferred; it is good faith that is. Under the Rules of
the said decision and required the parties to submit their respective Court, it is presumed that "a person is innocent of crime or wrong" 7 and that
memoranda. Pendente lite, Vicente J. Francisco died and was eventually "private transactions have been fair and regular." 8 While disputable, these
substituted by his heirs, 5 two of whom, Trinidad J. Francisco and Rosario F. presumptions can be overcome only by clear and preponderant evidence.
Kelemen, filed their own joint memorandum. 6 The Court has deliberated on
the issues and the arguments of the parties and is now ready to act on the Our finding is that the fraud alleged by the petitioner has not been
motions filed by the petitioner and the private respondents for the resolution satisfactorily established to call for the annulment of the contract. This finding
of this case. is based on the following considerations.

The petitioner faults the respondent court on the following grounds: First, it was the petitioner who admittedly approached the private respondent,
who never advertised the property nor offered it for sale to her.
1. The Intermediate Appellate Court palpably erred in not finding that
the lot on which the house in question stands is a portion of a creek,
hence outside the commerce of man.

2
Second, the petitioner had full opportunity to inspect the premises, including and ordinary means used by sellers to obtain a high price and are
the drainage canals indicated in the vicinity map that was furnished her, always understood as affording to buyers no ground for omitting to
before she entered into the contract of conditional sale. make inquiries. A man who relies upon such an affirmation made by
a person whose interest might so readily prompt him to exaggerate
Third, it is assumed that she made her appraisal of the property not with the the value of his property does so at his peril, and must take the
untrained eye of the ordinary prospective buyer but with the experience and consequences of his own imprudence.
even expertise of the licensed real estate broker that she was. 9 If she
minimized the presence of the drainage canals, she has only her own We have also held that "one who contracts for the purchase of real estate in
negligence to blame. reliance on the representations and statements of the vendor as to its
character and value, but after he has visited and examined it for himself and
Fourth, seeing that the lot was depressed and there was a drainage lot has had the means and opportunity of verifying such statements, cannot
abutting it, she cannot say she was not forewarned of the possibility that the avoid the contract on the ground that they were false and exaggerated." 13
place might be flooded. Notwithstanding the obvious condition of the
property, she still decided to buy it.

Fifth, there is no evidence except her own testimony that two previous ''The Court must also reject the petitioner's contention that the lot on which the house stands is a portion of a creek and

owners of the property had vacated it because of the floods and that therefore outside the commerce of man as part of the public domain.

Francisco assured her that the house would not be flooded again. The
supposed previous owners were not presented as witnesses and neither The said property is covered by TCT No. 102167 of the Registry of Deeds of Quezon City. Under the Land Registration
were the neighbors. Francisco himself denied having made the alleged Act, title to the property covered by a Torrens certificate becomes indefeasible after the expiration of one year from the
assurance. entry of the decree of registration. Such decree of registration is incontrovertible and is binding on all persons whether
or not they were notified of or participated in the registration proceedings.

Sixth, the petitioner paid the 1970 and 1971 amortizations even if, according
to her Complaint, "since 1969 said lot had been under floods of about one (1)
foot deep," 10 and despite the floods of September and November 1970.
If such title is to be challenged, it may not be done collaterally as in the present case, because the judicial action
Seventh, it is also curious that notwithstanding the said floods, the petitioner required is a direct attack. Section 48 of the Property Registration Decree expressly provides that a certificate of title
still "made annexes and decorations on the house," 11 all of a permanent cannot be subject collateral attack and can be altered, modified or cancelled only in a direct proceeding in accordance
nature, for which she now claims reimbursement from the private with law. This was the same rule under Act 496. 14
Moreover, the right of reversion belongs to
respondent. the State and may be invoked on its behalf only by the Solicitor General. 15

To repeat, it has not been satisfactorily established that the private

respondent inveigled the petitioner through false representation to buy the
subject property. Assuming that he did make such representations, as the It is true, as the private respondents have insisted and the respondent court has found, that the Contract of Conditional
petitioner contends, she is deemed to have accepted them at her own risk Sale contains the following condition:
and must therefore be responsible for the consequences of her careless
credulousness. In the case of Songco v. Sellner, 12 the Court said: (d) That should the SECOND PARTY fail to make any of the payments referred to in the aforesaid
paragraphs 2(a) and (b), of this contract of conditional sale, shall be considered automatically rescinded
The law allows considerable latitude to seller's statements, or and cancelled without the necessity of notice to the SECOND PARTY, or of any judicial declaration to that
dealer's talk, and experience teaches that it is exceedingly risky to effect, and any and all sums paid by the SECOND PARTY shall be considered rents and liquidated
accept it at it at face value. . . . damages for the breach of this contract, and the SECOND PARTY shall forthwith vacate the foresaid
property peacefully.
Assertions concerning the property which is the subject of a contract
of sale, or in regard to its qualities and characteristics, are the usual

3
Nevertheless, we cannot say that the petitioner was, strictly speaking, in default in the payment of the remaining NATIONAL DEVELOPMENT COMPANY, petitioner, vs. MADRIGAL WAN
amortizations in the sense contemplated in that stipulation. She was not simply unable to make the required payments. HAI LINES CORPORATION, respondent.
The fact is she refused to make such payments. If she suspended her payments, it was because she felt she was
justified in doing so in view of the defects she found in the property. It is noteworthy that it was she who sued the
DECISION
private respondent, not the other way round, and that it was she who argued that the seller was not entitled to the
additional installments because of his violation of the contract. If she asked for the annulment of the contract and the SANDOVAL-GUTIERREZ, J.:
refund to her of the payments she had already made, plus damages, it was because she felt she had the right to do so.

Before us is a petition for review on certiorari[1] assailing the Decision of

Given such circumstances, the Court feels and so holds that the above-quoted stipulation should not be strictly the Court of Appeals dated May 21, 2001 in CA-G.R. CV No. 66026, affirming
enforced, to justify the rescission of the contract. To make her forfeit the payments already made by her and at the with modification the Decision dated August 6, 1999 of the Regional Trial
same time return the property to the private respondents for standing up to what she considered her right would, in our Court, Branch 62, Makati City, in Civil Case No. 96-558 for sum of money and
view, be unfair and unconsionable. Justice demands that we moderate the harsh effects of the stipulation. Accordingly, damages.
in the exercise of our equity jurisdiction, we hereby rule that the Contract of Conditional Sale shall be maintained
between the parties except that the petitioner shall not return the house to the private respondents. However, she will The factual antecedents are:
have to pay them the balance of the purchase price in the sum of P52,500.00, ** with 12% annual interest from July 1,
The National Development Company, petitioner, is a government-owned
1972, until full payment.
and controlled corporation created and existing under Commonwealth Act No.
182, as amended by Presidential Decree No. 1648. The National Shipping
Obviously, rejection of the petitioner's claim for moral and exemplary damages must also be sustained. Corporation of the Philippines (NSCP) is a wholly-owned subsidiary of
petitioner offering shipping services for containerized cargo between the Far
East ports and the U.S. West Coast.[2]
On March 1, 1993, petitioners Board of Directors approved the
What we see here is a bad bargain, not an illegal transaction vitiated by privatization plan of the NSCP.[3] In May 1993, the Board offered for sale to the
fraud. While we may commiserate with the petitioner for a purchase that has public its one hundred percent (100%) stock ownership in NSCP
proved unwise, we can only echo what Mr. Justice Moreland observed worth P150,000.00, as well as its three (3) ocean-going vessels (M/V National
in Vales v. Villa, 16 thus: Honor, M/V National Pride and M/V National Dignity).[4]
Consequently, petitioner released to the public an Information
. . . Courts cannot follow one every step of his life and extricate him
Package[5] containing NSCPs background, assets, operational and financial
from bad bargains, protect him from unwise investments, relieve him
status. Attached thereto is NSCPs Financial Statements covering the period
from one-sided contracts, or annul the effects of foolish acts. Courts
from December 1990 up to 1992.
cannot constitute themselves guardians of persons who are not
legally incompetent. Courts operate not because one person has The Information Package likewise contained the Negotiated Sale
been defeated or overcome by another, but because he has been Guidelines which embodied the terms and conditions of the proposed
defeated or overcome illegally. Men may do foolish things, make sale. Attached thereto is a Proposal Letter Form[6] wherein bidders were
ridiculous contracts, use miserable judgment, and lose money by advised to submit their bids to be specified in the same form. Petitioners
them indeed, all they have in the world; but not for that alone can desired price for the NSCP shares of stock and the vessels was Twenty-Six
the law intervene and restore. There must be, in addition, Million Seven Hundred Fifty Thousand US Dollars ($26,750,000.00).[7]
a violation of law, the commission of what the law knows as
an actionable wrong, before the courts are authorized to lay hold of During the public bidding on May 7, 1993, the lone bidder was herein
the situation and remedy it. respondent, Madrigal Wan Hai Lines Corporation, a domestic private
corporation duly organized and existing under the Philippine laws with principal
WHEREFORE, the appealed decision is AFFIRMED as above modified, with office in Manila. Mr. Willie J. Uy, respondents Consultant, submitted a bid of
no pronouncement as to costs. It is so ordered. $15 million through the Proposal Letter Form.[8]
The respondents bid was rejected by petitioner and the Commission on
Narvasa, C.J., Feliciano, Grio-Aquino and Medialdea, JJ., concur. Audit.

4
 But since there was no other bidder, petitioner entered into a negotiated a. US $671,653, US $14,415.87, and US $2,117.23 or their
sale with respondent.[9] After several negotiations, respondent increased its peso equivalent at the time of payment;
offer to $18.5 million which was accepted by petitioner. The negotiated sale
was then approved by petitioners Board of Directors on August 26, 1993, the b. 6% interest of the above-mentioned amounts per annum
President of the Philippines on September 28, 1993, the Committee on from the time of the filing of the complaint until the
Privatization on October 7, 1993, and the Commission on Audit on February same shall have been fully paid;
2, 1994.[10]
Accordingly, on February 11, 1994, petitioner issued a Notice of Award to c. P100,000.00 as exemplary damages;
respondent of the sale of the NSCP shares and vessels for $18.5 million.[11] On
March 14, 1994, petitioner and respondent executed the corresponding d. P100,000.00 as attorneys fees;
Contract of Sale,[12] and the latter acquired NSCP, its assets, personnel,
records and its three (3) vessels.[13] (2) The Counterclaims of the defendant dated August 20, 1996 is
On September 22, 1994, respondent was surprised to receive from DISMISSED.[20]
the US Department of Treasury, Internal Revenue Service (US IRS), a
Notice of Final Assessment against NSCP for deficiency taxes on gross Upon appeal, the Court of Appeals rendered a Decision[21] on May 21,
transportation income derived from US sources for the years ending 2001 affirming the trial courts judgment with modification, thus:
1990, 1991 and 1992.[14] The tax assessment was based on Section 887 of
the US Internal Revenue Code imposing a 4% tax on gross transportation WHEREFORE, upon the premises, the Decision appealed from
income of any foreign corporation derived from US sources.[15] is AFFIRMED with the MODIFICATION that the award of exemplary
damages is DELETED and the award of attorneys fees
Anxious that the delay in the payment of the deficiency taxes may hamper is REDUCED to P20,000.00.
its shipping operations overseas, respondent, on October 14, 1994,
assumed and paid petitioners tax liabilities, including the tax due for the
year 1993, in the total amount of $671,653.00. These taxes were incurred SO ORDERED.[22]
prior to respondents take-over of NSCPs management.[16] Respondent
likewise paid the additional amount of $16,533.10 as penalty for late The Court of Appeals held:
payment.[17]
We concur with the trial court in ordering defendant-appellant (now petitioner)
Eventually, respondent demanded from petitioner reimbursement for the
to reimburse plaintiff-appellee (now respondent) the deficiency taxes it paid
amounts it paid to the US IRS. But petitioner refused despite repeated
to the US IRS, and quote with favor its well-written ratiocination as follows:
demands. Hence, on March 20, 1996, respondent filed with the Regional Trial
Court (RTC), Branch 62, Makati City a complaint[18] against petitioner for
reimbursement and damages, docketed as Civil Case No. 96-558. In its effort to extricate itself from liability, defendant further argues that the
sale with the plaintiff was on CASH, AS-WHERE-IS basis and that plaintiff,
On August 6, 1999, the RTC rendered a Decision[19] in favor of as an offeror, was responsible for informing itself with respect to any and all
respondent and against petitioner. The trial court found, among others, that conditions regarding the NSCP shares and vessels which may in any manner
even before the sale, petitioner knew that NSCP had tax liabilities with the US affect the offer price or the nature of offerors proposal (Exhs. 8, 8-A to A-B).
IRS, yet it did not inform respondent about it. The dispositive portion of the
RTC Decision reads: The above-mentioned contracts form part of the NSCPs Negotiated Sale
Guidelines dated March 1993 prepared by NSCP and required by NDC (now
WHEREFORE, premises considered, judgment is hereby rendered as petitioner) to be attached with the Proposal Letter Form, which was also
follows: prepared by NSCP, and submitted to NDC by bidders. These contracts are
ready-made form of contracts, the preparation of which was left entirely to
(1) defendant (now petitioner) to pay plaintiff (now respondent), to wit: the NSCP. Their nature is that of a contract of adhesion. A contract of
adhesion may be struck down as void and unenforceable, for being
subversive of public policy, when the weaker party is imposed upon in
5
dealing with the dominant bargaining party and is reduced to the alternative (1) Whether the Negotiated Sale Guidelines and the Proposal Letter Form
of taking it or leaving it, completely deprived of the opportunity to bargain on constitute a contract of adhesion; and
equal footing (Saludo, Jr. vs. Court of Appeals, 207 SCRA 498 [1992]). In the
case at bar, the acceptance of the Negotiated Sale Guidelines and (2) Whether petitioner is legally bound to reimburse respondent for the
submission thereof together with the Proposal Letter Form by a prospective amounts it paid corresponding to the formers tax liabilities to the US IRS.
buyer is a required formality of the bidding. Under the circumstance, the
plaintiff, in taking such contracts, may not be deemed to have been given the
On the first issue, we agree with both lower courts that the Negotiated
opportunity to bargain on equal footing.[23] Sale Guidelines and the Proposal Letter Form constitute a contract of
adhesion.
Petitioner now comes to us via the instant petition, ascribing to the Court
of Appeals the following error: A contract of adhesion is one in which one of the parties imposes a ready-
made form of contract, which the other party may accept or reject, but which
THE COURT OF APPEALS ERRED IN CONCURRING WITH THE TRIAL the latter cannot modify. In other words, in such contract, the terms therein are
COURT IN ORDERING HEREIN PETITIONER TO REIMBURSE fixed by one party, and the other party has merely to take it, or leave it.[38] Thus,
RESPONDENT THE DEFICIENCY TAXES IT PAID TO THE US IRS.[24] it can be struck down as void and unenforceable for being subversive of public
policy, especially when the will of the dominant party is imposed upon the
weaker party and the latter is denied the opportunity to bargain on equal
Petitioner contends that contrary to the findings of both lower courts, the footing.[39]
Negotiated Sale Guidelines and the Proposal Letter Form are mere invitations
to bid. As such, they are not contracts and should be treated as mere offer or It must be stressed, however, that contracts of adhesion are not strictly
proposal to prospective buyers of the NSCP shares and marine vessels.[25] against the law. In Ong Yiu vs. Court of Appeals[40] and Pan American World
Airways, Inc. vs. Intermediate Appellate Court,[41] we held that contracts of
Petitioner further stresses that the sale was on an AS IS, WHERE IS adhesion wherein one party imposes a ready-made form of contract on the
basis.[26] By accepting the terms and conditions of the sale, respondent, in other are not entirely prohibited. The other party is free to reject it entirely; if
effect, accepted the risk of an AS IS, WHERE IS arrangement wherein the he adheres, he gives his consent.
latter is charged with caution under the principle of caveat emptor.[27] Pursuant
to the Negotiated Sale Guidelines and the Proposal Letter Form, respondent Nevertheless, the inequality of bargaining positions and the resulting
should have apprised itself of the financial status and liabilities of NSCP and impairment of the other partys freedom to contract necessarily call upon us to
its marine vessels. Therefore, for its predicament, respondent should not fault exercise our mandate as a court of justice and equity. Indeed, we have ruled
petitioner.[28] that contracts of such nature obviously call for greater strictness and vigilance
on the part of the courts of justice with a view to protecting the weaker party
For its part, respondent maintains that the Court of Appeals did not from abuses and imposition and prevent their becoming traps for the
commit any error in its challenged Decision. The Negotiated Sale Guidelines unwary.[42]
and the Proposal Letter Form constitute a contract of adhesion because the
buyer was required to submit its bid through a pro-forma proposal letter.[29] The In the case at bar, the Negotiated Sale Guidelines and Proposal Letter
offer to bidders was on a take it, or leave it basis, leaving no room for argument Form fit the characteristics of a contract of adhesion. On their very face, these
or negotiation, except as to the price.[30] Being a contract of adhesion, it should documents show that petitioner NDC had control over the terms and conditions
be strictly construed against the seller, herein petitioner.[31] of the sale. The Negotiated Sale Guidelines provides:
Respondent also contends that under Articles 19,[32] 20[33] and 21[34] of
the Civil Code, petitioner had then the legal duty to disclose its tax 4.0 PREPARATION OF OFFERS
liabilities. Records show that respondent repeatedly inquired from petitioner
about such matter.[35] Instead of telling the truth, petitioner made several 4.01 Offerors shall use the Proposal Letter Form for Sale
assurances that the NSCP was a clean, lien-free going concern and profitable of NSCP and Vessels provided herein.
entity.[36] In fact, under Section 7.01 of the Negotiated Sale Guidelines,
petitioner made a warranty against any lien or encumbrance.[37] 4.02 All offers should be accompanied by: x x x (b) the
Negotiated Sale Guidelines duly signed by the
In this petition, the issues for our resolution are:

6
 offeror or authorized representative in every Negotiated Sale Guidelines, including the right of NDC and APT to
page thereof x x x. reject any and all offers without thereby creating any liability in our
favor x x x.[44] (Underscoring ours)
xxxxxxxxx
Clearly, respondent had hardly any say in the terms and conditions
14.0 OTHER PROVISIONS expressed in the Negotiated Sale Guidelines. Other than the price of the offer,
respondent was left with little or no alternative at all but to comply with its
14.01 NDC and APT reserve the right in their discretion to terms. Thus, the trial court correctly found:
reject any and all offers, to waive any formality
therein and of these guidelines, and to consider The above-mentioned contracts form part of NSCPs Negotiated Sale
only such offer as may be advantageous to the Guidelines dated March 1993 prepared by NSCP and required by NDC to be
National Government. attached with the Proposal Letter Form, which was also prepared by NSCP,
and submitted to NDC by bidders.These contracts are ready-made form of
contracts, the preparation of which was left entirely to the NSCP. Their
NDC and APT may, at their discretion require
nature is that of a contract of adhesion. x x x. In the case at bar, the
additional information and/or documents from any
acceptance of the Negotiated Sale Guidelines and submission thereof
offeror.
together with the Proposal Letter Form by a prospective buyer is a required
formality of the bidding. Under this circumstance, the plaintiff, in taking
14.02 NDC and APT reserve the right to amend the such contracts, may not be deemed to have been given the opportunity to
Guidelines prior to the submission of offers x x x. bargain on equal footing.[45](Underscoring ours)

xxxxxxxxx Being a contract of adhesion, we reiterate that it is our duty to apply a

strict construction of its terms upon the party who made the same [46] and to
14.05 Violation of any of these terms and conditions shall construe any ambiguity in such contract against its author.[47] It is public policy
cause the cancellation of the award and the to protect a party (herein respondent) against oppressive and onerous
automatic forfeiture of the conditions.[48]
deposit.[43] (Underscoring ours)
We are not impressed by petitioners argument that the Negotiated Sale
Guidelines was a mere invitation to bid.[49] On the contrary, the Contract of
The Proposal Letter Form provides that the bidder is bound by the
Sale itself provides that it is an integral part or applicable to this Contract, thus:
Negotiated Sale Guidelines, thus:

8. All of the terms and conditions of (a) the March 1993 NDC
It is understood that:
Information Memorandum and Negotiated Sale Guidelines, including the
amendments thereto, more particularly those contained in NDCs letter to A.
1. We accept and undertake without any reservations whatsoever that, P. Madrigal Steamship Co. Inc. dated May 4, 1993, and (b) the Notice of
if this offer to purchase the vessels and NSCP shares is accepted, we Award dated February 11, 1993 are hereby incorporated herein by
shall be subjected to all the terms and conditions issued by the NDC reference and shall insofar as they are not inconsistent with the terms
and APT including those outlined in the March, 1993 Information and conditions hereof, be applicable to this Contract.[50] (Underscoring
Memorandum and the Negotiated Sale Guidelines for the sale of NSCP ours)
and the three vessels.
We now determine whether petitioner is obliged under the law and the
xxxxxxxxx contract to reimburse respondent for the amounts it paid corresponding to the
formers US tax liabilities. We quote with approval the trial courts findings
5. We represent and warrant that: (i) we have examined and understood the affirmed by the Court of Appeals, thus:
Information Package, (ii) we accept the conditions of the March, 1993

7
From the foregoing facts, there is no doubt that during the negotiation for the its part. Bad faith implies a conscious and intentional design to do a wrongful
sale of defendants (now petitioners) shares of stocks and three (3) ocean- act for a dishonest purpose or moral obliquity; it x x x contemplates a state of
going vessels, NSCP was already aware of an impending assessment by the mind affirmatively operating with furtive design or ill will.[56]
US government on NSCPs gross transportation income derived from US
sources. The exchanges of communications (Exhibits D, E, F, G, H and I) We see no reason to disturb the factual findings of both the trial court and
between NSCP and US IRS are glaring proof of NSCPs prior knowledge Court of Appeals which petitioner does not dispute. Absent any showing that
of a possible assessment or additional taxes. Moreover, in the Partial such findings were reached arbitrarily or without sufficient basis, the same
Printout of NSCPs Unaudited Financial Statements for the Year ending must be respected and binding upon us.[57]
December 31, 1993 (Exhibit V), NSCP made provisions for US taxes as That petitioner has the obligation to reimburse respondent is likewise
follows: for the year ending 1993, US $3,919,018.81 (Exh. V-2), and for the clear under the Negotiated Sale Guidelines, which provides:
years ending 1990-1992, US $11,736,192.64 (Exh. V-3). Exhibit V is a clear
indication that, indeed, NSCP had prior knowledge of such deficiency taxes,
7.0 OFFERORS RESPONSIBILITY
and in fact, recognized the same even though there was no final assessment
yet from the US IRS.[51]
7.01 x x x. Seller gives no warranty regarding the sale of the
shares and assets except for a warranty on ownership
xxxxxxxxx
and against any liens or encumbrances, and the offeror
shall not be relieved of his obligation to make the aforesaid
The Partial Printout of NSCPs Unaudited Financial Statements for the Year examinations and verifications.[58] (Underscoring ours)
ending December 1993 (Exhs. 2, 2-A to 2-B or Exhs. V, V-2 to V-3), true to
the word of the defendant (now petitioner), carries provisions for US
The terms of the parties contract are clear and unequivocal. The seller
taxes. The problem, however, with this evidence is there is no showing
(petitioner NDC) gives a warranty as to the ownership of the object of sale
that this had been furnished the plaintiff (now respondent). On the
and against any lien and encumbrance. A tax liability of $688,186.10 was
contrary, plaintiff vehemently asserts having been denied by defendant
then a potential lien upon NSCPs marine vessels. Being in bad faith for having
access to the latters accounting books and financial statements. Basic in the
failed to inform the buyer, herein respondent, of such potential lien, petitioner
law of evidence that he who asserts the affirmative of the allegation has the
breached its warranty and should, therefore, be held liable for the resulting
burden of proving it (Geraldez vs. CA, 230 SCRA 320). The defendant has
damage, i.e., reimbursement for the amounts paid by petitioner to the US IRS.
failed to prove that the pertinent statement made in this document or
the document itself had been disclosed to the plaintiff. The Negotiated Sale Guidelines further provides:

The Unaudited Financial Statements of NSCP (Exhs. 3, 3-A and 3-B), which 2.0 TERMS OF SALE
allegedly includes the subject US taxes among NSCPs Trade Payable and
Accrued Expenses and Dividends, does not clearly indicate the said 2.01 The sale of the NSCP and the three vessels shall be
taxes. The Trade Payable and Accrued Expenses and Dividends as strictly on CASH, AS IS-WHERE IS
including the said taxes is vague or unequivocal on the matter. By mere basis.[59] (Underscoring ours)
reading of it, one would not have the slightest inkling or suspicion that
such taxes exist as among NSCPs liabilities.[52] (Underscoring ours)
In Hian vs. Court of Tax Appeals,[60] we had the occasion to construe the
phrase as is, where is basis, thus:
There is no dispute that petitioner was aware of its US tax liabilities
considering its numerous communications with the agents of the United States
We cannot accept the contention in the Governments Memorandum of March
Internal Revenue Service, just prior to the sale of NSCP and the marine
31, 1976 that Condition No. 5 in the Notice of Sale to the effect that The
vessels to respondent.[53] The NSCP itself made an ambiguous contingent
above-mentioned articles (the tobacco) are offered for sale AS IS and the
provision in its Unaudited Financial Statements for the year ending December
Bureau of Customs gives no warranty as to their condition relieves the
1993, thereby indicating its awareness of a possible US tax assessment. [54] It
Bureau of Customs of liability for the storage fees in dispute. As we
bears stressing that petitioner did not convey such information to respondent
understand said Condition No. 5, it refers to the physical condition of the
despite its inquiries.[55] Obviously, such concealment constitutes bad faith on
tobacco and not to the legal situation in which it was at the time of the
8
sale, as could be implied from the right of inspection to prospective bidders WHEREFORE, the petition is DENIED and the assailed Decision of the
under Condition No. 1. x x x. (Underscoring ours) Court of Appeals is AFFIRMED.
SO ORDERED.
The phrase as is, where is basis pertains solely to the physical condition
of the thing sold, not to its legal situation. In the case at bar, the US tax
liabilities constitute a potential lien which applies to NSCPs legal situation, not G.R. No. 73913 January 31, 1989
to its physical aspect. Thus, respondent as a buyer, has no obligation to
shoulder the same. JERRY T. MOLES, petitioner,
vs.
The case at bar calls to mind the principle of unjust enrichment Nemo INTERMEDIATE APPELLATE COURT and MARIANO M.
cum alterius detrimento locupletari potest. No person shall be allowed to DIOLOSA, respondents.
enrich himself unjustly at the expense of others. This principle of equity has
been enshrined in our Civil Code, Article 22 of which provides: Zoilo V. De la Cruz, Jr., Kenneth Barredo, Romeo Sabig and Natalio V. Sitjao
for petitioners.
Art. 22. Every person who through an act or performance by another or by
any other means, acquires or comes into possession of something at the Rolando N. Medalla and Jose G. Guinez, Jr., for private respondents.
expense of the latter without just or legal ground, shall return the same to
him.

Justice and equity thus oblige that petitioner be held liable for NSCPs tax
liabilities and reimburse respondent for the amounts it paid. It would be unjust REGALADO, J.:
enrichment on the part of petitioner to be relieved of that obligation.
This petition for review on certiorari assails the decision of the then
The deletion of the award of exemplary damages and reduction of the Intermediate Appellate Court 1 dismissing the complaint filed by herein
attorneys fees by the Court of Appeals are not challenged by either of the petitioner against the herein private respondent in the former Court of First
parties. At any rate, we find no error in its ruling quoted hereunder: Instance of Negros Occidental in Civil Case No. 13821 thereof. 2

However, we find no basis for the grant of exemplary damages which can be The factual backdrop of this controversy, as culled from the records, 3 shows
granted only in addition to moral, temperate, liquidated or compensatory that on May 17, 1978, petitioner Jerry T. Moles commenced a suit against
damages (Art. 2229, Civil Code of the Philippines), none of which was private respondent Mariano M. Diolosa in the aforesaid trial court, Branch IV
awarded or deserved in this case. The trial court merely granted plaintiffs in Bacolod City, for rescission of contract with damages. Private respondent
prayer in its main cause of action for reimbursement of taxes plaintiff paid to moved to dismiss on the ground of improper venue, invoking therefor Sales
the U.S. Since no actual or moral damages was awarded, there is no legal Invoice No. 075A executed between petitioner and private respondent on
basis for the award of exemplary damages which may only be granted in April 23, 1977 which provides that all judicial actions arising from this
addition thereto (Scott Consultants and Resources Development Corp. Inc. contract shall be instituted in the City of Iloilo. 4This was opposed by
vs. CA, 242 SCRA 393). petitioner who averred that there is no formal document evidencing the sale
which is substantially verbal in character. In an order dated June 23, 1978,
xxxxxxxxx the trial court denied the motion to dismiss, holding that the question of
venue could not be resolved at said stage of the case. The subsequent
Anent the award of attorneys fees, we find it excessive, considering that the motion for reconsideration was likewise denied.
instant case is a simple action for reimbursement and did not involve
extensive litigation. Nothing precludes the appellate courts from reducing the Consequently, private respondent, invoking the aforesaid venue stipulation,
award of attorneys fees when it is found to be unconscionable or excessive preceeded to this Court on a petition for prohibition with preliminary injunction
under the circumstances (Brahm Industries Inc. vs. NLRC, 280 SCRA in G.R. No. 49078, questioning the validity of the order denying his aforesaid
828). Thus, the award of attorneys fees is reduced to P20,000.00.[61] two motions and seeking to enjoin the trial court from further proceeding with

9
the case. This petition was dismissed for lack of merit in a resolution of the 1.) Crossed check for P15,407.10 representing.
Court, dated February 7, 1979, and which became final on March 15, 1979.
Thereafter, private respondent filed his answer and proceeded to trial. a) P 10,000.00-Overprice in the machine:

The aforecited records establish that sometime in 1977, petitioner needed a b) P203.00-Freight and handling of the machine;
linotype printing machine for his printing business, The LM Press at Bacolod
City, and applied for an industrial loan with the Development Bank of the c) P203.00-Share in the electric repair; and
Philippines. (hereinafter, DBP) for the purchase thereof. An agent of Smith,
Bell and Co. who is a friend of petitioner introduced the latter to private
respondent, owner of the Diolosa Publishing House in Iloilo City, who had d) P5,000.00- Insurance that Crispin will come back and
two available machines. Thereafter, petitioner went to Iloilo City to inspect repair the linotype machine at seller's account as provided in
the two machines offered for sale and was informed that the same were the contract; after Crispin has put everything in order when
secondhand but functional. he goes home on Sunday he will return the check of
P15,000.00.
On his second visit to the Diolosa Publishing House, petitioner together with
Rogelio Yusay, a letter press machine operator, decided to buy the linotype 2) Official receipt in the amount of P 50,000.00 as full
machine, Model 14. The transaction was basically verbal in nature but to payment of the linotype machine.
facilitate the loan application with the DBP, a pro forma invoice, dated April
23, 1977 and reflecting the amount of P50,000.00 as the consideration of the These were immediately complied with by private respondent and on the
same day, September 30,1977, he received the DBP check for P50,000.00. 9
sale, was signed by petitioner with an addendum that payment had not yet
been made but that he promised to pay the full amount upon the release of
his loan from the aforementioned bank on or before the end of the It is to be noted that the aforesaid official receipt No. 0451, dated September
month. 5 Although the agreed selling price was only P40,000.00, the amount 30, 1977 and prepared and signed by private respondent, expressly states
on the invoice was increased by P10,000.00, said increase being intended that he received from the petitioner the DBP check for P50,000.00 issued in
for the purchase of new matrices for said machine. our favor in full payment of one (1) Unit Model 14 Linotype Machine as
per Pro forma Invoice dated April 23, 1977. 10
Sometime between April and May, 1977, the machine was delivered to
petitioner's publishing house at Tangub, Bacolod City where it was installed On November 29, 1977, petitioner wrote private respondent that the machine
by one Crispino Escurido, an employee of respondent Diolosa. Another was not functioning properly as it needed a new distributor bar. In the same
employee of the Diolosa Publishing House, Tomas Plondaya, stayed at letter, petitioner unburdened himself of his grievances and sentiments in this
petitioners house for almost a month to train the latter's cousin in operating wise.
the machine. 6
We bought this machine in good faith because we trusted
Under date of August 29, 1977, private respondent issued a certification you very much being our elder brother in printing and
wherein he warranted that the machine sold was in A-1 condition, together publishing business. We did not hire anybody to look over
with other express warranties. 7 the machine, much more ask for a rebate in your price of
P40,000.00 and believed what your trusted two men, Tomas
Prior to the release of the loan, a representative from the DBP, Bacolod, and Crispin, said although they were hiding the real and
supposedly inspected the machine but he merely looked at it to see that it actual condition of the machine for your business protection.
was there .8 The inspector's recommendation was favorable and, thereafter,
petitioner's loan of P50,000.00 was granted and released. However, before Until last week, we found out the worst ever to happen to us.
payment was made to private respondent, petitioner required the former, in a We have been cheated because the expert of the Linotype
letter dated September 30, 1977, to accomplish the following, with the machine from Manila says, that the most he will buy your
explanations indicated by him: machine is at P5,000.00 only. ... 11

10
Private respondent made no reply to said letter, so petitioner engaged the (2) Ordering the plaintiff to return to the defendant at the
services of other technicians. Later, after several telephone calls regarding latter's place of business in Iloilo City the linotype machine
the defects in the machine, private respondent sent two technicians to make aforementioned together with all accessories that originally
the necessary repairs but they failed to put the machine in running condition. were delivered to the plaintiff;
In fact, since then petitioner was never able to use the machine.12
(3) Ordering the defendant to return to the plaintiff the sum of
On February 18, 1978, not having received from private respondent the Forty Thousand Pesos (P40,000.00) representing the price
action requested in his preceding letter as herein before stated, petitioner of the linotype machine, plus interest at the legal rate
again wrote private respondent, this time with the warning that he would be counted from May 17, 1978 when this action was instituted,
forced to seek legal remedies to protect his interest. 13 until fully paid;

Obviously in response to the foregoing letter, private respondent decided to (4) Ordering the defendant to indemnify the plaintiff the sum
purchase a new distributor bar and, on March 16, 1978, private respondent of Four Thousand Five Hundred Pesos (P4,500.00)
delivered this spare part to petitioner through one Pedro Candido. However, representing unearned income or actual damages;
when thereafter petitioner asked private respondent to pay for the price of the
distributor bar, the latter asked petitioner to share the cost with him. (5) Ordering the defendant to pay the plaintiff the sum of
Petitioner thus finally decided to indorse the matter to his lawyer. One Thousand Pesos (Pl,000.00) for attorney's fees.

An expert witness for the petitioner, one Gil Legaspina, declared that he Costs against the defendant.15
inspected the linotype machine involved in this case at the instance of
petitioner. In his inspection thereof, he found the following defects: (1) the
From this decision, private respondent appealed to the Intermediate
vertical automatic stop lever in the casting division was worn out; (2) the
Appellate Court which reversed the judgment of the lower court and
justification lever had a slight breach (balana in the dialect); (3) the distributor dismissed petitioner's complaint, hence the present petition.
bar was worn out; (4) the partition at the entrance channel had a tear; (5)
there was no "pie stacker" tube entrance; and (6) the slouch arm lever in the
driving division was worn out. We find merit in petitioner's cause.

It turned out that the said linotype machine was the same machine that On the matter of venue, private respondent relies on the aforementioned
witness Legaspina had previously inspected for Sy Brothers, a firm which Sales Invoice No. 076A which allegedly requires that the proper venue
also wanted to buy a linotype machine for their printing establishment. should be Iloilo City and not Bacolod City. We agree with petitioner that said
Having found defects in said machine, the witness informed Sy Brother about document is not the contract evidencing the sale of the linotype machine, it
his findings, hence the purchase was aborted. In his opinion, major repairs being merely a preliminary memorandum of a proposal to buy one linotype
were needed to put the machine back in good running condition.14 machine, using for such purpose a printed form used for printing job orders in
private respondent's printing business. As hereinbefore explained, this issue
on venue was brought to Us by private respondent in a special civil action for
After trial, the court a quo rendered a decision the dispositive portion of which
prohibition with preliminary injunction in G.R. No. 49078. After considering
reads:
the allegations contained, the issues raised and the arguments adduced in
said petition, as well as the comments thereto, the Court dismissed the
IN VIEW OF THE FOREGOING CONSIDERATIONS, petition for lack of merit. Respondent court erred in reopening the same issue
judgment is hereby rendered as follows: on appeal, with a contrary ruling.

(1) Decreeing the rescission of the contract of sale involving Furthermore, it was error for the respondent court, after adopting the factual
one linotype machine No. 14 between the defendant as findings of the lower court, to reverse the latter's holding that the sales
seller and the plaintiff as buyer; invoice is merely a pro forma memorandum. The records do not show that
this finding is grounded entirely on speculation, surmises or conjectures as to

11
warrant a reversal thereof. 16 In fact, as hereinbefore stated, private manufacturer or not), there is an implied warranty that the
respondent expressly admitted in his official receipt No. 0451, dated goods shall be reasonably fit for such purpose;
September 30, 1977, that the said sales invoice was merely a pro
forma invoice. Consequently, the printed provisions therein, especially since xxx
the printed form used was for purposes of other types of transactions, could
not have been intended by the parties to govern their transaction on the In Drumar Mining Co. vs. Morris Ravine Mining Co., 23 the District Court of
printing machine. It is obvious that a venue stipulation, in order to bind the
Appeals, 3rd District, California, in applying a similar provision of law, ruled:
parties, must have been intelligently and deliberately intended by them to
exclude their case from the reglementary rules on venue. Yet, even such
intended variance may not necessarily be given judicial approval, as, for 'There is nothing in the Uniform Sales Act declaring there is
instance, where there are no restrictive or qualifying words in the agreement no implied warranty in the sale of secondhand goods.
indicating that venue cannot be laid in any place other than that agreed upon Section 1735 of the Civil Code declares there is no implied
by the parties, 17 and in contracts of adhesion. 18 warranty or condition as to the quality or fitness for any
particular purpose, of goods supplied under a contract to sell
or a sale, except (this general statement is followed by an
Now, when an article is sold as a secondhand item, a question arises as to
enumeration of several exceptions). It would seem that the
whether there is an implied warranty of its quality or fitness. It is generally
legislature intended this section to apply to all sales of
held that in the sale of a designated and specific article sold as secondhand,
goods, whether new or secondhand. In subdivision 1 of this
there is no implied warranty as to its quality or fitness for the purpose
section, this language is used: where the buyer ... makes
intended, at least where it is subject to inspection at the time of the sale. On known to the seller the particular purpose for which the
the other hand, there is also authority to the effect that in a sale of a goods are required, and it appears that the buyer relies on
secondhand articles there may be, under some circumstances, an implied
the seller's skill or judgment ... there is an implied warranty
warranty of fitness for the ordinary purpose of the article sold or for the
that the goods shall be reasonably fit for such purpose.'
particular purpose of the buyer. 19
Furthermore, and of a more determinative role in this case, a perusal of past
In a line of decisions rendered by the United States Supreme Court, it had
American decisions 24 likewise reveals a uniform pattern of rulings to the
theretofore been held that there is no implied warranty as to the condition,
effect that an express warranty can be made by and also be binding on the
adaptation, fitness, or suitability for the purpose for which made, or the
seller even in the sale of a secondhand article.
quality, of an article sold as and for a secondhand article. 20
In the aforecited case of Markman vs. Hallbeck, while holding that there was
Thus, in finding for private respondent, the respondent court cited the ruling
an express warranty in the sale of a secondhand engine, the court said that it
in Sison vs. Ago, et al. 21 to the effect that unless goods are sold as to raise
was not error to refuse an instruction that upon the sale of secondhand
an implied warranty, as a general rule there is no implied warranty in the sale
goods no warranty was implied, since secondhand goods might be sold
of secondhand articles.22
under such circumstances as to raise an implied warranty.

Said general rule, however, is not without exceptions. Article 1562 of our Civil
To repeat, in the case before Us, a certification to the effect that the linotype
Code, which was taken from the Uniform Sales Act, provides:
machine bought by petitioner was in A-1 condition was issued by private
respondent in favor of the former. This cannot but be considered as an
Art. 1562. In a sale of goods, there is an implied warranty or express warranty. However, it is private respondent's submission, that the
condition as to the quality or fitness of the goods, as follows: same is not binding on him, not being a part of the contract of sale between
them. This contention is bereft of substance.
(1) Where the buyer, expressly or by implication, makes
known to the seller the particular purpose for which the It must be remembered that the certification was a condition sine qua non for
goods are acquired, and it appears that the buyer relies on the release of petitioner's loan which was to be used as payment for the
the seller's skill or judgment (whether he be the grower or purchase price of the machine. Private respondent failed to refute this
material fact. Neither does he explain why he made that express warranty on
12
the condition of the machine if he had not intended to be bound by it. In fact, with and express warranty. Consequently, the general rule on rescission of
the respondent court, in declaring that petitioner should have availed of the contract, which is four years 27 shall apply. Considering that the original case
remedy of requiring repairs as provided for in said certification, thereby for rescission was filed only one year after the delivery of the subject
considered the same as part and parcel of the verbal contract between the machine, the same is well within the prescriptive period. This is aside from
parties. the doctrinal rule that the defense of prescription is waived and cannot be
considered on appeal if not raised in the trial court, 28 and this case does not
On the basis of the foregoing circumstances, the inescapable conclusion is have the features for an exception to said rule.
that private respondent is indeed bound by the express warranty he executed
in favor of herein petitioner. WHEREFORE, the judgment of dismissal of the respondent court is hereby
REVERSED and SET ASIDE, and the decision of the court a quo is hereby
We disagree with respondent court that private respondents express REINSTATED.
warranty as to the A-1 condition of the machine was merely dealer's talk.
Private respondent was not a dealer of printing or linotype machines to whom SO ORDERED.
could be ascribed the supposed resort to the usual exaggerations of trade in
said items. His certification as to the condition of the machine was not made G.R. No. L-42636 August 1, 1985
to induce petitioner to purchase it but to confirm in writing for purposes of the
financing aspect of the transaction his representations thereon. Ordinarily, MARIA LUISA DE LEON ESCALER and ERNESTO ESCALER, CECILIA
what does not appear on the face of the written instrument should be J. ROXAS and PEDRO ROXAS, petitioners,
regarded as dealer's or trader's talk; 25 conversely, what is specifically vs.
represented as true in said document, as in the instant case, cannot be COURT OF APPEALS, JOSE L. REYNOSO, now deceased, to be
considered as mere dealer's talk. substituted by his heirs or legal representatives and AFRICA V.
REYNOSO, respondents.
On the question as to whether the hidden defects in the machine is sufficient
to warrant a rescission of the contract between the parties, we have to Avancea Law Office for petitioners.
consider the rule on redhibitory defects contemplated in Article 1561 of the
Civil Code. A redhibitory defect must be an imperfection or defect of such
nature as to engender a certain degree of importance. An imperfection or Bauza, Ampil, Suarez, and Paredes Law Office for respondent Africa V.
defect of little consequence does not come within the category of being Reynoso.
redhibitory.26

As already narrated, an expert witness for the petitioner categorically

established that the machine required major repairs before it could be used. CUEVAS, J.:
This, plus the fact that petitioner never made appropriate use of the machine
from the time of purchase until an action was filed, attest to the major defects This is a Petition for Review on certiorari of the Decision of the then Court of
in said machine, by reason of which the rescission of the contract of sale is Appeals (now the Intermediate Appellate Court) and of its Resolution denying
sought. The factual finding, therefore, of the trial court that the machine is not petitioners' Motion for Reconsideration, in CA G.R. No. 41953-R, which was
reasonably fit for the particular purpose for which it was intended must be an appeal from the judgment of the Court of First Instance of Rizal in Civil
upheld, there being ample evidence to sustain the same. Case No. 9014 entitled "Maria Luisa de Leon Escaler, et al vs. Jose L.
Reynoso and Africa Reynoso."
At a belated stage of this appeal, private respondent came up for the first
time with the contention that the action for rescission is barred by The following are the pertinent background facts:
prescription. While it is true that Article 1571 of the Civil Code provides for a
prescriptive period of six months for a redhibitory action a cursory reading of On March 7, 1958, the spouses Africa V. Reynoso and Jose L, Reynoso sold
the ten preceding articles to which it refers will reveal that said rule may be to petitioners several others, a parcel of land, situated in Antipolo, Rizal with
applied only in case of implied warranties. The present case involves one an area of 239,479 square meters and covered by TCT No. 57400 of the
13
Register of Deeds of the Province of Rizal. The Deed of Sale 1 contained the SO ORDERED.
following covenant against eviction, to wit:
On August 31, 1965, herein petitioners, spouses Maria de Leon Escaler and
That the VENDOR is the absolute owner of a parcel of land Ernesto Escaler and spouses Cecilia J. Roxas and Pedro Roxas, filed Civil
... the ownership thereof being evidenced by an absolute Case No. 9014 before the Court of First Instance of Rizal against their
deed of sale executed in her favor by registered owner vendors, herein private respondents, spouses Jose L. Reynoso and Africa
ANGELINA C. REYNOSO, ...; Reynoso for the recovery of the value of the property sold to them plus
damages on the ground that the latter have violated the vendors' "warranty
That the VENDOR warrants valid title to and ownership of against eviction."
said parcel of land and further, warrant to defend the
property herein sold and conveyed, unto the VENDEES, The complaint among others, alleged that the Order issued in Case No. 4252
their heirs, and assignees, from any and all claims of any which cancelled the title of Angelina C. Reynoso and all subsequent Transfer
persons whatsoever. Certificates of Title derived and/or emanating therefrom and which includes
the titles of petitioners, is now final, and by reason thereof petitioners lost
On April 21, 1961, the Register of Deeds of Rizal and A. Doronilla Resources their right over the property sold; and that in said Case No. 4252, the
Development, Inc. filed Case No. 4252 before the Court of First Instance of respondents were summoned and/or given their day in court at the instance
Rizal for the cancellation of OCT No. 1526 issued in the name of Angelina C. of the petitioners. 3
Reynoso (predecessor-in-interest of private respondents-vendors) on
February 26, 1958 under Decree No. 62373, LRC Record No. N-13783, on The respondents, as defendants, filed their answer alleging, among others,
the ground that the property covered by said title is already previously by way of affirmative defenses that "the cause of action, if any, of plaintiffs
registered under Transfer Certificate of Title No. 42999 issued in the name of against defendants have been fully adjudicated in Case No. 4252 when
A. Doronilla Development, Inc. Petitioners as vendees filed their opposition to plaintiffs failed to file a third-party complaint against defendants." 4
the said petition.
On August 18, 1967, petitioners, as plaintiffs, filed a Motion for Summary
On June 10, 1964, an Order 2 was issued in the said case, the dispositive Judgment, alleging the facts already averred in the complaint, and further
portion of which reads: alleging that the defendants were summoned and were given their day in
court at the instance of plaintiffs in Case No. 4252. In support of their said
IN VIEW OF THE ABOVE CONSIDERATIONS, this Court is motion, the plaintiffs attached the affidavit of Atty. Alberto R. Avancea who
constrained to set aside Decree No. 62373 issued in LRC. had represented the plaintiffs in Case No. 4252 and had filed a joint
Rec. No. N-13783 and the Register of Deeds of Rizal is opposition in behalf of all the vendees. The pertinent portion of that affidavit,
directed to cancel OCT No. 1526 of his office and all states
Transfer Certificates of Title issued subsequently thereafter
to purchaser of said property or portions thereof, the same 4. That he has furnished a copy of said joint opposition to
being null and void, the expenses for such cancellation to be Africa Reynoso, wife of Jose L. Reynoso, at her given
charged to spouses Angelina Reynoso and Floro Reynoso. address at c/o Antipolo Enterprises, Antipolo, Rizal and the
The owner's duplicates in the possession of the transferees latter had received the same, as evidenced by the
of the property covered by OCT No. 1526 are declared null photostatic copy of the Registry Return Receipt thereto
and void and said transferees are directed to surrender to affixed as Annex "C-l";
the Register of Deeds of Rizal, said owner's duplicates for
cancellation. xxx xxx xxx

The other reliefs sought for by the party oppositors are 6. That he hereby executed this Affidavit to prove that said
denied the same not falling within the jurisdiction of this defendants Africa Reynoso and Jose L. Reynoso were given
Court under this proceeding. their day in Court and/or were afforded their opportunity to
be heard in Case No. 4252 aforecited.
14
On September 27, 1967, judgment was rendered by the trial court, the 2) that the decision of the Court of First Instance of Rizal
pertinent portion of which reads should have been affirmed by the Court of Appeals or at
least, the, Court of Appeals should have remanded the case
Considering the foregoing motion for summary judgment and to the trial court, for hearing on the merits.
it appearing that the defendants under a Deed of Absolute
Sale (Annex "C") have expressly warranted their valid title The petition is devoid of merit. Consequently, it must be dismissed.
and ownership of the said parcel of land and further
warranted to defend said property from any and all claims of Article 1548, in relation to Articles 1558. and 1559 of the New Civil Code
any persons whomever in favor of plaintiffs; that the said reads as follows:
warranties were violated when on June 10, 1964, an Order
was promulgated by the Court of First Instance of Rizal in
Art. 1548, Eviction shall take place whenever by a final
Case No. 4252 (Related to LRC Case No. 1559, LRC
judgment based on a right prior to the sale or an act
Record No. N13293). In Re: Petition for Cancellation of imputable to the vendor, the vendee is deprived of the whole
Original Registration, etc., covering the parcel of land in or of a part of the thing purchased.
question; that said order of June 10, 1964 has become final
and executory there being no appeal interposed thereto and
defendants were summoned and were given a day in court The vendor shall answer for the eviction even though
at the instance of the plaintiffs in Case No. 4252, the Court nothing has been said in the contract on the subject.
hereby grants the motion for summary judgment, and hereby
orders the defendants to jointly and severally return to the The contracting parties, however, may increase, diminish, or
plaintiffs Maria Luisa de Leon Escaler and Ernesto Escaler, suppress this legal obligation of the vendor.
Cecilia J. Roxas and Pedro Roxas, the value of the property
sold to them at the time of eviction which is not to be less Art. 1558. The vendor shall not be obliged to make good the
than P5,500.00 to reimburse to each one of the plaintiffs the proper warranty, unless he is summoned in the suit for
expenses of contract and litigation and the amount of eviction at the instance of the vendee. (emphasis supplied)
P2,250.00 to pay the attorney's fees of P1,000.00 plus the
costs of suit. Art. 1559. The defendant vendee shall ask, within the time
fixed in the Rules of Court for answering the complaint that
SO ORDERED. the vendor be made as co-defendant.

Private respondents appealed the aforesaid decision to the then Court of In order that a vendor's liability for eviction may be enforced, the following
Appeals 5 assigning as sole errorthat the lower court erred in finding that requisites must concura) there must be a final judgment; b) the purchaser
they were summoned and were given their day in court at the instance of has been deprived of the whole or part of the thing sold; c) said deprivation
petitioners-plaintiffs in Case No. 4252. was by virtue of a right prior to the sale made by the vendor; and d) the
vendor has been summoned and made co-defendant in the suit for eviction
In reversing the decision of the trial court and dismissing the case, the then at the instance of the vendee. 6
Court of Appeals found and so ruled that petitioners as vendees had not
given private respondents-vendors, formal notice of the eviction case as In the case at bar, the fourth requisitethat of being summoned in the suit
mandated by Arts. 1558 and 1559 of the New Civil Code. for eviction (Case No. 4252) at the instance of the vendeeis not present.
All that the petitioners did, per their very admission, was to furnish
Hence, the instant recourse, petitioners contending respondents, by registered mail, with a copy of the opposition they
(petitioners filed in the eviction suit. Decidedly, this is not the kind of notice
1) that the Court of Appeals erred in applying strictly to the prescribed by the aforequoted Articles 1558 and 1559 of the New Civil Code.
instant case the provisions of Articles 1558 and 1559 of the The term "unless he is summoned in the suit for eviction at the instance of
new Civil Code; and the vendee" means that the respondents as vendor/s should be made parties

15
to the suit at the instance of petitioners-vendees, either by way of asking that Meanwhile, on April 10, 1953, petitioner signed a compromise agreement
the former be made a co-defendant or by the filing of a third-party complaint with the Deudors (in another Civil Case No. Q-135, captioned Florencio
against said vendors. Nothing of that sort appeared to have been done by Deudor, et al. vs. J.M. Tuason, et al.).
the petitioners in the instant case.
On July 19, 1965 with the consent of the petitioner, Ricardo de Leon
IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is transferred all his rights to the lot in favor of his parents, herein private
DISMISSED and the appealed decision of the then Court of Appeals is respondents Alfonso and Rosario de Leon (exhibit B). On the same date,
AFFIRMED. private respondents paid the outstanding balance of the purchase price
(Exhibit 1-B). On August 5, 1965 petitioner executed in favor of private
No pronouncement as to costs. respondents the deed of sale over the lot (Exhibit C) and upon its
registration, the Register of Deeds issued to the respondents the Transfer
Certificate of Title No. 96143 (Exhibit 3; Annex B, Rollo, 39-40).
SO ORDERED.

G.R. No. L-41233 November 21, 1979 At the time of the execution of the contract to sell, the contracting parties
knew that a portion of the lot in question was actually occupied by Ramon
Rivera. However, it was their understanding that the latter will be ejected by
J.M. TUASON & CO., INC., petitioner, the petitioner from the premises (Annex B, Id).
vs.
HON. COURT OF APPEALS, ALFONSO DE LEON and ROSARIO G. DE
LEON, respondents. On May 13, 1958, herein petitioner filed a complaint of ejectment against
Ramon Rivera before the Court of First Instance of Rizal (Civil Case No. Q-
2989) and later petitioner petitioner Ricardo de Leon and respondents
Araneta, Mendoza & Papa for petitioner. Alfonso and Rosario de Leon as necessary parties. In this Civil Case No. Q-
2989, the decision of the lower court, principally based on the compromise
Martin B. Laurea for private respondents. agreement executed in another Civil Case No. Q-135 entitled Florencio
Deudor, et al. vs. J.M. Tuason, et al. has the following dispositive portion:

WHEREFORE, the complaint against the defendant Ramon

DE CASTRO, J.: Rivera is hereby DISMISSSED ordering the plaintiff to enter
into an agreement with Ramon Rivera allowing said
Appeal by certiorari from the decision of respondent Court of Appeals (CA- defendant to purchase 1,050 square meters to land now
G.R. No. 54695-R) affirming with modification the decision of the Court of covered by Lot 15, Block 460 of the Sta. Mesa Heights
First Instance of Manila in Civil Case No. 89119, which is an action based on Subdivision to be priced at the prevailing cost in the year
warranty against eviction, and to recover the value of a subdivision lot at the 1958 which is placed by this Court to be P60.00 per square
time of eviction, plus damages. meters; to pay attorney's fees of P3,000.00 to defendant
Ramon Rivera, with costs against the plaintiff ... (Emphasis
supplied)
The following facts may be regarded as without any dispute:
The Court of Appeals wholly affirmed this decision with costs against plaintiff-
On January 31, 1952, petitioner J.M. Tuason & Co., Inc. executed, in favor of
appellant J.M. Tuason & Co., Inc. (CA-G.R. No. 38212-R), and denied the
Ricardo de Leon, a contract to sell Lot No. 15, Block 460 of the Sta. Mesa
motion for reconsideration filed by the other plaintiffs-appellants Alfonso and
Heights Subdivision containing an area of 1,703.6 square meters with the
Rosario de Leon, stating among others: ... We believe, however, that these
agreed price of P24.60 per square meter or a total of P41,908.56. At the
questions should be properly ventilated in the proper action which the
execution of the contract, Ricardo de Leon paid the down-payment of
plaintiffs- appellants, the De Leons, may file against the plaintiff-appellant
P4,190.86 and agreed to pay the balance in the monthly installment of
(J.M. Tuason & Co., Inc.) for failure of the latter to deliver to them the
P498.63 including the agreed annual interest of 10% (Exhibit A).

16
possession of the whole of Lot 15, Block 460 of the Sta. Mesa Heights the petitioner was ordered to sell to Ramon Rivera, and to pay petitioner
Subdivision ... (Annex E, 4-5). P30,000.00 as attorney's fees plus costs.

This decision of the Court of Appeals became final and executory in Petitioner J. M. Tuason & Co., Inc. alleges that dent court erred: (1) in
September, 1971 when the De Leons were evicted from the premises in holding that the compromise agreement was the proximate cause of its
question (Annex E, 6). failure to comply with its contract to self in favor of Ricardo de Leon; (2) in
holding that it entered into the compromise agreement without the knowledge
Pursuing the step as suggested by the Court of Appeals advising herein and behind the back of Ricardo de Leon and thereafter continued the
private respondents to file the proper action the latter instituted on December collection of the installments until the purchase price was fully paid and thus
5,1972 before the Court of First Instance of Manila, Branch XXIX, Civil Case it wilfully committed fraud against him; (3) in not considering that Ricardo de
No. 89119, an action against J.M. Tuason & Co., Inc. to enforce the vendor's Leon was guilty of bad faith in entering into the contract to sell and therefore
warranty against eviction or to recover the value of the land amounting to he is not entitled to the warranty against eviction; and (4) in granting moral
P315,000.00, plus damages. and exemplary damages.

The lower court decided the case against herein petitioner J.M. & Co., Inc. The real point in issue is whether respondents De Leon are entitled to the
(defendant below) disposing as follows: vendor's warranty against eviction and damages.

WHEREFORE, judgment is hereby rendered in favor of the The appellate court, in this action of warranty against eviction, found that
plaintiffs and against the defendant: petitioner J.M. Tuason & Co., Inc. failed to comply with its obligation to
transfer ownership over the lot to the De Leons due to the compromise
agreement it entered with the Deudors, and that petitioner is guilty of "wilful
(1) Ordering defendant to pay plaintiffs the sum of TWO
deception, intentional forsaking of one to whom defendant was bound in a
HUNDRED TEN THOUSAND (P210,000.00) PESOS
representing the value of the 1,050 square meters at contract to convey, and worse yet, even at that, after the compromise,
P200.00 per square meter, from which the latter were defendant still continued to collect installments from buyer ...
evicted, with legal interest from December 5, 1972, the date
of filing of the complaint; Contrary to these findings, this Court holds that it was not petitioner's own
making that it executed the compromise agreement with the Deudors. This
(2) Ordering defendant to pay plaintiffs the sum of TWENTY agreement was sanctioned by the court after the Deudors filed an action
against petitioner in Civil Case No. Q-135 entitled "Florencio Deudor, et al.
FIVE THOUSAND (P25,000.00) PESOS, by lay of moral
vs. J.M. Tuason et al." The prior right of Ramon Rivera to purchase the lot in
damages, TEN THOUSAND (P10,000.00) PESOS, by way
litigation was based more on his prior occupancy to the same since 1949,
of exemplary damages, and FIFTEEN THOUSAND
about which fact respondents De Leon were informed by petitioner at the
(P15,000.00) PESOS, for and as attorney's fees; and
time of the execution of the contract to sell. The execution of the compromise
agreement merely recognized this prior right, under the condition as
(3) For costs of this suit. stipulated in said agreement, that it was possible to do so.

This decision of the lower court was appealed to herein respondent Court of Petitioner claims, without having been contradicted, that it executed the
Appeals (CA-G.R. No. 54695-R), which on July 2, 1975 affirmed it with the compromise agreement with the Deudors in the honest belief that the lots it
sole modification on the reduction of the awarded moral damages from already sold. like the lot in question, were excluded from the coverage of the
P25,000.00 to P5,000.00 (Annex B, Rollo, p. 52). agreement. This claim finds support in paragraph "SEVENTH" of the
compromise agreement which reads ... It shall be the joint and solidary
Hence, this petition before Us with the prayer that the decision of respondent obligation of the Deudors to make the buyers of the lots purportedly sold by
court be reversed and another rendered, 'dismissing the complaint and them recognize the title of the OWNERS over the property purportedly
ordering respondents De Leons to accept from petitioner J.M. Tuason & Co., bought by them, and to make them sign, whenever possible, new contracts
Inc. the sum of P60.00 per square meter for the 1,050 square meters which of purchase for the said property at the current prices and terms specified by

17
the OWNERS in their sales of lots in their subdivision known as Sta. Mesa The subsequent execution of a deed of sale upon the total payment of the
Heights Subdivision ... " (Annex C, Rollo, p. 55). In fact, in their brief as purchase price in favor of herein respondents on August 5, 1965 in lieu of the
appellants in CA-G.R. No. 38212-R, private respondents stated that "as previous contract to sell made in favor of Ricardo de Leon, through which
correctly pointed out in the brief for plaintiff-appellant, it was not the intention deed of sale the respondents acquired a transfer certificate of title over the
of the signatories of the Compromise Agreement to include within its questioned lot, is further evidence of the honesty and good faith of petitioner
coverage those parcels of land already sold by plaintiff-appellant (petitioner in dealing with private respondents. Petitioner owns vast tracts of land, with
herein) to third parties," and "We reproduce herein by way of reference the the lot in question possibly put an insignificant part in terms of value, and it
arguments in pp. 1-2 to 39 of plaintiffs- appellants' brief." (See Annex C, would be much too difficult to make the serious imputations made to
Petition, pp. 3-4). Private respondents should not be allowed to turn back petitioner.
from what they stated in their brief in CA-G.R. No. 38212-R, to impute "wilful
deception" as the respondent court said in its decision under review. In fulfillment of the assurance made to eject the occupant from the lot,
petitioner, on May 13, 1958, later joined by Ricardo de Leon and
This particular stipulation in the compromise agreement discloses an respondents Alfonso and Rosario de Leon, instituted a complaint of
understanding between the petitioner and the Deudors that the buyers of lots ejectment against Ramon Rivera in Civil Case No. Q- 2989. Unfortunately,
from the Deudors, like Ramon Rivera, may, acquire lots from the subdivision however, the decision of the lower court dismissing the complaint of
being sold by petitioner and sign new contracts of purchase with the latter 6 ejectment was affirmed by the appellate court in CA-G.R. No. 38212-R,
whenever possible", or only when said lots have not already been sold to which decision, of the latter upon its finality in September, 1971 resulted in
third 'parties. Relying on the above-quoted provision, petitioner believed in the eviction of herein respondents from the lot. It is meet, at this juncture, to
good faith that said lot sold to the De Leons would not be adversely affected. repeat that in its decision, the Court of Appeals branded Ricardo de Leon as
Nonetheless, with the inevitable and admitted fact that Ramon Rivera was a a buyer in bad faith.
prior occupant thereof, petitioner was compelled by judicial fiat in Civil Case
No. 2989 of the Court of First Instance of Rizal, to recognize the preferential In manifesting its desire to compensate respondents, as disclosed by prayer
right of Rivera to rightfully purchase the lot. This fact is not of itself a proof in the instant petition in the sum of P60.00 per square meter for the 1,050
under the circumstance just cited, of bad faith on the part of the petitioner or meters which it was ordered by the courts, in Civil Case No. Q-2989 and CA-
that it is guilty of committing fraud and deception upon the respondents as G.R. No. 38212-R, to sell to Ramon Rivera, again reveals how fair petitioner
the respondent court found. Its good faith in with Ricardo de Leon who was would want to be to private respondents, not to defraud them as the
the one branded as a "buyer in bad faith" by the Court of Appeals in its respondent court would ascribe such base intent to petitioner, which is by no
decision affirming of the Court of First Instance of Rizal in CA-G.R. No. No. means not a disreputable but a respectable, corporation.
38212-R seems beyond question.
For all the foregoing circumstances, We have no hesitation to give to
If petitioner continued the collection of the outstanding monthly after the petitioner the benefit of the doubt of its having acted in good faith, which is
execution of the compromise agreement on April 10,1953 pursuant to the always presumed,, without any intention of taking advantage of the other
agreements embodied in the contract to sell (Exhibit A), its act only proved its party dealing with it. "Good faith consists in an honest intention to abstain
honest belief that it found no barrier against the enforceability of the contract from taking any unconscientious advantage of another. Good faith is an
to sell, the terms of which have the force of law between the parties and must opposite of fraud and of bad faith and its non-existence must be established
be complied with in good faith (Lazo vs. Republic Surety & Insurance Co., by competent proof." (Leung Yee vs. Strong Machinery Company, 37 PhiL
Inc., 311 SCRA 329; Ramos vs. Central Bank of the Philippines, 41 SCRA 645; Cui vs. Henson, 51 Phil. 606, 612; Fule vs. De Legare, 7 SCRA 351).
565; Enriquez vs. Ramos, 73 SCRA 116; De Cortes vs, Venturanza, 79
SCRA 709). The collection of the monthly installment payments terminated
Moreover, at the time of the execution of the contract to sell it is an admitted
upon the fun payment of the purchase price on July 19, 1965, long before the
fact that Ricardo de Leon knew that a third party was occupying a part of the
ejectment case against Ramon Rivera was finally resolved by the appellate lot subject of the sale. Ricardo de Leon ought to have known that he was
court in September, 1971 (Civil Case No. Q-2989; CA-G.R. No. 38212-R). As buying a property with the distinct possibility of not being able to possess and
properly claimed by the petitioner, it had the right to hopefully expect to win
own the land due to the occupancy of another person on the same. So there
the ejectment case. It was not exactly its fault that it lost the case. Private
had to be an understanding between him and the petitioner for the latter to
respondents joined in a common cause with it.
eject the occupant, something which, by the facts then obtaining and the law

18
relevant thereto, would make the ejectment more speculative than certain. WHEREFORE, the judgment of respondent court is hereby modified by
Nonetheless, Ricardo de Leon knowingly assumed the risk when he bought ordering petitioner J.M. Tuason & Co., Inc. to pay the respondents the
the, land, and was even called a vendee in bad faith by the Court of Appeals amount of ONE HUNDRED TWENTY-SIX THOUSAND (Pl26,000.00)
in doing so, clearly not an innocent purchaser in good faith. If petitioner that it PESOS plus the legal rate of interest from December 5, 1972, the date of
would eject Ramon Rivera, he did so, not knowing that the compromise filing the complaint until the s aid total sum is fully paid. No costs.
agreement would stand on the way, as it had thought, in all good faith, that
paragraph 7 of the compromise agreement excluded the lot in question, SO ORDERED.
having been already sold to Ricardo de Leon before the agreement was
executed in court. NUTRIMIX FEEDS CORPORATION, petitioner, vs. COURT OF APPEALS
and SPOUSES EFREN AND MAURA
This Court is impelled to declare that private respondents were lacking in EVANGELISTA, respondents.
good faith for knowing beforehand, at the time of the sale, the presence of an
obstacle to their taking over the possession of the land, which, in effect,
DECISION
would amount to eviction from said land, and still they bought the land
without first removing that obstacle. (Angelo vs. Pacheco, 56 Phil. 70; CALLEJO, SR., J.:
Andaya vs. Manansala, 107 Phil 1151).
For review on certiorari is the Decision[1] of the Court of Appeals in CA-
One who purchases real estate with knowledge of a defect or lack of title in G.R. CV No. 59615 modifying, on appeal, the Joint Decision[2] of the Regional
his vendor cannot claim that he has acquired title thereto in good faith, as Trial Court of Malolos, Bulacan, Branch 9, in Civil Case No. 1026-M-93[3] for
against the true owner of the land or of an interest therein; and the same rule sum of money and damages with prayer for issuance of writ of preliminary
must be applied to one who has knowledge of facts which should have put attachment, and Civil Case No. 49-M-94[4] for damages. The trial court
him upon such inquiry and investigation as might be necessary to acquaint dismissed the complaint of the respondents, ordering them to pay the
him with the defects in the title of his vendor. A purchaser cannot close his petitioner the unpaid value of the assorted animal feeds delivered to the former
eyes to facts which should put a reasonable man upon his guard and then by the latter, with legal interest thereon from the filing of the complaint,
claim that he acted in good faith under the belief that there was no defect in including attorneys fees.
the title of the vendor (Leung Yee vs. Strong Machinery Company, supra;
Manancop Jr. vs. Cansino, 1 SCRA 572; Paylago vs. Jarabe, 22-SCRA
1247; Barrios vs. Court of Appeals, 78 SCRA 427; Emphasis supplied).
The Factual Antecedents
Without being shown to be vendees in good faith, herein respondents are not
entitled to the warranty against eviction nor are they On titled to recover On April 5, 1993, the Spouses Efren and Maura Evangelista, the
damages (Article 1555 of the Civil Code). However, for justice and equity respondents herein, started to directly procure various kinds of animal feeds
sake, and in consonance with the salutary principle of non-enrichment at from petitioner Nutrimix Feeds Corporation. The petitioner gave the
another's expense, herein petitioner J.M. Tuason & Co., Inc. should respondents a credit period of thirty to forty-five days to postdate checks to be
compensate respondents De Leons in the total sum of ONE HUNDRED issued in payment for the delivery of the feeds. The accommodation was made
TWENTY SIX THOUSAND (P126,000.00) PESOS, representing the apparently because of the company presidents close friendship with Eugenio
aggregate value of the 1,050 square meters (which petitioner was judicially Evangelista, the brother of respondent Efren Evangelista. The various animal
ordered to sell to Ramon Rivera at the year 1958 prevailing rate of P60.00 feeds were paid and covered by checks with due dates from July 1993 to
per square meter) at the value of P120.00 per square meter, doubling the September 1993. Initially, the respondents were good paying customers. In
price of P60.00 per square meter which amount petitioner voluntarily offered some instances, however, they failed to issue checks despite the deliveries of
to pay herein respondents following how indemnity for death had been raised animal feeds which were appropriately covered by sales invoices.
from P6,000.00 to P12,060.00 (People vs. Pantoja, 25 SCRA 468, 474 Consequently, the respondents incurred an aggregate unsettled account with
[1968]) based on grounds of equity, due to the reduced purchasing power of the petitioner in the amount of P766,151.00. The breakdown of the unpaid
the peso, with the legal rate of interest from December 5, 1972, the date obligation is as follows:
respondents filed their complaint, until the said total sum is fully paid.

19
 Sales Invoice Number Date Amount On January 19, 1994, the respondents also lodged a complaint for
21334 June 23, 1993 P 7,260.00 damages against the petitioner, docketed as Civil Case No. 49-M-94, for the
21420 June 26, 1993 6,990.00 untimely and unforeseen death of their animals supposedly effected by the
21437 June 28, 1993 41,510.00 adulterated animal feeds the petitioner sold to them. Within the period to file
21722 July 12, 1993 45,185.00 an answer, the petitioner moved to dismiss the respondents complaint on the
22048 July 26, 1993 44,540.00 ground of litis pendentia. The trial court denied the same in a
22054 July 27, 1993 45,246.00 Resolution[5] dated April 26, 1994, and ordered the consolidation of the case
22186 August 2, 1993 84,900.00 with Civil Case No. 1026-M-93. On May 13, 1994, the petitioner filed its Answer
Total: P275,631.00 with Counterclaim, alleging that the death of the respondents animals was due
========= to the widespread pestilence in their farm. The petitioner, likewise, maintained
Bank Check Number Due Date Amount that it received information that the respondents were in an unstable financial
United Coconut condition and even sold their animals to settle their obligations from other
Planters Bank BTS052084 July 30, 1993 P 47,760.00 enraged and insistent creditors. It, moreover, theorized that it was the
-do- BTS052087 July 30, 1993 131,340.00 respondents who mixed poison to its feeds to make it appear that the feeds
-do- BTS052091 July 30, 1993 59,700.00 were contaminated.
-do- BTS062721 August 4, 1993 47,860.00
-do- BTS062720 August 5, 1993 43,780.00 A joint trial thereafter ensued.
-do- BTS062774 August 6, 1993 15,000.00 During the hearing, the petitioner presented Rufino Arenas, Nutrimix
-do- BTS062748 September 11, 1993 47,180.00 Assistant Manager, as its lone witness. He testified that on the first week of
-do- BTS062763 September 11, 1993 48,440.00 August 1993, Nutrimix President Efren Bartolome met the respondents to
-do- BTS062766 September 18, 1993 49,460.00 discuss the possible settlement of their unpaid account. The said respondents
Total: P490,520.00 still pleaded to the petitioner to continue to supply them with animal feeds
=== because their livestock were supposedly suffering from a disease.[6]
===
=== For her part, respondent Maura Evangelista testified that as direct buyers
of animal feeds from the petitioner, Mr. Bartolome, the company president,
When the above-mentioned checks were deposited at the petitioners gave them a discount of P12.00 per bag and a credit term of forty-five to
depository bank, the same were, consequently, dishonored because seventy-five days.[7] For the operation of the respondents poultry and piggery
respondent Maura Evangelista had already closed her account. The petitioner farm, the assorted animal feeds sold by the petitioner were delivered in their
made several demands for the respondents to settle their unpaid obligation, residence and stored in an adjacent bodega made of concrete wall and
but the latter failed and refused to pay their remaining balance with the galvanized iron sheet roofing with monolithic flooring.[8]
petitioner.
It appears that in the morning of July 26, 1993, three various kinds of
On December 15, 1993, the petitioner filed with the Regional Trial Court animal feeds, numbering 130 bags, were delivered to the residence of the
of Malolos, Bulacan, a complaint, docketed as Civil Case No. 1026-M-93, respondents in Sta. Rosa, Marilao, Bulacan. The deliveries came at about
against the respondents for sum of money and damages with a prayer for 10:00 a.m. and were fed to the animals at approximately 1:30 p.m. at the
issuance of writ of preliminary attachment. In their answer with counterclaim, respondents farm in Balasing, Sta. Maria, Bulacan. At about 8:30 p.m.,
the respondents admitted their unpaid obligation but impugned their liability to respondent Maura Evangelista received a radio message from a worker in her
the petitioner. They asserted that the nine checks issued by respondent Maura farm, warning her that the chickens were dying at rapid intervals. When the
Evangelista were made to guarantee the payment of the purchases, which was respondents arrived at their farm, they witnessed the death of 18,000 broilers,
previously determined to be procured from the expected proceeds in the sale averaging 1.7 kilos in weight, approximately forty-one to forty-five days old.
of their broilers and hogs. They contended that inasmuch as the sudden and The broilers then had a prevailing market price of P46.00 per kilo.[9]
massive death of their animals was caused by the contaminated products of
the petitioner, the nonpayment of their obligation was based on a just and legal On July 27, 1993, the respondents received another delivery of 160 bags
ground. of animal feeds from the petitioner, some of which were distributed to the
contract growers of the respondents. At that time, respondent Maura
Evangelista requested the representative of the petitioner to notify Mr.

20
Bartolome of the fact that their broilers died after having been fed with the same day. Samples of blood and bone marrow were taken for chromosome
animal feeds delivered by the petitioner the previous day. She, likewise, asked analysis, which showed pulverized chromosomes both from bone marrow and
that a technician or veterinarian be sent to oversee the untoward occurrence. blood chromosomes. On cross-examination, the witness admitted that the
Nevertheless, the various feeds delivered on that day were still fed to the feeds brought to him were merely placed in a small unmarked plastic bag and
animals. On July 27, 1993, the witness recounted that all of the chickens and that he had no way of ascertaining whether the feeds were indeed
hogs died.[10] Efren Evangelista suffered from a heart attack and was manufactured by the petitioner.
hospitalized as a consequence of the massive death of their animals in the
farm. On August 2, 1993, another set of animal feeds were delivered to the Another witness for the respondents, Aida Viloria Magsipoc, Forensic
respondents, but the same were not returned as the latter were not yet Chemist III of the Forensic Chemist Division of the National Bureau of
cognizant of the fact that the cause of the death of their animals was the Investigation, affirmed that she performed a chemical analysis [17] of the animal
polluted feeds of the petitioner.[11] feeds, submitted to her by respondent Maura Evangelista and Dr. Garcia in a
sealed plastic bag, to determine the presence of poison in the said specimen.
When respondent Maura Evangelista eventually met with Mr. Bartolome The witness verified that the sample feeds yielded positive results to the tests
on an undisclosed date, she attributed the improbable incident to the animal for COUMATETRALYL Compound,[18] the active component of RACUMIN, a
feeds supplied by the petitioner, and asked Mr. Bartolome for indemnity for the brand name for a commercially known rat poison.[19] According to the witness,
massive death of her livestock. Mr. Bartolome disavowed liability thereon and, the presence of the compound in the chicken feeds would be fatal to internal
thereafter, filed a case against the respondents.[12] organs of the chickens, as it would give a delayed blood clotting effect and
eventually lead to internal hemorrhage, culminating in their inevitable death.
After the meeting with Mr. Bartolome, respondent Maura Evangelista
requested Dr. Rolando Sanchez, a veterinarian, to conduct an inspection in Paz Austria, the Chief of the Pesticide Analytical Section of the Bureau of
the respondents poultry. On October 20, 1993, the respondents took ample Plants Industry, conducted a laboratory examination to determine the
amounts remaining from the feeds sold by the petitioner and furnished the presence of pesticide residue in the animal feeds submitted by respondent
same to various government agencies for laboratory examination. Maura Evangelista and Dr. Garcia. The tests disclosed that no pesticide
residue was detected in the samples received[20] but it was discovered that the
Dr. Juliana G. Garcia, a doctor of veterinary medicine and the Supervising animal feeds were positive for Warfarin, a rodenticide (anticoagulant), which
Agriculturist of the Bureau of Animal Industry, testified that on October 20, is the chemical family of Coumarin.[21]
1993, sample feeds for chickens contained in a pail were presented to her for
examination by respondent Efren Evangelista and a certain After due consideration of the evidence presented, the trial court ruled in
veterinarian.[13] The Clinical Laboratory Report revealed that the feeds were favor of the petitioner. The dispositive portion of the decision reads:
negative of salmonella[14] and that the very high aflatoxin level[15] found therein
would not cause instantaneous death if taken orally by birds. WHEREFORE, in light of the evidence on record and the laws/jurisprudence
Dr. Rodrigo Diaz, the veterinarian who accompanied Efren at the Bureau applicable thereon, judgment is hereby rendered:
of Animal Industry, testified that sometime in October 1993, Efren sought for
his advice regarding the death of the respondents chickens. He suggested that 1) in Civil Case No. 1026-M-93, ordering defendant spouses Efren
the remaining feeds from their warehouse be brought to a laboratory for and Maura Evangelista to pay unto plaintiff Nutrimix Feeds
examination. The witness claimed that the feeds brought to the laboratory Corporation the amount of P766,151.00 representing the unpaid
came from one bag of sealed Nutrimix feeds which was covered with a sack. value of assorted animal feeds delivered by the latter to and
received by the former, with legal interest thereon from the filing
Dr. Florencio Isagani S. Medina III, Chief Scientist Research Specialist of of the complaint on December 15, 1993 until the same shall have
the Philippine Nuclear Research Institute, informed the trial court that been paid in full, and the amount of P50,000.00 as attorneys
respondent Maura Evangelista and Dr. Garcia brought sample feeds and four fees. Costs against the aforenamed defendants; and
live and healthy chickens to him for laboratory examination. In his Cytogenetic
Analysis,[16] Dr. Medina reported that he divided the chickens into two 2) dismissing the complaint as well as counterclaims in Civil Case
categories, which he separately fed at 6:00 a.m. with the animal feeds of a No. 49-M-94 for inadequacy of evidence to sustain the same. No
different commercial brand and with the sample feeds supposedly supplied by pronouncement as to costs.
the petitioner. At noon of the same day, one of the chickens which had been
fed with the Nutrimix feeds died, and a second chicken died at 5:45 p.m. of the SO ORDERED.[22]

21
 In finding for the petitioner, the trial court ratiocinated as follows: SO ORDERED.[24]

On the strength of the foregoing disquisition, the Court cannot sustain the In dismissing the complaint in Civil Case No. 1026-M-93, the CA ruled
Evangelistas contention that Nutrimix is liable under Articles 1561 and 1566 that the respondents were not obligated to pay their outstanding obligation to
of the Civil Code governing hidden defects of commodities sold. As already the petitioner in view of its breach of warranty against hidden defects. The CA
explained, the Court is predisposed to believe that the subject feeds were gave much credence to the testimony of Dr. Rodrigo Diaz, who attested that
contaminated sometime between their storage at the bodega of the the sample feeds distributed to the various governmental agencies for
Evangelistas and their consumption by the poultry and hogs fed therewith, laboratory examination were taken from a sealed sack bearing the brand name
and that the contamination was perpetrated by unidentified or unidentifiable Nutrimix. The CA further argued that the declarations of Dr. Diaz were not
ill-meaning mischief-maker(s) over whom Nutrimix had no control in effectively impugned during cross-examination, nor was there any contrary
whichever way. evidence adduced to destroy his damning allegations.
On March 7, 2002, the petitioner filed with this Court the instant petition
All told, the Court finds and so holds that for inadequacy of proof to the for review on the sole ground that
contrary, Nutrimix was not responsible at all for the contamination or
poisoning of the feeds supplied by it to the Evangelistas which precipitated
the mass death of the latters chickens and hogs. By no means and under no THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT
circumstance, therefore, may Nutrimix be held liable for the sundry damages THE CLAIMS OF HEREIN PETITIONER FOR COLLECTION OF SUM OF
prayed for by the Evangelistas in their complaint in Civil Case No. 49-M-94 MONEY AGAINST PRIVATE RESPONDENTS MUST BE DENIED
and answer in Civil Case No. 1026-M-93. In fine, Civil Case No. 49-M-94 BECAUSE OF HIDDEN DEFECTS.
deserves dismissal.

Parenthetically, vis--vis the fulminations of the Evangelistas in this specific The Present Petition
regard, the Court does not perceive any act or omission on the part of
Nutrimix constitutive of abuse of rights as would render said corporation
liable for damages under Arts. 19 and 21 of the Civil Code. The alleged The petitioner resolutely avers that the testimony of Dr. Diaz can hardly
callous attitude and lack of concern of Nutrimix have not been established be considered as conclusive evidence of hidden defects that can be attributed
with more definitiveness. to the petitioner. Parenthetically, the petitioner asserts, assuming that the
sample feeds were taken from a sealed sack bearing the brand name Nutrimix,
As regards Civil Case No. 1026-M-93, on the other hand, the Court is it cannot decisively be presumed that these were the same feeds brought to
perfectly convinced that the deliveries of animal feeds by Nutrimix to the the respondents farm and given to their chickens and hogs for consumption.
Evangelistas constituted a simple contract of sale, albeit on a continuing It is the contention of the respondents that the appellate court correctly
basis and on terms or installment payments.[23] ordered the dismissal of the complaint in Civil Case No. 1026-M-93. They
further add that there was sufficient basis for the CA to hold the petitioner guilty
Undaunted, the respondents sought a review of the trial courts decision of breach of warranty thereby releasing the respondents from paying their
to the Court of Appeals (CA), principally arguing that the trial court erred in outstanding obligation.
holding that they failed to prove that their broilers and hogs died as a result of
consuming the petitioners feeds.
On February 12, 2002, the CA modified the decision of the trial court. The Ruling of the Court
The fallo of the decision reads:

Oft repeated is the rule that the Supreme Court reviews only errors of law
WHEREFORE, premises considered, the appealed decision is hereby
in petitions for review on certiorari under Rule 45. However, this rule is not
MODIFIED such that the complaint in Civil Case No. 1026-M-93
absolute. The Court may review the factual findings of the CA should they be
is DISMISSED for lack of merit.
contrary to those of the trial court. Conformably, this Court may review findings

22
of facts when the judgment of the CA is premised on a misapprehension of delivery or manufacture of the product;[31] or when the product left the sellers
facts.[25] or manufacturers control;[32] or when the product was sold to the
purchaser;[33] or the product must have reached the user or consumer without
The threshold issue is whether or not there is sufficient evidence to hold substantial change in the condition it was sold. Tracing the defect to the
the petitioner guilty of breach of warranty due to hidden defects. petitioner requires some evidence that there was no tampering with, or
The petition is meritorious. changing of the animal feeds. The nature of the animal feeds makes it
necessarily difficult for the respondents to prove that the defect was existing
The provisions on warranty against hidden defects are found in Articles when the product left the premises of the petitioner.
1561 and 1566 of the New Civil Code of the Philippines, which read as follows:
A review of the facts of the case would reveal that the petitioner delivered
the animal feeds, allegedly containing rat poison, on July 26, 1993; but it is
Art. 1561. The vendor shall be responsible for warranty against hidden
astonishing that the respondents had the animal feeds examined only on
defects which the thing sold may have, should they render it unfit for the use
October 20, 1993, or barely three months after their broilers and hogs had
for which it is intended, or should they diminish its fitness for such use to
died. On cross-examination, respondent Maura Evangelista testified in this
such an extent that, had the vendee been aware thereof, he would not have
manner:
acquired it or would have given a lower price for it; but said vendor shall not
be answerable for patent defects or those which may be visible, or for those Atty. Cruz:
which are not visible if the vendee is an expert who, by reason of his trade or
profession, should have known them. Q Madam Witness, you said in the last hearing that believing that
the 250 bags of feeds delivered to (sic) the Nutrimix Feeds
Corporation on August 2, 1993 were poison (sic), allegedly
Art. 1566. The vendor is responsible to the vendee for any hidden faults or
your husband Efren Evangelista burned the same with the
defects in the thing sold, even though he was not aware thereof.
chicken[s], is that right?
This provision shall not apply if the contrary has been stipulated, and the A Yes, Sir. Some, Sir.
vendor was not aware of the hidden faults or defects in the thing sold.
Q And is it not a fact, Madam Witness, that you did not, as
according to you, used (sic) any of these deliveries made on
A hidden defect is one which is unknown or could not have been known August 2, 1993?
to the vendee.[26] Under the law, the requisites to recover on account of hidden
defects are as follows: A We were able to feed (sic) some of those deliveries because we
did not know yet during that time that it is the cause of the
(a) the defect must be hidden; death of our chicks (sic), Sir.
(b) the defect must exist at the time the sale was made;
(c) the defect must ordinarily have been excluded from the contract; Q But according to you, the previous deliveries were not used by
(d) the defect, must be important (renders thing UNFIT or you because you believe (sic) that they were poison (sic)?
considerably decreases FITNESS);
(e) the action must be instituted within the statute of limitations.[27] A Which previous deliveries, Sir[?]

In the sale of animal feeds, there is an implied warranty that it is Q Those delivered on July 26 and 22 (sic), 1993?
reasonably fit and suitable to be used for the purpose which both parties A Those were fed to the chickens, Sir. This is the cause of the
contemplated.[28] To be able to prove liability on the basis of breach of implied death of the chickens.
warranty, three things must be established by the respondents. The first is that
they sustained injury because of the product; the second is that the injury Q And you stated that this last delivery on August 2 were poison
occurred because the product was defective or unreasonably unsafe; (sic) also and you did not use them, is that right?
and finally, the defect existed when the product left the hands of the
Atty. Roxas:
petitioner.[29] A manufacturer or seller of a product cannot be held liable for
any damage allegedly caused by the product in the absence of any proof that That is misleading.
the product in question was defective.[30] The defect must be present upon the

23
 Atty. Cruz: contention of the petitioner that there is no evidence on record to prove that
the animal feeds taken to the various governmental agencies for laboratory
She stated that. examination were the same animal feeds given to the respondents broilers
Atty. Roxas: and hogs for their consumption. Moreover, Dr. Diaz even admitted that the
feeds that were submitted for analysis came from a sealed bag. There is simply
She said some were fed because they did not know yet of the no evidence to show that the feeds given to the animals on July 26 and 27,
poisoning. 1993 were identical to those submitted to the expert witnesses in October
1993.
Court:
It bears stressing, too, that the chickens brought to the Philippine Nuclear
And when the chickens died, they stopped naturally feeding it to
Research Institute for laboratory tests were healthy animals, and were not the
the chickens.
ones that were ostensibly poisoned. There was even no attempt to have the
Atty. Cruz: dead fowls examined. Neither was there any analysis of the stomach of the
dead chickens to determine whether the petitioners feeds really caused their
Q You mean to say, Madam Witness, that although you believe sudden death. Mere sickness and death of the chickens is not satisfactory
(sic) that the chickens were allegedly poisoned, you used the evidence in itself to establish a prima facie case of breach of warranty.[36]
same for feeding your animals?
Likewise, there was evidence tending to show that the respondents
A We did not know yet during that time that the feeds contained combined different kinds of animal feeds and that the mixture was given to the
poison, only during that time when we learned about the same animals. Respondent Maura Evangelista testified that it was common practice
after the analysis. among chicken and hog raisers to mix animal feeds. The testimonies of
Q Therefore you have known only of the alleged poison in the respondent Maura Evangelista may be thus summarized:
Nutrimix Feeds only after you have caused the analysis of the Cross-Examination
same?
Atty. Cruz:
A Yes, Sir.
Q Because, Madam Witness, you ordered chicken booster mash
Q When was that, Madam Witness? from Nutrimix Feeds Corporation because in July 1993 you
A I cannot be sure about the exact time but it is within the months were taking care of many chickens, as a matter of fact,
of October to November, Sir. majority of the chickens you were taking care [of] were chicks
and not chickens which are marketable?
Q So, before this analysis of about October and November, you
were not aware that the feeds of Nutrimix Feeds Corporation A What I can remember was that I ordered chicken booster mash
were, according to you, with poison? on that month of July 1993 because we have some chicks
which have to be fed with chicken booster mash and I now
A We did not know yet that it contained poison but we were sure remember that on the particular month of July 1993 we
that the feeds were the cause of the death of our animals.[34] ordered several bags of chicken booster mash for the
consumption also of our chicken in our other poultry and at the
We find it difficult to believe that the feeds delivered on July 26 and 27, same time they were also used to be mixed with the feeds that
1993 and fed to the broilers and hogs contained poison at the time they were given to the hogs.
reached the respondents. A difference of approximately three months
enfeebles the respondents theory that the petitioner is guilty of breach of Q You mean to say [that], as a practice, you are mixing chicken
warranty by virtue of hidden defects. In a span of three months, the feeds could booster mash which is specifically made for chick feeds you
have already been contaminated by outside factors and subjected to many are feeding the same to the hogs, is that what you want the
conditions unquestionably beyond the control of the petitioner. In fact, Dr. Court to believe?
Garcia, one of the witnesses for the respondents, testified that the animal
feeds submitted to her for laboratory examination contained very high level of
aflatoxin, possibly caused by mold (aspergillus flavus).[35] We agree with the
24
 A Yes, Sir, because when you mix chicken booster mash in the reasons, the expert testimonies lack probative weight. The respondents case
feeds of hogs there is a better result, Sir, in raising of breach of implied warranty was fundamentally based upon the
hogs.[37] circumstantial evidence that the chickens and hogs sickened, stunted, and
died after eating Nutrimix feeds; but this was not enough to raise a reasonable
Re-Direct Examination supposition that the unwholesome feeds were the proximate cause of the
Atty. Roxas: death with that degree of certainty and probability required.[40] The rule is well-
settled that if there be no evidence, or if evidence be so slight as not
Q Now, you mentioned that shortly before July 26 and 27, 1993, reasonably to warrant inference of the fact in issue or furnish more than
various types of Nutrimix feeds were delivered to you like materials for a mere conjecture, the court will not hesitate to strike down the
chicks booster mash, broiler starter mash and hog finisher or evidence and rule in favor of the other party.[41] This rule is both fair and sound.
hog grower mash. What is the reason for simultaneous Any other interpretation of the law would unloose the courts to meander
deliveries of various types of feeds? aimlessly in the arena of speculation.[42]
A Because we used to mix all those together in one feeding, Sir. It must be stressed, however, that the remedy against violations of
warranty against hidden defects is either to withdraw from the contract (accion
Q And what is the reason for mixing the chick booster mash with
redhibitoria) or to demand a proportionate reduction of the price (accion quanti
broiler starter mash?
minoris), with damages in either case.[43] In any case, the respondents have
A So that the chickens will get fat, Sir. already admitted, both in their testimonies and pleadings submitted, that they
are indeed indebted to the petitioner for the unpaid animal feeds delivered to
Re-Cross Examination them. For this reason alone, they should be held liable for their unsettled
Atty. Cruz: obligations to the petitioner.

Q Madam Witness, is it not a fact that the mixing of these feeds by WHEREFORE, in light of all the foregoing, the petition is GRANTED. The
you is your own concuction (sic) and without the advice of a assailed Decision of the Court of Appeals, dated February 12, 2002, is
veterinarian expert to do so? REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
Malolos, Bulacan, Branch 9, dated January 12, 1998, is REINSTATED. No
A That is common practice among raisers to mix two feeds, Sir. costs.
Q By yourself, Madam Witness, who advised you to do the mixing SO ORDERED.
of these two types of feeds for feeding your chickens?
JON AND MARISSA DE YSASI, petitioners, vs. ARTURO AND ESTELA
A That is common practice of chicken raisers, Sir.[38] ARCEO, respondents.
Even more surprising is the fact that during the meeting with Nutrimix
President Mr. Bartolome, the respondents claimed that their animals were DECISION
plagued by disease, and that they needed more time to settle their obligations MENDOZA, J.:
with the petitioner. It was only after a few months that the respondents
changed their justification for not paying their unsettled accounts, claiming
This is a petition for review of the decision,[1] dated August 31, 1998, of
anew that their animals were poisoned with the animal feeds supplied by the
the Court of Appeals, affirming the decision of the Regional Trial Court, Branch
petitioner. The volte-face of the respondents deserves scant consideration for
67, Pasig City, which dismissed petitioners amended complaint for damages
having been conjured as a mere afterthought.
and ordered them instead to pay respondents back rentals and attorneys fees,
In essence, we hold that the respondents failed to prove that the petitioner as well as the appeals courts resolution,[2] dated November 27, 1998, denying
is guilty of breach of warranty due to hidden defects. It is, likewise, rudimentary petitioners motion for reconsideration.
that common law places upon the buyer of the product the burden of proving
The antecedent facts are as follows:
that the seller of the product breached its warranty. [39] The bevy of expert
evidence adduced by the respondents is too shaky and utterly insufficient to On October 1, 1988, petitioner spouses Jon and Marissa de Ysasi leased
prove that the Nutrimix feeds caused the death of their animals. For these from spouses Arturo and Estela Arceo, respondents herein, the latters

25
premises located at No. 91 East Capitol Drive, Barrio Kapitolyo, Pasig, Metro III. THE HONORABLE COURT OF APPEALS ERRED IN RULING
Manila in order to carry on their business of handpainting and finishing THAT PETITIONERS SHOULD BE HELD LIABLE TO PAY
services. Petitioners paid P5,000.00 as goodwill money and P15,000.00 as DAMAGES TO PRIVATE RESPONDENT PARTICULARLY THE
deposit for three months. SUM OF TWENTY THOUSAND (P20,000.00) PESOS
REPRESENTING THE ALLEGED UNPAID RENTALS.[7]
It appears that due to heavy rains, the roof of the building leaked and the
premises were flooded, as a result of which the schedule of the delivery of After reviewing the records of this case, we affirm the decision of the
handpainted mouldings to petitioners customers was disrupted. Although Court of Appeals dismissing petitioners amended complaint for damages and
petitioners asked respondents to make the necessary repairs, the latter ordering the payment of attorneys fees to respondents. However, the order for
repaired only a portion of the leased premises. Consequently, petitioners payment of unpaid rentals with interest to respondents should be deleted.
stopped paying rent as well as their share of the electric, water, and telephone
bills from December 1988 up to the time they vacated the leased premises in First. Petitioners anchor their complaint for damages on respondents
June 1989. failure, as lessors, to make the necessary repairs on the leased premises as
provided in Art. 1654(2) of the Civil Code.[8] The Court of Appeals held that
Respondents in turn filed an ejectment suit against petitioners in the under the contract of lease of the parties, there was an implied waiver of right
Metropolitan Trial Court, Branch 71, Pasig City. In its decision, the MeTC, to demand repairs to be made by the lessee.[9]
while ruling that petitioners were justified in suspending the payment of rent,
ordered the deposits made by them to be applied to the payment of rentals up The records show that respondent Mrs. Arceo caused certain repairs to
to June 1989 and directed them to pay the electric and water bills.[3] On appeal be done on the leased premises at the request of petitioners, [10] although the
to the Regional Trial Court, Branch 156, Pasig City, the decision was modified latter alleged that the repairs made were inadequate.[11] This fact indicates that
inasmuch as petitioners were ordered to pay P20,000.00 as balance of their there was no implied waiver of repairs on the part of the lessee. For Art. 1371
rentals up to the time they vacated the premises.[4] of the Civil Code provides that In order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts should be principally
Petitioners then filed a complaint in the Regional Trial Court, Branch 67, considered.
Pasig City, for specific performance or rescission of contract with damages,
which they subsequently changed to a claim for damages in view of the Petitioners contend that respondents were liable for hidden defects and,
expiration of the lease contract.[5]The trial court, however, dismissed the for this purpose, cite the following provisions of the Civil Code:
complaint and ordered petitioners to pay respondents the sums of P5,000.00
as attorneys fees and P20,000.00 as back rentals, with interest at the legal Art. 1566. The vendor is responsible to the vendee for any hidden faults or
rate.[6] On appeal to the Court of Appeals, the decision was defects in the thing sold, even though he was not aware thereof.
affirmed.Petitioners motion for reconsideration was subsequently
denied. Hence this appeal. This provision shall not apply if the contrary has been stipulated, and the
vendor was not aware of the hidden faults or defects in the thing sold.
Petitioners contend that:
I. THE HONORABLE COURT OF APPEALS COMMITTED A Art. 1653. The provisions governing warranty, contained in the Title on Sales,
CLEAR ERROR IN INTERPRETING THAT UNDER THE shall be applicable to the contract of lease.
CONTRACT OF LEASE DATED 1 OCTOBER 1988 THERE
WAS AN IMPLIED WAIVER OF REPAIRS INCLUDING Petitioners contention is without merit. Petitioner Jon de Ysasi admitted
REPAIRS FOR HIDDEN AND UNKNOWN DEFECTS. on cross-examination that he inspected the premises three or four times before
II. THE HONORABLE COURT OF APPEALS ERRED IN RULING signing the lease contract.[12] During his inspection, he noticed the rotten
THAT PRIVATE RESPONDENTS ARE NOT LIABLE TO PAY plywood on the ceiling which in his opinion was caused by leaking water or
DAMAGES TO PETITIONERS INASMUCH AS THE FAILURE anay (termites). Yet, he decided to go through with the lease
OF THE FORMER TO MAKE THE NECESSARY REPAIRS ON agreement.[13] Hence, respondents cannot be held liable for the alleged
THE SUBJECT PREMISES WAS NOT THE DIRECT AND warranty against hidden defects. What we said in Coca-Cola Bottlers
PROXIMATE CAUSE OF THE DAMAGES SUSTAINED BY THE Philippines, Inc. v. Court of Appeals[14] applies mutatis mutandis to this case:
LATTER.

26
Considering that the representatives of the petitioner were given every We find merit in this contention. The appeals court erred in affirming the
opportunity to visit and inspect the premises prior to the execution of the ruling of the trial court which went beyond its jurisdiction in ordering petitioners
contract of lease, we cannot impute bad faith on the part of respondents for to pay unpaid rentals to respondents. The trial court held:
having allegedly withheld the information that the leased land was a former
fishpond. In the case at bar, there is no evidence to show that the defendants were
liable to repair the roof and ceiling of the leased premises. They [are] also not
liable for the alleged damages sustained by the plaintiffs. On the other hand,
.... defendants had not sufficiently established that they sustained damages to
warrant the award for moral and exemplary damages. However, it is
Accordingly, private respondents cannot be held liable for the alleged unfortunate that the plaintiffs had filed the instant action for which they should
warranty against defects under Art. 1561 of the Civil Code. pay attorneys fees to the defendants in the amount of P5,000.00. Plaintiffs
should also pay the sum of P20,000.00 representing the balance of their
Under Arts. 1561 and 1653 of the Civil Code, the lessor is responsible for rentals up to the time they vacated the leased premises in June 1989 with
warranty against hidden defects, but he is not answerable for patent defects interest at the legal rate starting from January 1991.[20]
or those which are visible. Such appears to be the case here.
This ruling is based on the final judgment of the MeTC in the ejectment
Second. Petitioners contend that respondents obligation to make the case which ordered thus:
necessary repairs on the premises was fixed in the decision both of the
Metropolitan Trial Court (MeTC) and the Regional Trial Court (RTC) in the WHEREFORE, the Court hereby renders judgment modifying the judgment
ejectment case and that such is now conclusive on the parties. [15] of the lower court in the sense that defendants are adjudged to pay plaintiffs
We disagree. Although the MeTC held respondents responsible for the amount of P20,000.00 representing the balance of their rentals up to the
repairs, it does not appear that the RTC affirmed the same on appeal. The time they vacated the leased premises in June, 1989.[21]
RTC in fact decided the case in favor of respondents. Instead of holding
petitioners justified in refusing to pay rentals because of respondents alleged It would seem that the judgment in the ejectment case, particularly the
failure to comply with their obligation to make repairs, the RTC in fact ordered payment of unpaid rentals, had not yet been enforced.[22] Consequently, the
them to pay respondents the sum of P20,000.00, representing the balance of proper remedy of respondents herein was to file a motion for issuance of a writ
the rentals from the time they withheld payment up to the time they vacated of execution within five years from date of entry, or, after five years, to file an
the leased premises in June 1989.[16] action for revival of judgment, pursuant to Rule 39, 6 of the 1997 Rules on Civil
Procedure.
Nor is there any basis for petitioners claim of P41,007.35 as damages for
improvements allegedly made, consisting of tables and chairs, considering Thus, when the trial court ordered the payment of unpaid rentals, it
that the said pieces of furniture were removed by them when they transferred decided an issue which had already been adjudicated with finality by another
to another place.[17] As regards the business losses allegedly incurred by court. It had no jurisdiction to do so. As correctly pointed out by petitioners,
petitioners as a result of the cancellation of job orders in the amount respondent did not claim payment of unpaid rentals in their Answer with
of P100,000.00, such damages have not been sufficiently established by them Counterclaim dated October 23, 1989.[23] The ruling of this Court in Lazo v.
as attributable to respondents fault or neglect.[18] Republic Surety & Insurance Co., Inc.[24] is apropos:

It has not been duly proven in the case that respondents failed to fulfill The actuation of the trial court was not legally permissible, especially
their obligations as lessors or that they acted with fraud or bad faith. As because the theory on which it proceeded involved factual considerations
heretofore mentioned, respondents did cause repairs to be made on the neither touched upon the pleadings nor made the subject of evidence at the
leased premises upon petitioners request, but the latter claimed that the trial. Rule 6, Section 1, is quite explicit in providing that pleadings are the
repairs made were inadequate. written allegations of the parties of their respective claims and defenses
For the foregoing reasons, there is no basis for petitioners claim for submitted to the court for trial and judgment. This rule has been consistently
actual, moral, and exemplary damages and attorneys fees. applied and adhered to by the courts.

Third. Petitioners deny that they are liable for unpaid rentals to
respondents in the amount of P20,000.00.[19]
27
The subject matter of any given case is determined . . . by the nature and Cesar Villanueva for respondents in 83113.
character of the pleadings submitted by the parties to the court for trial and
judgment. Belandres vs. Lopez Sugar Central Mill Co., Inc., 97 Phil. 100,
103.
FELICIANO, J.:
It is a fundamental principle that judgments must conform to both the
pleadings and the proof, and must be in accordance with the theory of the The consolidated Petitions here before the Court compel us to consider the
action upon which the pleadings were framed and the case was tried; that a nature and at least some of the legal effects of a "financing lease" or
party can no more succeed upon a case proved, but not alleged, than upon
"financial lease." Such an instrument must seem an exotic creation in the
one alleged but not proved. (Ramon v. Ortuzar, 89 Phil. 730, 742).
eyes of many civil law jurists; for a financial lease does not fit neatly into the
tight and orderly categories of the Civil Code. But financial leases are quite
It is a well-known principle in procedure that courts of justice have no commonplace in today's commercial and financial world and the law must
jurisdiction or power to decide a question not in issue. (Lim Toco vs. Go Fay, take account of developments and practice in that world.
80 Phil. 166)
On 15 July 1980, the Beltran spouses purchased from Service Equipment
A judgment going outside the issues and purporting to adjudicate something Specialists Co. ("SESCO") one unit of Infra-Red Performance Analyzer with
upon which the parties were not heard, is not merely irregular, but Serial No. 19B2870, SUN 1115, FOR P137,000.00. Upon delivery of the unit
extrajudicial and invalid. (Salvante v. Cruz, 88 Phil. 236, 244.) on the same day, the Beltrans returned to SESCO a Performance Analyzer
SUN 1011 previously purchased from SESCO, and the payments made
Fourth. Petitioners contend that there is no basis for the award of thereon, plus two (2) other checks made out by the Beltrans in the name of
attorneys fees. This matter, however, was not raised by them in the Court of SESCO, were applied as downpayment on the new Performance Analyzer
Appeals. Consequently, they cannot now raise it for the first time on appeal.[25] SUN 1115. Further, SESCO agreed with the Beltrans that the balance of the
purchase price of the new SUN 1115 would be placed under a financing
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with arrangement which SESCO was to enter into with PAIC. 1
the MODIFICATION that the order for payment of unpaid rentals with interest
to respondents is deleted.
On 3 September 1980, the Beltrans issued another check in favor of SESCO
SO ORDERED. in the amount of P3,780.00. On the same date, SESCO assigned the sales
invoice it issued to the Beltran spouses to PAIC; the documentation dated 3
G.R. No. 83113 May 19, 1992 September 1980 stated that the Performance Analyzer SUN 1115 with Serial
No. 19B2870 was delivered to PAIC. At the same time, PAIC executed a
contract of lease over the SUN 1115 with the spouses Beltran as lessees for
RAFAEL S. BELTRAN and MA. VIOLETA BELTRAN, petitioners,
a term of 36 months at a monthly rental of P3,903.52 commencing on 2
vs.
September 1980 and ending on 2 October 1983. On 19 September 1980,
PAIC FINANCE CORPORATION, SERVICE EQUIPMENT SPECIALISTS
SESCO executed in favor of PAIC a surety undertaking under which SESCO
CO., INC., RODRIGO REYES and IRAIDA REYES, respondents.
guaranteed solidarily the faithful performance of all obligations of the Beltran
lessees to PAIC.
G.R. No. 83256 May 19, 1992
Sometime in October 1980, the SUN 1115 malfunctioned. The Beltrans
PAIC FINANCE CORPORATION, petitioner, sought the assistance of SESCO which in turn promised to repair the
vs. equipment. The repairs made on the SUN 1115 were, however, found to be
SPOUSES RAFAEL BELTRAN and MARIA VIOLETA BELTRAN, unsatisfactory by the Beltrans who thereupon decided to return the unit and
SERVICE EQUIPMENT SPECIALIST CO., INC., RODRIGO REYES and discontinued the monthly rental payments to PAIC.
IRAIDA G. REYES and COURT OF APPEALS, respondents.
When the spouses Beltran failed to pay four (4) succeeding monthly
Goo Law Office for petitioner in 83256. payments, PAIC sent them a letter demanding payment of the rentals in
28
arrears. When the spouses Beltran failed to pay the arrearages, PAIC, on 23 the trial court for having been filed late. The motion for reconsideration filed
February 1981, filed a complaint for a sum of money against the spouses. On by the spouses Beltran was denied on the ground that the period for appeal
31 March 1981, the spouses Beltran filed an answer with counterclaim and a is jurisdictional. A second motion for reconsideration was filed with, but was
third-party complaint against SESCO. SESCO eventually filed an answer to not acted upon by, the trial court. Instead, the trial court transmitted the
the third-party complaint as required by the trial court. records of the case to the Court of Appeals since PAIC had filed its own
appeal in a timely manner. Upon such transmittal, the Court of Appeals
On 16 October 1985, the trial court rendered a decision in favor of the assumed jurisdiction of the appealed case.
spouses Beltran. The trial court held that the transaction between PAIC and
the spouses Beltran was one of lease and dismissed the complaint of PAIC, The judgment of the trial court was affirmed by the Court of Appeals in a
as well as the Beltrans' counterclaim against PAIC and their third party decision dated 30 June 1987. In that decision, however, the Court of Appeals
complaint against SESCO. The trial court held: held the transaction between the Beltrans and PAIC to be one of sale rather
than a lease:
Under the terms of the lease, in case of fault of the lessee
(defendant Beltran), the plaintiff may declare any and all We agree with the contention of the defendants-appellees.
sums due and to become due and payable and in addition An examination of the records shows that indeed
the lessor shall be entitled to take possession of the leased the Contract of lease "is but a scheme to simulate the real
equipment and to recover as damages an amount equal to agreement between the parties which is a financing
the difference of the rent for the unexpired term of the lease arrangement for the defendants Beltran to pay the unpaid
and aggregate rental value of the leased equipment. price of the performance analyzer with Serial No. SUN
1115 to the plaintiff." (p. 251, Record). The equipment in
Categorizing the transaction had between plaintiff and question was sold to defendant-appellee Rafael S. Beltran
defendant Rafael S. Beltran as one of lease, which binds the on July 15, 1980 by Service Equipment Specialist Co., Inc.
plaintiff; we are constrained to dismiss the plaintiff's case. (SESCO) as evidenced by Sales Invoice No. 050 (p. 10,
Folder of Exhibits), by Warranty Certificate dated July 15,
Under Article 1654 of the Civil Code, the lessor is obliged to 1980 (p. 11, Folder of Exhibits), and by a letter of SESCO
deliver the object of the lease in such condition as to render addressed to defendant appellee dated October 21, 1980 (p.
it fit for the use intended; to make on the same during the 13, Folder of Exhibits).
lease all the necessary repairs in order to keep it suitable for
the use to which it has been devoted and to maintain the Plaintiff-appellant's evidence shows some glaring
lessee in the peaceful enjoyment of the lease during the inconsistencies. The contract of lease covers the equipment
contract. in question which was already sold and delivered to
defendant-appellee. The date of the contract of lease is July
31, 1980 but the subject of the lease was "sold" to plaintiff-
Defendants Beltran's evidence, without contradiction is that
the performance analyzer became unfit for the use intended appellant only on September 3, 1980 (p. 4, Folder of
soon after delivery. Plaintiff [PAIC] has not repaired such Exhibits). The original of Sales Invoice No. 050 reflect both
defect in order to keep the equipment suitable for the use to plaintiff-appellant and defendant-appellee Rafael S. Beltran
which it is devoted. as vendees of the equipment in question but the contract of
lease shows that defendant-appellee is the lessee and the
plaintiff-appellant is the lessor. The delivery receipts show
Consequently, the lease must be deemed extinguished that the equipment in question was delivered to defendant-
because the thing leased was totally unfit for the purposes of appellee on July 15, 1980 (p.10, Folder of Exhibits) by
the lease. 2 (Emphasis and brackets supplied) SESCO, on September 2, 1980 by plaintiff-appellant, and on
September 3, 1980 by SESCO (pp. 5-6, Folder of Exhibits).
The Beltran spouses filed a notice of appeal dated 12 April 1986 with the trial Exhibit D shows that the equipment in question was
court in view of the failure of the trial court to rule on the liability of SESCO on delivered to both plaintiff-appellant and defendant-appellee
its contract of sale. The notice of appeal was, however, denied due course by
29
 on September 3, 1980 by SESCO (p. 6, Folder of A Petition for Review on Certiorari was then filed by the Beltran spouses with
Exhibits). These inconsistencies belie plaintiff-appellant's this Court and docketed as G.R. No. 83113, assailing the Court of Appeals'
contention that the contract of lease is not a "scheme to refusal to entertain their appeal. In a Resolution dated 4 January 1989, the
simulate real agreement between the parties which is Court dismissed the petition of the Beltran spouses for "insufficiency in form
a financing arrangement." and substance and for lack of merit." The Beltrans moved for
reconsideration, without success. A second motion for reconsideration was
Defendants-appellees [Beltrans] cannot be held liable for the filed by the Beltrans.
breakdown of the equipment in question pursuant to the
Warranty Certificate of SESCO dated July 15, 1980 (p. 11, Meantime, PAIC also filed a Petition for Review on certiorari before this
Folder of Exhibits). It is admitted that the cause of the Court, docketed as G.R. No. 83256. On 25 January 1989, the Court issued a
breakdown was when one of SESCO's technicians Resolution in G.R. No. 83256, granting the motion of the spouses Beltran for
"accidentally damaged the PCB of the equipment" (p. 13 consolidation of G.R. No. 83256 with G.R. No. 83113, in effect reconsidering
Folder of Exhibits). When the equipment was not repaired the previous dismissal of the petition in G.R. No. 83113.
despite SESCO's assurance, defendants-appellees decided
to return the equipment and discontinued amortization PAIC, in its petition, mainly alleges that the Court of Appeals erred in
payments (pp. 12-13, Folder of Exhibits). As found by the applying the provisions of the Civil Code in the construction of its contract
trial court: with the Beltran spouses. PAIC maintains that the Court of Appeals should
have applied instead the provisions of R.A. No. 5980 entitled "An Act
Defendant Beltran's evidence, without Regulating the Organization and Operation of Financing Companies," in
contradiction is that the performance characterizing the relationship between PAIC and the spouses Beltran. It is
analyzer became unfit for the use intended argued that the contract of lease is actually a financial lease governed by
soon after delivery. Plaintiff has pot repaired Section 3 (a) of R.A. No. 5980; that under such scheme, PAIC under took no
such defect in order to keep the equipment warranty as to the fitness, design or condition of, or as to the quality or
suitable for the use it is devoted. (p. 252, capacity of the equipment.
Record).
The threshold problem relates to characterization of the relationships
Defendants-appellees seek a rescission of the contract of between the three (3) parties: PAIC, the Beltrans and SESCO.
sale pursuant to Article 1599 of the Civil Code which Characterization of these relationships requires us to examine the real nature
provides for such a remedy when there is a breach of of the commercial transactions entered into by these parties inter se, and in
warranty by the seller. Since the records show that the doing so, we need to look through the forms of the agreements and related
equipment in question became unfit for the use it is documents and to examine the effective intent of the parties as well as the
intended, defendants-appellees are entitled to rescission of economic facts and circumstances which existed at the time of establishment
the contract of sale with SESCO or its (SESCO's) assigns. of such agreements. 4

xxx xxx xxx 3 We begin by summarizing the claims asserted by each of the parties against
the others.
(Emphasis supplied)
The Beltrans asserted against PAIC and against SESCO two (2) principal
Both PAIC and the Beltrans moved for reconsideration of the Court of claims. The first claim was for rescission of the lease agreement with PAIC,
Appeals' decision. In a resolution dated 28 April 1988, the Court of Appeals which had obligated the Beltrans to make monthly payments to PAIC, for
rejected both motions and ruled that the Beltrans, not having perfected any failure of PAIC to render the SUN 1115 fit for the purpose for which the
appeal from the decision of the trial court, could not seek modification of that Beltrans wanted it in the first place. The second was a claim to recover the
decision. downpayment that the Beltrans had made to SESCO on the purchase price
of the SUN 1115.

30
The principal claim of PAIC was asserted against the Beltrans under the 2. Next, SESCO sold to PAIC the same equipment it had earlier sold to the
lease agreement. That claim was for specific performance of the Beltrans' Beltran spouses. The sale to PAIC is evidenced by SESCO's Sales Invoice
obligations under the lease agreement, i.e., payment of the specified monthly No. 050 dated 3 September 1980 and issued in the name of both PAIC and
payments all of which had become due and payable in view of the default on the Beltrans as vendees. For this transaction, PAIC paid SESCO the amount
the part of the Beltrans. The aggregate of those monthly payments in effect of P91,751.60. A delivery receipt covering the SUN 1115 and dated 3
represented the payment which PAIC had previously made to SESCO for the September 1980 was issued in the name of both PAIC and the Beltrans. A
balance of the purchase price (remaining after the Beltrans' downpayment) of close examination of the records will, however, show that PAIC never took
the SUN 1115, plus financing charges which included PAIC's profit. PAIC physical possession of the SUN 1115, since on the stated date of delivery to
also had a cause of action against SESCO under the suretyship agreement PAIC, the SUN 1115 was already physically in the hands of the Beltrans.
which SESCO had signed guaranteeing solidarily with the Beltrans payment
of the amounts due from the Beltrans under the lease agreement. PAIC did 3. Shortly after the transaction between SESCO and PAIC, a lease contract
not originally implead SESCO as a defendant in the complaint against the dated 19 September 1990 was entered into between PAIC and the Beltrans.
Beltrans. SESCO was originally brought in as a party-litigant through the The lease agreement provided for a fixed monthly rental payment for a
medium of the third-party complaint filed by the Beltrans against SESCO period of thirty-six (36) months. It is important to note that under this lease
before the trial court. Later, PAIC amended its complaint, this time bringing in contract, the lessor PAIC undertook no warranty of the fitness, design and
SESCO as a defendant; the amended complaint was admitted and SESCO condition of, or of the quality or capacity of, the leased Performance Analyzer
in due time filed an answer. SUN 1115. The relevant provision of the lease agreement reads as follows:

SESCO sought to defend itself against PAIC's claims by asserting that 2.1. Warranties; Negation Lessor not being the
PAIC's remedies were against the Beltrans under their lease contract; that by manufacturer of the Equipment, nor manufacturer's agent,
entering into the lease with the Beltrans, PAIC had waived any rights it had makes no warranty or representation, either expressed or
as a buyer from SESCO; that SESCO's solidary guarantee in favor of PAIC implied, as to the fitness, design or condition of, or as to the
had been extinguished or prescribed; that the Beltrans had prevented quality or capacity of the material, equipment or
SESCO from complying with its warranty on the SUN 1115; and that any workmanship in the Equipment, nor any warranty that the
defect of the SUN 1115 was due to the acts and negligence of the equipment will satisfy the requirements of any law, rule,
users, i.e., the Beltrans. SESCO did not appeal from the trial court's decision specification or contract which provides for specific
but was, of course, a party to the proceedings before the Court of Appeals machinery or operation, or special methods, it being agreed
and is a party to the two (2)Petitions for Review. In each of the Petitions for that all such risks as between the Lessor and the Lessee are
Review (G.R. Nos. 83113 and 83256) now consolidated before our Court, to be borne by the Lessee at its sole risk and expense. No
SESCO was served with a copy of the Petition. Clearly, therefore, the oral agreement, guaranty, promise, condition, representation
Supreme Court has jurisdiction over the person of SESCO. or warranty shall be binding; all prior conversations,
agreements, or representations related hereto and/or to the
We turn to the important circumstances constituting and attending the Equipment are integrated herein, and no modification hereof
transactions between SESCO, PAIC and the Beltrans: shall be binding unless in writing signed by Lessor. All
repairs, parts, supplies, accessories, equipment and device,
1. Initially, SESCO sold the Performance Analyzer SUN 1115 to the Beltran furnished or added to any Equipment under lease shall
spouses as evidenced by SESCO's Sales Invoice No. 050 dated 15 July become the property of the Lessor. The Lessee also agrees
1980. 5 Accompanying this Sales Invoices was a Certificate of Warranty that each Equipment under lease is of a design, capacity
issued by SESCO in favor of the Beltrans, also dated 15 July and size selected and approved by the Lessee, and the
1980. 6 Thereupon, delivery of the Performance Analyzer was made to the Lessee is satisfied that the same is suitable for its purposes.
Beltrans, as indicated in the Sales Invoice and in the delivery receipt dated The Lessor shall not be liable to the Lessee for any loss,
15 July 1980. 7 As downpayment fort his purchase, the Beltrans paid SESCO damage or expense of any kind or nature, caused directly or
the total amount of P29,672.11. indirectly, by any Equipment under lease, or the use or
maintenance thereof, or the repairs, servicing or adjustments
thereto, or by any delay or failure to provide the same, or by
any interruption of service or loss of use thereof or for any
31
 loss of business or damage whatever and however the same Appeals had concluded after examination of the above circumstances that
may have been caused. (Emphasis supplied) the contract of lease was "a scheme to simulate the real agreement between
the parties" which "real agreement" was a composite of a contract of sale
The lease contract also provided that "the lessee shall have no option to between the Beltrans as vendees and SESCO (or SESCO's assigns [PAIC])
purchase or otherwise acquire title or ownership of any of the leased as vendor, and a "financing arrangement."
equipment and shall have only he right to use the same under and subject to
the terms and conditions of [the] lease." We believe that the Court of Appeals was substantially correct in holding that
the principal transactions were two-fold: firstly, a sale of the SUN No. 1115
4. Pursuant to the lease agreement, another delivery receipt was issued, this from SESCO to PAIC/the Beltrans and, secondly, a financing
time in the name of the Beltrans by PAIC, and dated 2 September 1980. It arrangement that would permit the ultimate users of the SUN 1115 the
may be noted that this delivery receipt dated 2 September 1980 was in fact Beltrans to use that equipment and pay for it by installments, spread out
dated a day earlier than the date when SESCO, per its own documentation, over thirty-six (36) months. Their consistencies in the details of the
delivered the equipment to PAIC. documentation of the transactions may be seen to be due, not so much to
"simulation" of the "real agreement of the parties" but rather to the fact that
the financing company was chosen and the financing arrangement
5. Since the Beltrans were in possession of the SUN 1115 before PAIC, per
concluded sometime after the original sale transaction between SESCO and
SESCO's documentation, purchased the same from SESCO, it necessarily
the Beltrans. That original transaction was in effect remodelled or
follows that the Beltrans, rather than PAIC, had selected and inspected the
restructured to conform with the financing arrangement, which took the form
equipment.
of a financial lease. A financial lessor, like all lessors, is legal owner of the
thing leased. Accordingly, SESCO documented a sale to PAIC; because the
6. The amount paid by PAIC to SESCO represented the discounted value of SUN 1115 had earlier been sold to the Beltrans, the SESCO invoice was
the total amount receivable by SESCO from the Beltrans. 8 At the time of the modified and made out to both PAIC and the Beltrans. The possession
sale by SESCO to PAIC, the amount receivable by SESCO from the Beltrans originally held by the Beltrans in concept of owner, was transmuted into
(i.e., the balance of the purchase price of the equipment remaining after possession by the Beltrans in concept of lessee.
application of the downpayment) was P107,327.89 (P137,000.00 -
P29,672.11 = P107,327.89).
In this jurisdiction, financial leases as a species of secured financing are of
fairly recent vintage. Financial leases, while they are complex arrangements,
7. The rental payments stipulated in the lease contract between PAIC and cannot be casually dismissed as "simulated contracts." To the contrary, they
the Beltrans were so computed as to cover the amount paid by PAIC to are genuine or legitimate contracts which have been accorded statutory and
SESCO plus the financing charges. 9 administrative recognition. Section 3 (a) of Republic Act No. 5980, as
amended by Presidential Decrees Nos. 1454 and 1793, known as the
8. Although the lease contract gave no option to the Beltrans to purchase or "Financing Company Act," defines financing companies in the following
to acquire the SUN 1115, the declarations of the parties in their different manner:
pleadings 10 afford clear indication that the parties had contemplated that the
ownership of the SUN 1115 would pass to the Beltrans after the end of the Financing companies, hereinafter called companies,
lease period. It was not, therefore, anticipated by the parties that the SUN are corporations, or partnerships, except those regulated by
1115 would be returned to the lessor PAIC. PAIC was not in the business of the Central Bank of the Philippines, the Insurance
leasing out machinery or equipment and did not maintain a warehouse or Commissioner and the Cooperatives Administration
workshop nor service and maintenance personnel for the repair and servicing Office, which are primarily organized for the purpose of
of machinery or equipment. extending credit facilities toconsumers and to industrial,
commercial, or agricultural enterprises, either by discounting
It will be recalled that the trial court concluded that the contract between or factoring commercial papers or accounts receivables, or
PAIC and the Beltrans was a real lease or a "civil law lease" and held that by buying and selling contracts, leases, chattel mortgages,
the lease was extinguished because the thing leased was or had become or other evidences of indebtedness, or by leasing motor
totally unfit for the purposes of the lease, in accordance with the provisions of vehicles, heavy equipment and industrial machinery,
Article 1654 of the Civil Code. It will also be recalled that the Court of
32
 business and office machines and equipment, appliances primary or basic period) of specified rental amount for the
and other movable property. 11 (Emphasis supplied) use of a lessor's property, sufficient in total to amortize the
capital outlay of lessor and to provide for the lessor's
Section 1, paragraph 1 of the Revised Rules and Regulations Implementing borrowing costs and profits. The obligatory period refers to
the Provisions of the Financing Company Act, as amended, adopted jointly the primary or basic non-cancellable period of the lease
by the Securities and Exchange Commission and the Monetary Board of the which in no case shall be less than 730 days. The lessee,
Central Bank of the Philippines, defines leasing in the following terms: not the lessor, exercises the choice of the asset and is
normally responsible for maintenance, insurance and such
1. "LEASING" shall refer to financial leasing which is a mode other expenses pertinent to the use, preservation and
operation of the asset. Finance leases may be extended,
of extending credit through a non-cancellable contract under
which the lessor purchases or acquires at the instance of the after the expiration of the primary period, by non-cancellable
lessee heavy equipment, motor vehicles, secondary or subsequent periods with the rentals
industrial machinery, appliances, business and office significantly reduced. The residual value shall in no instance
machines, and other movable property in consideration of be less than five per cent (5%) of the lessor's acquisition
the periodic payment by the lessee of a fixed amount of cost of the leased asset. (Emphasis supplied)
money sufficient to amortize at least 70% of the purchase
price or acquisition cost, including any incidental The basic purpose of a financial leasing transaction is to enable the
expenses and a margin of profit, over the lease period. The prospective buyer of equipment, who is unable to pay for such equipment in
contract shall extend over an obligatory period during which cash in one lump sum, to lease such equipment in the meantime for his use,
the lessee has the right to hold and use the leased property at a fixed rental sufficient to amortize at least 70% of the acquisition cost
and shall bear the cost of repairs, maintenance, insurance (including the expenses and a margin of profit for the financial lessor) with
and preservation thereof, but with no obligation or option on the expectation that at the end of the lease period, the buyer/financial lessee
the part of the lessee to purchase the leased property at the will be able to pay any remaining balance of the purchase price. 12 Generally
end of the lease contract. (Emphasis supplied) speaking, a financing company is not a buyer or seller of goods; it is not a
trading company. Neither is it an ordinary leasing company; it does not make
its profit by buying equipment and repeatedly leasing out such equipment to
The tax treatment of lease agreements, as distinguished from conditional
different users thereof. But a financial lease must be preceded by a purchase
sales contracts, is governed by Revenue Regulations No. 19-86,
and sale contract covering the equipment which becomes the subject matter
promulgated by the Department of Finance on 1 January 1987. These
of the financial lease. The financial lessor takes the role of the buyer of
Revenue Regulations recognize two (2) types of leases. The first type,
denominated an "operating lease", is defined as equipment leased. And so the formal or documentary tie between the seller
and the real buyer of the equipment, i.e., the financial lessee, is apparently
severed. In economic reality, however, that relationship remains. The sale of
. . . a contract under which the asset is not wholly amortized the equipment by the supplier thereof to the financial lessor and the latter's
during the primary period of the lease, andwhere the lessor legal ownership thereof are intended to secure the repayment over time of
does not rely solely on the rentals during the primary period the purchase price of the equipment, plus financing charges, through the
for his profits, but looks for the recovery of the balance of his payment of lease rentals; that legal title is the upfront security held by the
costs and for the rest of his profits from the sale or re-lease financial lessor, a security probably superior in some instances to a chattel
of the returned asset at the end of the primary lease period. mortgagee's lien.
(Emphasis supplied)
A financing lease may be seen to be a contract sui generis, possessing some
The second type of recognized lease is designated as a "finance but not necessarily all of the elements of an ordinary or civil law lease. Thus,
lease" and defined in the Revenue Regulations in the following legal title to the equipment leased is lodged in the financial lessor. The
manner: financial lessee is entitled to the possession and use of the leased
equipment. At the same time, the financial lessee is obligated to make
. . . "Finance lease," or "Full payout lease" is a contract periodic payments denominated as lease rentals, which enable the financial
involving payment over an obligatory period (also called lessor to recover the purchase price of the equipment which had been paid to
33
the supplier thereof. However, the financial lessor, being a financing could not benefit either from the purchase of the equipment or from the
company, i.e., an extender of credit rather than an ordinary equipment rental financial lease. Clearly, it would be inequitable and unconscionable to permit
company, does not extend a warranty of the fitness of the equipment for any SESCO to hold on to the purchase price and to shift the burden of its own
particular use. In the instant case, the contract of lease between PAIC and failure either to the ultimate buyers or to the company which financed the
the Beltrans, in addition to expressly disclaiming any obligation on the part of bulk of the purchase price.
PAIC to warrant the fitness of the SUN 1115 for any particular use, had
specified that the equipment warranty, issued by SESCO the supplier of the The Court is aware that the Beltrans were unable to file a timely appeal from
equipment, "shall be passed on by [PAIC] to the lessee." In fact, as noted, the ruling of the trial court which had dismissed their claim against SESCO.
SESCO issued a Certificate of Warranty to the Beltrans. Thus, the financial However, guided by the principle that technicality should not be allowed to
lessee was precisely in a position to enforce such warranty directly against stand in the way of equitably and completely resolving the rights and
the supplier of the equipment and not against the financial lessor. We find obligations of the parties, 14 , this Court now resolves to treat the Beltrans'
nothing contra legem or contrary to public policy in such a contractual appeal as having been seasonably filed so as to permit complete resolution
arrangement. of this trilateral controversy on the merits.

Considering all the circumstances listed earlier, and bearing in mind the IN VIEW OF THE ALL THE FOREGOING, the Decision of the Court of
economic and legal nature and objectives of a financing lease, we conclude Appeals dated 30 June 1987 in C.A.-G.R. CV No. 10078 and the decision of
and so hold that the financial lease between PAIC and the Beltrans was a the Regional Trial Court of Manila dated 16 October 1985 in Civil Case No.
valid and enforceable contract as between the two (2) contracting parties. 138233, are hereby SET ASIDE, and a new judgment is hereby ENTERED
The Beltrans are therefore bound to pay to PAIC all the rental payments providing as follows:
which accrued and are due and payable under that contract.
1. The spouses Beltran and SESCO are hereby ORDERED to pay, jointly
At the same time, PAIC is entitled to require SESCO to respond under its and severally, to PAIC the rental payments accrued and remaining unpaid
solidary guarantee of the obligations of the Beltrans under the lease contract. under the lease agreement, with interest at six percent (6%) per
PAIC may thus opt to recover from either the Beltrans or SESCO alone, or annumstarting from 16 October 1985 and until full payment thereof.
from both the Beltrans and SESCO solidarily at the same time.
2. SESCO is also hereby ORDERED to reimburse the spouses Beltran any
Should PAIC recover fully or partially the amounts due from the Beltrans, we amount that they are actually compelled to pay to PAIC under paragraph 1 of
believe and so hold that the Beltrans are entitled to reimbursement from the dispositive portion of this Decision, with interest thereon at six percent
SESCO of such amounts as they shall have been compelled to pay PAIC. In (6%)per annum counting from the date of payment by the Beltran spouses
addition, the Beltrans are entitled to recover from SESCO the downpayment and until full reimbursement thereof.
they had previously made to SESCO on the SUN 1115, and as well to
require SESCO to take back that equipment. These rights of the Beltrans
3. The spouses Beltran are hereby REQUIRED to return the Infra-Red
flow from their rescission of the contract of sale covering the SUN 1115 for
Performance Analyzer SUN 1115 to SESCO, at the expense of SESCO.
failure of SESCO to make good on its warranty against defects in materials SESCO is in turn hereby ORDERED to accept that equipment.
and workmanship set out in its "Warranty Certificate," and on its warranty
against hidden defects which render the thing sold "unfit for the use of which
it is intended" under the general law on sales. 13 4. SESCO is, finally, hereby ORDERED to return to the spouses Beltran the
downpayment of P29,672.11 made on the SUN 1115, with interest thereon at
six percent (6%) per annum counting from 16 October 1985 and until full
It is clear to the Court that it is SESCO who must bear the legal payment thereof.
consequences of its failure to make good on the warranty it had given as
vendor of the SUN 1115. SESCO received the full value of the SUN 1115: (a)
the downpayment from the Beltrans; and (b) the balance of the purchase No pronouncement as to costs. This Decision is immediately executory.
price from PAIC. The record shows that PAIC had not breached any of its
undertakings to the Beltrans under the financial lease. Upon the other hand, SO ORDERED.
the Beltrans, because of failure of the equipment warranty given by SESCO,

34
G.R. No. L-67929 October 27, 1987
April 27, 1975 (a) 79 sets of pyrex trays "bacbac" with a total value of P

LEDA DINO GRAGEDA and TERESITA MONTILLA, petitioners, April 30, 1975 (a) 70 sets of rectangular trays "bacbac" valued at P315.
vs.
HONORABLE INTERMEDIATE APPELLATE COURT and FRANCISCO May 1, 1975 (a) 100 sets of rectangular trays "bacbac" and
MONTALLANA, JR., respondents.
(b) 100 sets of square trays "bacbac" with a total value o

May 3, 1975 (a) 270setsofrectangulartrays"bacbac"and

PARAS, J.: (b) 4 sets of square trays "bacbac" valued at P846.00; an

This is a petition to review and reverse the Resolution dated May 23, 1984 of May 12,1975 188 sets square trays;
respondent Intermediate Appellate Court (now Court of Appeals) in AC G.R.
No. CV-64223, which reversed its previous decision 1 for the petitioners and May 27, 1975 136 sets of square trays "bacbac" valued at P612.00(p. 3
affirmed the decision 2 of the Municipal Trial Court of Daraga, Albay in Civil
Case No. 362, the dispositive portion of which reads:
Said items were all received and duly receipted for by Grageda's caretaker,
herein co-petitioner Montilla.
... In view of aH the foregoing considerations, the Court has
come to the conclusion that the plaintiff had proven and
established not only by preponderance of evidence but by On several occasions, private respondent demanded payment for the total
adequate evidence as well that he is entitled to the relief value of the deliveries but Grageda requested for extensions of time within
prayed for in accordance with the aforecited pertinent which to pay. Finally, on June 13, 1975, private respondent sought the
provisions of law and judgement is hereby rendered, assistance of the Albay PC Command and a confrontation was conducted
ordering defendants to pay jointly and sevemuy unto the between Grageda and private respondent. When pressed for payment,
plaintiff the sum of P4,300.00 and P50.00 as litigation Grageda ultimately said that she rejected the items delivered by private
expenses and to pay the costs. No other pronouncement is respondent because they were defective. Subsequently, Grageda sent a
made as to other claims for damages for reasons of equity. letter dated June 20, 1975 to private respondent, to which a Nacida
The compulsory counterclaim is hereby denied and dismissd certification dated June 23, 1975 was annexed (Exh. "6"), informing private
for lack of merit ... (p. 51, Rollo) respondent of her rejection of the items delivered, and requesting for their
withdrawal from,her bodega. In view of the foregoing, private respondent filed
a Complaint for Sum of Money against the petitioners before the Municipal
The facts of the case are briefly as follows: Trial Court of Daraga, Albay.

Petitioner Grageda is the owner and manager of the Sorsogon Home

Grageda, on the other hand, claimed that the rectangular and square
Enterprises while private respodent is a seller of abaca finished products. On
"bacbac" pyrex trays delivered by the private respondent from April 27, 1975
March 26, 1975, Grageda ordered from private respondent 500 sets
until May 25, 1975 were not in accordance with the sample agreed upon by
of rectangular("bacbac") pyrex trays and 500 sets of square ("bacbac") pyrex
and between them, which is that the edging or "pleje" should be made of
trays with 3 measurements per sample with handle, at P4.50 per set. (E xh. steel; that as early as May, 1975, she advised private respondent of her
"A", "A-1", "A-2", "A-3")
rejection of the said items because their edgings were made of tin plates or
of inferior quality; that she demanded their withdrawal from her bodega but
Prior to April 27, 1975, private respondent delivered some of the items despite repeated requests, private respondent refused to withdraw the same;
ordered but they were outrightly rejected. After making the proper that she likewise informed private respondent of her rejection of the said
corrections, private respondent made subsequent deliveries, to wit: items at the confrontation with the police on June 13, 1975 and in her letter
dated June 20, 1975 (Exhs. "E ", "E-1 ") to which a certification of the Nacida
dated June 23, 1975 was annexed (Exh. "6"), stating therein that said items

35
are inferior and cannot be exported. In addition, Grageda presented two (2) rectangular "bacbac" trays and 500 square "bacbac" trays
disinterested witnesses who testified that the items delivered by private were rejected. ... (pp. 48-49, Rollo)
respondent were different from the samples desired by her. (pp. 7-8, Rollo)
We agree with the trial court's observations and conclusions that:
On February 25, 1977, the Metropolitan Trial Court rendered a decision in
private respondent's favor holding the petitioner civilly liable to the private ... The provisions of Article 1585 (New Civil Code) which
respondent for having impliedly accepted the deliveries, pursuant to Article provides, among others, that "the buyer is deemed to have
1585 of the Civil Code. Said decision was reversed by the Court of First accepted them," ... "when, after the lapse of a reasonable
Instance of Albay (now Regional Trial Court). Private respondent appealed to time, he retains the goods without intimating to the seller that
the Court of Appeals, which affirmed the decision 3 of the Regional Trial he has rejected them" is applicable in the instant case. The
Court. On motion for reconsideration, however, the Court of Appeals reverse evidence clearly and unmistakably shows that the
its previous decision and affirmed the decision of the Metropolitan Trial defendants retained possession of the abaca goods, subject
Court. matter in this case, for practically a month and almost two (2)
manths on June 20, 1975 or until this case was filed on June
Hence, this petition, raising the issue of whether or not there was an 27, 1975, without intimating their rejection to the supplier or
acceptance of the deliveries made, or otherwise stated, whether or not there seller, within a reasonable time ... for which reason such
was a rejection seasonably made. retention of the abaca "bacbac" goods for a month or more
already amounts to a waiver of defendants' right to reject
The petition is devoid of merit. acceptance and payment of the plaintiffs' abaca "bacbac"
goods ... . (p. 50, Rollo)
While it is true that Article 1584 of the Civil Code accords Grageda (as buyer)
the right to a reasonable opportunity to examine the abaca "bacbac" goods to Well settled is the rule that the findings of fact of the trial judge are generally
ascertain whether they are in conformity with the contract, such opportunity respected on appeal and We find no cogent reason to disturb the same.
to examine should be availed of within a reasonable time in order that private
respondent (as the seller) may not be subjected to undue delay or prejudice Premises considered, the petition is hereby DENIED and the decision of the
in the payment of his raw materials, workers and other damages which may Intermediate Appellate Court is hereby AFFIRMED.
be incurred due to the deterioration of his products.
SO ORDERED.
In this regard, the trial court found that the delay in the advice or notice of
rejection was almost two (2) months after receipt, hence, was rather too late. G.R. No. 111238 January 25, 1995
In its decision dated February 25, 1977, the Municipal Trial Court said:
ADELFA PROPERTIES, INC., petitioner,
... There is no clear, convincing and competent evidence that vs.
defendant Grageda (petitioner herein) advised or informed COURT OF APPEALS, ROSARIO JIMENEZ-CASTAEDA and SALUD
plaintiff (private respondent herein) even one or two weeks JIMENEZ, respondents.
after the date of delivery, so that the Court entertains grave
and serious doubts as to whether defendant Grageda really
advised or informed plaintiff that the latter's deliveries from
April 27 are rejected, within the month of May, 1975 as
alleged by her, in view of plaintiff's vehement denial. REGALADO, J.:
Moreover, said allegation is uncorroborated and not
substantiated by her caretaker, co-defendant Montilla, as to The main issues presented for resolution in this petition for review
lead the Court to believe that it was only on June 13, 1975 on certiorari of the judgment of respondent Court of appeals, dated April 6,
and on June 20, 1975, (Exhibit "E") that she really informed 1993, in CA-G.R. CV No. 347671 are (1) whether of not the "Exclusive Option
and advised, with certainty that his plaintiff's deliveries of 500 to Purchase" executed between petitioner Adelfa Properties, Inc. and private

36
respondents Rosario Jimenez-Castaeda and Salud Jimenez is an option 4. All expenses including the corresponding capital gains
contract; and (2) whether or not there was a valid suspension of payment of tax, cost of documentary stamps are for the account of the
the purchase price by said petitioner, and the legal effects thereof on the VENDORS, and expenses for the registration of the deed of
contractual relations of the parties. sale in the Registry of Deeds are for the account of ADELFA
PROPERTIES, INC.
The records disclose the following antecedent facts which culminated in the
present appellate review, to wit: Considering, however, that the owner's copy of the certificate of title issued
to respondent Salud Jimenez had been lost, a petition for the re-issuance of
1. Herein private respondents and their brothers, Jose and Dominador a new owner's copy of said certificate of title was filed in court through Atty.
Jimenez, were the registered co-owners of a parcel of land consisting of Bayani L. Bernardo, who acted as private respondents' counsel. Eventually,
17,710 square meters, covered by Transfer Certificate of Title (TCT) No. a new owner's copy of the certificate of title was issued but it remained in the
309773,2situated in Barrio Culasi, Las Pias, Metro Manila. possession of Atty. Bernardo until he turned it over to petitioner Adelfa
Properties, Inc.
2. On July 28, 1988, Jose and Dominador Jimenez sold their share
consisting of one-half of said parcel of land, specifically the eastern portion 4. Before petitioner could make payment, it received summons6 on
thereof, to herein petitioner pursuant to a "Kasulatan sa Bilihan ng November 29, 1989, together with a copy of a complaint filed by the nephews
Lupa."3Subsequently, a "Confirmatory Extrajudicial Partition and nieces of private respondents against the latter, Jose and Dominador
Agreement"4 was executed by the Jimenezes, wherein the eastern portion of Jimenez, and herein petitioner in the Regional Trial Court of Makati,
the subject lot, with an area of 8,855 square meters was adjudicated to Jose docketed as Civil Case No. 89-5541, for annulment of the deed of sale in
and Dominador Jimenez, while the western portion was allocated to herein favor of Household Corporation and recovery of ownership of the property
private respondents. covered by TCT No. 309773.7

3. Thereafter, herein petitioner expressed interest in buying the western 5. As a consequence, in a letter dated November 29, 1989, petitioner
portion of the property from private respondents. Accordingly, on November informed private respondents that it would hold payment of the full purchase
25, 1989, an "Exclusive Option to Purchase"5 was executed between price and suggested that private respondents settle the case with their
petitioner and private respondents, under the following terms and conditions: nephews and nieces, adding that ". . . if possible, although November 30,
1989 is a holiday, we will be waiting for you and said plaintiffs at our office up
1. The selling price of said 8,655 square meters of the to 7:00 p.m."8 Another letter of the same tenor and of even date was sent by
subject property is TWO MILLION EIGHT HUNDRED FIFTY petitioner to Jose and Dominador Jimenez.9 Respondent Salud Jimenez
refused to heed the suggestion of petitioner and attributed the suspension of
SIX THOUSAND ONE HUNDRED FIFTY PESOS ONLY
payment of the purchase price to "lack of word of honor."
(P2,856,150.00)

2. The sum of P50,000.00 which we received from ADELFA 6. On December 7, 1989, petitioner caused to be annotated on the title of the
PROPERTIES, INC. as an option money shall be credited as lot its option contract with private respondents, and its contract of sale with
Jose and Dominador Jimenez, as Entry No. 1437-4 and entry No. 1438-4,
partial payment upon the consummation of the sale and the
respectively.
balance in the sum of TWO MILLION EIGHT HUNDRED SIX
THOUSAND ONE HUNDRED FIFTY PESOS
(P2,806,150.00) to be paid on or before November 30, 1989; 7. On December 14, 1989, private respondents sent Francisca Jimenez to
see Atty. Bernardo, in his capacity as petitioner's counsel, and to inform the
latter that they were cancelling the transaction. In turn, Atty. Bernardo offered
3. In case of default on the part of ADELFA PROPERTIES,
to pay the purchase price provided that P500,000.00 be deducted therefrom
INC. to pay said balance in accordance with paragraph 2
for the settlement of the civil case. This was rejected by private respondents.
hereof, this option shall be cancelled and 50% of the option
On December 22, 1989, Atty. Bernardo wrote private respondents on the
money to be forfeited in our favor and we will refund the
remaining 50% of said money upon the sale of said property same matter but this time reducing the amount from P500,000.00 to
to a third party; P300,000.00, and this was also rejected by the latter.

37
8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil 13. On appeal, respondent Court of appeals affirmed in toto the decision of
Case No. 89-5541. Thus, on February 28, 1990, petitioner caused to be the court a quo and held that the failure of petitioner to pay the purchase
annotated anew on TCT No. 309773 the exclusive option to purchase as price within the period agreed upon was tantamount to an election by
Entry No. 4442-4. petitioner not to buy the property; that the suspension of payment constituted
an imposition of a condition which was actually a counter-offer amounting to
9. On the same day, February 28, 1990, private respondents executed a a rejection of the option; and that Article 1590 of the Civil Code on
Deed of Conditional Sale 10 in favor of Emylene Chua over the same parcel suspension of payments applies only to a contract of sale or a contract to
of land for P3,029,250, of which P1,500,000.00 was paid to private sell, but not to an option contract which it opined was the nature of the
respondents on said date, with the balance to be paid upon the transfer of document subject of the case at bar. Said appellate court similarly upheld the
title to the specified one-half portion. validity of the deed of conditional sale executed by private respondents in
favor of intervenor Emylene Chua.
10. On April 16, 1990, Atty. Bernardo wrote private respondents informing
the latter that in view of the dismissal of the case against them, petitioner In the present petition, the following assignment of errors are raised:
was willing to pay the purchase price, and he requested that the
corresponding deed of absolute sale be executed. 11 This was ignored by 1. Respondent court of appeals acted with grave abuse of discretion in
private respondents. making its finding that the agreement entered into by petitioner and private
respondents was strictly an option contract;
11. On July 27, 1990, private respondents' counsel sent a letter to petitioner
enclosing therein a check for P25,000.00 representing the refund of fifty 2. Granting arguendo that the agreement was an option contract, respondent
percent of the option money paid under the exclusive option to purchase. court of Appeals acted with grave abuse of discretion in grievously failing to
Private respondents then requested petitioner to return the owner's duplicate consider that while the option period had not lapsed, private respondents
copy of the certificate of title of respondent Salud Jimenez. 12 Petitioner failed could not unilaterally and prematurely terminate the option period;
to surrender the certificate of title, hence private respondents filed Civil Case
No. 7532 in the Regional Trial Court of Pasay City, Branch 113, for 3. Respondent Court of Appeals acted with grave abuse of discretion in
annulment of contract with damages, praying, among others, that the failing to appreciate fully the attendant facts and circumstances when it made
exclusive option to purchase be declared null and void; that defendant, the conclusion of law that Article 1590 does not apply; and
herein petitioner, be ordered to return the owner's duplicate certificate of title;
and that the annotation of the option contract on TCT No. 309773 be 4. Respondent Court of Appeals acted with grave abuse of discretion in
cancelled. Emylene Chua, the subsequent purchaser of the lot, filed a conforming with the sale in favor of appellee Ma. Emylene Chua and the
complaint in intervention.
award of damages and attorney's fees which are not only excessive, but also
without in fact and in law. 14
12. The trial court rendered judgment 13 therein on September 5, 1991
holding that the agreement entered into by the parties was merely an option An analysis of the facts obtaining in this case, as well as the evidence
contract, and declaring that the suspension of payment by herein petitioner presented by the parties, irresistibly leads to the conclusion that the
constituted a counter-offer which, therefore, was tantamount to a rejection of
agreement between the parties is a contract to sell, and not an option
the option. It likewise ruled that herein petitioner could not validly suspend
contract or a contract of sale.
payment in favor of private respondents on the ground that the vindicatory
action filed by the latter's kin did not involve the western portion of the land
covered by the contract between petitioner and private respondents, but the I
eastern portion thereof which was the subject of the sale between petitioner
and the brothers Jose and Dominador Jimenez. The trial court then directed 1. In view of the extended disquisition thereon by respondent court, it would
the cancellation of the exclusive option to purchase, declared the sale to be worthwhile at this juncture to briefly discourse on the rationale behind our
intervenor Emylene Chua as valid and binding, and ordered petitioner to pay treatment of the alleged option contract as a contract to sell, rather than a
damages and attorney's fees to private respondents, with costs. contract of sale. The distinction between the two is important for in contract
of sale, the title passes to the vendee upon the delivery of the thing sold;

38
whereas in a contract to sell, by agreement the ownership is reserved in the considered equivalent to delivery. 17 Neither did petitioner take actual,
vendor and is not to pass until the full payment of the price. In a contract of physical possession of the property at any given time. It is true that after the
sale, the vendor has lost and cannot recover ownership until and unless the reconstitution of private respondents' certificate of title, it remained in the
contract is resolved or rescinded; whereas in a contract to sell, title is possession of petitioner's counsel, Atty. Bayani L. Bernardo, who thereafter
retained by the vendor until the full payment of the price, such payment being delivered the same to herein petitioner. Normally, under the law, such
a positive suspensive condition and failure of which is not a breach but an possession by the vendee is to be understood as a delivery.18 However,
event that prevents the obligation of the vendor to convey title from becoming private respondents explained that there was really no intention on their part
effective. Thus, a deed of sale is considered absolute in nature where there to deliver the title to herein petitioner with the purpose of transferring
is neither a stipulation in the deed that title to the property sold is reserved in ownership to it. They claim that Atty. Bernardo had possession of the title
the seller until the full payment of the price, nor one giving the vendor the only because he was their counsel in the petition for reconstitution. We have
right to unilaterally resolve the contract the moment the buyer fails to pay no reason not to believe this explanation of private respondents, aside from
within a fixed period. 15 the fact that such contention was never refuted or contradicted by petitioner.

There are two features which convince us that the parties never intended to 2. Irrefragably, the controverted document should legally be considered as a
transfer ownership to petitioner except upon the full payment of the purchase perfected contract to sell. On this particular point, therefore, we reject the
price. Firstly, the exclusive option to purchase, although it provided for position and ratiocination of respondent Court of Appeals which, while
automatic rescission of the contract and partial forfeiture of the amount awarding the correct relief to private respondents, categorized the instrument
already paid in case of default, does not mention that petitioner is obliged to as "strictly an option contract."
return possession or ownership of the property as a consequence of non-
payment. There is no stipulation anent reversion or reconveyance of the The important task in contract interpretation is always the ascertainment of
property to herein private respondents in the event that petitioner does not the intention of the contracting parties and that task is, of course, to be
comply with its obligation. With the absence of such a stipulation, although discharged by looking to the words they used to project that intention in their
there is a provision on the remedies available to the parties in case of contract, all the words not just a particular word or two, and words in context
breach, it may legally be inferred that the parties never intended to transfer not words standing alone. 19 Moreover, judging from the subsequent acts of
ownership to the petitioner to completion of payment of the purchase price. the parties which will hereinafter be discussed, it is undeniable that the
intention of the parties was to enter into a contract to sell. 20 In addition, the
In effect, there was an implied agreement that ownership shall not pass to title of a contract does not necessarily determine its true nature. 21 Hence,
the purchaser until he had fully paid the price. Article 1478 of the civil code the fact that the document under discussion is entitled "Exclusive Option to
does not require that such a stipulation be expressly made. Consequently, an Purchase" is not controlling where the text thereof shows that it is a contract
implied stipulation to that effect is considered valid and, therefore, binding to sell.
and enforceable between the parties. It should be noted that under the law
and jurisprudence, a contract which contains this kind of stipulation is An option, as used in the law on sales, is a continuing offer or contract by
considered a contract to sell. 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
Moreover, that the parties really intended to execute a contract to sell, and compliance with, certain terms and conditions, or which gives to the owner of
not a contract of sale, is bolstered by the fact that the deed of absolute sale the property the right to sell or demand a sale. It is also sometimes called an
would have been issued only upon the payment of the balance of the "unaccepted offer." An option is not of itself a purchase, but merely secures
purchase price, as may be gleaned from petitioner's letter dated April 16, the privilege to buy. 22 It is not a sale of property but a sale of property but a
1990 16 wherein it informed private respondents that it "is now ready and sale of the right to purchase. 23 It is simply a contract by which the owner of
willing to pay you simultaneously with the execution of the corresponding property agrees with another person that he shall have the right to buy his
deed of absolute sale." property at a fixed price within a certain time. He does not sell his land; he
does not then agree to sell it; but he does sell something, that it is, the right
Secondly, it has not been shown there was delivery of the property, actual or or privilege to buy at the election or option of the other party. 24 Its
constructive, made to herein petitioner. The exclusive option to purchase is distinguishing characteristic is that it imposes no binding obligation on the
not contained in a public instrument the execution of which would have been person holding the option, aside from the consideration for the offer. Until

39
acceptance, it is not, properly speaking, a contract, and does not vest, make a down payment of P50,000.00, with the balance of P2,806,150.00 to
transfer, or agree to transfer, any title to, or any interest or right in the subject be paid on or before November 30, 1989. Private respondents agreed to the
matter, but is merely a contract by which the owner of property gives the counter-offer made by petitioner. 31 As a result, the so-called exclusive option
optionee the right or privilege of accepting the offer and buying the property to purchase was prepared by petitioner and was subsequently signed by
on certain terms. 25 private respondents, thereby creating a perfected contract to sell between
them.
On the other hand, a contract, like a contract to sell, involves a meeting of
minds two persons whereby one binds himself, with respect to the other, to It cannot be gainsaid that the offer to buy a specific piece of land was definite
give something or to render some service. 26 Contracts, in general, are and certain, while the acceptance thereof was absolute and without any
perfected by mere consent, 27 which is manifested by the meeting of the offer condition or qualification. The agreement as to the object, the price of the
and the acceptance upon the thing and the cause which are to constitute the property, and the terms of payment was clear and well-defined. No other
contract. The offer must be certain and the acceptance absolute. 28 significance could be given to such acts that than they were meant to finalize
and perfect the transaction. The parties even went beyond the basic
The distinction between an "option" and a contract of sale is that an option is requirements of the law by stipulating that "all expenses including the
an unaccepted offer. It states the terms and conditions on which the owner is corresponding capital gains tax, cost of documentary stamps are for the
willing to sell the land, if the holder elects to accept them within the time account of the vendors, and expenses for the registration of the deed of sale
limited. If the holder does so elect, he must give notice to the other party, and in the Registry of Deeds are for the account of Adelfa properties, Inc."
the accepted offer thereupon becomes a valid and binding contract. If an Hence, there was nothing left to be done except the performance of the
acceptance is not made within the time fixed, the owner is no longer bound respective obligations of the parties.
by his offer, and the option is at an end. A contract of sale, on the other hand,
fixes definitely the relative rights and obligations of both parties at the time of We do not subscribe to private respondents' submission, which was upheld
its execution. The offer and the acceptance are concurrent, since the minds by both the trial court and respondent court of appeals, that the offer of
of the contracting parties meet in the terms of the agreement. 29 petitioner to deduct P500,000.00, (later reduced to P300,000.00) from the
purchase price for the settlement of the civil case was tantamount to a
A perusal of the contract in this case, as well as the oral and documentary counter-offer. It must be stressed that there already existed a perfected
evidence presented by the parties, readily shows that there is indeed a contract between the parties at the time the alleged counter-offer was made.
concurrence of petitioner's offer to buy and private respondents' acceptance Thus, any new offer by a party becomes binding only when it is accepted by
thereof. The rule is that except where a formal acceptance is so required, the other. In the case of private respondents, they actually refused to concur
although the acceptance must be affirmatively and clearly made and must be in said offer of petitioner, by reason of which the original terms of the contract
evidenced by some acts or conduct communicated to the offeror, it may be continued to be enforceable.
made either in a formal or an informal manner, and may be shown by acts,
conduct, or words of the accepting party that clearly manifest a present At any rate, the same cannot be considered a counter-offer for the simple
intention or determination to accept the offer to buy or sell. Thus, acceptance reason that petitioner's sole purpose was to settle the civil case in order that
may be shown by the acts, conduct, or words of a party recognizing the it could already comply with its obligation. In fact, it was even indicative of a
existence of the contract of sale. 30 desire by petitioner to immediately comply therewith, except that it was being
prevented from doing so because of the filing of the civil case which, it
The records also show that private respondents accepted the offer of believed in good faith, rendered compliance improbable at that time. In
petitioner to buy their property under the terms of their contract. At the time addition, no inference can be drawn from that suggestion given by petitioner
petitioner made its offer, private respondents suggested that their transfer that it was totally abandoning the original contract.
certificate of title be first reconstituted, to which petitioner agreed. As a matter
of fact, it was petitioner's counsel, Atty. Bayani L. Bernardo, who assisted More importantly, it will be noted that the failure of petitioner to pay the
private respondents in filing a petition for reconstitution. After the title was balance of the purchase price within the agreed period was attributed by
reconstituted, the parties agreed that petitioner would pay either in cash or private respondents to "lack of word of honor" on the part of the former. The
manager's check the amount of P2,856,150.00 for the lot. Petitioner was reason of "lack of word of honor" is to us a clear indication that private
supposed to pay the same on November 25, 1989, but it later offered to respondents considered petitioner already bound by its obligation to pay the

40
balance of the consideration. In effect, private respondents were demanding purchase price, and were not merely quoting an agreed value for the
or exacting fulfillment of the obligation from herein petitioner. with the arrival property. The term "balance," connotes a remainder or something remaining
of the period agreed upon by the parties, petitioner was supposed to comply from the original total sum already agreed upon.
with the obligation incumbent upon it to perform, not merely to exercise an
option or a right to buy the property. In other words, the alleged option money of P50,000.00 was actually earnest
money which was intended to form part of the purchase price. The amount of
The obligation of petitioner on November 30, 1993 consisted of an obligation P50,000.00 was not distinct from the cause or consideration for the sale of
to give something, that is, the payment of the purchase price. The contract the property, but was itself a part thereof. It is a statutory rule that whenever
did not simply give petitioner the discretion to pay for the property. 32 It will be earnest money is given in a contract of sale, it shall be considered as part of
noted that there is nothing in the said contract to show that petitioner was the price and as proof of the perfection of the contract. 38 It constitutes an
merely given a certain period within which to exercise its privilege to buy. The advance payment and must, therefore, be deducted from the total price.
agreed period was intended to give time to herein petitioner within which to Also, earnest money is given by the buyer to the seller to bind the bargain.
fulfill and comply with its obligation, that is, to pay the balance of the
purchase price. No evidence was presented by private respondents to prove There are clear distinctions between earnest money and option money, viz.:
otherwise. (a) earnest money is part of the purchase price, while option money ids the
money given as a distinct consideration for an option contract; (b) earnest
The test in determining whether a contract is a "contract of sale or purchase" money is given only where there is already a sale, while option money
or a mere "option" is whether or not the agreement could be specifically applies to a sale not yet perfected; and (c) when earnest money is given, the
enforced. 33 There is no doubt that the obligation of petitioner to pay the buyer is bound to pay the balance, while when the would-be buyer gives
purchase price is specific, definite and certain, and consequently binding and option money, he is not required to buy. 39
enforceable. Had private respondents chosen to enforce the contract, they
could have specifically compelled petitioner to pay the balance of The aforequoted characteristics of earnest money are apparent in the so-
P2,806,150.00. This is distinctly made manifest in the contract itself as an called option contract under review, even though it was called "option
integral stipulation, compliance with which could legally and definitely be money" by the parties. In addition, private respondents failed to show that the
demanded from petitioner as a consequence. payment of the balance of the purchase price was only a condition precedent
to the acceptance of the offer or to the exercise of the right to buy. On the
This is not a case where no right is as yet created nor an obligation declared, contrary, it has been sufficiently established that such payment was but an
as where something further remains to be done before the buyer and seller element of the performance of petitioner's obligation under the contract to
obligate themselves. 34 An agreement is only an "option" when no obligation sell. 40
rests on the party to make any payment except such as may be agreed on
between the parties as consideration to support the option until he has made II
up his mind within the time specified. 35 An option, and not a contract to
purchase, is effected by an agreement to sell real estate for payments to be
1. This brings us to the second issue as to whether or not there was valid
made within specified time and providing forfeiture of money paid upon suspension of payment of the purchase price by petitioner and the legal
failure to make payment, where the purchaser does not agree to purchase, to consequences thereof. To justify its failure to pay the purchase price within
make payment, or to bind himself in any way other than the forfeiture of the
the agreed period, petitioner invokes Article 1590 of the civil Code which
payments made. 36 As hereinbefore discussed, this is not the situation
provides:
obtaining in the case at bar.
Art. 1590. Should the vendee be disturbed in the possession
While there is jurisprudence to the effect that a contract which provides that or ownership of the thing acquired, or should he have
the initial payment shall be totally forfeited in case of default in payment is to
reasonable grounds to fear such disturbance, by a
be considered as an option contract, 37 still we are not inclined to conform
vindicatory action or a foreclosure of mortgage, he may
with the findings of respondent court and the court a quo that the contract
suspend the payment of the price until the vendor has
executed between the parties is an option contract, for the reason that the
caused the disturbance or danger to cease, unless the latter
parties were already contemplating the payment of the balance of the
gives security for the return of the price in a proper case, or it

41
 has been stipulated that, notwithstanding any such The records of this case reveal that as early as February 28, 1990 when
contingency, the vendee shall be bound to make the petitioner caused its exclusive option to be annotated anew on the certificate
payment. A mere act of trespass shall not authorize the of title, it already knew of the dismissal of civil Case No. 89-5541. However, it
suspension of the payment of the price. was only on April 16, 1990 that petitioner, through its counsel, wrote private
respondents expressing its willingness to pay the balance of the purchase
Respondent court refused to apply the aforequoted provision of law on the price upon the execution of the corresponding deed of absolute sale. At
erroneous assumption that the true agreement between the parties was a most, that was merely a notice to pay. There was no proper tender of
contract of option. As we have hereinbefore discussed, it was not an option payment nor consignation in this case as required by law.
contract but a perfected contract to sell. Verily, therefore, Article 1590 would
properly apply. The mere sending of a letter by the vendee expressing the intention to
pay, without the accompanying payment, is not considered a valid tender of
Both lower courts, however, are in accord that since Civil Case No. 89-5541 payment. 43 Besides, a mere tender of payment is not sufficient to compel
filed against the parties herein involved only the eastern half of the land private respondents to deliver the property and execute the deed of absolute
subject of the deed of sale between petitioner and the Jimenez brothers, it sale. It is consignation which is essential in order to extinguish petitioner's
did not, therefore, have any adverse effect on private respondents' title and obligation to pay the balance of the purchase price. 44 The rule is different in
ownership over the western half of the land which is covered by the contract case of an option contract 45 or in legal redemption or in a sale with right to
subject of the present case. We have gone over the complaint for recovery of repurchase, 46 wherein consignation is not necessary because these cases
ownership filed in said case 41 and we are not persuaded by the factual involve an exercise of a right or privilege (to buy, redeem or repurchase)
findings made by said courts. At a glance, it is easily discernible that, rather than the discharge of an obligation, hence tender of payment would be
although the complaint prayed for the annulment only of the contract of sale sufficient to preserve the right or privilege. This is because the provisions on
executed between petitioner and the Jimenez brothers, the same likewise consignation are not applicable when there is no obligation to pay. 47 A
prayed for the recovery of therein plaintiffs' share in that parcel of land contract to sell, as in the case before us, involves the performance of an
specifically covered by TCT No. 309773. In other words, the plaintiffs therein obligation, not merely the exercise of a privilege of a right. consequently,
were claiming to be co-owners of the entire parcel of land described in TCT performance or payment may be effected not by tender of payment alone but
No. 309773, and not only of a portion thereof nor, as incorrectly interpreted by both tender and consignation.
by the lower courts, did their claim pertain exclusively to the eastern half
adjudicated to the Jimenez brothers. Furthermore, petitioner no longer had the right to suspend payment after the
disturbance ceased with the dismissal of the civil case filed against it.
Such being the case, petitioner was justified in suspending payment of the Necessarily, therefore, its obligation to pay the balance again arose and
balance of the purchase price by reason of the aforesaid vindicatory action resumed after it received notice of such dismissal. Unfortunately, petitioner
filed against it. The assurance made by private respondents that petitioner failed to seasonably make payment, as in fact it has deposit the money with
did not have to worry about the case because it was pure and simple the trial court when this case was originally filed therein.
harassment 42 is not the kind of guaranty contemplated under the exceptive
clause in Article 1590 wherein the vendor is bound to make payment even By reason of petitioner's failure to comply with its obligation, private
with the existence of a vindicatory action if the vendee should give a security respondents elected to resort to and did announce the rescission of the
for the return of the price. contract through its letter to petitioner dated July 27, 1990. That written
notice of rescission is deemed sufficient under the circumstances. Article
2. Be that as it may, and the validity of the suspension of payment 1592 of the Civil Code which requires rescission either by judicial action or
notwithstanding, we find and hold that private respondents may no longer be notarial act is not applicable to a contract to sell. 48 Furthermore, judicial
compelled to sell and deliver the subject property to petitioner for two action for rescission of a contract is not necessary where the contract
reasons, that is, petitioner's failure to duly effect the consignation of the provides for automatic rescission in case of breach,49 as in the contract
purchase price after the disturbance had ceased; and, secondarily, the fact involved in the present controversy.
that the contract to sell had been validly rescinded by private respondents.
We are not unaware of the ruling in University of the Philippines vs. De los
Angeles, etc. 50 that the right to rescind is not absolute, being ever subject to

42
scrutiny and review by the proper court. It is our considered view, however, DAVIDE, JR., J.:
that this rule applies to a situation where the extrajudicial rescission is
contested by the defaulting party. In other words, resolution of reciprocal Assailed in this petition for review is the Resolution of the respondent Court
contracts may be made extrajudicially unless successfully impugned in court. of Appeals dated 21 March 1979 in C.A.-G.R. No. SP-04866 setting aside its
If the debtor impugns the declaration, it shall be subject to judicial earlier decision therein, promulgated on 6 December 1978, which reversed
determination51 otherwise, if said party does not oppose it, the extrajudicial the decision of the then Court of First Instance (now Regional Trial Court) of
rescission shall have legal effect. 52 Iloilo City. The latter nullified the Orders of the Secretary of the Department
of Agriculture and Natural Resources (DANR) dated 29 August 1969, 20
In the case at bar, it has been shown that although petitioner was duly November 1969 and 21 April 1970, declared binding the Fishpond Lease
furnished and did receive a written notice of rescission which specified the Agreement (FLA) issued to private respondent and disallowed petitioner from
grounds therefore, it failed to reply thereto or protest against it. Its silence repurchasing from private respondent a portion of the fishery lot located at
thereon suggests an admission of the veracity and validity of private Dumangas, Iloilo, covered by the FLA.
respondents' claim. 53 Furthermore, the initiative of instituting suit was
transferred from the rescinder to the defaulter by virtue of the automatic The pleadings of the parties and the decision of the respondent Court
rescission clause in the contract. 54 But then, the records bear out the fact disclose the factual antecedents of this case.
that aside from the lackadaisical manner with which petitioner treated private
respondents' latter of cancellation, it utterly failed to seriously seek redress
A fishery lot, encompassing an area of 9.4 hectares and designated as Lot
from the court for the enforcement of its alleged rights under the contract. If
No. 518-A of the Cadastral Survey of Dumangas, Iloilo, was previously
private respondents had not taken the initiative of filing Civil Case No. 7532, covered by Fishpond Permit No. F-2021 issued in the name of Anecita
evidently petitioner had no intention to take any legal action to compel Dionio. Upon Anecita's death, her heirs, petitioner Diamante and Primitivo
specific performance from the former. By such cavalier disregard, it has been
Dafeliz, inherited the property which they later divided between themselves;
effectively estopped from seeking the affirmative relief it now desires but
petitioner got 4.4. hectares while Dafeliz got 5 hectares. It is the petitioner's
which it had theretofore disdained.
share that is the subject of the present controversy. Primitivo Dafeliz later
sold his share to private respondent.
WHEREFORE, on the foregoing modificatory premises, and considering that
the same result has been reached by respondent Court of Appeals with
On 21 May 1959, petitioner sold to private respondent his leasehold rights
respect to the relief awarded to private respondents by the court a quo which
over the property in question for P8,000.00 with the right to repurchase the
we find to be correct, its assailed judgment in CA-G.R. CV No. 34767 is
same within three (3) years from said date.
hereby AFFIRMED.
On 16 August 1960, private respondent filed an application with the Bureau
SO ORDERED.
of Fisheries, dated 12 July 1960, for a fishpond permit and a fishpond lease
agreement over the entire lot, submitting therewith the deeds of sale
G.R. No. L-51824 February 7, 1992 executed by Dafeliz and the petitioner.

PERCELINO DIAMANTE, petitioner, Pressed by urgent financial needs, petitioner, on 17 October 1960, sold all
vs. his remaining rights over the property in question to the private respondent
HON. COURT OF APPEALS and GERARDO DEYPALUBUS, respondents. for P4,000.00.

Hernandez, Velicaria, Vibar & Santiago for petitioner. On 25 October 1960, private respondent, with his wife's consent, executed in
favor of the petitioner an Option to Repurchase the property in question
Amancio B. Sorongon for private respondent. within ten (10) years from said date, with a ten-year grace period.

Private respondent submitted to the Bureau of Fisheries the definite deed of

sale; he did not, however, submit the Option to Repurchase.

43
Thereafter, on 2 August 1961, the Bureau of Fisheries issued to private parts of the permit or lease granted. Any false statements in
respondent Fishpond Permit No. 4953-Q; on 17 December 1962, it approved the application of facts or any alteration, change or
FLA No. 1372 in the latter's favor. modification of any or all terms and conditions made therein
shall ipso facto cause the cancellation of the permit or lease.
On 11 December 1963, petitioner, contending that he has a valid twenty-year
option to repurchase the subject property, requested the Bureau of Fisheries Private respondent moved for a reconsideration of this last Order arguing
to nullify FLA No. 1372 insofar as the said property is concerned. On 18 that the DANR Secretary's previous Order of 30 October 1968 dismissing
December 1964, his letter-complaint was dismissed. Petitioner then sought a petitioner's letter-complaint had already become final on the ground that he
reconsideration of the dismissal; the same was denied on 29 April 1965. His (private respondent) was not served a copy of petitioner's 20 November 1968
appeal to the Secretary of the DANR was likewise dismissed on 30 October motion for reconsideration. On 20 November 1969, private respondent's
1968. Again, on 20 November 1968, petitioner sought for a reconsideration; motion for reconsideration was denied; a second motion for reconsideration
this time, however, he was successful. On 29 August 1969, the DANR was likewise denied on 20 April 1970.
Secretary granted his motion in an Order cancelling FLA No. 1372 and
stating, inter alia, that: On 5 May 1970, private respondent filed with the Court of First Instance of
Iloilo City a special civil action for certiorari with preliminary injunction
Evidently, the application as originally filed, could not be (docketed as Civil Case No. 8209), seeking to annul the Secretary's Orders
favorably acted upon by reason of the existing right of a third of 20 April 1970, 20 November 1969 and 29 August 1969 on the ground that
party over a portion thereof. It was only the submission of the Secretary: (1) gravely abused his discretion in not giving him the
the deed of absolute sale which could eliminate the opportunity to be heard on the question of whether or not the Option to
stumbling block to the approval of the transfer and the Repurchase was forged; and (2) has no jurisdiction to set aside FLA No.
issuance of a permit or lease agreement. It was on the basis 1372 as the Order of the Bureau of Fisheries dismissing petitioner's 11
of this deed of sale, in fact, the one entitled "option to December 1963 letter-complaint had already become final.
repurchase" executed barely a week from the execution of
the deed of absolute sale, (which) reverted, in effect, the After issuing a temporary restraining order and a writ of preliminary
status of the land in question to what it was after the injunction, the lower court tried the case jointly with Criminal Case No. 520
execution of the deed of sale with right to repurchase; that is, wherein both the petitioner and a certain Atty. Agustin Dioquino, the Notary
the land was again placed under an encumbrance in favor of Public who notarized the 25 October 1960 Option to Repurchase, were
a third party. Circumstantially, there is a ground (sic) to charged with falsification of a public document.
believe that the deed of absolute sale was executed merely
with the end in view of circumventing the requirements for After due trial, the lower court acquitted the accused in the criminal case and
the approval of the transfer of leasehold rights of Diamante
decided in favor of the private respondent in Civil Case No. 8209; the court
in favor of Deypalubos; and the subsequent execution of the
ruled that: (1) the DANR Secretary abused his discretion in issuing the
"Option to Repurchase" was made to assure the
questioned Orders, (2) petitioner cannot repurchase the property in question
maintenance of a vendor a retro's rights in favor of
as the Option to Repurchase is of doubtful validity, and (3) FLA No. 1372 in
Diamante. There was, therefore, a misrepresentation of an the name of private respondent is valid and binding.
essential or material fact committed by the lessee-appellee
(Deypalubos) in his application for the permit and the lease
agreement, without which the same could not have been Petitioner appealed to the respondent Court which, on 6 December 1978,
issued. 1 reversed the decision of the trial court 2 on the ground that no grave abuse of
discretion was committed by respondent Secretary inasmuch as private
respondent was given the opportunity to be heard on his claim that the
The Secretary based his action on Section 20 of Fisheries Administrative Option to Repurchase is spurious, and that the trial court merely indulged in
Order No. 60, the second paragraph of which reads:
conjectures in not upholding its validity. Said the respondent Court:

Any and all of the statements made in the corresponding

With all the foregoing arguments appellee had exhaustively
application shall be considered as essential conditions and adduced to show the spuriousness of the deed of "Option to

44
Repurchase", appellee can hardly complain of not having The lower court's action of acquitting the notary public,
been given an opportunity to be heard, which is all that is Agustin Dioquino, and appellant Diamante in Criminal Case
necessary in relation to the requirement of notice and No. 520 for falsification of public document is in itself a
hearing in administrative proceedings. Moreover, appellee finding that the alleged forgery has not been conclusively
never asked for a formal hearing at the first opportunity that established. This finding is quite correct considering the
he had to do so, as when he filed his first motion for admission of the NBI handwriting expert that admission of
reconsideration. He asked for a formal hearing only in his the NBI handwriting expert that he cannot make any finding
second motion for reconsideration evidently as a mere on the question of whether appellee's signature on the deed
afterthought, upon realizing that his arguments were futile of "Option to Repurchase" is forged or not, because of the
without proofs to support them. lack of (sic) specimen signature of appellee for comparative
examination. The Secretary may have such signature in the
The only remaining question, therefore, is whether the application papers of appellee on file with the former's office
Secretary acted with grave abuse of discretion in giving upon which to satisfy himself of (sic) the genuineness of
weight to the alleged execution by appellee of the deed of appellee's signature. It would be strange, indeed, that
Option to Repurchase, on the basis of the xerox copy of said appellee had not provided the NBI expert with a specimen of
deed as certified by the Notary Public, Agustin Dioquino. his signature when his purpose was to have an expert
opinion that his signature on the questioned document is
forged.
With such documentary evidence duly certified by the Notary
Public, which is in effect an affirmation of the existence of
the deed of "Option of Repurchase" (sic) and its due On the other hand, as to the signature of his wife, the latter
execution, the Secretary may not be said to have gravely herself admitted the same to be her own. Thus
abused his discretion in giving the document enough
evidentiary weight to justify his action in applying the Q There is a signature
aforequoted provisions of Fisheries Adm. Order No. 60. This below the typewritten words
piece of evidence may be considered substantial enough to "with my marital consent"
support the conclusion reached by the respondent and above the name
Secretary, which is all that is necessary to sustain an Edelina Duyo, whose
administrative finding of fact (Ortua vs. Encarnacion, 59 Phil. signature is this?
635; Ang Tibay vs. CIR, 69 Phil. 635; Ramos vs. The Sec. of
Agriculture and Natural Resources, et al. L-29097, Jan. 28, A That is my signature.
1974, 55 SCRA 330). Reviewing courts do not re-examine (T.s.n., Crim. Case No. 520,
the sufficiency of the evidence in an administrative case, if April 5, 1971, p. 14).
originally instituted as such, nor are they authorized to
receive additional evidence that was not submitted to the
In not finding in favor of the perfect validity of the "Option to
administrative agency concerned. For common sense Repurchase," the court a quo merely indulged in
dictates that the question of whether the administrative conjectures. Thus, believing the testimony of appellee that
agency abused its discretion in weighing evidence should be the later (sic) could not have executed the deed of option to
resolved solely on the basis of the proof that the
repurchase after spending allegedly P12,000.00, and that if
administrative authorities had before them and no other
there was really a verbal agreement upon the execution of
(Timbancaya vs. Vicente, L-19100, Dec. 27, 1963, 9 SCRA
the deed of absolute sale, as alleged by appellant, that
852). In the instant case the evidence presented for the first appellant's right to repurchase, as was stipulated in the
time before the court a quo could be considered only for the
earlier deed of sale, shall be preserved, such agreement
criminal case heard jointly with this case.
should have been embodied in the deed of sale of October
17, 1960 (Exh. D), the court doubted the genuineness of the
deed of Option to Repurchase (sic).

45
 It is highly doubtful if appellee had spent P12,000.00 during . . . the respondent (DANR) Secretary had gone beyond his
the period from October 17, 1960 to October 25, 1960 when statutory authority and had clearly acted in abuse of
the deed of option was executed. Likewise, the right to discretion in giving due weight to the alleged option to
repurchase could not have been embodied in the deed of repurchase whose (sic) genuiness (sic) and due execution
absolute sale since, as the Secretary of DANR found, the had been impugned and denied by petitioner-appellee
purpose of the deed of absolute sale is to circumvent the law (Deypalubos). While the certified true copy of the option to
and insure the approval of appellee's application, as with his repurchase may have been the basis of the respondent
right to 4.4 hectares appearing to be subject to an Secretary in resolving the motion for reconsideration, the
encumbrance, his application would not have been given Court believes that he should have first ordered the
favorable action. presentation of evidence to resolve this factual issue
considering the conflicting claims of the parties. As earlier
Above all, the speculation and conjectures as indulged in by pointed out, all that was submitted to the Bureau of Fisheries
the court a quo cannot outweigh the probative effect of the and consequently to the respondent Secretary, was a xerox
document itself, a certified xerox copy thereof as issued by copy of the questioned document which was certified to by a
the Notary Public, the non-presentation of the original having notary public to be a copy of a deed found in his notarial file
been explained by its loss, as was the testimony of the same which did not bear any specimen of the signatures of the
Notary Public, who justly won acquittal when charged with contracting parties. And assuming that a certification made
falsification of public document at the instance of appellee. by a notary public as to the existence of a document should
The fact that the spaces for the document number, page and be deemed an affirmation that such document actually
book numbers were not filled up in the photostatic copy exists. Nevertheless, (sic) when such claim is impugned, the
presented by the representative of the Bureau of Records one who assails the existence of a document should be
Management does not militate against the genuineness of afforded the opportunity to prove such claim, because, at
the document. It simply means that the copy sent to the said most, the presumption of regularity in the performance of
Bureau happens to have those spaces unfilled up (sic). But official duties is merely disputable and can be rebutted by
the sending of a copy of the document to the Bureau of convincing and positive evidence to the contrary.
Records Management attests strongly to the existence of
such document, the original of which was duly executed, His motion for reconsideration having been denied, the petitioner filed the
complete with the aforesaid data duly indicated thereon, as instant petition for review.
shown by the xerox copy certified true by the Notary Public.
Petitioner contends that the Rules of Court should not be strictly applied to
Indeed, in the absence of positive and convincing proof of administrative proceedings and that the findings of fact of administrative
forgery, a public instrument executed with the intervention of bodies, absent a showing of arbitrariness, should be accorded respect.
a Notary Public must be held in high respect and accorded
full integrity, if only upon the presumption of the regularity of While the petition has merit, petitioner's victory is hollow and illusory for, as
official functions as in the nature of those upon the shall hereafter be shown, even as We reverse the assailed resolution of the
presumption of the regularity of official functions as in the respondent Court of Appeals, the questioned decision of the Secretary must,
nature of those of a notary public (Bautista vs. Dy Bun Chin, nevertheless, be set aside on the basis of an erroneous conclusion of law
49 OG 179; El Hogar Filipino vs. Olviga, 60 Phil. 17). with respect to the Option to Repurchase.

Subsequently, the respondent Court, acting on private respondent's motion The respondent Court correctly held in its decision of 6 December 1978 that
for reconsideration, promulgated on 21 March 1979 the challenged the respondent Secretary provided the private respondent sufficient
Resolution 3 setting aside the earlier decision and affirmed, in toto, the ruling opportunity to question the authenticity of the Option to Repurchase and
of the trial court, thus: committed no grave abuse of discretion in holding that the same was in fact
executed by private respondent. We thus find no sufficient legal and factual
moorings for respondent Court's sudden turnabout in its resolution of 21

46
March 1979. That private respondent and his wife executed the Option to In the earlier case of Ramos, et al. vs. Icasiano, et al., 5 decided in 1927, this
Repurchase in favor of petitioner on 25 October 1960 is beyond dispute. As Court had already ruled that "an agreement to repurchase becomes a
determined by the respondent Court in its decision of 6 December 1978, promise to sell when made after the sale, because when the sale is made
private respondent's wife, Edelina Duyo, admitted having affixed her without such an agreement, the purchaser acquires the thing sold absolutely,
signature to the said document. Besides, the trial court itself in Criminal Case and if he afterwards grants the vendor the right to repurchase, it is a new
No. 520 which was jointly tried with the civil case, acquitted both the contract entered into by the purchaser, as absolute owner already of the
petitioners and the notary public, before whom the Option to Repurchase object. In that case the vendor has not reserved to himself the right to
was acknowledged, of the crime of falsification of said document. repurchase."

We hold, however, that the respondent Secretary gravely erred in holding In Vda. de Cruzo, et al. vs. Carriaga, et al., 6 this Court found another
that private respondent's non-disclosure and suppression of the fact that 4.4 occasion to apply the foregoing principle.
hectares of the area subject of the application is burdened with or
encumbered by the Option to Repurchase constituted a falsehood or a Hence, the Option to Repurchase executed by private respondent in the
misrepresentation of an essential or material fact which, under the second present case, was merely a promise to sell, which must be governed by
paragraph of Section 29 of Fisheries Administrative Order No. 60 earlier Article 1479 of the Civil Code which reads as follows:
quoted, "shall ipso facto cause the cancellation of the permit or lease." In
short, the Secretary was of the opinion that the Option to Repurchase was an
Art. 1479. A promise to buy and sell a determinate thing
encumbrance on the property which affected the absolute and exclusive
for a price certain is reciprocally demandable.
character of private respondent's ownership over the 4.4 hectares sold to him
by petitioner. This is a clear case of a misapplication of the law on
conventional redemption and a misunderstanding of the effects of a right to An accepted unilateral promise to buy or to sell a
repurchase granted subsequently in an instrument different from the original determinate thing for a price certain is binding upon the
document of sale. promissor if the promise is supported by a consideration
distinct from the price.
Article 1601 of the Civil Code provides:
A copy of the so-called Option to Repurchase is neither attached to the
records nor quoted in any of the pleadings of the parties. This Court cannot,
Conventional redemption shall take place when the vendor
therefore, properly rule on whether the promise was accepted and a
reserves the right to repurchase the thing sold, with the consideration distinct from the price, supports the option. Undoubtedly, in the
obligation to comply with the provisions of article 1616 and absence of either or both acceptance and separate consideration, the
other stipulations which may have been agreed upon.
promise to sell is not binding upon the promissor (private respondent).

In Villarica, et al. vs. Court of Appeals, et al., 4 decided on 29 November

A unilateral promise to buy or sell is a mere offer, which is
1968, or barely seven (7) days before the respondent Court promulgated its not converted into a contract except at the moment it is
decision in this case, this Court, interpreting the above Article, held: accepted. Acceptance is the act that gives life to a juridical
obligation, because, before the promise is accepted, the
The right of repurchase is not a right granted the vendor by promissor may withdraw it at any time. Upon acceptance,
the vendee in a subsequent instrument, but is a right however, a bilateral contract to sell and to buy is created,
reserved by the vendor in the same instrument of sale as and the offeree ipso facto assumes the obligations of a
one of the stipulations of the contract. Once the instrument purchaser; the offeror, on the other hand, would be liable for
of absolute sale is executed, the vendor can no longer damages if he fails to deliver the thing he had offered for
reserve the right to repurchase, and any right thereafter sale.
granted the vendor by the vendee in a separate instrument
cannot be a right of repurchase but some other right like the
xxx xxx xxx
option to buy in the instant case. . . .

47
 . . . The contract of option is a separate and distinct contract In Insular Life Assurance Co., Ltd. Employees Association-NATU vs. Insular
from the contract which the parties may enter into upon the Life Assurance Co., Ltd., 10 this Court ruled:
consummation of the option, and a consideration for an
optional contract is just as important as the consideration for . . . (t)he Supreme Court has ample authority to review and
any other kind of contract. Thus, a distinction should be resolve matter not assigned and specified as errors by either
drawn between the consideration for the option to of the parties in the appeal if it finds the consideration and
repurchase, and the consideration for the contract of determination of the same essential and indispensable in
repurchase itself.7 order to arrive at a just decision in the case. 11 This Court,
thus, has the authority to waive the lack of proper
Even if the promise was accepted, private respondent was not bound thereby assignment of errors if the unassigned errors closely relate
in the absence of a distinct consideration. 8 to errors properly pinpointed out or if the unassigned errors
refer to matters upon which the determination of the
It may be true that the foregoing issues were not squarely raised by the questions raised by the errors properly assigned depend. 12
parties. Being, however, intertwined with the issue of the correctness of the
decision of the respondent Secretary and, considering further that the The same also applies to issues not specifically raised by
determination of said issues is essential and indispensable for the rendition the parties. The Supreme Court, likewise, has broad
of a just decision in this case, this Court does not hesitate to rule on them. discretionary power, in the resolution of a controversy, to
take into consideration matters on record which the parties
In Hernandez vs. Andal, 9 this Court held: fail to submit to the Court as specific questions for
determination. 13 Where the issues already raised also rest
on other issues not specifically presented, as long as the
If the appellants' assignment of error be not considered a
latter issues bear relevance and close relation to the former
direct challenge to the decision of the court below, we still
and as long as they arise from matters on record, the Court
believe that the objection takes a narrow view of practice
and procedure contrary to the liberal spirit which pervades has the authority to include them in its discussion of the
controversy as well as to pass upon them. In brief, in those
the Rules of Court. The first injunction of the new Rules
cases wherein questions not particularly raised by the
(Rule 1, section 2) is that they "shall be liberally construed in
parties surface as necessary for the complete adjudication of
order to promote their object and to assist the parties in
the rights and obligations of the parties and such questions
obtaining just, speedy, and inexpensive determination of
every action and proceeding." In line with the modern trends fall within the issues already framed by the parties, the
of procedure, we are told that, "while an assignment of error interests of justice dictate that the Court consider and
resolve them.
which is required by law or rule of court has been held
essential to appellate review, and only those assigned will be
considered, there are a number of cases which appear to WHEREFORE, the instant petition is GRANTED. The Resolution of
accord to the appellate court a broad discretionary power to respondent Court of Appeals of 21 March 1979 in C.A.-G.R. No. SP-04866
waive the lack of proper assignment of errors and consider and the Decision of the trial court in Civil Case No. 8209, insofar as they
errors not assigned. And an unassigned error closely related declare, for the reasons therein given, Fishpond Lease Agreement No. 1372,
to an error properly assigned, or upon which the valid and binding, are hereby REVERSED and SET ASIDE. The challenged
determination of the question raised by the error properly Orders of the respondent Secretary of Agriculture and Natural Resources of
assigned is dependent, will be considered by the appellate 29 August 1969, 20 November 1969 and 21 April 1970 are likewise
court notwithstanding the failure to assign it as error." (4 REVERSED and SET ASIDE and Fishpond Lease Agreement No. 1372 is
C.J.S., 1734; 3 C.J., 1341, footnote 77). At the least, the ordered REINSTATED.
assignment of error, viewed in this light, authorizes us to
examine and pass upon the decision of the court below. No pronouncement as to costs.

IT IS SO ORDERED.

48
G.R. No. L-55350 March 28, 1983 That the remaining balance of SIX THOUSAND SIX
HUNDRED AND 001/100 (P6,600.00) PESOS, Philippine
OLIMPIA FERNANDEZ Vda. de ZULUETA (Substituted by JOSEFINA, Currency, should be paid by the VENDOR to the following
LIBERTY and GREGORIO all surnamed ZULUETA) petitioners, person, to wit:
vs.
ISAURO B. OCTAVIANO and AURELIO B. OCTAVIANO, respondents. That on May 31st, 1955, the VENDEE shall pay unto one
MAXIMINO GUMAYAN of Leganes, Iloilo, the sum of FIVE
Ty, Gesmundo, Fernandez and Gesmundo for petitioners. THOUSAND AND 00/100 (P5,000.00) PESOS, Philippine
Currency, representing the redemption price of the land
Nicolas P. Sonalan for respondents. aforementioned by virtue of a DEED OF SALE WITH
PACTO DE RETRO the VENDOR has executed in favor of
said Maximino Gumayan on May 21, 1949, ratified before
Notary Public Tirso Espeleta and entered in his Notarial
Register as Doe. No. 270; Page No. 56; Book No. IV; Series
MELENCIO-HERRERA, J.: of 1949, the option of the VENDOR to redeem the
aforementioned parcel of land pursuant to said Pacto de
Appeal by certiorari seeking a review of the Decision of respondent Court of Retro Sale will be May 21, 1955;
Appeals 1 promulgated on 22 April 1980, which reversed the judgment of the
Trial Court rendered on 30 June 1975 in favor of petitioners' mother as That the VENDEE will pay unto one MAXIMINO GUMAYAN
plaintiff in Civil Case No. 8809 lodged before the Court of First Instance of of Leganes, Iloilo, the sum of ONE THOUSAND SIX
Iloilo, Branch III. HUNDRED AND 00/100 (Pl,600.00) PESOS, Philippine
Currency, representing the redemption price of the land
On 25 November 1952, Olimpia Fernandez Vda. de Zulueta (Olimpia, for aforementioned by virtue of a DEED OF MORTGAGE the
brevity), the registered owner of 5.5 hectares of riceland, covered by Transfer VENDOR has executed in favor of said Maximino Gumayan
Certificate of Title No. T-7428, sold the lot to private respondent Aurelio B. on May 8, 1950, ratified before Notary Public Felix Ravena
Octaviano (Aurelio, for short), for P8,600.00 subject to the following terms and entered in his Notarial Register as Doc. No. 404; Page
and conditions, to wit: No. 24; Book No. VII; series of 1950, the said Mortgage
could be redeemed on or before May 21, 1955, by the herein
That for and in consideration of the sum of EIGHT VENDOR. In other words, the VENDEE, upon the execution
THOUSAND SIX HUNDRED AND 00/100 (P8,600.00) of this instrument shall take the responsibility of redeeming
PESOS, Philippine currency, the VENDOR, her heirs, the land aforementioned from one Maximino Gumayan for
assigns, executors and administrators sells, transfers, and the sum of P5,000.00 in so far as the Deed of Pacto de
conveys as it is hereby SOLD, TRANSFERRED AND Retro Sale is concerned to be due on May 21, 1955 and for
CONVEYED by way of ABSOLUTE AND DEFINITE SALE another sum also in favor of said Maximino Gumayan for the
the aforementioned described property in favor of the amount of Pl,600.00 in so far as the Deed of Mortgage is
VENDEE, his heirs, assigns, executors and administrators, concerned to be due on or before May 21, 1955;
the manner of payment of the aforementioned amount is to
be made as follows: That upon the redemption of the land aforementioned by the
VENDEE from one Maximino Gumayan on May 21, 1955,
That upon the execution of this instrument, VENDEE will pay then this instrument shall be considered for all legal
unto the VENDOR the amount of TWO THOUSAND AND purposes, a DEED OF ABSOLUTE AND DEFINITE SALE by
00/100 (P2,000.00) PESOS, Philippine Currency, and the the VENDOR in favor of the VENDEE, his heirs, assigns,
VENDOR, has, by virtue of this instrument acknowledged executors and administrators, and the Register of Deeds for
receipt of said payment; the City and Province of Iloilo is hereby authorized to cancel

49
 Transfer Certificate of Title No. 7428 and to issue a new sale (Exhibit "E"), but was told that the same was in the possession of
Transfer Certificate of Title in favor of the VENDEE; Maximino Gumayan, who, in turn, informed him that the title had been
deposited with the Philippine National Bank. Consequently, on January 7,
That upon the execution of this instrument, the VENDOR, 1953, Aurelio filed Civil Case No. 2660 (Aurelio Octaviano vs. Olimpio
her heirs, assigns, executors and administrators, has no Fernandez, Maximino Gumayan & PNB) to compel them to deliver the title.
more rights, interests or participations over the parcel of land Aurelio also caused the annotation of a notice of lis pendens. Four months
aforementioned. (Exhibit "E") (Emphasis supplied). after the filing of the above Complaint, Aurelio again approached Gumayan
for the same purpose, but the latter refused to release the certificate of title
unless Aurelio would first pay him the "pagare "receipts representing
Exhibit "E" was registered in the Office of the Register of
additional sums of money in the total amount of P1,486.00 borrowed by
Deeds of Iloilo under Entry No. 43082 and annotated in the
Olimpia from Gumayan in 1951, 1952 and 1953, which amounts were not
Memorandum of Encumbrances of Transfer Certificate of
included in the mortgage obligation of Olimpia assumed by Aurelio. Aurelio
Title No. T-7428.
confronted Olimpia about these receipts contending that she had already
agreed to sell the property for P8,600.00. To avoid further trouble, Aurelio
On the same date, 25 November 1952, the vendee, Aurelio, offered Olimpia the option to repurchase the property. Olimpia did not accept
signed another document (Exhibit "F") giving the vendor, the offer alleging that she had no money at that time to buy back the land. In
Olimpia, the "option to repurchase" the property "at any time fact, Olimpia even suggested to Aurelio that he better sell the land to
after May 1958 but not later than May 1960." The full text of anybody and simply disregard the option to repurchase.2
that document reads:
Relying on the express consent of Olimpia to sell the land and believing that
This is to certify that as per instrument of Definite Sale of Lot she had renounced the option granted her to repurchase the same, Aurelio
No. 9234-B of the subdivision plan Psu-26187, being a negotiated with his own brother, respondent Isauro, for the sale of the
portion of Lot No. 9234 of the Cadastral Survey of Sta. property sometime in 1954. Isauro agreed to buy the property, and paid
Barbara, covered by Transfer Certificate of Title No. T-7428, Aurelio P10,500.00. Out of this amount, Aurelio paid Gumayan on 8 August
executed by Olimpia Fernandez in my favor, ratified before 1954 the amount of P6,600.00 representing the obligation of Olimpia that
Notary Public Eugenio G. Gemarino, and entered in his was assumed by Aurelio under the deed of definite sale (Exhibit "E"). This
Notarial Register as Doc. No. 119; Page No. 25; Book No. payment was evidenced by certificate of payment annotated as Entry No.
IV; Series of 1952, although same is a Deed of Definite Sale, 43083 at the back of TCT No. 7428. Additionally, Aurelio also paid Gumayan
however, I am giving the said Vendor, Olimpia Fernandez Pl,486.00 covering the "pagare" receipts representing the additional sums of
the option to repurchase the aforesaid property from me at money borrowed by Olimpia from Gumayan, as evidenced by Exhibit "4-
any time after May, 1958 but not later than May, 1960. Aurelio". The total amount paid by Aurelio for the property, therefore, was
Should she fail to redeem the aforesaid property by paying P10,086.00, compared to P8,600.00 contracted for in the deed of sale,
me back the sum of EIGHT THOUSAND SIX HUNDRED Exhibit "E".
AND 00/100 (P8,600.00) PESOS, Philippine Currency within
the period of time stated above, then she will lose all the
right to repurchase the land from me. On 8 September 1954, Aurelio executed an Affidavit stating that since the
defendants in Civil Case No. 2260 had surrendered the title to him, he was
causing the cancellation of the notice of lis pendens.
(SGD.) AURELIO B. OCTAVIANO
On the same date of 8 September 1954, Aurelio executed in favor of his
Unlike the deed of sale, this document was not registered. brother, Isauro, a deed of absolute sale (Exhibit "B"), reflecting a price of
P2,000.00 only, allegedly in order to reduce the notarial and registration
Aurelio took possession of the land after the sale. expenses. Thereafter, TCT No. 7428 in the name of Olimpia was cancelled
and TCT No. 16882 was issued, in the name of respondent Isauro
Sometime in May, 1953, Aurelio tried to get the certificate of title covering the Octaviano.
subject land from Olimpia for the purpose of registering the deed of absolute

50
On 16 February 1962 (or about two years after the deadline of May, 1960) for, as admitted by Olimpia, what was executed by her was a deed of definite
Olimpia, through her lawyer, desired to "repurchase" the land and wrote sale and that Olimpia is estopped from alleging fraud for the reason that she
Isauro a letter asking him if he was willing to resell the land as she had the herself admitted in her Complaint the existence of that deed of sale.
money already to buy it back (Exhibit "1"). Isauro was initially receptive as
shown by his reply letter of March 26, 1962 (Exhibit "G" and "2" - Isauro). For his part, respondent Isauro interposed the special defenses that he
Olimpia herself also wrote Isauro an undated letter offering to repurchase the purchased the land in dispute in good faith; that he took possession thereof
property for (P12,000.00, with the request that Isauro lend her the title which upon a just title, free from any liens and encumbrances; that he possessed
she would use as a collateral for a loan that she was intending to secure from the land in the concept of owner, continuously, openly and adversely for
a bank to cover the repurchase price (Exhibit "3-A"). Apparently, Isauro more than 17 years since 8 September 1954; that he was not privy to the
eventually refused to allow "repurchase" except allegedly according to alleged option given to Olimpia by Aurelio; neither had he (Isauro) any
Olimpia, for P40,000.00 knowledge of the said option which Olimpia should have asserted without
delay, within the statutory limitation; that more than ten (10) years had
Olimpia contends that since 1958, she was looking for Aurelio to tell him of elapsed since the alleged violation by Aurelio of the supposed option to
her desire to "repurchase" the property but that Aurelio could nowhere be resell, without Olimpia having taken any action thereon. As counterclaim,
found. 3 Isauro claimed moral damages and attorney's fees.

On 4 October 1971, Olimpia commenced suit for recovery of ownership and After trial on the merits, the Court a quo rendered a Decision on 30 June
possession of the subject land against the Octaviano brothers, both 1975, finding for Olimpia, the decretal portion of which reads:
respondents herein. The case was docketed in the Court of First Instance of
Iloilo, Branch III, as Civil Case No. 8809. The Complaint averred, inter alia, WHEREFORE, decision is hereby rendered in favor of the plaintiff, ordering
that Aurelio expressly allowed her in writing to repurchase the land at any the defendants:
time after May, 1958, but not later than May, 1960; that Aurelio fraudulently
sold the said land to his brother Isauro without first having consolidated his
1) To execute the sale of the property in favor of the plaintiff
ownership pursuant to Article 1607 of the Civil Code; that plaintiff could not upon the payment of P8,600.00 representing the repurchase
have exercised her option to repurchase because Aurelio sold the property to
price pursuant to their agreement;
his brother, who, being aware of her option to repurchase, cannot be
considered an innocent purchaser; that in 1962, Isauro refused to recognize
the plaintiff's option to repurchase, but, instead, offered to sell the property at 2) To declare null and void the registration and transfer
the prevailing price; and, that despite repeated demands made by Olimpia, certificate of title in favor of Isauro B. Octaviano of Lot 9234-
the Octavianos refused to allow her to redeem the land. It was then prayed B in 1954, the same having been made without the seller
that the certificate of title issued in the name of Isauro Octaviano be annulled, having been legally and lawfully entitled to the property
and that plaintiff be allowed to repurchase the land. being registered in his name at the time when such sale was
executed in 1954, no consolidation of ownership pursuant to
law having been made; and
The Octavianos separately filed their Answers with counterclaims. For his
part, Aurelio traversed the material allegations of the Complaint and
specifically denied the assertion that, through fraud and with evident intent to 3) To return immediately Lot No. 9234-B to the plaintiff plus
deceive Olimpia he sold the lot to his brother without consolidating ownership damages equal to the produce from 1958 until return is
unto himself. As special and affirmative defenses, Aurelio alleged that the complied with.
document (Exhibit "F"), purportedly an option to repurchase, was not an
express grant to Olimpia of her right to repurchase, but rather, a unilateral Without pronouncement as to costs.
offer of Aurelio to resell the property to the said vendor, which offer was not
accepted by her; that neither consent nor written authority, nor waiver of SO ORDERED. 4
Olimpia was necessary for the sale of the land in question for there was no
acceptance of his unilateral offer to sell; nor was there any necessity for the On appeal by the Octaviano brothers to the then Court of Appeals, that
consolidation of ownership pursuant to Article 1607 of the New Civil Code, Tribunal reversed the findings of the Trial Court that the contract was a sale

51
with right of repurchase, ruled instead that the transaction between Olimpia to Maximino Gumayan, and specifically stipulating that upon payment of that
and Aurelio was an absolute sale, and declared Isauro the lawful and indebtedness, the transaction became a deed of definite sale. The
absolute owner of the lot in question. Olimpia moved for reconsideration but presumption that the contract was an equitable mortgage neither arises
the same was denied for lack of merit. because the price of the sale at the time it was executed in 1952 was not
unusually inadequate; the vendor, Olimpia, did not remain in possession as
In the meantime, Olimpia died, and was substituted by her heirs, Josefina, lessee or otherwise; nor did she bind herself to pay taxes on the land. 9
Liberty and Gregorio, all surnamed Zulueta.
Inasmuch as the contract was neither a sale with right of repurchase, nor an
The Petition before us seeks a review of respondent Court's Decision. equitable mortgage, neither can it be successfully alleged that it partook of a
"pactum commissorium " and was, therefore, void. "Pactum commissorium
"is a stipulation for automatic vesting of title over the security in the creditor in
We affirm.
case of the debtor's default. It bears reiterating, however, that Olimpia was
not a debtor, but a vendor. She was so described in the document, Exhibit
1) The nature of the transaction between Olimpia and Aurelio, from the "E". Olimpia owed nothing to Aurelio, and offered nothing to him as security
context of Exhibit "E" is not a sale with right to repurchase. Conventional for the payment of any indebtedness,
redemption takes place "when the vendor reserves the right to repurchase
the thing sold, with the obligation to comply with the provisions of Article
It should also be recalled that, irked by the additional "pagares" incurred by
1616 and other stipulations which may have been agreed upon". 5
Olimpia from Maximino Gumayan, Aurelio had asked Olimpia to buy back the
property in 1954 but she demurred for lack of funds.
In this case, there was no reservation made by the vendor, Olimpia, in the
document Exhibit "E". The "option to repurchase" was contained in a
And what is of greater import is that petitioner waited for an unexplained
subsequent document and was made by the vendee, Aurelio. Thus, it was
delay of about 19 years, from the date of the execution of the deed of sale
more of an option to buy or a mere promise on the part of the vendee,
Aurelio, to resell the property to the vendor, Olimpia. 6As held in Villarica vs. (Exhibit "E") in 1952 and the option to repurchase (Exhibit "F") in the same
Court of Appeals:7 year up to the time of filing of the Complaint in 1971, before she assailed the
nature of her transaction with Aurelio, claiming that the contract was a sale
with right of repurchase. If Olimpia really believed so, an action for
The right of repurchase is not a right granted the vendor by reformation of instrument was open to her. Likewise, it took her more than 17
the vendee in a subsequent instrument but is a years-from the time of registration of the sale to Isauro and the subsequent
right reserved by the vendor in the same instrument of sale issuance of a new certificate of title in the latter's name in 1954 up to the
as one of the stipulations of the contract. Once the commencement of the action in 1971 for recovery of possession and
instrument of absolute sale is executed, the vendor can no ownership-before she questioned the validity of the sale by Aurelio to Isauro,
longer reserve the right to repurchase, and any right contending that Aurelio was not yet the registered owner when he sold the
thereafter granted the vendor by the vendee in a separate land to Isauro, hence, could not transfer ownership thereof, and that he had
instrument cannot be a right of repurchase but some other sold the land without first consolidating ownership in himself. In point of fact,
right like the option to buy in the instant case. ... (Emphasis however, there was no need for Aurelio to consolidate ownership since the
ours) contract was one of absolute sale and not a pacto de retro sale. It also took
Olimpia nine years from the time she sought to exercise her right of
Neither is the contract between Olimpia and Aurelio one of the equitable repurchase in 1962 up to the institution of the suit for recovery in 1971.
mortgage, which has been defined as "one in which although it lacks some Petitioner's long inaction to assert her alleged right should now be deemed
formality, form of words or other requisites, prescribed by a statute, show the barred by laches.
intention of the parties to charge a real property as security for a debt and
contain nothing impossible or contrary to law".8 From the provisions of the For a party to deserve the consideration of the courts, he
deed of sale, Exhibit "E", there is nothing therein from which it could be must not only show that he is entitled to the relief prayed for,
inferred that the property was being utilized as security for a debt. The but must show also that he is not guilty of laches,
document was labelled a deed of absolute and definite sale with the vendee indifference, negligence or ignorance. 10
Aurelio assuming the payment of the mortgage obligations owing by Olimpia
52
Again, of sale became fully operative (Exhibit "E"). Aurelio was not duty bound to
wait for the expiration of the alleged redemption period before he could
The defense of laches is an equitable one and does not dispose of or transfer ownership of the land for, as elsewhere discussed, the
concern itself with the character of the defendant's title, but sale was not a sale with right of repurchase.
only with whether or not by reason of the plaintiff's long
inaction or inexcusable neglect he should be barred from It is true that by virtue of Exhibit "F", Olimpia could have "repurchased" the
asserting this claim at all, because to allow him to do so property between 1958 and 1960. If she had done so, perhaps, her rights
would be inequitable and unjust to the defendant. 11 would have been entitled to protection. She was remiss, however, and only
attempted to do so in 1962, or way beyond the period granted her.
And even granting, arguendo that the sale was a pacto de retro sale, the
evidence shows that Olimpia, through her lawyer, opted to repurchase the We might sympathize with her plight, but an individual is expected to take
land only on 16 February 1962, approximately two years beyond the ordinary care of his concerns and cannot expect the law to protect him all the
stipulated period, that is, "not later than May, 1960". way. 16 To be noted also is the fact that her own lawyer prepared the deed of
sale and the separate document giving her the option to "repurchase". 17
If Olimpia could not locate Aurelio, as she contends, and based on her
allegation that the contract between her was one of sale with right to For his part, private respondent Isauro was an innocent purchaser for value
repurchase, neither, however, did she tender the redemption price to private and in good faith. As heretofore stated, the instrument granting the "option to
respondent Isauro, but merely wrote him letters expressing her readiness to repurchase" (Exhibit "F") was not registered nor annotated at the back of the
repurchase the property. corresponding certificate of title. A purchaser need not explore further than
what the Torrens title on its face indicates.
It is clear that the mere sending of letters by the vendor expressing his desire
to repurchase the property without accompanying tender of the redemption A purchaser in good faith is one who buys property of
price fell short of the requirements of law. 12 another, without notice that some other person has a right to,
or interest in such property and pays a full price for the
Neither did petitioner make a judicial consignation of the repurchase price same, at the time of such purchase or before he has notice
within the agreed period. of the claim or interest of some other persons in the
property. Good faith consists in an honest intention to
In a contract of sale with a right of repurchase, the abstain from taking any unconscientious advantage of
another. 18
redemptioner who may offer to make the repurchase on the
option date of redemption should deposit the full amount in
court. ... 13 Where there was nothing in the certificate of title to indicate
... any encumbrance thereon, the purchaser is not required
To effectively exercise the right to repurchase the vendor a to explore farther than what the Torrens title upon its face
retro must make an actual and simultaneous tender of indicates in quest for any hidden defect or inchoate right that
may subsequently defeat his right thereto. If the rule were
payment or consignation. 14
otherwise, the efficacy and conclusiveness of the certificate
of title which the Torrens system seeks to insure would
2) While it is true that Aurelio was not the registered owner of the property at entirely be futile and nugatory.19
the time of the sale to his brother in 1954, it should be recalled that by that
time he had already complied with the conditions of the deed of sale by
WHEREFORE, the decision of respondent Court of Appeals, being in
redeeming the property from Maximino Gumayan and paying the latter in full
accordance with law and the evidence, is hereby affirmed, with costs against
Aurelio may, therefore, be said to have had the right to transfer
petitioners.
ownership 15 as also shown by the fact that Maximino Gumayan had
rendered the certificate of title to him so that the authorization to the Register
of Deeds to cancel the same and issue a new one as stipulated in the deed SO ORDERED.

53
 SOCORRO TAOPO BANGA, G.R. No. 156705 The real estate mortgage, its two amendments, as well as the Deed of
Petitioner, Absolute Sale were notarized by one Teodorico L. Baltazar (Baltazar) in the
Present: presence of two witnesses.

PANGANIBAN, Chairm Petitioner later filed a complaint[7] before the Regional Trial Court (RTC) of
-versus- an, Pasig, for declaration of nullity with damages against her husband Nelson from
SANDOVAL- GUTIERREZ, whom she claims to have been separated since 1989 and herein respondents
CORONA, spouses Jose and Emeline Bello, alleging that Nelson and respondent Jose,
CARPIO MORALES, in criminal conspiracy with notary public [Baltazar] and two (2) instrumental
Spouses JOSE and EMELINE BELLO, and witnesses, criminally made it appear that . . . [petitioner] consented to the
Responde GARCIA, JJ. absolute sale . . .; that the signature in the deed of sale appearing above the
nts. name Socorro T. Banga is not hers; and that she never appeared before
Baltazar on December 11, 1989 or any date thereafter to acknowledge having
Promulgated: participated in the execution of the deed of absolute sale.

September 30, 2005 And petitioner questioned as unconscionably low the consideration
of P300,000.00 for the sale of the property which is situated in a commercial
x------------------------------------------------------- district.
----------x
Petitioner thus prayed that judgment be rendered:
DECISION
1. declaring void the Deed of Absolute Sale of December 11,
1989;
CARPIO MORALES, J.:
2. declaring void and/or canceling Transfer Certificate of Title
Spouses Socorro Taopo Banga and Nelson Banga (Nelson) acquired, among No. 3294 (in the names of [respondents]-spouses Bello)
other things, a real property located at 459 Boni Avenue, Mandaluyong City from the Registry of Deeds of Mandaluyong, Metro
(the property) covered by Transfer Certificate of Title (TCT) No. 62530.[1] Manila;

On June 19, 1987, Nelson, as mortgagor, with the consent of his wife-herein 3. ordering . . . Nelson F. Banga, Jose V. Bello V and Emeline
petitioner Socorro Taopo Banga, executed a Deed of Real Estate B. Bello solidarily liable to pay in favor of herein
Mortgage[2] in favor of respondent Jose V. Bello V (Jose) over the property as [petitioner] the following sums of money:
security for a loan in the amount of P200,000.00 extended by Jose to Nelson.
On July 28, 1987, Nelson and Jose executed an Amendment to the Real a. P500,000.00 as moral damages;
Estate Mortgage[3] increasing the loan to P300,000.00. b. Exemplary damages, to be fixed by this Honorable
Court, but no less than P50,000.00;
Still later or on September 1, 1989, Nelson and Jose executed a Second c. P200,000.00, as and for attorneys fees;
Amendment of Real Estate [Mortgage][4] which further increased the loan d. P50,000.00, as litigation expenses;
to P500,000.00. e. Costs of suit.

It appears that a Deed of Absolute Sale[5] was executed by Nelson purportedly xxx
on December 11, 1989 and with the marital consent of petitioner, covering the (Underscoring supplied)
property in favor of Jose for a consideration of P300,000.00. TCT No. 62530
was later cancelled and in its stead TCT No. 3294 [6] was issued in the name In their Answer with Counterclaim,[8] herein respondents spouses Bello alleged
of Jose. that petitioner has no cause of action against them; that the deed of sale was
personally and voluntarily executed by petitioner and her husband in the

54
presence of the witnesses before the notary public and her signature appearing A cursory glance at the duplicate original of the Deed of
thereon is genuine and authentic; and that the consideration for the sale is the Absolute Sale (Exhibits 1, 1-A-Bello) will readily show that on
fair and reasonable value of the property as it is not only based on the amount page 1 thereof, the date 11th (day of ) Dec. 1989; and the
provided in the deed of sale but [on] considerations in (sic) real estate mortgage Residence Certificates of defendant Nelson F. Banga, plaintiff
and amendments [thereto] . . .. and defendant Jose V. Bello for the year 1989, such as:
RCNo. 63315794, Mand, MM, 1/17/89; RC NO. B63315794,
In Nelsons Answer with Counterclaim and Crossclaim [9] against Jose, Mand, MM 1/17/89; and RC 09499689J, Mand, MM 3/6/89 on
he claimed that, among other things, the deed of sale was actually a third page 2 thereof, respectively, including the date 11 th (day of)
amendment to the mortgage which he and petitioner executed and was actually December, 1989 had been typed on two different dates.
an equitable mortgage for which no consideration was involved; he had already Defendant Bello admitted this fact. Although defendant Bello
paid in full their principal indebtedness to respondents in the amount contends that the Deed of Absolute Sale was executed by the
of P652,000.00, plus the amount of P187,500.00, in the form of guarantee parties and notarized by Notary Public Teodorico L. Baltazar
checks; and the cancellation of TCT No. 62530 was done without his consent on December 11, 1989, the Court believes that said Deed of
and against his actual and real agreement with respondents. Absolute sale was prepared in 1987 and was signed by
defendant Banga on June 19, 1987 when he executed the
In its Pre-Trial Order of November 28, 1990,[10] Branch 71 of the Pasig Deed of Real Estate Mortgage for P200,000.00 on June 19,
RTC stated the issues of the case as follows: 1987 also acknowledged before the same Notary Public
Teodorico L. Baltazar.
1) Whether the deed of sale is binding, valid, effective
and genuine; If the Deed of Absolute Sale were actually prepared and
signed on December 11, 1989, as defendant Bello insists,
2) Whether the said deed of sale expresses the true there is no need to type the date 11th (day of) Dec. 1989 on
and real agreement of the parties; page 1 and the date 11th (day of) December, 1989 and the
1989 residence certificates on page 2 on different dates. And,
3) Whether the alleged consideration of P300,000.00 there is no point also in typing the residence certificates of
as appearing in the deed of absolute sale covering a prime lot defendant Banga, plaintiff and defendant Bello which were
in Mandaluyong of 126 square meters is adequate or not; and issued in 1987 including their tax account numbers or TAN.
Besides, what firmly convinces the Court to believe that the
4) Whether or not the signature of Socorro Banga in Deed of Absolute Sale was prepared and executed on June
the deed of sale is genuine or not. 19, 1987 is the fact that in the acknowledgment portion of the
document found on page 2, the number 7 in Series of 1987,
was superimposed with the number 9. And, the name of the
In its Order[11] of January 12, 1994, however, the trial court, noting that Notary Public TEODORICO L. BALTAZAR, the date of his
petitioner has not come forward with evidence to indicate that [her signature on notarial commission, ptr and TAN were all insertions which
the deed of absolute sale] is a forgery . . . despite great lapse of time, were typed only on December 11, 1989.[12]
considered her to have waived the presentation of evidence of falsification of
her signature. It thus defined the remaining principal issue to be whether the
deed of absolute sale expresses the true intention of the parties. On respondents claim that the consideration for the sale of the property
was P300,000.00, the trial court found it preposterous in light of the amount
Upon the said principal issue then, the trial court, holding in the negative, found of P500,000.00 for which the property was mortgaged.
that the true intent of the parties was to merely guarantee the loan extended to
Nelson. The trial court thus disposed:

The trial court arrived at its decision in light of the following observations: WHEREFORE, the judgment is hereby rendered in favor of
[petitioner] and against [Nelson and respondents]:

55
 1. Declaring the Deed of Absolute Sale dated December 11,
1989 as NULL and VOID ab initio. Nelson did not appeal the trial courts decision.

2. Canceling Transfer of Certificate of Title No. 3294, Registry By Decision[14] dated December 13, 2002, the appellate court granted
of Deeds of Mandaluyong, Metro Manila (now City of the appeal of respondents, it holding that:
Mandaluyong).
The document denominated as Deed of Absolute Sale dated
3. Ordering [respondent] Jose V. Bello V to pay [petitioner] December 11, 1989 executed between [respondent] Bello
the amount of P50,000.00 as exemplary damages. and Banga, with the marital consent of the latters wife
Socorro, indicates in certain terms, the object, the cause and
4. Ordering [respondent] Jose V. Bello V and Nelson F. the consideration of the contract of sale. The instrument was
Banga to pay, jointly and severally, [petitioner] the amount of duly notarized and signed in the presence of two (2)
P50,000.00 as and by way of attorneys fees. witnesses. As the language of the written contract of sale
between the parties is clear and unambiguous, it must be
5. Ordering [respondent] Jose V. Bello V and Nelson F. taken to mean that which, on its face, it purports to mean. And
Banga to pay, jointly and severally, the costs of suit. unless some good reason can be assigned to show that the
words used should be understood in a different sense, the
Counterclaims filed by [respondent] Jose V. Bello V and contract must stand.
Nelson F. Banga against [petitioner] are DISMISSED.
Crossclaim filed by Banga against [respondent] Bello is Moreover, the deed of sale involved in the instant controversy
DISMISSED. (Underscoring supplied) is a notarized document. Being a public instrument, it has in
its favor the presumption of regularity, and to contradict the
same, there must be evidence that is clear, convincing and
more than merely preponderant. Other than the bare
Respondents thereupon appealed to the Court of Appeals faulting the allegations of [petitioner] that the deed of sale is fictitious, no
trial court in: convincing proof was adduced to overcome the
I presumption of validity as to its authenticity and due
execution. As complainant, plaintiff had the burden of proving
. . . DECLARING VOID AB INITIO THE DEED OF SALE that contrary to the recital in the deed of sale, she never
DATED DECEMBER 11, 1989. appeared before the notary public and acknowledged the
deed to be her voluntary act. It is worth mentioning that the
II deed of sale and the real estate mortgage previously
executed between the parties was notarized by the same
. . . NOT ORDERING [PETITIONER] AND HER HUSBAND, notary public, Atty. Teodorico Baltazar, further supporting the
NELSON BANGA, TO PAY THEIR MORTGAGE validity of the deed of sale.
INDEBTEDNESS TO [RESPONDENTS].
Likewise, the allegation of forgery of the signature of
III [petitioner] was not sufficiently proven during trial. No expert
witness was even presented to make an examination of
. . . HOLDING THAT [RESPONDENTS] ACTED WITH petitioners signatures in the deed of sale to ascertain whether
GROSS NEGLIGENCE AMOUNTING TO BAD FAITH. or not the same are fictitious when compared with her
specimen signatures. The prevailing rule in our jurisdiction is
IV that whoever alleges forgery has the burden of proving the
same, for forgery cannot be presumed but should be proved
. . . ORDERING [RESPONDENTS] TO PAY EXEMPLARY by clear and convincing evidence.
DAMAGES TO [PETITIONER][13] (Underscoring supplied)

56
Our courts have consistently denied relief to a party who indebtedness. This, the court did not do so, bolstering the
seeks to avoid the performance of an obligation voluntarily validity of the document as of sale and not of mortgage.
assumed because they turned out to be disastrous or unwise
contracts, even if there was a mistake of law or fact. The Thus, the award of exemplary damages, attorneys fees and
claim of the [petitioner] that the consideration for the sale is the costs of suit in favor of [petitioner] is not justified under
grossly inadequate and therefore passes no title to the circumstances.
[respondent] does not suffice to render the contract void.
While [petitioner] testified during the April 4, 1991 hearing that xxx
the prevailing market value of the property is ten to fifteen (Citations omitted; Underscoring supplied)
thousand per square meter, no evidence was presented,
such as that of an independent real estate appraiser, to
substantiate her claim. Consonant with the rule that gross The appellate court accordingly disposed:
inadequacy of price would not nullify the sale, the deed of sale
subject of the instant controversy must be upheld. WHEREFORE, in view of all the foregoing, the instant appeal
is GRANTED. The June 1, 1995 Decision of the Regional Trial
To support [respondent] Bellos right to the property arising Court of Pasig City, Branch 71, is
from the contract of sale between the parties, TCT No. 3294 hereby REVERSED and SET ASIDE. Plaintiff-appellee
was issued by the Register of Deeds of Mandaluyong in his Socorro Taopo-Banga and defendant [Nelson] Banga are
favor on March 7, 1990. In addition, he had the hereby ordered to comply with their obligations under the
property declared in his name for taxation purposes, and paid contract of sale. Costs against the plaintiff. (Emphasis in the
the corresponding real property taxes thereon. Absent any original)
showing of irregularity in the issuance of the title, the public
office who issued the same enjoys the presumption of having
acted regularly in the performance of his functions. Hence, this petition filed by petitioner-wife of Nelson, raising as sole issue
whether the parties intended the deed of sale to be merely an equitable
As to the claim that the residence certificate number used by mortgage.
[respondents] in the deed of sale is fictitious as the same did
not appear in the list retained by the Office of the City The pertinent Civil Code provisions on equitable mortgage read:
Treasurer of Mandaluyong, suffice it to state that the object
of the law in the issuance of a residence certificate is to Art. 1602. The contract shall be presumed to be
establish the true and correct identity of the person to whom an equitable mortgage, in any of the following cases:
it is issued. A residence certificate, being a receipt issued
upon receipt of money for public purposes, is a public (1) When the price of a sale with right to repurchase is
instrument and as such presentation of the same document unusually inadequate;
would suffice to prove its contents.
(2) When the vendor remains in possession as lessee or
We are thus inclined to agree with [respondents], after a otherwise;
thorough examination of the records of the case, that a valid
contract of sale was perfected between [Nelson] Banga, with (3) When upon or after the expiration of the right to
his wifes marital consent on the one hand, and Jose Bello on repurchase another instrument extending the period of
the other. redemption or granting a new period is executed;

Moreover, if the trial court was convinced that the real intent (4) When the purchase retains for himself a part of the
of the parties was one of mortgage, then the court should purchase price;
have ordered the payment of the balance of the

57
 (5) When the vendor binds himself to pay the taxes on the appears, the number 9 was superimposed on the number 7, which this Court
thing sold; takes as a clear design to make it appear that it was notarized in 1989.

(6) In any other case where it may be fairly inferred that And why, indeed, was the purchase price only P300,000.00 when the loan
the real intention of the parties is that the transaction granted to Nelson was P500,000.00 if the assailed document was really one of
shall ensure the payment of a debt or the performance of sale?
any other obligation.
Badges thus indeed exist showing that the deed of sale was accomplished in
In any of the foregoing cases, any money, fruits, or other 1987 as a part of the consideration in the grant of the loan.
benefit to be received by the vendee as rent or otherwise shall
be considered as interest shall be subject to the usury laws. But more revealing of the true intention of the parties is the undisputed
relationship of Nelson and respondents as debtor and creditors, respectively,
xxx which, together with the circumstances mentioned above, draws this Court to
(Emphasis and underscoring supplied) affirm the trial courts ruling that the deed of absolute sale was executed to serve
as additional security for the loan extended to Nelson. As Reyes v. Court of
Art. 1604. The provisions of Article 1602 shall also apply Appeals instructs:[16]
to a contract purporting to be an absolute sale. (Emphasis
and underscoring supplied) In determining whether a deed absolute in form is a mortgage,
the court is not limited to the written memorials of the
In Aguirre v. Court of Appeals, this Court ruled: transaction. The decisive factor in evaluating such
agreement is the intention of the parties, as shown not
x x x The presence of even one of the circumstances in Article necessarily by the terminology used in the contract but
1602 is sufficient basis to declare a contract as one of by all the surrounding circumstances, such as
equitable mortgage. The explicit provision of Article 1602 the relative situation of the parties at that time, the
that any of those circumstances would suffice to attitude, acts, conduct, declarations of the parties, the
construe a contract of sale to be one of equitable negotiations between them leading to the deed, and
mortgage is in consonance with the rule that law favors generally, all pertinent facts having a tendency to fix and
the least transmission of property rights. To stress, the determine the real nature of their design and
existence of any one of the conditions under Article 1602, understanding. x x x (Emphasis and underscoring supplied)
not a concurrence, nor an overwhelming number of such
circumstances, suffices to give rise to the presumption
that the contract is an equitable mortgage.[15] (Emphasis Debtors usually find themselves in an unequal position when bargaining with
and underscoring supplied) their creditors, and will readily sign onerous contracts just to have the money
they need. Necessitous men are not always free, in that to answer a pressing
emergency, they will submit to any terms that the crafty may impose on them.
The appeal is impressed with merit. This is precisely the evil that the above-quoted provision on equitable mortgage
seeks to prevent.[17]
The observation of the trial court that the deed of absolute sale was prepared
in 1987, the same year that the original deed of real estate mortgage was Lastly, if the parties really forged a contract of sale, why did not respondents
executed, is well taken. Why, indeed, were the residence certificate numbers immediately demand the vacation by Nelson of the property? They only served
issued to the parties in 1987 appearing in the acknowledgment portion of the Nelson a notice to vacate four months after the complaint subject of the present
real estate mortgage of 1987 are the same as those appearing in the petition was filed, by letter[18] dated August 17, 1990, which appears to be an
acknowledgment portion of the deed of absolute sale purportedly executed afterthought.[19]
in 1989, respondents offered no explanation. In fact, in the acknowledgment
portion of the 1989 deed of absolute sale whereon the phrase Series of 1987 A word on the award to petitioner by the trial court of exemplary damages
against Jose in the amount of P50,000.00 which respondents assailed, among

58
other things, before the appellate court as unfounded bad faith or gross
negligence on the part of [Jose] . . . not [having] been established. The case is nevertheless REMANDED to the trial court for further
proceedings only for the purpose of determining whether Nelson has settled his
The pertinent provisions of the Civil Code read: mortgage obligation to respondent and, if in the negative, to determine the
amount thereof and issue the necessary order or orders.
Art. 2229. Exemplary or corrective damages are imposed, by
way of example or correction for the public good, in addition SO ORDERED.
to the moral , temperate, liquidated or compensatory
damages.

xxx

Art. 2234. While the amount of exemplary damages

need not be proved , the plaintiff must show that he is
entitled to moral, temperate or compensatory damages
before the court may consider the question of whether or
not exemplary damages should be awarded. x x x
(Emphasis and underscoring supplied)

While petitioner did pray for the award of moral damages in her
complaint and even testified on her entitlement to it, the trial court made no
such award in its decision and petitioner did not assail the same by way of a
motion for reconsideration of the decision or by appeal before the appellate
court. There is thus no basis for the award of exemplary damages.

Finally, the logical consequence of a finding that a deed of sale is

actually one of equitable mortgage is to decree the vendor-debtor to pay his
outstanding loan to the vendee-creditor.

As priorly mentioned, Nelson alleged in his Answer that he had paid his
mortgage obligation to respondents. The trial court, however, despite ruling that
the deed of sale was actually an equitable mortgage, did not pass upon his
claim. The trial courts judgment is thus incomplete,[20] as in fact in respondents
appeal to the appellate court, they assigned as one of the errors of the trial
court its failure to order petitioner and her husband Nelson to pay the loan.

A remand of the case to the trial court is thus in order, only for the
purpose of determining whether the mortgage obligation had indeed been
settled, and if not, how much should Nelson pay respondents to settle the same.

WHEREFORE, the petition is GRANTED. The December 13, 2002 decision of

the Court of Appeals is REVERSED and SET ASIDE and the June 1, 1995
decision of the Regional Trial Court of Pasig City, Branch 71 in Civil Case No.
59384 is REINSTATED with the MODIFICATION that the award of exemplary
damages is DELETED.

59